-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IaOx6FEt6agmbmMOUo+9Sxj9xVRtD3YVbfJ2Fg5AlJBPQjt0SdRfVyqBUfuaFDfk OYZQKmF4RZZCxIGiTPyo2w== 0000893657-97-000016.txt : 19971113 0000893657-97-000016.hdr.sgml : 19971113 ACCESSION NUMBER: 0000893657-97-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIME WARNER ENTERTAINMENT CO L P CENTRAL INDEX KEY: 0000893657 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133666692 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12878 FILM NUMBER: 97716882 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TELEVISION & COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000005910 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 132922502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04049 FILM NUMBER: 97716883 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2033280600 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARNER COMMUNICATIONS INC CENTRAL INDEX KEY: 0000104650 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 132696809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-53742-14 FILM NUMBER: 97716884 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLZ STREET 2: C/O TIME WARNER ENTERTAINMENT CO L P CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARNER CABLE COMMUNICATIONS INC CENTRAL INDEX KEY: 0000893780 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133134949 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-53742-12 FILM NUMBER: 97716885 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA STREET 2: C/O TIME WARNER ENTERTAINMENT CO L P CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 10-Q 1 TIME WARNER ENTERTAINMENT 3RD QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended September 30, 1997, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from _______________ to __________________. Registration Number 33-53742 TIME WARNER ENTERTAINMENT COMPANY, L.P. (Exact name of registrant as specified in its charter) Delaware 13-3666692 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) American Television and Communications Corporation Delaware 13-2922502 Warner Cable Communications Inc. Delaware 13-3134949 Warner Communications Inc. Delaware 13-2696809 (Exact name of registrant as specified in its charter) (State or other (I.R.S. jurisdiction of Employer incorporation or Identification organization) Number) 75 Rockefeller Plaza New York, New York 10019 (212) 484-8000 (Address, including zip code, and telephone number, including area code, of each registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No/ / TIME WARNER ENTERTAINMENT COMPANY L.P. AND TWE GENERAL PARTNERS INDEX TO FORM 10-Q Page TWE General TWE Partners PART I. FINANCIAL INFORMATION Management's discussion and analysis of results of operations and financial condition 1 20 Consolidated balance sheets at September 30, 1997 and December 31, 1996 9 23 Consolidated statements of operations for the three and nine months ended September 30, 1997 and 1996 10 25 Consolidated statements of cash flows for the nine months ended September 30, 1997 and 1996 11 29 Notes to consolidated financial statements 12 31 PART II. OTHER INFORMATION 37 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TWE classifies its business interests into three fundamental areas: Entertainment, consisting principally of interests in filmed entertainment, television production and television broadcasting; Cable Networks, consisting principally of interests in cable television programming; and Cable, consisting principally of interests in cable television systems. TWE also manages the cable properties owned by Time Warner and the combined cable television operations are conducted under the name of Time Warner Cable. Capitalized terms are as defined and described in the accompanying consolidated financial statements, or elsewhere herein. Cable Financing Strategy Currently, Time Warner is no longer actively pursuing a restructuring of TWE with U S WEST. Time Warner's and TWE's cable financing strategy is to continue to use cable operating cash flow to finance the level of capital spending necessary to upgrade the technological capability of its cable television systems and develop new services, while pursuing opportunities to reduce both existing debt and its share of future funding requirements related to the cable television business and related ancillary businesses. Consistent with this strategy, Time Warner, TWE and the TWE-Advance/Newhouse Partnership ("TWE-A/N") have recently announced certain transactions, consisting of (i) a series of transactions with TCI Communications, Inc. ("TCI"), a subsidiary of Tele-Communications, Inc., to establish two, new strategic joint ventures, expand an existing joint venture and exchange certain cable television systems (collectively, the "TCI Cable Transactions"), (ii) the transfer of TWE's and TWE-A/N's direct broadcast satellite operations and related assets to a separate, publicly traded entity, as well as certain related transactions (collectively, the "Primestar Transactions") and (iii) the transfer by a wholly owned subsidiary of Time Warner of cable television systems serving approximately 650,000 subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange for common and preferred partnership interests therein, as well as certain related transactions (collectively, the "TWE-A/N Transfers"). Each of these transactions is discussed more fully below. TCI Cable Transactions In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter of intent to enter into a series of agreements to (i) form two cable television joint ventures in the Houston and south Texas areas that will be managed by TWE and own cable television systems serving an aggregate 1.1 million subscribers, subject to approximately $1.4 billion of debt, (ii) expand an existing joint venture in Kansas City, which is managed by TWE, through the contribution by TCI of a contiguous cable television system serving approximately 95,000 subscribers, subject to approximately $200 million of debt, and (iii) exchange various cable television systems owned by Time Warner and TWE serving over 500,000 subscribers (of which cable television systems serving approximately 400,000 subscribers are owned by TWE) for other cable television systems of comparable size in an effort to enhance each company's geographic clusters of cable television properties. The joint ventures will be accounted for under the equity method of accounting. As a result of these transactions, TWE expects to reduce debt by approximately $500 million, benefit from the geographic clustering of cable television systems and increase the number of subscribers under its management by approximately 675,000 subscribers, thereby becoming the largest cable television operator in the U.S. The TCI Cable Transactions are expected to close periodically throughout 1998 and are subject to the execution of definitive agreements by the parties and customary closing conditions, including all necessary governmental and regulatory approvals. There can be no assurance that such agreements will be completed or that such approvals will be obtained. Primestar Transactions In June 1997, TWE and the Advance/Newhouse Partnership ("Advance/Newhouse") entered into agreements to transfer the direct broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and the 31% partnership interest in Primestar Partners, L.P. held by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to a new, publicly traded holding company ("Newco") that will be the parent entity of TCI Satellite Entertainment, Inc. ("TSAT"). Newco will also own the DBS Operations and Primestar partnership interests currently owned by TSAT and other existing partners of Primestar. In exchange for contributing its interests in the Primestar Assets, TWE will receive an approximate 24% equity interest in Newco and realize approximately $200 million of debt reduction, as well as eliminating its share of future funding requirements for these operations that will be separately financed by Newco. In partial consideration for contributing its indirect interest in certain of the Primestar Assets, Advance/Newhouse will receive an approximate 6% equity interest in Newco. In a related transaction, Primestar also entered into an agreement in June 1997 with The News Corporation Limited, MCI Telecommunications Corporation and American Sky Broadcasting LLC ("ASkyB"), pursuant to which Primestar (or, under certain circumstances, Newco) will acquire certain assets relating to the high-power, direct broadcast satellite business of ASkyB. In exchange for such assets, ASkyB will receive non-voting securities of Newco that will be convertible into non-voting common stock of Newco and, accordingly, reduce TWE's equity interest in Newco to approximately 16% on a fully diluted basis. The Primestar transactions are not conditioned on each other and may close independently. They are expected to close in 1998, subject to customary closing conditions, including all necessary governmental and regulatory approvals, including the approval of the Federal Communications Commission (the "FCC"). There can be no assurance that such approvals will be obtained. TWE-A/N Transfers In October 1997, TWE, TWE-A/N and a wholly owned subsidiary of Time Warner entered into an agreement, pursuant to which Time Warner will contribute cable television systems serving approximately 650,000 subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange for common and preferred partnership interests therein. The cable television systems to be transferred to TWE-A/N are currently owned by TWI Cable Inc., a wholly owned subsidiary of Time Warner, and Paragon Communications ("Paragon"), a partnership owning cable television systems serving approximately 1 million subscribers that is currently owned by subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. In a related transaction, TWE will exchange substantially all of its beneficial interest in Paragon for an equivalent share of Paragon's cable television systems serving approximately 500,000 subscribers. TWE, in turn, will similarly transfer such systems and certain related assets to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in satisfaction of certain pre-existing obligations to TWE-A/N. This will result in subsidiaries of Time Warner owning 99% of the restructured Paragon entity. Accordingly, upon consummation of the TWE-A/N Transfers, TWE will deconsolidate Paragon, which will then be approximately half of its former size. Because this transaction represents an exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an equivalent amount of its cable television systems, it will not have any significant economic impact on Time Warner, TWE or TWE-A/N. In connection with the TWE-A/N Transfers, Advance/Newhouse will make a capital contribution to TWE-A/N in order to maintain its 33.3% common equity interest therein. Accordingly, upon consummation of the TWE-A/N Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by Advance/Newhouse and 1.2% indirectly by Time Warner. The TWE-A/N Transfers are expected to close in the first quarter of 1998, subject to customary closing conditions, including any necessary franchise or regulatory approvals. Use of EBITDA The following comparative discussion of the results of operations and financial condition of TWE includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in Time Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of TWE, and, when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS EBITDA and operating income for TWE for the three and nine months ended September 30, 1997 and 1996 are as follows: Three Months Ended September 30, Operating EBITDA Income 1997 1996 1997 1996 (millions) Filmed Entertainment-Warner Bros. $156 $139 $ 75 $ 56 Broadcasting-The WB Network (21) (27) (21) (27) Cable Networks-HBO 107 91 102 86 Cable 454 390 179 156 Total $696 $593 $335 $271 Nine Months Ended September 30, Operating EBITDA Income 1997 1996 1997 1996 Filmed Entertainment-Warner Bros. $446 $410 $223 $205 Broadcasting-The WB Network (59) (63) (60) (63) Cable Networks-HBO 306 259 291 245 Cable 1,304 1,134 530 449 Total $1,997 $1,740 $984 $836 Three Months Ended September 30, 1997 Compared to Three Months Ended September 30, 1996 TWE had revenues of $2.855 billion and net income of $81 million for the three months ended September 30, 1997, compared to revenues of $2.718 billion and net income of $45 million for the three months ended September 30, 1996. As discussed more fully below, TWE's net income increased in 1997 as compared to 1996 principally due to an overall increase in operating income generated by its business segments. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $27 million and $10 million for the three months ended September 30, 1997 and 1996, respectively, have been provided for the operations of TWE's domestic and foreign subsidiary corporations. Filmed Entertainment-Warner Bros. Revenues decreased to $1.397 billion, compared to $1.443 billion in the third quarter of 1996. EBITDA increased to $156 million from $139 million. Depreciation and amortization, including noncash amortization of intangible assets related to the purchase of WCI, amounted to $81 million in 1997 and $83 million in 1996. Operating income increased to $75 million from $56 million. Revenues decreased principally as a result of lower worldwide home video revenues that related to the successful sell-through release of Twister in 1996, offset in part by increases in worldwide theatrical and television distribution revenues. EBITDA and operating income increased principally as a result of the strong performance of worldwide television distribution operations. Broadcasting - The WB Network. Revenues increased to $31 million, compared to $23 million in the third quarter of 1996. Operating results improved to a loss of $21 million from a loss of $27 million. The increase in revenues primarily resulted from the expansion of programming in September 1996 to three nights of primetime scheduling and the expansion of Kids' WB!, the network's animated programming lineup on Saturday mornings and weekdays. The 1997 operating loss improved principally as a result of the revenue gains and the effect of an increase in a limited partner's interest in the network that occurred in early 1997. Due to the start-up nature of this national broadcast operation, losses are expected to continue. Cable Networks-HBO. Revenues increased to $482 million, compared to $426 million in the third quarter of 1996. EBITDA increased to $107 million from $91 million. Depreciation and amortization amounted to $5 million in 1997 and 1996. Operating income increased to $102 million from $86 million. Revenues benefited primarily from an increase in subscriptions. EBITDA and operating income increased principally as a result of the revenue gains. Cable. Revenues increased to $1.060 billion, compared to $955 million in the third quarter of 1996. EBITDA increased to $454 million from $390 million. Depreciation and amortization, including noncash amortization of intangible assets related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $275 million in 1997 and $234 million in 1996. Operating income increased to $179 million from $156 million. Revenues benefited from an increase in basic cable and Primestar-related, direct broadcast satellite subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the FCC and an increase in advertising and pay-per-view revenues. EBITDA and operating income increased as a result of the revenue gains, as well as net gains of approximately $15 million recognized in 1997 in connection with the sale or exchange of certain cable systems. Operating income was further affected by higher depreciation related to capital spending. Interest and Other, Net. Interest and other, net, was $145 million in the third quarter of 1997, compared to $147 million in the third quarter of 1996. Interest expense increased to $123 million, compared to $117 million in 1996. There was other expense, net, of $22 million in the third quarter of 1997, compared to $30 million in the third quarter of 1996, principally due to higher gains on asset sales, which more than offset higher investment-related losses, generally relating to reductions in the carrying value of certain investments, and the dividend requirements on preferred stock of a subsidiary issued in February 1997 to reduce TWE's bank debt. The preferred stock was issued by a newly formed, substantially owned subsidiary of TWE (the "REIT") intended to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September 30, 1996 TWE had revenues of $8.183 billion and net income of $483 million for the nine months ended September 30, 1997, compared to revenues of $7.811 billion and net income of $213 million for the nine months ended September 30, 1996. As discussed more fully below, TWE's net income increased significantly in 1997 as compared to 1996 principally due to an overall increase in operating income generated by its business segments and the inclusion of an approximately $250 million pretax gain on the first quarter of 1997 sale of TWE's 58% interest in E! Entertainment Television, Inc., offset in part by an increase in minority interest expense related to TWE-A/N. 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 $49 million for the nine months ended September 30, 1997 and 1996, respectively, have been provided for the operations of TWE's domestic and foreign subsidiary corporations. Filmed Entertainment-Warner Bros. Revenues decreased to $3.823 billion, compared to $3.929 billion in the first nine months of 1996. EBITDA increased to $446 million from $410 million. Depreciation and amortization, including noncash amortization of intangible assets related to the purchase of WCI, amounted to $223 million in 1997 and $205 million in 1996. Operating income increased to $223 million from $205 million. Revenues decreased principally as a result of lower worldwide theatrical and home video revenues, offset in part by increases in worldwide television distribution revenues. EBITDA and operating income increased principally as a result of the strong performance of worldwide television distribution operations and a gain on the sale of an investment. Operating income was further affected by higher depreciation principally relating to the expansion of theme parks and consumer products operations. Broadcasting - The WB Network. Revenues increased to $84 million, compared to $56 million in the first nine months of 1996. EBITDA improved to a loss of $59 million from a loss of $63 million. Depreciation and amortization amounted to $1 million in 1997. Operating losses decreased to $60 million from $63 million. The increase in revenues primarily resulted from the expansion of programming in September 1996 to three nights of primetime scheduling and the expansion of Kids' WB!, the network's animated programming lineup on Saturday mornings and weekdays. The 1997 operating loss improved principally as a result of the revenue gains and the effect of an increase in a limited partner's interest in the network that occurred in early 1997. Due to the start-up nature of this national broadcast operation, losses are expected to continue. Cable Networks-HBO. Revenues increased to $1.452 billion, compared to $1.301 billion in the first nine months of 1996. EBITDA increased to $306 million from $259 million. Depreciation and amortization amounted to $15 million in 1997 and $14 million in 1996. Operating income increased to $291 million from $245 million. Revenues benefited primarily from an increase in subscriptions. EBITDA and operating income increased principally as a result of the revenue gains. Cable. Revenues increased to $3.146 billion, compared to $2.863 billion in the first nine months of 1996. EBITDA increased to $1.304 billion from $1.134 billion. Depreciation and amortization, including noncash amortization of intangible assets related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $774 million in 1997 and $685 million in 1996. Operating income increased to $530 million from $449 million. Revenues benefited from an increase in basic cable and Primestar-related, direct broadcast satellite subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the FCC and an increase in advertising and pay-per-view revenues. EBITDA and operating income increased as a result of the revenue gains, as well as net gains of $39 million recognized in 1997 in connection with the sale or exchange of certain cable systems. Operating income was further affected by higher depreciation related to capital spending. Interest and Other, Net. Interest and other, net, decreased to $155 million in the first nine months of 1997, compared to $368 million in the first nine months of 1996. Interest expense increased to $358 million, compared to $356 million in 1996. There was other income, net, of $203 million in the first nine months of 1997, compared to other expense, net, of $12 million in the first nine months of 1996, principally due to higher gains on asset sales, including an approximately $250 million pretax gain on the sale of an interest in E! Entertainment Television, Inc. recognized in the first quarter of 1997. This income was offset in part by higher losses from reductions in the carrying value of certain investments and the dividend requirements on preferred stock of the REIT issued in February 1997 to reduce TWE's bank debt. FINANCIAL CONDITION AND LIQUIDITY September 30, 1997 Financial Condition TWE had $6.3 billion of debt, $237 million of preferred stock of a subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital and $6.4 billion of partners' capital at September 30, 1997, compared to $5.7 billion of debt, $1.5 billion of Time Warner General Partners' Senior Capital and $6.6 billion of partners' capital at December 31, 1996. Cash and equivalents were $296 million at September 30, 1997, compared to $216 million at December 31, 1996, resulting in net debt for TWE of $6 billion and $5.5 billion, respectively. Debt Refinancings In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and certain of its consolidated subsidiaries, expects to enter into a new, five-year revolving credit facility (the "1997 Credit Agreement") and terminate its previously existing bank credit facility (the "Old Credit Agreement"). This will enable TWE to reduce its aggregate borrowing availability from $8.3 billion to $7.5 billion, lower interest rates and refinance approximately $2.2 billion of its outstanding borrowings under the Old Credit Agreement. The 1997 Credit Agreement will permit borrowings in an aggregate amount of up to $7.5 billion, with no scheduled reduction in credit availability prior to maturity in November 2002. The borrowers under the 1997 Credit Agreement will be TWE, TWE-A/N, certain wholly owned subsidiaries of Time Warner Inc. and, under certain circumstances, Time Warner Inc. itself. Borrowings by TWE and TWE-A/N under the 1997 Credit Agreement will be limited to $7.5 billion in the case of TWE and $2 billion in the case of TWE-A/N, subject in each case to certain limitations and adjustments, including the aggregate borrowing limit of $7.5 billion. As a result, the amount that can be borrowed by TWE and TWE-A/N will be reduced by borrowings made by Time Warner Inc. and its wholly owned subsidiaries. Such borrowings will bear interest at specific rates for each of the borrowers (generally equal to LIBOR plus a margin initially equal to 40 basis points for TWE and 35 basis points for TWE-A/N) and each borrower will be required to pay a commitment fee on the unused portion of its commitment (initially equal to .15% per annum for TWE and .125% per annum for TWE-A/N), which margin and fee will vary based on the credit rating or financial leverage of TWE and TWE-A/N. Borrowings may be used for general business purposes and unused credit will be available to support commercial paper borrowings. The 1997 Credit Agreement will contain certain covenants generally for each borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and distributions and other restricted cash payments or transfers of assets from the borrowers to their respective partners or affiliates. An extraordinary loss of approximately $23 million is expected to be recognized by TWE in the fourth quarter of 1997 in connection with the write-off of deferred financing costs related to the Old Credit Agreement. Cash Flows During the first nine months of 1997, TWE's cash provided by operations amounted to $918 million and reflected $1.997 billion of EBITDA from the Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, less $394 million of interest payments, $55 million of income taxes, $54 million of corporate expenses, and $576 million related to an increase in working capital requirements, other balance sheet accounts and noncash items. Cash provided by operations of $1.322 billion in the first nine months of 1996 reflected $1.740 billion of business segment EBITDA and $77 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $391 million of interest payments, $52 million of income taxes and $52 million of corporate expenses. Cash used by investing activities was $777 million in the first nine months of 1997, compared to $864 million in the first nine months of 1996, principally as a result of lower capital expenditures. Capital expenditures were $1.117 billion in 1997 and $1.228 billion in 1996. Cash used by financing activities was $61 million in the first nine months of 1997, compared to $458 million in the first nine months of 1996, principally as a result of an increase in debt used to fund cash distributions to Time Warner and the issuance of 250,000 shares of preferred stock of a subsidiary for aggregate net proceeds of $243 million, offset in part by a $647 million increase in distributions paid to Time Warner and the absence of $169 million of collections on the note receivable from U S WEST that was fully paid in 1996. The preferred stock was issued by a newly formed, substantially owned subsidiary intended to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Management believes that TWE's operating cash flow, cash and equivalents and additional borrowing capacity are sufficient to fund its capital and liquidity needs for the foreseeable future. Cable Capital Spending Since the beginning of 1994, Time Warner Cable has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services, which it believes will position the business for sustained, long-term growth. Capital spending by TWE's Cable division amounted to $1.013 billion in the nine months ended September 30, 1997, compared to $936 million in the nine months ended September 30, 1996. For the full year of 1997, cable capital spending is expected to be relatively comparable to 1996 levels, with approximately $400 million budgeted for the remainder of 1997. Capital spending includes over $100 million in each year relating to Primestar, which is expected to be eliminated in 1998 upon the consummation of the Primestar Transactions. Other capital spending by TWE's Cable division is expected to continue to be funded by cable operating cash flow. In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996 and consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable has agreed with the FCC to invest a total of $4 billion in capital costs in connection with the upgrade of its cable infrastructure, which is expected to be substantially completed over a five-year period ending December 31, 2000. The agreement with the FCC covers all of the cable operations of Time Warner Cable, including the owned or managed cable television systems of TWE, the TWE-Advance/Newhouse Partnership and Time Warner. Management expects to continue to finance such level of investment through the growth in cable operating cash flow derived from increases in subscribers and cable rates, bank credit agreement borrowings and the development of new revenue streams from expanded programming options, high speed data transmission and other services. Warner Bros. Backlog Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition, amounted to $1.875 billion at September 30, 1997, compared to $1.502 billion at December 31, 1996 (including amounts relating to TWE's cable television networks of $239 million and $189 million, respectively, and to Time Warner's cable television networks of $465 million and $274 million, respectively). Because backlog generally relates to contracts for the licensing of theatrical and television product which have already been produced, the recognition of revenue for such completed product is principally only dependent upon the commencement of the availability period for telecast under the terms of the related licensing agreement. Cash licensing fees are collected periodically over the term of the related licensing agreements. Accordingly, the portion of backlog for which cash advances have not already been received has significant off-balance sheet asset value as a source of future funding. The backlog excludes advertising barter contracts, which are also expected to result in the future realization of revenues and cash through the sale of advertising spots received under such contracts. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) September 30, December 31, 1997 1996 (millions) ASSETS Current assets Cash and equivalents $ 296 $ 216 Receivables, including $333 and $383 million due from Time Warner, less allowances of $371 and $373 million 1,673 1,637 Inventories 1,266 1,134 Prepaid expenses 170 159 Total current assets 3,405 3,146 Noncurrent inventories 2,234 2,263 Loan receivable from Time Warner 400 400 Investments 381 351 Property, plant and equipment, net 6,390 5,999 Cable television franchises 2,929 3,054 Goodwill 3,903 3,996 Other assets 703 764 Total assets $20,345 $19,973 LIABILITIES AND PARTNERS' CAPITAL Current liabilities Accounts payable $ 815 $ 935 Participations and programming costs payable 1,217 1,393 Debt due within one year 8 7 Other current liabilities, including $156 and $82 million due to Time Warner 1,683 1,740 Total current liabilities 3,723 4,075 Long-term debt 6,257 5,676 Other long-term liabilities, including $459 and $138 million due to Time Warner 1,499 1,085 Minority interests 1,173 1,020 Preferred stock of subsidiary holding solely a mortgage note of its parent 237 - Time Warner General Partners' Senior Capital 1,096 1,543 Partners' capital Contributed capital 7,537 7,537 Undistributed partnership earnings (deficit) (1,177) (963) Total partners' capital 6,360 6,574 Total liabilities and partners' capital $20,345 $19,973 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (millions) Revenues (a) $2,855 $2,718 $8,183 $7,811 Cost of revenues (a)(b) 1,905 1,855 5,352 5,250 Selling, general and admini- 615 592 1,847 1,725 strative (a)(b) Operating expenses 2,520 2,447 7,199 6,975 Business segment operating income 335 271 984 836 Interest and other, net (a) (145) (147) (155) (368) Minority interest (64) (52) (228) (154) Corporate services (a) (18) (17) (54) (52) Income before income taxes 108 55 547 262 Income taxes (27) (10) (64) (49) Net income $ 81 $ 45 $ 483 $ 213 _______________ (a) Includes the following income (expenses) resulting from transactions with the partners of TWE and other related companies for the three and nine months ended September 30, 1997, respectively, and for the corresponding periods in the prior year: revenues-$103 million and $224 million in 1997, $48 million and $147 million in 1996; cost of revenues-$(11) million and $(47) million in 1997, $(30) million and $(68) million in 1996; selling, general and administrative-$20 million and $60 million in 1997, $(24) million and $(33) million in 1996; interest and other, net-$8 million and $25 million in 1997, $6 million and $22 million in 1996; and corporate services-$(18) million and $(54) million in 1997, $(17) million and $(52) million in 1996. (b) Includes depreciation and amortization expense of: $361 $322 $1,013 $ 904 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1997 1996 (millions) OPERATIONS Net income $ 483 $ 213 Adjustments for noncash and nonoperating items: Depreciation and amortization 1,013 904 Changes in operating assets and liabilities (578) 205 Cash provided by operations 918 1,322 INVESTING ACTIVITIES Investments and acquisitions (104) (86) Capital expenditures (1,117) (1,228) Investment proceeds 444 450 Cash used by investing activities (777) (864) FINANCING ACTIVITIES Borrowings 905 190 Debt repayments (323) (697) Issuance of preferred stock of subsidiary 243 - Capital distributions (809) (162) Collections on note receivable from U S WEST - 169 Other (77) 42 Cash used by financing activities (61) (458) INCREASE IN CASH AND EQUIVALENTS 80 - CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 216 209 CASH AND EQUIVALENTS AT END OF PERIOD $296 $209 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), classifies its businesses into three fundamental areas: Entertainment, consisting principally of interests in filmed entertainment, television production and television broadcasting; Cable Networks, consisting principally of interests in cable television programming; and Cable, consisting principally of interests in cable television systems. Each of the business interests within Entertainment, Cable Networks and Cable is important to TWE's objective of increasing partner value through the creation, extension and distribution of recognizable brands and copyrights throughout the world. Such brands and copyrights include (1) the unique and extensive film, television and animation libraries of Warner Bros. and trademarks such as the Looney Tunes characters and Batman, (2) The WB Network, a national broadcasting network launched in 1995 as an extension of the Warner Bros. brand and as an additional distribution outlet for Warner Bros.' collection of children's cartoons and television programming, (3) HBO and Cinemax, the leading pay television services and (4) Time Warner Cable, currently the second largest operator of cable television systems in the U.S. The operating results of TWE's various business interests are presented herein as an indication of financial performance (Note 8). Except for start-up losses incurred in connection with The WB Network, TWE's principal business interests generate significant operating income and cash flow from operations. The cash flow from operations generated by such business interests is considerably greater than their operating income due to significant amounts of noncash amortization of intangible assets recognized principally in Time Warner Companies, Inc.'s ("Time Warner")* $14 billion acquisition of Warner Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority interest in American Television and Communications Corporation ("ATC") in 1992, a portion of ______________________ * On October 10, 1996, Time Warner Inc. acquired the remaining 80% interest in Turner Broadcasting System, Inc. ("TBS") that it did not already own. As a result of this transaction, a new parent company with the name "Time Warner Inc." replaced the old parent company of the same name (now known as Time Warner Companies, Inc., "TW Companies"), and TW Companies and TBS became separate, wholly owned subsidiaries of the new parent company. Unless the context indicates otherwise, references herein to "Time Warner" refer to TW Companies. which cost was allocated to TWE upon the capitalization of the partnership. Noncash amortization of intangible assets recorded by TWE's businesses amounted to $109 million and $115 million in the three months ended September 30, 1997 and 1996, respectively, and $321 million and $326 million for the nine months ended September 30, 1997 and 1996, respectively. Time Warner and certain of its wholly owned subsidiaries collectively own general and limited partnership interests in TWE consisting of 74.49% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital"), and 100% of the senior priority capital ("Senior Capital") and junior priority capital ("Series B Capital"). The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST"). Certain of Time Warner's subsidiaries are the general partners of TWE ("Time Warner General Partners"). Basis of Presentation The accompanying financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of TWE for the year ended December 31, 1996. Certain reclassifications have been made to the prior year's financial statements to conform to the 1997 presentation. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" ("FAS 130"), effective for fiscal years beginning after December 15, 1997. The new rules establish standards for the reporting of comprehensive income and its components in financial statements. Comprehensive income consists of net income and other gains and losses affecting partnership capital that, under generally accepted accounting principles, are excluded from net income, such as unrealized gains and losses on marketable equity investments and foreign currency translation gains and losses. TWE does not expect that the adoption of FAS 130 will have a material effect on its financial statements. In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), effective for fiscal years beginning after December 15, 1997. The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. TWE does not expect that the adoption of FAS 131 will have a material effect on its financial statements. 2. CABLE TRANSACTIONS TCI Cable Transactions In September 1997, Time Warner Inc., TWE, the TWE-Advance/Newhouse Partnership ("TWE-A/N") and TCI Communications, Inc. ("TCI"), a subsidiary of Tele-Communications, Inc., signed a letter of intent to enter into a series of agreements to (i) form two cable television joint ventures in the Houston and south Texas areas that will be managed by TWE and own cable television systems serving an aggregate 1.1 million subscribers, subject to approximately $1.4 billion of debt, (ii) expand an existing joint venture in Kansas City, which is managed by TWE, through the contribution by TCI of a contiguous cable television system serving approximately 95,000 subscribers, subject to approximately $200 million of debt, and (iii) exchange various cable television systems owned by Time Warner and TWE and serving over 500,000 subscribers (of which cable television systems serving approximately 400,000 subscribers are owned by TWE) for other cable television systems of comparable size in an effort to enhance each company's geographic clusters of cable television properties (collectively, the "TCI Cable Transactions"). The joint ventures will be accounted for under the equity method of accounting. As a result of these transactions, TWE expects to reduce debt by approximately $500 million, benefit from the geographic clustering of cable television systems and increase the number of subscribers under its management by approximately 675,000 subscribers. The TCI Cable Transactions are expected to close periodically throughout 1998, subject to the execution of definitive agreements by the parties and customary closing conditions, including all necessary governmental and regulatory approvals. There can be no assurance that such agreements will be completed or that such approvals will be obtained. Primestar Transactions In June 1997, TWE and the Advance/Newhouse Partnership ("Advance/Newhouse") entered into agreements to transfer the direct broad- cast satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and the 31% partnership interest in Primestar Partners, L.P. held by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to a new, publicly traded holding company ("Newco") that will be the parent entity of TCI Satellite Entertainment, Inc. ("TSAT"). Newco will also own the DBS Operations and Primestar partnership interests currently owned by TSAT and other existing partners of Primestar. In exchange for contributing its interests in the Primestar Assets, TWE will receive an approximate 24% equity interest in Newco and realize approximately $200 million of debt reduction, as well as eliminating its share of future funding requirements for these operations that will be separately financed by Newco. In partial consideration for contributing its indirect interest in certain of the Primestar Assets, Advance/Newhouse will receive an approximate 6% equity interest in Newco. In a related transaction, Primestar also entered into an agreement in June 1997, with The News Corporation Limited, MCI Telecommunications Corporation ("MCI") and American Sky Broadcasting LLC ("ASkyB"), pursuant to which Primestar (or, under certain circumstances, Newco) will acquire certain assets relating to the high-power, direct broadcast satellite business of ASkyB. In exchange for such assets, ASkyB will receive non-voting securities of Newco that will be convertible into non-voting common stock of Newco and, accordingly, reduce TWE's equity interest in Newco to approximately 16% on a fully diluted basis. The Primestar transactions are not conditioned on each other and may close independently. They are expected to close in 1998, subject to customary closing conditions, including all necessary governmental and regulatory approvals, including the approval of the Federal Communications Commission. There can be no assurance that such approvals will be obtained. TWE-A/N Transfers In October 1997, TWE, TWE-A/N and a wholly owned subsidiary of Time Warner entered into an agreement, pursuant to which Time Warner will contribute cable television systems serving approximately 650,000 subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange for common and preferred partnership interests therein, as well as certain related transactions (collectively, the "TWE-A/N Transfers"). The cable television systems to be transferred to TWE-A/N are currently owned by TWI Cable Inc., a wholly owned subsidiary of Time Warner, and Paragon Communications ("Paragon"), a partnership owning cable television systems serving approximately 1 million subscribers that is currently owned by subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. In a related transaction, TWE will exchange substantially all of its beneficial interest in Paragon for an equivalent share of Paragon's cable television systems serving approximately 500,000 subscribers. TWE, in turn, will similarly transfer such systems and certain related assets to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in satisfaction of certain pre-existing obligations to TWE-A/N. This will result in subsidiaries of Time Warner owning 99% of the restructured Paragon entity. Accordingly, upon consummation of the TWE-A/N Transfers, TWE will deconsolidate Paragon, which will then be approximately half of its former size. Because this transaction represents an exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an equivalent amount of its cable television systems, it will not have any significant economic impact on Time Warner, TWE or TWE-A/N. In connection with the TWE-A/N Transfers, Advance/Newhouse will make a capital contribution to TWE-A/N in order to maintain its 33.3% common equity interest therein. Accordingly, upon consummation of the TWE-A/N Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by Advance/Newhouse and 1.2% indirectly by Time Warner. The TWE-A/N Transfers are expected to close in the first quarter of 1998, subject to customary closing conditions, including any necessary franchise or regulatory approvals. 3. INVENTORIES TWE's inventories consist of: September 30, 1997 December 31, 1996 Current Noncurrent Current Noncurrent (millions) Film costs: Released, less amortization $ 671 $ 599 $ 544 $ 535 Completed and not released 173 48 168 42 In process and other 45 649 21 704 Library, less amortization - 625 - 664 Programming costs, less amortization 297 313 319 318 Merchandise 80 - 82 - Total $1,266 $2,234 $1,134 $2,263 4. INVESTMENTS In the first quarter of 1997, TWE sold its 58% interest in E! Entertainment Television, Inc. A pretax gain of approximately $250 million relating to this sale has been included in the accompanying consolidated statement of operations. 5. LONG-TERM DEBT In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and certain of its consolidated subsidiaries, expects to enter into a new, five-year revolving credit facility (the "1997 Credit Agreement") and terminate their previously existing bank credit facility (the "Old Credit Agreement"). This will enable TWE to reduce its aggregate borrowing availability from $8.3 billion to $7.5 billion, lower interest rates and refinance approximately $2.2 billion of its outstanding borrowings under the Old Credit Agreement. The 1997 Credit Agreement will permit borrowings in an aggregate amount of up to $7.5 billion, with no scheduled reduction in credit availability prior to maturity in November 2002. The borrowers under the 1997 Credit Agreement will be TWE, TWE-A/N, certain wholly owned subsidiaries of Time Warner Inc. and, under certain circumstances, Time Warner Inc. itself. Borrowings by TWE and TWE-A/N under the 1997 Credit Agreement will be limited to $7.5 billion in the case of TWE and $2 billion in the case of TWE-A/N, subject in each case to certain limitations and adjustments, including the aggregate borrowing limit of $7.5 billion. As a result, the amount that can be borrowed by TWE and TWE-A/N will be reduced by borrowings made by Time Warner Inc. and its wholly owned subsidiaries. Such borrowings will bear interest at specific rates for each of the borrowers (generally equal to LIBOR plus a margin initially equal to 40 basis points for TWE and 35 basis points for TWE-A/N) and each borrower will be required to pay a commitment fee on the unused portion of its commitment (initially equal to .15% per annum for TWE and .125% per annum for TWE-A/N), which margin and fee will vary based on the credit rating or financial leverage of TWE and TWE-A/N. Borrowings may be used for general business purposes and unused credit will be available to support commercial paper borrowings. The 1997 Credit Agreement will contain certain covenants generally for each borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and distributions and other restricted cash payments or transfers of assets from the borrowers to their respective partners or affiliates. An extraordinary loss of approximately $23 million is expected to be recognized by TWE in the fourth quarter of 1997 in connection with the write-off of deferred financing costs related to the Old Credit Agreement. 6. PREFERRED STOCK OF SUBSIDIARY In February 1997, a newly formed, substantially owned subsidiary of TWE (the "REIT") issued 250,000 shares of step-down preferred stock ("Step-Down Preferred Stock"). The REIT is intended to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. TWE used the aggregate net proceeds from the transaction of $243 million to reduce its bank debt. The sole asset of the REIT is a $432 million mortgage note payable of TWE, which has been secured by certain real estate owned by TWE or its affiliates. Each share of Step-Down Preferred Stock is entitled to a liquidation preference of $1,000 and entitles the holder thereof to receive cumulative cash dividends, payable quarterly, at the rate of 14.253% per annum through December 30, 2006 and 1% per annum thereafter, which results in an effective dividend yield of 8.48%. Shares of Step-Down Preferred Stock are redeemable only in the event of certain changes or proposed changes to the tax laws or regulations, such that dividends paid by the REIT or interest paid under the mortgage note would not be fully deductible for federal income tax purposes. TWE has the right to liquidate or dissolve the REIT at any time after December 30, 2006 or, at any time prior thereto, upon the approval of the holders of at least two-thirds of the outstanding shares of Step-Down Preferred Stock. 7. PARTNERS' CAPITAL Changes in partners' capital were as follows: Nine Months Ended September 30, 1997 1996 (millions) Balance at beginning of year $6,574 $6,478 Net income 483 213 Distributions (586) (161) Allocation of income to Time Warner General Partners' Senior Capital (88) (87) Collections on note receivable from U S WEST - 169 Capital contributions - 15 Other (23) 11 Balance at September 30 $6,360 $6,638 TWE is required to make distributions to reimburse the partners for income taxes at statutory rates based on their allocable share of taxable income, and to reimburse Time Warner for its stock options granted to employees of TWE based on the amount by which the market price of Time Warner common stock exceeds the option exercise price on the exercise date or, with respect to options granted prior to the TWE capitalization on September 30, 1992, the greater of the exercise price and the $27.75 market price of Time Warner common stock at the time of the TWE capitalization. TWE accrues a stock option distribution and a corresponding liability with respect to unexercised options when the market price of Time Warner common stock increases during the accounting period, and reverses previously-accrued stock option distributions and the corresponding liability when the market price of Time Warner common stock declines. During the nine months ended September 30, 1997, TWE accrued $232 million of tax-related distributions and $354 million of stock option distributions, based on closing prices of Time Warner common stock of $54.19 at September 30, 1997 and $37.50 at December 31, 1996. During the nine months ended September 30, 1996, TWE accrued $153 million of tax-related distributions and $8 million of stock option distributions as a result of an increase at that time in the market price of Time Warner common stock. In the nine months ended September 30, 1997, TWE paid distributions to the Time Warner General Partners in the amount of $809 million, consisting of $232 million of tax-related distributions, $42 million of stock option related distributions and a $535 million distribution to the Time Warner General Partners relating to their Senior Capital interests. In the nine months ended September 30, 1996, TWE paid the Time Warner General Partners distributions in the amount of $162 million, consisting of $153 million of tax-related distributions and $9 million of stock option related distributions. 8. SEGMENT INFORMATION TWE classifies its businesses into three fundamental areas: Entertainment, consisting principally of interests in filmed entertainment, television production and television broadcasting; Cable Networks, consisting principally of interests in cable television programming; and Cable, consisting principally of interests in cable television systems. Information as to the operations of TWE in different business segments is set forth below. Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (millions) Revenues Filmed Entertainment-Warner Bros. $1,397 $1,443 $3,823 $3,929 Broadcasting-The WB Network 31 23 84 56 Cable Networks-HBO 482 426 1,452 1,301 Cable 1,060 955 3,146 2,863 Intersegment elimination (115) (129) (322) (338) Total $2,855 $2,718 $8,183 $7,811 Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (millions) Operating Income Filmed Entertainment-Warner Bros. $ 75 $ 56 $223 $205 Broadcasting-The WB Network (21) (27) (60) (63) Cable Networks-HBO 102 86 291 245 Cable 179 156 530 449 Total $335 $271 $984 $836 Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (millions) Depreciation of Property, Plant and Equipment Filmed Entertainment-Warner Bros. $ 50 $ 51 $131 $113 Broadcasting-The WB Network - - 1 - Cable Networks-HBO 5 5 15 14 Cable 197 151 545 451 Total $252 $207 $692 $578 Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (millions) Amortization of Intangible Assets (1) Filmed Entertainment-Warner Bros. $ 31 $ 32 $ 92 $ 92 Broadcasting-The WB Network - - - - Cable Networks-HBO - - - - Cable 78 83 229 234 Total $109 $115 $321 $326 (1) 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. 9. COMMITMENTS AND CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of TWE. 10. ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows: Nine Months Ended September 30, 1997 1996 (millions) Interest expense $358 $356 Cash payments made for interest 394 391 Cash payments made for income taxes, net 55 52 Noncash capital distributions 354 8 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Set forth below is a discussion of the results of operations and financial condition of WCI, the only General Partner with independent business operations. WCI conducts substantially all of Time Warner's Music operations, which include copyrighted music from many of the world's leading recording artists that is produced and distributed by a family of established record labels such as Warner Bros. Records, Atlantic Records, Elektra Entertainment and Warner Music International. The financial position and results of operations of ATC and WCCI (the other General Partners of TWE, as described in Note 1 to the accompanying consolidated financial statements) are principally derived from their investments in TWE, Time Warner Companies, Inc. ("TW Companies")*, Turner Broadcasting System, Inc. ("TBS") and their revolving credit agreements with TW Companies. Capitalized terms are as defined and described in the accompanying consolidated financial statements, or elsewhere herein. The following comparative discussion of the results of operations and financial condition of WCI includes, among other factors, an analysis of changes in operating income before depreciation and amortization ("EBITDA") in order to eliminate the effect on WCI's operating performance of significant amounts of amortization of intangible assets recognized in TW Companies' $14 billion acquisition of WCI in 1989 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for WCI, and, when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS Three Months Ended September 30, 1997 Compared to the Three Months Ended September 30, 1996 WCI had revenues of $866 million and net income of $11 million for the three months ended September 30, 1997, compared to revenues of $900 million and net income of $45 million for the three months ended September 30, 1996. EBITDA decreased to $110 million from $133 million. Depreciation and amortization, including amortization related to the purchase of WCI, was $90 million in 1997 and $92 million in 1996. ______________________ * On October 10, 1996, Time Warner Inc. ("Time Warner") acquired the remaining 80% interest in TBS that it did not already own (the "TBS Transaction"). As a result of this transaction, a new parent company with the name "Time Warner Inc." replaced the old parent company of the same name (now known as Time Warner Companies, Inc., "TW Companies"), and TW Companies and TBS became separate, wholly owned subsidiaries of the new parent company. The General Partners' pre-existing ownership interests in TW Companies and TBS were unaffected by the TBS Transaction. Operating income decreased to $20 million from $41 million. Despite WCI having a leading domestic market share for the year (20%), the decline in revenues principally related to continuing softness in the overexpanded U.S. retail marketplace, artist delays affecting the timing of releases of new product and a decline in international recorded music sales. EBITDA and operating income decreased principally as a result of the decline in revenues. Management expects that these domestic and international trends will continue to affect 1997 operating results. WCI's equity in the pretax income of TWE was $64 million for the three months ended September 30, 1997, compared to $32 million for the three months ended September 30, 1996. TWE's pretax income increased in 1997 as compared to results in 1996 principally due to an overall increase in operating income generated by its business segments. Interest and other, net was $15 million in the third quarter of 1997 and 1996. Interest expense decreased to $6 million from $8 million. There was other expense, net, of $9 million in 1997, compared to $7 million in 1996, principally because of a decrease in investment related income that included losses from reductions in the carrying value of certain investments. Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September 30, 1996 WCI had revenues of $2.635 billion and net income of $172 million for the nine months ended September 30, 1997, compared to revenues of $2.759 billion and net income of $98 million for the nine months ended September 30, 1996. EBITDA decreased to $351 million from $427 million. Depreciation and amortization, including amortization related to the purchase of WCI, was $267 million in 1997 and $271 million in 1996. Operating income decreased to $84 million from $156 million. Despite WCI having a leading domestic market share for the year (20%), the decline in revenues principally related to continuing softness in the overexpanded U.S. retail marketplace, artist delays affecting the timing of releases of new product and a decline in international recorded music sales. EBITDA and operating income decreased principally as a result of the decline in revenues, offset in part by certain one-time gains. Management expects that these domestic and international trends will continue to affect 1997 operating results. WCI's equity in the pretax income of TWE was $324 million for the nine months ended September 30, 1997, compared to $155 million for the nine months ended September 30, 1996. TWE's pretax income increased significantly in 1997 as compared to results in 1996 due to an overall increase in operating income generated by its business segments and the inclusion of an approximately $250 million pretax gain on the first quarter of 1997 sale of TWE's 58% interest in E! Entertainment Television, Inc., offset in part by an increase in minority interest expense related to the TWE-Advance/Newhouse Partnership. Interest and other, net was $15 million of income for the nine months ended September 30, 1997, compared to $41 million of expense for the nine months ended September 30, 1996. Interest expense decreased to $17 million from $22 million. There was other income, net, of $32 million in 1997, compared to other expense, net, of $19 million in 1996, principally because of gains on foreign exchange contracts and lower losses from reductions in the carrying value of certain investments, offset in part by costs associated with WCI's receivables securitization program. The relationship between income before income taxes and income tax expense for the General Partners is principally affected by the amortization of goodwill and certain other financial statement expenses that are not deductible for income tax purposes. Income tax expense for each of the General Partners includes all income taxes related to its allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of TWE. FINANCIAL CONDITION AND LIQUIDITY September 30, 1997 WCI had $9.1 billion of equity at September 30, 1997, compared to $9.5 billion of equity at December 31, 1996. Cash and equivalents increased to $164 million at September 30, 1997, compared to $91 million at December 31, 1996. WCI had no long-term debt due to TW Companies under its revolving credit agreement at the end of either period. The total capitalization of ATC and WCCI at September 30, 1997 consisted of equity capital of $2.1 billion and $727 million, respectively, compared to $2.3 billion and $814 million at December 31, 1996, respectively. Although these General Partners have no independent operations, it is expected that additional tax-related and other distribu- tions from TWE, as well as availability under each General Partner's revolving credit agreement with TW Companies, will continue to be sufficient to satisfy the General Partners' obligations with respect to their tax sharing agreements with TW Companies for the foreseeable future. Cash Flows In the first nine months of 1997, WCI's cash provided by operations amounted to $176 million and reflected $351 million of EBITDA, $210 million of distributions from TWE, less $10 million of interest payments, $254 million of income taxes ($151 million of which was paid to TW Companies under a tax sharing agreement) and $121 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items. Cash provided by WCI's operations of $479 million in the first nine months of 1996 reflected $427 million of EBITDA, $96 million of distributions from TWE and $116 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $14 million of interest payments and $146 million of income taxes ($73 million of which was paid to TW Companies under a tax sharing agreement). Cash provided by investing activities was $246 million in the first nine months of 1997, compared to cash used by investing activities of $127 million in 1996, principally as a result of the receipt of $270 million of proceeds representing the return of a portion of WCI's Senior Capital interest in TWE and an increase in investment proceeds. Cash used by financing activities was $349 million in the first nine months of 1997, compared to $293 million in the first nine months of 1996. The use of cash in 1997 principally resulted from the payment of $344 million of dividends to TW Companies. The use of cash in 1996 principally resulted from an increase in amounts due from TW Companies. Management believes that WCI's operating cash flow and borrowing availability under its revolving credit agreement with TW Companies are sufficient to meet its capital and liquidity needs for the foreseeable future without cash distributions from TWE above those permitted by existing agreements. WCI and the other General Partners have no claims on the assets and cash flows of TWE except through the payment of certain reimbursements and cash distributions. During the first nine months of 1997, the General Partners received an aggregate $809 million of distributions from TWE, consisting of $535 million of Senior Capital distributions (representing the return of $455 million of contributed capital and the distribution of $80 million of priority capital return), $232 million of tax-related distributions and $42 million of stock option related distributions. During the first nine months of 1996, the General Partners received an aggregate $162 million of distributions, consisting of $153 million of tax-related distributions and $9 million of stock option related distributions. Of such aggregate distributions in the first nine months of 1997 and 1996, WCI, ATC and WCCI received $480 million and $96 million, respectively; $329 million and $66 million, respectively; and $116 million and $23 million, respectively. TWE GENERAL PARTNERS CONSOLIDATED BALANCE SHEETS September 30, 1997 (Unaudited) WCI ATC WCCI (millions) ASSETS Current assets Cash and equivalents $ 164 $ - $ - Receivables, less allowances of $234 million 801 - - Inventories 144 - - Prepaid expenses 671 - - Total current assets 1,780 - - Investments in and amounts due to and from TWE 2,457 1,856 657 Investments in TW Companies 103 63 21 Other investments 1,668 347 107 Music catalogues, contracts and copyrights 956 - - Goodwill 3,598 - - Other assets, primarily property, plant and equipment 483 - - Total assets $11,045 $2,266 $ 785 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable $ 899 $ - $ - Other current liabilities 437 1 - Total current liabilities 1,336 1 - Long-term liabilities, including $327, $182 and $58 million due to TW Companies 578 182 58 Shareholders' equity Common stock 1 1 1 Preferred stock, $.01 par value, 125 thousand shares authorized, 90 thousand shares outstanding, $90 million liquidation preference - - - Paid-in capital 10,465 2,707 967 Retained earnings (accumulated deficit) 259 (32) (23) 10,725 2,676 945 Due from TW Companies, net (1,008) (257) (99) Reciprocal interest in TW Companies stock (586) (336) (119) Total shareholders' equity 9,131 2,083 727 Total liabilities and shareholders' equity $11,045 $2,266 $ 785 See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED BALANCE SHEETS December 31, 1996 WCI ATC WCCI (millions) ASSETS Current assets Cash and equivalents $ 91 $ - $ - Receivables, less allowances of $362 million 1,013 - - Inventories 165 - - Prepaid expenses 510 - - Total current assets 1,779 - - Investments in and amounts due to and from TWE 2,553 1,980 701 Investments in TW Companies 103 64 21 Other investments 1,688 345 105 Music catalogues, contracts and copyrights 1,035 - - Goodwill 3,704 - - Other assets, primarily property, plant and equipment 537 - - Total assets $11,399 $2,389 $ 827 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable $ 934 $ - $ - Other current liabilities 518 2 - Total current liabilities 1,452 2 - Long-term liabilities, including $148, $55 and $13 million due to Time Warner 406 56 13 Shareholders' equity Common stock 1 1 1 Paid-in capital 10,735 2,893 1,033 Retained earnings (accumulated deficit) 394 27 (3) 11,130 2,921 1,031 Due from TW Companies, net (1,003) (254) (98) Reciprocal interest in Time Warner stock (586) (336) (119) Total shareholders' equity 9,541 2,331 814 Total liabilities and shareholders' equity $11,399 $2,389 $ 827 See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30, 1997 (Unaudited) WCI ATC WCCI (millions) Revenues (a) $866 $ - $ - Cost of revenues (a)(b) 573 - - Selling, general and administra- tive (a)(b) 273 - - Operating expenses 846 - - Business segment operating income 20 - - Equity in pretax income of TWE (a) 64 44 16 Interest and other, net (a) (15) 9 3 Income before income taxes 69 53 19 Income taxes (a) (58) (28) (11) Net income $ 11 $ 25 $ 8 __________________ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TWE or equity investees of the General Partners: Revenues $ 28 $ - $ - Cost of revenues (10) - - Selling, general and administrative 17 - - Equity in pretax income of TWE (7) - - Interest and other, net 15 - - Income taxes (31) (17) (7) (b) Includes depreciation and amortization expense of: $ 90 $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30, 1996 (Unaudited) WCI ATC WCCI (millions) Revenues (a) $900 $ - $ - Cost of revenues (a)(b) 313 - - Selling, general and administrative (a)(b) 546 - - Operating expenses 859 - - Business segment operating income 41 - - Equity in pretax income of TWE (a) 32 23 8 Interest and other, net (a) (15) 7 2 Income before income taxes 58 30 10 Income taxes (a) (13) (14) (6) Net income $ 45 $ 16 $ 4 __________________________ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TWE or equity investees of the General Partners: Revenues $ 45 $ - $ - Cost of revenues (15) - - Selling, general and administrative 12 - - Equity in pretax income of TWE (6) - - Interest and other, net 8 - - Income taxes 5 (10) (5) (b) Includes depreciation and amortization expense of: $ 92 $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Ended September 30, 1997 (Unaudited) WCI ATC WCCI (millions) Revenues (a) $2,635 $ - $ - Cost of revenues (a)(b) 1,724 - - Selling, general and administrative (a)(b) 827 - - Operating expenses 2,551 - - Business segment operating income 84 - - Equity in pretax income of TWE (a) 324 223 79 Interest and other, net (a) 15 20 7 Income before income taxes 423 243 86 Income taxes (a) (251) (116) (41) Net income $ 172 $127 $ 45 _______________________ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TWE or equity investees of the General Partners: Revenues $ 93 $ - $ - Cost of revenues (30) - - Selling, general and administrative 42 - - Equity in pretax income of TWE (12) - - Interest and other, net 49 - - Income taxes (151) (90) (32) (b) Includes depreciation and amortization expense of: $267 $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Ended September 30, 1996 (Unaudited) WCI ATC WCCI (millions) Revenues (a) $2,759 $ - $ - Cost of revenues (a)(b) 1,523 - - Selling, general and administrative (a)(b) 1,080 - - Operating expenses 2,603 - - Business segment operating income 156 - - Equity in pretax income of TWE (a) 155 107 38 Interest and other, net (a) (41) 17 6 Income before income taxes 270 124 44 Income taxes (a) (172) (66) (24) Net income $ 98 $ 58 $ 20 _______________________ (a) Includes the following income (expense) resulting from transactions with Time Warner, TWE or equity investees of the General Partners: Revenues $ 144 $ - $ - Cost of revenues (42) - - Selling, general and administrative 36 - - Equity in pretax income of TWE (13) - - Interest and other, net 36 - - Income taxes (73) (46) (17) (b) Includes depreciation and amortization expense of: $ 271 $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1997 (Unaudited) WCI ATC WCCI (millions) OPERATIONS Net income $ 172 $ 127 $ 45 Adjustments for noncash and nonoperating items: Depreciation and amortization 267 - - Excess of equity in pretax income of TWE over distributions (114) (79) (28) Equity in loss of other investee companies, net of distributions 17 - - Changes in operating assets and liabilities (166) 5 2 Cash provided by operations 176 53 19 INVESTING ACTIVITIES Investments and acquisitions (54) - - Capital expenditures (78) - - Investment proceeds 108 - - Proceeds received from return of Senior Capital contributed to TWE 270 185 65 Cash provided by investing activities 246 185 65 FINANCING ACTIVITIES Dividends (344) (235) (83) Increase in amounts due from TW Companies, net (5) (3) (1) Cash used by financing activities (349) (238) (84) INCREASE IN CASH AND EQUIVALENTS 73 - - CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 91 - - CASH AND EQUIVALENTS AT END OF PERIOD $ 164 $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1996 (Unaudited) WCI ATC WCCI (millions) OPERATIONS Net income $ 98 $ 58 $ 20 Adjustments for noncash and nonoperating items: Depreciation and amortization 271 - - Excess of equity in pretax income of TWE over distributions (59) (41) (15) Equity in income of other investee companies, net of distributions (21) - - Changes in operating assets and liabilities 190 2 2 Cash provided by operations 479 19 7 INVESTING ACTIVITIES Investments and acquisitions (45) - - Capital expenditures (89) - - Investment proceeds 7 - - Cash used by investing activities (127) - - FINANCING ACTIVITIES Dividends (5) (4) (1) Increase in amounts due from TW Companies, net (288) (15) (6) Cash used by financing activities (293) (19) (7) INCREASE IN CASH AND EQUIVALENTS 59 - - CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 106 - - CASH AND EQUIVALENTS AT END OF PERIOD $165 $ - $ - See accompanying notes. TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner Companies, Inc. ("TW Companies")* contributed the assets and liabilities or the rights to the cash flows of substantially all of TW Companies' Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), for general partnership interests, and each general partner guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest based on the relative fair value of the net assets each contributed to TWE (the "General Partner Guarantees", see Note 4). On September 30, 1997, one of the original general partners, Time Warner Operations Inc. ("TWOI"), was merged into another original general partner, Warner Communications Inc. (the "TWOI Merger"). After the TWOI Merger, ten of the thirteen original general partners have now been merged or dissolved into the other three. Warner Communications Inc. ("WCI", a subsidiary of TW Companies), American Television and Communications Corporation ("ATC," a subsidiary of TW Companies) and Warner Cable Communications Inc. ("WCCI," a consolidated subsidiary of WCI) are the three remaining general partners of TWE. They have succeeded to the general partnership interests and have assumed the General Partner Guarantees of the ten former general partners. WCI, ATC, WCCI and, where appropriate, the former general partners are referred to herein as the "General Partners." WCI conducts substantially all of Time Warner's Music operations, which include copyrighted music from many of the world's leading recording artists that is produced and distributed by a family of established record labels such as Warner Bros. Records, Atlantic Records, Elektra Entertainment and Warner Music International. The remaining General Partners do not conduct operations independent of their ownership interests in TWE and certain other investments. Basis of Presentation The accompanying financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the ___________________ * On October 10, 1996, Time Warner Inc. ("Time Warner") acquired the remaining 80% interest in TBS that it did not already own (the "TBS Transaction"). As a result of this transaction, a new parent company with the name "Time Warner Inc." replaced the old parent company of the same name (now known as Time Warner Companies, Inc. "TW Companies"), and TW Companies and TBS became separate, wholly owned subsidiaries of the new parent company. The General Partners' pre-existing ownership interests in TW Companies and TBS were unaffected by the TBS Transaction. periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the General Partners for the year ended December 31, 1996. Certain reclassifications have been made to the 1996 financial statements to conform to the 1997 presentation. In 1997, WCI consummated certain mergers with other entities that are also under the common control of Time Warner, consisting of the TWOI Merger and the acquisition of two wholly owned subsidiaries of TBS that conduct certain of TBS's cable television programming operations in the United Kingdom (the "TBS UK Merger", see Note 2). The TWOI Merger and the TBS UK Merger have each been accounted for as a merger of entities under common control, similar to the pooling-of-interest method of accounting for business combinations. Accordingly, the consolidated financial statements of WCI have been restated to reflect the TWOI Merger for all periods presented herein and to reflect the TBS UK Merger effective as of January 1, 1997. The financial position, results of operations and cash flows of the companies acquired by WCI in the TBS UK Merger for the period from October 10, 1996 (the date on which such companies were acquired by Time Warner) to December 31, 1996 are not material to WCI's consolidated financial statements. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" ("FAS 130"), effective for fiscal years beginning after December 15, 1997. The new rules establish standards for the reporting of comprehensive income and its components in financial statements. Comprehensive income consists of net income and other gains and losses affecting partnership capital that, under generally accepted accounting principles, are excluded from net income, such as unrealized gains and losses on marketable equity investments and foreign currency translation gains and losses. The General Partners do not expect that the adoption of FAS 130 will have a material effect on their respective financial statements. In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), effective for fiscal years beginning after December 15, 1997. The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. The General Partners do not expect that the adoption of FAS 131 will have a material effect on their respective financial statements. 2. TBS UK MERGER In June 1997, WCI acquired TBS's interests in Turner Broadcasting System Europe Limited ("TBSEL") and Turner Entertainment Networks International Limited ("TENIL"), wholly owned subsidiaries of TBS, which conduct certain of TBS's cable television programming operations in the United Kingdom. To acquire TBSEL and TENIL, WCI issued 90 thousand shares of a new series of preferred stock. Each share of preferred stock is entitled to a liquidation preference of $1,000 per share and entitles the holder thereof to receive an $80 annual dividend per share, payable in cash on a quarterly basis. The TBS UK Merger was accounted for as a merger of entities under common control effective as of January 1, 1997, similar to the pooling-of-interest method of accounting for business combinations. The operating results of the companies acquired are not material to WCI's results of operations. 3. TWE The General Partners' investment in and amounts due to or from TWE at September 30, 1997 and December 31, 1996 is as follows (millions): September 30, 1997 WCI ATC WCCI Investment in TWE $2,418 $1,691 $599 Stock option related distributions due from TWE 240 165 58 Other net liabilities due to TWE, principally related to home video distribution (201) - - Total $2,457 $1,856 $657 December 31, 1996 WCI ATC WCCI Investment in TWE $2,786 $1,942 $688 Stock option related distributions due from TWE 55 38 13 Other net liabilities due to TWE, principally related to home video distribution (288) - - Total $2,553 $1,980 $701 TWE was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses previously owned by the General Partners. The General Partners in the aggregate hold, directly or indirectly, 63.27% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital") of TWE and 100% of the senior priority capital ("Senior Capital") and junior priority capital ("Series B Capital") of TWE. TW Companies acquired the 11.22% of the Series A Capital and Residual Capital limited partnership interests previously held by subsidiaries of each of ITOCHU Corporation and Toshiba Corporation in 1995. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST"). The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. No portion of TWE's net income has been allocated to the limited partnership interests. Set forth below is summarized financial information of TWE: TIME WARNER ENTERTAINMENT COMPANY, L.P. Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (million) Operating Statement Information Revenues $2,855 $2,718 $8,183 $7,811 Depreciation and amortization 361 322 1,013 904 Business segment operating income 335 271 984 836 Interest and other, net (1) 145 147 155 368 Minority interest 64 52 228 154 Income before income taxes 108 55 547 262 Net income 81 45 483 213 __________________ (1) Includes a pretax gain of approximately $250 million recognized in the first quarter of 1997 related to the sale of an interest in E! Entertainment Television, Inc. Nine Months Ended September 30, 1997 1996 (millions) Cash Flow Information Cash provided by operations $ 918 $1,322 Capital expenditures (1,117) (1,228) Investments and acquisitions (104) (86) Investment proceeds 444 450 Borrowings 905 190 Debt repayments (323) (697) Issuance of preferred stock of subsidiary 243 - Capital distributions (809) (162) Collections on note receivable from U S WEST - 169 Other financing activities, net (77) 42 Increase in cash and equivalents 80 - September 30, December 31, 1997 1996 (millions) Balance Sheet Information Cash and equivalents $ 296 $ 216 Total current assets 3,405 3,146 Total assets 20,345 19,973 Total current liabilities 3,723 4,075 Long-term debt 6,257 5,676 Minority interests 1,173 1,020 Preferred stock of subsidiary 237 - General Partners' Senior Capital 1,096 1,543 Partners' capital 6,360 6,574 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 September 30, 1997 and December 31, 1996, the General Partners had recorded $405 million and $93 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $54.19 and $37.50, respectively. The General Partners are paid when the options are exercised. The General Partners also receive tax-related distributions from TWE on a current basis. During the nine months ended September 30, 1997, the General Partners received distributions from TWE in the amount of $809 million, consisting of $535 million of Senior Capital distributions (representing the return of $455 million of contributed capital and the distribution of $80 million of priority capital return), $232 million of tax-related distributions and $42 million of stock option related distributions. During the nine months ended September 30, 1996, the General Partners received distributions from TWE in the amount of $162 million, consisting of $153 million of tax-related distributions and $9 million of stock option related distributions. Of such aggregate distributions in 1997 and 1996, WCI received $480 million and $96 million, respectively; ATC received $329 million and $66 million, respectively; and WCCI received $116 million and $23 million, respectively. 4. GENERAL PARTNER GUARANTEES Each General Partner has guaranteed a pro rata portion of approximately $6 billion of TWE's debt and accrued interest at September 30, 1997, 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. There are generally no restrictions on the ability of the General Partner guarantors to transfer material assets, other than TWE assets, to parties who are not guarantors. The portion of TWE debt and accrued interest at September 30, 1997 that was guaranteed by each General Partner, individually and on a consolidated basis for each General Partner and its subsidiaries, is set forth below: Total Guaranteed by Total Guaranteed by Each General Partner Each General Partner and its Subsidiaries General Partner % Amount % Amount (dollars in millions) WCI 44.88 $2,706 59.27 $3,573 ATC 40.73 2,456 40.73 2,456 WCCI, a subsidiary of WCI 14.39 867 14.39 867 Total 100.00 $6,029 * * * Adds to more than 100% and $6.029 billion, respectively, because of the parent-subsidiary relationship between WCI and WCCI. 5. SHAREHOLDERS' EQUITY Changes in shareholders' equity for WCI are as follows: Nine Months Ended September 30, 1997 1996 (millions) Balance at beginning of year $9,541 $9,888 Net income 172 98 Increase in stock option distribution liability to TW Companies (210) (5) Transfers to TW Companies, net (5) (288) Dividends (319) - Unrealized gains (losses) of certain marketable equity investments (10) 65 Other (38) 11 Balance at September 30 $9,131 $9,769 6. CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to the businesses of the General Partners. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of the General Partners. 7. ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows (millions): WCI ATC WCCI Nine Months Ended September 30, 1997 Cash payments made for interest $ 10 $ - $ - Cash payments made for income taxes, net 254 90 32 Tax-related distributions received from TWE 138 94 33 WCI ATC WCCI Nine Months Ended September 30, 1996 Interest expense $ 22 $ 1 $ - Cash payments made for interest 14 - - Cash payments made for income taxes, net 146 46 17 Tax-related distributions received from TWE 91 62 22 Part II. Other Information Item 1. Legal Proceedings. On September 23, 1997, Warner Communications Inc. was served by the Federal Trade Commission with a subpoena duces tecum calling for the production of documents in connection with a nonpublic investigation into whether the prerecorded music distribution companies and others may be engaging or may have engaged in any unfair methods of competition through the adoption, implementation and maintenance of cooperative advertising programs that included minimum advertised price provisions. On September 30, 1997, a purported class action was commenced in the United States District Court for the Central District of California entitled Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution Corporation, Bertelsmann Music Group, Inc. and PolyGram Group Distribution, Inc., No. 97- 7226 (JGD). The plaintiffs purporting to represent a class of direct purchasers of recorded music compact discs (CDs), allege that Warner Elektra Atlantic Corporation, along with five other distributors of CDs, violated the federal and state antitrust laws by engaging in a conspiracy to fix the prices of CDs, and seek an injunction and treble damages. Reference is made to the litigation entitled Samuel D. Moore, et al. v. American Federation of Television and Radio Artists, et al. on page I-37 of TWE's Annual Report on Form 10-K for the year ended December 31, 1996. On August 14, 1997, the Court granted the record company defendants' motion to dismiss all of the newly-added ERISA claims against them, denied the record company defendants' motion to dismiss newly-added state law claims for breach of contract and fraud, and denied the record company defendants motion for summary judgment on the RICO claims against them. The Court also denied a motion by the AFTRA Health and Retirement Fund and the Fund Trustees to dismiss the claims asserted against them. Plaintiffs' motion for class certification is currently pending before the Court. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K. No Current Report on Form 8-K was filed by TWE during the quarter ended September 30, 1997. TIME WARNER ENTERTAINMENT COMPANY, L.P. AND TWE GENERAL PARTNERS SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Time Warner Entertainment Company, L.P. By: Warner Communications Inc., as General Partner By: /s/ Richard J. Bressler Name: Richard J. Bressler Title: Senior Vice President and Chief Financial Officer American Television and Communications Corporation Warner Cable Communications Inc. Warner Communications Inc. By: /s/ Richard J. Bressler Name: Richard J. Bressler Title: Senior Vice President and Chief Financial Officer Dated: November 12, 1997 EXHIBIT INDEX Pursuant to Item 601 of Regulations S-K Exhibit No. Description of Exhibit 10 Amended and Restated Transaction Agreement, dated as of October 27, 1997 among Advance Publications, Inc., Newhouse Broadcasting Corporation, Advance/Newhouse Partnership, TWE, TW Holding Co. and Time Warner Entertainment-Advance/Newhouse Partnership (which is incorporated herein by reference to Exhibit 99(c) to Time Warner's Current Report on Form 8-K dated October 27, 1997). 27 Financial Data Schedule. EX-27 2
5 Exhibit 27 TIME WARNER ENTERTAINMENT COMPANY, L.P. FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the financial statements of Time Warner Entertainment Company, L.P. for the nine months ended September 30, 1997 and is qualified in its entirety by reference to such financial statements. 0000893657 TIME WARNER ENTERTAINMENT 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 296 0 2,044 371 3,500 3,405 10,377 3,987 20,345 3,723 6,257 0 1,096 0 6,360 20,345 8,183 8,183 5,342 5,342 0 0 358 547 64 483 0 0 0 483 0 0
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