-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, SknZa6CnLE9QKI4841HZMYTEe30FpR6kCO7XRAcWmrV3v5fh9NviWqG0FHgCx10E Pjx7zguvGV3SgpGRlJZZYQ== 0000950157-95-000167.txt : 19950605 0000950157-95-000167.hdr.sgml : 19950605 ACCESSION NUMBER: 0000950157-95-000167 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19950530 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19950602 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08637 FILM NUMBER: 95544566 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 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): May 30, 1995 TIME WARNER INC. - ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-8637 13-1388520 - ---------------------------- -------------- ------------------- (State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File Number) Identification No.) 75 Rockefeller Plaza, New York, NY 10019 - ---------------------------------------------------------------------------- (Address of principal executive offices) (zip code) (212) 484-8000 - ---------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - ---------------------------------------------------------------------------- (Former name or former address, if changed since last report) Item 5. Other Events. Time Warner Inc. ("Time Warner") and Time Warner Entertainment Company, L.P. ("TWE"), 63.27% of the residual equity as well as certain priority capital interests of which are owned by subsidiaries of Time Warner, have recently entered into, or intend to enter into, the transactions described below: (i) on May 18, 1995, Time Warner announced the sale by TWE of 15 of its unclustered cable television systems serving approximately 144,000 subscribers (the "Unclustered Cable Disposition"); (ii) on May 2, 1995, Time Warner closed the acquisition of Summit Communications Group, Inc. ("Summit"), which owns cable television systems serving approximately 162,000 subscribers (the "Summit Acquisition"); (iii) on April 17, 1995, TWE entered into certain agreements, pursuant to which, subject to certain conditions, (A) Six Flags Entertainment Corporation ("Six Flags") will be recapitalized and TWE will sell 51% of the capital stock of Six Flags to a third party and (B) TWE will grant certain licenses to Six Flags (the "License") (collectively, the "Six Flags Transaction"); (iv) on April 1, 1995 (as previously reported on the Form 8-K of Time Warner dated April 1, 1995), TWE closed its transaction (the "TWE-A/N Transaction") with the Advance/Newhouse Partnership ("Advance/Newhouse"), pursuant to which TWE and Advance/Newhouse formed the Time Warner Entertainment-Advance/Newhouse Partnership, a New York general partnership (the "TWE-Advance/Newhouse Partnership"), in which TWE owns a two-thirds equity interest and is the managing partner and Advance/Newhouse owns a one-third equity interest. The TWE-Advance/Newhouse Partnership owns cable television systems (or interests therein), serving approximately 4.5 million subscribers, as well as certain foreign cable investments and certain programming investments; (v) on February 6, 1995 (as previously reported on the Form 8-K of Time Warner dated February 6, 1995), Time Warner entered into certain agreements with Cablevision Industries Corporation ("Cablevision"), certain affiliated entities of Cablevision (the "Gerry Companies" and, together with Cablevision, the "Cablevision Companies"), the direct holders of certain interests in the Gerry Companies and Alan Gerry, the principal stockholder of Cablevision and the Gerry Companies (the "CVI Acquisition"), pursuant to which Time Warner will acquire Cablevision, and Time Warner or certain subsidiaries of Time Warner will acquire each of the Gerry Companies. Cablevision and the Gerry Companies own cable television systems serving approximately 1.3 million subscribers; (vi) on January 26, 1995 (as previously reported on the Form 8-K of Time Warner dated January 26, 1995), Time Warner entered into certain agreements with KBLCOM Incorporated ("KBLCOM") and its parent, Houston Industries Incorporated (the "KBLCOM Acquisition"), pursuant to which Time Warner will acquire KBLCOM, which owns cable television systems serving approximately 690,000 subscribers, and a 50% interest in Paragon Communications ("Paragon"), which owns cable television systems serving approximately 967,000 subscribers (the other 50% interest of which is already owned by TWE); and (vii) Time Warner and TWE are currently in negotiations with an administrative agent for a bank syndicate regarding a five-year revolving credit facility (the "New Credit Agreement"), expected to be executed in July 1995, pursuant to which TWE, the TWE- Advance/Newhouse Partnership and a wholly owned subsidiary of Time Warner ("TWI Cable") will be borrowers. The New Credit Agreement will enable such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the Acquisitions (as defined below), to refinance existing indebtedness and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower (the "1995 Debt Refinancing"). The Unclustered Cable Disposition and the Six Flags Transaction are referred to herein as the "Asset Sale Transactions"; the Summit Acquisition, KBLCOM Acquisition and CVI Acquisition are referred to herein as the "Acquisitions"; the Acquisitions and the TWE-A/N Transaction are referred to herein as the "Cable Transactions" and the Asset Sale Transactions, the Cable Transactions and the 1995 Debt Refinancing are referred to herein as the "Transactions". Pro Forma Consolidated Condensed Financial Statements The following pro forma consolidated condensed balance sheets of Time Warner and the Time Warner Entertainment Group (the "Entertainment Group"), principally consisting of TWE, at March 31, 1995 give effect to the Asset Sale Transactions, the TWE-A/N Transaction and the 1995 Debt Refinancing and, with respect to the balance sheet of Time Warner only, also give effect to the Acquisitions, in each case as if the Transactions occurred at such date. The following pro forma consolidated condensed statements of operations of Time Warner and the Entertainment Group for the three months ended March 31, 1995 and the year ended December 31, 1994 give effect to each applicable Transaction as if it had occurred at the beginning of such periods. The pro forma consolidated condensed financial statements should be read in conjunction with the historical financial statements of Time Warner and TWE, including the notes thereto, which are contained in the Time Warner Quarterly Report on Form 10-Q for the three months ended March 31, 1995 and the Time Warner Annual Report on Form 10-K for the year ended December 31, 1994, as well as the historical financial statements of Cablevision and Summit (which reports are incorporated herein by reference) and the historical financial statements of (i) Vision Cable Division of Vision Cable Communications Inc. and Subsidiaries and Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries (which entities contributed substantially all of their assets to Advance/Newhouse prior to the closing of the TWE-A/N Transaction), (ii) Cablevision Industries Limited Partnership and the Combined Entities (which financial statements are the combined financial statements of the Gerry Companies) and (iii) KBLCOM (which financial statements, in the case of (i), (ii) and (iii), are attached as Exhibits hereto). The pro forma consolidated condensed financial statements have been derived from the historical financial statements of the respective entities as of and for the three months ended March 31, 1995 and for the year ended December 31, 1994, except in the case of the Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries, which entities have different fiscal years and, consequently, such pro forma financial statements have been derived from the unaudited combined financial statements of such entities as of and for the three months ended January 31, 1995 and for the twelve months ended October 31, 1994, respectively. The pro forma consolidated condensed financial statements are presented for informational purposes only and are not necessarily indicative of the financial position or operating results that would have occurred if the Transactions had been consummated as of the dates indicated, nor are they necessarily indicative of future financial conditions or operating results. The one-third equity interest in the TWE-Advance/Newhouse Partnership owned by Advance/Newhouse is reflected in the Entertainment Group pro forma consolidated condensed balance sheet as minority interest. In accordance with the partnership agreement for the TWE-Advance/Newhouse Partnership, Advance/Newhouse may require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Following the third anniversary of the closing of the TWE-Advance/Newhouse Transaction, 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 TWE-Advance/Newhouse Partnership were recorded at their predecessor's historical cost. No gain was recognized by TWE upon the capitalization of the TWE-Advance/Newhouse Partnership. As a result of the Acquisitions, Time Warner will acquire cable television systems serving approximately 2.2 million subscribers and a 50% interest in Paragon, which owns cable television systems serving approximately 967,000 subscribers (the other 50% interest is already owned by TWE). As described below, in order to consummate the Acquisitions (including the Summit Acquisition), Time Warner will issue approximately 5.1 million shares of Common Stock, par value $1.00 per share, of Time Warner (the "Common Stock") and approximately $2.1 billion aggregate liquidation value of new series of convertible preferred stock, and will assume or incur, directly or indirectly, approximately $3.4 billion of debt. In connection with the Summit Acquisition, Time Warner issued 1,550,936 shares of Common Stock and 3,264,508 shares of a new series of convertible preferred stock (the "Series C Preferred Stock") and assumed or incurred approximately $146 million of indebtedness. The Series C Preferred Stock has a liquidation value of $100 per share, is convertible into 6.8 million shares of Common Stock at a conversion price of $48 per share (based on its liquidation value), receives for five years an annual dividend per share equal to the greater of $3.75 and an amount equal to the dividends paid on the Common Stock into which a share of Series C Preferred Stock may be converted, and is redeemable for cash at the liquidation value plus unpaid dividends after five years, or exchangeable for Common Stock by the holder beginning after the third year 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 connection with the KBLCOM Acquisition, Time Warner will issue one million shares of Common Stock and 11 million shares of a new series of convertible preferred stock (the "Series D Preferred Stock") and assume or incur approximately $1.3 billion of indebtedness, including $111 million of Time Warner's allocable share of Paragon's indebtedness. The Series D Preferred Stock will have a liquidation value of $100 per share, will be convertible into 22.9 million shares of Common Stock at a conversion price of $48 per share (based on its liquidation value), and will receive for four years an annual dividend per share equal to the greater of $3.75 and an amount equal to the dividends paid on the Common Stock into which a share of Series D Preferred Stock may be converted. After four years, Time Warner will have the right to exchange the Series D Preferred Stock for Common Stock at the stated conversion price and after five years Time Warner will have the right to redeem the Series D Preferred Stock, in whole or in part, for cash at the liquidation value plus accrued dividends. In connection with the CVI Acquisition, Time Warner will issue 2.5 million shares of Common Stock and 3.25 million shares each of two new series of convertible preferred stock (the "Series E Preferred Stock" and "Series F Preferred Stock") and assume or incur approximately $2 billion of indebtedness. The Series E Preferred Stock and Series F Preferred Stock will have a liquidation value of $100 per share, will be convertible into an aggregate of 13.5 million shares of Common Stock at a conversion price of $48 per share (based on its liquidation value), and will receive, for a period of five years with respect to the Series E Preferred Stock and a period of four years with respect to the Series F Preferred Stock, an annual dividend per share equal to the greater of $3.75 and an amount equal to the dividends paid on the Common Stock into which a share of Series E Preferred Stock or Series F Preferred Stock may be converted. Time Warner will have the right to exchange each of the Series E Preferred Stock and Series F Preferred Stock for Common Stock at the stated conversion price after five years and four years, respectively, and will be permitted to redeem each series, in whole or in part, for cash at the liquidation value plus accrued dividends, in each case after five years. The amount of Series F Preferred Stock and Common Stock to be issued in connection with the CVI Acquisition will be adjusted if the aggregate level of indebtedness, negative working capital and related items at the closing differs from approximately $2 billion. To the extent that any of the Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock remains 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 dividend declared on shares of Common Stock multiplied by the number of shares into which their shares of preferred stock are convertible. Holders of each series of preferred stock will be entitled to vote with the Common Stock on all matters on which the Common Stock is entitled to vote, and each share of each such series will be entitled to two votes on any such matter. The Acquisitions will be accounted for by the purchase method of accounting for business combinations and, accordingly, the estimated cost to acquire such assets will be allocated to the underlying net assets in proportion to their respective fair values. The valuations and other studies which will provide the basis for such an allocation have not been completed. As more fully described in the notes to the pro forma consolidated condensed financial statements, a preliminary allocation of the excess of cost over the book value of the net assets acquired or to be acquired has been made for pro forma purposes to investments and cable television franchises in proportion to their estimated fair values. In connection with the Cable Transactions, TWE will enter into management services agreements pursuant to which TWE will be responsible for the management and operations of the cable television systems owned by Time Warner and the TWE-Advance/Newhouse Partnership, other than the cable television systems located within the 14-state telephone service area of U S WEST, Inc. The pro forma consolidated condensed statements of operations of Time Warner and the Entertainment Group each reflect annual management fees to be paid by Time Warner and the TWE-Advance/Newhouse Partnership to TWE, based on a preliminary allocation, which management believes to be reasonable, of the corporate expenses of the cable division of TWE in proportion to the respective number of cable subscribers of Time Warner and the TWE-Advance/Newhouse Partnership to be managed by TWE's cable division as a percentage of the aggregate number of subscribers of all cable television systems to be managed by TWE's cable division. As a result of TWE's management of the Time Warner and the TWE-Advance/Newhouse Partnership-owned cable television systems, the pro forma consolidated condensed statements of operations of Time Warner also reflect certain reductions in corporate expenses of the acquired entities relating to the closing of certain facilities and the termination of related personnel as a direct result of the Acquisitions. Time Warner and TWE expect to realize certain additional cost savings as a result of initiatives to integrate the acquired cable television systems' operations into TWE's operating structure; however, such cost savings have not been reflected in the pro forma consolidated condensed statements of operations of Time Warner due to the preliminary nature of such initiatives at this time. It is anticipated that the New Credit Agreement will permit borrowings in an aggregate amount of up to $9 billion, which Time Warner and TWE may reduce to the extent of any excess availability resulting from the anticipated debt reductions associated with the Asset Sale Transactions. Any reductions in excess availability under the New Credit Agreement would not affect the pro forma consolidated condensed financial statements. Based upon an assumed $9 billion of aggregate availability under the New Credit Agreement, borrowings are expected to be limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $9 billion in the case of TWE, subject in each case to certain limitations and adjustments. It is also anticipated that such borrowings will bear interest at different rates for each of the three borrowers, generally equal to LIBOR plus a margin ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. Pro forma adjustments for the 1995 Debt Refinancing reflect borrowings of $5.077 billion in the aggregate under the New Credit Agreement. The proceeds of such borrowings are expected to be used to repay or redeem $2.552 billion of indebtedness to be assumed in the Acquisitions, plus redemption premiums thereon of $25 million; to repay $2.45 billion of indebtedness outstanding under the existing TWE bank credit agreement at March 31, 1995; and to pay for $50 million of financing costs. In addition to such $5.077 billion of refinancings, $262 million is expected to be borrowed under the New Credit Agreement to refinance additional indebtedness incurred in connection with the Cable Transactions, of which $193 million relates to the consummation of the CVI Acquisition and $69 million relates to the payment of transaction costs and other liabilities. Based on the average LIBOR rates in effect during the three months ended March 31, 1995 and the year ended December 31, 1994, LIBOR has been assumed to be 6% and 4.5% per annum, respectively, and accordingly, the pro forma consolidated condensed statements of operations reflect interest on borrowings at estimated rates of (i) 6.875% and 5.375% per annum, respectively, for TWI Cable, (ii) 6.5% and 5% per annum, respectively, for TWE and (iii) 6.5% and 5% per annum, respectively, for the TWE-Advance/Newhouse Partnership. Each 12.5 basis point increase in the pro forma interest rate applicable to the aggregate $5.339 billion of assumed borrowings under the New Credit Agreement would have the approximate effect of increasing Time Warner's annual interest expense and net loss by $3 million and $4 million, respectively, and, in the case of borrowings by TWE and the TWE-Advance/Newhouse Partnership only, of increasing TWE's annual interest expense and decreasing its net income by $3 million. The New Credit Agreement is expected to contain certain covenants for each borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and loans, advances, distributions and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. The Asset Sale Transactions reflect the disposition by TWE of 51% of its interest in Six Flags, the payment by Six Flags of certain intercompany indebtedness and licensing fees to TWE in connection therewith, and the sale of certain unclustered cable television systems for aggregate gross proceeds of approximately $1.14 billion. TWE will deconsolidate the assets, liabilities and operating results of Six Flags, including approximately $126 million of third-party indebtedness, and will account for its remaining 49% interest in Six Flags under the equity method of accounting. As a result of these transactions, TWE will reduce debt by approximately $1.050 billion, after related taxes and fees. TWE will realize aggregate net income of approximately $300 million as a result of the Asset Sale Transactions, of which approximately $170 million will be recognized currently and approximately $130 million will be deferred as a result of TWE's guarantee of third-party, zero-coupon indebtedness of Six Flags due in 1999. Such income has not been reflected in the pro forma consolidated condensed statement of operations of the Entertainment Group included herein. TIME WARNER INC. PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET March 31, 1995 (millions, unaudited)
Time Warner Summit KBLCOM CVI 1995 Debt TWE Pro Historical Acquisition(a) Acquisition(b) Acquisition(c) Refinancing(d) Transactions(e) Forma A S S E T S Cash and equivalents $ 309 $ 80 $ - $ 8 $ - $ 185 $ 582 Other current assets 2,331 2 32 26 - - 2,391 ------ ------ ----- ----- ------ ------ ------ Total current assets 2,640 82 32 34 - 185 2,973 Investments in and amounts due to and from Entertainment Group 5,443 - - - (27) (15) 5,401 Other investments 1,543 - 843 17 111 - 2,514 Property, plant and equipment 748 51 280 385 - - 1,464 Goodwill 4,589 171 662 835 - - 6,257 Cable television franchises - 421 1,469 2,370 - - 4,260 Other assets 1,645 - 6 35 11 - 1,697 ------ ------ ------ ------ ----- ----- ------ Total assets $16,608 $ 725 $3,292 $3,676 $ 95 $ 170 $24,566 ======= ====== ====== ====== ===== ===== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Total current liabilities $ 2,713 $ 6 $ 59 $ 129 $ (21) $ 185 $ 3,071 Long-term debt 9,001 146 1,130 1,950 147 - 12,374 Deferred income taxes 2,657 191 968 859 - (119) 4,556 Other long-term liabilities 1,124 1 - - - - 1,125 Shareholders' equity: Preferred stock 1 3 11 7 - - 22 Common stock 380 2 1 2 - - 385 Paid-in capital 2,600 376 1,123 729 - - 4,828 Unrealized gains on certain marketable securities 148 - - - - - 148 Accumulated deficit (2,016) - - - (31) 104 (1,943) ------- ------ ------ ------ ----- ----- ------- Total shareholders' equity 1,113 381 1,135 738 (31) 104 3,440 ------- ------ ------ ------ ----- ----- ------- Total liabilities and shareholders' equity $16,608 $ 725 $3,292 $3,676 $ 95 $ 170 $24,566 ======= ====== ====== ====== ===== ===== =======
See accompanying notes. TIME WARNER INC. PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS Three Months Ended March 31, 1995 (millions, unaudited)
Time Warner Summit KBLCOM CVI 1995 Debt TWE Pro Historical Acquisition(f) Acquisition(g) Acquisition(h) Refinancing(i) Transactions(j) Forma Revenues $1,817 $ 16 $ 67 $ 125 $ - $ - $2,025 Cost of revenues 1,103 12 45 84 - - 1,244 Selling, general and administrative 576 4 26 26 - - 632 ------ ------ ------ ------- ------ ------ ------ Operating expenses 1,679 16 71 110 - - 1,876 ------ ------ ------ ------- ------ ------ ------ Business segment operating income (loss) 138 - (4) 15 - - 149 Equity in pretax income of Entertainment Group 22 - - - 11 23 56 Interest and other, net (155) (4) (30) (39) 8 - (220) Corporate expenses (20) - - - - - (20) ------ ------ ------- ------- ------ ------ ------ Income (loss) before income taxes (15) (4) (34) (24) 19 23 (35) Income tax (provision) benefit (32) 1 13 11 (8) (9) (24) ------ ------- ------ ------ ------ ------ ------ Net income (loss) (47) (3) (21) (13) 11 14 (59) Preferred dividend requirements (3) (3) (10) (6) - - (22) ------ ------- ------ ------ ------ ------ ------ Net income (loss) applicable to common shares $ (50) $ (6) $ (31) $ (19) $ 11 $ 14 $ (81) ====== ======= ====== ====== ===== ====== ====== Net income (loss) per common share $ (.13) $ (.02) $ (.08) $ (.05) $ .03 $ .04 $ (.21) ====== ======= ====== ====== ===== ====== ====== Average common shares 379.5 1.6 1.0 2.5 - - 384.6 ====== ======= ====== ====== ===== ====== ====== - --------------- Includes depreciation and amortization expense of: $ 112 $ 8 $ 43 $ 69 $ - $ - $ 232 ====== ======= ====== ====== ====== ====== ======
See accompanying notes. TIME WARNER INC. PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 1994 (millions, unaudited)
Time Warner Summit KBLCOM CVI 1995 Debt TWE Pro Historical Acquisition(f) Acquisition(g) Acquisition(h) Refinancing(i) Transactions(j) Forma Revenues $7,396 $ 63 $ 265 $ 493 $ - $ - $8,217 Cost of revenues 4,307 48 201 426 - - 4,982 Selling, general and administrative 2,376 13 98 103 - - 2,590 ------ ------ ------ ------ ----- ----- ------ Operating expenses 6,683 61 299 529 - - 7,572 ------ ------ ------ ------ ----- ----- ------ Business segment operating income (loss) 713 2 (34) (36) - - 645 Equity in pretax income of Entertainment Group 176 - - - 29 12 217 Interest and other, net (724) (15) (104) (147) 52 - (938) Corporate expenses (76) - - - - - (76) ------ ------ ------ ------ ----- ----- ------ Income (loss) before income taxes 89 (13) (138) (183) 81 12 (152) Income tax (provision) benefit (180) 3 55 45 (33) (1) (111) ------ ------ ------ ------ ----- ----- ------ Net income (loss) (91) (10) (83) (138) 48 11 (263) Preferred dividend requirements (13) (12) (41) (24) - - (90) ------ ------ ------ ------ ----- ----- ------ Net income (loss) applicable to common shares $ (104) $ (22) $ (124) $ (162) $ 48 $ 11 $ (353) ====== ====== ====== ====== ===== ===== ====== Net income (loss) per common share $ (.27) $ (.06) $ (.33) $ (.42) $ .13 $ .03 $ (.92) ====== ====== ====== ====== ===== ===== ====== Average Common shares 378.9 1.6 1.0 2.5 - - 384.0 ====== ====== ====== ====== ===== ===== ====== - --------------- Includes depreciation and amortization expense of: $ 437 $ 33 $ 173 $ 275 $ - $ - $ 918 ====== ====== ====== ====== ===== ===== ======
See accompanying notes. TIME WARNER INC. NOTES TO THE TIME WARNER PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (a) Reflects the historical assets and liabilities of Summit as of March 31, 1995, including $140 million of indebtedness that is outstanding following the Summit Acquisition, as well as certain pro forma adjustments directly related to the Summit Acquisition. The pro forma adjustments reflect (1) the issuance by Time Warner of 1,550,936 shares of its common stock and 3,264,508 shares of Series C preferred stock, valued for pro forma purposes at an aggregate amount of $381 million, (2) the exclusion of approximately $48 million of net assets principally related to the payment of certain liabilities prior to the closing of the Summit Acquisition, (3) the incurrence of $6 million of additional indebtedness for the payment of transaction costs and other related liabilities, (4) the allocation of the excess of the purchase price over the book value of the net assets acquired of $417 million to cable television franchises, based on the estimated fair value of such assets, (5) an increase of $171 million in deferred income tax liabilities and goodwill, resulting from the fact that the tax basis of the acquired assets will not be adjusted as a result of the Summit Acquisition and (6) the elimination of Summit's historical stockholders' equity. (b) Reflects the historical assets and liabilities of KBLCOM as of March 31, 1995, including a 50% interest in Paragon not previously owned by TWE and $1.124 billion of indebtedness that will be assumed in the acquisition, as well as certain pro forma adjustments directly related to the KBLCOM Acquisition. The pro forma adjustments reflect (1) the issuance by Time Warner of 1 million shares of its common stock and 11 million shares of Series D preferred stock, valued for pro forma purposes at an aggregate amount of $1.135 billion, (2) the exclusion of approximately $301 million of net indebtedness and other liabilities of KBLCOM that will not be assumed by Time Warner and the exclusion of $505 million of pre-existing goodwill, (3) the incurrence of $6 million of additional indebtedness for the payment of transaction costs and other related liabilities, (4) the allocation of the excess of the purchase price over the book value of the net assets acquired of $1.615 billion to the investment in Paragon in the amount of $659 million and to cable television franchises in the amount of $956 million, based on the estimated fair values of such assets, (5) an increase of $662 million in deferred income tax liabilities and goodwill, resulting from the fact that the tax basis of the acquired assets will not be adjusted as a result of the KBLCOM Acquisition and (6) the elimination of KBLCOM's historical stockholders' equity. (c) Reflects the historical assets and liabilities of CVI and the Gerry Companies as of March 31, 1995, including $1.706 billion of indebtedness that will be assumed in the acquisition, as well as certain pro forma adjustments directly related to the CVI Acquisition. The pro forma adjustments reflect (1) the issuance by Time Warner of 2.5 million shares of its common stock, 3.25 million shares of Series E preferred stock and 3.25 million shares of Series F preferred stock, valued for pro forma purposes at an aggregate amount of $738 million, (2) the exclusion of approximately $303 million of net assets of CVI and the Gerry Companies that will not be assumed by Time Warner, of which $225 million represents pre- existing goodwill, (3) the incurrence of $244 million of additional indebtedness, consisting of $193 million to consummate the CVI Acquisition and $51 million to pay for transaction costs and other related liabilities, (4) the allocation of the excess of the purchase price over the book value of the net assets acquired of $2.036 billion to cable television franchises, based on the estimated fair value of such assets, (5) an increase of $835 million in deferred income tax liabilities and goodwill, resulting from the fact that the tax basis of the acquired assets will not be adjusted as a result of the CVI Acquisition and (6) the elimination of the historical stockholders' equity of CVI and the Gerry Companies. (d) Pro forma adjustments to record the 1995 Debt Refinancing as of March 31, 1995 reflect (1) $2.477 billion of borrowings by TWI Cable under the New Credit Agreement, the proceeds of which will be used (i) to repay or redeem $2.33 billion of indebtedness assumed or incurred in the KBLCOM and CVI Acquisitions, plus redemption premiums thereon of $25 million, (ii) to repay on behalf of Paragon $111 million of its aggregate $222 million of indebtedness, the other half of which will be repaid by TWE, and (iii) to pay for an allocable $11 million of deferred financing costs in connection with the New Credit Agreement and (2) a reduction in Time Warner's investment in and amounts due to and from the Entertainment Group and shareholders' equity by $31 million to reflect the one-time write-off by TWE of $27 million of deferred financing costs with respect to the existing TWE bank credit agreement and the $25 million of redemption premiums to be paid by TWI Cable, net of $21 million of related tax benefits. (e) Pro forma adjustments reflect the effect on Time Warner's financial position from TWE's Asset Sale Transactions, as more fully described in the notes to the Entertainment Group pro forma consolidated condensed financial statements contained elsewhere herein. Pro forma adjustments to record the Asset Sale Transactions as of March 31, 1995 reflect (1) an increase in Time Warner's investment in and amounts due to and from the Entertainment Group and shareholders' equity of $170 million with respect to the aggregate net income on the transactions to be recorded currently by TWE, (2) a decrease in shareholders' equity of $66 million with respect to income taxes provided by Time Warner on such net income, (3) a decrease in Time Warner's investment in and amounts due to and from the Entertainment Group and an increase in cash of $185 million with respect to the receipt from TWE of tax-related distributions to reimburse Time Warner for the payment of income taxes on its allocable share of the taxable income arising from the Asset Sale Transactions, in accordance with the terms of the TWE Partnership Agreement and (4) an increase in current liabilities of $185 million with respect to the related current income tax payable due as a result of the transaction, of which $119 million has been reclassified from Time Warner's previously-provided deferred income tax liability. The TWE-A/N Transaction and TWE's consolidation of Paragon, as more fully described in the notes to the Entertainment Group pro forma consolidated condensed financial statements contained elsewhere herein, have no pro forma effect on the underlying capital of TWE and, accordingly, have no effect on the pro forma financial position of Time Warner. (f) Reflects the historical operating results of Summit for the three months ended March 31, 1995 and the year ended December 31, 1994, as well as certain pro forma adjustments directly related to the Summit Acquisition. The pro forma adjustments reflect (1) the exclusion of an aggregate $32 million and $15 million, respectively, of net income relating to (i) Summit's broadcasting operations that were sold by Summit prior to the closing of the Summit Acquisition and (ii) reductions in Summit's corporate expenses principally relating to the closing of facilities and the termination of related personnel as a direct result of the transaction, (2) an increase of $6 million and $25 million, respectively, in cost of revenues with respect to the amortization of the excess cost to acquire Summit that has been allocated to (i) cable television franchises and amortized on a straight-line basis over a twenty-year period and (ii) goodwill and amortized on a straight-line basis over a forty-year period, (3) an increase of $1 million and $2 million, respectively, in selling, general and administrative expenses with respect to payments to be made to TWE for its management of Summit's cable television systems, (4) a decrease of $2 million and $9 million, respectively, in income tax expense as a result of income tax benefits provided at a 41% tax rate on the additional amortization expense and management fees to be paid to TWE and (5) an increase of $3 million and $12 million, respectively, in preferred dividend requirements of the Series C Preferred Stock issued in the Summit Acquisition. (g) Reflects the historical operating results of KBLCOM for the three months ended March 31, 1995 and the year ended December 31, 1994, as well as certain pro forma adjustments directly related to the KBLCOM Acquisition. The pro forma adjustments reflect (1) the exclusion of an aggregate $9 million and $14 million, respectively, of net losses relating to (i) interest costs on the portion of KBLCOM's indebtedness that will not be assumed by Time Warner, (ii) reductions in KBLCOM's corporate expenses principally relating to the closing of facilities and the termination of related personnel as a direct result of the transaction and (iii) for the year ended December 31, 1994 only, the pro forma effect of certain KBLCOM acquisitions which occurred during the year, (2) an increase of $20 million and $78 million, respectively, in cost of revenues consisting of a $5 million and $20 million, respectively, reduction of KBLCOM's historical amortization of pre-existing goodwill and a $25 million and $98 million, respectively, increase in amortization with respect to the excess cost to acquire KBLCOM that has been allocated to (i) investments and amortized on a straight-line basis over a twenty-year period, (ii) cable television franchises and amortized on a straight-line basis over a twenty-year period and (iii) goodwill and amortized on a straight-line basis over a forty-year period, (3) an increase of $2 million and $8 million, respectively, in selling, general and administrative expenses with respect to payments to be made to TWE for its management of certain of KBLCOM's cable television systems, (4) a decrease of $9 million and $36 million, respectively, in income tax expense as a result of income tax benefits provided at a 41% tax rate on the additional amortization expense and management fees to be paid to TWE and (5) an increase of $10 million and $41 million, respectively, in preferred dividend requirements of the Series D Preferred Stock to be issued in the KBLCOM Acquisition. (h) Reflects the historical operating results of CVI and the Gerry Companies for the three months ended March 31, 1995 and the year ended December 31, 1994, as well as certain pro forma adjustments directly related to the CVI Acquisition. The pro forma adjustments reflect (1) the exclusion of $6 million and $21 million, respectively, of net losses with respect to reductions in the corporate expenses of CVI and the Gerry Companies principally relating to the closing of facilities and the termination of related personnel as a direct result of the transaction, (2) an increase of $28 million and $111 million, respectively, in cost of revenues consisting of a $3 million and $12 million reduction, respectively, of CVI's historical amortization of pre-existing goodwill and a $31 million and $123 million increase, respectively, in amortization with respect to the excess cost to acquire CVI and the Gerry Companies that has been allocated to (i) cable television franchises and amortized on a straight-line basis over a twenty-year period and (ii) goodwill and amortized on a straight-line basis over a forty-year period, (3) an increase of $4 million and $15 million, respectively, in selling, general and administrative expenses with respect to payments to be made to TWE for its management of the cable television systems of CVI and the Gerry Companies, (4) an increase of $4 million and $13 million, respectively, in interest expense on the $244 million of borrowings under the New Credit Agreement, which will be used to consummate the CVI Acquisition and to pay for transaction costs and other related liabilities, (5) a decrease of $14 million and $53 million, respectively, in income tax expense as a result of income tax benefits provided at a 41% tax rate on the additional amortization expense, interest expense and management fees to be paid to TWE and (6) an increase of $6 million and $24 million, respectively, in preferred dividend requirements of the Series E Preferred Stock and Series F Preferred Stock to be issued in the CVI Acquisition. (i) Pro forma adjustments to record the 1995 Debt Refinancing for the three months ended March 31, 1995 and the year ended December 31, 1994 reflect interest savings of $19 million and $81 million, respectively, from $5.077 billion of aggregate borrowings under the New Credit Agreement, which are expected to be used to refinance $5.002 billion of indebtedness (plus $75 million of related financing costs), as follows (in millions):
Three Months Ended Year Ended March 31, 1995 December 31, 1994 ---------------------------- ----------------------------- Equity in Pretax Equity in Pretax Income of Income of Interest and Entertainment Interest and Entertainment Other, Net Group Other, Net Group ------------ ---------------- ------------ ---------------- Increase (Decrease) o Borrowings by TWI Cable, TWE and the TWE-Advance/Newhouse Partnership in the amounts of $2.477 billion, $2.586 billion, and $14 million, respectively, under the New Credit Agreement, at estimated annual interest rates of 6.875%, 6.5% and 6.5%, respectively, for the three months ended March 31, 1995 and 5.375%, 5% and 5%, respectively, for the year ended December 31, 1994 $ 43 $ 42 $133 $130 o Repayment by TWE of $2.45 billion of outstanding indebtedness under the existing TWE bank credit agreement - (41) - (124) o Repayment by TWI Cable of $1.206 billion of indebtedness assumed in the CVI Acquisition (22) - (83) - o Repayment by TWI Cable of $1.124 billion of indebtedness assumed in the KBLCOM Acquisition (30) - (104) - o Repayment of $222 million of Paragon's indebtedness, funded equally by Time Warner and TWE - (5) - (18) o Amortization of $11 million and $39 million of deferred financing costs allocated to Time Warner and the Entertainment Group, respectively, in connection with obtaining the New Credit Agreement on a straight-line basis for a five-year period 1 2 2 8 o Reduction of historical amortization of deferred financing costs recorded with respect to the existing TWE credit agreement - (9) - (25) ---- ---- ---- ---- Net decrease in interest costs $ (8) $(11) $(52) $(29) ==== ==== ==== ====
Income taxes of $8 million and $33 million, respectively, have been provided at a 41% tax rate on the aggregate net reduction in interest costs. (j) Pro forma adjustments to record $23 million and $12 million, respectively, of increased income from Time Warner's equity in the pretax income of the Entertainment Group reflect the aggregate effect on TWE's operating results from (1) the TWE-A/N Transaction, (2) all of the fees to be earned by TWE with respect to its management of certain of Time Warner's cable television systems and (3) the Asset Sale Transactions, as more fully described in the notes to the Entertainment Group pro forma consolidated condensed financial statements contained elsewhere herein. TWE's consolidation of Paragon, as more fully described in the notes to the Entertainment Group pro forma consolidated condensed financial statements contained elsewhere herein, has no pro forma effect on the net income of TWE and, accordingly, the consolidation of Paragon has no effect on the pro forma operating results of Time Warner. Income taxes of $9 million and $1 million, respectively, have been provided at a 41% tax rate on the aggregate increase in income from Time Warner's equity in the pretax income of the Entertainment Group, adjusted for certain temporary differences. TIME WARNER ENTERTAINMENT GROUP PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET March 31, 1995 (millions, unaudited)
Entertainment Group TWE-A/N Consolidation 1995 Debt Asset Sale Pro Historical Transaction(a) of Paragon(b) Refinancing(c) Transactions(d) Forma A S S E T S Cash and equivalents $ 1,267 $ - $ 8 $ - $ (10) $ 1,265 Other current assets 2,453 - 14 - (96) 2,371 ------- ------ ------ ------- ------- ------- Total current assets 3,720 - 22 - (106) 3,636 Noncurrent inventories 1,752 - - - - 1,752 Loan receivable from Time Warner 400 - - - - 400 Investments 795 26 (340) - - 481 Property, plant and equipment 4,083 313 396 - (486) 4,306 Goodwill 4,400 68 86 - (279) 4,275 Cable television franchises 3,189 3 295 - (73) 3,414 Other assets 704 10 3 12 (77) 652 ------- ------ ------ ------- ------- ------- Total assets $19,043 $ 420 $ 462 $ 12 $(1,021) $18,916 ======= ====== ====== ======= ======= ======= LIABILITIES AND PARTNERS' CAPITAL Total current liabilities $ 2,945 $ - $ 66 $ - $ (19) $ 2,992 Long-term debt 7,162 6 222 (72) (1,050) 6,268 Other long-term liabilities 777 414 174 111 63 1,539 Time Warner General Partners' senior capital 1,696 - - - - 1,696 Partners' capital 6,463 - - (27) (15) 6,421 ------- ------ ------ ------- -------- ------- Total liabilities and partners' capital $19,043 $ 420 $ 462 $ 12 $ (1,021) $18,916 ======= ====== ====== ======= ======== =======
See accompanying notes. TIME WARNER ENTERTAINMENT GROUP PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS Three Months Ended March 31, 1995 (millions, unaudited)
Entertainment TWI-TWE Group TWE-A/N Consolidation 1995 Debt Management Asset Sale Pro Historical Transaction(e) of Paragon(f) Refinancing(g) Fees (h) Transactions(i) Forma Revenues $2,073 $ 137 $ 87 $ - $ 6 $(39) $2,264 Cost of revenues 1,426 51 67 - - (26) 1,518 Selling, general and administrative 446 56 15 - - (10) 507 ------ ------ ----- ----- ----- ----- ------ Operating expenses 1,872 107 82 - - (36) 2,025 Business segment operating income (loss) 201 30 5 - 6 (3) 239 Interest and other, net (164) (27) (5) 11 - 17 (168) Corporate expenses (15) - - - - - (15) ------ ------ ----- ----- ----- ----- ------ Income before income taxes 22 3 - 11 6 14 56 Income tax provision (11) - - - - (4) (15) ------ ------ ----- ----- ----- ----- ------ Net income $ 11 $ 3 $ - $ 11 $ 6 $ 10 $ 41 ====== ====== ===== ===== ===== ===== ====== - --------------- Includes depreciation and amortization expense of: $ 230 $ 26 $ 20 $ - $ - $ (6) $ 270 ====== ===== ===== ===== ===== ===== ======
See accompanying notes. TIME WARNER ENTERTAINMENT GROUP PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 1994 (millions, unaudited)
TWI-TWE TWE-A/N Consolidation 1995 Debt Management Asset Sale Pro Historical Transaction(e) of Paragon(f) Refinancing(g) Fees (h) Transactions(i) Forma Revenues $8,509 $ 527 $ 348 $ - $ 25 $(619) $8,790 Cost of revenues 6,003 209 270 - - (511) 5,971 Selling, general and administrative 1,654 206 60 - - (29) 1,891 ------ ----- ----- ----- ------ ----- ------ Operating expenses 7,657 415 330 - - (540) 7,862 Business segment operating income (loss) 852 112 18 - 25 (79) 928 Interest and other, net (616) (99) (18) 29 - 53 (651) Corporate expenses (60) - - - - - (60) ------ ----- ----- ----- ------ ----- ------ Income (loss) before income taxes 176 13 - 29 25 (26) 217 Income tax (provision) benefit (40) - - - - 6 (34) ------ ----- ----- ----- ----- ----- ------ Net income (loss) $ 136 $ 13 $ - $ 29 $ 25 $ (20) $ 183 ====== ===== ===== ===== ===== ===== ====== - --------------- Includes depreciation and amortization expense of: $ 959 $ 104 $ 63 $ - $ - $ (86) $1,040 ====== ===== ===== ===== ====== ===== ======
See accompanying notes. TIME WARNER INC. NOTES TO THE ENTERTAINMENT GROUP PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (a) Reflects the historical assets and liabilities of Advance/Newhouse as of March 31, 1995 (and as of January 31, 1995 with respect to the Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries, which entities have different fiscal years), as well as certain pro forma adjustments directly related to the TWE-Advance/Newhouse Transaction. The pro forma adjustments reflect (1) the exclusion of approximately $38 million of negative working capital that was not assumed by the TWE-Advance/Newhouse Partnership and (2) the incurrence of $6 million of additional indebtedness for the payment of transaction costs. TWE owns a two-thirds equity interest and will consolidate the partnership. Accordingly, the one-third equity interest in the partnership owned by Advance/Newhouse has been reflected in the Entertainment Group pro forma consolidated condensed balance sheet as minority interest. The assets contributed by TWE and Advance/Newhouse to the TWE-Advance/Newhouse Partnership have been reflected in the pro forma consolidated condensed balance sheet at their predecessor's historical cost. No gain was recognized by TWE upon the capitalization of the partnership. (b) Pro forma adjustments reflect the consolidation of Paragon's financial position as of March 31, 1995 as a result of TWE's control over the management of such entity. Minority interest of $174 million has been recorded as a component of other long-term liabilities reflecting Time Warner's interest in the joint venture. (c) Pro forma adjustments to record the 1995 Debt Refinancing as of March 31, 1995 reflect (1) a net decrease in debt of $72 million, consisting of (i) $2.6 billion of aggregate borrowings by TWE and the TWE-Advance/Newhouse Partnership under the New Credit Agreement, (ii) the repayment of $2.45 billion of outstanding indebtedness under the existing TWE bank credit agreement at March 31, 1995 and (iii) the repayment of $222 million of Paragon's indebtedness, (2) an increase of $111 million in Time Warner's minority interest in Paragon, representing Time Warner's capital contribution to Paragon in the form of the repayment of its allocable share of Paragon's indebtedness, (3) the payment of an allocable $39 million of deferred financing costs in connection with the New Credit Agreement and (4) a reduction in TWE's partners' capital by $27 million to reflect the one-time write-off of deferred financing costs with respect to the existing TWE bank credit agreement. (d) Pro forma adjustments to record the Asset Sale Transactions as of March 31, 1995 reflect (1) the receipt by TWE of approximately $1.14 billion of aggregate gross proceeds with respect to the disposition by TWE of 51% of its interest in Six Flags, the payment by Six Flags of certain intercompany indebtedness and licensing fees to TWE in connection therewith and the sale by TWE of certain unclustered cable television systems, (2) a reduction in debt of approximately $1.050 billion, principally consisting of the use of the aggregate net proceeds received, after related taxes and fees, to repay indebtedness under the New Credit Agreement, (3) the deconsolidation of the assets and liabilities of Six Flags, including $126 million of third-party indebtedness, and a reduction in net assets with respect to the cable television systems to be sold and (4) the payment of $185 million in tax-related distributions that will reimburse Time Warner for the payment of income taxes on its allocable share of the taxable income arising from these transactions in accordance with the terms of the TWE partnership agreement. (e) Reflects the historical operating results of Advance/Newhouse for the three months ended March 31, 1995 and the year ended December 31, 1994 (and for the three months ended January 31, 1995 and for the twelve months ended October 31, 1994 with respect to certain contributed businesses which have different fiscal years), as well as certain pro forma adjustments directly related thereto. The pro forma adjustments reflect (1) an increase of $1 million and $2 million, respectively, in cost of revenues with respect to TWE's amortization of transaction costs on a straight-line basis over a three-year period and (2) an increase of $27 million and $99 million, respectively, in interest and other, net, representing Advance/Newhouse's minority interest in the net income of the TWE-Advance/Newhouse Partnership, including their one-third share of $45 million of annual management fees to be paid by the partnership to TWE. (f) Pro forma adjustments reflect the consolidation of Paragon's operating results for the three months ended March 31, 1995 and the year ended December 31, 1994, offset by Time Warner's minority share of the net income of Paragon in the amount of $16 million and $34 million, respectively. (g) Pro forma adjustments to record the 1995 Debt Refinancing for the three months ended March 31, 1995 and the year ended December 31, 1994 reflect lower interest costs of $11 million and $29 million, respectively, from (i) $2.6 billion of aggregate borrowings under the New Credit Agreement, which are expected to be used to refinance $2.561 billion of indebtedness (plus $39 million of related financing costs) and (ii) the repayment by Time Warner of $111 million of Paragon's indebtedness, as follows (in millions): Three Months Ended Year Ended March 31, 1995 December 31, 1994 ------------------ ----------------- Increase (Decrease) o Borrowings by TWE and the TWE- Advance/Newhouse Partnership in the amounts of $2.586 billion and $14 million, respectively, under the New Credit Agreement, at estimated annual interest rates for each borrower of 6.5% for the three months ended March 31, 1995 and 5% for the year ended December 31, 1994 $ 42 $130 o Repayment by TWE of $2.45 billion of indebtedness under the existing TWE bank credit agreement (41) (124) o Repayment of $222 million of Paragon's indebtedness, funded equally by TWE and Time Warner (5) (18) o Amortization of an allocable $39 million of deferred financing costs in connection with obtaining the New Credit Agreement on a straight- line basis for a five-year period 2 8 o Reduction of historical amortization of deferred financing costs recorded with respect to the existing TWE credit agreement (9) (25) ----- ----- Net decrease in interest costs $(11) $(29) ===== ===== (h) Pro forma adjustments for the three months ended March 31, 1995 and the year ended December 31, 1994 reflect fees to be received from Time Warner in the amount of $6 million and $25 million, respectively, with respect to TWE's management of certain of Time Warner's cable television systems. (i) Pro forma adjustments to record an increase of $10 million and a decrease of $20 million in net income, respectively, from the Asset Sale Transactions for the three months ended March 31, 1995 and the year ended December 31, 1994 reflect (1) the deconsolidation of the operating results of Six Flags, (2) the elimination of the operating results of the cable television systems to be sold and (3) a decrease in interest expense, representing interest savings from the repayment by TWE of indebtedness under the New Credit Agreement using the aggregate net proceeds received in these transactions. TWE will realize aggregate net income of approximately $300 million on these transactions, of which approximately $170 million will be recognized currently and approximately $130 million will be deferred as a result of TWE's guarantee of third-party, zero-coupon indebtedness of Six Flags due in 1999. Such income has not been reflected in the pro forma consolidated condensed statement of operations included elsewhere herein. Item 7. Financial Statements and Exhibits. (a) Financial statements of businesses acquired: (i) Summit Communications Group, Inc. and Subsidiaries (the documents listed in this paragraph (i) being referred to as the "Financial Statements of Summit Communications Group, Inc."): (A) Unaudited Consolidated Financial Statements as of March 31, 1995 and for each of the three months ended March 31, 1994 and 1995; and (B) Consolidated Financial Statements as of December 31, 1993 and 1994 and for each of the years ended December 31, 1992, 1993 and 1994, including the report thereof of Deloitte & Touche LLP, independent auditors ("Deloitte & Touche LLP"); (ii) Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries (the documents listed in this paragraph (ii) being referred to as the "Financial Statements of Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation"): (A) Unaudited Condensed Financial Statements as of January 31, 1995 and for each of the six months ended January 31, 1994 and 1995; and (B) Financial Statements as of July 31, 1993 and 1994 and for the three years ended July 31, 1992, 1993 and 1994, including the report thereon of Paul Scherer & Company LLP, independent auditors ("Paul Scherer & Company, LLP"); (iii) Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries (the documents listed in this paragraph (iii) being referred to as the "Financial Statements of Vision Cable Division of Vision Cable Communications, Inc."): (A) Unaudited Condensed Financial Statements as of March 31, 1995 and for each of the three months ended March 31, 1994 and 1995; and (B) Financial Statements as of December 31, 1993 and 1994 and for each of the years ended December 31, 1992, 1993 and 1994, including the report thereon of Paul Scherer & Company, LLP; (iv) Cablevision Industries Corporation and Subsidiaries (the documents listed in this paragraph (iv) being referred to as the "Financial Statements of Cablevision Industries Corporation"): (A) Unaudited Consolidated Financial Statements as of March 31, 1995 and for each of the three months ended March 31, 1994 and 1995; and (B) Consolidated Financial Statements as of December 31, 1993 and 1994 and for each of the years ended December 31, 1992, 1993 and 1994, including the report thereon of Arthur Andersen LLP; (v) Cablevision Industries Limited Partnership and Combined Entities (the documents listed in this paragraph (v) being referred to as the "Financial Statements of Cablevision Industries Limited Partnership"): (A) Unaudited Combined Financial Statements as of March 31, 1995 and for each of the three months ended March 31, 1994 and 1995; and (B) Combined Financial Statements as of December 31, 1993 and 1994 and for each of the years ended December 31, 1992, 1993 and 1994, including the report thereon of Arthur Andersen LLP; (vi) KBLCOM Incorporated (the documents listed in this paragraph (vi) being referred to as the "Financial Statements of KBLCOM Incorporated"): (A) Unaudited Consolidated Financial Statements as of March 31, 1995 and for each of the three months ended March 31, 1994 and 1995; and (B) Consolidated Financial Statements as of December 31, 1993 and 1994 and for each of the years ended December 31, 1992, 1993 and 1994, including the report thereon of Deloitte & Touche LLP; (b) Pro forma Consolidated Condensed Financial Statements: (i) Time Warner Inc.: (A) Pro Forma Consolidated Condensed Balance Sheet as of March 31, 1995; (B) Pro Forma Consolidated Condensed Statement of Operations for the year ended December 31, 1994 and the three months ended March 31, 1995; and (C) Notes to Pro Forma Consolidated Condensed Financial Statements. (ii) Entertainment Group: (A) Pro Forma Consolidated Condensed Balance Sheet as of March 31, 1995; (B) Pro Forma Consolidated Condensed Statement of Operations for the year ended December 31, 1994 and the three months ended March 31, 1995; and (C) Notes to Pro Forma Consolidated Condensed Financial Statements. (c) Exhibits: (i) Exhibit 23(a): Consent of Deloitte & Touche LLP. (ii) Exhibit 23(b): Consent of Paul Scherer & Company LLP. (iii) Exhibit 23(c): Consent of Arthur Andersen LLP. (iv) Exhibit 23(d): Consent of Deloitte & Touche LLP. (v) Exhibit 99(a): Financial Statements of Summit Communications Group, Inc. (incorporated by reference from pages 34 to 49 of the Annual Report on Form 10-K for the year ended December 31, 1994 and from pages 3 to 8 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 of Summit Communications Group, Inc.) (vi) Exhibit 99(b): Financial Statements of Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation. (vii) Exhibit 99(c): Financial Statements of Vision Cable Division of Vision Cable Communications, Inc. (viii) Exhibit 99(d): Financial Statements of Cablevision Industries Corporation (incorporated by reference from pages 30 to 49 of the Annual Report on Form 10-K for the year ended December 31, 1994 and from pages 2 to 11 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 of Cablevision Industries Corporation). (ix) Exhibit 99(e): Financial Statements of Cablevision Industries Limited Partnership and Combined Entities. (x) Exhibit 99(f): Financial Statements of KBLCOM Incorporated. (xi) Exhibit 99(g): Pro Forma Consolidated Condensed Balance Sheet as of March 31, 1995, Pro Forma Consolidated Condensed Statement of Operations for the year ended December 31, 1994 and the quarterly period ended March 31, 1995 and Notes to Pro Forma Consolidated Condensed Financial Statements of Time Warner Entertainment Company, L.P. (the "Pro Forma Financial Statements of Time Warner Entertainment Company, L.P.") (incorporated by reference from pages 3 to 15 of the Current Report on Form 8-K of Time Warner Entertainment Company, L.P. dated May 30, 1995). 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, in the City of New York, State of New York, on June 1, 1995. TIME WARNER INC., By: /s/ Richard J. Bressler ------------------------- Name: Richard J. Bressler Title: Senior Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit No. Description of Exhibit Sequential Page Number 23(a) Consent of Deloitte & Touche LLP, Independent Auditors. 23(b) Consent of Paul Scherer & Company LLP, Independent Auditors. 23(c) Consent of Arthur Andersen LLP, Independent Public Accountants. 23(d) Consent of Deloitte & Touche LLP, Independent Auditors. 99(a) Financial Statements of Summit Communications Group, Inc. (incorporated by reference from pages 34 to 49 of the Annual Report on Form 10-K for the year ended December 31, 1994 and from pages 3 to 8 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 of Summit Communications Group, Inc.) 99(b) Financial Statements of Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation. 99(c) Financial Statements of Vision Cable Division of Vision Cable Communications, Inc. 99(d) Financial Statements of Cablevision Industries Corporation (incorporated by reference from pages 30 to 49 of the Annual Report on Form 10-K for the year ended December 31, 1994 and from pages 2 to 11 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 of Cablevision Industries Corporation). 99(e) Financial Statements of Cablevision Industries Limited Partnership and Combined Entities. Exhibit No. Description of Exhibit Sequential Page Number 99(f) Financial Statements of KBLCOM Incorporated. 99(g) Pro Forma Financial Statements of Time Warner Entertainment Company, L.P. (incorporated by reference from pages 3 to 15 of the Current Report on Form 8-K of Time Warner Entertainment Company, L.P. dated May 30, 1995). [FN] - -------------------- Incorporated by reference. EX-23.A 2 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference of our report dated March 10, 1995, with respect to the consolidated financial statements and schedule of Summit Communications Group, Inc. included in the Annual Report on Form 10-K of Summit Communications Group, Inc. for each of the three years ended December 31, 1994 in each of the following registration statements of Time Warner, Inc.: 1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031 and No. 2-76753 on Form S-8; 2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 33-58262 on Form S-3; 3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8; 4. Post-Effective Amendment No. 8 to Registration Statements No. 2-26477 and No. 2-67216 on Form S-8; 5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8; 6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507 on Form S-8 and Registration Statement No. 33-48381 on Form S-8; 7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247 on Form S-8; 8. Registration Statement No. 33-33076 (the Prospectus constituting a part thereof also applies to Registration Statements No. 33-29029 and No. 33-29030) on Form S-8; 9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and Registration Statement No. 33-51471 on Form S-8; 10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on Form S-3; 11. Registration Statement No. 33-35317 on Form S-8; 12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8; 13. Registration Statement No. 33-47151 on Form S-8; 14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 33-47705 on Form S-4; 15. Registration Statement No. 33-57812 on Form S-3; 16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8; 17. Registration Statement No. 33-50237 on Form S-3; and 18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8. /s/ Deloitte & Touche LLP - ------------------------------ DELOITTE & TOUCHE LLP Atlanta, Georgia May 30, 1995 EX-23.B 3 CONSENT OF PAUL SCHERER & COMPANY LLP EXHIBIT 23(b) EXHIBIT 23(b) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of (i) our report dated Octobeer 7, 1994, with respect to the financial statements of Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries for each of the three years ended July 31, 1994, and (ii) our report dated March 24, 1995, with respect to the financial statements of Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries for each of the three years ended December 31, 1994, appearing in the Current Report on Form 8-K of Time Warner Inc. dated May 30, 1995, in each of the following: 1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031 and No. 2-76753 on Form S-8; 2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 33-58262 on Form S-3; 3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8; 4. Post-Effective Amendment No. 8 to Registration Statements No. 2-26477 and No. 2-67216 on Form S-8; 5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8; 6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507 on Form S-8 and Registration Statement No. 33-48381 on Form S-8; 7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247 on Form S-8; 8. Registration Statement No. 33-33076 (the Prospectus constituting a part thereof also applies to Registration Statements No. 33-29029 and No. 33-29030) on Form S-8; 9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and Registration Statement No. 33-51471 on Form S-8; 10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on Form S-3; 11. Registration Statement No. 33-35317 on Form S-8; 12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8; 13. Registration Statement No. 33-47151 on Form S-8; 14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 33-47705 on Form S-4; 15. Registration Statement No. 33-57812 on Form S-3; 16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8; 17. Registration Statement No. 33-50237 on Form S-3; and 18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8. /s/ Paul Scherer & Company LLP ------------------------------- PAUL SCHERER & COMPANY LLP New York, New York May 30, 1995 EX-23.C 4 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23(c) EXHIBIT 23(c) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated March 1, 1995, included, or incorporated by reference, in this Form 8-K, in each of the following: 1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031 and No. 2-76753 on Form S-8; 2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 33-58262 on Form S-3; 3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8; 4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477 and No. 2-67216 on Form S-8; 5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8; 6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507 on Form S-8 and Registration Statement No. 33-48381 on Form S-8; 7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247 on Form S-8; 8. Registration Statement No. 33-33076 (the Prospectus constituting a part thereof also applies to Registration Statements No. 33-29029 and No. 33-29030) on Form S-8; 9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and Registration Statement No. 33-51471 on Form S-8; 10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on Form S-3; 11. Registration Statement No. 33-35317 on Form S-8; 12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8; 13. Registration Statement No. 33-47151 on Form S-8; 14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 33-47705 on Form S-4; 15. Registration Statement No. 33-57812 on Form S-3; 16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8; 17. Registration Statement No. 33-50237 on Form S-3; and 18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8. /s/ Arthur Andersen LLP ------------------------ ARTHUR ANDERSEN LLP Stamford, Connecticut May 30, 1995 EX-23.D 5 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23(d) EXHIBIT 23(d) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated April 20, 1995, with respect to the consolidated financial statements of KBLCOM Incorporated included in this Form 8-K of Time Warner Inc. dated May 30, 1995, in each of the following: 1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031 and No. 2-76753 on Form S-8; 2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 33-58262 on Form S-3; 3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8; 4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477 and No. 2-67216 on Form S-8; 5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8; 6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507 on Form S-8 and Registration Statement No. 33-48381 on Form S-8; 7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247 on Form S-8; 8. Registration Statement No. 33-33076 (the Prospectus constituting a part thereof also applies to Registration Statements No. 33-29029 and No. 33-29030) on Form S-8; 9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and Registration Statement No. 33-51471 on Form S-8; 10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on Form S-3; 11. Registration Statement No. 33-35317 on Form S-8; 12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8; 13. Registration Statement No. 33-47151 on Form S-8; 14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 33-47705 on Form S-4; 15. Registration Statement No. 33-57812 on Form S-3; 16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8; 17. Registration Statement No. 33-50237 on Form S-3; and 18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8. /s/ Deloitte & Touche LLP - -------------------------- DELOITTE & TOUCHE LLP Houston, Texas May 30, 1995 EX-99.A 6 FINANCIAL STATEMENTS OF SUMMIT COMMUNICATIONS GROUP, INC. EXHIBIT 99(a) Financial Statements of Summit Communications Group, Inc. (incorporated by reference from pages 34 to 49 of the Annual Report on Form 10-K for the year ended December 31, 1994 and from pages 3 to 8 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 of Summit Communications Group, Inc.) EX-99.B 7 FINANCIAL STATEMENTS OF NEWHOUSE CABLE DIVISION EXHIBIT 99(b) Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Condensed Balance Sheet (UNAUDITED) January 31, 1995 Assets Current assets Cash $ 7,913,802 Receivables: Trade, less allowance for doubtful accounts 7,158,811 Other 2,548,697 Refundable income taxes 1,907,750 Prepaid expenses and other 1,536,780 Deferred income taxes 323,410 ------------ Total current assets 21,389,250 Property, plant and equipment - less accumulated depreciation 190,084,610 Notes receivable 2,727,644 Investments 12,524,698 Intangible assets - less accumulated amortization 68,372,391 Deferred income taxes 1,432,824 Other assets 941,897 ------------ Total assets $297,473,314 ============ Liabilities and divisional equity Current liabilities Accounts payable and accrued liabilities $ 27,762,555 Income taxes payable 7,715,499 ------------ Total current liabilities 35,478,054 Long-term liabilities 2,423,731 ----------- Total liabilities 37,901,785 ----------- Divisional equity 259,571,529 ----------- Total liabilities and divisional equity $297,473,314 ============ See notes to condensed financial statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Condensed Statements of Operations and Divisional Equity (UNAUDITED) Six Months Ended January 31, 1995 1994 Total operating revenues $161,224,896 $157,038,106 ------------ ------------ Operating expenses Programming costs 37,731,406 33,643,419 Selling, general and administrative 63,888,324 59,294,203 Depreciation and amortization 23,439,560 19,408,041 ------------ ------------ Total operating expenses 125,059,290 112,345,663 ------------ ------------ Operating income 36,165,606 44,692,443 Other (expense) income (526,415) 181,015 ----------- ----------- Income before taxes on income and cumulative effect of accounting change 35,639,191 44,873,458 Taxes on income 14,098,000 17,874,364 Income before cumulative ------------ ----------- effect of accounting change 21,541,191 26,999,094 Cumulative effect of a change in accounting for income taxes - 692,680 ------------ ------------ Net income 21,541,191 27,691,774 Divisional equity - beginning of period 226,095,948 158,519,280 Distributions from (to) parent 11,934,390 (2,682,427) ------------ ------------ Divisional equity - end of period $259,571,529 $183,528,627 ============ ============ See notes to condensed financial statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Condensed Statements of Cash Flows (UNAUDITED) Six Months Ended January 31, -------------------------------- 1995 1994 Cash flows from operating activities: Net income $21,541,191 $27,691,774 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,439,560 19,408,041 Cumulative effect of change in accounting for income taxes - (692,680) Change in working capital items: (Increase) in receivables - trade (74,796) (1,026,246) Decrease (increase) in receivables - other 980,367 (2,132,942) Decrease (increase) in refundable income taxes 466,121 (186,689) Decrease (increase) in prepaid expenses and other 99,903 (423,557) Decrease (increase) in other assets 67,201 (224,827) (Decrease) in accounts payable and accrued expenses (3,820,836) (3,336,356) Increase (decrease) in income taxes payable 6,591,565 (1,994,699) ----------- ------------ Net cash provided by operating activities 49,290,276 37,081,819 ----------- ------------ Cash flows used in investing activities: Capital expenditures (54,838,366) (32,886,133) (Increase) in investments - net (525,433) (486,583) (Increase) in notes receivable - (39,000) (Increase) in intangible assets (1,982,173) (131,510) ------------- ------------- Net cash used in investing activities (57,345,972) (33,543,226) ------------- ------------- Cash flows provided by (used in) financing activities: Distributions from (to) parent 11,934,390 (2,682,427) ------------ ------------- Net cash provided by (used in) financing activities 11,934,390 (2,682,427) ------------ ------------- Net increase in cash 3,878,694 856,166 Cash - beginning of period 4,035,108 4,618,969 ------------ ------------- Cash - end of period $ 7,913,802 $ 5,475,135 ============ ============= - Continued - See notes to condensed financial statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Condensed Statements of Cash Flows (UNAUDITED) - Continued - Six Months Ended January 31, -------------------------- 1995 1994 Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ - $ - ========== =========== Income taxes $7,040,314 $20,055,752 ========== =========== Supplemental disclosure of non-cash transactions On December 31, 1994, the division exchanged notes receivable and accrued interest for additional shares of E! Entertainment Television, Inc. preferred stock. $3,437,196 $ - ========== =========== See notes to condensed financial statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Condensed Financial Statements (UNAUDITED) January 31, 1995 1. Basis of presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted principles for interim financial information. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, there has been no material change in the information disclosed in the notes to financial statements included in the division's financial statements for the year ended July 31, 1994. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 2. Subsequent event On September 9, 1994, Newhouse Broadcasting Corporation and subsidiaries and an affiliate (Vision Cable Communications, Inc. and subsidiaries) entered into an agreement with Time Warner Entertainment Company, L.P. The agreement stipulates that Newhouse Broadcasting Corporation and subsidiaries and its affiliate will transfer their cable system divisions, along with certain cable systems owned by Time Warner Entertainment Company, L.P. to a newly formed partnership. The transaction was completed on April 1, 1995. PAUL SCHERER & COMPANY LLP CERTIFIED PUBLIC ACCOUNTANTS 330 MADISON AVENUE NEW YORK, NY 10017 TELEPHONE (212) 661-9300 FACSIMILE (212) 983-1921 Independent Auditor's Report ---------------------------- Board of Directors Newhouse Broadcasting Corporation We have audited the accompanying balance sheets of Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and subsidiaries as of July 31, 1994 and 1993, and the related statements of operations and divisional equity and cash flows for each of the three years in the period ended July 31, 1994. These financial statements are the responsibility of the division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and subsidiaries at July 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes 1, 8 and 11 to the financial statements, effective August 1, 1993, the division adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As discussed in Note 2 to the accompanying financial statements, on September 9, 1994, Newhouse Broadcasting Corporation and subsidiaries entered into a partnership agreement with another company for the purpose of merging certain cable systems owned by both entities. /s/ Paul Scherer & Company LLP October 7, 1994 Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Balance Sheets July 31, 1994 1993 ---- ---- Assets ------ Current assets -------------- Cash $ 4,035,108 $ 4,618,969 Receivables: Trade, less allowance for doubtful accountsof $849,441 in 1994 and $837,333 in 1993 7,084,015 6,292,208 Other 3,988,838 3,443,726 Refundable income taxes 2,373,871 709,960 Prepaid expenses and other 1,636,683 1,718,085 Deferred income taxes (Notes 1 and 8) 323,410 -- ------------ ------------ Total current assets 19,441,925 16,782,948 -------------------- Property, plant and equipment - less accumulated depreciation (Notes 1 and 4) 157,264,804 113,908,345 Notes receivable (Note 5) 5,705,066 5,358,399 Investments (Notes 1 and 6) 8,562,069 6,203,487 Intangible assets - less accumulated amortization (Note 7) 67,811,218 70,325,948 Deferred income taxes (Notes 1 and 8) 1,432,824 406,490 Other assets 1,009,098 911,220 ------------ ------------ Total assets $261,227,004 $213,896,837 ------------ ============ ============ Liabilities and divisional equity --------------------------------- Current liabilities ------------------- Accounts payable $ 19,417,636 $ 12,825,820 Accrued liabilities: Taxes, other than income taxes 5,485,239 4,725,002 Copyright fees 2,705,802 1,671,504 Payroll and related costs 2,071,859 1,057,038 Income taxes payable 1,123,934 32,055,567 Deferred revenue (Note 1) 1,902,855 2,218,767 ------------ ------------ Total current liabilities 32,707,325 54,553,698 ------------------------- Long-term liabilities (Note 9) 2,423,731 823,859 ----------------------------- ------------ ------------ Total liabilities 35,131,056 55,377,557 ----------------- Divisional equity 226,095,948 158,519,280 ----------------- ------------ ------------ Total liabilities and divisional equity $261,227,004 $213,896,837 --------------------------------------- ============ ============ See accompanying Notes to Financial Statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Statement of Operations and Divisional Equity Years Ended July 31, 1994 1993 1992 ---- ---- ---- Total operating revenues $318,224,972 $312,489,816 $287,493,010 - ------------------------ ------------ ------------ ------------ Operating expenses - ------------------ Programming costs 72,444,428 67,038,684 60,892,411 Selling, general and administration 122,673,132 118,171,763 111,245,151 Depreciation and amortization 48,226,815 39,499,777 35,932,372 ------------ ------------ ------------ Total operating expenses 243,344,375 224,710,224 208,069,934 ------------------------ ------------ ------------ ------------ Operating income 74,880,597 87,779,592 79,423,076 ---------------- Other (expense) (3,396,483) (2,701,461) (1,466,086) ------------ ------------ ------------ Income before taxes on income and cumulative effect of accounting change 71,484,114 85,078,131 77,956,990 ----------------- Taxes on income (Notes 1 and 8) 28,183,331 33,065,189 28,661,180 ------------ ------------ ------------ Income before cumulative effect of accounting change 43,300,783 52,012,942 49,295,810 -------------------- Cumulative effect of a change in accounting for income taxes (Notes 1 and 8) 692,680 -- -- ------------ ------------ ------------ Net income 43,993,463 52,012,942 49,295,810 ---------- Divisional equity - beginning of year 158,519,280 139,190,869 132,438,056 Distributions from (to) parent 23,583,205 (32,684,531) (42,542,997) ------------ ------------ ------------ Divisional equity - end of year $226,095,948 $158,519,280 $139,190,869 ------------------------------- ============ ============ ============ See accompanying Notes to Financial Statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Statement of Cash Flow Years Ended July 31, 1994 1993 1992 ---- ---- ---- Cash flows from operating activities: - ------------------------------------- Net income $43,993,463 $52,012,942 $49,295,810 Adjustments to reconcile net income to net cash provided by operating activities: ----------- Depreciation and amortization 48,226,815 39,499,777 35,932,372 Cumulative effect of change in accounting for income taxes (692,680) -- -- Deferred income taxes (657,064) 11,358 (72,927) Loss on disposal of property, plant and equipment 1,010,181 -- -- Change in working capital items: (Increase) decrease in receivables - trade (791,807) (2,493,458) 1,154,779 (Increase) in receivables - other (545,112) (796,969) (284,263) (Increase) in refundable income taxes (1,663,911) (183,482) (4,930) Decrease (increase) in prepaid expenses and other 81,402 (18,080) 575,843 (Increase) decrease in other assets (97,878) 79,359 (367,193) Increase (decrease) in accounts payable and accrued liabilities 9,401,172 625,234 (1,171,227) (Decrease) increase in income taxes payable (30,931,633) 3,704,130 2,002,188 (Decrease) increase in deferred revenue (315,912) 1,480,767 (24,632) Increase in long-term liabilities 1,599,872 149,420 674,439 ----------- ----------- ----------- Net cash provided by operating activities 68,616,908 94,070,998 87,710,259 ---------- ----------- ----------- ----------- Cash flows provided by (used in) investing activities: --------------------- Capital expenditures (89,750,801)(52,403,365) (39,853,211) (Increase) decrease in investments - net (2,358,582) (369,201) 270,288 (Increase) in notes receivables (346,667) -- (1,626,917) (Increase) in intangibles (327,924)(12,572,777) (262,583) ----------- ----------- ----------- Net cash used in investing activities (92,783,974) (65,345,343)(41,472,423) ---------- ----------- ----------- ----------- Cash flows provided by (used in) financing activities: --------------------- Distributions from (to) parent 23,583,205 (32,684,531) (42,542,997) ----------- ----------- ----------- Net cash provided by (used in) financing activities 23,583,205 (32,684,531) (42,542,997) -------------------- ----------- ----------- ----------- Net (decrease) increase in cash (583,861) (3,958,876) 3,694,839 Cash - beginning of year 4,618,969 8,577,845 4,883,006 ----------- ----------- ----------- Cash - end of year $ 4,035,108 $ 4,618,969 $ 8,577,845 ------------------ =========== =========== =========== - Continued - See accompanying Notes to Financial Statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Statement of Cash Flow Years Ended July 31, - Continued - 1994 1993 1992 ---- ---- ---- Supplemental disclosures of cash flow information - ----------- Cash paid during the year for: Interest $ 44,840 $ 6,666 $ 1,401 =========== =========== =========== Income taxes $61,435,939 $29,656,677 $27,277,691 =========== =========== =========== See accompanying Notes to Financial Statements. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements 1. Summary of significant accounting policies ------------------------------------------ Description of business The Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and subsidiaries ("the division") provides cable television services and telecommunications services throughout the United States. The division also provides advertising to businesses and individuals in the areas in which it operates cable systems. Financial statement presentation The financial statements include only those accounts related to the division's cable operations after elimination of significant intercompany transactions. All other accounts of Newhouse Broadcasting Corporation and subsidiaries have not been included in the financial statements since they are not directly related to cable operations. Credit risk A significant portion of the division's customer base is concentrated within the local geographical areas of the cable systems. The division generally extends credit to its customers and the ultimate collection of accounts receivable could be affected by the local economies. Management performs continuous credit evaluations of its customers and may require cash in advance or other special arrangements for certain customers. Management does not believe that there is any significant credit risk which could have a material effect on the financial condition of the division. Property, plant and equipment Property, plant and equipment is recorded at cost. Depreciation is calculated over the estimated useful lives of the assets using straight-line and accelerated methods for financial and income tax purposes. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements Investments Investments in which the division has less than a 20% interest are accounted for under the cost method. Investment partnerships in which the division owns at least a 20%, but not more than a 50% interest are accounted for under the equity method. Franchise costs Costs of obtaining franchises to operate cable systems are amortized by the straight-line method over the periods of the respective franchises. The remaining lives of such franchises range from 1 to 19 years. Goodwill The division has classified as goodwill the cost in excess of fair market value of identifiable net assets acquired in purchase transactions. Goodwill is being amortized on a straight-line basis over a period of 10 to 40 years. Deferred revenue Proceeds received from subscribers are deferred at the time of receipt and are recorded as income as services are provided. Taxes on income In 1993, the division adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (Note 8). Statement of cash flows For the purposes of the statement of cash flows, the division considers all highly liquid investments with a maturity of less than three months to be cash equivalents. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements 2. Transfer of division to new partnership --------------------------------------- On September 9, 1994, Newhouse Broadcasting Corporation and subsidiaries and an affiliate (Vision Cable Communications, Inc. and subsidiaries) entered into an agreement with Time Warner Entertainment Company, L.P. The agreement stipulates that Newhouse Broadcasting Corporation and subsidiaries and its affiliate will transfer their cable system divisions, along with certain cable systems owned by Time Warner Entertainment Company, L.P. to a newly formed partnership. The transaction is expected to close on April 1, 1995. 3. Acquisition ----------- During 1993, the division purchased the remaining outside interest in a cable subsidiary for $12,572,777. 4. Property, plant and equipment ----------------------------- Property, plant and equipment consisted of the following: July 31, -------- 1994 1993 ---- ---- Land $ 3,454,455 $ 3,448,848 Buildings and improvements 20,237,377 20,176,824 Technical equipment 297,110,510 226,714,265 Other equipment, automobiles, furniture and fixtures and other 33,981,839 30,293,817 ------------ ------------ Total cost 354,784,181 280,633,754 ---------- Less: Accumulated depreciation 197,519,377 166,725,409 ------------ ------------ Property, plant and equipment - net $157,264,804 $113,908,345 --------------- ============= ============ Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements Depreciation expense amounted to $45,384,161, $36,823,991 and $33,380,647 for the years ended July 31, 1994, 1993 and 1992, respectively. 5. Notes receivable ---------------- Notes receivable included the following: July 31, -------- 1994 1993 ---- ---- PPVN Holding Company - Series S notes (a) $2,450,500 $2,450,500 PPVN Holding Company - Series A note (a) 277,144 277,144 E! Entertainment Television, Inc. (b) 2,977,422 2,630,755 ---------- ---------- $5,705,066 $5,358,399 ========== ========== (a) The Series S notes bear simple interest of 7.5% and are payable no later than 30 years from the date of issuance. The Series S notes were issued as follows: 1988 $861,250 1989 585,000 1990 468,000 1991 260,000 1992 276,250 ---------- $2,450,500 ========== The series A note was issued November 18, 1988 and carries a 7.5% interest rate, compounded annually. All principal and interest is payable no later than November 18, 2018. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements Both the Series S and Series A notes become payable in each year when PPVN Holding Company generates a positive cash flow in accordance with its by-laws. The Series S notes have priority as to principal and interest followed by the Series B notes, if any, and the Series A note. The division has not accrued interest on either the Series S or Series A notes and to date, no interest or principal has been paid. (b) The E! Entertainment Television, Inc. notes bear interest at the applicable federal rate as set forth in the Internal Revenue code. Principal and interest are due on August 11, 2003, but may be repaid earlier if certain conditions are met. 6. Investments ----------- Investments (at cost) included the following: July 31, -------- 1994 1993 ---- ---- E! Entertainment Television, Inc. - preferred stock - non-marketable (7.0% owned) $4,350,577 $4,330,280 Partnerships and other (a) 4,211,492 1,873,207 ---------- ---------- $8,562,069 $6,203,487 ========== ========== (a) Investment in partnerships and other includes the division's 10.43% interest in PrimeStar Partners L.P. The division has entered into a contract which guarantees payment of up to $70,625,000 to finance part of the total costs associated with the construction and launch of two satellites for PrimeStar Partners L.P. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements 7. Intangible assets ----------------- Intangible assets less accumulated amortization consisted of the following: July 31, -------- 1994 1993 ---- ---- Goodwill $93,871,168 $93,608,404 Franchise costs 4,050,133 4,152,922 ----------- ----------- Total 97,921,301 97,761,326 ----- Less: Accumulated amortization 30,110,083 27,435,378 ----------- ----------- Intangible assets-net $67,811,218 $70,325,948 --------------------- =========== =========== Amortization expense amounted to $2,842,654, $2,675,786 and $2,551,725 for the years ended July 31, 1994, 1993 and 1992, respectively. 8. Taxes on income --------------- Taxes on income consisted of the following: Years Ended July 31, -------------------- 1994 1993 1992 ---- ---- ---- Current: -------- Federal $ 25,171,766 $ 28,407,034 $ 26,691,145 State and local 3,668,629 4,646,797 2,042,962 ------------ ------------ ------------ 28,840,395 33,053,831 28,734,107 ------------ ------------ ------------ Deferred: -------- Federal (528,718) 11,358 (72,927) State and local (128,346) -- -- ------------ ------------ ------------ (657,064) 11,358 (72,927) ------------ ------------ ------------ Total $ 28,183,331 $ 33,065,189 $ 28,661,180 ----- ============ ============ ============ Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements Effective August 1, 1993, the division adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The cumulative effect of adopting this pronouncement as a change in accounting principle resulted in an increase to net income of $692,680 for the year ended July 31, 1994. Prior years' financial statements were not restated to apply the provisions of SFAS No. 109. Deferred income taxes are provided for temporary differences between the financial reporting bases and the tax bases of the division's assets and liabilities. Temporary differences which give rise to significant deferred tax assets and liabilities at July 31, 1994 are as follows: Accrued pension cost $ 549,125 Postretirement benefits liability 426,296 Equity in partnership investments 457,401 Reserve for doubtful accounts 331,181 Accrued vacation pay (117,000) Other 109,231 ---------- $1,756,234 ========== Current $ 323,410 Long-term 1,432,824 ---------- $1,756,234 ========== The division's taxable income is included in the consolidated federal income tax return filed by Newhouse Broadcasting Corporation and subsidiaries. Deferred income tax expense is allocated to members of the group including the division, by applying SFAS 109 to each member of the group as if it were a separate taxpayer. Current income tax expense is allocated to members of the group, including the division, based on each member's proportionate share of income (loss). Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements The income tax expense differs from the amount computed by applying the federal statutory rate to income before taxes on income. The difference is reconciled as follows: Years Ended July 31, -------------------- 1994 1993 1992 ---- ---- ---- Income before taxes on income $ 71,484,114 $ 85,078,131 $ 77,956,990 Federal statutory income tax rate 35% 34.58% 34% ------------ ------------ ------------ 25,019,440 29,420,017 26,505,377 State and local income taxes, net of federal effect 2,301,184 3,039,935 1,348,355 Other 862,707 605,237 807,448 ----------- ----------- ----------- $28,183,331 $33,065,189 $28,661,180 =========== =========== =========== 9. Long-term liabilities --------------------- Long-term liabilities consisted of the following: July 31, -------- 1994 1993 ---- ---- Accrued pension cost (Note 10) $1,391,829 $ 823,859 Postretirement benefits liability (Note 11) 1,031,902 - ---------- --------- $2,423,731 $ 823,859 ========== ========= 10. Pension plans ------------- The division sponsors several pension plans which cover substantially all employees. These plans provide participating employees with retirement benefits in accordance with benefit provision formulas which are based on years of service and career pay. Funding is based on an evaluation and review of the assets, liabilities and requirements of each plan. SEE TABLES ON FOLLOWING PAGES Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements The following table sets forth the plan's funded status and amounts recognized in the division's balance sheets: July 31, -------- 1994 1993 ---- ---- Actuarial present value of accumulated benefit obligations Vested $(9,335,054) $(8,723,895) Nonvested (140,572) (158,496) ------------ ------------ Total accumulated benefit obligations (9,475,626) (8,882,391) - ------------------------------------- Projected compensation increases (3,662,990) (3,933,754) ------------ ------------ Projected accumulated benefit obligations (13,138,616) (12,816,145) - ----------------------------------------- Plan assets at fair market value, primarily fixed income securities, equities, and short-term securities 9,050,780 7,991,538 ------------ ------------ Projected accumulated benefit obligations in excess of plan assets at fair market value (4,087,836) (4,824,607) ------------ Unrecognized net transition obligation 700,153 777,221 Adjustment required to recognize minimum liability - (5,198) Unrecognized net loss 1,605,925 2,735,631 ------------ ------------ Pension liability recognized in the balance sheet $ (1,781,758) $ (1,316,953) ----- ============= ============ Pension liability recognized in the balance sheet Current $ (389,929) $ (493,094) Long-term (1,391,829) (823,859) ------------ ------------ Net $ (1,781,758) $ (1,316,953) --- ============ ============ Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements Net periodic pension cost consisted of the following: Years Ended July 31, ------------------------------ 1994 1993 1992 -------- --------- --------- Service cost-benefits earned during the period $ 989,587 $ 741,452 $ 682,372 Interest cost on projected benefit obligation 1,014,711 792,355 671,175 Actual return on plan assets (184,824) (951,346) (666,976) Net amortization and deferral (395,340) 397,267 218,797 ---------- --------- --------- Net periodic pension cost $1,424,134 $ 979,728 $ 905,368 ------------------------- ========== ========= ========= The discount rate, expected long-term rate of return on assets and the rate of increase in future compensation used in determining the plans' funded status was as follows: July 31, ---------------------------- 1994 1993 1992 ------ ------ ------ Discount rate used to determine benefit obligations 8.5% 8% 9% Expected long-term rate of return on assets 9.5% 9.5% 9.5% Rate of increase in future compensation 5% 5% 5% Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements 11. Postretirement benefits other than pensions ------------------------------------------- The division provides postretirement health care and life insurance benefits to retirees and eligible dependents. These benefits are funded as incurred from the general assets of the division. Prior to 1994, the costs of retiree health care and life insurance benefits were charged to expense as premiums were paid (pay-as-you-go-basis). Effective August 1, 1993, the division adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires that the cost of postretirement benefits be accrued during an employee's active working career instead of recognizing these costs on the cash basis. In accordance with SFAS No. 106, the transition obligation, representing the unrecognized accumulated past-service benefit obligation for all plan participants, may be recognized as a cumulative effect of an accounting change or may be amortized on a straight-line basis over the average remaining service period of active plan participants. The division has elected to amortize the $5,612,833 of transitional obligation on a straight-line basis over 22 years. For the year 1994, the adoption of the statement resulted in an increase in postretirement benefit costs of $1,031,902. Prior years' financial statements were not restated to apply the provisions of SFAS No. 106. The following tables set forth the postretirement benefit plans combined funding status reconciled to the balance sheet at July 31, 1994 and net postretirement benefit cost for the year then ended. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements Funded status: -------------- Accumulated postretirement benefit obligation (APBO) attributable to: ---------------- Retiree $ 523,952 Fully eligible active participants 1,166,631 Other active participants 3,973,033 ----------- Accumulated postretirement benefit obligation 5,663,616 Unrecognized net loss 725,694 Unrecognized transition obligation (5,357,408) ----------- Postretirement benefits liability $ 1,031,902 --------------------------------- =========== Net postretirement benefit cost for the year ended July 31, 1994 consisted of the following components: ------------------------------------------- Service cost - benefits earned during the year $ 363,165 Interest cost on projected benefit obligation 447,641 Net amortization and deferral 255,115 ---------- Net postretirement benefit cost $1,065,921 ------------------------------- ========== The assumed weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 8.5%. The assumed weighted average rate of increase in future compensation levels related to pay-related life insurance benefits was 5%. The assumed weighted average health-care cost trend rate in 1994 was approximately 11%, and is assumed to decrease to 7% by the year 2009 and remain at that approximate level thereafter. The effect of increasing the health-care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at July 31, 1994 by $1,938,011 and the total service and interest cost components of the 1994 net postretirement benefit cost by $267,250. The pay-as-you-go cost for postretirement benefits was $34,018 for the year ended July 31, 1994. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements 12. Commitments and contingencies ----------------------------- (a) The division is the defendant in several lawsuits, which in the opinion of management, will not have a material adverse effect upon the financial condition of the division. No provision for any liability that may result has been made in the financial statements. (b) The division is obligated under long-term leases expiring at various dates through 2010. Certain leases contain renewal options. These leases generally provide that the division is liable for increases in property taxes and other operating expenses. Minimum lease commitments under operating leases were as follows: Year Amount ---- ------ 1995 $1,397,948 1996 1,174,773 1997 1,093,708 1998 999,478 1999 785,478 Thereafter 1,218,130 ---------- $6,669,515 ========== Total rent expense was approximately $1,397,000, $1,573,000 and $1,310,000 for the years ended July 31, 1994, 1993 and 1992, respectively. Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation and Subsidiaries Notes to Financial Statements (c) At July 31, 1994 and 1993, the division was contingently liable for approximately $17,700,000 and $3,150,000, respectively, net of deposits paid under contracts for the purchase of property, plant and equipment, performance of services and programming costs under various licensing agreements for which no liability is shown on the balance sheets. (d) Examination of the income tax returns of the division has been completed (or in the case of income tax returns which have not been examined, the period of assessment of additional income tax has expired) through at least the year 1983. The division is contingently liable for additional income taxes which may be assessed on examination of income tax returns for subsequent years. Management believes that any future assessments will not have a material adverse effect upon the financial condition of the division. No provision for any liability that may result has been made in the financial statements. (e) In October, 1992, the Cable Television Consumer Protection and Competition Act was enacted, which among other things, reimposed rate regulations on most cable systems. The regulations under this Act were effective September 1, 1993 and the required adjustments to customer billings have been reflected in the operating revenues of the company for the year ended July 31, 1994. In February, 1994, the Federal Communications Commission issued revised rules for calculating subscriber rates which took effect in July 1994. The effects of these revised rules on future operating revenues of the company cannot be determined at this time. EX-99.C 8 FINANCIAL STATEMENTS OF VISION CABLE DIVISION EXHIBIT 99(c) Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Financial Statements Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Condensed Balance Sheet (UNAUDITED) March 31, 1995 Assets Current assets Cash $ 2,948,590 Receivables: Trade, less allowance for doubtful accounts of $297,322 4,101,162 Other 687,526 Refundable income taxes 45,537 Prepaid expenses and other 1,377,283 Deferred income taxes 162,679 ------------ Total current assets 9,322,777 --------------------- Property, plant and equipment - less accumulated depreciation 122,796,632 Notes receivable 1,319,500 Investments 10,032,352 Intangible assets - less accumulated amortization 2,777,580 Deferred income taxes 542,751 Other assets 178,712 ------------ Total assets $146,970,304 ------------ ============ Liabilities and divisional equity Current liabilities Accounts payable and accrued liabilities $ 27,568,629 Income taxes payable 3,982,482 Deferred revenue 1,423,201 ------------ Total current liabilities 32,974,312 ------------------------- Long-term liabilities 1,094,381 ------------ Total liabilities 34,068,693 ----------------- Divisional equity 112,901,611 ----------- Total liabilities and division equity $146,970,304 ------------------------------------- ============ See notes to condensed financial statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Condensed Statements of Operations and Divisional Equity (UNAUDITED) Three Months Ended March 31, 1995 1994 ---- ---- Total operating revenues $ 55,316,795 $ 51,347,513 - ------------------------ ------------ ----------- Operating expenses Programming costs 12,255,159 10,620,877 Selling, general and administrative 22,672,763 19,636,723 Depreciation and amortization 7,703,423 6,250,001 ------------ ------------ Total operating expenses 42,631,345 36,507,601 ------------------------ ------------ ----------- Operating income 12,685,450 14,839,912 ---------------- Other income 9,314 181,089 ------------ ----------- Income before taxes on income 12,694,764 15,021,001 ----------------------------- Taxes on income 5,331,801 6,060,667 ------------ ------------ Net income 7,362,963 8,960,334 ---------- Divisional equity - beginning of period 104,736,289 70,879,502 Distributions from (to) parent 802,359 (14,913,243) ------------ ----------- Divisional equity - end of period $112,901,611 $ 64,926,593 --------------------------------- =========== =========== See notes to condensed financial statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Condensed Statements of Cash Flows (UNAUDITED) Three Months Ended March 31, 1995 1994 ---- ---- Cash flows from operating activities: Net income $ 7,362,963 $ 8,960,334 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,703,423 6,250,001 Change in working capital items: Decrease (increase) in receivables - trade 2,830,451 (181,834) (Increase) decrease in receivables - other (15,621) 3,299,321 Decrease in refundable income taxes 528,337 - (Increase) in prepaid expenses and other (93,715) (383,708) (Increase) decrease in other assets (24,424) 12,843 Increase in accounts payable and accrued liabilities 2,736,276 3,553,450 Increase in income taxes payable 3,707,302 1,668,474 Increase (decrease) in deferred revenue 313,434 (1,697) Increase in long-term liabilities - 3,488 ---------- ---------- Net cash provided by operating activities 25,048,426 23,180,672 ----------------------------------------- ---------- ---------- Cash flows provided by (used in) investing activities: Capital expenditures (23,631,755) (8,361,782) (Increase) decrease in investments - net (899,392) 43,282 (Increase) in notes receivable - (136,111) (Increase) in intangible assets (1,137) - ----------- ---------- Net cash used in investing activities (24,532,284) (8,454,611) ------------------------------------- ----------- ----------- Cash flows provided by (used in) financing activities: Distributions from (to) parent 802,359 (14,913,243) ----------- ----------- Net cash provided by (used in)financing activities 802,359 (14,913,243) ---------- ----------- ----------- Net increase (decrease) in cash 1,318,501 (187,182) Cash - beginning of period 1,630,089 1,238,838 ----------- ----------- Cash - end of period $ 2,948,590 $1,051,656 -------------------- =========== =========== - Continued - See notes to condensed financial statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Condensed Statements of Cash Flow (UNAUDITED) - Continued - Three Months Ended March 31, 1995 1994 ---- ---- Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ - $ - ========== ========== Income taxes $1,096,162 $4,392,193 ========== ========== See notes to condensed financial statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Condensed Financial Statements (UNAUDITED) March 31, 1995 1. Basis of presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted principles for interim financial information. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, there has been no material change in the information disclosed in the notes to financial statements included in the division's financial statements for the year ended December 31, 1994. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 2. Subsequent event On September 9, 1994, Vision Cable Communications, Inc. and subsidiaries and an affiliate (Newhouse Broadcasting Corporation and subsidiaries) entered into an agreement with Time Warner Entertainment Company, L.P. The agreement stipulates that Vision Cable Communications, Inc. and subsidiaries and it's affiliate will transfer their cable system divisions, along with certain cable systems owned by Time Warner Entertainment Company, L.P. to a newly formed partnership. The transaction was completed on April 1, 1995. PAUL SCHERER & COMPANY LLP CERTIFIED PUBLIC ACCOUNTANTS 330 MADISON AVENUE - NEW YORK, NY 10017 TELEPHONE (212) 661-9300 FACSIMILE (212) 983-1921 Independent Auditor's Report ---------------------------- Board of Directors Vision Cable Communications, Inc. We have audited the accompanying balance sheets of Vision Cable Division of Vision Cable Communications, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related statements of operations and divisional equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vision Cable Division of Vision Cable Communications, Inc. and subsidiaries at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 7 to the financial statements, effective January 1, 1993, the division adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes." As discussed in Note 2 to the accompanying financial statements, on September 9, 1994, Vision Cable Communications, Inc. and subsidiaries entered into a partnership agreement with another company for the purpose of merging certain cable systems owned by both entities. /s/ Paul Scherer & Company LLP ------------------------------ March 24, 1995 Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Balance Sheets December 31, 1994 1993 ---- ---- Assets ------ Current assets - -------------- Cash $ 1,630,089 $ 1,238,838 Receivables: Trade, less allowance for doubtful accounts of $308,197 in 1994 and $265,705 in 1993 6,931,613 5,175,452 Other 671,905 3,819,205 Refundable income taxes 573,874 - Prepaid expenses and other 1,283,568 914,718 Deferred income taxes (Notes 1 and 7) 162,679 125,349 ----------- ---------- Total current assets 11,253,728 11,273,562 -------------------- Property, plant and equipment - less accumulated depreciation (Notes 1 and 3) 106,784,850 67,572,236 Notes receivable (Note 4) 1,319,500 2,889,269 Investments (Notes 1 and 5) 9,132,960 4,423,620 Intangible assets - less accumulated amortization (Note 6) 2,859,893 3,382,948 Deferred income taxes (Notes 1 and 7) 542,751 407,359 Other assets 154,288 173,101 ------------ ----------- Total assets $132,047,970 $90,122,095 ------------ ============ =========== Liabilities and divisional equity --------------------------------- Current liabilities - ------------------- Accounts payable $ 22,913,613 $13,126,711 Accrued liabilities 1,918,740 1,272,712 Income taxes payable 275,180 2,493,627 Deferred revenue (Note 1) 1,109,767 1,520,469 ------------ ----------- Total current liabilities 26,217,300 18,413,519 ------------------------- Long-term liabilities (Note 8) 1,094,381 829,074 - ------------------------------ ------------ ----------- Total liabilities 27,311,681 19,242,593 ----------------- Divisional equity 104,736,289 70,879,502 - ----------------- ------------ ----------- Total liabilities and division equity $132,047,970 $90,122,095 ------------------------------------- ============ =========== See accompanying Notes to Financial Statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Statement of Operations and Divisional Equity Years Ended December 31, 1994 1993 1992 ---- ---- ---- Total operating revenues $209,210,836 $204,124,761 $189,623,925 - ------------------------ ----------- ------------ ------------ Operating expenses - ------------------ Programming costs 45,142,397 42,358,755 39,279,633 Selling, general and administrative 79,618,826 80,839,207 75,238,836 Depreciation and amortization 32,954,207 24,476,033 25,638,171 ---------- ------------ ------------ Total operating expenses 157,715,430 147,673,995 140,156,640 ------------------------ ----------- ----------- ----------- Operating income 51,495,406 56,450,766 49,467,285 ---------------- Other (expense) income (874,951) 231,427 (381,127) ----------- ---------- ---------- Income before taxes on income and cumulative effect of accounting change 50,620,455 56,682,193 49,086,158 ----------------- Taxes on income (Notes 1 and 7) 21,392,993 21,516,128 18,493,033 ---------- ---------- ---------- Income before cumulative effect of accounting change 29,227,462 35,166,065 30,593,125 ------------------------ Cumulative effect of a change in accounting for income taxes (Notes 1 and 7) - 514,476 - ----------- ---------- ---------- Net income 29,227,462 35,680,541 30,593,125 ---------- Divisional equity - beginning of year 70,879,502 58,473,393 65,830,516 Distributions from (to) parent 4,629,325 (23,274,432) (37,950,248) ---------- ----------- ----------- Divisional equity - end of year $104,736,289 $70,879,502 $58,473,393 ------------------------------- ============= =========== =========== See accompanying Notes to Financial Statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Statement of Cash Flows Years Ended December 31, 1994 1993 1992 ---- ---- ---- Cash flows from operating activities: - ------------------------------------- Net income $29,227,462 $35,680,541 $30,593,125 Adjustments to reconcile net income to net cash provided by operating activities: ----------- Depreciation and amortization 32,954,207 24,476,033 25,638,171 Cumulative effect of accounting change - (514,476) - Deferred income taxes (172,722) (18,232) - Change in working capital items: (Increase) in receivables - trade (1,756,161) (579,592) (844,758) Decrease (increase) in receivables - other 3,147,300 (3,275,373) (171,464) (Increase) decrease in refundable income taxes (573,874) 45,909 159,665 (Increase) decrease in prepaid expenses and other (368,850) 277,647 170,211 Decrease (increase) in other assets 18,813 2,391 (26,145) Increase (decrease) in accounts payable and accrued liabilities 10,432,929 5,356,442 (6,329,916) (Decrease) increase in income taxes payable (2,218,477) (12,900,384) 3,124,832 (Decrease) increase in deferred revenue (410,702) 102,368 876,128 Increase in long-term liabilities 265,308 97,668 199,240 ----------- ----------- ----------- Net cash provided by operating activities 70,545,263 48,750,942 53,389,089 ------------------------------ ----------- ----------- ----------- Cash flows provided by (used in) investing activities: --------------------- Capital expenditures (71,569,201) (23,646,858) (22,178,214) (Increase) decrease in investments - net (2,957,527) (683,814) 977,865 (Increase) in notes receivables (182,044) (56,034) (862,770) Acquisition of contracts, agreements and franchises (74,565) (162,433) (33,000) ----------- ----------- ---------- Net cash used in investing activities (74,783,337) (24,549,139) (22,096,118) ---------------------- ------------ ------------ ----------- Cash flows provided by (used in) financing activities: --------------------- Distributions from (to) parent 4,629,325 (23,274,432) (37,950,248) ------------ ------------ ----------- Net cash provided by (used in) financing activities 4,629,325 (23,274,432) (37,950,248) --------------------- ----------- ------------ ----------- Net increase (decrease) in cash 391,251 927,371 (6,657,278) Cash - beginning of year 1,238,838 311,467 6,968,745 ----------- ----------- ----------- Cash - end of year $ 1,630,089 $ 1,238,838 $ 311,467 ------------------ =========== =========== =========== - Continued - See accompanying Notes to Financial Statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Statement of Cash Flows Years Ended December 31, - Continued - 1994 1993 1992 ---- ---- ---- Supplemental disclosures of cash flow information ---------------- Cash paid during the year for: Interest $ 4,053 $ 31,163 $ 126,105 =========== =========== =========== Income taxes $24,378,861 $34,400,913 $15,120,981 =========== =========== =========== Supplemental disclosure of non-cash transactions - ------------------------------------------------ On December 31, 1994, the division exchanged notes receivable and accrued interest for additional shares of preferred stock of an investee. (Note 5) $ 1,751,813 $ - $ - =========== =========== =========== See accompanying Notes to Financial Statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements 1. Summary of significant accounting policies ------------------------------------------ Description of business. The Vision Cable Division of Vision Cable Communications, Inc. and subsidiaries ("the division"), provides cable service to subscribers in New Jersey, Florida, Louisiana, North Carolina, South Carolina and Pennsylvania. The division also provides advertising to businesses and individuals in the areas in which it operates cable systems. Financial statement presentation. The financial statements include only those accounts related to the division's cable operations after elimination of significant intercompany transactions. All other accounts of Vision Cable Communications, Inc. and subsidiaries have not been included in the financial statements since they are not directly related to cable operations. Credit risk. A significant portion of the division's customer base is concentrated within the local geographical areas of cable systems. The division generally extends credit to its customers and the ultimate collection of accounts receivable could be affected by the local economies. Management performs continuous credit evaluations of its customers and may require cash in advance or other special arrangements from certain customers. Management does not believe that there is any significant credit risk which could have a material effect on the financial condition of the division. Property, plant and equipment. Property, plant and equipment is recorded at cost. Depreciation is calculated over the estimated useful lives of the assets using straight-line and accelerated methods for financial and income tax purposes. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements Investments. Investments in which the division has less than a 20% interest are accounted for under the cost method. Investment partnerships in which the division owns at least a 20%, but not more than a 50% interest are accounted for under the equity method. Franchise costs. Costs of obtaining franchises to operate cable systems are amortized by the straight-line method over the periods of the respective franchises. The lives of such franchises range from 10 to 25 years. Goodwill. The division has classified as goodwill the cost in excess of fair market value of identifiable net assets acquired in purchase transactions. Goodwill is being amortized on a straight-line basis over a period of 10 to 40 years. Deferred revenue. Proceeds from subscribers are deferred at the time of receipt and are recorded as income as services are provided. Taxes on income. In 1993, the division adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (Note 7). Statement of cash flows. For the purposes of the statement of cash flows, the division considers all highly liquid investments with a maturity of less than three months to be cash equivalents. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements 2. Transfer of division to new partnership ---------------------------------------- On September 9, 1994, Vision Cable Communications, Inc. and subsidiaries and an affiliate (Newhouse Broadcasting Corporation and subsidiaries) entered into an agreement with Time Warner Entertainment Company, L.P. The agreement stipulates that Newhouse Broadcasting Corporation and subsidiaries and its affiliate will transfer their cable system divisions, along with certain cable systems owned by Time Warner Entertainment Company, L.P., to a newly formed partnership. The transaction is expected to close on April 1, 1995. 3. Property, plant and equipment ----------------------------- Property, plant and equipment consisted of the following: December 31, ----------------------- 1994 1993 ---- ---- Land $ 2,022,003 $ 2,008,903 Buildings and improvements 11,098,530 11,489,098 Leasehold improvements 2,138,192 1,311,681 Technical equipment, automobiles, furniture and fixtures 248,922,971 267,507,316 ----------- ----------- Total Cost 264,181,696 282,316,998 ---------- Less: Accumulated depreciation 157,396,846 214,744,762 ----------- ----------- Property, plant and equipment-net $106,784,850 $ 67,572,236 --------------------------------- =========== =========== Depreciation expense amounted to $32,356,587, $23,878,413 and $24,700,071 for the years ended December 31, 1994, 1993 and 1992, respectively. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements 4. Notes receivables ----------------- Notes receivables included the following: December 31, -------------- 1994 1993 ---- ---- PPVN Holding Company - Series S notes (a) $1,319,500 $1,319,500 E! Entertainment (b) - 1,569,769 ---------- --------- $1,319,500 $2,889,269 ========= ========= (a) The Series S notes bear simple interest of 7.5% and are payable no later than 30 years from the date of issuance. The Series S notes will become payable in each year when PPVN Holding Company generates a positive cash flow, as defined in the by-laws. The Board of Directors has the discretion to limit repayments if funds are needed for working capital requirements. The division has not accrued interest on these notes and no interest or principal has been paid. (b) Principal and interest were due on August 11, 2003. On December 31, 1994, the division exchanged $1,751,813 of notes receivable and accrued interest from E! Entertainment Television, Inc. for additional shares of class A preferred stock (Note 5). Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements 5. Investments ----------- Investments (at cost) included the following: December 31, ------------ 1994 1993 ---- ---- E! Entertainment Television, Inc. - preferred stock - non-marketable (3.8% owned) (Note 4(b)) $ 4,094,430 $ 2,331,687 Partnerships and other 5,038,530 2,091,933 ------------ ----------- $ 9,132,960 $ 4,423,620 =========== =========== 6. Intangible assets ----------------- Intangible assets less accumulated amortization consisted of the following: December 31, ------------ 1994 1993 ---- ---- Franchise, contracts and agreements $10,796,526 $10,706,577 Goodwill 1,154,680 1,154,680 Net transitional pension asset 2,641 18,025 ----------- ----------- Total 11,953,847 11,879,282 ----- Less: Accumulated amortization 9,093,954 8,496,334 ----------- ----------- Intangible assets - net $ 2,859,893 $ 3,382,948 ----------------------- =========== =========== Amortization amounted to $597,620, $846,508 and $938,100 for the years ended December 31, 1994, 1993 and 1992, respectively. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements 7. Taxes on income --------------- Taxes on income consisted of the following: Years Ended December 31, ------------------------ 1994 1993 1992 ---- ---- ---- Current - ------- Federal $17,825,141 $18,539,010 $15,792,827 State and local 3,740,574 2,995,350 2,700,206 ---------- ---------- ---------- 21,565,715 21,534,360 18,493,033 ---------- ---------- ---------- Deferred: - --------- Federal (140,928) (17,271) - State and local (31,794) (961) - ----------- ------------ ----------- (172,722) (18,232) - ----------- ------------ ----------- Total $21,392,993 $21,516,128 $18,493,033 ----- =========== =========== =========== Effective January 1, 1993, the division adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The cumulative effect of adopting this pronouncement as a change in accounting principle resulted in an increase to net income of $514,476 for the year ended December 31, 1993. Prior years' financial statements were not restated to apply the provisions of SFAS No. 109. Deferred income taxes are provided for temporary differences between the financial reporting bases and the tax bases of the company's assets and liabilities. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements Temporary differences which give rise to significant deferred tax assets are as follows: December 31, ------------ 1994 1993 ---- ---- Accrued pension cost $435,718 $264,642 Reserve for doubtful accounts 109,266 88,784 Other 160,446 179,282 ------- ------- $705,430 $532,708 ======= ======= Current $162,679 $125,349 Non-current 542,751 407,359 ------- ------- $705,430 $532,708 ======= ======= The division's taxable income is included in the consolidated federal income tax return filed by Vision Cable Communications, Inc. and subsidiaries with its ultimate parent, Advance Publications, Inc. Deferred income tax expense is allocated to members of the group including the division, by applying SFAS 109 to each member of the group as if it were a separate taxpayer. Current income tax expense is allocated to members of the group, including the division, based on each member's proportionate share of income (loss). The income tax expense differs from the amount computed by applying the federal statutory rate to income before taxes on income. The difference is reconciled as follows: Years Ended December 31, ------------------------- 1994 1993 1992 ---- ---- ---- Income before taxes on income $50,620,455 $56,682,193 $49,086,158 Federal statutory income tax rate 35% 35% 34% ---------- ---------- ---------- 17,717,159 19,838,768 16,689,294 State and local income taxes, net of federal effect 2,410,707 1,870,445 1,782,136 Non-deductible depreciation expense 1,211,754 - - Other 53,373 (193,085) 21,603 ---------- ---------- ---------- Total $21,392,993 $21,516,128 $18,493,033 ----- ========== ========== ========== Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements 8. Long-term liabilities --------------------- Long-term liabilities consisted of the following: December 31, ----------- 1994 1993 ---- ---- Accrued pension cost (Note 9) $1,094,381 $678,977 Other - 150,097 --------- ------- $1,094,381 $829,074 ========= ======= 9. Pension plans ------------- The division sponsors several pension plans which cover substantially all employees. These plans provide participating employees with retirement benefits in accordance with benefit provision formulas which are based on years of service and career pay. Funding is based on an evaluation and review of the assets, liabilities and requirements of each plan. SEE TABLES ON FOLLOWING PAGES Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements The following table sets forth the plan's funded status and amounts recognized in the division's balance sheet: December 31, ------------ 1994 1993 ---- ---- Actuarial present value of accumulated benefit obligations Vested $(4,682,268) $(4,040,688) Nonvested (260,547) (308,079) ----------- ----------- Total accumulated benefit obligations (4,942,815) (4,348,767) ------------------------------------- Projected compensation increases (2,171,942) (2,023,491) ----------- ---------- Projected accumulated benefit obligations (7,114,757) (6,372,258) ----------------------------------------- Plan assets at fair market value, primarily fixed income securities, equities, and short-term securities 4,196,966 3,856,540 --------- --------- Projected accumulated benefit obligations in excess of plan assets at fair market value (2,917,791) (2,515,718) --------------------------- Unrecognized net transition obligation 219,478 243,254 Adjustment required to recognize minimum liability (2,641) (18,025) Unrecognized net loss 1,606,573 1,611,512 ---------- --------- Pension liability recognized in the balance sheet $(1,094,381) $ (678,977) -------------------- =========== =========== Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements Net periodic pension cost consisted of the following: Years Ended December 31, ------------------------ 1994 1993 1992 ---- ---- ---- Service cost-benefits earned during the period $577,671 $390,265 $348,578 Interest cost on projected benefit obligation 491,541 364,082 300,720 Actual return on plan assets (482) (375,040) (280,016) Net amortization and deferral (263,053) 106,047 55,865 --------- --------- -------- Net periodic pension cost $805,677 $485,354 $425,147 ------------------------- ======= ======= ======= The discount rate, expected long-term rate on return on assets and the rate of increase in future compensation used in determining the plans' funded status were as follows: December 31, ------------ 1994 1993 1992 ---- ---- ---- Discount rate used to determine benefit obligations 7.75% 7.75% 9% Expected long-term rate of return on assets 9.5% 9.5% 9.5% Rate of increase in future compensation 5% 5% 5% 10. Commitments and contingencies ----------------------------- a. The division is the defendant in several lawsuits, which in the opinion of management, will not have a material adverse effect upon the financial condition of the division. No provision for any liability that may result has been made in the financial statements. Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries Notes to Financial Statements b. The division is obligated under long-term leases expiring at various dates through 2018. These leases generally provide that the division is liable for increases in property taxes and other operating expenses. Minimum lease commitments under operating leases were as follows: Year Amount ---- ------ 1995 $1,238,647 1996 635,028 1997 318,629 1998 157,166 1999 2,100 Thereafter 289,000 --------- $2,640,570 ========= Total rent expense was approximately $1,455,000, $1,267,000 and $1,161,000 for the years ended December 31, 1994, 1993 and 1992, respectively. c. Examination of the income tax returns of the company has been completed (or in the case of income tax returns which have not been examined, the period of assessment of additional income tax has expired) through at least the year 1983. The division is contingently liable for additional income taxes which may be assessed on examination of income tax returns for subsequent years. Management believes that any future assessments will not have a material adverse effect upon the financial condition of the division. No provision for any liability that may result has been made in the financial statements. EX-99.D 9 FINANCIAL STATEMENTS OF CABLEVISION INDUSTRIES CORPORATION EXHIBIT 99(d) Financial Statements of Cablevision Industries Corporation (incorporated by reference from pages 30 to 49 of the Annual Report on Form 10-K for the year ended December 31, 1994 and from pages 2 to 11 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995) EX-99.E 10 FINANCIAL STATEMENTS OF CABLEVISION INDUSTRIES LP EXHIBIT 99(e) CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED BALANCE SHEETS (All dollar amounts in 000's) March 31, December 31, 1995 1994 ---------- ------------ ASSETS (Unaudited) Cash and cash equivalents $ 4,146 $ 1,455 Subscriber receivables, net of allowance for doubtful accounts of $197 and $205 2,852 2,854 Prepaid expenses and other assets 7,523 3,413 Investment in cable television systems: Property, plant and equipment, at cost 177,771 176,915 Less - accumulated depreciation (113,833) (111,476) ---------- --------- 63,938 65,439 Franchising costs, net 18,993 20,250 Intangible assets, net 12,615 13,130 ---------- --------- Total investment in cable television systems 95,546 98,819 ---------- --------- $ 110,067 $ 106,541 ========== ========= LIABILITIES AND STOCKHOLDER'S AND PARTNERS' DEFICIT Senior bank debt $ 173,420 $ 173,420 Senior subordinated bank debt 53,019 53,690 Senior unsecured subordinated debt - Series A Notes 672 564 Senior unsecured subordinated debt - Series B Notes 5,000 5,000 Accounts payable and accrued expenses 14,688 14,288 Subscriber advance payments and deposits 2,074 2,970 Management fee payable 9,681 8,565 Commitments and contingencies Stockholder's and partners' deficit: Common stock 3 3 Additional paid-in capital 10,053 10,053 Accumulated deficit (13,836) (15,640) Partners' deficit (144,707) (146,372) ---------- ---------- Total stockholder's and partners' deficit (148,487) (151,956) ---------- ---------- $ 110,067 $ 106,541 ========== ========= The accompanying notes to combined financial statements are an integral part of these balance sheets. CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED STATEMENTS OF OPERATIONS (NOTE 1) (All dollar amounts in 000's) (Unaudited) Three Months ended March 31, ----------------- 1995 1994 ---- ---- Revenues 22,311 21,816 ------ ------ Costs and expenses: Service costs 6,868 6,630 Selling, general and administrative expenses 3,903 3,836 Management fee expense 1,116 1,078 Depreciation and amortization 5,758 6,197 ------ ------ 17,645 17,741 ------ ------ Operating income 4,666 4,075 Gain on sale of assets (2,747) - ------- ------ Interest expense: Bank debt, net 3,836 3,827 Unsecured subordinated debt and other 108 70 ------- ------ 3,944 3,897 ------- ------ Net income $ 3,469 $ 178 ======= ====== The accompanying notes to combined financial statements are an integral part of these statements. CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S AND PARTNERS'DEFICIT (NOTE 1) (All dollar amounts in 000's) (Unaudited) Accumulated Partners' Deficit Deficit ----------- ----------- BALANCE, December 31, 1994 $(15,640) $(146,372) Net income 1,804 1,665 ---------- ---------- BALANCE, March 31,1995 $(13,836) $(144,707) ========== ========== The accompanying notes to combined financial statements are an integral part of these statements. CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED STATEMENTS OF CASH FLOWS (NOTE 1) (All dollar amounts in 000's) (Unaudited) Three Months Ended March 31, ------------------ 1995 1994 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,469 $178 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 5,758 6,197 Net increase in subscriber receivables, prepaid expenses and other assets, accounts payable and accrued expenses, subscriber advance payments and deposits and management fee payable (3,488) (1,155) -------- ------- Net cash flows from operating activities 5,739 5,220 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in cable television systems (4,104) (1,063) Sale of cable television assets 1,682 - -------- ------- Net cash flows from investing activities (2,422) (1,063) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of senior bank debt - (4,320) Repayment of senior subordinated bank debt (671) - Increase in senior unsecured subordinated debt - Series A Notes 108 70 Other (63) (63) --------- -------- Net cash flows from financing activities (626) (4,313) --------- -------- Net increase (decrease) in cash 2,691 (156) CASH AND CASH EQUIVALENTS, beginning of year 1,455 13,894 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 4,146 $13,738 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest on bank debt (net of amount capitalized) $4,344 $4,231 The accompanying notes to combined financial statements are an integral part of these statements. CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS (All dollar amounts in 000's) (Unaudited) (1) Basis of Preparation of Combined Financial Statements The accompanying combined financial statements include the accounts of Cablevision Industries Limited Partnership ("CILP"), Cablevision Industries of Tennessee L.P. ("TLP"), Cablevision Industries of Florida, Inc. ("CIF"), Cablevision Industries of Middle Florida, Inc. ("CIMF"), Cablevision of Fairhaven/Acushnet ("CFA"), a partnership, and Cablevision Industries of Saratoga Associates ("CISA"), a partnership, collectively referred to as the "Company." All of the stock and partnerships' interest of the Company are owned directly or indirectly by one individual (the "Owner"). The accompanying combined financial statements have been prepared to comply with the terms of bank credit agreements referred to in Note 4. All significant intercompany accounts and transactions related to these entities have been eliminated in the combined financial statements. (2) Responsibility for Interim Financial Statements The financial statements as of March 31, 1995 and 1994 are unaudited; however, in the opinion of management, such statements include all adjustments necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the Combined Financial Statements and Notes for the fiscal year ended December 31, 1994. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ended December 31, 1995. (3) Bank Debt (a) The Company had $173,420 outstanding at March 31, 1995 and December 31, 1994, under a senior credit agreement (the "Senior Agreement") with a group of banks. The outstanding loans on March 31, 1995 are being repaid in 18 remaining consecutive quarterly installments, ranging from 2.75% to 6.0% of the principal outstanding on December 31, 1992. The Senior Agreement also provides for mandatory prepayments from excess cash flow, as defined. The Company has the option of paying interest at the prime rate, the Eurodollar rate, or the CD rate, plus a margin which is based on the attainment of certain financial ratios. The effective interest rate at March 31, 1995 and 1994 was 6.88% and 4.44%, respectively, before giving effect to interest rate exchange agreements discussed below. The applicable margins for the respective borrowing rate options have the following ranges: Interest Rate Option Margin Range -------------------- ------------ Prime rate 0% to 5/8% Eurodollar rate 3/4% to 1-1/2% CD rate 7/8% to 1-5/8% (b) The Company had $53,019 and $53,690 outstanding at March 31, 1995 and December 31, 1994, respectively, under a subordinated credit agreement (the "Subordinated Agreement") with a group of banks. The outstanding loans on March 31, 1995 will be repaid in 21 remaining consecutive quarterly installments ranging from 1.25% to 10.0% of the principal. The Subordinated Agreement also provides for mandatory prepayments from excess cash flow, as defined. The Company has the option of paying interest at either the prime rate, the Eurodollar rate, or the CD rate, plus a margin which is based on the attainment of certain financial ratios. The effective interest rate at March 31, 1995 and 1994 was 7.88% and 5.38%, respectively, before giving effect to interest rate exchange agreements discussed below. The applicable margins for the respective borrowing rate options have the following ranges: Interest Rate Option Margin Range -------------------- ------------ Prime rate 3/4% to 2-1/4% Eurodollar rate 1-3/4% to 3-1/4% CD rate 1-7/8% to 3-3/8% The Senior and Subordinated Agreements contain restrictive covenants regarding additional indebtedness, investments, guarantees, loans, acquisitions, dividends and other distributions, and require the maintenance of certain financial ratios. All ownership interests of the Company have been pledged as security for the outstanding debt under these Agreements. In addition, the Owner has guaranteed up to $23,000 of the outstanding debt through the execution of two assumption agreements. The Company has entered into interest rate exchange agreements (the "Swaps") with various banks pursuant to which the interest rate on $75,000 is fixed at a weighted average swap rate of 6.09%, plus the weighted average applicable margin over the Eurodollar rate option under the Senior and Subordinated Agreements. Under the terms of the Swaps, which expire in 1996 through 1998, the Company is exposed to credit loss in the event of nonperformance by the other parties to the Swaps. However, the Company does not anticipate nonperformance by the counterparties. (4) Senior Unsecured Subordinated Debt - Series A Notes The senior unsecured subordinated Series A notes are payable to Cablevision Industries Corporation ("CVI"), an affiliated company, the Owner and partners. Cash interest payments may be made as permitted under the Senior and Subordinated Agreements at an annual interest rate which cannot exceed the lesser of 10% or the effective interest rate on the senior subordinated bank debt. The interest rate at March 31, 1995 and 1994 was 7.0% and 4.5%, respectively. (5) Senior Unsecured Subordinated Debt - Series B Notes The senior unsecured subordinated Series B notes are payable to CVI, the Owner and partners. The annual interest rate cannot exceed the lesser of 10% or the effective interest rate on the senior subordinated bank debt. The interest rate at March 31, 1995 and 1994 was 7.0% and 4.5%, respectively. Principal and interest payments cannot be made until all debt outstanding under the Senior and Subordinated Agreements is paid in full. Any debt outstanding is subordinated to debt outstanding under the Senior and Subordinated Agreements. (6) Related Party Transactions The Company incurred management fees of approximately $1,116 and $1,078 in the three months ended March 31, 1995 and 1994, respectively. (7) Commitments and Contingencies Recent Regulation The Federal Communications Commission (the "FCC") has adopted regulations implementing almost all of the requirements of the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), and it is in the process of completing the remaining rulemaking proceedings. The FCC promulgated regulations governing the rates charged to subscribers for basic service, cable programming service (other than premium, pay-per-view and a la carte services) and equipment, and ordered a freeze on these rates from April 5, 1993 until May 15, 1994. The FCC adopted a benchmark methodology as the principal method of regulating basic service and cable programming service rates. Under the FCC's initial regulations, cable operators whose rates are above FCC benchmark levels would be required to reduce those rates to the benchmark level or by up to 10% of the rates in effect on September 30, 1992, whichever reduction was less, adjusted for equipment costs and for inflation and channel modifications occurring subsequent to September 30, 1992. On February 22, 1994, the FCC adopted a rate order which revised its benchmark regulatory scheme. This revision generally requires rate reductions, absent a successful cost-of-service showing, of 17% of September 30, 1992 rates, adjusted for inflation, channel modifications, equipment costs and increases in programming costs. The revised regulations became effective for the Company on July 15, 1994. Rate reductions will not be required if a cable operator can demonstrate that the rates for basic and other regulated programming services are justified and reasonable using FCC interim cost-of-service guidelines. The FCC will consider individual showings to rebut certain presumptions made under these guidelines. The Company cannot predict the ultimate outcome of the FCC's cost-of-service rulemaking. Rate increases for existing regulated services will be limited to an inflation-indexed amount plus increases in certain external costs which are beyond the cable operator's control, such as taxes and programming costs. Operators are able to increase rates under the benchmark regulatory scheme for new channels pursuant to an FCC-prescribed formula, which includes a 7.5% mark-up on new programming services. In addition to this formula for calculating the permissible rate for new services, the FCC adopted on November 10, 1994 a three-year flat fee mark-up plan for charges relating to new channels of cable programming services. In response to the 1992 Cable Act the Company repackaged certain existing cable services, added new channels, introduced a la carte services and adjusted rates for programming services and equipment. The FCC reviewed the a la carte packages offered in certain of the Cablevision systems to determine whether such packages should be subject to rate regulations and concluded that these a la carte packages qualify as "new product tiers" ("NPTs") which are not subject to rate regulation. Because the a la carte packages offered in the systems reviewed by the FCC are substantially identical to those offered in most of the Company's systems, the Company believes that all of such packages will qualify as NPTs that are not subject to rate regulation. On November 10, 1994, the FCC adopted regulations permitting cable operators to create NPTs that will not be subject to rate regulation upon compliance with certain conditions. Beyond its affect on a la carte service packages as described above, the FCC's NPT decision also provides the Company with additional pricing flexibility by affording the option of offering new services at rates that are not regulated under the FCC's rules. The Company continues to develop various strategies to minimize the adverse impact of rate regulations and the other provisions of the 1992 Cable Act on the Company's results of operations. Such strategies to date have included: (i) placing an increased emphasis on developing revenues from sources that are not subject to rate regulation, including advertising, premium programming services, NPT services and pay-per-view programming services; (ii) expanding channel capacity to add new unregulated services; and (iii) charging for certain equipment and installation services previously offered without charge or at discounted prices. In addition, only 31 % of the Company's subscribers are in communities that have sought FCC certification to regulate basic service rates, and the Company has received complaints concerning its cable programming rates in communities representing only approximately 29% of its subscribers. The Company elected to use both benchmark and cost-of-service methodology to justify its rates. The Company decided to use cost-of-service standards only after extensive evaluation and legal analyses by experts in the rate regulation area, and is justifying its regulated rates for approximately 27% of the Company's subscribers using such cost-of-service standards. Having decided to pursue the cost-of-service process, the Company added the resources and availed itself of the expertise needed to support the filings. The Company has reached agreements with local and state regulatory authorities in most of these cost-of-service proceedings regarding the prices that the Company is permitted to charge for basic service. These agreements allow the Company to charge its existing basic rates and to increase such rates under the FCC's "going forward" rules. The Company may not be able to justify its rates in the remaining cost-of-service showings and accordingly has recorded reserves it believes are adequate if the Company is unsuccessful in justifying such rates. No assurances can be given that the Company will be able to develop and successfully implement its other rate regulation strategies in order to minimize the potentially material adverse impact of the FCC's rate regulations on its results of operations. Additionally, the FCC's rate regulations and policies may be subject to further interpretation, clarification and modification by the FCC and the courts. The Company believes that the regulation of its industry, including the rates charged for regulated services under present FCC rules and the cable industry's restructuring of rates and services in response to the 1992 Cable Act, remains a matter of interest to Congress, the FCC and other regulatory authorities. Congress is currently considering legislation which would amend the rate regulation provisions of the 1992 Cable Act. Under the proposed legislation, the FCC could only consider a rate for cable programming services to be unreasonable if it substantially exceeds the national average rate for comparable cable programming services. A provision of another bill would eliminate rate regulation of cable programming services within a cable operator's franchise area if a common carrier is authorized to provide video programming directly to subscribers pursuant to a franchise, upon authorization by the FCC to a common carrier to provide video dialtone service or when the FCC has completed all actions necessary to prescribe regulations relating to video platforms. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on the Company. Pending Merger On February 6, 1995, CVI entered into an Agreement and Plan of Merger (the "CVI Merger Agreement") with Time Warner Inc. ("Time Warner"), the majority stockholder of CVI and a direct, wholly-owned subsidiary of Time Warner. In connection with the CVI Merger Agreement, two additional merger agreements and a purchase agreement were entered into providing for the acquisition of the Company by Time Warner. The closing of the merger and acquisition transactions with Time Warner is subject to customary conditions for transactions of this type, including certain stockholder and regulatory approvals, as specified in the respective agreements. (8) Sale of Certain Cable Assets On February 27, 1995, the Company sold certain assets used in providing cable television services in Orange County Florida for a purchase price of $4,856. Approximately 4,800 subscribers were sold as a result of this transaction. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Partners of Cablevision Industries Limited Partnership and Combined Entities: We have audited the accompanying combined balance sheets of Cablevision Industries Limited Partnership and Combined Entities (as described in Note 1 to the combined financial statements) as of December 31, 1994 and 1993, and the related combined statements of operations, changes in stockholder's and partners' deficit and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cablevision Industries Limited Partnership and Combined Entities as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Stamford, Connecticut, March 1, 1995 CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED BALANCE SHEETS (NOTE 1) (All dollar amounts in 000's) December 31, ---------------- ASSETS 1994 1993 ------ ---- ---- Cash and cash equivalents (Note 2) $ 1,455 $ 13,894 Subscriber receivables, net of allowance for doubtful accounts of $205 and $190 2,854 2,783 Prepaid expenses and other assets (Note 10) 3,413 2,541 Investment in cable television systems (Notes 2 and 3): Inventory and construction in progress 4,011 2,555 Property, plant and equipment, at cost 172,904 164,779 --------- --------- 176,915 167,334 Less - accumulated depreciation (111,476) (95,437) --------- --------- 65,439 71,897 Franchising costs, net of accumulated amortization of $30,843 and $36,870 20,250 24,717 Intangible assets, net of accumulated amortization of $16,405 and $34,048 13,130 17,044 --------- -------- Total investment in cable television systems 98,819 113,658 --------- -------- $ 106,541 $132,876 ========= ======== LIABILITIES AND STOCKHOLDER'S AND PARTNERS' DEFICIT Senior bank debt (Note 4) $ 173,420 $ 205,200 Senior subordinated bank debt (Note 4) 53,690 55,000 Senior unsecured subordinated debt - Series A Notes (Note 5) 564 282 Senior unsecured subordinated debt - Series B Notes (Note 6) 5,000 5,000 Accounts payable and accrued expenses 14,288 12,059 Subscriber advance payments and deposits 2,970 2,803 Management fee payable (Note 7) 8,565 4,216 Commitments and contingencies (Note 9) Stockholder's and partners' deficit: Common stock (Note 11) 3 3 Additional paid-in captial 10,053 10,053 Accumulated deficit (15,640) (17,913) Partners' deficit (146,372) (143,827) --------- --------- Total stockholder's and partners' deficit (151,956) (151,684) --------- --------- $ 106,541 $ 132,876 ========= ========= The accompanying notes to combined financial statements are an integral part of these balance sheets. CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED STATEMENTS OF OPERATIONS (NOTE 1) (All dollar amounts in 000's)
Year ended December 31, ------------------------------- 1994 1993 1992 ---- ---- ---- Revenues $ 88,560 $ 84,760 $ 77,921 -------- -------- -------- Costs and expenses: Service costs 26,554 24,979 23,180 Selling, general and administrative expenses 16,321 15,427 14,539 Management fee expense (Note 7) 4,349 4,216 3,895 Depreciation and amortization (Notes 2 and 3) 25,204 29,697 30,283 -------- -------- -------- Operating income 16,132 10,441 6,024 -------- -------- -------- Interest expense (Notes 2, 4, 5 and 6): Bank debt, net 16,122 16,474 20,416 Unsecured subordinated debt and other 282 282 668 -------- -------- -------- 16,404 16,756 21,084 -------- -------- -------- Net loss $ (272) $ (6,315) $(15,060) ======== ======== ========
The accompanying notes to combined financial statements are an integral part of these statements. CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S AND PARTNERS' DEFICIT (NOTE 1) (All dollar amounts in 000's) Accumulated Partners' Deficit Deficit ----------- ---------- BALANCE, January 1, 1992 $(20,426) $(119,939) Net income (loss) 432 (15,492) -------- --------- BALANCE, December 31, 1992 (19,994) (135,431) Net income (loss) 2,081 (8,396) -------- --------- BALANCE, December 31, 1993 (17,913) (143,827) Net income (loss) 2,273 (2,545) -------- --------- BALANCE, December 31, 1994 $(15,640) $(146,372) ======== ========= CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES COMBINED STATEMENTS OF CASH FLOWS (NOTE 1) (All dollar amounts in 000's)
Year Ended December 31, 1994 1993 1992 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (272) $ (6,315) $(15,060) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 25,204 29,697 30,283 Net increase (decrease) in subscriber receivables, prepaid expenses and other assets, accounts payable and accrued expenses, subscriber advance payments and deposits and management fee payable 5,802 4,850 (4,310) -------- -------- -------- Net cash flows from operating activities 30,734 28,232 10,913 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in cable television systems (10,265) (6,841) (7,680) Acquisition of cable television system - - (1,000) -------- -------- -------- Net cash flows from investing (10,265) (6,841) (8,680) activities -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in senior bank debt - - 17,000 Repayment of senior bank debt (31,780) (10,800) (16,000) Increase in senior subordinated bank debt - - 10,000 Repayment of senior subordinated bank debt (1,310) - (5,000) Repayment of other debt - - (788) Increase (decrease) in senior unsecured subordinated debt - Series A Notes 282 282 (1,063) Decrease in senior unsecured subordinated debt - Series B Notes - - (4,000) Other (100) (110) (200) -------- -------- -------- Net cash flows from financing activities (32,908) (10,628) (51) -------- -------- -------- Net (decrease) increase in cash (12,439) 10,763 2,182 CASH AND CASH EQUIVALENTS, beginning of year 13,894 3,131 949 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of year $ 1,455 $ 13,894 $ 3,131 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest on bank debt (net of amount capitalized) $ 15,975 $ 16,098 $ 22,100
The accompanying notes to combined financial statements are an integral part of these statements. CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS (All dollar amounts in 000's) (1) Basis of Preparation of Combined Financial Statements The accompanying combined financial statements include the accounts of Cablevision Industries Limited Partnership ("CILP"), Cablevision Industries of Tennessee L.P. ("TLP"), Cablevision Industries of Florida, Inc. ("CIF"), Cablevision Industries of Middle Florida, Inc. ("CIMF"), Cablevision of Fairhaven/Acushnet ("CFA"), a partnership, and Cablevision Industries of Saratoga Associates ("CISA"), a partnership, collectively referred to as the "Company." All of the stock and partnerships' interest of the Company are owned directly or indirectly by one individual (the "Owner"). The accompanying combined financial statements have been prepared to comply with the terms of bank credit agreements referred to in Note 4. All significant intercompany accounts and transactions related to these entities have been eliminated in the combined financial statements. (2) Significant Accounting Policies Cash equivalents Cash equivalents consist of short-term investments with original maturities less than or equal to three months. Property, plant and equipment Property, plant and equipment is recorded at purchased and capitalized cost. Capitalized costs principally consist of employee costs and interest on funds borrowed during construction. Capitalized labor amounted to approximately $1,252, $1,076 and $1,077 in 1994, 1993 and 1992, respectively. Capitalized interest amounted to approximately $237, $190 and $276 in 1994, 1993 and 1992, respectively. Cable systems' materials and supplies of approximately $3,059 and $2,366 at December 31, 1994 and 1993, respectively, are stated at the lower of cost or market and are included in inventory and construction in progress. Repairs and maintenance are charged to operations, and replacements, renewals and additions are capitalized. At the time of retirements, sales or other dispositions of property, the original cost and related accumulated depreciation are written off. Franchising costs Franchising costs include the assigned fair value of the franchises from purchased cable television systems and the costs of original franchise applications which are deferred until the franchise has been granted, at which time such costs are amortized. All costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise were unsuccessful. Franchising costs are amortized on a straight line basis over the lives of the current franchises, which range from five to thirty years. Intangible assets Intangible assets include goodwill, which is being amortized over fifteen years, and subscriber lists, which are being amortized over four years, the estimated average period that a subscriber is expected to remain connected to one of the Company's cable television systems. Income taxes Since CILP, TLP, CISA and CFA are partnerships, and CIF and CIMF are S Corporations, they are not subject to federal income taxes and no provision for income taxes relating to their operations has been reflected in the accompanying combined financial statements. The partners and stockholders of the applicable entities are required to report their share of income or loss in their respective income tax returns. (3) Investment in Property, Plant and Equipment As of December 31, 1994 and 1993, property, plant and equipment consisted of: 1994 1993 ---- ---- Land $ 832 $ 832 Buildings and leasehold improvements 3,218 3,036 Cable systems, equipment and subscriber devices 162,564 154,736 Vehicles 3,908 3,838 Furniture, fixtures and office equipment 2,382 2,337 ------- ------- $172,904 $164,779 ======= ======= Depreciation is calculated on a straight line basis over the following useful lives: Buildings 45 years Leasehold improvements Life of respective lease Cable systems, equipment and subscriber devices 5 to 10 years Vehicles 5 years Furniture, fixtures and office equipment 5 to 10 years (4) Bank Debt (a) The Company had $173,420 and $205,200 outstanding at December 31, 1994 and 1993, respectively, under a senior credit agreement (the "Senior Agreement") with a group of banks. The outstanding loans on December 31, 1994 are being repaid in 18 remaining consecutive quarterly installments, ranging from 2.75% to 6.0% of the principal outstanding on December 31, 1992. The Senior Agreement also provides for mandatory prepayments from excess cash flow, as defined. The Company made an optional prepayment of $11,880 in 1994. The Company does not expect to make a mandatory prepayment in 1995. The Company has the option of paying interest at the prime rate, the Eurodollar rate, or the CD rate, plus a margin which is based on the attainment of certain financial ratios. The effective interest rate at December 31, 1994 and 1993 was 6.67% and 4.37%, respectively, before giving effect to interest rate exchange agreements discussed below. The applicable margins for the respective borrowing rate options have the following ranges: Interest Rate Option Margin Range -------------------- ------------ Prime rate 0% to 5/8% Eurodollar rate 3/4% to 1- 1/2% CD rate 7/8% to 1-5/8% (b) The Company had $53,690 and $55,000 outstanding at December 31, 1994 and 1993, respectively, under a subordinated credit agreement (the "Subordinated Agreement") with a group of banks. The outstanding loans on December 31, 1994 will be repaid in 22 consecutive quarterly installments ranging from 1.25% to 10.0% of the principal, with the first installment due on March 31, 1995. The Subordinated Agreement also provides for mandatory prepayments from excess cash flow, as defined. The Company does not expect to make a mandatory prepayment in 1995. The Company has the option of paying interest at either the prime rate, the Eurodollar rate, or the CD rate, plus a margin which is based on the attainment of certain financial ratios. The effective interest rate at December 31, 1994 and 1993 was 7.68% and 5.25%, respectively, before giving effect to interest rate exchange agreements discussed below. The applicable margins for the respective borrowing rate options have the following ranges: Interest Rate Option Margin Range -------------------- --------------- Prime rate 3/4% to 2-1/4% Eurodollar rate 1-3/4% to 3-1/4% CD rate 1-7/8% to 3-3/8% The Senior and Subordinated Agreements contain restrictive covenants regarding additional indebtedness, investments, guarantees, loans, acquisitions, dividends and other distributions, and require the maintenance of certain financial ratios. All ownership interests of the Company have been pledged as security for the outstanding debt under these Agreements. In addition, the Owner has guaranteed up to $23,000 of the outstanding debt through the execution of two assumption agreements. The stated maturities of all debt outstanding as of December 31, 1994, other than the senior unsecured subordinated debt, are as follows: 1995 $ 14,630 1996 35,740 1997 47,130 1998 62,840 1999 57,080 Thereafter 9,690 -------- $227,110 ======== The Company has entered into interest rate exchange agreements (the "Swaps") with various banks pursuant to which the interest rate on $135,000 is fixed at a weighted average swap rate of 6.32%, plus the weighted average applicable margin over the Eurodollar rate option under the Senior and Subordinated Agreements. Under the terms of the Swaps, which expire in 1995 through 1998, the Company is exposed to credit loss in the event of nonperformance by the other parties to the Swaps. However, the Company does not anticipate nonperformance by the counterparties. (5) Senior Unsecured Subordinated Debt - Series A Notes The senior unsecured subordinated Series A notes are payable to Cablevision Industries Corporation ("CVI"), an affiliated company, the Owner and partners. Cash interest payments may be made as permitted under the Senior and Subordinated Agreements at an annual interest rate which cannot exceed the lesser of 10% or the effective interest rate on the senior subordinated bank debt. The interest rate at December 31, 1994 and 1993 was 4.5%. (6) Senior Unsecured Subordinated Debt - Series B Notes The senior unsecured subordinated Series B notes are payable to CVI, the Owner and partners. The annual interest rate cannot exceed the lesser of 10% or the effective interest rate on the senior subordinated bank debt. The interest rate at December 31, 1994 and 1993 was 4.5%. Principal and interest payments cannot be made until all debt outstanding under the Senior and Subordinated Agreements is paid in full. Any debt outstanding is subordinated to debt outstanding under the Senior and Subordinated Agreements. (7) Related Party Transactions The Company incurred management fees of approximately $4,349, $4,216 and $3,895 in 1994, 1993 and 1992, respectively, for management services provided by CVI. Net transfers in of approximately $35 and $194 of certain construction inventory and converters were made, at cost, between the Company and CVI in 1994 and 1993, respectively. (8) Profit Sharing Plan Substantially all of the employees of the Company are eligible to participate in a profit sharing plan of an affiliate. The plan provides that the Company may contribute, at the discretion of the affiliate's board of directors, an amount up to 15% of compensation for all eligible participants out of its accumulated earnings and profits, as defined. Profit sharing expense amounted to approximately $311, $326 and $277 in 1994, 1993 and 1992, respectively. (9) Commitments and Contingencies Under various lease and rental agreements for offices, warehouses and computer terminals, the Company had rental expense of approximately $347, $354 and $358 in 1994, 1993 and 1992, respectively. Future minimum annual rental payments under noncancellable leases are as follows: 1995 $206 1996 124 1997 17 1998 15 1999 15 In addition, the Company rents utility poles in its operations generally under short-term arrangements, but the Company expects these arrangements to recur. Total rental expense for utility poles was approximately $896, $859 and $790 in 1994, 1993 and 1992, respectively. Recent Regulation The Federal Communications Commission (the "FCC") has adopted regulations implementing almost all of the requirements of the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), and it is in the process of completing the remaining rulemaking proceedings. On April 1, 1993, the FCC adopted regulations, effective September 1, 1993, governing the rates charged to subscribers for basic service, cable programming service (other than premium, pay-per-view and a la carte services) and equipment, and ordered a freeze on these rates from April 5, 1993 until May 15, 1994. The FCC adopted a benchmark methodology as the principal method of regulating basic service and cable programming service rates. Cable operators with rates above the allowable level under the FCC's benchmark methodology may justify such rates using cost-of-service principles. Local franchising authorities may not elect cost-of-service as their primary form of rate regulation but must apply the FCC benchmark rules unless the operator justifies its basic rates on a cost-of-service basis. Under the FCC's initial regulations, in order to avoid refund liability, cable operators whose rates are above FCC benchmark levels would be required, absent a successful cost-of-service showing, to reduce those rates to the benchmark level or by up to 10% of the rates in effect on September 30, 1992, whichever reduction was less, adjusted for inflation and channel modifications occurring subsequent to September 30, 1992, and equipment costs. Refund liability for basic service rates is limited to a one-year period, initially calculated from the effective date of the FCC's initial rate regulations. Refund liability for cable programming service rates is calculated from the date a complaint is filed with the FCC until the refund is implemented. A complaint alleging an unreasonable rate for a cable programming service in effect on September 1, 1993 must have been filed by February 28, 1994. After that date, a complaint regarding a rate increase for a cable programming service must be filed with the FCC within 45 days from the date that the complainant receives the bill for such service. On February 22, 1994, the FCC adopted several rate orders, including an order which revised its benchmark regulatory scheme. This revision generally requires rate reductions, absent a successful cost-of-service showing, of 17% of September 30, 1992 rates, adjusted for inflation, channel modifications, equipment costs, and increases in programming costs. The revised regulations became effective on May 15, 1994, but operators were permitted to elect to defer rate reductions until July 14, 1994, if there were no changes in their rates or if there were no restructuring of service offerings between May 15 and July 14. The Company, like most operators, elected to defer such rate reductions until July 14, 1994. The FCC also announced its intention to investigate the rates for cable systems whose rates are substantially above the permitted benchmark levels. Rate reductions will not be required if a cable operator can demonstrate that the rates for basic and other regulated programming services are justified and reasonable using cost-of-service guidelines. On February 22, 1994, the FCC adopted interim cost-of-service standards and regulations. As part of these standards, the FCC established an interim industry-wide 11.25% rate of return. The FCC requested comments on whether this standard and other interim cost-of-service standards should be made permanent. The FCC also established a rebuttable presumption that purchase price adjustments above a system's original book value should be excluded from the rate base. However, the FCC will consider individual showings to rebut this presumption. The FCC indicated that the cable system rate base will include, among other factors, plant in service, specified intangibles and certain permitted operating expenses and that it would establish a uniform system of accounts and rules to govern affiliate transactions for operators choosing a cost-of-service showing. The FCC will also consider the need for special rate relief if an operator demonstrates that the rates set by a cost-of-service proceeding would constitute confiscation of investment and that, absent a higher rate, the credit necessary to operate and to attract investment could not be maintained. The Company cannot predict the ultimate outcome of the FCC's cost-of-service rulemaking. Beginning in September 1993, the Company repackaged certain existing cable services, added new channels, introduced a la carte services and adjusted rates for programming services and equipment. In February 1994, the FCC announced that it would revise its treatment of a la carte programming offerings (which the FCC previously had indicated would not be subject to rate regulation) by applying various criteria, on a case-by-case basis, to determine whether a cable operator's a la carte packages should be subject to rate regulation. The FCC stated that if an operator was found to have bundled channels as an a la carte package to evade rate regulations, the FCC could impose forfeitures or other sanctions. In November 1994, as part of its decision relating to "new product tiers" or "NPTs" (discussed below), the FCC again modified its policy regarding packages of a la carte services by ruling that such packages would now be subject to rate regulation by the FCC. However, because of the uncertainties created by the FCC's shifting a la carte package guidelines, the FCC stated that it would allow cable operators (such as the Company) that had implemented a la carte service packages under the FCC's prior rate regulations to treat such previously offered a la carte packages as NPTs, which would not be subject to rate regulation unless the FCC found that such packages were implemented to evade rate regulations. The FCC reviewed the a la carte packages offered in certain of CVI's systems and concluded that such packages qualify as NPTs that will not be subject to rate regulation. Because the a la carte packages offered in the systems reviewed by the FCC are substantially identical to those offered in the Company's systems, the Company believes that all of such packages will qualify as NPTs that are not subject to rate regulation. On November 10, 1994, the FCC adopted regulations permitting cable operators to create NPTs that will not be subject to rate regulation upon compliance with certain conditions. Operators will be able to price these tiers as they elect so long as, among other conditions, other channels that are subject to rate regulation are priced in conformity with applicable regulations and operators do not remove programming services from existing service tiers and offer them on the NPT. Beyond its effect on a la carte service packages as described above, the FCC's NPT decision also provides the Company with additional pricing flexibility by affording the option of offering new services at rates that are not regulated under the FCC's rules. Rate increases for existing regulated services will be limited to an inflation-indexed amount plus increases in certain external costs which are beyond the cable operator's control, such as taxes and programming costs. Operators are able to increase rates under the benchmark regulatory scheme for new channels pursuant to an FCC-prescribed formula, which includes a 7.5% mark-up on new programming services. On November 10, 1994, the FCC announced a revision to its regulations governing the manner in which cable operators may charge subscribers for new cable programming services. In addition to the present formula for calculating the permissible rate for new services, the FCC instituted a three-year flat fee mark-up plan for charges relating to new channels of cable programming services. Commencing on January 1, 1995, operators may charge for new channels of cable programming services added after May 14, 1994 at a rate of up to 20 cents per channel, but may not make adjustments to monthly rates totalling more than $1.20 plus an additional 30 cents for programming license fees per subscriber over the first two years of the three-year period for these new services. Operators may charge an additional 20 cents in the third year only for channels added in that year plus the costs for the programming. Operators electing to use the 20 cent per channel adjustment may not also take a 7.5% mark-up on programming cost increases. In connection with its November 10, 1994 revision to these regulations governing the manner in which cable operators may charge subscribers for new programming services, the FCC has proposed to eliminate the 7.5% mark-up on new programming services. The Company continues to develop various strategies to minimize the adverse impact of rate regulations and the other provisions of the 1992 Cable Act on the Company's results of operations. Such strategies to date have included: (i) placing an increased emphasis on developing revenues from sources that are not subject to rate regulation, including advertising, premium programming services, a la carte programming services and pay-per-view programming services; (ii) expanding channel capacity to add new unregulated services; and (iii) charging for certain equipment and installation services previously offered without charge or at discounted prices. In addition, only 36% of the Company's subscribers are in communities that have sought FCC certification to regulate basic service rates, and the Company has received complaints concerning its cable programming rates in communities representing only approximately 34% of its subscribers. In September 1993, the Company used the FCC's benchmark methodology in setting its rates. In response to the FCC's revisions to its benchmark methodology requiring further rate reductions effective July 14, 1994, the Company elected to use both benchmark and cost-of-service methodology to justify its rates. The Company decided to use cost-of-service standards only after extensive evaluation and legal analyses by experts in the rate regulation area, and is justifying its regulated rates for approximately 27% of the Company's subscribers using such cost-of-service standards. Having decided to pursue the cost-of-service process, the Company has added the resources and availed itself of the expertise needed to support the filings. The Company has reached agreements with local and state regulatory authorities for basic service tier cost-of-service proceedings. These agreements allow the Company to charge its existing basic rates and to increase such rates under the FCC's "going forward" rules. The Company may not be able to successfully justify its rates in the cable programming service tier cost-of-service showings and accordingly has recorded reserves it believes are adequate, if unsuccessful. No assurances can be given that the Company will be able to develop and successfully implement its rate regulation strategies in order to minimize the potentially material adverse impact of the FCC's rate regulations on its results of operations. Additionally, the FCC's rate regulations and policies may be subject to further interpretation, clarification and modification by the FCC and the courts, and such administrative and/or judicial actions may require the Company to make further reductions to its regulated service rates. The 1984 Cable Act codified the FCC's cross-ownership regulations, which prohibit local exchange telephone companies ("LECs"), including the Regional Bell Operating Companies ("RBOCs"), from providing video programming directly to subscribers within their local exchange telephone service areas, except in rural areas or by specific waiver of FCC rules. This federal cross-ownership rule has been particularly important to the cable industry because these telephone companies already own certain facilities needed for cable television operation, such as poles, ducts and associated rights-of-way. Several federal district courts have struck down the 1984 Cable Act's telco cross-ownership provision as facially invalid and inconsistent with the First Amendment. The U.S. Courts of Appeals for the Fourth and the Ninth Circuits have upheld the appeals of two of these district court decisions, and the U.S. Justice Department is expected to request the U.S. Supreme Court to review these two decisions. Even in the absence of changes in the cross-ownership restrictions, the expansion of telephone companies' fiber optic systems and recent changes in FCC policies may facilitate competition between other video service providers and cable systems. In anticipation of this development, the Company and the cable industry generally have been rebuilding and upgrading its cable plant to create advanced fiber optic and coaxial networks, which will serve as the infrastructure for the provision of expanded video services and wire and wireless telephony services. The Company and the cable industry believe that their fiber optic networks will position them to provide new services as they become available and to compete with the telephone companies. Legislation is expected to be considered by Congress that would permit the local exchange telephone companies to provide cable television service within their own local service areas. The legislation would also enable cable television companies and others to offer telephone services by eliminating state and local barriers to entry. (10) Prepaid Expenses and Other Assets As of December 31, 1994 and 1993, prepaid expenses and other assets include a $1,000 noninterest bearing deposit held by the City of Dearborn, Michigan. (11) Common Stock As of December 31, 1994 and 1993, common stock of the corporations combined in these financial statements consisted of: CIMF CIF Par value None None Authorized shares 60 60 Issued shares 20 60 Outstanding shares 20 60 (12) Subsequent Event On February 6, 1995, CVI entered into an Agreement and Plan of Merger (the "CVI Merger Agreement") with Time Warner Inc. ("Time Warner"), the majority stockholder of CVI and a direct wholly-owned subsidiary of Time Warner. In connection with the CVI Merger Agreement, two additional merger agreements and a purchase agreement were entered into providing for the acquisition of the Company by Time Warner. The closing of the merger and acquisition transactions with Time Warner is subject to customary conditions for transactions of this type, including certain stockholder and regulatory approvals, as specified in the respective agreements. EX-99.F 11 FINANCIAL STATEMENTS OF KBLCOM INCORPORATED EXHIBIT 99(f) KBLCOM INCORPORATED CONSOLIDATED BALANCE SHEETS, MARCH 31, 1995 AND DECEMBER 31, 1994 (in Thousands Except Share Amounts) - ------------------------------------------------------------------------------ March 31, 1995 December 31, ASSETS (Unaudited) 1994 -------------------- --------------------- Subscriber receivables, net of allowance for doubtful accounts of $868 and $924 at March 31, 1995 and December 31, 1994, respectively $ 11,707 $ 12,028 Other receivables, net 6,091 7,152 Prepaid expenses 3,146 3,466 Inventory 10,520 9,952 Property, plant and equipment, net 280,247 276,624 Equity investments: Paragon 167,879 152,364 Other partnerships 8,512 7,999 Investments in marketable equity securities 7,861 7,861 Cable television franchises and intangible assets, net 1,018,388 1,029,440 Other deferred costs, net of accumulated amoritzation of $9,972 and $9,853 at March 31, 1995 and December 31, 1994, respectively 9,701 8,104 Due from parent 45,092 41,615 ---------- ---------- TOTAL $1,569,144 $1,556,605 ========== =========== LIABILITIES AND STOCKHOLDER'S DEFICIT LIABILITIES: Accounts payable $ 20,576 $ 24,309 Accrued liabilities 40,517 31,176 Accrued interest: Due to third parties 6,144 8,790 Due to parent 106,626 86,363 Prepayments for services and subscriber deposits 10,413 7,717 Short-term borrowings from parent 191,300 140,300 Senior bank debt 339,000 364,000 Senior notes 54,670 62,480 Senior subordinated notes 70,113 78,100 Notes payable to parent 694,097 694,097 Deferred tax liability 305,700 311,823 ---------- ---------- Total liabilities 1,839,156 1,809,155 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S DEFICIT: Common stock, $1 par; 1,000 shares authorized, issued and outstanding 1 1 Paid-in capital 388,876 388,876 Accumulated deficit (658,889) (641,427) ---------- ---------- Total stockholder's deficit (270,012) (252,550) ---------- ---------- TOTAL $1,569,144 $1,556,605 ========== ========== See notes to consolidated financial statements. KBLCOM INCORPORATED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (in Thousands) (UNAUDITED) - --------------------------------------------------------------------------- Three Months Ended March 31, -------------------------------- 1995 1994 ---- ---- REVENUES $ 67,105 $ 60,250 COSTS AND EXPENSES: Programming 17,166 15,115 Selling, general and administrative 26,035 25,295 Depreciation and amortization 23,371 20,375 -------- ---------- Total 66,572 60,785 -------- ---------- OPERATING INCOME (LOSS) 533 (265) -------- ---------- OTHER INCOME: Equity in income of partnerships 7,378 7,910 Other, net 286 350 -------- ---------- Total 7,664 8,260 -------- ---------- INTEREST EXPENSE: Third parties 10,419 10,626 Parent, net of interest income 23,358 16,584 -------- ---------- Total 33,777 27,210 -------- ---------- LOSS BEFORE INCOME TAXES (25,580) (19,215) INCOME TAX BENEFIT (8,118) (5,267) --------- ---------- KBLCOM INCORPORATED STATEMENTS OF CONSOLIDATED ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (in Thousands) (UNAUDITED) - ------------------------------------------------------------------------- Three Months Ended March 31, ------------------------------ 1995 1994 ---- ---- BALANCE AT BEGINNING OF PERIOD $ (641,427) $ (594,630) NET LOSS (17,462) (13,948) ---------- ---------- BALANCE AT END OF PERIOD $ (658,889) $ (608,578) ========== ========== See notes to consolidated financial statements. KBLCOM INCORPORATED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (in Thousands) (UNAUDITED) - ------------------------------------------------------------------------- 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES ----------- ------------ Net loss $ (17,462) $ (13,948) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 23,371 20,375 Equity in income of partnerships (7,378) (7,910) Deferred income tax benefit (6,123) (827) Changes in operating assets and liabilities Subscriber and other receivables, net 1,382 (491) Inventory and prepaid expenses (248) 176 Due from parent (2,432) (7,975) Accounts payable and accrued liabilities (4,242) 685 Interest payable 17,617 12,346 Prepayments for services and subscriber deposits 2,696 1,111 Other (324) (40) ---------- ---------- Net cash provided by operating activities 6,857 3,502 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (16,663) (12,127) Other investments (3,501) Other (397) 10 ---------- --------- Net cash used in investing activities (17,060) (15,618) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (40,797) (10,384) Proceeds from short-term borrowings from parent 51,000 22,500 ---------- ---------- Net Cash provided by financing activities 10,203 12,116 ---------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS 0 0 CASH AND CASH EQUIVALENTS, BEGINNING OF 0 0 YEAR CASH AND CASH EQUIVALENTS, END OF YEAR $ 0 $ 0 =========== =========== See notes to consolidated financial statements. KBLCOM INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995 - -------------------------------------------------------------------------- 1. GENERAL The information presented in the following notes should be read in conjunction with the KBLCOM Incorporated ("KBLCOM") consolidated financial statements for the years ended December 31, 1994, 1993 and 1992. These quarterly financial statements are unaudited, however, in the opinion of management, the interim information reflects all adjustments (consisting only of normal recurring adjustments) necessary for a full presentation of the results for the interim periods. 2. EQUITY INVESTMENTS IN PARTNERSHIPS KBLCOM's equity investments include its 50% ownership in Paragon. Equity in Paragon's income represents substantially all of the equity in income of the partnerships during the quarterly periods ended March 31, 1995 and 1994. The following table sets forth certain summarized operating information of Paragon: Three Months Ended March 31, -------------------------------- 1995 1994 ---- ---- Paragon: Revenues $ 86,989 $ 86,052 Operating expenses 65,297 63,378 Net income 31,031 16,006 KLBCOM's underlying equity in the earnings of investee: Paragon $ 7,516 $ 8,004 Other partnerships (138) (94) ----------- --------- Total $ 7,378 $ 7,910 =========== ========= During the first quarter of 1995, Paragon recognized a $16 million gain on the sale of certain marketable equity securities. Because the merger agreement described in Note 5 provides that proceeds from selling certain assets inure to the benefit of Time Warner Inc. ("Time Warner"), KBLCOM's share of such gain has been deferred and is included in the consolidated balance sheet in accrued liabilities. 3. LONG-TERM DEBT In March 1995, KBL Cable, Inc. ("KBL Cable"), a wholly owned subsidiary of KBLCOM, made a scheduled repayment of $15.8 million principal amount of its senior notes and senior subordinated notes. In the first quarter of 1995, KBL Cable repaid borrowings under its senior bank credit facility in the amount of $25 million. 4. COMMITMENTS AND CONTINGENCIES KBLCOM is routinely involved in litigation incidental to its business, which involves claims for monetary amounts, some, but not all, of which would be covered by insurance. In the opinion of management, none of the existing litigation will have any material adverse effect on the Company. Taxes. In connection with the Internal Revenue Service's ("IRS") audit of Houston Industries Incorporated's ("HII") consolidated federal income tax returns for 1987 through 1989, the IRS proposed adjustments that would reduce KBLCOM's net operating losses for such three-year period by $12.2 million. If the IRS prevails in its position regarding the proposed adjustments, KBLCOM would be liable to EHI for $4.3 million in tax benefits previously recorded, plus interest. HII has initiated administrative appeals with the IRS regarding KBLCOM's proposed adjustments and substantive discussions have taken place. In the opinion of management, no material adverse effect will result from resolution of the IRS audit. 5. SUBSEQUENT EVENT On January 26, 1995, Time Warner and HII reached an agreement in which Time Warner would acquire KBLCOM in a tax-deferred, stock-for-stock merger with a subsidiary of Time Warner. Time Warner will issue to HII one million shares of Time Warner common stock and 11 million shares of a newly issued series of its convertible preferred stock, which will have a liquidation value of $100 per share. The preferred stock will be convertible into approximately 22.9 million shares of Time Warner common stock and, until the earlier of conversion or the fourth anniversary of its issuance, pays an annual dividend of $3.75 per share. After four years, Time Warner will have the right to exchange the Time Warner preferred stock for Time Warner common stock at the stated conversion rate. In addition, at the closing Time Warner will purchase for cash certain intercompany debt of KBLCOM from HII for approximately $600 million subject to adjustment for changes in or levels of specified indebtedness and liabilities, working capital, capital expenditures and related items. The agreement includes certain restrictions, including restrictions on dividends, sales or acquisitions of assets and new indebtedness. Closing of the merger, which is conditioned upon, among other things, (i) the parties obtaining necessary consents of certain franchise authorities and other governmental entities, (ii) the absence of any change that might have a material adverse effect on KBLCOM or Time Warner and (iii) the absence of any material litigation, is expected to take place in mid-1995. INDEPENDENT AUDITORS' REPORT To the Stockholder and Board of Directors of KBLCOM Incorporated: We have audited the accompanying consolidated balance sheets of KBLCOM Incorporated (the "Company"), a wholly owned subsidiary of Houston Industries Incorporated, and its subsidiaries as of December 31, 1994 and 1993, and the related statements of consolidated operations, consolidated stockholder's deficit and consolidated cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Paragon Communications ("Paragon"), the Company's investment in which is accounted for by use of the equity method. The Company's equity of $152 million and $119 million in Paragon's net assets at December 31, 1994 and 1993, respectively, and of $33.6 million, $32.2 million and $24.9 million in Paragon's net income for the respective years ended December 31, 1994, 1993 and 1992 are included in the accompanying consolidated financial statements. The financial statements of Paragon were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such company, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Houston, Texas April 20, 1995 KBLCOM INCORPORATED CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1994 AND 1993 (in Thousands Except Share Amounts) ASSETS 1994 1993 Subscriber receivables, net of allowance for doubtful accounts of $924 and $1,146 at December 31, 1994 and 1993, respectively $ 12,028 $ 10,428 Other receivables, net 7,152 6,679 Prepaid expenses 3,466 3,148 Inventory 9,952 6,072 Property, plant and equipment, net 276,624 220,506 Equity investments: Paragon 152,364 118,901 Other partnerships 7,999 3,630 Investments in marketable equity securities 7,861 8,870 Cable television franchises and intangible assets, net 1,029,440 984,032 Other deferred costs, net of accumulated amortization of $9,853 and $9,391 at December 31, 1994 and 1993, respectively 8,104 5,535 Due from parent 41,615 45,786 ------ ------ TOTAL $1,556,605 $1,413,587 ========== ========== LIABILITIES AND STOCKHOLDER'S DEFICIT LIABILITIES: Accounts payable $ 24,309 $ 19,699 Accrued liabilities 31,176 18,824 Accured interest: Due to third parties 8,790 10,485 Due to parent 86,363 15,216 Prepayments for services and subscriber deposits 7,717 7,964 Short-term borrowings from parent 140,300 57,700 Senior bank debt 364,000 364,000 Senior notes 62,480 67,095 Senior subordinated notes 78,100 83,869 Notes payable to parent 694,097 694,097 Deferred tax liability 311,823 301,225 --------- --------- Total liabilites 1,809,155 1,640,174 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S DEFICIT: Preferred stock, no par; 500,000 shares authorized, none outstanding Common stock, $1 par; 1,000 shares authorized, issued and outstanding 1 1 Paid-in capital 388,876 368,042 Accumulated deficit (641,427) (594,630) ---------- ---------- Total stockholder's deficit (252,550) (226,587) ---------- ---------- TOTAL $1,556,605 $1,413,587 ========== ========== See notes to consolidated financial statements. KBLCOM INCORPORATED STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in Thousands) 1994 1993 1992 REVENUES $255,772 $244,067 $235,258 -------- -------- -------- COSTS AND EXPENSES: Programming 61,972 54,611 52,940 Selling, general and administrative 97,340 98,091 92,446 Depreciation and amortization 85,038 78,525 75,622 ------- ------- ------- Total 244,350 231,227 221,008 ------- ------- ------- OPERATING INCOME 11,422 12,840 14,250 ------- ------- ------- OTHER INCOME: Equity in income of partnerships 33,313 31,979 24,871 Other, net 1,190 770 1,345 -------- ------- ------- Total 34,503 32,749 26,216 -------- ------- ------- INTEREST EXPENSE: Third parties 41,874 46,799 63,223 Parent, net of interest income 78,662 18,256 6,693 -------- -------- -------- Total 120,536 65,055 69,916 -------- -------- -------- LOSS BEFORE INCOME TAXES (74,611) (19,466) (29,450) INCOME TAX (BENEFIT) EXPENSE (27,814) 3,225 (8,201) ------- ------- -------- NET LOSS (46,797) (22,691) (21,249) DIVIDENDS ON PREFERRED STOCK 19,097 25,000 -------- -------- -------- LOSS AFTER PREFERRED DIVIDENDS $(46,797) $(41,788) $(46,249) ======== ======== ======== See notes to consolidated financial statements. KBLCOM INCORPORATED STATEMENTS OF CONSOLIDATED STOCKHOLDER'S DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in Thousands of Dollars Except Per Share Amounts) Common Stock Preferred Stock -------------- --------------- Paid-In Accumulated Shares Amount Shares Amount Capital Deficit BALANCE AT JANUARY 1, 1992 1,000 $1 250,000 $ 250,000 $ 319,481 $(506,593) Capital contribution - cash 116,900 Dividends on preferred stock at a 10% rate (25,000) Net loss (21,249) ----- -- ------- --------- --------- --------- BALANCE AT DECEMBER 31, 1992 1,000 1 250,000 250,000 436,381 (552,842) Capital contributions: Cash 177,349 Forgiveness by parent of: Senior and senior subordinated notes 64,913 Short-term borrowings from parent 39,399 Common stock dividend ($350,000 per share) (350,000) Dividends on preferred stock at a 10% rate (19,097) Repurchase of stock in exchange for notes payable to parent (250,000) (250,000) Net loss (22,691) ----- -- ------- --------- --------- --------- BALANCE AT DECEMBER 31, 1993 1,000 1 368,042 (594,630) Capital contribution - forgiveness by parent of note payable 20,834 Net loss (46,797) ----- -- ------- --------- --------- --------- BALANCE AT DECEMBER 31, 1994 1,000 $1 0 $ 0 $ 388,876 $(641,427) ===== == ======= ========= ========= ========== See notes to consolidated financial statements. KBLCOM INCORPORATED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in Thousands) 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(46,797) $(22,691) $(21,249) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 85,038 78,525 75,622 Equity in income of partnerships (33,313) (31,979) (24,871) Deferred income tax benefit (17,700) (2,202) (3,265) Changes in operating assets and liabilities: Subscriber and other receivables, net (2,073) (4,758) (1,307) Inventory and prepaid expenses (4,198) (3,221) 346 Due from parent 4,171 (2,728) 5,653 Accounts payable and accrued liabilities 13,162 (795) 8,738 Interest payable 69,452 11,319 (2,906) Prepayments for services and subscriber deposits (247) (8,137) 1,988 Other 2,160 584 4,890 ------ ------ ------ Net cash provided by operating activities 69,655 13,917 43,639 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (80,318) (54,482) (40,642) Other investments (3,610) (5,903) (3,664) Other (143) (1,471) (927) -------- -------- ------- Net cash used in investing activities (84,071) (61,856) (45,233) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (68,184) (244,810) (11,506) Proceeds from long-term debt 20,000 Capital contributions 177,349 116,900 Proceeds from (payment of) short-term borrowings from parent 82,600 95,400 (103,800) -------- -------- --------- Net cash provided by financing activities 14,416 47,939 1,594 -------- -------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS 0 0 0 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 0 0 0 -------- -------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 0 $ 0 $ 0 ======== ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash payments (receipts): Interest, net of amounts capitalized $ 51,464 $ 52,450 $ 70,428 Income taxes: Received $(21,158) $ (6,837) $(10,008) Paid $ 523 $ 1,119 $ 403 See notes to consolidated financial statements. KBLCOM INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 1. ORGANIZATION AND BUSINESS KBLCOM Incorporated ("KBLCOM"), a wholly owned subsidiary of Houston Industries Incorporated ("HII"), was formed August 22, 1985, to engage in the acquisition and operation of cable television systems. KBL Cable, Inc. ("KBL Cable"), a subsidiary of KBLCOM, owns five cable television systems located in four states (Texas, Minnesota, Oregon and California). In July 1994, KBLCOM acquired the stock of three cable television companies located in the Minneapolis, Minnesota area in exchange for shares of HII common stock valued at approximately $20.1 million. (See Note 11.) See Note 3 regarding KBLCOM's investment in Paragon Communications ("Paragon"). As of December 31, 1994, KBLCOM served approximately 690,000 basic cable customers who subscribed to approximately 545,000 premium programming units. As of the same date, Paragon provided services to approximately 967,000 basic cable customers with approximately 552,000 premium programming units. The cable television business of KBLCOM consists primarily of selling to subscribers, for a monthly fee, television programming that is distributed through a network of coaxial and fiber optic cables. See Note 12 regarding the pending sale of KBLCOM to Time Warner Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Financial Statements. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should KBLCOM be unable to continue as a going concern. As shown in the financial statements, during the years ended December 31, 1994, 1993 and 1992 KBLCOM incurred net losses of $46.8 million, $22.7 million and $21.2 million, respectively. At December 31, 1994 and 1993, the excess of liabilities over assets was $252.6 million and $226.6 million, respectively. At December 31, 1994 and 1993, KBLCOM's net liabilities due to HII for notes, short-term borrowings, accrued interest and due from parent totalled $879.1 million and $721.2 million, respectively. KBLCOM generated positive cash flows from operations in 1994, 1993 and 1992, and management believes positive cash flows from operations will continue with execution of its business plan. As shown in Note 5, scheduled debt principal requirements for 1995 are $15.8 million. Capital expenditures of $91 million are budgeted for 1995. A substantial portion of these capital requirements is expected to be met through internally generated funds. HII has represented its intention to fund any shortfalls through either equity contributions, debt or a combination thereof. Principles of Consolidation. The consolidated financial statements include the accounts of KBLCOM and all of its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. Property, Plant and Equipment. Additions to property, plant and equipment are recorded at cost which includes amounts for material, labor, overhead and interest. Expenditures for maintenance and repairs are expensed as incurred. The cost of initial subscriber installation is capitalized. Costs of subsequent disconnections and reconnections are expensed. Depreciation is computed using the straight-line method of accounting. The depreciation provision as a percentage of the depreciable cost of property was 11.3% for both 1994 and 1993 and 12.1% for 1992. Investments. Investments in affiliates in which KBLCOM holds a 20% to 50% interest (which includes the investment in Paragon) or a lesser percent in which KBLCOM has management influence, are recorded using the equity method of accounting. Investments in marketable equity securities are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115. (See Note 3.) Cable Television Franchises and Intangible Assets. The acquisition cost in excess of the fair market value of the tangible assets and liabilities is recorded on the balance sheet as cable television franchises and intangible assets. Such amounts are amortized over periods ranging from 8 to 40 years on a straight-line basis. Amortization expense as a percentage of cable television franchises and intangible assets was 3.3% for 1994, 1993 and 1992. The accumulated amortization related to cable television franchises and intangible assets as of December 31, 1994 and 1993 was $223.5 million and $184.1 million, respectively. Management of KBLCOM periodically reviews the carrying value of cable television franchises and intangible assets in relation to current and expected operating results of the business in order to assess whether there has been a permanent impairment of such amounts. Inventory. Inventory consists of plant and maintenance materials and subscriber equipment. Inventory is recorded at the lower of cost or market using the first-in, first-out method. Income Taxes. KBLCOM follows a policy of comprehensive interperiod income tax allocation. Investment tax credits are deferred and amortized over the estimated lives of the related property. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and available tax credit carryforwards. (See Note 7.) Statements of Consolidated Cash Flows. For purposes of reporting cash flows, cash equivalents are considered to be short-term, highly liquid investments readily convertible to cash. Revenues and Programming Costs. Revenues include amounts for basic cable services, premium services, pay-per-view services and advertising. Service revenues are recognized as services provided to subscribers, and advertising revenues are recognized when earned. Subscriber fees for regulated services and equipment are based on rates that management believes are determined in accordance with the regulations established by the Federal Communications Commission pursuant to the Cable Television Consumer Protection Act of 1992 ("1992 Cable Act"). The cost to acquire the rights to the programming ("programming costs") generally is recorded when the product is initially available for exhibition. Interest Rate Swap Agreements. The differential to be paid or received under interest rate swap agreements is accrued and is recognized as interest expense or income over the term of each swap. (See Note 5.) 3. INVESTMENTS a. Equity investments in partnerships. KBLCOM has equity investments in five partnerships with ownership interests ranging from 10% to 50%. KBLCOM's 50% ownership in Paragon represents $152.4 million or 95% of its total equity investments at December 31, 1994. Equity in Paragon's income of $33.6 million represents substantially all of KBLCOM's equity in income of the partnerships for 1994. The following tables set forth certain summarized financial information of Paragon and summarized combined financial information of the other partnerships. Combined Financial Statement Data of Equity Investments in - ---------------------------------------------------------- Partnerships (in thousands): - ---------------------------- December 31, 1994 ------------------------------- Other Paragon Partnerships Total Property, plant and equipment, net $391,726 $32,319 $424,045 Other assets 236,101 24,081 260,182 -------- ------- -------- Total assets 627,827 56,400 684,227 Debt 249,000 12,850 261,850 Other liabilities 74,105 8,800 82,905 -------- ------- -------- Net assets $304,722 $34,750 $339,472 ======== ======= ======== KBLCOM's underlying equity in the net assets of investees $152,364 $ 7,999 $160,363 ======== ======= ======== December 31, 1993 -------------------------------- Other Paragon Partnerships Total Property, plant and equipment, net $384,869 $27,822 $412,691 Other assets 242,538 21,928 264,466 -------- ------- -------- Total assets 627,407 49,750 677,157 Debt 320,317 10,048 330,365 Other liabilities 69,468 13,800 83,268 -------- ------- -------- Net assets $237,622 $25,902 $263,524 ======== ======= ======== KBLCOM's underlying equity in the net assets of investees $118,901 $ 3,630 $122,531 ======== ======= ======== Year Ended December 31, -------------------------------- 1994 1993 1992 Revenues: Paragon $348,323 $338,200 $315,999 Other partnerships 40,075 32,853 30,964 -------- -------- -------- Total 388,398 371,053 346,963 Operating expenses: Paragon 263,014 253,063 240,578 Other partnerships 37,707 30,122 28,558 -------- -------- -------- Total 300,721 283,185 269,136 Net income: Paragon 67,100 64,482 49,822 Other partnerships 1,847 1,983 903 -------- -------- -------- Total $ 68,947 $ 66,465 $ 50,725 ======== ======== ======== KBLCOM's underlying equity in the earnings of investees: Paragon $ 33,550 $ 32,241 $ 24,911 Other partnerships (237) (262) (40) -------- -------- -------- Total $ 33,313 $ 31,979 $ 24,871 ======== ======== ======== Paragon, a Colorado partnership, owns 19 cable television systems located in 7 states. The remaining interest is owned by American Television and Communications Corporation ("ATC"), a subsidiary of Time Warner Inc. The partnership agreement provides that at any time after December 31, 1993, either partner may elect to divide the assets of the partnership under certain pre-defined procedures set forth in the agreement. Paragon is a party to a $225 million revolving credit agreement with a group of banks. This credit agreement contains certain covenants which restrict merger or sale of assets, amount of debt, distributions to partners and certain investments. Paragon also has outstanding $50 million principal amount of 9.56% senior notes, due in 1995. In each case, borrowings are nonrecourse to KBLCOM and ATC. One of the other partnerships that KBLCOM has an equity interest in has a loan agreement that specifies future capital commitments for the partners. KBLCOM's remaining capital commitment was $4 million at December 31, 1994. b. Marketable equity securities. KBLCOM adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. At December 31, 1994, the securities held were classified as available for sale. Such securities are reported on the balance sheets at fair value based on quoted market prices, which at December 31, 1994 approximated cost. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment was comprised of the following: December 31, ------------------- 1994 1993 (In Thousands) Land and buildings $ 6,097 $ 5,277 Towers and headend 17,248 10,536 Distribution cable 215,735 197,334 Subscriber drops and devices 89,430 77,680 Subscriber equipment 56,763 42,053 Other equipment 47,020 34,423 Leasehold improvements 5,733 4,875 -------- -------- Total 438,026 372,178 Less accumulated depreciation 161,402 151,672 -------- -------- Net property, plant and equipment $276,624 $220,506 ========= ======== 5. LONG-TERM DEBT KBLCOM and its subsidiaries are parties to several financing agreements: a. KBL Cable Senior Bank Credit Facility. KBL Cable is a party to a $475.2 million revolving credit and letter of credit facility agreement with annual mandatory commitment reductions (which may require principal payments). At December 31, 1994, KBL Cable had $76 million available under such credit facility. The credit facility has scheduled commitment reductions in March of each year (including $55 million on March 1, 1995) until it is terminated in March 1999. Loans have generally borne interest at an interest rate of London Interbank Offered Rate plus an applicable margin. The margin was 0.75% and 0.625% at December 31, 1994 and 1993, respectively. The effective interest rate was 5.871% and 4.060% at December 31, 1994 and 1993, respectively. The credit facility includes restrictions on dividends and sales of assets and limitations on total indebtedness. The amount of indebtedness outstanding at December 31, 1994 and 1993 was $364 million. Commitment fees are required on the unused portion of the senior bank credit facility. In October 1989 KBL Cable entered into interest rate swaps to effectively fix the interest rate on $375 million of loans under the bank credit facility. The objective of the swaps was to reduce the financial exposure to increases in interest rates. Interest rate swaps aggregating $75 million and $150 million terminated in October 1992 and October 1994, respectively. As of December 31, 1994, KBL Cable had one remaining interest rate swap terminating in 1996 which effectively fixes the rate on $50 million of debt under the bank credit facility at 8.88% plus the applicable margin. As of December 31, 1994 and 1993, the effective interest rate on the debt subject to the interest rate swaps was approximately 9.63%. KBL Cable is exposed to risk of nonperformance by the other party to the swap. However, KBL Cable does not anticipate nonperformance by the other party. b. KBL Cable Senior and Senior Subordinated Notes. As of December 31, 1994, KBL Cable had outstanding $62.5 million of 10.95% senior notes and $78.1 million of 11.30% senior subordinated notes. Both series mature in 1999 with annual principal payments which began in 1992. The agreement under which the notes were issued contains restrictions and covenants similar to those contained in the KBL Cable Senior Bank Credit Facility. In March 1994 KBL Cable made principal payments in the amount of $4.6 million on the 10.95% senior notes and $5.8 million on the 11.30% senior subordinated notes. As of December 31, 1992, HII owned $28.9 million principal amount of the senior notes and $36.1 million principal amount of the senior subordinated notes. Effective April 1, 1993, these $65 million of notes held by HII were contributed to KBLCOM. KBLCOM subsequently contributed such notes to KBL Cable, which retired and canceled the notes. c. Notes Payable to Parent. In October 1993 all the outstanding shares of preferred stock and dividends in arrears thereon were exchanged by HII for notes payable totaling $344 million. KBLCOM also declared a common stock dividend totaling $350 million and issued HII a note for the same amount. The notes bear interest at the prime rate (8.5% and 6% as of December 31, 1994 and 1993, respectively) plus 3% and have no stated maturity or required principal amortization. Consolidated annual maturities of long-term debt for KBLCOM are as follows: (In Thousands) 1995 $ 15,798 1996 76,188 1997 130,175 1998 140,323 1999 142,096 Thereafter 694,097 ---------- Total payments required $1,198,677 ========== 6. COMMITMENTS AND CONTINGENCIES KBLCOM is routinely involved in litigation incidental to its business, which involves claims for monetary amounts, some, but not all, of which would be covered by insurance. In the opinion of management, none of the existing litigation will have any material adverse effect on the Company. Taxes. In connection with the Internal Revenue Service's ("IRS") audit of HII's consolidated federal income tax returns for 1987 through 1989, the IRS proposed adjustments that would reduce KBLCOM's net operating losses for such three-year period by $12.2 million. If the IRS prevails in its position regarding the proposed adjustments, KBLCOM would be liable to HII for $4.3 million in tax benefits previously recorded, plus interest. HII has initiated administrative appeals with the IRS regarding KBLCOM's proposed adjustments and substantive discussions have taken place. In the opinion of management, no material adverse effect will result from resolution of the IRS audit. Franchise Obligations. KBLCOM's cable television systems generally operate pursuant to non-exclusive franchises or permits awarded by local governmental authorities, and, accordingly, other applicants may obtain franchises or permits in areas served by KBLCOM. Cable television franchises generally can be terminated prior to their stated expiration date under circumstances such as a material breach of the franchise by the cable operator. Franchises typically contain a number of provisions dealing with, among other things, minimum technical specifications for the systems; operational requirements; total channel capacity; local governmental, community and educational access; franchise fees (which range up to 5% of cable system revenues); and procedures for renewal of the franchise. Franchise fees paid to franchising authorities in accordance with the franchise agreement are reflected in the statements of consolidated operations, net of amounts collected from subscribers. In connection with certain obligations under existing franchise agreements, KBLCOM obtains surety bonds and letters of credit guaranteeing performance to municipalities and public utilities. Payment is required only in the event of nonperformance. KBLCOM has fulfilled all of its obligations such that no payments have been required. Letters of credit were available at December 31, 1994 in the amount of $5.4 million including $4.1 million which supported performance bonds of the same amount. The provisions of state and local franchises are subject to federal regulation under the Cable Communications Policy Act of 1984 and the 1992 Cable Act. KBLCOM franchises are also subject to renewal upon expiration and generally are not transferable without the prior approval of the franchising authority. As of December 31, 1994, KBLCOM held 70 franchises with unexpired terms ranging from under one year to approximately 17 years. In the 1995-1998 period, franchises representing approximately 20% of total subscribers are subject to renewal. In addition, some franchises provide for purchase of the franchise under certain circumstances, such as failure to renew the franchise. To date, KBLCOM's franchises generally have been renewed or extended upon their stated expirations, but there can be no assurance of renewal of franchises in the future. Operating Leases. KBLCOM leases certain premises, distribution facilities and various equipment. KBLCOM also has various renewable commitments for rental of utility poles which are based on the number of poles used. Under these leases, KBLCOM's lease expense for 1994, 1993 and 1992 was $3.9 million, $3.6 million and $3.2 million, respectively, with $1.3 million, $1.2 million and $1.2 million related to pole rentals in each respective year. The following is a schedule of future minimum commitments under leases, excluding renewable commitments for the rental of utility poles, that have initial lease terms in excess of one year at December 31, 1994: (In Thousands) 1995 $2,639 1996 2,174 1997 1,785 1998 1,058 1999 347 Thereafter 61 ------ Total payments required $8,064 ====== 7. INCOME TAXES KBLCOM and its subsidiaries are members of the HII consolidated group and are included in the consolidated federal income tax return of HII. KBLCOM and HII have entered into a tax-sharing agreement which provides for the determination of federal income taxes for KBLCOM and its subsidiaries equal to the tax that would be incurred if KBLCOM were a separate taxable entity. KBLCOM is paid by HII for its operating losses and tax credits ("tax benefits") which are used in HII's consolidated tax return to offset the tax liabilities of other members of the HII consolidated group. KBLCOM recognizes such tax benefits for financial reporting purposes through the income tax provision and due from parent accounts. The current and deferred components of income tax (benefit) expense are as follows: Year Ended December 31, ------------------------------ 1994 1993 1992 (In Thousands) Current: Federal $(13,174) $ 3,250 $(5,895) State and local 3,060 2,177 959 Deferred (17,700) (2,202) (3,265) -------- -------- ------- Income tax (benefit) expense) $(27,814) $ 3,225 $(8,201) ======== ======== ======= Effective income tax rates differ from statutory corporate rates for each year as follows: Year Ended December 31, ------------------------------ 1994 1993 1992 (In Thousands) Loss before income taxes $(74,611) $(19,466) $(29,450) Statutory rate 35% 35% 34% -------- -------- -------- Income tax benefit at statutory rate (26,114) (6,813) (10,013) Adjustments to taxes resulting from: Amortization of intangible assets 4,487 4,389 4,264 Rate change in federal corporate tax 6,876 Reduction in deferred state income tax liabilities (7,497) Adjustment of prior years' estimated liability (2,367) Other 1,310 (1,227) (85) -------- -------- -------- Income tax (benefit) expense $(27,814) $ 3,225 $ (8,201) ======== ======== ======== Effective rate 37% (17)% 28% ======== ======== ========= Following are the tax effects of temporary differences resulting in deferred tax assets and liabilities: December 31, ------------------------ 1994 1993 (In Thousands) Deferred tax assets: Loss, ITC and alternative minimum tax carryforwards $ 57,919 $ 57,661 Valuation allowance (57,919) (57,661) -------- -------- Total deferred tax assets - net 0 0 -------- -------- Deferred tax liabilities: Depreciation 68,255 60,253 Identifiable intangibles 244,636 236,475 Other (1,068) 4,497 ------- -------- Total deferred tax liabilities 311,823 301,225 -------- -------- Accumulated deferred income taxes - net $311,823 $301,225 ======== ======== At December 31, 1994, pursuant to the acquisition of cablesystems, KBLCOM has unutilized Separate Return Limitation Year ("SRLY") net operating loss tax benefits of approximately $22.1 million and unutilized SRLY investment tax credits of approximately $14.0 million which expire in the years 1995 through 2008 and the years 1995 through 2003, respectively. In addition, KBLCOM has unutilized restricted state loss tax benefits of $20.0 million which expire in years 1995 through 2009 and unutilized minimum tax credits of $1.8 million. KBLCOM does not anticipate full utilization of these losses and tax credits and, therefore, has established a valuation allowance. Utilization of preacquisition carryforwards in the future would not affect KBLCOM's income, but would be applied to reduce the carrying value of cable television franchises and intangible assets. 8. EMPLOYEE BENEFIT PLANS Retirement Plans. KBLCOM has a noncontributory defined benefit retirement plan covering substantially all employees. The plan provides retirement benefits based on years of service and compensation. The funding policy of KBLCOM is to contribute amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. The assets of the plan consist principally of high-quality, interest-bearing obligations. Net pension cost includes the following components: Year Ended December 31, ------------------------ 1994 1993 1992 (In Thousands) Service cost - benefits earned during the period $ 738 $ 650 $ 601 Interest cost on projected benefit obligation 326 281 273 Actual (return) loss on plan assets 45 (240) (173) Net amortization and deferrals (355) 1 3 ------ ------ ------ Net pension cost $ 754 $ 692 $ 704 ====== ====== ====== The funded status of the retirement plan was as follows: December 31, ------------------- 1994 1993 (In Thousands) Actuarial present value of: Vested benefit obligation $ 3,532 $ 2,525 ======= ======= Accumulated benefit obligation $ 4,360 $ 3,447 ======= ======= Plan assets at fair value $ 3,575 $ 2,996 Projected benefit obligation 5,766 4,514 ------- ------- Projected benefit obligation in excess of plan assets (2,191) (1,518) Unrecognized net loss 1,095 504 ------- ------- Accrued pension cost $(1,096) $(1,014) ======= ======= The projected benefit obligation was determined using an assumed discount rate of 8% in 1994 and 7.25% in 1993. A long-term rate of compensation increase of 5.5% was used in both 1994 and 1993. The assumed long-term rate of return on plan assets was 9.5% in 1994 and 1993. Savings Plan. KBLCOM participates in a HII savings plan covering substantially all employees. The plan allows only pretax contributions in amounts not to exceed 10% of an employee's annualized compensation and no withdrawal of pretax contributions because of legal restrictions. The employer matches 70% of the first 6% of annualized compensation contributed by the employee subject to a vesting schedule which entitles the employee to a percentage of the matching contributions, depending on years of service. Prior to 1994, the matching percentage was 50% for the first 6% of contributed compensation. Employer contributions for 1994, 1993 and 1992 were approximately $1,480,000, $747,000 and $587,000, respectively. Upon the closing of the sale of KBLCOM (see Note 12), the savings plan will be amended to provide for full vesting for all KBLCOM participants and KBLCOM will terminate its participation in the savings plan. Retention and Severance Agreements. In anticipation of a possible change in ownership control of KBLCOM, certain agreements were established to provide incentives for continued employment and to provide severance benefits, including medical, to certain executives and employees. The agreements include the Incentive Bonus Plan, Retention Agreements and Special Severance Benefits Plan. The $3.8 million estimated liability for the Incentive Bonus Plan and Retention Agreements, assuming a June 30, 1995 closing of the sale, was recorded at December 31, 1994. The effective dates of the Incentive Bonus Plan and Retention Agreements vary and events triggering payment include the earlier of an effective change of ownership control, termination without cause or, in the case of the Incentive Bonus Plan, September 1, 1996. The Special Severance Benefits Plan provides benefits, but only if the covered employees are involuntarily terminated between September 1, 1994 and June 30, 1996. There are also certain severance agreements for selected executives and employees that were put in place between December 1993 and October 1994. The primary event triggering payment of benefits under the agreements is involuntary termination within a specified period in connection with a change in control. KBLCOM has not accrued the estimated liabilities for these agreements, which total approximately $10.4 million, since the event triggering payment is not certain of occurrence as of December 31, 1994. 9. RELATED-PARTY TRANSACTIONS Related-party transactions are as follows: Related Year Ended December 31, Party Description --------------------------- 1994 1993 1992 (In Thousands) HII Dividends $369,097 $ 25,000 Capital contributrions- cash 177,349 116,900 Interest on notes payable (b) $71,132 16,719 4,123 Service fees (a) 3,620 5,034 3,374 Money fund expense (b) 7,530 1,537 2,570 Paragon Management fee income (c) 1,696 1,653 1,543 Other equity investments Management fee income (a) 382 819 600 Houston Industries Finance Discount expenses (a) 5,398 (a) Included in selling, general and administrative expenses (b) Included in interest expense - parent (c) Included in other income Related party balances are as follows: Related Year Ended December 31, Party Description ----------------------- 1994 1993 (In Thousands) HII Notes payable $694,097 $694,097 Short-term borrowings 140,300 57,700 Accrued interest 86,363 15,216 Tax-related receivable (a) 42,537 46,583 Service fee payable (a) (922) (797) (a) Included in due from parent HII has established a "money fund" through which KBLCOM can borrow or invest on a short-term basis. KBLCOM's weighted average short-term borrowing rates for the money fund are established at the prime rate. During 1992, Houston Industries Finance, a wholly owned subsidiary of HII, purchased advance service billings of KBLCOM. In January 1993 Houston Industries Finance sold the billings back to KBLCOM and ceased operations. 10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of KBLCOM's financial instruments are as follows: December 31, ----------------------------------- 1994 1993 ---------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value (In Thousands) Financial liabilities: Senior bank debt $364,000 $364,000 $364,000 $364,000 Senior and senior subordinated notes 140,580 154,654 150,964 180,890 Notes payable to parent 694,097 694,097 694,097 694,097 Unrecognized financial instruments - Interest rate swaps (net payable position) 1,019 13,604 The fair values of senior and senior subordinated notes are estimated using rates currently available for debt with similar terms and remaining maturities. The fair values of senior bank debt and notes payable to parent are equivalent to the carrying amounts. The fair value of interest rate swaps is the estimated amount that the swap counterparties would receive or pay to terminate the swap agreements, taking into account current interest rates and the current creditworthiness of the swap counterparties. 11. CABLE TELEVISION ACQUISITION In July 1994 KBLCOM acquired the stock of three cable companies then serving approximately 48,000 customers in the Minneapolis area in exchange for 587,646 shares of common stock of HII valued at approximately $20.1 million in a business combination accounted for using the purchase method of accounting. The total purchase price of approximately $80 million included the assumption of approximately $60 million in liabilities. Notes were repaid in connection with the acquisition in the amount of $57.7 million. The acquisition cost in excess of the fair market value of the tangible assets and liabilities is recorded on the balance sheet as cable television franchises and intangible assets and is amortized over periods ranging from 15 to 40 years on a straight-line basis. 12. SUBSEQUENT EVENT On January 26, 1995, Time Warner Inc. ("Time Warner") and HII reached an agreement in which Time Warner would acquire KBLCOM in a tax-deferred, stock-for-stock merger with a subsidiary of Time Warner. Time Warner will issue to HII one million shares of Time Warner common stock and 11 million shares of a newly issued series of its convertible preferred stock, which will have a liquidation value of $100 per share. The preferred stock will be convertible into approximately 22.9 million shares of Time Warner common stock and, until the earlier of conversion or the fourth anniversary of its issuance, pays an annual dividend of $3.75 per share. After four years, Time Warner will have the right to exchange the Time Warner preferred stock for Time Warner common stock at the stated conversion rate. In addition, at the closing Time Warner will purchase for cash certain intercompany debt of KBLCOM from HII for approximately $600 million subject to adjustment for changes in or levels of specified indebtedness and liabilities, working capital, capital expenditures and related items. The agreement includes certain restrictions, including restrictions on dividends, sales or acquisitions of assets and new indebtedness. Closing of the merger, which is conditioned upon, among other things, (i) the parties obtaining necessary consents of certain franchise authorities and other governmental entities, (ii) the absence of any change that might have a material adverse effect on KBLCOM or Time Warner and (iii) the absence of any material litigation, is expected to take place during the second half of 1995. EX-99.G 12 PRO FORMA FINANCIAL STMNTS OF TIME WARNER INC. EXHIBIT 99(g) Pro Forma Financial Statements of Time Warner Entertainment Company, L.P. (incorporated by reference from pages 3 to 15 of the Current Report on Form 8-K of Time Warner Entertainment Company, L.P. dated May 30, 1995) -----END PRIVACY-ENHANCED MESSAGE-----