ITEM 1. BUSINESS
Time Warner Inc. (the "Company") was incorporated in the State of Delaware in August 1983 and is the successor to a New York corporation originally organized in 1922. The Company changed its name from Time Incorporated following its acquisition of 59.3% of the common stock of Warner Communications Inc. ("WCI") in July 1989. WCI became a wholly owned subsidiary of the Company in January 1990 upon the completion of the merger of WCI and a subsidiary of the Company (the "Merger"). As used in this report, the terms "Registrant," the "Company" and "Time Warner" refer to Time Warner Inc. and its subsidiaries and divisions, and includes Time Warner Entertainment Company, L.P. ("TWE"), which conducts substantially all of the Entertainment businesses of the Company, unless the context otherwise requires.
The Company is the largest media and entertainment company in the world. Its businesses are carried on in three principal groups: Publishing, Music and Entertainment. The Publishing group consists principally of the publication and distribution of magazines and books; the Music group consists principally of the production and distribution of recorded music and the ownership and administration of music copyrights; and the Entertainment group consists principally of the production and distribution of motion pictures and television programming, the distribution of videocassettes, the ownership and operation of retail stores and theme parks, the production and distribution of pay television and cable programming, and the operation of cable television systems. These businesses are conducted throughout the world through numerous wholly owned, and in certain cases less than wholly owned, subsidiaries and affiliates.
TWE was formed as a Delaware limited partnership in February 1992 pursuant to an Agreement of Limited Partnership, dated as of October 29, 1991, as amended (the "TWE Partnership Agreement"), and has, since its capitalization on June 30, 1992 (the "TWE Capitalization"), owned and operated substantially all of the Entertainment group businesses, and certain other businesses, previously owned and operated by the Company. Upon the TWE Capitalization, certain wholly owned subsidiaries of the Company (the "TW Partners" or the "General Partners"), contributed such businesses, or assigned the net cash flow derived therefrom (or an amount equal to the net cash flow derived therefrom), to TWE and became general partners of TWE. Also upon the TWE Capitalization, wholly owned subsidiaries of ITOCHU Corporation (formerly C. Itoh & Co., Ltd.), a corporation organized under the laws of Japan ("ITOCHU"), and Toshiba Corporation, a corporation organized under the laws of Japan ("Toshiba"), collectively contributed $1 billion to TWE and became limited partners of TWE. On September 15, 1993, TWE consummated the transactions contemplated by the Admission Agreement, dated as of May 16, 1993, as amended (the "Admission Agreement"), between TWE and U S WEST, Inc., a Colorado corporation ("USW"). Pursuant to the Admission Agreement, a wholly owned subsidiary of USW made a capital contribution of $2.553 billion and became a limited partner of TWE (the "USW Transaction"). As a result of the USW Transaction, the TW Partners collectively own 63.27% pro rata priority capital and residual equity interests in TWE and wholly owned subsidiaries of ITOCHU, Toshiba and USW (the "Class A Partners" or the "Limited Partners") own pro rata priority capital and residual equity interests in TWE of 5.61%, 5.61% and 25.51%, respectively. Each of ITOCHU and Toshiba has the right to maintain its original 6.25% pro rata priority capital and residual equity interests by acquiring additional partnership interests. In addition, the TW Partners own priority capital interests senior and junior to the pro rata priority capital interests.
The Admission Agreement provides that TWE will use its best efforts to upgrade a substantial portion of its cable systems to "Full Service Network(TM)" capacity over the next five years. As systems are designated for such upgrade and after any required approvals are obtained, USW and TWE will share joint control of those systems through a 50-50 management committee. The "Full Service Network" business is expected to include substantially all of TWE's cable systems, subject to obtaining necessary regulatory consents and approvals. See "Entertainment--Description of Certain Provisions of the TWE Partnership Agreement."
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For financial information about the Company's industry segments and operations in different geographical areas with respect to each of the years in the three-year period ended December 31, 1993, see Note 10, "Segment Information," to the Company's consolidated financial statements at pages through herein.
The Company's Entertainment Group, consisting of the Company's interests in certain entertainment companies, principally TWE, was deconsolidated effective January 1, 1993 as a result of the USW Transaction. The TWE Partnership Agreement and the TWE credit agreement impose restrictions on the ability of TWE to make distributions to the Company and the TW Partners. See Note 1, "Summary of Significant Accounting Policies," and Note 2, "Entertainment Group," to the Company's consolidated financial statements at pages through herein.
PUBLISHING
The Company's wholly owned publishing division, Time Inc., publishes magazines and books and develops products for the multimedia and television markets. It conducts these activities through wholly owned subsidiaries, joint ventures, equity investments and partnerships.
MAGAZINES
General
Time Inc. publishes TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, LIFE, SPORTS ILLUSTRATED FOR KIDS and ENTERTAINMENT WEEKLY. In March 1994, Time Inc. announced the launch of IN STYLE, a monthly celebrity life style publication, which will have an initial rate base of 500,000.
Time Publishing Ventures, Inc. ("TPV"), a subsidiary of Time Inc. Ventures ("TIV") and an indirect subsidiary of Time Inc., is responsible for international, regional and special interest publishing and development activities, including Southern Progress Corporation ("Southern Progress"), Sunset Publishing Corporation ("Sunset Publishing"), PARENTING, BABY TALK, HEALTH, HIPPOCRATES, MARTHA STEWART LIVING and WHO WEEKLY magazines and various joint ventures. In September 1993, a joint venture between a subsidiary of TPV and affiliates of Quincy Jones Entertainment Company began publication of VIBE, a magazine that covers rap, rhythm and blues, reggae and dance music, as well as politics and fashion.
Southern Progress publishes SOUTHERN LIVING, PROGRESSIVE FARMER, SOUTHERN ACCENTS, COOKING LIGHT and TRAVEL GUIDE magazines.
Time Inc., either directly or through subsidiaries, has equity interests in ASIAWEEK, ELLE JAPON, PRESIDENT, American Family Publishers, Time Distribution Services and Publishers Express. In 1993, Time Inc. sold its interest in WORKING WOMAN and WORKING MOTHER, and in March 1994, it sold its interest in the magazine, YAZHOU ZHOUKAN, but retained the right to reacquire 25% of the magazine in the future.
TIV has management responsibility for most of the American Express Publishing Corporation's operations, including TRAVEL & LEISURE and FOOD & WINE magazines. TIV also operates an in-store advertising and demonstration business, Time Inc. In-Store Marketing.
Each magazine published by the Company has an editorial staff under the general supervision of a managing editor and a business staff under the management of a president or publisher. Magazine manufacturing and distribution activities are generally managed by centralized staffs at Time Inc. Fulfillment activities for Time Inc.'s magazines are generally administered from a centralized facility in Tampa, Florida.
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PARENTING, SUNSET, BABY TALK, HEALTH, HIPPOCRATES, MARTHA STEWART LIVING and Time Inc.'s overseas operations employ independent fulfillment services and undertake their own manufacturing and distribution.
Magazine publishing follows a seasonal pattern with revenues being generally higher in the second and fourth quarters and lower in the first and third quarters.
The individual magazines of the Company are summarized below:
TIME, a weekly magazine, summarizes the news and brings original interpretation and insight to the week's events. The domestic advertising rate base of TIME as of January 1994 was 4,000,000, which is unchanged from January 1993.
TIME Asia, TIME Atlantic, TIME Canada, TIME Latin America and TIME South Pacific are weekly English-language editions of TIME which circulate outside the United States. These editions had an aggregate worldwide advertising rate base of 1,480,000 as of January 1994, compared to 1,510,000 in January 1993.
SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and is designed to appeal to, spectators and participants in virtually all forms of recreation and competitive sports. In 1993, Time Canada Ltd. tested a Canadian version of the magazine which provides expanded coverage of Canada's teams and athletes. The advertising rate base as of January 1994 was 3,150,000, the same as in January 1993. SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to children ages eight through 14. Its advertising rate base as of January 1994 was 900,000, compared to 800,000 in January 1993, including 250,000 copies distributed free to over 1,400 schools.
PEOPLE, a weekly magazine, focuses on celebrities and other notable personalities. The advertising rate base as of January 1994 was 3,150,000, the same as in January 1993.
ENTERTAINMENT WEEKLY is a weekly magazine which includes reviews and reports on television, movies, video, music and books. The advertising rate base as of January 1994 was 1,075,000, compared to 800,000 in January 1993 and 1,000,000 in February 1993.
FORTUNE, a biweekly magazine, reports on worldwide economic and business developments. FORTUNE International, an overseas English-language edition, contains most of the articles in the domestic edition. The combined worldwide advertising rate base was 870,000 as of January 1994, which is unchanged from January 1993.
MONEY is a monthly magazine which reports on personal finance. The advertising rate base as of January 1994 was 1,900,000, the same as in January 1993.
LIFE is a monthly magazine which features photographic essays. The advertising rate base as of January 1994 was 1,500,000 as compared to 1,700,000 in January 1993. The rate base was reduced in May 1993 as the magazine sought to redefine its publishing niche for the 1990's.
SOUTHERN LIVING is a monthly regional home, garden, food and travel magazine focused on the South with an advertising rate base of 2,300,000 as of January 1994, which is the same as in January 1993.
PROGRESSIVE FARMER is a monthly regional farming magazine with an advertising rate base of 415,000 as of January 1994, compared to 425,000 in January 1993.
SOUTHERN ACCENTS, published six times a year, features architecture, fine homes and gardens, arts and travel and is targeted to affluent Southerners. Its advertising rate base as of January 1994 was 250,000, which is unchanged from January 1993.
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COOKING LIGHT is published seven times a year and features health and fitness through active lifestyles and good nutrition. The advertising rate base as of January 1994 was 1,100,000, compared to 1,000,000 in January 1993.
TRAVEL GUIDE, formerly TRAVEL SOUTH, is a seasonal, regional travel magazine focused on the South with an average circulation of 200,000 as of January 1994, the same as in January 1993.
PARENTING is published ten times per year and is aimed at parents of children under the age of ten. The advertising rate base increased as of January 1994 to 925,000, compared to 875,000 in January 1993.
SUNSET, The Magazine of Western Living, is a monthly regional magazine focused on lifestyles in the West. The advertising rate base increased to 1,400,000 in January 1994 compared to 1,375,000 in January 1993.
HEALTH is a consumer health magazine published seven times a year, and HIPPOCRATES is published ten times a year. Although similar in editorial content, HEALTH is targeted at the consumer market, while HIPPOCRATES is a trade magazine targeted at physicians and carries primarily trade advertising. HEALTH had an advertising rate base of 900,000 in January 1994, the same as in January 1993. HIPPOCRATES had a controlled circulation of 125,000 primary care physicians in January 1994, the same as in January 1993.
MARTHA STEWART LIVING presents Martha Stewart's personal perspective on entertaining, cooking, decorating and gardening. Published bimonthly in 1993, it will expand to eight issues in 1994. Its advertising rate base as of January 1994 was 725,000, compared to 575,000 in January 1993. In 1993, a TIV subsidiary developed a weekly one-half hour syndicated television show featuring Martha Stewart which began airing on broadcast television to a nationwide audience in September 1993.
BABY TALK is a monthly magazine targeted at expectant and new mothers. Its rate base as of January 1994 was 1,125,000, the same as in January 1993. BABY TALK's ancillary publications are BABY ON THE WAY (published semi-annually) and BABY ON THE WAY BASICS (published annually).
WHO WEEKLY is an Australian version of PEOPLE which focuses on celebrities and other notable personalities. The advertising rate base as of January 1994 was 200,000, compared to 180,000 in January 1993.
VIBE was launched in September 1993 and covers rap, rhythm and blues, reggae and dance music, as well as politics and fashion. Four issues of VIBE were published in 1993 and it is expected that 10 issues will be published in 1994. The advertising rate base as of January 1994 was 200,000.
Circulation
The Company's publications are sold primarily by subscription. Subscription copies are delivered to subscribers through the mail. Subscriptions are sold by direct-mail solicitation, subscription sales agencies, television and telephone solicitation and insert cards in the Company's magazines and other publications. Single copies of magazines are sold through retail news dealers who are supplied in turn by regional wholesalers.
Advertising
Advertising carried in the Company's magazines is predominantly consumer advertising. Eleven of the Company's magazines have numerous regional and demographic editions which contain the same basic editorial material but permit advertisers to concentrate their advertising in specific markets. Through the use of selective binding and ink-jet technology, the Company creates special custom editions targeted towards specific groups. This allows the Company to deliver advertisers a more highly targeted audience by
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segmenting subscriber lists to identify those subscribers advertisers desire most, as well as providing the opportunity to personalize advertising messages.
Paper and Printing
Lightweight coated paper, which for certain magazines is recycled, constitutes a significant component of physical costs in the production of magazines. Time Inc. has contractual commitments to ensure an adequate supply of paper, but periodic shortages may occur in the event of strikes or other unexpected disruptions in the paper industry. During 1993, a year in which paper prices generally increased, Time Inc. purchased paper principally from four independent manufacturers, in each case under contracts that, for the most part, are either fixed-term or open-ended at prices determined on a market price or formula price basis.
Printing and binding for the Company's magazines are accomplished primarily by major domestic and international printing concerns in 21 locations. Magazine printing contracts are either fixed-term or open-ended at fixed prices with, in some cases, adjustments based on certain criteria.
BOOKS
General
The Company's book operations include Time Life Inc.; Book-of-the-Month Club Inc.; Time Warner Trade Publishing which operates Warner Books, Warner Publisher Services and Little, Brown and Company, each of which is a wholly owned subsidiary of Time Inc.; and the Oxmoor House and Sunset Books divisions of Southern Progress and Sunset Publishing, respectively. In 1993, the book operations distributed, in aggregate, approximately 142 million gross units.
Time Life Inc.
Time Life Inc. is composed of five divisions: Books, Music, Video and Television, Education, and International. Time Life Inc. is one of the nation's largest direct marketers of books, music and videos. The products are sold by direct response, including mail order, television and telephone, through retail, institutional and license channels, and by door-to-door independent distributors in some foreign markets. Editions of the books are currently sold in 22 languages worldwide and approximately 42% of Time Life Inc.'s revenues are generated outside the United States. In 1993, Time Life Inc. created Time Life Education, a division designed to enter the school and library market.
Editorial material is created by in-house staffs as well as through outside book packagers. The most significant new product launched in 1993 was Time Life Music's new series "The Rolling Stone Collection: 25 Years of Essential Rock." Other 1993 best sellers included the series "Barney & Friends" at Time Life Video and Television. In 1993, Time Life began the development of two ten-hour television documentary series, "Lost Civilizations" and "The History of Rock 'n' Roll," each of which draw on Time Life's existing editorial resources. First-run television rights to "Lost Civilizations" have been pre-sold to one of the three major networks, and "The History of Rock 'n' Roll" is being co- produced with TWE's Telepictures Productions.
Manufacturing for Time Life Books is done by several independent companies. Manufacturing contracts are entered into on a series rather than a single title basis and are fixed-price with provisions for cost of labor, material and specification adjustments. These contracts, subject to certain limitations, may be terminated by Time Life Inc. or the manufacturer. Time Life Inc.'s fulfillment activities, excluding international operations, are conducted from a centralized facility in Richmond, Virginia.
Book-of-the-Month Club
Book-of-the-Month Club operates seven book clubs and two continuity businesses with combined membership in excess of 3.1 million. Two of the clubs, Book-of-the-Month Club and Quality Paperback Book
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Club, are general interest clubs and the remaining clubs specialize in history, cooking and crafts, business, children's books and the books of a particular author. In addition, audio and video products are offered through the clubs. In 1993, Book-of-the-Month Club launched its businesses internationally in over 20 countries primarily in Europe and Asia.
Book-of-the-Month Club buys the rights from publishers to manufacture and distribute books and then has them printed by independent printing concerns. Book-of-the-Month Club runs its own fulfillment and warehousing operations in Mechanicsburg, Pennsylvania.
Time Warner Trade Publishing
Warner Books
Warner Books publishes hardcover, mass market and trade paperback books. Among the best selling hardcover books published in 1993 were Robert James Waller's "Slow Waltz in Cedar Bend," and Sandra Brown's "Where There's Smoke." Robert James Waller's "The Bridges of Madison County," published in 1992, was the number one selling hardcover title of 1993. Mass market paperback books published in 1993 included "The General's Daughter" by Nelson DeMille, "The Star Shines Down" by Sidney Sheldon, "Decked: A Regan Reilly Mystery" by Carol Higgins Clark, "Along Came a Spider" by James Patterson, "French Silk" by Sandra Brown, and "Double Cross" by Sam and Chuck Giancana. The major trade paperback book published by Warner Books in 1993 was: "Bottoms Up!" by Joyce L. Vedral, Ph.D.
Little, Brown
Little, Brown publishes general and children's trade books, legal and medical reference books and textbooks. Through its subsidiary, Little, Brown (U.K.), it also publishes general hardcover and mass market paperback books in the United Kingdom. Among the trade hardcover books published by Little, Brown in 1993 were "The Hope" by Herman Wouk and "The Best Cat Ever" by Cleveland Amory. The major trade paperback book published by Little, Brown in 1993 was "Revolution From Within" by Gloria Steinem.
Little, Brown handles book distribution for itself and Warner Books. The marketing of trade books is primarily to retail stores and wholesalers throughout the United States, Canada and the United Kingdom. Law and medical textbooks are sold primarily to university retail stores. Professional reference books are sold to practitioners through retail stores and direct marketing. Through their combined U.S. and U.K. operations, Little, Brown and Warner Books have the ability to acquire English-language publishing rights for the distribution of hard and softcover books throughout the world.
In July 1993, the trade publishing group and Warner Music Group's Atlantic Records formed a joint venture, Time Warner AudioBooks, to develop and market audio versions of books and other materials published by Warner Books, Little, Brown and other outside publishers.
Oxmoor House and Leisure Arts
Oxmoor House, the book publishing division of Southern Progress, markets how- to books on a wide variety of topics including food and crafts, as well as illustrated volumes on art and other subjects. Acquired in 1992 and integrated into Oxmoor House, Leisure Arts is a well-established publisher and distributor of instructional leaflets, continuity books series and magazines for the needlework and craft market.
Sunset Books
Sunset Books, the book publishing division of Sunset Publishing, markets books on topics such as building and decorating, cooking, gardening and landscaping, and travel. Sunset Books' unique marketing formula includes an extensive network of home repair and garden centers.
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OTHER PUBLISHING OPERATIONS
Multimedia and Other Television Development
Time Inc. is actively developing products for emerging technologies such as on-line computer networks, the Full Service Network, and the CD ROM market. These efforts include alliances with leading worldwide consumer on-line computer services to provide interactive entertainment and information to the home computer market, the development of an interactive news-on-demand service for the Full Service Network, as well as the creation of CD ROM versions of original and existing Time Inc. editorial products.
Time Inc. has also undertaken development efforts in various television ventures, both in combination with other divisions of the Company and independently. The most significant of these activities is an entertainment news show, "Entertainment News Television," produced in conjunction with the Telepictures division of TWE, which will be a six-day-a-week program utilizing the editorial resources of Time Inc. to break exclusive stories. The first episode of this show is planned for the autumn of 1994.
Time Inc. In-Store Marketing
In June 1993, Time Inc. formed, as part of TIV, Time Inc. In-store Marketing, an umbrella organization to operate all of the company's in-store advertising and demonstration businesses, including Media One, Inc. ("Media One") and SmartDemo Inc. ("SmartDemo"). Media One's primary product is a two-sided backlit advertising display unit that is installed in supermarket checkout lanes. SmartDemo, an in-store demonstration, couponing, sampling and merchandising business, was acquired by TIV in June 1993.
American Express Publishing
In March 1993, Time Inc., through its TIV subsidiary, entered into an agreement to assume management responsibility for most of American Express Publishing Corporation's operations, including its core lifestyle magazines, TRAVEL & LEISURE and FOOD & WINE. Under the terms of the agreement, TIV receives a fee for managing these properties, as well as incentives for improving profitability.
American Family Publishers
Time Inc. is a 50% partner in American Family Publishers ("AFP"), a direct mail magazine subscription sales agency. AFP sells magazine subscriptions for approximately 200 major magazines in the United States, including many of the Company's publications. AFP sells primarily through two heavily promoted nationwide sweepstakes mailings conducted each year.
Time Distribution Services
Time Inc. owns approximately a 63% interest in Time Distribution Services ("TDS"), a joint venture with the New York Times Company. TDS markets and distributes magazines published by both companies, and also certain other publishers in the United States and Canada, through wholesalers to retail outlets such as newsstands and directly to supermarkets and drugstore chains.
Warner Publisher Services
Warner Publisher Services ("WPS") is a major distributor of magazines and paperback books sold through wholesalers in the United States and Canada. WPS is the sole national distributor for MAD magazine, the publications of DC Comics and certain publications owned by other publishers, including TEEN, VOGUE, WOMAN'S DAY, and the Dell Puzzle Books. WPS also distributes the paperback books published by Warner Books as well as the full paperback lines of the Berkley Group and St. Martin's Press/Tor Books. WPS is wholly owned by the Company.
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Publishers Express
Time Inc. owns 25% of Publishers Express Inc., a corporation whose shareholders consist of eleven other publishers, printers, paper companies and direct mailers established to deliver second- and third-class mail and advertising material in competition with the U.S. Postal Service. As of January 1994, the corporation was delivering in 30 cities throughout the United States.
POSTAL RATES
Postal costs represent a significant operating expense for the Company's publishing activities. There were no general postal rate increases in 1993 and none will occur in 1994. A general increase of approximately 10% has been proposed for 1995 by the Postal Service. Some relatively small savings will be realized by the Company through the adoption by the Postal Board of Governors of a special discount for certain types of barcoded postal material.
Publishing operations continue to minimize postal expense through the use of certain cost-saving measures, including the utilization of contract carriers to transport books and magazines to central postal centers. It has been the Company's practice in selling books and other products by mail to include a charge for postage and handling, which is adjusted from time to time to partially offset any increased postage or handling costs.
COMPETITION
The Company's magazine operations compete for sales with numerous other publishers and retailers, as well as other media. The general circulation magazine industry is highly competitive both within itself and with other advertising media which compete with the Company's magazines for audience and advertising revenue.
The Company's book publishing operations compete for sales with numerous other publishers and retailers as well as other media. In addition, the acquisition of publication rights to important book titles is highly competitive, and Warner Books and Little, Brown compete with numerous other book publishers. WPS and TDS meet with direct competition from other distributors operating throughout the United States and Canada in the distribution of magazines and paperback books.
MUSIC
GENERAL
The Company's music business, conducted under the umbrella name Warner Music Group ("WMG"), consists of a vertically integrated worldwide recorded music business and a worldwide music publishing business.
The Company's domestic recorded music business is conducted principally through WCI's wholly owned subsidiaries Warner Bros. Records Inc. ("WBR"), Atlantic Recording Corporation ("Atlantic"), WEA Manufacturing Inc. ("WEA Mfg.") and Warner-Elektra-Atlantic Corporation ("WEA"), and a division of WCI, Elektra Entertainment ("Elektra"). Outside of the United States, the recorded music business is conducted in 72 countries through WEA International Inc. and a division of WCI, Warner Music International, and their subsidiaries and affiliates ("WMI"), as well as through non-affiliated licensees.
The Company's music publishing business is conducted principally through wholly owned subsidiaries of WCI (collectively, "Warner/Chappell").
In 1993, approximately 52% of WMG's revenues were derived from sources outside of the United States.
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RECORDED MUSIC
WMI, WBR, Atlantic and Elektra produce, sell and license compact discs, cassette tapes and music videos (in both videocassette and video laserdisc configurations) of the performances of recording artists under contract to them or for whose recordings they have acquired rights. WMG's recorded music and video product is marketed under various labels, including the proprietary labels "Warner Bros.," "Reprise," "Sire," "Tommy Boy," "Warner Nashville," "Elektra," "Asylum," "Nonesuch," "Atlantic," "A*Vision," "EastWest America," "Big Beat," "Atlantic Nashville," "WEA," "EastWest," "Teldec," "CGD," "Carrere," "Erato," "MMG," "DRO," "Telegram," "D-Day" and "Muser."
In addition, WMG has entered into joint venture agreements pursuant to which WMG companies manufacture, distribute and market (both domestically and, in most cases, internationally) recordings owned by such joint ventures. The terms of such agreements vary widely, but each agreement typically provides the WMG record company with an equity interest and a profit participation in the venture, with financing furnished either solely by WMG or by both parties. Included among these arrangements are the labels "American Recordings," "Giant," "Interscope," "Maverick," "Quest" and "Rhino."
WMG's record companies also acquire rights pursuant to agreements to manufacture and distribute certain recordings that are marketed under the licensor's proprietary label. Included among the labels distributed under such arrangements are "Slash," which is distributed by WBR; "Hollywood" and "Mute," which are distributed by Elektra; and "Beggars Banquet," "Delicious Vinyl" and "Matador," which are distributed by Atlantic.
Recording artists are engaged under arrangements that generally provide that the artist is to receive a percentage of the suggested retail selling price of compact discs, cassette tapes and music videos sold. Most artists receive non- returnable advance payments against future royalties.
Among the artists whose albums resulted in significant record sales for WMG's record companies during 1993 were: Eric Clapton, Rod Stewart, the artist formerly known as Prince, Neil Young, Silk, Metallica, 10,000 Maniacs, Stone Temple Pilots, 4 Non Blondes, John Michael Montgomery, Tracy Lawrence, Luis Miguel, Noriyuki Mikihara, Leandro e Leonardo and Mana. In 1994, WMG's record companies expect to release albums by the following artists: Madonna, R.E.M., Travis Tritt, Philip Glass, Motley Crue, Keith Sweat, Tori Amos, Stevie Nicks, Confederate Railroad, Clawfinger, Enya, Gilberto Gil and Inner Circle, among others.
WEA Mfg. is engaged in the domestic manufacturing of audio and ROM compact discs, cassette tapes, vinyl records and videocassettes. WEA Mfg. conducts its operations from facilities situated in Olyphant, Pennsylvania and in the greater Los Angeles area. WMI also operates two plants in Germany that manufacture compact discs, cassette tapes and vinyl records for WMI's European affiliates and licensees and for WMI companies outside Europe, as well as for unrelated parties.
Ivy Hill Corporation ("Ivy Hill") is engaged in the offset lithography and packaging business through facilities situated in four states. Ivy Hill is a major supplier of packaging to the recorded music industry (including WMG's record companies) and also supplies packaging for a wide variety of other consumer products.
Warner Special Products produces, primarily for telemarketers, compilations of music for which it has obtained rights from WMG's recorded music companies as well as third parties.
WMG's recorded music product is marketed and distributed in the continental United States by WEA, which supplies, directly or indirectly through sub- distributors and wholesalers, thousands of record stores, department stores, discount centers and other retail outlets across the country. Alternative Distribution Alliance, a music distribution company specializing in alternative rock music, with a focus on new artists, was formed in 1993 as a joint venture of Warner Music Group, its labels, Restless Records and Sub-Pop.
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In foreign markets, WMI produces, distributes, promotes and sells recordings of local artists and, in most cases, distributes the recordings of those artists for whom WMG's domestic recording companies have international rights. In certain countries, WMI licenses to non-affiliated parties rights to distribute recordings of WMG's labels.
Warner Music Enterprises, a direct marketing company, entered into an agreement in 1993 with the BBC to launch the BBC Music Service, a subscription program specializing in classical music, announced the launch of New Country Music Service, another subscription service, in the first quarter of 1994 and announced the addition of a new rock music magazine to the existing Rock Video Monthly Service for the third quarter of 1994.
Through partnerships with Sony Music Entertainment Inc., Time Warner owns a 50% interest in the music and video clubs of The Columbia House Company. The Columbia House Company, consisting of a U.S. partnership and a Canadian partnership, is the leading direct marketer of compact discs, cassette tapes and videocassettes in the United States and Canada. WCI owns a minority portion of Time Warner's 50% interest in the U.S. partnership and all of Time Warner's 50% interest in the Canadian partnership. WMG and Sony Music Entertainment are also partners in Music Sound Exchange, a direct marketing catalog launched in 1993 that is primarily geared to selling music and related product to consumers age 35 and over.
A 1993 joint venture between WMG and Sony Software Corporation became an equity partner with TWE's Time Warner Cable in Music Choice, an audio programming service that delivers multiple channels of CD-quality stereo music via cable television. In Europe, where the service is known as Music Choice Europe, it is delivered via cable television and direct-to-home satellite.
In December 1993, a joint venture among WMG, Sony, PolyGram, EMI and Hamburg radio executive Frank Otto, launched VIVA, a 24-hour German language music video channel carried on cable television in Germany. In January 1994, WMG, EMI, PolyGram, Sony and Ticketmaster announced plans to form a partnership that will operate an advertiser-supported, 24-hour music video channel to be offered as a basic cable television service in the United States and Puerto Rico.
MUSIC PUBLISHING
Time Warner's music publishing companies own or control the rights to over 900,000 standard and contemporary compositions, including numerous popular hits, folk songs and music from the stage and motion pictures. Certain works of the following artists, authors and composers are included in Warner/Chappell's catalogues: John Bettis, Michael Bolton, The Black Crowes, Phil Collins, Comden & Green, Dubin & Warren, Genesis, George and Ira Gershwin, Gin Blossoms, Victor Herbert, Michael Jackson, Elton John, Leiber & Stoller, Lerner & Lowe, Madonna, Henry Mancini, Johnny Mercer, George Michael, Midnight Oil, Cole Porter, the artist formerly known as Prince, R.E.M., Rodgers & Hart, Soul Asylum, Jule Styne, Bernie Taupin, Van Halen, John Williams and the foreign administration of the works of Irving Berlin.
Warner/Chappell also administers the film music of Lucasfilm, Ltd., Viacom Enterprises, Samuel Goldwyn Productions, Famous Music (the music publishing division of Paramount Communications Inc.) outside the United States and Japan, and several other television and motion picture companies.
Warner/Chappell's printed music division markets publications throughout the world containing the works of Alabama, Phil Collins, Bon Jovi, The Eagles, The Grateful Dead, Michael Jackson, Led Zeppelin, Madonna, John Mellencamp, the artist formerly known as Prince, Rush, Bob Seger and many others.
Principal sources of revenues to Warner/Chappell are license fees for use of its music copyrights on radio and television, in motion pictures and in other public performances; royalties for use of its music copyrights on compact discs, cassette tapes, vinyl records, music videos and in commercials; and sales of published sheet
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music and song books for the home musician as well as the professional and school markets, including methods for teaching musical instruments.
LEGISLATION
The Audio Home Recording Act, enacted in 1992, establishes the right of individuals to copy pre-recorded music for private non-commercial use and grants to copyright owners, including music publishers and record companies, a royalty in connection with the sale of new digital audio recording equipment and blank digital audio recording media. The statute also requires manufacturers of digital audio recording equipment to utilize technology that would prevent subsequent copying from copied audio recordings. In 1993, Congress began considering bills to provide royalties to performers and producers of digitized music. The legislation is prompted by the improved reception and the potential for recording that digitization of broadcast, cable and other means of music distribution is expected to provide. Passage of this legislation could be favorable to WMG's interests.
COMPETITION
The recorded music business is highly competitive. The revenues and income of a company in the recording industry depend upon the public acceptance of the company's recording artists and the recordings released in a particular year. Although WMG is one of the largest recorded music companies in the world, its competitive position is dependent upon its continuing ability to attract and develop talent that can achieve a high degree of public acceptance. The recorded music business continues to be adversely affected by counterfeiting, piracy, parallel imports and, in particular, the home taping of recorded music. In addition, the recorded music business also meets with competition from other forms of entertainment, such as television, pre-recorded videocassettes and video games.
Competition in the music publishing business is intense. Although WMG's music publishing business is the largest on a worldwide basis, it competes with every other music publishing company in acquiring musical compositions and in having them recorded and performed.
ENTERTAINMENT
The Company's Entertainment Group consists of TWE's Filmed Entertainment, Programming--HBO and Cable businesses, and also the Company's interests in certain other businesses. Each of the three principal businesses is operated as a separate division of TWE and, except as described below, in the same manner as it was operated by the Company at the time of the TWE Capitalization. See "--Description of Certain Provisions of the TWE Partnership Agreement-- Management and Operations of TWE."
In order to ensure compliance with the Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia applicable to USW and its affiliated enterprises, which may include TWE (the "Modification of Final Judgment"), prior to USW's investment in TWE, TWE distributed to the TW Partners certain assets, including the satellite receiving dishes and broadcast antennae used by TWE's cable division, the transponders and other transmission equipment used by TWE's cable television programming and filmed entertainment divisions and equity interests in certain programming entities (collectively, the "TW Service Partnership Assets"). Such partners then contributed such assets to newly formed sister partnerships in which the TW Partners and subsidiaries of ITOCHU and Toshiba are the partners (the "Time Warner Service Partnerships"). Upon the distribution of the TW Service Partnership Assets to the TW Partners, the TW Partners' junior priority capital interests were reduced by approximately $300 million. See "--Other Entertainment Group Assets--Time Warner Service Partnerships."
Generally, the Modification of Final Judgment prohibits the seven Regional Bell Operating Companies ("RBOCs") including USW, and any of their "affiliated enterprises," which, as a result of the USW
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Transaction, may include TWE, from among other things, (i) providing long distance telecommunications services, which may include operating or providing long distance services using TVROs or satellites, or coaxial cable, fiber or microwave facilities, (ii) manufacturing or providing telecommunications equipment and (iii) manufacturing "customer premises equipment," which may include cable television converter or multimedia boxes. In addition, the Modification of Final Judgment may prohibit the RBOCs and their "affiliated enterprises" from holding certain financial interests in ventures that engage in the foregoing activities. Several bills that would alleviate many of the restrictions contained in the Modification of Final Judgment are under active consideration in the Congress. See "--Other Entertainment Group Assets--Time Warner Service Partnerships."
FILMED ENTERTAINMENT DIVISION
General
TWE's principal operations in the fields of motion pictures and television are conducted by its Warner Bros. division ("WB"). The filmed entertainment business includes the production, financing and distribution of feature motion pictures, television series, made-for-television movies, mini-series for television, first-run syndication programming, and animated programming for theatrical and television exhibition; and the distribution of pre-recorded videocassettes and videodiscs. TWE also is engaged in product licensing and the ownership and operation of retail stores, movie theaters and theme parks.
Feature motion pictures and television programs are produced at various locations throughout the world, including The Warner Bros. Studio in Burbank, California and The Warner Hollywood Studio in West Hollywood, California. For additional information, see Item 2
ITEM 2. PROPERTIES
PUBLISHING, MUSIC AND CORPORATE
The following table sets forth certain information as of December 31, 1993 with respect to the Company's principal properties (over 250,000 square feet in area) that are used primarily by its publishing and music divisions or occupied for corporate offices, all of which the Company considers adequate for its present needs, and all of which were substantially used by the Company or were leased to outside tenants:
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ENTERTAINMENT
The following table sets forth certain information as of December 31, 1993 with respect to TWE's principal properties (over 125,000 square feet in area), all of which TWE considers adequate for its present needs, and all of which were substantially used by TWE or were leased to outside tenants.
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- -------- (a) Ten acres consist of various parcels adjoining The Warner Bros. Studio, with mixed commercial, office and residential uses. (b) 1,640 acres of which are undeveloped land available for expansion. (c) Excludes 8,817,000 sq. ft. of owned and 2,024,000 sq. ft. of leased properties used by the Cable division for headend, hub, and tower sites. (d) Includes 108,000 sq. ft. of office space occupied by Time Warner corporate staff who provide services to TWE pursuant to arrangements set forth in the TWE Partnership Agreement.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties, in the ordinary course of business, to litigations involving property, personal injury and contract claims. The amounts that the Company believes may be recoverable in these matters are either covered by insurance or are not material.
In June 1989, a stockholder class action was filed in the Court of Chancery for the State of Delaware, in and for New Castle County ("Delaware Chancery Court"), entitled In re Time Incorporated Shareholder Litigation, Consol. Civ. Action No. 10670 (the "Time Warner Stockholder Litigation"), against the Company, its Board of Directors, WCI and the Company's financial advisors, Wasserstein Perella & Co., Inc. ("Wasserstein Perella") and Shearson Lehman Hutton Inc. ("Shearson Lehman"), in which plaintiffs seek, among other things, judgment declaring that the defendant directors breached their fiduciary duties by entering into the Share Exchange Agreement dated as of March 3, 1989, as amended, between the Company and WCI (the "Share Exchange Agreement") and the Agreement and Plan of Merger (as amended, the "Merger Agreement") among the Company, TW Sub Inc., then a wholly owned subsidiary of the Company, and WCI, as in effect on March 3, 1989, and that WCI, Shearson Lehman and Wasserstein Perella aided and
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abetted those breaches; an order requiring redemption of the Rights issued pursuant to the Company's Stockholder Rights Plan; and judgment rescinding consummation of the Share Exchange Agreement and enjoining the Company's acquisition of WCI pursuant to the tender offer (the "Tender Offer") pursuant to which the Company purchased 100 million shares of WCI common stock for $70 per share on July 24, 1989 and the Merger Agreement. Plaintiffs' motion preliminarily to enjoin the Tender Offer was denied in July 1989 and that decision was affirmed on appeal. In July 1993, the action was dismissed without prejudice and without the payment of any compensation to the plaintiffs by the defendants.
Two other purported stockholder class actions, Greenberg v. Time, et al., and Northern Laminating, Inc. Retirement Fund v. Munro, et al., Index No. 12653-89, were filed in June 1989 in the Supreme Court of the State of New York, County of New York ("New York Supreme Court") and make substantially similar allegations against most of the same defendants, plus an alleged violation of New York antitrust law. Defendants have not yet been required to respond to the amended complaint in the Northern Laminating case. The Greenberg action had been consolidated with the Time Warner Stockholder Litigation, which was dismissed in July 1993.
Also pending in the Delaware Chancery Court is another consolidated stockholder litigation, In re Warner Communications Inc. Shareholders Litigation, Consol. Civ. Action No. 10671 (the "Warner Stockholder Litigation"), commenced in 1989 against WCI, its Board of Directors and the Company, alleging that WCI's Board of Directors breached their fiduciary duties to WCI's stockholders, and the Company aided and abetted such alleged breach, by not ensuring that the securities distributed to WCI stockholders in the Merger contained certain protective covenants and redemption provisions. The amended complaint seeks, among other things, to enjoin the consummation of the Tender Offer and the Merger, or to rescind the Tender Offer and the Merger. The defendants have not yet been required to respond to the amended complaint. The action has been stayed pending resolution of the Berger action described below.
Another 1989 purported stockholder class action, Berger, et al. v. Warner Communications Inc., et al., Index No. 91-3735, filed in the New York Supreme Court against WCI, certain of WCI's directors, the Company, Wasserstein Perella, Shearson Lehman and Lazard Freres & Co. ("Lazard") alleges, among other things, that WCI's directors and the Company breached their fiduciary duties to WCI's stockholders by structuring the Merger as a freezeout of WCI's minority stockholders, and by failing to ensure that the securities to be distributed to stockholders in the Merger would in fact trade at the value imputed to those securities, and that Wasserstein Perella, Shearson Lehman and Lazard aided and abetted those breaches of fiduciary duty. The complaint seeks, among other things, a declaratory judgment that defendants have breached their fiduciary duties, compensatory damages and a judgment declaring the Merger a nullity. On April 9, 1991, a court order effected defendants' stipulation to the certification of a plaintiff class consisting of those persons who held shares of WCI common stock on August 23, 1989 and before the effective date of the Merger, except defendants in this litigation and any person or entity related to or affiliated with any defendants. Argument on both sides' motions for partial summary judgment on plaintiffs' contract claim for additional interest of approximately $20 million in connection with the consideration paid in the merger transaction was heard on February 22, 1994.
Another purported stockholder class action, Silverstein v. Warner Communications Inc., et al., Civ. Action No. 11285, was filed in 1989 in the Delaware Chancery Court against WCI, members of its Board of Directors and the Company. The complaint alleges, among other things, violations of fiduciary duties to WCI stockholders by allegedly "forcing out" WCI's stockholders upon consummation of the Merger at an unfair price without according them a meaningful vote or the right to an appraisal proceeding. The complaint seeks rescission or rescissory and other damages in an unspecified amount. In August 1991, the court signed a stipulation of the parties staying the Silverstein action and the Warner Stockholder Litigation pending resolution of the Berger action. The parties have agreed to dismiss this action without prejudice and without compensation to the plaintiffs or their attorneys. An order effectuating that agreement was approved by the court on March 28, 1994.
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Two class actions consolidated under the caption In re Time Warner Inc. Securities Litigation, Master Case No. 91 Civ. 4081, brought purportedly on behalf of holders of the Company's Common Stock, were filed in June 1991 in the United States District Court for the Southern District of New York against the Company and several of its directors. Plaintiffs allege that defendants issued materially false and misleading statements regarding possible strategic alliances and failed to disclose the Company's intention to make the Rights Offering Proposal of June 5, 1991, whereby each holder of the Company's Common Stock was granted a specific number of transferable subscription rights to purchase additional shares of the Company's Common Stock that could be exercised or sold under certain specified terms and conditions, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and the state common law of fraud and negligent misrepresentation. Plaintiffs in both actions seek unspecified monetary damages. On May 29, 1992, the defendants' motion to dismiss these actions with prejudice was granted. On November 30, 1993, a panel of the United States Court of Appeals for the Second Circuit, with one judge dissenting, reversed the dismissal and remanded the case to the District Court for further proceedings. On January 24, 1994, defendants filed a petition for a writ of certiorari in the U.S. Supreme Court. Plaintiffs filed briefs in opposition to the petition and in support of a conditional cross-petition on or about February 23, 1994, and defendants have filed reply papers. On March 3, 1994, defendants also filed a motion for summary judgment in the District Court. The District Court has stayed all proceedings pending a determination by the Supreme Court on the certiorari petitions.
Two identical lawsuits under the name of Ferne Glanzrock, Bernice Berger, Charles Elder and Arthur Schecter v. Steven J. Ross et al., that were filed in March 1992, in the New York Supreme Court and in the Delaware Chancery Court against the Company's Board of Directors relating to certain payments to the Company's former President and Co-Chief Executive Officer N.J. Nicholas Jr. in connection with his termination of employment were dismissed without prejudice by Court order on January 26, 1994 pursuant to a stipulation of the parties.
On January 24, 1994, a purported class action entitled Dr. Arun Shingala v. Gerald M. Levin, et al., Civil Action No. 13356, was filed against the Company and its directors in the Court of Chancery of the State of Delaware, New Castle County, on behalf of all stockholders of the Company, other than defendants and their related or affiliated entities. The complaint alleges that the defendant directors acting on behalf of the Company have adopted a plan ("rights plan") to thwart any attempt to take over control of the Company which the defendants find unfavorable to their personal interests. Plaintiff contends that defendants' actions are in violation of their fiduciary duties and seeks a judgment rescinding the adoption of the rights plan and ordering the director defendants jointly and severally to account for all damages which reasonably flow from the actions and transactions alleged.
In November 1992, TWE filed a federal lawsuit seeking to overturn major provisions of the 1992 Cable Act primarily on First Amendment grounds. The complaint, filed in the U.S. District Court for the District of Columbia against the FCC and the United States of America, challenges the provisions of the 1992 Cable Act relating to rate regulation, must carry, retransmission consent, terms of dealing by vertically integrated programmers, uniform pricing and operation of cable systems by municipal authorities, the number of subscribers that a cable operator could serve nationwide, free previews of certain premium channels and educational channel set-aside requirements for direct broadcast satellite service. In addition, the complaint seeks to overturn several parts of the 1984 Cable Act relating to public, educational and government access requirements and commercial leased channels. The complaint seeks injunctions against the enforcement or implementation of these provisions. Several other parties have also filed similar lawsuits and these actions have been at least partially consolidated with the action filed by TWE. Hearings on the plaintiffs' motions for summary judgment and the defendants' motions to dismiss or for summary judgment were held in March 1993. On April 8, 1993, in a 2-1 decision, the District Court upheld the constitutionality of the must carry provisions of the 1992 Cable Act. On May 3, 1993, TWE filed an appeal from this decision directly to the U.S. Supreme Court. The U.S. Supreme Court heard argument on that appeal in January 1994. On September 16, 1993, a one-judge District Court upheld the constitutionality on First Amendment grounds of all the other challenged provisions except restrictions on the number of subscribers that a cable operator could serve
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nationwide, free pay TV previews and direct broadcast channel usage. TWE appealed this decision to the U.S. Court of Appeals for the D.C. Circuit on November 12, 1993. For a description of the 1984 Cable Act and the 1992 Cable Act, see Item 1 "Business--Cable Division--Regulation and Legislation."
By letters dated July 15, 1993 and September 21, 1993 (the "Access Letters"), the Dallas Regional Office of the Federal Trade Commission (the "FTC") informed WEA that it is conducting a preliminary investigation to determine whether WEA is "unreasonably restricting the resale of previously-owned compact discs" and "unreasonably restricting the sale of new compact discs." The Access Letters allege that WEA's conduct may violate Section 5 of the Federal Trade Commission Act, but also say that neither the Access Letters nor the existence of the investigation "should be viewed as an accusation by the FTC or its staff of any wrongdoing by [WEA]." The Access Letters request that WEA voluntarily submit the documents and information requested therein. The FTC investigation also includes other major distributors of recorded music. WEA is cooperating with the investigation.
On July 19, 1993, Wherehouse Entertainment, Inc., a California corporation engaged in the retail sale of music cassettes and compact discs ("CDs"), filed an action in the United States District Court for the Central District of California entitled Wherehouse Entertainment, Inc. v. CEMA Distribution, Sony Music Distribution, UNI Distribution Corporation and Warner Elektra Atlantic Corporation, No. 93-4253 SVW, alleging that, by implementing policies restricting the advertising allowances of customers that sell used CDs, the defendants have violated Section 1 of the Sherman Act, Sections 2(d) and 2(e) of the Robinson-Patman Act and Section 17200 of the California Business & Professions Code. Plaintiff sought injunctive relief, treble damages pursuant to Section 4 of the Clayton Act, attorneys' fees and costs of suit. On October 20, 1993, plaintiff and WEA settled this case on terms not material to the business of either WEA or WCI.
Also in July 1993, two purported class actions against the same defendants in the Wherehouse litigation were filed in the United States District Court for the Northern District of Ohio and in the United States District Court for the Central District of California, containing substantially the same allegations and seeking substantially the same relief as the complaint in the Wherehouse case. Both class action suits have been settled by agreements that are currently before the courts for approval.
In October 1993, a purported class action was filed in the United States District Court for the Northern District of Georgia entitled Samuel B. Moore, et al. v. American Federation of Television and Radio Artists, et al., No. 93- CV-2358. The action was brought by fifteen named music performers or representatives of deceased performers on behalf of an alleged class of performers who participated in the creation or production of phonograph recordings for one or more of the defendant recording companies. The named defendants include the American Federation of Television and Radio Artists ("AFTRA"), the AFTRA Health and Retirement Fund ("Fund"), each present trustee of the Fund and fifty named recording companies, including four WCI subsidiaries. The named defendant recording companies comprise substantially all of the domestic recording industry and the complaint seeks to establish a defendant class for purposes of the litigation. The complaint seeks recovery against the recording companies for, among other things, breach of contract, breach of fiduciary duty, fraud, embezzlement and RICO violations, all growing out of alleged failure by the recording companies to make proper contributions to the Fund pursuant to the Phono Code, which is negotiated by AFTRA and most of the domestic recording companies, and other alleged failures to meet the terms of the Phono Code and individual contracts. Plaintiffs seek from the defendant record companies substantial monetary damages, treble damages, attorneys' fees and costs and the imposition of a constructive trust over the master recordings created from recorded performances of the plaintiffs. In March 1994, plaintiffs filed an amended complaint. Plaintiffs also have filed a motion for a preliminary injunction against AFTRA and the Fund's trustees seeking, among other things, to enjoin the completion of audits of the amount of contributions to be made to the Fund and ongoing collective bargaining negotiations between AFTRA and the record companies, as well as the removal of the Fund's present trustees. The defendant record companies, along with AFTRA and the Fund, have filed papers in opposition to the motion for a preliminary injunction. The time for the record companies to respond to plaintiffs' amended complaint has not yet expired.
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The Company and its subsidiaries are also subject to industry investigations by certain government agencies and/or proceedings under the antitrust laws that have been filed by private parties in which, in some cases, other companies in the same or related industries are also defendants. The Company and its subsidiaries have denied or will deny liability in all of these actions. In all but a few similar past actions, the damages, if any, recovered from the Company or the amounts, if any, for which the actions were settled were small or nominal in relation to the damages sought; and it is the opinion of the management of the Company that any settlements or adverse judgments in the similar actions currently pending will not involve the payment of amounts or have other results that would have a material adverse effect on the financial condition of the Company.
In addition, WCI and certain of its current and former directors are parties to lawsuits previously disclosed in WCI's annual reports or other filings which, among other things, challenge as excessive certain executive compensation arrangements between WCI and, among others, Steven J. Ross, formerly Chairman of the Board of WCI. The parties have executed a stipulation of settlement of these actions and on March 15, 1994 the New York Supreme Court approved a Notice of Proposed Settlement to be sent to shareholders and set May 13, 1994 as the date for the settlement hearing.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G (3), the information regarding the Company's executive officers required by Item 401(b) of Regulation S-K is hereby included in Part I of this report.
The following table sets forth the name of each executive officer of the Company, the office held by such officer and the age, as of February 28, 1994, of such officer:
Set forth below are the positions held by each of the executive officers named above since March 1, 1989:
Mr. Levin.................. Chairman of the Board of Directors, President and Chief Executive Officer since January 21, 1993. Prior to that he served as President and Co-Chief Executive Officer from February 20, 1992; Vice Chairman and Chief Operating Officer from May 1991; and Vice Chairman of the Board prior to that.
Mr. Munro.................. Chairman of the Executive/Finance Committee of the Board of Directors since January 1993 (at which time the functions of the Executive Committee and the Finance Committee were merged), having served as Chairman of the Executive Committee since May 8, 1990. Prior to that, he was Co-Chairman of the Board and Co-Chief Executive Officer from July 1989 and he served as Chairman and Chief Executive Officer prior to that.
Mr. Wasserman.............. Executive Vice President and Chief Financial Officer since January 10, 1990. Prior to that, he was a member of the Office of the President and Chief Financial Officer of WCI.
Mr. Haje................... Executive Vice President and General Counsel since October 1, 1990. Prior to that, he was a member of the law firm of Paul, Weiss, Rifkind, Wharton & Garrison.
Mr. Boggs.................. Senior Vice President, Public Policy since November 19, 1992. Prior to that he served as Vice President of Public Affairs from January 1990 and Vice President of Public Affairs of WCI prior to that.
Mr. Haas................... Senior Vice President and Controller since January 18, 1990. Prior to that, he served as Senior Vice President and Controller of WCI.
Mr. Holmes................. Senior Vice President, Technology since January 21, 1993. Prior to that, he served as Senior Vice President from January 10, 1990 and as Senior Vice President of WCI prior to that.
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Mr. Hullin................. Senior Vice President, Communications and Public Affairs since February 7, 1991. Prior to that, he served as Senior Vice President, Corporate Affairs of SmithKline Beecham (diversified health care company) from July 1989 and as Vice President, Communications and Public Affairs prior to that.
Mr. Lochner................ Senior Vice President since July 18, 1991. Prior to that, he was a Commissioner of the Securities and Exchange Commission from March 1990 to June 1991. Prior to his tenure with the SEC, Mr. Lochner served as Deputy General Counsel and Senior Vice President of Time Warner from January to March 1990 and General Counsel, Senior Vice President and Secretary prior to that.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's Common Stock is the New York Stock Exchange. The Common Stock is also listed on the Pacific Stock Exchange and the London Stock Exchange. For quarterly price information with respect to the Company's Common Stock for the two years ended December 31, 1993, see "Quarterly Financial Information" at page herein, which information is incorporated herein by reference.
The approximate number of holders of record of the Company's Common Stock as of March 1, 1994 was 23,000.
For information on the frequency and amount of dividends paid with respect to the Company's Common Stock during the two years ended December 31, 1993, see "Quarterly Financial Information" at page herein, which information is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information of the Company for the five years ended December 31, 1993 is set forth at pages and herein and is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and Analysis" at pages through herein is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company and the report of independent auditors thereon set forth at pages through and herein are incorporated herein by reference.
Quarterly Financial Information set forth at page herein is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by PART III (Items 10, 11, 12 and 13) is incorporated by reference from the Company's definitive Proxy Statement to be filed in connection with its 1994 Annual Meeting of Stockholders pursuant to Regulation 14A, except that the information regarding the Company's executive officers called for by Item 401(b) of Regulation S-K has been included in PART I of this report and the information called for by Items 402(k) and 402(l) of Regulation S-K is not incorporated by reference.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)-(2) Financial Statements and Schedules:
(i) The list of consolidated financial statements and schedules set forth in the accompanying Index to Consolidated Financial Statements and Other Financial Information at page herein is incorporated herein by reference. Such consolidated financial statements and schedules are filed as part of this report.
(ii) The financial statements and financial statement schedules of Paragon Communications and the report of independent accountants thereon, set forth at pages through in the 1993 Annual Report on Form 10-K of Time Warner Entertainment Company, L.P. (Reg. No. 33-53742) are incorporated herein by reference and are filed as an exhibit to this report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report and such Exhibit Index is incorporated herein by reference. Exhibits 10.1 through 10.20 listed on the accompanying Exhibit Index identify management contracts or compensatory plans or arrangements required to be filed as exhibits to this report, and such listing is incorporated herein by reference.
(b) No reports on Form 8-K were filed by Time Warner during the quarter ended December 31, 1993.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Time Warner Inc.
/s/ Bert W. Wasserman By ................................... BERT W. WASSERMAN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Date: March 30, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Gerald M. Levin Director, Chairman of the March 30, 1994 ............................ Board, President and Chief (GERALD M. LEVIN) Executive Officer
/s/ Bert W. Wasserman Executive Vice President and March 30, 1994 ............................ Chief Financial Officer (BERT W. WASSERMAN) (principal financial officer)
/s/ David R. Haas Senior Vice President and March 30, 1994 ............................ Controller (principal (DAVID R. HAAS) accounting officer)
* Director March 30, 1994 ............................ (MERV ADELSON)
* Director March 30, 1994 ............................ (LAWRENCE B. BUTTENWIESER)
* Director March 30, 1994 ............................ (HUGH F. CULVERHOUSE)
* Director March 30, 1994 ............................ (EDWARD S. FINKELSTEIN)
*
............................ Director March 30, 1994 (BEVERLY SILLS GREENOUGH)
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SIGNATURE TITLE DATE --------- ----- ---- *
............................. Director March 30, 1994 (CARLA A. HILLS)
*
............................. Director March 30, 1994 (DAVID T. KEARNS)
*
............................. Director March 30, 1994 (HENRY LUCE III)
*
............................. Director March 30, 1994 (REUBEN MARK)
*
............................. Director March 30, 1994 (J. RICHARD MUNRO)
*
............................. Director March 30, 1994 (RICHARD D. PARSONS)
*
............................. Director March 30, 1994 (DONALD S. PERKINS)
*
............................. Director March 30, 1994 (RAYMOND S. TROUBH)
*
............................. Director March 30, 1994 (FRANCIS T. VINCENT, JR.)
/s/ David R. Haas *By: ........................ ATTORNEY-IN-FACT
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TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
All other financial statements and schedules are omitted because the required information is not present, or is not present in amounts sufficient to require submission of the financial statements or schedules, or because the information required is included in the consolidated financial statements and notes thereto.
TIME WARNER INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, (MILLIONS, EXCEPT PER SHARE AMOUNTS)
- -------- (a)The 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The historical financial statements for periods prior to such date have not been changed; however, financial statements for the year ended December 31, 1992 retroactively reflecting the deconsolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Note 1).
(b)Time Warner issued $6.1 billion of long-term debt and used $.5 billion of cash and equivalents in 1993 in exchange for or to redeem preferred stock having an aggregate liquidation preference of $6.4 billion (Notes 5 and 7).
See accompanying notes.
TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, (MILLIONS, EXCEPT PER SHARE AMOUNTS)
(d)Includes $70 million unusual charge for increase in deferred income tax liability as a result of new tax law.
(e)Time Warner issued $6.1 billion of long-term debt and used $.5 billion of available cash and equivalents in 1993 in exchange for or to redeem preferred stock having an aggregate liquidation preference of $6.4 billion (Notes 5 and 7).
See accompanying notes.
TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, (MILLIONS)
- -------- (a)The 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The historical financial statements for periods prior to such date have not been changed; however, financial statements for the year ended December 31, 1992 retroactively reflecting the deconsolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Note 1).
(b)Includes $70 million increase in deferred income tax liability as a result of new tax law and $57 million extraordinary loss on the retirement of debt.
See accompanying notes.
TIME WARNER INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (MILLIONS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS IN AFFILIATED COMPANIES
The consolidated financial statements include the accounts of Time Warner Inc. and its subsidiaries ("Time Warner"). Significant intercompany accounts and transactions are eliminated. Interests in consolidated subsidiaries not owned by Time Warner are eliminated from operating results and reflected in the balance sheet as minority interests.
Investments in companies in which Time Warner has significant influence but less than controlling financial interest are stated at cost plus equity in the affiliates' undistributed earnings. The excess of cost over the underlying net equity of investments in affiliated companies is attributed to the underlying net assets based on their respective fair values and amortized over their respective economic lives.
Time Warner Entertainment Group ("Entertainment Group"), consisting of Time Warner's interests in certain entertainment companies, principally Time Warner Entertainment Company, L.P. ("TWE"), was deconsolidated effective January 1, 1993 as a result of an agreement between TWE and U S WEST, Inc. ("USW") to co- manage TWE Cable's Full Service Networks(TM), subject to franchise and regulatory approvals, and certain other changes to the partnership agreement relating to the general governance of TWE (Note 2). The historical financial statements of Time Warner for periods prior to January 1, 1993 have not been changed; accordingly, they include TWE and other Entertainment Group interests on a consolidated basis. However, financial statements for the year ended December 31, 1992 retroactively reflecting the deconsolidation of the Entertainment Group also are presented under the caption "restated" to facilitate comparative analysis.
The effect of changes in Time Warner's ownership interests resulting from the issuance of equity capital to third parties by consolidated subsidiaries or affiliates accounted for on the equity basis is included in income.
Time Warner's $14 billion cost to acquire Warner Communications Inc. ("WCI") was allocated to the net assets acquired as of December 31, 1989 in accordance with the purchase method of accounting for business combinations. The acquisition was financed principally by $8.3 billion of long-term debt and $5.6 billion of Series C and Series D preferred stock, which was redeemed or exchanged for debt in 1993 (Notes 5 and 7).
The effect of the four-for-one common stock split on September 10, 1992 has been reflected retroactively.
REVENUES AND COSTS
The unearned portion of paid subscriptions is deferred until magazines are delivered to subscribers. Upon each delivery, a proportionate share of the gross subscription price is included in revenues.
Inventories of magazines, books, cassettes and compact discs are stated at the lower of cost or estimated realizable value. Cost is determined using first-in, first-out; last-in, first-out; and average cost methods. In accordance with industry practice, certain products are sold to customers with the right to return unsold items. Revenues from such sales represent gross sales less a provision for future returns. Returned goods included in inventory are valued at estimated realizable value but not in excess of cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided generally on the straight-line method over useful lives ranging up to twenty- five years for buildings and improvements and up to fifteen years for furniture, fixtures and equipment.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE ASSETS
Intangible assets are amortized over periods up to forty years using the straight-line method. Amortization of the excess of cost over net assets acquired amounted to $148 million, $257 million ($142 million on a restated basis) and $246 million in 1993, 1992 and 1991, respectively, and amortization of music copyrights, artists' contracts and record catalogues amounted to $113 million in all years. Amortization of cable television franchises in 1992 and 1991, years in which the Entertainment Group was consolidated, amounted to $194 million and $171 million, respectively. Accumulated amortization of intangible assets at December 31, 1993 and 1992 amounted to $1.245 billion and $2.021 billion ($943 million on a restated basis), respectively.
FOREIGN CURRENCY TRANSLATION
The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses, which have not been material, are included in retained earnings (accumulated deficit). Foreign currency transaction gains and losses, which have not been material, are included in operating results.
INCOME TAXES
Income taxes are provided in 1993 and 1992 using the liability method prescribed by Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes," which Time Warner adopted as of January 1, 1992. Income taxes provided in 1991 using the liability method prescribed by FASB Statement No. 96 were not restated. The effect of the change in accounting method was not material.
Under the liability method, deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The financial effect of changes in tax laws or rates is accounted for in the period of enactment.
Realization of the net operating loss and investment tax credit carryforwards, which were acquired in acquisitions, are accounted for as a reduction of the excess of cost over net assets acquired.
The principal operations of the Entertainment Group are conducted by partnerships. Income tax expense includes all income taxes related to Time Warner's allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of the partnerships.
FINANCIAL INSTRUMENTS
Investments in unrestricted marketable equity securities not accounted for on the equity basis are stated at fair value. Unrealized appreciation is reported net-of-tax in a separate component of shareholders' equity in accordance with FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which Time Warner adopted as of December 31, 1993.
Foreign exchange contracts are used to reduce exchange rate exposure on future cash flows and earnings denominated in foreign currencies. Contract gains and losses generally are included in income. Time Warner had contracts for the sale of $573 million of foreign currencies at fixed rates at December 31, 1993, primarily Japanese yen, German marks, Canadian dollars and French francs. The fair value of foreign exchange contracts approximates carrying value. Time Warner reimburses or is reimbursed by TWE for contract gains or losses related to TWE's exposure.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest rate swap agreements are used to reduce exposure to interest rate changes and to lower the overall costs of borrowing. The net amounts paid and received under open contracts are included in interest expense. At December 31, 1993, Time Warner had contracts to pay floating rates of interest (average rate of 3.7%) and receive fixed rates of interest (average rate of 5.4%) on $2.1 billion notional amount of indebtedness over an average remaining term of 4 years. The fair value of the Company's debt and related interest rate swap agreements will fluctuate with changes in the credit markets, including changes in the level of interest rates. At December 31, 1993, the fair value of Time Warner's long-term debt was estimated to exceed its carrying value by $530 million. The fair value of the related interest rate swap agreements was not material.
Fair value is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market.
LOSS PER COMMON SHARE
Loss per common share is based upon the net loss applicable to common shares after preferred dividend requirements and upon the weighted average of common shares outstanding during the period. The conversion of securities convertible into common stock and the exercise of stock options were not assumed in the calculations of loss per common share because the effect would have been antidilutive.
2.ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment Group at December 31, 1993 consists of the following (millions):
TWE is a Delaware limited partnership that was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment, Programming- HBO and Cable businesses previously owned by subsidiaries of Time Warner. At December 31, 1993, the Time Warner subsidiaries ("General Partners") held a 63.27% pro rata priority capital partnership interest in TWE in the initial capital amount of $3.5 billion, plus partnership income allocated thereto; a partnership capital interest senior to the pro rata priority capital interests ("General Partners' Senior Capital"), in the initial capital amount of $1.4 billion, plus partnership income allocated thereto; a partnership capital interest junior to pro rata priority capital interests ("General Partners' Junior Capital") in the initial capital amount of $2.7 billion, plus partnership income allocated thereto; and a 63.27% residual equity partnership interest. The limited partners, subsidiaries of USW, ITOCHU Corporation ("ITOCHU") and Toshiba Corporation ("Toshiba"), held 25.51%, 5.61% and 5.61% pro rata priority capital partnership interests, respectively, in the initial capital amounts of $1.4 billion, $313 million and $313 million, respectively, plus partnership income allocated thereto; and residual equity partnership interests of 25.51%, 5.61% and 5.61%, respectively. General Partners' Senior Capital is required to be distributed no later than in three annual installments beginning July 1, 1997; earlier distributions may be made under certain circumstances. General Partners' Junior Capital may be increased if certain performance targets are achieved between 1992 and 2001. Prior to the admission of USW on September 15, 1993, the General Partners held 87.5% pro rata priority capital and residual equity partnership interests in TWE, and the General Partners' Junior Capital interest; and ITOCHU and Toshiba each held 6.25% pro rata priority capital and residual equity partnership interests.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At the initial capitalization of TWE, the General Partners contributed the assets and liabilities or the rights to the cash flow of substantially all of Time Warner's Filmed Entertainment, Programming-HBO and Cable businesses, and ITOCHU and Toshiba each contributed $500 million of cash. On September 15, 1993, USW contributed $1.532 billion of cash and a $1.021 billion 4.4% note ("USW Note") for its interests. USW has an option to increase its pro rata priority capital and residual equity interests to as much as 31.84%, depending on cable operating performance. The option is exercisable between January 1, 1999 and on or about May 31, 2005 at a maximum exercise price of $1.25 billion to $1.8 billion, depending on the year of exercise. Either USW or TWE may elect that the exercise price be paid with partnership interests rather than cash. Each of ITOCHU and Toshiba have options to increase their interests to as much as 6.25% in certain circumstances, payable in cash.
Each General Partner has guaranteed a pro rata portion of $7 billion of TWE's debt and accrued interest at December 31, 1993, based on the relative fair value of the net assets each General Partner contributed to TWE. Such indebtedness is recourse to each General Partner only to the extent of its guarantee. In addition to their interests in TWE and the other Entertainment Group companies, the assets of the General Partners include the equivalent of 29.6 million common shares of Turner Broadcasting System, Inc., 12.1 million common shares of Hasbro, Inc., 43.7 million common shares of Time Warner, and substantially all the assets of Time Warner's music business. There are no restrictions on the ability of the General Partner guarantors to transfer assets, other than TWE assets, to parties that are not guarantors.
The summarized financial information for the Entertainment Group set forth below reflects the consolidation of Six Flags Entertainment Corporation ("Six Flags") as of January 1, 1993 as a result of the increase in TWE's ownership from 50% to 100% in September 1993. The historical financial information for periods prior to such date has not been changed; however, financial information for the year ended December 31, 1992 retroactively reflecting the consolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis.
TIME WARNER ENTERTAINMENT GROUP
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the TWE partnership agreement, partnership income, to the extent earned, is first allocated to the partners so that the economic burden of the income tax consequences of partnership operations is borne as though the partnership were taxed as a corporation ("special tax allocations"), then to the priority capital interests, in order of priority, at rates of return ranging from 8% to 13.25% per annum, and finally to the residual equity interests. For the purpose of the foregoing allocations, partnership income is based on the fair value of assets contributed to the partnership, and differs from net income of TWE, which is based on the historical cost of contributed assets. Partnership losses generally are allocated first to eliminate prior allocations of partnership income to, and then to reduce the initial capital amounts of, the residual equity, General Partners' Junior Capital and pro rata priority capital interests, in that order, then to reduce General Partners' Senior Capital, including partnership income allocated thereto, and finally to reduce any special tax allocations.
TWE reported net income of $198 million and $160 million in 1993 and 1992, respectively, no portion of which was allocated to the limited partners. Time Warner did not recognize a gain when TWE was capitalized. The excess of the General Partners' interest in the net assets of TWE over the net book value of their investment in TWE is being amortized to income over a twenty year period at the rate of $17 million per year prior to the admission of USW, and $72 million per year thereafter.
The assets and cash flows of TWE are restricted by the TWE partnership and credit agreements and are unavailable for use by the partners except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. At December 31, 1993, the General Partners had recorded $276 million of tax related distributions due from TWE, $108 million of which is receivable on or after July 1, 1994, and $271 million of stock option related distributions due from TWE, based on a closing price of $44.25, receivable when the options are exercised. In addition to the tax, stock option and General Partners' Senior Capital distributions, TWE may make other distributions, generally depending on excess cash and credit agreement limitations. The General Partners' full share of such distributions may be deferred if the limited partners do not receive certain threshold amounts by certain dates. TWE may loan Time Warner up to $1.1 billion, increasing up to $1.5 billion on July 1, 1995. Generally, TWE must be in compliance with its credit agreement at the time distributions and loans are made.
In the normal course of conducting their businesses, Time Warner and its subsidiaries and affiliates have had various transactions with TWE and other Entertainment Group companies, generally on terms resulting from a negotiation between the affected units that in management's view results in reasonable allocations. Time Warner provides TWE with certain corporate support services for which it receives an annual fee of $60 million.
Inventories of TWE at December 31, 1993 and 1992 include $821 million and $879 million, respectively, of unamortized cost of the WCI acquisition allocated to the film library, which is amortized on a straight-line basis over twenty years, $1.085 billion and $982 million, respectively, of the unamortized cost of completed films, more than 90% of which is expected to be amortized within three years after release under the
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) individual film-forecast method prescribed by FASB Statement No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films," $347 million and $285 million, respectively, of theatrical films and television programs in process, and $405 million and $457 million, respectively, of unamortized programming acquired or produced for pay cable television exhibition, which is allocated to availability periods and amortized as the programming is exhibited.
On June 26, 1992, Time Warner acquired the 18.7% minority interest in American Television and Communications Corporation ("ATC") by issuing redeemable reset notes due August 15, 2002 (Note 5), valued at such date at $1.3 billion. The acquisition was accounted for by the purchase method of accounting. ATC subsequently contributed its cable assets to TWE. The Entertainment Group would have reported net income of $142 million and Time Warner would have reported net income of $47 million (a loss of $1.57 per common share after preferred dividends) in 1992 if the acquisition of the ATC minority interest had occurred at the beginning of that year.
3. OTHER INVESTMENTS
Time Warner's other investments consist of:
- -------- (1) Upon adoption of FASB Statement No. 115 at December 31, 1993, unrestricted marketable equity securities not accounted for on the equity basis are stated at fair value. The 1993 amount includes the market value of 12.058 million shares of common stock of Hasbro, Inc., which can be used, at Time Warner's option, to satisfy its obligations with respect to the zero coupon exchangeable notes due 2012 (Note 5). Investments in unrestricted marketable equity securities not accounted for on the equity basis were carried at a cost of $297 million and had a market value of $481 million at December 31, 1992.
Companies accounted for on the equity basis other than TWE and its equity affiliates include Turner Broadcasting System, Inc. ("TBS") (19.4% owned); Cinamerica Theatres, L.P. (50% owned) and The Columbia House Company partnerships (50% owned) and other music joint ventures (generally 50% owned). Equity affiliates of TWE include Paragon Communications (50% owned), certain other cable system joint ventures (generally 50% owned) and Comedy Partners (50% owned). A summary of financial information of equity affiliates (100% basis) is set forth below.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The market value and cost of Time Warner's investment in TBS at December 31, 1993 was $1.484 billion and $493 million, respectively. The sale, transfer or other disposition of substantially all of the shares of TBS capital stock is restricted pursuant to shareholder agreements. The TBS securities also may be considered restricted securities under the Securities Act of 1933 and, if so, could only be sold pursuant to an effective registration statement or in a transaction exempt from the registration requirements of the Securities Act of 1933.
4.INVENTORIES
Time Warner's current inventories consist of:
5.LONG-TERM DEBT
Long-term debt consists of:
- -------- (1) Classified as long-term because of the intent and ability to refinance under a long-term financing arrangement with TWE.
Time Warner issued $6.126 billion of long-term debt and used $494 million of cash and equivalents in 1993 in connection with the redemption and exchange of preferred stock having an aggregate liquidation value of $6.368 billion (Note 7).
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The redeemable reset notes due August 15, 2002 do not pay interest prior to August 15, 1995, the first redemption date, at which time an interest rate will be set. The interest rate will be reset on August 15, 1998, the second redemption date. The notes are redeemable at par on each redemption date, payable in any combination of cash and debt securities, if Time Warner elects to redeem the notes, or in any combination of cash or equity or debt securities of Time Warner or any other entity, if the holders elect to have the notes redeemed. Unamortized discount was $229 million and $358 million at December 31, 1993 and 1992, respectively.
The zero coupon notes do not pay interest until maturity. The zero coupon exchangeable notes due December 17, 2012 are exchangeable at any time by the holder into 7.301 shares of common stock of Hasbro, Inc. ("Hasbro shares") per $1,000 principal amount, subject to Time Warner's right to pay in whole or in part with cash instead of Hasbro shares. Time Warner can elect to redeem the notes any time after December 17, 1997, and holders can elect to have the notes redeemed prior thereto in the event of a change of control, at the issue price plus accrued interest. Holders also can elect to have the notes redeemed at the issue price plus accrued interest on December 17, 1997, 2002 and 2007, subject to Time Warner's right to pay in whole or in part with Hasbro shares instead of cash. Unamortized discount was $1.137 billion and $1.168 billion at December 31, 1993 and 1992, respectively.
The zero coupon convertible notes due June 22, 2013 are convertible at any time by the holder into 7.759 shares of Time Warner common stock. Time Warner can elect to redeem the notes any time after June 22, 1998, and holders can elect to have the notes redeemed prior thereto in the event of a change in control, at the issue price plus accrued interest. Holders also can elect to have the notes redeemed at the issue price plus accrued interest on June 22, 1998, 2003 and 2008, subject to Time Warner's right to pay in whole or in part with Time Warner common stock instead of cash. Unamortized discount was $1.492 billion at December 31, 1993.
$3.125 billion of 8.75% convertible subordinated debentures due January 10, 2015 were issued in exchange for Series C convertible preferred stock in April 1993 (Note 7). $900 million of such debentures were redeemed in July 1993. The $2.225 billion of 8.75% convertible subordinated debentures outstanding at December 31, 1993 are convertible into 46.6 million shares of Time Warner common stock at the rate of $47.73 principal amount of indebtedness per common share and are redeemable at any time, in whole or in part, at Time Warner's option, at 105.25% of par until January 9, 1995, decreasing ratably each year thereafter to 100% of par on January 10, 2000.
An after-tax cost of $57 million was incurred in connection with the redemption of debt in 1993, principally the redemption of $900 million of 8.75% convertible subordinated debentures and $529 million of WCI senior and subordinated debentures.
Each General Partner has guaranteed a pro rata portion of $7 billion of TWE's debt and accrued interest at December 31, 1993, as more fully described in Note 2. When TWE was consolidated with Time Warner at December 31, 1992, TWE's debt consisted of $5.507 billion borrowed under its credit agreement (4.5% interest rate), $447 million of commercial paper (4.3% interest rate), $600 million of 9.625% senior notes due 2002, $350 million of 8.875% senior notes due 2012 and $250 million of 10.15% senior notes due 2012. TWE's credit agreement contains certain restrictive covenants relating to, among other things, additional indebtedness; cash flow coverage and leverage ratios; and loans, advances, distributions or other cash payments or transfers of assets to Time Warner and its subsidiaries.
Interest expense amounted to $698 million in 1993, $729 million ($287 million on a restated basis) in 1992 and $912 million in 1991.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Annual repayments of long-term debt for the five years subsequent to December 31, 1993 are: 1994-$375 million; 1995-$300 million; and 1998-$500 million. Such amounts exclude the aggregate repurchase or redemption prices of $1.801 billion in 1995, $656 million in 1997 and $1.151 billion in 1998 relating to the redeemable reset notes, zero coupon exchangeable notes and zero coupon convertible notes, respectively, in the years in which the holders of such debt may first exercise their redemption options.
6.INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
Current and deferred income taxes (tax benefits) provided are as follows:
- -------- (1) Includes utilization of tax carryforwards of $136 million in 1993, $15 million in 1992 and $120 million in 1991. Excludes $14 million of current tax benefits resulting from the exercise of stock options in 1993, which were credited directly to paid-in-capital, and $6 million of current tax benefits resulting from the retirement of debt, which reduced the extraordinary loss. (2) Includes $70 million unusual charge in 1993 to increase deferred tax liability for increase in tax rate. (3) Includes foreign withholding taxes of $79 million in 1993, $57 million in 1992 and $43 million in 1991.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as set forth below. The relationship between income before income taxes and income tax expense is most affected by the amortization of excess cost over net assets acquired and certain other financial statement expenses that are not deductible for income tax purposes and by a $70 million unusual charge ($.19 per common share) in 1993 to adjust the deferred income tax liability for the increase in the U.S. federal statutory rate from 34% to 35% enacted into law during the year.
U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of foreign subsidiaries aggregating approximately $575 million at December 31, 1993. Determination of the amount of unrecognized deferred U.S. income tax liability with respect to such earnings is not practicable. If such earnings are repatriated, additional U.S. income and foreign withholding taxes are expected to be offset by the accompanying foreign tax credits.
U.S. federal tax carryforwards at December 31, 1993 consisted of $52 million of net operating losses that expire from 1997 to 2003, $267 million of investment tax credits that expire from 1996 to 2004, and $27 million of alternative minimum tax credits that have no expiration dates. The utilization of certain carryforwards is subject to limitations under U.S. federal income tax laws.
Significant components of Time Warner's net deferred tax liabilities are as follows:
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. CAPITAL STOCK
In 1993, Time Warner redeemed its Series D convertible preferred stock for cash and exchanged its Series C convertible preferred stock for 8.75% convertible subordinated debentures due January 10, 2015. The Series D redemption was financed principally by the proceeds from the issuance of long- term notes and debentures (Note 5).
Pursuant to a shareholder rights plan adopted in January 1994, Time Warner distributed one right per common share which becomes exercisable in certain events involving the acquisition of 15% or more of Time Warner common stock. Upon the occurrence of such an event, each right entitles its holder to purchase for $150 the economic equivalent of common stock of Time Warner, or in certain circumstances, of the acquiror, worth twice as much. In connection with the plan, 4 million shares of preferred stock were reserved. The rights expire on January 20, 2004.
Time Warner issued 137.9 million shares of common stock at $20 per share at the completion of its rights offering on August 5, 1991. Net proceeds of $2.558 billion, after expenses and a $70 million loan to the Time Warner Employee Stock Ownership Plan, were used to reduce credit agreement debt. If the rights offering had been completed on January 1, 1991, net loss for the year ended December 31, 1991 would have been reduced to $33 million, or $1.70 per common share after preferred dividends.
At December 31, 1993, Time Warner had reserved 66.2 million shares of common stock for the conversion of the 8.75% convertible subordinated debentures, zero coupon convertible notes and other convertible securities, and 73 million shares for the exercise of outstanding options to purchase shares of common stock. There were 45.2 million shares of common stock in treasury at December 31, 1993, of which 43.7 million were held by subsidiaries who are the General Partners of TWE. At January 31, 1994, there were approximately 23,000 holders of record of Time Warner common stock.
8. STOCK OPTION PLANS
Options to purchase Time Warner common stock under various stock option plans have been granted to employees of Time Warner and TWE, generally at fair market value at the date of grant. Generally, the options become exercisable over a three-year vesting period and expire ten years from the date of grant. A summary of stock option activity under all plans is as follows:
For options granted to employees of TWE, Time Warner is reimbursed for the amount by which the market value of Time Warner common stock on the exercise date exceeds the exercise price, or the greater of the exercise price or $27.75 for options granted prior to the TWE capitalization. There were 26.8 million options held by employees of TWE at December 31, 1993, 18.5 million of which were exercisable (Note 2).
There were 933,000 options exercised in 1992 at prices ranging from $8-$28 per share, 512,000 options exercised in 1991 at prices ranging from $6-$29 per share, and 50.1 million options exercisable and 5.1 million options available for grant at December 31, 1992.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. BENEFIT PLANS
Time Warner and its subsidiaries have defined benefit pension plans covering substantially all domestic employees. Pension benefits are based on formulas that reflect the employees' years of service and compensation levels during their employment period. Qualifying plans are funded in accordance with government pension and income tax regulations. Plan assets are invested in equity and fixed income securities.
Pension expense included the following:
The status of funded pension plans is as follows:
Employees of Time Warner's operations in foreign countries participate to varying degrees in local pension plans, which in the aggregate are not significant.
Time Warner also has an employee stock ownership plan, 401(k) savings plans and profit sharing plans as to which the expense amounted to $46 million in 1993, $57 million ($41 million on a restated basis) in 1992 and $53 million in 1991. Contributions to the 401(k) plans are based upon a percentage of the employees' elected contributions. Contributions to the employee stock ownership plan are determined by management and approved by the Board of Directors.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10.SEGMENT INFORMATION
Information as to the operations of Time Warner and the Entertainment Group in different business segments is set forth below:
- -------- (1) Includes a $60 million restructuring charge ($36 million after taxes).
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- -------- (1) Depreciation and amortization includes all amortization relating to the acquisition of WCI in 1989, the acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method.
Information as to the assets and capital expenditures of Time Warner and its Entertainment Group is as follows:
- -------- (1) At December 31, 1993 and December 31, 1992 on a restated basis, Entertainment Group assets represent Time Warner's investment in and amounts due to and from Entertainment Group. At December 31, 1992 and 1991 on an historical basis, Entertainment Group assets represent total assets of the Entertainment Group, less certain assets related to transactions with other Time Warner companies. (2) Consists principally of cash and investments.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information as to Time Warner's operations in different geographical areas is as follows:
- -------- (/1/) Includes Filmed Entertainment export revenues of $1.379 billion and $1.133 billion in 1992 and 1991, respectively.
TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11.COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $163 million in 1993, $258 million ($159 million on a restated basis) in 1992 and $236 million in 1991. The minimum rental commitments under noncancellable long-term operating leases are: 1994- $138 million; 1995-$125 million; 1996-$113 million; 1997-$104 million; 1998- $102 million and after 1998-$954 million.
Minimum commitments and guarantees under certain licensing, artists and other agreements aggregated approximately $1.5 billion at December 31, 1993, which are payable principally over a seven-year period. Such amounts do not include the General Partner guarantees of approximately $7 billion of TWE debt.
Pending legal proceedings are substantially limited to litigation incidental to the businesses of Time Warner and alleged damages in connection with class action lawsuits. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the financial statements of Time Warner.
12.SUPPLEMENTAL INFORMATION
Supplemental information with respect to cash flows is as follows:
The noncash effects of the deconsolidation of the Entertainment Group are reflected in the differences between the historical and restated balance sheet amounts at December 31, 1992. Time Warner issued $3.125 billion of debentures in a noncash exchange for Series C preferred stock on April 1, 1993 (Note 5 and 7). The principal noncash effects of the acquisition of the ATC minority interest in 1992 were to increase investments by $156 million, cable television franchise costs by $865 million, excess of cost over net assets acquired by $410 million, deferred income taxes by $299 million and long-term debt by $1.312 billion, and to eliminate the ATC minority interest of $180 million. On a restated basis, the investments in and amounts due to and from Entertainment Group were increased $1.431 billion. Investment proceeds in 1992 on a restated basis include $875 million from the collection of a note receivable from TWE. Cash equivalents consist of commercial paper and other investments that are readily convertible into cash, and have original maturities of three months or less.
Other current liabilities consist of:
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by management in conformity with generally accepted accounting principles, and necessarily include some amounts that are based on management's best estimates and judgments.
Time Warner maintains a system of internal accounting controls designed to provide management with reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgments by management. Further, because of inherent limitations in any system of internal accounting control, errors or irregularities may occur and not be detected. Nevertheless, management believes that a high level of internal control is maintained by Time Warner through the selection and training of qualified personnel, the establishment and communication of accounting and business policies, and its internal audit program.
The Audit Committee of the Board of Directors, composed solely of directors who are not employees of Time Warner, meets periodically with management and with Time Warner's internal auditors and independent auditors to review matters relating to the quality of financial reporting and internal accounting control, and the nature, extent and results of their audits. Time Warner's internal auditors and independent auditors have free access to the Audit Committee.
Gerald M. Levin Bert W. Wasserman Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS TIME WARNER INC.
We have audited the accompanying consolidated balance sheet of Time Warner Inc. ("Time Warner") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of Time Warner's management. Our responsibility is to express an opinion on these financial statements and schedules 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 consolidated financial position of Time Warner at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG
New York, New York February 4, 1994
TIME WARNER INC. SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period ended December 31, 1993 set forth below has been derived from and should be read in conjunction with the financial statements and other financial information presented elsewhere herein. The selected historical financial information for 1993 reflects the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The selected historical financial information for periods prior to such date have not been changed; however, selected financial information for 1992 retroactively reflecting the deconsolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis.
The selected historical financial information for 1993 reflects the issuance of $6.1 billion of long-term debt and the use of $.5 billion of cash and equivalents in 1993 for the exchange or redemption of preferred stock having an aggregate liquidation preference of $6.4 billion. The selected historical financial information for 1992 reflects the capitalization of TWE on June 30, 1992 and associated refinancings, and the acquisition of the 18.7% minority interest in American Television and Communications Corporation as of June 30, 1992, using the purchase method of accounting for business combinations. The selected historical financial information for 1989 reflects the acquisition of a 59.3% common stock interest in Warner Communications Inc. ("WCI") as of July 31, 1989, and the acquisition on January 10, 1990 of the remaining capital stock of WCI as of December 31, 1989, using the purchase method of accounting for business combinations.
Per common share amounts and average common shares have been restated to give effect to the four-for-one common stock split that occurred on September 10, 1992.
- -------- (a) The net loss for the year ended December 31, 1993 includes an extraordinary loss on the retirement of debt of $57 million ($.15 per common share) and an unusual charge of $70 million ($.19 per common share) from the effect of the new income tax law on Time Warner's deferred income tax liability. (b) The net loss for the year ended December 31, 1991 includes a $36 million after-tax charge ($.12 per common share) relating to the restructuring of the Publishing division. The net loss in 1989 includes an after-tax gain of $42 million ($.18 per common share) resulting primarily from the sale of 3.125 million shares of Columbia Pictures Entertainment, Inc. common stock and an after-tax loss of $120 million ($.51 per common share) from the sale of Scott, Foresman and Company. (c) In August 1991, Time Warner completed the sale of 137.9 million shares of common stock pursuant to a rights offering. Net proceeds of $2.558 billion from the rights offering were used to reduce indebtedness under Time Warner's bank credit agreement. If the rights offering had been completed at the beginning of 1991, net loss for the year would have been reduced to $33 million, or $1.70 per common share, and there would have been 369.3 million shares of common stock outstanding during the year. (d) After preferred dividend requirements.
TIME WARNER INC. SELECTED FINANCIAL INFORMATION--(CONTINUED)
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -------- (a) The 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The historical financial statements for periods prior to such date have not been changed; however, financial statements for the year ended December 31, 1992 retroactively reflecting the deconsolidation are presented as supplementary information under the heading "restated" to facilitate comparative analysis. (b) The net loss for the second quarter of 1993 includes an extraordinary loss on the retirement of debt of $35 million ($.09 per common share). The net loss for the third quarter of 1993 includes an extraordinary loss on the retirement of debt of $22 million ($.06 per common share) and an unusual charge of $70 million ($.19 per common share) due to the effect of the new income tax law on Time Warner's deferred income tax liability. (c) After preferred dividend requirements.
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
There have been a series of transactions during 1993 and 1992 resulting from the restructuring of Time Warner's balance sheet that have affected the comparability of the financial statements, including the following (collectively, the "Time Warner Transactions"):
. The USW Transaction: The admission of a subsidiary of USW as an additional limited partner of TWE on September 15, 1993, which resulted in the deconsolidation of the Entertainment Group effective as of January 1, 1993. The historical financial statements of Time Warner for periods prior to 1993 have not been changed; however, financial statements retroactively reflecting the deconsolidation for 1992 also have been presented as supplementary information under the column heading "restated" in order to facilitate comparative analysis.
. The Series C Exchange and Series D Redemption: The issuance of $3 billion of publicly held long-term debt early in 1993 and $.5 billion late in 1992 in connection with the redemption of $3.3 billion aggregate liquidation value of Series D preferred stock and the exchange of $3.1 billion aggregate liquidation value of Series C preferred stock for $3.1 billion aggregate principal amount of 8-3/4% convertible subordinated debentures.
. The 8-3/4% Partial Redemption: The issuance of zero coupon convertible notes in 1993 at an aggregate issue price of $900 million and the use of the proceeds therefrom and available cash and equivalents to redeem $900 million aggregate principal amount of 8-3/4% convertible subordinated debentures.
. The 1993 WCI Refinancings: The repurchase or redemption of all of WCI's outstanding senior and subordinated debentures in the aggregate principal amount of $570 million.
The following transactions have affected the comparability of the financial statements of both the Entertainment Group and Time Warner (collectively, and together with the USW Transaction, the "Entertainment Group Transactions"):
. The 1993 Six Flags Acquisition and Refinancing: The increase in TWE's ownership of Six Flags from 50% to 100% on September 17, 1993 and the retirement of outstanding debt and preferred stock of Six Flags and its subsidiaries, using Six Flags cash flow and $550 million of funds provided by TWE, which resulted in the consolidation of Six Flags effective as of January 1, 1993. The historical summarized financial information of the Entertainment Group for periods prior to January 1, 1993 has not been changed; however, summarized financial information retroactively reflecting the consolidation for 1992 also has been presented as supplementary information under the column heading "restated" in order to facilitate comparative analysis.
. The 1993 TWE Refinancings: The issuance of $2.6 billion of TWE debentures in 1993 to reduce indebtedness under the TWE credit agreement.
. The TWE Capitalization and Refinancing: The initial capitalization of TWE on June 30, 1992 and associated refinancings, including the repayment of the Time Warner and ATC credit agreements with $5.9 billion borrowed under a new TWE credit agreement and $1 billion of capital contributions; and the issuance of $1.2 billion of senior notes to reduce bank debt.
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
. The ATC Merger: The acquisition of the ATC minority interest on June 26, 1992, in exchange for Time Warner notes then valued at $1.3 billion.
. The 1992 Six Flags Recapitalization: The issuance of $192 million aggregate principal amount of zero coupon notes by Six Flags in December 1992 to redeem or repurchase shares of common stock of Six Flags and its principal subsidiary.
The impact of these transactions on the financial statements of Time Warner and the Entertainment Group is reflected on a pro forma basis in the discussion and analysis set forth below.
RESULTS OF OPERATIONS 1993 VS. 1992
Time Warner had 1993 revenues of $6.581 billion, a loss of $94 million ($.56 per common share) before a one-time tax charge and an extraordinary loss, and a net loss of $221 million ($.90 per common share), compared to 1992 revenues of $13.070 billion ($6.309 billion on a restated basis) and net income of $86 million (a loss of $1.46 per common share after preferred dividends). The one- time tax charge of $70 million ($.19 per common share) resulted from the effect on the company's deferred income tax liability of the increase in the corporate income tax rate enacted in August 1993; the extraordinary loss of $57 million ($.15 per common share) resulted from the retirement of debt in 1993. The improvement in per share results in 1993 includes the after-tax benefits of replacing preferred stock with debt in the first quarter. Preferred dividends were $118 million in 1993, compared to $628 million in 1992. Only Series B preferred stock is outstanding at December 31, 1993, as to which the annual dividends on a financial statement basis are $13 million. On a pro forma basis, giving effect to the Time Warner Transactions and the Entertainment Group Transactions as if they had occurred at the beginning of the years, Time Warner would have reported a net loss of $160 million ($.46 per common share) in 1993 and $247 million ($.70 per common share) in 1992.
The relationship between income before income taxes and income tax expense of Time Warner is principally affected by the amortization of excess cost over net assets acquired and certain other financial statement expenses that are not deductible for income tax purposes, and by the unusual tax charge in 1993. Time Warner's income tax expense includes all income taxes related to its equity in the pretax income of the Entertainment Group, including its equity in the income tax expense of TWE.
The Entertainment Group had revenues of $7.963 billion, income of $217 million before a $10 million extraordinary loss on the retirement of debt, and net income of $207 million in 1993, compared to revenues of $6.761 billion ($7.251 billion on a restated basis) and net income of $173 million in 1992. On a pro forma basis, giving effect to the Entertainment Group Transactions as if they had occurred at the beginning of the year, the Entertainment Group would have reported net income of $207 million in 1993 compared to $23 million in 1992.
Other factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the music, filmed entertainment and cable businesses of significant amounts of purchase price amortization from the $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method.
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
EBITDA for Time Warner and the Entertainment Group in 1993 and 1992 was as follows:
While many financial analysts consider EBITDA to be an important measure of comparative operating performance for the businesses of Time Warner and the Entertainment Group, it should be considered in addition to, but not as a substitute for, or superior to, operating income, net income, cash flow and other measures of financial performance reported in accordance with generally accepted accounting principles.
TIME WARNER
Publishing. Revenues increased to $3.270 billion compared to $3.123 billion in 1992. Operating income increased to $295 million from $254 million. Depreciation and amortization amounted to $77 million in 1993 and $74 million in 1992. EBITDA increased to $372 million from $328 million. Revenues benefited from increased magazine circulation revenues, higher book publishing revenues and the full year impact of the 1992 Leisure Arts acquisition. Magazine circulation revenues reflected higher overall subscription and newsstand sales, led by People, Time and Entertainment Weekly, as well as increases at American Family Publishers, the subscription agency. Despite a difficult market, advertising revenues were nearly flat. EBITDA increased as a result of the revenue gains and improved operating margins achieved through continued cost savings.
Music. Revenues increased to $3.334 billion compared to $3.214 billion in 1992. Operating income increased to $296 million from $275 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $347 million in 1993 and $310 million in 1992. EBITDA increased to $643 million from $585 million. The revenue gains primarily reflected an increase in domestic recorded music sales and Warner/Chappell Music Publishing revenues. An increase in unit volume was achieved internationally, principally because of an increase in Pacific Rim sales. International dollar-denominated revenues did not increase, however, because of exchange rate fluctuations. Overall, revenues benefited from a broad range of popular releases from both new and established artists, increased unit sales of compact discs and higher average unit selling prices. The increase in EBITDA reflects the revenue gains and improved margins, offset in part by start-up costs for new business ventures.
Interest and Other, Net. Interest and other, net, decreased to $718 million in 1993 compared to $882 million ($351 million on a restated basis) in 1992. Interest expense decreased to $698 million compared to $729 million ($287 million on a restated basis) in 1992. The decrease in interest and other, net, on an historical basis resulted primarily from the exclusion in 1993 of the expenses of the Entertainment Group, which was
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) deconsolidated in 1993, offset in part by an increase in interest expense from higher debt levels associated with the Series D Redemption and Series C Exchange. Other expenses, net, in 1993 included reductions in the carrying value of certain investments offset by investment-related income. Other expenses, net, in 1992 included an expense in connection with the settlement of senior management employment contracts, ATC minority interest expense and litigation-related costs.
ENTERTAINMENT GROUP
Filmed Entertainment. Revenues increased to $4.565 billion compared to $3.455 billion ($3.945 billion on a restated basis) in 1992. Operating income increased to $286 million from $213 million ($254 million on a restated basis). Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $263 million in 1993 and $197 million ($266 million on a restated basis) in 1992. EBITDA increased to $549 million from $410 million ($520 million on a restated basis). The increase in revenues, operating income and EBITDA on an historical basis resulted primarily from the inclusion in 1993 of the operating results of Six Flags, which previously had been accounted for using the equity method. Revenues at Warner Bros. increased during the period primarily due to increases in international theatrical, international syndication and domestic home video revenues, as well as increased revenues from retail operations. Record international revenues of $1.650 billion would have been greater but for unfavorable exchange rate fluctuations. Warner Bros. ranked number one at both the domestic and international box office in 1993, led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags increased, benefiting from higher revenues per visitor. EBITDA benefited from the revenue gains.
Programming--HBO. Revenues decreased to $1.441 billion compared to $1.444 billion in 1992. Operating income increased to $213 million from $201 million. Depreciation and amortization amounted to $17 million in 1993 and $14 million in 1992. EBITDA increased to $230 million from $215 million. The decrease in revenues reflects lower HBO Video sales, which in 1992 were favorably affected by a children's sell-thru title, offset in part by higher subscriber revenues, principally as a result of higher pay-TV rates at HBO and an increase in subscribers. EBITDA benefited primarily from improved results from new businesses, including Time Warner Sports and the Comedy Central joint venture.
Cable. Revenues increased to $2.208 billion compared to $2.091 billion in 1992. Operating income increased to $406 million from $400 million. Depreciation and amortization, including amortization related to the purchase of WCI and the ATC Merger, amounted to $629 million in 1993 and $577 million in 1992. EBITDA increased to $1.035 billion from $977 million. Revenues increased principally as a result of growth in the number of cable subscribers and increases in advertising sales and pay-per-view. The increase in subscribers accounted for approximately three quarters of the revenue increase. EBITDA benefited from the revenue gains and increased income from cable joint ventures, but was negatively affected in the fourth quarter by cable rate regulation which went into effect on September 1, 1993. The negative effect of rate regulation is expected to continue into 1994 (see "Financial Condition and Liquidity" elsewhere herein).
Interest and Other, Net. Interest and other, net, increased to $564 million in 1993 compared to $531 million ($569 million on a restated basis) in 1992. Interest expense increased to $580 million compared to $442 million ($491 million on a restated basis) in 1992. The increase in interest expense resulted primarily from the higher average debt levels attributable to the TWE capitalization, the higher interest cost of the TWE notes and debentures issued to refinance TWE bank debt, and the consolidation of Six Flags' interest expense in 1993. Other income, net, in 1993 included gains on the sale of certain assets partially offset by losses from and reductions in the carrying value of certain investments. Other expenses, net, on a restated basis in 1992 is principally attributable to losses on certain investments and litigation- related costs.
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) 1992 VS. 1991
Time Warner had revenues of $13.070 billion, net income of $86 million and a $1.46 net loss per common share after preferred dividends in 1992, compared to revenues of $12.021 billion, a net loss of $99 million and a net loss of $2.40 per common share in 1991. The 1991 results include a $60 million restructuring charge in the Publishing division ($36 million after tax, or $.12 per common share). Per common share amounts for 1991 have been restated to give effect to the four-for-one common stock split that occurred on September 10, 1992.
EBITDA for 1992 and 1991 on a historical consolidated basis was as follows:
Publishing. Revenues increased to $3.123 billion compared to $3.021 billion in 1991. Operating income increased to $254 million from $174 million in 1991, which included the $60 million restructuring charge. Depreciation and amortization amounted to $74 million in 1992 and $72 million in 1991. EBITDA increased to $328 million from $246 million in 1991. Magazine revenues benefited from increases in both circulation and advertising revenues and the inclusion in 1992 of the revenues of Leisure Arts, a crafts publisher acquired in the third quarter of 1992. Circulation revenues reflected higher overall subscription and newsstand sales. The revenue growth was led by People, Entertainment Weekly and the regional and lifestyle magazines. Book revenues benefited from higher direct marketing sales at Time Life Inc. Excluding the restructuring charge in 1991, EBITDA improved in 1992 as a result of cost savings and the revenue gains.
Music. Revenues increased to $3.214 billion compared to $2.960 billion in 1991. Operating income increased to $275 million from $256 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $310 million in 1992 and $304 million in 1991. EBITDA increased to $585 million from $560 million in 1991. Revenues benefited from increases in both international and domestic recorded music sales. The strong international revenue growth reflected Warner Music International's continued success with local artist development and the continued popularity of the domestic labels' artists outside the U.S. Overall, revenues benefited from a broad range of popular releases, increased unit sales of compact discs and higher average unit selling prices. Warner/Chappell Music Publishing revenues increased, reflecting the continued popularity of its large worldwide catalogue of music copyrights. The revenue gains and increased income from the Columbia House partnerships contributed to the increase in EBITDA.
Filmed Entertainment. Revenues increased to $3.455 billion compared to $3.065 billion in 1991, and operating income increased to $213 million from $207 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $197 million in 1992 and $183 million in 1991. EBITDA increased to $410 million from $390 million in 1991. The revenue growth resulted primarily from increased worldwide theatrical revenues, which benefited from a number of very successful releases. Warner Bros. ranked number one in domestic box office. Revenues from international home video and syndication, sales to network television and retail operations also increased, while revenue from pay-television sales declined. The increase in EBITDA reflects the higher revenues, offset in part by lower margins.
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Programming--HBO. Revenues increased to $1.444 billion from $1.366 billion in 1991, while operating income rose to $201 million from $183 million. Depreciation and amortization amounted to $14 million in 1992 and $12 million in 1991. EBITDA increased to $215 million from $195 million in 1991. The revenue growth resulted from higher subscriber revenues and increased revenues from ancillary businesses, particularly from television production. The increase in subscriber revenues resulted from higher pay-TV rates at HBO and a slight increase in the number of subscribers. EBITDA benefited from the revenue gains, improved operating margins and a smaller loss from the Comedy Central joint venture, offset in part by expenses associated with the start-up of international pay-TV ventures.
Cable. Revenues increased to $2.091 billion, compared to $1.935 billion in 1991, and operating income increased to $400 million from $334 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $577 million in 1992 and $538 million in 1991. EBITDA increased to $977 million from $872 million in 1991. Revenues increased as a result of growth in the number of cable customers and an increase in per subscriber revenue. The increase in subscribers accounted for approximately 40% of the revenue increase. EBITDA benefited from the revenue gains, continued cost containment and increased income from domestic cable joint ventures, partially offset by higher cable programming costs and expenses associated with the start-up of international cable ventures. Operating income also was affected by amortization related to the ATC Merger.
Interest and Other, Net. Interest and other, net, decreased to $882 million in 1992 from $966 million in 1991. Interest expense decreased to $729 million in 1992 compared with $912 million in 1991. The decrease in interest expense, which is attributable to lower interest rates and lower average debt levels, was offset in part by increases in litigation-related costs and other expenses, including expenses in connection with the settlement of senior management employment contracts, and a decline in investment-related income.
In August 1992, Time Warner and TWE settled the litigation brought by Viacom International, Inc. in 1989 against Time Warner, ATC and HBO. The settlement terminated with prejudice all claims and counterclaims raised in the litigation. The effects of the settlement were not material to Time Warner or TWE.
FINANCIAL CONDITION AND LIQUIDITY DECEMBER 31, 1993
TIME WARNER
Aided by favorable conditions in the credit markets, Time Warner continued to restructure its balance sheet and reduce its after-tax financing cost. The Series C Exchange, Series D Redemption and 8-3/4% Partial Redemption replaced $6.4 billion of Series C and Series D preferred stock having an average after- tax cost of 9.9% with $6.6 billion of long-term debt having an average after- tax cost of 5%, resulting in annual savings of $300 million. In addition, the new debt includes $1.4 billion of zero coupon exchangeable or convertible notes that require no periodic payments of interest, resulting in annual deferrals of $75 million. The deconsolidation of the Entertainment Group also had a significant effect on the balance sheet by eliminating nearly $16 billion of assets and over $7 billion of debt. Principally as a result of these factors, Time Warner had $9.4 billion of debt and $1.4 billion of equity at December 31, 1993, compared to $10.2 billion of debt and $8.2 billion of equity at December 31, 1992. Cash and equivalents were $200 million at December 31, 1993, compared to $942 million at December 31, 1992, resulting in debt-net-of-cash amounts of $9.2 billion and $9.3 billion at such dates. Substantially all of Time Warner's debt at December 31, 1993 consisted of long-term fixed-rate or zero coupon obligations, approximately $2 billion of which was effectively converted to a floating rate basis through the use of interest-rate swap agreements.
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Cash provided by Time Warner's operations amounted to $257 million in 1993, after $330 million of interest payments, $182 million of income taxes and working capital requirements. Cash flows used in investing activities in 1993, excluding investment proceeds, were $373 million. Of this amount, $198 million was for capital expenditures, principally in the Music division. Cash dividends of $125 million were paid on common and Series B preferred stock during 1993. On a pro forma basis, giving retroactive effect to the beginning of the year to the 1993 Time Warner Transactions, cash flow from operations would have been $183 million, after $402 million of interest payments, $179 million of income taxes and working capital requirements.
Time Warner has no claim on the assets and cash flows of TWE except through the payment of certain fees and reimbursements, such as the $60 million annual charge for corporate services, and cash distributions to the General Partners, which are limited by the TWE partnership and credit agreements. Distributions from TWE of $20 million in 1993 are expected to increase to approximately $125 million in 1994, primarily because of tax-related distributions.
TWE is permitted under its partnership and credit agreements to loan Time Warner up to $1.1 billion, increasing up to $1.5 billion on July 1, 1995. Time Warner has $375 million of debt maturing in 1994 that will be refinanced by borrowings from TWE under a long-term arrangement. Management believes that 1994 operating cash flow, cash and marketable securities and additional borrowing capacity are sufficient to meet Time Warner's liquidity needs without distributions and loans from TWE above those permitted by existing agreements.
ENTERTAINMENT GROUP
TWE continued its strategy of significantly lengthening debt maturities at attractive fixed rates. Over the past two years, TWE reduced variable rate debt by $3.8 billion with proceeds from the issuance of long-term notes and debentures having an after-tax cost to Time Warner of 5.1%. An additional $2.5 billion of capital was raised by the USW Transaction, $1 billion of which, presently in the form of the USW Note, has been earmarked for building cable Full Service Networks(TM) ("FSN"). The Six Flags acquisition culminated a series of transactions over a two-year period that resulted in it becoming a wholly-owned subsidiary of TWE. Six Flags was consolidated by TWE effective as of January 1, 1993. Primarily as a result of these transactions, the Entertainment Group had $7.1 billion of long-term debt at December 31, 1993, $1.5 billion of TWE General Partners' Senior Capital and $6 billion of TWE partners' capital (net of the $1 billion uncollected amount of the USW Note), compared to $7.2 billion of long-term debt ($7.7 billion restated for the Six Flags consolidation) and $6.4 billion of TWE partners' capital at December 31, 1992. Cash and equivalents were $1.3 billion at December 31, 1993, reducing the debt-net-of-cash amount to $5.8 billion. Cash and equivalents at December 31, 1992 were $47 million.
Cash provided by the operations of the Entertainment Group in 1993 amounted to $1.276 billion, after $450 million of interest payments, $70 million of income taxes and working capital requirements. On a pro forma basis, giving retroactive effect to the beginning of 1993 to the Entertainment Group Transactions, cash flow from operations would have been $1.284 billion, after $473 million of interest payments, $70 million of income taxes and working capital requirements. Cash used in investing activities in 1993, excluding investment proceeds, amounted to $981 million. Of this amount, $613 million was spent on capital projects, including $352 million to upgrade cable systems and $244 million to expand international theaters and Warner Bros. Studio Stores, upgrade facilities at the Warner Bros. Studio and introduce new rides at Six Flags.
The Entertainment Group continues to expand its core businesses through selective acquisitions and investments, which in 1993 resulted in payments of $368 million, including $136 million for the purchase of common and preferred stocks of Six Flags. The Milwaukee, Wisconsin cluster of cable systems was
TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) augmented by the purchase of a cable system from Viacom Inc. Several other cable systems that did not fit into a cluster were disposed of in 1993 for approximately $100 million.
Capital spending is expected to increase significantly in 1994, principally because of the plan to upgrade a significant percentage of cable systems to FSN capacity over the next five years at an estimated cost of $5 billion, which is about three times cable capital expenditures for the last five years. $1 billion of FSN capital expenditures will be funded by collections on the USW Note.
TWE is permitted under its partnership and credit agreements to loan up to $1.1 billion to Time Warner. An additional $400 million of such loans are permitted beginning July 1, 1995.
There was $1.3 billion of cash and equivalents and $2 billion of available credit under the TWE credit agreement at December 31, 1993. In early 1994, TWE filed a shelf registration statement with the Securities and Exchange Commission covering the issuance of up to $2 billion of debt securities. These securities may be issued from time to time on terms determined at the time of sale. Management believes that 1994 operating cash flow, cash and equivalents, the USW Note, and additional borrowing capacity are sufficient to meet the capital and liquidity needs of TWE, and to fund anticipated loans to Time Warner.
On October 5, 1992, Congress enacted the 1992 Cable Act, which among other things reimposed rate regulation on most cable systems. The Federal Communications Commission ("FCC") froze rates in April 1993 for regulated cable services and associated equipment, other than for systems in which local franchising authorities regulate rates. The current expiration date of the freeze is May 15, 1994. On May 3, 1993, the FCC released rules implementing rate regulation, which required that rates for certain equipment be established based on a cost-of-service standard and rates for regulated cable services be established based on either a per-channel benchmark or a cost-of-service standard, at the election of the cable operator. TWE Cable elected to establish rates based on the per-channel benchmarks, which the FCC had set at 10% below the average level of rates prevailing nationwide in September of 1992.
On February 22, 1994, the FCC announced the adoption of revised rules lowering the per-channel benchmarks from 10% to 17% below the average level of rates prevailing in September of 1992 and changing the factors cable operators must use to calculate the benchmarks applicable to their systems. The text of the new rules is expected to be released in late March, with an effective date of May 15. Under the May 1993 rules, revenues from sales of regulated equipment and services had been expected to decline by $90 to $100 million per year. That decline was expected to be partially offset by increases in revenues from other activities, including optional services, advertising sales and subscriber growth, which could not be quantified. It is not yet possible to estimate the effect of the new rules adopted in February 1994, although it is expected to be more adverse than the effect of the earlier rules.
On November 5, 1992, TWE filed a lawsuit seeking to overturn major provisions of the 1992 Cable Act, primarily on First Amendment grounds. On April 8, 1993, a three-judge District Court upheld the constitutionality of the "must carry" provisions of the 1992 Cable Act. TWE's appeal from this decision was heard by the U.S. Supreme Court in January 1994. On September 16, 1993, a one-judge District Court upheld the constitutionality of a majority of the other challenged provisions of the 1992 Cable Act. The Company and the federal defendants have appealed this decision to the U.S. Court of Appeals for the D.C. Circuit.
Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition amounted to $724 million at December 31, 1993 compared to $674 million at December 31, 1992 (including amounts relating to HBO of $178 million at December 31, 1993 and $161 million at December 31, 1992). The backlog excludes advertising barter contracts.
The net impact of inflation on operations has not been significant in the past three years.
TIME WARNER INC. SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------- (a) The 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993.
TIME WARNER INC. SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTES TO SCHEDULE II
(1) Note pursuant to an employment agreement bearing interest at 6% per annum, payable quarterly, due December 31, 1994. Secured by a mortgage on real estate. (2) Note pursuant to an employment agreement bearing interest at 8% per annum, payable quarterly, until end of employment term at which time principal and interest are payable in 48 monthly installments, beginning on August 1, 1996. Secured by a mortgage on real estate. (3) Note in the amount of $950,000 bearing interest at 6% per annum payable on December 31, 1996. Note in the amount of $431,746 bearing interest at 7% per annum due on demand. (4) Note bearing interest at 10% per annum due December 31, 1994. (5) Non-interest bearing notes pursuant to an employment agreement due on demand.
TIME WARNER INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------- (a) The 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The historical financial statements for periods prior to such date have not been changed; however, financial information for the year ended December 31, 1992 retroactively reflecting the deconsolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis. (b) Represents uncollectible receivables charged against reserve. (c) Represents returns or allowances applied against reserve. (d) The distribution of magazines not owned by Time Warner results in a receivable recorded at the sales price and a corresponding liability to the publisher recorded at the sales price less the distribution commission recognized by Time Warner as revenue. Therefore, it would be misleading to compare magazine revenues to the provision charged to the reserve for magazine returns that is deducted from accounts receivable without also considering the related offsetting activity in the reserve for magazine returns that is deducted from the liability due to the publishers.
TIME WARNER INC. SCHEDULE X--SUPPLEMENTARY OPERATING STATEMENT INFORMATION YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- --------
(a) The 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The historical financial statements for periods prior to such date have not been changed; however, financial information for the year ended December 31, 1992 retroactively reflecting the deconsolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis.
TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET DECEMBER 31, (MILLIONS)
- -------- (a) The 1993 financial statements reflect the consolidation of Six Flags effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The historical financial statements for periods prior to such date have not been changed; however, financial statements for the year ended December 31, 1992 retroactively reflecting the consolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Notes 1 and 2).
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, (MILLIONS)
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, (MILLIONS)
- -------- (a) The 1993 financial statements reflect the consolidation of Six Flags effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The historical financial statements for periods prior to such date have not been changed; however, financial statements for the year ended December 31, 1992 retroactively reflecting the consolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Notes 1 and 2).
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL (MILLIONS)
- -------- (a) Distributions in 1993 and 1992 included $252 million and $24 million, respectively, of tax-related distributions, $274 million and $17 million, respectively, of stock option distributions and in 1993 $13 million of distributions to the Time Warner Service Partnerships. In addition, General Partners' Junior Capital was reduced $95 million in 1993 for the distribution of the Time Warner Service Partnership Assets. A $12 million contribution was made by the General Partners in 1992 after the TWE Capitalization pursuant to the net worth adjustment provision of the partnership agreement. (Note 6.)
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), was capitalized on June 30, 1992 (the "TWE Capitalization") to own and operate substantially all of the Filmed Entertainment, Programming-HBO and Cable businesses previously owned by subsidiaries of Time Warner Inc. ("Time Warner"). At December 31, 1993, the general partners of TWE, subsidiaries of Time Warner ("General Partners"), collectively held 63.27% pro rata priority capital and residual equity partnership interests in TWE, and certain priority capital interests senior and junior to the pro rata priority capital interests, which they received for the net assets, or the rights to cash flows, they contributed to the partnership at the TWE Capitalization; and the limited partners, subsidiaries of U S WEST, Inc. ("USW"), ITOCHU Corporation ("ITOCHU") and Toshiba Corporation ("Toshiba"), held 25.51%, 5.61% and 5.61% pro rata priority capital and residual equity partnership interests, respectively. ITOCHU and Toshiba each contributed $500 million of cash at the TWE Capitalization for their limited partnership interests. USW contributed $1.532 billion of cash and a $1.021 billion 4.4% note ("USW Note") on September 15, 1993 for its limited partnership interests. Prior to the admission of USW, the General Partners held 87.5% pro rata priority capital and residual equity partnership interests, and a priority capital interest junior to the pro rata priority capital interests, and ITOCHU and Toshiba each held 6.25% pro rata priority capital and residual equity partnership interests (Note 6).
In lieu of contributing certain assets (the "Beneficial Assets"), the General Partners assigned to TWE the net cash flow generated by such assets or agreed to pay an amount equal to the net cash flow generated by such assets. TWE has the right to receive from the General Partners, at the limited partners' option, an amount equal to the fair value of Beneficial Assets, net of associated liabilities, that have not been contributed to TWE by June 30, 1996, rather than continuing to receive the net cash flow, or an amount equal to the net cash flow, generated by the Beneficial Assets. The consolidated financial statements include the assets and liabilities of the businesses contributed by the General Partners, including the Beneficial Assets and associated liabilities, all at Time Warner's historical cost basis of accounting.
Time Warner's $14 billion acquisition of Warner Communications Inc. ("WCI") as of December 31, 1989, and $1.3 billion acquisition of the minority interest in American Television and Communications Corporation ("ATC") on June 26, 1992 were accounted for by the purchase method of accounting. WCI subsequently contributed filmed entertainment and cable assets to TWE, and ATC subsequently contributed its cable assets. The financial statements of TWE reflect an allocable portion of Time Warner's cost to acquire WCI and the ATC minority interest in accordance with the pushdown method of accounting.
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS IN AFFILIATED COMPANIES
The consolidated financial statements include the accounts of TWE and its subsidiaries. Significant intercompany accounts and transactions are eliminated. Significant accounts and transactions between TWE and its partners and affiliates are disclosed as related party transactions (Note 11).
Investments in companies in which TWE has significant influence but less than controlling financial interest are stated at cost plus equity in the affiliates' undistributed earnings. The excess of cost over the underlying net equity of investments in affiliated companies is attributed to the underlying net assets based on their respective fair values and amortized over their respective economic lives.
Six Flags Entertainment Corporation ("Six Flags") was consolidated effective January 1, 1993 as a result of the increase of TWE's ownership in Six Flags from 50% to 100% on September 17, 1993 (Note 2). The historical financial statements for periods prior to such date have not been changed; however, financial
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) statements for the year ended December 31, 1992 retroactively reflecting the consolidation of Six Flags are presented as supplementary information under the column heading "restated" in order to facilitate comparative analysis. Certain other prior year amounts have been reclassified to conform to the 1993 presentation.
REVENUES AND COSTS
Feature films are produced or acquired for initial exhibition in theaters followed by distribution in the home video, pay cable, basic cable, broadcast network and syndicated television markets. Generally, distribution to the theatrical, home video and pay cable markets (the primary markets) is completed within eighteen months of initial release. Theatrical revenues are recognized as the films are exhibited. Home video revenues, less a provision for returns, are recognized when the home videos are sold. Revenues from cable and broadcast television distribution are recognized when the films are available to telecast. Television films and series are initially produced for the networks or first-run television syndication (the primary markets) and may be subsequently licensed to foreign or other domestic television markets. Revenues from television license agreements are recognized when the films or series are available to telecast, except for barter agreements where the recognition of revenue is deferred until the related advertisements are telecast.
Inventories of theatrical and television product are stated at the lower of amortized cost or net realizable value. Cost includes direct production and acquisition costs, production overhead and capitalized interest. A portion of the cost to acquire WCI was allocated to its theatrical and television product as of December 31, 1989, including an allocation to product that had been exhibited at least once in all markets ("Library"). Individual films and series are amortized, and the related participations and residuals are accrued, based on the proportion that current revenues from the film or series bear to an estimate of total revenues anticipated from all markets. These estimates are revised periodically and losses, if any, are provided in full. WCI acquisition cost allocated to the Library is amortized on a straight-line basis over twenty years. Current film inventories include the unamortized cost of completed feature films allocated to the primary markets, television films and series in production pursuant to a contract of sale, film rights acquired for the home video market and advances pursuant to agreements to distribute third-party films in the primary markets. Noncurrent film inventories include the unamortized cost of completed theatrical and television films allocated to the secondary markets, theatrical films in production and WCI acquisition cost allocated to the Library.
A significant portion of cable system and cable programming revenues are derived from subscriber fees, which are recorded as revenue in the period the service is provided. The right to exhibit feature films and other programming on pay cable services during one or more availability periods ("programming costs") generally is recorded when the programming is initially available for exhibition, and is allocated to the appropriate availability periods and amortized as the programming is exhibited.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable property, plant and equipment generally include material, labor, overhead, interest and certain start-up costs incurred in developing new franchises. Depreciation is provided generally on the straight-line method over useful lives ranging up to twenty-five years for buildings and improvements and up to fifteen years for furniture, fixtures and cable television and other equipment.
INTANGIBLE ASSETS
Intangible assets are amortized over periods up to forty years using the straight-line method. Amortization of the excess of cost over net assets acquired amounted to $132 million in 1993, $115 million
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ($124 million on a restated basis) in 1992 and $110 million in 1991, and amortization of cable television franchises amounted to $222 million, $194 million, and $171 million, respectively. Accumulated amortization of intangible assets at December 31, 1993 and 1992 amounted to $1.438 billion and $1.078 billion ($1.108 billion on a restated basis), respectively.
FOREIGN CURRENCY TRANSLATION
The financial position and operating results of substantially all of the foreign operations of TWE are consolidated using the local currency as the functional currency. Accordingly, local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses, which have not been material, are included in partners' capital. Foreign currency transaction gains and losses, which have not been material, are included in operating results.
INCOME TAXES
As a Delaware limited partnership, TWE is not subject to U.S. federal and state income taxation. However, certain of TWE's operations are conducted by subsidiary corporations that are subject to domestic or foreign taxation. Income taxes are provided on the income of such corporations using the liability method of accounting for income taxes prescribed by Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes." The consolidated financial statements for periods prior to the TWE Capitalization include, for comparative purposes, the income and withholding tax consequences of those TWE operations subject to domestic or foreign taxation, as determined on a stand-alone basis consistent with the liability method of accounting for income taxes.
FINANCIAL INSTRUMENTS
Foreign exchange contracts are used to reduce exchange rate exposure on future cash flows and earnings denominated in foreign currencies. Contract gains and losses are included in income. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's exposure. At December 31, 1993, Time Warner had contracts for the sale of $226 million of foreign currencies at fixed rates related to TWE's exposure, primarily Japanese yen, German marks, Canadian dollars and French francs. The fair value of foreign exchange contracts approximates carrying value.
TWE has used interest rate swap agreements to reduce its exposure to interest rate changes; however, there were no material amounts of contracts outstanding at December 31, 1993. The net amounts paid and received under the contracts are included in interest expense. The fair value of TWE's debt will fluctuate with changes in the credit markets, including changes in the level of interest rates. At December 31, 1993, the fair value of TWE's publicly-held long-term debt was estimated to exceed its carrying value by approximately $290 million.
Fair value is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market.
2.INVESTMENTS
Investments accounted for on the equity basis include Paragon Communications (50% owned), certain other cable system joint ventures (generally 50% owned), Comedy Partners (50% owned), Six Flags (50% owned until 1993 when consolidated) and E! Entertainment Corporation (50% owned until distributed in 1993). These investments were carried at cost plus undistributed equity in the affiliates' earnings of $517
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) million at December 31, 1993 and $594 million ($562 million on a restated basis) at December 31, 1992. A summary of financial information of equity affiliates (100% basis) is set forth below:
In September 1993, TWE provided Six Flags with $136 million to repurchase the 50% common stock interest held by other stockholders and preferred stock of certain subsidiaries. TWE also provided $414 million to finance the repurchase or retirement of all indebtedness of Six Flags and its subsidiaries, except for the zero coupon notes due 1999. As a result, TWE has consolidated Six Flags effective January 1, 1993.
Certain investments included in the balance sheet at December 31, 1992 were among the Time Warner Service Partnership Assets distributed to the General Partners in 1993 (Note 6), including common and common equivalent stock of QVC Inc., which was carried at a cost of $28 million and had a market value of $142 million at December 31, 1992, and common and common equivalent stock of E! Entertainment Corporation, an equity affiliate. The remainder of TWE's investments, none of which are individually significant, were carried at cost.
3.INVENTORIES
TWE's inventories consist of:
Excluding the Library, the unamortized cost of completed films at December 31, 1993 amounted to $1.085 billion, more than 90% of which is expected to be amortized within three years after release. Excluding the effects of accounting for the acquisition of WCI, the total cost incurred in the production of theatrical and television films amounted to $1.784 billion in 1993, $1.652 billion in 1992 and $1.476 billion in 1991; and the total cost amortized amounted to $1.619 billion, $1.535 billion and $1.494 billion, respectively.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT
Long-term debt consists of:
Each General Partner has guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest thereon based on the relative fair value of the net assets each General Partner contributed to TWE (the "General Partner Guarantees"). Such indebtedness is recourse to each General Partner only to the extent of its guarantee. The indenture pursuant to which TWE's notes and debentures have been issued (the "Indenture") requires the unanimous consent of the holders of the notes and debentures to terminate the General Partner Guarantees prior to June 30, 1997, and the consent of a majority of such holders to effect a termination thereafter. There are no restrictions on the ability of the General Partner guarantors to transfer material assets, other than TWE assets, to parties who are not guarantors.
As of December 31, 1993, the TWE credit agreement provided for up to $5.2 billion of borrowings and consisted of a $4.2 billion revolving credit facility with available credit reducing at June 30, 1995 and thereafter by $200 million per quarter through June 30, 1996, by $125 million per quarter from September 30, 1996 through September 30, 1999, and by $1.575 billion at final maturity on December 31, 1999; and a $986 million term loan with repayments of $66 million on June 30, 1995, $98 million per quarter beginning September 30, 1995 through March 31, 1996, $27 million per quarter beginning June 30, 1996 through June 30, 1999, $20 million on September 30, 1999 and a final repayment of $255 million on December 31, 1999. Unused credit is available for general business purposes and to support commercial paper borrowings. Outstanding borrowings under the credit agreement generally bear interest at LIBOR plus 7/8% per annum. The credit agreement contains covenants relating to, among other things, additional indebtedness; liens on assets; acquisitions and investments; cash flow coverage and leverage ratios; and loans, advances, distributions or other cash payments or transfers of assets to its partners or their affiliates. TWE is permitted under the credit agreement to loan Time Warner up to $1.1 billion, increasing to up to $1.5 billion at July 1, 1995 (Note 6).
In connection with and immediately prior to the TWE Capitalization, indebtedness under the Time Warner and ATC credit agreements was assigned to and assumed by the General Partners. Immediately
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) thereafter and concurrently with the TWE Capitalization, such indebtedness was assigned to and assumed by TWE. Proceeds from a $5.9 billion initial borrowing under the TWE credit agreement, $1 billion of capital contributed to the partnership by ITOCHU and Toshiba and $250 million of other loan proceeds were used, directly or indirectly, to repay and terminate the credit agreements of Time Warner and ATC and to pay certain transaction costs. In addition, $850 million of 9 5/8% and 10.15% long-term notes issued by Time Warner in April 1992 were assigned to and assumed by TWE.
An after-tax cost of $10 million was incurred by Six Flags in 1993 in connection with the retirement of its debt (Note 2). The Six Flags zero coupon senior notes due 1999 are guaranteed by TWE.
Interest expense was $573 million in 1993, $436 million ($486 million on a restated basis) in 1992 and $479 million in 1991. Interest expense for all periods prior to the TWE Capitalization includes interest expense related to Time Warner's credit and interest rate swap agreements on a pushdown basis and interest expense on $875 million of loans due to WCI, which were repaid at the TWE Capitalization.
Annual repayments of long-term debt for the five years subsequent to December 31, 1993 are: 1994-$0 million; 1995-$262 million; 1996-$179 million; 1997-$108 million and 1998-$372 million.
5. INCOME TAXES
Domestic and foreign pretax income are as follows:
As a partnership, TWE is not subject to U.S. federal, state or local income taxation (Note 1). Income taxes (benefits) of TWE and subsidiary corporations are as set forth below:
- -------- (1) Includes utilization of $75 million of Six Flags tax carryforwards in 1993. (2) Includes foreign withholding taxes of $59 million in 1993, $34 million in 1992 and $19 million 1991.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The financial statement basis of TWE's assets exceeds the corresponding tax basis by $10 billion at December 31, 1993, principally as a result of differences in accounting for depreciable and amortizable assets for financial statement and income tax purposes. At December 31, 1993, Six Flags had $100 million of net operating loss carryforwards that expire from 2004 to 2007, which are subject to limitations.
6. TWE PARTNERS' CAPITAL
The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. Pursuant to the partnership agreement as amended for the admission of USW on September 15, 1993, and assuming that no additional partnership interests are issued to new partners, the relative priority of initial partnership capital amounts and of partnership income and loss related thereto is as follows, from most to least senior: (1) partnership income, to the extent earned, allocated to the partners so that the economic burden of the income tax consequences of partnership operations is borne as though the partnership was taxed as a corporation, reduced by prior distributions and allocations of partnership agreement losses ("special tax allocations"), (2) a senior capital interest in the initial capital amount of $1.4 billion, plus allocations of partnership income, to the extent earned, of up to 8% per annum, compounded quarterly, of the initial capital amount, reduced by prior distributions and allocations of partnership losses, allocated to the General Partners ("General Partners' Senior Capital"), (3) pro rata priority capital interests in the initial capital amounts of $3.5 billion allocated to the General Partners, $1.4 billion allocated to USW and $313 million allocated to each of ITOCHU and Toshiba, plus allocations of partnership income, to the extent earned, of up to 13% per annum (11% to the extent concurrently distributed), compounded quarterly, of the initial capital amounts, reduced by prior distributions and allocations of partnership losses, allocated to all the partners according to their residual equity partnership interests, (4) a junior capital interest in the initial capital amount of $2.7 billion, plus allocations of partnership income, to the extent earned, of up to 13.25% per annum (11.25% to the extent concurrently distributed), compounded quarterly, of the initial capital amount, reduced by prior distributions and allocations of partnership losses, allocated to the General Partners ("General Partners' Junior Capital") and (5) residual equity capital, plus allocations of partnership income, to the extent earned, reduced by prior distributions and allocations of partnership losses, allocated to all partners according to their residual partnership interests. To the extent partnership income is insufficient to satisfy all special allocations in a particular accounting period, the unearned portion is carried over until satisfied out of future partnership income.
Partnership losses are allocated first to eliminate prior allocations of partnership income to, and then to reduce the initial capital amounts of, the residual equity, General Partners' Junior Capital and pro rata priority capital interests, in that order, then to reduce General Partners' Senior Capital, including partnership income allocated thereto, and finally to reduce special tax allocations. Partnership income first earned following a period of partnership losses will be allocated in reverse order so as to eliminate prior allocations of loss. For the purpose of the foregoing allocations, partnership income or loss is based on the fair value of the assets contributed to the partnership, and differs from net income of TWE, which is based on the historical cost of the contributed assets. General Partners' Senior Capital is required to be distributed no later than in three annual installments beginning July 1, 1997; earlier distributions may be made under certain circumstances ("Senior Capital Distributions"). General Partners' Junior Capital is subject to retroactive adjustment, based on TWE's operating performance over five-and ten-year periods, so as to result in an additional initial capital amount of up to $4 billion, plus allocations of partnership income, to the extent earned, of up to 13% per annum (11% per annum to the extent concurrently distributed), compounded quarterly, reduced by prior distributions and allocations of partnership losses.
USW has an option to increase its pro rata priority capital and residual equity interests to as much as 31.84%, depending on cable operating performance. The option is exercisable between January 1, 1999 and on or about May 31, 2005 at a maximum exercise price ranging from $1.25 billion to $1.8 billion, depending
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) on the year of exercise. USW or TWE may elect that the exercise price be paid with partnership interests rather than cash. Prior to the exercise of the USW option, each of ITOCHU and Toshiba has the right to maintain its original 6.25% pro rata priority capital and residual equity interests by acquiring additional partnership interests at fair market value; thereafter, each would have the right to maintain the percentage of the pro rata priority capital and residual equity interests it held immediately prior to USW's exercise.
Distributions and loans to the partners are subject to partnership and credit agreement limitations. Generally, TWE must be in compliance with the cash flow coverage and leverage ratios, restricted payment limitations and other credit agreement covenants in order to make such distributions or loans.
Certain assets of TWE (the "Time Warner Service Partnership Assets") were distributed to the General Partners prior to the admission of USW in order to ensure compliance with the Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia applicable to USW and its affiliated companies, which may include TWE. The distribution was recorded based on the $95 million historical cost of the Time Warner Service Partnership Assets. For purposes of the partnership agreement, the initial capital amount of General Partners' Junior Capital of $3 billion was reduced by approximately $300 million to give effect to such distributions. The General Partners contributed the Time Warner Service Partnership Assets to newly formed partnerships (the "Time Warner Service Partnerships") in which the General Partners and subsidiaries of ITOCHU and Toshiba are the partners. The Time Warner Service Partnerships have entered into service agreements that make certain Time Warner Service Partnership Assets and related services available to TWE (Note 11). TWE is required to make quarterly distributions of $12.5 million with respect to General Partners' Junior Capital through September 30, 1998 ("TWSP Distributions"). The General Partners are required to contribute such amounts to the Time Warner Service Partnerships.
TWE reimburses Time Warner for the amount by which the market price on the exercise date of Time Warner common stock options or options to purchase Time Warner redeemable reset notes due 2002 granted to employees of TWE exceeds the exercise price or, with respect to options granted prior to the TWE Capitalization, the greater of the exercise price or the market price of such securities at the TWE Capitalization ("Stock Option Distributions"). TWE paid $20 million of Stock Option Distributions in 1993 for exercised options and had a liability of $271 million and $17 million at December 31, 1993 and 1992, respectively, for future Stock Option Distributions based on the unexercised options and the market prices at such dates of $44.25 and $29.25, respectively, per Time Warner common share and $908.75 and $807.50, respectively, per $1,000 principal amount of Time Warner redeemable reset note.
Cash distributions are required to be made to the partners to permit them to pay income taxes at statutory rates based on their allocable taxable income from TWE ("Tax Distributions"), including any taxable income generated by the Beneficial Assets, subject to limitations referred to herein. The aggregate amount of such Tax Distributions is computed generally by reference to the taxes that TWE would have been required to pay if it were a corporation. Tax Distributions in the amount of $276 million and $24 million were payable to the General Partners at December 31, 1993 and 1992, respectively.
Other than the Stock Option Distributions and TWSP Distributions, under the most restrictive limitations, no other cash distributions to partners are permitted prior to July 1, 1994, at which time the payment of a Tax Distribution, limited in amount, is permitted. Accordingly, a $108 million Tax Distribution is classified as a current liability at December 31, 1993. Additional Tax Distributions are permitted beginning July 1, 1995.
In addition to Stock Option Distributions, Tax Distributions, Senior Capital Distributions and TWSP Distributions, quarterly cash distributions may be made to the partners to the extent of excess cash, as defined ("Excess Cash Distribution"). Assuming that no additional partnership interests are issued to new partners and that certain cash distribution thresholds are met, cash distributions other than Stock Option
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Distributions, Tax Distributions, Senior Capital Distributions and TWSP distributions will in the aggregate be made 63.27% to the General Partners and 36.73% to the limited partners prior to June 30, 1998; thereafter, the General Partners also will be entitled to additional distributions of General Partners' Junior Capital. If aggregate distributions made to the limited partners, generally from all sources, have not reached approximately $800 million by June 30, 1997, cash distributions to the General Partners with respect to the General Partners' pro rata priority and residual equity capital, other than Stock Option Distributions and Tax Distributions, will be deferred until such threshold is met. Similarly, if such aggregate distributions to the limited partners have not reached approximately $1.6 billion by June 30, 1998, cash distributions with respect to General Partners' Junior Capital, other than TWSP Distributions, will be deferred until such threshold is met. If any such deferral occurs, a portion of the corresponding partnership income allocations with respect to such deferred amounts will be made at a rate higher than otherwise would have been the case. If a division of TWE or a substantial portion thereof is sold, the net proceeds of such sale, less expenses and proceeds used to repay outstanding debt, will be required to be distributed with respect to the partners' partnership interests. Similar distributions are required to be made in the event of a financing or refinancing of debt. Subject to any limitations on the incurrence of additional debt contained in the TWE partnership and credit agreements, and the Indenture, TWE may borrow funds to make distributions.
7. STOCK OPTION PLANS
Options to purchase Time Warner common stock under various stock option plans have been granted to employees of TWE, generally at fair market value at the date of grant. Generally, the options are exercisable over a three-year vesting period and expire ten years from the date of grant. A summary of stock option activity with respect to employees of TWE is as follows:
TWE reimburses Time Warner for the use of Time Warner stock options on the basis described in Note 6. There were 129,000 options exercised by employees of TWE in 1992 at prices ranging from $8-$24 per share.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. BENEFIT PLANS
TWE and its divisions have defined benefit pension plans covering substantially all domestic employees. Pension benefits are based on formulas that reflect the employees' years of service and compensation levels during their employment period. Qualifying plans are funded in accordance with government pension and income tax regulations. Plan assets are invested in equity and fixed income securities.
Pension expense included the following:
Certain domestic employees of TWE participate in defined contribution multiemployer pension plans as to which the expense amounted to $19 million in 1993, $20 million in 1992 and $21 million in 1991. Employees in foreign countries participate to varying degrees in local pension plans, which in the aggregate are not significant.
Certain domestic employees also participate in Time Warner's 401(k) savings plans and profit sharing plans as to which the expense amounted to $20 million in 1993, $16 million in 1992 and $18 million in 1991. Contributions to the 401(k) plans are based upon a percentage of the employees' elected contributions.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. SEGMENT INFORMATION
Information as to the operations of TWE in different business segments is as set forth below:
- -------- (1) Depreciation and amortization includes amortization relating to the acquisitions of WCI in 1989 and the ATC minority interest in 1992 and to other business combinations accounted for by the purchase method.
- -------- (1)Consists principally of cash, cash equivalents and other investments.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information as to the capital expenditures of TWE is as follows:
Substantially all operations outside of the United States support the export of domestic products. Approximately 60% of export revenues are from sales to European customers.
10. COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $119 million in 1993, $99 million ($107 million on a restated basis) in 1992 and $83 million in 1991. The minimum rental commitments under noncancellable long-term operating leases are: 1994-- $100 million; 1995--$97 million; 1996--$90 million; 1997--$76 million; 1998-- $71 million and after 1998--$453 million.
Minimum commitments and guarantees under certain programming, licensing, franchise and other agreements at December 31, 1993 aggregated approximately $3 billion, which are payable principally over a five-year period.
Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements.
11. RELATED PARTY TRANSACTIONS
In the normal course of conducting their businesses, TWE units have had various transactions with Time Warner units, generally on terms resulting from a negotiation among the affected parties that in management's view results in reasonable allocations. Employees of TWE participate in various Time Warner medical, stock option (Note 7) and other benefit plans (Note 8) for which TWE is charged its allocable share of plan expenses, including administrative costs. Time Warner's corporate group provides various other services to TWE. The Music division of WCI provides home videocassette distribution services to certain TWE operations, and certain TWE units have placed advertising in magazines published by Time Warner's Publishing division.
TWE is required to pay a $130 million advisory fee to USW over a five-year period ending September 15, 1997 for USW's expertise in telecommunications, telephony and information technology, and its participation in the management and upgrade of the cable systems to Full Service Network(TM) capacity.
Time Warner provides TWE with certain corporate support services for which Time Warner is paid $60 million per year, subject to adjustment for inflation beginning in 1995. The corporate services agreement runs through June 30, 1997, and may be extended by agreement of both parties. Management believes that the corporate services fee is representative of the cost of corporate services that would be necessary for the stand-alone operations of TWE.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TWE has entered into service agreements with the Time Warner Service Partnerships for program signal delivery and transmission services, and TWE provides billing, collection and marketing services to the Time Warner Service Partnerships. TWE also has distribution and merchandising agreements with Time Warner Entertainment Japan Inc., a company owned by partners of TWE to conduct TWE's businesses in Japan.
In addition to transactions with its partners, TWE has had transactions with Paragon Communications, L.P., Comedy Partners, L.P. and its other equity affiliates, and with Turner Broadcasting System, Inc., The Columbia House Company partnerships, Cinamerica Theatres, L.P. and other equity affiliates of Time Warner, generally with respect to sales of product in the ordinary course of business.
Long-term debt and interest expense prior to the TWE Capitalization include the effects of the pushdown of a portion of the Time Warner credit agreement debt that was related to the WCI acquisition, based on the proportion that the fair value of the WCI contributed businesses acquired bore to the fair value of all of the WCI net assets acquired. Interest expense prior to the TWE Capitalization also reflects interest on $875 million of loans due to WCI, which were repaid at the TWE Capitalization, at a rate approximating the rate applicable to borrowings under the Time Warner credit agreement.
12. SUPPLEMENTAL INFORMATION
Supplemental information with respect to cash flows is as follows:
The noncash effects of the consolidation of Six Flags are reflected in the difference between the historical and restated balance sheet amounts at December 31, 1992. The noncash effect of the acquisition of the ATC minority interest was to increase investments--$156 million; cable television franchises--$865 million; excess of cost over net assets acquired--$410 million; and partners' capital--$1.431 billion. A noncash effect of the TWE Capitalization was the assumption by TWE of $2.545 billion of Time Warner debt in excess of the amount reflected as a liability prior to the TWE Capitalization. Cash equivalents consist of commercial paper and other investments that are readily convertible into cash, and have original maturities of three months or less.
TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Other current liabilities consist of:
REPORT OF INDEPENDENT AUDITORS
TO THE PARTNERS OF TIME WARNER ENTERTAINMENT COMPANY, L.P.
We have audited the accompanying consolidated balance sheet of Time Warner Entertainment Company, L.P. ("TWE") as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows and partnership capital for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of TWE's management. Our responsibility is to express an opinion on these financial statements and schedules 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 consolidated financial position of TWE at December 31, 1993 and 1992, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG
New York, New York February 4, 1994
TIME WARNER ENTERTAINMENT COMPANY, L.P. SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period ended December 31, 1993 set forth below has been derived from and should be read in conjunction with the consolidated financial statements and other financial information presented elsewhere herein. Capitalized terms are as defined and described in such consolidated financial statements, or elsewhere herein. The selected historical financial information for 1993 gives effect to the consolidation of Six Flags effective as of January 1, 1993, as a result of the 1993 Six Flags acquisition. The selected historical financial information for periods prior to such date has not been changed; however, selected financial information for 1992 retroactively reflecting the consolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis.
The selected historical financial information for 1993 gives effect to the USW Transaction as of September 15, 1993 and the 1993 TWE Refinancings, and for 1992 gives effect to the TWE Capitalization and Refinancing as of the dates such transactions were consummated and the ATC Merger as of June 30, 1992, using the purchase method of accounting and reflected in the consolidated financial statements of TWE under the pushdown method of accounting. The selected historical financial information for 1989 gives effect to the purchase by Time Warner of 59.3% of the WCI contributed businesses (as part of Time Warner's acquisition of 59.3% of WCI) as of July 31, 1989, and to the purchase by Time Warner of the 40.7% minority interest in the WCI contributed businesses (as part of Time Warner's acquisition on January 10, 1990 of the remaining capital stock of WCI) as of December 31, 1989, using the purchase method of accounting for business combinations and reflected in the consolidated financial statements of TWE under the pushdown method of accounting.
TIME WARNER ENTERTAINMENT COMPANY, L.P. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -------- (a) The 1993 financial statements reflect the consolidation of Six Flags effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The historical financial statements for periods prior to such date have not been changed; however, financial statements for the year ended December 31, 1992 retroactively reflecting the consolidation are presented as supplementary information under the heading "restated" to facilitate comparative analysis.
(b) Net income for each of the second and third quarters of 1993 includes an extraordinary loss on the retirement of debt of $2 million and $8 million, respectively.
TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following transactions that occurred in 1993 and 1992 have affected the comparability of the financial statements of TWE (collectively, the "TWE Transactions"):
. The 1993 Six Flags Acquisition and Refinancing: The increase in TWE's ownership of Six Flags from 50% to 100% on September 17, 1993 and the retirement of outstanding debt and preferred stock of Six Flags and its subsidiaries, using Six Flags cash flow and $550 million of funds provided by TWE, which resulted in the consolidation of Six Flags effective as of January 1, 1993. The historical financial information prior to 1993 has not been changed; however, financial statements retroactively reflecting the consolidation of Six Flags for 1992 also have been presented as supplementary information under the column heading "restated" in order to facilitate comparative analysis.
. The USW Transaction: The admission of a subsidiary of USW as an additional limited partner of TWE on September 15, 1993 for a capital contribution of $2.553 billion, consisting of $1.532 billion in cash and the $1.021 billion USW Note, in exchange for 25.51% pro rata priority capital and residual equity interests.
. The 1993 TWE Refinancings: The issuance of $2.6 billion of TWE debentures in 1993 to reduce indebtedness under the TWE credit agreement.
. The TWE Capitalization and Refinancing: The initial capitalization of TWE on June 30, 1992 and associated refinancings, including the repayment of the Time Warner and ATC credit agreements with $5.9 billion borrowed under a new TWE credit agreement and $1 billion of capital contributions; and the issuance of $1.2 billion of senior notes to reduce bank debt.
. The ATC Merger: Time Warner's acquisition of the ATC minority interest on June 26, 1992, in exchange for Time Warner notes then valued at $1.3 billion.
. The 1992 Six Flags Recapitalization: The issuance of $192 million aggregate principal amount of zero coupon notes by Six Flags in December 1992 to redeem or repurchase shares of common stock of Six Flags and its principal subsidiary.
The impact of these transactions on the financial statements of TWE is reflected on a pro forma basis in the discussion and analysis set forth below.
RESULTS OF OPERATIONS
1993 VS. 1992
TWE had 1993 revenues of $7.946 billion, income of $208 million before an extraordinary loss of $10 million on the retirement of debt and net income of $198 million, compared to 1992 revenues of $6.761 billion ($7.251 billion on a restated basis) and net income of $160 million.
On a pro forma basis, giving effect to the TWE Transactions as if such transactions had occurred at the beginning of the year, TWE would have reported net income of $198 million in 1993, compared to $208 million on an historical basis. On the same pro forma basis, TWE would have reported net income of $10 million in 1992, compared to net income of $160 million on an historical basis.
TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $64 million and $50 million ($53 million on a restated basis) in the years ended December 31, 1993 and 1992, respectively, have been provided in respect of the operations of TWE's domestic and foreign subsidiary corporations, including Six Flags in 1993.
Other factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA"), because the operating income of certain businesses has been affected by significant amounts of purchase price amortization from Time Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted-for by the purchase method.
EBITDA for 1993 and 1992 was as follows:
While many financial analysts consider EBITDA to be an important measure of comparative operating performance for the businesses of TWE, it should be considered in addition to, but not as a substitute for, or superior to, operating income, net income, cash flow and other measures of financial performance reported in accordance with generally accepted accounting principles.
Filmed Entertainment. Revenues increased to $4.557 billion compared to $3.455 billion ($3.945 billion on a restated basis) in 1992. Operating income increased to $263 million from $194 million ($235 million on a restated basis). Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $258 million in 1993 and $191 million ($260 million on a restated basis) in 1992. EBITDA increased to $521 million from $385 million ($495 million on a restated basis). The increase in revenues, operating income and EBITDA on an historical basis resulted primarily from the inclusion in 1993 of the operating results of Six Flags, which previously had been accounted for using the equity method. Revenues at Warner Bros. increased during the period primarily due to increases in international theatrical, international syndication and domestic home video revenues, as well as increased revenues from retail operations. Record international revenues of $1.650 billion would have been greater but for unfavorable exchange rate fluctuations. Warner Bros. ranked number one at both the domestic and international box office in 1993, led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags increased, benefiting from higher revenues per visitor. EBITDA benefited from the above gains.
Programming--HBO. Revenues decreased to $1.435 billion compared to $1.444 billion in 1992. Operating income increased to $213 million from $201 million. Depreciation and amortization amounted to $17 million in 1993 and $14 million in 1992. EBITDA increased to $230 million from $215 million. The decrease in revenues reflects lower HBO Video sales, which in 1992 were favorably affected by a children's sell-thru title, offset in part by higher subscriber revenues, principally as a result of higher pay-TV rates at
TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) HBO and an increase in subscribers. EBITDA benefited primarily from improved results from new businesses, including Time Warner Sports and the Comedy Central joint venture.
Cable. Revenues increased to $2.205 billion compared to $2.091 billion in 1992. Operating income increased to $407 million from $400 million. Depreciation and amortization, including amortization related to the purchase of WCI and the ATC Merger, amounted to $627 million in 1993 and $577 million in 1992. EBITDA increased to $1.034 billion from $977 million. Revenues increased principally as a result of growth in the number of cable subscribers and increases in advertising sales and pay-per-view. The increase in subscribers accounted for approximately three quarters of the revenue increase. EBITDA benefited from the revenue gains and increased income from cable joint ventures, but was negatively affected in the fourth quarter by cable rate regulation which went into effect on September 1, 1993. The negative effect of rate regulation is expected to continue into 1994 (see "Financial Condition and Liquidity" elsewhere herein).
Interest and Other, Net. Interest and other, net, increased to $551 million in 1993 from $525 million ($563 million on a restated basis) in 1992. Interest expense increased to $573 million compared with $436 million ($486 million on a restated basis) in 1992. The increase in interest expense resulted primarily from the higher average debt levels attributable to the TWE Capitalization, the higher interest cost of the TWE notes and debentures issued to refinance TWE bank debt, and the consolidation of Six Flags' interest expense in 1993. Other income, net, in 1993 included gains on the sale of certain assets partially offset by reductions in the carrying value of certain investments. Other expenses, net, on a restated basis in 1992 is principally attributable to losses on certain investments and litigation-related costs.
1992 VS. 1991
TWE had revenues of $6.761 billion and net income of $160 million in 1992, compared to revenues of $6.068 billion and net income of $97 million in 1991.
EBITDA for 1992 and 1991 on a historical basis was as follows:
Filmed Entertainment. Revenues increased to $3.455 billion compared to $3.065 billion in 1991, and operating income decreased to $194 million from $195 million. Depreciation and amortization, including amortization related to Time Warner's purchase of WCI, amounted to $191 million in 1992 and $183 million in 1991. EBITDA increased to $385 million from $378 million in 1991. The revenue growth resulted primarily from increased worldwide theatrical revenues, which benefited from a number of very successful releases. Warner Bros. ranked number one in domestic box office. Revenues from international home video and syndication, sales to network television and retail operations also increased, while revenue from pay-television sales declined. The increase in EBITDA reflects the higher revenues, offset in part by lower margins.
Programming--HBO. Revenues increased to $1.444 billion from $1.366 billion in 1991, while operating income rose to $201 million from $183 million. Depreciation and amortization amounted to $14 million in 1992 and $12 million in 1991. EBITDA increased to $215 million from $195 million in 1991. The revenue
TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) growth resulted from higher subscriber revenues and increased revenues from ancillary businesses, particularly from television production. The increase in subscriber revenues resulted from higher pay-TV rates at HBO and a slight increase in the number of subscribers. EBITDA benefited from the revenue gains, improved operating margins and a smaller loss from the division's 50% investment in Comedy Central, offset in part by expenses associated with the start-up of international pay-TV ventures.
Cable. Revenues increased to $2.091 billion, compared to $1.935 billion in 1991, and operating income increased to $400 million from $334 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $577 million in 1992 and $538 million in 1991. EBITDA increased to $977 million from $872 million in 1991. Revenues increased as a result of growth in the number of cable customers and an increase in per subscriber revenue. The increase in subscribers accounted for approximately 40% of the revenue increase. EBITDA benefited from the revenue gains, continued cost containment and increased income from domestic cable joint ventures, partially offset by higher cable programming costs and expenses associated with the start-up of international cable ventures. Operating income also was affected by amortization related to the ATC merger.
Interest and Other, Net. Interest and other, net increased to $525 million in 1992 from $520 million in 1991. Interest expense decreased to $436 million in 1992 compared with $479 million in 1991. The decrease in interest expense, which is attributable to lower interest rates and lower average debt levels, was offset in part by increases in litigation-related costs and a decline in investment-related income. In August 1992, Time Warner and TWE settled the litigation brought by Viacom International, Inc. in 1989 against Time Warner, ATC and HBO. The settlement terminated with prejudice all claims and counterclaims raised in the litigation. The effects of the settlement were not material to TWE.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1993
Aided by favorable conditions in the credit markets, TWE continued its strategy of significantly lengthening debt maturities at attractive fixed rates. Over the past two years, TWE reduced variable rate debt by $3.8 billion with proceeds from the issuance of long-term notes and debentures having an average fixed interest rate of 8.6%. An additional $2.5 billion of capital was raised by the USW Transaction, $1 billion of which, presently in the form of the USW Note, has been earmarked for building the Cable division's Full Service Networks(TM) ("FSN"). The Six Flags acquisition culminated a series of transactions over a two-year period that resulted in it becoming a wholly-owned subsidiary of TWE. Six Flags was consolidated effective as of January 1, 1993. Primarily as a result of these transactions, TWE had $7.1 billion of long-term debt at December 31, 1993, and $1.5 billion of General Partners' Senior Capital and $6 billion of partners' capital (net of the $1 billion uncollected portion of the USW Note), compared to $7.2 billion of long-term debt ($7.7 billion on a restated basis) and $6.4 billion of partners' capital at December 31, 1992. Cash and equivalents were $1.3 billion at December 31, 1993, reducing the debt- net-of-cash amount to $5.8 billion at such date. Cash and equivalents at December 31, 1992 were $47 million on a restated basis.
Cash provided by the operations of TWE in 1993 amounted to $1.271 billion, after interest payments of $450 million, income taxes of $70 million and working capital requirements. On a pro forma basis, giving retroactive effect to the beginning of the year to the 1993 TWE Refinancings, the USW Transaction and the 1993 Six Flags Acquisition and Refinancings, cash flow from operations would have been $1.279 billion, after interest payments of $473 million, income taxes of $70 million and working capital requirements. Cash used in investing activities in 1993, excluding proceeds from investments, amounted to $960 million. Of this amount, $613 million was spent on capital projects, including $352 million by the Cable division to upgrade its cable systems and $244 million by the Filmed Entertainment division, principally to continue the expansion of international theaters and Warner Bros. Studio Stores, to upgrade facilities at the Warner Bros. Studio, and to introduce new rides at Six Flags.
TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
TWE continues to expand its core businesses through selective acquisitions and investments, which in 1993 resulted in payments of $347 million, including $136 million for the purchase of common and preferred stocks of Six Flags in connection with the 1993 Six Flags Acquisition and Refinancing. The Milwaukee, Wisconsin cluster of cable systems was augmented by the purchase of a cable system from Viacom Inc. Several other cable systems that did not fit into a cluster were disposed of in 1993 for approximately $100 million.
Capital spending is expected to increase significantly in 1994, principally because of the plan to upgrade a significant percentage of cable systems to FSN capacity over the next five years at an estimated cost of $5 billion, which is about three times cable capital expenditures for the last five years. $1 billion of FSN capital expenditures will be funded by collections on the USW Note.
TWE is permitted under its partnership and credit agreements to loan up to $1.1 billion to Time Warner. An additional $400 million of such loans are permitted beginning July 1, 1995.
There was $1.3 billion of cash and equivalents and $2 billion of available credit under the TWE credit agreement at December 31, 1993. In early 1994, TWE filed a shelf registration statement with the Securities and Exchange Commission covering the issuance of up to $2 billion of debt securities. These securities may be issued from time to time on terms determined at the time of sale. Management believes that 1994 operating cash flow, cash and equivalents, the USW Note, and additional borrowing capacity are sufficient to meet the capital and liquidity needs of TWE, and to fund anticipated loans to Time Warner.
On October 5, 1992, Congress enacted the 1992 Cable Act, which among other things reimposed rate regulation on most cable systems. The Federal Communications Commission ("FCC") froze rates in April 1993 for regulated cable services and associated equipment, other than for systems in which local franchising authorities regulate rates. The current expiration date of the freeze is May 15, 1994. On May 3, 1993, the FCC released rules implementing rate regulation, which required that rates for certain equipment be established based on a cost-of-service standard and rates for regulated cable services be established based on either a per-channel benchmark or a cost-of-service standard, at the election of the cable operator. The Cable division elected to establish rates based on the per-channel benchmarks, which the FCC had set at 10% below the average level of rates prevailing nationwide in September of 1992.
On February 22, 1994, the FCC announced the adoption of revised rules setting the benchmarks at an average of 17% below the level of rates prevailing in September of 1992, compared with an average 10% rollback under the earlier rules published in May 1993. The text of the new rules is expected to be released in late March, with an effective date of May 15. Under the earlier rules, revenues from sales of regulated equipment and services were expected to decline $90 to $100 million per year. That decline was expected to be partially offset by increases in revenues from other activities, including optional services, advertising sales and subscriber growth that could not be quantified. It is not yet possible to estimate the effect of the new rules although it is expected to be more adverse than the effect of the earlier rules.
On November 5, 1992, TWE filed a lawsuit seeking to overturn major provisions of the 1992 Cable Act, primarily on First Amendment grounds. On April 8, 1993, a three-judge District Court upheld the constitutionality of the "must carry" provisions of the 1992 Cable Act. TWE's appeal from this decision was heard by the U.S. Supreme Court in January 1994. On September 16, 1993, a one-judge District Court upheld the constitutionality of a majority of the other challenged provisions of the 1992 Cable Act. The Company and the federal defendants have appealed this decision to the U.S. Court of Appeals for the D.C. Circuit.
Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition amounted to $724 million at December 31, 1993 compared to $674 million at December 31, 1992 (including amounts
TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) relating to HBO of $178 million at December 31, 1993 and $161 million at December 31, 1992). The backlog excludes advertising barter contracts.
The net impact of inflation on operations has not been significant in the past three years.
TIME WARNER ENTERTAINMENT COMPANY, L.P. SUPPLEMENTARY INFORMATION SUMMARIZED FINANCIAL INFORMATION OF SIX FLAGS
Six Flags was formed by a group of companies, including a subsidiary of Time Warner ("Enterprises") which owned 50% of Six Flags common stock, to effect the acquisition on December 29, 1991 of Six Flags Theme Parks Inc. ("1991 SF Acquisition"). Enterprises' interest in Six Flags was contributed to TWE at the TWE capitalization. In December 1992, Six Flags redeemed certain of its equity with $102 million of proceeds from the issuance of zero coupon senior notes due 1999 and $12 million of proceeds from the issuance of additional shares of Six Flags common stock ("1992 SF Recapitalization"). TWE continued to own 50% of the common stock of Six Flags following the 1992 SF Recapitalization, until September 17, 1993, when it provided Six Flags with $136 million to repurchase all the common stock held by the other stockholders and preferred stock of certain subsidiaries. TWE also provided $414 million to finance the repurchase or retirement of all the indebtedness of Six Flags and its subsidiaries, except for the zero coupon senior notes due 1999 ("1993 SF Acquisition and Refinancing"). As a result of the 1993 SF Acquisition and Refinancing, TWE has consolidated Six Flags effective January 1, 1993.
Set forth below is summarized financial information of Six Flags for 1993 and 1992, and of the predecessor to Six Flags ("Predecessor Company") for 1991, the year preceding the 1991 SF Acquisition.
SIX FLAGS ENTERTAINMENT CORPORATION
- -------- (a)The 1993 SF Acquisition and Refinancing, certain transactions with respect to the 1992 SF Recapitalization, and the 1991 SF Acquisition were accounted for using the purchase method of accounting for business combinations. If the 1993 SF Acquisition and Refinancing had occurred at the beginning of the year, the 1993 income before extraordinary item would have been $7 million; if the 1992 SF Recapitalization had occurred at the beginning of the year, the 1992 net loss would have been $18 million; and if the 1991 SF Acquisition had occurred at the beginning of the year, the 1991 net loss would have been $17 million.
(b)Six Flags entered into a sale and leaseback transaction with TWE with respect to certain of its wholly-owned theme parks. Sale proceeds of $301 million were used to repay indebtedness to TWE incurred in connection with the 1993 SF Acquisition and Refinancing. The 15-year leases have been accounted for as capital leases.
TIME WARNER ENTERTAINMENT COMPANY, L.P. SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------- (1)Non-interest bearing note pursuant to an employment agreement for $1,000,000 due on demand. Additional loan pursuant to the agreement of $1,000,000 due December 31, 1994, bearing interest at 6%, payable quarterly.
(2)Note pursuant to an employment agreement due on demand bearing interest at 6% per annum, payable annually.
(3)Payment of $50,000 received in February 1994. Remaining balance of note due on January 1, 1995, bearing interest at 10% per annum.
TIME WARNER ENTERTAINMENT COMPANY, L.P. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------- (a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
TIME WARNER ENTERTAINMENT COMPANY, L.P. SCHEDULE X--SUPPLEMENTARY OPERATING STATEMENT INFORMATION YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------- (a)The 1993 financial statements reflect the consolidation of Six Flags effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The historical financial statements for periods prior to such date have not been changed; however, financial information for the year ended December 31, 1992 retroactively reflecting the consolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis.
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC GRAPHIC OR IMAGE OR IMAGE IN TEXT - --------------------- -------------------
An organizational chart showing the Registrant's major business groups and its ownership interests therein. IFC - 1
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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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EXHIBITS FILED WITH
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NUMBER 1-8637
TIME WARNER INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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EXHIBIT INDEX
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- -------- * Incorporated by reference.
The Registrant hereby agrees to furnish to the Securities and Exchange Commission at its request copies of long-term debt instruments defining the rights of holders of the Registrant's outstanding long-term debt that are not required to be filed herewith.
iv