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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
COMMISSION FILE NUMBER 1-12259
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TIME WARNER INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3527249
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
75 ROCKEFELLER PLAZA, NEW YORK, N.Y. 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 7, 1997, there were 508,429,638 shares of registrant's Common
Stock and 50,642,172 shares of registrant's Series LMCN-V Common Stock
outstanding. The aggregate market value of the registrant's voting securities
held by non-affiliates of the registrant (based upon the closing price of such
shares on the New York Stock Exchange Composite Tape on March 7, 1997) was
approximately $28 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
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DESCRIPTION OF DOCUMENT PART OF THE FORM 10-K
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Portions of the Definitive Proxy Statement to be used in connection with Part III (Item 10 through Item 13)
the registrant's 1997 Annual Meeting of Stockholders.
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Time Warner Inc.
CORPORATE ORGANIZATION CHART
Included in the Form 10-K for Time Warner Inc. is a chart illustrating Time
Warner Inc.'s corporate organization, providing the following information:
Time Warner Inc. owns 100% of Turner Broadcasting System, Inc. and Time Warner
Companies, Inc.
Turner Broadcasting System, Inc. owns 100% of Cable Networks-TBS and Filmed
Entertainment-TBS .
Time Warner Companies, Inc. owns 100% of Time Inc. (Magazine and Book
Publishing), TWI Cable and the Time Warner General and Limited Partners.(1)
Time Warner General and Limited Partners own 100% of Warner Music Group
(Recorded Music and Music Publishing) and 74.49% of Time Warner Entertainment
Company, L.P. ("TWE"). TWE is also 25.51%-owned by US West Limited Partner.(2)
TWE owns 100% of Time Warner Cable, Cable Networks - HBO and Filmed
Entertainment - Warner Bros., and 66-2/3% of the TWE - A/N Partnership (Cable).
The TWE - A/N Partnership is also 33-1/3% - owned by Advance/Newhouse.
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(1) Time Warner Inc. directly or indirectly owns 100% of the capital stock
of each of the Time Warner General and Limited Partners.
(2) Pro rata priority capital and residual equity interests. In addition,
the Time Warner General Partners own 100% of the priority capital interest
senior and junior to the pro rata priority capital interests. (See Note 3 to the
Company's consolidated statements.)
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PART I
ITEM 1. BUSINESS
Time Warner Inc. (the 'Company'), together with its consolidated and
unconsolidated subsidiaries, is the world's leading media and entertainment
company. The Company classifies its business interests in four fundamental
areas: Entertainment, consisting principally of interests in filmed
entertainment, television production, television broadcasting, theme parks,
recorded music and music publishing; Cable Networks, consisting principally of
interests in cable television programming and sports franchises; Publishing,
consisting principally of interests in magazine publishing, book publishing and
direct marketing; and Cable, consisting principally of interests in cable
television systems. The Company is a holding company that derives its operating
income and cash flow from its investments in its direct subsidiaries Time Warner
Companies, Inc. and Turner Broadcasting System, Inc.
On October 10, 1996, the Company completed the merger of Turner
Broadcasting System, Inc. ('TBS') thereby acquiring the remaining approximately
80% interest in TBS that the Company did not already own (the 'TBS
Transaction'). As a result of the TBS Transaction, a new parent company with the
name 'Time Warner Inc.' replaced the old parent company of the same name and the
old parent company, which changed its name to Time Warner Companies, Inc.
('TWCI'), and TBS became separate, wholly owned subsidiaries of the new parent
company. The assets of TWCI consist primarily of investments in its consolidated
and unconsolidated subsidiaries, including Time Warner Entertainment Company,
L.P. ('TWE'). For convenience, the terms the 'Registrant,' 'Company' and 'Time
Warner' are used in this report to refer to both the old and new parent company
and collectively to the parent company and the subsidiaries through which its
various businesses are conducted, unless the context otherwise requires. See
below for a description of TWE and its relationship to the Company.
TBS MERGER
On October 10, 1996, pursuant to an Amended and Restated Agreement and Plan
of Merger among the Company, TWCI, TBS and certain of the Company's wholly owned
subsidiaries, among other things: (a) each of TWCI and TBS became a wholly owned
subsidiary of the Company through a merger with a subsidiary of the Company, (b)
each outstanding share of common stock of TWCI, other than shares held directly
or indirectly by TWCI, was converted into one share of common stock of the
Company, (c) each outstanding share of preferred stock of TWCI was converted
into one share of a substantially identical series of preferred stock of the
Company, (d) each outstanding share of common stock of TBS, other than shares
held directly or indirectly by TBS or the Company or in the treasury of TBS, was
converted into the right to receive .75 shares of common stock of the Company,
and (e) each outstanding share of preferred stock of TBS, other than shares held
directly or indirectly by TWCI or the Company, was converted into the right to
receive 4.8 shares of common stock of the Company. Additional information on the
TBS Transaction is set forth in Note 2, 'Mergers and Acquisitions,' to the
Company's consolidated financial statements, at pages F-32 through F-34 herein.
TWE
TWE was formed as a Delaware limited partnership in 1992 to own and operate
substantially all of the business of Warner Bros., Home Box Office and the cable
television businesses owned and operated by the Company prior to such date. In
1995, the Company acquired the aggregate 11.22% limited partnership interests in
TWE previously held by subsidiaries of ITOCHU Corporation and Toshiba
Corporation in exchange for 15 million shares of the Company's convertible
preferred stock and $10 million. As a result, the Company, through its wholly
owned subsidiaries, owns general and limited partnership interests in 74.49% 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. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by a subsidiary of US WEST, Inc. ('US West'). The
Company does not consolidate TWE and certain related
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companies (the 'Entertainment Group') for financial reporting purposes. The
subsidiaries of the Company that own general partnership interests in TWE are
collectively referred to herein as the 'Time Warner General Partners.' See also
'Description of Certain Provisions of the TWE Partnership Agreement' for
additional information about the organization of TWE.
On April 1, 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') known as the TWE-A/N
Partnership to which Advance/Newhouse and TWE contributed cable television
systems (or interests therein) serving approximately 4.5 million subscribers, as
well as certain foreign cable investments and programming investments. TWE owns
a two-thirds equity interest in the TWE-A/N Partnership and is the managing
partner. TWE consolidates the partnership and the one-third equity interest
owned by Advance/Newhouse is reflected in TWE's consolidated financial
statements as minority interest.
The Company from time to time has engaged in discussions with US West to
restructure TWE in a manner that would achieve the Company's previously
announced goal of decreasing its interests in the cable television business of
TWE and increasing its interests in the filmed entertainment and cable networks
businesses of TWE. Any TWE restructuring depends, among other things, upon
successful negotiations with US West and other third parties, a renegotiation of
certain credit arrangements and the receipt of consents or approvals from cable
television franchise and other regulatory authorities. Other alternatives remain
available to the Company to advance its goal of reducing its interests in cable
systems, in addition to or in lieu of a TWE restructuring, that would not
require US West's consent but would still require other third party, franchise
and regulatory approvals. There is no assurance that any of these efforts will
succeed.
For financial information about the Company's industry segments and
operations in different geographical areas with respect to each of the years in
the three-year period ended December 31, 1996, see Note 15 'Segment
Information,' to the Company's consolidated financial statements, at pages F-56
through F-60 herein.
ENTERTAINMENT
The Company's Entertainment businesses produce and distribute theatrical
motion pictures, animation, television series and films and other programming
through an expanding variety of media and markets, operate a televison network,
produce and distribute recorded music, license rights to the Company's
characters and operate theme parks and retail stores featuring consumer products
based on the Company's characters and brands.
FILMED ENTERTAINMENT
The Company's filmed entertainment business includes the production,
financing and distribution of feature motion pictures for theatrical release,
television series and mini-series, made-for-television movies, first-run
syndication and cable programming and animated programming for theatrical and
television exhibition, the ownership and operation of The WB national television
broadcast network and the distribution of recorded video product for the home
video market. The Company's filmed entertainment business is principally
conducted by the Warner Bros. divisions of TWE. Warner Bros. is also, among
other things, engaged in product licensing and merchandising, the ownership and
operation of retail stores, movie theaters and worldwide theme parks (including
management of TWE's 49% interest in Six Flags theme parks).
The filmed entertainment business also includes New Line Cinema
Corporation, Castle Rock Entertainment and Hanna-Barbera Productions Inc., as
well as the Turner libraries, which include Hanna-Barbera, MGM, RKO and classic
Warner Bros. films and animated shorts, which became part of the Company as a
result of the TBS Transaction. These businesses are wholly owned by the Company
and are not a part of TWE, although TWE performs certain distribution and other
services for these businesses.
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FILMED ENTERTAINMENT -- WARNER BROS.
WARNER BROS. FEATURE FILMS
Warner Bros. produces feature films both wholly on its own and under
financing arrangements with independent motion picture producers in which Warner
Bros. is generally the principal source of financing for such films. Warner
Bros. also acquires for distribution completed films produced by others.
Acquired distribution rights may be limited to specified territories, specified
media and/or particular periods of time. The terms of Warner Bros.' agreements
with independent producers and other entities are separately negotiated and vary
depending upon the production, the amount and type of financing by Warner Bros.,
the media and territories covered, the distribution term and other factors. In
some cases, producers, directors, actors, writers and others participate in the
proceeds generated by the motion pictures in which they are involved.
Feature films are licensed to exhibitors under contracts that provide for
the length of the engagement, rental fees, which may be either a percentage of
box office receipts, with or without a guarantee of a fixed minimum, or a flat
sum, and other relevant terms. The number of feature films that a particular
theater exhibits depends upon its policy of program changes, the competitive
conditions in its area and the quality and appeal of the feature films available
to it. Warner Bros. competes with all other distributors for playing time in
theaters.
Warner Bros. has entered into distribution servicing agreements with Morgan
Creek Productions Inc. and its affiliates ('Morgan Creek'), pursuant to which,
among other things, Warner Bros. provides domestic distribution services for all
Morgan Creek pictures through June 1998, and certain foreign distribution
services for selected pictures. In 1996, Warner Bros. released, among others,
'Diabolique,' starring Sharon Stone and Kathy Bates, under this arrangement.
Among the releases anticipated for 1997 is 'Incognito,' starring Jason Patrick
and Rod Steiger.
An affiliate of Warner Bros. is a party to an agreement with Monarchy
Enterprises C.V. and its affiliate, Regency Entertainment U.S.A. (collectively
'Monarchy/Regency'), for the distribution of major motion pictures. Arnon
Milchan produces the pictures for Monarchy/Regency with funding provided
primarily by Monarchy/Regency. The Warner Bros. affiliate makes a distribution
advance (which it has the right to recoup, together with its distribution fee
and distribution expenses) equal to a portion of the production costs for the
film. Warner Bros. has acquired all distribution rights in the U.S. and Canada,
and substantially all international theatrical and home video rights to these
motion pictures. The 1996 Monarchy/Regency releases included 'Bogus,' 'Carpool,'
'Sunchaser' and 'Heat,' which opened in December 1995 but had significant
revenue during 1996. Among the Monarchy/Regency productions to be distributed by
Warner Bros. in 1997 is 'L.A. Confidential' with Kevin Spacey and Kim Basinger.
The Monarchy/Regency agreement will expire in 1998 unless extended or renewed.
In addition, an affiliate of Warner Bros. from time to time enters into
single picture co-financing agreements with Monarchy/Regency pursuant to which
Warner Bros. acquires all distribution rights in the U.S. and Canada and
substantially all international theatrical and home video rights. Warner Bros.
and Monarchy/Regency are each responsible for approximately 50% of production
costs. Warner Bros. advances marketing and distribution costs and receives a
distribution fee in connection with the exploitation of the films. Co-financed
pictures released in 1996 included 'Tin Cup' and 'A Time to Kill;' co-financed
pictures to be released in 1997 include 'Murder at 1600' and 'Free Willy III.'
During 1996, Warner Bros. released 29 motion pictures for theatrical
exhibition, of which 16 were produced by others. The following motion pictures
released in 1996 produced substantial domestic gross theatrical receipts:
'Twister,' 'A Time to Kill,' 'Eraser' and 'Space Jam.' During 1996, 60% of film
rentals from Warner Bros. theatrical distribution were generated in the United
States and Canada and 40% in international territories.
During 1997, Warner Bros. expects to release domestically approximately 30
motion pictures, of which 12 are expected to be produced by others, including
two Turner Pictures productions. In addition to those previously mentioned,
motion pictures to be released in 1997 include: 'Batman and Robin,' starring
George Clooney, Arnold Schwarzenegger and Uma Thurman; 'Contact,' starring Jodie
Foster, Matthew McConaughey
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and James Woods; 'Conspiracy Theory,' starring Mel Gibson and Julia Roberts; and
'Father's Day,' starring Robin Williams and Billy Crystal.
TELEVISION
Warner Bros., through its various divisions, is the leading supplier of
television programming in the world. Warner Bros. both develops and produces new
television series, made-for-television movies, mini-series, animation programs
and reality-based entertainment shows, and also distributes television
programming for exhibition on all national networks, syndicated domestic
television, cable syndication and in a growing array of international television
distribution outlets. Including the product owned by TBS, the distribution
library managed by Warner Bros. has grown to more than 6,000 feature films,
28,500 television titles, 10,000 animated titles plus 1,500 classic animated
shorts. The TBS Transaction reunites for distribution the entire Warner Bros.
film and animation library, adding classic MGM and RKO titles and animation from
Hanna-Barbera, Ruby-Spears and MGM. Warner Bros. acts as distributor of the
material owned by subsidiaries of TBS.
Warner Bros.' television programming is produced by Warner Bros.
Television, which produces dramatic and comedy programming, and Telepictures
Productions, which specializes in reality-based and talk/variety series, and
also by Witt-Thomas-Harris Productions, an independent company which has an
exclusive, long-term feature film and television production and distribution
agreement with Warner Bros.
During the 1996 season, Warner Bros. Television successfully launched
several new network primetime series, including 'The Jamie Foxx Show' and
'Suddenly Susan,' starring Brooke Shields. Returning network primetime series
include, among others, the top-rated series 'ER' and 'Friends' (both in their
third season); 'Murphy Brown' (in its ninth season); 'Family Matters' (in its
eighth season); 'Step by Step' (in its sixth season); 'Living Single' and 'Lois
& Clark: The New Adventures of Superman' (each in its fourth season); 'The
Parent 'Hood' and 'The Wayans Bros.' (each in its third season) and 'The Drew
Carey Show' (in its second season).
In addition, Telepictures Productions launched in 1996 the new syndicated
daytime television hit, 'The Rosie O'Donnell Show.' Telepictures also produces
for syndicated television such popular series as 'Jenny Jones' (in its sixth
season) and 'EXTRA' (in its third season).
Warner Bros. Television Animation ('WBTA') is responsible for the creation,
development and production of contemporary animation, as well as for the
creative use and production of classic animated characters from Warner Bros.'
extensive libraries, including 'Looney Tunes.' Following the completion of the
TBS Transaction, the Hanna-Barbera, MGM and Ruby-Spears animation libraries
became managed by WBTA. Animation programming is important to the Company as a
foundation for various product merchandising and marketing revenue streams as
well as being a cost-effective source of initial and on-going programming for
various distribution outlets, including those owned by the Company's
subsidiaries and divisions (including Kids' WB! and Cartoon Network).
WBTA continues to be a leading supplier of original children's animation
programming with such programs as 'Steven Spielberg Presents Animaniacs,' 'Pinky
& The Brain,' 'Tiny Toon Adventures,' 'Taz-Mania,' 'Batman' and 'Superman.'
The rapid expansion of off-network, pay-per-view, pay and basic cable and
satellite broadcasting has increased the distribution opportunities for
already-produced feature films and television programming of all varieties from
the Warner Bros. and Turner Entertainment libraries. A typical sale of a new
program series produced by or for Warner Bros. Television to a major domestic
network grants that network an option to carry such program series for four
years, after which time Warner Bros. Television can enter into a new license
agreement with that or any other network as well as license the
already-broadcast episodes into off-network syndication (broadcast and/or
cable). New series are also licensed concurrently into the international
marketplace and can, after a short period of time, be sold in part or in whole
on home video. Warner Bros.' domestic distribution operation handles the
launching and supporting of first-run series produced directly for syndication,
as well as the sale of movie packages, off-network syndication strips (in which
shows originally
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produced for weekly broadcast on a network are aired five days a week), and
reruns of classic television series for cable and satellite broadcasting.
Television programs currently in off-network syndication include, among
others, 'Murphy Brown,' 'Full House,' 'Martin,' 'The Fresh Prince of Bel Air'
and 'Family Matters.' During 1996, the top-rated series 'ER' was sold to Turner
Network Television for syndication commencing in 1998; 'Friends' was sold for
syndication commencing in 1998 to stations covering over 85% of the country, and
'The Dukes of Hazzard,' which ceased original production in 1985, became a hit
all over again on The Nashville Network. This renewed popularity has, in turn,
spawned a resurgence of popular interest in 'The Dukes of Hazzard' and generated
a two-hour network television movie.
International television distribution opportunities expanded during 1996 as
a result of the increased privatization of terrestrial broadcast in European
markets and the introduction of new technologies and platforms around the world.
Internationally, Warner Bros. licenses more than 35,000 hours of television
programming and feature films originally produced for United States
distribution. This product is dubbed or subtitled in more than 40 languages and
seen in more than 175 countries. In 1996, Warner Bros. completed five-year
multi-faceted distribution agreements with Taurus in Germany and Canal Plus in
France.
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, network, basic cable and syndicated television
exhibition, amounted to $1.5 billion at December 31, 1996, compared to $1.056
billion at December 31, 1995, (including amounts relating to the licensing of
product to Time Warner's and TWE's cable television networks of $463 million as
of December 31, 1996 (which includes the sale to TBS of syndication rights to
'ER' during 1996), and $175 million as of December 31, 1995, respectively). The
backlog excludes advertising barter contracts.
HOME VIDEO
Warner Home Video ('WHV') distributes for home video use pre-recorded
videocassettes and laser optical videodiscs containing film product of Warner
Bros., Home Box Office, WarnerVision Entertainment and TBS, including product
from New Line Cinema and Turner Pictures and, commencing in 1997, Castle Rock
Entertainment. WHV also distributes (or services the distribution of) other
companies' product for which it has acquired home video distribution or
servicing rights.
During 1996, WHV released five titles in the North American rental market
with sales exceeding 450,000 units each: 'Executive Decision,' 'Eraser,' 'A Time
to Kill,' 'Goldeneye' and 'Birdcage.' Internationally, the following titles
generated substantial home video revenue in 1996: 'Goldeneye,' 'Under Siege 2:
Dark Territory,' 'Free Willy 2: The Adventure Home,' 'Assassins,' 'Batman
Forever' and 'The Bridges of Madison County.' Additionally, the Warner Bros.
Family Entertainment label was expanded through affordably-priced North American
video releases which generated combined videocassette sales in excess of 8
million units. Also, WHV released for home sale in North America 'Twister,' 'Ace
Ventura 2: When Nature Calls' and, under the MGM/UA family entertainment label,
'All Dogs Go to Heaven 2,' which generated combined sales of more than 18
million units.
WHV sells its product in the United States and in major international
territories through its own sales force, with warehousing and fulfillment
handled by divisions of Warner Music Group and third parties. In some
international markets, WHV's product is distributed through licensees.
Videocassette and laser optical videodisc product is generally manufactured
under contract with independent duplicators and replicators. During 1996,
approximately 63% of WHV's revenues were generated in North America and
approximately 37% in other territories.
In December 1995, a consortium of nine major consumer electronics
manufacturers and TWE announced agreement on a standard for a high density
digital optical disc technology, named the 'digital versatile disc' or 'DVD,'
that is capable of storing large volumes of digitized information -- enough
storage capacity for two full-length feature films on a double-sided disc. The
DVD technology offers picture quality significantly superior to existing home
video technology as well as premium features such as multiple language
soundtracks. WHV,
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along with several other studios will release a limited number of software
titles in the DVD format commencing in spring 1997 in the United States. DVD
product will be manufactured by Warner Advanced Media Operations, a Warner Music
Group company, and third parties.
CONSUMER PRODUCTS AND WARNER BROS. STUDIO STORES
Warner Bros. Consumer Products licenses rights in both domestic and
international markets to the names, photographs, logos and other representations
of characters and copyrighted material from the films and television series
produced or distributed by Warner Bros., including the superhero characters
owned by DC Comics. During 1996, Warner Bros. Consumer Products incorporated
licensing programs for Hanna-Barbera characters and Turner classic films and
launched a major program in conjunction with the theatrical release of the
motion picture 'Space Jam.'
In 1996, Warner Bros. Studio Stores continued its expansion with the
opening of 16 outlets in the United States and eight in major international
cities in Europe and the Asia Pacific region. Of the total of 161 stores as of
the end of 1996, 149 are wholly owned and 12 are operated outside the United
States by franchisees. Approximately 25 stores are planned to be opened in 1997,
of which 18 will be operated by franchisees.
THEATERS
Warner Bros. International Theatres, through joint ventures, operates 57
multiplex cinema complexes with 464 screens in seven foreign countries,
including 17 complexes in the United Kingdom, four in Germany, 22 in Australia,
eight in Japan, two in Denmark, three in Portugal and one in Spain. Warner Bros.
will expand into two new countries through joint ventures during the remainder
of 1997, Taiwan and Italy, and plans to open one new multiplex cinema each in
Portugal and Spain, two in Germany, three in Italy, six in Japan and six in
Australia.
Time Warner owns a 50% interest in Cinamerica Theatres, L.P., an
unconsolidated joint venture with Viacom Inc. which is not a part of TWE, and
which owns and operates two theater circuits: Mann Theatres and Festival
Cinemas. The joint venture operates approximately 400 screens in 67 theaters,
principally located in California and Colorado.
FILMED ENTERTAINMENT -- TBS
Theatrical films are also produced by Castle Rock Entertainment and New
Line Cinema, which are wholly owned subsidiaries of TBS and are not a part of
TWE. The Company is exploring alternatives for Castle Rock and New Line, which
range from an equity transaction in these studios to a nonrecourse financing
transaction. Following the release of 'Michael,' which was distributed by New
Line during the 1996 holiday season, Turner Pictures ceased active operations in
1996 and final production of its projects is being managed by Warner Bros.
Castle Rock Entertainment produced or acquired 10 films which were released
during 1996, including 'Lone Star,' 'City Hall,' 'The Spitfire Grill,' 'Some
Mother's Son' and 'Hamlet.' In early 1997, Castle Rock's 'Absolute Power,'
starring and directed by Clint Eastwood was released along with 'Waiting for
Guffman' and 'SubUrbia.' It is expected that Castle Rock theatrical product will
become available for distribution by the Company in the domestic home video
market in 1997 and the domestic theatrical market in 1998.
New Line Cinema is a leading independent producer and distributor of
theatrical motion pictures. Through its two film divisions, New Line Cinema and
Fine Line Features, during 1996 it distributed such films as 'Shine,' 'Island of
Dr. Moreau' and 'Long Kiss Goodnight.' Upcoming films include 'One Night,'
directed by Mike Figgis and starring Wesley Snipes and Nastassja Kinski; 'Lost
in Space,' starring William Hurt and Gary Oldman; and 'Love! Valour!
Compassion!,' a film adaptation of the Tony Award-winning Broadway play,
starring Jason Alexander.
Castle Rock Television has produced the critically acclaimed and highly
rated Emmy-winning series 'Seinfeld' for the past eight years. The company also
produces the hit show 'The Single Guy' and 'Boston
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Common.' New Line Television creates original television programming, including
the animated series 'The Mask.' A new series for ABC based on the film 'The
Player' is under development.
TBS's filmed entertainment business also includes the Hanna-Barbera, MGM
and RKO libraries, which include classic films such as 'Gone With the Wind' and
the 'Flintstones,' 'Yogi Bear,' 'Huckleberry Hound,' 'Tom & Jerry' and 'Popeye'
cartoons. Distribution of these libraries is managed by Warner Bros.
THE WB TELEVISION NETWORK
The WB Television Network was launched by Warner Bros. in 1995, the year of
the repeal of the Financial Interest and Syndication Rules ('fin-syn') which had
prohibited networks from owning a financial interest in or participating in the
syndication of shows broadcast by that network. As of January 1997, the end of
the network's second year, The WB reaches approximately 84% of total U.S.
households through its 98 affiliates and its coverage on Tribune Broadcasting's
WGN superstation.
During the 1996/97 broadcast season, The WB's primetime programming
schedule was expanded to a third night, broadcasting on Sunday, Monday and
Wednesday nights. A fourth night of prime time programming is currently
scheduled to be added in the first quarter of 1998, and it is currently planned
that an additional night of programming will be added each year thereafter. The
network's philosophy is to offer family-oriented programming in family viewing
hours (7 p.m.-9 p.m. on Sunday and 8 p.m.-9 p.m. on Monday and Wednesday). Kids'
WB! carries eight half-hour animated series on Saturday mornings and two
half-hour weekday morning strips. In September 1997 Kids' WB! will expand to a
total of 19 hours of programming per week with the addition of a two-hour
weekday afternoon programming block.
In 1996 The WB announced plans to distribute a satellite-delivered program
service for smaller markets in partnership with local broadcasters (The WeB),
creating WB affiliates on local cable systems.
Tribune Broadcasting owns an 11.125% interest in The WB, has recently
exercised an option to acquire an additional 8.375% interest and has another
option exercisable over the next year that could increase Tribune Broadcasting's
ownership to 22.25% of the network. Key employees of The WB hold an 11% interest
in the network.
OTHER ENTERTAINMENT ASSETS
WARNER BROS. THEME PARKS
Through joint ventures with local partners, Warner Bros. has developed
theme parks in select international locations which feature Warner Bros.' movie,
cartoon and superhero characters. In the summer of 1996, Warner Bros. Movie
World, a new regional theme park and studio complex, was opened in the
Rhine/Ruhr area of Germany. The park complex is modeled after Warner Bros. Movie
World in Australia which owns and operates a 400-acre movie-related theme park
(including a movie studio) and water park complex near Brisbane, Australia, as
well as Sea World of Australia.
SIX FLAGS THEME PARKS
TWE has a 49% indirect ownership interest in Six Flags Theme Parks Inc.
('Six Flags'). Six Flags operates 12 theme parks in eight locations making it
the second largest operator of theme parks in the United States and the leading
operator of a national system of regional theme parks. Six Flags' theme parks
include eight major ride-based theme parks, three separate-gated water parks and
one wildlife safari park. Each of the theme parks is located in or near a major
metropolitan area. All of the theme parks operated by Six Flags are owned by Six
Flags, except for Six Flags Over Texas, which is managed by Six Flags pursuant
to a partnership agreement which is scheduled to expire at the end of 1997, Six
Flags Over Georgia, which is managed by Six Flags pursuant to a recently
renegotiated partnership agreement which extends through 2026, and Six Flags
Fiesta Texas which is managed by Six Flags pursuant to a lease arrangement and
which Six Flags has the option to purchase.
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DC COMICS AND MAD MAGAZINE
TWE and Warner Communications Inc. ('WCI'), which is wholly owned by Time
Warner, each owns a 50% interest in DC Comics. DC Comics publishes more than 60
regularly issued comics magazines, among the most popular of which are
'Superman,' 'Batman,' 'Wonder Woman' and 'The Sandman,' as well as story
collections sold as books. DC Comics also derives revenues from motion pictures,
television syndication, product licensing, books for juvenile and adult markets
and foreign publishing. Trademarks in DC Comics' principal characters have been
registered in the United States Patent and Trademark Office and in certain
foreign countries.
Time Warner owns E.C. Publications, Inc., the publisher of MAD, a magazine
featuring articles of humorous and satirical interest, which is regularly
published nine times a year and also in periodic special editions. E.C.
Publications, Inc. is wholly owned and not a part of TWE.
REGULATION AND LEGISLATION
On February 8, 1996, President Clinton signed into law a comprehensive
reform of the nation's communications laws, entitled the Telecommunications
Competition and Deregulation Act of 1996 (the '1996 Telecommunications Act'),
which substantially revises the Communications Act of 1934, as amended. The new
law contains certain provisions relating to violent and sexually explicit
programming. First, the statute requires manufacturers to build television sets
with the capability of blocking certain coded programming (the so-called
'V-chip'). The effective date for any Federal Communications Commission ('FCC')
rule regarding the manufacture of such sets may not occur before March 8, 1998
and may occur at a later date if, after consultation with the manufacturing
industry, the FCC determines that more time is needed. Second, the 1996
Telecommunications Act gave the cable and broadcasting industries one year to
develop voluntary ratings for video programming containing violent, sexually
explicit or other indecent content and to agree voluntarily to transmit signals
containing such ratings. Principal representatives from both industries have
agreed upon a system of parental guidelines, which is now being implemented on a
voluntary basis by broadcast stations and networks, program producers, as well
as cable systems and networks. The 1996 Telecommunications Act authorizes the
FCC to prescribe guidelines of its own, in consultation with an advisory
committee, if the industry guidelines are not acceptable to the FCC. The FCC has
sought public comment on whether the voluntary industry guidelines comply with
the requirements of the 1996 Telecommunications Act.
The 1996 Telecommunications Act eliminated the restrictions on the number
of television stations that one entity may own and increased the national
audience reach limitation by one entity from 25% to 35% of U.S. television
households. As required by the 1996 Telecommunications Act, the FCC has revised
its dual network rule to allow a TV station to affiliate with an entity
maintaining two or more networks, unless certain limited circumstances pertain.
The FCC has also amended its rules to permit common ownership or control of a
broadcast network and cable systems.
The FCC rules currently prohibit an entity from having an attributable
interest in two local TV stations with overlapping specified signal contours. In
an ongoing rulemaking proceeding, the FCC has proposed to relax this rule in
certain circumstances and sought comment on a possible waiver mechanism. In
another rulemaking, the FCC has sought comment on possible changes to its
attribution rules, which define the type of interests in television stations
that are recognizable for purposes of its ownership rules. Under one such
proposal, certain currently nonattributable debt or passive equity interests
would become attributable if held in conjunction with certain other interests in
or relationships with the TV licensee, such as the provision of programming.
Such a proposal, if adopted, could adversely affect the WB's efforts to add new
television stations as affiliates.
Effective on August 30, 1996, the FCC eliminated a regulation limiting the
number of hours of network (including off-network) programs which television
stations affiliated with the networks and located in the top 50 markets could
broadcast during the four-hour primetime period.
Warner Bros. cannot at this time predict the effect on its television
businesses of the passage of the 1996 Telecommunications Act and the changes, or
proposed changes, to the FCC rules discussed above.
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COMPETITION
The production and distribution of theatrical motion pictures, television
and animation product and videocassettes/videodiscs are highly competitive
businesses, as each competes with the other, as well as with other forms of
entertainment and leisure time activities (including video games and on-line
services, including the Internet). Furthermore, there is increased competition
in the television industry evidenced by the increasing number and variety of
broadcast networks, basic cable and pay television services now available. There
is active competition among all production companies in these industries for the
services of producers, directors, actors and others and for the acquisition of
literary properties. With respect to the distribution of television product,
there is significant competition from independent distributors as well as major
studios. The increased number of theatrical films released in the U.S. has
resulted in increased competition for theater space and audience attention.
Revenues for filmed entertainment product depend in part upon general economic
conditions, but the competitive position of a producer or distributor is still
greatly affected by the quality of, and public response to, the entertainment
product it makes available to the marketplace. The television network industry
is extremely competitive as networks seek to attract audience share and
television stations for affiliation and to obtain advertising revenue and
distribution rights to television programming. There is strong competition
throughout the home video industry, both from home video subsidiaries of several
major motion picture studios and from independent companies, as well as from new
film viewing opportunities, such as pay-per-view. Warner Bros. competes in its
character merchandising and other licensing and retail activities with other
licensors and retailers of character, brand and celebrity names. Warner Bros.'
operation of theaters is subject to varying degrees of competition with respect
to obtaining new theater sites and attracting patrons, including competition
from a number of motion picture exhibition delivery systems, such as pay
television and home video systems. Competition within the theme park industry
exists on a regional rather than a national basis. Principal competitive factors
within the theme park industry generally include the uniqueness and perceived
quality of the rides and attractions in a particular park, ease of access to the
park from major metropolitan areas, the atmosphere and cleanliness of a park,
and the quality of its food and entertainment.
MUSIC
In the United States and around the world, the Company, through its wholly
owned Warner Music Group division ('WMG'), is in the business of discovering and
signing musical artists and manufacturing, packaging, distributing and marketing
their recorded music.
WMG also operates Warner/Chappell, a music publishing business with offices
around the world, is a partner in music video channels in Germany and the Far
East, and is a joint venture partner of music and video clubs in North America.
RECORDED MUSIC
In the United States, WMG's recorded music business is principally
conducted through WMG's Warner Bros. Records, Inc., Atlantic Recording
Corporation and Elektra Entertainment Group and their affiliated labels, as well
as through the WEA Inc. companies. The WEA Inc. companies include WEA
Manufacturing Inc., which manufactures compact discs (CDs), audio and
videocassettes, CD-ROMs and, commencing in 1997, digital versatile discs (DVDs),
both for WMG's record labels as well as for outside companies; Ivy Hill
Corporation, which produces printed material and packaging for WMG's recorded
music products as well as for a wide variety of other consumer products; and
Warner-Elektra-Atlantic Corporation ('WEA Corp.'), which markets and distributes
WMG's recorded music products to retailers and wholesale distributors. WMG also
owns a majority interest in Alternative Distribution Alliance ('ADA'), a
so-called 'independent' distribution company specializing in alternative rock
music with a focus on new artists and smaller retailers.
These activities are conducted in more than 70 countries outside the United
States by Warner Music International and its subsidiaries, affiliates and
non-affiliated licensees. In 1996, more than 58% of WMG's recorded music
revenues came from outside the United States.
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DOMESTIC
WMG's record labels in the United States -- Warner Bros., Atlantic and
Elektra -- each with a distinct identity, discover and sign musical artists. The
labels scout and sign talent in many different musical genres, including pop,
rock, jazz, country, hip hop, reggae, folk, blues, gospel and Christian music.
Artists generally receive royalties based upon a percentage of the suggested
retail or wholesale price of their recordings and music videos, and most receive
non-returnable advance payments against such royalties.
WMG is a vertically-integrated music company. After an artist has entered
into a contract with a WMG label, a master recording of the artist's music is
produced and provided to WMG's manufacturing operation, WEA Manufacturing, which
replicates the music primarily on CDs and audio cassettes. Ivy Hill prints
material that is included with CDs and audio cassettes and creates packaging for
them. WEA Corp. and ADA, WMG's distribution arms, sell product and deliver it,
either directly or through sub-distributors and wholesalers, to thousands of
record stores, mass merchants and other retailers throughout the country. At the
same time these activities take place, the label's promotion, marketing,
advertising and publicity departments place advertisements in print and
electronic media, work to get the new album played on the radio, reviewed and
mentioned in publications and the artist booked for appearances on radio and
television. If a music video featuring an artist has been produced, the video is
distributed and promoted to music video television programmers. Label personnel
may also help organize a tour that will further promote a new album.
In addition to newly released records, each of WMG's labels markets and
sells albums from their extensive catalogues of prior releases, in which the
labels generally continue to own the copyright. Rhino Records, in which WMG owns
a 50% equity interest, specializes in compilations and re-issues of previously
released music.
WMG also has entered into joint venture arrangements pursuant to which WMG
companies manufacture, distribute and market (in most cases, domestically and
internationally) recordings owned by the joint ventures. Such agreements
typically provide a WMG label with an equity interest and a profit participation
in the venture, with financing furnished either solely by WMG or by both
parties. Included among these arrangements are the labels Maverick, Rhino, Sub
Pop and Qwest. WMG labels also enter into agreements with unaffiliated third-
party record labels such as Curb and Scotti Brothers to manufacture and
distribute recordings that are marketed under the owner's proprietary label.
Through a joint venture, WMG and Sony Music Entertainment operate The Columbia
House Company, the leading direct marketer of CDs, audio and videocassettes in
the United States and Canada.
Among the artists whose albums resulted in significant sales for WMG record
companies during 1996 were Tracy Chapman, Hootie & the Blowfish, Madonna,
Metallica, Alanis Morissette, LeAnn Rimes, and Keith Sweat, as well as the Space
Jam soundtrack.
INTERNATIONAL
Operating in more than 70 countries around the world, Warner Music
International ('WMI') engages in the same activities as WMG's domestic labels,
discovering and signing artists and manufacturing, packaging, distributing and
marketing their recorded music. The artists signed to WMI and its affiliates
number more than a thousand. In most cases, WMI also markets and distributes the
recordings of those artists for whom WMG's domestic record labels have
international rights. In certain countries, WMI licenses to unaffiliated
third-party record labels the right to distribute its recordings.
WMI operates a plant in Germany that manufactures CDs, laser discs and
vinyl records for its affiliated companies, as well as for outside companies
and, as part of a joint venture, operates a plant in Australia that also
manufactures CDs. WMI operates a video company that coordinates the
international release of music and non-music video titles.
During 1996, WMI strengthened its operations with the establishment of
Warner Music Colombia; PT Warner Music Indonesia, a joint venture with PT Hema
Giatama Records; the creation of Continental East West in Brazil, and the buyout
of a joint venture partner in the London-based label PWL International.
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Among the artists whose albums resulted in significant sales for WMI in
1996 were Phil Collins, Enya, Madonna, Luis Miguel, Alanis Morissette, Simply
Red and R.E.M.
MUSIC PUBLISHING
WMG's music publishing companies own or control the rights to more than one
million musical compositions, including numerous pop music hits, American
standards, folk songs, and motion picture and theatrical compositions. The
catalogue includes works from a diverse range of artists and composers,
including Phil Collins, Comden & Green, George and Ira Gershwin, Michael
Jackson, Leiber & Stoller, Madonna and Cole Porter. Warner/Chappell also
administers the music of several television and motion picture companies,
including Lucasfilm, Ltd., Samuel Goldwyn Productions, Aaron Spelling
Productions and New World.
Warner/Chappell's printed music division markets publications throughout
the world containing the works of such artists as Alabama, The Grateful Dead,
Led Zeppelin, Madonna, Bob Seger and many others. Warner/Chappell also owns
CPP/Belwin, one of the world's largest publishers of printed music.
The principal source of revenues to Warner/Chappell are license fees paid
for the use of its musical compositions on radio, television, in motion pictures
and in other public performances; royalties for the use of its compositions on
CDs, audio cassettes, music videos and in television commercials; and sales of
published sheet music and song books.
COMPETITION
The recorded music business is highly competitive. The revenues of a
company in the recording industry depend upon public acceptance of the company's
recording artists and their music. Although WMG is one of the largest recorded
music companies in the world, its competitive position is dependent on its
continuing ability to attract and develop talent that can achieve a high degree
of public acceptance. Overexpansion of retail outlets for music over the past
several years led to the closing of many such stores during 1996, which has
further increased competition among recorded music companies for sales of
music-related product. Competition also intensified during 1996 as a result of
the start-up of a number of new labels and the continuing growth in the number
of albums released by independent record labels. The recorded music business
continues to be adversely affected by counterfeiting of both audio cassettes and
CDs, piracy, parallel imports and the home taping of music and may in the future
be affected by consumers' ability to download quality sound reproductions from
the Internet. In addition, the recorded music business also meets with
competition from other forms of entertainment, such as television, pre-recorded
videocassettes, the Internet and computer and video games. Competition in the
music publishing business is intense. Although WMG's music publishing business
is the largest on a worldwide basis, it competes with every other music
publishing company in acquiring musical compositions and in having them recorded
and performed.
CABLE NETWORKS
The Company's Cable Networks business consists of domestic and
international basic cable networks and premium pay television programming
services and the operation of sports franchises. TBS's networks (collectively,
the 'Turner Networks') constitute the principal component of the Company's basic
cable networks: Cable News Network ('CNN'); CNN International; Headline News;
CNN Financial News Network ('CNNfn'); WTBS (commonly known as 'TBS
Superstation'); Turner Network Television ('TNT'); Turner Classic Movies,
Cartoon Network and the recently launched sports news network, CNN/SI, all
operated by TBS, which is wholly owned by the Company. Pay television
programming consists of the HBO and Cinemax pay television programming services,
operated by the Home Box Office division of TWE ('Home Box Office'). The Company
also has a partial interest in certain other domestic and international
programming networks.
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GENERAL
The Company, through TBS, is the leading supplier of programming for the
basic cable industry in the United States. The Turner Networks provide a wide
variety of movies and general entertainment, all-news and all-sports news
programming. Through Home Box Office, the Company distributes HBO, the leading
pay-TV service, as well as Cinemax. HBO and Cinemax offer uncut, commercial-free
motion pictures and high-quality documentaries. In addition, HBO offers
exclusive sporting and special entertainment events (such as concerts and comedy
shows), and feature motion pictures and television series produced specifically
by or for HBO.
All of the cable networks (which does not include TBS Superstation)
distribute their programming via cable and other distribution technologies,
including satellite distribution. A separate distribution company, Turner
Network Sales, handles the sales and marketing of all of TBS's domestic basic
cable networks to cable systems in the United States. Both the basic cable
networks and the pay television programming services generally enter into
separate multi-year agreements, known as affiliation agreements, with operators
of cable television systems and direct-to-home satellite ('DTH') distribution
companies in the United States that have agreed to carry such networks. In the
United States, cable operators elect to carry networks and services on an
individual, and not packaged, basis. With the proliferation of new cable
networks and services, competition for cable carriage on the limited available
channel capacity has intensified.
The programming produced for the Company's cable networks is generally
transmitted via C-band or Ku-band communications satellites from an uplinking
terminus and received on receivers located at local operations centers for each
affiliated cable company, or on home satellite dish receivers. Individual dish
owners wishing to receive programming from one of the satellite distribution
companies must purchase a consumer decoder from a local source and arrange for
its activation.
The basic cable networks generate their revenue principally from the sale
of advertising time on the networks and from receipt of monthly per subscriber
fees for each of the services carried, paid by cable system operators, DTH
distribution companies, hotels and other customers (known as affiliates) who
have contracted to receive and distribute such networks. The pay-TV networks,
being commercial free, generate their revenue principally from the monthly fees
paid by affiliates, which are generally charged on a per subscriber basis.
Individual subscribers to HBO and Cinemax are then generally billed monthly by
their local cable company or DTH packager for each service purchased and are
free to cancel a service at any time.
As a result of acquisitions and mergers in the cable television industry in
recent years, the percentage of Turner Networks' and Home Box Office's revenue
from affiliates that are large multiple system cable operators has increased. As
of December 31, 1996, the largest single multiple system cable operator with
which Turner Networks and Home Box Office do business is Tele-Communications,
Inc. ('TCI'), which accounted for approximately 28% of TBS's and 20% of HBO's
and Cinemax's combined subscribers. (TCI, through subsidiaries, owns 50.6
million shares of LMCN-V Class Common Stock of the Company entitling the holder
to 1/100 of a vote per share on certain limited matters, voting together with
all other voting shares. These shares, which were issued in connection with the
TBS Transaction, represent less than 1% of the voting power of the Company's
outstanding common stock.) As of December 31, 1996, Time Warner Cable (see
'Cable') accounted for an additional 18% and 15%, respectively of TBS's and
HBO's and Cinemax's combined subscribers. Turner Networks and Home Box Office
attempt to assure continuity in their relationships with affiliates and have
entered into multi-year contracts with affiliates, whenever possible. Although
TBS and Home Box Office believe the prospects of continued carriage and
marketing of their programming services by the larger affiliates are good, the
loss of one or more of them as distributors of any individual cable network
could have a material adverse effect on their respective businesses.
Advertising revenue on the Company's basic cable networks is a function of
the number of advertising spots sold, the 'CPM,' which is the average cost per
thousand homes charged for such advertising, and market conditions. The CPM
applicable to each network program varies depending upon its ratings (which
measure the numbers of viewers delivered), the type of program and its time
slot, which latter factors influence the demographics of such viewers, which are
important to an advertiser. To evaluate the level of its viewing audience, TBS
utilizes the metered method of audience measurement as provided by A.C. Nielsen.
Cable
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networks which have not achieved widespread cable system distribution are not
able to achieve significant viewing levels and, as a result, do not command a
high CPM for their advertising time.
TURNER NETWORKS
DOMESTIC
TBS Superstation is a 24-hour per day, independent UHF television station
headquartered in Atlanta which is transmitted over-the-air to the Atlanta market
and then retransmitted by third parties via satellite to cable systems in all 50
states, Puerto Rico and the Virgin Islands. The network is seen in approximately
70 million homes and its programming includes movies, sports, original
productions, and classic television comedies.
TBS Superstation relies principally on advertising revenue and receives no
direct compensation for its signal from cable systems, or from Southern
Satellite Systems, Inc. ('SSSI'), the common carrier which delivers its signal
to cable systems. Unlike other cable networks, TBS does not have contracts with
local cable systems which carry TBS Superstation and also does not have a
written agreement with SSSI, which is controlled by TCI.
The Company continues to explore the possibility of converting TBS
Superstation from a broadcast television station to a copyright-paid cable
network. Such a conversion would permit the Company to charge cable systems a
fee for providing the network to customers but involves the successful
completion of negotiations with certain third parties for programming rights,
among other things. If such conversion occurs, the Company has an option,
obtained as part of the TBS Transaction, to require SSSI to be subject to a non-
competition agreement and to provide satellite uplink and distribution services
for the converted cable network.
Other entertainment networks produced and distributed by TBS are TNT, which
as of December 31, 1996 had over 70 million subscribers in the United States;
Cartoon Network, which in early 1997 increased its subscribers in the United
States to 40 million, as reported by A.C. Nielsen, and Turner Classic Movies, a
24-hour commercial free classic film network which presents films from TBS's
MGM, RKO and pre-1950 Warner Bros. film libraries and which has over 10 million
subscribers. Programming for these entertainment networks is derived from the
Company's film, made-for-television and animation libraries as to which TBS or
other divisions of the Company own the copyrights, licensed programming,
including sports, and original productions.
TBS has acquired programming rights from the National Basketball
Association (the 'NBA') to televise a certain number of regular season and
playoff games in each of the 1994-1995 through 1997-1998 seasons for which it
has agreed to pay fees plus a share of the advertising revenues generated in
excess of specified amounts. TBS has also acquired broadcast rights from the
National Football League to televise a certain number of preseason and regular
season Thursday and Sunday night football games in each of the 1994 through 1997
seasons, for which it has agreed to pay fees.
TBS also televises on TBS Superstation a certain number of baseball games
of the Atlanta Braves, a major league baseball club owned by a subsidiary of
TBS, for which rights fee payments are paid to the Major League's central fund
for distribution to all Major League Baseball clubs.
CNN, launched in 1980, is a 24-hour per day cable television news service
and, with CNN International, is distributed to more than 170 million homes in
more than 210 countries and territories. In addition to Headline News which
provides updated half-hour newscasts throughout each day, CNN has expanded its
brand franchise to include CNNfn, launched on December 29, 1995, featuring
business and consumer news; and CNN/SI, launched on December 12, 1996, featuring
sports news and features. The Company has also expanded into a number of special
market networks.
CNN owns and operates 30 permanent news bureaus, of which nine are in the
United States and 21 are located around the world. In addition, a network of
satellite newsgathering trucks, portable satellite uplinks and a network of
approximately 400 domestic and 200 international broadcast television affiliates
on five continents permit CNN to report live from virtually anywhere in the
world. These affiliate arrangements, from which CNN obtains substantial news
coverage, are generally represented by contracts having terms of one or more
years.
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CNN also operates CNN Interactive (at http://www.CNN.com), one of the most
popular sites on the World Wide Web, receiving more than 16 million page views
each week.
INTERNATIONAL
CNN International ('CNNI') is a television news service consisting of
programming produced by CNN and Headline News, as well as original programming,
which is distributed to cable systems, broadcasters, hotels, direct-to-home
satellite viewers and businesses around the world on a network of 16 regional
satellites. TBS has announced that in March 1997 it will launch CNN en Espanol,
a new Spanish language all-news network in Latin America, which TBS expects will
achieve greater penetration into the region.
CNNI derives its revenues primarily from fees charged to cable operators,
fees paid by other recipients of the CNNI signal, including hotels and
international over-the-air television stations, and the sale of advertising
time.
Internationally, TBS also distributes TNT Latin America, Cartoon Network
Latin America, TNT & Cartoon Network Europe and TNT & Cartoon Network Asia, each
of which features a portion of its schedule in more than one language through
dubbing or subtitling. In Europe and Asia, the channels are dual programming
services, featuring animated programming during the day and film product at
night. These networks are now seen in 33 countries in Europe and North Africa,
more than 30 countries in Latin America and the Caribbean, and 20 countries in
the Asia Pacific region. In Latin America, revenues from these services are
derived primarily from subscription fees based on contracts with cable
operators. In Europe and Asia, these services generate advertising revenues in
addition to subscriber fees.
n-tv, a German language news network currently reaching 40 million homes in
Germany and contiguous countries in Europe, primarily via cable systems and
satellite, is 25.52%-owned by TBS and 24.27%-owned by the Home Box Office
division of TWE. Like TBS Superstation, n-tv relies principally on advertising
revenues and receives no compensation for its signal from cable systems.
HOME BOX OFFICE
HBO, operated by the Home Box Office division of TWE, is the nation's most
widely distributed pay television service, which together with its sister
service, Cinemax, had approximately 32.4 million subscribers as of December 31,
1996.
PROGRAMMING
A majority of HBO's programming and a large portion of that on Cinemax
consists of recently released, uncut and uncensored feature motion pictures.
Home Box Office's practice has been to negotiate licensing agreements of varying
duration for such programming with major motion picture studios and independent
producers and distributors. These agreements typically grant pay television
exhibition rights to recently released and certain older films owned by the
particular studio, producer or distributor in exchange for a negotiated fee,
which may be a function of, among other things, HBO and Cinemax subscriber
levels and the films' box office performances.
Home Box Office attempts to ensure access to future movies in a number of
ways. In addition to its exhibition of movies distributed by Warner Bros. and
its regular licensing agreements with numerous distributors, it has entered into
agreements with DreamWorks SKG, Sony Pictures Entertainment, Inc. ('Sony
Pictures'), Paramount Pictures Corporation ('Paramount') and Twentieth Century
Fox Film Corporation ('Fox') pursuant to which Home Box Office has acquired
exclusive and non-exclusive rights to exhibit on its pay television services all
or a substantial portion of the films produced, acquired and/or released by
these entities during the term of each agreement. Home Box Office has also
entered into non-exclusive license agreements with Fox, Paramount, Sony Pictures
and Walt Disney Pictures for older, library films. Home Box Office's exclusive
distribution agreement with Paramount, the parent company of which also owns the
Showtime Network, expires as to new theatrical releases on December 31, 1997 and
is not expected to be renewed.
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HBO has also increasingly defined itself by the exhibition of sporting
events, such as boxing matches and Wimbledon, contemporary and sometimes
controversial, pay television premiere movies, dramatic and comedy specials,
television series, and documentaries that are produced by HBO or for initial
exhibition on HBO. Examples of such shows include 'The Larry Sanders Show,' now
in its fifth season, 'Dennis Miller Live,' in its fourth season and 'Real Sports
with Bryant Gumbel,' in its third season.
OTHER INTERESTS
Time Warner Sports, a division of Home Box Office, operates TVKO and TVKO
Entertainment, entities that distribute pay-per-view prize fights and other
pay-per-view programming.
In 1996, Home Box Office's own production company, HBO Independent
Productions, produced the series 'Martin,' now in its fifth season on the Fox
network, and 'Everybody Loves Raymond' under a 'first look' production agreement
with CBS. Divisions of Home Box Office also produce comedy programming for HBO,
Comedy Central, broadcast networks and syndication. Home Box Office owns a 50%
interest in Citadel Entertainment, L.P., which produces motion pictures and
other programs for broadcast, basic cable and pay television networks, including
HBO. Home Box Office is also co-owner of a U.K. television production company
and a separate joint venture for the foreign distribution of programming
produced by that production company.
When it controls the rights, Home Box Office also distributes theatrical
films and made-for-pay television programming to other cable television or
pay-per-view services, and distributes original programming into domestic
syndication and foreign television.
INTERNATIONAL
HBO Ole, a 37.6%-owned partnership comprised of TWE (acting through its
Home Box Office and Warner Bros. divisions), a Venezuelan company and two other
motion picture companies, operates two Spanish-language pay television motion
picture services, HBO Ole and Cinemax, which are currently distributed in
Central and South America, Mexico and the Caribbean. HBO Brasil, another
partnership in which TWE has an interest, distributes Portuguese-language pay
television movie services in Brazil. TWE also has a 40% interest in HBO Asia, an
English-language, movie-based pay television service which, together with
Cinemax, is currently distributed to various countries in Southeast Asia.
In addition to the Latin American and Asian ventures, Home Box Office has
interests in pay television services in Hungary, the Czech Republic and Poland.
TWE also has a 6.6% interest in TV-1000, a pay television service operating in
Scandinavia, a 20.5% interest in PulsTV, a general interest regional television
broadcaster serving the Berlin and Brandenberg areas of Germany, as well as a
26.5% interest in Hamburg 1, also a regional broadcaster in Germany.
OTHER BASIC CABLE NETWORK INTERESTS
The Company, through TWE, holds a 50% interest in Comedy Central, an
advertiser-supported basic cable television service, which provides comedy
programming. Comedy Central was available in 42 million homes at year-end 1996.
The Company, through TWE and the TWE-A/N Partnership, as of December 31,
1996 held an interest of approximately 58% in E! Entertainment Television, a Los
Angeles-based basic cable channel specializing in promoting the entertainment
industry and serving approximately 43 million subscribers as of year-end 1996.
In December 1996, the other owners of E! triggered contractual buy-sell
provisions, pursuant to which the Company expects to sell its interest in E! in
March 1997.
The Company, through TWE, holds a 33 1/3% interest in Court TV. Court TV,
launched in 1991, is a 24-hour cable network covering actual courtroom trials
from around the United States and abroad with approximately 28 million
subscribers at year-end 1996. During prime time, Court TV features live analyses
of the day's coverage and other programming exploring aspects of the legal
system.
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REGULATION AND LEGISLATION
In April 1993, the FCC released regulations designed to implement
provisions of the 1992 Cable Act, which generally prohibits vertically
integrated programmers, which currently include the program services owned by
TBS and Home Box Office, from offering different prices, terms, or conditions to
competing multichannel video programming distributors unless the differential is
justified by certain permissible factors set forth in the regulations. The rules
also place certain restrictions on the ability of vertically integrated
programmers to enter into exclusive distribution arrangements with cable
operators. Although the Turner Networks, HBO and Cinemax services are currently
provided to subscribers by means of a number of different technologies including
cable, MMDS and DTH, the 1992 Cable Act and the FCC's implementing regulations
could have a material adverse effect on their businesses. See 'Cable Systems
Regulation and Legislation.'
As a result of the TBS Transaction, the Company is subject to a Consent
Decree (the 'FTC Consent Decree') entered into with the Federal Trade Commission
('FTC'), certain provisions of which impose limitations on the Company's
business conduct with respect to the sale of TBS's cable programming services.
Such provisions of the FTC Consent Decree are designed to ensure that the
Company does not disadvantage rival multi-channel programming distributors by
increasing the proportional relationship which existed prior to the consummation
of the TBS Transaction between the carriage terms offered to large distributors
and those offered to smaller distributors in geographic areas also served by
Time Warner Cable. Compliance with the FTC Consent Decree is not expected to
cause an undue financial burden on the Company.
The 1996 Telecommunications Act contains provisions concerning manufacturer
insertion of a 'V-chip' into television sets and industry implementation of a
ratings system for violent, sexually explicit and indecent programming. (See
'Filmed Entertainment -- Regulation and Legislation.') The Company cannot
predict at this time the effect of this legislation on its cable network
business.
COMPETITION
The Turner Networks and Home Box Office's businesses face strong
competition. Each of the cable networks and programming services compete with
other cable television programming services for distribution on the limited
number of channels available on cable operating systems. All of the networks
compete for viewers' attention with all other forms of programming provided to
viewers, including broadcast networks, local over-the-air television stations,
other pay and basic cable television services, home video, pay-per-view services
and on-line activities. In addition, the cable networks face competition for
programming product with those same commercial television networks, independent
stations, and pay and basic cable television services, some of which have
exclusive contracts with motion picture studios and independent motion picture
distributors.
The Turner Networks and Home Box Office's production divisions compete with
other producers and distributors of programs for air time on broadcast networks,
independent commercial television stations, and pay and basic cable television
networks.
OTHER CABLE NETWORK ASSETS
THE ATLANTA BRAVES
Through a wholly owned subsidiary, TBS owns the Atlanta Braves (the
'Braves'), a major league baseball club and 1996 National League champions. As a
member of the National League, the Braves are subject to assessments and dues
and to compliance with the constitution and by-laws of the National League and
rules of the Commissioner of Baseball. Player employment matters are governed
primarily by the terms of a five-year collective bargaining agreement which was
reached in 1996 between Major League Baseball and the Major League Baseball
Players Association.
The Braves derive income from gate receipts, concessions and related sales,
suite sales, local sponsorships, and local media. The Braves share pro rata in
proceeds from national media contracts, expansion fees, and the national
licensing activities of Major League Baseball.
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Commencing with the 1997 Season, the Braves will play their home games at
Turner Field in Atlanta. The stadium was originally constructed for the 1996
Summer Olympic Games and is currently being converted for use as a Major League
Baseball stadium pursuant to an agreement between the Braves and the Atlanta
Committee for the Olympic Games under which the Braves have committed to
contribute $23.4 million towards the cost of such conversion.
THE ATLANTA HAWKS
Through wholly owned subsidiaries, TBS owns the Atlanta Hawks basketball
team (the 'Hawks'), a member of the NBA. The NBA, through its constitution and
by-laws, has established rules governing club operations, including player
relations. The Hawks derive income from gate receipts, concessions and related
sales, suite sales, local sponsorships, and local media. The Hawks share pro
rata in proceeds from national media contracts, expansion fees, and the national
licensing activities of the NBA. The Hawks currently play their home games in
the Omni Coliseum in Atlanta which is operated by another wholly owned
subsidiary of TBS.
TBS has reached a preliminary agreement with the City of Atlanta-Fulton
County Recreation Authority to build a new multi-purpose arena adjacent to CNN
Center to replace the Omni Coliseum. The cost of the arena will be funded
primarily by the proceeds from bonds issued by the Authority. Pursuant to the
preliminary agreement, TBS will contribute $20 million towards the cost of
certain infrastructure improvements on the site and become a partner in a joint
venture that will operate the new arena.
WRESTLING AND HOCKEY
Through World Championship Wrestling, TBS produces wrestling programming
for TBS Superstation and TNT, the domestic syndication markets and pay-per-view
television.
TBS filed an application for a National Hockey League (the 'NHL') franchise
in Atlanta on October 31, 1996. The NHL is expected to make a decision regarding
expansion teams for the league by the end of 1997.
PUBLISHING
The Company's Publishing business is conducted primarily by Time Inc., a
wholly owned subsidiary of the Company. Time Inc. is one of the world's leading
magazine and book publishers and is one of the largest direct-mail marketers in
the world.
MAGAZINES
GENERAL
Time Inc. publishes some of the world's best-known magazines, including
TIME, LIFE, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY and ENTERTAINMENT WEEKLY.
These magazines are generally aimed at a broad consumer market. They cover a
broad range of topics of interest to potential readers, including current
events, prominent personalities, sports, entertainment, business and personal
finance, and lifestyle. Several of the magazines have developed affiliated
publications that provide editorial content directed to particular demographic
groups, such as children, that are outside their core readership.
Each magazine published by Time Inc. has an editorial staff under the
general supervision of a managing editor and a business staff under the
management of a president or publisher. Many of the magazines have numerous
regional and demographic editions which contain the same basic editorial
material but permit advertisers to direct their advertising to specific markets.
Through the use of selective binding and ink-jet technology, magazines can
create special custom editions targeted towards specific groups or readers.
Magazine manufacturing and distribution activities are generally managed by
centralized staffs of Time Inc. Fulfillment activities for Time Inc.'s magazines
are generally administered from a centralized facility in Tampa,
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Florida. Some of the development properties and overseas operations employ
independent fulfillment services and undertake their own manufacturing and
distribution.
Time Inc. has expanded its core magazine businesses through the development
of product extensions. These are generally managed by the individual magazines
and involve specialized editions of the respective magazine aimed at particular
readership groups, publication of editorial content developed by the magazine
staffs through different media, such as hardcover books, television, and new
media, particularly the Internet, and use of the brand name and reach of the
core publications to expand into related products, such as merchandise.
DESCRIPTION OF MAGAZINES
The Company's magazines and their areas of interest are summarized below:
TIME summarizes the news and brings original interpretation and insight to
the week's events, both national and international, and across the spectrum of
politics, business, entertainment, sports, societal trends, health, and other
areas of general consumer interest. TIME has also developed additional
publications aimed at particular reader segments. TIME FOR KIDS is a weekly news
magazine aimed at elementary school students from fourth through sixth grade.
TIME DIGITAL is a quarterly supplement to TIME, which discusses issues regarding
the impact of new electronic technology on society and culture. TIME also has
five weekly English-language editions which circulate outside the United States:
TIME Asia, TIME Atlantic, TIME Canada, TIME Latin America, and TIME South
Pacific.
SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and
is designed to appeal to, spectators and participants in virtually all forms of
recreational and competitive sports. In addition, SPORTS ILLUSTRATED has created
special custom editions, including GOLF PLUS and NFL PLUS, to deliver
advertisers more highly targeted audiences and has also developed new venues for
its editorial content, including television production through SITV, which
produces original programming for sale to the television broadcast networks, and
CNN/SI, a new sports news cable television network that is operated as a joint
venture between SPORTS ILLUSTRATED and CNN.
SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to
children ages eight through fourteen. SPORTS ILLUSTRATED FOR KIDS also publishes
INSIDE STUFF, a magazine produced under license from the National Basketball
Association which is aimed at teen-age basketball fans and published during the
basketball season.
PEOPLE is a weekly magazine which reports on celebrities and other notable
personalities in the fields of politics, sports and entertainment, or who
otherwise come to prominent public attention due to acts of heroism, tragedy or
other aspects of general human interest. PEOPLE is currently testing PEOPLE en
Espanol, a Spanish-language edition aimed primarily at Hispanic readers in the
United States. WHO WEEKLY is an Australian version of PEOPLE.
Time Inc. has other magazines directed at readers' interests in
entertainment and celebrities. ENTERTAINMENT WEEKLY is a weekly magazine which
includes reviews and reports on television, movies, video, music, books, and
multimedia and also offers entertainment-related merchandise directly to
consumers. IN STYLE is a monthly magazine which focuses on celebrity lifestyles
and includes reports and advice on beauty and fashion.
FORTUNE is a biweekly magazine which reports on worldwide economic and
business developments. FORTUNE also provides extensive coverage of the
activities of major or noteworthy corporations and business personalities, and
compiles the annual FORTUNE 500 list of the largest U.S. corporations. MONEY is
a monthly magazine which reports on personal finance and provides information on
topics such as investing, planning for retirement, financing children's college
educations, and other areas of interest to consumers regarding their financial
concerns. The magazine will be celebrating its 25th anniversary in 1997. MONEY
publishes related products, such as the RETIRE WITH MONEY newsletter, which
provides consumer advice on retirement investments.
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LIFE is a monthly magazine which features photographic essays of important
news events, prominent personalities and meaningful vignettes of the lives of
ordinary people. LIFE also publishes hardcover books that include contemporary
and historical photographs of note from its extensive collection.
Time Inc. also publishes several regional magazines including SOUTHERN
LIVING, a monthly regional home, garden, food and travel magazine focused on the
South, published by Southern Progress Corporation ('Southern Progress'), and
SUNSET, The Magazine of Western Living, a monthly focused on lifestyles in the
West, published by Sunset Publishing Corp. COOKING LIGHT is published nine times
a year and promotes health and fitness through active lifestyles and good
nutrition. Southern Progress also publishes SOUTHERN ACCENTS, a bi-monthly
magazine that features architecture, fine homes and gardens, and arts and
travel, and PROGRESSIVE FARMER, a monthly regional farming magazine. In 1996,
Southern Progress acquired the rights to publish WEIGHT WATCHERS magazine, under
license from H.J. Heinz.
Time Publishing Ventures ('TPV') manages Time Inc.'s specialty publishing
titles. Parents and families are addressed by PARENTING, which is published ten
times a year and aimed at parents of children under the age of ten and BABY
TALK, which is published ten times a year and is targeted at expectant and new
mothers. HEALTH is a women's consumer health magazine and HIPPOCRATES is a trade
magazine targeted at primary care physicians. TPV also publishes THIS OLD HOUSE
six times a year, pursuant to a licensing arrangement with public television
station WGBH in Boston based on the popular home renovation television series.
MARTHA STEWART LIVING was sold in February 1997, with the Company retaining a
minor equity interest and certain distribution rights.
Time Inc.'s international operations include both regional versions of some
of its core magazines, including TIME, PEOPLE and FORTUNE, as well as
publications whose editorial content and focus are outside the United States.
Such magazines include PRESIDENT, DANCYU, and ASIAWEEK.
Time Inc. also has management responsibility for most of the American
Express Publishing Corporation's operations, including its core lifestyle
magazines TRAVEL & LEISURE and FOOD & WINE, as well as DEPARTURES magazine,
which is a controlled circulation magazine distributed to holders of the
American Express Platinum Card. Time Inc. receives a fee for managing these
properties.
CIRCULATION
Time Inc.'s magazines are sold primarily by subscription and delivered to
subscribers through the mail. Subscriptions are sold by direct-mail
solicitation, subscription sales agencies, television and telephone solicitation
and insert cards in Time Inc. magazines and other publications. Single copies of
magazines are sold through retail news dealers and other consumer magazine
retailers, such as supermarkets, drug stores, and discount stores, which are
supplied in turn by regional wholesalers.
Circulation efforts form the basis of the advertising rate base, which is
the guaranteed minimum paid circulation level on which advertising rates are
based. The Time Inc. titles with the 10 highest rate bases on January 1, 1997
were:
<TABLE>
<CAPTION>
TITLE RATE BASE
- --------------------------------------------------------------------------------- ---------
<S> <C>
TIME............................................................................. 4,000,000
PEOPLE........................................................................... 3,150,000
SPORTS ILLUSTRATED............................................................... 3,150,000
SOUTHERN LIVING.................................................................. 2,400,000
MONEY............................................................................ 2,000,000
LIFE............................................................................. 1,500,000
SUNSET........................................................................... 1,425,000
COOKING LIGHT.................................................................... 1,300,000
ENTERTAINMENT WEEKLY............................................................. 1,275,000
PARENTING........................................................................ 1,150,000
</TABLE>
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Time Distribution Services ('TDS') is a national distribution company
responsible for the retail sales, distribution, marketing and merchandising of
single copies of periodicals for Time Inc. and other publishers. TDS distributes
periodicals through a magazine wholesaler network which services retail outlets
such as newsstands, supermarkets, convenience and drug stores.
Warner Publisher Services ('WPS') is a major distributor of magazines and
paperback books sold through wholesalers in the United States and Canada, and
internationally. WPS is the sole national distributor for MAD magazine, the
publications of DC Comics, and certain publications and paperback books
published by other publishers, including TEEN, VOGUE, WOMEN'S DAY, and the Dell
Puzzle Books.
ADVERTISING
Advertising carried in Time Inc. magazines is predominantly consumer
advertising. In 1996, Time Inc. magazines accounted for 21% of the total
advertising revenue in consumer magazines, as measured by the Publishers
Information Bureau ('PIB'), which measures consumer advertising placed in
magazines. As a result, Time Inc. had the three leading magazines in terms of
advertising dollars and seven of the top 25:
<TABLE>
<CAPTION>
TITLE PIB RANK
- --------------------------------------------------- --------
<S> <C>
PEOPLE............................................. 1
SPORTS ILLUSTRATED................................. 2
TIME............................................... 3
FORTUNE............................................ 13
ENTERTAINMENT WEEKLY............................... 19
MONEY.............................................. 20
SOUTHERN LIVING.................................... 22
</TABLE>
The five leading categories of advertising carried in Time Inc. magazines
in 1996, according to PIB were, in descending order, domestic automobile
manufacturers, computers, toiletries and cosmetics, food, and publishing, media
and movies.
PAPER AND PRINTING
Lightweight coated paper constitutes a significant component of physical
costs in the production of magazines. Time Inc. has contractual commitments to
ensure an adequate supply of paper, but periodic shortages may occur in the
event of strikes or other unexpected disruptions in the paper industry. During
1996, Time Inc. purchased paper principally from six independent manufacturers,
in each case under contracts that, for the most part, are either fixed-term or
open-ended at prices determined on a market price or formula price basis. Paper
prices in 1996 declined significantly for all major grades of paper for which
Time Inc. has substantial demand. Based upon the current marketplace, however,
Time Inc. does not anticipate that this trend will continue.
Printing and binding for Time Inc. magazines are accomplished primarily by
major domestic and international independent printing concerns in 20 locations.
Magazine printing contracts are either fixed-term or open-ended at fixed prices
with, in some cases, adjustments based on certain criteria.
BOOKS
TRADE PUBLISHING
Time Inc.'s trade publishing operations are conducted primarily by Time
Warner Trade Publishing, through its two major publishing houses, Warner Books
and Little, Brown. In 1996, Time Warner Trade Publishing placed 28 books on The
New York Times best-seller lists.
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WARNER BOOKS
Warner Books primarily publishes hardcover, mass market and trade paperback
books. Among its best selling hardcover books in 1996 were: The Search for
Justice, by Robert L. Shapiro with L. Warren, The Tenth Insight, by James
Redfield, Simple Abundance, by Sarah Ban Breathnach, The Notebook, by Nicholas
Spark, and My Sergei, by Ekaterina Gordeeva with E.M. Swift. Best selling mass
market paperbacks in 1996 included The Rules, by Ellen Fein and Sherrie
Schneider, Morning, Noon & Night, by Sidney Sheldon, and Absolute Power, by
David Baldacci, which was released as a full-length motion picture in early 1997
produced by the Castle Rock division of the Company.
Time Warner Audiobooks develops and markets audio versions of books and
other materials published by both Warner Books and Little, Brown. In addition,
through a joint venture with Little, Brown, Warner Books operates Time Warner
Electronic Publishing, which is engaged in on-line and multimedia publishing.
LITTLE, BROWN
Little, Brown publishes general and children's trade books. Through its
subsidiary, Little, Brown and Company (U.K.) Ltd., it also publishes general
hardcover and mass market paperback books in the United Kingdom. Among the trade
hardcover best-sellers published by Little, Brown in 1996 were: Jack and Jill,
by James Patterson, How Good Do We Have To Be, by Rabbi Harold Kushner, and A
Good Walk Spoiled, by John Feinstein, which was a best-selling mass market
paperback for Little, Brown as well.
Little, Brown handles book distribution for itself, Warner Books and Sunset
Books, as well as other publishers. The marketing of trade books is primarily to
retail stores and wholesalers throughout the United States, Canada and the
United Kingdom. Through their combined United States and United Kingdom
operations, Little, Brown and Warner Books have the ability to acquire
English-language publishing rights for the distribution of hard and soft-cover
books throughout the world.
In 1996, Little, Brown sold its professional publishing division, which
published legal and medical reference books and textbooks and journals sold
primarily to university retail stores and to practitioners.
OXMOOR HOUSE AND SUNSET BOOKS
Oxmoor House, a division of Southern Progress, markets how-to books on a
wide variety of topics including food and crafts, as well as Leisure Arts, a
well-established publisher and distributor of instructional leaflets, continuity
books series and magazines for the needlework and crafts markets. Sunset Books,
the book publishing division of Sunset Publishing Corp., markets books on topics
such as building and decorating, cooking, gardening and landscaping, and travel.
Sunset Books' unique marketing formula includes an extensive distribution
network of home repair and garden centers.
DIRECT MARKETING
TIME LIFE
Time Life is one of the nation's largest direct marketers of continuity
series of books, music and videos. Its products are sold by direct response,
including mail order, television and telephone, through retail, institutional
and learning channels, and by door-to-door independent distributors in some
foreign markets. Time Life products are currently sold in over 25 languages
worldwide and approximately 40% of its revenues are generated outside the United
States. Two major titles recently published by Time Life are the Williams-Sonoma
Kitchen Library Series, and the Medical Advisor: The Complete Guide To
Alternative and Conventional Treatments. In 1996, Time Life acquired Heartland
Music, a direct marketer of music that offers single-shot packages to consumers
in genres not currently addressed by Time Life, such as country and gospel.
Editorial material is created by in-house staffs as well as through outside
book publishers. Time Life Books products are manufactured by several
independent companies. Manufacturing contracts are entered into on a series
rather than a single title basis and are fixed-price with provisions for cost of
labor, material and
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specification adjustments. These contracts, subject to certain limitations, may
be terminated by Time Life or the manufacturer. Time Life's fulfillment
activities, excluding international operations, are conducted from a centralized
facility in Richmond, Virginia.
BOOK-OF-THE-MONTH CLUB
Book-of-the-Month Club currently operates eight book clubs and two
continuity businesses with a combined membership of more than four million. Two
of the clubs, Book-of-the-Month Club and Quality Paperback Book Club, are
general interest clubs, and the remaining clubs specialize in history, cooking
and crafts, business, children's books, women's lifestyle, spiritual, self-help
and health topics, and the books of a particular author. In addition,
multimedia, audio and video products are offered through the clubs. Book-of-the-
Month Club's international businesses operate in over 50 countries worldwide.
Book-of-the-Month Club acquires the rights from publishers to manufacture
and distribute books and then has them printed by independent printing concerns.
Book-of-the-Month Club operates its own fulfillment and warehousing operations
in Mechanicsburg, Pennsylvania.
AMERICAN FAMILY ENTERPRISES
In 1996, Time Inc. restructured its 50%-owned joint venture, American
Family Publishers ('AFP'). As a result of its contributions of Time Inc. Home
Entertainment and Music Sound Exchange into the restructured partnership, Time
Inc. now holds a 50% equity interest in the newly-formed American Family
Enterprises ('AFE'), which is a direct mail magazine subscription, book and
music marketer.
POSTAL RATES
Postal costs represent a significant operating expense for the Company's
publishing activities. During 1996, Time Inc. benefitted from a reduction in its
postal rates as a result of changes in the Postal Rate Commission's system of
classification of mail.
Publishing operations strive to minimize postal expense through the use of
certain cost-saving measures, including the utilization of contract carriers to
transport books and magazines to central postal centers. It has been the
Company's practice in selling books and other products by mail to include a
charge for postage and handling, which is adjusted from time to time to
partially offset any increased postage or handling costs.
COMPETITION
Time Inc.'s magazine operations compete for sales with numerous other
publishers and retailers, as well as other media. The general circulation
magazine industry is highly competitive both within itself and with other
advertising media which compete with the Company's magazines for audience and
advertising revenue.
Time Inc.'s book publishing operations compete for sales with numerous
other publishers and retailers as well as other media. In addition, the
acquisition of publication rights to important book titles is highly
competitive, and Warner Books and Little, Brown compete with numerous other book
publishers. TDS and WPS meet with direct competition from other distributors
operating throughout the United States and Canada in the distribution of
magazines and paperback books.
CABLE
The Company's Cable business consists principally of interests in cable
television systems that are managed by Time Warner Cable, a division of TWE. Of
the approximately 12.3 million subscribers, approximately 2.3 million are in
systems owned by TWI Cable Inc., a wholly owned subsidiary of Time Warner which
is not a part of TWE, and approximately 10 million are in systems owned by TWE,
including approximately 4.5 million subscribers in a joint venture between TWE
and Advance/Newhouse known as the
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TWE-A/N Partnership. Time Warner Cable generally manages all such systems and
receives a fee from Time Warner for management of the systems owned by TWI
Cable.
CABLE TELEVISION SYSTEMS
GENERAL
Time Warner Cable is the second-largest multiple system cable operator in
the United States. As of January 1, 1997, Time Warner Cable's 12.3 million cable
subscribers were geographically concentrated in 34 groupings of more than
100,000 subscribers each. This includes the approximately 2.3 million
subscribers in the cable television systems formerly owned by Summit
Communications Group, Inc., KBLCOM Incorporated and Cablevision Industries
Corporation, which were acquired by Time Warner in 1995 and early 1996 (the 'TWI
Cable Systems'), and the approximately 4.5 million subscribers in the TWE-A/N
Partnership, in which TWE owns a 66 2/3% interest and is paid a fee to manage.
More than 55% of Time Warner Cable's aggregate subscribers are located in five
states: Florida, New York, North Carolina, Ohio and Texas.
Through a network of coaxial and fiber-optic cable, the Company's cable
television system subscribers generally receive more than 50 channels of video
programming, including local broadcast television signals, locally produced or
originated video programming, distant broadcast television signals (such as WTBS
or WGN), advertiser-supported video programming (such as ESPN and CNN) and
premium programming services (such as HBO, Cinemax, Showtime and The Movie
Channel). In most systems, Time Warner Cable also offers movies and other events
on a pay-per-view basis, as well as audio and other entertainment services.
Pursuant to the Admission Agreement under which US West became a limited
partner of TWE, TWE has agreed to use its best efforts to complete upgrades to a
substantial portion of its cable systems to Full Service Network capability by
the end of 1998. Time Warner Cable expects that by the end of 1997, more than
half of its systems will be upgraded. Such upgrades include the broad deployment
of fiber and electronics. As systems are designated for such upgrade and after
any required approvals are obtained, US West and TWE share joint control over
the direction of those systems through a 50-50 management committee.
Time Warner Cable has also agreed with the FCC under the Social Contract
described below to invest a total of $4 billion in capital costs over a
five-year period ending December 31, 2000. The agreement with the FCC covers all
Time Warner Cable systems, including those owned by TWI Cable and the TWE-A/N
Partnership.
Time Warner Cable intends to use a portion of the band-width in its
upgraded systems to support its on-line service for home personal computers,
called Road Runner. Road Runner, developed in partnership with Time Inc.,
delivers Internet access and proprietary local, national and international
content through the cable network to customers' home computers. During 1996, the
service was launched commercially in Time Warner Cable's Akron/Canton, Ohio and
TWE-A/N's Binghamton, NY systems. In early 1997 it was launched in the TWE-A/N
San Diego system. A number of other launches are planned for 1997.
The number of cable subscribers managed by Time Warner Cable has grown
primarily as a result of the acquisition of the TWI Cable Systems, the formation
of the TWE-A/N Partnership, increases in the number of subscribers to its cable
television systems and the development of geographically-clustered systems
through the exchange or purchase of cable television systems. Any future growth
in subscribers is expected to come from the exchange of certain of Time Warner
Cable's unclustered cable television systems for geographically strategic
systems, increased penetration of existing homes passed (through rebuilds and
the introduction of new services), population growth and extensions of existing
systems. (See also, 'Business -- TWE.')
Most of the Company's cable television revenue is derived from monthly fees
paid by subscribers for cable video programming services. Additional revenue is
generated by selling time on cable television systems for commercial
advertisements to local, regional and, in some cases, national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable programming
and local origination programming shown on the Company's cable television
systems. In addition, pay-per-view service is offered in most cable television
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systems, which allows subscribers to choose to view specific movies and events,
such as concerts and sporting events, and to pay on a per-event basis.
TWE also owns a 31.3% equity interest in Primestar, a satellite
distribution company offering packages of programming services to customers
owning DTH receiving dishes. Time Warner Satellite Services generally has the
non-exclusive right to distribute Primestar to customers in Time Warner Cable's
service areas (including TWI Cable and the TWE-A/N Partnership) and also in
certain adjacent areas. Time Warner Satellite Services currently has more than
500,000 Primestar customers.
PROGRAMMING
Time Warner Cable provides video programming to its subscribers pursuant to
multi-year contracts with program suppliers who generally are paid a monthly fee
per subscriber. Many of these contracts contain price escalation provisions;
however, in most cases the cable operator has a right to cancel the contract if
the supplier raises its price beyond agreed limits. The loss of any one supplier
would not have a material adverse effect on Time Warner Cable's operations.
SERVICE AND PROGRAMMING CHARGES
Subscribers to the Company's cable systems generally are charged monthly
fees based on the level of service selected. The monthly prices for various
levels of cable television services (excluding services offered on a per-channel
or per-program basis) range generally from $5 to $25 for residential customers.
Other services offered include equipment rentals, usually for an additional
monthly fee. Systems offering pay-per-view movies generally charge between $4
and $6 per movie, and systems offering pay-per-view events generally charge
between $6 and $50, depending on the event. A one-time installation fee is
generally charged for connecting subscribers to the Company's cable television
system.
Subscribers may purchase premium programming services and, in certain
systems, other per-channel services, for an additional monthly fee for each such
service, with discounts generally available for the purchase of more than one
service.
Commercial subscribers are charged rates for cable programming services
that vary depending on the nature of the contract.
INTERNATIONAL
TWE has a 53.75% interest in a joint venture established to invest in, and
further develop, cable television systems and programming in Hungary. TWE also
owns a 13% indirect interest in Sky Network Television, an over-the-air
subscription service in New Zealand. In France, TWE owns 100% of Cite Reseau and
49.88% of Rhone Vision Cable both established to acquire new franchises, build
and operate cable systems in France. In China, TWE owns 75% of the Beijing-Time
Warner Cable Television Engineering Company and, in Japan has acquired a 15.44%
interest in two cable television companies, Titus Communications and Chofu Cable
Television.
REGULATION AND LEGISLATION
The cable television industry is regulated by the FCC, some states and
substantially all local governments. In addition, various legislative and
regulatory proposals under consideration from time to time by the Congress and
various federal agencies may in the future materially affect the cable
television industry. The following discussion summarizes certain federal, state
and local laws and regulations affecting cable television.
Federal Laws. The Cable Communications Policy Act of 1984 ('1984 Cable
Act'), the 1992 Cable Act and the 1996 Telecommunications Act are the principal
federal statutes governing the cable industry. These statutes regulate the cable
industry, among other things, with respect to: (i) cable system rates for both
basic and certain nonbasic services; (ii) programming access and exclusivity
arrangements; (iii) access to cable channels by unaffiliated programming
services; (iv) leased access terms and conditions; (v) horizontal and vertical
ownership
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of cable systems; (vi) consumer protection and customer service requirements;
(vii) franchise renewals; (viii) television broadcast signal carriage and
retransmission consent; (ix) technical standards; and (x) privacy of customer
information.
Federal Regulations. The FCC, the principal federal regulatory agency with
jurisdiction over cable television, has promulgated regulations implementing the
federal statutes.
Rate Regulation. Under the 1992 Cable Act, nearly all cable television
systems are subject to local rate regulation of basic service pursuant to a
formula established by the FCC and enforced by local franchising authorities.
Additionally, the legislation required the FCC to review rates for nonbasic
service tiers (other than per-channel or per-program services) in response to
complaints filed by franchising authorities and/or cable customers; prohibited
cable television systems from requiring subscribers to purchase service tiers
above basic service in order to purchase premium service if the system is
technically capable of doing so; required the FCC to adopt regulations to
establish, on the basis of actual costs, the price for installation of cable
service and rental of cable equipment; and allowed the FCC to impose
restrictions on the retiering and rearrangement of basic and non-basic services
under certain limited circumstances.
Under the 1996 Telecommunications Act, regulation of nonbasic tier rates is
scheduled to terminate on March 31, 1999. Regulation of both basic and nonbasic
tier cable rates also ceases for any cable system subject to 'effective
competition.' The 1996 Telecommunications Act expands the definition of
'effective competition' to cover situations where a local telephone company or
its affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except DTH.
The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and nonbasic service rates. Alternatively,
cable operators have the opportunity to make cost-of-service showings which, in
some cases, may justify rates above the applicable benchmarks. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and costs. Cost-based adjustments to these capped
rates can also be made in the event a cable operator adds or deletes channels or
significantly upgrades its system. In addition, new product tiers consisting of
services new to the cable system can be created free of rate regulation as long
as certain conditions are met, e.g., services may not be moved from existing
tiers to the new product tier. The rules also require that charges for
cable-related equipment (e.g., converter boxes and remote control devices) and
installation be unbundled from the provision of cable service and based upon
actual costs plus a reasonable profit.
Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or nonbasic cable services and associated equipment, and refunds can
be required.
On November 30, 1995, the FCC adopted a Social Contract with Time Warner
Cable which resolved all of the cable television rate complaints pending against
Time Warner Cable and requires Time Warner Cable to upgrade its domestic cable
television systems. The Social Contract was negotiated in accordance with the
FCC's authority to consider and adopt 'social contracts' as alternatives to
other regulatory approaches applicable to cable television rates. Specifically,
the Social Contract provides for an estimated $4.7 million plus interest in
refunds in the form of bill credits to subscribers of certain designated Time
Warner Cable systems, a commitment by Time Warner Cable to establish a lifeline
basic service priced at 10% below Time Warner Cable's benchmark regulated rates
with an adjustment to the nonbasic tier to recoup the reduced basic service tier
revenue; and a commitment by Time Warner Cable to upgrade its domestic systems
by December 31, 2000. Court appeals filed by the city of Austin, Texas and the
Intercommunity Cable Regulatory Commission (which represents 28 Cincinnati
suburbs served by Time Warner Cable) seeking review of the FCC decision adopting
the Social Contract as well as certain FCC staff decisions implementing the
Social Contract are pending. The appeals contend, among other things, that the
terms of the Social Contract and the process by which it was negotiated and
implemented are contrary to the 1992 Cable Act, and are inconsistent with the
FCC's own rules. These parties also filed a petition with the FCC for
reconsideration of the Social Contract, which is currently pending.
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A purported nationwide class action has been brought in a federal court in
New York alleging that any charges imposed by Time Warner Cable for additional
outlet connections violate the 1992 Cable Act and the FCC's rate regulation
rules to the extent those charges exceed Time Warner Cable's costs. Time Warner
Cable has opposed this claim.
Carriage of Broadcast Television Signals. The 1992 Cable Act allows
commercial television broadcast stations which are 'local' to a cable system to
elect every three years either to require the cable system to carry the station,
subject to certain exceptions, or to negotiate for 'retransmission consent' to
carry the station. Broadcast stations typically seek monetary compensation or
the carriage of additional programming in return for granting retransmission
consent. Local non-commercial television stations are also given mandatory
carriage rights, subject to certain exceptions. Unlike commercial stations,
noncommercial stations are not given the option to require negotiation of
retransmission consent. In addition, cable systems must obtain retransmission
consent for the carriage of all 'distant' commercial broadcast stations, except
for certain 'superstations,' i.e., commercial satellite-delivered independent
stations such as WTBS and WGN. Time Warner Cable has obtained any necessary
retransmission consents from all stations carried, which consents have varying
expiration dates. The next three-year election between mandatory carriage and
retransmission consent for local commercial television stations will occur on
October 1, 1999. The mandatory carriage rule is presently under review by the
United States Supreme Court.
Deletion of Certain Programming. Cable television systems that serve 1,000
or more customers must delete the simultaneous or nonsimultaneous network
programming of a distant station upon the appropriate request of a local
television station holding local exclusive rights to such programming. FCC
regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or 'black out' such programming from other
television stations which are carried by the cable system.
Public and Leased Access Channels. The 1984 Cable Act permits local
franchising authorities to require operators to set aside certain channels for
public, educational and governmental access programming. The 1984 Cable Act
further requires cable television systems with thirty-six or more activated
channels to designate a portion of their channel capacity for commercial leased
access by unaffiliated third parties. The 1992 Cable Act requires leased access
rates to be set according to a formula determined by the FCC.
Ownership. The 1996 Telecommunications Act repealed the 1984 Cable Act's
restrictions on local exchange telephone companies ('LECs') from providing video
programming directly to customers within their local exchange telephone service
areas. With certain limited exceptions, a LEC may not acquire more than a 10%
equity interest in an existing cable system operating within the LEC's service
area. The 1996 Telecommunications Act also authorized LECs and others to operate
'open video systems' without obtaining a local cable franchise, although LECs
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. A number of separate entities have been
certified to operate open video systems in New York City and in other areas
where the Company operates cable systems.
The 1996 Telecommunications Act eliminated the FCC rule prohibiting common
ownership between a cable system and a national broadcast television network,
and the statutory ban covering certain common ownership interests, operation or
control between a television station and cable system within the station's Grade
B signal coverage area. However, the parallel FCC rule against cable/television
station cross-ownership remains in place, subject to review by the FCC within
two years. Finally, the 1992 Cable Act prohibits common ownership, control or
interest in cable television systems and multichannel MDS ('MMDS') facilities or
satellite master antenna television ('SMATV') systems having overlapping service
areas, except in limited circumstances. The 1996 Telecommunications Act exempts
cable systems facing 'effective competition' from the MMDS and SMATV
cross-ownership restrictions.
Pursuant to the 1992 Cable Act, the FCC has adopted rules which, with
certain exceptions, preclude a cable television system from devoting more than
40% of its first 75 activated channels to national video programming services in
which the cable system owner has an attributable interest. The FCC also has set
a limit of 30% of total nationwide cable homes that can be served by any
multiple cable system operator.
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Other FCC Regulations and FTC Consent Decree. Additional FCC regulations
relate to a cable system's carriage of local sports programming; privacy of
customer information; equipment compatibility, franchise transfers; franchise
fees; equal employment opportunity; pole attachments; restrictions on
origination and cablecasting by cable system operators; application of the rules
governing political broadcasts; customer service; technical standards, home
wiring and limitations on advertising contained in nonbroadcast children's
programming. The 1996 Telecommunications Act changes the formula for pole
attachment fees which could result in substantial increases in payments by cable
operators to utilities for pole attachment rights when services other than cable
services are delivered by cable systems.
Under the terms of the FTC Consent Decree entered into in connection with
the consummation of the TBS Transaction, Time Warner Cable is required to carry
on a significant number of its cable systems a 24-hour per day news and
information channel that is not owned, controlled by or affiliated with the
Company.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations.
State and Local Regulation. Because a cable television system uses local
streets and rights-of-way, cable television systems are subject to local
regulation, typically imposed through the franchising process, and certain
states have also adopted cable television legislation and regulations. Cable
franchises are nonexclusive, granted for fixed terms and usually terminable if
the cable operator fails to comply with material provisions. No Time Warner
Cable franchise has been terminated due to breach. Franchises usually call for
the payment of fees (which are limited under the 1984 Cable Act to 5% of the
system's gross revenues from cable service) to the granting authority. The terms
and conditions of cable franchises vary materially from jurisdiction to
jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome.
The 1992 Cable Act prohibits exclusive franchises and allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise. Moreover, franchising authorities are immunized
from monetary damage awards arising from regulation of cable television systems
or decisions made on franchise grants, renewals, transfers and amendments.
The 1996 Telecommunications Act provides that local franchising authorities
may not condition the grant or renewal of a cable franchise on the provision of
telecommunications service or facilities (other than institutional networks) and
clarifies that the calculation of franchise fees is to be based solely on
revenues derived from the provision of cable services, not revenues derived from
telecommunications services.
Renewal of Franchises. The 1984 Cable Act established renewal procedures
and criteria designed to protect incumbent franchisees against arbitrary denials
of renewal. While these formal procedures are not mandatory unless timely
invoked by either the cable operator or the franchising authority, they can
provide substantial protection to incumbent franchisees. The 1992 Cable Act
makes several changes to the renewal process which could make it easier in some
cases for a franchising authority to deny renewal.
In the renewal process, a franchising authority may seek to impose new and
more onerous requirements, such as upgraded facilities, increased channel
capacity or enhanced services, although the municipality must take into account
the cost of meeting such requirements. Time Warner Cable may be required to make
significant additional investments in its cable television systems as part of
the franchise renewal process. Of Time Warner Cable's franchises, as of January
1, 1997, 800 franchises serving approximately 3,600,000 subscribers expire
during the period ending December 31, 1999. Although Time Warner Cable has been
successful in the past in negotiating new franchise agreements, there can be no
assurance as to the renewal of franchises in the future.
In October 1996, the New York City Franchise Concession and Review
Committee (the 'Committee') met to consider whether the consummation of the TBS
Transaction constituted a 'change in control' within the
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meaning of Time Warner Cable's New York City franchise agreements. The Committee
took no action on this matter at the meeting and has not considered the matter
since then. The TBS Transaction was consummated on October 10, 1996. Effecting a
change in control within the meaning of such franchise agreements without the
City's consent could give the City various rights, which could include the right
to terminate the franchise agreements. The Company does not believe there has
been such a change in control. For further information regarding this matter and
a related legal proceeding, see Item 3 -- 'Legal Proceedings.'
The foregoing does not describe all present and proposed federal, state and
local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or Time Warner Cable can be
predicted at this time.
COMPETITION
Cable television systems face strong competition for viewer attention from
a wide variety of established providers and new entrants, including broadcast
television, DTH, MMDS, SMATV systems and telephone companies. Cable television
systems also compete with these and other media for advertising dollars.
DTH. The FCC has awarded conditional permits to several companies for
orbital slots from which high-power Ku-Band DTH service can be provided. DTH
services offer pre-packaged programming that can be received by relatively small
and inexpensive receiving dishes. As of the end of 1996, satellite-delivered DTH
services including Echostar, DirecTV, USSB and Primestar, a medium-powered DTH
service partially owned by TWE, were reported to be serving approximately five
million subscribers. In addition, News Corp. is scheduled to launch a DTH
service later in 1997, and recently announced a plan to merge that service with
Echostar's. If consummated, the combined venture would have greater satellite
transponder, and hence channel, capacity than other DTH services. News Corp. has
also announced that unlike other DTH services, the new venture will deliver some
local broadcast stations in some areas. In addition to DTH, most cable
programming is available to owners of larger, more expensive C-Band satellite
dishes ('TVROs'), either directly from the programmers or through third-party
packagers.
MMDS/Wireless Cable. Wireless cable operators use microwave technology to
distribute video programming. Wireless cable has grown rapidly, reportedly
servicing over one million subscribers nationwide as of September 1996. In
recent years, the FCC has adopted rules to facilitate the use of greater numbers
of channels by wireless cable operators.
SMATV. Additional competition may come from private cable television
systems servicing condominiums, apartment complexes and certain other multiple
unit residential developments. The operators of these private systems, known as
SMATV systems, often enter into exclusive agreements with apartment building
owners or homeowners' associations which preclude franchised cable television
operators from serving residents of such private complexes. Under the 1996
Telecommunications Act a SMATV system is not a cable system as long as it uses
no public right-of-way. SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered program services as
offered by franchised cable television systems.
Overbuilds. Under the 1992 Cable Act, franchising authorities are
prohibited from unreasonably refusing to award additional franchises. There are
an increasing number of overlapping cable systems operating in Time Warner Cable
franchise areas. Municipalities themselves are authorized to operate cable
systems without a franchise. No such municipally-owned systems are presently in
operation in Time Warner Cable franchise areas, although several municipalities
have indicated an interest in doing so.
Telephone Companies. The 1996 Telecommunications Act eliminated the
restriction against ownership and operation of cable systems by local telephone
companies within their local exchange service areas. Telephone companies are now
free to enter the retail video distribution business through any means, such as
DTH, MMDS, SMATV or as traditional franchised cable system operators.
Alternatively, the 1996 Telecommunications Act authorizes local telephone
companies to operate 'open video systems' without obtaining a local cable
franchise,
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although telephone companies operating such systems can be required to make
payments to local governmental bodies in lieu of cable franchise fees. Where
demand exceeds available channel capacity, up to two-thirds of the channels on
an 'open video system' must be available to programmers unaffiliated with the
local telephone company. The open video system concept replaces the FCC's video
dialtone rules.
Other Competition. Cable television systems compete with other
communications and entertainment media, including off-air television broadcast
signals which a viewer is able to receive directly using the viewer's own
television set and antenna. Cable systems also face competition from alternative
methods of distributing and receiving television signals and from other sources
of entertainment such as live sporting events, movie theaters and home video
products, including videocassette recorders. In recent years, the FCC has
adopted policies providing for authorization of new technologies and a more
favorable operating environment for certain existing technologies that provide,
or may provide, substantial additional competition for cable television systems.
TELEPHONY
Time Warner Cable's wireline telephony operations are conducted through the
Time Warner Communications division of TWE, which has wholly or partially owned
competitive local exchange carrier ('LEC') businesses targeting business
customers in 18 cities. Time Warner Communications has an advanced network
management center in Denver to monitor and manage operations of its networks.
These operations generally provide fiber optic connections between large
businesses and their long distance telephone providers, between multiple
business locations of a large business, and between long distance telephone
company locations. In addition, switched services are being introduced. Revenues
to date have been insignificant.
Residential telephone service is being provided over Time Warner Cable's
system in the Rochester, NY area. Time Warner Cable has announced that it has
suspended any further roll out of the residential telephone business until the
various rulemakings required to be made by the FCC under the 1996
Telecommunications Act are final and the Company is able to assess whether the
resulting economic framework will allow a profitable entry into this business.
OTHER ASSETS
AMERICAN LAWYER MEDIA
The Company owns a 90% interest in American Lawyer Media, L.P. ('ALM'). The
Company has announced its intention to sell substantially all of the assets of
ALM. ALM operates a chain of metropolitan and regional legal and business
newspapers and also publishes THE AMERICAN LAWYER, a national monthly magazine
with a subscription-only readership among lawyers across the United States and
owns and operates COUNSEL CONNECT ('CC'), an on-line service connecting lawyers
in law firms and corporate legal departments worldwide. ALM also provides
certain services to Courtroom Television Network ('Court TV'). See 'Cable
Networks -- Other Basic Cable Interests.'
HASBRO
TWI owns approximately 14% of the outstanding common stock of Hasbro, Inc.,
one of the world's largest toy companies. The Company has issued zero coupon
exchangeable notes due 2012 that are exchangeable for the shares of Hasbro
common stock owned by the Company (the 'Hasbro Stock') and mandatorily
redeemable preferred securities of a subsidiary of the Company redeemable in
1997 for cash or Hasbro Stock, which together have effectively monetized the
Company's investment in Hasbro. See Note 4 'Other Investments' to the Company's
consolidated financial statements at pages F-39 and F-40 herein.
DESCRIPTION OF AGREEMENT WITH LIBERTY MEDIA CORPORATION
The following description summarizes certain provisions of the Company's
agreement with Liberty Media Corporation (a subsidiary of TCI) and certain of
its subsidiaries (collectively, 'LMC') that was entered into in connection with
the TBS Transaction and the FTC Consent Decree. Such description does not
purport to be
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complete and is subject to, and is qualified in its entirety by reference to,
the provisions of the Second Amended and Restated LMC Agreement dated as of
September 22, 1995 among the Company, Time Warner Companies, Inc. and LMC (the
'LMC Agreement').
OWNERSHIP OF TIME WARNER COMMON STOCK
Pursuant to the LMC Agreement, immediately following consummation of the
TBS Transaction, LMC exchanged the 50.6 million shares of Time Warner common
stock, par value $.01 per share ('Time Warner Common Stock'), received by LMC in
the TBS Transaction on a one-for-one basis for 50.6 million shares of LMCN-V
Class Common Stock. Shares of LMCN-V Class Common Stock receive the same
dividends and otherwise have the same rights as shares of Time Warner Common
Stock except that (a) holders of LMCN-V Class Common Stock are entitled to
1/100th of a vote per share on the election of directors and do not have any
other voting rights, except as required by law or with respect to limited
matters, including amendments to the terms of the LMCN-V Class Common Stock
adverse to such holders, and (b) unlike shares of Time Warner Common Stock,
shares of LMCN-V Class Common Stock are not subject to redemption by the Company
if necessary to prevent the loss by the Company of any governmental license or
franchise. The LMCN-V Class Common Stock is not transferable, except in limited
circumstances, and is not listed on any securities exchange.
The LMC Agreement requires LMC to exchange its shares of Time Warner Common
Stock for LMCN-V Class Common Stock in order to comply with the FTC Consent
Decree, which effectively prohibits LMC and its affiliates (including TCI) from
owning voting securities of the Company other than securities that have limited
voting rights. Shares of LMCN-V Class Common Stock are convertible on a
one-for-one basis for shares of Time Warner Common Stock at any time when such
conversion would no longer violate the FTC Consent Decree or have a Prohibited
Effect (as defined below), including following a transfer to a third party. For
a discussion of the agreement under which the Company may issue additional
shares of LMCN-V Class Common Stock to LMC, see Note 2, 'Mergers and
Acquisitions,' to the Company's consolidated financial statements at pages F-32
through F-34 herein.
OTHER AGREEMENTS
Under the LMC Agreement, if the Company takes certain actions that have the
effect of (a) making the continued ownership by LMC of the Company's equity
securities illegal under any federal or state law, (b) imposing damages or
penalties on LMC under any federal or state law as a result of such continued
ownership, (c) requiring LMC to divest any such Company equity securities, or
(d) requiring LMC to discontinue or divest any business or assets or lose or
significantly modify any license under any federal communications law (each a
'Prohibited Effect'), then the Company will be required to compensate LMC for
income taxes incurred by it in disposing of all the Company's equity securities
received by LMC in connection with the TBS Transaction and related agreements
(whether or not the disposition of all such equity securities is necessary to
avoid such Prohibited Effect). In the event LMC consummates a distribution or
'spin-off' of its subsidiaries that hold substantially all of the LMCN-V Class
Common Stock, the foregoing obligations of the Company will continue to apply to
such spin-off subsidiaries.
The agreements described in the preceding paragraph may have the effect of
requiring the Company to pay amounts to LMC in order to engage in (or requiring
the Company to refrain from engaging in) activities that LMC would be prohibited
under the Federal communications laws from engaging in. Based on the current
businesses of the Company and LMC and based upon the Company's understanding of
applicable law, the Company does not expect these requirements to have a
material effect on its business.
DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT
The following description summarizes certain provisions of the TWE
Partnership Agreement relating to the ongoing operations of TWE. Such
description does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the TWE Partnership
Agreement.
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MANAGEMENT AND OPERATIONS OF TWE
Partners. Upon the capitalization of TWE in June 1992, certain subsidiaries
of the Company became the general partners (the 'Class B Partners' or the 'Time
Warner General Partners') of TWE and subsidiaries of Itochu Corporation
('Itochu') and Toshiba Corporation ('Toshiba') became limited partners of TWE
(the 'Class A Partners'). U S West was admitted as a Class A Partner in
September 1993. In 1995, Time Warner acquired the limited partnership interests
of Itochu and Toshiba. Consequently, the limited partnership interests in TWE
are held by the Class A Partners consisting of U S West and wholly owned
subsidiaries of the Company and the general partnership interests in TWE are
held by the Class B Partners consisting of wholly owned subsidiaries of the
Company.
Board of Representatives. Subject to certain authority of the Management
Committee (as described below) with respect to the Cable division, the business
and affairs of TWE are managed under the direction of a board of representatives
(the 'Board of Representatives' or the 'Board') that is comprised of
representatives appointed by subsidiaries of Time Warner (the 'Time Warner
Representatives') and representatives appointed by US West (the 'US West
Representatives').
The Time Warner Representatives control all Board decisions except for
certain matters including (i) the merger or consolidation of TWE; (ii) the sale
or other disposition of assets of TWE generating in excess of 10% of the
consolidated revenues of TWE during the previous fiscal year or representing in
excess of 10% of the fair market value of the total assets of TWE (in each case,
other than in connection with certain joint ventures and 'cable asset swaps' as
to which the thresholds are greater); (iii) any acquisition by TWE, other than
in the ordinary course of business, if the consideration paid by TWE in
connection with such acquisition would exceed the greater of (1) $750 million
and (2) 10% of the consolidated revenues of TWE for the most recently ended
fiscal year of TWE; (iv) the engagement by TWE in any business other than the
businesses then being conducted by TWE, as they may evolve from time to time and
any business related to such businesses (provided that TWE may not engage in the
manufacturing, sale or servicing of hardware, other than as may be incidental to
TWE's businesses); (v) the incurrence by TWE of indebtedness for money borrowed
if, after giving effect to such incurrence, the ratio of total indebtedness for
money borrowed to cash flow would exceed the greater of (x) 5.00 to 1.00 and (y)
.5 over the analogous ratio in the TWE credit agreement as in effect from time
to time; (vi) cash distributions other than as provided in the TWE Partnership
Agreement; (vii) the dissolution or voluntary bankruptcy of TWE; and (viii) any
amendment to the TWE Partnership Agreement, which matters also require the
approval of the US West Representatives.
The managing general partners, both of which are wholly owned subsidiaries
of Time Warner, may take any action without the approval or consent of the Board
if such action may be authorized by the Time Warner Representatives without the
approval of the US West Representatives. However, see 'Full Service Network
Management Committee,' below.
Full Service Network Management Committee. In connection with the admission
of U S West as a limited partner of TWE, the Board established the Full Service
Network business, which, subject to obtaining necessary franchise and other
approvals, is comprised of the businesses and operations of the cable television
systems of TWE and TWE-A/N that have been from time to time designated to become
a part thereof. Subject to obtaining such approvals relating to the designated
systems, the business and affairs of the Full Service Network business will be
governed by a Full Service Network Management Committee (the 'Management
Committee'). The Management Committee is comprised of six voting members, three
designated by U S West and three designated by TWE. If U S West at any time owns
less than 50% of the partnership interest which it owned, directly or
indirectly, as of September 15, 1993 or if a 'change in control' of U S West
occurs, U S West's right to designate any members of the Management Committee
will terminate. The Full Service Network business is managed on a day-to-day
basis by the officers of Time Warner Cable. The approval of a majority of the
members of the Management Committee is required for certain significant
transactions relating to the Full Service Network business, including, among
other things, the sale, pledge or encumbrance of assets of the Full Service
Network business, the acquisition of cable assets, the making of commitments or
expenditures relating to the Full Service Network business, in each case subject
to agreed upon thresholds, certain decisions with
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respect to design, architecture and designation of cable systems for upgrade and
the adoption of the annual business plan.
Non-Voting Representatives and Committee Members. Each of ITOCHU and
Toshiba has the right to designate non-voting members to the Board of
Representatives and the Management Committee. In addition, Advance/Newhouse has
the right to designate a non-voting member to the Management Committee.
Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's three principal partnership divisions is managed on a
day-to-day basis by the officers of such division. Upon the TWE Capitalization,
the officers of Time Warner also became officers of TWE and the officers of the
Time Warner General Partners became the officers of the corresponding
partnership divisions and the subdivisions thereof.
CERTAIN COVENANTS
Covenant Not to Compete. For so long as any partner (or affiliate of any
partner) owns in excess of 5% of TWE and in the case of any Time Warner General
Partner, for one year thereafter, such partner (including its affiliates) is
generally prohibited from competing or owning an interest in the three principal
lines of business of TWE -- cable, cable programming and filmed entertainment
(including the ownership and operation of theme parks) -- as such businesses may
evolve, subject to certain agreed upon exceptions (including TBS), limited
passive investments and inadvertent violations. The covenant not to compete does
not prohibit (i) U S West from conducting cable and certain regional programming
businesses in the 14-state region in which it provides telephone service, (ii)
any party from engaging in the cable business in a region in which TWE is not
then engaging in the cable business, subject to TWE's right of first refusal
with respect to such cable business, or (iii) any party from engaging in the
telephone or information services business. ITOCHU and Toshiba continue to be
bound by and benefit from the non-compete provisions but only as they relate to
Japan.
Transactions with Affiliates. Subject to agreed upon exceptions for
existing arrangements, TWE will not enter into any transaction with any partner
or any of its affiliates other than on an arm's-length basis.
REGISTRATION RIGHTS
Beginning on June 30, 2002 (or as early as June 30, 1999 if certain
threshold cash distributions are not made to the Class A Partners), the Class A
Partners holding, individually or in the aggregate, at least 10% of the residual
equity of TWE will have the right to request that TWE reconstitute itself as a
corporation and register for sale in a public offering an amount of partnership
interests held by such Class A Partners determined by an investment banking firm
so as to maximize trading liquidity and minimize the initial public offering
discount, if any. Upon any such request, the parties will cause an investment
banker to determine the price at which the interests sought to be registered
could be sold in a public offering (the 'Appraised Value'). Upon determination
of the Appraised Value, TWE may elect either to register such interests or
purchase such interests at the Appraised Value, subject to certain adjustments.
If TWE elects to register the interests and the proposed public offering price
(as determined immediately prior to the time the public offering is to be
declared effective) is less than 92.5% of the Appraised Value, TWE will have a
second option to purchase such interests immediately prior to the time such
public offering would otherwise have been declared effective by the Securities
and Exchange Commission at the proposed public offering price less underwriting
fees and discounts. If TWE exercises its purchase option, it will be required to
pay the fees and expenses of the underwriters. Upon exercise of either purchase
option, TWE may also elect to purchase the entire partnership interests of the
Class A Partners requesting registration at the relevant price, subject to
certain adjustments.
In addition to the foregoing, U S West will have the right to exercise an
additional demand registration right (in which the other Class A Partners would
be entitled to participate) beginning 18 months following the date on which TWE
reconstitutes itself as a corporation and registers the sale of securities
pursuant to a previously exercised demand registration right.
At the request of any Time Warner General Partner, TWE will effect a public
offering of the partnership interests of the Time Warner General Partners or
reconstitute TWE as a corporation and register the shares held
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<PAGE>
by the Time Warner General Partners. In any such case, the Class A Partners will
have standard 'piggy-back' registration rights.
Upon any reconstitution of TWE into a corporation, each partner will
acquire preferred and common equity in the corporation corresponding in both
relative value, rate of return and priority to the partnership interests it held
prior to such reconstitution, subject to certain adjustments to compensate the
partners for the effects of converting their partnership interests into capital
stock.
CERTAIN PUT RIGHTS OF THE CLASS A PARTNERS
Change in Control Put. Upon the occurrence of a change in control of Time
Warner, at the request of any Class A Partner, TWE will be required to elect
either to liquidate TWE within a two-year period or to purchase the interest of
such partner at fair market value (without any minority discount) as determined
by investment bankers. A 'change in control' of Time Warner shall be deemed to
have occurred:
(x) whenever, in any three-year period, a majority of the members of the
Board of Directors of the Company elected during such three-year period shall
have been so elected against the recommendation of the management of the Company
or the Board of Directors shall be deemed to have been elected against the
recommendation of such Board of Directors of the Company in office immediately
prior to such election; provided, however, that for purposes of this clause (x)
a member of such Board of Directors shall be deemed to have been elected against
the recommendation of such Board of Directors if his or her initial election
occurs as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended) or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than such Board of
Directors; or
(y) whenever any person shall acquire (whether by merger, consolidation,
sale, assignment, lease, transfer or otherwise, in one transaction or any
related series of transactions), or otherwise beneficially owns voting
securities of the Company that represent in excess of 50% of the voting power of
all outstanding voting securities of the Company generally entitled to vote for
the election of directors, if such person acquires or publicly announces its
intention to initially acquire ten percent or more of such voting securities in
a transaction that has not been approved by the management of the Company within
30 days after the date of such acquisition or public announcement.
Assignment of Put Rights, etc. TWE, with the consent of such assignee, may
assign to the Company, any general partner or any third party, the obligation to
pay the applicable put price in connection with the exercise of a change in
control put right by a Class A Partner and the right to receive the partnership
interests in payment therefor.
With respect to any of the put rights of the Class A Partners, TWE may pay
the applicable put price in cash or Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or quoted
on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put price
to the Company, by the Company). The amount of any Marketable Securities
comprising the applicable put price shall be determined based on the market
price of such securities during the seven months following the closing of such
put transaction.
RESTRICTIONS ON TRANSFER BY TIME WARNER GENERAL PARTNERS
Time Warner General Partners. Any Time Warner General Partner is permitted
to dispose of any partnership interest (and any Time Warner General Partner and
any parent of any Time Warner General Partner may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) the Company would
not own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the later of December 31, 1997 and the
date on which the Class A Partners have received cash distributions of $500
million per $1 billion of investment, and (b) 35% of the residual equity of TWE
if such disposition occurs after such date, (ii) no person or entity would own,
directly or indirectly, a partnership interest greater than that owned, directly
or indirectly, by the Company, and (iii) a subsidiary of the Company would be a
managing general partner of TWE.
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<PAGE>
<PAGE>
No other dispositions are permitted, except that the Company may sell its
entire partnership interest subject to the Class A Partners' rights of first
refusal and 'tag-along' rights pursuant to which the Company must provide for
the concurrent sale of the partnership interests of the Class A Partners so
requesting.
CURRENCY RATES AND REGULATIONS
The Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict the
extent to which such controls and fluctuations in currency exchange rates may
affect its operations in the future or its ability to remit dollars from abroad.
See Note 1 'Organization and Summary of Significant Accounting
Policies -- Foreign Currency' and Note 14 'Financial Instruments -- Foreign
Exchange Risk Management' to the consolidated financial statements set forth at
pages F-28 and F-55, respectively, herein. For the revenues, operating income
from and identifiable assets of foreign operations, see Note 15 'Segment
Information' to the consolidated financial statements set forth at pages F-56
through F-60 herein.
EMPLOYEES
At December 31, 1996, the Company employed a total of approximately 73,400
persons. This number includes approximately 30,300 persons employed by TWE.
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<PAGE>
<PAGE>
ITEM 2. PROPERTIES
TBS, PUBLISHING, MUSIC AND CORPORATE
The following table sets forth certain information as of December 31, 1996
with respect to the Company's principal properties (over 250,000 square feet in
area) that are used primarily by TBS and the Company's publishing and music
divisions or occupied for corporate offices, all of which the Company considers
adequate for its present needs, and all of which were substantially used by the
Company or were leased to outside tenants:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FEET TYPE OF OWNERSHIP
LOCATION PRINCIPAL USE FLOOR SPACE EXPIRATION DATE OF LEASE
- ----------------------------- ---------------------------------- ----------- ---------------------------------
<S> <C> <C> <C>
New York, New York Executive and administrative 560,000 Leased by the Company. Lease
75 Rockefeller Plaza offices (Corporate and Music) expires in 2014. Approximately
Rockefeller Center 109,000 sq. ft. are sublet to
outside tenants.
New York, New York Business and editorial offices 1,520,000 Leased by the Company. Most
Time & Life Bldg. (Publishing and Corporate) leases expire in 2007.
Rockefeller Center Approximately 36,000 sq. ft. are
sublet to outside tenants.
Atlanta, Georgia Executive and administrative 1,570,000 Owned by the Company.
One CNN Center offices, studio (TBS) Approximately 146,000 sq. ft. are
Retail, Hotel and Theatres sublet to outside tenants.
Atlanta, Georgia Offices and studios (TBS) 311,000 Owned and occupied by the
1050 Techwood Dr. Company.
Mechanicsburg, Office and warehouse space 358,000 Owned and occupied by the
Pennsylvania (Publishing) Company.
1225 S. Market St.
Olyphant, Manufacturing, warehouses, 1,058,000 Owned and occupied by the
Pennsylvania distribution and office space Company.
1400 and 1444 East (Music)
Lackawanna Avenue
Indianapolis, Indiana Warehouse space (Publishing) 252,000 Owned and occupied by the
4200 N. Industrial Company.
Street
Nortorf, Manufacturing, distribution and 334,000 Owned and occupied by the
Germany office space (Music) Company.
Niedernstrasse 3-7
Alsdorf, Manufacturing, distribution and 269,000 Owned and occupied by the
Germany office space (Music) Company.
Max-Planck Strasse 1-9
Terre Haute, Manufacturing and office space 269,000 Leased by the Company. Lease
Indiana (Music) expires in 2001.
Bldg. 102, Fort Harrison
Industrial Park
</TABLE>
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<PAGE>
<PAGE>
FILMED ENTERTAINMENT, CABLE NETWORKS -- HBO AND CABLE
The following table sets forth certain information as of December 31, 1996
with respect to principal properties (over 250,000 square feet in area) owned or
leased by the Company's Filmed Entertainment, Cable Networks -- HBO and cable
television businesses, all of which the Company considers adequate for its
present needs, and all of which were substantially used by TWE.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FEET
FLOOR TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE SPACE/ACRES EXPIRATION DATE OF LEASE
- ------------------------ ----------------------------- ------------------ -----------------------------
<S> <C> <C> <C>
New York, New York Business offices 335,000 sq. ft. Leased by TWE.
1100 and 1114 (HBO) and 237,000 sq. Leases expire in 2004 and
Avenue of the ft. 2006.
Americas
Baltimore, Maryland Warehouse (Filmed 387,000 sq. ft. Owned by TWE.
White Marsh Entertainment)
Burbank, California Sound stages, 3,303,000 Owned by TWE.
The Warner Bros. administrative, technical and sq. ft. of
Studio dressing room structures, improved
screening theaters, machinery space on 158
and equipment facilities, acres(a)
back lot and parking lot and
other Burbank properties
(Filmed Entertainment)
West Hollywood, Sound stages, 350,000 Owned by TWE.
California administrative, sq. ft. of
The Warner technical and dressing improved
Hollywood Studio room structures, screening space on 11
theaters, machinery and acres
equipment facilities (Filmed
Entertainment)
Valencia, California Location filming (Filmed 232 acres Owned by TWE.
Undeveloped Land Entertainment)
------------------
</TABLE>
- ------------
(a) Ten acres consist of various parcels adjoining The Warner Bros. Studio,
with mixed commercial, office and residential uses.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties, in the ordinary course of
business, to litigations involving property, personal injury and contract
claims. The amounts that the Company believes may be recoverable in these
matters are either covered by insurance or are not material.
In November 1992, TBS and TWE filed federal lawsuits in the U.S. District
Court for the District of Columbia against the FCC and the United States of
America seeking to overturn the must carry provisions of the 1992 Cable Act on
First Amendment grounds. The TWE complaint also challenges the provisions of the
1992 Cable Act relating to rate regulation, retransmission consent, terms of
dealing by vertically integrated programmers, uniform pricing and operation of
cable systems by municipal authorities, the number of subscribers that a cable
operator could serve nationwide, free previews of certain premium channels and
educational channel set-aside requirements for direct broadcast satellite
service. In addition, the TWE complaint seeks to overturn several parts of the
1984 Cable Act relating to public, educational and government access
requirements and commercial leased channels. The plaintiffs seek injunctions
against the enforcement or implementation of these provisions. Several other
parties have also filed similar lawsuits and these actions have been at least
partially consolidated with the actions filed by TBS and TWE. On April 8, 1993,
in a 2-1 decision,
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<PAGE>
the District Court upheld the constitutionality of the must carry provisions of
the 1992 Cable Act. On May 3, 1993, plaintiffs filed an appeal from this
decision directly to the U.S. Supreme Court. The U.S. Supreme Court on June 27,
1994 vacated the judgment of the District Court regarding the must-carry
provisions and remanded the case to that court for further factual findings
after ruling that cable systems were entitled to significant First Amendment
protection. In December 1995, that panel upheld the 'must-carry' requirements by
2-1 vote. The Supreme Court decided to review that decision. Argument was held
in the Supreme Court on October 7, 1996. On September 16, 1993, a one-judge
District Court upheld the constitutionality on First Amendment grounds of all
the other challenged provisions except restrictions on the number of subscribers
that a cable operator could serve nationwide, free pay TV previews and direct
broadcast channel usage. TWE appealed this decision to the U.S. Court of Appeals
for the D.C. Circuit on November 12, 1993. Briefing on the appeal and argument
took place on November 20, 1995. On August 30, 1996, the D.C. Circuit Court of
Appeals rejected TWE's challenges to certain provisions of the 1984 and 1992
Cable Acts, held unripe the challenge to the program creation provision of
Section 11(c) of the 1992 Cable Act, and consolidated the remaining challenges
to Section 11(c) with Time Warner Entertainment Company, L.P. v. FCC. On October
29, 1996, TWE and the other plaintiffs filed a Petition for Rehearing and
Suggestion for Rehearing En Banc with the Court. On February 7, 1997, the Court
denied the petition for rehearing. For a description of the 1984 Cable Act and
the 1992 Cable Act, see Item 1 'Business -- Cable Division -- Regulation and
Legislation.'
In October, 1993, 15 music performers or representatives of deceased
performers, on behalf of an alleged similarly-situated class, filed suit in the
United States District Court for the Northern District of Georgia against
approximately 50 record companies, including four WMG record labels. (Samuel D.
Moore, et al. v. American Federation of Television and Radio Artists, et al.,
No. 93-Civ-2358). Plaintiffs claimed that the recording companies, the American
Federation of Television and Radio Artists ('AFTRA') (their union), and the
AFTRA Health and Retirement Fund ('Fund') under-reported and under-contributed
to the Fund, in violation of ERISA, in breach of contract and fiduciary duty,
through fraud and embezzlement, and in violation of RICO. Plaintiffs sought
substantial, but unquantified, monetary damages, treble damages, attorneys' fees
and costs and the imposition of a constructive trust over their master
recordings. Following a series of motions, on August 2, 1994, the court
dismissed the claims against the Fund and the Fund's trustees, and dismissed all
claims against the defendant recording companies except the RICO claim. The
record company defendants then answered the RICO claim, denying its material
allegations and alleging defenses. After certain discovery, the defendants, on
January 29, 1997, moved for summary judgment, and that motion is pending.
Plaintiffs' motion to certify various classes of plaintiffs is pending. A
second, similar lawsuit, commenced by the same plaintiffs in the United States
District Court for the Southern District of New York, alleging a class action
and derivative claims on behalf of the Fund against essentially the same
defendants has, after various motions by defendants, been combined with the
first action in the Northern District of Georgia. Defendants' December 18, 1996
motion to dismiss the newly-added counts is pending. If defendants' dispositive
motions are not granted, discovery is likely to continue, in a class or
individual actions, with a trial following.
On July 14, 1994, the Company received a civil investigative demand from
the United States Department of Justice in furtherance of an investigation into
certain worldwide activities of WMG and other companies in the recorded music
industry principally related to cable, wire and satellite-delivered music and
music video programmers. The Company has complied with the civil investigative
demand to the extent that it sought information and documents with respect to
domestic activities of WMG and has objected to responding with respect to
foreign activities on the ground that the Department of Justice lacks
jurisdiction to inquire into such activities. On November 3, 1994, the
Department of Justice filed a petition in the United States District Court for
the District of Columbia seeking to compel the Company and the other companies
to provide documents from their files in the United States that deal with
overseas activities. On January 22, 1997, the court granted the petition.
On May 30, 1995, a purported class action was filed with the United States
District Court for the Central District of California, entitled Digital
Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and PolyGram Group Distribution,
Inc., No. 95-3536 (JSL). The plaintiff, representing a class of direct
purchasers of recorded music compact discs ('CDs'), alleged that Warner Elektra
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<PAGE>
Atlantic Corporation ('WEA'), along with five other distributors of CDs,
violated the federal antitrust laws by engaging in a conspiracy to fix the
prices of CDs, and sought an injunction and treble damages. On January 9, 1996,
the defendants' motion to dismiss the amended complaint was granted and the
action was dismissed, with prejudice. Plaintiff appealed the dismissal to the
United States Court of Appeals for the Ninth Circuit, No. 96-55264. The appeal
has been fully briefed and no date for oral argument has yet been set.
Litigation relating to the 1990 merger of Time Inc. and WCI has either been
dismissed, or has been dormant for years. The litigation is described in
previous reports on Form 10-K filed by the Company.
On October 30, 1995, two complaints were filed in the Court of Chancery of
the State of Delaware in and for New Castle County ('Delaware Chancery Court')
against the Company, certain officers and directors of the Company, and other
defendants, by stockholders of the Company, purportedly derivatively on behalf
of the Company. The two complaints allege, among other things, that in
connection with the then proposed TBS Transaction, some or all of the defendants
have violated fiduciary duties owed to the Company and its stockholders by,
among other things, (i) seeking to entrench themselves in board and management
positions and to eliminate the threat of a hostile takeover, (ii) securing
economic benefits for themselves or conferring special benefits on
Tele-Communications, Inc. ('TCI') and others at the expense of the Company's
public stockholders, and (iii) structuring the TBS Transaction so as to place
the Company's chief executive officer in a position which allegedly will involve
a conflict between the interests of TCI and the Company. Among other relief
demanded, both complaints seek an injunction against consummation of the TBS
Transaction and an order directing the individual defendants to account to the
Company for their alleged profits and plaintiffs' alleged damages. On November
22, 1995, the Company and the other defendants moved to dismiss the complaint in
one of these actions on the ground that the plaintiff had failed to comply with
Delaware Chancery Court Rule 23.1. There has been no further activity in these
actions.
On March 12, 1996, a complaint was filed in the Delaware Chancery Court
against the directors and certain officers of the Company by a stockholder of
the Company, purportedly derivatively on behalf of the Company. The complaint
alleges, among other things, that some or all of the defendants have breached
fiduciary duties owed to the Company and its stockholders in furtherance of an
entrenchment scheme by, among other things, (i) forcing the resignations of or
firing certain directors and officers of the Company, (ii) conferring special
benefits upon TCI, R.E. Turner and Michael Milken in connection with the TBS
Transaction, and (iii) taking certain actions relating to a dispute with U S
West that has since been successfully litigated by the Company. The complaint
seeks, among other things, (i) an injunction against consummation of the TBS
Transaction and certain related arrangements, (ii) an injunction against any
settlement of a litigation between the Company and U S West (in which U S West
sought to enjoin the transaction with TBS and other relief), (iii) a declaratory
judgment that defendants breached their fiduciary duties to the Company and its
stockholders, and (iv) unspecified damages. On April 8, 1996, the defendants
moved to dismiss the complaint in this action. There has been no further
activity in this action.
Fifteen actions against TBS, the Company, certain officers and directors of
TBS or TWE, and other defendants, purportedly on behalf of a class of TBS
shareholders, filed in Superior Court, Fulton County, Georgia in connection with
the TBS Transaction have been consolidated. On February 29, 1996, plaintiffs
filed their third amended consolidated supplemental and derivative class action
complaint (the 'Third Amended Complaint'). The Third Amended Complaint, which
included a derivative claim, alleged, among other things, that the terms of the
TBS Transaction were unfair to TBS shareholders and that the defendants had
breached or aided and abetted the breach of fiduciary common law and statutory
duties owned to TBS shareholders by (i) conferring benefits on controlling
shareholders at the expense of other shareholders, (ii) committing corporate
waste and (iii) taking actions to entrench TBS Board members. The Third Amended
Complaint further alleged that the defendants acted fraudulently in negotiating
and approving the TBS Transaction, that the approval of the TBS Transaction by
the TBS Board had been fraudulently obtained, and that the vote of the TBS Board
approving the TBS Transaction did not comply with the TBS Articles of
Incorporation and By-laws or with Georgia law. Among other relief demanded, the
Third Amended Complaint sought damages, an injunction against the consummation
of the TBS Transaction and related transactions, and an auction of TBS. On April
1, 1996, defendants filed motions for judgment on the pleadings on all claims
asserted in the Third
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<PAGE>
<PAGE>
Amended Complaint. On June 17, 1996, the court transformed the defendants'
motion for judgment on the pleadings into a motion for summary judgment with
respect to two of the plaintiffs' claims and denied the plaintiffs' request for
discovery on those claims. On September 13, 1996, plaintiffs filed a motion for
a preliminary injunction (and related relief) seeking, among other things, an
order enjoining consummation of the TBS Transaction. Their motion was denied on
October 3, 1996. On September 19, 1996, plaintiffs sought leave to file a fourth
amended complaint. On December 20, 1996, the Court granted defendants' motion
for judgment on the pleadings with respect to certain of the claims in the Third
Amended Complaint and also granted plaintiffs' motion for leave to file a fourth
amended complaint. On January 16, 1997, plaintiffs filed a fourth amended class
action complaint containing allegations and requesting relief substantially
similar in substance to the Third Amended Complaint.
On July 8, 1996, a purported class action was filed in the Circuit Court of
Blount County, Tennessee at Maryville, entitled Robinson and Silvey v. EMI Music
Distribution, Inc., Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, UNI Distribution Corporation, Bertelsmann Music Group, Inc. and
PolyGram Group Distribution, Inc., No. L-10462. The action is brought on behalf
of persons who, from June 26, 1992 to the present, purchased CDs indirectly from
defendants in Alabama, California, Florida, Kansas, Maine, Michigan, Minnesota,
Mississippi, New Mexico, North Dakota, South Dakota, Tennessee, West Virginia,
Wisconsin and District of Columbia, and alleges that the defendants are engaged
in a conspiracy to fix the prices of CDs, in violation of the antitrust, unfair
trade practices and consumer protection statutes of each of those jurisdictions.
Also on July 8, the Circuit Court issued an order conditionally granting class
certification, subject to defendants' right to move to decertify the class. On
February 25, 1997, defendants filed a motion to dismiss the complaint. On
February 26, 1997, the Circuit Court stayed all proceedings pending
consideration of the motion to dismiss.
On July 25, 1996, WEA was served with an antitrust civil investigative
demand from the Office of the Attorney General of the State of Florida that
calls for the production of documents in connection with an investigation to
determine whether there is, has been or may be a conspiracy to fix the prices of
CDs or conduct consisting of unfair methods of competition or unfair trade
practices in the sale and marketing of CDs. WEA produced documents in compliance
with the investigative demand.
On October 8, 1996, the New York State Attorney General began an
investigation by serving a subpoena duces tecum on Time Warner. In re New York
State Attorney General's Investigation. The subpoena seeks information regarding
whether Time Warner and Time Warner Cable may have violated Section 340 of the
General Business Law of New York and/or Sections 1 and/or 2 of the Sherman
Antitrust Act in making certain decisions regarding the carriage of video
programming services on Time Warner's cable systems, including its decision to
carry the MSNBC news service and not the Fox News Channel ('FNC'). On November
22, 1996, the subpoena was modified by agreement between Time Warner and the
Attorney General and on December 12, 1996, Time Warner produced documents
pursuant to the subpoena, as modified. On January 10, 1997, Time Warner
responded to the interrogatory requests of the subpoena, as modified.
On October 9, 1996, an action was commenced in the United States District
Court for the Eastern District of New York entitled Fox News Network, L.L.C. v.
Time Warner Inc., Time Warner Entertainment Company, L.P., Turner Broadcasting
System, Inc., and R.E. 'Ted ' Turner III. The plaintiff seeks to have Time
Warner divest the TBS assets acquired alleging that the TBS Transaction is
violative of Section 7 of the Clayton Act. The plaintiff also seeks damages
flowing from alleged violations of Section 1 of the Sherman Act, the Donnelly
Act, New York State's antitrust statute, as well as alleged breach of contract
and fraudulent misrepresentations regarding carriage of the FNC on defendants'
cable television systems. In total, the plaintiff seeks $1.75 billion in
damages. On October 30, 1996, plaintiff filed an amended complaint. On November
15, 1996 defendants filed a motion to dismiss the amended complaint. On December
11, 1996, the court orally denied defendants' motion. On December 31, 1996,
defendants filed their answer to plaintiff's amended complaint and their
counterclaims, naming both Fox News and News Corp. as counterclaim-defendants.
The answer denies all substantive allegations of the amended complaint and the
counterclaims allege that Fox News and News Corp. conspired with various unnamed
officials of the City of New York to deprive Time Warner of its First and
Fourteenth Amendment rights, as well as its rights under Federal cable
legislation, and that counterclaim-defendants tortiously
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<PAGE>
interfered with Time Warner's rights under its franchise agreements with the
City of New York. Fox News and News Corp. filed a motion to dismiss Time
Warner's counterclaims. Argument on the motion to dismiss the counterclaims was
held on February 27, 1997, and the parties have submitted additional briefs on
the issues presented by the motion. On March 14, 1997, FNC conceded its
inability to sustain its breach of contract claim and withdrew it.
On October 10, 1996, the holders of Time Warner's New York City cable
franchises filed a complaint against the City of New York in the United States
District Court for the Southern District of New York alleging that the City's
announced plan to carry two commercial cable programs, Bloomberg Information
Television ('BIT') and the FNC, over the City's municipal access channels is a
violation of the Franchise Agreements, the 1984 Cable Act, the First Amendment,
New York Public Service Law and certain other legal rights of such holders. In
addition to seeking to enjoin the City's activity, the complaint seeks a
declaratory judgment that the TBS Transaction does not effect a change in
control for the purposes of the Franchise Agreements. On October 11, 1996, the
judge in this action issued a temporary restraining order preventing the City
from carrying either BIT or the FNC over its municipal access channels. After a
hearing on October 28, 1996, the judge on November 6, 1996 granted the Time
Warner plaintiffs a preliminary injunction that will continue to prevent the
City from carrying these services on its municipal access channels until a trial
on the matter is completed. The City and BIT, which had intervened as a
defendant in the action, appealed the judge's decision to the United States
Court of Appeals for the Second Circuit. Argument on the appeal took place on
February 19, 1997. Thus far, all activity in this action has related to Time
Warner's request for an injunction, and proceedings with respect to the
declaratory judgment that the TBS Transaction does not effect a change in
control for the purposes of the Franchise Agreements have not as yet commenced.
The Company and its subsidiaries are also subject to industry
investigations by certain government agencies and/or proceedings under the
antitrust laws that have been filed by private parties in which, in some cases,
other companies in the same or related industries are also defendants. The
Company and its subsidiaries have denied or will deny liability in all of these
actions. In all but a few similar past actions, the damages, if any, recovered
from the Company or the amounts, if any, for which the actions were settled were
small or nominal in relation to the damages sought; and it is the opinion of the
management of the Company that any settlements or adverse judgments in the
similar actions currently pending will not involve the payment of amounts or
have other results that would have a material adverse effect on the financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
For information regarding the special meeting of stockholders of the
Company and Turner Broadcasting System, Inc. held on October 10, 1996 to approve
the merger agreement related to the TBS Transaction, see Item 4 to the Quarterly
Report on Form 10-Q for the period ended September 30, 1996 filed by Time Warner
Companies, Inc. (File No. 1-8637).
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<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G (3), the information regarding the
Company's executive officers required by Item 401(b) of Regulation S-K is hereby
included in Part I of this report.
The following table sets forth the name of each executive officer of the
Company, the office held by such officer and the age, as of March 14, 1997, of
such officer:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Gerald M. Levin.............................. 57 Chairman of the Board and Chief Executive Officer
R.E. Turner.................................. 58 Vice Chairman of the Board
Richard D. Parsons........................... 48 President
Peter R. Haje................................ 62 Executive Vice President, General Counsel and Secretary
Timothy A. Boggs............................. 46 Senior Vice President
Richard J. Bressler.......................... 39 Senior Vice President and Chief Financial Officer
Philip R. Lochner, Jr. ...................... 54 Senior Vice President
</TABLE>
Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1992:
<TABLE>
<S> <C>
Mr. Levin.............................. Chairman of the Board of Directors and Chief Executive Officer since
January 21, 1993. Prior to that, he served as President and Co-Chief
Executive Officer from February 20, 1992.
Mr. Turner............................. Vice Chairman since the consummation of the TBS Transaction on October
10, 1996. Prior to that, he served as Chairman of the Board and
President of TBS from 1970.
Mr. Parsons............................ President since February 1, 1995. Prior to that, he served as Chairman
and Chief Executive Officer of The Dime Savings Bank of New York, FSB
from January 1991.
Mr. Haje............................... Executive Vice President and General Counsel since October 1, 1990 and
Secretary since May 20, 1993.
Mr. Boggs.............................. Senior Vice President since November 19, 1992. Prior to that he served
as Vice President of Public Affairs.
Mr. Bressler........................... Senior Vice President and Chief Financial Officer since March 16, 1995.
Prior to that he served as Senior Vice President, Finance from January
2, 1995; and as a Vice President prior to that.
Mr. Lochner............................ Senior Vice President since July 18, 1991.
</TABLE>
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's Common Stock is the New York Stock
Exchange. For quarterly price information with respect to the Company's Common
Stock for the two years ended December 31, 1996, see 'Quarterly Financial
Information' at page F-66 herein, which information is incorporated herein by
reference.
The approximate number of holders of record of the Company's Common Stock
as of January 31, 1997 was 26,000.
For information on the frequency and amount of dividends paid with respect
to the Company's Common Stock during the two years ended December 31, 1996, see
'Quarterly Financial Information' at page F-66 herein, which information is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information of the Company for the five years ended
December 31, 1996 is set forth at pages F-64 and F-65 herein and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption 'Management's Discussion and
Analysis' at pages F-2 through F-22 herein is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
and the report of independent auditors thereon set forth at pages F-23 through
F-61, F-67 and F-68, and F-63 herein are incorporated herein by reference.
Quarterly Financial Information set forth at page F-66 herein is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
II-1
<PAGE>
<PAGE>
PART III
<TABLE>
<S> <C>
Items 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION;
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
</TABLE>
Information called for by PART III (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive Proxy Statement to be
filed in connection with its 1997 Annual Meeting of Stockholders pursuant to
Regulation 14A, except that the information regarding the Company's executive
officers called for by Item 401(b) of Regulation S-K has been included in PART I
of this report and the information called for by Items 402(k) and 402(l) of
Regulation S-K is not incorporated by reference.
III-1
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)-(2) Financial Statements and Schedules:
(i) The list of consolidated financial statements and schedules set
forth in the accompanying Index to Consolidated Financial Statements and
Other Financial Information at page F-1 herein is incorporated herein by
reference. Such consolidated financial statements and schedules are filed
as part of this report.
(ii) The unaudited financial statements of the Time Warner Service
Partnerships for the quarterly period ended September 30, 1995 included in
the Current Report on Form 8-K of Time Warner Entertainment Company, L.P.
(Reg. No. 33-53742) dated November 28, 1995 ('TWE's 1995 Form 8-K') are
incorporated herein by reference and are filed as an exhibit to this
report.
(iii) The financial statements of the Time Warner Service Partnerships
and the report of independent auditors thereon, set forth at pages F-64
through F-73 in the 1994 Annual Report on Form 10-K of Time Warner
Entertainment Company, L.P. ('TWE's 1994 Form 10-K') are incorporated
herein by reference and are filed as an exhibit to this report.
(iv) The unaudited financial statements of Paragon Communications for
the quarterly period ended June 30, 1995 included in TWE's 1995 Form 8-K
are incorporated herein by reference and are filed as an exhibit to this
report.
(v) The financial statements and financial statement schedule of
Paragon Communications and the report of independent accountants thereon,
set forth at pages F-74 through F-83 in TWE's 1994 Form 10-K, are
incorporated herein by reference and are filed as an exhibit to this
report.
All other financial statement schedules are omitted because the required
information is not applicable, or because the information required is included
in the consolidated financial statements and notes thereto.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and such Exhibit Index is
incorporated herein by reference. Exhibits 10.1 through 10.18 listed on the
accompanying Exhibit Index identify management contracts or compensatory plans
or arrangements required to be filed as exhibits to this report, and such
listing is incorporated herein by reference.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K dated October 10,
1996 in which it reported (x) in Item 2 that on October 10, 1996 the TBS
Transaction was consummated, and (y) in Item 5 certain events relating to
the Company's decision not to carry the Financial News Channel on its New
York City cable system and certain matters related to the TBS Transaction.
(ii) The Company filed a Current Report on Form 8-K dated November 14,
1996 setting forth in Item 7 certain pro forma financial statements of the
Company and the Time Warner Entertainment Group at September 30, 1996,
reflecting the TBS Transaction and certain other transactions entered into
by the Company and TWE during 1995 and 1996.
IV-1
<PAGE>
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TIME WARNER INC.
By /s/ PETER R. HAJE
..................................
PETER R. HAJE
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Date: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------- -------------------
<C> <S> <C>
/S/ GERALD M. LEVIN Director, Chairman of the Board and Chief March 25, 1997
......................................... Executive Officer (principal executive
(GERALD M. LEVIN) officer)
/S/ RICHARD J. BRESSLER Senior Vice President and Chief Financial March 25, 1997
......................................... Officer (principal financial officer)
(RICHARD J. BRESSLER)
/S/ JOHN A. LABARCA Vice President and Controller (principal March 25, 1997
......................................... accounting officer)
(JOHN A. LABARCA)
/S/ MERV ADELSON Director March 25, 1997
.........................................
(MERV ADELSON)
/S/ J. CARTER BACOT Director March 25, 1997
.........................................
(J. CARTER BACOT)
/S/ LAWRENCE B. BUTTENWIESER Director March 25, 1997
.........................................
(LAWRENCE B. BUTTENWIESER)
/S/ BEVERLY SILLS GREENOUGH Director March 25, 1997
.........................................
(BEVERLY SILLS GREENOUGH)
/S/ CARLA A. HILLS Director March 25, 1997
.........................................
(CARLA A. HILLS)
/S/ DAVID T. KEARNS Director March 25, 1997
.........................................
(DAVID T. KEARNS)
</TABLE>
IV-2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------- -------------------
<C> <S> <C>
/S/ REUBEN MARK Director March 25, 1997
.........................................
(REUBEN MARK)
/S/ MICHAEL A. MILES Director March 25, 1997
.........................................
(MICHAEL A. MILES)
/S/ J. RICHARD MUNRO Director March 25, 1997
.........................................
(J. RICHARD MUNRO)
/S/ RICHARD D. PARSONS Director March 25, 1997
.........................................
(RICHARD D. PARSONS)
/S/ DONALD S. PERKINS Director March 25, 1997
.........................................
(DONALD S. PERKINS)
/S/ RAYMOND S. TROUBH Director March 25, 1997
.........................................
(RAYMOND S. TROUBH)
/S/ R.E. TURNER Director March 25, 1997
.........................................
(R. E. TURNER)
/S/ FRANCIS T. VINCENT, JR. Director March 25, 1997
.........................................
(FRANCIS T. VINCENT, JR.)
</TABLE>
IV-3
<PAGE>
<PAGE>
TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------------
TIME
WARNER TWE
------ -----
<S> <C> <C>
Management's Discussion and Analysis of Results of Operations and Financial Condition........... F-2 F-75
Consolidated Financial Statements:
Balance Sheet.............................................................................. F-23 F-84
Statement of Operations.................................................................... F-24 F-85
Statement of Cash Flows.................................................................... F-25 F-86
Statement of Shareholders' Equity and Partnership Capital.................................. F-26 F-87
Notes to Consolidated Financial Statements................................................. F-27 F-88
Report of Management............................................................................ F-62
Report of Independent Auditors.................................................................. F-63 F-108
Selected Financial Information.................................................................. F-64 F-109
Quarterly Financial Information................................................................. F-66 F-110
Supplementary Information....................................................................... F-67
Financial Statement Schedules:
Schedule I -- Condensed Financial Information of Registrant................................ F-69
Schedule II -- Valuation and Qualifying Accounts........................................... F-74 F-111
</TABLE>
F-1
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On October 10, 1996, Time Warner Inc. ('Time Warner' or the 'Company'),
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 ('Old Time Warner', now known as Time Warner Companies, Inc.), and Old
Time Warner and TBS became separate, wholly owned subsidiaries of the new parent
company ('New Time Warner'). References herein to 'Time Warner' or the 'Company'
refer to Old Time Warner prior to October 10, 1996 and New Time Warner
thereafter.
Time Warner classifies its business interests into four fundamental areas:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, television production, television broadcasting
and theme parks; Cable Networks, consisting principally of interests in cable
television programming and sports franchises; Publishing, consisting principally
of interests in magazine publishing, book publishing and direct marketing; and
Cable, consisting principally of interests in cable television systems. A
majority of Time Warner's interests in filmed entertainment, television
production, television broadcasting and theme parks, a portion of its interests
in cable television programming and a majority of its cable television systems
are held through Time Warner Entertainment Company, L.P. ('TWE'). Time Warner
owns 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'). Time Warner does not
consolidate TWE and certain related companies (the 'Entertainment Group') for
financial reporting purposes because of certain limited partnership approval
rights related to TWE's interest in certain cable television systems.
Capitalized terms are as defined and described in the accompanying consolidated
financial statements, or elsewhere herein.
STRATEGIC INITIATIVES
SIGNIFICANT TRANSACTIONS
During the past two years, Time Warner has pursued significant, strategic
initiatives that have resulted in the acquisition of TBS and the expansion of
Time Warner's interests in the cable television business. These initiatives were
part of an ongoing strategy to strengthen Time Warner's interests in
entertainment and cable television programming, and to expand the operation of
large geographic clusters of cable television systems in an effort to achieve
economies of scale in the development and distribution of new and expanded
services. Over the same period, management also engaged in a program to improve
the combined financial condition of Time Warner and the Entertainment Group, as
well as to increase their overall financial flexibility, through the initiation
of a debt reduction program and significant debt refinancings.
Management believes its expansion strategy has largely achieved its
objectives and intends to sharpen its focus on improving the combined financial
condition of Time Warner and the Entertainment Group and increasing their
overall financial flexibility through additional initiatives, such as continued
debt reduction and implementation of various cost-savings and revenue-enhancing
measures designed to augment fundamental business growth.
Consistent with management's strategic direction, Time Warner completed the
following transactions in 1996 that have had and are expected to continue to
have a significant effect on its results of operations and financial condition:
F-2
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
The acquisition in October 1996 of the remaining 80% interest in TBS that
was not already owned (the 'TBS Transaction'). In connection with this
transaction, New Time Warner issued or agreed to issue approximately 178.4
million shares of common stock, approximately 14 million stock options and
$67 million of consideration payable, at its election, in either cash or
common stock. New Time Warner also assumed approximately $2.8 billion of
indebtedness. The addition of TBS's news and entertainment programming
networks, film and animation libraries, film production companies and
sports franchises is expected to complement virtually all of Time Warner's
business interests.
The implementation in April 1996 of a program to repurchase, from time to
time, up to 15 million shares of Time Warner common stock. This program is
supported, in part, by a five-year, $750 million revolving credit facility
which is expected to be repaid principally from the cash proceeds from the
future exercise of employee stock options. As of December 31, 1996, Time
Warner had acquired approximately 11.4 million shares of its common stock
for an aggregate cost of $456 million.
The issuance in April 1996 of 1.6 million shares of a new series of
exchangeable preferred stock, which currently pays cumulative, noncash
dividends at the rate of 10 1/4% per annum. The approximate $1.55 billion
of net proceeds raised from this transaction were used to reduce debt (the
'Preferred Stock Refinancing'). Along with other actions since the
initiation of a $2-$3 billion debt reduction program in February 1995,
including the expected 1997 sale of TWE's interest in E! Entertainment
Television, Inc., Time Warner and the Entertainment Group have exceeded
their initial goals under this program.
The redemption in 1996 and early 1997 of approximately $1.5 billion of
convertible debt using proceeds from other financings, which lowered
interest rates, staggered debt maturities and eliminated the potential
dilution from the conversion of such securities into 31.3 million shares
of common stock.
The acquisition of Cablevision Industries Corporation and related
companies ('CVI') on January 4, 1996 (the 'CVI Acquisition'), which
strengthened Time Warner Cable's geographic clusters of cable television
systems and substantially increased the number of cable subscribers
managed by Time Warner Cable. Time Warner issued 2.9 million shares of
common stock and 6.3 million shares of new convertible preferred stock and
assumed or incurred approximately $2 billion of indebtedness. As of
December 31, 1996, Time Warner Cable, which includes the cable operations
of both Time Warner and TWE, served approximately 12.3 million
subscribers, passing nearly 20% of the television homes in the U.S.
The nature of these transactions and their impact on the results of operations
and financial condition of Time Warner and the Entertainment Group are further
discussed below.
TBS TRANSACTION
In the TBS Transaction, each of Old Time Warner and TBS became separate,
wholly owned subsidiaries of New Time Warner, which combines, for financial
reporting purposes, the consolidated net assets and operating results of Old
Time Warner and TBS. Each issued and outstanding share of each class of capital
stock of Old Time Warner was converted into one share of a substantially
identical class of capital stock of New Time Warner.
In connection with the TBS Transaction, New Time Warner issued (i)
approximately 173.4 million shares of common stock (including 50.6 million
shares of LMCN-V Class Common Stock to affiliates of Liberty Media Corporation
('LMC'), a subsidiary of Tele-Communications, Inc.), in exchange for shares of
TBS capital stock and (ii) approximately 14 million stock options to replace all
outstanding TBS stock options. In addition, New Time Warner agreed to issue to
LMC and its affiliates at a later date an additional five million shares of
F-3
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
LMCN-V Class Common Stock and $67 million of consideration payable, at the
election of New Time Warner, in cash or additional shares of LMCN-V Class Common
Stock. This additional consideration will be issued pursuant to a separate
option and non-competition agreement that will provide, if New Time Warner
exercises its option, for a subsidiary of LMC to provide certain satellite
uplink and distribution services for WTBS, a broadcast television station owned
by TBS, if it is converted to a copyright-paid, cable television programming
service. The cost to acquire TBS was approximately $6.2 billion. New Time Warner
has also fully and unconditionally guaranteed all of TBS's and Old Time Warner's
outstanding publicly traded indebtedness, which amounted to approximately $1.030
billion and $7.754 billion, respectively, at December 31, 1996.
As part of the integration of TBS's businesses into Time Warner's operating
structure, management is pursuing various cost-saving and revenue-enhancing
initiatives. Such initiatives, some of which have already been implemented,
include the consolidation of certain duplicative administrative and operational
functions (such as transferring the management of TBS's television syndication
and home video operations to Warner Bros.), the restructuring of TBS's film
production companies, the planned conversion of WTBS from a broadcast
superstation into a copyright-paid, cable television programming service, the
creation of new basic cable television networks (such as CNN/SI, Time Warner's
sports news network) and other revenue-enhancing activities, including the
cross-promotion of animation assets, film libraries and children's programming.
In restructuring TBS's film production activities, Time Warner has already
phased out all production activities of Turner Pictures and is evaluating
alternatives for Castle Rock Entertainment ('Castle Rock') and New Line Cinema
('New Line'). These alternatives range from an equity transaction in these
studios to a nonrecourse financing transaction.
CABLE STRATEGY
Over the past two years, Time Warner has combined with or acquired cable
television systems serving approximately 3.7 million subscribers (the 'Cable
Transactions'), which, along with internal growth, has increased the total
number of subscribers under the management of Time Warner Cable to 12.3 million
from 7.5 million subscribers at the end of 1994. This expansion strategy has
also extended Time Warner Cable's reach of cable television systems to
neighborhoods passing 19 million homes or close to 20% of television homes in
the U.S. In addition, there are now 34 geographic clusters of cable television
systems serving over 100,000 subscribers each, including key markets such as New
York City, northern New York State, central Florida and North Carolina.
Management believes that the improved concentration of its subscriber base will
provide for sustained revenue growth from new and expanded services, and provide
certain economies of scale relating to the upgrade of the technological
capabilities of Time Warner Cable's cable television systems.
Time Warner's current strategy is to restructure its cable television
systems, so far as practicable and on a tax-efficient basis, to enable such
interests to be self-financed. As part of this strategy, Time Warner is seeking
to reduce its economic interest in the cable television business in order to
reduce existing debt and its share of future funding requirements related to
such cable operations. The primary alternative being pursued is a restructuring
of TWE that would decrease Time Warner's cable interests in TWE and increase
Time Warner's interests in TWE's entertainment and cable networks. Any TWE
restructuring depends, among other things, upon successful negotiations with U S
WEST and other third parties, a renegotiation of certain credit arrangements,
including the 1995 Credit Agreement, and consents or approvals from cable
television franchise and other regulatory authorities. In addition to, or in
lieu of, a TWE restructuring, other alternatives remain available to Time Warner
to advance these goals, some of which would not require U S WEST consent but
would still require other third party, franchise and regulatory approvals. There
is no assurance that any of these efforts will succeed.
F-4
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
USE OF EBITDA
The following comparative discussion of the results of operations and
financial condition of Time Warner and the Entertainment Group includes, among
other factors, an analysis of changes in the operating income of the business
segments before depreciation and amortization ('EBITDA') in order to eliminate
the effect on the operating performance of the music, filmed entertainment,
cable network and cable businesses of significant amounts of amortization of
intangible assets recognized in the $14 billion acquisition of WCI in 1989, the
$1.3 billion acquisition of the ATC minority interest in 1992, the $2.3 billion
of Cable Acquisitions in 1995 and 1996, the $6.2 billion acquisition of TBS in
1996 and other business combinations accounted for by the purchase method.
Financial analysts generally consider EBITDA to be an important measure of
comparative operating performance for the businesses of Time Warner and the
Entertainment Group, and when used in comparison to debt levels or the coverage
of interest expense, as a measure of liquidity. However, EBITDA should be
considered in addition to, not as a substitute for, operating income, net
income, cash flow and other measures of financial performance and liquidity
reported in accordance with generally accepted accounting principles.
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
In connection with management's strategic initiatives, Time Warner and the
Entertainment Group have completed a number of transactions over the past two
years which have affected the comparability of each entity's results of
operations and financial condition. For Time Warner, these transactions include
the TBS Transaction, the Cable Acquisitions, the ITOCHU/Toshiba Transaction, the
Preferred Stock Refinancing and certain other debt refinancings (the 'TW
Transactions'). For the Entertainment Group, these transactions include the
formation of the TWE-Advance/Newhouse Partnership, the refinancing of TWE's bank
debt and certain asset sales, including the sale of 51% of TWE's interest in Six
Flags (the 'Entertainment Group Transactions' and, when taken together with the
TW Transactions, the 'Time Warner Transactions'). Each of these transactions is
more fully discussed elsewhere herein.
In order to enhance comparability, the following discussion of results of
operations for Time Warner and the Entertainment Group is supplemented, where
appropriate, by pro forma financial information that gives effect to the Time
Warner Transactions and the Entertainment Group Transactions, respectively, as
if such transactions had occurred at the beginning of the respective periods
presented. The pro forma results are presented for informational purposes only
and are not necessarily indicative of the operating results that would have
occurred had the transactions actually occurred at the beginning of those
periods, nor are they necessarily indicative of future operating results.
RESULTS OF OPERATIONS
As a result of the TBS Transaction, Time Warner now has two new business
segments which parallel its previously existing interests in filmed
entertainment and cable television programming held through TWE. Time Warner's
Cable Networks segment principally consists of TBS's cable television networks
and sports operations. These operations include entertainment networks such as
TNT, the TBS Superstation, the Cartoon Network and Turner Classic Movies; news
networks such as CNN, CNN International and CNN Headline News; and sports
franchises consisting of the Atlanta Braves and the Atlanta Hawks. Time Warner's
Filmed Entertainment segment principally consists of TBS's film and television
production and distribution operations, including New Line, Castle Rock,
Hanna-Barbera, Inc. and the former film and television libraries of
Metro-Goldwyn-Mayer, Inc. and RKO Pictures, Inc. Because the results of
operations of these businesses and Time Warner's cable
F-5
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
businesses are not comparable to the prior period, the following discussion of
business segment operating results is presented on both a historical and pro
forma basis.
1996 VS. 1995
EBITDA and operating income for Time Warner and the Entertainment Group in
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
EBITDA OPERATING INCOME
------------------------------ ------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
-------------- -------------- -------------- --------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Time Warner:
Publishing...................................... $ 535 $ 476 $ 535 $ 476 $ 418 $381 $ 418 $381
Music(1)........................................ 744 690 744 690 361 321 361 321
Cable Networks-TBS.............................. 547 502 162 -- 297 267 99 --
Filmed Entertainment-TBS........................ (108) 48 32 -- (202) (62) 8 --
Cable........................................... 476 425 476 90 75 29 75 (5)
Intersegment elimination........................ (10) 6 5 -- (10) 6 5 --
------ ------ ------ ------ ------ ------ ------ ------
Total........................................... $2,184 $2,147 $1,954 $1,256 $ 939 $942 $ 966 $697
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Entertainment Group:
Filmed Entertainment-Warner Bros................ $ 546 $ 490 $ 546 $ 490 $ 254 $253 $ 254 $253
Six Flags Theme Parks(2)........................ -- -- -- 60 -- -- -- 29
Broadcasting-The WB Network..................... (98) (66) (98) (66) (98) (66) (98) (66)
Cable Networks-HBO.............................. 350 293 350 293 328 274 328 274
Cable........................................... 1,536 1,355 1,536 1,275 606 533 606 502
------ ------ ------ ------ ------ ------ ------ ------
Total........................................... $2,334 $2,072 $2,334 $2,052 $1,090 $994 $1,090 $992
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
- ------------
(1) Includes pretax losses of $85 million recorded in 1995 related to certain
businesses and joint ventures owned by the Music division which were
restructured or closed.
(2) Deconsolidated as a result of the sale of a 51% interest in Six Flags
effective as of June 23, 1995.
Time Warner had revenues of $10.064 billion, a loss of $156 million ($.95
per common share) before an extraordinary loss on the retirement of debt and a
net loss of $191 million ($1.04 per common share) in 1996, compared to revenues
of $8.067 billion, a loss of $124 million ($.46 per common share) before an
extraordinary loss on the retirement of debt and a net loss of $166 million
($.57 per common share) in 1995. Time Warner's equity in the pretax income of
the Entertainment Group was $290 million in 1996, compared to $256 million in
1995.
As discussed more fully below, the increase in Time Warner's historical net
loss in 1996 principally resulted from an increase in interest expense relating
to approximately $6.1 billion of debt assumed or incurred in the TBS Transaction
and the Cable Acquisitions and a decrease in investment-related income primarily
relating to lower gains on certain asset sales, which more than offset an
overall increase in the operating income of Time Warner's business segments and
increased income from its equity in the pretax income of the Entertainment
Group. The increase in Time Warner's 1996 historical net loss per common share
was further affected by a $205 million increase in preferred dividend
requirements relating to the preferred stock issued in
F-6
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
connection with the Preferred Stock Refinancing, the Cable Acquisitions and the
ITOCHU/Toshiba Transaction, offset in part by the dilutive effect from issuing
173.4 million shares of common stock in connection with the TBS Transaction.
Time Warner's historical results of operations include the operating
results of each acquired business from the respective closing date of each
transaction. On a pro forma basis, giving effect to the Time Warner Transactions
as if each of such transactions had occurred at the beginning of 1995, Time
Warner would have reported for the years ended December 31, 1996 and 1995,
respectively, revenues of $12.799 billion and $12.154 billion, EBITDA of $2.184
billion and $2.147 billion, operating income of $939 million and $942 million,
equity in the pretax income of the Entertainment Group of $290 million and $286
million, a loss before extraordinary item of $284 million and $233 million
($1.05 and $.97 per common share) and a net loss of $319 million and $275
million ($1.11 and $1.04 per common share).
The 1996 and 1995 comparison of pro forma results are similarly affected by
any underlying historical trends that are unrelated to the transactions given
pro forma effect to therein, such as lower gains on certain asset sales
discussed above. The increased pro forma over historical net loss for each
period is principally the result of higher amortization and interest expense
associated with the TBS Transaction and the Cable Acquisitions. The 1996 pro
forma results are further affected by the significant pre-merger operating
losses incurred by TBS's filmed entertainment companies as a consequence of
disappointing results from worldwide theatrical releases.
The Entertainment Group had revenues of $10.861 billion and net income of
$220 million in 1996, compared to revenues of $9.629 billion, income of $170
million before an extraordinary loss on the retirement of debt and net income of
$146 million in 1995. On a pro forma basis, giving effect to the Entertainment
Group Transactions as if each of such transactions had occurred at the beginning
of 1995, the Entertainment Group would have reported for the year ended December
31, 1995, revenues of $9.686 billion, EBITDA of $2.072 billion, operating income
of $994 million, income before extraordinary item of $203 million and net income
of $179 million. No pro forma financial information has been presented for the
Entertainment Group for the year ended December 31, 1996 because all of such
transactions are already reflected, in all material respects, in the historical
financial statements of the Entertainment Group.
As discussed more fully below, the Entertainment Group's historical net
income was higher in 1996 as compared to pro forma results in 1995 due to an
overall increase in operating income generated by its business segments,
interest savings due to lower floating interest rates and the absence of a $24
million extraordinary loss on the retirement of debt recognized in 1995, offset
in part by a decrease in investment-related income and an increase in minority
interest expense related to the TWE-Advance/Newhouse Partnership. On a
historical basis, such underlying operating trends were enhanced by favorable
comparisons as 1996 more fully benefited from the interest savings on lower
average debt levels related to management's ongoing debt reduction program.
The relationship between income before income taxes and income tax expense
of Time Warner is principally affected by the amortization of goodwill and
certain other financial statement expenses that are not deductible for income
tax purposes. Income tax expense of Time Warner includes all income taxes
related to its allocable share of partnership income and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.
TIME WARNER
Publishing. Revenues increased to $4.117 billion, compared to $3.722
billion in 1995. EBITDA increased to $535 million from $476 million.
Depreciation and amortization amounted to $117 million in 1996 and $95
F-7
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<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
million in 1995. Operating income increased to $418 million from $381 million.
Revenues benefited from across-the-board increases in magazine circulation,
advertising and book revenues. All major magazine brands achieved revenue gains,
including People, Entertainment Weekly, and Sports Illustrated, the latter of
which benefited in part from Olympics-related coverage. The increase in book
revenues was led by the direct marketing businesses. EBITDA and operating income
increased principally as a result of the revenue gains.
Music. Revenues decreased to $3.949 billion, compared to $4.196 billion in
1995. EBITDA increased to $744 million from $690 million. Depreciation and
amortization, including amortization related to the purchase of WCI, amounted to
$383 million in 1996 and $369 million in 1995. Operating income increased to
$361 million from $321 million. Operating results for 1995 included an $85
million charge relating to certain start-up businesses and joint ventures owned
by the Music division which were restructured or closed. With regard to 1996,
despite maintaining its leading domestic market share (over 22%), the Music
division's domestic recorded music operating results were negatively affected by
the industry-wide softness in the overexpanded U.S. retail marketplace, which
has resulted in a number of music retail store closings and higher returns of
music product. The decline in revenues principally related to (i) the effects
from the current U.S. retail environment, including an increase in the Music
division's provision for returns, (ii) a decline in international recorded music
sales and (iii) the absence of revenues from certain start-up businesses which
are no longer being operated by the Music division. The increase in EBITDA and
operating income principally resulted from the absence of losses from certain
start-up businesses and joint ventures, the absence of the $85 million charge
recognized in 1995 and the inclusion of certain one-time gains, including gains
on the sale of investments, offset in part by the decline in the worldwide
recorded music business, a related increase in the Music division's provision
for bad debts and lower results from direct marketing activities. Management
expects that the current state of the U.S. retail environment will continue to
affect 1997 operating results.
Cable Networks-TBS. Cable Networks results reflect the acquisition of TBS
effective in October 1996 and include revenues of $680 million, EBITDA of $162
million, depreciation and amortization of $63 million and operating income of
$99 million. Such operating results are not comparable to the prior year and,
accordingly, are discussed on a pro forma basis.
On a pro forma basis, revenues increased to $2.477 billion, compared to
$2.106 billion in 1995. EBITDA increased to $547 million from $502 million.
Depreciation and amortization, including amortization related to the purchase of
TBS, amounted to $250 million in 1996 and $235 million in 1995. Operating income
increased to $297 million from $267 million. Revenues benefited from increases
in advertising and subscriptions. Advertising revenues increased due to a strong
overall advertising market for TNT and the TBS Superstation, the continued
expansion of CNN International, and increased viewership for the news networks
during the 1996 U.S. political conventions and presidential campaign.
Subscription revenues increased as a result of higher rates, as well as an
increase in both cable and home satellite viewers, primarily at TNT, the Cartoon
Network, CNN and CNN International. EBITDA and operating income increased
principally as a result of the revenue gains, offset in part by higher sports
and entertainment programming costs and start-up costs for three new networks,
including CNN/SI.
Filmed Entertainment-TBS. Filmed Entertainment results reflect the
acquisition of TBS effective in October 1996, and include revenues of $455
million, EBITDA of $32 million, depreciation and amortization of $24 million and
operating income of $8 million. Such operating results are not comparable to the
prior year and, accordingly, are discussed on a pro forma basis.
On a pro forma basis, revenues increased to $1.458 billion, compared to
$1.352 billion in 1995. EBITDA decreased from $48 million in 1995 to a loss of
$108 million in 1996. Depreciation and amortization, including amortization
related to the purchase of TBS, amounted to $94 million in 1996 and $110 million
in 1995.
F-8
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<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Operating losses increased to $202 million from $62 million. Revenues benefited
from increases in worldwide theatrical and home video revenues. Worldwide
theatrical revenues benefited from an increase in the number of theatrical
releases. Home video revenues increased primarily due to an increase in sales of
theatrical and existing library product. Despite such revenue increases, EBITDA
and operating income decreased principally as a result of disappointing results
for theatrical releases, which resulted in approximately $200 million of
write-offs at New Line and Castle Rock during the nine-month, pre-merger period.
Cable. The 1996 Cable operating results increased as a result of the CVI
Acquisition effective as of January 4, 1996, and the full year effect from the
acquisitions of KBLCOM effective as of July 6, 1995 and Summit effective as of
May 2, 1995. Revenues increased to $909 million, compared to $172 million in
1995. EBITDA increased to $476 million from $90 million. Depreciation and
amortization amounted to $401 million in 1996 and $95 million in 1995. Operating
income increased to $75 million from a loss of $5 million.
On a pro forma basis, Time Warner's Cable division had 1995 revenues of
$847 million, EBITDA of $425 million, depreciation and amortization of $396
million and operating income of $29 million. In comparison to 1995 pro forma
results, 1996 revenues benefited from an increase in basic cable subscribers,
increases in regulated cable rates as permitted under Time Warner Cable's
'social contract' with the Federal Communications Commission (the 'FCC') and an
increase in pay-per-view and advertising revenues. EBITDA and operating income
increased principally as a result of revenue gains, offset in part, with respect
to operating income only, by higher depreciation and amortization relating to
increased capital spending.
Interest and Other, Net. Interest and other, net, increased to $1.174
billion in 1996, compared to $877 million in 1995. Interest expense increased to
$968 million, compared to $877 million. The increase in interest expense was
principally due to the assumption or incurrence of approximately $6.1 billion of
debt in the Cable Acquisitions and the TBS Transaction, offset in part by the
favorable effect from Time Warner's redemption of the 8.75% Convertible
Debentures and the reduction in debt associated with the Preferred Stock
Refinancing. Other expense, net, increased to $206 million in 1996 from an
immaterial amount in 1995, principally because of a decrease in
investment-related income resulting from lower gains on certain asset sales,
increased losses from reductions in the carrying value of certain investments
and an increase in dividend requirements on preferred securities of subsidiaries
issued in 1995 in connection with the redemption of the 8.75% Convertible
Debentures.
ENTERTAINMENT GROUP
Filmed Entertainment-Warner Bros. Revenues increased to $5.648 billion,
compared to $5.078 billion in 1995. EBITDA increased to $546 million from $490
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $292 million in 1996 and $237 million in 1995.
Operating income increased to $254 million from $253 million. Revenues benefited
from increases in worldwide home video, television distribution and consumer
products operations, offset in part by lower international theatrical revenues.
EBITDA and operating income benefited principally from the revenue gains, offset
in large part, with respect to operating income only, by higher depreciation and
amortization principally related to the 1996 summer opening of an international
theme park in Germany.
Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted
for under the equity method of accounting.
Broadcasting-The WB Network. The WB Network recorded an operating loss of
$98 million on $87 million of revenues in 1996, compared to an operating loss of
$66 million on $33 million of revenues in 1995.
F-9
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<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
The increase in revenues and operating losses primarily resulted from the
expansion of the WB Network's primetime programming schedule (now at three
nights) and the expansion of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. In addition, operating losses for 1995
were mitigated by a favorable legal settlement. Due to the start-up nature of
this national broadcast operation, losses are expected to continue.
Cable Networks-HBO. Revenues increased to $1.763 billion, compared to
$1.607 billion in 1995. EBITDA increased to $350 million from $293 million.
Depreciation and amortization amounted to $22 million in 1996 and $19 million in
1995. Operating income increased to $328 million from $274 million. Revenues
benefited primarily from a significant increase in subscriptions to 32.4 million
from 29.7 million at the end of 1995. EBITDA and operating income improved
principally as a result of the revenue gains.
Cable. Revenues increased to $3.851 billion, compared to $3.094 billion in
1995. EBITDA increased to $1.536 billion from $1.275 billion. Depreciation and
amortization, including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $930 million in 1996 and
$773 million in 1995. Operating income increased to $606 million from $502
million. The 1996 Cable operating results increased as a result of the full year
effect from the formation of the TWE-Advance/Newhouse Partnership effective as
of April 1, 1995, and the consolidation of Paragon Communications effective as
of July 6, 1995.
On a pro forma basis, the Entertainment Group's Cable division had 1995
revenues of $3.378 billion, EBITDA of $1.355 billion, depreciation and
amortization of $822 million and operating income of $533 million. In comparison
to 1995 pro forma results, 1996 revenues benefited from an aggregate 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 increases in pay-per-view and advertising
revenues. EBITDA and operating income increased principally as a result of
revenue gains, offset in part, with respect to operating income only, by higher
depreciation and amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $524
million in 1996, compared to $539 million in 1995. Interest expense decreased to
$478 million, compared to $579 million in 1995, principally as a result of
interest savings on lower average debt levels related to management's debt
reduction program and lower short-term, floating-rates of interest paid on
borrowings under TWE's former and existing bank credit agreements. There was
other expense, net, of $46 million in 1996, compared to other income, net, of
$40 million in 1995, principally due to an overall decrease in
investment-related income. The decrease in investment-related income resulted
from a reduction in interest income and lower aggregate gains on the sale of
certain unclustered cable systems and other investments. The reduction in
interest income related to lower average cash balances and lower average
principal amounts due under the note receivable from U S WEST that was fully
collected during 1996.
F-10
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<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
1995 VS. 1994
EBITDA and operating income for Time Warner and the Entertainment Group in
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
EBITDA OPERATING INCOME
---------------- ----------------
1995 1994 1995 1994
------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Time Warner:
Publishing................................................................. $ 476 $ 430 $381 $347
Music(1)................................................................... 690 720 321 366
Cable...................................................................... 90 -- (5) --
------ ------ ------ ------
Total...................................................................... $1,256 $1,150 $697 $713
------ ------ ------ ------
------ ------ ------ ------
Entertainment Group:
Filmed Entertainment-Warner Bros........................................... $ 490 $ 430 $253 $219
Six Flags Theme Parks(2)................................................... 60 135 29 56
Broadcasting-The WB Network................................................ (66) -- (66) --
Cable Networks-HBO......................................................... 293 257 274 237
Cable...................................................................... 1,275 989 502 340
------ ------ ------ ------
Total...................................................................... $2,052 $1,811 $992 $852
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ------------
(1) Includes pretax losses of $85 million recorded in 1995 related to certain
businesses and joint ventures owned by the Music division which were
restructured or closed.
(2) Deconsolidated as a result of the sale of a 51% interest in Six Flags
effective as of June 23, 1995.
Time Warner had revenues of $8.067 billion, a loss of $124 million ($.46
per common share) before an extraordinary loss on the retirement of debt and a
net loss of $166 million ($.57 per common share) in 1995, compared to revenues
of $7.396 billion and a net loss of $91 million ($.27 per common share) in 1994.
Time Warner's equity in the pretax income of the Entertainment Group was $256
million in 1995, compared to $176 million in 1994.
The increase in Time Warner's net loss in 1995 was principally related to a
$42 million extraordinary loss on the retirement of debt ($.11 per common share)
and $85 million in pretax losses ($52 million after taxes and $.13 per common
share) related to certain businesses and joint ventures owned by the Music
division which were restructured or closed. As discussed more fully below, the
increase in Time Warner's net loss in 1995 from such losses was principally
mitigated by an overall increase in the fundamental operating income of Time
Warner's business segments and increased income from its equity in the pretax
income of the Entertainment Group, offset in part by a decrease in
investment-related income and higher interest expense on approximately $1.3
billion of debt assumed in the acquisitions of Summit and KBLCOM. The increase
in Time Warner's net loss per common share in 1995 also related to a $39 million
increase in preferred dividend requirements as a result of the preferred stock
issued in connection with the acquisitions of Summit and KBLCOM and the
ITOCHU/Toshiba Transaction.
The Entertainment Group had revenues of $9.629 billion, income of $170
million before an extraordinary loss on the retirement of debt and net income of
$146 million in 1995, compared to revenues of $8.509 billion and net income of
$136 million in 1994. As discussed more fully below, the Entertainment Group's
operating results in 1995 reflect an overall increase in operating income
generated by its business segments (including the
F-11
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<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
contribution by the TWE-Advance/Newhouse Partnership) and an increase in
investment-related income resulting from gains on the sale of certain
unclustered cable systems and other investments, offset in part by minority
interest expense related to the consolidation of the operating results of the
TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
TIME WARNER
Publishing. Revenues increased to $3.722 billion, compared to $3.433
billion in 1994. EBITDA increased to $476 million from $430 million.
Depreciation and amortization amounted to $95 million in 1995 and $83 million in
1994. Operating income increased to $381 million from $347 million. Revenues
benefited from increases in magazine circulation, advertising and book revenues.
Contributing to the revenue gain were increases achieved by People, Sports
Illustrated, Fortune and book publisher Oxmoor House. EBITDA and operating
income increased as a result of the revenue gains, offset in part by
significantly higher postal and paper costs as a result of price increases.
Music. Revenues increased to $4.196 billion, compared to $3.986 billion in
1994. EBITDA decreased to $690 million from $720 million. Depreciation and
amortization, including amortization related to the purchase of WCI, amounted to
$369 million in 1995 and $354 million in 1994. Operating income decreased to
$321 million from $366 million. Operating results were adversely affected by $85
million in losses recorded in 1995 that related to certain businesses and joint
ventures owned by the Music division which were restructured or closed. Revenues
for 1995 were negatively affected by certain reclassifications relating to third
party, pressing and distribution arrangements and changes in the Music
division's ownership interests in certain investments and subsidiaries that
resulted in changes from the consolidation to the equity method of accounting.
Excluding the effects from such reclassifications and changes, revenues from the
fundamental business increased by approximately 6%, principally as a result of
increases in both domestic and international recorded music revenues and
increased music publishing revenues. Domestic and international recorded music
revenues benefited from a number of popular releases and an increase in the
percentage of compact disc to total unit sales. Excluding the $85 million in
losses, EBITDA increased, and operating income benefited, principally from the
revenue gains and interest income on the resolution of a recorded music tax
matter, offset in part by expenses incurred in connection with the settlement of
certain employment contracts and lower results from direct marketing activities
attributable to higher amortization of member acquisition costs.
The losses in 1995 relating to certain businesses and joint ventures that
were restructured or closed are primarily related to Warner Music Enterprises,
one of the Company's direct marketing efforts, and the write off of its related
direct mail order assets that were not recoverable due to the closure of this
business. The activities that were not continued were not material to previous
historical operating results.
Cable. The 1995 Cable operating results reflect the acquisition of KBLCOM
effective as of July 6, 1995 and Summit effective as of May 2, 1995 and include
revenues of $172 million, EBITDA of $90 million, depreciation and amortization
of $95 million and operating losses of $5 million. Such operating results are
not comparable to the prior year.
Interest and Other, Net. Interest and other, net, increased to $877
million in 1995, compared to $724 million in 1994. Interest expense increased to
$877 million, compared to $769 million, principally as a result of approximately
$1.3 billion of debt assumed in the cable acquisitions and higher short-term,
floating-rates of interest paid on $2.6 billion notional amount of interest rate
swap contracts. Other income, net, was immaterial in 1995, compared to $45
million in 1994, principally because of a decrease in investment-related income.
Investment-related income in both periods consisted of gains on the sale of
certain assets, including the sale of
F-12
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
an interest in QVC, Inc. in 1995, which were offset by losses from reductions in
the carrying value of certain investments taken in each period.
ENTERTAINMENT GROUP
Filmed Entertainment-Warner Bros. Revenues increased to $5.078 billion,
compared to $4.484 billion in 1994. EBITDA increased to $490 million from $430
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $237 million in 1995 and $211 million in 1994.
Operating income increased to $253 million from $219 million. Revenues benefited
from increases in worldwide theatrical, home video, consumer products and
television distribution operations. Worldwide theatrical and domestic home video
revenues in 1995 were led by the success of Batman Forever. EBITDA and operating
income benefited from the revenue gains and increased income from licensing
operations.
Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted
for under the equity method of accounting. Accordingly, revenues decreased to
$227 million, compared to $557 million in 1994. EBITDA decreased to $60 million
from $135 million. Depreciation and amortization amounted to $31 million in 1995
and $79 million in 1994. Operating income decreased to $29 million from $56
million.
Broadcasting-The WB Network. The WB Network was launched in January 1995,
and generated $66 million of operating losses on $33 million of revenues. The
operating loss was mitigated by a favorable legal settlement, as well as by
funding from a limited partner admitted as of August 1995. Due to the start-up
nature of this national broadcast operation, losses are expected to continue.
Cable Networks-HBO. Revenues increased to $1.607 billion, compared to
$1.513 billion in 1994. EBITDA increased to $293 million from $257 million.
Depreciation and amortization amounted to $19 million in 1995 and $20 million in
1994. Operating income increased to $274 million from $237 million. Revenues
benefited primarily from an increase in subscriptions to 29.7 million from 27
million at the end of 1994, as well as from higher pay-TV rates. EBITDA and
operating income improved principally as a result of the revenue gains.
Cable. The 1995 Cable operating results reflect the formation of the
TWE-Advance/Newhouse Partnership effective as of April 1, 1995 and the
consolidation of Paragon effective as of July 6, 1995. Revenues increased to
$3.094 billion, compared to $2.242 billion in 1994. EBITDA increased to $1.275
billion from $989 million. Depreciation and amortization, including amortization
related to the purchase of WCI and the acquisition of the ATC minority interest,
amounted to $773 million in 1995 and $649 million in 1994. Operating income
increased to $502 million from $340 million. Revenues and operating results
benefited from the formation of the TWE-Advance/Newhouse Partnership and the
consolidation of Paragon. Excluding such effects, revenues benefited from an
aggregate increase in basic cable and Primestar-related, direct broadcast
satellite subscribers and increases in nonregulated revenues, including pay-TV,
pay-per-view and advertising. Excluding the positive contributions from the
TWE-Advance/Newhouse Partnership and the consolidation of Paragon, EBITDA and
operating income increased as a result of the revenue gains, offset in part by
the full year impact of the second round of cable rate regulations that went
into effect in July 1994, higher start-up costs for telephony operations and,
with respect to operating income only, higher depreciation and amortization
related to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $539
million in 1995, compared to $616 million in 1994. Interest expense increased to
$579 million, compared to $567 million in 1994, principally as a
F-13
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
result of higher short-term, floating-rates of interest paid on borrowings under
TWE's former and existing bank credit agreements, offset in part by interest
savings in the last quarter of 1995 on lower debt levels related to management's
asset sales program. There was other income, net, of $40 million in 1995,
compared to other expense, net, of $49 million in 1994, principally because of
an increase in investment-related income related to gains on the sale of certain
unclustered cable systems and other investments.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1996
TIME WARNER
1996 FINANCIAL CONDITION
At December 31, 1996, Time Warner had $12.7 billion of debt, $452 million
of available cash and equivalents (net debt of $12.2 billion), $488 million of
borrowings against future stock option proceeds, $949 million of mandatorily
redeemable preferred securities of subsidiaries, $1.7 billion of Series M
Preferred Stock and $9.5 billion of shareholders' equity, compared to $9.9
billion of debt, $1.2 billion of available cash and equivalents (net debt of
$8.7 billion), $949 million of mandatorily redeemable preferred securities of
subsidiaries and $3.7 billion of shareholders' equity at December 31, 1995. At
December 31, 1996, Time Warner also had $62 million of noncurrent cash and
equivalents held in escrow for purposes of funding certain preferred dividend
requirements. The increase in net debt principally reflects the assumption or
incurrence of approximately $4.8 billion of debt related to the TBS Transaction
and the CVI Acquisition, offset in part by the use of approximately $1.55
billion of net proceeds from the issuance of the Series M Preferred Stock for
debt reduction. The increase in shareholders' equity principally reflects the
issuance in 1996 of approximately 173.4 million shares of common stock in
connection with the TBS Transaction and approximately 2.9 million shares of
common stock and 6.3 million shares of preferred stock in connection with the
CVI Acquisition. The effect from such issuances was offset in part by an
increase in dividend requirements and the repurchase of approximately 11.4
million shares of Time Warner common stock at an aggregate cost of $456 million.
INVESTMENT IN TWE
Time Warner's investment in TWE at December 31, 1996 consisted of interests
in 74.49% of the Series A Capital and Residual Capital of TWE, and 100% of the
Senior Capital and Series B Capital of TWE. The priority capital interests
provide Time Warner (and with respect to the Series A Capital only, U S WEST)
with certain priority claims to the net partnership income of TWE and
distributions of TWE partnership capital, including certain priority
distributions of partnership capital in the event of liquidation or dissolution
of TWE. Each level of priority capital interest provides for an annual rate of
return equal to or exceeding 8%, including an above-market 13.25% annual rate of
return (11.25% to the extent concurrently distributed) related to Time Warner's
Series B Capital interest, which, when taken together with Time Warner's
contributed capital, represented a cumulative priority Series B Capital interest
of $5.2 billion at December 31, 1996. While the TWE partnership agreement
contemplates the reinvestment of significant partnership cash flows in the form
of capital expenditures and otherwise provides for certain other restrictions
that are expected to limit cash distributions on partnership interests for the
foreseeable future, Time Warner's $1.5 billion Senior Capital interest and, to
the extent not previously distributed, partnership income allocated thereto
(based on an 8% annual rate of return) is required to be distributed to Time
Warner in three annual installments beginning on July 1, 1997. Time Warner
expects that the initial distribution of Senior Capital will be approximately
$535 million.
F-14
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
SERIES M EXCHANGEABLE PREFERRED STOCK
In April 1996, Time Warner raised approximately $1.55 billion of net
proceeds for debt reduction in a private placement of 1.6 million shares of
exchangeable preferred stock, which pay cumulative dividends at the rate of
10 1/4% per annum. This issuance allowed the Company to realize cash proceeds
through a security whose payment terms are principally linked (until a
reorganization of TWE occurs, if any) to a portion of Time Warner's currently
noncash-generating interest in the Series B Capital of TWE, as more fully
described herein. Time Warner used these proceeds to redeem $250 million
principal amount of 8.75% Debentures due April 1, 2017 for approximately $265
million (including redemption premiums and accrued interest thereon), and to
reduce bank debt of TWI Cable Inc. ('TWI Cable'), its wholly owned subsidiary,
by approximately $1.3 billion. As part of the TBS Transaction, these preferred
shares were converted into registered shares of Series M exchangeable preferred
stock with substantially identical terms ('Series M Preferred Stock').
Generally, the terms of the Series M Preferred Stock only require Time
Warner to pay cash dividends or to redeem, prior to its mandatory redemption
date, any portion of the security for cash upon the receipt of certain cash
distributions from TWE with respect to Time Warner's interests in the Series B
Capital and Residual Capital of TWE (excluding stock option related
distributions and certain tax related distributions). However, because such cash
distributions are subject to restrictions under the TWE partnership agreement,
Time Warner does not expect to pay cash dividends or to redeem any portion of
the Series M Preferred Stock for cash in the foreseeable future. Instead, Time
Warner expects to satisfy its dividend requirements through the issuance of
additional shares of Series M Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends. In addition, upon a
reorganization of TWE, Time Warner must elect either to redeem each outstanding
share of Series M Preferred Stock for cash, subject to certain conditions, or to
exchange the Series M Preferred Stock for new Series L Preferred Stock, which
also pays cumulative dividends at the rate of 10 1/4% per annum but is not
linked to Time Warner's interest in the Series B Capital of TWE. The terms of
the Series L Preferred Stock do not require Time Warner to pay cash dividends
until July 2006 and provide Time Warner with an option to exchange the Series L
Preferred Stock, subject to certain conditions, into 10 1/4% Senior Subordinated
Debentures which do not require the payment of cash interest until July 2006.
See Note 10 to the accompanying consolidated financial statements for a summary
of the principal terms of the Series M Preferred Stock.
COMMON STOCK REPURCHASE PROGRAM
In April 1996, Time Warner's Board of Directors authorized a program to
repurchase, from time to time, up to 15 million shares of Time Warner common
stock. In connection therewith, Time Warner entered into a five-year, $750
million revolving credit facility (the 'Stock Option Proceeds Credit Facility')
in May 1996. Borrowings under the Stock Option Proceeds Credit Facility are
principally used to fund stock repurchases and approximately $200 million of
preferred dividend requirements on Time Warner's Series G, H, I and J Preferred
Stock. The common stock repurchased under the program is expected to be used to
satisfy future share issuances related to the exercise of existing employee
stock options. Actual repurchases in any period will be subject to market
conditions. As of December 31, 1996, Time Warner had acquired approximately 11.4
million shares of its common stock for an aggregate cost of $456 million. Such
repurchases were principally funded with borrowings under the Stock Option
Proceeds Credit Facility.
The Stock Option Proceeds Credit Facility initially provided for borrowings
of up to $750 million, of which up to $100 million is reserved solely for the
payment of interest and fees thereunder. At December 31, 1996, $488 million had
been borrowed under the Stock Option Proceeds Credit Facility. Borrowings under
the Stock Option Proceeds Credit Facility generally bear interest at LIBOR plus
a margin equal to 75 basis points
F-15
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
and are principally expected to be repaid from the cash proceeds received from
the exercise of designated employee stock options. The receipt of such stock
option proceeds permanently reduces the borrowing availability under the
facility, which has been reduced to approximately $715 million as of December
31, 1996. At December 31, 1996, based on a closing market price of Time Warner
common stock of $37.50, the aggregate value of potential proceeds to Time Warner
from the exercise of outstanding vested, 'in the money' stock options covered
under the facility was approximately $1.5 billion, representing a 2.1 to 1
coverage ratio over the related borrowing availability.
To the extent that stock option proceeds are not sufficient to satisfy Time
Warner's obligations under the Stock Option Proceeds Credit Facility, Time
Warner is generally required to repay such borrowings using proceeds from the
sale of shares of its common stock held in escrow under the Stock Option
Proceeds Credit Facility or, at Time Warner's election, using available cash on
hand. In addition, as a result of Time Warner's commitment to use the Stock
Option Proceeds Credit Facility to fund approximately $200 million of preferred
dividend requirements on its Series G, H, I and J Preferred Stock, Time Warner
has also supplementally agreed to place in escrow an amount of cash equal to the
excess of the unpaid preferred dividend requirements on such series of
convertible preferred stock over the borrowing availability under the facility
at any time. At December 31, 1996, Time Warner had placed $62 million of cash
and 36 million shares in escrow under these arrangements, which shares are not
considered to be issued and outstanding capital stock of the Company. Time
Warner may be required, from time to time, to have up to 52.5 million shares
held in escrow.
Because borrowings under the Stock Option Proceeds Credit Facility are
expected to be principally repaid by Time Warner from the cash proceeds related
to the exercise of employee stock options, Time Warner's principal credit rating
agencies have concluded that such borrowings and related financing costs are
credit neutral and are excludable from debt and interest expense, respectively,
for their purposes in evaluating Time Warner's leverage and coverage ratios. In
addition, because Time Warner has committed to use the Stock Option Proceeds
Credit Facility to fund approximately $200 million of preferred dividend
requirements on its Series G, H, I and J Preferred Stock, and has entered into
the escrow arrangements described above, such preferred dividend requirements
are similarly excluded from preferred dividends for purposes of evaluating Time
Warner's coverage ratio.
DEBT REFINANCINGS
In 1996 and early 1997, Time Warner continued to capitalize on favorable
market conditions through certain debt refinancings, which lowered interest
rates, staggered debt maturities and, with respect to the redemption of the
8.75% Convertible Debentures in February 1996 and the TBS Convertible Notes in
February 1997, eliminated the potential dilution from the conversion of such
securities into 31.3 million shares of common stock.
In January 1996, in connection with the CVI Acquisition, subsidiaries of
Time Warner assumed $500 million of public notes and debentures of CVI and
borrowed $1.5 billion under the 1995 Credit Agreement to refinance a like-amount
of other indebtedness assumed or incurred in such acquisition.
In February 1996, Time Warner redeemed the remaining $1.2 billion principal
amount of 8.75% Convertible Debentures for $1.28 billion, including redemption
premiums and accrued interest thereon. The redemption was financed with (1)
proceeds raised from a $575 million issuance in December 1995 of Company-
obligated mandatorily redeemable preferred securities of a subsidiary and (2)
$750 million of proceeds raised from the issuance in January 1996 of (i) $400
million principal amount of 6.85% debentures due 2026, which are redeemable at
the option of the holders thereof in 2003, (ii) $200 million principal amount of
8.3% discount
F-16
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
debentures due 2036, which do not pay cash interest until 2016, (iii) $166
million principal amount of 7.48% debentures due 2008 and (iv) $150 million
principal amount of 8.05% debentures due 2016.
During the first quarter of 1997, Time Warner entered into a number of
financing transactions, which resulted in the refinancing of approximately $600
million of debt. Time Warner redeemed $300 million principal amount of 10.75%
Senior Notes due January 30, 2002 of TWI Cable and approximately $283 million
accreted amount of TBS Convertible Notes at an aggregate redemption price of
approximately $600 million, including redemption premiums and accrued interest
thereon. Time Warner also issued $600 million principal amount of Floating Rate
Reset Notes due December 30, 2031 (the 'Floating Rate Reset Notes'). The
Floating Rate Reset Notes bear interest at a floating rate equal to LIBOR less
25 basis points until December 30, 2001, at which time the interest rate will be
reset at a fixed rate equal to 6.59% plus a margin based upon Time Warner's
credit risk at such time. The Floating Rate Reset Notes are redeemable at the
election of the holders, in whole but not in part, on December 30, 2001.
DEBT REDUCTION PROGRAM
As part of a continuing strategy to enhance the financial position and
credit statistics of Time Warner and the Entertainment Group, a $2-$3 billion
debt reduction program was initiated in 1995. Including the sale of 51% of TWE's
interest in Six Flags in June 1995, the sale of an interest in QVC, Inc. in
February 1995, the sale of certain unclustered cable systems, the proceeds
raised from the monetization of Time Warner's investment in Hasbro in August
1995 (through the issuance of mandatorily redeemable preferred securities of a
subsidiary) and a portion of its interest in TWE in April 1996 (through the
issuance of Series M Preferred Stock) and the expected 1997 sale of TWE's
interest in E! Entertainment Television, Inc., Time Warner and the Entertainment
Group on a combined basis have exceeded their initial goals under this program.
CREDIT STATISTICS
The combination of asset sales and debt refinancings is intended to
strengthen the financial position of Time Warner and the Entertainment Group
and, when taken together with EBITDA growth, is expected to continue the
improvement of Time Warner's overall credit statistics. These credit statistics
consist of commonly-used liquidity measures such as leverage and coverage
ratios. The leverage ratio represents the ratio of total debt, less available
cash and equivalents ('Net debt') to total business segment EBITDA, less
corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the ratio
of Adjusted EBITDA to total interest expense and/or preferred dividends. Those
ratios, on a pro forma basis for 1996 and 1995, and on a historical basis for
1994, are as set forth below for each of Time Warner and Time Warner and the
Entertainment Group combined. Certain rating agencies and other credit analysts
place more emphasis on the combined ratios while others place more emphasis on
the Time Warner stand-alone ratios. It should be understood, however, that the
assets of the Entertainment Group are not freely available to fund the cash
needs of Time Warner.
F-17
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA(a)
---------------- HISTORICAL
1996 1995 1994
------ ------ ----------
<S> <C> <C> <C>
Time Warner and Entertainment Group combined:
Net debt/Adjusted EBITDA............................................................. 4.1x 4.3x 5.3x
Adjusted EBITDA/Interest (b)......................................................... 2.9x 2.5x 2.1x
Adjusted EBITDA/Interest and preferred dividends (b)(c).............................. 2.3x 2.0x 2.1x
Time Warner:
Net debt/Adjusted EBITDA............................................................. 5.9x 5.7x 8.3x
Adjusted EBITDA/Interest (b)......................................................... 2.0x 1.9x 1.4x
Adjusted EBITDA/Interest and preferred dividends (b)(c).............................. 1.5x 1.4x 1.4x
</TABLE>
- ------------
(a) Pro forma ratios for 1996 and 1995 give effect to the Time Warner
Transactions as if each of such transactions occurred at the beginning of
1995. Historical ratios for 1996 and 1995 are not meaningful and have not
been presented because they reflect the operating results of acquired or
disposed entities for only a portion of the year in comparison to year-end
Net debt levels.
(b) Excludes interest of $26 million in 1996, $28 million in 1995 and $12
million in 1994 which was paid to TWE in connection with borrowings under
Time Warner's $400 million credit agreement with TWE, and, in 1996 only,
excludes interest of $13 million on borrowings under the Stock Option
Proceeds Credit Facility.
(c) Includes preferred dividends related to Company-obligated mandatorily
redeemable preferred securities of subsidiaries. Excludes preferred
dividends of $17 million in 1996 related to Time Warner's Series G, H, I and
J Preferred Stock, which Time Warner has funded with borrowings under the
Stock Option Proceeds Credit Facility.
CASH FLOWS
During 1996, Time Warner's cash provided by operations amounted to $253
million and reflected $1.954 billion of EBITDA from its Publishing, Music, Cable
Networks-TBS, Filmed Entertainment-TBS and Cable businesses, $228 million of
distributions from TWE and $147 million from the securitization of receivables,
less $839 million of interest payments, $338 million of income taxes, $78
million of corporate expenses and $821 million related to an increase in other
working capital requirements, balance sheet accounts and noncash items. Cash
provided by operations of $1.051 billion in 1995 reflected $1.256 billion of
EBITDA from the Publishing, Music and Cable businesses, $1.063 billion of net
distributions from TWE and $35 million from the securitization of receivables,
less $659 million of interest payments, $278 million of income taxes, $74
million of corporate expenses and $292 million related to an increase in other
working capital requirements, balance sheet accounts and noncash items.
Cash used by investing activities increased to $424 million in 1996,
compared to $271 million in 1995, principally as a result of a decrease in
investment proceeds realized in connection with management's debt reduction
program and higher capital expenditures, offset in part by lower investment
spending. Capital expenditures increased to $481 million in 1996, compared to
$266 million in 1995, principally as a result of higher cable capital spending
associated with Time Warner's cable acquisitions.
Cash used by financing activities was $500 million in 1996, compared to
cash provided by financing activities of $123 million in 1995. The use of cash
in 1996 principally resulted from higher cash dividend requirements and the use
of $557 million of noncurrent cash and equivalents raised in the December 1995
issuance of the Preferred Trust Securities to redeem the remaining portion of
the 8.75% Convertible Debentures in February 1996, offset in part by borrowings
incurred to finance the cash portion of the consideration paid to acquire CVI.
Cash dividends paid increased to $287 million in 1996, compared to $171 million
in 1995, principally as a result of dividends paid on the preferred stock issued
in connection with the Cable Acquisitions and the ITOCHU/Toshiba Transaction. In
addition, Time Warner raised approximately $1.55 billion of net proceeds in 1996
from the issuance of 1.6 million shares of Series M Preferred Stock and used the
net proceeds therefrom to reduce debt. Time Warner also borrowed $488 million
under its Stock Options Proceeds Credit
F-18
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Facility and used the proceeds therefrom to repurchase approximately 11.4
million shares of its common stock at an aggregate cost of $456 million.
The assets and cash flows of certain consolidated and unconsolidated
subsidiaries of Time Warner are restricted by certain borrowing and partnership
agreements. The assets and cash flows of TBS, TWE and TWI Cable are restricted
by their respective bank credit agreements, although each entity is permitted to
incur additional indebtedness to make loans, advances, distributions and other
cash payments to Time Warner, subject to its individual compliance with the cash
flow coverage and leverage ratio covenants contained therein. Further, under the
TWE partnership agreement, the assets and cash flows of TWE are unavailable to
Time Warner except through the payment of certain fees, reimbursements, cash
distributions and loans, which are subject to limitations.
Management believes that Time Warner's operating cash flow, cash and
marketable securities and additional borrowing capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future without distributions
and loans from its restricted subsidiaries, including TWE, above those permitted
by existing agreements.
ENTERTAINMENT GROUP
1996 FINANCIAL CONDITION
At December 31, 1996, the Entertainment Group had $5.7 billion of debt,
$1.5 billion of Time Warner General Partners' Senior Capital and $6.7 billion of
partners' capital, compared to $6.2 billion of debt, $1.4 billion of Time Warner
General Partners' Senior Capital and $6.6 billion of partners' capital (net of
the $169 million uncollected portion of the note receivable from U S WEST) at
December 31, 1995. Cash and equivalents were $216 million at December 31, 1996,
compared to $209 million at December 31, 1995, reducing the debt-net-of-cash
amounts for the Entertainment Group to $5.5 billion and $6 billion,
respectively.
CREDIT STATISTICS
Entertainment Group leverage and coverage ratios for 1996, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA HISTORICAL
1996 1995(a) 1994
---------- --------- ----------
<S> <C> <C> <C>
Net debt/Adjusted EBITDA....................................................... 2.4x 2.9x 3.5x
Adjusted EBITDA/Interest....................................................... 4.8x 3.8x 3.1x
</TABLE>
- ------------
(a) Pro forma ratios for 1995 give effect to the Entertainment Group
Transactions, as if each of such transactions had occurred at the beginning
of 1995. Historical ratios for 1995 are not meaningful and have not been
presented because they reflect the operating results of acquired or disposed
entities for only a portion of the year in comparison to year-end Net debt
levels.
CASH FLOWS
In 1996, the Entertainment Group's cash provided by operations amounted to
$1.912 billion and reflected $2.334 billion of EBITDA from the Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses and $234 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items, less $513 million
of interest payments, $74 million of income taxes and $69 million of corporate
expenses. Cash provided by operations of $1.495 billion in 1995 reflected $2.052
billion of business segment EBITDA and $159 million related to a reduction in
working capital requirements, other balance sheet accounts and noncash items,
less $577 million of interest payments, $75 million of income taxes and $64
million of corporate expenses.
Cash used by investing activities was $1.253 billion in 1996, compared to
$750 million in 1995, principally as a result of a $508 million decrease in
investment proceeds realized in 1995 in connection with management's
F-19
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
debt reduction program and higher capital expenditures. Capital expenditures
increased to $1.719 billion in 1996, compared to $1.653 billion in 1995,
principally as a result of higher capital spending by the Cable division.
Cash used by financing activities was $652 million in 1996, compared to
$1.607 billion in 1995, principally as a result of a lower level of debt
reduction realized in 1996 in connection with management's debt reduction
program and an $835 million decrease in net distributions paid to Time Warner,
offset in part by a $433 million decrease in collections on the note receivable
from U S WEST.
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 Time Warner Cable,
including the cable operations of both Time Warner and TWE, amounted to $1.563
billion in 1996, compared to $1.349 billion in 1995, and was financed in part
through collections on the note receivable from U S WEST of $169 million in 1996
and $602 million in 1995. Cable capital spending for 1997 is budgeted to be
steady at approximately $1.6 billion and is expected to be funded principally 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
Time Warner, TWE and the TWE-Advance/Newhouse Partnership. Management expects to
continue to finance such level of investment principally 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.
OFF-BALANCE SHEET ASSETS
As discussed below, Time Warner believes that the value of certain
off-balance sheet assets should be considered, along with other factors
discussed elsewhere herein, in evaluating the Company's financial condition and
prospects for future results of operations, including its ability to fund its
capital and liquidity needs.
Intangible Assets
As a creator and distributor of branded information and entertainment
copyrights, Time Warner and the Entertainment Group have a significant amount of
internally-generated intangible assets whose value is not fully reflected in
their respective consolidated balance sheets. Such intangible assets extend
across Time Warner's principal business interests, but are best exemplified by
Time Warner's collection of copyrighted music product, its libraries of
copyrighted film and television product and the creation or extension of brands.
Generally accepted accounting principles do not recognize the value of such
assets, except at the time they may be acquired in a business combination
accounted for by the purchase method of accounting.
Because Time Warner owns the copyrights to such creative material, it
continually generates revenue through the sale of such products across different
media and in new and existing markets. The value of film and television-related
copyrighted product and trademarks is continually realized by the licensing of
films and
F-20
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
television series to secondary markets and the licensing of trademarks, such as
the Looney Tunes characters and Batman, to the retail industry and other
markets. In addition, technological advances, such as the introduction of the
compact disc and home videocassette in the 1980's and potentially the digital
video disc in the future, have historically generated significant revenue
opportunities through the repackaging and sale of such copyrighted products in
the new technological format. Accordingly, such intangible assets have
significant off-balance sheet asset value that is not fully reflected in the
consolidated balance sheets of Time Warner and the Entertainment Group.
Filmed Entertainment Backlog
Backlog represents 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. Backlog of Warner
Bros. amounted to $1.502 billion and $1.056 billion at December 31, 1996 and
1995, respectively (including amounts relating to the licensing of film product
to Time Warner's and TWE's cable television networks of $463 million and $175
million, respectively). Warner Bros.' backlog increased principally as a result
of the licensing of the hit television series Friends and ER for domestic
syndication, as well as for exhibition on Time Warner's cable television
networks beginning in 1998. Backlog of the recently-acquired film production
companies of TBS amounted to approximately $290 million at December 31, 1996
(including amounts relating to the licensing of film product to Time Warner's
cable television networks of approximately $90 million).
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.
INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT
Interest Rate Swap Contracts
Time Warner uses interest rate swap contracts to adjust the proportion of
total debt that is subject to variable and fixed interest rates. At December 31,
1996, Time Warner had interest rate swap contracts to pay floating-rates of
interest (average six-month LIBOR rate of 5.7%) and receive fixed-rates of
interest (average rate of 5.5%) on $2.3 billion notional amount of indebtedness,
which resulted in approximately 47% of Time Warner's underlying debt, and 43% of
the debt of Time Warner and the Entertainment Group combined, being subject to
variable interest rates. At December 31, 1995, Time Warner had interest rate
swap contracts on $2.6 billion notional amount of indebtedness.
Foreign Exchange Contracts
Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future royalties and license fees owed to Time Warner or TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted products
abroad may be adversely affected by changes in foreign currency exchange rates.
As part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, Time Warner hedges a portion of its
and TWE's combined foreign currency exposures anticipated over the
F-21
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
ensuing twelve month period. At December 31, 1996, Time Warner had effectively
hedged approximately half of the combined estimated foreign currency exposures
that principally relate to anticipated cash flows to be remitted to the U.S.
over the ensuing twelve month period, using foreign exchange contracts that
generally have maturities of three months or less, which are generally rolled
over to provide continuing coverage throughout the year. Time Warner often
closes foreign exchange sale contracts by purchasing an offsetting purchase
contract. At December 31, 1996, Time Warner had contracts for the sale of $447
million and the purchase of $104 million of foreign currencies at fixed rates,
compared to contracts for the sale of $504 million and the purchase of $140
million of foreign currencies at December 31, 1995.
See Note 14 to the accompanying consolidated financial statements for a
more comprehensive description of Time Warner's interest rate and foreign
currency risk management activities.
F-22
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.......................................................................... $ 452 $ 628
Receivables, less allowances of $976 and $786 million......................................... 2,421 1,755
Inventories................................................................................... 941 443
Prepaid expenses.............................................................................. 1,007 894
------- -------
Total current assets.......................................................................... 4,821 3,720
Noncurrent cash and equivalents............................................................... 62 557
Noncurrent inventories........................................................................ 1,698 --
Investments in and amounts due to and from Entertainment Group................................ 5,814 5,734
Other investments............................................................................. 1,919 2,389
Property, plant and equipment, net............................................................ 1,986 1,119
Music catalogues, contracts and copyrights.................................................... 1,035 1,140
Cable television and sports franchises........................................................ 4,203 1,696
Goodwill...................................................................................... 12,421 5,213
Other assets.................................................................................. 1,105 564
------- -------
Total assets.................................................................................. $35,064 $22,132
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................................. $ 715 $ 672
Participations, royalties and programming costs payable....................................... 1,196 755
Debt due within one year...................................................................... 11 34
Other current liabilities..................................................................... 2,090 1,566
------- -------
Total current liabilities..................................................................... 4,012 3,027
Long-term debt................................................................................ 12,713 9,907
Borrowings against future stock option proceeds............................................... 488 --
Deferred income taxes......................................................................... 4,082 3,420
Unearned portion of paid subscriptions........................................................ 679 654
Other liabilities............................................................................. 967 508
Company-obligated mandatorily redeemable preferred securities of subsidiaries
holding solely subordinated notes and debentures of subsidiaries of the Company (a)......... 949 949
Series M exchangeable preferred stock, $.10 par value, 15.2 million shares authorized,
1.72 million shares outstanding and $1.720 billion liquidation preference................... 1,672 --
SHAREHOLDERS' EQUITY
Preferred stock, $.10 and $1 par value, 250 million shares authorized, 35.6 million and 29.7
million shares outstanding, $3.559 billion and $2.994 billion liquidation preference........ 4 30
LMCN-V Class Common Stock, $.01 par value, 60 million shares authorized, 50.6 million shares
outstanding................................................................................. 1 --
Common stock, $.01 and $1 par value, 2 billion shares authorized, 508.4 million and 387.7
million shares outstanding.................................................................. 5 388
Paid-in capital............................................................................... 12,250 5,422
Accumulated deficit........................................................................... (2,758) (2,173)
------- -------
Total shareholders' equity.................................................................... 9,502 3,667
------- -------
Total liabilities and shareholders' equity.................................................... $35,064 $22,132
------- -------
------- -------
</TABLE>
- ------------
(a) Includes $374 million of preferred securities that are redeemable for cash
or, at Time Warner's option, approximately 18.1 million shares of Hasbro,
Inc. common stock owned by Time Warner (Note 9).
See accompanying notes.
F-23
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Revenues (a)......................................................................... $10,064 $8,067 $7,396
------- ------ ------
Cost of revenues (a)(b).............................................................. 5,922 4,682 4,307
Selling, general and administrative (a)(b)........................................... 3,176 2,688 2,376
------- ------ ------
Operating expenses................................................................... 9,098 7,370 6,683
------- ------ ------
Business segment operating income.................................................... 966 697 713
Equity in pretax income of Entertainment Group (a)................................... 290 256 176
Interest and other, net (a).......................................................... (1,174) (877) (724)
Corporate expenses (a)............................................................... (78) (74) (76)
------- ------ ------
Income before income taxes........................................................... 4 2 89
Income taxes......................................................................... (160) (126) (180)
------- ------ ------
Loss before extraordinary item....................................................... (156) (124) (91)
Extraordinary loss on retirement of debt, net of $22 million and $26 million
income tax benefit in 1996 and 1995, respectively.................................. (35) (42) --
------- ------ ------
Net loss............................................................................. (191) (166) (91)
Preferred dividend requirements...................................................... (257) (52) (13)
------- ------ ------
Net loss applicable to common shares................................................. $ (448) $ (218) $ (104)
------- ------ ------
------- ------ ------
Loss per common share:
Loss before extraordinary item....................................................... $ (.95) $ (.46) $ (.27)
------- ------ ------
------- ------ ------
Net loss............................................................................. $ (1.04) $ (.57) $ (.27)
------- ------ ------
------- ------ ------
Average common shares................................................................ 431.2 383.8 378.9
------- ------ ------
------- ------ ------
</TABLE>
- ------------
(a) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the years ended
December 31, 1996, 1995 and 1994, respectively: revenues-$224 million, $211
million and $203 million; cost of revenues-$(177) million, $(108) million
and $(109) million; selling, general and administrative-$34 million, $46
million and $47 million; equity in pretax income of Entertainment
Group-$(29) million, $(95) million and $(120) million; interest and other,
net-$(33) million, $(27) million and $13 million; and corporate expenses-$69
million, $64 million and $60 million (Note 17).
<TABLE>
<S> <C> <C> <C>
(b) Includes depreciation and amortization expense of:................................ $ 988 $ 559 $ 437
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes.
F-24
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
OPERATIONS
Net loss.............................................................................. $ (191) $ (166) $ (91)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.............................................. 35 42 --
Depreciation and amortization......................................................... 988 559 437
Noncash interest expense.............................................................. 96 176 219
Excess (deficiency) of distributions over equity in pretax income of Entertainment
Group............................................................................... (62) 807 (56)
Equity in income of other investee companies, net of distributions.................... (53) (16) (17)
Changes in operating assets and liabilities:
Receivables....................................................................... (39) (68) (47)
Inventories....................................................................... (180) (52) (38)
Accounts payable and other liabilities............................................ (408) 160 324
Other balance sheet changes....................................................... 67 (391) (258)
------- ------- -----
Cash provided by operations........................................................... 253 1,051 473
------- ------- -----
INVESTING ACTIVITIES
Investments and acquisitions.......................................................... (261) (381) (187)
Capital expenditures.................................................................. (481) (266) (164)
Investment proceeds................................................................... 318 376 118
------- ------- -----
Cash used by investing activities..................................................... (424) (271) (233)
------- ------- -----
FINANCING ACTIVITIES
Borrowings............................................................................ 3,431 2,023 582
Debt repayments....................................................................... (5,271) (2,693) (626)
Borrowings against future stock option proceeds....................................... 488
Repurchases of Time Warner common stock............................................... (456) -- --
Issuance of Series M Preferred Stock.................................................. 1,550 -- --
Issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiaries........................................................................ -- 949 --
Dividends paid........................................................................ (287) (171) (142)
Stock option and dividend reinvestment plans.......................................... 105 106 34
Other, principally financing costs.................................................... (60) (91) (6)
------- ------- -----
Cash provided (used) by financing activities.......................................... (500) 123 (158)
------- ------- -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS........................................... (671) 903 82
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a)....................................... 1,185 282 200
------- ------- -----
CASH AND EQUIVALENTS AT END OF PERIOD (a)............................................. $ 514 $ 1,185 $ 282
------- ------- -----
------- ------- -----
</TABLE>
- ------------
(a) Includes current and noncurrent cash and equivalents at December 31, 1996
and 1995.
See accompanying notes.
F-25
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK (a) CAPITAL DEFICIT TOTAL
--------- ---------- ------- ----------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993............................. $ 1 $378 $ 2,537 $(1,546) $1,370
Net loss................................................. (91) (91)
Dividends on common stock-$.35 per share................. (133) (133)
Dividends on Series B preferred stock-$9.28 per share.... 4 (13) (9)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans (1 million shares)...... 1 53 54
Unrealized losses on certain marketable equity
investments............................................ (75) (75)
Other.................................................... (6) 38 32
--- ----- ------- ----------- ------
BALANCE AT DECEMBER 31, 1994............................. 1 379 2,588 (1,820) 1,148
Net loss................................................. (166) (166)
Dividends on common stock-$.36 per share................. (138) (138)
Dividends on Series B preferred stock-$6.40 per share.... 3 (8) (5)
Dividends on Series C, D, G, H and I preferred
stock-$3.75 per share per year effective from the
respective dates of issuance........................... (44) (44)
Issuance of common and preferred stock in the KBLCOM and
Summit acquisitions (14.3 million preferred shares and
2.6 million common shares)............................. 14 3 1,367 1,384
Issuance of preferred stock in the ITOCHU/Toshiba
Transaction (15 million shares)........................ 15 1,335 1,350
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans (3.9 million shares).... 4 122 126
Unrealized losses on certain marketable equity
investments............................................ (14) (14)
Other (1.9 million shares issued)........................ 2 7 17 26
--- ----- ------- ----------- ------
BALANCE AT DECEMBER 31, 1995............................. 30 388 5,422 (2,173) 3,667
Net loss................................................. (191) (191)
Dividends on common stock-$.36 per share................. (155) (155)
Dividends on Series B preferred stock-$3.36 per share.... (2) (2)
Dividends on Series D, E, F, G, H, I and J preferred
stock-$3.75 per share.................................. (133) (133)
Dividends on Series M exchangeable preferred stock (120
thousand shares paid in-kind).......................... (122) (122)
Issuance of common and preferred stock in the CVI
acquisition (6.3 million preferred shares and 2.9
million common shares)................................. 6 3 671 680
Reduction in par value of common stock and preferred
stock in connection with the TBS Transaction........... (32) (382) 414 --
Issuance of common stock in the TBS Transaction (173.4
million shares)........................................ 2 6,025 6,027
Repurchases of Time Warner common stock (11.4 million
shares)................................................ (11) (445) (456)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans (4.6 million shares).... 4 159 (8) 155
Unrealized gains on certain marketable equity
investments............................................ 17 17
Other (1.8 million shares issued)........................ 2 4 9 15
--- ----- ------- ----------- ------
BALANCE AT DECEMBER 31, 1996............................. $ 4 $ 6 $12,250 $(2,758) $9,502
--- ----- ------- ----------- ------
--- ----- ------- ----------- ------
</TABLE>
- ------------
(a) Includes 50.6 million shares of LMCN-V Class Common Stock issued in 1996 in
connection with the TBS Transaction (Note 2).
See accompanying notes.
F-26
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
On October 10, 1996, Time Warner Inc. ('Time Warner' or the 'Company')
acquired the remaining 80% interest in Turner Broadcasting System, Inc. ('TBS')
that it did not already own, as more fully described herein (Note 2). 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 ('Old Time Warner', now
known as Time Warner Companies, Inc.), and Old Time Warner and TBS became
separate, wholly owned subsidiaries of the new parent company ('New Time
Warner'). References herein to 'Time Warner' or the 'Company' refer to Old Time
Warner prior to October 10, 1996 and New Time Warner thereafter.
Time Warner is the world's leading media and entertainment company, whose
principal business objective is to create and distribute branded information and
entertainment copyrights throughout the world. Time Warner classifies its
business interests into four fundamental areas: Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production, television broadcasting and theme parks;
Cable Networks, consisting principally of interests in cable television
programming and sports franchises; Publishing, consisting principally of
interests in magazine publishing, book publishing and direct marketing; and
Cable, consisting principally of interests in cable television systems. A
majority of Time Warner's interests in filmed entertainment, television
production, television broadcasting and theme parks, a portion of its interests
in cable television programming and a majority of its cable television systems
are held through Time Warner Entertainment Company, L.P. ('TWE'). Time Warner
owns 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'). Time Warner does not
consolidate TWE and certain related companies (the 'Entertainment Group') for
financial reporting purposes because of certain limited partnership approval
rights related to TWE's interest in certain cable television systems.
Each of the business interests within Entertainment, Cable Networks,
Publishing and Cable is important to management's objective of increasing
shareholder value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands and
copyrights include (1) 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, the Atlantic and Elektra
Entertainment Groups and Warner Music International, (2) the unique and
extensive film, television and animation libraries of Warner Bros. and TBS, and
trademarks such as the Looney Tunes characters, Batman and The Flintstones, (3)
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 the
Company's collection of children's cartoons and television programming, (4) Six
Flags, the largest regional theme park operator in the United States, in which
TWE owns a 49% interest, (5) leading cable television networks, such as HBO,
Cinemax, CNN, TNT and the TBS Superstation, (6) sports franchises consisting of
the Atlanta Braves and Atlanta Hawks, (7) magazine franchises such as Time,
People and Sports Illustrated and direct marketing brands such as Time Life Inc.
and Book-of-the-Month Club and (8) Time Warner Cable, the second largest
operator of cable television systems in the U.S.
The operating results of Time Warner's various business interests are
presented herein as an indication of financial performance (Note 15). Except for
start-up losses incurred in connection with The WB Network, Time Warner'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 in various
acquisitions accounted for by the purchase method of accounting. Noncash
amortization of intangible assets
F-27
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded by Time Warner's business interests, including the unconsolidated
business interests of the Entertainment Group, amounted to $1.117 billion in
1996, $822 million in 1995 and $782 million in 1994.
BASIS OF PRESENTATION
The consolidated financial statements of Time Warner reflect the
acquisitions of Summit Communications Group, Inc. ('Summit') effective as of May
2, 1995, KBLCOM Incorporated ('KBLCOM') effective as of July 6, 1995,
Cablevision Industries Corporation and related companies ('CVI') effective as of
January 4, 1996 (collectively, the 'Cable Acquisitions') and TBS effective as of
October 10, 1996. Certain reclassifications have been made to the prior years'
financial statements to conform to the 1996 presentation.
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of Time Warner and
all companies in which Time Warner has a controlling voting interest
('subsidiaries'), as if Time Warner and its subsidiaries were a single company.
Significant intercompany accounts and transactions between the consolidated
companies have been eliminated. Significant accounts and transactions between
Time Warner and the Entertainment Group are disclosed as related party
transactions (Note 17).
The Entertainment Group and investments in certain other companies in which
Time Warner has significant influence but less than a controlling voting
interest, are accounted for using the equity method. Under the equity method,
only Time Warner's investment in and amounts due to and from the equity investee
are included in the consolidated balance sheet, only Time Warner's share of the
investee's earnings is included in the consolidated operating results, and only
the dividends, cash distributions, loans or other cash received from the
investee, less any additional cash investments, loan repayments or other cash
paid to the investee are included in the consolidated cash flows.
Investments in companies in which Time Warner does not have the controlling
interest or an ownership and voting interest so large as to exert significant
influence are accounted for at market value if the investments are publicly
traded and there are no resale restrictions, or at cost, if the sale of a
publicly-traded investment is restricted or if the investment is not publicly
traded. Unrealized gains and losses on investments accounted for at market value
are reported net-of-tax in accumulated deficit until the investment is sold, at
which time the realized gain or loss is included in income. Dividends and other
distributions of earnings from both market value and cost method investments are
included in income when declared.
The effect of any changes in Time Warner's ownership interests resulting
from the issuance of equity capital by consolidated subsidiaries or equity
investees to unaffiliated parties is included in income.
FOREIGN CURRENCY
The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on
the balance sheet date, and local currency revenues and expenses are translated
at average rates of exchange during the period. Resulting translation gains or
losses, which have not been material, are included in accumulated deficit.
Foreign currency transaction gains and losses, which have not been material, are
included in operating results.
F-28
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the sale of future and existing music and publishing-related
products, as well as from the distribution of theatrical and television product,
in order to evaluate the ultimate recoverability of accounts receivables, film
inventory and artist and author advances recorded as assets in the consolidated
balance sheet. Accounts receivables and sales in the music and publishing
industries, as well as sales of home video product in the filmed entertainment
industry, are subject to customers' rights to return unsold items. Management
periodically reviews such estimates and it is reasonably possible that
management's assessment of recoverability of accounts receivables, individual
films and television product and individual artist and author advances may
change based on actual results and other factors.
REVENUES AND COSTS
The unearned portion of paid subscriptions is deferred until magazines are
delivered to subscribers. Upon each delivery, a proportionate share of the gross
subscription price is included in revenues.
Inventories of magazines, books, cassettes and compact discs are stated at
the lower of cost or estimated realizable value. Cost is determined using
first-in, first-out; last-in, first-out; and average cost methods. In accordance
with industry practice, certain products (such as magazines, books, home
videocassettes, compact discs and cassettes) are sold to customers with the
right to return unsold items. Revenues from such sales represent gross sales
less a provision for future returns. Returned goods included in inventory are
valued at estimated realizable value but not in excess of cost.
Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, basic cable, broadcast
network and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is
principally completed within eighteen months of initial release and thereafter
with respect to distribution to the basic cable, broadcast network and
syndicated television markets (the secondary markets). Theatrical revenues are
recognized as the films are exhibited. Home video revenues, less a provision for
returns, are recognized when the home videos are sold. Revenues from the
distribution of theatrical product to cable, broadcast network and syndicated
television markets are recognized when the films are available to telecast.
Television films and series are initially produced for the networks or
first-run television syndication (the primary markets) and may be subsequently
licensed to foreign or domestic cable and syndicated television markets (the
secondary markets). Revenues from the distribution of television product are
recognized when the films or series are available to telecast, except for barter
agreements where the recognition of revenue is deferred until the related
advertisements are exhibited.
License agreements for the telecast of theatrical and television product in
the cable, broadcast network and syndicated television markets are routinely
entered into well in advance of their available date for telecast, which is
generally determined by the telecast privileges granted under previous license
agreements. Accordingly, there are significant contractual rights to receive
cash and barter upon which revenues will not be recognized until such product is
available for telecast under the contractual terms of the related license
agreement. Such contractual rights for which revenue is not yet recognizable is
referred to as 'backlog.' Excluding advertising barter contracts, backlog of the
recently-acquired film production companies of TBS amounted to approximately
$290 million at December 31, 1996 (including amounts relating to the licensing
of film product to Time Warner's cable television networks of approximately $90
million).
F-29
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost includes direct production and
acquisition costs, production overhead and capitalized interest. A portion of
the cost to acquire TBS in 1996 was allocated to its theatrical and television
product, including an allocation to purchased program rights (such as the film
and animation libraries of Hanna-Barbera Inc. and Turner Entertainment Co., the
latter of which includes the former film and television libraries of Metro-
Goldwyn-Mayer, Inc. and RKO Pictures, Inc.) and product that had been exhibited
at least once in all markets ('Library'). The Library is amortized on a
straight-line basis over twenty years. Individual films and series are
amortized, and the related participations and residuals are accrued, based on
the proportion that current revenues from the film or series bear to an estimate
of total revenues anticipated from all markets. These estimates are revised
periodically and losses, if any, are provided in full. Current film inventories
include the unamortized cost of completed feature films allocated to the primary
markets, television films and series in production pursuant to a contract of
sale, film rights acquired for the home video market and advances pursuant to
agreements to distribute third-party films in the primary markets. Noncurrent
film inventories include the unamortized cost of completed theatrical and
television films allocated to the secondary markets, theatrical films in
production and the Library.
A significant portion of cable system and cable programming revenues are
derived from subscriber fees and advertising. Subscriber fees are recorded as
revenue in the period the service is provided and advertising revenues are
recognized in the period that the advertisements are exhibited. The cost of
rights to exhibit feature films and other programming on the cable networks
during one or more availability periods ('programming costs') generally is
recorded when the programming is initially available for exhibition, and is
allocated to the appropriate availability periods and amortized as the
programming is exhibited.
ADVERTISING
In accordance with Financial Accounting Standards Board ('FASB') Statement
No. 53, 'Financial Reporting by Producers and Distributors of Motion Picture
Films,' advertising costs for theatrical and television product are capitalized
and amortized over the related revenue streams in each market for which such
costs are intended to benefit, which generally does not exceed three months.
Other advertising costs are expensed upon the first exhibition of the
advertisement, except for certain direct-response advertising, for which the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response advertising principally consists of product promotional
mailings, broadcast advertising, catalogs and other promotional costs incurred
in the Company's direct-marketing businesses. Deferred advertising costs are
generally amortized over periods of up to three years subsequent to the
promotional event using straight-line or accelerated methods, with a significant
portion of such costs amortized in twelve months or less. Deferred advertising
costs for Time Warner amounted to $217 million and $195 million at December 31,
1996 and 1995, respectively. Advertising expense, excluding theatrical and
television product, amounted to $1.050 billion in 1996, $1.045 billion in 1995
and $931 million in 1994.
CASH AND EQUIVALENTS
Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash, and have original maturities of three months or
less. Noncurrent cash and equivalents at December 31, 1996 consist of amounts
held in escrow for purposes of funding certain preferred dividend requirements
(Note 7). Noncurrent cash and equivalents at December 31, 1995 consist of net
proceeds received from the issuance of Preferred Trust Securities in December
1995, which were segregated for the redemption of the 8.75% Convertible
Debentures in February 1996 (Notes 6 and 9).
F-30
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead and
interest. Depreciation is provided generally on the straight-line method over
useful lives ranging up to thirty years for buildings and improvements and up to
fifteen years for furniture, fixtures, cable television equipment and other
equipment. Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Land and buildings............................................................................. $ 914 $ 431
Cable television equipment..................................................................... 777 361
Furniture, fixtures and other equipment........................................................ 1,337 1,196
------ ------
3,028 1,988
Less accumulated depreciation.................................................................. (1,042) (869)
------ ------
Total.......................................................................................... $1,986 $1,119
------ ------
------ ------
</TABLE>
Effective January 1, 1996, Time Warner adopted FASB Statement No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of' ('FAS 121'), which established standards for the recognition and
measurement of impairment losses on long-lived assets and certain intangible
assets. The adoption of FAS 121 did not have a material effect on Time Warner's
financial statements.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, Time Warner has a significant and growing amount of intangible
assets, including goodwill, cable television and sports franchises, music
catalogues, contracts and copyrights, and other copyrighted products and
trademarks. In accordance with generally accepted accounting principles, Time
Warner does not recognize the fair value of internally-generated intangible
assets. Costs incurred to create and produce copyrighted product, such as
feature films, television series and compact discs, are generally either
expensed as incurred, or capitalized as tangible assets as in the case of cash
advances and inventoriable product costs. However, accounting recognition is not
given to any increasing asset value that may be associated with the collection
of the underlying copyrighted material. Additionally, costs incurred to create
or extend brands, such as magazine titles and new cable networks, generally
result in losses over an extended development period and are recognized as a
reduction of income as incurred, while any corresponding brand value created is
not recognized as an intangible asset in the consolidated balance sheet. On the
other hand, intangible assets acquired in business combinations accounted for by
the purchase method of accounting are capitalized and amortized over their
expected useful life as a noncash charge against future results of operations.
Accordingly, the intangible assets reported in the consolidated balance sheet do
not reflect the fair value of Time Warner's internally-generated intangible
assets, but rather are limited to intangible assets resulting from certain
acquisitions in which the cost of the acquired companies exceeded the fair value
of their tangible assets at the time of acquisition.
Time Warner amortizes goodwill and sports franchises over periods up to
forty years using the straight-line method. Cable television franchises, music
catalogues, contracts and copyrights, and other intangible assets are amortized
over periods up to twenty years using the straight-line method. In 1996, 1995
and 1994, amortization of goodwill amounted to $250 million, $175 million and
$158 million, respectively; amortization of music copyrights, artists' contracts
and record catalogues amounted to $132 million, $118 million and $115 million,
respectively; amortization of cable television and sports franchises amounted to
$212 million in 1996 and $42 million in 1995 and amortization of other
intangible assets amounted to $87 million, $43 million and $31
F-31
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million, respectively. Accumulated amortization of intangible assets at December
31, 1996 and 1995 amounted to $2.452 billion and $1.845 billion, respectively.
Time Warner separately reviews the carrying value of acquired intangible
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. Time Warner considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of intangible
assets can be recovered. Upon a determination that the carrying value of
intangible assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such intangible assets would be
considered impaired and will be reduced by a charge to operations in the amount
of the impairment. An impairment charge is measured as any deficiency in
estimated discounted future cash flows of the acquired business to recover the
carrying value related to the intangible assets.
INCOME TAXES
Income taxes are provided using the liability method prescribed by FASB
Statement No. 109, 'Accounting for Income Taxes.' Under the liability method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment.
Realization of the net operating loss and investment tax credit
carryforwards, which were acquired in acquisitions, are accounted for as a
reduction of goodwill.
The principal operations of the Entertainment Group are conducted by
partnerships. Income tax expense includes all income taxes related to Time
Warner's allocable share of partnership income and its equity in the income tax
expense of corporate subsidiaries of the partnerships.
STOCK OPTIONS
In accordance with Accounting Principles Board Opinion No. 25, 'Accounting
for Stock Issued to Employees' ('APB 25'), compensation cost for stock options
is recognized in income based on the excess, if any, of the quoted market price
of the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock. The exercise price for stock
options granted to employees equals or exceeds the fair market value of Time
Warner common stock at the date of grant, thereby resulting in no recognition of
compensation expense by Time Warner.
LOSS PER COMMON SHARE
Loss per common share is based upon the net loss applicable to common
shares after preferred dividend requirements and upon the weighted average of
common shares outstanding during the period. The conversion of securities
convertible into common stock and the exercise of stock options were not assumed
in the calculations of loss per common share because the effect would have been
antidilutive.
2. MERGERS AND ACQUISITIONS
TBS TRANSACTION
On October 10, 1996, New Time Warner acquired the remaining 80% interest in
TBS that was not already owned by Old Time Warner (the 'TBS Transaction'). As
part of the transaction, each of Old Time Warner and TBS became separate, wholly
owned subsidiaries of New Time Warner which combines, for financial reporting
purposes, the consolidated net assets and operating results of Old Time Warner
and TBS. Each issued and
F-32
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding share of each class of capital stock of Old Time Warner was
converted into one share of a substantially identical class of capital stock of
New Time Warner.
In connection with the TBS Transaction, New Time Warner issued (i)
approximately 173.4 million shares of common stock (including 50.6 million
shares of a special class of non-redeemable common stock having 1/100th of a
vote per share on certain limited matters ('LMCN-V Class Common Stock') to
affiliates of Liberty Media Corporation ('LMC'), a subsidiary of
Tele-Communications, Inc.), in exchange for shares of TBS capital stock and (ii)
approximately 14 million stock options to replace all outstanding TBS stock
options. In addition, New Time Warner agreed to issue to LMC and its affiliates
at a later date an additional five million shares of LMCN-V Class Common Stock
and $67 million of consideration payable, at the election of New Time Warner, in
cash or additional shares of LMCN-V Class Common Stock. This additional
consideration will be issued pursuant to a separate option and non-competition
agreement that will provide, if New Time Warner exercises its option, for a
subsidiary of LMC to provide certain satellite uplink and distribution services
for WTBS, a broadcast television station owned by TBS, if it is converted to a
copyright-paid, cable television programming service. New Time Warner has also
fully and unconditionally guaranteed all of TBS's and Old Time Warner's
outstanding publicly traded indebtedness, which amounted to $1.030 billion and
$7.754 billion, respectively, at December 31, 1996.
The TBS Transaction was accounted for by the purchase method of accounting
for business combinations; accordingly, the cost to acquire TBS of approximately
$6.2 billion was preliminarily allocated to the net assets acquired in
proportion to estimates of their respective fair values, as follows:
goodwill-$6.746 billion; other current and noncurrent assets-$3.806 billion;
long-term debt-$2.765 billion; deferred income taxes-$189 million; and other
current and noncurrent liabilities-$1.416 billion.
CABLE TRANSACTIONS
On January 4, 1996, Time Warner acquired CVI which owned cable television
systems serving approximately 1.3 million subscribers, in exchange for the
issuance of approximately 2.9 million shares of common stock and approximately
6.3 million shares of new convertible preferred stock ('Series E Preferred
Stock' and 'Series F Preferred Stock'), as adjusted, and the assumption or
incurrence of approximately $2 billion of indebtedness. The acquisition was
accounted for by the purchase method of accounting for business combinations;
accordingly, the cost to acquire CVI of $904 million was allocated to the net
assets acquired in proportion to their respective fair values, as follows: cable
television franchises-$2.390 billion; goodwill-$688 million; other current and
noncurrent assets-$481 million; long-term debt-$1.766 billion; deferred income
taxes-$731 million; and other current and noncurrent liabilities-$158 million.
On July 6, 1995, Time Warner acquired KBLCOM, which owned cable television
systems serving approximately 700,000 subscribers, and a 50% interest in Paragon
Communications ('Paragon'), which owned cable television systems serving an
additional 972,000 subscribers. The other 50% interest in Paragon was already
owned by TWE. To acquire KBLCOM, Time Warner issued 1 million shares of common
stock and 11 million shares of a new convertible preferred stock ('Series D
Preferred Stock') and assumed or incurred approximately $1.2 billion of
indebtedness. The acquisition was accounted for by the purchase method of
accounting for business combinations; accordingly, the cost to acquire KBLCOM of
approximately $1.033 billion was allocated to the net assets acquired in
proportion to their respective fair values, as follows: investments-$950
million; cable television franchises-$1.366 billion; goodwill-$586 million;
other current and noncurrent assets-$289 million; long-term debt-$1.213 billion;
deferred income taxes-$895 million; and other current liabilities-$50 million.
On May 2, 1995, Time Warner acquired Summit, which owned cable television
systems serving approximately 162,000 subscribers, in exchange for the issuance
of approximately 1.6 million shares of common stock and approximately 3.3
million shares of a new convertible preferred stock ('Series C Preferred Stock')
F-33
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the assumption of $140 million of indebtedness. The acquisition was
accounted for by the purchase method of accounting for business combinations;
accordingly, the cost to acquire Summit of approximately $351 million was
allocated to the assets acquired in proportion to their respective fair values,
as follows: cable television franchises-$372 million; goodwill-$146 million;
other current and noncurrent assets-$144 million; long-term debt-$140 million;
deferred income taxes-$166 million; and other current liabilities-$5 million. In
August 1996, all shares of Series C Preferred Stock were exchanged for shares of
a new series of convertible preferred stock with substantially identical terms
('Series J Preferred Stock').
On April 1, 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse and
TWE contributed cable television systems (or interests therein) serving
approximately 4.5 million subscribers, as well as certain foreign cable
investments and programming investments that included Advance/Newhouse's 10%
interest in Primestar Partners, L.P. ('Primestar'). TWE owns a two-thirds equity
interest in the TWE-Advance/Newhouse Partnership and is the managing partner.
TWE consolidates the partnership and the one-third equity interest owned by
Advance/Newhouse is reflected in TWE's consolidated financial statements as
minority interest. In accordance with the partnership agreement,
Advance/Newhouse can require TWE to purchase its equity interest for fair market
value at specified intervals following the death of both of its principal
shareholders. Beginning on April 1, 1998, either partner can initiate a
dissolution in which TWE would receive two-thirds and Advance/Newhouse would
receive one-third of the partnership's net assets. The assets contributed by TWE
and Advance/Newhouse to the partnership were recorded at their predecessor's
historical cost. No gain was recognized by TWE upon the capitalization of the
partnership.
PRO FORMA FINANCIAL INFORMATION
The accompanying consolidated statement of operations includes the
operating results of each acquired business from the respective closing date of
each transaction. On a pro forma basis, giving effect to (i) the TBS
Transaction, (ii) the cable transactions as described above, (iii) the
ITOCHU/Toshiba Transaction (Note 3), (iv) the Preferred Stock Refinancing (Note
10), (v) Time Warner's and TWE's debt refinancings (Note 6) and (vi) certain
asset sales, including the sale of 51% of TWE's interest in Six Flags
Entertainment Corporation ('Six Flags') (Note 3), as if each of such
transactions had occurred at the beginning of 1995, Time Warner would have
reported for the years ended December 31, 1996 and 1995, respectively, revenues
of $12.799 billion and $12.154 billion, depreciation and amortization of $1.245
billion and $1.205 billion, operating income of $939 million and $942 million,
equity in the pretax income of the Entertainment Group of $290 million and $286
million, a loss before extraordinary item of $284 million and $233 million
($1.05 and $.97 per common share) and a net loss of $319 million and $275
million ($1.11 and $1.04 per common share).
F-34
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Investment in TWE.............................................................................. $6,254 $6,179
Stock option related distributions due from TWE................................................ 93 122
Credit agreement debt due to TWE............................................................... (400) (400)
Other net liabilities due to TWE, principally related to home video distribution............... (256) (278)
------ ------
Investment in and amounts due to and from TWE.................................................. 5,691 5,623
Investment in other Entertainment Group companies.............................................. 123 111
------ ------
Total.......................................................................................... $5,814 $5,734
------ ------
------ ------
</TABLE>
TWE is a Delaware limited partnership that 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 subsidiaries of Time
Warner. Certain Time Warner subsidiaries are the general partners of TWE ('Time
Warner General Partners'). Time Warner acquired the aggregate 11.22% limited
partnership interests previously held by subsidiaries of each of ITOCHU
Corporation and Toshiba Corporation in 1995 for an aggregate cost of $1.36
billion, consisting of 15 million shares of convertible preferred stock ('Series
G Preferred Stock', 'Series H Preferred Stock' and 'Series I Preferred Stock')
and $10 million in cash (the 'ITOCHU/Toshiba Transaction'). Accordingly, Time
Warner, through its wholly owned subsidiaries, collectively owns general and
limited partnership interests in TWE consisting of 74.49% of the Series A
Capital and Residual Capital and 100% of the Senior Capital and Series B
Capital. The remaining 25.51% limited partnership interests in the Series A
Capital and Residual Capital of TWE are owned by U S WEST, which acquired such
interests in 1993 for $1.532 billion of cash and a $1.021 billion 4.4% note (the
'U S WEST Note Receivable') that was fully collected during 1996. The
ITOCHU/Toshiba Transaction was accounted for by the purchase method of
accounting for business combinations.
Each partner's interest in TWE consists of the initial priority capital and
residual equity amounts that were assigned to that partner or its predecessor
based on the estimated fair value of the net assets each contributed to TWE, as
adjusted for the fair value of certain assets distributed by TWE to the Time
Warner General Partners in 1993 which were not subsequently reacquired by TWE in
1995 ('Contributed Capital'), plus, with respect to the priority capital
interests only, any undistributed priority capital return. The priority capital
return consists of net partnership income allocated to date in accordance with
the provisions of the TWE partnership agreement and the right to be allocated
additional partnership income which, together with any previously allocated net
partnership income, provides for the various priority capital rates of return
specified in the table below. The sum of Contributed Capital and the
undistributed priority capital return is referred to herein as 'Cumulative
Priority Capital.' Cumulative Priority Capital is not necessarily indicative of
the fair value of the underlying priority capital interests principally due to
above-market rates of return on certain priority capital interests as compared
to securities of comparable credit risk and maturity, such as the 13.25% rate of
return on the Series B Capital interest owned by the Time Warner General
Partners. Furthermore, the ultimate realization of Cumulative Priority Capital
could be affected by the fair value of TWE which is subject to fluctuation.
F-35
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the priority of Contributed Capital, Time Warner's ownership
of Contributed Capital and Cumulative Priority Capital at December 31, 1996 and
priority capital rates of return thereon is as set forth below:
<TABLE>
<CAPTION>
PRIORITY
CUMULATIVE CAPITAL
CONTRIBUTED PRIORITY RATES OF % OWNED BY
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(a) CAPITAL RETURN(b) TIME WARNER
----------- ---------- ------------ -----------
(BILLIONS) (% PER ANNUM
COMPOUNDED
QUARTERLY)
<S> <C> <C> <C> <C>
Senior Capital........................................ $ 1.4 $1.5(c) 8.00% 100.00%
Series A Capital...................................... 5.6 9.9 13.00%(d) 74.49%
Series B Capital...................................... 2.9(g) 5.2 13.25%(e) 100.00%
Residual Capital...................................... 3.3(g) 3.3(f) --(f) 74.49%
</TABLE>
- ------------
(a) Excludes partnership income or loss allocated thereto.
(b) Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c) Net of $366 million of partnership income distributed in 1995 representing
the priority capital return thereon through June 30, 1995.
(d) 11.00% to the extent concurrently distributed.
(e) 11.25% to the extent concurrently distributed.
(f) Residual Capital is not entitled to stated priority rates of return and, as
such, its Cumulative Priority Capital is equal to its Contributed Capital.
However, in the case of certain events such as the liquidation or
dissolution of TWE, Residual Capital is entitled to any excess of the then
fair value of the net assets of TWE over the aggregate amount of Cumulative
Priority Capital and special tax allocations.
(g) The Contributed Capital relating to the Series B Capital has priority over
the priority returns on the Series A Capital. The Contributed Capital
relating to the Residual Capital has priority over the priority returns on
the Series B Capital and the Series A Capital.
Because Contributed Capital is based on the fair value of the net assets
that each partner contributed to the partnership, the aggregate of such amounts
is significantly higher than TWE's partners' capital as reflected in the
consolidated financial statements, which is based on the historical cost of the
contributed net assets. For purposes of allocating partnership income or loss to
the partners, partnership income or loss is based on the fair value of the net
assets contributed to the partnership and results in significantly less
partnership income, or results in partnership losses, in contrast to the net
income reported by TWE for financial statement purposes, which is also based on
the historical cost of contributed net assets.
Under the TWE partnership agreement, partnership income, to the extent
earned, is first allocated to the partners' capital accounts so that the
economic burden of the income tax consequences of partnership operations is
borne as though the partnership were taxed as a corporation ('special tax
allocations'), then to the Senior Capital, Series A Capital and Series B
Capital, in order of priority, at rates of return ranging from 8% to 13.25% per
annum, and finally to the Residual Capital. Partnership losses generally are
allocated first to eliminate prior allocations of partnership income to, and
then to reduce the Contributed Capital of, the Residual Capital, Series B
Capital and Series A Capital, in that order, then to reduce the Time Warner
General Partners' Senior Capital, including partnership income allocated
thereto, and finally to reduce any special tax allocations. To the extent
partnership income is insufficient to satisfy all special allocations in a
particular accounting period, the right to receive additional partnership income
necessary to provide for the various priority capital rates of return is carried
forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation, sale or dissolution of
TWE.
The TWE partnership agreement provides, under certain circumstances, for
the distribution of partnership income allocated to the Senior Capital owned by
the Time Warner General Partners. Pursuant to such provision, $366 million of
partnership income was distributed to the Time Warner General Partners in 1995.
Beginning on July 1, 1997, the Senior Capital and, to the extent not previously
distributed, partnership income allocated thereto is required to be distributed
in three annual installments, with the initial distribution expected to be
approximately $535 million. The Series B Capital owned by the Time Warner
General Partners may be increased if certain operating performance targets are
achieved over a five-year period ending on December 31,
F-36
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 and a ten-year period ending on December 31, 2001. Although satisfaction of
the ten-year operating performance target is indeterminable at this time, the
five-year target was not attained.
TWE reported net income of $210 million, $73 million and $161 million in
1996, 1995 and 1994, respectively, no portion of which was allocated to the
limited partners. Time Warner did not recognize a gain when TWE was capitalized.
TWE recorded the assets contributed by the Time Warner General Partners at Time
Warner's historical cost. The excess of the Time Warner General Partners'
interests in the net assets of TWE over the net book value of their investment
in TWE is being amortized to income over a twenty-year period.
U S WEST has an option to obtain up to an additional 6.33% of Series A
Capital and Residual Capital interests, depending on cable operating
performance. The option is exercisable between January 1, 1999 and on or about
May 31, 2005 at a maximum exercise price of $1.25 billion to $1.8 billion,
depending on the year of exercise. Either U S WEST or TWE may elect that the
exercise price be paid with partnership interests rather than cash.
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.4 billion of TWE's debt and accrued interest at December 31,
1996, based on the relative fair value of the net assets each Time Warner
General Partner contributed to TWE. Such indebtedness is recourse to each Time
Warner General Partner only to the extent of its guarantee. In addition to their
interests in TWE and the other Entertainment Group companies, the assets of the
Time Warner General Partners include a 10.6% interest in TBS, a 10.2% interest
in Old Time Warner, 18.1 million common shares of Hasbro, Inc. and substantially
all the assets of Time Warner's music business. There are no restrictions on the
ability of the Time Warner General Partner guarantors to transfer assets, other
than TWE assets, to parties that are not guarantors.
Set forth below is summarized financial information of the Entertainment
Group, which reflects the formation by TWE of the TWE-Advance/Newhouse
Partnership effective as of April 1, 1995 (Note 2), the deconsolidation of Six
Flags effective as of June 23, 1995 and the consolidation of Paragon effective
as of July 6, 1995.
TIME WARNER ENTERTAINMENT GROUP
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
(MILLIONS)
<S> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues............................................................................ $10,861 $9,629 $8,509
Depreciation and amortization....................................................... 1,244 1,060 959
Business segment operating income................................................... 1,090 992 852
Interest and other, net............................................................. 524 539 616
Minority interest................................................................... 207 133 --
Income before income taxes.......................................................... 290 256 176
Income before extraordinary item.................................................... 220 170 136
Net income.......................................................................... 220 146 136
</TABLE>
F-37
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
CASH FLOW INFORMATION
Cash provided by operations....................................................... $ 1,912 $ 1,495 $ 1,341
Capital expenditures.............................................................. (1,719) (1,653) (1,235)
Investments and acquisitions...................................................... (146) (217) (186)
Investment proceeds............................................................... 612 1,120 51
Loan to Time Warner............................................................... -- -- (400)
Borrowings........................................................................ 215 2,484 1,001
Debt repayments................................................................... (716) (3,596) (953)
Collections on note receivable from U S WEST...................................... 169 602 234
Capital distributions............................................................. (228) (1,063) (120)
Other financing activities, net................................................... (92) (34) --
Increase (decrease) in cash and equivalents....................................... 7 (862) (267)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION
Cash and equivalents....................................................................... $ 216 $ 209
Total current assets....................................................................... 3,147 2,909
Total assets............................................................................... 20,027 18,960
Total current liabilities.................................................................. 4,092 3,230
Long-term debt............................................................................. 5,676 6,137
Minority interests......................................................................... 1,020 726
Time Warner General Partners' Senior Capital, consisting of $1.364 billion Contributed
Capital plus an undistributed priority return............................................ 1,543 1,426
Partners' capital.......................................................................... 6,681 6,576
</TABLE>
The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. At December 31, 1996 and 1995, the Time Warner General
Partners had recorded $93 million and $122 million, respectively, of stock
option related distributions due from TWE, based on closing prices of Time
Warner common stock of $37.50 and $37.875, respectively. Time Warner is paid
when the options are exercised. The Time Warner General Partners also receive
tax-related distributions from TWE. The payment of such distributions was
previously subject to restrictions until July 1995 and is now made to the Time
Warner General Partners on a current basis. During 1996, the Time Warner General
Partners received distributions from TWE in the amount of $228 million,
consisting of $215 million of tax-related distributions and $13 million of stock
option related distributions. During 1995, the Time Warner General Partners
received net distributions from TWE in the amount of $1.063 billion, consisting
of $366 million of TWE partnership income allocated to the Time Warner General
Partners' Senior Capital interest, $680 million of tax-related distributions and
$17 million of stock option related distributions. During 1994, the Time Warner
General Partners received net distributions from TWE in the amount of $120
million, consisting of $115 million of tax-related distributions and $5 million
of stock option related distributions. In addition to the tax, stock option and
Time Warner General Partners' Senior Capital distributions, TWE may make other
distributions, generally depending on excess cash and credit agreement
limitations. The Time Warner General
F-38
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Partners' full share of such distributions may be deferred if the limited
partners do not receive certain threshold amounts by certain dates.
On June 23, 1995, TWE sold 51% of its interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the transaction,
Six Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags
is now accounted for under the equity method of accounting. TWE reduced debt by
approximately $850 million in connection with the transaction, and a portion of
the income on the transaction has been deferred by TWE principally as a result
of its guarantee of certain third-party, zero-coupon indebtedness of Six Flags
due in 1999.
4. OTHER INVESTMENTS
Time Warner's other investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Equity method investments(1)................................................................... $1,392 $1,898
Market value method investments................................................................ 401 375
Cost method investments........................................................................ 126 116
------ ------
Total.......................................................................................... $1,919 $2,389
------ ------
------ ------
</TABLE>
- ------------
(1) Equity method investments at December 31, 1995 included Time Warner's
investment in TBS which was carried at $541 million. On October 10, 1996,
Time Warner consolidated its investment in TBS as a result of its
acquisition of the remaining interest in TBS that it did not already own
(Note 2).
Market value method investments include 18.1 million shares of common stock
of Hasbro, Inc. ('Hasbro'). Notwithstanding the market value per share, such
shares can be used, at Time Warner's option, to fully satisfy either its
obligations with respect to the zero coupon exchangeable notes due 2012 (Note 6)
or the Company-obligated mandatorily redeemable preferred securities of a
subsidiary due 1997 (Note 9). Because the issuance of the mandatorily redeemable
preferred securities provides Time Warner with protection against the risk of
depreciation of the market price of Hasbro common stock and the zero coupon
exchangeable notes limit Time Warner's ability to share in the appreciation of
the market price of Hasbro common stock, the combination thereof has effectively
monetized Time Warner's investment in Hasbro.
In addition to TWE and its equity investees, companies accounted for using
the equity method include: Cinamerica Theatres, L.P. (50% owned) and The
Columbia House Company partnerships (50% owned), other
F-39
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
music joint ventures (generally 50% owned) and in 1995 and 1994 only, TBS (20%
owned). A summary of combined financial information as reported by the equity
investees of Time Warner is set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues.......................................................................... $1,773 $5,123 $4,444
Depreciation and amortization..................................................... 29 219 182
Operating income.................................................................. 173 547 584
Income before extraordinary items and cumulative effect
of a change in accounting principle............................................. 61 188 281
Net income........................................................................ 61 188 256
Current assets.................................................................... 1,002 2,272 2,113
Total assets...................................................................... 1,616 5,851 5,194
Current liabilities............................................................... 517 1,318 1,136
Long-term debt.................................................................... 1,360 3,826 3,730
Total liabilities................................................................. 1,999 5,886 5,423
Total shareholders' deficit or partners' capital.................................. (383) (35) (229)
</TABLE>
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization..................................... $ 209 $ 142 $ -- $ --
Completed and not released...................................... 54 -- -- --
In process and other............................................ 24 251 -- --
Library, less amortization...................................... -- 1,116 -- --
Programming costs, less amortization................................. 213 189 -- --
Magazines, books and recorded music.................................. 441 -- 443 --
------- ---------- ------- ----------
Total................................................................ $ 941 $1,698 $ 443 $ --
------- ---------- ------- ----------
------- ---------- ------- ----------
</TABLE>
The increase in film and programming costs resulted from the acquisition of
TBS effective as of October 10, 1996. Excluding the Library, the total cost
incurred in the production of theatrical and television films since such date
amounted to $339 million in 1996, and the total cost amortized amounted to $239
million. Excluding the Library, the unamortized cost of completed films at
December 31, 1996 amounted to $405 million, more than 90% of which is expected
to be amortized within three years after release.
F-40
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Old Time Warner(1):
7.45% Notes due February 1, 1998............................................................ $ 500 $ 500
7.95% Notes due February 1, 2000............................................................ 500 500
Floating rate notes due August 15, 2000 (6.5% and 6.8%)..................................... 454 454
7.975% Notes due August 15, 2004............................................................ 272 272
7.75% Notes due June 15, 2005............................................................... 497 497
8.11% Debentures due August 15, 2006........................................................ 545 545
8.18% Debentures due August 15, 2007........................................................ 545 545
7.48% Debentures due January 15, 2008....................................................... 166 --
Zero coupon exchangeable notes due December 17, 2012 (6.25% yield).......................... 618 581
Zero coupon convertible notes due June 22, 2013 (5% yield).................................. 1,070 1,019
9.125% Debentures due January 15, 2013...................................................... 1,000 1,000
8.75% Convertible subordinated debentures due January 10, 2015.............................. -- 1,226
8.05% Debentures due January 15, 2016....................................................... 150 --
8.75% Debentures due April 1, 2017.......................................................... -- 248
9.15% Debentures due January 15, 2023....................................................... 1,000 1,000
6.85% Debentures due January 15, 2026....................................................... 400 --
8.30% Discount Debentures due January 15, 2036.............................................. 37 --
Debt due to TWE (6.7% and 6.8%)............................................................. 400 400
TBS(1):
TBS Credit Agreements (7.0%)................................................................ 677 --
7.4% Senior Notes due February 1, 2004...................................................... 250 --
Zero coupon subordinated convertible notes due February 13, 2007 (7.25% yield).............. 283 --
8.375% Senior Notes due July 1, 2013........................................................ 297 --
8.4% Senior Debentures due February 1, 2024................................................. 200 --
TWI Cable:
1995 Credit Agreement (6.5% and 6.8%)....................................................... 2,530 1,265
10.75% Senior Notes due January 30, 2002.................................................... 300 --
10.5% Debentures due April 15, 2005......................................................... 140 140
9.25% Senior Debentures due April 1, 2008................................................... 200 --
Other....................................................................................... 82 115
------- -------
Subtotal.................................................................................... 13,113 10,307
Reclassification of debt due to TWE to amounts due to the Entertainment Group............... (400) (400)
------- -------
Total....................................................................................... $12,713 $ 9,907
------- -------
------- -------
</TABLE>
- ------------
(1) New Time Warner has guaranteed all such indebtedness of Old Time Warner and
TBS, except for debt due to TWE and borrowings under the TBS Credit
Agreements. New Time Warner has not guaranteed any indebtedness of TWI
Cable.
F-41
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEBT REFINANCINGS
During the past two years and in early 1997, in response to favorable
market conditions and in connection with certain acquisitions, Time Warner
entered into a series of financing transactions which has resulted in the
refinancing of approximately $6.4 billion of debt and the reduction of an
additional $2.5 billion of debt, as more fully described below. The debt
refinancings have had the positive effect of lowering interest rates, staggering
debt maturities and, with respect to the redemption of its 8.75% Convertible
Subordinated Debentures due 2015 (the '8.75% Convertible Debentures') and TBS's
zero coupon subordinated notes due February 13, 2007 (the 'TBS Convertible
Notes'), eliminating the potential dilution from the conversion of such
securities into 52.2 million shares of common stock. In turn, the reduction in
debt, using proceeds raised from the issuance of certain preferred equity
securities, has partially offset the assumption or incurrence of $6.1 billion of
debt in connection with the Cable Acquisitions and the TBS Transaction.
During the first quarter of 1997, Time Warner entered into a number of
financing transactions, which resulted in the refinancing of approximately $600
million of debt. Time Warner redeemed $300 million principal amount of 10.75%
Senior Notes due January 30, 2002 of TWI Cable Inc. ('TWI Cable'), its wholly
owned subsidiary, and approximately $283 million accreted amount of TBS
Convertible Notes at an aggregate redemption price of approximately $600
million, including redemption premiums and accrued interest thereon
(collectively, the '1997 Debt Redemptions'). Time Warner also issued $600
million principal amount of Floating Rate Reset Notes due December 30, 2031 (the
'Floating Rate Reset Notes'). The Floating Rate Reset Notes bear interest at a
floating rate equal to LIBOR less 25 basis points until December 30, 2001, at
which time the interest rate will be reset at a fixed rate equal to 6.59% plus a
margin based upon Time Warner's credit risk at such time. The Floating Rate
Reset Notes are redeemable at the election of the holders, in whole but not in
part, on December 30, 2001.
In October 1996, Time Warner assumed approximately $2.8 billion of
indebtedness in connection with the TBS Transaction, of which approximately $1.1
billion was subsequently repaid during 1996 principally using proceeds from
additional borrowings under the 1995 Credit Agreement (as defined below).
In April 1996, Time Warner raised approximately $1.55 billion of net
proceeds in a private placement of 10 1/4% exchangeable preferred stock (Note
10). The proceeds were used by Time Warner to redeem $250 million principal
amount of 8.75% Debentures due April 1, 2017 (the '8.75% Non-Convertible
Debentures' and when taken together with the 8.75% Convertible Debentures, the
'8.75% Debentures') for approximately $265 million in May 1996 (including
redemption premiums and accrued interest thereon), and to reduce bank debt of
TWI Cable by approximately $1.3 billion.
In February 1996, Time Warner redeemed its remaining $1.2 billion principal
amount of 8.75% Convertible Debentures for $1.28 billion, including redemption
premiums and accrued interest thereon. The redemption was financed with (1)
proceeds raised from a $575 million issuance in December 1995 of
Company-obligated mandatorily redeemable preferred securities of a subsidiary
and (2) $750 million of proceeds raised from the issuance in January 1996 of (i)
$400 million principal amount of 6.85% debentures due 2026, which are redeemable
at the option of the holders thereof in 2003, (ii) $200 million principal amount
of 8.3% discount debentures due 2036, which do not pay cash interest until 2016,
(iii) $166 million principal amount of 7.48% debentures due 2008 and (iv) $150
million principal amount of 8.05% debentures due 2016. Time Warner had
previously redeemed approximately $1 billion principal amount of 8.75%
Convertible Debentures for $1.06 billion (including redemption premiums and
accrued interest) in September 1995 using proceeds raised from (a) a $500
million issuance in June 1995 of 7.75% ten-year notes, (b) a $374 million
issuance in August 1995 of Company-obligated mandatorily redeemable preferred
securities of a subsidiary and (c) available cash and equivalents. See Note 9
for a description of the mandatorily redeemable preferred securities issued in
connection with such redemptions.
F-42
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1996, in connection with its acquisition of CVI, subsidiaries of
Time Warner assumed $500 million of public notes and debentures of CVI and
borrowed $1.5 billion under the 1995 Credit Agreement (as defined below) to
refinance a like-amount of other indebtedness assumed or incurred in such
acquisition.
In August 1995, Time Warner redeemed all of its $1.8 billion principal
amount of outstanding Redeemable Reset Notes due August 15, 2002 (the 'Reset
Notes') in exchange for new securities, consisting of approximately $454 million
aggregate principal amount of Floating Rate Notes due August 15, 2000,
approximately $272 million aggregate principal amount of 7.975% Notes due August
15, 2004, approximately $545 million aggregate principal amount of 8.11%
Debentures due August 15, 2006, and approximately $545 million aggregate
principal amount of 8.18% Debentures due August 15, 2007.
In July 1995, TWI Cable borrowed approximately $1.2 billion under the 1995
Credit Agreement to refinance certain indebtedness assumed or incurred in the
acquisition of KBLCOM.
In June 1995, TWI Cable, TWE and the TWE-Advance/Newhouse Partnership
executed a five-year revolving credit facility (the '1995 Credit Agreement').
The 1995 Credit Agreement enabled such entities to refinance certain
indebtedness assumed in the cable acquisitions, to refinance TWE's indebtedness
under a pre-existing bank credit agreement and to finance the ongoing working
capital, capital expenditure and other corporate needs of each borrower.
An extraordinary loss of $17 million was recognized by Time Warner in the
first quarter of 1997 in connection with the 1997 Debt Redemptions. An
extraordinary loss of $35 million was recognized in 1996 in connection with Time
Warner's redemption of the 8.75% Debentures. An extraordinary loss of $42
million was recognized in 1995 in connection with Time Warner's partial
redemption of the 8.75% Convertible Debentures and the write-off by TWE of
deferred financing costs related to its former bank credit agreement that was
terminated.
ZERO COUPON NOTES
Time Warner's zero coupon notes do not pay interest until maturity. The
zero coupon exchangeable notes due December 17, 2012 are exchangeable at any
time by the holders into an aggregate of 18.1 million shares of common stock of
Hasbro at the rate of 10.9515 shares for each $1,000 principal amount of notes,
subject to Time Warner's right to pay in whole or in part with cash instead of
Hasbro common stock. The terms of these notes have been adjusted for a 3-for-2
stock split of Hasbro common stock that occurred in March 1997 (the 'Hasbro
Stock Split'). Time Warner can elect to redeem the notes any time after December
17, 1997, and holders can elect to have the notes redeemed prior thereto in the
event of a change of control, at the issue price plus accrued interest. Holders
also can elect to have the notes redeemed at the issue price plus accrued
interest on December 17, 1997, 2002 and 2007, subject to Time Warner's right to
pay in whole or in part with Hasbro common stock instead of cash. The equivalent
conversion price of Hasbro common stock at the first date of redemption is
$36.27 per share, and will be adjusted thereafter in proportion to changes in
the accrued original issue discount of each note. The 18.1 million shares of
Hasbro common stock owned by Time Warner can be used by the Company, at its
election, to satisfy its obligations under such notes or its obligations under
certain mandatorily redeemable preferred securities of a subsidiary (Note 9).
Unamortized original issue discount on the zero coupon exchangeable notes due
2012 was $1.033 billion and $1.070 billion at December 31, 1996 and 1995,
respectively.
The zero coupon convertible notes due June 22, 2013 are convertible at any
time by the holders into an aggregate of 18.7 million shares of Time Warner
common stock at the rate of 7.759 shares for each $1,000 principal amount of
notes. Time Warner can elect to redeem the notes any time after June 22, 1998,
and holders can elect to have the notes redeemed prior thereto in the event of a
change in control, at the issue price plus accrued interest. Holders also can
elect to have the notes redeemed at the issue price plus accrued interest on
June 22, 1998, 2003 and 2008, subject to Time Warner's right to pay in whole or
in part with Time Warner
F-43
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock instead of cash. The equivalent conversion price of Time Warner
common stock at the first date of redemption is $61.44 per share, and will be
adjusted thereafter in proportion to changes in the accrued original issue
discount of each note. Unamortized original issue discount on the zero coupon
convertible notes due 2013 was $1.345 billion and $1.396 billion at December 31,
1996 and 1995, respectively.
BANK CREDIT FACILITIES
The 1995 Credit Agreement permits borrowings in an aggregate amount of up
to $8.3 billion, with no scheduled reductions in credit availability prior to
maturity in June 2000. Borrowings are limited to $4 billion in the case of TWI
Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $8.3
billion in the case of TWE, subject in each case to certain limitations and
adjustments. Such borrowings bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially ranging from
50 to 87.5 basis points, which margin will vary based on the credit rating or
financial leverage of the applicable borrower. Unused credit is available for
general business purposes and to support any commercial paper borrowings. Each
borrower is required to pay a commitment fee initially ranging from .2% to .35%
per annum on the unused portion of its commitment. TWI Cable may also be
required to pay an annual facility fee equal to .1875% of the entire amount of
its commitment, depending on the level of its financial leverage in any given
year. The 1995 Credit Agreement contains certain covenants for each borrower
relating to, among other things, additional indebtedness; liens on assets; cash
flow coverage and leverage ratios; and loans, advances, distributions and other
cash payments or transfers of assets from the borrowers to their respective
partners or affiliates.
In connection with the TBS Transaction, Time Warner assumed approximately
$1.7 billion of debt under two separate revolving credit facilities of TBS (the
'TBS Credit Agreements'). The TBS Credit Agreements permit borrowings by TBS in
an aggregate amount of up to $2 billion. Borrowing availability under the TBS
Credit Agreements is scheduled to be reduced by $100 million for each calendar
quarter in 1998 and thereafter, by $200 million per quarter until December 31,
2000, at which time the TBS Credit Agreements expire. Borrowings under the TBS
Credit Agreements bear interest at rates generally equal to LIBOR plus a margin
ranging from 50 to 150 basis points, which margin will vary based on a measure
of TBS's financial leverage. Unused credit is available for general business
purposes. TBS is required to pay commitment fees of .375% on the unused portion
of its commitments. The TBS Credit Agreements contain certain covenants for TBS
relating to, among other things, additional indebtedness; liens on assets;
guarantees; dispositions and acquisitions; cash flow coverage and leverage
ratios; and loans, advances, distributions and other cash payments or transfers
of assets from TBS to Time Warner or its affiliates.
Principally as a result of the restrictions under the 1995 Credit Agreement
and the TBS Credit Agreements, restricted net assets of consolidated
subsidiaries of Time Warner amounted to approximately $8.7 billion at December
31, 1996.
TIME WARNER-TWE CREDIT AGREEMENT
Time Warner and TWE entered into a credit agreement in 1994 that allows
Time Warner to borrow up to $400 million from TWE through September 15, 2000.
Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement, and used the
proceeds therefrom principally to repay certain of its notes at their maturity.
In addition, each Time Warner General Partner has guaranteed a pro rata portion
of approximately $5.4 billion of TWE's debt and accrued interest at December 31,
1996, as more fully described in Note 3.
F-44
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST EXPENSE AND MATURITIES
At December 31, 1996, Time Warner had interest rate swap contracts to pay
floating-rates of interest and receive fixed-rates of interest on $2.3 billion
notional amount of indebtedness, which resulted in approximately 47% of Time
Warner's underlying debt being subject to variable interest rates (Note 14).
Interest expense amounted to $968 million in 1996, $877 million in 1995 and
$769 million in 1994, including $26 million in 1996, $28 million in 1995 and $12
million in 1994 which was paid to TWE in connection with borrowings under Time
Warner's $400 million credit agreement with TWE. The weighted average interest
rate on Time Warner's total debt, including the effect of interest rate swap
contracts, was 7.5% and 7.9% at December 31, 1996 and 1995, respectively.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1996 consist of $500 million due in 1998 and $4.161 billion due in
2000. Such repayments exclude the aggregate repurchase or redemption prices of
$656 million in 1997 and $1.151 billion in 1998 relating to the zero coupon
exchangeable notes and zero coupon convertible notes, respectively, in the years
in which the holders of such debt may first exercise their redemption options.
7. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with Time Warner's common stock repurchase program (Note 11),
Time Warner entered into a five-year, $750 million revolving credit facility
(the 'Stock Option Proceeds Credit Facility') in May 1996. Borrowings under the
Stock Option Proceeds Credit Facility are principally used to fund stock
repurchases and approximately $200 million of preferred dividend requirements on
Time Warner's Series G, H, I and J Preferred Stock. At December 31, 1996, Time
Warner had borrowed $488 million under the Stock Option Proceeds Credit
Facility.
The Stock Option Proceeds Credit Facility initially provided for borrowings
of up to $750 million, of which up to $100 million is reserved solely for the
payment of interest and fees thereunder. Borrowings under the Stock Option
Proceeds Credit Facility generally bear interest at LIBOR plus a margin equal to
75 basis points and are principally expected to be repaid from the cash proceeds
received from the exercise of designated employee stock options. The receipt of
such stock option proceeds permanently reduces the borrowing availability under
the facility, which has been reduced to approximately $715 million as of
December 31, 1996. At December 31, 1996, based on a closing market price of Time
Warner common stock of $37.50, the aggregate value of potential proceeds to Time
Warner from the exercise of outstanding vested, 'in the money' stock options
covered under the facility was approximately $1.5 billion, representing a 2.1 to
1 coverage ratio over the related borrowing availability. To the extent that
such stock option proceeds are not sufficient to satisfy Time Warner's
obligations under the Stock Option Proceeds Credit Facility, Time Warner is
generally required to repay such borrowings using proceeds from the sale of
shares of its common stock held in escrow under the Stock Option Proceeds Credit
Facility or, at Time Warner's election, using available cash on hand. In
addition, as a result of Time Warner's commitment to use the Stock Option
Proceeds Credit Facility to fund approximately $200 million of preferred
dividend requirements on its Series G, H, I and J Preferred Stock, Time Warner
has also supplementally agreed to place in escrow an amount of cash equal to the
excess of the unpaid preferred dividend requirements on such series of
convertible preferred stock over the borrowing availability under the facility
at any time. At December 31, 1996, Time Warner had placed $62 million of cash
and 36 million shares in escrow under these arrangements, which shares are not
considered to be issued and outstanding capital stock of the Company. Time
Warner may be required, from time to time, to have up to 52.5 million shares
held in escrow.
F-45
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
----- ----- ----
(MILLIONS)
<S> <C> <C> <C>
Domestic.............................................................................. $(193) $(203) $(78)
Foreign............................................................................... 197 205 167
----- ----- ----
Total................................................................................. $ 4 $ 2 $ 89
----- ----- ----
----- ----- ----
</TABLE>
Current and deferred income taxes (tax benefits) provided are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
----- ----- ----
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current(1)....................................................................... $ 50 $ 42 $ 66
Deferred......................................................................... (143) (167) (81)
Foreign:
Current(2)....................................................................... 230 215 194
Deferred......................................................................... (16) 8 (45)
State and Local:
Current.......................................................................... 89 78 79
Deferred......................................................................... (50) (50) (33)
----- ----- ----
Total................................................................................. $ 160 $ 126 $180
----- ----- ----
----- ----- ----
</TABLE>
- ------------
(1) Includes utilization of tax carryforwards of $77 million in 1996, $101
million in 1995 and $48 million in 1994. Excludes current tax benefits of
$16 million in 1996, $9 million in 1995 and $11 million in 1994 resulting
from the exercise of stock options and vesting of restricted stock awards,
which were credited directly to paid-in-capital, and current tax benefits of
$4 million in 1996 and $3 million in 1995 resulting from the retirement of
debt, which reduced the extraordinary losses in such years.
(2) Includes foreign withholding taxes of $101 million in 1996, $102 million in
1995 and $74 million in 1994.
The differences between income taxes expected at the U.S. federal statutory
income tax rate and income taxes provided are as set forth below. The
relationship between income before income taxes and income tax expense is most
affected by the amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Taxes on income at U.S. federal statutory rate........................................ $ 2 $ 1 $ 31
State and local taxes, net............................................................ 26 18 30
Nondeductible goodwill amortization................................................... 131 100 97
Other nondeductible expenses.......................................................... 10 10 10
Foreign income taxed at different rates, net of U.S. foreign tax credits.............. 4 3 1
Other................................................................................. (13) (6) 11
---- ---- ----
Total................................................................................. $160 $126 $180
---- ---- ----
---- ---- ----
</TABLE>
F-46
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of Time Warner's net deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Assets acquired in business combinations....................................................... $3,788 $2,963
Depreciation and amortization.................................................................. 912 829
Unrealized appreciation of certain marketable securities....................................... 91 81
Other.......................................................................................... 463 390
------ ------
Deferred tax liabilities....................................................................... 5,254 4,263
------ ------
Tax carryforwards.............................................................................. 458 296
Accrued liabilities............................................................................ 322 228
Receivable allowances and return reserves...................................................... 222 211
Other.......................................................................................... 170 108
------ ------
Deferred tax assets............................................................................ 1,172 843
------ ------
Net deferred tax liabilities................................................................... $4,082 $3,420
------ ------
------ ------
</TABLE>
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $860 million at December 31, 1996. Determination of the amount of
unrecognized deferred U.S. income tax liability with respect to such earnings is
not practicable. If such earnings are repatriated, additional U.S. income and
foreign withholding taxes are substantially expected to be offset by the
accompanying foreign tax credits.
U.S. federal tax carryforwards at December 31, 1996 consisted of $752
million of net operating losses, $37 million of foreign tax credits, $106
million of investment tax credits and $52 million of alternative minimum tax
credits. The utilization of certain carryforwards is subject to limitations
under U.S. federal income tax laws. Except for the alternative minimum tax
credits which do not expire, the other U.S. federal tax carryforwards expire in
varying amounts as follows for income tax reporting purposes:
<TABLE>
<CAPTION>
CARRYFORWARDS
----------------------------------
NET INVESTMENT FOREIGN
OPERATING TAX TAX
LOSSES CREDITS CREDITS
--------- ---------- -------
(MILLIONS)
<S> <C> <C> <C>
1997............................................................................. $ 3 $ 9 $ 7
1998............................................................................. 5 7 15
1999............................................................................. 5 6 --
2000............................................................................. 8 3 15
Thereafter up to 2008............................................................ 731 81 --
--------- ---------- -------
$ 752 $106 $37
--------- ---------- -------
--------- ---------- -------
</TABLE>
9. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In August 1995, Time Warner issued approximately 12.1 million
Company-obligated mandatorily redeemable preferred securities of a wholly owned
subsidiary ('PERCS') for aggregate gross proceeds of $374 million. The sole
assets of the subsidiary that is the obligor on the PERCS are $385 million
principal amount of 4% subordinated notes of Old Time Warner due December 23,
1997. Cumulative cash distributions are payable on the PERCS at an annual rate
of 4%. The PERCS are mandatorily redeemable on December 23, 1997, for an
F-47
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount per PERCS equal to the lesser of $54.41, and the market value of 1.5
shares of common stock of Hasbro on December 17, 1997 (as adjusted for the
Hasbro Stock Split), payable in cash or, at Time Warner's option, Hasbro common
stock. Time Warner has the right to redeem the PERCS at any time prior to
December 23, 1997, at an amount per PERCS equal to $54.41 (or in certain limited
circumstances the lesser of such amount and the market value of 1.5 shares of
Hasbro common stock at the time of redemption) plus accrued and unpaid
distributions thereon and a declining premium, payable in cash or, at Time
Warner's option, Hasbro common stock.
In December 1995, Time Warner issued approximately 23 million
Company-obligated mandatorily redeemable preferred securities of a wholly owned
subsidiary ('Preferred Trust Securities') for aggregate gross proceeds of $575
million. The sole assets of the subsidiary that is the obligor on the Preferred
Trust Securities are $592 million principal amount of 8 7/8% subordinated
debentures of Old Time Warner due December 31, 2025. Cumulative cash
distributions are payable on the Preferred Trust Securities at an annual rate of
8 7/8%. The Preferred Trust Securities are mandatorily redeemable for cash on
December 31, 2025, and Time Warner has the right to redeem the Preferred Trust
Securities, in whole or in part, on or after December 31, 2000, or in other
certain circumstances, in each case at an amount per Preferred Trust Security
equal to $25 plus accrued and unpaid distributions thereon.
Time Warner has certain obligations relating to the PERCS and the Preferred
Trust Securities which amount to a full and unconditional guaranty (on a
subordinated basis) of each subsidiary's obligations with respect thereto.
10. SERIES M EXCHANGEABLE PREFERRED STOCK
In April 1996, Time Warner raised approximately $1.55 billion of net
proceeds in a private placement of 1.6 million shares of 10 1/4% exchangeable
preferred stock. This issuance allowed the Company to realize cash proceeds
through a security whose payment terms are principally linked (until a
reorganization of TWE occurs, if any) to a portion of Time Warner's currently
noncash-generating interest in the Series B Capital of TWE. The proceeds raised
from this transaction were used by Time Warner to reduce debt. As part of the
TBS Transaction, these preferred shares were converted into registered shares of
Series M exchangeable preferred stock with substantially identical terms
('Series M Preferred Stock').
Each share of Series M Preferred Stock is entitled to a liquidation
preference of $1,000 and entitles the holder thereof to receive cumulative
dividends at the rate of 10 1/4% per annum, payable quarterly (1) in cash, to
the extent of an amount equal to the Pro Rata Percentage (as defined below)
multiplied by the amount of cash distributions received by Time Warner from TWE
with respect to its interests in the Series B Capital and Residual Capital of
TWE, excluding stock option related distributions and certain tax related
distributions (collectively, 'Eligible TWE Cash Distributions'), or (2) to the
extent of any balance, at Time Warner's option, (i) in cash or (ii) in-kind,
through the issuance of additional shares of Series M Preferred Stock with an
aggregate liquidation preference equal to the amount of such dividends. The 'Pro
Rata Percentage' is equal to the ratio of (1) the aggregate liquidation
preference of the outstanding shares of Series M Preferred Stock, including any
accumulated and unpaid dividends thereon, to (2) Time Warner's total interest in
the Series B Capital of TWE, including any undistributed priority capital return
thereon. Because cash distributions to Time Warner with respect to its interests
in the Series B Capital and Residual Capital of TWE are generally restricted
until June 30, 1998 and are subject to additional limitations thereafter under
the TWE partnership agreement, Time Warner does not expect to pay cash dividends
in the foreseeable future.
The Series M Preferred Stock may be redeemed at the option of Time Warner,
in whole or in part, on or after July 1, 2006, subject to certain conditions, at
an amount per share equal to its liquidation preference plus accumulated and
accrued and unpaid dividends thereon, and a declining premium through July 1,
2010 (the 'Optional Redemption Price'). Time Warner is required to redeem shares
of Series M Preferred Stock
F-48
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
representing up to 20%, 25%, 33 1/3% and 50% of the then outstanding liquidation
preference of the Series M Preferred Stock on July 1 of 2012, 2013, 2014 and
2015, respectively, at an amount equal to the aggregate liquidation preference
of the number of shares to be redeemed plus accumulated and accrued and unpaid
dividends thereon (the 'Mandatory Redemption Price'). Total payments in respect
of such mandatory redemption obligations on any redemption date are limited to
an amount equal to the Pro Rata Percentage of any cash distributions received by
Time Warner from TWE in the preceding year in connection with the redemption of
Time Warner's interest in the Series B Capital of TWE and in connection with
certain cash distributions related to Time Warner's interest in the Residual
Capital of TWE. The redemption of the Series B Capital of TWE is scheduled to
occur ratably over a five-year period commencing on June 30, 2011. Time Warner
is required to redeem any remaining outstanding shares of Series M Preferred
Stock on July 1, 2016 at the Mandatory Redemption Price; however, in the event
that Time Warner's interest in the Series B Capital of TWE has not been redeemed
in full prior to such final mandatory redemption date, payments in respect of
the final mandatory redemption obligation of the Series M Preferred Stock in
2016 will be limited to an amount equal to the lesser of the Mandatory
Redemption Price and an amount equal to the Pro Rata Percentage of the fair
market value of TWE (net of taxes) attributable to Time Warner's interests in
the Series B Capital and Residual Capital of TWE.
Upon a reorganization of TWE, as defined in the related certificate of
designation, Time Warner must elect either to (1) exchange each outstanding
share of Series M Preferred Stock for shares of a new series of 10 1/4%
exchangeable preferred stock ('Series L Preferred Stock') or (2) subject to
certain conditions, redeem the outstanding shares of Series M Preferred Stock at
an amount per share equal to 110% of the liquidation preference thereof, plus
accumulated and accrued and unpaid dividends thereon or, after July 1, 2006, at
the Optional Redemption Price. The Series L Preferred Stock has terms similar to
those of the Series M Preferred Stock, except that (i) Time Warner may only pay
dividends in-kind until June 30, 2006, (ii) Time Warner is required to redeem
the outstanding shares of Series L Preferred Stock on July 1, 2011 at an amount
per share equal to the liquidation preference thereof, plus accumulated and
accrued and unpaid dividends thereon and (iii) Time Warner has the option to
exchange, in whole but not in part, subject to certain conditions, the
outstanding shares of Series L Preferred Stock for Time Warner 10 1/4% Senior
Subordinated Debentures due July 1, 2011 (the 'Senior Subordinated Debentures')
having a principal amount equal to the liquidation preference of the Series L
Preferred Stock plus accrued and unpaid dividends thereon. Interest on the
Senior Subordinated Debentures is payable in cash or, at Time Warner's option
through June 30, 2006, in-kind through the issuance of additional Senior
Subordinated Debentures with a principal amount equal to such interest. The
Senior Subordinated Debentures may be redeemed at the option of Time Warner, in
whole or in part, on or after July 1, 2006, subject to certain conditions, at an
amount per debenture equal to its principal amount plus accrued and unpaid
interest, and a declining premium through July 1, 2010.
11. SHAREHOLDERS' EQUITY
Shareholders' equity of Time Warner at December 31, 1996 included 35.6
million shares of convertible preferred stock, 50.6 million shares of LMCN-V
Class Common Stock and 508.4 million shares of common stock (net of 50 million
shares of common stock in treasury). At February 28, 1997, there were
approximately 26,000 holders of record of Time Warner common stock. This total
does not include the large number of investors who hold such shares through
banks, brokers or other fiduciaries.
In April 1996, Time Warner's Board of Directors authorized a program to
repurchase, from time to time, up to 15 million shares of Time Warner common
stock. The common stock repurchased under the program is expected to be used to
satisfy future share issuances related to the exercise of existing employee
stock options. Actual repurchases in any period will be subject to market
conditions. As of December 31, 1996, Time Warner had acquired approximately 11.4
million shares of its common stock for an aggregate cost of $456 million. Such
repurchases were principally funded with borrowings under the Stock Option
Proceeds Credit Facility (Note 7).
F-49
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996 and 1995, Time Warner issued approximately 35.6 million shares
of convertible preferred stock in connection with the ITOCHU/Toshiba Transaction
and its acquisitions of KBLCOM, Summit and CVI. Set forth below is a summary of
the principal terms of Time Warner's outstanding issues of preferred stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK EFFECTIVE EARLIEST EARLIEST
SHARES ISSUABLE UPON ISSUANCE EXCHANGE REDEMPTION
DESCRIPTION OUTSTANDING CONVERSION DATE DATE DATE
- ---------------------------------------------- ----------- ---------------- -------- -------- ----------
(MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C>
Series D Preferred Stock...................... 11.0 22.9 7/6/95 7/6/99 7/6/00
Series E Preferred Stock...................... 3.3 6.8 1/4/96 1/4/01 1/4/01
Series F Preferred Stock...................... 3.0 6.4 1/4/96 1/4/00 1/4/01
Series G Preferred Stock...................... 6.2 12.9 9/5/95 9/5/99 9/5/99
Series H Preferred Stock...................... 1.8 3.7 9/5/95 9/5/00 9/5/99
Series I Preferred Stock...................... 7.0 14.6 10/2/95 10/2/99 10/2/99
Series J Preferred Stock...................... 3.3 6.8 5/2/95 5/2/98 5/2/00
----- -----
Total shares outstanding at December 31,
1996........................................ 35.6 74.1
----- -----
----- -----
</TABLE>
The principal terms of each series of convertible preferred stock issued in
1996 and 1995 (the Series D Preferred Stock, the Series E Preferred Stock, the
Series F Preferred Stock, the Series G Preferred Stock, the Series H Preferred
Stock, the Series I Preferred Stock and the Series J Preferred Stock, and
collectively, the 'Convertible Preferred Stock') are similar in nature, unless
otherwise noted below. Each share of Convertible Preferred Stock: (1) is
entitled to a liquidation preference of $100 per share, (2) is immediately
convertible into 2.08264 shares of Time Warner common stock at a conversion
price of $48 per share (based on its liquidation value), except that shares of
the Series H Preferred Stock are generally not convertible until September 2000,
(3) entitles the holder thereof (i) to receive for a four-year period from the
date of issuance (or a five-year period with respect to the Series E and Series
J Preferred Stock) an annual dividend per share equal to the greater of $3.75
and an amount equal to the dividends paid on the Time Warner common stock into
which each share may be converted and (ii) to the extent that any of such shares
of preferred stock remain outstanding at the end of the period in which the
minimum $3.75 per share dividend is to be paid, the holders thereafter will
receive dividends equal to the dividends paid on shares of Time Warner common
stock multiplied by the number of shares into which their shares of preferred
stock are convertible and (4) except for the Series H Preferred Stock which is
generally not entitled to vote, entitles the holder thereof to vote with the
common stockholders on all matters on which the common stockholders are entitled
to vote, and each share of such Convertible Preferred Stock is entitled to two
votes on any such matter.
Time Warner has the right to exchange each series of Convertible Preferred
Stock for Time Warner common stock at the stated conversion price at any time on
or after the respective exchange date. The Series J Preferred Stock is
exchangeable by the holder beginning after the third year from its date of
issuance and by Time Warner after the fourth year at the stated conversion price
plus a declining premium in years four and five and no premium thereafter. In
addition, Time Warner has the right to redeem each series of Convertible
Preferred Stock, in whole or in part, for cash at the liquidation value plus
accrued dividends, at any time on or after the respective redemption date.
In June 1996, Time Warner exchanged all outstanding shares of its Series B
preferred stock having an aggregate liquidation value of $69 million for
approximately 1.7 million shares of Time Warner common stock.
Pursuant to Time Warner's shareholder rights plan, as amended, each share
of Time Warner common stock has attached to it one right, which becomes
exercisable in certain events involving the acquisition of 15% or more of the
then outstanding common stock of Time Warner on a fully-diluted basis. Upon the
occurrence of such an event, each right entitles its holder to purchase for $150
the economic equivalent of common stock of
F-50
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time Warner, or in certain circumstances, of the acquiror, worth twice as much.
In connection with the plan, 8 million shares of preferred stock were reserved.
The rights expire on January 20, 2004.
At December 31, 1996, Time Warner had reserved approximately 200 million
shares of common stock for the conversion of its Convertible Preferred Stock,
zero coupon convertible notes and other convertible securities, and for the
exercise of outstanding options to purchase shares of common stock.
12. STOCK OPTION PLANS
Time Warner has various stock option plans under which Time Warner may
grant options to purchase Time Warner common stock to employees of Time Warner
and TWE. Such options have been granted to employees of Time Warner and TWE at,
or in excess of, fair market value at the date of grant. Accordingly, in
accordance with APB 25 and related interpretations, no compensation cost has
been recognized for its stock option plans. Generally, the options become
exercisable over a three-year vesting period and expire ten years from the date
of grant. Had compensation cost for Time Warner's stock option plans been
determined based on the fair value at the grant dates for all awards during 1995
and 1996 under those plans consistent with the method set forth under FASB
Statement No. 123, 'Accounting for Stock-Based Compensation' ('FAS 123'), Time
Warner's net loss and net loss per common share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
------ -----
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net loss:
As reported....................................................................... $ (191) $(166)
------ -----
------ -----
Pro forma......................................................................... $ (216) $(178)
------ -----
------ -----
Net loss per common share:
As reported....................................................................... $(1.04) $(.57)
------ -----
------ -----
Pro forma......................................................................... $(1.10) $(.60)
------ -----
------ -----
</TABLE>
FAS 123 is applicable only to stock options granted subsequent to December
31, 1994. Accordingly, since Time Warner's compensation expense associated with
such grants would generally be recognized over a three-year vesting period, the
initial impact of applying FAS 123 on pro forma net income is not representative
of the potential impact on pro forma net income in future years, when the pro
forma effect would be fully reflected.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yields of
1% in both periods; expected volatility of 21.7% and 22.3%, risk-free interest
rates of 6.1% and 7.1%; and expected lives of 5 years in both periods. The
weighted average fair value of an option granted during the year was $11.55
($6.81, net of taxes) and $11.95 ($7.05, net of taxes) for the years ended
December 31, 1996 and 1995, respectively. The weighted average exercise price
and fair value of an option granted during the year at prices exceeding the
market price of the stock on the date of grant are $52.88 and $8.87 ($5.23, net
of taxes), respectively.
F-51
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under all plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
THOUSANDS EXERCISE
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at January 1, 1994................................................................ 72,954 $ 30.04
Granted................................................................................... 6,071 37.85
Exercised................................................................................. (1,262) 23.55
Cancelled................................................................................. (152) 35.24
---------
Balance at December 31, 1994.............................................................. 77,611 $ 30.75
Granted................................................................................... 5,096 38.00
Exercised................................................................................. (3,721) 27.16
Cancelled................................................................................. (367) 35.80
---------
Balance at December 31, 1995.............................................................. 78,619 $ 31.36
Granted................................................................................... 9,460 43.30
Exercised................................................................................. (3,686) 26.91
Assumed in connection with the TBS Transaction............................................ 13,713 26.40
Cancelled................................................................................. (239) 40.83
---------
Balance at December 31, 1996.............................................................. 97,867 $ 31.97
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable.......................................................................... 82,697 66,242 63,106
Available for future grants.......................................................... 8,032 7,884 8,849
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ------------------- ----------- ----------- --------- ----------- ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $17 2,688 3 years $ 12.65 2,688 $ 12.65
$17.00 to $25.00 20,313 4 years $ 21.26 20,313 $ 21.26
$25.01 to $35.00 25,873 5 years $ 29.58 25,568 $ 29.53
$35.01 to $40.00 35,356 5 years $ 36.79 29,054 $ 36.59
$40.01 to $45.00 11,412 8 years $ 42.08 4,824 $ 42.05
$45.01 to $63.95 2,225 9 years $ 52.36 250 $ 48.29
----------- -----------
Total 97,867 5 years $ 31.97 82,697 $ 30.22
----------- -----------
----------- -----------
</TABLE>
For options exercised by employees of TWE, Time Warner is reimbursed for
the amount by which the market value of Time Warner common stock on the exercise
date exceeds the exercise price, or the greater of the exercise price or $27.75
for options granted prior to the TWE capitalization on June 30, 1992. There were
30.3 million options held by employees of TWE at December 31, 1996, 22.8 million
of which were exercisable.
F-52
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BENEFIT PLANS
Time Warner and its subsidiaries have defined benefit pension plans
covering substantially all domestic employees. Pension benefits are based on
formulas that reflect the employees' years of service and compensation levels
during their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities. Time Warner's common stock represents
approximately 5% and 6% of plan assets at December 31, 1996 and 1995,
respectively.
Pension expense included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
---- ----- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost......................................................................... $ 49 $ 29 $ 34
Interest cost........................................................................ 64 53 50
Actual return on plan assets......................................................... (90) (137) (2)
Net amortization and deferral........................................................ 37 89 (45)
---- ----- ----
Total................................................................................ $ 60 $ 34 $ 37
---- ----- ----
---- ----- ----
</TABLE>
The status of funded pension plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
(MILLIONS)
<S> <C> <C>
Accumulated benefit obligation (90% vested)....................................................... $550 $544
Effect of future salary increase.................................................................. 210 192
---- ----
Projected benefit obligation...................................................................... 760 736
Plan assets at fair value......................................................................... 704 643
---- ----
Projected benefit obligation in excess of plan assets............................................. (56) (93)
Unamortized actuarial losses...................................................................... 2 94
Unamortized plan changes.......................................................................... 3 2
Other............................................................................................. (2) (10)
---- ----
Accrued pension expense........................................................................... $(53) $ (7)
---- ----
---- ----
</TABLE>
The following assumptions were used in accounting for pension plans:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate....................................................... 7.75% 7.25% 8.5%
Return on plan assets................................................................ 9% 9% 9%
Rate of increase in compensation..................................................... 6% 6% 6%
</TABLE>
Employees of Time Warner's operations in foreign countries participate to
varying degrees in local pension plans, which in the aggregate are not
significant.
Time Warner also has certain defined contribution plans, including savings
and profit sharing plans, as to which the expense amounted to $67 million in
1996, $51 million in 1995 and $51 million in 1994. Contributions to the savings
plans are based upon a percentage of the employees' elected contributions.
Contributions to the profit sharing plans are generally determined by management
and approved by the board of directors of the participating companies.
F-53
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. FINANCIAL INSTRUMENTS
The carrying value of Time Warner's financial instruments approximates fair
value, except for differences with respect to long-term, fixed-rate debt and
related interest rate swap contracts and certain differences related to cost
method investments and other financial instruments which are not significant.
The fair value of financial instruments, such as long-term debt and investments,
is generally determined by reference to market values resulting from trading on
a national securities exchange or in an over-the-counter market. In cases where
quoted market prices are not available, such as for derivative financial
instruments, fair value is based on estimates using present value or other
valuation techniques.
INTEREST RATE RISK MANAGEMENT
Interest rate swap contracts are used to adjust the proportion of total
debt that is subject to variable and fixed interest rates. Under interest rate
swap contracts, the Company either agrees to pay an amount equal to a specified
floating-rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified fixed-rate of interest times the same
notional principal amount or, vice versa, to receive a floating-rate amount and
to pay a fixed-rate amount. The notional amounts of the contracts are not
exchanged. No other cash payments are made unless the contract is terminated
prior to maturity, in which case the amount paid or received in settlement is
established by agreement at the time of termination, and usually represents the
net present value, at current rates of interest, of the remaining obligations to
exchange payments under the terms of the contract. Interest rate swap contracts
are entered into with a number of major financial institutions in order to
minimize credit risk.
The net amounts paid or payable, or received or receivable, through the end
of the accounting period are included in interest expense. Because interest rate
swap contracts are used to modify the interest characteristics of Time Warner's
outstanding debt from a fixed to a floating-rate basis or, vice versa,
unrealized gains or losses on interest rate swap contracts are not recognized in
income unless the contracts are terminated prior to their maturity. Gains or
losses on any contracts terminated early are deferred and amortized to income
over the remaining average life of the terminated contracts.
At December 31, 1996, Time Warner had interest rate swap contracts to pay
floating-rates of interest (average six-month LIBOR rate of 5.7%) and receive
fixed-rates of interest (average rate of 5.5%) on $2.3 billion notional amount
of indebtedness, which resulted in approximately 47% of Time Warner's underlying
debt, and 43% of the debt of Time Warner and the Entertainment Group combined,
being subject to variable interest rates. The notional amount of outstanding
contracts by year of maturity at December 31, 1996 is as follows: 1998-$700
million; 1999-$1.2 billion; and 2000-$400 million. At December 31, 1995, Time
Warner had interest rate swap contracts on $2.6 billion notional amount of
indebtedness.
Based on the level of interest rates prevailing at December 31, 1996, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by $231
million and it would have cost $43 million to terminate the related interest
rate swap contracts, which combined is the equivalent of an unrealized loss of
$274 million. Based on the level of interest rates prevailing at December 31,
1995, the fair value of Time Warner's fixed-rate debt exceeded its carrying
value by $407 million and it would have cost $9 million to terminate its
interest rate swap contracts, which combined was the equivalent of an unrealized
loss of $416 million. Unrealized gains or losses on debt or interest rate swap
contracts are not recognized for financial reporting purposes unless the debt is
retired or the contracts are terminated prior to their maturity.
Changes in the unrealized gains or losses on interest rate swap contracts
and debt do not result in the realization or expenditure of cash unless the
contracts are terminated or the debt is retired. However, based on Time Warner's
variable-rate debt and related interest rate swap contracts outstanding at
December 31, 1996, each 25 basis point increase or decrease in the level of
interest rates would, respectively, increase or decrease Time Warner's annual
interest expense and related cash payments by approximately $16 million,
including $6
F-54
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million related to interest rate swap contracts. Such potential increases or
decreases are based on certain simplifying assumptions, including a constant
level of variable-rate debt and related interest rate swap contracts during the
period and, for all maturities, an immediate, across-the-board increase or
decrease in the level of interest rates with no other subsequent changes for the
remainder of the period.
FOREIGN EXCHANGE RISK MANAGEMENT
Foreign exchange contracts are used primarily by Time Warner to hedge the
risk that unremitted or future royalties and license fees owed to Time Warner or
TWE domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in foreign currency
exchange rates. As part of its overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a
portion of its and TWE's combined foreign currency exposures anticipated over
the ensuing twelve month period. At December 31, 1996, Time Warner has
effectively hedged approximately half of the combined estimated foreign currency
exposures that principally relate to anticipated cash flows to be remitted to
the U.S. over the ensuing twelve month period, using foreign exchange contracts
that generally have maturities of three months or less, which are generally
rolled over to provide continuing coverage throughout the year. Time Warner
often closes foreign exchange contracts by purchasing an offsetting purchase
contract. At December 31, 1996, Time Warner had contracts for the sale of $447
million and the purchase of $104 million of foreign currencies at fixed rates,
primarily English pounds (21% of net contract value), German marks (19%),
Canadian dollars (18%), French francs (15%) and Japanese yen (19%), compared to
contracts for the sale of $504 million and the purchase of $140 million of
foreign currencies at December 31, 1995.
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1996 and 1995 and is included in other current liabilities. No cash is required
to be received or paid with respect to such gains and losses until the related
foreign exchange contracts are settled, generally at their respective maturity
dates. For the years ended December 31, 1996, 1995 and 1994, Time Warner
recognized $15 million in gains, $20 million in losses and $33 million in
losses, respectively, and TWE recognized $6 million in gains, $11 million in
losses and $20 million in losses, respectively, on foreign exchange contracts,
which were or are expected to be offset by corresponding decreases and
increases, respectively, in the dollar value of foreign currency royalties and
license fee payments that have been or are anticipated to be received in cash
from the sale of U.S. copyrighted products abroad. Time Warner reimburses or is
reimbursed by TWE for contract gains and losses related to TWE's foreign
currency exposure. Foreign currency contracts are placed with a number of major
financial institutions in order to minimize credit risk.
Based on the foreign exchange contracts outstanding at December 31, 1996,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1996 would result
in approximately $22 million of unrealized losses and $5 million of unrealized
gains on foreign exchange contracts involving foreign currency sales and
purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $22 million of unrealized gains and $5 million of unrealized losses,
respectively. At December 31, 1996, none of Time Warner's foreign exchange
purchase contracts relates to TWE's foreign currency exposure. However, with
regard to the $22 million of unrealized losses or gains on foreign exchange sale
contracts, Time Warner would be reimbursed by TWE, or would reimburse TWE,
respectively, for approximately $5 million related to TWE's foreign currency
exposure. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, in the dollar value of
future foreign currency royalty and license fee payments that would be received
in cash within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
F-55
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENT INFORMATION
Time Warner classifies its businesses into four fundamental areas:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, television production, television broadcasting
and theme parks; Cable Networks, consisting principally of interests in cable
television programming and sports franchises; Publishing, consisting principally
of interests in magazine publishing, book publishing and direct marketing; and
Cable, consisting principally of interests in cable television systems. A
majority of Time Warner's interests in filmed entertainment, television
production, television broadcasting and theme parks, a portion of its interests
in cable television programming and a majority of its cable television systems
are held by the Entertainment Group. The Entertainment Group is not consolidated
for financial reporting purposes.
Information as to the operations of Time Warner and the Entertainment Group
in different business segments is set forth below. The operating results of Time
Warner reflect the acquisitions of Summit effective as of May 2, 1995, KBLCOM
effective as of July 6, 1995, CVI effective as of January 4, 1996 and TBS
effective as of October 10, 1996. The operating results of the Entertainment
Group reflect the formation of the TWE-Advance/Newhouse Partnership effective as
of April 1, 1995, the deconsolidation of Six Flags effective as of June 23, 1995
and consolidation of Paragon effective as of July 6, 1995. The operating results
of Six Flags prior to June 23, 1995 are reported separately to facilitate
comparability.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ---------- ------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
Time Warner:
Publishing........................................................................ $ 4,117 $3,722 $3,433
Music............................................................................. 3,949 4,196 3,986
Cable Networks-TBS................................................................ 680 -- --
Filmed Entertainment-TBS.......................................................... 455 -- --
Cable............................................................................. 909 172 --
Intersegment elimination.......................................................... (46) (23) (23)
------- ---------- ------
Total............................................................................. $10,064 $8,067 $7,396
------- ---------- ------
------- ---------- ------
Entertainment Group:
Filmed Entertainment-Warner Bros.................................................. $ 5,648 $5,078 $4,484
Six Flags Theme Parks............................................................. -- 227 557
Broadcasting-The WB Network....................................................... 87 33 --
Cable Networks-HBO................................................................ 1,763 1,607 1,513
Cable............................................................................. 3,851 3,094 2,242
Intersegment elimination.......................................................... (488) (410) (287)
------- ---------- ------
Total............................................................................. $10,861 $9,629 $8,509
------- ---------- ------
------- ---------- ------
</TABLE>
F-56
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
OPERATING INCOME
Time Warner:
Publishing........................................................................ $ 418 $ 381 $ 347
Music(1).......................................................................... 361 321 366
Cable Networks-TBS................................................................ 99 -- --
Filmed Entertainment-TBS.......................................................... 8 -- --
Cable............................................................................. 75 (5) --
Intersegment elimination.......................................................... 5 -- --
------ ------- -------
Total............................................................................. $ 966 $ 697 $ 713
------ ------- -------
------ ------- -------
Entertainment Group:
Filmed Entertainment-Warner Bros.................................................. $ 254 $ 253 $ 219
Six Flags Theme Parks............................................................. -- 29 56
Broadcasting-The WB Network....................................................... (98) (66) --
Cable Networks-HBO................................................................ 328 274 237
Cable............................................................................. 606 502 340
------ ------- -------
Total............................................................................. $1,090 $ 992 $ 852
------ ------- -------
------ ------- -------
</TABLE>
- ------------
(1) Includes pretax losses of $85 million recorded in 1995 related to certain
businesses and joint ventures owned by the Music division which were
restructured or closed. The losses were primarily related to Warner Music
Enterprises, one of the Company's former direct marketing efforts, and the
write off of its related direct mail order assets that were not recoverable
due to the closure of this business.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing............................................................................ $ 71 $ 59 $ 47
Music................................................................................. 91 95 86
Cable Networks-TBS.................................................................... 20 -- --
Filmed Entertainment-TBS.............................................................. 2 -- --
Cable................................................................................. 123 27 --
---- ---- ----
Total................................................................................. $307 $181 $133
---- ---- ----
---- ---- ----
Entertainment Group:
Filmed Entertainment-Warner Bros...................................................... $167 $113 $ 76
Six Flags Theme Parks................................................................. -- 20 51
Broadcasting-The WB Network........................................................... -- -- --
Cable Networks-HBO.................................................................... 22 18 14
Cable................................................................................. 619 465 340
---- ---- ----
Total................................................................................. $808 $616 $481
---- ---- ----
---- ---- ----
</TABLE>
F-57
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Time Warner:
Publishing....................................................................... $ 46 $ 36 $ 36
Music............................................................................ 292 274 268
Cable Networks-TBS............................................................... 43 -- --
Filmed Entertainment-TBS......................................................... 22 -- --
Cable............................................................................ 278 68 --
------- ------- -------
Total............................................................................ $ 681 $ 378 $ 304
------- ------- -------
------- ------- -------
Entertainment Group:
Filmed Entertainment-Warner Bros................................................. $ 125 $ 124 $ 135
Six Flags Theme Parks............................................................ -- 11 28
Broadcasting-The WB Network...................................................... -- -- --
Cable Networks-HBO............................................................... -- 1 6
Cable............................................................................ 311 308 309
------- ------- -------
Total............................................................................ $ 436 $ 444 $ 478
------- ------- -------
------- ------- -------
</TABLE>
- ------------
(1) Amortization includes all amortization relating to the acquisition of Warner
Communications Inc. ('WCI') in 1989, the acquisition of the minority
interest in American Television and Communications Corporation ('ATC') in
1992, the acquisitions of KBLCOM and Summit in 1995, the acquisitions of TBS
and CVI in 1996 and other business combinations accounted for by the
purchase method.
Information as to the assets and capital expenditures of Time Warner and
the Entertainment Group is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Time Warner:
Publishing....................................................................... $ 2,418 $ 2,175 $ 2,013
Music............................................................................ 7,478 7,828 7,672
Cable Networks-TBS............................................................... 7,860 -- --
Filmed Entertainment-TBS......................................................... 3,232 -- --
Cable............................................................................ 7,257 3,875 --
Entertainment Group(1)........................................................... 5,814 5,734 5,350
Corporate(2)..................................................................... 1,005 2,520 1,681
------- ------- -------
Total............................................................................ $35,064 $22,132 $16,716
------- ------- -------
------- ------- -------
Entertainment Group:
Filmed Entertainment-Warner Bros................................................. $ 8,111 $ 7,389 $ 7,184
Six Flags Theme Parks............................................................ -- -- 814
Broadcasting-The WB Network...................................................... 67 63 --
Cable Networks-HBO............................................................... 997 935 911
Cable............................................................................ 10,202 9,842 8,303
Corporate(2)..................................................................... 650 731 1,780
------- ------- -------
Total............................................................................ $20,027 $18,960 $18,992
------- ------- -------
------- ------- -------
</TABLE>
- ------------
(1) Entertainment Group assets represent Time Warner's investment in and amounts
due to and from the Entertainment Group.
(2) Consists principally of cash, cash equivalents and other investments.
F-58
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Time Warner:
Publishing.......................................................................... $ 76 $ 70 $ 50
Music............................................................................... 142 121 108
Cable Networks-TBS.................................................................. 34 -- --
Filmed Entertainment-TBS............................................................ 2 -- --
Cable............................................................................... 215 56 --
Corporate........................................................................... 12 19 6
------- ------ ------
Total............................................................................... $ 481 $ 266 $ 164
------- ------ ------
------- ------ ------
Entertainment Group:
Filmed Entertainment-Warner Bros.................................................... $ 340 $ 294 $ 395
Six Flags Theme Parks............................................................... -- 43 46
Broadcasting-The WB Network......................................................... 2 -- --
Cable Networks-HBO.................................................................. 29 20 14
Cable(1)............................................................................ 1,348 1,293 778
Corporate........................................................................... -- 3 2
------- ------ ------
Total............................................................................... $ 1,719 $1,653 $1,235
------- ------ ------
------- ------ ------
</TABLE>
- ------------
(1) Cable capital expenditures were funded in part through collections on the U
S WEST Note Receivable in the amount of $169 million in 1996, $602 million
in 1995 and $234 million in 1994 (Note 3). The U S WEST Note Receivable was
fully collected during 1996.
Information as to Time Warner's operations in different geographical areas
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
United States(1).................................................................... $ 7,562 $5,447 $4,944
Europe.............................................................................. 1,494 1,552 1,445
Pacific Rim......................................................................... 697 775 724
Rest of World....................................................................... 311 293 283
------- ------ ------
Total............................................................................... $10,064 $8,067 $7,396
------- ------ ------
------- ------ ------
OPERATING INCOME
United States....................................................................... $ 732 $ 457 $ 494
Europe.............................................................................. 184 158 108
Pacific Rim......................................................................... 12 57 74
Rest of World....................................................................... 38 25 37
------- ------ ------
Total............................................................................... $ 966 $ 697 $ 713
------- ------ ------
------- ------ ------
</TABLE>
- ------------
(1) Time Warner's revenues do not include the revenues of the Entertainment
Group, which had export revenues of $2.134 billion in 1996, $1.982 billion
in 1995 and $1.693 billion in 1994, principally from the sale of Filmed
Entertainment products abroad.
F-59
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
United States.................................................................... $31,999 $19,301 $13,961
Europe........................................................................... 1,886 1,797 1,717
Pacific Rim...................................................................... 692 628 636
Rest of World.................................................................... 487 406 402
------- ------- -------
Total............................................................................ $35,064 $22,132 $16,716
------- ------- -------
------- ------- -------
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $192 million in 1996, $174 million in 1995
and $157 million in 1994. The minimum rental commitments under noncancellable
long-term operating leases are: 1997-$235 million; 1998-$230 million; 1999-$205
million; 2000-$185 million; 2001-$160 million and after 2001-$1.151 billion.
Minimum commitments and guarantees under certain programming, licensing,
artists, athletes, franchise and other agreements aggregated approximately $3.8
billion at December 31, 1996, which are payable principally over a five-year
period. Such amounts do not include the Time Warner General Partner guarantees
of approximately $5.4 billion of TWE debt.
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of Time Warner, alleged damages in connection with
class action lawsuits and the pending litigation with the City of New York and
Fox News Channel ('FNC') relating to the TBS Transaction and the carriage of FNC
on Time Warner Cable's New York City cable television system. In the opinion of
management, the ultimate resolution of these matters will not have a material
effect on the financial statements of Time Warner.
17. RELATED PARTY TRANSACTIONS
In the normal course of conducting their businesses, Time Warner and its
subsidiaries and affiliates have had various transactions with TWE and other
Entertainment Group companies, generally on terms resulting from a negotiation
between the affected units that in management's view results in reasonable
allocations. Employees of TWE participate in various Time Warner medical, stock
option and other benefit plans for which Time Warner charges TWE its allocable
share of plan expenses, including administrative costs. In addition, Time Warner
provides TWE with certain corporate support services for which it received a fee
in the amount of $69 million, $64 million and $60 million in 1996, 1995 and
1994, respectively. The corporate support services agreement expires on June 30,
1997, subject to the obligation of both parties to negotiate, in good faith, any
extension thereto.
Time Warner's Cable division has management services agreements with TWE,
pursuant to which TWE manages, or provides services to, the cable television
systems owned by Time Warner. Such cable television systems also pay TWE for the
right to carry cable television programming provided by TWE's cable networks.
Time Warner's Filmed Entertainment-TBS division has various service
agreements with TWE's Filmed Entertainment-Warner Bros. division, pursuant to
which TWE's Filmed Entertainment-Warner Bros. division provides certain
management and distribution services for Time Warner's theatrical, television
and animated product, as well as certain services for administrative and
technical support.
Time Warner's Cable Networks-TBS division has license agreements with TWE,
pursuant to which the cable networks have acquired broadcast rights to certain
film and television product. In addition, Time Warner's Music division provides
home videocassette distribution services to certain TWE operations, and certain
TWE units place advertising in magazines published by Time Warner's Publishing
division.
F-60
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time Warner and TWE entered into a credit agreement in 1994 that allows
Time Warner to borrow up to $400 million from TWE through September 15, 2000.
Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement.
In addition to transactions with TWE and other Entertainment Group
companies, Time Warner has had transactions with the Columbia House Company
partnerships, Cinamerica Theatres, L.P., Comedy Partners, L.P., Six Flags and
other equity investees of Time Warner and the Entertainment Group, generally
with respect to sales of product in the ordinary course of business.
18. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Cash payments made for interest...................................................... $839 $659 $539
Cash payments made for income taxes.................................................. 382 302 389
Tax-related distributions received from TWE.......................................... 215 680 115
Income tax refunds received.......................................................... 44 24 50
Noncash dividends.................................................................... 122 -- --
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, Time Warner
realized $147 million, $35 million and $179 million, respectively, from the
securitization of receivables. Noncash investing activities in 1996 included the
$6.2 billion acquisition of TBS and the $904 million acquisition of CVI in
exchange for capital stock (Note 2). Noncash investing and financing activities
in 1995 included the $1.4 billion acquisitions of KBLCOM and Summit in exchange
for capital stock (Note 2), the $1.36 billion acquisition of ITOCHU's and
Toshiba's interests in TWE in exchange for capital stock and $10 million in cash
(Note 3) and the $1.8 billion redemption of Time Warner's Reset Notes in
exchange for other debt securities (Note 6).
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses............................................................................... $1,410 $ 972
Accrued compensation........................................................................... 351 337
Accrued income taxes........................................................................... 81 173
Deferred revenues.............................................................................. 248 84
------ ------
Total.......................................................................................... $2,090 $1,566
------ ------
------ ------
</TABLE>
F-61
<PAGE>
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles, and
necessarily include some amounts that are based on management's best estimates
and judgments.
Time Warner maintains a system of internal accounting controls designed to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization and recorded properly. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal control should not exceed the benefits derived and that the evaluation
of those factors requires estimates and judgments by management. Further,
because of inherent limitations in any system of internal accounting control,
errors or irregularities may occur and not be detected. Nevertheless, management
believes that a high level of internal control is maintained by Time Warner
through the selection and training of qualified personnel, the establishment and
communication of accounting and business policies, and its internal audit
program.
The Audit Committee of the Board of Directors, composed solely of directors
who are not employees of Time Warner, meets periodically with management and
with Time Warner's internal auditors and independent auditors to review matters
relating to the quality of financial reporting and internal accounting control,
and the nature, extent and results of their audits. Time Warner's internal
auditors and independent auditors have free access to the Audit Committee.
<TABLE>
<S> <C> <C>
Gerald M. Levin Richard D. Parsons Richard J. Bressler
Chairman and President Senior Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
F-62
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TIME WARNER INC.
We have audited the accompanying consolidated balance sheet of Time Warner Inc.
('Time Warner') as of December 31, 1996 and 1995, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedules and supplementary information listed in the Index
at Item 14(a). These financial statements, schedules and supplementary
information are the responsibility of Time Warner's management. Our
responsibility is to express an opinion on these financial statements, schedules
and supplementary information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Time Warner at
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules and supplementary
information, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
New York, New York
February 11, 1997
F-63
<PAGE>
<PAGE>
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1996 set forth below has been derived from and should be read
in conjunction with the financial statements and other financial information
presented elsewhere herein. Capitalized terms are as defined and described in
such consolidated financial statements, or elsewhere herein. The selected
historical financial information for all periods after 1992 reflects the
deconsolidation of the Entertainment Group, principally TWE, effective January
1, 1993.
The selected historical financial information for 1996 reflects (a) the
issuance of approximately 173.4 million shares of common stock and the
assumption of approximately $2.8 billion of indebtedness in connection with the
TBS Transaction, (b) the issuance of 1.6 million shares of Series M exchangeable
preferred stock having an aggregate liquidation preference of $1.6 billion and
the use of approximately $1.55 billion of net proceeds therefrom to reduce debt
and (c)(i) the issuance of 6.3 million shares of convertible preferred stock
having an aggregate liquidation preference of $633 million and 2.9 million
shares of common stock and (ii) the assumption or incurrence of approximately $2
billion of indebtedness, in connection with the acquisition of CVI. The selected
historical financial information for 1995 reflects (a) the issuance of 29.3
million shares of convertible preferred stock having an aggregate liquidation
preference of $2.926 billion and 2.6 million shares of common stock and (b) the
assumption or incurrence of approximately $1.3 billion of indebtedness in
connection with (x) the acquisitions of KBLCOM and Summit and (y) the exchange
by Toshiba and ITOCHU of their direct and indirect interests in TWE. The
selected historical financial information for 1993 reflects the issuance of $6.1
billion of long-term debt and the use of $500 million of cash and equivalents
for the exchange or redemption of preferred stock having an aggregate
liquidation preference of $6.4 billion. The selected historical financial
information for 1992 reflects the capitalization of TWE on June 30, 1992 and
associated refinancings, and the acquisition of the 18.7% minority interest in
ATC as of June 30, 1992, using the purchase method of accounting for business
combinations.
Per common share amounts and average common shares have been restated to
give effect to the four-for-one common stock split that occurred on September
10, 1992.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................................... $10,064 $ 8,067 $ 7,396 $ 6,581 $13,070
Depreciation and amortization.............................. 988 559 437 424 1,172
Business segment operating income (a)...................... 966 697 713 591 1,343
Equity in pretax income of Entertainment Group............. 290 256 176 281 --
Interest and other, net.................................... 1,174 877 724 718 882
Income (loss) before extraordinary item.................... (156) (124) (91) (164) 86
Net income (loss) (b)...................................... (191) (166) (91) (221) 86
Net loss applicable to common shares (after preferred
dividends)............................................... (448) (218) (104) (339) (542)
Per share of common stock:
Net loss (b)............................................. $ (1.04) $ (0.57) $ (0.27) $ (0.90) $ (1.46)
Dividends................................................ $ 0.36 $ 0.36 $ 0.35 $ 0.31 $ 0.265
Average common shares...................................... 431.2 383.8 378.9 374.7 371.0
</TABLE>
- ------------
(a) Business segment operating income for the year ended December 31, 1995
includes $85 million in losses relating to certain businesses and joint
ventures owned by the Music division which were restructured or closed.
(b) The net loss for the year ended December 31, 1996 includes an
extraordinary loss on the retirement of debt of $35 million ($.09 per
common share). The net loss for the year ended December 31, 1995 includes
an extraordinary loss on the retirement of debt of $42 million ($.11 per
common share). The net loss for the year ended December 31, 1993 includes
an extraordinary loss on the retirement of debt of $57 million ($.15 per
common share) and an unusual charge of $70 million ($.19 per common share)
from the effect of the new income tax law on Time Warner's deferred income
tax liability.
F-64
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Investments in and amounts due to and from Entertainment
Group.................................................... $ 5,814 $ 5,734 $ 5,350 $ 5,627 $ --
Total assets............................................... 35,064 22,132 16,716 16,892 27,366
Debt due within one year................................... 11 34 355 120 171
Long-term debt............................................. 12,713 9,907 8,839 9,291 10,068
Borrowings against future stock option proceeds............ 488 -- -- -- --
Company-obligated mandatorily redeemable preferred
securities of subsidiaries holding solely subordinated
notes and debentures of subsidiaries of the Company(c)... 949 949 -- -- --
Series M exchangeable preferred stock...................... 1,672 -- -- -- --
Shareholders' equity:
Preferred stock liquidation preference................... 3,559 2,994 140 140 6,532
Equity applicable to common stock........................ 5,943 673 1,008 1,230 1,635
Total shareholders' equity............................... 9,502 3,667 1,148 1,370 8,167
Total capitalization....................................... 25,335 14,557 10,342 10,781 18,406
</TABLE>
- ------------
(c) Includes $374 million of preferred securities that are redeemable for cash
or, at Time Warner's option, approximately 18.1 million shares of Hasbro,
Inc. common stock owned by Time Warner.
F-65
<PAGE>
<PAGE>
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY IN NET NET INCOME
OPERATING PRETAX INCOME (LOSS) (LOSS) PER DIVIDENDS
INCOME OF INCOME OF NET APPLICABLE COMMON PER
BUSINESS ENTERTAINMENT INCOME TO COMMON SHARE COMMON
QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(d) (d)(e) SHARE
- -------- -------- --------- ------------- ------ ------------- ---------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
1996 (a)
1st (b) $2,068 $ 110 $ 116 $(119) $(153) $(0.39) $0.09
2nd (b) 2,139 215 93 (40) (110) (0.28) 0.09
3rd 2,157 139 61 (91) (167) (0.43) 0.09
4th 3,700 502 20 59 (18) (0.03) 0.09
Year (b) 10,064 966 290 (191) (448) (1.04) 0.36
1995
1st $1,817 $ 138 $ 22 $ (47) $ (50) $(0.13) $0.09
2nd 1,907 184 84 (8) (13) (0.03) 0.09
3rd (c) 1,981 21 129 (144) (160) (0.41) 0.09
4th 2,362 354 21 33 5 0.01 0.09
Year (c) 8,067 697 256 (166) (218) (0.57) 0.36
<CAPTION>
COMMON
AVERAGE STOCK
COMMON ------------
QUARTER SHARES HIGH LOW
- -------- ------ ---- ---
<S> <C> <C> <C>
1996 (a)
1st (b) 391.7 $45 1/4 $37 1/4
2nd (b) 389.5 42 7/8 38 1/8
3rd 385.0 39 7/8 29 3/4
4th 558.7 42 1/4 36 1/2
Year (b) 431.2 45 1/4 29 3/4
1995
1st 379.5 $39 1/4 $33 5/8
2nd 381.4 43 1/2 34 1/4
3rd (c) 386.5 45 5/8 38 7/8
4th 387.5 41 1/4 35 3/4
Year (c) 383.8 45 5/8 33 5/8
</TABLE>
- ------------
(a) Quarterly financial information for 1996 reflects the acquisition by Time
Warner of the remaining interest in TBS that it did not already own,
effective as of October 10, 1996.
(b) The net loss for the first quarter of 1996 includes an extraordinary loss
on the retirement of debt of $26 million ($.07 per common share). The net
loss for the second quarter of 1996 includes an extraordinary loss on the
retirement of debt of $9 million ($.02 per common share).
(c) Business segment operating income for the third quarter of 1995 includes
$85 million in losses relating to certain businesses and joint ventures
owned by the Music division which were restructured or closed. The net
loss for the third quarter of 1995 includes an extraordinary loss on the
retirement of debt of $42 million ($.11 per common share).
(d) After preferred dividend requirements.
(e) Per common share amounts for the quarters and full years have been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amount because of differences in the average common shares
outstanding during each period.
F-66
<PAGE>
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF
TIME WARNER COMPANIES, INC. AND TURNER BROADCASTING SYSTEM, INC.
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 more
fully described in Note 2 to the Time Warner Inc. consolidated financial
statements. 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 ('Old Time
Warner', now known as Time Warner Companies, Inc.) and Old Time Warner and TBS
became separate, wholly owned subsidiaries of the new parent company ('New Time
Warner'). New Time Warner has fully and unconditionally guaranteed all of the
outstanding publicly traded indebtedness of each of Old Time Warner and TBS.
Set forth below is summarized financial information of each of Old Time
Warner and TBS presented for the information of their respective debtholders.
Summarized financial information of Old Time Warner presented below includes Old
Time Warner's 20% interest in TBS under the equity method of accounting.
Summarized financial information of TBS for all post-merger periods presented
below has been adjusted to reflect New Time Warner's basis of accounting and
includes $6.254 billion of contributed capital. Summarized financial information
of TBS presented below for all pre-merger periods is reflected at TBS's
historical cost basis of accounting. Certain reclassifications have been made to
TBS's summarized financial information for all pre-merger periods to conform to
the post-merger presentation.
OLD TIME WARNER
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
OPERATING STATEMENT INFORMATION 1996 1995 1994
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues............................................................................. $8,951 $8,067 $7,396
Depreciation and amortization........................................................ 902 559 437
Business segment operating income (a)................................................ 853 697 713
Equity in pretax income of Entertainment Group....................................... 290 256 176
Interest and other, net.............................................................. 1,096 877 724
Loss before extraordinary item....................................................... (145) (124) (91)
Net loss (b)......................................................................... (180) (166) (91)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
BALANCE SHEET INFORMATION 1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Total current assets........................................................................ $ 3,529 $ 3,720
Investments in and amounts due to and from Entertainment Group.............................. 5,814 5,734
Total assets................................................................................ 25,595 22,132
Total current liabilities................................................................... 2,831 3,027
Long-term debt.............................................................................. 11,002 9,907
Total liabilities........................................................................... 18,532 17,516
Old Time Warner-obligated mandatorily redeemable preferred securities of subsidiaries
holding solely subordinated notes and debentures of subsidiaries (c)...................... 949 949
Series M exchangeable preferred stock....................................................... 1,672 --
Shareholders' equity........................................................................ 4,442 3,667
</TABLE>
- ------------
(a) Business segment operating income for the year ended December 31, 1995
includes $85 million in losses relating to certain businesses and joint
ventures owned by the Music division which were restructured or closed.
(b) The net loss for the year ended December 31, 1996 includes an
extraordinary loss on the retirement of debt of $35 million. The net loss
for the year ended December 31, 1995 includes an extraordinary loss on the
retirement of debt of $42 million.
(c) Includes $374 million of preferred securities that are redeemable for cash
or, at Old Time Warner's option, approximately 18.1 million shares of
Hasbro, Inc. common stock owned by Old Time Warner.
F-67
<PAGE>
<PAGE>
TBS
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, ---------------------------
1996 1996 1995 1994
------------ ------------ ----------- ------------
(MILLIONS)
<S> <C> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues............................................. $1,124 $2,735 $ 3,412 $2,790
Depreciation and amortization........................ 86 141 188 153
Business segment operating income.................... 113 123 415 319
Interest and other, net.............................. 62 143 215 216
Income before extraordinary item..................... 3 (20) 103 46
Net income (loss) (a)................................ 3 (20) 103 21
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- ------
(MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION
Total current assets......................................................................... $ 1,286 $1,393
Total assets................................................................................. 11,092 4,395
Total current liabilities.................................................................... 934 840
Long-term debt............................................................................... 1,711 2,480
Total liabilities............................................................................ 3,989 3,958
Shareholder's equity......................................................................... 7,103 438
</TABLE>
- ------------
(a) Net income for the year ended December 31, 1994 includes an extraordinary
loss on the retirement of debt of $25 million.
F-68
<PAGE>
<PAGE>
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED (PARENT-ONLY) CONDENSED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
ASSETS
Cash and equivalents (a).................................................................... $ 62 $ 922
Investments in and amounts due to and from unconsolidated subsidiaries and
equity method investees................................................................... 16,110 16,040
Other assets................................................................................ 216 436
------- -------
Total assets................................................................................ $16,388 $17,398
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt.............................................................................. $ -- $ 8,467
Borrowings against future stock option proceeds............................................. 488 --
Deferred income taxes....................................................................... 4,082 3,420
Other liabilities........................................................................... 644 867
Subordinated notes and debentures in support of mandatorily redeemable preferred securities
of subsidiaries........................................................................... -- 977
Series M exchangeable preferred stock....................................................... 1,672 --
Shareholders' equity:
Preferred stock............................................................................. 4 30
LMCN-V Class Common Stock................................................................... 1 --
Common stock................................................................................ 5 388
Paid-in capital............................................................................. 12,250 5,422
Accumulated deficit......................................................................... (2,758) (2,173)
------- -------
Total shareholders' equity.................................................................. 9,502 3,667
------- -------
Total liabilities and shareholders' equity.................................................. $16,388 $17,398
------- -------
------- -------
</TABLE>
- ------------
(a) Cash and equivalents at December 31, 1996 consists of $62 million held in
escrow for purposes of funding certain preferred dividend requirements and
$557 million at December 31, 1995 segregated for the redemption of
long-term debt.
See accompanying notes.
F-69
<PAGE>
<PAGE>
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF OPERATIONS
(MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS YEARS ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, ------------------------
1996 1996 1995 1994
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Equity in the income of unconsolidated subsidiaries and equity
method investees before federal and state income and foreign
withholding taxes............................................. $ 156 $ 395 $ 815 $ 731
Interest and other, net......................................... (16) (574) (860) (641)
Corporate expenses.............................................. (17) (52) (74) (76)
------ ------ ----------- -----------
Income (loss) before federal and state income and foreign
withholding taxes............................................. 123 (231) (119) 14
Benefit (provision) for federal and state income and foreign
withholding taxes............................................. (64) 16 (5) (105)
------ ------ ----------- -----------
Income (loss) before extraordinary item......................... 59 (215) (124) (91)
Extraordinary loss on debt, net of $22 million and
$26 million income tax benefit in the nine months ended
September 30, 1996 and the year ended December 31, 1995,
respectively.................................................. -- (35) (42) --
------ ------ ----------- -----------
Net income (loss)............................................... $ 59 $(250) $ (166) $ (91)
------ ------ ----------- -----------
------ ------ ----------- -----------
</TABLE>
See accompanying notes.
F-70
<PAGE>
<PAGE>
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF CASH FLOWS
(MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS YEARS ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, ------------------------
1996 1996 1995 1994
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net income (loss).............................................. $ 59 $ (250) $ (166) $ (91)
Extraordinary loss on retirement of debt....................... -- 35 42 --
Noncash interest expense....................................... -- 68 176 219
Excess (deficiency) of distributions over equity in pretax
income of unconsolidated subsidiaries and equity method
investees(a)................................................. 213 (288) (89) (396)
Other, principally changes in operating assets and
liabilities.................................................. 35 89 (72) 149
------------ ------------- ----------- -----------
Cash provided (used) by operations(b)(d)....................... 307 (346) (109) (119)
------------ ------------- ----------- -----------
INVESTING ACTIVITIES
Investments and acquisitions, principally loans and advances to
unconsolidated subsidiaries.................................. (1,300) (1,506) (353) (815)
Investment proceeds, principally repayments of loans and
advances by unconsolidated subsidiaries...................... 1,058 304 1,154 1,087
------------ ------------- ----------- -----------
Cash provided (used) by investing activities(c)(d)............. (242) (1,202) 801 272
------------ ------------- ----------- -----------
FINANCING ACTIVITIES
Borrowings..................................................... -- 845 748 550
Debt repayments................................................ -- (1,526) (1,455) (617)
Borrowings against future stock option proceeds................ 63 425 -- --
Repurchases of Time Warner common stock........................ (4) (452) -- --
Issuance of Series M Preferred Stock........................... -- 1,550 -- --
Issuance of subordinated notes and debentures in support of
mandatorily redeemable preferred securities of
subsidiaries................................................. -- -- 977 --
Dividends paid................................................. (84) (203) (171) (142)
Stock option and dividend reinvestment plans................... 22 83 106 34
Other, principally financing costs............................. -- (60) (43) (6)
------------ ------------- ----------- -----------
Cash provided (used) by investing activities(c)(d)............. (3) 662 162 (181)
------------ ------------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................... 62 (886) 854 (28)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.................... -- 922 68 96
------------ ------------- ----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD.......................... $ 62 $ 36 $ 922 $ 68
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
</TABLE>
- ------------
(a) Distributions from unconsolidated subsidiaries and equity method investees
were $369 million, $107 million, $726 million and $335 million in the
three months ended December 31, 1996, the nine months ended September 30,
1996 and the years ended December 31, 1995 and 1994, respectively.
(b) Cash payments made for interest amounted to $6 million, $598 million, $628
million and $539 million in the three months ended December 31, 1996, the
nine months ended September 30, 1996 and the years ended December 31, 1995
and 1994, respectively. U.S. federal and state income and foreign
withholding tax payments were $67 million, $231 million, $195 million and
$299 million in the three months ended December 31, 1996, the nine months
ended September 30, 1996 and the years ended December 31, 1995 and 1994,
respectively, and related tax refunds were $6 million, $31 million, $19
million and $44 million, respectively.
(c) For information with respect to certain noncash investing and financing
activities of Time Warner, see Note 18 to the Time Warner consolidated
financial statements. In addition, noncash investing activities of Time
Warner with its unconsolidated subsidiaries included noncash capital
distributions (contributions), net, of $2.450 billion and ($176) million
in the years ended December 31, 1995 and 1994, respectively.
(d) The noncash effects of the capitalization of New Time Warner were to
increase investments in unconsolidated subsidiaries-$9.783 billion, other
assets-$215 million, borrowings against future stock option proceeds-$425
million, deferred income taxes-$3.935 billion, other liabilities-$429
million, Series M exchangeable preferred stock-$1.629 billion and
equity-$3.580 billion.
See accompanying notes.
F-71
<PAGE>
<PAGE>
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO UNCONSOLIDATED (PARENT-ONLY) CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
On October 10, 1996, Time Warner Inc. ('Time Warner'), acquired the
remaining 80% interest in Turner Broadcasting System, Inc. ('TBS') that it did
not already own (the 'TBS Transaction'), as more fully described in Note 2 to
the Time Warner consolidated financial statements. 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 ('Old Time Warner', now known as Time Warner
Companies, Inc.), and Old Time Warner and TBS became separate, wholly owned
subsidiaries of the new parent company ('New Time Warner'). The accompanying
condensed financial information presented herein reflects the financial
condition, results of operations and cash flows of Old Time Warner prior to the
TBS Transaction and New Time Warner thereafter. Similarly, references herein to
'Time Warner' refer to Old Time Warner prior to the TBS Transaction and New Time
Warner thereafter.
Time Warner's investments in and amounts due to and from unconsolidated
subsidiaries and equity method investees are stated at cost plus equity in the
undistributed income (loss) of subsidiaries and equity method investees, before
U.S. federal and state income and foreign withholding taxes, since dates of
acquisition. Time Warner's share of the income (loss) of unconsolidated
subsidiaries and equity method investees, before federal and state income and
foreign withholding taxes, is included in the statement of operations using the
equity method. The unconsolidated (parent-only) financial statements should be
read in conjunction with the accompanying consolidated financial statements of
Time Warner. Capitalized terms are as defined herein or elsewhere in the Time
Warner consolidated financial statements.
2. LONG-TERM DEBT
The principal terms and amounts of the long-term debt of Old Time Warner
(parent-only) at December 31, 1995 are set forth in Note 6 to the Time Warner
consolidated financial statements. Such indebtedness was not assumed by New Time
Warner in connection with the TBS Transaction. Old Time Warner (parent-only)
long-term debt at December 31, 1995 excludes unconsolidated subsidiary debt of
$1.440 billion.
New Time Warner has fully and unconditionally guaranteed all of Old Time
Warner's and TBS's outstanding publicly traded indebtedness, which amounted to
approximately $7.754 billion and $1.030 billion, respectively, at December 31,
1996.
3. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with Time Warner's common stock repurchase program, Old Time
Warner entered into a five-year, $750 million revolving credit facility (the
'Stock Option Proceeds Credit Facility') in May 1996. Borrowings under the Stock
Option Proceeds Credit Facility are principally used to fund stock repurchases
and approximately $200 million of preferred dividend requirements on Time
Warner's Series G, H, I and J Preferred Stock. In connection with the TBS
Transaction, New Time Warner assumed all of Old Time Warner's rights and
obligations under the Stock Option Proceeds Credit Facility. At December 31,
1996, $488 million of borrowings were outstanding under the Stock Option
Proceeds Credit Facility. The principal terms of the Stock Option Proceeds
Credit Facility are set forth in Note 7 to the Time Warner consolidated
financial statements.
4. SUBORDINATED NOTES AND DEBENTURES
In August 1995, Old Time Warner issued $385 million principal amount of 4%
subordinated notes due December 23, 1997 (the '4% Notes') to a wholly owned
subsidiary in support of such subsidiary's issuance of the PERCS. In addition,
in December 1995, Old Time Warner issued $592 million principal amount of 8 7/8%
subordinated debentures due December 31, 2025 (the '8 7/8% Debentures') to a
wholly owned subsidiary in support of such subsidiary's issuance of the
Preferred Trust Securities. The 4% Notes and the 8 7/8% Debentures
F-72
<PAGE>
<PAGE>
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO UNCONSOLIDATED (PARENT-ONLY)
CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
were not assumed by New Time Warner in connection with the TBS Transaction.
However, New Time Warner has guaranteed Old Time Warner's obligations
thereunder.
5. SERIES M EXCHANGEABLE PREFERRED STOCK
In April 1996, Old Time Warner raised approximately $1.55 billion of net
proceeds in a private placement of 1.6 million shares of 10 1/4% exchangeable
preferred stock. As a part of the TBS Transaction, these shares were converted
into registered shares of Series M exchangeable preferred stock of New Time
Warner with substantially identical terms ('Series M Preferred Stock'). The
principal terms of the Series M Preferred Stock are set forth in Note 10 to the
Time Warner consolidated financial statements.
F-73
<PAGE>
<PAGE>
TIME WARNER INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------------------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 188 $ 312(a) $ (264)(c) $ 236
Reserves for sales returns and allowances.............. 598 2,628(b) (2,486)(d)(e) 740
---------- ---------- ---------- ---------
Total............................................. $ 786 $ 2,940 $ (2,750) $ 976
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns................ $ (163) $ (1,023) $ 1,007(e) $(179)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1995:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 157 $ 230 $ (199)(c) $ 188
Reserves for sales returns and allowances.............. 611 2,217 (2,230)(d)(e) 598
---------- ---------- ---------- ---------
Total............................................. $ 768 $ 2,447 $ (2,429) $ 786
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns................ $ (159) $ (1,015) $ 1,011(e) $(163)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1994:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 131 $ 197 $ (171)(c) $ 157
Reserves for sales returns and allowances.............. 545 1,822 (1,756)(d)(e) 611
---------- ---------- ---------- ---------
Total............................................. $ 676 $ 2,019 $ (1,927) $ 768
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns................ $ (154) $ (905) $ 900(e) $(159)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
- ------------
(a) Includes $40 million charged to other accounts in connection with the
allocation of Time Warner's cost to acquire the remaining 80% interest in
TBS that it did not already own.
(b) Includes $21 million charged to other accounts in connection with the
allocation of Time Warner's cost to acquire the remaining 80% interest in
TBS that it did not already own.
(c) Represents uncollectible receivables charged against reserve.
(d) Represents returns or allowances applied against reserve.
(e) The distribution of magazines not owned by Time Warner results in a
receivable recorded at the sales price and a corresponding liability to
the publisher recorded at the sales price less the distribution commission
recognized by Time Warner as revenue. Therefore, it would be misleading to
compare magazine revenues to the provision charged to the reserve for
magazine returns that is deducted from accounts receivable without also
considering the related offsetting activity in the reserve for magazine
returns that is deducted from the liability due to the publishers.
F-74
<PAGE>
<PAGE>
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, television broadcasting and theme parks; 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.
STRATEGIC INITIATIVES
SIGNIFICANT TRANSACTIONS
During the past two years, TWE and Time Warner have pursued significant,
strategic initiatives that have resulted in the expansion of their interests in
the cable television business. These initiatives were part of a strategy to
expand the operation of large geographic clusters of cable television systems in
an effort to achieve economies of scale in the development and distribution of
new and expanded services. Over the same period, management also engaged in a
program to improve the financial condition of TWE, as well as to increase its
overall financial flexibility, through the initiation of a debt reduction
program and the refinancing of its bank debt. In connection with these strategic
objectives, TWE and Time Warner completed a number of transactions in 1996 that
have had an effect on TWE's results of operations and financial condition. Such
transactions include:
The acquisition by Time Warner of Cablevision Industries Corporation and
related companies ('CVI') on January 4, 1996 (the 'CVI Acquisition'),
which strengthened Time Warner Cable's geographic clusters of cable
television systems and substantially increased the number of cable
subscribers managed by Time Warner Cable. As of December 31, 1996, Time
Warner Cable served approximately 12.3 million subscribers, passing nearly
20% of the television homes in the U.S.
The 1996 closing of certain previously-announced sales by TWE of
unclustered cable television systems which raised approximately $150
million of net proceeds for debt reduction. Including the 1995 sale of 51%
of its interest in Six Flags Entertainment Corporation ('Six Flags') and
the expected 1997 sale of its interest in E! Entertainment Television,
Inc., TWE has raised over $1 billion for debt reduction.
The nature of these transactions and their impact on the results of
operations and financial condition of TWE are further discussed below.
CABLE STRATEGY
Over the past two years, TWE and Time Warner have combined with or acquired
cable television systems serving approximately 3.7 million subscribers, which,
along with internal growth, has increased the total number of subscribers under
the management of Time Warner Cable to 12.3 million from 7.5 million subscribers
at the end of 1994. This expansion strategy has also extended Time Warner
Cable's reach of cable television systems to neighborhoods passing 19 million
homes or close to 20% of television homes in the U.S. In addition, there are now
34 geographic clusters of cable television systems serving over 100,000
subscribers each, including key markets such as New York City, northern New York
State, central Florida and North Carolina. Excluding Time Warner's systems, TWE
owns or manages cable television systems serving 10 million subscribers, with 31
geographic clusters serving over 100,000 subscribers each. Management believes
that the improved concentration of its subscriber base will provide for
sustained revenue growth from new and expanded services, and provide certain
economies of scale relating to the upgrade of the technological capabilities of
Time Warner Cable's cable television systems.
TWE and Time Warner's current strategy is to restructure their cable
television systems, so far as practicable and on a tax-efficient basis, to
enable such interests to be self-financed. As part of this strategy, TWE and
Time Warner are seeking to reduce their economic interests in the cable
television business in order to
F-75
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
reduce existing debt and their share of future funding requirements related to
the cable operations. The primary alternative being pursued is a restructuring
of TWE that would decrease Time Warner's cable interests in TWE and increase
Time Warner's interests in TWE's entertainment and cable networks. Any TWE
restructuring depends, among other things, upon successful negotiations with U S
WEST and other third parties, a renegotiation of certain credit arrangements,
including the 1995 Credit Agreement, and consents or approvals from cable
television franchise and other regulatory authorities. In addition to, or in
lieu of, a TWE restructuring, other alternatives remain available to Time Warner
to advance these goals, some of which would not require U S WEST consent but
would still require other third party, franchise and regulatory approvals. There
is no assurance that any of these efforts will succeed.
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.
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
In connection with management's strategic initiatives, TWE completed a
number of transactions in 1995 which have affected the comparability of its
results of operations and financial condition. These transactions include the
formation of the TWE-Advance/Newhouse Partnership, the consolidation of Paragon,
the refinancing of its bank debt, the reacquisition of the Time Warner Service
Partnership Assets and certain asset sales, including the sale of 51% of TWE's
interest in Six Flags, all of which are more fully discussed herein. Such
transactions are collectively referred to herein as the 'TWE Transactions'.
In order to enhance comparability, the following discussion of results of
operations for TWE is supplemented by pro forma financial information that gives
effect to the TWE Transactions as if such transactions had occurred at the
beginning of 1995. The pro forma results are presented for informational
purposes only and are not necessarily indicative of the operating results that
would have occurred had the transactions actually occurred at the beginning of
1995, nor are they necessarily indicative of future operating results.
F-76
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
RESULTS OF OPERATIONS
1996 VS. 1995
EBITDA and operating income for TWE in 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
OPERATING
EBITDA INCOME
----------------- ---------------
1996 1995 1996 1995
------ ------ ------ ----
(MILLIONS)
<S> <C> <C> <C> <C>
Filmed Entertainment.................................................... $ 525 $ 459 $ 242 $228
Six Flags Theme Parks(1)................................................ -- 60 -- 29
Broadcasting-The WB Network............................................. (98) (66) (98) (66)
Cable Networks-HBO...................................................... 350 291 328 274
Cable................................................................... 1,536 1,255 606 495
------ ------ ------ ----
Total................................................................... $2,313 $1,999 $1,078 $960
------ ------ ------ ----
------ ------ ------ ----
</TABLE>
- ------------
(1) Deconsolidated as a result of the sale of a 51% interest in Six Flags
effective as of June 23, 1995.
TWE had revenues of $10.852 billion and net income of $210 million for the
year ended December 31, 1996, compared to revenues of $9.517 billion, income of
$97 million before an extraordinary loss on the retirement of debt and net
income of $73 million for the year ended December 31, 1995.
On a pro forma basis, giving effect to the TWE Transactions as if each of
such transactions had occurred at the beginning of 1995, TWE would have reported
for the year ended December 31, 1995, revenues of $9.682 billion, EBITDA of
$2.031 billion, operating income of $962 million, income before extraordinary
item of $172 million and net income of $148 million. No pro forma financial
information has been presented for TWE for the year ended December 31, 1996
because all of such transactions are already reflected, in all material
respects, in the historical financial statements of TWE.
As discussed more fully below, TWE's historical net income was higher in
1996 as compared to pro forma results in 1995 due to an overall increase in
operating income generated by its business segments, interest savings due to
lower floating interest rates and the absence of a $24 million extraordinary
loss on the retirement of debt recognized in 1995, offset in part by a decrease
in investment-related income and an increase in minority interest expense
related to the TWE-Advance/Newhouse Partnership. On a historical basis, such
underlying operating trends were enhanced by favorable comparisons as 1996 more
fully benefited from the interest savings on lower average debt levels related
to management's ongoing debt reduction program.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $70 million in the year ended December
31, 1996, and $86 million in the year ended December 31, 1995, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $5.639 billion,
compared to $5.069 billion in 1995. EBITDA increased to $525 million from $459
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $283 million in 1996 and $231 million in 1995.
Operating income increased to $242 million from $228 million. Revenues benefited
from increases in worldwide home video, television distribution and consumer
products operations, offset in part by lower international theatrical revenues.
EBITDA and operating income benefited principally from the revenue gains, offset
in part, with respect to operating income only, by higher depreciation and
amortization principally related to the 1996 summer opening of an international
theme park in Germany.
F-77
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted
for under the equity method of accounting.
Broadcasting -- The WB Network. The WB Network recorded an operating loss
of $98 million on $87 million of revenues in 1996, compared to an operating loss
of $66 million on $33 million of revenues in 1995. The increase in revenues and
operating losses primarily resulted from the expansion of the WB Network's
primetime programming schedule (now at three nights) and the expansion of Kids'
WB!, the network's animated programming lineup on Saturday mornings and
weekdays. In addition, operating losses for 1995 were mitigated by a favorable
legal settlement. Due to the start-up nature of this national broadcast
operation, losses are expected to continue.
Cable Networks-HBO. Revenues increased to $1.763 billion in 1996, compared
to $1.593 billion in 1995. EBITDA increased to $350 million from $291 million.
Depreciation and amortization amounted to $22 million in 1996 and $17 million in
1995. Operating income increased to $328 million from $274 million. Revenues
benefited primarily from a significant increase in subscriptions to 32.4 million
from 29.7 million at the end of 1995. EBITDA and operating income improved
principally as a result of the revenue gains.
Cable. Revenues increased to $3.851 billion in 1996, compared to $3.005
billion in 1995. EBITDA increased to $1.536 billion from $1.255 billion.
Depreciation and amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to $930 million
in 1996 and $760 million in 1995. Operating income increased to $606 million
from $495 million. The 1996 Cable operating results increased as a result of the
full year effect from the formation of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995 and the consolidation of Paragon Communications
effective as of July 6, 1995.
On a pro forma basis, TWE's Cable division had 1995 revenues of $3.368
billion, EBITDA of $1.346 billion, depreciation and amortization of $818 million
and operating income of $528 million. In comparison to 1995 pro forma results,
1996 revenues benefited from an aggregate 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 increases in pay-per-view and advertising revenues. EBITDA and
operating income increased principally as a result of revenue gains, offset in
part, with respect to operating income only, by higher depreciation and
amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $522
million in 1996, compared to $580 million in 1995. Interest expense decreased to
$475 million, compared to $571 million in 1995, principally as a result of
interest savings on lower average debt levels related to management's debt
reduction program and lower short-term, floating-rates of interest paid on
borrowings under TWE's former and existing bank credit agreements. There was
other expense, net, of $47 million in 1996 compared to other expense, net, of $9
million in 1995, principally due to an overall decrease in investment-related
income. The decrease in investment-related income resulted from a reduction in
interest income, and lower aggregate gains on the sale of certain unclustered
cable systems and other investments. The reduction in interest income related to
lower average cash balances and lower average principal amounts due under the
note receivable from U S WEST that was fully collected as of June 1996.
F-78
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
1995 VS. 1994
EBITDA and operating income for TWE in 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
OPERATING
EBITDA INCOME
----------------- -------------
1995 1994 1995 1994
------ ------ ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.......................................... $ 459 $ 407 $228 $201
Six Flags Theme Parks(1).................................................. 60 135 29 56
Broadcasting-the WB Network............................................... (66) -- (66) --
Cable Network-HBO......................................................... 291 255 274 236
Cable..................................................................... 1,255 994 495 355
------ ------ ---- ----
Total..................................................................... $1,999 $1,791 $960 $848
------ ------ ---- ----
------ ------ ---- ----
</TABLE>
- ------------
(1) Deconsolidated as a result of the sale of a 51% interest in Six Flags
effective as of June 23, 1995.
TWE had revenues of $9.517 billion, income of $97 million before an
extraordinary loss on the retirement of debt and net income of $73 million for
the year ended December 31, 1995, compared to revenues of $8.460 billion and net
income of $161 million for the year ended December 31, 1994. The decrease in net
income in 1995 was principally related to a $24 million extraordinary loss on
the retirement of debt and higher depreciation and amortization relating to
increased capital spending.
As discussed more fully below, TWE's operating results in 1995 reflect an
overall increase in operating income generated by its business segments
(including the contribution by the TWE-Advance/Newhouse Partnership) and an
increase in investment-related income resulting from gains on the sale of
certain unclustered cable systems and other investments, offset in part by
minority interest expense related to the consolidation of the operating results
of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $86 million in the year ended December
31, 1995, and $40 million in the year ended December 31, 1994, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $5.069 billion,
compared to $4.476 billion in 1994. EBITDA increased to $459 million from $407
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $231 million in 1995 and $206 million in 1994.
Operating income increased to $228 million from $201 million. Revenues benefited
from increases in worldwide theatrical, home video, consumer products and
television distribution operations. Worldwide theatrical and domestic home video
revenues in 1995 were led by the success of Batman Forever. EBITDA and operating
income benefited from the revenue gains and increased income from licensing
operations.
Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is now
accounted for under the equity method of accounting. Accordingly, revenues
decreased to $227 million, compared to $557 million in 1994. EBITDA decreased to
$60 million from $135 million. Depreciation and amortization amounted to $31
million in 1995 and $79 million in 1994. Operating income decreased to $29
million from $56 million.
Broadcasting-The WB Network. The WB Network was launched in January 1995,
and generated $66 million of operating losses on $33 million of revenues. The
operating loss was mitigated by a favorable legal
F-79
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
settlement, as well as by funding from a limited partner admitted as of August
1995. Due to the start-up nature of this national broadcast operation, losses
are expected to continue.
Cable Networks-HBO. Revenues increased to $1.593 billion, compared to
$1.494 billion in 1994. EBITDA increased to $291 million from $255 million.
Depreciation and amortization amounted to $17 million in 1995 and $19 million in
1994. Operating income increased to $274 million from $236 million. Revenues
benefited primarily from an increase in subscriptions to 29.7 million from 27
million at the end of 1994, as well as from higher pay-TV rates. EBITDA and
operating income improved principally as a result of the revenue gains.
Cable. The 1995 Cable operating results reflect the formation of the
TWE-Advance/Newhouse Partnership effective as of April 1, 1995 and the
consolidation of Paragon effective as of July 6, 1995. Revenues increased to
$3.005 billion, compared to $2.220 billion in 1994. EBITDA increased to $1.255
billion from $994 million. Depreciation and amortization, including amortization
related to the purchase of WCI and the acquisition of the ATC minority interest,
amounted to $760 million in 1995 and $639 million in 1994. Operating income
increased to $495 million from $355 million. Revenues and operating results
benefited from the formation of the TWE-Advance/Newhouse Partnership and the
consolidation of Paragon. Excluding such effects, revenues benefited from an
increase in basic cable subscribers and increases in nonregulated revenues,
including pay-TV, pay-per-view and advertising. Excluding the positive
contributions from the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the revenue gains,
offset in part by the full year impact of the second round of cable rate
regulations that went into effect in July 1994, higher start-up costs for
telephony operations and, with respect to operating income only, higher
depreciation and amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $580
million in 1995, compared to $587 million in 1994. Interest expense increased to
$571 million, compared to $563 million in 1994, principally as a result of
higher short-term, floating-rates of interest paid on borrowings under TWE's
former and existing bank credit agreements, offset in part by interest savings
in the last quarter of 1995 on lower debt levels related to management's asset
sales program. Other expense, net, decreased to $9 million in 1995 from $24
million in 1994, principally because of an increase in investment-related income
related to gains on the sale of certain unclustered cable systems and other
investments.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1996
1996 FINANCIAL CONDITION
At December 31, 1996, TWE had $5.7 billion of debt, $1.5 billion of Time
Warner General Partners' Senior Capital and $6.6 billion of partners' capital
compared to $6.2 billion of debt, $1.4 billion of Time Warner General Partners'
Senior Capital and $6.5 billion of partners' capital (net of the $169 million
uncollected portion of the note receivable from U S WEST) at December 31, 1995.
Cash and equivalents increased to $216 million at December 31, 1996, compared to
$209 million at December 31, 1995, reducing the debt-net-of-cash amounts for TWE
to $5.5 billion and $6 billion, respectively.
DEBT REDUCTION PROGRAM
In conjunction with Time Warner and as part of a continuing strategy to
enhance the financial position and credit statistics of TWE, an asset sales
program was initiated by Time Warner and TWE in 1995. Including the sale of 51%
of TWE's interest in Six Flags in June 1995, the sale of certain unclustered
cable systems and the
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<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
expected 1997 sale of TWE's interest in E! Entertainment Television, Inc., TWE
has raised over $1 billion for debt reduction.
CREDIT STATISTICS
The combination of asset sales and the debt refinancing is intended to
strengthen the financial position of TWE and, when taken together with EBITDA
growth, is expected to continue the improvement of TWE's overall credit
statistics. These credit statistics consist of commonly-used liquidity measures
such as leverage and coverage ratios. The leverage ratio represents the ratio of
total debt, less cash ('Net debt') to total business segment EBITDA, less
corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the ratio
of Adjusted EBITDA to total interest expense. Those ratios, on a historical
basis for 1996 and 1994 and on a pro forma basis for 1995 are as set forth
below:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA HISTORICAL
1996 1995(a) 1994
---------- --------- ----------
<S> <C> <C> <C>
Net debt/Adjusted EBITDA..................................................... 2.4x 3.0x 3.5x
Adjusted EBITDA/Interest..................................................... 4.7x 3.7x 3.1x
</TABLE>
- ------------
(a) Pro forma ratios for 1995 give effect to the TWE Transactions as if each
of such transactions had occurred at the beginning of 1995. Historical
ratios for 1995 are not meaningful and have not been presented because
they reflect the operating results of acquired or disposed entities for
only a portion of the year in comparison to year-end Net debt levels.
CASH FLOWS
In 1996, TWE's cash provided by operations amounted to $1.912 billion and
reflected $2.313 billion of EBITDA from the Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses and $255
million related to a reduction in working capital requirements, other balance
sheet accounts and noncash items, less $513 million of interest payments, $74
million of income taxes and $69 million of corporate expenses. Cash provided by
operations of $1.519 billion in 1995 reflected $1.999 billion of business
segment EBITDA and $230 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items, less $571 million
of interest payments, $75 million of income taxes and $64 million of corporate
expenses.
Cash used by investing activities increased to $1.253 billion in 1996,
compared to $688 million in 1995, principally as a result of a $438 million
decrease in investment proceeds realized in 1995 relating to management's debt
reduction program and higher capital expenditures. Capital expenditures
increased to $1.719 billion in 1996, compared to $1.535 billion in 1995,
principally as a result of higher capital spending by the Cable Division.
Cash used by financing activities was $652 million in 1996, compared to
$1.693 billion in 1995, principally as a result of a lower level of debt
reduction realized in 1996 in connection with management's debt reduction
program and a $860 million decrease in distributions paid to Time Warner, offset
in part by a $433 million decrease in collections on the note receivable from U
S WEST.
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
F-81
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
the business for sustained, long-term growth. Capital spending by TWE's Cable
division amounted to $1.348 billion in 1996, compared to $1.178 billion in 1995,
and was financed in part through collections on the note receivable from U S
WEST of $169 million in 1996 and $602 million in 1995. Capital spending by TWE's
Cable division for 1997 is budgeted to be steady at approximately $1.4 billion
and is expected to be funded principally 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 principally 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.
OFF-BALANCE SHEET ASSETS
As discussed below, TWE believes that the value of certain off-balance
sheet assets should be considered, along with other factors discussed elsewhere
herein, in evaluating TWE's financial condition and prospects for future results
of operations, including its ability to meet its capital and liquidity needs.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant amount of internally-generated intangible
assets whose value is not fully reflected in the consolidated balance sheet.
Such intangible assets extend across TWE's principal business interests, but are
best exemplified by its interest in Warner Bros.' and HBO's copyrighted film and
television product libraries, and the creation or extension of brands. Generally
accepted accounting principles do not recognize the value of such assets, except
at the time they may be acquired in a business combination accounted for by the
purchase method of accounting.
Because TWE owns the copyrights to such creative material, it continually
generates revenue through the sale of such products across different media and
in new and existing markets. The value of film and television-related
copyrighted product and trademarks is continually realized by the licensing of
films and television series to secondary markets and the licensing of
trademarks, such as the Looney Tunes characters and Batman, to the retail
industry and other markets. In addition, technological advances, such as the
introduction of the home videocassette in the 1980's and potentially the digital
video disc in the future, have historically generated significant revenue
opportunities through the repackaging and sale of such copyrighted products in
the new technological format. Accordingly, such intangible assets have
significant off-balance sheet asset value that is not fully reflected in TWE's
consolidated balance sheet.
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, network, basic cable and syndicated television
exhibition, amounted to $1.502 billion at December 31, 1996, compared to $1.056
million at December 31, 1995 (including amounts relating to TWE's cable
television networks of $189 million and $175 million, respectively, and to Time
Warner's cable television networks of $274 million at December 31, 1996). Warner
Bros.' backlog increased principally as a result of the licensing of the hit
television series Friends and ER for
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<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
domestic syndication, as well as for exhibition on Time Warner's cable
television networks beginning in 1998. 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.
FOREIGN CURRENCY RISK MANAGEMENT
Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future license fees owed to TWE domestic companies for the
sale or anticipated sale of U.S. copyrighted products abroad may be adversely
affected by changes in foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period, including those
related to TWE. At December 31, 1996, Time Warner had effectively hedged
approximately half of TWE's estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of three months or less, which generally are rolled over to
provide continuing coverage throughout the year. TWE is reimbursed by or
reimburses Time Warner for Time Warner contract gains and losses related to
TWE's foreign currency exposure. Time Warner often closes foreign exchange
contracts by purchasing an offsetting purchase contract. At December 31, 1996,
Time Warner had contracts for the sale of $447 million and the purchase of $104
million of foreign currencies at fixed rates. Of Time Warner's $343 million net
sale contract position, none of the foreign exchange purchase contracts and $102
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, compared to contracts for the sale of $113 million of foreign
currencies at December 31, 1995.
See Note 10 to the accompanying consolidated financial statements for a
more comprehensive description of TWE's foreign currency risk management
activities.
F-83
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.......................................................................... $ 216 $ 209
Receivables, including $383 and $354 million due from Time Warner,
less allowances of $373 and $365 million.................................................... 1,637 1,635
Inventories................................................................................... 1,134 904
Prepaid expenses.............................................................................. 159 161
------- -------
Total current assets.......................................................................... 3,146 2,909
Noncurrent inventories........................................................................ 2,263 1,909
Loan receivable from Time Warner.............................................................. 400 400
Investments................................................................................... 351 383
Property, plant and equipment, net............................................................ 5,999 5,205
Cable television franchises................................................................... 3,054 3,360
Goodwill...................................................................................... 3,996 4,119
Other assets.................................................................................. 764 620
------- -------
Total assets.................................................................................. $19,973 $18,905
------- -------
------- -------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.............................................................................. $ 935 $ 697
Participations and programming costs payable.................................................. 1,393 1,090
Debt due within one year...................................................................... 7 47
Other current liabilities, including $82 million in 1996 due to Time Warner................... 1,740 1,380
------- -------
Total current liabilities..................................................................... 4,075 3,214
Long-term debt................................................................................ 5,676 6,137
Other long-term liabilities, including $138 and $198 million due to Time Warner............... 1,085 924
Minority interests............................................................................ 1,020 726
Time Warner General Partners' Senior Capital.................................................. 1,543 1,426
PARTNERS' CAPITAL
Contributed capital........................................................................... 7,537 7,522
Undistributed partnership earnings (deficit).................................................. (963) (875)
Note receivable from U S WEST................................................................. -- (169)
------- -------
Total partners' capital....................................................................... 6,574 6,478
------- -------
Total liabilities and partners' capital....................................................... $19,973 $18,905
------- -------
------- -------
</TABLE>
See accompanying notes.
F-84
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Revenues (a)......................................................................... $10,852 $9,517 $8,460
------- ------ ------
Cost of revenues (a)(b).............................................................. 7,441 6,597 5,976
Selling, general and administrative (a)(b)........................................... 2,333 1,960 1,636
------- ------ ------
Operating expenses................................................................... 9,774 8,557 7,612
------- ------ ------
Business segment operating income.................................................... 1,078 960 848
Interest and other, net (a).......................................................... (522) (580) (587)
Minority interest.................................................................... (207) (133) --
Corporate services (a)............................................................... (69) (64) (60)
------- ------ ------
Income before income taxes........................................................... 280 183 201
Income taxes......................................................................... (70) (86) (40)
------- ------ ------
Income before extraordinary item..................................................... 210 97 161
Extraordinary loss on retirement of debt............................................. -- (24) --
------- ------ ------
Net income........................................................................... $ 210 $ 73 $ 161
------- ------ ------
------- ------ ------
</TABLE>
- ------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the years ended December
31, 1996, 1995 and 1994, respectively: revenues-$198 million, $56 million
and $112 million; cost of revenues-$(95) million, $(54) million and $(70)
million; selling, general and administrative-$(38) million, $(61) million
and $(72) million; interest and other, net-$30 million, $24 million and $21
million; and corporate expenses-$(69) million, $(64) million and $(60)
million (Note 13).
<TABLE>
<S> <C> <C> <C>
(b) Includes depreciation and amortization expense of:............................... $1,235 $1,039 $ 943
------- ------ ------
------- ------ ------
</TABLE>
See accompanying notes.
F-85
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
OPERATIONS
Net income.......................................................................... $ 210 $ 73 $ 161
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................ -- 24 --
Depreciation and amortization....................................................... 1,235 1,039 943
Equity in (income) losses of investee companies, net of distributions............... 38 84 58
Changes in operating assets and liabilities:
Receivables..................................................................... (50) (159) (192)
Inventories..................................................................... (637) (118) (76)
Accounts payable and other liabilities.......................................... 970 679 400
Other balance sheet changes..................................................... 146 (103) 2
------- ------- -------
Cash provided by operations......................................................... 1,912 1,519 1,296
------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions........................................................ (146) (203) (156)
Capital expenditures................................................................ (1,719) (1,535) (1,153)
Investment proceeds................................................................. 612 1,050 50
Loan to Time Warner................................................................. -- -- (400)
------- ------- -------
Cash used by investing activities................................................... (1,253) (688) (1,659)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.......................................................................... 215 2,484 977
Debt repayments..................................................................... (716) (3,596) (945)
Collections on note receivable from U S WEST........................................ 169 602 234
Capital distributions............................................................... (228) (1,088) (170)
Other............................................................................... (92) (95) --
------- ------- -------
Cash provided (used) by financing activities........................................ (652) (1,693) 96
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS......................................... 7 (862) (267)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......................................... 209 1,071 1,338
------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD............................................... $ 216 $ 209 $ 1,071
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes.
F-86
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(MILLIONS)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
TIME WARNER -------------------------------------------------------
GENERAL UNDISTRIBUTED U S
PARTNERS' PARTNERSHIP WEST TOTAL
SENIOR CONTRIBUTED EARNINGS NOTE PARTNERS'
CAPITAL CAPITAL (DEFICIT) RECEIVABLE CAPITAL
----------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993................... $ 1,536 $ 7,398 $(393) $ (1,005) $ 6,000
Net income..................................... 161 161
Distributions (a).............................. (46) (46)
Allocation of income........................... 127 (127) (127)
Collections.................................... 234 234
Other.......................................... 11 11
----------- ----------- ----- ---------- ---------
BALANCE AT DECEMBER 31, 1994................... 1,663 7,398 (394) (771) 6,233
Net income..................................... 73 73
Distributions (a).............................. (366) (421) (421)
Reacquisition of Time Warner Service
Partnership Assets (b)....................... 124 124
Allocation of income........................... 129 (129) (129)
Collections.................................... 602 602
Other.......................................... (4) (4)
----------- ----------- ----- ---------- ---------
BALANCE AT DECEMBER 31, 1995................... 1,426 7,522 (875) (169) 6,478
Net income..................................... 210 210
Distributions (a).............................. (199) (199)
Capital contributions.......................... 15 15
Allocation of income........................... 117 (117) (117)
Collections.................................... 169 169
Other.......................................... 18 18
----------- ----------- ----- ---------- ---------
BALANCE AT DECEMBER 31, 1996................... $ 1,543 $ 7,537 $(963) $ -- $ 6,574
----------- ----------- ----- ---------- ---------
----------- ----------- ----- ---------- ---------
</TABLE>
- ------------
(a) Distributions in 1996, 1995 and 1994 included $215 million, $346 million and
$173 million, respectively, of accrued tax-related distributions.
Previously-accrued stock option distributions of $16 million and $177
million were reversed in 1996 and 1994 because the market price of Time
Warner common stock declined during the period and stock option
distributions of $50 million were accrued in 1995 because of an increase in
the market price of Time Warner common stock. Distributions in 1995 and 1994
included $25 million and $50 million of cash distributions to the Time
Warner Service Partnerships, respectively. In addition, Time Warner General
Partners' Senior Capital was reduced in 1995 by a $366 million distribution
of partnership income previously allocated to such interest.
(b) Time Warner General Partners' Series B Capital was increased in 1995 by the
$124 million historical cost of the Time Warner Service Partnership Assets
reacquired by TWE.
See accompanying notes.
F-87
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Entertainment Company, L.P., a Delaware limited partnership
('TWE'), classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production, television broadcasting and theme parks; 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) Six Flags, the
largest regional theme park operator in the United States, in which TWE owns a
49% interest, (4) HBO and Cinemax, the leading pay television services and (5)
Time Warner Cable, 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 11). 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
significantly 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 which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $436 million in 1996, $444 million in 1995 and $478
million in 1994.
Subsidiaries of Time Warner are the general partners of TWE ('Time Warner
General Partners'). During 1995, Time Warner acquired the aggregate 11.22%
limited partnership interests previously held by subsidiaries of each of ITOCHU
Corporation and Toshiba Corporation. As a result, 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'), which acquired such interests in 1993 for $1.532 billion of cash
and a $1.021 billion 4.4% note (the 'U S WEST Note Receivable') that was fully
collected during 1996.
BASIS OF PRESENTATION
The consolidated financial statements of TWE reflect (i) the formation by
TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, (ii)
the deconsolidation of Six Flags Entertainment Corporation ('Six Flags')
effective as of June 23, 1995 and (iii) the consolidation of Paragon
- ------------
* 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 ('Old Time Warner', now
known as Time Warner Companies, Inc.), and Old Time Warner and TBS became
separate, wholly owned subsidiaries of the new parent company. Unless the
context indicates otherwise, references herein to 'Time Warner' refer to Old
Time Warner.
F-88
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Communications ('Paragon') effective as of July 6, 1995. Certain
reclassifications have been made to the prior years' financial statements to
conform to the 1996 presentation.
In lieu of contributing certain assets to the partnership at its
capitalization in 1992 (the 'Beneficial Assets'), the Time Warner General
Partners assigned to TWE the net cash flow generated by such assets or agreed to
pay an amount equal to the net cash flow generated by such assets. TWE has the
right to receive from the Time Warner General Partners, at the limited partners'
option, an amount equal to the fair value of the Beneficial Assets, net of
associated liabilities, that have not been contributed to TWE, rather than
continuing to receive the net cash flow, or an amount equal to the net cash
flow, generated by such Beneficial Assets. The consolidated financial statements
include the assets and liabilities of the businesses contributed by the Time
Warner General Partners, including the Beneficial Assets and associated
liabilities, all at Time Warner's historical cost basis of accounting.
BASIS OF CONSOLIDATION AND
ACCOUNTING FOR INVESTMENTS
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of TWE and all
companies in which TWE has a direct and indirect controlling voting interest
('subsidiaries'), as if TWE and its subsidiaries were a single company.
Significant intercompany accounts and transactions between the consolidated
companies have been eliminated. Significant accounts and transactions between
TWE and its partners and affiliates are disclosed as related party transactions
(Note 13).
Investments in companies in which TWE has significant influence but less
than a controlling voting interest are accounted for using the equity method.
Under the equity method, only TWE's investment in and amounts due to and from
the equity investee are included in the consolidated balance sheet, only TWE's
share of the investee's earnings is included in the consolidated operating
results, and only the dividends, cash distributions, loans or other cash
received from the investee, less any additional cash investments, loan
repayments or other cash paid to the investee are included in the consolidated
cash flows.
FOREIGN CURRENCY
The financial position and operating results of substantially all of the
foreign operations of TWE are consolidated using the local currency as the
functional currency. Local currency assets and liabilities are translated at the
rates of exchange on the balance sheet date, and local currency revenues and
expenses are translated at average rates of exchange during the period.
Resulting translation gains or losses, which have not been material, are
included in partners' capital. Foreign currency transaction gains and losses,
which have not been material, are included in operating results.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the distribution of theatrical and television product in order to
evaluate the ultimate recoverability of accounts receivables and film inventory
recorded as assets in the consolidated balance sheet. Accounts receivables and
sales related to the distribution of home video product in the filmed
entertainment industry are subject to customers' rights to return unsold items.
Management periodically reviews such estimates and it is reasonably possible
that management's assessment of recoverability
F-89
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of accounts receivables and individual films and television product may change
based on actual results and other factors.
REVENUES AND COSTS
Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, basic cable, broadcast
network and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is
principally completed within eighteen months of initial release and thereafter
with respect to distribution to the basic cable, broadcast network and
syndicated television markets (the secondary markets). Theatrical revenues are
recognized as the films are exhibited. Home video revenues, less a provision for
returns, are recognized when the home videos are sold. Revenues from the
distribution of theatrical product to cable, broadcast network and syndicated
television markets are recognized when the films are available to telecast.
Television films and series are initially produced for the networks or
first-run television syndication (the primary markets) and may be subsequently
licensed to foreign or domestic cable and syndicated television markets (the
secondary markets). Revenues from the distribution of television product are
recognized when the films or series are available to telecast, except for barter
agreements where the recognition of revenue is deferred until the related
advertisements are exhibited.
License agreements for the telecast of theatrical and television product in
the cable, broadcast network and syndicated television markets are routinely
entered into well in advance of their available date for telecast, which is
generally determined by the telecast privileges granted under previous license
agreements. Accordingly, there are significant contractual rights to receive
cash and barter upon which revenues will not be recognized until such product is
available for telecast under the contractual terms of the related license
agreement. Such contractual rights for which revenue is not yet recognizable is
referred to as 'backlog.' Excluding advertising barter contracts, Warner Bros.'
backlog amounted to $1.502 billion and $1.056 billion at December 31, 1996 and
1995, respectively (including amounts relating to the licensing of film product
to TWE's cable television networks of $189 million and $175 million,
respectively, and to Time Warner's cable television networks of $274 million at
December 31, 1996).
Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost includes direct production and
acquisition costs, production overhead and capitalized interest. A portion of
the cost to acquire WCI in 1989 was allocated to its theatrical and television
product, including an allocation to product that had been exhibited at least
once in all markets ('Library'). The Library is amortized on a straight-line
basis over twenty years. Individual films and series are amortized, and the
related participations and residuals are accrued, based on the proportion that
current revenues from the film or series bear to an estimate of total revenues
anticipated from all markets. These estimates are revised periodically and
losses, if any, are provided in full. Current film inventories include the
unamortized cost of completed feature films allocated to the primary markets,
television films and series in production pursuant to a contract of sale, film
rights acquired for the home video market and advances pursuant to agreements to
distribute third-party films in the primary markets. Noncurrent film inventories
include the unamortized cost of completed theatrical and television films
allocated to the secondary markets, theatrical films in production and the
Library.
A significant portion of cable system and cable programming revenues are
derived from subscriber fees. Subscriber fees are recorded as revenue in the
period the service is provided. The cost of rights to exhibit feature films and
other programming on pay cable services during one or more availability periods
('programming costs') generally is recorded when the programming is initially
available for exhibition, and is allocated to the appropriate availability
periods and amortized as the programming is exhibited.
F-90
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING
In accordance with the Financial Accounting Standards Board ('FASB')
Statement No. 53, 'Financial Reporting by Producers and Distributors of Motion
Picture Films,' advertising costs for theatrical and television product are
capitalized and amortized over the related revenue streams in each market for
which such costs are intended to benefit, which generally does not exceed three
months. Other advertising costs are expensed upon the first exhibition of the
advertisement. Advertising expense, excluding theatrical and television product,
amounted to $332 million in 1996, $241 million in 1995 and $190 million in 1994.
CASH AND EQUIVALENTS
Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash, and have original maturities of three months or
less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead and
interest. Depreciation is provided generally on the straight-line method over
useful lives ranging up to thirty years for buildings and improvements and up to
fifteen years for furniture, fixtures, cable television equipment and other
equipment. Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Land and buildings.......................................................................... $ 780 $ 732
Cable television equipment.................................................................. 6,602 5,859
Furniture, fixtures and other equipment..................................................... 2,129 1,752
------- -------
9,511 8,343
Less accumulated depreciation............................................................... (3,512) (3,138)
------- -------
Total....................................................................................... $ 5,999 $ 5,205
------- -------
------- -------
</TABLE>
Effective January 1, 1996, TWE adopted FASB Statement No. 121, 'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,' ('FAS 121') which established standards for the recognition and measurement
of impairment losses on long-lived assets and certain intangible assets. The
adoption of FAS 121 did not have a material effect on TWE's financial
statements.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant and growing amount of intangible assets,
including goodwill, cable television franchises and other copyrighted products
and trademarks. In accordance with generally accepted accounting principles, TWE
does not recognize the fair value of internally-generated intangible assets.
Costs incurred to create and produce copyrighted product, such as feature films
and television series, are generally either expensed as incurred, or capitalized
as tangible assets, as in the case of cash advances and inventoriable product
costs. However, accounting recognition is not given to any increasing asset
value that may be associated with the collection of the underlying copyrighted
material. Additionally, costs incurred to create or extend brands, such as the
start-up of The WB Network, generally result in losses over an extended
development period and are recognized as a reduction of income as incurred,
while any corresponding brand value created is not recognized as an intangible
asset in the consolidated balance sheet. On the other hand, intangible assets
acquired in business combinations accounted for by the purchase method of
accounting are capitalized and amortized over their expected useful life as a
noncash
F-91
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charge against future results of operations. Accordingly, the intangible assets
reported in the consolidated balance sheet do not reflect the fair value of
TWE's internally-generated intangible assets, but rather are limited to
intangible assets resulting from certain acquisitions in which the cost of the
acquired companies exceeded the fair value of their tangible assets at the time
of acquisition.
TWE amortizes goodwill over periods up to forty years using the
straight-line method. Cable television franchises and other intangible assets
are amortized over periods up to twenty years using the straight-line method. In
1996, 1995 and 1994, amortization of goodwill amounted to $123 million, $127
million and $129 million, respectively; amortization of cable television
franchises amounted to $225 million, $223 million and $208 million,
respectively; and amortization of other intangible assets amounted to $88
million, $94 million and $141 million, respectively. Accumulated amortization of
intangible assets at December 31, 1996 and 1995 amounted to $2.623 billion and
$2.337 billion, respectively.
TWE separately reviews the carrying value of acquired intangible assets for
each acquired entity on a quarterly basis to determine whether an impairment may
exist. TWE considers relevant cash flow and profitability information, including
estimated future operating results, trends and other available information, in
assessing whether the carrying value of intangible assets can be recovered. Upon
a determination that the carrying value of intangible assets will not be
recovered from the undiscounted future cash flows of the acquired business, the
carrying value of such intangible assets would be considered impaired and will
be reduced by a charge to operations in the amount of the impairment. An
impairment charge is measured as any deficiency in estimated discounted future
cash flows of the acquired business to recover the carrying value related to the
intangible assets.
INCOME TAXES
As a Delaware limited partnership, TWE is not subject to U.S. federal and
state income taxation. However, certain of TWE's operations are conducted by
subsidiary corporations that are subject to domestic or foreign taxation. Income
taxes are provided on the income of such corporations using the liability method
of accounting for income taxes prescribed by FASB Statement No. 109, 'Accounting
for Income Taxes.'
2. ACQUISITIONS AND DISPOSITIONS
TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse and
TWE contributed cable television systems (or interests therein) serving
approximately 4.5 million subscribers, as well as certain foreign cable
investments and programming investments that included Advance/Newhouse's 10%
interest in Primestar Partners, L.P. ('Primestar'). TWE owns a two-thirds equity
interest in the TWE-Advance/Newhouse Partnership and is the managing partner.
TWE consolidates the partnership and the one-third equity interest owned by
Advance/Newhouse is reflected in TWE's consolidated financial statements as
minority interest. In accordance with the partnership agreement,
Advance/Newhouse can require TWE to purchase its equity interest for fair market
value at specified intervals following the death of both of its principal
shareholders. Beginning on April 1, 1998, either partner can initiate a
dissolution in which TWE would receive two-thirds and Advance/Newhouse would
receive one-third of the partnership's net assets. The assets contributed by TWE
and Advance/Newhouse to the partnership were recorded at their predecessor's
historical cost, which, with respect to Advance/Newhouse, consisted of assets
contributed to the partnership of approximately $338 million and liabilities
assumed by the partnership of approximately $9 million. No gain was recognized
by TWE upon the capitalization of the partnership.
F-92
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIX FLAGS
On June 23, 1995, TWE sold 51% of its interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the transaction,
Six Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags
is accounted for under the equity method of accounting. TWE reduced debt by
approximately $850 million in 1995 in connection with the transaction, and a
portion of the income on the transaction has been deferred by TWE principally as
a result of its guarantee of certain third-party, zero-coupon indebtedness of
Six Flags due in 1999.
PRO FORMA FINANCIAL INFORMATION
The accompanying consolidated statement of operations includes the
operating results of the Advance/Newhouse businesses from the date of
contribution to the partnership. On a pro forma basis, giving effect to (i) the
formation of the TWE-Advance/Newhouse Partnership, (ii) the refinancing of
approximately $2.6 billion of bank debt (Note 5), (iii) the consolidation of
Paragon, (iv) the reacquisition of the Time Warner Service Partnership Assets
(Note 7), (v) the sale of 51% of TWE's interest in Six Flags and (vi) the sale
or transfer of certain unclustered cable television systems owned by TWE, as if
each of such transactions had occurred at the beginning of 1995, TWE would have
reported for the year ended December 31, 1995, revenues of $9.682 billion,
depreciation and amortization of $1.069 billion, operating income of $962
million, income before extraordinary item of $172 million and net income of $148
million. No pro forma information has been presented for 1996 because all of
such transactions are already reflected, in all material respects, in the
historical financial statements of TWE.
3. INVENTORIES
TWE's inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1995
---------------------- ----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization................................ $ 544 $ 535 $ 529 $ 437
Completed and not released................................. 168 42 74 22
In process and other....................................... 21 704 11 396
Library, less amortization................................. -- 664 -- 717
Programming costs, less amortization............................ 319 318 219 337
Merchandise..................................................... 82 -- 71 --
------- ---------- ------- ----------
Total........................................................... $1,134 $2,263 $ 904 $1,909
------- ---------- ------- ----------
------- ---------- ------- ----------
</TABLE>
Excluding the Library, the total cost incurred in the production of
theatrical and television films amounted to $2.543 billion in 1996, $2.011
billion in 1995 and $1.667 billion in 1994; and the total cost amortized
amounted to $1.998 billion, $2 billion and $1.640 billion, respectively.
Excluding the Library, the unamortized cost of completed films at December 31,
1996 amounted to $1.289 billion, more than 90% of which is expected to be
amortized within three years after release.
F-93
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS
TWE's investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Equity method investments.................................................................... $ 298 $ 335
Cost method investments...................................................................... 53 48
------- -------
Total........................................................................................ $ 351 $ 383
------- -------
------- -------
</TABLE>
Companies accounted for using the equity method include Comedy Partners,
L.P. (50% owned), certain cable system joint ventures (generally 50% owned),
Primestar (31% owned), Six Flags (49% owned), certain international cable and
programming joint ventures (generally 25% owned) and Courtroom Television
Network (33% owned in 1996 and 1995). A summary of combined financial
information as reported by the equity investees of TWE is set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues.......................................................................... $1,823 $1,450 $ 722
Depreciation and amortization..................................................... 197 195 125
Operating income (loss)........................................................... 62 (9) 11
Net loss.......................................................................... (138) (168) (53)
Current assets.................................................................... 624 455 192
Total assets...................................................................... 3,193 2,416 1,281
Current liabilities............................................................... 431 405 305
Long-term debt.................................................................... 2,853 1,778 554
Total liabilities................................................................. 2,829 2,323 926
Total shareholders' equity or partners' capital................................... 340 93 355
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Credit agreement, weighted average interest rates of 6.1% and 6.4%........................... $1,555 $2,185
Commercial paper, weighted average interest rates of 5.8% and 6.2%........................... 310 157
9 5/8% notes due May 1, 2002................................................................. 600 600
7 1/4% debentures due September 1, 2008...................................................... 599 599
10.15% notes due May 1, 2012................................................................. 250 250
8 7/8% notes due October 1, 2012............................................................. 347 347
8 3/8% debentures due March 15, 2023......................................................... 991 991
8 3/8% debentures due July 15, 2033.......................................................... 994 994
Other........................................................................................ 30 14
------ ------
Total........................................................................................ $5,676 $6,137
------ ------
------ ------
</TABLE>
In June 1995, TWE, the TWE-Advance/Newhouse Partnership and a wholly-owned
subsidiary of Time Warner ('TWI Cable') executed a five-year revolving credit
facility (the '1995 Credit Agreement'). The 1995
F-94
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Agreement enabled such entities to refinance certain indebtedness assumed
in certain cable acquisitions, to refinance TWE's indebtedness under a
pre-existing bank credit agreement and to finance the ongoing working capital,
capital expenditure and other corporate needs of each borrower.
The 1995 Credit Agreement permits borrowings in an aggregate amount of up
to $8.3 billion, with no scheduled reductions in credit availability prior to
maturity in June 2000. Borrowings are limited to $4 billion in the case of TWI
Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $8.3
billion in the case of TWE, subject in each case to certain limitations and
adjustments. Such borrowings bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially ranging from
50 to 87.5 basis points, which margin will vary based on the credit rating or
financial leverage of the applicable borrower. Unused credit is available for
general business purposes and to support any commercial paper borrowings. Each
borrower is required to pay a commitment fee initially ranging from .2% to .35%
per annum on the unused portion of its commitment. The 1995 Credit Agreement
contains certain covenants for each borrower relating to, among other things,
additional indebtedness; liens on assets; cash flow coverage and leverage
ratios; and loans, advances, distributions and other cash payments or transfers
of assets from the borrowers to their respective partners or affiliates.
In July 1995, TWE borrowed approximately $2.6 billion under the 1995 Credit
Agreement to repay and terminate its pre-existing bank credit agreement. In
connection therewith, TWE recognized an extraordinary loss of $24 million to
write-off deferred financing costs related to the former credit agreement.
As a result of the Six Flags transaction, long-term debt was reduced by
approximately $850 million in 1995, including the deconsolidation of Six Flags'
9.25% zero coupon notes due in 1999. Such zero coupon notes have been guaranteed
by TWE.
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.4 billion of TWE's debt and accrued interest thereon based on
the relative fair value of the net assets each Time Warner General Partner
contributed to TWE (the 'Time Warner General Partner Guarantees'). Such
indebtedness is recourse to each Time Warner General Partner only to the extent
of its guarantee. The indenture pursuant to which TWE's notes and debentures
have been issued (the 'Indenture') requires the unanimous consent of the holders
of the notes and debentures to terminate the Time Warner General Partner
Guarantees prior to June 30, 1997, and the consent of a majority of such holders
to effect a termination thereafter. There are generally no restrictions on the
ability of the Time Warner General Partner guarantors to transfer material
assets, other than TWE assets, to parties that are not guarantors.
Interest expense was $475 million in 1996, $571 million in 1995 and $563
million in 1994. The weighted average interest rate on TWE's total debt was 7.8%
and 7.7% at December 31, 1996 and 1995, respectively.
TWE has the intent and the ability under the 1995 Credit Agreement to
continue to refinance its commercial paper borrowings on a long-term basis. TWE
is not obligated to repay any portion of its long-term debt until the year 2000,
when the 1995 Credit Agreement expires and all borrowings thereunder, including
commercial paper supported by the 1995 Credit Agreement, are required to be
repaid.
6. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- ---------
(MILLIONS)
<S> <C> <C> <C>
Domestic.......................................................................... $263 $ 191 $ 242
Foreign........................................................................... 17 (8) (41)
-------- ------- ---------
Total............................................................................. $280 $ 183 $ 201
-------- ------- ---------
-------- ------- ---------
</TABLE>
F-95
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a partnership, TWE is not subject to U.S. federal, state or local income
taxation. However, certain of TWE's operations are conducted by subsidiary
corporations that are subject to domestic or foreign taxation. Income taxes
(benefits) of TWE and subsidiary corporations are as set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current(1)................................................................. $ 4 $ 7 $ 6
Deferred................................................................... (3) (5) (2)
Foreign:
Current(2)................................................................. 86 74 53
Deferred................................................................... (21) 6 (16)
State and local:
Current.................................................................... 5 7 14
Deferred................................................................... (1) (3) (15)
-------- --------- ---------
Total income taxes.............................................................. $ 70 $ 86 $ 40
-------- --------- ---------
-------- --------- ---------
</TABLE>
- ------------
(1) Includes utilization of Six Flags' tax carryforwards in the amount of $16
million in 1995 and $35 million in 1994.
(2) Includes foreign withholding taxes of $54 million in 1996, $60 million in
1995 and $44 million in 1994.
The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $8.1 billion at December 31, 1996, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
7. TWE PARTNERS' CAPITAL
Each partner's interest in TWE consists of the initial priority capital and
residual equity amounts that were assigned to that partner or its predecessor
based on the estimated fair value of the net assets each contributed to the
partnership, as adjusted for the fair value of certain assets distributed by TWE
to the Time Warner General Partners in 1993 which were not subsequently
reacquired by TWE in 1995 ('Contributed Capital'), plus, with respect to the
priority capital interests only, any undistributed priority capital return. The
priority capital return consists of net partnership income allocated to date in
accordance with the provisions of the TWE partnership agreement and the right to
be allocated additional partnership income which, together with any previously
allocated net partnership income, provides for the various priority capital
rates of return specified in the table below. The sum of Contributed Capital and
the undistributed priority capital return is referred to herein as 'Cumulative
Priority Capital.' Cumulative Priority Capital is not necessarily indicative of
the fair value of the underlying priority capital interests principally due to
above-market rates of return on certain priority capital interests as compared
to securities of comparable credit risk and maturity, such as the 13.25% rate of
return on the Series B Capital interest owned by the Time Warner General
Partners. Furthermore, the ultimate realization of Cumulative Priority Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
F-96
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the priority of Contributed Capital, ownership of Contributed
Capital and Cumulative Priority Capital at December 31, 1996 and priority
capital rates of return thereon is set forth below:
<TABLE>
<CAPTION>
PRIORITY TIME
CUMULATIVE CAPITAL WARNER
CONTRIBUTED PRIORITY RATES OF GENERAL
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(a) CAPITAL RETURN(b) PARTNERS
- ----------------------------------- ----------- ---------- ------------ --------
(BILLIONS) (% PER ANNUM (OWNERSHIP %)
COMPOUNDED
QUARTERLY)
<S> <C> <C> <C> <C>
Senior Capital..................... $ 1.4 $1.5(c) 8.00% 100.00%
Series A Capital................... 5.6 9.9 13.00%(d) 63.27%
Series B Capital................... 2.9(g) 5.2 13.25%(e) 100.00%
Residual Capital................... 3.3(g) 3.3(f) --(f) 63.27%
<CAPTION>
LIMITED PARTNERS
-------------------
U S
PRIORITY OF CONTRIBUTED CAPITAL TIME WARNER WEST
- ----------------------------------------------- -----
(OWNERSHIP %)
<S> <C> <C>
Senior Capital..................... -- --
Series A Capital................... 11.22% 25.51%
Series B Capital................... -- --
Residual Capital................... 11.22% 25.51%
</TABLE>
- ------------
(a) Excludes partnership income or loss allocated thereto.
(b) Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c) Net of $366 million of partnership income distributed in 1995 representing
the priority capital return thereon through June 30, 1995.
(d) 11.00% to the extent concurrently distributed.
(e) 11.25% to the extent concurrently distributed.
(f) Residual Capital is not entitled to stated priority rates of return and, as
such, its Cumulative Priority Capital is equal to its Contributed Capital.
However, in the case of certain events such as the liquidation or
dissolution of TWE, Residual Capital is entitled to any excess of the then
fair value of the net assets of TWE over the aggregate amount of Cumulative
Priority Capital and special tax allocations.
(g) The Contributed Capital relating to the Series B Capital has priority over
the priority returns on the Series A Capital. The Contributed Capital
relating to the Residual Capital has priority over the priority returns on
the Series B Capital and the Series A Capital.
Because Contributed Capital is based on the fair value of the net assets
that each partner contributed to the partnership, the aggregate of such amounts
is significantly higher than TWE's partners' capital as reflected in the
consolidated financial statements, which is based on the historical cost of the
contributed net assets. For purposes of allocating partnership income or loss to
the partners, partnership income or loss is based on the fair value of the net
assets contributed to the partnership and results in significantly less
partnership income, or results in partnership losses, in contrast to the net
income reported by TWE for financial statement purposes, which is also based on
the historical cost of contributed net assets.
Under the TWE partnership agreement, partnership income, to the extent
earned, is first allocated to the partners' capital accounts so that the
economic burden of the income tax consequences of partnership operations is
borne as though the partnership were taxed as a corporation ('special tax
allocations'), then to the Senior Capital, Series A Capital and Series B
Capital, in order of priority, at rates of return ranging from 8% to 13.25% per
annum, and finally to the Residual Capital. Partnership losses generally are
allocated first to eliminate prior allocations of partnership income to, and
then to reduce the Contributed Capital of, the Residual Capital, Series B
Capital and Series A Capital, in that order, then to reduce the Time Warner
General Partners' Senior Capital, including partnership income allocated
thereto, and finally to reduce any special tax allocations. To the extent
partnership income is insufficient to satisfy all special allocations in a
particular accounting period, the right to receive additional partnership income
necessary to provide for the various priority capital rates of return is carried
forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation, sale or dissolution of
TWE.
The TWE partnership agreement provides, under certain circumstances, for
the distribution of partnership income allocated to the Senior Capital owned by
the Time Warner General Partners. Pursuant to such provision, $366 million of
partnership income was distributed to the Time Warner General Partners in 1995.
Beginning on July 1, 1997, the Senior Capital and, to the extent not previously
distributed, partnership income allocated thereto is required to be distributed
in three annual installments, with the initial distribution expected to be
approximately $535 million. The Series B Capital owned by subsidiaries of Time
Warner may be increased if
F-97
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain operating performance targets are achieved over a five-year period
ending on December 31, 1996 and a ten-year period ending on December 31, 2001.
Although satisfaction of the ten-year operating performance target is
indeterminable at this time, the five-year target was not attained.
U S WEST has an option to obtain up to an additional 6.33% of Series A
Capital and Residual Capital interests, depending on cable operating
performance. The option is exercisable between January 1, 1999 and on or about
May 31, 2005 at a maximum exercise price of $1.25 billion to $1.8 billion,
depending on the year of exercise. Either U S WEST or TWE may elect that the
exercise price be paid with partnership interests rather than cash.
Distributions and loans to the partners are subject to partnership and
credit agreement limitations. Generally, TWE must be in compliance with the cash
flow coverage and leverage ratios, restricted payment limitations and other
credit agreement covenants in order to make such distributions or loans.
In September 1993, certain assets of TWE were distributed to the Time
Warner General Partners and were owned and operated by other partnerships (the
'Time Warner Service Partnerships') in order to ensure compliance with the
Modification of Final Judgment entered on August 24, 1982 by the United States
District Court for the District of Columbia applicable to U S WEST and its
affiliated companies, which may have included TWE. This distribution was
recorded for financial statement purposes based on the $95 million historical
cost of such assets and, for partnership agreement purposes, Time Warner General
Partners' Series B Capital was reduced by approximately $300 million. In 1994, U
S WEST received a judicial order that TWE was no longer prohibited from owning
or operating substantially all of such assets. Accordingly, in September 1995,
TWE reacquired substantially all of the assets of the Time Warner Service
Partnerships, subject to the liabilities relating thereto, (the 'Time Warner
Service Partnership Assets') in exchange for Series B Capital interests in TWE
equal to approximately $400 million. The reacquisition was recorded for
financial statement purposes based on the $124 million historical cost of the
Time Warner Service Partnership Assets. Prior to the reacquisition of the Time
Warner Service Partnership Assets in September 1995, TWE was required to make
quarterly cash distributions of Series B Capital in the amount of $12.5 million
to the Time Warner General Partners ('TWSP Distributions'), which the General
Partners were then required to contribute to the Time Warner Service
Partnerships. TWE paid TWSP Distributions to the Time Warner General Partners in
the amount of $25 million and $50 million in 1995 and 1994, respectively, which
were recorded as reductions of Time Warner General Partners' Series B Capital.
TWE reimburses Time Warner for the amount by which the market price on the
exercise date of Time Warner common stock options exercised by employees of TWE
exceeds the exercise price or, with respect to options granted prior to the TWE
capitalization, the greater of the exercise price and $27.75, the market price
of the common stock at the time of the TWE capitalization on June 30, 1992
('Stock Option Distributions'). TWE accrues Stock Option Distributions 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. Stock
Option Distributions are paid when the options are exercised. At December 31,
1996 and 1995, TWE had recorded a liability for Stock Option Distributions of
$93 million and $122 million, respectively, based on the unexercised options and
the market prices at such dates of $37.50 and $37.875, respectively, per Time
Warner common share. TWE paid Stock Option Distributions to Time Warner in the
amount of $13 million, $17 million and $5 million in 1996, 1995 and 1994,
respectively.
Cash distributions are required to be made to the partners to permit them
to pay income taxes at statutory rates based on their allocable taxable income
from TWE ('Tax Distributions'), including any taxable income generated by the
Beneficial Assets, subject to limitations referred to herein. The aggregate
amount of such Tax Distributions is computed generally by reference to the taxes
that TWE would have been required to pay if it were a corporation. Tax
Distributions were previously subject to restrictions until July 1995 and are
now paid to
F-98
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Time Warner General Partners on a current basis. TWE paid Tax Distributions
to the Time Warner General Partners in the amount of $215 million, $680 million
and $115 million in 1996, 1995 and 1994, respectively.
In addition to Stock Option Distributions, Tax Distributions and Senior
Capital Distributions, quarterly cash distributions may be made to the partners
to the extent of excess cash, as defined in the TWE partnership agreement
('Excess Cash Distribution'). Assuming that no additional partnership interests
are issued to new partners and that certain cash distribution thresholds are
met, cash distributions other than Stock Option Distributions, Tax Distributions
and Senior Capital Distributions will in the aggregate be made 63.27% to the
Time Warner General Partners, 11.22% to Time Warner and 25.51% to U S WEST prior
to June 30, 1998; thereafter, the Time Warner General Partners will be entitled
to additional distributions with respect to Series B Capital. If aggregate
distributions made to the limited partners, generally from all sources, have not
reached approximately $800 million by June 30, 1997, cash distributions to the
Time Warner General Partners with respect to the Time Warner General Partners'
Series A Capital and Residual Capital, other than Stock Option Distributions and
Tax Distributions, will be deferred until such threshold is met. Similarly, if
such aggregate distributions to the limited partners have not reached
approximately $1.6 billion by June 30, 1998, cash distributions with respect to
Series B Capital will be deferred until such threshold is met. If any such
deferral occurs, a portion of the corresponding partnership income allocations
with respect to such deferred amounts will be made at a rate higher than
otherwise would have been the case. As of December 31, 1996, no cash
distributions have been made to the limited partners. In addition, if a division
of TWE or a substantial portion thereof is sold, the net proceeds of such sale,
less expenses and proceeds used to repay outstanding debt, will be required to
be distributed with respect to the partners' partnership interests. Similar
distributions are required to be made in the event of a financing or refinancing
of debt. Subject to any limitations on the incurrence of additional debt
contained in the TWE partnership and credit agreements, and the Indenture, TWE
may borrow funds to make distributions.
8. STOCK OPTION PLANS
Time Warner has various stock option plans under which Time Warner may
grant options to purchase Time Warner common stock to employees of Time Warner
and TWE. Such options have been granted to employees of TWE at, or in excess of,
fair market value at the date of grant. Accordingly, in accordance with APB 25
and related interpretations, no compensation cost has been recognized by Time
Warner, nor charged to TWE, related to such stock option plans. Generally, the
options become exercisable over a three-year vesting period and expire ten years
from the date of grant. Had compensation cost for Time Warner's stock option
plans been determined based on the fair value at the grant dates for all awards
during 1995 and 1996 under those plans consistent with the method set forth
under FASB Statement No. 123, 'Accounting for Stock-Based Compensation' ('FAS
123'), TWE's allocable share of compensation cost would have decreased its net
income to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995
----------- ------------
(IN MILLIONS)
<S> <C> <C>
Net income:
As reported...................................................................... $ 210 $ 73
----------- ---
----------- ---
Pro forma........................................................................ $ 193 $ 68
----------- ---
----------- ---
</TABLE>
FAS 123 is applicable only to stock options granted subsequent to December
31, 1994. Accordingly, since TWE's compensation expense associated with such
grants would generally be recognized over a three-year vesting period, the
initial impact of applying FAS 123 on pro forma net income is not representative
of the potential impact on pro forma net income in future years, when the pro
forma effect would be fully reflected.
F-99
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants to TWE employees in 1996 and 1995, respectively:
dividend yields of 1% in both periods; expected volatility of 21.7% and 22.3%,
risk-free interest rates of 5.7% and 6.6%; and expected lives of 5 years in both
periods. The weighted average fair value of an option granted to TWE employees
during the year was $10.43 and $11.46 for the years ended December 31, 1996 and
1995, respectively. The weighted average exercise price and fair value of an
option granted during the year at prices exceeding the market price of the stock
on the date of grant are $48.51 and $6.82, respectively.
A summary of stock option activity with respect to employees of TWE is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
THOUSANDS AVERAGE
OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at January 1, 1994............................................................... 26,880 $ 31.54
Granted.................................................................................. 3,856 36.73
Exercised................................................................................ (437) 19.71
Cancelled(a)............................................................................. (101) 35.81
---------
Balance at December 31, 1994............................................................. 30,198 $ 32.36
Granted.................................................................................. 2,141 38.13
Exercised................................................................................ (1,316) 27.31
Cancelled(a)............................................................................. (2,488) 29.69
---------
Balance at December 31, 1995............................................................. 28,535 $ 33.26
Granted.................................................................................. 4,510 42.48
Exercised................................................................................ (1,242) 28.67
Cancelled(a)............................................................................. (1,492) 31.37
---------
Balance at December 31, 1996............................................................. 30,311 $ 34.91
---------
---------
</TABLE>
- ------------
(a) Includes all options cancelled and forfeited during the year, as well as
options related to employees who have been transferred out of and into TWE
to and from other Time Warner divisions.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable....................................................................... 22,772 21,846 21,318
</TABLE>
F-100
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
with respect to employees of TWE at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ------------------------------------------------------ ------------ ----------- --------- ------------ ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $17............................................. 455 3 years $ 16.61 455 $ 16.61
$17.00 to $25.00...................................... 3,124 3 years $ 21.80 3,124 $ 21.80
$25.01 to $35.00...................................... 6,564 5 years $ 28.89 6,402 $ 28.75
$35.01 to $40.00...................................... 11,547 5 years $ 36.65 8,619 $ 36.22
$40.01 to $45.00...................................... 7,621 7 years $ 42.15 4,172 $ 42.18
$45.01 to $48.51...................................... 1,000 9 years $ 48.51 -- $ --
------------ ------------
Total................................................. 30,311 5 years $ 34.91 22,772 $ 32.84
------------ ------------
------------ ------------
</TABLE>
TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 7.
9. BENEFIT PLANS
TWE and its divisions have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities. Time Warner's common stock represents
approximately 5% and 6% of plan assets at December 31, 1996 and 1995,
respectively.
Pension expense included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- ------- --------
(MILLIONS)
<S> <C> <C> <C>
Service cost...................................................................... $ 33 $ 20 $ 26
Interest cost..................................................................... 28 21 24
Actual return on plan assets...................................................... (27) (55) 4
Net amortization and deferral..................................................... 7 37 (21)
-------- ------- --------
Total............................................................................. $ 41 $ 23 $ 33
-------- ------- --------
-------- ------- --------
</TABLE>
F-101
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of funded pension plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ -------
(MILLIONS)
<S> <C> <C>
Accumulated benefit obligation (90% vested)..................................................... $212 $ 213
Effect of future salary increases............................................................... 124 111
------ -------
Projected benefit obligation.................................................................... 336 324
Plan assets at fair value....................................................................... 284 247
------ -------
Projected benefit obligation in excess of plan assets........................................... (52) (77)
Unamortized actuarial losses.................................................................... 1 60
Unamortized plan changes........................................................................ 3 5
Other........................................................................................... (2) (3)
------ -------
Accrued pension expense......................................................................... $(50) $ (15)
------ -------
------ -------
</TABLE>
The following assumptions were used in accounting for pension plans:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate........................................................ 7.75% 7.25% 8.5%
Return on plan assets................................................................. 9% 9% 9%
Rate of increase in compensation levels............................................... 6% 6% 6%
</TABLE>
Certain domestic employees of TWE participate in multiemployer pension
plans as to which the expense amounted to $30 million in 1996, $21 million in
1995 and $18 million in 1994. Employees in foreign countries participate to
varying degrees in local pension plans, which in the aggregate are not
significant.
Certain domestic employees also participate in Time Warner's savings and
profit sharing plans, as to which the expense amounted to $28 million in 1996,
$25 million in 1995 and $23 million in 1994. Contributions to the savings plans
are based upon a percentage of the employees' elected contributions.
Contributions to the profit sharing plans are generally determined by
management.
10. FINANCIAL INSTRUMENTS
The carrying value of TWE's financial instruments approximates fair value,
except for differences with respect to long-term, fixed-rate debt and certain
differences related to cost method investments and other financial instruments
which are not significant. The fair value of financial instruments, such as
long-term debt and investments, is generally determined by reference to market
values resulting from trading on a national securities exchange or in an
over-the-counter market. In cases where quoted market prices are not available,
such as for derivative financial instruments, fair value is based on estimates
using present value or other valuation techniques.
LONG-TERM DEBT
Based on the level of interest rates prevailing at December 31, 1996, the
fair value of TWE's fixed-rate debt exceeded its carrying value by $181 million
which represents an unrealized loss. Based on the level of interest rates
prevailing at December 31, 1995, the fair value of TWE's fixed-rate debt
exceeded its carrying value by $386 million, which represents an unrealized
loss. Unrealized gains or losses related to the differences in the fair value
and carrying value of TWE's long-term debt are not recognized unless such debt
is retired prior to its maturity.
F-102
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN EXCHANGE RISK MANAGEMENT
Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future license fees owed to TWE domestic companies for the
sale or anticipated sale of U.S. copyrighted products abroad may be adversely
affected by changes in foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period, including those
related to TWE. At December 31, 1996, Time Warner had effectively hedged
approximately half of TWE's estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of three months or less, which generally are rolled over to
provide continuing coverage throughout the year. TWE is reimbursed by or
reimburses Time Warner for Time Warner contract gains and losses related to
TWE's foreign currency exposure. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting purchase contract. At December 31, 1996,
Time Warner had contracts for the sale of $447 million and the purchase of $104
million of foreign currencies at fixed rates and maturities of three months or
less. Of Time Warner's $343 million net sale contract position, none of the
foreign exchange purchase contracts and $102 million of the foreign exchange
sale contracts related to TWE's foreign currency exposure, primarily Japanese
yen (21% of net contract position related to TWE), French francs (22%), German
marks (11%) and Canadian dollars (19%), compared to a net sale contract position
of $113 million of foreign currencies at December 31, 1995.
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1996 and 1995. No cash is required to be received or paid with respect to the
realization of such gains and losses until the related foreign exchange
contracts are settled, generally at their respective maturity dates. For the
years ended December 31, 1996, 1995 and 1994, TWE recognized $6 million in
gains, $11 million in losses and $20 million in losses, respectively, on foreign
exchange contracts, which were or are expected to be offset by corresponding
decreases and increases, respectively, in the dollar value of foreign currency
license fee payments that have been or are anticipated to be received in cash
from the sale of U.S. copyrighted products abroad. Time Warner places foreign
currency contracts with a number of major financial institutions in order to
minimize credit risk.
Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1996, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1996 would result in approximately $5 million of unrealized losses
on foreign exchange contracts. Conversely, a 5% appreciation of the U.S. dollar
as compared to the level of foreign exchange rates for currencies under contract
at December 31, 1996 would result in $5 million of unrealized gains on
contracts. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, in the dollar value of
future foreign currency license fee payments that would be received in cash
within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
11. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production, television broadcasting and theme parks; 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. The operating results of TWE reflect the formation of the
TWE-Advance/Newhouse Partnership effective as of April 1, 1995, the
deconsolidation of Six Flags effective as of June 23, 1995 and the consolidation
of Paragon effective as of
F-103
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
July 6, 1995. The operating results of Six Flags prior to June 23, 1995 are
reported separately to facilitate comparability.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------ ------
(MILLIONS)
<S> <C> <C> <C>
REVENUES(1)
Filmed Entertainment-Warner Bros. ............................................... $ 5,639 $5,069 $4,476
Six Flags Theme Parks............................................................ -- 227 557
Broadcasting-The WB Network...................................................... 87 33 --
Cable Networks-HBO............................................................... 1,763 1,593 1,494
Cable............................................................................ 3,851 3,005 2,220
Intersegment elimination......................................................... (488) (410) (287)
------- ------ ------
Total............................................................................ $10,852 $9,517 $8,460
------- ------ ------
------- ------ ------
</TABLE>
- ------------
(1) Substantially all operations outside of the United States support the export
of domestic products. Revenues include export sales of $2.134 billion in
1996, $1.982 billion in 1995 and $1.693 billion in 1994. Approximately 62%
of export revenues are from sales to European customers.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ---- ----
(MILLIONS)
<S> <C> <C> <C>
OPERATING INCOME
Filmed Entertainment-Warner Bros. .................................................... $ 242 $228 $201
Six Flags Theme Parks................................................................. -- 29 56
Broadcasting-The WB Network........................................................... (98) (66) --
Cable Networks-HBO.................................................................... 328 274 236
Cable................................................................................. 606 495 355
------ ---- ----
Total................................................................................. $1,078 $960 $848
------ ---- ----
------ ---- ----
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros....................................................... $158 $107 $ 71
Six Flags Theme Parks.................................................................. -- 20 51
Broadcasting-The WB Network............................................................ -- -- --
Cable Networks-HBO..................................................................... 22 16 13
Cable.................................................................................. 619 452 330
---- ---- ----
Total.................................................................................. $799 $595 $465
---- ---- ----
---- ---- ----
</TABLE>
F-104
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment-Warner Bros. ..................................................... $125 $124 $135
Six Flags Theme Parks.................................................................. -- 11 28
Broadcasting-The WB Network............................................................ -- -- --
Cable Networks-HBO..................................................................... -- 1 6
Cable.................................................................................. 311 308 309
---- ---- ----
Total.................................................................................. $436 $444 $478
---- ---- ----
---- ---- ----
</TABLE>
- ------------
(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.
Information as to the assets and capital expenditures of TWE is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Filmed Entertainment-Warner Bros.............................................. $ 8,057 $ 7,334 $ 7,133
Six Flags Theme Parks......................................................... -- -- 814
Broadcasting-The WB Network................................................... 67 63 --
Cable Networks-HBO............................................................ 997 935 895
Cable......................................................................... 10,202 9,842 8,191
Corporate(1).................................................................. 650 731 1,629
------- ------- -------
Total......................................................................... $19,973 $18,905 $18,662
------- ------- -------
------- ------- -------
</TABLE>
- ------------
(1) Consists principally of cash, cash equivalents and other investments.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros.............................................. $ 340 $ 294 $ 395
Six Flags Theme Parks......................................................... -- 43 46
Broadcasting-The WB Network................................................... 2 -- --
Cable Networks-HBO............................................................ 29 20 13
Cable(1)...................................................................... 1,348 1,178 699
------- ------- -------
Total......................................................................... $ 1,719 $ 1,535 $ 1,153
------- ------- -------
------- ------- -------
</TABLE>
- ------------
(1) Cable capital expenditures were funded in part through collections on the U
S WEST Note Receivable in the amount of $169 million in 1996, $602 million
in 1995 and $234 million in 1994 (Note 1). The U S WEST Note Receivable was
fully collected during 1996.
12. COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $205 million in 1996, $176 million in 1995
and $143 million in 1994. The minimum rental commitments under noncancellable
long-term operating leases are: 1997-$177 million; 1998-$173 million; $1999-$167
million; 2000-$157 million; 2001-$151 million and after 2001-$893 million.
F-105
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum commitments and guarantees under certain programming, licensing,
franchise and other agreements aggregated approximately $7.3 billion at December
31, 1996, which are payable principally over a five-year period.
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE and the pending litigation with the City of
New York and Fox News Channel ('FNC') relating to Time Warner's acquisition of
Turner Broadcasting System, Inc. and the carriage of FNC on Time Warner Cable's
New York City cable television system. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial statements.
13. RELATED PARTY TRANSACTIONS
In the normal course of conducting their businesses, TWE units have had
various transactions with Time Warner units, generally on terms resulting from a
negotiation between the affected units that in management's view results in
reasonable allocations. Employees of TWE participate in various Time Warner
medical, stock option and other benefit plans for which TWE is charged its
allocable share of plan expenses, including administrative costs. In addition,
Time Warner provides TWE with certain corporate services for which TWE paid a
fee in the amount of $69 million, $64 million and $60 million in 1996, 1995 and
1994, respectively. The corporate support services agreement expires on June 30,
1997, subject to the obligation of both parties to negotiate, in good faith, any
extension thereto. Management believes that the corporate services fee is
representative of the cost of corporate services that would be necessary for the
stand-alone operations of TWE.
TWE is required to pay a $130 million advisory fee to U S WEST over a
five-year period ending September 15, 1998 for U S WEST's expertise in
telecommunications, telephony and information technology, and its participation
in the management and upgrade of the cable systems to Full Service NetworkTM
capacity.
TWE has management services agreements with Time Warner's Cable division,
pursuant to which TWE manages, or provides services to, the cable television
systems owned by Time Warner. Such cable television systems also pay fees to TWE
for the right to carry cable television programming provided by TWE's cable
networks.
TWE's Filmed Entertainment-Warner Bros. division has various service
agreements with Time Warner's Filmed Entertainment-TBS division, pursuant to
which TWE's Filmed Entertainment-Warner Bros. division provides certain
management and distribution services for Time Warner's theatrical, television
and animated product, as well as certain services for administrative and
technical support.
Time Warner's Cable Networks-TBS division has license agreements with TWE,
pursuant to which the cable networks have acquired broadcast rights to certain
film and television product. In addition, Time Warner's Music division provides
home videocassette distribution services to certain TWE operations, and certain
TWE units place advertising in magazines published by Time Warner's Publishing
division.
Time Warner and TWE entered into a credit agreement in 1994 that allows
Time Warner to borrow up to $400 million from TWE through September 15, 2000.
Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement.
Prior to TWE's reacquisition of the Time Warner Service Partnership Assets
in September 1995, TWE had service agreements with the Time Warner Service
Partnerships for program signal delivery and transmission services, and TWE
provided billing, collection and marketing services to the Time Warner Service
Partnerships. TWE also has distribution and merchandising agreements with Time
Warner Entertainment Japan Inc., a company owned by certain former and existing
partners of TWE to conduct TWE's businesses in Japan.
In addition to transactions with its partners, TWE has had transactions
with The Columbia House Company partnerships, Cinamerica Theatres, L.P., Comedy
Partners, L.P., Six Flags and other equity investees of Time
F-106
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warner and the Entertainment Group, generally with respect to sales of product
in the ordinary course of business.
14. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Cash payments made for interest........................................................ $513 $571 $521
Cash payments made for income taxes, net............................................... 74 75 69
Noncash capital contributions (distributions), net..................................... (1) 50 4
</TABLE>
Noncash investing activities in 1995 included the formation of the
TWE-Advance/Newhouse Partnership in April 1995 (Note 2) and the reacquisition of
the Time Warner Service Partnership Assets in September 1995 (Note 7).
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses............................................................................. $1,200 $ 937
Accrued compensation......................................................................... 247 216
Deferred revenues............................................................................ 293 227
------ ------
Total........................................................................................ $1,740 $1,380
------ ------
------ ------
</TABLE>
F-107
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE PARTNERS OF
TIME WARNER ENTERTAINMENT COMPANY, L.P.
We have audited the accompanying consolidated balance sheet of Time Warner
Entertainment Company, L.P. ('TWE') as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
TWE's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TWE at December
31, 1996 and 1995, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 11, 1997
F-108
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1996 set forth below has been derived from and should be read
in conjunction with the consolidated financial statements and other financial
information presented elsewhere herein. Capitalized terms are as defined and
described in such consolidated financial statements, or elsewhere herein. The
selected historical financial information for 1995 reflects the consolidation by
TWE of the TWE-Advance/Newhouse Partnership resulting from the formation of such
partnership, effective as of April 1, 1995, and the consolidation of Paragon
effective as of July 6, 1995. The selected historical financial information
gives effect to the consolidation of Six Flags effective as of January 1, 1993
as a result of an increase in TWE's ownership of Six Flags from 50% to 100% in
September 1993, and the subsequent deconsolidation of Six Flags resulting from
the disposition by TWE of a 51% interest in Six Flags effective as of June 23,
1995.
The selected historical financial information for 1993 also gives effect to
the admission of U S WEST as an additional limited partner of TWE as of
September 15, 1993 and the issuance of $2.6 billion of TWE debentures during the
year to reduce indebtedness under the former TWE credit agreement, and for 1992
gives effect to the initial capitalization of TWE and associated refinancings as
of the dates such transactions were consummated and Time Warner's acquisition of
the ATC minority interest as of June 30, 1992, using the purchase method of
accounting. Time Warner's cost to acquire the ATC minority interest is reflected
in the consolidated financial statements of TWE under the pushdown method of
accounting.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues................................................... $10,852 $ 9,517 $ 8,460 $ 7,946 $ 6,761
Depreciation and amortization.............................. 1,235 1,039 943 902 782
Business segment operating income.......................... 1,078 960 848 883 795
Interest and other, net.................................... 522 580 587 551 525
Income before extraordinary item........................... 210 97 161 208 160
Net income................................................. 210 73 161 198 160
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Total assets............................................... $19,973 $18,905 $18,662 $17,963 $15,848
Debt due within one year................................... 7 47 32 24 7
Long-term debt............................................. 5,676 6,137 7,160 7,125 7,171
Time Warner General Partners' Senior Capital............... 1,543 1,426 1,663 1,536 --
Partners' capital.......................................... 6,574 6,478 6,233 6,000 6,437
</TABLE>
F-109
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING
INCOME OF NET
BUSINESS INCOME
QUARTER REVENUES SEGMENTS (LOSS)
- ---------------------------------------------------------------------------------- -------- --------- ------
(MILLIONS)
<S> <C> <C> <C>
1996
1st............................................................................... $ 2,485 $ 268 $ 94
2nd............................................................................... 2,608 297 74
3rd............................................................................... 2,718 271 45
4th............................................................................... 3,041 242 (3)
Year.............................................................................. 10,852 1,078 210
1995
1st............................................................................... $ 2,046 $ 191 $ 4
2nd............................................................................... 2,392 266 56
3rd (a)........................................................................... 2,324 268 23
4th............................................................................... 2,755 235 (10)
Year (a).......................................................................... 9,517 960 73
</TABLE>
- ------------
(a) Net income for the third quarter of 1995 includes an extraordinary loss on
the retirement of debt of $24 million.
F-110
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............................. $196 $ 97 $ (98)(a) $ 195
Reserves for sales returns and allowances................... 169 278 (269)(b) 178
---------- ---------- ---------- ---------
Total.................................................. $365 $375 $ (367) $ 373
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1995:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............................. $188 $104 $ (96)(a) $ 196
Reserves for sales returns and allowances................... 118 218 (167)(b) 169
---------- ---------- ---------- ---------
Total.................................................. $306 $322 $ (263) $ 365
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1994:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............................. $161 $ 49 $ (22)(a) $ 188
Reserves for sales returns and allowances................... 96 164 (142)(b) 118
---------- ---------- ---------- ---------
Total.................................................. $257 $213 $ (164) $ 306
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
- ------------
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
F-111
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
2.1 The Amended and Restated Agreement and Plan of Merger (the 'Merger Agreement'), dated as of
September 22, 1995, among TWCI, the Registrant, Time Warner Acquisition Corp., TW
Acquisition Corp. and TBS (which is incorporated herein by reference to Appendix A-1(a)
to the Joint Proxy Statement/Prospectus included as part of the Registrant's Registration
Statement on Form S-4 (Registration No. 333-11471) (the 'S-4 Registration
Statement'))............................................................................. *
2.2 Amendment No. 1 dated as of August 8, 1996 to the Merger Agreement (which is incorporated
herein by reference to Appendix A-1(b) to the Joint Proxy Statement/Prospectus included
as part of the Registrant's S-4 Registration Statement).................................. *
3.(i)(a) Restated Certificate of Incorporation of the Registrant as filed with the Secretary of
State of the State of Delaware on October 10, 1996 (which is incorporated herein by
reference to Exhibit 4.3 to the Registrant's Post-Effective Amendment No. 1 on Form S-8
to the Registrant's S-4 Registration Statement (Registration No. 333-11471) (the 'S-8
Registration Statement'))................................................................ *
3.(i)(b) Certificate of Amendment of Restated Certificate of Incorporation of the Registrant as
filed with the Secretary of State of the State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.4 to the Registrant's S-8 Registration
Statement)............................................................................... *
3.(i)(c) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series LMC Common Stock of the Registrant as filed with the Secretary of
State of the State of Delaware on October 10, 1996 (which is incorporated herein by
reference to Exhibit 4.5 to the Registrant's S-8 Registration Statement)................. *
3.(i)(d) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series LMCN-V Common Stock of the Registrant as filed with the Secretary of
State of the State of Delaware on October 10, 1996 (which is incorporated herein by
reference to Exhibit 4.6 to the Registrant's S-8 Registration Statement)................. *
3.(i)(e) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series A Participating Cumulative Preferred Stock of the Registrant as filed
with the Secretary of State of the State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.7 to the Registrant's S-8 Registration
Statement)............................................................................... *
3.(i)(f) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series D Convertible Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.8 to the Registrant's S-8 Registration Statement)....... *
3.(i)(g) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series E Convertible Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.9 to the Registrant's S-8 Registration Statement)....... *
3.(i)(h) Certificate of Correction of the Certificate of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof, of Series E Convertible Preferred
Stock of the Registrant as filed with the Secretary of State of the State of Delaware on
November 13, 1996........................................................................
3.(i)(i) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series F Convertible Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.10 to the Registrant's S-8 Registration Statement)...... *
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
3.(i)(j) Certificate of Correction of the Certificate of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof, of Series F Convertible Preferred
Stock of the Registrant as filed with the Secretary of State of the State of Delaware on
November 13, 1996........................................................................
3.(i)(k) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series G Convertible Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.11 to the Registrant's S-8 Registration Statement)...... *
3.(i)(l) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series H Convertible Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.12 to the Registrant's S-8 Registration Statement)...... *
3.(i)(m) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series I Convertible Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.13 to the Registrant's S-8 Registration Statement)...... *
3.(i)(n) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series J Convertible Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.14 to the Registrant's S-8 Registration Statement)...... *
3.(i)(o) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof, of 10 1/4% Series M Exchangeable Preferred Stock of the Registrant as filed with
the Secretary of State of the State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.15 to the Registrant's S-8 Registration
Statement)............................................................................... *
3.(ii) By-laws of the Registrant as of November 21, 1996..........................................
4.1 Rights Agreement dated as of October 10, 1996 between the Registrant and ChaseMellon
Shareholder Services L.L.C. (which is incorporated herein by reference to Exhibit 4.17
to the Registrant's S-8 Registration Statement).......................................... *
4.2 Indenture dated as of April 30, 1992, as amended by the First Supplemental Indenture, dated
as of June 30, 1992, among Time Warner Entertainment Company, L.P. ('TWE'), TWCI, certain
of TWCI's subsidiaries that are parties thereto and The Bank of New York, as Trustee
(which is incorporated herein by reference to Exhibits 10(g) and 10(h) to TWCI's
Current Report on Form 8-K dated July 14, 1992 (File No. 1-8637) ('TWCI's July 1992 Form
8-K')).................................................................................... *
4.3 Second Supplemental Indenture, dated as of December 9, 1992, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and The Bank of New York, as Trustee (which
is incorporated herein by reference to Exhibit 4.2 to Amendment No. 1 to TWE's
Registration Statement on Form S-4 (Registration No. 33-67688) filed with the Commission
on October 25, 1993 ('TWE's 1993 Form S-4'))............................................. *
4.4 Third Supplemental Indenture, dated as of October 12, 1993, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and The Bank of New York, as Trustee (which
is incorporated herein by reference to Exhibit 4.3 to TWE's 1993 Form S-4)............... *
4.5 Fourth Supplemental Indenture, dated as of March 29, 1994, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and The Bank of New York, as Trustee (which
is incorporated herein by reference to Exhibit 4.4 to TWE's Annual Report on Form 10-K
for the year ended December 31, 1993 ('TWE's 1993 Form 10-K'))........................... *
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
4.6 Fifth Supplemental Indenture, dated as of December 28, 1994, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and The Bank of New York, as Trustee (which
is incorporated herein by reference to Exhibit 4.5 to TWE's Annual Report on Form 10-K
for the year ended December 31, 1994 ('TWE's 1994 Form 10-K'))........................... *
4.7 Indenture dated as of January 15, 1993, between TWCI and The Chase Manhattan Bank (formerly
Chemical Bank) ('Chase Manhattan'), as Trustee (which is incorporated herein by reference
to Exhibit 4.11 to TWCI's Annual Report on Form 10-K for the year ended December 31,
1992).................................................................................... *
4.8 First Supplemental Indenture dated as of June 15, 1993 between TWCI and Chase Manhattan,
as Trustee (which is incorporated herein by reference to Exhibit 4 to TWCI's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)................................. *
4.9 Second Supplemental Indenture dated as of October 10, 1996 among the Registrant, TWCI and
Chase Manhattan, as Trustee (which is incorporated herein by reference to Exhibit 4.1 to
TWCI's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996).................................................................................... *
4.10 Third Supplemental Indenture dated as of December 31, 1996 among the Registrant, TWCI and
Chase Manhattan, as Trustee..............................................................
10.1 Time Warner 1986 Stock Option Plan, as amended through July 18, 1996.......................
10.2 1988 Stock Incentive Plan of Time Warner Inc., as amended through July 18, 1996............
10.3 Time Warner 1989 Stock Incentive Plan, as amended through July 18, 1996....................
10.4 Time Warner 1994 Stock Option Plan, as amended through July 18, 1996.......................
10.5 Time Warner Corporate Group Stock Incentive Plan, as amended through July 18, 1996.........
10.6 Time Warner 1988 Restricted Stock Plan for Non-Employee Directors, as amended through
November 18, 1993 (which is incorporated herein by reference to Exhibit 10.8 to TWCI's
Annual Report on Form 10-K for the year ended December 31, 1993 ('TWCI's 1993 Form
10-K')).................................................................................. *
10.7 Time Warner 1996 Stock Option Plan for Non-Employee Directors (which is incorporated herein
by reference to Annex A to TWCI's definitive Proxy Statement dated March 29, 1996 used in
connection with TWCI's 1996 Annual Meeting of Stockholders).............................. *
10.8 Deferred Compensation Plan for Directors of Time Warner, as amended through November 18,
1993 (which is incorporated herein by reference to Exhibit 10.9 to TWCI's 1993 Form
10-K).................................................................................... *
10.9 Time Warner Retirement Plan for Outside Directors, as amended through May 16, 1996.........
10.10 Amended and Restated Time Warner Inc. Annual Bonus Plan for Executive Officers (which is
incorporated herein by reference to Annex A to TWCI's definitive Proxy Statement dated
March 30, 1995 used in connection with TWCI's 1995 Annual Meeting of Stockholders)....... *
10.11 Amended and Restated Employment and Termination Agreement dated as of March 3, 1989, as
amended and restated as of January 10, 1990, between the Registrant and J. Richard Munro
(which is incorporated herein by reference to Exhibit 10.26 to TWCI's Annual Report on
Form 10-K for the year ended December 31, 1989 (File No.1-8637)).......................... *
10.12 Amended and Restated Employment Agreement dated as of November 15, 1990, between the
Registrant and Gerald M. Levin (which is incorporated herein by reference to Exhibit
10.26 to TWCI's Annual Report on Form 10-K for the year ended December 31, 1990 (File No.
1-8637))......... ....................................................................... *
10.13 Employment Agreement made and effective as of October 10, 1996, between the Registrant and
R.E. Turner ('Turner')...................................................................
10.14 Employment Agreement made as of November 2, 1994, between the Registrant and Richard D.
Parsons (which is incorporated herein by reference to Exhibit 10.17 to TWCI's Annual
Report on Form 10-K for the year ended December 31, 1994 ('TWCI's 1994 Form 10-K'))...... *
10.15 Employment Agreement made as of May 17, 1995 between the Registrant and Peter R. Haje
(which is incorporated herein by reference to Exhibit 10.5 to TWCI's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995)........................................... *
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.16 Employment Agreement effective as of January 1, 1995, between the Registrant and Richard J.
Bressler (which is incorporated herein by reference to Exhibit 10.18 to TWCI's 1994 Form
10-K).................................................................................... *
10.17 Amended and Restated Employment Agreement effective as of January 1, 1994, between the
Registrant and Philip R. Lochner, Jr. (which is incorporated herein by reference to
Exhibit 10.20 to TWCI's 1994 Form 10-K)................................................. *
10.18 Employment Agreement dated as of May 15, 1996, between the Registrant and Timothy A.
Boggs....................................................................................
10.19 Second Amended and Restated LMC Agreement dated as of September 22, 1995 among TWCI, LMC,
TCI Turner Preferred, Inc. ('TCITP'), Communication Capital Corp. ('CCC') and United
Cable Turner Investment, Inc. (which is incorporated herein by reference to Exhibit 10(a)
to the TWCI Current Report on Form 8-K dated September 6, 1996 ('TWCI's September 1996
Form 8-K')).................. ........................................................... *
10.20 SSSI Agreement dated as of October 10, 1996 between the Registrant, LMC, Southern Satellite
Systems, Inc. and with respect to Section 11(d), Section 11(f) and Section 11(g) only,
Satellite Services, Inc. ................................................................
10.21 Agreement Containing Consent Order dated August 14, 1996 among TWCI, TBS,
TCI, LMC and the Federal Trade Commission (which is incorporated herein by reference to
Exhibit 2(b) to TWCI's September 1996 Form 8-K).......................................... *
10.22 Stockholders' Agreement dated as of October 10, 1996 among the Registrant, Turner, TCITP,
Liberty Broadcasting Inc., CCC, Turner Outdoor Inc. ('Turner Outdoor') and Turner
Partners, L.P. ('Turner Partners').......................................................
10.23 Investors Agreement (No. 1) dated as of October 10, 1996 among the Registrant, Turner,
Turner Outdoor and Turner Partners.......................................................
10.24 Investors Agreement (No. 2) dated as of October 10, 1996 among the Registrant, Turner
Foundation, Inc. ('Turner Foundation') and Robert E. Turner Charitable Remainder Unitrust
No. 2 ('Turner Trust')...................................................................
10.25 Registration Rights Agreement dated as of October 10, 1996 among the Registrant, Turner,
Turner Outdoor, Turner Foundation, Turner Trust and Turner Partners......................
10.26 Credit Agreement dated as of June 30, 1995 (the 'TWE Credit Agreement') among TWE, Time
Warner Entertainment-Advance/Newhouse Partnership ('TWE-AN Partnership') and TWI Cable
Inc., as borrowers, Chase Manhattan, as administrative agent, Bank of America National
Trust and Savings Association, The Bank of New York and Morgan Guaranty Trust Company of
New York, as documentation and syndication agents, and the lending institutions named
therein (which is incorporated herein by reference to Exhibit 10(a) to TWCI's Current
Report on Form 8-K dated July 6, 1995)................................................... *
10.27 Amendment No. 1 dated as of October 30, 1995 to the TWE Credit Agreement (which is
incorporated herein by reference to Exhibit 10.2 to TWE's Annual Report on Form 10-K for
the year ended December 31, 1995). ......................................................
10.28 Waiver No. 1 dated as of December 1, 1995 to the TWE Credit Agreement......................
10.29 Amendment and Waiver No. 2 dated as of August 26, 1996 to the TWE Credit Agreement.........
10.30 Credit Agreement, dated as of July 1, 1993 ('1993 TBS Credit Agreement'), between TBS and
Chase Manhattan, as agent (which is incorporated herein by reference to Exhibit 4.9.1 to
TBS's Quarterly Report on Form 10-Q for the quarter ended June 30,
1993).................................................................................... *
10.31 Form of Amendment No. 1, dated as of December 1, 1993, to the 1993 TBS Credit Agreement
(which is incorporated herein by reference to Exhibit 4.6.2 to TBS's Registration
Statement on Form S-4 (Registration No. 33-51739) filed with the Commission on December
29, 1993 ('TBS's Form S-4 Registration Statement'))...................................... *
10.32 Form of Amendment No. 2, dated as of December 15, 1993, to the 1993 TBS Credit Agreement
(which is incorporated herein by reference to Exhibit 4.6.3 to TBS's Form S-4
Registration Statement).................................................................. *
10.33 Form of Consent and Agreement, dated as of December 21, 1993, relating to the 1993 TBS
Credit Agreement (which is incorporated herein by reference to Exhibit 4.6.4 to TBS's
Form S-4 Registration Statement)......................................................... *
10.34 Amendment No. 3, dated as of June 30, 1994, to the 1993 TBS Credit Agreement (which is
incorporated herein by reference to Exhibit 10.46 to TBS's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994 ('TBS's September 1994 Form
10-Q')).................................................................................. *
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.35 Form of Amendment No. 4, dated as of December 5, 1994, to the 1993 TBS Credit Agreement
(which is incorporated herein by reference to Exhibit 4.4.6 to TBS's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995 ('TBS's March 1995 Form
10-Q')).................................................................................. *
10.36 Amendment No. 5, dated as of April 25, 1996, to the 1993 TBS Credit Agreement..............
10.37 Amendment No. 6, dated as of September 30, 1996 to the 1993 TBS Credit Agreement...........
10.38 Credit Agreement, dated as of September 7, 1994 (the '1994 TBS Credit Agreement'), among
TBS, the banks listed therein and Chase Manhattan, as agent, (which is incorporated
herein by reference to Exhibit 10.45 to TBS's September 1994 Form
10-Q).................................................................................... *
10.39 Form of Amendment No. 1, dated as of December 5, 1994, to the 1994 TBS Credit Agreement
(which is incorporated herein by reference to Exhibit 4.7.1 to TBS's March 1995 Form
10-Q).................................................................................... *
10.40 Amendment No. 2, dated as of April 26, 1996, to the 1994 TBS Credit Agreement..............
10.41 Amendment No. 3, dated as of September 30, 1996 to the 1994 TBS Credit Agreement...........
10.42 Agreement of Limited Partnership, dated as of October 29, 1991, as amended by the Letter
Agreement, dated February 11, 1992, and the Letter Agreement dated June 23, 1992, among
TWCI and certain of its subsidiaries, ITOCHU Corporation ('ITOCHU') and Toshiba
Corporation ('Toshiba') (which is incorporated herein by reference to Exhibit (A) to
TWCI's Current Report on Form 8-K dated October 29, 1991 (File No. 1-8637) and Exhibit
10(b) and 10(c) to TWCI's July 1992 Form 8-K)............................................ *
10.43 Admission Agreement, dated as of May 16, 1993, between TWE and US West (which is
incorporated herein by reference to Exhibit 10(a) to TWE's Current Report on Form 8-K
dated May 16, 1993)...................................................................... *
10.44 Amendment Agreement, dated as of September 14, 1993, among ITOCHU, Toshiba, TWCI, US West
and certain of their respective subsidiaries, amending the TWE Partnership Agreement, as
amended (which is incorporated herein by reference to Exhibit 3.2 to TWE's 1993 Form
10-K).................................................................................... *
10.45 Restructuring Agreement dated as of August 31, 1995 among TWCI, ITOCHU and ITOCHU
Entertainment Inc. (which is incorporated herein by reference to Exhibit 2(a) to TWCI's
Current Report on Form 8-K dated August 31, 1995 ('TWCI's August 1995 Form 8-K'))........ *
10.46 Restructuring Agreement dated as of August 31, 1995 between TWCI and Toshiba (including
Form of Registration Rights Agreement, between TWCI and Toshiba) (which is incorporated
herein by reference to Exhibit 2(b) to TWCI's August 1995 Form 8-K)...................... *
10.47 Option Agreement, dated as of September 15, 1993, between TWE and US West (which is
incorporated herein by reference to Exhibit 10.9 to TWE's 1993 Form 10-K)................ *
10.48 Contribution Agreement dated as of September 9, 1994 among TWE, Advance Publications, Inc.,
("Advance Publications'), Newhouse Broadcasting Corporation ('Newhouse'),
Advance/Newhouse Partnership ('Advance/Newhouse'), and TWE-A/N Partnership (which is
incorporated herein by reference to Exhibit 10(a) to TWE's Current Report on Form 8-K
dated September 9, 1994 ('TWE's September 1994 Form 8-K'))............................... *
10.49 Partnership Agreement, dated as of September 9, 1994, between TWE and Advance/Newhouse
(which is incorporated herein by reference to Exhibit 10(b) to TWE's September 1994 Form
8-K)..................................................................................... *
10.50 Letter Agreement dated April 1, 1995 among TWE, Advance/Newhouse, Advance Publications, and
Newhouse (which is incorporated herein by reference to Exhibit 10(c) to TWE's Current
Report on Form 8-K dated April 1, 1995).................................................. *
21 Subsidiaries of the Registrant.............................................................
23.1 Consent of Ernst & Young LLP, Independent Auditors.........................................
23.2 Consent of Price Waterhouse LLP, Independent Accountants...................................
27 Financial Data Schedule....................................................................
99.1 The 1994 financial statements of the Time Warner Service Partnerships and the report of
independent auditors thereon (which is incorporated by reference to TWE's 1994 Form
10-K).................................................................................... *
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- --------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
99.2 The unaudited financial statements of the Time Warner Service Partnerships for the
quarterly period ended September 30, 1995 (which is incorporated herein by reference to
the Current Report on Form 8-K of TWE dated November 28, 1995 ('TWE's November 1995 Form
8-K'))................................................................................... *
99.3 The 1994 financial statements and financial statement schedule of Paragon Communications
and the report of independent accountants thereon (which is incorporated herein by
reference to TWE's 1994 Form 10-K)....................................................... *
99.4 The unaudited financial statements of Paragon Communications for the quarterly period ended
June 30, 1995 (which is incorporated by reference to TWE's November 1995 Form 8-K)....... *
99.5 Annual Report on Form 11-K of the Time Warner Employees' Savings Plan for the period
December 31, 1995 to October 1, 1996 (to be filed by amendment)..........................
99.6 Annual Report on Form 11-K of the Time Warner Savings Plan for the year ended
December 31, 1996 (to be filed by amendment).............................................
99.7 Annual Report on Form 11-K of the Time Warner Thrift Plan for the year ended December 31,
1996 (to be filed by amendment)..........................................................
99.8 Annual Report on Form 11-K of the Cable Employees Savings Plan for the year ended December
31, 1996 (to be filed by amendment)......................................................
</TABLE>
- ------------
* Incorporated by reference.
The Registrant hereby agrees to furnish to the Securities and Exchange
Commission at its request copies of long-term debt instruments defining the
rights of holders of outstanding long-term debt that are not required to be
filed herewith.
<PAGE>
<PAGE>
CERTIFICATE OF CORRECTION
OF THE
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF SERIES E CONVERTIBLE
PREFERRED STOCK
OF
TIME WARNER INC.
--------------------
Pursuant to Section 103(f) of the General Corporation Law
of the State of Delaware
---------------------
TIME WARNER INC. (the "Corporation"), a corporation organized
and existing by virtue of the General Corporation Law of the State of Delaware
(the "DGCL"), DOES HEREBY CERTIFY:
1. The Certificate of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof, of Series E Convertible
Preferred Stock of the Corporation (hereinafter, the "Certificate") was filed
pursuant to Section 151 of the DGCL with the Secretary of State of the State of
Delaware on October 10, 1996.
<PAGE>
<PAGE>
2
2. The Certificate incorrectly states certain dates in Section
2.1 thereof, which requires correction as permitted by Section 103(f) of the
DGCL.
3. Section 2.1 of the Certificate is hereby deleted and
corrected to read in its entirety as follows:
"2.1 The holders of the outstanding Series E Stock shall be
entitled to receive quarter-annual dividends, as and when declared by
the Board of Directors out of funds legally available therefor. Each
quarter-annual dividend shall be an amount per share equal to (i) in
the case of each Dividend Payment Date (as defined below) occurring on
or prior to January 4, 2001, the greater of (A) $.9375 per $100 of
Liquidation Value of Series E Stock (which is equivalent to $3.75 per
annum), and (B) an amount per $100 of Liquidation Value of Series E
Stock equal to the product of (1) the Conversion Rate and (2) the
aggregate per share amount of regularly scheduled dividends paid in
cash on the Common Stock during the period from but excluding the
immediately preceding Dividend Payment Date to and including such
Dividend Payment Date (the "Preferred Dividend Amount"), and (ii) in
the case of each Dividend Payment Date occurring thereafter, an amount
per share of Series E Stock equal to the product of (1) the Conversion
Rate and (2) the aggregate per share amount of regularly scheduled
dividends paid in cash on the Common Stock during the period from but
excluding the immediately preceding Dividend Payment Date to and
including such Dividend Payment Date. All dividends shall be payable in
cash on or about the first day of March, June, September and December
in each year, as fixed by the Board of Directors, or such other dates
as are fixed by the Board of Directors (provided that January 4, 2001,
shall be a Dividend Payment Date) (each a "Dividend Payment Date"), to
the holders of record of Series E Stock at the close of business on or
about the Trading Day next preceding such first day of March,
<PAGE>
<PAGE>
3
June, September and December (or January 4, 2001) as the case may be,
as fixed by the Board of Directors, or such other dates as are fixed by
the Board of Directors (each a "Record Date"). Subject to the next
sentence, in the case of dividends payable in respect of periods prior
to January 4, 2001, (i) such dividends shall accrue on each share on a
daily basis, whether or not there are unrestricted funds legally
available for the payment of such dividends and whether or not declared
and (ii) any such dividends that become payable for any partial
dividend period shall be computed on the basis of the actual days
elapsed in such period. Notwithstanding the preceding sentence, the
amount accruing and payable in respect of the first dividend on the
Series E Stock payable after the date of the Certificate shall equal
the Preferred Dividend Amount. From and after January 4, 2001,
dividends on the Series E Stock (determined as to amount as provided
herein) shall accrue to the extent, but only to the extent, that
regularly scheduled cash dividends are declared by the Board of
Directors on the Common Stock with a payment date after January 4, 2001
(or, in the case of Series E Stock originally issued after January 4,
2001, after the Dividend Payment Date next preceding such date of
original issuance). All dividends that accrue in accordance with the
foregoing provisions shall be cumulative from and after the day
immediately succeeding the date of issuance. The amount payable to each
holder of record on any Dividend Payment Date shall be rounded to the
nearest cent."
<PAGE>
<PAGE>
4
IN WITNESS WHEREOF, Time Warner Inc. has caused this
Certificate to be signed this 11th day of November, 1996.
TIME WARNER INC.,
by /s/ Thomas W. McEnerney
--------------------------
Name: Thomas W. McEnerney
Title: Vice President
<PAGE>
<PAGE>
CERTIFICATE OF CORRECTION
OF THE
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF SERIES F CONVERTIBLE
PREFERRED STOCK
OF
TIME WARNER INC.
--------------------
Pursuant to Section 103(f) of the General Corporation Law
of the State of Delaware
---------------------
TIME WARNER INC. (the "Corporation"), a corporation organized
and existing by virtue of the General Corporation Law of the State of Delaware
(the "DGCL"), DOES HEREBY CERTIFY:
1. The Certificate of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof, of Series F Convertible
Preferred Stock of the Corporation (hereinafter, the "Certificate") was filed
pursuant to Section 151 of the DGCL with the Secretary of State of the State of
Delaware on October 10, 1996.
<PAGE>
<PAGE>
2
2. The Certificate incorrectly states certain dates in Section
2.1 thereof, which requires correction as permitted by Section 103(f) of the
DGCL.
3. Section 2.1 of the Certificate is hereby deleted and
corrected to read in its entirety as follows:
"2.1 The holders of the outstanding Series F Stock shall be
entitled to receive quarter-annual dividends, as and when declared by
the Board of Directors out of funds legally available therefor. Each
quarter-annual dividend shall be an amount per share equal to (i) in
the case of each Dividend Payment Date (as defined below) occurring on
or prior to January 4, 2000, the greater of (A) $.9375 per $100 of
Liquidation Value of Series F Stock (which is equivalent to $3.75 per
annum), and (B) an amount per $100 of Liquidation Value of Series F
Stock equal to the product of (1) the Conversion Rate and (2) the
aggregate per share amount of regularly scheduled dividends paid in
cash on the Common Stock during the period from but excluding the
immediately preceding Dividend Payment Date to and including such
Dividend Payment Date (the "Preferred Dividend Amount"), and (ii) in
the case of each Dividend Payment Date occurring thereafter, an amount
per share of Series F Stock equal to the product of (1) the Conversion
Rate and (2) the aggregate per share amount of regularly scheduled
dividends paid in cash on the Common Stock during the period from but
excluding the immediately preceding Dividend Payment Date to and
including such Dividend Payment Date. All dividends shall be payable in
cash on or about the first day of March, June, September and December
in each year, as fixed by the Board of Directors, or such other dates
as are fixed by the Board of Directors (provided that January 4, 2000,
shall be a Dividend Payment Date) (each a "Dividend Payment Date"), to
the holders of record of Series F Stock at the close of business on or
about the Trading Day next preceding such first day of March,
<PAGE>
<PAGE>
3
June, September and December (or January 4, 2000) as the case may be,
as fixed by the Board of Directors, or such other dates as are fixed by
the Board of Directors (each a "Record Date"). Subject to the next
sentence, in the case of dividends payable in respect of periods prior
to January 4, 2000, (i) such dividends shall accrue on each share on a
daily basis, whether or not there are unrestricted funds legally
available for the payment of such dividends and whether or not declared
and (ii) any such dividends that become payable for any partial
dividend period shall be computed on the basis of the actual days
elapsed in such period. Notwithstanding the preceding sentence, the
amount accruing and payable in respect of the first dividend on the
Series F Stock payable after the date of the Certificate shall equal
the Preferred Dividend Amount. From and after January 4, 2000,
dividends on the Series F Stock (determined as to amount as provided
herein) shall accrue to the extent, but only to the extent, that
regularly scheduled cash dividends are declared by the Board of
Directors on the Common Stock with a payment date after January 4, 2000
(or, in the case of Series F Stock originally issued after January 4,
2000, after the Dividend Payment Date next preceding such date of
original issuance). All dividends that accrue in accordance with the
foregoing provisions shall be cumulative from and after the day
immediately succeeding the date of issuance. The amount payable to each
holder of record on any Dividend Payment Date shall be rounded to the
nearest cent."
<PAGE>
<PAGE>
4
IN WITNESS WHEREOF, Time Warner Inc. has caused this
Certificate to be signed this 11th day of November, 1996.
TIME WARNER INC.,
by /s/ Thomas W. McEnerney
--------------------------
Name: Thomas W. McEnerney
Title: Vice President
<PAGE>
<PAGE>
BY-LAWS
OF
TIME WARNER INC.
Incorporated under the Laws of the State of Delaware
Effective November 21, 1996
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I: Offices 1
Registered Office................................................................... 1
Other Offices....................................................................... 1
ARTICLE II: Meetings of Stockholders 1
Place of Meeting.................................................................... 1
Annual Meetings..................................................................... 1
Special Meetings.................................................................... 2
Notice of Meetings.................................................................. 2
Quorum.............................................................................. 2
Adjournments........................................................................ 3
Order of Business................................................................... 3
List of Stockholders................................................................ 5
Voting.............................................................................. 5
Inspectors.......................................................................... 6
Public Announcements................................................................ 6
ARTICLE III: Board of Directors 7
General Powers...................................................................... 7
Number, Qualification and Election.................................................. 7
Notification of Nominations..........................................................8
Quorum and Manner of Acting.........................................................10
Place of Meeting....................................................................10
Regular Meetings....................................................................10
Special Meetings....................................................................10
Notice of Meetings..................................................................10
Rules and Regulations...............................................................11
Participation in Meeting by Means of
Communications Equipment.....................................................11
Action without Meeting..............................................................11
Resignations........................................................................11
Removal of Directors................................................................12
Vacancies...........................................................................12
Compensation........................................................................12
Independent Directors...............................................................12
</TABLE>
i
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<PAGE>
<TABLE>
<S> <C>
ARTICLE IV: Committees of the Board of Directors 13
Establishment of Committees of the Board of
Directors; Election of Members of Committees
of the Board of Directors; Functions of
Committees of the Board of Directors.........................................13
Procedure; Meetings; Quorum.........................................................14
ARTICLE V: Officers 15
Number; Term of Office..............................................................15
Removal.............................................................................16
Resignation.........................................................................16
Vacancies...........................................................................16
Chairman of the Board...............................................................16
Chief Executive Officer.............................................................16
The President.......................................................................17
Chief Operating Officer ............................................................17
Vice-Chairman of the Board..........................................................17
Chairman of the Executive Committee.................................................17
Chief Financial Officer.............................................................18
Vice-Presidents.....................................................................18
Treasurer...........................................................................18
Controller..........................................................................19
Secretary...........................................................................19
Assistant Treasurers and Assistant
Secretaries..................................................................19
ARTICLE VI: Indemnification 20
Right to Indemnification............................................................20
Insurance, Contracts and Funding....................................................21
Indemnification Not Exclusive Right.................................................21
Advancement of Expenses; Procedures; Presumptions
and Effect of Certain Proceedings; Remedies..................................21
Severability........................................................................26
Indemnification of Employees Serving
as Directors.................................................................27
Indemnification of Employees and Agents.............................................27
ARTICLE VII: Capital Stock 28
Certificates for Shares.............................................................28
Transfer of Shares..................................................................28
Registered Stockholders and Addresses
of Stockholders..............................................................29
</TABLE>
ii
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<PAGE>
<TABLE>
<S> <C>
Lost, Destroyed and Mutilated Certificates..........................................29
Regulations.........................................................................30
Fixing Date for Determination of
Stockholders of Record.......................................................30
Transfer Agents and Registrars......................................................30
ARTICLE VIII: Seal 31
ARTICLE IX: Fiscal Year 31
ARTICLE X: Waiver of Notice 31
ARTICLE XI: Amendments 31
ARTICLE XII: Miscellaneous 32
Execution of Documents..............................................................32
Deposits............................................................................32
Checks..............................................................................32
Proxies in Respect of Stock or Other
Securities of Other Corporations.............................................33
Subject to Law and Certificate of
Incorporation................................................................33
</TABLE>
iii
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<PAGE>
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of Time
Warner Inc. (hereinafter called the Corporation) in the State of Delaware shall
be at 32 Loockerman Square, Suite L-100, Dover, Delaware 19901 and the
registered agent shall be The Prentice-Hall Corporation System, Inc., or such
other office or agent as the Board of Directors of the Corporation (the "Board")
shall from time to time select.
SECTION 2. Other Offices. The Corporation may also have an office
or offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board may from time to time determine or
the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of Meeting. All meetings of the stockholders of
the Corporation (the "stockholders") shall be held at the office of the
Corporation or at such other places, within or without the State of Delaware, as
may from time to time be fixed by the Board.
SECTION 2. Annual Meetings. The annual meeting of the
stockholders for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held on such date and
at such hour as shall from time to time be fixed by the Board. Any previously
scheduled annual meeting of the stockholders may be postponed by action of the
Board taken prior to the time previously scheduled for such annual meeting of
stockholders.
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<PAGE>
SECTION 3. Special Meetings. Except as otherwise required by law
or the Restated Certificate of Incorporation of the Corporation (the
"Certificate") and subject to the rights of the holders of any series of
Preferred Stock or Series Common Stock or any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, special
meetings of the stockholders for any purpose or purposes may be called by the
Chairman, either Co-Chief Executive Officer, or the President or a majority of
the entire Board. Only such business as is specified in the notice of any
special meeting of the stockholders shall come before such meeting.
SECTION 4. Notice of Meetings. Except as otherwise provided by
law, written notice of each meeting of the stockholders, whether annual or
special, shall be given, either by personal delivery or by mail, not less than
10 nor more than 60 days before the date of the meeting to each stockholder of
record entitled to notice of the meeting. If mailed, such notice shall be deemed
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall attend such meeting in person
or by proxy without protesting, prior to or at the commencement of the meeting,
the lack of proper notice to such stockholder, or who shall waive notice thereof
as provided in Article X of these By-laws. Notice of adjournment of a meeting of
stockholders need not be given if the time and place to which it is adjourned
are announced at such meeting, unless the adjournment is for more than 30 days
or, after adjournment, a new record date is fixed for the adjourned meeting.
SECTION 5. Quorum. Except as otherwise provided by law or by the
Certificate, the holders of a majority of the votes entitled to be cast by the
stockholders entitled to vote generally, present in person or by proxy, shall
constitute a quorum at any meeting of the stockholders; provided, however, that
in the case of any vote to be taken by classes, the holders of a majority of the
votes entitled to be cast by the stockholders of a particular
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<PAGE>
class, present in person or by proxy, shall constitute a quorum of such class.
SECTION 6. Adjournments. The chairman of the meeting or the
holders of a majority of the votes entitled to be cast by the stockholders who
are present in person or by proxy may adjourn the meeting from time to time
whether or not a quorum is present. In the event that a quorum does not exist
with respect to any vote to be taken by a particular class, the chairman of the
meeting or the holders of a majority of the votes entitled to be cast by the
stockholders of such class who are present in person or by proxy may adjourn the
meeting with respect to the vote(s) to be taken by such class. At any such
adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally called.
SECTION 7. Order of Business. At each meeting of the
stockholders, the Chairman or, in the absence of the Chairman, the President, or
in the absence of both the Chairman and the President, such person as shall be
selected by the Board shall act as chairman of the meeting. The order of
business at each such meeting shall be as determined by the chairman of the
meeting. The chairman of the meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of the meeting,
including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the Corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof, and the opening
and closing of the voting polls.
At any annual meeting of stockholders, only such business shall
be conducted as shall have been brought before the annual meeting (i) by or at
the direction of the chairman of the meeting or (ii) by any stockholder who is a
holder of record at the time of the giving of the notice provided for in this
Section 7, who is entitled to vote at the meeting and who complies with the
procedures set forth in this Section 7.
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<PAGE>
For business properly to be brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation (the "Secretary"). To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 70 days nor
more than 120 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days earlier or more than 60 days later than such
anniversary date, notice by the stockholder to be timely must be so delivered or
received not earlier than the 120th day prior to such annual meeting and not
later than the close of business on the later of the 70th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made. To be in proper written form, a
stockholder's notice to the Secretary shall set forth in writing as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting; (ii) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business; (iii) the class and number of shares of the Corporation
which are beneficially owned by the stockholder; (iv) any material interest of
the stockholder in such business; and (v) if the stockholder intends to solicit
proxies in support of such stockholder's proposal, a representation to that
effect. The foregoing notice requirements shall be deemed satisfied by a
stockholder if the stockholder has notified the Corporation of his or her
intention to present a proposal at an annual meeting and such stockholder's
proposal has been included in a proxy statement that has been prepared by
management of the Corporation to solicit proxies for such annual meeting;
provided, however, that if such stockholder does not appear or send a qualified
representative to present such proposal at such annual meeting, the Corporation
need not present such proposal for a vote at such meeting, notwithstanding that
proxies in respect of such vote may have been received by the Corporation.
Notwithstanding anything in the By-laws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 7. The chairman of an annual meeting may refuse to permit
any
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<PAGE>
business to be brought before an annual meeting which fails to comply with the
foregoing procedures or, in the case of a stockholder proposal, if the
stockholder solicits proxies in support of such stockholder's proposal without
having made the representation required by clause (v) of the second preceding
sentence.
SECTION 8. List of Stockholders. It shall be the duty of the
Secretary or other officer who has charge of the stock ledger to prepare and
make, at least 10 days before each meeting of the stockholders, a complete list
of the stockholders entitled to vote thereat, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in such stockholder's name. Such list shall be produced and kept available at
the times and places required by law.
SECTION 9. Voting. Except as otherwise provided by law or by the
Certificate, each stockholder of record of any series of Preferred Stock or
Series Common Stock shall be entitled at each meeting of stockholders to such
number of votes, if any, for each share of such stock as may be fixed in the
Certificate or in the resolution or resolutions adopted by the Board providing
for the issuance of such stock, and each stockholder of record of Common Stock
shall be entitled at each meeting of stockholders to one vote for each share of
such stock, in each case, registered in such stockholder's name on the books of
the Corporation:
(1) on the date fixed pursuant to Section 6 of Article VII of
these By-laws as the record date for the determination of stockholders
entitled to notice of and to vote at such meeting; or
(2) if no such record date shall have been so fixed, then at the
close of business on the day next preceding the day on which notice of
such meeting is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held.
Each stockholder entitled to vote at any meeting of stockholders
may authorize not in excess of three persons to act for such stockholder by
proxy. Any such proxy shall be delivered
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<PAGE>
to the secretary of such meeting at or prior to the time designated for holding
such meeting, but in any event not later than the time designated in the order
of business for so delivering such proxies. No such proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period.
At each meeting of the stockholders, all corporate actions to be
taken by vote of the stockholders (except as otherwise required by law and
except as otherwise provided in the Certificate or these By-laws) shall be
authorized by a majority of the votes cast by the stockholders entitled to vote
thereon who are present in person or represented by proxy, and where a separate
vote by class is required, a majority of the votes cast by the stockholders of
such class who are present in person or represented by proxy shall be the act of
such class.
Unless required by law or determined by the chairman of the
meeting to be advisable, the vote on any matter, including the election of
directors, need not be by written ballot. In the case of a vote by written
ballot, each ballot shall be signed by the stockholder voting, or by such
stockholder's proxy, and shall state the number of shares voted.
SECTION 10. Inspectors. The chairman of the meeting shall appoint
two or more inspectors to act at any meeting of stockholders. Such inspectors
shall perform such duties as shall be required by law or specified by the
chairman of the meeting. Inspectors need not be stockholders. No director or
nominee for the office of director shall be appointed such inspector.
SECTION 11. Public Announcements. For purpose of Section 7 of
this Article II and Section 3 of Article III, "public announcement" shall mean
disclosure (i) in a press release reported by the Dow Jones News Service,
Reuters Information Service or any similar or successor news wire service or
(ii) in a writing distributed generally to stockholders and in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934 or
any successor provisions thereto.
-6-
<PAGE>
<PAGE>
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the
Corporation shall be managed by or under the direction of the Board, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate directed or required to be
exercised or done by the stockholders.
SECTION 2. Number, Qualification and Election. Except as
otherwise fixed by or pursuant to the provisions of Article IV of the
Certificate relating to the rights of the holders of any series of Preferred
Stock or Series Common Stock or any class or series of stock having preference
over the Common Stock as to dividends or upon liquidation, the number of
directors of the Corporation shall be determined from time to time by the Board
by the affirmative vote of directors constituting at least a majority of the
entire Board; provided that the number thereof may not be less than three.
The directors, other than those who may be elected by the holders
of shares of any series of Preferred Stock or Series Common Stock or any class
or series of stock having a preference over the Common Stock of the Corporation
as to dividends or upon liquidation pursuant to the terms of Article IV of the
Certificate or any resolution or resolutions providing for the issuance of such
stock adopted by the Board, shall be classified, with respect to the time for
which they severally hold office, into three classes as nearly equal in number
as possible, with each class to hold office until its successors are elected and
qualified. If the number of directors is changed by the Board, any newly created
directorships or any decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal as possible; provided, however,
that no decrease in the number of directors shall shorten the term of any
incumbent director. Subject to the rights of the holders of any series of
Preferred Stock or Series Common Stock or any class or series of stock having a
preference over the Common Stock of the Corporation as to dividends or upon
liquidation, at each such annual meeting of the stockholders, the
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<PAGE>
successors of the class of directors whose term expires at that meeting shall be
elected to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election.
Each director shall be at least 21 years of age. Directors need
not be stockholders of the Corporation.
In any election of directors, the persons receiving a plurality
of the votes cast, up to the number of directors to be elected in such election,
shall be deemed elected.
SECTION 3. Notification of Nominations. Subject to the rights of
the holders of any series of Preferred Stock or Series Common Stock or any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation, nominations for the election of directors may be made by the
Board or by any stockholder who is a stockholder of record at the time of giving
of the notice of nomination provided for in this Section 3 and who is entitled
to vote for the election of directors. Any stockholder of record entitled to
vote for the election of directors at a meeting may nominate persons for
election as directors only if timely written notice of such stockholder's intent
to make such nomination is given, either by personal delivery or by United
States mail, postage prepaid, to the Secretary. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation (i) with respect to an election to be held at an
annual meeting of stockholders, not less than 70 nor more than 120 days prior to
the anniversary date of the immediately preceding annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days earlier or more than 60 days later than such anniversary date, notice by
the stockholder to be timely must be so delivered or received not earlier than
the 120th day prior to such annual meeting and not later than the close of
business on the later of the 70th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such meeting
is first made and (ii) with respect to an election to be held at a special
meeting of stockholders for the election of directors, not earlier than the 90th
day prior to such special meeting and not later than the close of business on
the
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<PAGE>
later of the 60th day prior to such special meeting or the 10th day following
the day on which public announcement is first made of the date of the special
meeting and of the nominees to be elected at such meeting. Each such notice
shall set forth: (a) the name and address of the stockholder who intends to make
the nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the Board; (e) the
consent of each nominee to serve as a director of the Corporation if so elected
and (f) if the stockholder intends to solicit proxies in support of such
stockholder's nominee(s), a representation to that effect. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure or if the stockholder solicits proxies
in favor of such stockholder's nominee(s) without having made the representation
required by the immediately preceding sentence. Only such persons who are
nominated in accordance with the procedures set forth in this Section 3 shall be
eligible to serve as directors of the Corporation.
Notwithstanding anything in the immediately preceding paragraph
of this Section 3 to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation at an annual meeting of
stockholders is increased and there is no public announcement naming all of the
nominees for directors or specifying the size of the increased Board of
Directors made by the Corporation at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a shareholder's notice
required by this Section 3 shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered to or
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mailed to and received by the secretary at the principal executive offices of
the Corporation not later than the close of business on the 10th day following
the day on which such public announcement is first made by the Corporation.
SECTION 4. Quorum and Manner of Acting. Except as otherwise
provided by law, the Certificate or these By-laws, a majority of the entire
Board shall constitute a quorum for the transaction of business at any meeting
of the Board, and, except as so provided, the vote of a majority of the
directors present at any meeting at which a quorum is present shall be the act
of the Board. The chairman of the meeting or a majority of the directors present
may adjourn the meeting to another time and place whether or not a quorum is
present. At any adjourned meeting at which a quorum is present, any business may
be transacted which might have been transacted at the meeting as originally
called.
SECTION 5. Place of Meeting. The Board may hold its meetings at
such place or places within or without the State of Delaware as the Board may
from time to time determine or as shall be specified or fixed in the respective
notices or waivers of notice thereof.
SECTION 6. Regular Meetings. Regular meetings of the Board shall
be held at such times and places as the Board shall from time to time by
resolution determine. If any day fixed for a regular meeting shall be a legal
holiday under the laws of the place where the meeting is to be held, the meeting
which would otherwise be held on that day shall be held at the same hour on the
next succeeding business day.
SECTION 7. Special Meetings. Special meetings of the Board shall
be held whenever called by the Chairman, either Co- Chief Executive Officer, or
the President or by a majority of the directors.
SECTION 8. Notice of Meetings. Notice of regular meetings of the
Board or of any adjourned meeting thereof need not be given. Notice of each
special meeting of the Board shall be given by overnight delivery service or
mailed to each director, in either case addressed to such director at such
director's residence
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or usual place of business, at least two days before the day on which the
meeting is to be held or shall be sent to such director at such place by
telegraph or telecopy or be given personally or by telephone, not later than the
day before the meeting is to be held, but notice need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of such notice or who shall attend such meeting without protesting, prior to or
at its commencement, the lack of notice to such director. Every such notice
shall state the time and place but need not state the purpose of the meeting.
SECTION 9. Rules and Regulations. The Board may adopt such rules
and regulations not inconsistent with the provisions of law, the Certificate or
these By-laws for the conduct of its meetings and management of the affairs of
the Corporation as the Board may deem proper.
SECTION 10. Participation in Meeting by Means of Communications
Equipment. Any one or more members of the Board or any committee thereof may
participate in any meeting of the Board or of any such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at such meeting.
SECTION 11. Action without Meeting. Any action required or
permitted to be taken at any meeting of the Board or any committee thereof may
be taken without a meeting if all of the members of the Board or of any such
committee consent thereto in writing and the writing or writings are filed with
the minutes or proceedings of the Board or of such committee.
SECTION 12. Resignations. Any director of the Corporation may at
any time resign by giving written notice to the Board, the Chairman, the
President or the Secretary. Such resignation shall take effect at the time
specified therein or, if the time be not specified therein, upon receipt
thereof; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
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SECTION 13. Removal of Directors. Directors may be removed only
as provided in Section 4 of Article VI of the Certificate.
SECTION 14. Vacancies. Subject to the rights of the holders of
any series of Preferred Stock or Series Common Stock or any class or series of
stock having a preference over the Common Stock of the Corporation as to
dividends or upon liquidation, any vacancies on the Board resulting from death,
resignation, removal or other cause shall only be filled by the Board by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board, or by a sole remaining director, and
newly created directorships resulting from any increase in the number of
directors shall be filled by the Board, or if not so filled, by the stockholders
at the next annual meeting thereof or at a special meeting called for that
purpose in accordance with Section 3 of Article II of these By-laws. Any
director elected in accordance with the preceding sentence of this Section 14
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified.
SECTION 15. Compensation. Each director, in consideration of such
person serving as a director, shall be entitled to receive from the Corporation
such amount per annum and such fees (payable in cash or stock) for attendance at
meetings of the Board or of committees of the Board, or both, as the Board shall
from time to time determine. In addition, each director shall be entitled to
receive from the Corporation reimbursement for the reasonable expenses incurred
by such person in connection with the performance of such person's duties as a
director. Nothing contained in this Section shall preclude any director from
serving the Corporation or any of its subsidiaries in any other capacity and
receiving proper compensation therefor.
SECTION 16. Independent Directors.
(a) Independence of Members of Board of Directors at Time
of Nomination. At the time that the Board determines the slate of directors for
election at an Annual Meeting of
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Stockholders, a majority of the members of the Board, assuming the election of
the nominated slate and taking into account resignations effective on or prior
to such Annual Meeting, shall be determined by the Board to be eligible to be
classified as independent directors.
(b) Directors Elected to Fill Vacancies on the Board or
Newly Created Directorships. If the Board elects directors between Annual
Meetings of Stockholders to fill vacancies or newly created directorships, the
majority of all directors holding office immediately after such elections shall
be determined by the Board to be eligible to be classified as independent
directors.
(c) Determination of Independence of Directors. In its
determination of a director's eligibility to be classified as an independent
director pursuant to this Section 16, the Board shall consider, among such other
factors as it may in any case deem relevant, that the director: (i) has not been
employed by the Corporation as an executive officer within the past three years;
(ii) is not a paid adviser or consultant to the Corporation and derives no
financial benefit from any entity as a result of advice or consultancy provided
to the Corporation by such entity; (iii) is not an executive officer, director
or significant stockholder of a significant customer or supplier of the
Corporation; (iv) has no personal services contract with the Corporation; (v) is
not an executive officer or director of a tax-exempt entity receiving a
significant part of its annual contributions from the Corporation; (vi) is not a
member of the immediate family of any director who is not considered an
independent director; and (vii) is free of any other relationship that would
interfere with the exercise of independent judgment by such director.
ARTICLE IV
Committees of the Board of Directors
SECTION 1. Establishment of Committees of the Board of Directors;
Election of Members of Committees of the Board of Directors; Functions of
Committees of the Board of Directors. The
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Board may, in accordance with and subject to the General Corporation Law of the
State of Delaware, from time to time establish committees of the Board to
exercise such powers and authorities of the Board, and to perform such other
functions, as the Board may from time to time determine.
SECTION 2. Procedure; Meetings; Quorum. Regular meetings of
committees of the Board, of which no notice shall be necessary, may be held at
such times and places as shall be fixed by resolution adopted by a majority of
the members thereof. Special meetings of any committee of the Board shall be
called at the request of any member thereof. Notice of each special meeting of
any committee of the Board shall be sent by overnight delivery service, or
mailed to each member thereof, in either case addressed to such member at such
member's residence or usual place of business, at least two days before the day
on which the meeting is to be held or shall be sent to such member at such place
by telegraph or telecopy or be given personally or by telephone, not later than
the day before the meeting is to be held, but notice need not be given to any
member who shall, either before or after the meeting, submit a signed waiver of
such notice or who shall attend such meeting without protesting, prior to or at
its commencement, the lack of such notice to such member. Any special meeting of
any committee of the Board shall be a legal meeting without any notice thereof
having been given, if all the members thereof shall be present thereat and no
member shall protest the lack of notice to such member. Notice of any adjourned
meeting of any committee of the Board need not be given. Any committee of the
Board may adopt such rules and regulations not inconsistent with the provisions
of law, the Certificate or these By-laws for the conduct of its meetings as such
committee of the Board may deem proper. A majority of the members of any
committee of the Board shall constitute a quorum for the transaction of business
at any meeting, and the vote of a majority of the members thereof present at any
meeting at which a quorum is present shall be the act of such committee. Each
committee of the Board shall keep written minutes of its proceedings and shall
report on such proceedings to the Board.
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ARTICLE V
Officers
SECTION 1. Number; Term of Office. The officers of the
Corporation shall be such officers, which may include a Chairman of the Board,
Chief Executive Officer or Co-Chief Executive Officers, President, Chief
Operating Officer, Chairman of the Executive Committee and one or more Vice
Chairmen and Vice Presidents (including, without limitation, Assistant,
Executive, Senior and Group Vice Presidents) and a Treasurer, Secretary and
Controller and such other officers or agents with such titles and such duties as
the Board may from time to time determine, each to have such authority,
functions or duties as in these By-laws provided or as the Board may from time
to time determine, and each to hold office for such term as may be prescribed by
the Board and until such person's successor shall have been chosen and shall
qualify, or until such person's death or resignation, or until such person's
removal in the manner hereinafter provided. The Chairman, the Chief Executive
Officers, the Vice-Chairmen, the Chairman of the Executive Committee, and the
President, if any, shall be elected from among the directors. One person may
hold the offices and perform the duties of any two or more of said officers;
provided, however, that no officer shall execute, acknowledge or verify any
instrument in more than one capacity if such instrument is required by law, the
Certificate or these By-laws to be executed, acknowledged or verified by two or
more officers. The Board may from time to time authorize any officer to appoint
and remove any such other officers and agents and to prescribe their powers and
duties. The Board may require any officer or agent to give security for the
faithful performance of such person's duties.
Except as otherwise provided by these By-laws, any reference to
the Chairman or Chief Executive Officer in these Bylaws shall be deemed to mean,
if there are Co-Chairmen or Co-Chief Executive Officers, either Co-Chairmen or
either Co-Chief Executive Officer, each of whom may severally exercise the full
powers and authorities of the office of Chairman or Chief Executive Officer, as
the case may be.
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SECTION 2. Removal. Any officer may be removed, either with or
without cause, by the Board at any meeting thereof called for the purpose or,
except in the case of any officer elected by the Board, by any superior officer
upon whom such power may be conferred by the Board.
SECTION 3. Resignation. Any officer may resign at any time by
giving notice to the Board, the Chairman or the Secretary. Any such resignation
shall take effect at the date of receipt of such notice or at any later date
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these By-laws for election to such
office.
SECTION 5. Chairman of the Board. The Chairman shall, if present,
preside at meetings of the Board and, if present, preside at meetings of the
stockholders, and, if present and in the absence of the Chairman of the
Executive Committee, preside at meetings of the Executive Committee. The
Chairman may sign and execute in the name of the Corporation deeds, mortgages,
bonds, contracts or other instruments. The Chairman shall, when requested,
counsel with and advise the other officers of the Corporation and shall perform
such other duties as he may agree with the Chief Executive Officer or as the
Board may from time to time determine.
SECTION 6. Chief Executive Officer. The Chief Executive Officer
shall have general supervision and direction of the business and affairs of the
Corporation, subject to the control of the Board. The Chief Executive Officer
may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts or other instruments. The Chief Executive Officer shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other duties as the Board may from time to time determine.
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SECTION 7. The President. The President shall perform such senior
executive duties as the Board shall from time to time determine. The President
shall, if present and in the absence of the Chairman, preside at meetings of the
stockholders and, if present and in the absence of the Chairman, preside at
meetings of the Board and, if present and in the absence of the Chairman of the
Executive Committee and the Chairman of the Board, preside at meetings of the
Executive Committee. The President may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts or other instruments. The
President shall, when requested, counsel with and advise the other officers of
the Corporation and shall perform such other duties as he may agree with the
Chief Executive Officer or as the Board may from time to time determine.
SECTION 8. Chief Operating Officer. The Chief Operating Officer
shall perform such senior duties in connection with the operations of the
Corporation as the Board or the Chief Executive Officer shall from time to time
determine. The Chief Operating Officer may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts and other instruments. The Chief
Operating Officer, shall, when requested, counsel with and advise the other
officers of the Corporation and shall perform such other duties as he may agree
with the Chief Executive Officer or as the Board may from time to time
determine.
SECTION 9. Vice-Chairman of the Board. In the absence of the
Chairman of the Board and the President, the Vice-Chairman of the Board (the
"Vice Chairman") if one shall have been elected, or if there shall be more than
one, a Vice-Chairman as designated by the Chairman or the President, or, in the
absence of such designation, as designated by the Board, shall, if present,
preside at meetings of the Board. The Vice Chairman may sign and execute in the
name of the Corporation deeds, mortgages, bonds, contracts or other instruments.
The Vice Chairman shall, when requested, counsel with and advise the other
officers of the Corporation and shall perform such other duties as he may agree
with the Chief Executive Officer or as the Board may from time to time
determine.
SECTION 10. Chairman of the Executive Committee. The Chairman of
the Executive Committee shall, if present, preside at
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meetings of the Executive Committee. The Chairman of the Executive Committee
shall perform such other duties as the Board or the Executive Committee may from
time to time determine. The Chairman of the Executive Committee shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other duties as he may agree with the Chief Executive Officer
or as the Board may from time to time determine.
SECTION 11. Chief Financial Officer. The Chief Financial Officer
of the Corporation, if one shall have been elected, shall perform all the powers
and duties of the office of the chief financial officer and in general have
overall supervision of the financial operations of the Corporation. The Chief
Financial Officer may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments. The Chief Financial Officer
shall, when requested, counsel with and advise the other officers of the
Corporation and shall perform such other duties as he may agree with the Chief
Executive Officer or as the Board may from time to time determine.
SECTION 12. Vice-Presidents. Any Vice-President shall have such
powers and duties as shall be prescribed by his superior officer or the Board.
Any Vice-President may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments. The Vice President shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other duties as he may agree with the Chief Executive Officer
or as the Board may from time to time determine.
SECTION 13. Treasurer. The Treasurer, if one shall have been
elected, shall supervise and be responsible for all the funds and securities of
the Corporation; the deposit of all moneys and other valuables to the credit of
the Corporation in depositories of the Corporation; borrowings and compliance
with the provisions of all indentures, agreements and instruments governing such
borrowings to which the Corporation is a party; the disbursement of funds of the
Corporation and the investment of its funds; and in general shall perform all of
the duties incident to the office of the Treasurer. The Treasurer may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments. The Treasurer shall, when requested, counsel with and
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advise the other officers of the Corporation and shall perform such other duties
as he may agree with the Chief Executive Officer or as the Board may from time
to time determine.
SECTION 14. Controller. The Controller shall be the chief
accounting officer of the Corporation. The Controller may sign and execute in
the name of the Corporation deeds, mortgages, bonds, contracts or other
instruments. The Controller shall, when requested, counsel with and advise the
other officers of the Corporation and shall perform such other duties as he may
agree with the Chief Executive Officer or the Chief Financial Officer or as the
Board may from time to time determine.
SECTION 15. Secretary. It shall be the duty of the Secretary to
act as secretary at all meetings of the Board, of the committees of the Board
and of the stockholders and to record the proceedings of such meetings in a book
or books to be kept for that purpose; the Secretary shall see that all notices
required to be given by the Corporation are duly given and served; the Secretary
shall be custodian of the seal of the Corporation and shall affix the seal or
cause it to be affixed to all certificates of stock of the Corporation (unless
the seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and to all documents, the execution of which on behalf of
the Corporation under its seal is duly authorized in accordance with the
provisions of these By-laws; the Secretary shall have charge of the books,
records and papers of the Corporation and shall see that the reports, statements
and other documents required by law to be kept and filed are properly kept and
filed; and in general shall perform all of the duties incident to the office of
Secretary. The Secretary shall, when requested, counsel with and advise the
other officers of the Corporation and shall perform such other duties as he may
agree with the Chief Executive Officer or as the Board may from time to time
determine.
SECTION 16. Assistant Treasurers and Assistant Secretaries. Any
Assistant Treasurers and Assistant Secretaries shall perform such duties as
shall be assigned to them by the Board. Any Assistant Treasurer or Assistant
Secretary shall perform such duties as shall be assigned to them by the
Treasurer or Secretary, respectively, or by the Chairman of the Board or by
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the Chief Executive Officer.
ARTICLE VI
Indemnification
SECTION 1. Right to Indemnification. The Corporation, to the
fullest extent permitted or required by Delaware General Corporation Law or
other applicable law, as the same exists or may hereafter be amended (but, in
the case of any such amendment and unless applicable law otherwise requires,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), shall indemnify and hold harmless any person
who is or was a director or officer of the Corporation and who is or was
involved in any manner (including, without limitation, as a party or a witness)
or is threatened to be made so involved in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without limitation, any action, suit
or proceedings by or in the right of the Corporation to procure a judgment in
its favor) (a "Proceeding") by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including, without limitation, any employee benefit plan) (a "Covered Entity")
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in connection
with such Proceeding; provided, however, that the foregoing shall not apply to a
director or officer of the Corporation with respect to a Proceeding that was
commenced by such director or officer unless the proceeding was commenced after
a Change in Control (as hereinafter defined in Section 4(e) of this Article).
Any director or officer of the Corporation entitled to indemnification as
provided in this Section 1 is hereinafter called an "Indemnitee". Any right of
an Indemnitee to indemnification shall be a contract right and shall include the
right to receive, prior to the conclusion of any Proceeding, payment of any
expenses incurred by the Indemnitee in connection with such proceeding,
consistent with
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the provisions of applicable law as then in effect and the other provisions of
this Article.
SECTION 2. Insurance, Contracts and Funding. The Corporation may
purchase and maintain insurance to protect itself and any director, officer,
employee or agent of the Corporation or of any Covered Entity against any
expenses, judgments, fines and amounts paid in settlement as specified in
Section 1 of this Article or incurred by any such director, officer, employee or
agent in connection with any Proceeding referred to in Section 1 of this
Article, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the DGCL. The Corporation
may enter into contracts with any director, officer, employee or agent of the
Corporation or of any Covered Entity in furtherance of the provisions of this
Article and may create a trust fund, grant a security interest or use other
means (including, without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect indemnification as provided or
authorized in this Article.
SECTION 3. Indemnification Not Exclusive Right. The right of
indemnification provided in this Article shall not be exclusive of any other
rights to which an Indemnitee may otherwise be entitled, and the provisions of
this Article shall inure to the benefit of the heirs and legal representatives
of any Indemnitee under this Article and shall be applicable to Proceedings
commenced or continuing after the adoption of this Article, whether arising from
acts or omissions occurring before or after such adoption.
SECTION 4. Advancement of Expenses; Procedures; Presumptions and
Effect of Certain Proceedings; Remedies. In furtherance, but not in limitation
of the foregoing provisions, the following procedures, presumptions and remedies
shall apply with respect to advancement of expenses and the right to
indemnification under this Article:
(a) Advancement of Expenses. All reasonable expenses
(including attorney's fees) incurred by or on behalf of the Indemnitee in
connection with any Proceeding shall be advanced to the Indemnitee by the
Corporation within 20 days after the receipt by the Corporation of a statement
or statements from the
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Indemnitee requesting such advance or advances from time to time, whether prior
to or after final disposition of such Proceeding. Such statement or statements
shall reasonably evidence the expenses incurred by the Indemnitee and, if
required by law at the time of such advance, shall include or be accompanied by
an undertaking by or on behalf of the Indemnitee to repay the amounts advanced
if ultimately it should be determined that the Indemnitee is not entitled to be
indemnified against such expenses pursuant to this Article.
(b) Procedure for Determination of Entitlement to
Indemnification. (i) To obtain indemnification under this Article, an Indemnitee
shall submit to the Secretary a written request, including such documentation
and information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification (the "Supporting Documentation"). The determination of the
Indemnitee's entitlement to indemnification shall be made not later than 60 days
after receipt by the Corporation of the written request for indemnification
together with the Supporting Documentation. The Secretary shall, promptly upon
receipt of such a request for indemnification, advise the Board in writing that
the Indemnitee has requested indemnification.
(ii) The Indemnitee's entitlement to indemnification under
this Article shall be determined in one of the following ways: (A) by a majority
vote of the Disinterested Directors (as hereinafter defined in Section 4(e) of
this Article), whether or not they constitute a quorum of the Board; (B) by a
written opinion of Independent Counsel (as hereinafter defined in Section 4(e)
of this Article) if (x) a Change in Control (as hereinafter defined in Section
4(e) of this Article) shall have occurred and the Indemnitee so requests or (y)
there are no Disinterested Directors or a majority of such Disinterested
Directors so directs; (C) by the stockholders of the Corporation; or (D) as
provided in Section 4(c) of this Article.
(iii) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 4(b)
(ii) of this Article, a majority of the Disinterested Directors shall select the
Independent Counsel, but only an
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Independent Counsel to which the Indemnitee does not reasonably object;
provided, however, that if a Change in Control shall have occurred, the
Indemnitee shall select such Independent Counsel, but only an Independent
Counsel to which a majority of the Disinterested Directors does not reasonably
object.
(c) Presumptions and Effect of Certain Proceedings. Except
as otherwise expressly provided in this Article, if a Change in Control shall
have occurred, the Indemnitee shall be presumed to be entitled to
indemnification under this Article (with respect to actions or omissions
occurring prior to such Change in Control) upon submission of a request for
indemnification together with the Supporting Documentation in accordance with
Section 4(b)(i) of this Article, and thereafter the Corporation shall have the
burden of proof to overcome that presumption in reaching a contrary
determination. In any event, if the person or persons empowered under Section
4(b) of this Article to determine entitlement to indemnification shall not have
been appointed or shall not have made a determination within 60 days after
receipt by the Corporation of the request therefor, together with the Supporting
Documentation, the Indemnitee shall be deemed to be, and shall be, entitled to
indemnification unless (A) the Indemnitee misrepresented or failed to disclose a
material fact in making the request for indemnification or in the Supporting
Documentation or (B) such indemnification is prohibited by law. The termination
of any Proceeding described in Section 1 of this Article, or of any claim, issue
or matter therein, by judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, adversely affect the
right of the Indemnitee to indemnification or create a presumption that the
Indemnitee did not act in good faith and in a manner which the Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Corporation or, with respect to any criminal proceeding, that the Indemnitee had
reasonable cause to believe that such conduct was unlawful.
(d) Remedies of Indemnitee. (i) In the event that a
determination is made pursuant to Section 4(b) of this Article that the
Indemnitee is not entitled to indemnification under this Article, (A) the
Indemnitee shall be entitled to seek an adjudication of entitlement to such
indemnification either, at the
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Indemnitee's sole option, in (x) an appropriate court of the State of Delaware
or any other court of competent jurisdiction or (y) an arbitration to be
conducted by a single arbitrator pursuant to the rules of the American
Arbitration Association; (B) any such judicial proceeding or arbitration shall
be de novo and the Indemnitee shall not be prejudiced by reason of such adverse
determination; and (C) if a Change in Control shall have occurred, in any such
judicial proceeding or arbitration, the Corporation shall have the burden of
proving that the Indemnitee is not entitled to indemnification under this
Article (with respect to actions or omissions occurring prior to such Change in
Control).
(ii) If a determination shall have been made or deemed to
have been made, pursuant to Section 4(b) or (c) of this Article, that the
Indemnitee is entitled to indemnification, the Corporation shall be obligated to
pay the amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination unless (A) the Indemnitee
misrepresented or failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (B) such indemnification
is prohibited by law. In the event that (X) advancement of expenses is not
timely made pursuant to Section 4(a) of this Article or (Y) payment of
indemnification is not made within five days after a determination of
entitlement to indemnification has been made or deemed to have been made
pursuant to Section 4(b) or (c) of this Article, the Indemnitee shall be
entitled to seek judicial enforcement of the Corporation's obligation to pay to
the Indemnitee such advancement of expenses or indemnification. Notwithstanding
the foregoing, the Corporation may bring an action, in an appropriate court in
the State of Delaware or any other court of competent jurisdiction, contesting
the right of the Indemnitee to receive indemnification hereunder, due to the
occurrence of an event described in sub-clause (A) or (B) of this clause (ii) (a
"Disqualifying Event"); provided, however, that in any such action the
Corporation shall have the burden of proving the occurrence of such
Disqualifying Event.
(iii) The Corporation shall be precluded from asserting in
any judicial proceeding or arbitration commenced pursuant to this Section 4(d)
that the procedures and presumptions
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of this Article are not valid, binding and enforceable and shall stipulate in
any such court or before any such arbitrator that the Corporation is bound by
all the provisions of this Article.
(iv) In the event that the Indemnitee, pursuant to this
Section 4(d), seeks a judicial adjudication of or an award in arbitration to
enforce rights under, or to recover damages for breach of, this Article, the
Indemnitee shall be entitled to recover from the Corporation, and shall be
indemnified by the Corporation against, any expenses actually and reasonably
incurred by the Indemnitee if the Indemnitee prevails in such judicial
adjudication or arbitration. If it shall be determined in such judicial
adjudication or arbitration that the Indemnitee is entitled to receive part but
not all of the indemnification or advancement of expenses sought, the expenses
incurred by the Indemnitee in connection with such judicial adjudication or
arbitration shall be prorated accordingly.
(e) Definitions. For purposes of this Section 4:
(i) "Authorized Officer" means any one of the Chairman,
the President, a Vice Chairman, the Chief Financial Officer, any Vice President
or the Secretary of the Corporation.
(ii) "Change in Control" means the occurrence of any of
the following (w) any merger or consolidation of the Corporation in which the
Corporation is not the continuing or surviving corporation or pursuant to which
shares of the Corporation's Common Stock would be converted into cash,
securities or other property, other than a merger of the Corporation in which
the holders of the Corporation's Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, (x) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, the assets of the Corporation, or the liquidation or
dissolution of the Corporation, (y) any person (as such term is defined in
Section 4(c) of Article V of the Certificate of Incorporation) shall become an
Interested Stockholder (as defined therein) without the prior consent of the
Board, or (z) during any period of two consecutive years, individuals who at the
beginning of such period who shall
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have constituted the entire Board shall have ceased for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
Corporation's stockholders, of each new director shall have been approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(iii) "Disinterested Director" means a director of the
Corporation who is not or was not a party to the Proceeding in respect of which
indemnification is sought by the Indemnitee.
(iv) "Independent Counsel" means a law firm or a member of
a law firm that neither presently is, nor in the past five years has been,
retained to represent: (x) the Corporation or the Indemnitee in any matter
material to either such party or (y) any other party to the Proceeding giving
rise to a claim for indemnification under this Article. Notwithstanding the
foregoing, the term "Independent Counsel" shall not include any person who,
under the applicable standards of professional conduct then prevailing under the
law of the State of Delaware, would have a conflict of interest in representing
either the Corporation or the Indemnitee in an action to determine the
Indemnitee's rights under this Article.
SECTION 5. Severability. If any provision or provisions of this
Article shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Article (including, without limitation, all portions of any
paragraph of this Article containing any such provision held to be invalid,
illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (b) to
the fullest extent possible, the provisions of this Article (including, without
limitation, all portions of any paragraph of this Article containing any such
provision held to be invalid, illegal or unenforceable, that are not themselves
invalid, illegal or enforceable) shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable.
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SECTION 6. Indemnification of Employees Serving as Directors. The
Corporation, to the fullest extent of the provisions of this Article with
respect to the indemnification of directors and officers of the Corporation,
shall indemnify any person who is or was an employee of the Corporation and who
is or was involved in any manner (including, without limitation, as a party or a
witness) or is threatened to be made so involved in any threatened, pending or
completed Proceeding by reason of the fact that such employee is or was serving
(a) as a director of a corporation in which the Corporation had at the time of
such service, directly or indirectly, a 50 percent or greater equity interest (a
"Subsidiary Director") and (b) at the written request of an Authorized Officer,
as a director of another corporation in which the Corporation had at the time of
such service, directly or indirectly, a less than 50 percent equity interest (or
no equity interest at all) or in a capacity equivalent to that of a director for
any partnership, joint venture, trust or other enterprise (including, without
limitation, any employee benefit plan) in which the Corporation has an interest
(a "Requested Employee"), against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such Subsidiary Director or Requested Employee in connection with such
Proceeding. The Corporation may also advance expenses incurred by any such
Subsidiary Director or Requested Employee in connection with any such
Proceeding, consistent with the provisions of this Article with respect to the
advancement of expenses of directors and officers of the Corporation.
SECTION 7. Indemnification of Employees and Agents.
Notwithstanding any other provision or provisions of this Article, the
Corporation, to the fullest extent of the provisions of this Article with
respect to the indemnification of directors and officers of the Corporation, may
indemnify any person other than a director or officer of the Corporation, a
Subsidiary Director or a Requested Employee, who is or was an employee or agent
of the Corporation and who is or was involved in any manner (including, without
limitation, as a party or a witness) or is threatened to be made so involved in
any threatened, pending or completed Proceeding by reason of the fact that such
person is or was a director, officer, employee or agent of a Covered Entity
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in
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settlement actually and reasonably incurred by such person in connection with
such Proceeding. The Corporation may also advance expenses incurred by such
employee or agent in connection with any such Proceeding, consistent with the
provisions of this Article with respect to the advancement of expenses of
directors and officers of the Corporation.
ARTICLE VII
Capital Stock
SECTION 1. Certificates for Shares. Certificates representing
shares of stock of each class of the Corporation, whenever authorized by the
Board, shall be in such form as shall be approved by the Board. The certificates
representing shares of stock of each class shall be signed by, or in the name
of, the Corporation by the Chairman or the President, a Vice Chairman or any
Vice-President and by the Secretary or any Assistant Secretary or the Treasurer
or any Assistant Treasurer of the Corporation, and sealed with the seal of the
Corporation, which may be a facsimile thereof. Any or all such signatures may be
facsimiles if countersigned by a transfer agent or registrar. Although any
officer, transfer agent or registrar whose manual or facsimile signature is
affixed to such a certificate ceases to be such officer, transfer agent or
registrar before such certificate has been issued, it may nevertheless be issued
by the Corporation with the same effect as if such officer, transfer agent or
registrar were still such at the date of its issue.
The stock ledger and blank share certificates shall be kept by
the Secretary or by a transfer agent or by a registrar or by any other officer
or agent designated by the Board.
SECTION 2. Transfer of Shares. Transfers of shares of stock of
each class of the Corporation shall be made only on the books of the Corporation
by the holder thereof, or by such holder's attorney thereunto authorized by a
power of attorney duly executed and filed with the Secretary or a transfer agent
for such stock, if any, and on surrender of the certificate or certificates for
such shares properly endorsed or accompanied by a duly executed stock
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transfer power (or by proper evidence of succession, assignment or authority to
transfer) and the payment of any taxes thereon; provided, however, that the
Corporation shall be entitled to recognize and enforce any lawful restriction on
transfer. The person in whose name shares are registered on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation; provided, however, that whenever any transfer of shares shall be
made for collateral security and not absolutely, and written notice thereof
shall be given to the Secretary or to such transfer agent, such fact shall be
stated in the entry of the transfer. No transfer of shares shall be valid as
against the Corporation, its stockholders and creditors for any purpose, except
to render the transferee liable for the debts of the Corporation to the extent
provided by law, until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
SECTION 3. Registered Stockholders and Addresses of Stockholders.
The Corporation shall be entitled to recognize the exclusive right of a person
registered on its records as the owner of shares of stock to receive dividends
and to vote as such owner, shall be entitled to hold liable for calls and
assessments a person registered on its records as the owner of shares of stock,
and shall not be bound to recognize any equitable or other claim to or interest
in such share or shares of stock on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
Each stockholder shall designate to the Secretary or transfer
agent of the Corporation an address at which notices of meetings and all other
corporate notices may be served or mailed to such person, and, if any
stockholder shall fail to designate such address, corporate notices may be
served upon such person by mail directed to such person at such person's post
office address, if any, as the same appears on the stock record books of the
Corporation or at such person's last known post office address.
SECTION 4. Lost, Destroyed and Mutilated Certificates. The holder
of any share of stock of the Corporation shall immediately notify the
Corporation of any loss, theft, destruction or mutilation of the certificate
therefor; the Corporation may
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issue to such holder a new certificate or certificates for shares, upon the
surrender of the mutilated certificate or, in the case of loss, theft or
destruction of the certificate, upon satisfactory proof of such loss, theft or
destruction; the Board, or a committee designated thereby, or the transfer
agents and registrars for the stock, may, in their discretion, require the owner
of the lost, stolen or destroyed certificate, or such person's legal
representative, to give the Corporation a bond in such sum and with such surety
or sureties as they may direct to indemnify the Corporation and said transfer
agents and registrars against any claim that may be made on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
SECTION 5. Regulations. The Board may make such additional rules
and regulations as it may deem expedient concerning the issue and transfer of
certificates representing shares of stock of each class of the Corporation and
may make such rules and take such action as it may deem expedient concerning the
issue of certificates in lieu of certificates claimed to have been lost,
destroyed, stolen or mutilated.
SECTION 6. Fixing Date for Determination of Stockholders of
Record. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment or any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days before the date of such meeting, nor more than 60
days prior to any other action. A determination of stockholders entitled to
notice of or to vote at a meeting of the stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
SECTION 7. Transfer Agents and Registrars. The Board may appoint,
or authorize any officer or officers to appoint, one or more transfer agents and
one or more registrars.
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ARTICLE VIII
Seal
The Board shall provide a corporate seal, which shall be in the
form of a circle and shall bear the full name of the Corporation and the words
and figures of "Corporate Seal Delaware 1983", or such other words or figures as
the Board may approve and adopt. The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall end on the 31st day of
December in each year.
ARTICLE X
Waiver of Notice
Whenever any notice whatsoever is required to be given by these
By-laws, by the Certificate or by law, the person entitled thereto may, either
before or after the meeting or other matter in respect of which such notice is
to be given, waive such notice in writing, which writing shall be filed with or
entered upon the records of the meeting or the records kept with respect to such
other matter, as the case may be, and in such event such notice need not be
given to such person and such waiver shall be deemed equivalent to such notice.
ARTICLE XI
Amendments
Any By-law (other than this Article XI) may be adopted, repealed,
altered or amended by a majority of the entire Board at
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any meeting thereof, provided that such proposed action in respect thereof shall
be stated in the notice of such Meeting. The stockholders of the Corporation
shall have the power to amend, alter or repeal any provision of these By-laws
only to the extent and in the manner provided in the Certificate.
ARTICLE XII
Miscellaneous
SECTION 1. Execution of Documents. The Board or any committee
thereof shall designate the officers, employees and agents of the Corporation
who shall have power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, notes, checks, drafts and other orders for the payment of money and
other documents for and in the name of the Corporation and may authorize
(including authority to redelegate) by written instrument to other officers,
employees or agents of the Corporation. Such delegation may be by resolution or
otherwise and the authority granted shall be general or confined to specific
matters, all as the Board or any such committee may determine. In the absence of
such designation referred to in the first sentence of this Section, the officers
of the Corporation shall have such power so referred to, to the extent incident
to the normal performance of their duties.
SECTION 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as the Board or any committee thereof or any officer of the
Corporation to whom power in respect of financial operations shall have been
delegated by the Board or any such committee or in these By-laws shall select.
SECTION 3. Checks. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation, and all notes or other
evidences of indebtedness of the Corporation, shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by
resolution of the Board or of any committee thereof or by any officer of the
Corporation to whom power in respect of financial operations shall have been
delegated by the Board or any such committee thereof or as set forth in these
By-laws.
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SECTION 4. Proxies in Respect of Stock or Other Securities of
Other Corporations. The Board or any committee thereof shall designate the
officers of the Corporation who shall have authority from time to time to
appoint an agent or agents of the Corporation to exercise in the name and on
behalf of the Corporation the powers and rights which the Corporation may have
as the holder of stock or other securities in any other corporation or other
entity, and to vote or consent in respect of such stock or securities; such
designated officers may instruct the person or persons so appointed as to the
manner of exercising such powers and rights; and such designated officers may
execute or cause to be executed in the name and on behalf of the Corporation and
under its corporate seal, or otherwise, such written proxies, powers of attorney
or other instruments as they may deem necessary or proper in order that the
Corporation may exercise its said powers and rights.
SECTION 5. Subject to Law and Certificate of Incorporation. All
powers, duties and responsibilities provided for in these By-laws, whether or
not explicitly so qualified, are qualified by the provisions of the Certificate
and applicable laws.
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EXECUTION VERSION
THIRD SUPPLEMENTAL INDENTURE (this "Third
Supplemental Indenture"), dated as of December 31,
1996, among TIME WARNER COMPANIES, INC. (formerly
known as Time Warner Inc.), a Delaware corporation
(the "Company"), TIME WARNER INC. (formerly known as
TW Inc.), a Delaware corporation (the "Guarantor"),
and THE CHASE MANHATTAN BANK (formerly known as
Chemical Bank), a New York banking corporation, as
trustee (the "Trustee").
WHEREAS the Company has executed and delivered to the Trustee
an Indenture (the "Indenture"), dated as of January 15, 1993, providing for the
issuance and sale by the Company from time to time of its senior debt securities
(the "Securities"), which term shall include any Securities issued under the
Indenture after the date hereof;
WHEREAS pursuant to an Amended and Restated Agreement and Plan
of Merger, dated as of September 22, 1995, as amended, among the Guarantor, the
Company, Turner Broadcasting System, Inc. ("TBS"), Time Warner Acquisition Corp.
and TW Acquisition Corp., each of the Company and TBS became wholly owned
subsidiaries of the Guarantor;
WHEREAS the Company and Guarantor have executed and delivered
to the Trustee a Second Supplemental Indenture, dated as of October 10, 1996,
among the Company, the Guarantor and the Trustee providing that the Guarantor
will unconditionally and irrevocably guarantee the full and punctual payment of
principal of and interest on the Securities when due, whether at maturity, by
acceleration, by redemption or otherwise, and all other monetary obligations of
the Company under the Indenture (including obligations of the Trustee) and the
Securities, and the full and punctual performance within applicable grace
periods of
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2
all other obligations of the Company under the Indenture and the
Securities;
WHEREAS Section 901(5) of the Indenture permits the Company,
when authorized by a resolution of the Board of Directors of the Company, and
the Trustee, at any time and from time to time, to enter into one or more
indentures supplemental to the Indenture, in form satisfactory to the Trustee,
for the purpose of adding to the rights of the Holders of the Securities;
WHEREAS the Guarantor desires to extend to the Holders of
Securities certain rights and privileges in connection with the guarantee of the
Securities by the Guarantor;
WHEREAS the Company and the Guarantor have requested that the
Trustee execute and deliver this Third Supplemental Indenture and all
requirements necessary to make this Third Supplemental Indenture a valid
instrument in accordance with its terms and to make the amendments provided for
herein the valid obligation of the Guarantor, and the execution and delivery of
this Third Supplemental Indenture has been duly authorized in all respects.
NOW THEREFORE, the Company, the Guarantor and the Trustee
hereby agree that the following Sections of this Third Supplemental Indenture
supplement the Indenture with respect to Securities issued thereunder:
SECTION 1. Definitions. Capitalized terms used herein and not
defined herein have the meanings ascribed to such terms in the Indenture.
SECTION 2. Amendment to Defeasance upon Deposit of Funds or
Government Obligations. Section 403 of Article 4 of the Indenture is hereby
supplemented and amended by adding the following sentence after clause (5) and
before
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3
the definition of "Discharged" in Section 403 of Article 4 of the Indenture:
"If the Company, at its option, with respect to a series of
Securities, satisfies the applicable conditions pursuant to either
clause (a) or (b) above, then (x), in the event the Company satisfies
the conditions to clause (a) and elects clause (a) to be applicable,
the Guarantor shall be deemed to have paid and discharged the entire
indebtedness represented by, and obligations under, its guarantee of
the Securities of such series and to have satisfied all the
obligations under this Indenture relating to the Securities of such
series and (y) in either case, the Guarantor shall cease to be under
any obligation to comply with any term, provision or condition set
forth in Article Eight (and any other covenants applicable to such
Securities that are determined pursuant to Section 301 to be subject
to this provision), and clause (5)(ii) of Section 501 (and any other
Events of Default applicable to such series of Securities that are
determined pursuant to Section 301 to be subject to this provision)
shall be deemed not to be an Event of Default with respect to such
series of Securities at any time thereafter."
SECTION 3. Amendments to the Events of Default and Remedies.
(a) Clause (5) of Section 501 of Article Five of the Indenture is hereby amended
by redesignating clause (5) as clause (5)(i) and by adding thereto at the end
thereof the following:
"; or (ii) default in the performance, or breach, of any
covenant or warranty of the Guarantor in this Indenture (as it may be
supplemented from time to time) in respect of the Securities of such
series (other than a covenant or warranty in respect of the Securities
of such series a default in the performance of which or
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4
the breach of which is elsewhere in this Section specifically dealt
with), all of such covenants and warranties in the Indenture (as so
supplemented) which are not expressly stated to be for the benefit of a
particular series of Securities being deemed in respect of the
Securities of all series for this purpose, and continuance of such
default or breach for a period of 90 days after there has been given,
by registered or certified mail, to the Guarantor by the Trustee or to
the Guarantor and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities of such series, a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default"
hereunder; or".
(b) Clause (6) of Section 501 of Article Five of the Indenture
is hereby amended by redesignating clause (6) as clause (6)(i) and by adding
thereto at the end thereof the following:
"; or (ii) the entry of an order for relief against the
Guarantor under Title 11, United States Code (the "Federal Bankruptcy
Act") by a court having jurisdiction in the premises or a decree or
order by a court having jurisdiction in the premises adjudging the
Guarantor a bankrupt or insolvent under any other applicable Federal or
State law, or the entry of a decree or order approving as properly
filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Guarantor under the Federal
Bankruptcy Act or any other applicable Federal or State law, or
appointing a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Guarantor or of any substantial part of
its property, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect
for a period of 90 consecutive days; or".
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5
(c) Clause (7) of Section 501 of Article Five of the Indenture
is hereby amended by redesignating clause (7) as clause (7)(i) and by adding
thereto at the end thereof the following:
"; or (ii) the consent by the Guarantor to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of
a petition or answer or consent seeking reorganization or relief under
the Federal Bankruptcy Act or any other applicable Federal or State
law, or the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Guarantor or of any substantial part
of its property, or the making by it of an assignment for the benefit
of creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due, or the taking of corporate
action by the Guarantor in furtherance of any such action; or".
SECTION 4. Amendments to Article Eight. (a) The introductory
clause and clause (1) of Section 801 of Article Eight of the Indenture is hereby
supplemented and amended to read in its entirety as follows:
"Section 801. Consolidation, Merger, Conveyance or Transfer on
Certain Terms. Neither the Company nor the Guarantor shall consolidate
with or merge into any other corporation or convey or transfer its
properties and assets substantially as an entirety to any Person,
unless:
(1)(a) In the case of the Company, the corporation formed by
such consolidation or into which the Company is merged or the Person
which acquires by conveyance or transfer the properties and assets of
the Company substantially as an entirety shall be organized and
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6
existing under the laws of the United States of America or any State or
the District of Columbia, and shall expressly assume, by any indenture
supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Securities
and the performance of every covenant of this Indenture (as
supplemented from time to time) on the part of the Company to be
performed or observed; (b) in the case of the Guarantor, the
corporation formed by such consolidation or into which the Guarantor is
merged or the Person which acquires by conveyance or transfer the
properties and assets of the Guarantor substantially as an entirety
shall be organized and existing under the laws of the United States of
America or any State or the District of Columbia, and shall expressly
assume, by any indenture supplemental hereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, the performance of
every covenant of this Indenture (as supplemented from time to time) on
the part of the Guarantor to be performed or observed;".
(b) Section 802 of Article Eight of the Indenture is
supplemented and amended to read in its entirety as follows:
"Section 802. Successor Person Substituted. Upon any
consolidation or merger, or any conveyance or transfer of the
properties and assets of the Company or the Guarantor substantially as
an entirety in accordance with Section 801, the successor Person formed
by such consolidation or into which the Company or the Guarantor is
merged or to which such conveyance or transfer is made shall succeed
to, and be substituted for, and may exercise every right and power of,
the Company or the Guarantor, as the case may be, under this Indenture
with the same effect as if such successor had been named as the Company
or the
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7
Guarantor herein, as the case may be. In the event of any such
conveyance of transfer, the predecessor as the Company or the
Guarantor, as the case may be, shall be discharged from all obligations
and covenants under this Indenture and the Securities and may be
dissolved, wound up or liquidated at any time thereafter."
SECTION 5. Supplemental Indentures. Clauses (1) and (2) of
Section 901 of Article Nine of the Indenture are supplemented and amended to
read in their entirety as follows:
"(1) to evidence the succession of another corporation or
Person to the Company or the Guarantor, and the assumption by any such
successor of the respective covenants of the Company or the Guarantor
herein and in the Securities contained; or
(2) to add to the covenants of the Company or the Guarantor,
or to surrender any right or power herein conferred upon the Company or
the Guarantor, for the benefit of the Holders of the Securities of any
or all series (and if such covenants or the surrender of such right or
power are to be for the benefit of less than all series of Securities,
stating that such covenants are expressly being included or such
surrenders are expressly being made solely for the benefit of one or
more specified series); or".
SECTION 6. This Third Supplemental Indenture. This Third
Supplemental Indenture shall be construed as supplemental to the Indenture and
shall form a part of it, and the Indenture is hereby incorporated by reference
herein and each is hereby ratified, approved and confirmed.
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8
SECTION 7. Governing Law. THIS THIRD SUPPLEMENTAL INDENTURE
SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
SECTION 8. Counterparts. This Third Supplemental Indenture may
be executed in two or more counterparts, each of which shall constitute an
original, but all of which when taken together shall constitute but one
instrument.
SECTION 9. Headings. The headings of this Third Supplemental
Indenture are for reference only and shall not limit or otherwise affect the
meaning hereof.
SECTION 10. Trustee Not Responsible for Recitals. The recitals
herein contained are made by the Company and the Guarantor, and not by the
Trustee, and the Trustee assumes no responsibility for the correctness thereof.
The Trustee shall have no responsibility whatsoever for or in respect of the
validity or sufficiency of this Third Supplemental Indenture.
SECTION 11. Separability. In case any one or more of the
provisions contained in this Third Supplemental Indenture or in the Securities
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Third Supplemental Indenture or of the Securities, but
this Third Supplemental Indenture and the Securities shall be construed as if
such invalid or illegal or unenforceable provision had never been contained
herein or therein.
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9
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed by their respective authorized
officers as of the date first written above.
TIME WARNER COMPANIES, INC.,
by /s/ Thomas W. McEnerney
----------------------------
Name: Thomas W. McEnerney
Title: Vice President
TIME WARNER INC.,
by /s/ Thomas W. McEnerney
----------------------------
Name: Thomas W. McEnerney
Title: Vice President
THE CHASE MANHATTAN BANK, as
Trustee,
by /s/ Richard Lorenzen
----------------------------
Name: Richard Lorenzen
Title: Senior Trust Officer
<PAGE>
<PAGE>
As Amended through
July 18, 1996
Time Warner
1986 Stock Option Plan
1. ADOPTION AND PURPOSE OF THE PLAN.
Time Incorporated, a Delaware corporation (hereinafter called the
Company), hereby adopts this stock option plan (hereinafter called the Plan),
providing for the granting of stock options to key employees of the Company and
its subsidiaries. The general purpose of the Plan is to promote the interests of
the Company and its stockholders by providing to key employees of the Company
and its subsidiaries additional incentives to continue and increase their
efforts with respect to, and to remain in the employ of, the Company or its
subsidiaries.
So that the maximum incentive may be provided to particular employees
participating in the Plan, the Plan provides for the granting of "incentive"
stock options (hereinafter called incentive stock options), within the meaning
of Section 422A(b) of the Internal Revenue Code of 1954, as amended (hereinafter
called the Code), and for the granting of "nonqualified" stock options.
2. STOCK SUBJECT TO THE PLAN.
There will be reserved for issuance upon the exercise of options and
stock appreciation rights to be granted from time to time under the Plan an
aggregate of 2,500,000 shares of the Company's Common Stock, par value $1 per
share (hereinafter called Common Stock). Such shares may be, in whole or in
part, authorized and unissued shares of Common Stock or issued shares of Common
Stock which shall have been reacquired by the Company. If any option granted
under the Plan shall expire or terminate for any reason without having been
exercised (or without having been considered to have been exercised as provided
in paragraphs 8 and 9 hereof) in full, the unpurchased shares subject thereto
shall again be available for purposes of the Plan.
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3. ADMINISTRATION.
The Plan shall be administered by the Board of Directors of the Company
(hereinafter called the Board). Subject to the express provisions of the Plan,
the Board shall have plenary authority, in its discretion, to determine the
terms of all options granted under the Plan (which need not be identical),
including, without limitation, the purchase price of the shares covered by each
option, the individuals to whom, and the time or times at which, options shall
be granted, the number of shares to be subject to each option (provided that the
maximum aggregate number of shares which may be granted to an individual
employee under the Plan shall be 100,000), whether an option shall be an
incentive stock option or a nonqualified stock option, when an option can be
exercised and whether in whole or in installments (which terms may be altered,
subject to paragraph 14 hereof). In making such determinations, the Board may
take into account the nature of the services rendered by the respective
employees, their present and potential contributions to the Company's success
and such other factors as the Board in its discretion shall deem relevant.
Subject to the express provisions of the Plan, the Board shall have plenary
authority to interpret the Plan, to prescribe, amend and rescind the rules and
regulations relating to it and to make all other determinations deemed necessary
or advisable for the administration of the Plan. The determinations of the Board
on the matters referred to in this paragraph 3 shall be conclusive.
Notwithstanding anything to the contrary contained herein, the Board may
at any time, or from time to time, appoint a committee (hereinafter called the
Committee) of at least three members, who shall be members of the Personnel and
Compensation Committee of the Board (or such other members of the Board as the
Board may designate), and delegate to such Committee the authority of the Board
to administer the Plan. Upon such appointment and delegation, the Committee
shall have all the powers, privileges and duties of the Board in the
administration of the Plan, except the power to appoint members of the Committee
and to terminate, modify or amend the Plan. The Board may from time to time
appoint members of any such Committee in substitution for or in addition to
members previously appointed, may fill vacancies in the Committee and may
discharge the Committee. The Committee shall select one of its members as its
chairman and shall hold its meetings at such
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times and places as it shall deem advisable. A majority of its members shall
constitute a quorum and all determinations shall be made by a majority of such
quorum. Any determination reduced to writing and signed by a majority of the
members shall be fully as effective as if it had been made by a majority vote at
a meeting duly called and held.
4. ELIGIBILITY.
Options may be granted only to key salaried employees (which term shall
be deemed to include officers) of the Company and of its present and future
subsidiary corporations as defined in Section 425 of the Code, as the same shall
be amended from time to time (hereinafter called subsidiaries). A director of
the Company or of a subsidiary who is not also such an employee of the Company
or of one of its subsidiaries will not be eligible to receive any options under
the Plan. No option shall be granted to any person who, at the time the option
is granted, owns (or is considered as owning within the meaning of Section
425(d) of the Code) stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any subsidiary, unless at the
time the option is granted the option price is at least 110% of the fair market
value of the Common Stock subject to the option and the option by its terms is
not exercisable after the expiration of five years from the date it is granted.
Options may be granted to employees who hold or have held options under previous
plans. An employee who has been granted an option may be granted an additional
option or options.
Notwithstanding anything to the contrary contained herein, in the case
of incentive stock options granted on or prior to December 31, 1986, the maximum
aggregate fair market value (determined at the time each incentive stock option
is granted) of the shares of Common Stock for which any individual employee may
be granted incentive stock options under the Plan in any calendar year (and
under all other plans of the Company or any subsidiary which provide for the
granting of incentive stock options) shall not exceed $100,000 plus the amount
of any unused limit carryover to such year. If $100,000 exceeds the aggregate
fair market value (determined at the time each incentive stock option is
granted) of the Common Stock for which an employee was granted incentive stock
options in any calendar year under the Plan (and under all other plans of the
Company or any subsidiary which provide for the granting of incentive stock
options), one-half of such excess shall be an
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unused limit carryover to each of the three succeeding calendar years, under the
rules of Section 422A(c)(4) of the Code. In the case of incentive stock options
granted after December 31, 1986, the aggregate fair market value (determined at
the time the option is granted) of the shares of Common Stock covered by
incentive stock options which first become exercisable in any calendar year
under the Plan by any individual employee (and under all other plans of the
Company or any subsidiary which provide for the granting of incentive stock
options) shall not exceed $100,000. For purposes of this paragraph, fair market
value of Common Stock shall be the mean between the high and low sales prices of
a share of Common Stock as reported on the New York Stock Exchange Composite
Tape on the date of grant of an incentive stock option under the Plan.
5. OPTION PRICES.
Except as otherwise specifically provided in paragraph 4 hereof, the
purchase price of the Common Stock under each option shall be determined by the
Board, but shall not be less than 100% of the fair market value of the Common
Stock at the time of the granting of such option. Such fair market value shall
be determined by the Board and shall not be less than the mean between the high
and low sales prices of a share of Common Stock as reported on the New York
Stock Exchange Composite Tape on the day on which the option is granted.
6. TERM OF OPTIONS.
The term of each option shall be for such period as the Board shall
determine, but not more than ten years from the date of grant in the case of
each incentive stock option and not more than ten and one-half years from the
date of grant in the case of each nonqualified stock option, or such shorter
period as is prescribed in paragraphs 4, 11 and 12 hereof.
7. EXERCISE OF OPTIONS.
Unless otherwise provided in the option agreement, an option granted
under the Plan shall be exercisable in whole, or in part, at any time during the
term of the option. Each incentive stock option granted under the Plan on or
prior to December 31, 1986 shall by its terms comply with the requirements of
Section 422A(b)(7) of the Code, as in effect
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prior to December 31, 1986.
The Board shall be authorized to establish the procedure for the
exercise of an option, provided that the Company shall not be required to
deliver certificates for shares with respect to which an option is exercised
until the purchase price of such shares shall have been paid in full. Payment
shall be made in cash or, unless otherwise provided in the option agreement, in
whole shares of Common Stock already owned by the holder of the option or,
unless otherwise provided in the option agreement, partly in cash and partly in
such Common Stock. An option shall be exercised by written notice to the
Company. Such notice shall state that the holder of the option elects to
exercise the option, the number of shares in respect of which it is being
exercised and the manner of payment for such shares, and shall either (i) be
accompanied by payment of the full purchase price of such shares, or (ii) fix a
date (not more than 10 business days from the date of exercise) for the payment
of the full purchase price of such shares. Cash payments shall be made by
certified or bank cashier's check, or by the wire transfer of immediately
available funds, in each case payable to the order of the Company. Common Stock
payments (valued at the mean between the high and low sales prices of a share of
Common Stock as reported on the New York Stock Exchange Composite Tape on the
date of exercise) shall be made by delivery of stock certificates in negotiable
form. If certificates representing Common Stock are used to pay all or part of
the purchase price of an option, separate certificates shall be delivered by the
Company representing the same number of shares as each certificate so used, and
an additional certificate shall be delivered representing any additional shares
to which the holder of the option is entitled as a result of the exercise of the
option. Except as provided in paragraphs 11 and 12 hereof, no option may be
exercised at any time unless the employee to whom the option was granted under
the Plan is then an employee of the Company or of a subsidiary or, if the option
agreement so provides, an Employee of an Affiliated Entity. For the purposes of
this Plan, "Employee of an Affiliated Entity" shall mean an employee of any
entity other than the Company or a subsidiary, whether or not incorporated,
which is controlled by or under common control with the Company (an "Affiliated
Entity"); provided, however, that no director, officer or holder of ten percent
or more of any class of equity securities of the Company who was subject,
directly or indirectly, to Section 16(b) of the Securities Exchange Act of 1934,
as amended, at any time on or after May 14, 1991, shall be considered an
Employee of an Affiliated
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Entity. The holder of an option shall have none of the rights of a stockholder
with respect to the shares subject to the option until such shares shall be
transferred to the holder upon the exercise of his or her option.
Notwithstanding any contrary waiting period or installment period in any
option agreement or in the Plan, each outstanding option granted under the Plan
shall, except as otherwise provided in the option agreement, become exercisable
in full for the aggregate number of shares covered thereby, in the event (i) the
Board (or, if approval of the Board is not required as a matter of law, the
stockholders of the Company) shall approve (a) any consolidation or merger of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of Common Stock would be converted into cash,
securities or other property, other than a merger of the Company (x) as
contemplated in the Amended and Restated Agreement and Plan of Merger dated as
of September 22, 1995 among Time Warner Inc., TW Inc., Time Warner Acquisition
Corp., TW Acquisition Corp. and Turner Broadcasting System, Inc., as the same
may be amended from time to time, or (y) in which the holders of Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (b) any
sale, lease, exchange, or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company, or (c) the adoption of any plan or proposal for the liquidation or
dissolution of the Company, or (ii) any person (as such term is defined in
Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (hereinafter called the Exchange Act)), corporation or other entity (a)
shall purchase any Common Stock of the Company (or securities convertible into
the Company's Common Stock) for cash, securities or any other consideration
pursuant to a tender offer or exchange offer, without the prior consent of the
Board, or (b) any such person, corporation or other entity (other than the
Company or any benefit plan sponsored by the Company or any subsidiary) shall
become the "beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
20 percent or more of the combined voting power of the then outstanding
securities of the Company ordinarily (and apart from rights accruing under
special circumstances) having the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case of
rights to acquire the Company's securities), or (iii) during any period of two
consecutive
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years, individuals who at the beginning of such period constitute the entire
Board shall cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Company's stockholders, of each
new director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. Any
transaction referred to in the foregoing clause (i) is hereinafter called an
Approved Transaction, any purchase pursuant to a tender offer or exchange offer
or otherwise as described in the foregoing clause (ii) is hereinafter called a
Control Purchase and the cessation of individuals constituting a majority of the
Board as described in the foregoing clause (iii) is hereinafter called a Board
Change. The option agreement evidencing an option granted under the Plan may
contain such provisions limiting the acceleration of the exercise of options as
the Board deems appropriate to ensure that the penalty provisions of Section
4999 of the Code, or any successor thereto in effect at the time of such
acceleration, will not apply to any stock or cash received by the holder from
the Company.
8. GENERAL STOCK APPRECIATION RIGHTS.
The Board may (but shall not be obligated to) grant general stock
appreciation rights (hereinafter called SARs) pursuant to the provisions of this
paragraph to the holder of any option granted under the Plan (hereinafter in
this paragraph 8 called a related option) with respect to all or a portion of
the shares subject to the related option. An SAR may only be granted
concurrently with the grant of the related option. Subject to the terms and
provisions of this paragraph 8, each SAR shall be exercisable only at the same
time and to the same extent the related option is exercisable, and in no event
after the termination or exercise of the related option.
Notwithstanding the foregoing, no SAR may be exercised within a period of six
months after the date of grant of the SAR. SARs shall be exercisable only when
the fair market value (determined as of the date of exercise of the SARs) of
each share of Common Stock with respect to which the SARs are to be exercised
shall exceed the option price per share of Common Stock subject to the related
option. SARs granted under the Plan shall be exercisable in whole or in part by
notice to the Company. Such notice shall state that the holder of the SARs
elects to exercise the SARs and the number of shares in respect of which the
SARs are being exercised.
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Subject to the terms and provisions of this paragraph 8, upon the
exercise of SARs, the holder thereof shall be entitled to receive from the
Company consideration (in the form hereinafter provided) equal in value to the
excess of the fair market value (determined as of the date of exercise of the
SARs) of each share of Common Stock with respect to which such SARs have been
exercised over the option price per share of Common Stock subject to the related
option. Upon the exercise of an SAR, the holder may specify the form of
consideration to be received by such holder, which shall be in shares of Common
Stock (valued at fair market value on the date of exercise of the SAR), or in
cash, or partly in cash and partly in shares of Common Stock as the holder shall
request; provided, however, that the Board in its sole discretion may disapprove
the form of consideration requested and instead authorize the payment of such
consideration in shares of Common Stock (valued as aforesaid), or in cash, or
partly in cash and partly in shares of Common Stock. Notwithstanding the
foregoing, any election by the holder of an SAR to receive cash in full or
partial settlement of the SAR, as well as any exercise of an SAR for such cash,
shall be made only during the period beginning on the third business day
following the date of release for publication of quarterly or annual summary
statements of sales and earnings and ending on the twelfth business day
following such date (such period is hereinafter called the Exercise Period).
Notwithstanding the foregoing, the number of SARs which may be exercised for
cash, or partly for cash and partly for shares of Common Stock, during any
Exercise Period may not exceed twenty percent of the aggregate number of shares
of Common Stock originally subject to the related option (as such original
number, without giving effect to the exercise of any portion of the related
option, shall have been retroactively adjusted by application of the
adjustment(s), if any, determined in accordance with paragraph 13 hereof or the
corresponding provisions of any outstanding option agreement), but such SARs
shall be exercisable only to the extent the related option is exercisable. For
purposes of this paragraph 8, (a) fair market value of Common Stock shall be the
mean between the high and low sales prices thereof as reported on the New York
Stock Exchange Composite Tape on the date of exercise of an SAR, and (b) the
date of exercise of an SAR shall mean the date on which the Company shall have
received notice from the holder of the SAR of the exercise of such SAR.
Notwithstanding the foregoing, upon the exercise during the Exercise Period of
an SAR granted in tandem with a nonqualified stock option, the date of exercise
of such SAR shall be deemed to be the date during the Exercise Period on which
the highest
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reported closing sales price of a share of Common Stock as reported on the New
York Stock Exchange Composite Tape occurred and the fair market value of such
shares shall be deemed to be such highest reported closing sales price.
Upon the exercise of SARs, the related option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised, and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock available for the grant of options under the Plan. Upon the
exercise or termination of the related option, the SARs with respect to such
related option shall be considered to have been exercised or terminated to the
extent of the number of shares of Common Stock with respect to which the related
option was so exercised or terminated.
The provisions of paragraphs 3, 6, 10 through 16, and 18 through 20 of
the Plan (to the extent that such provisions are applicable to options granted
under the Plan) shall also be applicable to SARs unless the context otherwise
requires. The effective date of the grant of an SAR shall be the date on which
the Board approves the grant of such SAR. Each grantee of an SAR shall be
notified promptly of the grant of an SAR in such manner as the Board shall
prescribe.
Notwithstanding anything to the contrary contained in this paragraph 8,
SARs shall not be exercisable unless at the time of such exercise (i) the holder
of the SARs is directly or indirectly subject to Section 16 of the Exchange Act
or (ii) sales of Common Stock by the person exercising the SARs would be
reportable under Section 16 by the original holder of the related option.
9. LIMITED STOCK APPRECIATION RIGHTS.
The Board may (but shall not be obligated to) grant limited stock
appreciation rights (hereinafter called limited rights) pursuant to the
provisions of this paragraph to the holder of any option granted under the Plan
(hereinafter in this paragraph 9 called a related option) with respect to all or
a portion of the shares subject to the related option. A limited right may only
be granted concurrently with the grant of the related option. A limited right
may be exercised only during the period (a) beginning on the first day following
either (i) the date of approval by the stockholders of the
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Company of an Approved Transaction (as defined in the last paragraph of
paragraph 7 hereof), (ii) the date of a Control Purchase (as defined in the last
paragraph of paragraph 7 hereof), or (iii) the date of a Board Change (as
defined in the last paragraph of paragraph 7 hereof), and (b) ending on the
thirtieth day following such date. Each limited right shall be exercisable only
to the extent the related option is exercisable, and in no event after the
termination of the related option. Notwithstanding the provisions of the two
immediately preceding sentences, no limited right may be exercised within a
period of six months after the date of grant of the limited right. Limited
rights shall be exercisable only when the fair market value (determined as of
the date of exercise of the limited rights) of each share of Common Stock with
respect to which the limited rights are to be exercised shall exceed the option
price per share of Common Stock subject to the related option.
Upon the exercise of limited rights, the related option shall be
considered to have been exercised to the extent of the number of shares of
Common Stock with respect to which such limited rights are exercised, and shall
be considered to have been exercised to that extent for purposes of determining
the number of shares of Common Stock available for the grant of options under
the Plan. Upon the exercise or termination of the related option, the limited
rights with respect to such related option shall be considered to have been
exercised or terminated to the extent of the number of shares of Common Stock
with respect to which the related option was so exercised or terminated.
The provisions of paragraphs 3, 6, 10 through 16, and 18 through 20 of
the Plan (to the extent that such provisions are applicable to options granted
under the Plan) shall also be applicable to limited rights unless the context
otherwise requires. The effective date of the grant of a limited right shall be
the date on which the Board approves the grant of such limited right. Each
grantee of a limited right shall be notified promptly of the grant of the
limited right in such manner as the Board shall prescribe.
Limited rights granted under the Plan shall be exercisable in whole or
in part by notice to the Company. Such notice shall state that the holder of the
limited rights elects to exercise the limited rights and the number of shares in
respect of which the limited rights are being exercised. The effective date of
exercise of a limited right shall be deemed to be the
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date on which the Company shall have received such notice. Upon the exercise of
limited rights granted in tandem with an incentive stock option, except as
otherwise provided in the option agreement, the holder thereof shall receive in
cash an amount equal to the excess of the fair market value (determined as of
the date of exercise of such limited rights) of each share of Common Stock with
respect to which such limited right shall have been exercised over the option
price per share of Common Stock subject to the related incentive stock option.
For purposes of this paragraph 9, the fair market value of a share of Common
Stock shall be the mean between the high and low sales price thereof as reported
on the New York Stock Exchange Composite Tape on the date of exercise of a
limited right.
Upon the exercise of limited rights granted in tandem with a
nonqualified stock option, except as otherwise provided in the option agreement,
the holder thereof shall receive in cash an amount equal to the product computed
by multiplying (i) the excess of (a) the higher of (x) the Minimum Price Per
Share (as hereinafter defined), or (y) the highest reported closing sales price
of a share of Common Stock as reported on the New York Stock Exchange Composite
Tape at any time during the period beginning on the sixtieth day prior to the
date on which such limited rights are exercised and ending on the date on which
such limited rights are exercised, over (b) the option price per share of Common
Stock subject to the related nonqualified stock option, by (ii) the number of
shares of Common Stock with respect to which such limited rights are being
exercised.
For purposes of this paragraph 9, the term "Minimum Price Per Share"
shall mean the highest gross price (before brokerage commissions, soliciting
dealers' fees and similar charges) paid or to be paid for any share of Common
Stock (whether by way of exchange, conversion, distribution, liquidation or
otherwise) in, or in connection with, any Approved Transaction or Control
Purchase which occurs at any time during the period beginning on the sixtieth
day prior to the date on which such limited rights are exercised and ending on
the date on which such limited rights are exercised. For purposes of this
definition, if the consideration paid or to be paid in any such Approved
Transaction or Control Purchase shall consist, in whole or in part, of
consideration other than cash, the Board shall take such action, as in its
judgment it deems appropriate, to establish the cash value of such
consideration, but such valuation shall not be less than the value, if any,
attributed to such consideration by any other party to such Approved
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Transaction or Control Purchase.
Notwithstanding anything to the contrary contained in this paragraph 9,
limited rights shall not be exercisable unless at the time of the occurrence of
an Approved Transaction, Control Purchase or Board Change, (i) the holder of the
limited rights is directly or indirectly subject to Section 16 of the Exchange
Act or (ii) sales of Common Stock by the person exercising the limited rights
would be reportable under Section 16 by the original holder of the related
option. The option agreement evidencing an option granted under the Plan may
contain such provisions limiting the exercise of limited rights as the Board
deems appropriate to ensure that the penalty provisions of Section 4999 of the
Code, or any successor thereto in effect at the time of such exercise, will not
apply to any stock or cash received from the Company by the holder of the
limited rights.
10. NONTRANSFERABILITY OF OPTIONS.
Except as set forth in this paragraph 10, no option granted under the
Plan shall be transferable otherwise than by will or the laws of descent and
distribution, and an option may be exercised during the lifetime of the holder
thereof only by such holder. The option agreement may provide that nonqualified
stock options and SARs are transferable by gift to such persons or entities and
upon such terms and conditions as specified in the option agreement.
11. TERMINATION OF EMPLOYMENT.
In the event that an employee to whom an option has been granted under
the Plan ceases to be an employee of the Company and/or one or more of its
subsidiaries otherwise than by reason of death, such option may, subject to the
provisions of the last paragraph of this paragraph 11, be exercised (to the
extent exercisable by the employee at the effective date of the termination of
his or her employment) at any time (i) in the case of either a nonqualified or
incentive stock option, within one year (or such shorter period as may be
specified in the option agreement) after the termination of his or her
employment due to his or her "permanent and total disability", as defined in
Section 22(e)(3) of the Code, as the same shall be amended from time to time
(hereinafter called total disability); (ii) in the case of a nonqualified stock
option, (x) within five years (or such shorter period as may be
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specified in the option agreement) after the termination of his or her
employment upon retirement pursuant to any retirement plan of the Company or a
subsidiary, or (y) within three months after the termination of his or her
employment for any reason other than as specifically provided in this paragraph
(or such shorter period as may be specified in the option agreement); or (iii)
in the case of an incentive stock option, within three months after the
termination of his or her employment for any reason other than as specifically
provided in this paragraph (or such shorter period as may be specified in the
option agreement), but, in any case, in no event after the expiration date of
such option. Options granted under the Plan shall not be affected by any change
of employment so long as the employee to whom the option was granted under the
Plan continues to be an employee of the Company or of a subsidiary. Retirement
pursuant to any retirement plan of the Company or of a subsidiary shall be
deemed to be a termination of employment for the purpose of this paragraph. The
option agreement may contain such provisions as the Board may approve with
reference to the effect of approved leaves of absence. Nothing in the Plan or in
any option granted pursuant to the Plan shall confer on any individual any right
to continue in the employ of the Company or any of its subsidiaries or to
interfere in any way with the right of the Company or any of its subsidiaries to
terminate his or her employment at any time, with or without cause,
notwithstanding the possibility that the number of shares purchasable under an
option may thereby be reduced or eliminated.
Anything herein to the contrary notwithstanding, in the event the
employment of an employee to whom an option has been granted under the Plan
shall be terminated by the Company or a subsidiary for cause, then, in such
event, any option or options held by such employee or any permitted transferee
pursuant to paragraph 10 under the Plan, to the extent not theretofore
exercised, shall immediately terminate; provided, however, that the foregoing
shall not apply to any employee employed under a separate written employment
agreement if the termination of such employee's employment for cause hereunder
would constitute a breach of such employment agreement. For purposes of this
paragraph 11, termination for cause shall include, but shall not be limited to,
termination of the employee's employment by reason of insubordination,
dishonesty, incompetence, moral turpitude, other misconduct of any kind, and the
refusal to perform his or her normal duties and responsibilities for any reason
other than illness or incapacity; provided, however, that if such termination
occurs
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within 12 months after an Approved Transaction, Control Purchase or Board
Change, termination for cause shall only include fraud, misappropriation or
embezzlement on the part of the employee. For purposes of this paragraph 11,
whether or not such employment shall have been terminated for cause shall be
determined by the Board and the determination of the Board shall be conclusive.
If the option agreement provides that an option may be exercised by an employee
who is an Employee of an Affiliated Entity, then the provisions of this
paragraph 11 shall apply to such Employee of an Affiliated Entity to the same
extent they would apply to an employee of the Company or a subsidiary and
termination of employment under this paragraph 11 shall include termination of
employment with such Affiliated Entity.
12. DEATH OF HOLDER OF OPTION.
In the event of the death of an employee to whom an option has been
granted under the Plan, unless the option shall have been previously terminated
pursuant to the provisions of paragraph 11 hereof, (i) in the case of an
incentive stock option, if the employee dies while employed by the Company or a
subsidiary or within three months after termination of his or her employment,
such option may be exercised (to the extent exercisable by the employee at the
time of death) by a legatee or legatees of such employee under his or her last
will, or by his or her personal representatives or distributees, or by such
employee's permitted transferee pursuant to paragraph 10, at any time within a
period of one year after his or her death (or such shorter period as may be
specified in the option agreement), but in no event after the expiration date of
such option; and (ii) in the case of a nonqualified stock option (x) if the
employee dies while employed by the Company or a subsidiary, then such option
may be exercised at any time within a period of five years after his or her
death (or such shorter period as may be specified in the option agreement), or
(y) if the employee dies within three months after termination of his or her
employment, then such option may be exercised at any time within a period of one
year after his or her death (or such shorter period as may be specified in the
option agreement) by a legatee or legatees of such employee under his or her
last will, or by his or her personal representatives or distributees, or by such
employee's permitted transferee pursuant to paragraph 10, and, in each case, to
the extent exercisable by such employee at the time of his or her death, but in
no event after the expiration date of such option;
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provided, however, that a nonqualified stock option agreement may provide that
if the employee dies within five years (or such shorter period as may be
specified in the option agreement) after his or her retirement pursuant to any
retirement plan of the Company or a subsidiary, then such option may be
exercised to the same extent and during the same period such option would
otherwise have been exercisable by the employee at the time of his or her death
by a legatee or legatees of such employee under his or her last will or by his
or her personal representatives or distributees, or by such employee's permitted
transferee pursuant to paragraph 10, but not after the expiration date of such
option. Notwithstanding the foregoing, in the event of the death of an employee
to whom an option has been granted under the Plan within one year after the
termination of such employee's employment due to his or her total disability,
such option (unless the option shall have been previously terminated pursuant to
the provisions of paragraph 11 hereof, or unless otherwise provided in such
holder's option agreement) may be exercised to the same extent and during the
same period such option would otherwise have been exercisable by such employee
at the time of his or her death by a legatee or legatees of such employee under
his or her last will, or by his or her personal representatives or distributees,
or by such employee's permitted transferee pursuant to paragraph 10, but not
after the expiration date of such option. If the option agreement provides that
an option may be exercised by an employee who is an Employee of an Affiliated
Entity, then the provisions of this paragraph 12 shall apply to such Employee of
an Affiliated Entity to the same extent they would apply to an employee of the
Company or a subsidiary.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Notwithstanding any other provisions of the Plan, option agreements may
contain such provisions as the Board shall determine to be appropriate for the
adjustment of the number and class of shares subject to each outstanding option
and the option prices in the event of changes in the outstanding Common Stock of
the Company by reason of any stock dividend, distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation or
liquidation and the like, and, in the event of any such change in the
outstanding Common Stock of the Company, the aggregate number and class of
shares available under the Plan and the maximum number of shares as to which
options may be granted to any
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individual shall be appropriately adjusted by the Board, whose
determination shall be conclusive.
14. TERMINATION AND AMENDMENT.
Unless the Plan shall theretofore have been terminated as hereinafter
provided, the Plan shall terminate on, and no option shall be granted after,
December 31, 1991. The Board may at any time prior to December 31, 1991
terminate the Plan, and the Board may at any time also modify or amend the Plan
in such respects as it shall deem advisable; provided, however, that the Board
may not, without approval of the holders of a majority of the voting securities
of the Company present, or represented, and entitled to vote at a meeting (i)
increase (except as provided in paragraph 13 hereof) the maximum number of
shares as to which options may be granted under the Plan, (ii) change the class
of employees eligible to receive options, (iii) change the manner of determining
the minimum option prices other than to change the manner of determining the
fair market value of the Common Stock, as set forth in paragraph 5 hereof, or
(iv) extend the period during which options may be granted or exercised. No
termination, modification or amendment of the Plan may, without the consent of
the holder of an option, adversely affect the rights of such holder under such
option.
15. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective upon approval by the vote of a majority
of the voting securities of the Company present, or represented, and entitled to
vote at the 1986 Annual Meeting of Stockholders to be held on April 17, 1986, or
any adjournment thereof. Prior to such approval, the Board may, in its
discretion, grant or authorize the granting of options under the Plan the
exercise of which shall be expressly subject to the condition that the Plan
shall have been so approved. Unless the Plan shall be so approved, the Plan and
all options theretofore granted thereunder shall be and become null and void.
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16. GOVERNMENT AND OTHER REGULATIONS.
The obligation of the Company to sell and deliver shares under the
options granted under the Plan shall be subject to (i) all applicable laws,
rules and regulations and such approvals by any governmental agencies as may be
required, including, without limitation, the effectiveness of a registration
statement under the Securities Act of 1933, and (ii) the condition that the
shares of Common Stock reserved for issuance upon the exercise of options
granted under the Plan shall have been duly listed on the New York Stock
Exchange.
17. TIME OF GRANTING OF OPTIONS.
The effective date of the granting of an option (hereinafter called the
Granting Date) shall be the date on which the Board approves the granting of
such option. Each grantee of an option shall be notified promptly of the grant
of the option and a written option agreement shall promptly be executed and
delivered by or on behalf of the Company and the grantee, provided that such
grant of an option shall expire if a written option agreement is not signed by
such grantee (or his or her agent or attorney) and delivered to the Company
within 60 days after the Granting Date.
18. WITHHOLDING.
The Company's obligation to deliver shares of Common Stock or to pay
cash upon the exercise of any nonqualified stock option or any stock
appreciation right granted under the Plan shall be subject to applicable
federal, state and local tax withholding requirements. Federal, state and local
withholding taxes paid upon the exercise of any nonqualified stock option may be
paid in shares of Common Stock upon such terms and conditions as the Board shall
determine; provided, however, that the Board in its sole discretion may
disapprove such payment and require that such taxes be paid in cash.
19. SEPARABILITY.
If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 under the Exchange Act (as the same shall be amended
from time to time) and/or Section 422A of the Code (as the same shall be amended
from time to
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time), then such terms or provisions shall be deemed inoperative to the extent
they so conflict with the requirements of said Rule 16b-3 and/or Section 422A of
the Code.
If this Plan does not contain any provision required to be included
herein under Section 422A of the Code (as the same shall be amended from time to
time), such provision shall be deemed to be incorporated herein with the same
force and effect as if such provision had been set out at length herein.
20. NON-EXCLUSIVITY OF THE PLAN.
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under the Plan, and such arrangements
may be either generally applicable or applicable only in specific cases.
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As Amended through
July 18, 1996
1988 Stock Incentive Plan
of Time Warner Inc.
1. PURPOSE OF THE PLAN.
Time Incorporated, a Delaware corporation, hereby adopts this stock
incentive plan, providing for the granting of stock options, stock appreciation
rights and restricted shares to key employees (including officers) of the
Company and its subsidiaries. The general purpose of the Plan is to promote the
interests of the Company and its stockholders by providing to key employees of
the Company and its subsidiaries additional incentives to continue and increase
their efforts with respect to, and to remain in the employ of, the Company or
its subsidiaries.
2. CERTAIN DEFINITIONS.
The following terms shall have the meanings set forth below when used in
this Plan:
(a) "Award" means grants of an Option, SAR and/or Restricted
Shares under this Plan.
(b) "Board" means the Board of Directors of the
Company.
(c) "Cash Award" means the amount of cash, if any, to be paid to
an employee pursuant to paragraph 7D hereof.
(d) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
(e) "Committee" means the Committee of the Board
appointed pursuant to paragraph 4 hereof.
(f) "Common Stock" means the Common Stock, par value
$1 per share, of the Company.
(g) "Company" means Time Warner Inc., a Delaware
corporation.
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(h) "Composite Tape" means the New York Stock
Exchange Composite Tape.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
(j) "Exercise Period" shall have the meaning ascribed thereto in
paragraph 6E hereof.
(k) "Fair Market Value" of a share of Common Stock shall mean the
mean between the high and low sales prices of a share of Common Stock on
the Composite Tape on the date in question, except as otherwise provided
in paragraph 6E hereof.
(l) "Holder" means an employee of the Company or a Subsidiary who
has received an Award under this Plan.
(m) "ISO" means an incentive stock option within the meaning of
Section 422A(b), or any successor section, of the Code.
(n) "Limited Rights" shall have the meaning ascribed thereto in
paragraph 6F hereof.
(o) "Maturity Value" means, unless the Board shall determine
otherwise, the average (rounded to the nearest cent) of the means
between the high and low sales prices of a share of Common Stock on the
Composite Tape on the sixty consecutive trading days ending on the
Valuation Date with respect to each award of Restricted Shares, or if
the Valuation Date is not a trading day, the sixty consecutive trading
days prior thereto.
(p) "Nonqualified Stock Option" means a stock option that does
not qualify as an ISO.
(q) "Option" means any option granted under this
Plan.
(r) "Plan" means this 1988 Incentive Stock Plan of
the Company.
(s) "Restricted Shares" means shares of Common Stock
or the right to receive shares of Common Stock, as the
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case may be, awarded to an employee of the Company or a
Subsidiary, pursuant to paragraph 7 hereof.
(t) "Restricted Shares Agreement" means the
agreement specified in paragraph 12 hereof.
(u) "Restriction Period" means a period of time beginning on the
date of each award of Restricted Shares and ending on the Valuation Date
with respect to each such award.
(v) "Retained Distributions" means distributions with respect to
Restricted Shares that are retained by the Company pursuant to paragraph
7C hereof.
(w) "SARs" shall mean stock appreciation rights as defined in
paragraph 6E hereof.
(x) "SEC" means the Securities and Exchange
Commission.
(y) "Stock Option Agreement" means the agreement
specified in paragraph 12 hereof.
(z) "Subsidiary" means any present or future subsidiary of the
Company as such term is defined in Section 425, or any successor
section, of the Code.
(aa) "Total Disability" means a permanent and total disability as
defined in Section 22(e)(3), or any successor section, of the Code.
(bb) "Valuation Date" with respect to any Restricted Shares
awarded hereunder means the date designated in the Restricted Shares
Agreement with respect to each award of Restricted Shares pursuant to
paragraph 7A hereof.
(cc) "Dividend Equivalents" means an amount equal to the cash
dividend payable on each share of Common Stock on any dividend payment
date multiplied by the number of shares of Common Stock covered by an
award of Restricted Shares hereunder but only to the extent the shares
of Common Stock covered by such award are not issued until the end of
the Restriction Period.
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(dd) "Employee of an Affiliated Entity" means an employee of any
entity other than the Company or a Subsidiary, whether or not
incorporated, which is controlled by or under common control with the
Company (an "Affiliated Entity"); provided, however, that no director,
officer or holder of ten percent or more of any class or equity
securities of the Company who was subject, directly or indirectly, to
Section 16(b) of the Exchange Act at any time on or after May 14, 1991,
shall be considered an Employee of an Affiliated Entity.
3. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of paragraph 13 hereof and this paragraph 3,
the maximum aggregate number of shares of Common Stock which may be issued upon
exercise of Options and SARs and which may be granted as Restricted Shares or
issued at the end of the Restriction Period with respect to an award of
Restricted Shares hereunder shall be 1,500,000. Such shares may be, in whole or
in part, authorized and unissued shares of Common Stock or issued shares of
Common Stock which shall have been reacquired by the Company. If any Option
shall expire or terminate for any reason without having been exercised (or
without having been considered to have been exercised as provided in paragraphs
6E and 6F hereof) in full, the unexercised shares subject thereto shall again be
available for purposes of the Plan. In addition, any Restricted Shares which are
forfeited by the terms of the Plan or any Restricted Shares Agreement shall
again become available for purposes of the Plan.
4. ADMINISTRATION.
A. Powers. The Plan shall be administered by the Board. Subject to the
express provisions of the Plan, the Board shall have plenary authority, in its
discretion, to grant Options and award Restricted Shares under the Plan and to
determine the terms and conditions (which need not be identical), of all Options
and Restricted Shares granted or awarded under the Plan, including, without
limitation, (i) the purchase price, if any, of each Restricted Share, (ii) the
individuals to whom, and the time or times at which, Options and Restricted
Shares shall be granted or awarded, (iii) the number of shares to be subject to
each Option or award of Restricted Shares, (iv) whether an Option shall be an
ISO or a Nonqualified Stock
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Option, (v) when an Option can be exercised and whether in whole or in
installments, (vi) the time or times and the conditions subject to which
Restricted Shares shall become vested and any Cash Awards shall become payable,
and (vii) the form, terms and provisions of any Stock Option Agreement and
Restricted Shares Agreement evidencing a grant of Options or awards of
Restricted Shares hereunder (which terms may be amended, subject to paragraph 15
hereof). In making such determinations, the Board may take into account the
nature of the services rendered by the respective employees, their present and
potential contributions to the success of the Company and its subsidiaries, and
such other factors as the Board in its discretion shall deem relevant. Subject
to the express provisions of the Plan, the Board shall have plenary authority to
interpret the Plan, to prescribe, amend and rescind the rules and regulations
relating to it and to make all other determinations deemed necessary or
advisable for the administration of the Plan. The determinations of the Board on
the matters referred to in this paragraph 4 shall be conclusive.
B. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee of at least three members, who shall be members of the Compensation
Committee of the Board (or such other persons as the Board may designate), and
delegate to such Committee the authority of the Board to administer the Plan.
Upon such appointment and delegation, the Committee shall have all the powers,
privileges and duties of the Board in the administration of the Plan, except the
power to appoint members of the Committee and to terminate, modify or amend the
Plan. The Board may from time to time appoint members of any such Committee in
substitution for or in addition to members previously appointed, may fill
vacancies in the Committee and may discharge the Committee. The Committee shall
select one of its members as its chairman and shall hold its meetings at such
times and places as it shall deem advisable. A majority of its members shall
constitute a quorum and all determinations shall be made by a majority of such
quorum. Any determination reduced to writing and signed by a majority of the
members shall be fully as effective as if it had been made by a majority vote at
a meeting duly called and held.
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5. ELIGIBILITY.
Options and Restricted Shares may be awarded only to key salaried
employees (including officers) of the Company and its Subsidiaries who are at
the time of the Award regularly employed by the Company or a Subsidiary on a
full-time basis. A director of the Company or of a Subsidiary who is not also an
employee of the Company or of one of its Subsidiaries will not be eligible to
receive any Awards under the Plan. No ISO shall be granted to any employee who,
at the time the ISO is granted, owns (or is considered as owning within the
meaning of Section 425(d), or any successor section, of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of any Subsidiary, unless at the time the ISO is granted
the option price is at least 110% of the Fair Market Value of the Common Stock
subject to the ISO and the ISO by its terms is not exercisable after the
expiration of five years from the date it is granted. Awards may be made to
employees who hold or have held Options and/or Restricted Shares under this Plan
or any other plans of the Company. An employee who has received Awards under
this Plan may be granted additional Options and Restricted Shares under this
Plan or any other plan.
6. OPTIONS.
A. Option Prices. Except as otherwise specifically provided in paragraph
5 hereof, the purchase price of the Common Stock under each Option shall be
determined by the Board, but shall not be less than 100% of the Fair Market
Value of the Common Stock at the time of the granting of such Option.
B. Term of Options. The term of each Option shall be for such period as
the Board shall determine, but not more than ten years from the date of grant in
the case of each ISO, and, except as set forth in paragraph 9 hereof, shall
expire upon termination of employment with the Company or any Subsidiary.
C. Exercise of Options. Unless otherwise provided in the Stock Option
Agreement, an Option granted under the Plan shall be exercisable in whole, or in
part, at any time during the term of the Option. Payment shall be made in cash
or, unless otherwise provided in the Stock Option Agreement, in whole shares of
Common Stock already owned by the person exercising the Option or, unless
otherwise provided in the Stock Option Agreement, partly in cash and partly in
such Common Stock. An
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Option shall be exercised by written notice to the Company. Such notice shall
state that the person exercising the Option elects to exercise the Option, the
number of shares in respect of which it is being exercised and the manner of
payment for such shares, and shall either (i) be accompanied by payment of the
full purchase price of such shares or (ii) fix a date (not more than 10 business
days from the date of exercise) for the payment of the full purchase price of
such shares. Cash payments shall be made by wire transfer, certified or bank
check or personal check, in each case payable to the order of the Company;
provided, however, that the Company shall not be required to deliver
certificates for shares with respect to which an Option is exercised until the
Company has confirmed the receipt of good and available funds in payment of the
purchase price thereof. Common Stock payments (valued at the Fair Market Value
of a share of Common Stock on the date of exercise) shall be made by delivery of
stock certificates in negotiable form. If certificates representing Common Stock
are used to pay all or part of the purchase price of an Option, separate
certificates shall be delivered by the Company representing the same number of
shares as each certificate so used, and an additional certificate shall be
delivered representing any additional shares to which the person exercising the
Option is entitled as a result of the exercise of the Option. Except as provided
in paragraph 9 hereof, no Option may be exercised at any time unless the Holder
thereof is then an employee of the Company or of a Subsidiary or, if the option
agreement so provides, is an Employee of an Affiliated Entity. No Holder or
other person exercising the Option shall have any of the rights of a stockholder
with respect to the shares subject to the Option until such shares shall be
transferred to the Holder or such other person upon the exercise of the Option.
D. ISOs. Notwithstanding anything to the contrary contained herein, but
subject to paragraph 8 hereof, in the case of ISOs, the aggregate Fair Market
Value (determined at the time the Option is granted) of the shares of Common
Stock covered by ISOs which first become exercisable in any calendar year under
the Plan by any individual employee (and under all other plans of the Company or
any Subsidiary which provide for the granting of ISOs) shall not exceed
$100,000.
E. SARs. The Board may (but shall not be obligated to) grant SARs
pursuant to the provisions of this subparagraph 6E to the Holder of any Option
granted under the Plan (hereinafter in this subparagraph 6E called a related
Option) with respect
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to all or a portion of the shares subject to the related Option. An SAR may only
be granted concurrently with the grant of the related Option. Subject to the
terms and provisions of this subparagraph 6E, each SAR shall be exercisable only
at the same time and to the same extent the related Option is exercisable, and
in no event after the termination or exercise of the related Option.
Notwithstanding the foregoing, no SAR may be exercised within a period of six
months after the date of grant of the SAR. SARs granted under the Plan shall be
exercisable in whole or in part by notice to the Company. Such notice shall
state that the person exercising the SARs elects to exercise the SARs, the
number of shares in respect of which the SARs are being exercised and the form
of payment requested.
Subject to the terms and provisions of this subparagraph 6E, upon the
exercise of SARs, the person exercising the SARs shall be entitled to receive
from the Company consideration (in the form hereinafter provided) equal in value
to the excess of the Fair Market Value as of the date of exercise of the SARs of
each share of Common Stock with respect to which such SARs have been exercised
over the option price per share of Common Stock subject to the related Option.
Upon the exercise of an SAR, the person exercising the SARs may specify the form
of consideration to be received, which shall be in shares of Common Stock
(valued at Fair Market Value on the date of exercise of the SAR), or in cash, or
partly in cash and partly in shares of Common Stock as the person exercising the
SARs shall request; provided, however, that the Board in its sole discretion may
disapprove the form of consideration requested and instead authorize the payment
of such consideration in shares of Common Stock (valued as aforesaid), or in
cash, or partly in cash and partly in shares of Common Stock. Any election by
the person exercising the SARs to receive cash in full or partial settlement of
the SAR, as well as any exercise of an SAR for such cash, shall be made only
during the period beginning on the third business day following the date of
release for publication of quarterly or annual summary statements of sales and
earnings and ending on the twelfth business day following such date (the
"Exercise Period"). Unless the Board determines otherwise, the number of SARs
which may be exercised for cash, or partly for cash and partly for shares of
Common Stock, during any Exercise Period may not exceed twenty percent of the
aggregate number of shares of Common Stock originally subject to the related
Option (as such original number, without giving effect to the exercise of any
portion of the related Option, shall have been retroactively adjusted by
application of the adjustment(s), if any,
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determined in accordance with paragraph 13 hereof or the corresponding
provisions of any outstanding Stock Option Agreement), but such SARs shall be
exercisable only to the extent the related Option is exercisable. For purposes
of this subparagraph 6E, the date of exercise of an SAR shall mean the date on
which the Company shall have received notice from the person exercising the SARs
of the exercise of such SAR, except that, upon exercise during the Exercise
Period of an SAR granted in tandem with a Nonqualified Stock Option, the date of
exercise of such SAR shall be deemed to be the date during the Exercise Period
on which the highest reported closing sales price of a share of Common Stock as
reported on the Composite Tape occurred and the Fair Market Value of such shares
shall be deemed to be such highest reported closing sales price.
Upon the exercise of SARs, the related Option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised, and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock available for the grant of Options under the Plan. Upon the
exercise or termination of the related Option, the SARs with respect to such
related Option shall be considered to have been exercised or terminated to the
extent of the number of shares of Common Stock with respect to which the related
Option was so exercised or terminated.
The provisions of paragraphs 4, 6B and 9 through 22 of the Plan (to the
extent that such provisions are applicable to Options) shall also be applicable
to SARs unless the context otherwise requires. The effective date of the grant
of an SAR shall be the date on which the Board approves the grant of such SAR.
Each grantee of an SAR shall be notified promptly of the grant of an SAR.
Notwithstanding anything to the contrary contained in this subparagraph
6E, SARs shall not be exercisable unless at the time of such exercise (i) the
Holder or other person exercising the SARs is directly or indirectly subject to
Section 16 of the Exchange Act or (ii) sales of Common Stock by the person
exercising the SARs would be reportable under Section 16 by the original Holder
of the related Option.
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F. Limited Rights. The Board may (but shall not be obligated to) grant
Limited Rights pursuant to the provisions of this subparagraph 6F to the Holder
of any Option (hereinafter in this subparagraph 6F called a related Option) with
respect to all or a portion of the shares subject to the related Option. A
Limited Right may only be granted concurrently with the grant of the related
Option. A Limited Right may be exercised only during the period (a) beginning on
the first day following either (i) the date of approval by the stockholders of
the Company of an Approved Transaction (as defined in the last paragraph of
paragraph 8 hereof), (ii) the date of a Control Purchase (as defined in the last
paragraph of paragraph 8 hereof), or (iii) the date of a Board Change (as
defined in the last paragraph of paragraph 8 hereof), and (b) ending on the
thirtieth day (or such other date specified in the Stock Option Agreement)
following such date. Each Limited Right shall be exercisable only to the extent
the related Option is exercisable, and in no event after the termination of the
related Option. Notwithstanding the provisions of the two immediately preceding
sentences, no Limited Right may be exercised within a period of six months after
the date of grant of the Limited Right.
Upon the exercise of Limited Rights, the related Option shall be
considered to have been exercised to the extent of the number of shares of
Common Stock with respect to which such Limited Rights are exercised, and shall
be considered to have been exercised to that extent for purposes of determining
the number of shares of Common Stock available for the grant of Options under
the Plan. Upon the exercise or termination of the related Option, the Limited
Rights with respect to such related Option shall be considered to have been
exercised or terminated to the extent of the number of shares of Common Stock
with respect to which the related Option was so exercised or terminated.
The provisions of paragraphs 4, 6B and 9 through 22 of the Plan (to the
extent that such provisions are applicable to Options) shall also be applicable
to Limited Rights unless the context otherwise requires. The effective date of
the grant of a Limited Right shall be the date on which the Board approves the
grant of such Limited Right. Each grantee of a Limited Right shall be notified
promptly of the grant of the Limited Right.
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Limited Rights granted under the Plan shall be exercisable in whole or
in part by notice to the Company. Such notice shall state that the person
exercising the Limited Rights elects to exercise the Limited Rights and the
number of shares in respect of which the Limited Rights are being exercised. The
effective date of exercise of a Limited Right shall be deemed to be the date on
which the Company shall have received such notice. Upon the exercise of Limited
Rights granted in tandem with an ISO, except as otherwise provided in the Stock
Option Agreement, the person exercising the Limited Rights shall receive in cash
an amount equal to the excess of the Fair Market Value on the date of exercise
of such Limited Rights of each share of Common Stock with respect to which such
Limited Right shall have been exercised over the option price per share of
Common Stock subject to the related ISO.
Upon the exercise of Limited Rights granted in tandem with a
Nonqualified Stock Option, except as otherwise provided in the Stock Option
Agreement, the person exercising the Limited Rights shall receive in cash an
amount equal to the product computed by multiplying (i) the excess of (a) the
higher of (x) the Minimum Price Per Share (as hereinafter defined), or (y) the
highest reported closing sales price of a share of Common Stock as reported on
the Composite Tape at any time during the period beginning on the sixtieth day
prior to the date on which such Limited Rights are exercised and ending on the
date on which such Limited Rights are exercised, over (b) the option price per
share of Common Stock subject to the related Nonqualified Stock Option, by (ii)
the number of shares of Common Stock with respect to which such Limited Rights
are being exercised.
For purposes of this subparagraph 6F, the term "Minimum Price Per Share"
shall mean the highest gross price (before brokerage commissions, soliciting
dealers' fees and similar charges) paid or to be paid for any share of Common
Stock (whether by way of exchange, conversion, distribution, liquidation or
otherwise) in, or in connection with, any Approved Transaction or Control
Purchase (as such terms are defined in paragraph 8 hereof) which occurs at any
time during the period beginning on the sixtieth day prior to the date on which
such Limited Rights are exercised and ending on the date on which such Limited
Rights are exercised. For purposes of this definition, if the consideration paid
or to be paid in any such Approved Transaction or Control Purchase shall
consist, in whole or in part, of consideration other than cash, the Board shall
take such action, as in its judgment it deems
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appropriate, to establish the cash value of such consideration, but such
valuation shall not be less than the value, if any, attributed to such
consideration by any other party to such Approved Transaction or Control
Purchase.
Notwithstanding anything to the contrary contained in this subparagraph
6F, Limited Rights shall not be exercisable unless at the time of the occurrence
of an Approved Transaction, Control Purchase or Board Change (as such terms are
defined in paragraph 8 hereof) (i) the Holder or other person exercising the
Limited Rights is directly or indirectly subject to Section 16(b) of the
Exchange Act or (ii) sales of Common Stock by the person exercising the Limited
Rights would be reportable under Section 16 by the original Holder of the
related Option. The Stock Option Agreement evidencing an Option may contain such
provisions limiting the exercise of Limited Rights as the Board deems
appropriate to ensure that the penalty provisions of Section 4999 of the Code,
or any successor thereto in effect at the time of such exercise, will not apply
to any stock or cash received from the Company by the Holder or other person
exercising the Limited Rights.
G. Nontransferability of Options. Except as set forth in this
subparagraph 6G, no Options shall be transferable otherwise than by will or the
laws of descent and distribution, and an Option may be exercised during the
lifetime of the Holder thereof only by such Holder. A breach by the Holder of
any of the restrictions, terms or conditions provided in the Plan or in the
Holder's Stock Option Agreements will cause the Options covered thereby to be
terminated. The Stock Option Agreement may provide that Nonqualified Stock
Options and SARs are transferable by gift to such persons or entities and upon
such terms and conditions as specified in the Holder's Stock Option Agreement.
7. RESTRICTED SHARES.
A. Valuation Date, Issuance and Price. The Board shall determine whether
certificates representing shares of Common Stock covered by awards of Restricted
Shares will be issued at the beginning or the end of the Restriction Period,
whether Dividend Equivalents will be paid during the Restriction Period in the
event shares of Common Stock are to be issued at the end of the Restriction
Period and shall designate a Valuation Date with respect to each award of
Restricted Shares and may prescribe restrictions, terms and conditions
applicable to the
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vesting of such Restricted Shares in addition to those provided in this Plan.
The Board shall determine the price, if any, to be paid by the Holder for the
Restricted Shares.
B. Issuance of Stock at Beginning of the Restriction Period. If
certificates representing shares of Common Stock are issued at the beginning of
the Restriction Period, the stock certificate or certificates representing such
shares shall be registered in the name of the Holder to whom such Restricted
Shares shall have been awarded. During the Restriction Period, certificates
representing the Restricted Shares and any securities constituting Retained
Distributions shall bear a restrictive legend to the effect that ownership of
the Restricted Shares (and such Retained Distributions), and the enjoyment of
all rights appurtenant thereto, are subject to the restrictions, terms and
conditions provided in the Plan and the applicable Restricted Shares Agreement.
Such certificates shall be deposited by such Holder with the Company, together
with stock powers or other instruments of assignment, each endorsed in blank,
which will permit transfer to the Company of all or any portion of the
Restricted Shares and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the applicable Restricted Shares Agreement.
C. Restrictions. If certificates representing shares of Common Stock
covered by an award of Restricted Shares are issued at the beginning of the
Restriction Period, the Restricted Shares shall constitute issued and
outstanding shares of Common Stock for all corporate purposes. The Holder will
have the right to vote such Restricted Shares, to receive and retain all regular
cash dividends, and such other distributions as the Board may in its sole
discretion designate, paid or distributed on such Restricted Shares and to
exercise all other rights, powers and privileges of a Holder of Common Stock
with respect to such Restricted Shares, with the exception that (i) the Holder
will not be entitled to delivery of the stock certificate or certificates
representing such Restricted Shares until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing such Restricted Shares during the
Restriction Period; (iii) other than regular cash dividends and such other
distributions as the Board may in its sole discretion designate, the Company
will retain custody of all distributions ("Retained Distributions") made or
declared with respect to such
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Restricted Shares (and such Retained Distributions will be subject to the same
restrictions, terms and conditions as are applicable to such Restricted Shares)
until such time, if ever, as the Restricted Shares with respect to which such
Retained Distributions shall have been made, paid or declared shall have become
vested, and such Retained Distributions shall not bear interest or be segregated
in separate accounts; (iv) the Holder may not sell, assign, transfer, pledge,
exchange, encumber or dispose of such Restricted Shares or any Retained
Distributions during the Restriction Period; and (v) a breach of any
restrictions, terms or conditions provided in the Plan or established by the
Board with respect to such Restricted Shares or Retained Distributions will
cause a forfeiture of such Restricted Shares and any Retained Distributions with
respect thereto.
D. Issuance of Stock at End of the Restriction Period. If certificates
representing shares of Common Stock covered by an award of Restricted Shares are
to be issued at the end of the Restriction Period, the Holder shall have none of
the rights of a stockholder with respect to the shares of Common Stock covered
by an award of Restricted Shares until such shares have been transferred to the
Holder at the end of the Restriction Period. If shares of Common Stock are to be
issued at the end of the Restriction Period, the Holder, unless otherwise
determined by the Board, shall be entitled to receive Dividend Equivalents
during the Restriction Period with respect to the shares of Common Stock covered
thereby.
E. Cash Awards. In connection with any award of Restricted Shares, the
Board may authorize the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested; provided, however, that the amount of the cash payment, if any, that a
Holder shall be entitled to receive shall not exceed 100% of the aggregate
Maturity Value of the Restricted Shares awarded to such Holder hereunder. Such
Cash Awards shall be payable in accordance with such additional restrictions,
terms and conditions as shall be prescribed by the Board and shall be in
addition to any other salary, incentive, bonus or other compensation payments
which Holders shall be otherwise entitled or eligible to receive from the
Company.
F. Completion of Restriction Period. On the Valuation Date with respect
to each award of Restricted Shares, and the satisfaction of any other applicable
restrictions, terms and conditions (i) all or part of such Restricted Shares
shall
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become vested, (ii) any Retained Distributions with respect to such Restricted
Shares shall become vested to the extent that the Restricted Shares related
thereto shall have become vested, and (iii) any Cash Award to be received by the
Holder with respect to such Restricted Shares shall become payable, all in
accordance with the terms of the applicable Restricted Shares Agreement. Any
such Restricted Shares and Retained Distributions that shall not have become
vested shall be forfeited to the Company and the Holder shall not thereafter
have any rights with respect to such Restricted Shares and Retained
Distributions that shall have been so forfeited.
8. ACCELERATION OF OPTIONS AND RESTRICTED SHARES.
Notwithstanding any contrary waiting period or installment period in any
Stock Option Agreement or any Restriction Period in any Restricted Share
Agreement or in the Plan, each outstanding Option granted under the Plan shall,
except as otherwise provided in the Stock Option Agreement, become exercisable
in full for the aggregate number of shares covered thereby, and each Restricted
Share, except as otherwise provided in the Restricted Shares Agreement, shall
vest unconditionally, in the event (i) the Board (or, if approval of the Board
is not required as a matter of law, the stockholders of the Company) shall
approve (a) any consolidation or merger of the Company (x) as contemplated in
the Amended and Restated Agreement and Plan of Merger dated as of September 22,
1995 among Time Warner Inc., TW Inc., Time Warner Acquisition Corp., TW
Acquisition Corp. and Turner Broadcasting System, Inc., as the same may be
amended from time to time, or (y) in which the Company is not the continuing or
surviving corporation or pursuant to which shares of Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the Holders of Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (b) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company, or (c) the adoption of any
plan or proposal for the liquidation or dissolution of the Company, or (ii) any
person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act), corporation or other entity (other than the Company or any
employee benefit plan sponsored by the Company or any Subsidiary) (a) shall
purchase any Common Stock of the Company (or securities convertible into the
Company's Common Stock) for
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cash, securities or any other consideration pursuant to a tender offer or
exchange offer, without the prior consent of the Board, or (b) shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 20
percent or more of the combined voting power of the then outstanding securities
of the Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors (calculated
as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire
the Company's securities), or (iii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire Board
shall cease for any reason to constitute a majority thereof unless the election,
or the nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. Any
transaction referred to in the foregoing clause (i) is herein called an Approved
Transaction, any purchase pursuant to a tender offer or exchange offer or
otherwise as described in the foregoing clause (ii) is herein called a Control
Purchase and the cessation of individuals constituting a majority of the Board
as described in the foregoing clause (iii) is herein called a Board Change. The
Stock Option Agreement and Restricted Shares Agreement evidencing Options or
Restricted Shares granted under the Plan may contain such provisions limiting
the acceleration of the exercise of Options and the acceleration of the vesting
of Restricted Shares as provided in this paragraph 8 as the Board deems
appropriate to ensure that the penalty provisions of Section 4999 of the Code,
or any successor thereto in effect at the time of such acceleration, will not
apply to any stock or cash received from the Company by the Holder or such
Holder's permitted transferee pursuant to subparagraph 6G.
9. TERMINATION OF EMPLOYMENT.
A. Death of Holder. If a Holder shall die during the Restriction Period
with respect to any Restricted Shares or prior to the exercise of any Option,
then:
(i) unless otherwise provided in a Restricted Shares
Agreement, the Restriction Period applicable to each award of Restricted
Shares shall be deemed to have expired and all such Restricted Shares
and Retained Distributions shall become vested and any Cash Award
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payable pursuant to the applicable Restricted Shares Agreement shall be
adjusted in such manner as provided in the Restricted Shares Agreement;
(ii) in the case of either an ISO or a Nonqualified Stock
Option, if the Holder dies while employed by the Company or a Subsidiary
or while the Holder is an Employee of an Affiliated Entity, then such
Option (subject to clause (vi) below) may be exercised by the legatee(s)
or personal representative or by a permitted transferee pursuant to
subparagraph 6G of such Holder at any time within five years after such
Holder's death;
(iii) in the case of either an ISO or a Nonqualified
Option, if the Holder ceases to be an employee of the Company or any
Subsidiary or ceases to be an Employee of an Affiliated Entity due to
Total Disability and such Holder dies within one year after such
termination of employment, then such Option (subject to clause (vi)
below) may be exercised by the legatee(s) or personal representative or
by a permitted transferee pursuant to subparagraph 6G of such Holder at
any time during the remainder of the period during which such Holder
would have been able to exercise such Option had the Holder not died;
(iv) in the case of either an ISO or a Nonqualified Stock
Option, if the Holder ceases to be an employee of the Company or a
Subsidiary or ceases to be an Employee of an Affiliated Entity as a
result of retirement pursuant to any retirement plan of the Company, a
Subsidiary or such Affiliated Entity and such Holder dies during the
period after retirement when such Option was still exercisable by such
Holder, then such Option (subject to clause (vi) below) may be exercised
by the legatee(s) or personal representative or by a permitted
transferee pursuant to subparagraph 6G of such Holder at any time during
the remainder of the period during which such Holder would have been
able to exercise such Option had the Holder not died;
(v) in the case of either an ISO or a Nonqualified Stock
Option, if the Holder dies within three months after termination of
employment with the Company or a Subsidiary or after ceasing to be an
Employee of an Affiliated Entity and clauses (iii) and (iv) are not
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applicable, then such Option (subject to clause (vi) below) may be
exercised by the legatee(s) or personal representative or by a permitted
transferee pursuant to subparagraph 6G of such Holder at any time within
one year after such Holder's death, and;
(vi) the exercise of Options after the termination of
employment with the Company or a Subsidiary or after ceasing to be an
Employee of an Affiliated Entity for any reason is subject to the
following: (a) no Option may be exercised after the expiration date of
such Option; (b) only Options exercisable by the Holder or such Holder's
permitted transferee pursuant to subparagraph 6G at the time of such
termination may be exercised after such termination; and (c) any Stock
Option Agreement may provide a shorter period of time for the exercise
of Options than provided in clauses (ii) through (v) above.
B. Total Disability. If a Holder shall cease to be an employee of the
Company or any Subsidiary or ceases to be an Employee of an Affiliated Entity
during the Restriction Period with respect to any Restricted Shares or prior to
the exercise of any Option as a result of Total Disability; then:
(i) in the case of Restricted Shares, clause
A(i) above shall apply; and
(ii) in the case of either an ISO or a Nonqualified Stock
Option, such Option (subject to clause A(vi) above) may be exercised by
such Holder (or his or her personal representative or permitted
transferee pursuant to subparagraph 6G) at any time within one year
after such termination of employment.
C. Retirement. If a Holder ceases to be an employee of the Company or
any Subsidiary or ceases to be an Employee of an Affiliated Entity during the
Restriction Period with respect to any Restricted Shares or prior to the
exercise of any Option as a result of retirement pursuant to any retirement plan
of the Company, any Subsidiary or such Affiliated Entity, then:
(i) unless the Board determines otherwise, in the case of
Restricted Shares, all Restricted Shares, Retained Distributions and
rights to any Cash Awards will be forfeited;
(ii) in the case of an ISO, such ISO (subject
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to clause A(vi) above) may be exercised at any time within
three months after such Holder's termination of
employment; and
(iii) in the case of a Nonqualified Stock Option, such
Option (subject to clause A(vi) above) may be exercised at any time
within five years after such Holder's termination of employment.
D. Termination by Company for Cause. If during the Restriction Period
with respect to any Restricted Shares or prior to the exercise of any Option, a
Holder's employment with the Company or any Subsidiary shall be terminated by
the Company or such Subsidiary for cause or an Affiliated Entity shall cause the
Holder to cease to be an Employee of an Affiliated Entity for cause (for these
purposes, cause shall have the meaning ascribed thereto in any employment
agreement to which such Holder is a party or, in the absence thereof, shall
include but not be limited to, insubordination, dishonesty, incompetence, moral
turpitude, other misconduct of any kind and the refusal to perform his or her
duties and responsibilities for any reason other than illness or incapacity;
provided, however, that if such termination occurs within 12 months after an
Approved Transaction, Control Purchase or Board Change, termination for cause
shall only mean a felony conviction for fraud, misappropriation or
embezzlement), then:
(i) all options held by such Holder and any
permitted transferee pursuant to subparagraph 6G shall
immediately terminate; and
(ii) such Holder's rights to all Restricted Shares,
Retained Distribution and any Cash Awards shall be forfeited
immediately.
E. Termination by Holder for Cause or by Company without Cause. If
during the Restriction Period with respect to any Restricted Shares or prior to
the exercise of any Option, a Holder's employment with the Company or any
Subsidiary shall be terminated by the Holder for cause or by the Company or
Subsidiary without cause or an Affiliated Entity shall cause the Holder to cease
to be an Employee of an Affiliated Entity without cause or the Holder shall
terminate his or her employment as an Employee of an Affiliated Entity for cause
(for these purposes, cause shall have the meaning ascribed thereto in any
employment agreement to which the Holder is a
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party or in the absence thereof, as determined by the Board)
then:
(i) in the case of Restricted Shares, the
provisions of clause A(i) above shall apply; and
(ii) in the case of either an ISO or a Nonqualified Stock
Option, such Option (subject to clause A(vi) above) may be exercised at
any time within three months after such Holder's termination of
employment.
F. Termination for Other Reason. If during the Restriction Period with
respect to any Restricted Shares or prior to the exercise of any Option, a
Holder shall cease to be an employee of the Company or any Subsidiary or shall
cease to be an Employee of an Affiliated Entity for any reason other than as set
forth in subparagraphs A through E above, then:
(i) all such Holder's rights to Restricted
Shares, Retained Distributions and any Cash Awards shall
be forfeited immediately; and
(ii) in the case of an ISO or a Nonqualified Stock Option,
the provisions of clause E(ii) above shall apply.
G. General. A leave of absence, unless otherwise determined by the Board
prior to the commencement thereof, shall not be considered a termination of
employment. Awards made under this Plan shall not be affected by any change of
employment so long as the Holder continues to be an employee of the Company or a
Subsidiary or an Employee of an Affiliated Entity.
10. RIGHT OF THE EMPLOYER TO TERMINATE EMPLOYMENT.
Nothing contained in the Plan or in any Award shall confer on any Holder
any right to continue in the employ of the Company or any of its Subsidiaries or
to continue as an Employee of an Affiliated Entity or interfere in any way with
the right of the Company or a Subsidiary or an Affiliated Entity to terminate
the employment of the Holder at any time, with or without cause.
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11. NONALIENATION OF BENEFITS.
Except as provided in subparagraph 6G, no right or benefit under the
Plan shall be subject to anticipation, alienation, sale, assignment,
hypothecation, pledge, exchange, transfer, encumbrance or charge, and any
attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange,
transfer, encumber or charge the same shall be void. No right or benefit
hereunder shall in any manner be liable for or subject to the debts, contracts,
liabilities or torts of the person entitled to such benefit.
12. WRITTEN AGREEMENT.
Each award of Restricted Shares and any right to a Cash Award hereunder
shall be evidenced by a Restricted Shares Agreement and each grant of an Option
shall be evidenced by a Stock Option Agreement, each in such form and containing
such terms and provisions not inconsistent with the provisions of the Plan as
the Board from time to time shall approve. The effective date of the granting of
an Option shall be the date on which the Board approves the granting of such
Option. Each grantee of an Option or Restricted Shares shall be notified
promptly of such grant and a written Stock Option Agreement and/or Restricted
Shares Agreement shall be promptly executed and delivered by the Company and the
grantee, provided that such grant of Options or Restricted Shares shall
terminate if such written Agreement is not signed by such grantee (or his or her
attorney) and delivered to the Company within 60 days after the date the Board
approved such grant. Any such written Agreement may contain such provisions as
the Board deems appropriate to ensure that the penalty provisions of Section
4999 of the Code, or any successor thereto, will not apply to any stock or cash
received from the Company by the Holder or such Holder's permitted transferee
pursuant to subparagraph 6G.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
The Stock Option Agreements and Restricted Shares Agreements evidencing
Awards may contain such provisions as the Board shall determine to be
appropriate for the adjustment of the number and class of all Restricted Shares
and the terms applicable to any Cash Awards and the number and class of shares
subject to each outstanding Option and the option prices in the event of changes
in the outstanding Common Stock of the
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Company by reason of any stock dividend, distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation or
liquidation and the like, and, in the event of any such change in the
outstanding Common Stock of the Company, the aggregate number and class of
shares available under the Plan shall be appropriately adjusted by the Board,
whose determination shall be conclusive.
14. RIGHT OF FIRST REFUSAL.
The Stock Option Agreements and Restricted Shares Agreements may contain
such provisions as the Board shall determine to the effect that if a Holder, or
other person exercising an Option, elects to sell all or any shares of Common
Stock that such Holder or other person acquired upon the exercise of an Option
or upon the vesting of Restricted Shares awarded under this Plan, then such
Holder or other person shall not sell such shares unless such Holder or other
person shall have first offered in writing to sell such shares to the Company at
Fair Market Value on a date specified in such offer (which date shall be at
least three business days and not more than ten business days following the date
of such offer). In any such event, certificates representing shares issued upon
exercise of Options and the vesting of Restricted Shares shall bear a
restrictive legend to the effect that transferability of such shares are subject
to the restrictions contained in the Plan and the applicable Stock Option
Agreement or Restricted Shares Agreement and the Company may cause the registrar
of its Common Stock to place a stop transfer order with respect to such shares.
15. TERMINATION AND AMENDMENT.
Unless the Plan shall theretofore have been terminated as hereinafter
provided, no Awards may be made under the Plan after December 31, 1997. The
Board may at any time prior to December 31, 1997 terminate the Plan, and the
Board may at any time also modify or amend the Plan in such respects as it shall
deem advisable; provided, however, that the Board may not, without approval of
the Holders of a majority of the voting securities of the Company present,
either in person or by proxy, and entitled to vote at a meeting (i) materially
increase (except as provided in paragraph 13 hereof) the maximum number of
shares which may be issued under the Plan, (ii) materially modify the
requirements as to eligibility for
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participation in the Plan, or (iii) materially increase the benefits accruing to
participants under the Plan. No termination, modification or amendment of the
Plan or any outstanding Restricted Shares Agreement or Stock Option Agreement
may, without the consent of the employee (or a transferee of such employee if
the Award, or any part thereof, has been transferred pursuant to subparagraph
6G) to whom any Award shall theretofore have been granted, adversely affect the
rights of such employee (or a transferee of such employee if the Award, or any
part thereof, has been transferred pursuant to subparagraph 6G) with respect to
such Award.
16. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective upon approval by the vote of a majority
of the voting securities of the Company present, either in person or by proxy,
and entitled to vote at the 1988 Annual Meeting of Stockholders to be held on
April 21, 1988, or any adjournment thereof. Prior to such approval, the Board
may, in its discretion, grant or authorize the making of Awards under the Plan
provided that the exercise of Options and the vesting of Restricted Shares shall
be expressly subject to the condition that the Plan shall have been so approved.
Unless the Plan shall be so approved, the Plan and all Awards theretofore made
thereunder shall be and become null and void.
17. GOVERNMENT AND OTHER REGULATIONS.
The obligation of the Company with respect to Awards shall be subject to
(i) all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of a registration statement under the Securities Act of 1933, and
(ii) the rules and regulations of any securities exchange on which the Common
Stock may be listed.
18. WITHHOLDING.
The Company's obligation to deliver shares of Common Stock or to pay
cash upon the exercise of any Nonqualified Stock Option or any SAR granted under
the Plan and to deliver stock certificates or to pay cash upon the vesting of
Restricted Shares or Cash Awards shall be subject to applicable Federal, state
and local tax withholding requirements. Federal, state
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and local withholding tax paid upon the exercise of any Nonqualified Stock
Option and upon the vesting of Restricted Shares may be paid in shares of Common
Stock upon such terms and conditions as the Board shall determine; provided,
however, that the Board in its sole discretion may disapprove such payment and
require that such taxes be paid in cash.
19. SEPARABILITY.
If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 under the Exchange Act (as the same shall be amended
from time to time) and/or Section 422A of the Code (as the same shall be amended
from time to time), then such terms or provisions shall be deemed inoperative to
the extent they so conflict with the requirements of said Rule 16b-3, and/or
with respect to ISO's, Section 422A of the Code.
With respect to ISOs, if this Plan does not contain any provision
required to be included herein under Section 422A of the Code (as the same shall
be amended from time to time), such provision shall be deemed to be incorporated
herein with the same force and effect as if such provision had been set out at
length herein.
20. NON-EXCLUSIVITY OF THE PLAN.
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION.
By acceptance of an Award, each Holder shall be deemed to have agreed
that the award of Restricted Shares and any right to a Cash Award and the grant
of any Option and the exercise thereof or of any SAR or Limited Right are
special incentive compensation and that they will not be taken into account as
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"salary" or "compensation" or "bonus" in determining the amount of any payment
under any pension, retirement or other qualified employee benefit plan of the
Company or any Subsidiary or any Affiliated Entity. In addition, each
beneficiary of a deceased Holder shall be deemed to have agreed that such Award
will not affect the amount of any life insurance coverage provided by the
Company on the life of the Holder which is payable to such beneficiary under any
life insurance plan covering employees of the Company or any Subsidiary or any
Affiliated Entity.
22. GOVERNING LAW.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
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As Amended through
July 18, 1996
TIME WARNER
1989 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner 1989 Stock Incentive Plan, as amended
(hereinafter the "Plan"), is to provide for the granting of stock options, stock
appreciation rights and restricted shares to certain employees, including
officers and directors who are also employees of the Company or its
Subsidiaries. The general purpose of the Plan is to promote the interests of the
Company and its stockholders by providing to certain employees of the Company or
its Subsidiaries additional incentives to continue and increase their efforts
with respect to, and to remain in the employ of, the Company or its
Subsidiaries.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement, stock
appreciation rights agreement and the restricted shares agreement
specified in Section 12, both individually and collectively, as the
context so requires.
(b) "Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of law,
the stockholders of the Company) shall approve (i) any consolidation or
merger of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of Common Stock would
be converted into cash, securities or other property, other than a
merger of the Company (x) as contemplated in the Amended and Restated
Agreement and Plan of Merger dated as of September 22, 1995 among Time
Warner Inc., TW Inc., Time Warner Acquisition Corp., TW Acquisition
Corp. and Turner Broadcasting System, Inc., as the same may be amended
from time to time, or (y) in which the holders of Common Stock
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger,
or (ii) any sale, lease, exchange, or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of
the assets
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of the Company, or (iii) the adoption of any plan or proposal for the
liquidation or dissolution of the Company.
(c) "Award" means grants of Options, SARs and/or Restricted
Shares under this Plan.
(d) "Board" means the Board of Directors of the
Company.
(e) "Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board ceased for any reason to constitute a majority thereof
unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of the period.
(f) "Cash Award" means the amount of cash, if any, to be paid to
an employee pursuant to Section 7.5.
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
Reference to any specific Code section shall include any successor
section.
(h) "Committee" means the Committee of the Board
appointed pursuant to Section 4.
(i) "Common Stock" means the common stock, par value
$1.00 per share, of the Company.
(j) "Company" means Time Warner Inc., a Delaware
corporation, and any successor thereto.
(k) "Composite Tape" means the New York Stock
Exchange Composite Tape.
(l) "Control Purchase" means any transaction in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act), corporation or other entity (other than the Company or
any employee benefit plan sponsored by the Company or any Subsidiary)
(i) shall purchase any Common Stock (or securities convertible into
Common Stock) for cash, securities or any other consideration pursuant
to a tender offer or exchange offer, without the prior consent of the
Board, or (ii) shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 20% or more of the combined
voting power of the then
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outstanding securities of the Company ordinarily (and apart from the
rights accruing under special circumstances) having the right to vote in
the election of directors (calculated as provided in Rule 13d-3(d) in
the case of rights to acquire the Company's securities).
(m) "Dividend Equivalents" means, with respect to Restricted
Shares to be issued at the end of the Restriction Period, to the extent
specified by the Board only, an amount equal to the regular cash
dividends and all other distributions (or the economic equivalent
thereof) which are payable to stockholders of record during the
Restriction Period on a like number of shares of Common Stock.
(n) "Effective Date" means the date the Plan becomes effective
pursuant to Section 16.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any
successor section.
(p) "Exercise Period" has the meaning ascribed
thereto in Section 6.5.
(q) "Fair Market Value" of a share of Common Stock means the
average of the high and low sales prices of a share of Common Stock on
the Composite Tape on the date in question, except as otherwise provided
in Section 6.5.
(r) "General SARs" means stock appreciation rights subject to the
terms of Section 6.5(b).
(s) "Holder" means an employee of the Company or a Subsidiary who
has received an Award under this Plan.
(t) "ISO" means an incentive stock option within the meaning of
section 422A(b) of the Code.
(u) "Limited SARs" means stock appreciation rights subject to the
terms of Section 6.5(c).
(v) "Minimum Price Per Share" means the highest gross price
(before brokerage commissions, soliciting dealers' fees and similar
charges) paid or to be paid for any share of Common Stock (whether by
way of exchange, conversion, distribution, liquidation or otherwise) in,
or in connection with, any Approved Transaction or Control Purchase
which occurs at any time during the period beginning on the sixtieth day
prior to the date on which Limited SARs are exercised and ending on the
date on which
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Limited SARs are exercised. If the consideration paid or to be paid in
any such Approved Transaction or Control Purchase shall consist, in
whole or in part, of consideration other than cash, the Board shall take
such action, as in its judgment it deems appropriate, to establish the
cash value of such consideration, but such valuation shall not be less
than the value, if any, attributed to such consideration by any other
party to such Approved Transaction or Control Purchase.
(w) "Nonqualified Stock Option" means a stock option that is
designated as a nonqualified stock option.
(x) "Option" means any ISO or Nonqualified Stock
Option.
(y) "Plan" has the meaning ascribed thereto in
Section 1.
(z) "Restricted Shares" means shares of Common Stock or the right
to receive shares of Common Stock, as the case may be, awarded to an
employee of the Company or a Subsidiary pursuant to Section 7.
(aa) "Restriction Period" means a period of time beginning on the
date of each award of Restricted Shares and ending on the Valuation Date
with respect to such award.
(bb) "Retained Distributions" has the meaning
ascribed thereto in Section 7.3.
(cc) "SARs" means General SARs and Limited SARs.
(dd) "SEC" means the Securities and Exchange
Commission.
(ee) "Subsidiary" means any present or future subsidiary of the
Company as such term is defined in section 425 of the Code and any
present or future trade or business, whether or not incorporated,
controlled by or under common control with the Company. An entity shall
be deemed a Subsidiary of the Company only for such periods as the
requisite ownership or control relationship is maintained.
(ff) "Total Disability" means a permanent and total disability as
defined in section 22(e)(3) of the Code.
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(gg) "Valuation Date" with respect to any Restricted Shares
awarded hereunder means the date designated as such in the Agreement
with respect to such award of Restricted Shares pursuant to Section 7.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 13 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is 5,500,000. If and to the extent that an Option shall
expire, terminate or be canceled for any reason without having been exercised
(or without having been considered to have been exercised as provided in Section
6.5(a)), the shares of Common Stock subject to such expired, terminated or
canceled portion of the Option shall again become available for purposes of the
Plan. In addition, any Restricted Shares which are forfeited under the terms of
the Plan or any Agreement shall again become available for purposes of the Plan.
3.2. Character of Shares. Shares of Common Stock deliverable under the
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in the Company's treasury, or
both.
3.3. Reservation of Shares. The Company shall at all times reserve a
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in the Company's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to the
express provisions of the Plan, the Board shall have plenary authority, in its
discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the purchase price, if any, of each Restricted Share,
(b) the individuals to whom, and the time or times at which, Awards shall be
granted or awarded, (c) the number of shares to be subject to each Award, (d)
whether an Option shall be an ISO or a Nonqualified Stock Option, (e) when an
Option or SAR can be exercised and whether in whole or in installments, (f) the
time or times and the conditions subject to which Restricted Shares shall become
vested and any Cash Awards shall become payable, and (g) the form, terms and
provisions of any Agreement (which terms may be amended, subject to Section 15).
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4.2. Factors to Consider. In making determinations hereunder, the Board
may take into account the nature of the services rendered by the respective
employees, their present and potential contributions to the success of the
Company and its Subsidiaries and such other factors as the Board in its
discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on the matters referred to in this Section 4
shall be conclusive.
4.4. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee of at least three members, who shall be members of the Compensation
Committee of the Board (or such other persons as the Board may designate), and
delegate to such Committee the authority of the Board to administer the Plan.
Upon such appointment and delegation, the Committee shall have all the powers,
privileges and duties of the Board in the administration of the Plan, except for
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in the Committee and may discharge the Committee. The Committee shall
select one of its members as its chairman and shall hold its meetings at such
times and places as it shall deem advisable. A majority of its members shall
constitute a quorum and all determinations shall be made by a majority of such
quorum. Any determination reduced to writing and signed by all of the members
shall be fully as effective as if it had been made by a majority vote at a
meeting duly called and held.
5. ELIGIBILITY
5.1. General. Awards may be made only to (a) employees, including
officers and directors who are also employees, of the Company or any of its
Subsidiaries and (b) prospective employees of the Company or any of its
Subsidiaries. The exercise of Options and SARs and the vesting of Restricted
Shares granted to a prospective employee shall be conditioned upon such person
becoming an employee of the Company or any of its Subsidiaries. For purposes of
the Plan, the term "prospective employee" shall mean any person who holds an
outstanding offer of employment on specific terms from the Company or any of its
Subsidiaries. Awards may be made to employees who hold or have held Awards under
this Plan or any
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similar or other awards under any other plan of the Company or
its Subsidiaries.
5.2. Intentionally Omitted.
5.3. Special ISO Rule. No ISO shall be granted to an employee who, at
the time the ISO is granted, owns (or is considered as owning within the meaning
of section 425(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any Subsidiary,
unless at the time the ISO is granted the option price is at least 110% of the
Fair Market Value of the Common Stock subject to the ISO and the ISO by its
terms is not exercisable after the expiration of five years from the date it is
granted.
6. OPTIONS AND SARS
6.1. Option Prices. Subject to Section 5.3, the purchase price of the
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
6.2. Term of Options. The term of each Option shall be for such period
as the Board shall determine, as set forth in the applicable Agreement, but not
more than 10 years from the date of grant in the case of an ISO (except as
provided in Section 5.3).
6.3. Exercise of Options. An Option granted under the Plan shall become
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option).
6.4. Manner of Exercise. Payment of the Option purchase price shall be
made in cash or in whole shares of Common Stock already owned by the person
exercising an Option or, partly in cash and partly in such Common Stock;
provided, however, that such payment may be made in whole or in part in shares
of Common Stock only if and to the extent permitted by the applicable Agreement.
An Option shall be exercised by written notice to the Company upon such terms
and conditions as provided in the Agreement. The Company shall effect the
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transfer of the shares of Common Stock purchased under the Option as soon as
practicable, and within a reasonable time thereafter such transfer shall be
evidenced on the books of the Company. No Holder or other person exercising an
Option shall have any of the rights of a stockholder of the Company with respect
to shares of Common Stock subject to an Option granted under the Plan until due
exercise and full payment has been made. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date of such
due exercise and full payment.
6.5. SARS. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
A SAR may be granted either concurrently with the grant of the
related Option or at any time thereafter prior to the complete exercise,
termination, expiration or cancellation of such related Option. Subject to the
terms and provisions of this Section 6.5, each SAR shall be exercisable to the
extent the related Option is then exercisable (and may be subject to such
additional limitations on exercisability as the Agreement may provide), and in
no event after the complete termination or full exercise of the related Option.
SARs shall be exercisable in whole or in part upon notice to the Company upon
such terms and conditions as provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered
to have been exercised to the extent of the number of shares of Common Stock
with respect to which such SARs are exercised and shall be considered to have
been exercised to that extent for purposes of determining the number of shares
of Common Stock in respect of which other Awards may be granted. Upon the
exercise or termination of the related Option, the SARs with respect thereto
shall be considered to have been exercised or terminated to the extent of the
number of shares of Common Stock with respect to which the related Option was so
exercised or terminated.
The provisions of Sections 4, 6 and 8 through 22 (to the extent
that such provisions are applicable to Options) shall also be applicable to SARs
unless the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the
time the related Option is exercisable and subject to the terms and provisions
of this Section 6.5, upon the exercise of General SARs, the person exercising
the General SAR shall be entitled to receive from the Company consideration (in
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the form hereinafter provided) equal in value to the excess of the Fair Market
Value on the date of exercise of the shares of Common Stock with respect to
which such General SARs have been exercised over the aggregate related Option
purchase price for such shares; provided, however, that the Board may, in any
Agreement granting General SARs provide that the appreciation realizable upon
exercise thereof shall be measured from a base higher than the related Option
purchase price.
Upon the exercise of a General SAR, the person exercising the
General SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
General SAR shall comply with all applicable laws and shall additionally comply
(to the extent necessary) with the requirements for exemptive relief under Rule
16b-3 promulgated under the Exchange Act. Unless otherwise specified in the
applicable Agreement, the number of General SARs which may be exercised for
cash, or partly for cash and partly for shares of Common Stock, during any
permitted period of exercise (the "Exercise Period"), may not exceed 20% of the
aggregate number of shares of Common Stock originally subject to the related
Option (as such original number, without giving effect to the exercise of any
portion of the related Option, shall have been retroactively adjusted in
accordance with Section 13 or any corresponding provisions of an applicable
Agreement).
For purposes of this Section 6.5, the date of exercise of a
General SAR shall mean the date on which the Company shall have received notice
from the person exercising the General SAR of the exercise of such General SAR,
except that, upon exercise of a General SAR granted in connection with a
Nonqualified Stock Option during an Exercise Period which consists of the ten
business days beginning on the third business day following the date of the
release for publication of quarterly or annual summary statements of sales and
earnings and ending on the twelfth business day following such date, the date of
exercise of such General SAR shall be deemed to be the date during the Exercise
Period on which the highest reported closing sales price of a share of Common
Stock as reported on the Composite Tape occurred and the Fair Market Value of
such shares shall be deemed to be such highest reported closing sales price.
Notwithstanding anything to the contrary contained in this
Section 6.5, a General SAR shall not be exercisable unless at the time of such
exercise (i) the Holder or other person exercising the General SAR is directly
or indirectly subject to
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Section 16 of the Exchange Act or (ii) sales of Common Stock by the person
exercising the General SAR would be reportable under Section 16 by the original
Holder of the related Option.
(c) Limited SARs. Limited SARs may be exercised only during the
period (a) beginning on the first day following either (i) the date of an
Approved Transaction, (ii) the date of a Control Purchase, or (iii) the date of
a Board Change, and (b) ending on the ninetieth day (or such other date
specified in the Agreement) following such date. The effective date of exercise
of a Limited SAR shall be deemed to be the date on which the Company shall have
received notice from the person exercising the Limited SAR of the exercise
thereof.
Upon the exercise of Limited SARs granted in connection with an
ISO, except as otherwise provided in the Agreement, the person exercising the
Limited SAR shall receive in cash an amount equal to the excess of the Fair
Market Value on the date of exercise of such Limited SARs of the shares of
Common Stock with respect to which such Limited SARs shall have been exercised
over the aggregate related Option purchase price for such shares.
Upon the exercise of Limited SARs granted in connection with a
Nonqualified Stock Option, except as otherwise provided in the Agreement, the
person exercising the Limited SAR shall receive in cash an amount equal to the
product computed by multiplying (a) the excess of (i) the higher of (A) the
Minimum Price Per Share, or (B) the highest reported closing sales price of a
share of Common Stock as reported on the Composite Tape at any time during the
period beginning on the sixtieth day prior to the date on which such Limited
SARs are exercised and ending on the date on which such Limited SARs are
exercised over (ii) the per share Option price of the related Nonqualified Stock
Option, by (b) the number of shares of Common Stock with respect to which such
Limited SARs are being exercised.
Notwithstanding anything to the contrary contained in this
Section 6.5, Limited SARs shall not be exercisable unless at the time of the
occurrence of an Approved Transaction, Control Purchase or Board Change, (i) the
Holder or other person exercising the Limited SAR is directly or indirectly
subject to Section 16 of the Exchange Act or (ii) sales of Common Stock by the
person exercising the Limited SAR would be reportable under Section 16 by the
original Holder of the related Option.
6.6. Nontransferability of Options and SARs. Except as set forth in this
Section 6.6, Options and SARs shall not be transferable other than by will or
the laws of descent and distribution, and Options and SARs may be exercised
during the
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lifetime of the Holder thereof only by such Holder (or his or her court
appointed legal representative). The Agreement may provide that Nonqualified
Stock Options and SARs are transferable by gift to such persons or entities and
upon such terms and conditions as specified in the Agreement.
7. RESTRICTED SHARES
7.1. Valuation Date, Issuance and Price. The Board shall determine
whether shares of Common Stock covered by awards of Restricted Shares will be
issued at the beginning or the end of the Restriction Period, whether Dividend
Equivalents will be paid during the Restriction Period in the event shares of
the Common Stock are to be issued at the end of the Restriction Period and shall
designate a Valuation Date with respect to each award of Restricted Shares and
may prescribe other restrictions, terms and conditions applicable to the vesting
of such Restricted Shares in addition to those provided in the Plan. The Board
shall determine the price, if any, to be paid by the Holder for the Restricted
Shares; provided, however, that the issuance of Restricted Shares shall be made
for at least the minimum consideration necessary to permit such Restricted
Shares to be deemed fully paid and nonassessable. All determinations made by the
Board pursuant to this Section 7.1 shall be specified in the Agreement.
7.2. Issuance of Restricted Shares at Beginning of the Restriction
Period. If shares of Common Stock are issued at the beginning of the Restriction
Period, the stock certificate or certificates representing such Restricted
Shares shall be registered in the name of the Holder to whom such Restricted
Shares shall have been awarded. During the Restriction Period, certificates
representing the Restricted Shares and any securities constituting Retained
Distributions shall bear a restrictive legend to the effect that ownership of
the Restricted Shares (and such Retained Distributions), and the enjoyment of
all rights appurtenant thereto, are subject to the restrictions, terms and
conditions provided in the Plan and the applicable Agreement. Such certificates
shall remain in the custody of the Company and the Holder shall deposit with the
Company stock powers or other instruments of assignment, each endorsed in blank,
so as to permit retransfer to the Company of all or any portion of the
Restricted Shares and any securities constituting Retained Distributions that
shall be forfeited or otherwise not become vested in accordance with the Plan
and the applicable Agreement.
7.3. Restrictions. Restricted Shares issued at the beginning of the
Restriction Period shall constitute issued and outstanding shares of Common
Stock for all corporate purposes. The Holder will have the right to vote such
Restricted Shares,
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to receive and retain all regular cash dividends and such other distributions,
as the Board may in its sole discretion designate, paid or distributed on such
Restricted Shares and to exercise all other rights, powers and privileges of a
Holder of Common Stock with respect to such Restricted Shares; except, that, (a)
the Holder will not be entitled to delivery of the stock certificate or
certificates representing such Restricted Shares until the Restriction Period
shall have expired and unless all other vesting requirements with respect
thereto shall have been fulfilled or waived; (b) the Company will retain custody
of the stock certificate or certificates representing the Restricted Shares
during the Restriction Period as provided in Section 7.2; (c) other than regular
cash dividends and such other distributions as the Board may in its sole
discretion designate, the Company will retain custody of all distributions
("Retained Distributions") made or declared with respect to the Restricted
Shares (and such Retained Distributions will be subject to the same
restrictions, terms and vesting and other conditions as are applicable to the
Restricted Shares) until such time, if ever, as the Restricted Shares with
respect to which such Retained Distributions shall have been made, paid or
declared shall have become vested, and such Retained Distributions shall not
bear interest or be segregated in a separate account; (d) the Holder may not
sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted
Shares or any Retained Distributions or his interest in any of them during the
Restriction Period; and (e) a breach of any restrictions, terms or conditions
provided in the Plan or established by the Board with respect to any Restricted
Shares or Retained Distributions will cause a forfeiture of such Restricted
Shares and any Retained Distributions with respect thereto.
7.4. Issuance of Stock at End of the Restriction Period. Restricted
Shares issued at the end of the Restriction Period shall not constitute issued
and outstanding shares of Common Stock and the Holder shall not have any of the
rights of a stockholder with respect to the shares of Common Stock covered by
such an award of Restricted Shares, in each case, until such shares shall have
been transferred to the Holder at the end of the Restriction Period. If and to
the extent that shares of Common Stock are to be issued at the end of the
Restriction Period, the Holder shall be entitled to receive Dividend Equivalents
with respect to the shares of Common Stock covered thereby either (a) during the
Restriction Period or (b) in accordance with the rules applicable to Retained
Distributions, as the Board may specify in the Agreement.
7.5. Cash Awards. In connection with any award of Restricted Shares, an
Agreement may provide for the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested.
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Such Cash Awards shall be payable in accordance with such additional
restrictions, terms and conditions as shall be prescribed by the Board in the
Agreement and shall be in addition to any other salary, incentive, bonus or
other compensation payments which such Holder shall be otherwise entitled or
eligible to receive from the Company.
7.6. Completion of Restriction Period. On the Valuation Date with
respect to each award of Restricted Shares, and the satisfaction of any other
applicable restrictions, terms and conditions (a) all or part of such Restricted
Shares shall become vested, (b) any Retained Distributions and any unpaid
Dividend Equivalents with respect to such Restricted Shares shall become vested
to the extent that the Restricted Shares related thereto shall have become
vested and (c) any Cash Award to be received by the Holder with respect to such
Restricted Shares shall become payable, all in accordance with the terms of the
applicable Agreement. Any such Restricted Shares, Retained Distributions and any
unpaid Dividend Equivalents that shall not become vested shall be forfeited to
the Company and the Holder shall not thereafter have any rights (including
dividend and voting rights) with respect to such Restricted Shares, Retained
Distributions and any unpaid Dividend Equivalents that shall have been so
forfeited.
8. ACCELERATION OF OPTIONS, SARS AND RESTRICTED SHARES
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period or
Restriction Period in any Agreement or in the Plan or in the event of any
Approved Transaction, Board Change or Control Purchase, unless the applicable
Agreement provides otherwise: (a) in the case of an Option or SAR, each such
outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby; and (b) in the case of Restricted Shares, the Restriction Period
applicable to each such award of Restricted Shares shall be deemed to have
expired and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents shall become vested and any Cash Award payable
pursuant to the applicable Agreement shall be adjusted in such manner as
provided in the Agreement.
9. TERMINATION OF EMPLOYMENT
9.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the
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applicable Agreement; provided, however, that (a) no Option may be exercised
after the scheduled expiration date of such Option; (b) if the Holder's
employment terminates by reason of death or Total Disability, the Option shall
remain exercisable for a period of at least one year following such termination
(but not later than the scheduled expiration of such Option); and (c) any
termination by the Company for cause will be treated in accordance with the
provisions of Section 9.2.
9.2. Termination by Company for Cause. If a Holder's employment with the
Company or a Subsidiary shall be terminated by the Company or such Subsidiary
during the Restriction Period with respect to any Restricted Shares or prior to
the exercise of any Option for cause (for these purposes, cause shall have the
meaning ascribed thereto in any employment agreement to which such Holder is a
party or, in the absence thereof, shall include but not be limited to,
insubordination, dishonesty, incompetence, moral turpitude, other misconduct of
any kind and the refusal to perform his duties and responsibilities for any
reason other than illness or incapacity; provided, however, that if such
termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, termination for cause shall mean only a felony
conviction for fraud, misappropriation or embezzlement), then (a) all Options
held by such Holder and any permitted transferees pursuant to Section 6.6 shall
immediately terminate and (b) such Holder's rights to all Restricted Shares,
Retained Distributions, any unpaid Dividend Equivalents and any Cash Awards
shall be forfeited immediately.
9.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
9.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of the Company or a Subsidiary.
10. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any Holder
any right to continue in the employ of the Company or any of its Subsidiaries or
interfere in any way with the right of the Company or a Subsidiary to terminate
the
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employment of the Holder at any time, with or without cause; subject, however,
to the provisions of any employment agreement between the Holder and the Company
or any Subsidiary.
11. NONALIENATION OF BENEFITS
Except as provided in Section 6.6, no right or benefit under the Plan
shall be subject to anticipation, alienation, sale, assignment, hypothecation,
pledge, exchange, transfer, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer,
encumber or charge the same shall be void. No right or benefit hereunder shall
in any manner be liable for or subject to the debts, contracts, liabilities or
torts of the person entitled to such benefits.
12. WRITTEN AGREEMENT
Each award of Restricted Shares and any right to a Cash Award hereunder
shall be evidenced by a restricted shares agreement; each grant of an Option
shall be evidenced by a stock option agreement which shall designate the Options
granted thereunder as ISOs or Nonqualified Stock Options; and each SAR shall be
evidenced by a stock appreciation rights agreement, each in such form and
containing such terms and provisions not inconsistent with the provisions of the
Plan as the Board from time to time shall approve; provided, however, that such
Awards may be evidenced by a single agreement. The effective date of the
granting of an Award shall be the date on which the Board approves such grant.
Each grantee of an Option, SAR or Restricted Shares shall be notified promptly
of such grant and a written Agreement shall be promptly executed and delivered
by the Company and the grantee, provided that such grant of Options, SARs or
Restricted Shares shall terminate if such written Agreement is not signed by
such grantee (or his attorney) and delivered to the Company within 60 days after
the date the Board approved such grant or if the effectiveness of such grant is
conditioned upon the grantee becoming an employee of the Company or one of its
subsidiaries, the execution by the grantee of an employment agreement with the
Company or one of its subsidiaries or any other similar condition, within 60
days after the occurrence of such condition, if later. Any such written
Agreement may contain (but shall not be required to contain) such provisions as
the Board deems appropriate to ensure that the penalty provisions of section
4999 of the Code will not apply to any stock or cash received by the Holder or
such Holder's permitted transferee pursuant to Section 6.6 from the Company.
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13. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes the character or amount of the
Common Stock while any portion of any Award theretofore granted under the Plan
is outstanding but unexercised or unvested, the Board shall make such
adjustments in the character and number of shares subject to such Award, in the
option price, in the relevant appreciation base and in the Cash Awards, as shall
be applicable, equitable and appropriate in order to make such Award,
immediately after any such change, as nearly as may be practicable, equivalent
to such Award, immediately prior to any such change. If any merger,
consolidation or similar transaction affects the Common Stock subject to any
unexercised or unvested Award theretofore granted under the Plan, the Board or
any surviving or acquiring corporation shall take such action as is equitable
and appropriate to substitute a new award for such Award or to assume such Award
in order to make such new or assumed Award, as nearly as may be practicable,
equivalent to the old Award. If any such change or transaction shall occur, the
number and kind of shares for which Awards may thereafter be granted under the
Plan shall be adjusted to give effect thereto.
14. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine
to the effect that if a Holder, or other person exercising an Option, elects to
sell all or any shares of Common Stock that such Holder or other person acquired
upon the exercise of an Option or upon the vesting of Restricted Shares awarded
under the Plan, then such Holder or other person shall not sell such shares
unless such Holder or other person shall have first offered in writing to sell
such shares to the Company at Fair Market Value on a date specified in such
offer (which date shall be at least three business days and not more than 10
business days following the date of such offer). In any such event, certificates
representing shares issued upon exercise of Options and the vesting of
Restricted Shares shall bear a restrictive legend to the effect that
transferability of such shares are subject to the restrictions contained in the
Plan and the applicable Agreement and the Company may cause the registrar of its
Common Stock to place a stop transfer order with respect to such shares.
15. TERMINATION AND AMENDMENT
15.1. General. Unless the Plan shall theretofore have been terminated as
hereinafter provided, no Awards may be made under the Plan on or after the tenth
anniversary of the
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Effective Date. The Board may at any time prior to the tenth anniversary of the
Effective Date terminate the Plan, and the Board may at any time modify or amend
the Plan in such respects as it shall deem advisable; provided, however, that
any such modification or amendment shall comply with all applicable laws,
applicable stock exchange listing requirements, and applicable requirements for
exemption (to the extent necessary) under Rule 16b-3 under the Exchange Act.
15.2. Modification. No termination, modification or amendment of the
Plan may, without the consent of the person to whom any Award shall theretofore
have been granted (or a transferee of such person if the Award, or any part
thereof, has been transferred pursuant to Section 6.6), adversely affect the
rights of such person with respect to such Award. No modification, extension,
renewal or other change in any Award granted under the Plan shall be made after
the grant of such Award, unless the same is consistent with the provisions of
the Plan. With the consent of the Holder (or a transferee of such Holder if the
award, or any part thereof, has been transferred pursuant to Section 6.6) and
subject to the terms and conditions of the Plan (including Section 15.1), the
Board may amend outstanding Agreements with any Holder (or any such transferee),
including, without limitation, any amendment which would (a) accelerate the time
or times at which the Award may be exercised and/or (b) extend the scheduled
expiration date of the Award. Without limiting the generality of the foregoing,
the Board may but solely with the Holder's consent, agree to cancel any Award
under the Plan held by such Holder and issue a new Award in substitution
therefor, provided that the Award so substituted shall satisfy all of the
requirements of the Plan as of the date such new Award is made.
16. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the vote of a majority
of the voting securities of the Company present, either in person or by proxy,
and entitled to vote at a duly called and held meeting of stockholders of the
Company. Prior to the Effective Date, the Board may, in its discretion, grant or
authorize the making of Awards under the Plan as if the Effective Date had
occurred, provided that the exercise of Options and SARs and the vesting of
Restricted Shares so granted or made shall be expressly subject to the
occurrence of the Effective Date.
17. GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company with respect to Awards shall be subject to
all applicable laws, rules and regulations and
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such approvals by any governmental agencies as may be required, including,
without limitation, the effectiveness of any registration statement required
under the Securities Act of 1933, and the rules and regulations of any
securities exchange on which the Common Stock may be listed. For so long as the
Common Stock is registered under the Exchange Act, the Company shall use its
reasonable efforts to comply with any legal requirements (a) to maintain a
registration statement in effect under the Securities Act of 1933 with respect
to all shares of Common Stock that may be issued to Holders under the Plan, and
(b) to file in a timely manner all reports required to be filed by it under the
Exchange Act.
18. WITHHOLDING
The Company's obligation to deliver shares of Common Stock or pay cash
in respect of any Award or Cash Award under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding taxes paid upon the exercise of any Option and upon the
vesting of Restricted Shares may be paid in shares of Common Stock upon such
terms and conditions as the Board shall determine; provided, however, that the
Board in its sole discretion may disapprove such payment and require that such
taxes be paid in cash.
19. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 under the Exchange Act and/or section 422A of the
Code, then such terms or provisions shall be deemed inoperative to the extent
they so conflict with the requirements of Rule 16b-3, and/or with respect to
ISOs, section 422A of the Code. With respect to ISOs, if this Plan does not
contain any provision required to be included herein under section 422A of the
Code, such provision shall be deemed to be incorporated herein with the same
force and effect as if such provision had been set out at length herein;
provided, further, that to the extent any Option which is intended to qualify as
an ISO cannot so qualify, such Option, to that extent, shall be deemed to be a
Nonqualified Stock Option for all purposes of the Plan.
20. NON-EXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements
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as it may deem desirable, including, without limitation, the granting of stock
options and the awarding of stock and cash otherwise than under the Plan, and
such arrangements may be either generally applicable or applicable only in
specific cases.
21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award or Cash Award, as applicable, each Holder
shall be deemed to have agreed that such Award or Cash Award, as applicable, is
special incentive compensation that will not be taken into account, in any
manner, as salary, compensation or bonus in determining the amount of any
payment under any pension, retirement or other employee benefit plan of the
Company or any Subsidiary. In addition, each beneficiary of a deceased Holder
shall be deemed to have agreed that such Award or Cash Award, as applicable,
will not affect the amount of any life insurance coverage, if any, provided by
the Company on the life of the Holder which is payable to such beneficiary under
any life insurance plan covering employees of the Company or any Subsidiary.
22. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
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As Amended through
July 18, 1996
TIME WARNER INC.
1994 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner Inc. 1994 Stock Option Plan (hereinafter
the "Plan") is to provide for the granting of nonqualified stock options and
stock appreciation rights to certain employees of and consultants and advisors
to Time Warner Inc. and its Subsidiaries in recognition of the valuable services
provided, and contemplated to be provided, by such employees, consultants and
advisors. The general purpose of the Plan is to promote the interests of Time
Warner and its stockholders and to reward dedicated employees, consultants and
advisors of Time Warner and its Subsidiaries by providing them additional
incentives to continue and increase their efforts with respect to, and to remain
in the employ of, Time Warner or its Subsidiaries. This plan is being adopted in
connection with the development of an overall long-term compensation program for
Time Warner and its Subsidiaries.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement and stock
appreciation rights agreement specified in Section 12, both individually
and collectively, as the context so requires.
(b) "Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of law,
the stockholders of Time Warner) shall approve (i) any consolidation or
merger of Time Warner in which Time Warner is not the continuing or
surviving corporation or pursuant to which shares of Common Stock would
be converted into cash, securities or other property, other than a
merger of Time Warner (x) as contemplated in the Amended and Restated
Agreement and Plan of Merger dated as of September 22, 1995 among Time
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Warner Inc., TW Inc., Time Warner Acquisition Corp., TW Acquisition
Corp. and Turner Broadcasting System, Inc., as the same may be amended
from time to time, or (y) in which the holders of Common Stock
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger,
or (ii) any sale, lease, exchange, or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of
the assets of Time Warner, or (iii) the adoption of any plan or proposal
for the liquidation or dissolution of Time Warner.
(c) "Award" means grants of Options and/or SARs
under this Plan.
(d) "Board" means the Board of Directors of Time
Warner.
(e) "Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board ceased for any reason to constitute a majority thereof
unless the election, or the nomination for election by Time Warner's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of the period.
(f) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
Reference to any specific Code section shall include any successor
section.
(g) "Committee" means the Committee comprised of members of the
Board appointed pursuant to Section 4.
(h) "Common Stock" means the common stock, par value $1.00 per
share, of Time Warner.
(i) "Composite Tape" means the New York Stock
Exchange Composite Tape.
(j) "Control Purchase" means any transaction in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act), corporation or other entity (other than Time Warner or
any employee benefit plan sponsored by Time Warner or any of its
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Subsidiaries) (i) shall purchase any Common Stock (or securities
convertible into Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of the Board, or (ii) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of Time Warner representing 20% or more of
the combined voting power of the then outstanding securities of Time
Warner ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors
(calculated as provided in Rule 13d-3(d) in the case of rights to
acquire Time Warner's securities).
(k) "Effective Date" means the date the Plan becomes effective
pursuant to Section 15.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any
successor section.
(m) "Fair Market Value" of a share of Common Stock means the
average of the high and low sales prices of a share of Common Stock on
the Composite Tape on the date in question, except as otherwise provided
in Section 6.5.
(n) "General SARs" means stock appreciation rights subject to the
terms of Section 6.5(b).
(o) "Holder" means an employee of or a consultant or
advisor to Time Warner or any of its Subsidiaries who has
received an Award under this Plan.
(p) "Limited SARs" means stock appreciation rights subject to the
terms of Section 6.5(c).
(q) "Minimum Price Per Share" means the highest gross price
(before brokerage commissions, soliciting dealers' fees and similar
charges) paid or to be paid for any share of Common Stock (whether by
way of exchange, conversion, distribution, liquidation or otherwise) in,
or in connection with, any Approved Transaction or Control Purchase
which occurs at any time during the period beginning on the sixtieth day
prior to the date on which Limited SARs are exercised and ending on the
date on which Limited SARs are exercised. If the consideration paid or
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to be paid in any such Approved Transaction or Control Purchase shall
consist, in whole or in part, of consideration other than cash, the
Board shall take such action, as in its judgment it deems appropriate,
to establish the cash value of such consideration, but such valuation
shall not be less than the value, if any, attributed to such
consideration by any other party to such Approved Transaction or Control
Purchase.
(r) "Option" means any nonqualified stock option
granted pursuant to this Plan.
(s) "Plan" has the meaning ascribed thereto in
Section 1.
(t) "SARs" means General SARs and Limited SARs.
(u) "SEC" means the Securities and Exchange
Commission.
(v) "Subsidiary" of a person means any present or future
subsidiary of such person as such term is defined in section 425 of the
Code and any present or future trade or business, whether or not
incorporated, controlled by or under common control with such person. An
entity shall be deemed a Subsidiary of a person only for such periods as
the requisite ownership or control relationship is maintained.
(w) "Time Warner" means Time Warner Inc., a Delaware corporation,
and any successor thereto.
(x) "Total Disability" means a permanent and total disability as
defined in section 22(e)(3) of the Code.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 12 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is the sum of 1.5% (one and one-half percent) of the
number of shares of Common Stock outstanding on December 31, 1993, plus 1.25%
(one and one-quarter percent) of the number of shares of Common Stock
outstanding on December 31, 1994, plus 1% (one percent) of the number of shares
of Common Stock outstanding on December 31, 1995, plus two million. If and to
the extent that an Option shall expire, terminate or be canceled for any reason
without having been exercised (or without having been
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considered to have been exercised as provided in Section 6.5(a)), the shares of
Common Stock subject to such expired, terminated or canceled portion of the
Option shall again become available for purposes of the Plan.
3.2. Character of Shares. Shares of Common Stock deliverable under the
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in Time Warner's treasury, or
both.
3.3. Reservation of Shares. Time Warner shall at all times reserve a
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in Time Warner's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to the
express provisions of the Plan, the Board shall have plenary authority, in its
discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the individuals to whom, and the time or times at which,
Awards shall be granted or awarded, (b) the number of shares to be subject to
each Award, (c) when an Option or SAR can be exercised and whether in whole or
in installments, and (d) the form, terms and provisions of any Agreement (which
terms may be amended, subject to Section 14).
4.2. Factors to Consider. In making determinations hereunder, the Board
may take into account the nature of the services rendered by the respective
employees, consultants or advisors, their dedication and past contributions to
Time Warner and its Subsidiaries, their present and potential contributions to
the success of Time Warner and its Subsidiaries and such other factors as the
Board in its discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on
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the matters referred to in this Section 4 shall be conclusive.
4.4. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board in the
administration of the Plan to the extent provided in such delegation, except for
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in such Committee and may discharge such Committee.
Any such Committee shall select one of its members as its chairman and
shall hold its meetings at such times and places as it shall deem advisable. A
majority of members shall constitute a quorum and all determinations shall be
made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
Awards may be made only to (a) employees of Time Warner or any of its
Subsidiaries (including officers and directors of any of Time Warner's
Subsidiaries), other than officers or directors of Time Warner who are subject
to Section 16 of the Exchange Act, (b) prospective employees of Time Warner or
any of its Subsidiaries and (c) consultants or advisors to Time Warner or any of
its Subsidiaries. The exercise of Options and SARs granted to a prospective
employee shall be conditioned upon such person becoming an employee of Time
Warner or any of its Subsidiaries. For purposes of the Plan, the term
"prospective employee" shall mean any person who holds an outstanding offer of
employment on specific terms from Time Warner or any of its Subsidiaries. Awards
may be made to employees, consultants and advisors who hold or have held Awards
under this Plan or any similar or other awards under any other plan of Time
Warner or its Subsidiaries.
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6. OPTIONS AND SARS
6.1. Option Prices. Subject to Section 5.2, the purchase price of the
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
6.2. Term of Options. The term of each Option shall be for such period
as the Board shall determine, as set forth in the applicable Agreement.
6.3. Exercise of Options. An Option granted under the Plan shall become
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option). The Agreement may contain conditions precedent to the exercisability of
Options, including without limitation, the achievement of minimum performance
criteria.
6.4. Manner of Exercise. Payment of the Option purchase price shall be
made in cash or in whole shares of Common Stock already owned by the person
exercising an Option or, partly in cash and partly in such Common Stock;
provided, however, that such payment may be made in whole or in part in shares
of Common Stock only if and to the extent permitted by the applicable Agreement.
An Option shall be exercised by written notice to Time Warner upon such terms
and conditions as provided in the Agreement. Time Warner shall effect the
transfer of the shares of Common Stock purchased under the Option as soon as
practicable, and within a reasonable time thereafter such transfer shall be
evidenced on the books of Time Warner. No Holder or other person exercising an
Option shall have any of the rights of a stockholder of Time Warner with respect
to shares of Common Stock subject to an Option granted under the Plan until due
exercise and full payment has been made. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date of such
due exercise and full payment.
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6.5. SARs. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
A SAR may be granted either concurrently with the grant of the related
Option or at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Subject to the terms and
provisions of this Section 6.5, each SAR shall be exercisable to the extent the
related Option is then exercisable (and may be subject to such additional
limitations on exercisability as the Agreement may provide), and in no event
after the complete termination or full exercise of the related Option. SARs
shall be exercisable in whole or in part upon notice to Time Warner upon such
terms and conditions as provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock in respect of which other Awards may be granted. Upon the exercise
or termination of the related Option, the SARs with respect thereto shall be
considered to have been exercised or terminated to the extent of the number of
shares of Common Stock with respect to which the related Option was so exercised
or terminated.
The provisions of Sections 4 and 6 through 21 (to the extent that such
provisions are applicable to Options) shall also be applicable to SARs unless
the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the time the
related Option is exercisable and subject to the terms and provisions of this
Section 6.5, upon the exercise of General SARs, the person exercising the
General SAR shall be entitled to receive consideration (in the form hereinafter
provided) equal in value to the excess of the Fair Market Value on the date of
exercise of the shares of Common Stock with respect to which such General SARs
have been exercised over the aggregate related Option purchase price for such
shares; provided, however, that the Board may, in any Agreement granting General
SARs provide that the appreciation realizable
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upon exercise thereof shall be measured from a base higher than the related
Option purchase price.
Upon the exercise of a General SAR, the person exercising the General
SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
General SAR shall comply with all applicable laws and shall be subject to the
discretion of the Board to settle General SARs only in shares of Common Stock if
necessary or advisable in the judgment of the Board to preserve pooling of
interests accounting treatment for any proposed transaction involving the
Company. Unless otherwise specified in the applicable Agreement, the number of
General SARs which may be exercised for cash, or partly for cash and partly for
shares of Common Stock, during any calendar quarter, may not exceed 20% of the
aggregate number of shares of Common Stock originally subject to the related
Option (as such original number, without giving effect to the exercise of any
portion of the related Option, shall have been retroactively adjusted in
accordance with Section 13 or any corresponding provisions of an applicable
Agreement).
For purposes of this Section 6.5, the date of exercise of a General SAR
shall mean the date on which Time Warner shall have received notice from the
person exercising the General SAR of the exercise of such General SAR.
(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board
Change, and (b) ending on the ninetieth day (or such other date specified in the
Agreement) following such date. The effective date of exercise of a Limited SAR
shall be deemed to be the date on which Time Warner shall have received notice
from the person exercising the Limited SAR of the exercise thereof.
Upon the exercise of Limited SARs granted in connection with an Option,
except as otherwise provided in the Agreement and the immediately succeeding
sentence, the person exercising the Limited SAR shall receive in cash an amount
equal to the product computed by multiplying (a) the excess of (i) the higher of
(A) the Minimum Price Per Share, or (B) the highest
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reported closing sales price of a share of Common Stock as reported on the
Composite Tape at any time during the period beginning on the sixtieth day prior
to the date on which such Limited SARs are exercised and ending on the date on
which such Limited SARs are exercised over (ii) the per share Option price of
the related Nonqualified Stock Option, by (b) the number of shares of Common
Stock with respect to which such Limited SARs are being exercised. The Board
shall have the discretion to settle Limited SARs by the delivery of Common Stock
rather than cash if in the judgment of the Board such action is necessary or
advisable to preserve pooling of interests accounting treatment for any proposed
transaction involving the Company.
6.6. Nontransferability of Options and SARs. Except as set forth in this
Section 6.6, Options and SARs shall not be transferable other than by will or
the laws of descent and distribution, and Options and SARs may be exercised
during the lifetime of the Holder thereof only by such Holder (or his or her
court appointed legal representative). The Agreement may provide that Options
and SARs are transferable by gift to such persons or entities and upon such
terms and conditions specified in the Agreement.
7. ACCELERATION OF OPTIONS AND SARS
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period in
any Agreement or in the Plan or in the event of any Approved Transaction, Board
Change or Control Purchase, unless the applicable Agreement provides otherwise,
each outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby.
8. TERMINATION OF EMPLOYMENT
8.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the applicable Agreement; provided, however, that (a) no
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates by reason of death or Total Disability,
the Option shall remain exercisable for a period of at least one year following
such termination
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(but not later than the scheduled expiration of such Option); and (c) any
termination by the employing company for cause will be treated in accordance
with the provisions of Section 8.2.
8.2. Termination for Cause. If a Holder's employment with Time Warner or
any of its Subsidiaries shall be terminated by Time Warner or such Subsidiary
prior to the exercise of any Option for cause (for these purposes, cause shall
have the meaning ascribed thereto in any employment agreement to which such
Holder is a party or, in the absence thereof, shall include but not be limited
to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct
of any kind and the refusal to perform his duties and responsibilities for any
reason other than illness or incapacity; provided, however, that if such
termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, termination for cause shall mean only a felony
conviction for fraud, misappropriation or embezzlement), then all Options held
by such Holder and any permitted transferee pursuant to Section 6.6 shall
immediately terminate.
8.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
8.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or one of its Subsidiaries.
9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any Holder
any right to continue in the employ of Time Warner or any of its Subsidiaries or
interfere in any way with the right of Time Warner or a Subsidiary to terminate
the employment of the Holder at any time, with or without cause; subject,
however, to the provisions of any employment agreement between the Holder and
Time Warner or any of its Subsidiaries.
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10. NONALIENATION OF BENEFITS
Except as specifically provided in Section 6.6, no right or benefit
under the Plan shall be subject to anticipation, alienation, sale, assignment,
hypothecation, pledge, exchange, transfer, encumbrance or charge, and any
attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange,
transfer, encumber or charge the same shall be void. No right or benefit
hereunder shall in any manner be liable for or subject to the debts, contracts,
liabilities or torts of the person entitled to such benefits.
11. WRITTEN AGREEMENT
Each grant of an Option shall be evidenced by a stock option agreement
and each SAR shall be evidenced by a stock appreciation rights agreement, each
in such form and containing such terms and provisions not inconsistent with the
provisions of the Plan as the Board from time to time shall approve; provided,
however, that such Awards may be evidenced by a single agreement. The effective
date of the granting of an Award shall be the date on which the Board approves
such grant. Each grantee of an Option or SAR shall be notified promptly of such
grant and a written Agreement shall be promptly executed and delivered by Time
Warner and the grantee, provided that such grant of Options or SARs shall
terminate if such written Agreement is not signed by such grantee (or his
attorney) and delivered to Time Warner within 60 days after the date the Board
approved such grant or if the effectiveness of such grant is conditioned upon
the grantee becoming an employee of Time Warner or one of its Subsidiaries, the
execution by the grantee of an employment agreement with Time Warner or one of
its Subsidiaries or any other similar condition, within 60 days after the
occurrence of such condition, if later. Any such written Agreement may contain
(but shall not be required to contain) such provisions as the Board deems
appropriate to ensure that the penalty provisions of section 4999 of the Code
will not apply to any stock or cash received by the Holder or such Holder's
permitted transferee pursuant to Section 6.6 from Time Warner or any of its
Subsidiaries.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes
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the character or amount of the Common Stock while any portion of any Award
theretofore granted under the Plan is outstanding but unexercised, the Board
shall make such adjustments in the character and number of shares subject to
such Award and, in the option price, as shall be applicable, equitable and
appropriate in order to make such Award, immediately after any such change, as
nearly as may be practicable, equivalent to such Award, immediately prior to any
such change. If any merger, consolidation or similar transaction affects the
Common Stock subject to any unexercised Award theretofore granted under the
Plan, the Board or any surviving or acquiring corporation shall take such action
as is equitable and appropriate to substitute a new award for such Award or to
assume such Award in order to make such new or assumed Award, as nearly as may
be practicable, equivalent to the old Award. If any such change or transaction
shall occur, the number and kind of shares for which Awards may thereafter be
granted under the Plan shall be adjusted to give effect thereto.
13. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine
to the effect that if a Holder, or such other person exercising an Option,
elects to sell all or any shares of Common Stock that such Holder or other
person acquired upon the exercise of an Option awarded under the Plan, then such
Holder or other person shall not sell such shares unless such Holder or other
person shall have first offered in writing to sell such shares to Time Warner at
Fair Market Value on a date specified in such offer (which date shall be at
least three business days and not more than 10 business days following the date
of such offer). In any such event, certificates representing shares issued upon
exercise of Options shall bear a restrictive legend to the effect that
transferability of such shares are subject to the restrictions contained in the
Plan and the applicable Agreement and Time Warner may cause the registrar of its
Common Stock to place a stop transfer order with respect to such shares.
14. TERMINATION AND AMENDMENT
14.1. General. Unless the Plan shall theretofore have been terminated as
hereinafter provided, no Awards may be made under the Plan on or after the tenth
anniversary of the Effective Date. The Board may at any time prior to the tenth
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anniversary of the Effective Date terminate the Plan, and the Board may at any
time modify or amend the Plan in such respects as it shall deem advisable;
provided, however, that any such modification or amendment shall comply with all
applicable laws and stock exchange listing requirements.
14.2. Modification. No termination, modification or amendment of the
Plan may, without the consent of the person to whom any Award shall theretofore
have been granted (or a transferee of such person if the Award, or any part
thereof, has been transferred pursuant to Section 6.6), adversely affect the
rights of such person with respect to such Award. No modification, extension,
renewal or other change in any Award granted under the Plan shall be made after
the grant of such Award, unless the same is consistent with the provisions of
the Plan. With the consent of the Holder (or a transferee of such Holder if the
Award, or any part thereof, has been transferred pursuant to Section 6.6) and
subject to the terms and conditions of the Plan (including Section 14.1), the
Board may amend outstanding Agreements with any Holder (or any such transferee),
including, without limitation, any amendment which would (a) accelerate the time
or times at which the Award may be exercised and/or (b) extend the scheduled
expiration date of the Award. Without limiting the generality of the foregoing,
the Board may but solely with the Holder's consent, agree to cancel any Award
under the Plan held by such Holder and issue a new Award in substitution
therefor, provided that the Award so substituted shall satisfy all of the
requirements of the Plan as of the date such new Award is made.
15. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the Board of Directors
of Time Warner.
16. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject to
all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner
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shall use its reasonable efforts to comply with any legal requirements (a) to
maintain a registration statement in effect under the Securities Act of 1933
with respect to all shares of Common Stock that may be issued to Holders under
the Plan, and (b) to file in a timely manner all reports required to be filed by
it under the Exchange Act.
17. WITHHOLDING
Time Warner's obligation to deliver shares of Common Stock or pay cash
in respect of any Award under the Plan shall be subject to applicable federal,
state and local tax withholding requirements. Federal, state and local
withholding taxes paid upon the exercise of any Option may be paid in shares of
Common Stock upon such terms and conditions as the Board shall determine;
provided, however, that the Board in its sole discretion may disapprove such
payment and require that such taxes be paid in cash.
18. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of applicable law, then such terms or provisions shall be deemed
inoperative to the extent necessary to avoid the conflict with applicable law
without invalidating the remaining provisions hereof.
19. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as creating
any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
20. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award, each Holder shall be deemed to have agreed
that such Award is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment
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under any pension, retirement or other employee benefit plan of Time Warner or
any of its Subsidiaries. In addition, each beneficiary of a deceased Holder
shall be deemed to have agreed that such Award will not affect the amount of any
life insurance coverage, if any, provided by Time Warner or any of its
Subsidiaries on the life of the Holder which is payable to such beneficiary
under any life insurance plan covering employees of Time Warner or any of its
Subsidiaries.
21. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
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As Amended through
July 18, 1996
TIME WARNER
CORPORATE GROUP
STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner Corporate Group Stock Incentive Plan
(hereinafter the "Plan"), is to provide for the granting of stock options, stock
appreciation rights and restricted shares to certain employees of Time Warner
Inc., Warner Communications Inc., Time Warner Enterprises, Inc. and their
respective Subsidiaries in recognition of the valuable services provided, and
contemplated to be provided, by such employees. The general purpose of the Plan
is to promote the interests of Time Warner and its stockholders and to reward
dedicated employees of these companies by providing such employees additional
incentives to continue and increase their efforts with respect to, and to remain
in the employ of, Time Warner or its Subsidiaries. This plan is being adopted in
connection with the development of an overall long-term compensation program for
these companies and it is expected that certain Options granted hereunder will
become exercisable only if certain performance criteria are met.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement, stock
appreciation rights agreement and the restricted shares agreement
specified in Section 12, both individually and collectively, as the
context so requires.
(b) "Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of law,
the stockholders of Time Warner) shall approve (i) any consolidation or
merger of Time Warner in which Time Warner is not the continuing or
surviving corporation or pursuant to which shares of Common Stock would
be converted into cash, securities or other property, other than a
merger of Time Warner (x) as
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contemplated in the Amended and Restated Agreement and Plan of Merger
dated as of September 22, 1995 among Time Warner Inc., TW Inc., Time
Warner Acquisition Corp., TW Acquisition Corp. and Turner Broadcasting
System, Inc., as the same may be amended from time to time, or (y) in
which the holders of Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (ii) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of Time
Warner, or (iii) the adoption of any plan or proposal for the
liquidation or dissolution of Time Warner.
(c) "Award" means grants of Options, SARs and/or Restricted
Shares under this Plan.
(d) "Board" means the Board of Directors of Time
Warner.
(e) "Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board ceased for any reason to constitute a majority thereof
unless the election, or the nomination for election by Time Warner's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of the period.
(f) "Cash Award" means the amount of cash, if any, to be paid to
an employee pursuant to Section 7.5.
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
Reference to any specific Code section shall include any successor
section.
(h) "Committee" means the Committee comprised of members of the
Board appointed pursuant to Section 4.
(i) "Common Stock" means the common stock, par value $1.00 per
share, of Time Warner.
(j) "Composite Tape" means the New York Stock
Exchange Composite Tape.
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(k) "Control Purchase" means any transaction in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act), corporation or other entity (other than Time Warner or
any employee benefit plan sponsored by Time Warner or any if its
Subsidiaries) (i) shall purchase any Common Stock (or securities
convertible into Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of the Board, or (ii) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of Time Warner representing 20% or more of
the combined voting power of the then outstanding securities of Time
Warner ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors
(calculated as provided in Rule 13d-3(d) in the case of rights to
acquire Time Warner's securities).
(l) "Dividend Equivalents" means, with respect to Restricted
Shares to be issued at the end of the Restriction Period, to the extent
specified by the Board only, an amount equal to the regular cash
dividends and all other distributions (or the economic equivalent
thereof) which are payable to stockholders of record during the
Restriction Period on a like number of shares of Common Stock.
(m) "Effective Date" means the date the Plan becomes effective
pursuant to Section 16.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any
successor section.
(o) "Fair Market Value" of a share of Common Stock means the
average of the high and low sales prices of a share of Common Stock on
the Composite Tape on the date in question, except as otherwise provided
in Section 6.5.
(p) "General SARs" means stock appreciation rights subject to the
terms of Section 6.5(b).
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(q) "Holder" means an employee of Time Warner or any of its
Subsidiaries who has received an Award under this Plan.
(r) "ISO" means an incentive stock option within the meaning of
section 422A(b) of the Code.
(s) "Limited SARs" means stock appreciation rights subject to the
terms of Section 6.5(c).
(t) "Minimum Price Per Share" means the highest gross price
(before brokerage commissions, soliciting dealers' fees and similar
charges) paid or to be paid for any share of Common Stock (whether by
way of exchange, conversion, distribution, liquidation or otherwise) in,
or in connection with, any Approved Transaction or Control Purchase
which occurs at any time during the period beginning on the sixtieth day
prior to the date on which Limited SARs are exercised and ending on the
date on which Limited SARs are exercised. If the consideration paid or
to be paid in any such Approved Transaction or Control Purchase shall
consist, in whole or in part, of consideration other than cash, the
Board shall take such action, as in its judgment it deems appropriate,
to establish the cash value of such consideration, but such valuation
shall not be less than the value, if any, attributed to such
consideration by any other party to such Approved Transaction or Control
Purchase.
(u) "Nonqualified Stock Option" means a stock option that is
designated as a nonqualified stock option.
(v) "Option" means any ISO or Nonqualified Stock
Option.
(w) "Plan" has the meaning ascribed thereto in
Section 1.
(x) "Restricted Shares" means shares of Common Stock or the right
to receive shares of Common Stock, as the case may be, awarded pursuant
to Section 7.
(y) "Restriction Period" means a period of time beginning on the
date of each award of Restricted Shares and ending on the Valuation Date
with respect to such
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award.
(z) "Retained Distributions" has the meaning
ascribed thereto in Section 7.3.
(aa) "SARs" means General SARs and Limited SARs.
(bb) "SEC" means the Securities and Exchange
Commission.
(cc) "Subsidiary" of a person means any present or future
subsidiary of such person as such term is defined in section 425 of the
Code and any present or future trade or business, whether or not
incorporated, controlled by or under common control with such person. An
entity shall be deemed a Subsidiary of a person only for such periods as
the requisite ownership or control relationship is maintained.
(dd) "Time Warner" means Time Warner Inc., a Delaware
corporation, and any successor thereto.
(ee) "Total Disability" means a permanent and total disability as
defined in section 22(e)(3) of the Code.
(ff) "Valuation Date" with respect to any Restricted Shares
awarded hereunder means the date designated as such in the Agreement
with respect to such award of Restricted Shares pursuant to Section 7.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 13 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is 325,000. If and to the extent that an Option shall
expire, terminate or be canceled for any reason without having been exercised
(or without having been considered to have been exercised as provided in Section
6.5(a)), the shares of Common Stock subject to such expired, terminated or
canceled portion of the Option shall again become available for purposes of the
Plan. In addition, any Restricted Shares which are forfeited under the terms of
the Plan or any Agreement shall again become available for purposes of the Plan.
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3.2. Character of Shares. Shares of Common Stock deliverable under the
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in Time Warner's treasury, or
both.
3.3. Reservation of Shares. Time Warner shall at all times reserve a
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in Time Warner's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to the
express provisions of the Plan, the Board shall have plenary authority, in its
discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the purchase price, if any, of each Restricted Share,
(b) the individuals to whom, and the time or times at which, Awards shall be
granted or awarded, (c) the number of shares to be subject to each Award, (d)
whether an Option shall be an ISO or a Nonqualified Stock Option, (e) when an
Option or SAR can be exercised and whether in whole or in installments, (f) the
time or times and the conditions subject to which Restricted Shares shall become
vested and any Cash Awards shall become payable, and (g) the form, terms and
provisions of any Agreement (which terms may be amended, subject to Section 15).
4.2. Factors to Consider. In making determinations hereunder, the Board
may take into account the nature of the services rendered by the respective
employees, their dedication and past contributions to Time Warner and its
Subsidiaries, their present and potential contributions to the success of Time
Warner and its Subsidiaries and such other factors as the Board in its
discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on
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the matters referred to in this Section 4 shall be conclusive.
4.4. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board in the
administration of the Plan to the extent provided in such delegation, except for
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in such Committee and may discharge such Committee.
Any such Committee shall select one of its members as its chairman and
shall hold its meeting at such times and places as it shall deem advisable. A
majority of members shall constitute a quorum and all determinations shall be
made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
5.1. General. Awards may be made only to (a) employees of Time Warner or
any of its Subsidiaries (including officers and directors of any of Time
Warner's Subsidiaries), other than officers or directors of Time Warner who are
subject to Section 16 of the Exchange Act, and (b) prospective employees of Time
Warner or any of its Subsidiaries. The exercise of Options and SARs and the
vesting of Restricted Shares granted to a prospective employee shall be
conditioned upon such person becoming an employee of Time Warner or any of its
Subsidiaries. For purposes of the Plan, the term "prospective employee" shall
mean any person who holds an outstanding offer of employment on specific terms
from Time Warner or any of its Subsidiaries. Awards may be made to employees who
hold or have held Awards under this Plan or any similar or other awards under
any other plan of Time Warner or its Subsidiaries.
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5.2. Special ISO Rule. No ISO shall be granted to an employee who, at
the time the ISO is granted, owns (or is considered as owning within the meaning
of section 425(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of Time Warner or any of its
Subsidiaries, unless at the time the ISO is granted the option price is at least
110% of the Fair Market Value of the Common Stock subject to the ISO and the ISO
by its terms is not exercisable after the expiration of five years from the date
it is granted.
6. OPTIONS AND SARS
6.1. Option Prices. Subject to Section 5.2, the purchase price of the
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
6.2. Term of Options. The term of each Option shall be for such period
as the Board shall determine, as set forth in the applicable Agreement, but not
more than 10 years from the date of grant in the case of an ISO (except as
provided in Section 5.2).
6.3. Exercise of Options. An Option granted under the Plan shall become
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option). The Agreement may contain conditions precedent to the exercisability of
Options, including without limitation, the achievement of minimum performance
criteria.
6.4. Manner of Exercise. Payment of the Option purchase price shall be
made in cash or in whole shares of Common Stock already owned by the person
exercising an Option or, partly in cash and partly in such Common Stock;
provided, however, that such payment may be made in whole or in part in shares
of Common Stock only if and to the extent permitted by the
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applicable Agreement. An Option shall be exercised by written notice to Time
Warner upon such terms and conditions as provided in the Agreement. Time Warner
shall effect the transfer of the shares of Common Stock purchased under the
Option as soon as practicable, and within a reasonable time thereafter such
transfer shall be evidenced on the books of Time Warner. No Holder or other
person exercising an Option shall have any of the rights of a stockholder of
Time Warner with respect to shares of Common Stock subject to an Option granted
under the Plan until due exercise and full payment has been made. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to the date of such due exercise and full payment.
6.5. SARS. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
A SAR may be granted either concurrently with the grant of the related
Option or at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Subject to the terms and
provisions of this Section 6.5, each SAR shall be exercisable to the extent the
related Option is then exercisable (and may be subject to such additional
limitations on exercisability as the Agreement may provide), and in no event
after the complete termination or full exercise of the related Option. SARs
shall be exercisable in whole or in part upon notice to Time Warner upon such
terms and conditions as provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock in respect of which other Awards may be granted. Upon the exercise
or termination of the related Option, the SARs with respect thereto shall be
considered to have been exercised or terminated to the extent of the number of
shares of Common Stock with respect to which the related Option was so exercised
or terminated.
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The provisions of Sections 4, 6 and 8 through 22 (to the extent that
such provisions are applicable to Options) shall also be applicable to SARs
unless the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the time the
related Option is exercisable and subject to the terms and provisions of this
Section 6.5, upon the exercise of General SARs, the person exercising the
General SAR shall be entitled to receive consideration (in the form hereinafter
provided) equal in value to the excess of the Fair Market Value on the date of
exercise of the shares of Common Stock with respect to which such General SARs
have been exercised over the aggregate related Option purchase price for such
shares; provided, however, that the Board may, in any Agreement granting General
SARs provide that the appreciation realizable upon exercise thereof shall be
measured from a base higher than the related Option purchase price.
Upon the exercise of a General SAR, the person exercising the General
SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
General SAR shall comply with all applicable laws. Unless otherwise specified in
the applicable Agreement, the number of General SARs which may be exercised for
cash, or partly for cash and partly for shares of Common Stock, during any
calendar quarter, may not exceed 20% of the aggregate number of shares of Common
Stock originally subject to the related Option (as such original number, without
giving effect to the exercise of any portion of the related Option, shall have
been retroactively adjusted in accordance with Section 13 or any corresponding
provisions of an applicable Agreement).
For purposes of this Section 6.5, the date of exercise of a General SAR
shall mean the date on which Time Warner shall have received notice from the
person exercising the General SAR of the exercise of such General SAR.
(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date
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of a Control Purchase, or (iii) the date of a Board Change, and (b) ending on
the ninetieth day (or such other date specified in the Agreement) following such
date. The effective date of exercise of a Limited SAR shall be deemed to be the
date on which Time Warner shall have received notice from the person exercising
the Limited SAR of the exercise thereof.
Upon the exercise of Limited SARs granted in connection with an ISO,
except as otherwise provided in the Agreement, the person exercising the Limited
SAR shall receive in cash an amount equal to the excess of the Fair Market Value
on the date of exercise of such Limited SARs of the shares of Common Stock with
respect to which such Limited SARs shall have been exercised over the aggregate
related Option purchase price for such shares.
Upon the exercise of Limited SARs granted in connection with a
Nonqualified Stock Option, except as otherwise provided in the Agreement, the
person exercising the Limited SAR shall receive in cash an amount equal to the
product computed by multiplying (a) the excess of (i) the higher of (A) the
Minimum Price Per Share, or (B) the highest reported closing sales price of a
share of Common Stock as reported on the Composite Tape at any time during the
period beginning on the sixtieth day prior to the date on which such Limited
SARs are exercised and ending on the date on which such Limited SARs are
exercised over (ii) the per share Option price of the related Nonqualified Stock
Option, by (b) the number of shares of Common Stock with respect to which such
Limited SARs are being exercised.
6.6. Nontransferability of Options and SARs. Except as set forth in this
Section 6.6, Options and SARs shall not be transferable other than by will or
the laws of descent and distribution, and Options and SARs may be exercised
during the lifetime of the Holder thereof only by such Holder (or his or her
court appointed legal representative). The Agreement may provide that
Nonqualified Stock Options and SARs are transferable by gift to such persons or
entities and upon such terms and conditions specified in the Agreement.
7. RESTRICTED SHARES
7.1. Valuation Date, Issuance and Price. The Board shall determine
whether shares of Common Stock covered by awards of
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Restricted Shares will be issued at the beginning or the end of the Restriction
Period, whether Dividend Equivalents will be paid during the Restriction Period
in the event shares of the Common Stock are to be issued at the end of the
Restriction Period and shall designate a Valuation Date with respect to each
award of Restricted Shares and may prescribe other restrictions, terms and
conditions applicable to the vesting of such Restricted Shares in addition to
those provided in the Plan. The Board shall determine the price, if any, to be
paid by the Holder for the Restricted Shares; provided, however, that the
issuance of Restricted Shares shall be made for at least the minimum
consideration necessary to permit such Restricted Shares to be deemed fully paid
and nonassessable. All determinations made by the Board pursuant to this Section
7.1 shall be specified in the Agreement.
7.2. Issuance of Restricted Shares at Beginning of the Restriction
Period. If shares of Common Stock are issued at the beginning of the Restriction
Period, the stock certificate or certificates representing such Restricted
Shares shall be registered in the name of the Holder to whom such Restricted
Shares shall have been awarded. During the Restriction Period, certificates
representing the Restricted Shares and any securities constituting Retained
Distributions shall bear a restrictive legend to the effect that ownership of
the Restricted Shares (and such Retained Distributions), and the enjoyment of
all rights appurtenant thereto, are subject to the restrictions, terms and
conditions provided in the Plan and the applicable Agreement. Such certificates
shall remain in the custody of Time Warner and the Holder shall deposit with
Time Warner stock powers or other instruments of assignment, each endorsed in
blank, so as to permit retransfer to Time Warner of all or any portion of the
Restricted Shares and any securities constituting Retained Distributions that
shall be forfeited or otherwise not become vested in accordance with the Plan
and the applicable Agreement.
7.3. Restrictions. Restricted Shares issued at the beginning of the
Restriction Period shall constitute issued and outstanding shares of Common
Stock for all corporate purposes. The Holder will have the right to vote such
Restricted Shares, to receive and retain all regular cash dividends and such
other distributions, as the Board may in its sole discretion designate, paid or
distributed on such Restricted Shares and to exercise all other rights, powers
and privileges of a Holder of Common Stock with respect to such Restricted
Shares; except,
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that, (a) the Holder will not be entitled to delivery of the stock certificate
or certificates representing such Restricted Shares until the Restriction Period
shall have expired and unless all other vesting requirements with respect
thereto shall have been fulfilled or waived; (b) Time Warner will retain custody
of the stock certificate or certificates representing the Restricted Shares
during the Restriction Period as provided in Section 7.2; (c) other than regular
cash dividends and such other distributions as the Board may in its sole
discretion designate, Time Warner will retain custody of all distributions
("Retained Distributions") made or declared with respect to the Restricted
Shares (and such Retained Distributions will be subject to the same
restrictions, terms and vesting and other conditions as are applicable to the
Restricted Shares) until such time, if ever, as the Restricted Shares with
respect to which such Retained Distributions shall have been made, paid or
declared shall have become vested, and such Retained Distributions shall not
bear interest or be segregated in a separate account; (d) the Holder may not
sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted
Shares or any Retained Distributions or his interest in any of them during the
Restriction Period; and (e) a breach of any restrictions, terms or conditions
provided in the Plan or established by the Board with respect to any Restricted
Shares or Retained Distributions will cause a forfeiture of such Restricted
Shares and any Retained Distributions with respect thereto.
7.4. Issuance of Stock at End of the Restriction Period. Restricted
Shares issued at the end of the Restriction Period shall not constitute issued
and outstanding shares of Common Stock and the Holder shall not have any of the
rights of a stockholder with respect to the shares of Common Stock covered by
such an award of Restricted Shares, in each case, until such shares shall have
been transferred to the Holder at the end of the Restriction Period. If and to
the extent that shares of Common Stock are to be issued at the end of the
Restriction Period, the Holder shall be entitled to receive Dividend Equivalents
with respect to the shares of Common Stock covered thereby either (a) during the
Restriction Period or (b) in accordance with the rules applicable to Retained
Distributions, as the Board may specify in the Agreement.
7.5. Cash Awards. In connection with any award of Restricted Shares, an
Agreement may provide for the payment of a cash amount to the Holder of such
Restricted Shares at any
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time after such Restricted Shares shall have become vested. Such Cash Awards
shall be payable in accordance with such additional restrictions, terms and
conditions as shall be prescribed by the Board in the Agreement and shall be in
addition to any other salary, incentive, bonus or other compensation payments
which such Holder shall be otherwise entitled or eligible to receive from Time
Warner or any of its Subsidiaries.
7.6. Completion of Restriction Period. On the Valuation Date with
respect to each award of Restricted Shares, and the satisfaction of any other
applicable restrictions, terms and conditions (a) all or part of such Restricted
Shares shall become vested, (b) any Retained Distributions and any unpaid
Dividend Equivalents with respect to such Restricted Shares shall become vested
to the extent that the Restricted Shares related thereto shall have become
vested and (c) any Cash Award to be received by the Holder with respect to such
Restricted Shares shall become payable, all in accordance with the terms of the
applicable Agreement. Any such Restricted Shares, Retained Distributions and any
unpaid Dividend Equivalents that shall not become vested shall be forfeited to
Time Warner and the Holder shall not thereafter have any rights (including
dividend and voting rights) with respect to such Restricted Shares, Retained
Distributions and any unpaid Dividend Equivalents that shall have been so
forfeited.
8. ACCELERATION OF OPTIONS, SARS AND RESTRICTED SHARES
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period or
Restriction Period in any Agreement or in the Plan or in the event of any
Approved Transaction, Board Change or Control Purchase, unless the applicable
Agreement provides otherwise: (a) in the case of an Option or SAR, each such
outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby; and (b) in the case of Restricted Shares, the Restriction Period
applicable to each such award of Restricted Shares shall be deemed to have
expired and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents shall become vested and any Cash Award payable
pursuant to the applicable Agreement shall be adjusted in such manner as
provided in the Agreement.
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9. TERMINATION OF EMPLOYMENT
9.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the applicable Agreement; provided, however, that (a) no
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates by reason of death or Total Disability,
the Option shall remain exercisable for a period of at least one year following
such termination (but not later than the scheduled expiration of such Option);
and (c) any termination by the employing company for cause will be treated in
accordance with the provisions of Section 9.2.
9.2. Termination for Cause. If a Holder's employment with Time Warner or
any of its Subsidiaries shall be terminated by Time Warner or such Subsidiary
during the Restriction Period with respect to any Restricted Shares or prior to
the exercise of any Option for cause (for these purposes, cause shall have the
meaning ascribed thereto in any employment agreement to which such Holder is a
party or, in the absence thereof, shall include but not be limited to,
insubordination, dishonesty, incompetence, moral turpitude, other misconduct of
any kind and the refusal to perform his duties and responsibilities for any
reason other than illness or incapacity; provided, however, that if such
termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, termination for cause shall mean only a felony
conviction for fraud, misappropriation or embezzlement), then (a) all Options
held by such Holder and any permitted transferee pursuant to Section 6.6 shall
immediately terminate and (b) such Holder's rights to all Restricted Shares,
Retained Distributions, any unpaid Dividend Equivalents and any Cash Awards
shall be forfeited immediately.
9.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
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9.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or any of its Subsidiaries.
10. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any Holder
any right to continue in the employ of Time Warner or any of its Subsidiaries or
interfere in any way with the right of Time Warner or a Subsidiary to terminate
the employment of the Holder at any time, with or without cause; subject,
however, to the provisions of any employment agreement between the Holder and
Time Warner or any of its Subsidiaries.
11. NONALIENATION OF BENEFITS
Except as provided in Section 6.6, no right or benefit under the Plan
shall be subject to anticipation, alienation, sale, assignment, hypothecation,
pledge, exchange, transfer, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer,
encumber or charge the same shall be void. No right or benefit hereunder shall
in any manner be liable for or subject to the debts, contracts, liabilities or
torts of the person entitled to such benefits.
12. WRITTEN AGREEMENT
Each award of Restricted Shares and any right to a Cash Award hereunder
shall be evidenced by a restricted shares agreement; each grant of an Option
shall be evidenced by a stock option agreement which shall designate the Options
granted thereunder as ISOs or Nonqualified Stock Options; and each SAR shall be
evidenced by a stock appreciation rights agreement, each in such form and
containing such terms and provisions not inconsistent with the provisions of the
Plan as the Board from time to time shall approve; provided, however, that such
Awards may be evidenced by a single agreement. The effective date of the
granting of an Award shall be the date on which the Board approves such grant.
Each grantee of an Option, SAR or Restricted Shares shall be notified promptly
of
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such grant and a written Agreement shall be promptly executed and delivered by
Time Warner and the grantee, provided that such grant of Options, SARs or
Restricted Shares shall terminate if such written Agreement is not signed by
such grantee (or his attorney) and delivered to Time Warner within 60 days after
the date the Board approved such grant or if the effectiveness of such grant is
conditioned upon the grantee becoming an employee of Time Warner or one of its
Subsidiaries, the execution by the grantee of an employment agreement with Time
Warner or one of its subsidiaries or any other similar condition, within 60 days
after the occurrence of such condition, if later. Any such written Agreement may
contain (but shall not be required to contain) such provisions as the Board
deems appropriate to ensure that the penalty provisions of section 4999 of the
Code will not apply to any stock or cash received by the Holder or such Holder's
permitted transferee pursuant to Section 6.6 from Time Warner or any of its
Subsidiaries.
13. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes the character or amount of the
Common Stock while any portion of any Award theretofore granted under the Plan
is outstanding but unexercised or unvested, the Board shall make such
adjustments in the character and number of shares subject to such Award, in the
option price, in the relevant appreciation base and in the Cash Awards, as shall
be applicable, equitable and appropriate in order to make such Award,
immediately after any such change, as nearly as may be practicable, equivalent
to such Award, immediately prior to any such change. If any merger,
consolidation or similar transaction affects the Common Stock subject to any
unexercised or unvested Award theretofore granted under the Plan, the Board or
any surviving or acquiring corporation shall take such action as is equitable
and appropriate to substitute a new award for such Award or to assume such Award
in order to make such new or assumed Award, as nearly as may be practicable,
equivalent to the old Award. If any such change or transaction shall occur, the
number and kind of shares for which Awards may thereafter be granted under the
Plan shall be adjusted to give effect thereto.
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14. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine
to the effect that if a Holder, or other person exercising an Option, elects to
sell all or any shares of Common Stock that such Holder or other person acquired
upon the exercise of an Option or upon the vesting of Restricted Shares awarded
under the Plan, then such Holder or other person shall not sell such shares
unless such Holder or other person shall have first offered in writing to sell
such shares to Time Warner at Fair Market Value on a date specified in such
offer (which date shall be at least three business days and not more than 10
business days following the date of such offer). In any such event, certificates
representing shares issued upon exercise of Options and the vesting of
Restricted Shares shall bear a restrictive legend to the effect that
transferability of such shares are subject to the restrictions contained in the
Plan and the applicable Agreement and Time Warner may cause the registrar of its
Common Stock to place a stop transfer order with respect to such shares.
15. TERMINATION AND AMENDMENT
15.1. General. Unless the Plan shall theretofore have been terminated as
hereinafter provided, no Awards may be made under the Plan on or after the tenth
anniversary of the Effective Date. The Board may at any time prior to the tenth
anniversary of the Effective Date terminate the Plan, and the Board may at any
time modify or amend the Plan in such respects as it shall deem advisable;
provided, however, that any such modification or amendment shall comply with all
applicable laws and stock exchange listing requirements.
15.2. Modification. No termination, modification or amendment of the
Plan may, without the consent of the person (or a transferee of such person if
the Award, or any part thereof, has been transferred pursuant to Section 6.6) to
whom any Award shall theretofore have been granted, adversely affect the rights
of such person with respect to such Award. No modification, extension, renewal
or other change in any Award granted under the Plan shall be made after the
grant of such Award, unless the same is consistent with the provisions of the
Plan. With the consent of the Holder (or a transferee of such Holder if the
Award, or any part thereof, has been transferred pursuant to Section 6.6) and
subject to the terms and
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conditions of the Plan (including Section 15.1), the Board may amend outstanding
Agreements with any Holder (or any such transferee), including, without
limitation, any amendment which would (a) accelerate the time or times at which
the Award may be exercised and/or (b) extend the scheduled expiration date of
the Award. Without limiting the generality of the foregoing, the Board may but
solely with the Holder's consent, agree to cancel any Award under the Plan held
by such Holder and issue a new Award in substitution therefor, provided that the
Award so substituted shall satisfy all of the requirements of the Plan as of the
date such new Award is made.
16. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the Board of Directors
of Time Warner.
17. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject to
all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner shall use its reasonable efforts to comply with
any legal requirements (a) to maintain a registration statement in effect under
the Securities Act of 1933 with respect to all shares of Common Stock that may
be issued to Holders under the Plan, and (b) to file in a timely manner all
reports required to be filed by it under the Exchange Act.
18. WITHHOLDING
Time Warner's obligation to deliver shares of Common Stock or pay cash
in respect of any Award or Cash Award under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding taxes paid upon the exercise of any Option and upon the
vesting of Restricted Shares may be paid in shares of Common Stock upon such
terms and conditions as the Board shall
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determine; provided, however, that the Board in its sole discretion may
disapprove such payment and require that such taxes be paid in cash.
19. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of section 422A of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of
section 422A of the Code. If this Plan does not contain any provision required
to be included herein under section 422A of the Code, such provision shall be
deemed to be incorporated herein with the same force and effect as if such
provision had been set out at length herein; provided, however, that to the
extent any Option which is intended to qualify as an ISO cannot so qualify, such
Option, to that extent, shall be deemed to be a Nonqualified Stock Option for
all purposes of the Plan.
20. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as creating
any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award or Cash Award, as applicable, each Holder
shall be deemed to have agreed that such Award or Cash Award, as applicable, is
special incentive compensation that will not be taken into account, in any
manner, as salary, compensation or bonus in determining the amount of any
payment under any pension, retirement or other employee benefit plan of Time
Warner or any of its Subsidiaries. In addition, each beneficiary of a deceased
Holder shall be deemed to have agreed that such Award or Cash Award, as
applicable, will not affect the amount of any life insurance coverage, if any,
provided by Time Warner or any of its Subsidiaries on the life of the Holder
which is payable to such beneficiary under any life
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insurance plan covering employees of Time Warner or any of its
Subsidiaries.
22. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
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As of May 16, 1996
TIME WARNER INC.
RETIREMENT PLAN FOR
OUTSIDE DIRECTORS
1. PURPOSE. The purpose of the Plan is to recognize the service and
contributions of the members of the Board of Directors to Time Warner Inc. (the
"Company") by providing retirement income benefits and to attract and retain
persons of outstanding ability as members of the Board of Directors.
2. DEFINITIONS. Except as otherwise expressly provided herein, the terms
defined in this Section 2 shall have the meanings assigned to them herein, and
shall include the plural as well as the singular.
(a) "Annual Retainer" shall mean the value of the basic annual
retainer payable to Outside Directors and shall include (i) cash, (ii) the value
on the date of grant of any shares of Restricted Stock awarded to Outside
Directors pursuant to the 1988 Restricted Stock Plan for Non-Employee Directors
or any successor thereto, and (iii) any portion of the basic annual retainer
which is deferred pursuant to the Deferred Compensation Plan for Directors of
Time Warner Inc. or any successor thereto, but shall not include (x) fees
payable for services as the Chairman of a Committee of the Board and (xi)
attendance fees for Committee meetings and special Board meetings.
(b) "Beneficiary" shall mean the person or persons entitled to
receive payments under the Plan pursuant to Section 10 hereof after the death of
a Participant.
(c) "Board" shall mean the Board of Directors of
the Company.
(d) "Company" shall mean Time Warner Inc., a Delaware
corporation, and any successor thereto.
(e) "Outside Director" shall mean a member of the
Board of Directors of the Company who is not an employee of
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the Company or any subsidiary of the Company. For the purposes hereof, a
subsidiary of the Company shall mean any corporation, partnership or other
entity in which the Company owns, directly or indirectly, an equity interest of
50% or more. For the purposes hereof, a Director who is or was an employee of
the Company or any subsidiary of the Company will be considered an Outside
Director only for those periods when he or she was a member of the Board and was
not such an employee.
(f) "Participant" shall mean a person who has at least three
Service Credit Years and who was an Outside Director on or after January 1,
1987.
(g) "Plan" shall mean this Retirement Plan for
Outside Directors of the Company.
(h) "Service Credit Years" shall mean the number of years,
including quarters of a year calculated as described below, a member of the
Board (i) served as an Outside Director, plus (ii) the number of years, if any,
that such member served as a director of Warner prior to July 24, 1989 but, for
these purposes, counting only those years during such service when such member
was not also an employee of Warner or any of its subsidiaries. If the total of
all such service includes a portion of a year, Service Credit Years shall be
calculated by rounding up any portion of a year to the next whole quarter of a
year.
(i) "Warner" shall mean Warner Communications Inc., a Delaware
corporation, and its predecessor corporations.
3. AUTHORITY.
(a) Approval. The Board originally approved this Plan on October
20, 1988. The Plan may be amended from time to time as provided in Section 9
hereof.
(b) Administration. The Plan shall be administered by the Office
of the Secretary of the Company (the "Corporate Secretary") and such other
person or persons from time to time designated by the Secretary of the Company.
(c) Legal Opinions. The Company and the Corporate Secretary may
consult with legal counsel, who may be counsel for the Company or other counsel,
with respect to their
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obligations or duties hereunder, or with respect to any action or proceeding or
any questions of law, and shall not be liable with respect to any action taken
or omitted by them in good faith pursuant to the advice of such counsel.
(d) Liability. Any decision made or action taken by the Company,
the Board, the Chief Executive Officer of the Company or the Corporate Secretary
arising out of or in connection with the construction, administration,
interpretation and effect of the Plan shall be within the absolute discretion of
all and each of them, as the case may be, and will be conclusive and binding on
all parties. No member of the Board and no employee of the Company shall be
liable for any act or action hereunder, whether of omission or commission, by
any other member or employee or by any agent to whom duties in connection with
the administration of the Plan have been delegated or, except in circumstances
involving his or her bad faith, for anything done or omitted to be done by
himself or herself.
4. AMOUNT OF BENEFITS. The annual retirement benefit payable to any
Participant under the Plan shall be an amount equal to one-half of the Annual
Retainer payable to Outside Directors for the earlier of (a) the year in which
the Participant ceases to be an Outside Director and (b) the year ended December
31, 1995.
5. DURATION OF BENEFITS. Annual retirement benefits payable under the
Plan shall be paid for the number of Service Credit Years earned by an Outside
Director through May 16, 1996 and shall include Series Credit Years earned prior
to the adoption of the Plan.
6. PAYMENT OF BENEFITS. Except as otherwise provided in Sections 7, 8,
11 and 13, retirement benefits payable to the Participant under the Plan shall
be payable quarterly on the first day of the calendar quarter, commencing on the
first day of the calendar quarter following the later to occur of (a) the day
the Participant retires from the Board or (b) the day the Participant attains
age 60.
7. DEATH. In the event the Participant shall die prior to the
commencement of benefits under the Plan, the Participant's Beneficiary shall be
entitled to receive in one lump-sum cash payment an amount equal to the total
benefits a Participant would have been entitled to receive pursuant to
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Sections 4 and 5 had the Participant not died. In the event the Participant
shall die after commencement of retirement benefits under the Plan but prior to
the completion thereof, the Participant's Beneficiary shall be entitled to
receive in one lump-sum cash payment an amount equal to the total remaining
benefits that would have been paid to the Participant had he or she not died. In
each case, such lump-sum payment shall be made as soon as practicable after
receipt by the Corporate Secretary of satisfactory evidence of the death of the
Participant.
8. DISABILITY. In the event the Participant shall suffer a permanent and
total disability within the meaning of Section 22(e)(3) of the Internal Revenue
Code of 1986, as amended from time to time, or any successor thereto (a
"Disability") prior to the commencement of benefits under the Plan, then
benefits under the Plan shall commence on the first day of the calendar quarter
following receipt by the Corporate Secretary of satisfactory evidence of the
occurrence of such Disability.
9. AMENDMENT AND TERMINATION. The Board of Directors of the Company may
modify or amend, in whole or in part, any or all of the provisions of the Plan,
or suspend or terminate it entirely; provided, however, that any such
modification, amendment, suspension or termination may not, without the
Participant's consent, adversely affect any benefits accrued to him or her prior
to the effective date of such modification, amendment, suspension or
termination. The Plan shall remain in effect until terminated pursuant to this
Section 9.
10. BENEFICIARIES. Each Participant may designate any person(s) or legal
entity(ies), including his or her estate, as his or her Beneficiary under the
Plan. Such designation shall be made in writing on a form filed with the
Corporate Secretary or his or her designee and may be revoked or changed by a
Participant at any time by filing written notice of such revocation or change
with the Corporate Secretary or his or her designee. If no person shall be
designated by a Participant as his or her Beneficiary or if no person designated
by such Participant as his or her Beneficiary survives such Participant, the
Participant's Beneficiary shall be his or her estate.
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11. ACCELERATION OF BENEFITS. Notwithstanding any other provisions of
the Plan to the contrary, the Chief Executive Officer of the Company, in his or
her sole discretion, is empowered to accelerate the payment of the annual
retirement benefits accrued to a Participant under the Plan, whether in a
lump-sum payment or otherwise, for any reason the Chief Executive Officer shall
deem appropriate in the circumstances.
12. NO RIGHT TO NOMINATION. Nothing contained in the Plan shall confer
upon any Outside Director the right to be nominated for reelection to the Board.
13. EFFECTIVE DATE. The Plan shall be effective October 20, 1988.
Persons who ceased to be Outside Directors after January 1, 1987 and before
October 20, 1988 shall be entitled to their first quarterly payment on January
1, 1989 if they are otherwise eligible to receive payments under the Plan.
14. MISCELLANEOUS.
(a) Expenses. All expenses and costs in connection
with the operation of the Plan shall be borne by the Company.
(b) Withholding. The Company shall have the right to deduct from
any payment to be made pursuant to the Plan any Federal, state or local taxes
required by law to be withheld.
(c) Governing Law. The Plan shall be construed and its provisions
enforced and administered in accordance with the laws of the State of New York
except as such laws may be superseded by any Federal law.
(d) Assignment. A Participant may not assign, anticipate or
alienate in any manner any interest arising under the Plan and any attempt to
assign, anticipate or alienate any such interest shall be void. In addition, no
interest hereunder shall be subject to attachment, bankruptcy proceedings or to
any other legal processes or to the interference or control of creditors or
others.
(e) Incompetency. If the Chief Executive Officer determines that
any Participant or Beneficiary, as the case may be, to whom a payment is due
hereunder is an incompetent by reason of physical or mental disability, or is a
minor, the Chief Executive Officer shall have the power to cause the payments
becoming due to such Participant or Beneficiary to be
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made to another for the benefit of the incompetent or minor, without
responsibility of the Company, the Chief Executive Officer or the Corporate
Secretary to see to the application of any such payment. Payments made pursuant
to such power shall operate as a complete discharge of the Company's liability
under this Plan.
(f) Notice. All notices, elections, consents, directions and
other communications required or permitted under the Plan must be in writing and
if sent to the Company, shall be addressed to the Corporate Secretary at the
Company's principal executive offices, currently the Time & Life Building,
Rockefeller Center, New York, New York 10020 and if sent to the Participant,
shall be addressed to the Participant at the address appearing on the
designation of Beneficiary form, or absent such an address, at the address
appearing on the records of the Corporate Secretary or at such other address as
may be supplied by the Participant by written notice to the Corporate Secretary
from time to time.
(g) Nonexclusivity. The adoption of the Plan shall not be
construed as creating any limitations on the power of the Board to adopt such
other retirement, incentive or compensation arrangements as it may deem
desirable, and any such arrangements may be either generally applicable or
applicable only in specific cases.
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EMPLOYMENT AGREEMENT made and effective as of October 10, 1996,
(the "Effective Date"), between TIME WARNER INC., a Delaware corporation (the
"Company"), and R.E. Turner III (the "Executive").
This Agreement is being entered into pursuant to the provisions
of the Amended and Restated Agreement and Plan of Merger, dated as of September
22, 1995, as amended on August 8, 1996 (the "Merger Agreement"), among Time
Warner Inc., Turner Broadcasting System, Inc. ("TBS"), the Company, Time Warner
Acquisition Corp. and TW Acquisition Corp., pursuant to which, among other
things, TBS became a wholly owned subsidiary of the Company upon the terms and
subject to the conditions set forth in the Merger Agreement (the "Merger").
Pursuant to the Merger Agreement, the Company wishes to secure
the services of the Executive for the period to and including December 31, 2001
(the "Term Date") on and subject to the terms and conditions set forth in this
Agreement, and the Executive is willing to provide such services on and subject
to the terms and conditions set forth in this Agreement. The parties therefore
agree as follows:
1. Term of Employment. The Executive's "term of employment", as
this phrase is used throughout this Agreement, shall be for the period beginning
on the Effective Date and ending on the Term Date, subject, however, to the
terms and conditions set forth in this Agreement.
2. Employment. During the term of employment, the Company shall
employ the Executive, and the Executive shall serve, as Vice Chairman of the
Company and Chief Executive Officer of the Company's newly created Video
Division (the "Video Division"). The Video Division shall consist of (i) TBS,
including all of the businesses conducted by TBS and its subsidiaries at the
time of the Merger, and any business thereafter conducted by TBS and its
subsidiaries, (ii) the businesses conducted from time to time by the Home Box
Office division of Time Warner Entertainment Company, L.P., including all such
businesses so conducted at the time of the Merger, (iii) the Company's interest
in Court TV, and (iv) subject only
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2
to contractual obligations of the Company and its subsidiaries existing at
September 22, 1995, substantially all other nationally distributed cable
networks and nationally distributed cable programming services operated from
time to time by the Company or its subsidiaries or controlled affiliates. The
Executive shall have responsibility for the direction and supervision of the
Video Division with all of the authority, duties, functions and powers
appropriate and customary to discharge such responsibility. The Chief Operating
Officer of the Video Division shall be selected by the Company's Chairman of the
Board subject to the consent of the Executive, which consent shall not be
unreasonably withheld. In addition, the Executive shall be invited to
participate in all meetings of the chief executive officers of the divisions of
the Company held during the term of employment and shall have such other
authority, functions, duties, powers and responsibilities as the Board of
Directors or the Chief Executive Officer of the Company may from time to time
delegate to the Executive in addition thereto, consistent with the terms hereof
and his status as Vice Chairman of the Company and Chief Executive Officer of
the Video Division. The Executive shall, subject to his election as such from
time to time and without additional compensation, serve during the term of
employment in such additional offices of comparable or greater stature and
responsibility in the Company and its subsidiaries and as a director and as a
member of any committee of the Board of Directors of the Company and its
subsidiaries, to which he may be elected from time to time. So long as the
Executive is employed by the Company pursuant to the terms of this Agreement
and subject to the Company's obligations under the provisions of the Investors
Agreement No. 1 dated as of October 10, 1996 between the Company, the Executive
and Turner Outdoor, Inc., the Company shall include the Executive in the
management slate for election as a director at every stockholders' meeting at
which his term as a director would otherwise expire and shall use its best
efforts to cause the Executive to be elected a member of its Board of Directors
at each such meeting.
During the term of employment, (i) the Executive shall report
only to the Company's Board of Directors and its Chief Executive Officer, (ii)
the Executive shall have no other employment and, without the prior written
consent of the Chief Executive Officer of the Company, no outside business
activities which require the devotion of substantial amounts of
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3
the Executive's time; provided, however, that the Executive's
engaging in bison raising, the ownership and operation of ranch properties and
other real estate, the management of the Executive's investments, including
without limitation, the operation of venture capital or investment funds or
partnerships that are owned primarily by the Executive and/or members of his
family and activities on behalf of not-for-profit and charitable organizations
or foundations shall not be deemed a breach of this Section 2, and (iii) the
place for the performance of the Executive's services shall be the principal
executive offices of TBS in the Atlanta, Georgia metropolitan area, subject to
such reasonable travel as may be appropriate or required in the performance of
the Executive's duties in the business of the Company, including without
limitation, regular trips to the Company's headquarters in New York City. The
foregoing shall be subject to the Company's policies, as in effect from time to
time, regarding vacations, holidays, illness and the like and shall not prevent
the Executive from devoting such time to his personal affairs as he devoted to
such affairs while serving as Chairman, Chief Executive Officer and President of
TBS prior to the Merger; provided, however, that the Executive shall in any
event comply with the provisions of Sections 9 and 10 and any Company policies
in effect from time to time on conflicts of interest.
3. Compensation.
3.1 Base Salary. The Company shall pay or cause to be paid to
the Executive a base salary of not less than $700,000 per annum during the term
of employment (the "Base Salary"). The Company may increase, but not decrease,
the Base Salary at any time and from time to time during the term of employment
and upon each such increase the term "Base Salary" shall mean such increased
amount. The Company shall consider an increase in the Executive's Base Salary
each time it increases the Base Salary of its Chief Executive Officer. Base
Salary shall be payable in monthly or more frequent installments in accordance
with the Company's then current practices and policies with respect to senior
executives. For the purposes of this Agreement "senior executives" shall mean
the executive officers of the Company.
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4
3.2 Bonus. In addition to Base Salary, the Executive shall be
entitled to receive during the term of employment an annual cash bonus based on
the performance of the Company and of the Executive. The Executive's annual
bonus will be targeted at 90% of the annual bonus received by the Company's
Chief Executive Officer, however, the actual amount of the Executive's bonus for
all periods commencing on or after January 1, 1997, shall be determined by the
Compensation Committee of the Company's Board of Directors in accordance with
the provisions of the Company's Annual Bonus Plan for Executive Officers. Such
determination with respect to the amount, if any, of annual bonuses to be paid
to the Executive under this Agreement shall be final and conclusive except as
specifically provided otherwise in this Agreement. If the Executive is not
employed hereunder for a full fiscal year, the bonus provided for herein shall
be prorated based upon the number of full or partial months of actual employment
during such year. Payments of any bonus compensation under this Section 3.2
shall be made in accordance with the Company's then current practices and
policies with respect to senior executives.
3.3 Deferred Compensation. In addition to Base Salary and
bonus as set forth in Sections 3.1 and 3.2, the Executive shall be credited with
deferred compensation which shall be determined and paid out as provided in this
Agreement, including Annex A hereto. Subject to the provisions of Sec tion A.7
of Annex A, during the term of employment, the Company shall credit to a special
account maintained on the Company's books for the Executive (the "Account"),
monthly, an amount equal to 50% of one-twelfth of the Executive's then current
Base Salary. If a lump sum payment is made pursuant to Section 4.2.2 or 4.2.3,
the Company shall credit to the Account at the time of such payment an amount
equal to 50% of the Base Salary portion of such lump sum payment. The Account
shall be maintained by the Company in accordance with the terms of this
Agreement, including Annex A, until the full amount which the Executive is
entitled to receive therefrom has been paid in full.
3.4 Deferred Bonus. In addition to any other deferred bonus
plan in which the Executive may be entitled to participate, the Executive may
elect by written notice delivered to the Company at least 15 days prior to the
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5
commencement of any calendar year during the term of employment during which an
annual cash bonus would otherwise accrue or to which it would relate, to defer
payment of and to have the Company credit to the Account all or any portion of
the Executive's bonus for such year. Any such election shall only apply to the
calendar year during the term of employment with respect to which such election
is made and a new election shall be required with respect to each successive
calendar year during the term of employment. Notwithstanding the foregoing, the
Executive hereby elects to defer payment of and have the Company credit to the
Account 100% of the annual bonus payable to the Executive with respect to the
period beginning on the Effective Date and ending on December 31, 1996.
3.5 Reimbursement. The Company shall pay or reimburse the
Executive for all reasonable travel (including use of the Executive's personal
means of transportation), entertainment and other business expenses actually
incurred or paid by the Executive during the term of employment in the
performance of his services under this Agreement provided such expenses are
incurred or paid in accordance with the Company's then current practices and
policies with respect to senior executives of the Company and upon presentation
of expense statements or vouchers or such other supporting information as the
Company may customarily require of its senior executives.
3.6 No Anticipatory Assignments. Except as specifically
contemplated in Section 12.8 or under the life insurance policies and benefit
plans referred to in Sections 7 and 8, respectively, neither the Executive, his
legal representative nor any beneficiary designated by him shall have any right,
without the prior written consent of the Company, to assign, transfer, pledge,
hypothecate, anticipate or commute to any person or any corporation,
partnership, trust or other entity ("Entity") any payment due in the future
pursuant to any provision of this Agreement, and any attempt to do so shall be
void and shall not be recognized by the Company.
3.7 Indemnification. The Executive shall be entitled
throughout the term of employment in his capacity as an officer or director of
the Company or any of its subsidiaries or a member of the Board of
Representatives or other governing body of any partnership or joint venture in
which the Company has an equity interest (and after the term of
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6
employment, to the extent relating to his service as such officer, director or
member) to the benefit of the indemnification provisions contained on the date
hereof in the Certificate of Incorporation and By-Laws of the Company (not
including any amendments or additions after the date of execution hereof that
limit or narrow, but including any that add to or broaden, the protection
afforded to the Executive by those provisions), to the extent not prohibited by
applicable law at the time of the assertion of any liability against the
Executive. In addition, if at any time during the term of employment the Company
generally provides indemnification agreements to its other directors or
executive officers, the Company shall provide a substantially similar agreement
to the Executive.
4. Termination.
4.1 Termination for Cause. The Company may terminate the term
of employment and all of the Company's obligations hereunder, other than its
obligations set forth below in this Section 4.1, only for "cause" and only if
the term of employment has not previously been terminated pursuant to any other
provision of this Agreement. Termination by the Company for "cause" shall mean
termination by action of the Company's Board of Directors, or a committee
thereof, because of the Executive's conviction (treating a nolo contendere plea
as a conviction) of a felony (whether or not any right to appeal has been or may
be exercised) or willful refusal without proper cause to perform his obligations
under this Agreement or because of the Executive's material breach of any of the
covenants provided for in Section 9. Such termination shall be effected by
written notice thereof delivered by the Company to the Executive and shall be
effective as of the date of such notice; provided, however, that if (i) such
termination is because of (x) the Executive's willful refusal without proper
cause to perform any one or more of his obligations under this Agreement or (y)
the Executive's breach of any of the covenants in Sections 9.1.2 or 9.1.3 or the
Executive's inadvertent breach of any limitation contained in Section 9.2
relating to the acquisition or ownership of an interest in any Entity, (ii) such
notice is the first such notice of termination for any reason delivered by the
Company to the Executive under this Section 4.1, and (iii) within 15 days
following the date of
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7
such notice the Executive shall (x) cease his refusal and shall use his best
efforts to perform such obligations or (y) cure such breach, as applicable, the
termination shall not be effective.
In the event of such termination by the Company for cause in
accordance with the foregoing procedures, without prejudice to any other rights
or remedies that the Company may have at law or in equity, except as set forth
in the last sentence of this Section 4.1, the Executive shall have no further
obligation to the Company under this Agreement and the Company shall have no
further obligations to the Executive under this Agreement other than (i) to pay
Base Salary and make credits of deferred compensation to the Account accrued
through the effective date of termination (including but not limited to pursuant
to Section 3.4),(ii) to pay any annual bonus pursuant to Section 3.2 to the
Executive in respect of the calendar year prior to the calendar year in which
such termination is effective, in the event such annual bonus has been
determined but not yet paid as of the date of such termination and (iii) with
respect to any rights the Executive has in respect of amounts credited to the
Account or pursuant to any insurance or other benefit plans or arrangements of
the Company maintained for the benefit of the Executive or the Company's senior
executives. The Executive hereby disclaims any right to receive a pro rata
portion of the Executive's annual bonus with respect to the year in which such
termination occurs. The last sentence of Section 3.3, the provisions of Section
3.5 with respect to expenses incurred prior to such termination and the
provisions of Sections 3.7, 8.2, 8.3 and 9 through 12 and Annex A shall survive
any termination pursuant to this Section 4.1.
4.2 Termination by Executive for Material Breach by the
Company and Wrongful Termination by the Company. Unless previously terminated
pursuant to any other provision of this Agreement and unless a Disability Period
shall be in effect, the Executive shall have the right, exercisable by written
notice to the Company, to terminate the term of employment effective 15 days
after the giving of such notice, if, at the time of the giving of such notice,
the Company shall be in material breach of its obligations under this Agreement;
provided, however, that, with the exception of clause (i) below, the term of
employment shall not so terminate if such notice is the first such notice of
termination delivered by the
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8
Executive pursuant to this Section 4.2 and within such 15-day period the Company
shall have cured all such material breaches of its obligations under this
Agreement. A material breach by the Company shall include, but not be limited
to, (i) the Company failing to cause the Executive to retain any titles
specified in the first two sentences of Section 2; (ii) the Executive being
required to report to persons other than those specified in Section 2; (iii) the
Company violating the provisions of Section 2 with respect to the Executive's
authority, functions, duties, powers or responsibilities (whether or not
accompanied by a change in title); (iv) the Company requiring the Executive's
primary services to be rendered at a place other than at the principal executive
offices of TBS in the Atlanta, Georgia metropolitan area; and (v) the Company
failing to cause any successor to all or substantially all of the business and
assets of the Company expressly to assume the obligations of the Company under
this Agreement.
In the event of a termination pursuant to the preceding
paragraph of this Section 4.2, or in the event of a termination of this
Agreement or the term of employment by the Company in breach of this
Agreement,(A) the Executive shall cease being an employee of the Company and
shall be entitled to receive a lump sum payment as provided in Section 4.2.2;
provided, however, that (B) the Executive may elect by delivery of written
notice to the Company prior to the date written notice of such termination is
given by the Executive pursuant to the preceding paragraph of this Section 4.2
or any time prior to 10 days after written notice of such termination is given
by the Company in breach of this Agreement, to remain an employee of the Company
as provided in Section 4.2.3.
4.2.1 Regardless of whether the election set forth in
clause (B) of Section 4.2 is made by the Executive, (i) after the effective date
of such termination, the Executive shall have no further obligations or
liabilities to the Company whatsoever, except that Section 4.4 and Sections 6
through 12 shall survive such termination, and (ii) the Executive shall be
entitled to receive (A) any earned and unpaid Base Salary and deferred
compensation accrued through the Termination Date, (B) any annual bonus pursuant
to Section 3.2 in respect of the calendar year prior to the calendar year in
which such termination is effective, in the event such
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9
annual bonus has been determined but not yet paid as of the Termination Date and
(C) a pro rata portion of the Executive's annual bonus for the year in which
such termination occurs through the date of such termination based on the
average annual bonus received by the Executive from the Company for the two
fiscal years immediately preceding the year of termination (or the prior year's
annual bonus, if only one annual bonus has been received by the Executive, or an
amount equal to 90 percent of the annual bonus earned by the Company's Chief
Executive Officer with respect to 1995, if no annual bonus has been received by
the Executive), all or a portion of which pro rata bonus will be credited to the
Account if the Executive previously elected to defer all or any portion of the
Executive's bonus for such year pursuant to Section 3.4.
4.2.2 In the event the Executive shall not have made the
election provided in clause (B) of Section 4.2 above, the Company shall pay to
the Executive as damages in a lump sum within 30 days thereafter an amount
(discounted as provided in the immediately following sentence) equal to all
amounts otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year or
part thereof in which such termination occurs and for each subsequent year
through and including the Term Date (assuming that annual bonuses are required
to be paid for each such year (or portion thereof, in which case a pro rata
portion of such bonus shall be payable), with each such annual bonus being equal
to the average annual bonus received by the Executive from the Company for the
two fiscal years immediately preceding the year of termination (or the prior
year's annual bonus, if only one annual bonus has been received by the
Executive, or an amount equal to 90 percent of the annual bonus earned by the
Company's Chief Executive Officer with respect to 1995, if no annual bonus has
been received by the Executive), assuming that no portion of such bonus is
deferred pursuant to Section 3.4). Any payments required to be made to the
Executive pursuant to this Section 4.2.2 upon such termination in respect of
Sections 3.1 and 3.2 and the credit to the Account provided for in the
penultimate sentence of Section 3.3 shall be discounted to present value as of
the date of payment from the times at which such amounts would have become
payable absent any such termination at an annual discount rate for the relevant
periods equal to 120% of the "applicable Federal rate" (within the meaning of
Section 1274(d) of the Internal Revenue Code of 1986 (the "Code")), in effect on
the date of such
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10
termination, compounded semi-annually, the use of which rate is hereby elected
by the parties hereto pursuant to Treas. Reg. ss.1.280G-1 Q/A 32 (provided that,
in the event such election is not permitted under Section 280G of the Code and
the regulations thereunder, such other rate determined as of such other date as
is applicable for determining present value under Section 280G of the Code shall
be used).
4.2.3 In the event the Executive shall have made the
election provided in clause (B) of Section 4.2 above, the term of employment
shall continue and the Executive shall remain an employee of the Company until
the Term Date and during such period the Executive shall be entitled to receive,
whether or not he becomes disabled during such period but subject to Section 6,
(a) Base Salary at an annual rate equal to his Base Salary in effect immediately
prior to the date of the notice of termination, (b) an annual bonus (all or a
portion of which may be deferred by the Executive pursuant to Section 3.4) in
respect of each calendar year or portion thereof (in which case a pro rata
portion of such annual bonus will be payable) during such period equal to the
average annual bonus received by the Executive from the Company for the two
years immediately preceding the year in which the notice of termination is given
(or the prior year's annual bonus if only one annual bonus has been received by
the Executive, or an amount equal to 90 percent of the annual bonus earned by
the Company's Chief Executive Officer with respect to 1995, if no annual bonus
has been received by the Executive), and (c) deferred compensation as provided
in Section 3.3. Except as provided in the next sentence, if the Executive
accepts full-time employment with any other Entity during such period or
notifies the Company in writing of his intention to terminate his status as an
employee during such period, then the term of employment shall end and the
Executive shall cease to be an employee of the Company effective upon the
commencement of such employment or the effective date of such termination as
specified by the Executive in such notice, whichever is applicable, and the
Executive shall be entitled to receive as damages in a lump sum within 30 days
after such commencement or such effective date an amount (discounted as provided
in the second sentence of Section 4.2.2) for the balance of the Base Salary,
deferred compensation (which shall be credited to the Account as provided in the
penultimate sentence of Section 3.3) and regular annual bonuses (assuming no
deferral pursuant to
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11
Section 3.4) the Executive would have been entitled to receive pursuant to this
Section 4.2.3 had the Executive remained on the Company's payroll until the Term
Date. Notwithstanding the preceding sentence, if the Executive accepts
employment with any not-for-profit or charitable organization or foundation,
then the Executive shall be entitled to remain an employee of the Company and
receive the payments as provided in the first sentence of this Section 4.2.3;
and if the Executive accepts full-time employment with any affiliate of the
Company, then the payments provided for in this Section 4.2.3 and the term of
employment shall cease and the Executive shall not be entitled to any such lump
sum payment. For purposes of this Agreement, the term "affiliate" shall mean any
Entity which, directly or indirectly, controls, is controlled by, or is under
common control with, the Company.
4.3 Office Facilities. In the event the Executive shall make
the election provided in clause (B) of Section 4.2, then for the period
beginning on the day the Executive makes such election and ending one year
thereafter, the Company shall, without charge to the Executive, make available
to the Executive office space at the Executive's principal job location
immediately prior to his termination of employment, or other location reasonably
close to such location, together with secretarial services, office facilities,
services and furnishings, in each case reasonably appropriate to an employee of
the Executive's position and responsibilities prior to such termination of
employment.
4.4 Mitigation. In the event of termination of the term of
employment by the Executive pursuant to Section 4.2 as a result of a material
breach by the Company of any of its obligations hereunder, or in the event of
termination of the term of employment by the Company in breach of this
Agreement, the Executive shall not be required to seek other employment in order
to mitigate his damages hereunder; provided, however, that, notwithstanding the
foregoing, if there are any damages hereunder by reason of the events of
termination described above which are "contingent on a change" (within the
meaning of Section 280G(b)(2)(A)(i) of the Code), the Executive shall be
required to mitigate such damages hereunder, including any such
damages theretofore paid, but not in excess of the extent, if any, necessary to
prevent the Company from losing any tax deductions to which it otherwise would
be entitled in
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12
connection with such damages if they were not so "contingent on a change". With
respect to the preceding sentence, any payments or rights to which the Executive
is entitled by reason of the termination of the term of employment by the
Executive pursuant to Section 4.2 or in the event of the termination of the term
of employment by the Company in breach of this Agreement shall be considered as
damages hereunder. Any obligation of the Executive to mitigate his damages
pursuant to this Section 4.4 shall not be a defense or offset to the Company's
obligation to pay the Executive in full the amounts provided in Section 4.2.2 or
4.2.3, at the time provided therein or the timely and full performance of any of
the Company's other obligations under this Agreement.
4.5 Payments. So long as the Executive remains on the payroll
of the Company or any subsidiary of the Company, payments of salary, deferred
compensation and bonus required to be made pursuant to Section 4.2 shall be made
at the same times as such payments are made to senior executives of the Company
or such subsidiary
4.6 Termination by the Executive Without Cause. If the term
of employment has not previously been terminated pursuant to any other provision
of this Agreement, the Executive may terminate the term of employment and all of
his obligations hereunder on 90 days prior written notice to the Company. In the
event of such termination, the Company shall have no further obligations to the
Executive other than (i) to pay Base Salary and make credits of deferred
compensation to the Account accrued through the effective date of termination,
(ii) to pay any annual bonus pursuant to Section 3.2 to the Executive in respect
of the calendar year prior to the calendar year in which such termination is
effective, in the event such annual bonus has been determined but not yet paid
as of the date of such termination, (iii) to pay the Executive a pro rata annual
bonus for the portion of the year in which such termination occurs based on the
average annual bonus received by the Executive from the Company for the two
fiscal years immediately preceding the year of termination (or the prior year's
annual bonus, if only one annual bonus has been received by the Executive), or
an amount equal to 90 percent of the annual bonus earned by the Company's Chief
Executive Officer with respect to 1995, if no annual bonus has been received by
the Executive, all or a portion of which pro rata bonus will be
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13
credited to the Account if the Executive previously elected to defer all or any
portion of the Executive's bonus for such year pursuant to Section 3.4 and (iv)
with respect to any rights the Executive has in respect of amounts credited to
the Account or pursuant to any insurance or other benefit plans or arrangements
of the Company maintained for the benefit of the Executive or the Company's
Senior executives. The last sentence of Section 3.3, the provisions of Section
3.5 with respect to expenses incurred prior to such termination and the
provisions of Sections 3.7, 8.2, 8.3 and 9 through 12 and Annex A shall survive
any termination pursuant to this Section 4.6.
5. Disability. If during the term of employment and prior to any
termination of the term of employment or of this Agreement under Section 4.2,
the Executive shall become physically or mentally disabled, whether totally or
partially, so that he is prevented from performing his usual duties for a period
of six consecutive months, or for shorter periods aggregating six months in any
twelve-month period, the Company shall, nevertheless, continue to pay the
Executive his full compensation and continue to credit the Account, when
otherwise due, as provided in Section 3 and Annex A, through the last day of the
sixth consecutive month of disability or the date on which the shorter periods
of disability shall have equaled a total of six months in any twelve-month
period (such last day or date being referred to herein as the "Disability
Date"). If the Executive has not resumed his usual duties on or prior to the
Disability Date, the Company shall pay the Executive a pro rata bonus through
the Disability Date for the year in which the Disability Date occurs in an
amount equal to the average annual bonus received by the Executive from the
Company for the two years immediately preceding the year in which the notice of
termination is given, or the prior year's annual bonus if only one annual bonus
has been received by the Executive, or an amount equal to 90 percent of the
annual bonus earned by the Company's Chief Executive Officer with respect to
1995, if no annual bonus has been received by the Executive and shall pay the
Executive disability benefits until the Term Date (the "Disability Period"), in
an amount equal to 75% of (a) the Executive's Base Salary at the time the
Executive becomes disabled (and this reduced amount shall also be deemed to be
the Base Salary for purposes of determining the amounts to be credited to his
Account pursuant to Section 3.3 and Annex A as
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14
further disability benefits) and (b) the average of the annual bonuses in
respect of the two calendar years for which the annual bonus received by the
Executive from the Company was the greatest (or if only two annual bonuses have
been received by the Executive, the average of such bonuses or the prior year's
annual bonus if only one annual bonus has been received, or an amount equal to
90 percent of the annual bonus earned by the Company's Chief Executive Officer
with respect to 1995, if no annual bonus has been received by the Executive),
all or a portion of which may be deferred by the Executive pursuant to Section
3.4. If during the Disability Period the Executive shall fully recover from his
disability, the Company shall have the right (exercisable within 60 days after
notice from the Executive of such recovery), but not the obligation, to restore
the Executive to full-time service at full compensation. If the Company elects
to restore the Executive to full-time service, then this Agreement shall
continue in full force and effect in all respects and the Term Date shall not be
extended by virtue of the occurrence of the Disability Period. If the Company
elects not to restore the Executive to full-time service, the Executive shall be
entitled to obtain other employment, subject, however, to the following: (i) the
Executive shall be obligated to perform advisory services during any balance of
the Disability Period, unless he is rendering the services described in clause
(iii) below; (ii) the provisions of Sections 9.1, 9.3 and 10 shall continue to
apply to the Executive during the Disability Period; and (iii) if the Executive
renders any services to any persons that are in competition with the Company or
any of its subsidiaries or affiliates (which, notwithstanding Section 9.2, the
parties agree the Executive shall be permitted to do if the Company elects not
to restore the Executive to full-time service, as described above), the total
cash salary and bonus received in connection therewith, whether paid to the
Executive or deferred for his benefit, prior to the last day of the Disability
Period, shall reduce, pro tanto, any amount that the Company would otherwise be
required to pay to him hereunder. The advisory services referred to in clause
(i) of the immediately preceding sentence shall consist of rendering advice
concerning the business, affairs and management of the Company as requested by
the Chief Executive Officer of the Company but the Executive shall not be
required to devote more than five days (up to eight hours per day) each month to
such services, which shall be performed at a time and place mutually convenient
to
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15
both parties. Subject to clause (iii) of the second preceding sentence, any
income from such other employment shall not be applied to reduce the Company's
obligations under this Agreement. The Company shall be entitled to deduct from
all payments to be made to the Executive during the Disability Period pursuant
to this Section 5 an amount equal to all disability payments received by the
Executive during the Disability Period from Workmen's Compensation, Social
Security and disability insurance policies maintained by the Company; provided,
however, that for so long as, and to the extent that, proceeds paid to the
Executive from such disability insurance policies are not includible in his
income for federal income tax purposes, the Company's deduction with respect to
such payments shall be equal to the product of (i) such payments and (ii) a
fraction, the numerator of which is one and the denominator of which is one less
the maximum marginal rate of federal income taxes applicable to individuals at
the time of receipt of such payments. All payments made under this Section 5
after the Disability Date are intended to be disability payments, regardless of
the manner in which they are computed. Except as otherwise provided in this
Section 5, the term of employment shall continue during the Disability Period
and the Executive shall be entitled to all of the rights and benefits provided
for in this Agreement except that, Section 4.2 shall not apply during the
Disability Period and the term of employment shall end and the Executive shall
cease to be an employee of the Company at the end of the Disability Period and
shall not be entitled to notice and severance or to receive or be paid for any
accrued vacation time or unused sabbatical.
6. Death. Upon the death of the Executive during the term of
employment, this Agreement and all obligations of the Company to make any
payments under Sections 3, 4 and 5 shall terminate except that (i) the
Executive's estate (or a designated beneficiary) shall be entitled to receive,
to the extent being received by the Executive immediately prior to his death,
Base Salary and deferred compensation to the last day of the month in which his
death occurs and bonus compensation (at the time bonuses are normally paid)
based on the average of the annual bonuses in respect of the three years for
which the annual bonus received by the Executive from the Company was the
greatest (or if only two annual bonuses have been received, the average of such
bonuses or the prior year's annual bonus if only one annual bonus has been
received, or an amount equal to
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16
90 percent of the annual bonus earned by the Company's Chief Executive Officer
with respect to 1995, if no annual bonus has been received by the Executive),
but prorated according to the number of whole or partial months the Executive
was employed by the Company in such calendar year, and (ii) the Account shall be
liquidated and revalued as provided in Annex A as of the date of the Executive's
death (except that all taxes shall be computed and charged to the Account as of
such date of death to the extent not theretofore so computed and charged) and
the entire balance thereof (plus any amount due under the last paragraph of
Section A.6 of Annex A) shall be paid to the Executive's estate (or a designated
beneficiary) in a single payment not later than 75 days following such date of
death.
7. Life Insurance. Subject to the Executive's satisfactory
completion of any applications and other documentation and any physical
examination that may be required by the insurer, the Company shall obtain
$6,000,000 face amount of split ownership, whole or universal life insurance on
the life of the Executive, to be owned by the Executive or the trustees of a
trust for the benefit of the Executive's spouse and/or descendants. The
Executive shall use reasonable efforts to fulfill all requirements necessary to
obtain such insurance. Until the death of the Executive, and irrespective of any
termination of this Agreement except pursuant to Section 4.1, the Company shall
pay all premiums on such policy and shall maintain such policy (without
reduction of the face amount of the coverage). At the death of the Executive, or
on the earlier surrender of such policy by the owner, the Executive agrees that
the owner of the policy shall promptly pay to the Company an amount equal to the
premiums on such policy paid by the Company (net of (i) tax benefits, if any, to
the Company in respect of payments of such premiums, (ii) any amounts payable by
the Company which had been paid by or on behalf of the Executive with respect to
such insurance, (iii) dividends received by the Company in respect of such
premiums, but only to the extent such dividends are not used to purchase
additional insurance on the life of the Executive, and (iv) any unpaid
borrowings by the Company on the policy), whether before, during or after the
term of this Agreement. The owner of the policy from time to time shall execute,
deliver and maintain a customary split dollar insurance and collateral
assignment form, assigning to the Company the proceeds of such policy
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17
but only to the extent necessary to secure the reimbursement obligation
contained in the preceding sentence. The life insurance provided for in this
Section 7 shall be in addition to any other insurance hereafter provided by the
Company on the life of the Executive under any group policy.
8. Other Benefits.
8.1 General Availability. To the extent that (a) the
Executive is eligible under the general provisions thereof and (b) the Company
maintains such plan or program for the benefit of its senior executives, during
the term of employment and so long as the Executive is an employee of the
Company, the Executive shall be eligible to participate in any pension,
profit-sharing, stock option or similar plan or program and in any group
insurance, hospitalization, medical, dental, accident, disability or similar
plan or program of the Company now existing or established hereafter. In
addition, the Executive shall be entitled during the term of employment and so
long as the Executive is an employee of the Company, to receive other benefits
generally available to all senior executives of the Company to the extent the
Executive is eligi ble under the general provisions thereof, including, without
limitation, to the extent maintained in effect by the Company for its senior
executives, an automobile allowance and financial services.
8.2 Stock Options. The Compensation Committee of the Board of
Directors (the "Committee") has approved the Company's commitment to grant to
the Executive options to purchase shares of the Company's Common Stock in the
amounts and at the times and in accordance with the other provisions set forth
in Annex B attached hereto (the "Contract Options"), subject to the execution of
this Agreement by the Executive. All Contract Options granted to the Executive
shall be subject to substantially the same terms and conditions as options
granted to other senior executives of the Company, except as otherwise provided
herein or in Annex B. The Executive shall be eligible to receive grants of stock
options in addition to the Contract Options in the discretion of the Committee.
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18
8.3 Benefits After a Termination or Disability. During the
period the Executive remains on the payroll of the Company after a termination
pursuant to Section 4.2 and during the Disability Period the Executive shall
continue to be eligible to receive the benefits required to be provided to the
Executive under Section 8.1 to the extent such benefits are maintained in effect
by the Company for its senior executives; provided, however, that except with
respect to the Contract Options, the Executive shall not be entitled to any
additional awards or grants under any stock option, restricted stock or other
stock based incentive plan. The Executive shall continue to be an employee of
the Company for purposes of any stock option and restricted shares agreements
and any other incentive plan awards during the term of employment and until such
time as the Executive shall leave the payroll of the Company. At the time the
Executive's term of employment with the Company terminates and he leaves the
payroll of the Company pursuant to the provisions of Section 4.1, 4.2, 4.6, 5 or
6, the Executive's rights to benefits and payments under any benefit plans or
any insurance or other death benefit plans or arrangements of the Company or
under any stock option, restricted stock, stock appreciation right, bonus unit,
management incentive or other plan of the Company shall be determined, subject
to the other terms and provisions of this Agreement, in accordance with the
terms and provisions of such plans and any agreements under which such stock
options, restricted stock or other awards were granted; provided, however, that
notwithstanding the foregoing or the provisions of any plan or agreement, all
stock options granted to the Executive by the Company shall become immediately
exercisable at the time the Executive shall leave the payroll of the Company
pursuant to Section 4.2.
8.4 Payments in Lieu of Other Benefits. In the event the term
of employment and the Executive's employment with the Company is terminated
pursuant to Sections 4.1, 4.2, 5 or 6 (and regardless of whether the Executive
elects (B) as provided in Section 4.2), the Executive shall not be entitled to
notice and severance or to be paid for any accrued vacation time or unused
sabbatical, the payments provided for in such Sections being in lieu thereof.
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19
9. Protection of Confidential Information; Non- Compete. The
provisions of Section 9.2 shall apply from the Effective Date through the date
the Executive ceases to be an employee of the Company and leaves the payroll of
the Company for any reason. Except as otherwise provided therein, the provisions
of Sections 9.1 and 9.3 shall apply from the Effective Date to the date that is
three years after the event described in the preceding sentence.
9.1 Confidentiality Covenant. The Executive acknowledges that
his employment by the Company (which, for purposes of this Section 9 shall mean
Time Warner Inc. and its affiliates) will, throughout the term of employment,
bring him into close contact with many confidential affairs of the Company,
including information about costs, profits, markets, sales, products, key
personnel, pricing policies, operational methods, technical processes and other
business affairs and methods and other information not readily available to the
public, and plans for future development. The Executive further acknowledges
that the services to be performed under this Agreement are of a special, unique,
unusual, extraordinary and intellectual character. The Executive further
acknowledges that the business of the Company is international in scope, that
its products are marketed throughout the world, that the Company competes in
nearly all of its business activities with other Entities that are or could be
located in nearly any part of the world and that the nature of the Executive's
services, position and expertise are such that he is capable of competing with
the Company from nearly any location in the world. In recognition of the
foregoing, the Executive covenants and agrees:
9.1.1 The Executive shall keep secret all material
confidential matters of the Company and shall not intentionally disclose such
matters to anyone outside of the Company, either during or after the term of
employment, except with the Company's written consent, provided that (i) the
Executive shall have no such obligation to the extent such matters are or become
publicly known other than as a result of the Executive's breach of his
obligations hereunder and (ii) the Executive may, after giving prior notice to
the Company to the extent practicable under the circumstances, disclose such
matters to the extent required by applicable laws or governmental regulations or
judicial or regulatory process;
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20
9.1.2 At the Company's request and expense, the Executive
shall deliver promptly to the Company, all memoranda, notes, records, reports
and other documents (and all copies thereof) relating to the Company's business,
which he obtained while employed by, or otherwise serving or acting on behalf
of, the Company and which he may then possess or have under his control; and
9.1.3 If the term of employment is terminated pursuant to
Section 4.1 or 4.2, or ends as scheduled on the Term Date, for a period of one
year after such termina tion, without the prior written consent of the Company,
the Executive shall not solicit the employment of, and shall not cause any
Entity of which he is an affiliate to solicit the employment of, any person who
was a full-time executive employee of the Company at the date of such
termination or within six months prior thereto. The parties agree that the
restrictions set forth in the immediately preceding sentence shall not apply to
any solicitation directed by the Executive at the public in general in
publications available to the public in general or any contact which Executive
can demonstrate was initiated by such employee.
9.2 Non-Compete. The Executive shall not, directly or
indirectly, without the prior written consent of the Chief Executive Officer of
the Company, render any services to any person or Entity or acquire any interest
of any type in any Entity, that is in competition with the Company; provided,
however, that the foregoing shall not be deemed to prohibit the Executive from
(a) acquiring, solely as an investment and through market purchases, securities
of any Entity which are registered under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934 and which are publicly traded, so long as he is
not part of any control group of such Entity and such securities, if converted,
do not constitute more than three percent (3%) of the outstanding voting power
of that Entity, (b) acquiring, solely as an investment, any securities of an
Entity (other than an Entity that has outstanding securities covered by the
preceding clause (a)) so long as he remains a passive investor in such Entity
and does not become part of any control group thereof and so long as such Entity
is not, directly or through subsidiaries, in competition with the Company, or
(c) serving as a director of any Entity that is not
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21
in competition with the Company. For purposes of the foregoing, a person or
Entity shall be deemed to be in competition with the Company if such person or
Entity engages in any line of business that is substantially the same as any
line of operating business which the Company engages in, conducts or, to the
knowledge of the Executive, has definitive plans to engage in or conduct.
9.3 Specific Remedy. In addition to such other rights and
remedies as the Company may have at equity or in law with respect to any breach
of this Agreement, if the Executive commits a material breach of any of the
provisions of Section 9.1 or 9.2, the Company shall have the right and remedy to
have such provisions specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, improve ments, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (all of the
foregoing being collectively referred to herein as "Work Product"), and that
various business opportunities shall be presented to him by reason of his
employment by the Company. The Executive acknowledges that all of the foregoing
shall be owned by and belong exclusively to the Company and that he shall have
no personal interest therein, provided that they are either related in any
manner to the business (commercial or experimental) of the Company, or are, in
the case of Work Product, conceived or made on the Company's time or with the
use of the Company's facilities or materials, or, in the case of business
opportunities, are presented to him for the possible interest or participation
of the Company. The Executive shall (i) promptly disclose any such Work Product
and business opportunities to the Company; (ii) assign to the Company, upon
request and without additional compensation, the entire rights to such Work
Product and business opportunities; (iii) sign all papers necessary to carry out
the foregoing; and (iv) give testimony in support of his inventorship or
creation in any appropriate case. The Executive agrees that he will not
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22
assert any rights to any Work Product or business opportunity as having been
made or acquired by him prior to the date of this Agreement except for Work
Product or business opportunities, if any, disclosed to and acknowledged by the
Company in writing prior to the date hereof. The Company hereby agrees that the
Executive shall have all rights and interest in any biographical or
autobiographical materials concerning the Executive's life, which materials
shall be owned by and belong exclusively to the Executive and with respect to
which the Company shall have no interest or rights therein.
11. Notices. All notices, requests, consents and other
communications required or permitted to be given under this Agreement shall be
effective only if given in writing and shall be deemed to have been duly given
if delivered personally or sent by overnight courier, or mailed first-class,
postage prepaid, by registered or certified mail, as follows (or to such other
or additional address as either party shall designate by notice in writing to
the other in accordance herewith):
11.1 If to the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: Chief Executive Officer
(with a copy, similarly addressed
but Attention: General Counsel)
11.2 If to the Executive, to his residence address set forth
on the records of the Company.
12. General.
12.1 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the substantive laws of the State of
New York applicable to agreements made and to be performed entirely in New York.
12.2 Captions. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
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23
12.3 Entire Agreement. This Agreement, including Annexes A
and B, sets forth the entire agreement and understanding of the parties relating
to the subject matter of this Agreement and supersedes all prior agreements,
arrangements and understandings, written or oral, between the parties.
12.4 No Other Representations. No representa tion, promise or
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or be liable for any alleged representation,
promise or inducement not so set forth.
12.5 Assignability. This Agreement and the Executive's rights
and obligations hereunder may not be assigned by the Executive. The Company may
assign its rights together with its obligations hereunder, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets; and such rights and obligations shall inure to, and be
binding upon, any successor to all or substantially all of the business and
assets of the Company, whether by merger, purchase of stock or assets or
otherwise. The Company shall cause such successor expressly to assume such
obligations.
12.6 Amendments; Waivers. This Agreement may be amended,
modified, superseded, canceled, renewed or extended and the terms or covenants
hereof may be waived only by written instrument executed by both of the parties
hereto, or in the case of a waiver, by the party waiving compliance. The failure
of either party at any time or times to require performance of any provision
hereof shall in no manner affect such party's right at a later time to enforce
the same. No waiver by either party of the breach of any term or covenant
contained in this Agreement, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
12.7 Legal Fees. In addition to any obligations the Company
may have under Section 3.8, the Company shall promptly pay, upon demand by the
Executive, all legal fees, court costs, fees of experts, and other costs and
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24
expenses when incurred by the Executive arising in connection with any actual,
threatened or contemplated litigation or legal, administrative or other
proceeding relating to this Agreement to which the Executive is or expects to
become a party. Subject to any rights of the Executive under Section 3.8, if the
Company or, if the Company is not a party to such litigation or proceeding, the
party opposing the Executive, shall substantially prevail on the material issues
involved in any such litigation or proceeding (but in no other case), then,
after all rights of appeal have been exercised or lapsed, the Executive shall
promptly repay to the Company all amounts previously paid to the Executive under
this Section in respect of such litigation or proceeding, but without interest
thereon.
12.8 Beneficiaries. Whenever this Agreement provides for any
payment to the Executive's estate, such payment may be made instead to such
beneficiary or beneficiaries as the Executive may designate by written notice to
the Company. The Executive shall have the right to revoke any such designation
and to redesignate a beneficiary or beneficiaries by written notice to the
Company (and to any applicable insurance company) to such effect.
12.9 No Conflict. The Executive represents and warrants to
the Company that this Agreement is legal, valid and binding upon the Executive
and the execution of this Agreement and the performance of the Executive's
obligations hereunder does not and will not constitute a breach of, or conflict
with the terms or provisions of, any agreement or understanding to which the
Executive is a party (including, without limitation, any other employment
agreement). The Company represents and warrants to the Executive that this
Agreement is legal, valid and binding upon the Company and the execution of this
Agreement and the performance of the Company's obligations hereunder does not
and will not constitute a breach of, or conflict with the terms or provisions
of, any agreement or understanding to which the Company is a party.
12.10 Withholding Taxes. Payments made to the Executive
pursuant to this Agreement shall be subject to withholding and social security
taxes and other ordinary and customary payroll deductions.
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25
12.11 No Offset. Neither the Company nor the Executive shall
have any right to offset any amounts owed by one party hereunder against amounts
owed or claimed to be owed to such party, whether pursuant to this Agreement or
otherwise, and the Company and the Executive shall make all the payments
provided for in this Agreement in a timely manner.
12.12 Severability. If any provision of this Agreement shall
be held invalid, the remainder of this Agreement shall not be affected thereby;
provided, however, that the parties shall negotiate in good faith with respect
to equitable modification of the provision or application thereof held to be
invalid. To the extent that it may effectively do so under applicable law, each
party hereby waives any provision of law which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.
12.13 Definitions. The following terms are defined in this
Agreement in the places indicated:
Account - Section 3.3
Account Retained Income - Section A.6 of Annex A
affiliate - Section 4.2.3
Applicable Tax Law - Section A.5 of Annex A
Base Salary - Section 3.1
cause - Section 4.1
Code - Section 4.2.2
Company - the first paragraph on page 1
and Section 9.1
Contract Options - Section 8.2
Disability Date - Section 5
Disability Period - Section 5
Effective Date - the first paragraph on page 1
eligible securities - Section A.1 of Annex A
Entity - Section 3.6
Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
Investment Advisor - Section A.1 of Annex A
Other Period Deferred Amount - Section A.6 of Annex A
Pay-Out Period - Section A.6 of Annex A
senior executives - Section 3.1
TBS - Section 2
Term Date - the second paragraph on page 1
term of employment - Section 1
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26
Valuation Date - Section A.6 of Annex A
Video Division - Section 2
Work Product - Section 10
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of the date first above written.
TIME WARNER INC.
/s/ Gerald M. Levin
By _________________________________
/s/ R.E. Turner
____________________________________
R.E. Turner III
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<PAGE>
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Account, at the Company's
option, shall either be actually invested and reinvested, or deemed invested and
reinvested, in an account in securities selected from time to time by an
investment advisor designated from time to time by the Company (the "Investment
Advisor"), substantially all of which securities shall be "eligible securities".
The designation from time to time by the Company of an Investment Advisor shall
be subject to the approval of the Executive, which approval shall not be
withheld unreasonably. "Eligible securities" are common and preferred stocks,
warrants to purchase common or preferred stocks, put and call options, and
corporate or governmental bonds, notes and debentures, either listed on a
national securities exchange or for which price quotations are published in
newspapers of general circulation, including The Wall Street Journal, and
certificates of deposit. Eligible securities shall not include the common or
preferred stock, any warrants, options or rights to purchase common or preferred
stock or the notes or debentures of the Company or any corporation or other
entity of which the Company owns directly or indirectly 5% or more of any class
of outstanding equity securities. The Investment Advisor shall have the right,
from time to time, to designate eligible securities which shall be either
actually purchased and sold, or deemed to have been purchased or sold, for the
Account on the date of reference. Such purchases may be made or deemed to be
made on margin; provided that the Company may, from time to time, by written
notice to the Executive and the Investment Advisor, limit or prohibit margin
purchases in any manner it deems prudent and, upon three business days written
notice to the Executive and the Investment Advisor, cause all eligible
securities theretofore purchased or deemed purchased on margin to be sold or
deemed sold. The Investment Advisor shall notify the Executive in writing of
each transaction within five business days thereafter and shall render to the
Executive written monthly reports as to the current status of his Account. In
the case of any purchase, the Account shall be charged with a dollar amount
equal to the quantity and kind of securities purchased or deemed to have been
purchased multiplied by the fair market value of such securities on the date of
reference and shall be credited with the quantity and
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A-2
kind of securities so purchased or deemed to have been purchased. In the case of
any sale, the Account shall be charged with the quantity and kind of securities
sold or deemed to have been sold, and shall be credited with a dollar amount
equal to the quantity and kind of securities sold or deemed to have been sold
multiplied by the fair market value of such securities on the date of reference.
Such charges and credits to the Account shall take place immediately upon the
consummation of the transactions to which they relate. As used herein "fair
market value" means either (i) if the security is actually purchased or sold by
the Company on the date of reference, the actual purchase or sale price per
security to the Company or (ii) if the security is not purchased or sold on the
date of reference, in the case of a listed security, the closing price per
security on the date of reference, or if there were no sales on such date, then
the closing price per security on the nearest preceding day on which there were
such sales, and, in the case of an unlisted security, the mean between the bid
and asked prices per security on the date of reference, or if no such prices are
available for such date, then the mean between the bid and asked prices per
security on the nearest preceding day for which such prices are available. If no
bid or asked price information is available with respect to a particular
security, the price quoted to the Company as the value of such security on the
date of reference (or the nearest preceding date for which such information is
available) shall be used for purposes of administering the Account, including
determining the fair market value of such security. The Account shall be charged
currently with all interest paid or deemed payable by the Account with respect
to any credit extended or deemed extended to the Account. Such interest shall be
charged to the Account, for margin purchases actually made, at the rates and
times actually paid by the Account and, for margin purchases deemed to have been
made, at the rates and times then charged by an investment banking firm
designated by the Company with which the Company does significant business. The
Company may, in the Company's sole discretion, from time to time serve as the
lender with respect to any margin transactions by notice to the then Investment
Advisor and in such case interest shall be charged at the rate and times then
charged by an investment banking firm designated by the Company with which the
Company does significant business. Brokerage fees shall be charged to the
Account, for transactions actually made, at the rates and times actually paid
and, for
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A-3
transactions deemed to have been made, at the rates and times then charged for
transactions of like size and kind by an investment banking firm designated by
the Company with which the Company does significant business.
A.2 Dividends and Interest. The Account shall be credited with
dollar amounts equal to cash dividends paid from time to time upon the stocks
held or deemed to be held therein. Dividends shall be credited as of the payment
date. The Account shall similarly be credited with interest payable on interest
bearing securities held or deemed to be held therein. Interest shall be credited
as of the payment date, except that in the case of purchases of interest-bearing
securities the Account shall be charged with the dollar amount of interest
accrued to the date of purchase, and in the case of sales of such
interest-bearing securities the Account shall be credited with the dollar amount
of interest accrued to the date of sale. All dollar amounts of dividends or
interest credited to the Account pursuant to this Section A.2 shall be charged
with all taxes thereon deemed payable by the Company (as and when determined
pursuant to Section A.5). The Investment Advisor shall have the same right with
respect to the investment and reinvestment of net dividends and net interest as
he has with respect to the balance of the Account.
A.3 Adjustments. The Account shall be equitably adjusted to
reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
or deemed to be held therein.
A.4 Obligation of the Company. The Company shall not be required
to purchase, hold or dispose of any of the securities designated by the
Investment Advisor; however, whether or not it elects to purchase or sell any
such securities, such transactions shall be deemed to have been made and the
Account shall be charged with all taxes (including stock transfer taxes),
interest, brokerage fees and investment advisory fees, if any, deemed payable by
the Company and attributable to such transactions (in all cases net after any
tax benefits that the Company would be deemed to derive from the payment
thereof, as and when determined pursuant to Section A.5), but no other costs of
the Company. The only obligation of the Company is its contractual obligation to
make payments
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A-4
to the Executive measured as set forth below. To the extent that the Company, in
its discretion, purchases or holds any of the securities designated by the
Investment Advisor, the same shall remain the sole property of the Company,
subject to the claims of its general creditors, and shall not be deemed to form
part of the Account. Neither the Executive nor his legal representative nor any
beneficiary designated by him shall have any right, other than the right of an
unsecured general creditor, against the Company in respect of any portion of the
Account.
A.5 Taxes. The Account shall be charged with all federal, state
and local taxes deemed payable by the Company with respect to income recognized
upon the dividends and interest received or deemed to have been received by the
Account pursuant to Section A.2 and gains recognized upon sales of any of the
securities which are deemed to have been sold pursuant to Section A.1 or A.6.
The Account shall be credited with the amount of the tax benefit received or
deemed to be received by the Company as a result of any payment of interest
actually made or deemed to be made pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made or
deemed to be made pursuant to Section A.1. If any of the sales of the securities
which are deemed to have been sold pursuant to Section A.1 or A.6 results in a
loss to the Account, such net loss shall be deemed to offset the income and
gains referred to in the second preceding sentence (and thus reduce the charge
for taxes referred to therein) to the extent then permitted under the Internal
Revenue Code of 1986, as amended from time to time, and under applicable state
and local income and franchise tax laws (collectively referred to as "Applicable
Tax Law"); provided, however, that for the purposes of this Section A.5 the
Account shall, except as provided in the third following sentence, be deemed to
be a separate corporate taxpayer and the losses referred to above shall be
deemed to offset only the income and gains referred to in the second preceding
sentence. Such losses shall be carried back and carried forward within the
Account to the extent permitted by Applicable Tax Law in order to minimize the
taxes deemed payable on such income and gains within the Account. For the
purposes of this Section A.5, all charges and credits to the Account for taxes
shall be deemed to be made as of the end of the Company's taxable year during
which the transactions, from which the liabilities for such
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A-5
taxes are deemed to have arisen, are deemed to have occurred. Notwithstanding
the foregoing, if and to the extent that in any year there is a net loss in the
Account that cannot be offset against income and gains in any prior year, then
an amount equal to the tax benefit or deemed tax benefit to the Company of such
net loss (after such net loss is reduced by the amount of any net capital loss
of the Account for such year) shall be credited to the Account on the last day
of such year. If and to the extent that any such net loss of the Account shall
be utilized to determine a credit to the Account pursuant to the preceding
sentence, it shall not thereafter be carried forward under this Section A.5. For
purposes of determining taxes payable by the Company under any provision of this
Annex A it shall be assumed that the Company is a taxpayer and pays all taxes at
the maximum marginal rate of federal income taxes and state and local income and
franchise taxes (net of assumed federal income tax benefits) applicable to
business corporations and that all of such dividends, interest, gains and losses
are allocable to its corporate headquarters, which are currently located in New
York City.
A.6 Payments. Subject to the provisions of Section A.7, payments
of deferred compensation shall be made as provided in this Section A.6. Deferred
compensation shall be paid monthly for a period of 60 months (the "Pay-Out
Period") commencing on the first day of the month after the later of (i) the
Term Date and (ii) the date the Executive ceases to be an employee of the
Company and leaves the payroll of the Company for any reason. On each payment
date, the Account shall be charged with the dollar amount of such payment. On
each payment date, the amount of cash held or deemed to be held in the Account
shall be not less than the payment then due and the Company may select the
securities to be sold or deemed sold to provide such cash if the Investment
Advisor shall fail to do so on a timely basis. The amount of any taxes payable
with respect to any such sales shall be computed, as provided in Section A.5
above, and deducted from the Account, as of the end of the taxable year of the
Company during which such sales are deemed to have occurred. Solely for the
purpose of determining the amount of monthly payments during the Pay-Out Period,
the Account shall be valued on the fifth trading day preceding the first monthly
payment of each year of the Pay-Out Period, or more frequently at the Company's
election (the "Valuation Date"), by adjusting all of the securities held or
<PAGE>
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A-5
deemed to be held in the Account to their fair market value (net of the tax
adjustment that would be made thereon if sold, as estimated by the Company) and
by deducting from the Account the amount of all outstanding indebtedness and all
amounts with respect to which the Executive has elected pursuant to clause (ii)
of Section A.7 to receive payments at times different from the time provided in
this Section A.6 (the "Other Period Deferred Amount"). The extent, if any, by
which the Account, valued as provided in the immediately preceding sentence (but
not reduced by the Other Period Deferred Amount to the extent not theretofore
distributed), exceeds the aggregate amount of credits to the Account pursuant to
Sections 3.3 and 3.4 of the Agreement as of each Valuation Date and not
theretofore distributed or deemed distributed pursuant to this Section A.6 is
herein called "Account Retained Income". The amount of each payment for the
year, or such shorter period as may be determined by the Company, of the Pay-Out
Period immediately succeeding such Valuation Date, including the payment then
due, shall be determined by dividing the aggregate value of the Account, as
valued and adjusted pursuant to the second preceding sentence, by the number of
payments remaining to be paid in the Pay-Out Period, including the payment then
due; provided that each payment made shall be deemed made first out of Account
Retained Income (to the extent remaining after all prior distributions thereof
since the last Valuation Date). The balance of the Account (excluding the Other
Period Deferred Amount), after all the securities held or deemed to have been
held therein have been sold or deemed to have been sold and all indebtedness
liquidated, shall be paid to the Executive in the final payment, which shall be
decreased by deducting therefrom the amount of all taxes attributable to the
sale of any securities held or deemed to have been held in the Account since the
end of the preceding taxable year of the Company, which taxes shall be computed
as of the date of such payment.
If this Agreement is terminated by the Company pursuant to
Section 4.1 or if the Executive terminates this Agreement or the term of
employment in breach of this Agreement, the Account shall be valued as of the
later of (i) the Term Date or (ii) twelve months after termination of the
Executive's employment with the Company, and the balance of the Account, after
the securities held or deemed to have been held therein have been sold or deemed
to have been sold and all related indebtedness liquidated, shall be paid to the
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A-7
Executive as soon as practicable and in any event within 75 days following the
later of such dates in a final lump sum payment, which shall be decreased by
deducting therefrom the amount of all taxes attributable to the sale of any
securities held or deemed to have been held in the Account since the end of the
preceding taxable year of the Company, which taxes shall be computed as of the
date of such payment. Payments made pursuant to this Section A.6 shall be deemed
made first out of Account Retained Income.
If the Executive becomes disabled within the meaning of Section 5
of the Agreement and is not thereafter returned to full-time employment with the
Company as provided in said Section 5, then deferred compensation shall be paid
monthly during the Pay-Out Period commencing on the first day of the month
following the end of the Disability Period in accordance with the provisions of
the first paragraph of this Section A.6.
If the Executive shall die at any time whether during or after
the term of employment, the Account shall be valued as of the date of the
Executive's death and the balance of the Account shall be paid to the
Executive's estate or beneficiary within 75 days of such death in accordance
with the provisions of the second preceding paragraph.
Within 90 days after the end of each taxable year of the Company
in which payments have been made from the Account and at the time of the final
payment from the Account, the Company shall compute and shall credit to the
Account, the amount of the tax benefit assumed to be received by it from the
payment to the Executive of amounts of Account Retained Income during such
taxable year or since the end of the last taxable year, as the case may be. No
additional credits shall be made to the Account pursuant to the preceding
sentence in respect of the amounts credited to the Account pursuant to the
preceding sentence. Notwithstanding any provision of this Section A.6, the
Executive shall not be entitled to receive pursuant to this Annex A an aggregate
amount that shall exceed the sum of (i) all credits made to the Account pursuant
to Sections 3.3 and 3.4 of the Agreement to which this Annex is attached, (ii)
the net cumulative amount (positive or negative) of all income, gains, losses,
interest and expenses charged or credited to the Account pursuant to this Annex
A (excluding credits made pursuant to the second preceding sentence), after all
credits
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A-8
and charges to the Account with respect to the tax benefits or burdens thereof,
and (iii) an amount equal to the tax benefit to the Company from the payment of
the amount (if positive) determined under clause (ii) above; and the final
payment(s) otherwise due may be adjusted or eliminated accordingly. In
determining the tax benefit to the Company under clause (iii) above, the Company
shall be deemed to have made the payments under clause (ii) above with respect
to the same taxable years and in the same proportions as payments of Account
Retained Income were actually made from the Account. Except as otherwise
provided in this paragraph, the computation of all taxes and tax benefits
referred to in this Section A.6 shall be determined in accordance with Section
A.5 above.
A.7 Other Payment Methods. Notwithstanding the foregoing
provisions of this Annex A, the Executive may, prior to the commencement of any
calendar year elect by written notice to the Company to cause (i) all or any
portion of the amounts otherwise to be credited to the Account in such year
under Section 3.3 of the Agreement not to be so credited but to be paid to the
Executive on the date(s) such credits otherwise would have been made thereunder
and/or (ii) all or any portion of the amounts to be credited to the Account
under Section 3.3 of the Agreement in such year (after giving effect to clause
(i) above) to be payable from the Account at times different from those provided
in Section A.6 above but not earlier than the dates on which such amounts were
to be credited to the Account.
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ANNEX B
CONTRACT OPTIONS
To be granted promptly after the Effective Date:
Options to purchase not less than 1,300,000 shares of Common Stock,
allocated as follows:
<TABLE>
<CAPTION>
No. of Shares Exercise Price
------------- --------------
<C> <S>
650,000 fair market value*
325,0000 125% of fair market value*
325,0000 150% of fair market value*
</TABLE>
To be granted on or before each of the first four anniversaries of the Effective
Date:
Options to purchase not less than 300,000 shares of Common Stock,
to be awarded at exercise prices no less favorable to the Executive (on a
percentage basis) than those most recently granted to the Chief Executive
Officer of the Company.
All Contract Options shall have a term of 10 years from the date of
grant and, upon becoming exercisable, shall remain exercisable by the Executive
(or his estate or beneficiary) for the full ten-year term thereof; provided,
however, that the Contract Options shall (a) terminate immediately if the
Executive's employment is terminated for "cause" pursuant to Section 4.1 of the
Employment Agreement to which this Annex B is attached or pursuant to any
similar provision of any successor employment agreement and (b) terminate one
year after the death of the Executive (but not beyond the option term). All
Contract Options will become vested and exercisable in installments of one-third
on each of the first three anniversaries of the date of grant except that
Contract Options granted after termination of the term of employment pursuant to
Section 4.2 will vest in full on the date of grant and will become exercisable
in full twelve months thereafter. All Contract Options will become immediately
exercisable in full if the Executive's employment terminates by reason of death
or Total Disability.
* In each case, fair market value is determined at date of grant.
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of May 15, 1996, between TIME
WARNER INC., a Delaware corporation (the "Company"), and Timothy A. Boggs (the
"Executive").
The Company currently employs the Executive on a full-time basis
pursuant to an Employment Agreement dated as of February 1, 1992 (the "Prior
Agreement") which expired on December 31, 1995. The Company has continued to
employ the Executive pursuant to the terms of the Prior Agreement and desires to
continue to secure the services of the Executive on a full-time basis subject to
the terms and conditions set forth in this Agreement, and the Executive is
willing to provide such services on and subject to the terms and conditions set
forth in this Agreement. The parties therefore agree as follows:
1. Term of Services. The Executive's "term of employment", as
this phrase is used throughout this Agreement, shall be for the period beginning
May 15, 1996 (the "Effective Date") and ending on December 31, 2000 (the "Term
Date") subject, however, to earlier termination as expressly provided herein.
2. Employment. The Company shall employ the Executive, and the
Executive shall serve, as Senior Vice President, Government and Public Affairs
of the Company during the term of employment, and the Executive shall have the
authority, functions, duties, powers and responsibilities normally associated
with such position and as the Board of Directors, the Chief Executive Officer,
the President or the Senior Vice President-Communications of the Company may
from time to time delegate to the Executive in addition thereto. The Executive
agrees, subject to his election as such and without additional compensation, to
serve during the term of employment in such particular additional offices of
comparable stature and responsibility to which he may be elected from time to
time in the Company and its subsidiaries and to serve as a director and as a
member of any committee of the Board of Directors of the Company and its
subsidiaries. During the term of employment, (i) the Executive's services shall
be rendered on a substantially full-time, exclusive basis, (ii) he will apply on
a full-time basis all of his skill and experience to the performance of his
duties in such employment, and shall report only to the Senior Vice President -
Communications of the Company, the Company's Board of Directors, if so
requested, and to such other corporate officer(s) of the Company more senior
than the Executive as the Board of Directors shall determine, (iii) he shall
have no other employment and, without the prior written consent of the Chief
Executive Officer or
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the President of the Company, no outside business activities which require the
devotion of substantial amounts of the Executive's time and (iv) unless the
Executive otherwise consents, the headquarters for the performance of his
services shall be the principal executive offices of the Company in the greater
Washington, D.C. area, subject to such reasonable travel as the performance of
his duties in the business of the Company may require. The foregoing shall be
subject to the policies of the Company, as in effect from time to time,
regarding vacations, holidays, illness and the like and shall not prevent the
Executive from devoting such time to his personal affairs as shall not interfere
with the performance of his duties hereunder.
During the term of employment and so long as the Executive
remains on the payroll of the Company, the Executive shall not, directly or
indirectly, without the prior written consent of the Chief Executive Officer or
the President of the Company, render any services to any other person, or
acquire any interest of any type in any other person, that might be deemed in
competition with the Company or any of its subsidiaries or affili- ates or in
conflict with his full-time, exclusive position as a senior executive officer of
the Company; provided, however, that the foregoing shall not be deemed to
prohibit the Executive from (a) acquiring, solely as an investment and through
market pur- chases, securities of any corporation which are registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are
publicly traded, so long as he is not part of any control group of such
corporation and such securities, if converted, do not constitute more than one
percent (1%) of the outstanding voting power of that public company, (b)
acquiring, solely as an investment, any securities of a partnership, trust,
corporation (other than a corporation that has outstanding securities covered by
the preceding clause (a)) or other entity so long as he remains a passive
investor in such entity and does not become part of any control group thereof
and so long as such entity is not, directly or indirectly, in competition with
the Company or any of its subsidiaries or affiliates, or (c) serving as a
director of any other public company that is not in competition with the Company
or any of its subsidiaries or affiliates. For purposes of the foregoing, a
person or entity shall be deemed to be in competition with the Company or any of
its subsidiaries or affiliates if he or it engages in any line of business that
is substantially the same as either (i) any line of operating business which the
Company or any of its subsidiaries or affiliates engages in, conducts or, to the
knowledge of the Executive, has definitive plans to engage in or conduct during
the term of employment, or (ii) any operating business that is engaged in or
conducted by the Company or any of its subsidiaries or affiliates during the
term of employment and as to which, to the knowledge of the Executive, the
Company or any of its subsidiaries or affiliates covenants in writing, in
connection with the disposition of such business, not to compete therewith (in
each case, a "Competitive Entity").
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3. Compensation.
3.1 Base Salary. The Company shall pay or cause to be paid to
the Executive a base salary of not less than $300,000 per annum during the term
of employment (the "Base Salary"). The Company may increase, but not decrease,
the Base Salary at any time and from time to time during the term of employment
and upon each such increase the term "Base Salary" shall mean such increased
amount. Base Salary shall be payable in monthly or more frequent installments in
accordance with the Company's regular payroll practices for senior executives of
the Company.
3.2 Bonus. In addition to Base Salary, the Executive shall be
eligible to receive an annual cash bonus based on the performance of the Company
and of the Executive as determined by the Compensation Committee of the
Company's Board of Directors or the Company's Chief Executive Officer, President
or Senior Vice President-Communications, as the case may be. The Executive's
target bonus shall be 100% of the Executive's Base Salary but the Executive
acknowledges that the Executive's actual bonus will vary depending upon the
performance of the Company and the Executive. The Company may increase, but not
decrease, the target bonus from time to time. The Company's determination of the
amount, if any, of annual bonuses to be paid to the Executive under this
Agreement shall be final and conclusive except as otherwise provided herein.
Payments of any bonus compensation under this Section 3.2 shall be made in
accordance with the Company's then current practices and policies with respect
to other senior executives of the Company.
3.3 Deferred Compensation. In addition to Base Salary and
bonus as set forth in Sections 3.1 and 3.2, the Executive will be credited with
deferred compensation which shall be determined and paid out as provided in this
Agreement and in Annex A hereto. During the term of employment, the Company
shall credit to a special account maintained on the Company's books for the
Executive (the "Account"), monthly, an amount equal to 25% of one-twelfth of
Executive's then annual Base Salary. If a lump sum payment is made pursuant to
Section 4.2.2, 4.2.3 or 4.3 hereof, the Company shall credit to the Account at
the time of such payment an amount equal to 25% of any portion of such lump sum
payment attributable to Base Salary. The Account will be maintained by the
Company in accordance with the terms of this Agreement and Annex A until the
full amount which the Executive is entitled to receive therefrom has been paid
in full.
3.4 Deferred Bonus. In addition to any other deferred bonus
plan in which the Executive may be entitled to participate, the Executive may
elect by written notice delivered to the Company as of the Effective Date or at
least 15 days prior to the commencement of any subsequent calendar year during
the term of employment during which an annual cash bonus would otherwise accrue
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or to which it would relate, to defer payment of and to
have the Company credit to the Account all or any portion of the Executive's
bonus for such year. Any such election shall only apply to the calendar year
during the term of employment with respect to which such election is made and a
new election shall be required with respect to each successive calendar year
during the term of employment.
3.5 Prior Account. The parties confirm that the Company has
maintained a deferred compensation account (the "Prior Account") for the
Executive in accordance with the Prior Agreement through the Effective Date. The
Prior Account shall be promptly transferred to, and shall for all purposes be
deemed part of, the Account and shall continue to be maintained by the Company
in accordance with this Agreement. All prior credits to the Prior Account shall
be deemed to be credits made under this Agreement, all "Account Retained Income"
thereunder shall be deemed to be Account Retained Income under this Agreement
and all increases or decreases to the Prior Account as a result of income,
gains, losses and other changes shall be deemed to have been made under this
Agreement.
3.6 Reimbursement. The Company shall pay or reim- burse the
Executive for all reasonable expenses actually incurred or paid by the Executive
during the term of employment in the performance of his services hereunder upon
presentation of expense statements or vouchers or such other supporting
information as the Company may customarily require of its senior executives.
3.7 No Anticipatory Assignments. Except as specifically
contemplated hereunder (including Section 12.8 and the life insurance policies
and benefit plans referred to herein), neither the Executive, his legal
representative nor any beneficiary designated by him shall have any right,
without the prior written consent of the Company, to assign, transfer, pledge,
hypothecate, anticipate or commute any payment due in the future to such person
pursuant to any provision of this Agreement, and any attempt to do so shall be
void and will not be recognized by the Company.
3.8 Indemnification. The Executive shall be entitled
throughout the term of employment in his capacity as an officer or director of
the Company or any of its subsidiaries or a member of the board of
representatives or other governing body of any partnership or joint venture in
which the Company has an equity interest (and after the term of employment to
the extent relating to his service as such officer, director or member) to the
benefit of the indemnification provisions contained on the date hereof in the
Certificate of Incorporation and By-Laws of the Company (not including any
amendments or additions that limit or narrow, but including any that add to or
broaden, the protection afforded to the Executive by those provisions), to the
extent not prohibited by applicable law at the time of the assertion of any
liability against the Executive.
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4. Termination.
4.1 Termination for Cause. The Company may termi- nate the
term of employment and all of the Company's obligations hereunder, other than
its obligations set forth below in this Section 4.1, for "cause" but only if the
term of employment has not previously been terminated pursuant to any other
provision of this Agreement. Termination by the Company for "cause" shall mean
termination by the Company's Board of Directors (or a Committee thereof), Chief
Executive Officer or President (as the case may be) because of the Executive's
conviction (treating a nolo contendere plea as a conviction) of a felony
(whether or not any right to appeal has been or may be exercised) or willful
refusal without proper cause to perform his obligations under this Agreement or
because of the Executive's material breach of any of the covenants provided for
in Section 9. Such termination shall be effected by notice thereof delivered by
the Company to the Executive and shall be effective as of the date of such
notice; provided, however, that if (i) such termination is because of the
Executive's willful refusal without proper cause to perform any one or more of
his obligations under this Agreement, (ii) such notice is the first such notice
of termination for any reason delivered by the Company to the Executive under
this Section 4.1, and (iii) within 15 days following the date of such notice the
Executive shall cease his refusal and shall use his best efforts to perform such
obligations, the termination shall not be effective.
In the event of termination by the Company for cause in
accordance with the foregoing procedures, without prejudice to any other rights
or remedies that the Company may have at law or equity, the Company shall have
no further obligations to the Executive other than (i) to pay Base Salary and
make credits of deferred compensation to the Account accrued through the
effective date of termination, (ii) to pay any annual bonus pursuant to Sec-
tion 3.2 to the Executive in respect of the year prior to the year in which such
termination is effective, in the event such annual bonus has been determined but
not yet paid as of the date of such termination and (iii) with respect to any
rights the Executive has under Section 8 through the effective date of
termination (except as may be otherwise specifically provided in any such plan
or program) or any rights which the Executive has in respect of amounts credited
to the Account through the effective date of termination or pursuant to any
insurance or other benefit plans or arrangements of the Company maintained for
the benefit of its senior executives. The Executive hereby disclaims any right
to receive a pro rata portion of the Executive's annual bonus with respect to
the year in which such termination occurs. The last paragraph of Section 2, the
last sentence of Section 3.3 and Sections 3.6, 3.8 and 9 through 12 and Annex A
shall survive any termination pursuant to this Section 4.1.
5
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4.2 Termination by Executive for Material Breach by the
Company and Wrongful Termination by the Company. The Executive shall have the
right, exercisable by notice to the Company, to terminate the term of employment
effective 15 days after the giving of such notice, if, at the time of such
notice, the Company shall be in material breach of its obligations hereunder;
provided, however, that, with the exception of clause (i) below, this Agreement
shall not so terminate if such notice is the first such notice of termination
delivered by the Executive pursuant to this Section 4.2 and within such 15-day
period the Company shall have cured all such material breaches of its
obligations hereunder. The parties acknowledge and agree that a material breach
by the Company shall include, but not be limited to, (i) the Company failing to
cause the Executive to remain as Senior Vice President Government and Public
Affairs of the Company; (ii) the Executive being required to report to persons
other than those specified in Section 2; (iii) the Company violating the
provisions of Section 2 with respect to the Executive's authority, functions,
duties, powers or responsibilities (whether or not accompanied by a change in
title); and (iv) unless the Executive otherwise consents, the Company requiring
the Executive's primary services to be rendered in an area other than at the
Company's principal offices in the greater Washington, D.C. area and (v) the
Company failing to cause the successor to all or substantially all of the
business and assets of the Company expressly to assume the obligations of the
Company under this Agreement.
The parties agree that in the event of a termination pursuant to
this Section 4.2, or in the event of a termination of this Agreement or the term
of employment by the Company in breach of this Agreement, the Executive shall be
entitled to elect, within 30 days after notice of termination is given by either
party, either (A) to cease being an employee of the Company and receive the lump
sum payment (and credits) described in Section 4.2.2 or (B) to remain an
employee of the Company as provided in Section 4.2.3. After the Executive makes
such election, the following provisions shall apply:
4.2.1 Regardless of the election made by the Executive, (i)
the Executive shall have no further obligations or liabilities to the Company
whatsoever, except that the last paragraph of Section 2, Sections 3.8, 4.4 and
4.5, and Sections 6 through 12 and Annex A shall survive such termination and
(ii) the Executive shall be entitled to receive any earned and unpaid Base
Salary and deferred compensation accrued through the effective date of such
termination and a pro rata portion of the Executive's annual bonus for the year
in which such termination occurs through the date of such termination, based on
the average of the regular annual bonus amounts (excluding the amount of any
special or spot bonuses) received by the Executive from the Company for the two
calendar years immediately preceding the year of termination, provided that all
or a portion of such pro rata bonus shall be
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credited to the Account in accordance with any timely deferral election the
Executive may previously have made pursuant to Section 3.4 hereof.
4.2.2 In the event the Executive shall make the election
provided in clause (A) above, the Company shall pay to the Executive as damages
(or credit to the Account with respect to Section 3.3) within 30 days thereafter
in a lump sum (discounted as provided in the immediately following sentence) all
amounts otherwise payable (whether or not deferred) pursuant to Section 3 for
the year in which such termination occurs and for each subsequent year of the
term of employment (assuming that annual bonuses are required to be paid for
each such year), with the annual bonuses due the Executive in respect of the
balance of the term of employment being equal to the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses)
received by the Executive from the Company (whether or not deferred) for the two
calendar years immediately preceding the year of termination; provided, however,
that for purposes of this Section 4.2.2, the term of employment shall be deemed
to end on the later of (a) the date set forth in Section 1 or (b) the date which
is one year from the date of such termination. Any payments required to be made
to the Executive upon such termination in respect of Sections 3.1 and 3.2 and
the credit to the Account provided for in the penultimate sentence of Section
3.3 shall be discounted to present value as of the date of payment from the
times at which such amounts would have been paid absent any such termination at
an annual discount rate for the relevant periods equal to 120% of the
"applicable Federal rate" (within the meaning of Section 1274(d) of the Internal
Revenue Code of 1986 (the "Code")), in effect on the date of such termination,
compounded semi-annually, the use of which rate is hereby elected by the parties
hereto pursuant to Treas. Reg. ss.1.280G-1 Q/A 32 (provided that, in the event
such election is not permitted under Section 280G of the Code and the
regulations thereunder, such other rate determined as of such other date as is
applicable for determining present value under Section 280G of the Code shall be
used).
4.2.3 In the event the Executive shall make the election
provided in clause (B) above, the Executive shall remain an employee of the
Company until the later of (a) the Term Date and (b) the date that is one year
after the date of termination of the Executive's employment under this Section
4.2 and during such period the Executive shall be entitled to receive, whether
or not he becomes disabled during such period, but subject to Section 5 hereof,
(i) Base Salary at an annual rate equal to his Base Salary in effect immediately
prior to the notice of termination, (ii) an annual bonus (subject to deferral
hereunder) in respect of each calendar year during such period equal to the
average of the regular annual bonus amounts (excluding the amount of any special
or spot bonuses) received by the Executive from the
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Company (whether or not deferred) for the two calendar years immediately
preceding the year of termination and (iii) deferred compensation as provided in
Section 3.3; provided, however, that if the Executive accepts full-time
employment with any other corporation, partnership, trust, government agency or
body or other entity during such period or notifies the Company in writing of
his intention to terminate his employment during such period, the Executive
shall cease to be an employee of the Company effective upon the commencement of
such employment, or the effective date of such termination as specified by the
Executive in such notice, and shall be entitled to receive as damages within 30
days after such commencement or effective date, a lump sum cash payment
(discounted as provided in Section 4.2.2) for the balance of the Base Salary,
deferred compensation (which shall be credited to the Account as provided in the
penultimate sentence of Section 3.3) and annual bonuses (assuming no deferral)
that the Executive would have been entitled to receive pursuant to this Section
4.2.3 had the Executive remained on the Company's payroll until the end of the
period described in the first sentence of this Section 4.2.3. Notwithstanding
the preceding sentence, if the Executive accepts employment with any
not-for-profit entity, then the Executive shall be entitled to remain an
employee of the Company and receive the payments as provided in the first
sentence of this Section 4.2.3; and the Executive shall not be entitled to
receive such lump sum cash payment if he accepts full-time employment with any
subsidiary or affiliate of the Company. For purposes of this Agreement, the term
"affiliates" shall mean any entity which, directly or indirectly, controls, is
controlled by, or is under common control with, the Company.
4.2.4 In the event the Executive shall make the election
provided in clause (B) above, then during the period the Executive remains on
the payroll of the Company, the Executive will continue to be eligible to
receive the benefits required to be provided to the Executive under this
Agreement to the extent such benefits are maintained in effect by the Company
for its senior executives; provided, however, the Executive shall not be
entitled to any additional awards or grants under any stock option, restricted
stock or other stock based incentive plan. In the event of a termination of this
Agreement pursuant to the terms hereof, the Executive shall continue to be an
employee of the Company for purposes of any stock option and restricted share
agreements and any other incentive plan awards until such time as the Executive
shall leave the payroll of the Company.
4.2.5 At the time the Executive shall terminate his employment
and leave the payroll of the Company pursuant to the provisions of this Section
4.2, the Executive's rights to benefits and payments under any insurance or
other death benefit plans or arrangements of the Company or under any stock
option, restricted stock, stock appreciation right, bonus unit, management
incentive or other plan of the Company shall be
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determined, subject to the other terms and conditions of this Agreement, in
accordance with the terms and provisions of such Plans and any agreements under
which such stock options, restricted stock or other awards were granted;
provided, however, that notwithstanding the foregoing or any more restrictive
provisions of any such plan or agreement, if the Executive leaves the payroll of
the Company as a result of a termination pursuant to Section 4.2, then all stock
options granted to the Executive by the Company (i) shall become immediately
exercisable at the time the Executive shall leave the payroll of the Company
pursuant to Section 4.2 and (ii) shall remain exercisable (but not beyond the
expiration of the option term) until three months after the Term Date.
4.2.6 The Executive's rights to receive deferred compensation,
and the Company's obligations with respect to the maintenance of the Account and
the payment of such deferred compensation, shall be governed by the provisions
of Section 3.3 and Annex A.
4.2.7 Any obligation of the Executive to mitigate his damages
pursuant to Section 4.5 shall not be a defense or offset to the Company's
obligation to pay the Executive in full the damages provided in Section 4
hereof, as the case may be, at the time provided therein or the timely and full
performance of any of the Company's other obligations under this Agreement.
4.3 End of Term of Employment. At least 120 days prior to the
Term Date, the Company and the Executive shall commence discussions regarding a
renewal or extension of this Agreement on terms and conditions mutually
agreeable to the parties. If at the Term Date, the parties have not agreed to an
extension or renewal of this Agreement or on the terms of a new employment
agreement and no Disability Period is in effect, then either party may terminate
the Executive's employment on 60 days written notice to the other party, which
notice may be delivered at any time on or after the November 1st immediately
preceding the Term Date. If the Executive shall cause his employment with the
Company to terminate on or after the Term Date, then the Executive shall receive
Base Salary and deferred compensation through the effective date of termination
and a pro rata bonus for the year in which such termination occurs calculated as
provided in Section 4.2.1; provided, however, that if the Company has changed
the terms or conditions of the Executive's employment from those provided for in
this Agreement such that the Executive would have been able to terminate the
term of employment pursuant to Section 4.2 if such Section 4.2 had been
applicable at the time (without giving effect to any cure right of the Company),
then the Executive shall be entitled to the additional benefits described in the
next sentence. If the Company shall cause the Executive's employment to
terminate on or after the Term Date for any reason (other than cause as defined
in Section 4.1, in which case Section 4.1 shall apply, and other than for death
or disability, in which case Section 5 or 6
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shall apply), then in lieu of the provisions of Section 4.2, the Executive shall
be entitled to receive Base Salary and deferred compensation through the
effective date of such termination and a pro rata bonus for the year in which
such termination occurs calculated as provided in Section 4.2.1 and shall be
entitled to elect by delivery of written notice to the Company, within 30 days
after such notice of termination is given, either (A) to cease being an employee
of the Company and receive a lump sum payment (and credits) as provided in
Section 4.3.2 or (B) remain an employee of the Company for a period of twelve
months pursuant to Section 4.3.3 and receive the payments (and credits) provided
in Section 4.3.3. The payments described in this Section 4.3 are in addition to
any annual bonus otherwise payable pursuant to Section 3.2 hereof with respect
to the last calendar year of the term of employment, which bonus shall be paid
in accordance with the Company's then current practices and policies with
respect to other senior executives. After the Executive makes such election, the
following provisions shall apply:
4.3.1 Regardless of the election made by the Executive, at the
end of the 60-day notice period provided for in the first sentence of Section
4.3 the Executive shall have no further obligations or liabilities to the
Company whatsoever, except that Sections 3.8, 4.4 and 4.5 and Sections 6 through
12 and Annex A shall survive such termination.
4.3.2 In the event the Executive shall make the election
provided in clause (A) above, the Company shall pay the Executive (or credit to
the Account with respect to Section 3.3) in a lump sum at the end of the 60-day
notice period provided for in the first sentence of Section 4.3 an amount
(discounted as provided in Section 4.2.2) equal to the sum of (i) one year's
Base Salary, (ii) the annual amount of deferred compensation to be credited to
the Account pursuant to Section 3.3, and (iii) an amount equal to the average of
the regular annual bonus amounts (excluding the amount of any special or spot
bonuses) received by the Executive from the Company (or credited to the Account)
for the two calendar years immediately preceding the year of termination.
4.3.3 In the event the Executive shall make the election
provided in clause (B) above, the Executive shall remain an employee of the
Company until the date which is twelve months after the end of the 60-day period
referred to in the first sentence of Section 4.3 and during such period the
Executive shall be entitled to receive, whether or not he thereafter becomes
disabled during such period but subject to Section 5, (i) salary at an annual
rate equal to the Base Salary, (ii) credits to the Account of deferred
compensation as provided in Section 3.3, and (iii) an annual bonus (all or any
portion of which may be deferred by the Executive pursuant to Section 3.4) equal
to the average of the regular annual bonus amounts (excluding the amount of any
special or spot bonuses) received by the Executive from the Company
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(or credited to the Account) for the two calendar years immediately preceding
the year of termination. Except as provided in the next sentence, if the
Executive accepts full-time employment with any other entity during such
twelve-month period or notifies the Company in writing of his intention to leave
the payroll of the Company during such period, the Executive shall cease to be
an employee of the Company effective upon the commencement of such employment or
the effective date of such termination as specified by the Executive in such
notice, whichever is applicable, and shall be entitled to receive a lump sum
payment within 30 days after such commencement or such effective date in an
amount (discounted as provided in the second sentence of Section 4.2.2) equal to
the balance of the Base Salary, deferred compensation (which shall be credited
to the Account as provided in the penultimate sentence of Section 3.3.1) and
regular annual bonuses the Executive would have been entitled to receive
pursuant to this Section 4.3.3 had the Executive remained on the Company's
payroll until the end of such twelve-month period. Notwithstanding the preceding
sentence, if the Executive accepts employment with any not-for-profit entity,
then the Executive shall be entitled to remain an employee of the Company and
receive the payments as provided in the first sentence of this Section 4.3.3;
and if the Executive accepts full-time employment with any affiliate of the
Company, then the payments provided for in this Section 4.3.3 shall cease and
the Executive shall not be entitled to any such lump sum payment.
4.4 Release. In partial consideration for and as an express
condition of, the Company's obligation to make the payments described in
Sections 4.2.2, 4.2.3 and 4.3, the Company shall be entitled to require the
Executive to execute and deliver to the Company a release in substantially the
form attached hereto as Annex B. If the Company so elects, it shall deliver such
release to the Executive within 10 days after written notice of termination is
delivered pursuant to Section 4.2 or 4.3, and the Executive shall execute and
deliver such release to the Company within 21 days after receipt thereof. If the
Executive elects not to execute and deliver such release to the Company within
such 21 day period, or if the Executive shall revoke the Executive's consent to
such release as provided therein, the Executive's employment with the Company
shall terminate as provided in Section 4.2 or 4.3, but the Executive shall
receive, in lieu of the payments provided for in said Section 4.2 or 4.3, a lump
sum cash payment in an amount determined in accordance with the personnel
policies of the Company relating to notice and severance applicable to employees
with the length of service and compensation level of the Executive.
4.5 Mitigation. In the event of the termination of this
Agreement pursuant to Section 4.2 or 4.3, or in the event of the termination of
this Agreement or the term of employment by the Company in breach of this
Agreement, the Executive shall not be required to seek other employment in order
to mitigate his damages
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hereunder; provided, however, that, notwithstanding the
foregoing, if there are any damages hereunder by reason of the events of
termination described above which are "contingent on a change" (within the
meaning of Section 280G(b)(2)(A)(i) of the Code), the Executive shall be
required to mitigate such damages hereunder, including any such damages
theretofore paid, but not in excess of the extent, if any, necessary to prevent
the Company from losing any tax deductions to which it otherwise would be
entitled in connection with such damages if they were not so "contingent on a
change". In addition to any obligation under the preceding sentence, and without
duplication of any amounts required to be paid to the Company thereunder, if any
such termination occurs and the Executive, whether or not required to mitigate
his damages under the preceding sentence, thereafter obtains other employment
with any entity other than a not-for-profit organization or a governmental body
or agency, the total cash salary and bonus received in connection with such
other employment, whether paid to him or deferred for his benefit, for services
through the Term Date or during the one-year period referred to in Section 4.2
or 4.3, whichever is later, in each case up to an amount equal to (x) the
payment actually received by or for the account of the Executive with respect to
Base Salary, annual bonus under Section 3.2 and deferred compensation under
Section 3.3 for such period, minus (y) the amount of severance the Executive
would have received in accordance with the personnel policies of the Company if
the Executive had been job eliminated, shall reduce, pro tanto, any amount which
the Company would otherwise be required to pay to him as a result of such
termination and, to the extent amounts have theretofore been paid to him by the
Company as a result of such termination, such cash salary and bonus shall be
paid over to the Company as received with respect to such period, but the
provisions of this sentence shall not apply to any type of equity interest,
bonus unit, phantom or restricted stock, stock option, stock appreciation right
or similar benefit received as a result of such other employment. With respect
to the preceding sentences, any payments or rights to which the Executive is
entitled by reason of the termination of the Executive's employment pursuant to
Section 4.2 or 4.3 or in the event of the termination of this Agreement or the
term of employment by the Company in breach of this Agreement shall be
considered as damages hereunder. With respect to the second preceding sentence,
the Executive shall in no event be required to pay the Company with respect to
any calendar year more than the amount actually received by the Executive or
credited to the Account with respect to Base Salary or annual bonus under
Section 3.2 and deferred compensation under Section 3.3 for such year.
4.6 Office Facilities. In the event the Executive shall make
the election provided in clause (B) of Section 4.2 or 4.3, then for the period
beginning on the day the Executive makes such election and ending one year
thereafter, the Company shall, without charge to the Executive, make available
to the Executive
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office space at the Executive's principal job location immediately prior to his
termination of employment, or other location reasonably close to such location,
together with secretarial services, office facilities, services and furnishings,
in each case reasonably appropriate to an employee of the Executive's position
and responsibilities prior to such termination of employment.
5. Disability. If during the term of employment the Executive
shall become physically or mentally disabled, whether totally or partially, so
that he is prevented from performing his usual duties for a period of six
consecutive months, or for shorter periods aggregating six months in any
twelve-month period, the Company shall, nevertheless, continue to pay the
Executive his full compensation and continue to credit the Account, when
otherwise due, as provided in Section 3 and Annex A, through the last day of the
sixth consecutive month of disability or the date on which the shorter periods
of disability shall have equalled a total of six months in any twelve-month
period (such last day or date being referred to herein as the "Disability
Date"). If the Executive has not resumed his usual duties on or prior to the
Disability Date, the Company shall pay the Executive a pro rata bonus for that
portion of the calendar year preceding the Disability Date and shall pay the
Executive disability benefits for the longer of (i) the balance of the term of
employment or (ii) one year following the Disability Date (in the case of either
(i) or (ii), the "Disability Period") in an amount equal to 75% of (a) what the
Base Salary otherwise would have been pursuant to this Agreement had the
disability not occurred, and this reduced amount shall also be deemed to be the
Base Salary for purposes of determining the amounts to be credited to his
Account pursuant to Section 3.3 and Annex A as further disability benefits and
(b) the average of the regular annual bonuses (excluding the amount of any
special or spot bonuses) in respect of the two calendar years for which the
annual bonus received by the Executive from the Company was the greatest (which
may be deferred by the Executive pursuant to Section 3.4). If during the term of
employment and subsequent to the Disability Date the Executive shall fully
recover from a disability, the Company shall have the right (exercisable within
sixty (60) days after notice from the Executive of such recovery), but not the
obligation, to restore the Executive to full-time service at full compensation.
If the Company elects to restore the Executive to full-time service, then this
Agreement shall continue in full force and effect in all respects. If the
Company elects not to restore the Executive to full-time service, the Company
shall continue to pay the Executive the disability benefits provided for in this
Section 5 (notwithstanding any such recovery by the Executive) and the Executive
shall be entitled to obtain other employment, subject, however, to the
following: (i) the Executive shall be obligated to perform advisory services
during any balance of the term of employment; and (ii) the provisions of Section
9 and the last sentence of Section 2 shall continue to apply to the Executive
during the Disability Period. The advisory services referred to in
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clause (i) of the immediately preceding sentence shall consist of rendering
advice concerning the business, affairs and management of the Company as
requested by the Company but the Executive shall not be required to devote more
than five days (up to eight hours per day) each month to such services, which
shall be performed at a time and place mutually convenient to both parties. Any
income from such other employment shall not be applied to reduce the Company's
obligations under this Agreement. The term of employment shall not be extended
or be deemed suspended by reason of any period of disability. The Company shall
be entitled to deduct from all payments to be made to the Executive during any
Disability Period (whether or not there has been a reduction in amounts paid
pursuant to this Section 5 and whether or not such payments are made in lieu of
Base Salary, bonus or deferred compensation) an amount equal to all disability
payments received by the Executive (but only with respect to that portion of the
Disability Period occurring during the term of employment) from Workmen's
Compensation, Social Security and disability insurance policies maintained by
the Company; provided, however, that for so long as, and to the extent that,
proceeds paid to the Executive from such disability insurance policies are not
includible in his income for federal income tax purposes, the Company's
deduction with respect to such payments shall be equal to the product of (i)
such payments and (ii) a fraction, the numerator of which is one and the
denominator of which is one less the maximum marginal rate of federal income
taxes applicable to individuals at the time of receipt of such payments. All
payments made under this Section 5 after the Disability Date are intended to be
disability payments, regardless of the manner in which they are computed. Except
as otherwise provided in this Section 5, the term of employment shall continue
during the Disability Period and the Executive shall be entitled to all of the
rights and benefits provided for in this Agreement except that, Sections 4.2 and
4.3 shall not apply during the Disability Period (unless the Company terminates
this Agreement in breach hereof in which case Section 4.2 shall apply) and
unless the Company has restored the Executive to full-time service at full
compensation prior to the end of the Disability Period, the term of employment
shall end and the Executive shall cease to be an employee of the Company at the
end of the Disability Period.
6. Death. Upon the death of the Executive, this Agreement and
all benefits hereunder shall terminate except that (i) the Executive's estate
(or a designated beneficiary thereof) shall be entitled to receive the Base
Salary and deferred compensation to the last day of the month in which his death
occurs and shall be entitled to receive bonus compensation based on the average
of the regular annual bonuses (excluding the amount of any special or spot
bonuses) in respect of the two years for which the annual bonus received by the
Executive from the Company was the greatest, but prorated according to the
number of whole or partial months the Executive was employed by the Company in
such year, (ii) such termination shall not affect any vested rights which the
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Executive may have at the time of his death pursuant to any insurance or other
death benefit plans or arrangements of the Company or any subsidiary or the
benefit plans described in Section 8, which vested rights shall continue to be
governed by the provisions of such plans, and (iii) the Account shall be
liquidated and revalued as provided in Annex A as of the date of the Executive's
death (except that all taxes shall be computed and charged to the Account as of
such date of death to the extent not theretofore so computed and charged) and
the entire balance thereof (plus any amount due under the last paragraph of
Section A.6 of Annex A) shall be paid to the Executive's estate in a single
payment not later than 75 days following such date of death.
7. Life Insurance. Subject to the Executive's satisfactory
completion of any applications and other documentation and any physical
examination that may be required by the insurer for any additional insurance on
the Executive, the Company shall obtain $1,000,000 face amount of split
ownership life insurance on the life of the Executive. The Company shall pay all
premiums on such policy and shall maintain such policy (without reduction of the
face amount of the coverage) during the term of employment, including during the
period the Executive remains on the payroll of the Company following a
termination pursuant to Section 4.2 or 4.3. The Executive shall be entitled to
designate the beneficiary or beneficiaries of such policy which may include a
trust. The Executive agrees that at the time of his death, his estate (or the
owner of the policy if such owner is a trust as contemplated below) shall
promptly pay to the Company an amount equal to the premiums on such policy paid
by the Company (net of (i) tax benefits, if any, to the Company in respect of
the payment of such premiums, (ii) any amounts payable by the Company which had
been paid by or on behalf of the Executive with respect to such insurance, (iii)
dividends received by the Company in respect of such premiums, but only to the
extent such dividends are not used to purchase additional insurance for the
benefit of the Executive, and (iv) any unpaid borrowings by the Company) but in
no event shall such payment to the Company exceed the death benefit paid under
the policy. Except as hereinafter provided, the Company shall own the policy and
shall provide by endorsement or collateral assignment as it may deem appropriate
for the payment of benefits on the death of the Executive. In the event that the
Executive advises the Company in writing within 60 days of the date of this
Agreement that the Executive desires to have such policy owned by the trustees
of a trust for the benefit of the Executive's designees, the Company shall
permit such ownership provided the trustees of the trust enter into a split
dollar insurance agreement and collateral assignment in favor of the Company
which in the Company's judgment satisfactorily protects the Company's investment
in such policy. The provisions of this Section 7 shall be in addition to any
other insurance hereafter provided by the Company on the life of the Executive
under any group policy.
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8. Other Benefits. To the extent that (a) he is eligible under
the general provisions thereof and (b) the Company maintains such plan or
program for the benefit of its senior executive officers, during the term of
employment and so long as the Executive is an employee of the Company, the
Executive shall be eligible to participate in any pension, profit-sharing, stock
option or similar plan or program of the Company now existing or established
hereafter.
To the extent maintained in effect by the Company for its senior
executives, the Executive shall also be entitled to participate in any group
insurance, hospitalization, medical, dental, accident, disability or similar
plan or program of the Company now existing or established hereafter to the
extent that he is eligible under the general provisions thereof. In addition,
during the term of employment and for so long as the Executive is an employee of
the Company, the Executive shall be entitled to receive other benefits generally
available to all senior executive officers of the Company to the extent that he
is eligible under the general provisions thereof, including, without limitation,
to the extent maintained in effect by the Company for its senior executives, an
automobile allowance and financial services.
9. Protection of Confidential Information.
9.1 Covenant. The Executive acknowledges that his employment
by the Company (which, for purposes of this Section 9 shall mean Time Warner
Inc., its subsidiaries and affiliates) will, throughout the term of employment,
bring him into close contact with many confidential affairs of the Company,
including information about costs, profits, markets, sales, products, key
personnel, pricing policies, operational methods, technical processes and other
business affairs and methods and other information not readily available to the
public, and plans for future development. The Executive further acknowledges
that the services to be performed under this Agreement are of a special, unique,
unusual, extraordinary and intellectual character. The Executive further
acknowledges that the business of the Company is international in scope, that
its products are marketed throughout the world, that the Company competes in
nearly all of its business activities with other organizations that are or could
be located in nearly any part of the world and that the nature of the
Executive's services, position and expertise are such that he is capable of
competing with the Company from nearly any location in the world. In recognition
of the foregoing, the Executive covenants and agrees:
9.1.1 The Executive will keep secret all confidential matters
of the Company and will not intentionally disclose such matters to anyone
outside of the Company, either during or after the term of employment, except
with the Company's written consent, provided that (i) the Executive shall have
no such obligation to the extent such matters are or become publicly known
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other than as a result of the Executive's breach of his obligations hereunder
and (ii) the Executive may, after giving prior notice to the Company to the
extent practicable under the circumstances, disclose such matters to the extent
required by applicable laws or governmental regulations or judicial or
regulatory process;
9.1.2 The Executive will deliver promptly to the Company on
termination of his employment by the Company, or at any other time the Company
may so request, at the Company's expense, all memoranda, notes, records, reports
and other documents (and all copies thereof) relating to the Company's business,
which he obtained while employed by, or otherwise serving or acting on behalf
of, the Company and which he may then possess or have under his control (other
than the Executive's personal tax and accounting records and publicly available
documents); and
9.1.3 If the term of employment is terminated pursuant to
Section 4.1, or if the term of employment terminates as scheduled, for a period
of one year after such termination, without the consent of the Company, the
Executive shall not employ, and shall not cause any entity of which he is an
affiliate to employ, any person who was a full-time executive employee of the
Company or any of its affiliates at the date of such termination or within six
months prior thereto.
9.2 Non-Compete. If this Agreement is terminated pursuant to
Section 4.1, 4.2 or 4.3 or by the Company in breach of this Agreement or if the
Executive quits in breach of this Agreement, then for the time period specified
in the second sentence of this Section 9.2, the Executive shall not (a) become
an officer, director, partner or employee of or consultant to or act in any
managerial capacity or own an equity interest in excess of one percent in The
Walt Disney Company, The News Corporation, The Seagram Company, Ltd.,
Tele-Communications, Inc. or Viacom Inc. or any of their respective subsidiaries
or affiliates (each of the foregoing companies is herein referred to as a
"Prohibited Entity" but only if at the time such company is a Competitive
Entity) or (b) provide consulting, lobbying or public relations services or
activities (collectively "Lobbying Services") to or for any Prohibited Entity
whether directly or indirectly through a separate firm or entity, provided that
this clause (b) shall not prevent the Executive from becoming an officer,
employee or partner of a firm or entity (or providing Lobbying Services to a
firm or entity) that in turn provides Lobbying Services to a Prohibited Entity
so long as the Executive is not directly or indirectly involved in providing
such Lobbying Services to such Prohibited Entity. If the Executive's employment
is terminated pursuant to Section 4.1, 4.2 or 4.3 of this Agreement or by the
Company in breach of this Agreement or if the Executive quits in breach of this
Agreement, then (i) so long as the Executive remains on the payroll of the
Company, the last paragraph of Section 2 shall apply and (ii) if the Executive
leaves the payroll of the Company within 12 months
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after the effective date of any notice of termination delivered hereunder, then
the provisions of this Section 9.2 shall apply for the remainder of such
12-month period.
9.3 Specific Remedy. In addition to the provisions of Section
9.4 and such other rights and remedies as the Company may have at equity or in
law with respect to any breach of this Agreement, if the Executive commits a
material breach of the last paragraph of Section 2 or any of the provisions of
Sections 9.1 or 9.2, the Company shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company.
9.4 Liquidated Damages. If the Executive breaches the
provisions of Section 9.2, the Executive shall pay to the Company as liquidated
damages an amount equal to the product of (i) the sum of (x) the monthly Base
Salary and deferred compensation payable to the Executive immediately prior to
his termination of employment with the Company, plus (y) one-twelfth of the
average of the regular annual bonuses (excluding the amount of any special or
spot bonuses) received by the Executive from the Company for the two calendar
years immediately preceding the year of such termination, multiplied by (ii) the
number of months remaining in the non-compete period applicable to the Executive
under Section 9.2 at the time of such breach. The Company shall be entitled to
offset any amounts owed by the Executive to the Company under this Section 9.4
against any amounts owed by the Company to the Executive under any provision of
this Agreement or otherwise, including without limitation, amounts payable to
the Executive under Sections 4.2 or 4.3. The Company and the Executive agree
that it is impossible to determine with any reasonable accuracy the amount of
prospective damages to the Company upon a breach of Section 9.2 by the Executive
and further agree that the damages set forth in this Section 9.4 are reasonable,
and not a penalty, based upon the facts and circumstances of the parties and
with due regard to future expectations.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (all of the
foregoing being collectively referred to herein as "Work Product"), and that
various business opportunities shall be presented to him by reason of his
employment by the Company. The Executive acknowledges that, unless the Company
otherwise agrees in writing, all of the foregoing shall be owned by and belong
exclusively to the Company and that he shall have no personal interest therein,
provided that they are either related in any manner to the business (commercial
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or experimental) of the Company, or are, in the case of Work Product, conceived
or made on the Company's time or with the use of the Company's facilities or
materials, or, in the case of business opportunities, are presented to him for
the possible interest or participation of the Company. The Executive shall
further, unless the Company otherwise agrees in writing, (i) promptly disclose
any such Work Product and business opportunities to the Company; (ii) assign to
the Company, upon request and without additional compensation, the entire rights
to such Work Product and business opportunities; (iii) sign all papers necessary
to carry out the foregoing; and (iv) give testimony in support of his
inventorship or creation in any appropriate case. The Executive agrees that he
will not assert any rights to any Work Product or business opportunity as having
been made or acquired by him prior to the date of this Agreement except for Work
Product or business opportunities, if any, disclosed to and acknowledged by the
Company in writing prior to the date hereof.
11. Notices. All notices, requests, consents and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given at the time personally delivered,
the day after being sent by overnight courier, or three days after being mailed
first-class, postage prepaid, by registered or certified mail, as follows (or to
such other or additional address as either party shall designate by notice in
writing to the other in accordance herewith):
11.1 If to the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: General Counsel
(with a copy, similarly addressed
but Attention: Vice President - Executive
Compensation and Organization Development
11.2 If to the Executive, to the address set forth on the records
of the Company.
12. General.
12.1 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely in New York.
12.2 Captions. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
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12.3 Entire Agreement. This Agreement, including Annexes A and
B, sets forth the entire agreement and understanding of the parties relating to
the subject matter hereof and supersedes all prior agreements, arrangements and
understandings, written or oral, between the parties, including without
limitation, the Prior Agreement.
12.4 No Other Representations. No representation, promise or
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or be liable for any alleged representation,
promise or inducement not so set forth.
12.5 Assignability. This Agreement and the Executive's rights
and obligations hereunder may not be assigned by the Executive. The Company may
assign its rights together with its obligations hereunder, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets; and such rights and obligations shall inure to, and be
binding upon, any successor to the business or substantially all of the assets
of the Company, whether by merger, purchase of stock or assets or otherwise, and
the Company shall cause such successor expressly to assume such obligations.
12.6 Amendments; Waivers. This Agreement may be amended,
modified, superseded, canceled, renewed or extended and the terms or covenants
hereof may be waived only by written instrument executed by both of the parties
hereto, or in the case of a waiver, by the party waiving compliance. The failure
of either party at any time or times to require performance of any provision
hereof shall in no manner affect such party's right at a later time to enforce
the same. No waiver by either party of the breach of any term or covenant
contained in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any other term or
covenant contained in this Agreement.
12.7 Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement may be referred by either party to
JAMS/ENDISPUTE for resolution in arbitration in accordance with the rules and
procedures of JAMS/ENDISPUTE. Any such proceedings shall take place in New York
City before a single arbitrator (rather than a panel of arbitrators), pursuant
to any streamlined or expedited (rather than a comprehensive) arbitration
process, before a nonjudicial (rather than a judicial) arbitrator, and in
accordance with an arbitration process which, in the judgment of such
arbitrator, shall have the effect of reasonably limiting or reducing the cost of
such arbitration. The resolution of any such dispute or controversy by the
arbitrator appointed in accordance with the procedures of JAMS/ENDISPUTE shall
be final and binding. Judgment upon the award rendered by such arbitrator
20
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may be entered in any court having jurisdiction thereof, and the parties consent
to the jurisdiction of the New York courts for this purpose. The prevailing
party shall be entitled to recover the costs of arbitration (including
reasonable attorneys fees and the fees of experts) from the losing party. If at
the time any dispute or controversy arises with respect to this Agreement,
JAMS/ENDISPUTE is not in business or is no longer providing arbitration
services, then the American Arbitration Association shall be substituted for
JAMS/ENDISPUTE for the purposes of the foregoing provisions of this Section
12.7. If the Executive shall be the prevailing party in such arbitration, the
Company shall promptly pay, upon demand of the Executive, all legal fees, court
costs and other costs and expenses incurred by the Executive in any legal action
seeking to enforce the award in any court.
12.8 Beneficiaries. Whenever this Agreement provides for any
payment to the Executive's estate, such payment may be made instead to such
beneficiary or beneficiaries as the Executive may designate in writing filed
with the Company. The Executive shall have the right to revoke any such
designation and to redesignate a beneficiary or beneficiaries by written notice
to the Company (and to any applicable insurance company) to such effect.
12.9 No Conflict. The Executive represents and warrants to the
Company that this Agreement is legal, valid and binding upon the Executive and
the execution of this Agreement and the performance of the Executive's
obligations hereunder does not and will not constitute a breach of, or conflict
with the terms or provisions of, any agreement or understanding to which the
Executive is a party (including, without limitation, any other employment
agreement). The Company represents and warrants to the Executive that this
Agreement is legal, valid and binding upon the Company and the Company is not a
party to any agreement or understanding which would prevent the fulfillment by
the Company of the terms of this Agreement or pursuant to which performance by
the Company of its obligations hereunder would constitute a breach or conflict.
12.10 Withholding Taxes. Payments made to the Executive
pursuant to this Agreement shall be subject to withholding and social security
taxes and other ordinary and customary payroll deductions.
12.11 Severability. If any provision of this Agreement shall
be held invalid, the remainder of this Agreement shall not be affected thereby;
provided, however, that the parties shall negotiate in good faith with respect
to equitable modification of the provision or application thereof held to be
invalid. To the extent that it may effectively do so under applicable law, each
party hereby waives any provision of law which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.
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12.12 No Offset. Except as set forth in Section 9.4, neither
the Company nor the Executive shall have any right to offset any amounts owed by
one party hereunder against amounts owed or claimed to be owed to such party,
whether pursuant to this Agreement or otherwise, and the Company and the
Executive shall make all the payments provided for in this Agreement in a timely
manner.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of the date first above written.
TIME WARNER INC.
/s/ Tod M. Hullin
By:_________________________________
/s/ Timothy A. Boggs
_________________________________
Timothy A. Boggs
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ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Account, at the Company's
option, shall either be actually invested and reinvested, or deemed invested and
reinvested, in an account in securities selected from time to time by an
investment advisor designated from time to time by the Company (the "Investment
Advisor"), substantially all of which securities shall be "eligible securities".
The designation from time to time by the Company of an Investment Advisor shall
be subject to the approval of the Executive, which approval shall not be
withheld unreasonably. "Eligible securities" are common and preferred stocks,
warrants to purchase common or preferred stocks, put and call options, and
corporate or governmental bonds, notes and debentures, either listed on a
national securities exchange or for which price quotations are published in
newspapers of general circulation, including The Wall Street Journal, and
certificates of deposit. Eligible securities shall not include the common or
preferred stock, any warrants, options or rights to purchase common or preferred
stock or the notes or debentures of the Company or any corporation or other
entity of which the Company owns directly or indirectly 5% or more of any class
of outstanding equity securities. The Investment Advisor shall have the right,
from time to time, to designate eligible securities which shall be either
actually purchased and sold, or deemed to have been purchased or sold, for the
Account on the date of reference. Such purchases may be made or deemed to be
made on margin; provided that the Company may, from time to time, by written
notice to the Executive and the Investment Advisor, limit or prohibit margin
purchases in any manner it deems prudent and, upon three business days written
notice to the Executive and the Investment Advisor, cause all eligible
securities theretofore purchased or deemed purchased on margin to be sold or
deemed sold. The Investment Advisor shall notify the Executive in writing of
each transaction within five business days thereafter and shall render to the
Executive written monthly reports as to the current status of the Executive's
Account. In the case of any purchase, the Account shall be charged with a dollar
amount equal to the quantity and kind of securities purchased or deemed to have
been purchased multiplied by the fair market value of such securities on the
date of reference and shall be credited with the quantity and kind of securities
so purchased or deemed to have been purchased. In the case of any sale, the
Account shall be charged with the quantity and kind of securities sold or deemed
to have been sold, and shall be credited with a dollar amount equal to the
quantity and kind of securities sold or deemed to have been sold multiplied by
the fair market value of such securities on the date of reference. Such charges
and credits to the Account shall take place immediately upon the consummation of
the transactions to which they relate. As used herein "fair market value" means
either (i) if the security is actually
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A-2
purchased or sold by the Company on the date of reference, the actual purchase
or sale price per security to the Company or (ii) if the security is not
purchased or sold on the date of reference, in the case of a listed security,
the closing price per security on the date of reference, or if there were no
sales on such date, then the closing price per security on the nearest preceding
day on which there were such sales, and, in the case of an unlisted security,
the mean between the bid and asked prices per security on the date of reference,
or if no such prices are available for such date, then the mean between the bid
and asked prices per security on the nearest preceding day for which such prices
are available. If no bid or asked price information is available with respect to
a particular security, the price quoted to the Company as the value of such
security on the date of reference (or the nearest preceding date for which such
information is available) shall be used for purposes of administering the
Account, including determining the fair market value of such security. The
Account shall be charged currently with all interest paid or deemed payable by
the Account with respect to any credit extended or deemed extended to the
Account. Such interest shall be charged to the Account, for margin purchases
actually made, at the rates and times actually paid by the Account and, for
margin purchases deemed to have been made, at the rates and times then charged
by an investment banking firm designated by the Company with which the Company
does significant business. The Company may, in the Company's sole discretion,
from time to time serve as the lender with respect to any margin transactions by
notice to the then Investment Advisor and in such case interest shall be charged
at the rate and times then charged by an investment banking firm designated by
the Company with which the Company does significant business. Brokerage fees
shall be charged to the Account, for transactions actually made, at the rates
and times actually paid and, for transactions deemed to have been made, at the
rates and times then charged for transactions of like size and kind by an
investment banking firm designated by the Company with which the Company does
significant business.
A.2 Dividends and Interest. The Account shall be credited with
dollar amounts equal to cash dividends paid from time to time upon the stocks
held or deemed to be held therein. Dividends shall be credited as of the payment
date. The Account shall similarly be credited with interest payable on interest
bearing securities held or deemed to be held therein. Interest shall be credited
as of the payment date, except that in the case of purchases of interest-bearing
securities the Account shall be charged with the dollar amount of interest
accrued to the date of purchase, and in the case of sales of such
interest-bearing securities the Account shall be credited with the dollar amount
of interest accrued to the date of sale. All dollar amounts of dividends or
interest credited to the Account pursuant to this Section A.2 shall be charged
with all taxes thereon deemed payable
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A-3
by the Company (as and when determined pursuant to Section A.5). The Investment
Advisor shall have the same right with respect to the investment and
reinvestment of net dividends and net interest as the Investment Advisor has
with respect to the balance of the Account.
A.3 Adjustments. The Account shall be equitably adjusted to
reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
or deemed to be held therein.
A.4 Obligation of the Company. The Company shall not be required
to purchase, hold or dispose of any of the securities designated by the
Investment Advisor; however, whether or not it elects to purchase or sell any
such securities, such transactions shall be deemed to have been made and the
Account shall be charged with all taxes (including stock transfer taxes),
interest, brokerage fees and investment advisory fees, if any, deemed payable by
the Company and attributable to such transactions (in all cases net after any
tax benefits that the Company would be deemed to derive from the payment
thereof, as and when determined pursuant to Section A.5), but no other costs of
the Company. The only obligation of the Company is its contractual obligation to
make payments to the Executive measured as set forth below. To the extent that
the Company, in its discretion, purchases or holds any of the securities
designated by the Investment Advisor, the same shall remain the sole property of
the Company, subject to the claims of its general creditors, and shall not be
deemed to form part of the Account. Neither the Executive nor his legal
representative or any beneficiary designated by the Executive shall have any
right, other than the right of an unsecured general creditor, against the
Company in respect of any portion of the Account.
A.5 Taxes. The Account shall be charged with all federal, state
and local taxes deemed payable by the Company with respect to income recognized
upon the dividends and interest received or deemed to have been received by the
Account pursuant to Section A.2 and gains recognized upon sales of any of the
securities which are deemed to have been sold pursuant to Section A.1 or A.6.
The Account shall be credited with the amount of the tax benefit received by the
Company as a result of any payment of interest actually made or deemed to be
made pursuant to Section A.1 or A.2 and as a result of any payment of brokerage
fees and investment advisory fees made or deemed to be made pursuant to Section
A.1. If any of the sales of the securities which are deemed to have been sold
pursuant to Section A.1 or A.6 results in a loss to the Account, such net loss
shall be deemed to offset the income and gains referred to in the second
preceding sentence (and
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A-4
thus reduce the charge for taxes referred to therein) to the extent then
permitted under the Internal Revenue Code of 1986, as amended from time to time,
and under applicable state and local income and franchise tax laws (collectively
referred to as "Applicable Tax Law"); provided, however, that for the purposes
of this Section A.5 the Account shall, except as provided in the third following
sentence, be deemed to be a separate corporate taxpayer and the losses referred
to above shall be deemed to offset only the income and gains referred to in the
second preceding sentence. Such losses shall be carried back and carried forward
within the Account to the extent permitted by Applicable Tax Law in order to
minimize the taxes deemed payable on such income and gains within the Account.
For the purposes of this Section A.5, all charges and credits to the Account for
taxes shall be deemed to be made as of the end of the Company's taxable year
during which the transactions, from which the liabilities for such taxes are
deemed to have arisen, are deemed to have occurred. Notwithstanding the
foregoing, if and to the extent that in any year there is a net loss in the
Account that cannot be offset against income and gains in any prior year, then
an amount equal to the tax benefit to the Company of such net loss (after such
net loss is reduced by the amount of any net capital loss of the Account for
such year) shall be credited to the Account on the last day of such year. If and
to the extent that any such net loss of the Account shall be utilized to
determine a credit to the Account pursuant to the preceding sentence, it shall
not thereafter be carried forward under this Section A.5. For purposes of
determining taxes payable by the Company under any provision of this Annex A it
shall be assumed that the Company is a taxpayer and pays all taxes at the
maximum marginal rate of federal income taxes and state and local income and
franchise taxes (net of assumed federal income tax benefits) applicable to
business corporations and that all of such dividends, interest, gains and losses
are allocable to its corporate headquarters, which are currently located in New
York City.
A.6 Payments. Payments of deferred compensation shall be made as
provided in this Section A.6. Except as otherwise specifically provided in this
Section A.6, deferred compensation shall be paid monthly for a period of 60
months (the "Pay-Out Period") commencing on the first day of the month after the
date the Executive ceases to be an employee of the Company and leaves the
payroll of the Company for any reason; provided, however, that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such payments shall commence on January 1st of the year following the
year in which such event occurs. On each payment date, the Account shall be
charged with the dollar amount of such payment. On each payment date, the amount
of cash held or deemed to be held in the Account shall be not less than the
payment then due and the Company may select the securities to be sold or deemed
sold to provide such
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A-5
cash if the Investment Advisor shall fail to do so on a timely basis. The amount
of any taxes payable with respect to any such sales shall be computed, as
provided in Section A.5 above, and deducted from the Account, as of the end of
the taxable year of the Company during which such sales are deemed to have
occurred. Solely for the purpose of determining the amount of monthly payments
during the Pay-Out Period, the Account shall be valued on the fifth trading day
preceding the first monthly payment of each year of the Pay-Out Period, or more
frequently at the Company's election (the "Valuation Date"), by adjusting all of
the securities held or deemed to be held in the Account to their fair market
value (net of the tax adjustment that would be made thereon if sold, as
estimated by the Company) and by deducting from the Account the amount of all
outstanding indebtedness. The extent, if any, by which the Account, valued as
provided in the immediately preceding sentence exceeds the aggregate amount of
credits to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement as
of each Valuation Date and not theretofore distributed or deemed distributed
pursuant to this Section A.6 is herein called "Account Retained Income". The
amount of each payment for the year, or such shorter period as may be determined
by the Company, of the Pay-Out Period immediately succeeding such Valuation
Date, including the payment then due, shall be determined by dividing the
aggregate value of the Account, as valued and adjusted pursuant to the second
preceding sentence, by the number of payments remaining to be paid in the
Pay-Out Period, including the payment then due; provided that each payment made
shall be deemed made first out of Account Retained Income (to the extent
remaining after all prior distributions thereof since the last Valuation Date).
The balance of the Account, after all the securities held or deemed to have been
held therein have been sold or deemed to have been sold and all indebtedness
liquidated, shall be paid to the Executive in the final payment, which shall be
decreased by deducting therefrom the amount of all taxes attributable to the
sale of any securities held or deemed to have been held in the Account since the
end of the preceding taxable year of the Company, which taxes shall be computed
as of the date of such payment.
If this Agreement is terminated by the Company pursuant to
Section 4.1, the Account shall be valued as of the later of (i) the date the
Executive ceases to be an employee of the Company and leaves the Company's
payroll or (ii) twelve months after the date the Agreement is terminated
pursuant to Section 4.1 and, after the securities held or deemed to have been
held therein have been sold or deemed to have been sold and all related
indebtedness liquidated, shall be paid to the Executive as soon as practicable
and in any event within 75 days following the later of such dates in a final
lump sum payment, which shall be decreased by deducting therefrom the amount of
all taxes attributable to the sale of any securities held or deemed to have been
held in the Account since
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A-6
the end of the preceding taxable year of the Company, which taxes shall be
computed as of the date of such payment. Payments made pursuant to this
paragraph shall be deemed made first out of Account Retained Income.
If the Executive becomes disabled within the meaning of Section 5
of the Agreement and is not thereafter returned to full-time employment with the
Company as provided in said Section 5, then deferred compensation shall be paid
monthly during the Pay-Out Period commencing on the first day of the month
following the termination of the Executive's employment with the Company in
accordance with the provisions of the first paragraph of this Section A.6.
If the Executive shall die at any time whether during or after
the termination of the Agreement, the Account shall be valued as of the date of
the Executive's death and the balance of the Account shall be paid to the
Executive's estate or beneficiary within 75 days of such death in accordance
with the provisions of the second preceding paragraph.
Within 90 days after the end of each taxable year of the Company
in which payments have been made from the Account and at the time of the final
payment from the Account, the Company shall compute and shall credit to the
Account, the amount of the tax benefit assumed to be received by it from the
payment to the Executive of amounts of Account Retained Income during such
taxable year or since the end of the last taxable year, as the case may be. No
additional credits shall be made to the Account pursuant to the preceding
sentence in respect of the amounts credited to the Account pursuant to the
preceding sentence. Notwithstanding any provision of this Section A.6, the
Executive shall not be entitled to receive pursuant to this Annex A an aggregate
amount that shall exceed the sum of (i) all credits made to the Account pursuant
to Sections 3.3, 3.4 and 3.5 of the Agreement to which this Annex is attached,
(ii) the net cumulative amount (positive or negative) of all income, gains,
losses, interest and expenses charged or credited to the Account pursuant to
this Annex A (excluding credits made pursuant to the second preceding sentence),
after all credits and charges to the Account with respect to the tax benefits or
burdens thereof, and (iii) an amount equal to the tax benefit to the Company
from the payment of the amount (if positive) determined under clause (ii) above;
and the final payment(s) otherwise due may be adjusted or eliminated
accordingly. In determining the tax benefit to the Company under clause (iii)
above, the Company shall be deemed to have made the payments under clause (ii)
above with respect to the same taxable years and in the same proportions as
payments of Account Retained Income were actually made from the Account. Except
as otherwise provided in this paragraph, the computation of all taxes and tax
benefits referred to in this
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A-7
Section A.6 shall be determined in accordance with Section A.5 above.
A.7. Other Payment Methods. Notwithstanding the foregoing
provisions of this Annex A, the Executive may, prior to the commencement of any
calendar year elect by written notice to the Company to cause (i) all or any
portion of the amounts otherwise to be credited to the Account in such year
under Section 3.3 of the Agreement not to be so credited but to be paid to the
Executive on the date(s) such credits otherwise would have been made thereunder
and/or (ii) all or any portion of the amounts to be credited to the Account
under Section 3.3 of the Agreement in such year (after giving effect to clause
(i) above) to be payable from the Account at times earlier than those provided
in Section A.6 above but not earlier than the dates on which such amounts were
to be credited to the Account.
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ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
November , 1995, between TIME WARNER INC., a Delaware corporation (the
"Company"), 75 Rockefeller Plaza, New York, New York 10019 and the undersigned
(the "Agreement"), and in consideration of the payments made to me and other
benefits to be received by me pursuant thereto, I, [NAME], being of lawful age,
do hereby release and forever discharge the Company and its officers,
shareholders, subsidiaries, agents, and employees, from any and all actions,
causes of action, claims, or demands for general, special or punitive damages,
attorney's fees, expenses, or other compensation, which in any way relate to or
arise out of my employment with the Company or any of its subsidiaries or the
termination of such employment, which I may now or hereafter have under any
federal, state or local law, regulation or order, including without limitation,
under the Age Discrimination in Employment Act, as amended, through and
including the date of this Release; provided, however, that the execution of
this Release shall not prevent the undersigned from bringing a lawsuit against
the Company to enforce its obligations under the Agreement.
I acknowledge that I have been given at least 21 days from the
day I received a copy of this Release to sign it and that I have been advised to
consult an attorney. I understand that I have the right to revoke my consent to
this Release for seven days following my signing. This Release shall not become
effective or enforceable until the expiration of the seven-day period following
the date it is signed by me.
I further state that I have read this document and the Agreement
referred to herein, that I know the contents of both and that I have executed
the same as my own free act.
WITNESS my hand this ____ day of ___________ , ____.
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EXECUTION COPY
SSSI AGREEMENT
This SSSI Agreement (the "Agreement") is
dated as of October 10, 1996, and is entered into
between TW Inc. (which will be renamed Time Warner
Inc.), a Delaware corporation ("Holdco"), Liberty
Media Corporation, a Delaware corporation ("LMC"),
and Southern Satellite Systems, Inc., a Georgia
corporation ("SpinCo"), and, with respect to Section
11(d), Section 11(f) and Section 11(g) only,
Satellite Services, Inc., a Delaware corporation
("Satellite"). For purposes of this Agreement, LMC,
SpinCo and, with respect to the above referenced
Sections, Satellite, on the one hand are,
collectively, a "Party" and Holdco on the other hand,
individually, is a "Party". References to "Parties"
is a collective reference to LMC, SpinCo and with
respect to the above referenced Sections, Satellite,
on the one hand, and Holdco, on the other.
WHEREAS Holdco, LMC and certain subsidiaries of LMC have
entered into a Second Amended and Restated LMC Agreement dated as of September
22, 1995 (the "LMC Agreement"), which contemplates the Parties entering into
this Agreement;
WHEREAS Holdco desires to acquire (a) from SpinCo the Contract
Option (as defined in Section 2) and (b) from LMC and its Affiliates (as defined
in Section 24) the non-competition agreement contemplated in Section 11(b)(ix);
WHEREAS Tele-Communications, Inc., a Delaware corporation
("TCI"), is required pursuant to the FTC Consent Decree (including the FTC
Agreement in Principle) (each, as
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2
defined in Section 24) to seek from the Internal Revenue Service the Letter
Ruling (as defined in Section 24) with respect to the Spin-off (as defined in
Section 24) of 100% of the shares of SpinCo;
WHEREAS as of the date hereof LMC directly owns all the
outstanding common stock, par value $1.00 per share (the "Shares"), of SpinCo,
which is engaged primarily in the Business;
WHEREAS, in connection with the Spin-off, LMC shall contribute
all the capital stock of TCI Turner Preferred, Inc., a Colorado corporation
("TCITP"), to SpinCo, so that, as of immediately prior to the effectiveness of
the Spin-off, TCITP will be a wholly owned subsidiary of SpinCo;
WHEREAS immediately prior to the Spin-off, TCITP will own,
directly or indirectly, all voting securities of Holdco then owned beneficially
or of record by LMC or any of its Controlled Affiliates (as defined in the LMC
Agreement) and, if LMC is then a Controlled Affiliate of TCI, all voting
securities of Holdco then owned beneficially or of record by TCI or any of its
Controlled Affiliates, other than the Excluded Shares (as defined in the LMC
Agreement);
WHEREAS this Agreement is being executed on the date of the
closing of Holdco's acquisition of Turner Broadcasting System, Inc., but the
Contract Option provided for in Section 2 will not be granted until the Grant
Date (as defined in Section 2); and
WHEREAS capitalized terms used but not defined in any of the
other Sections of this Agreement are defined in Section 24.
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3
NOW, THEREFORE, it is agreed as follows:
1. Execution Date. (a) Holdco shall deliver to LMC (or its
designee pursuant to Section 15) and SpinCo upon the execution of this Agreement
(the "Execution Date"):
(i) An opinion of counsel to Holdco (which counsel may be an
employee of Holdco), reasonably acceptable to LMC and SpinCo, addressed
to LMC and SpinCo and dated the Execution Date, to the effect that:
(A) Holdco is a corporation duly organized, validly
existing and in good standing under the laws of its
jurisdiction of incorporation and in good standing to do
business as a foreign corporation in each jurisdiction in
which the conduct or nature of its business or the ownership,
leasing or holding of its properties makes such qualification
necessary, except such jurisdictions where the failure to be
so qualified or in good standing, individually or in the
aggregate, would not have a Material Adverse Effect. Holdco
has all requisite corporate power and authority to execute and
deliver this Agreement, the Distribution Contract and the
Registration Rights Agreement (as defined in the LMC
Agreement) (collectively, the "Relevant Agreements"), to
perform its obligations thereunder and to consummate the
transactions contemplated hereby and thereby.
(B) The execution and delivery by Holdco of the
Relevant Agreements, the performance by Holdco of its
obligations thereunder and the consummation by Holdco of the
transactions contemplated thereby have been duly and validly
authorized by all necessary corporate action on the part of
Holdco. Each of the Relevant Agreements has been duly executed
and delivered by a duly authorized
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4
officer of Holdco and constitutes the legal, valid and binding
obligation of Holdco enforceable against Holdco in accordance
with its terms (subject to all applicable bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium
and similar laws affecting creditors' rights generally and
subject, as to enforceability, to general principles of
equity, and except that the indemnification obligations set
forth in Section 8 of the Registration Rights Agreement may be
subject to considerations of public policy).
(C) The execution, delivery and performance by Holdco
of the Relevant Agreements do not conflict with or result in a
violation of the General Corporation Law of the State of
Delaware, or the certificate of incorporation or by-laws of
Holdco.
(ii) The duly executed Registration Rights
Agreement.
(b) On the Execution Date, Holdco shall execute and deliver to
SpinCo, and SpinCo shall execute and deliver to Holdco, the Distribution
Contract (the "Distribution Contract") in substantially the form of Exhibit 1
hereto. The Distribution Contract shall not become effective until the Contract
Option provided for in Section 2 is exercised and closed.
2. Contract Option; Non-Competition Agreement. (a) Subject to
and on the terms and conditions set forth in this Agreement (including Section
15(b)), SpinCo hereby agrees to grant to Holdco on the Grant Date the right and
option (the "Contract Option"), which may be exercised at any time during the
Exercise Period (as defined in Section 2(d)), to cause the effectiveness of the
Distribution Contract. The "Grant Date" shall be five business days after the
earliest of (i) receipt of the
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5
Letter Ruling, (ii) the date on which TCI shall have been advised by the
Internal Revenue Service, or TCI shall have notified Holdco in writing that it
has determined, that it will not obtain the Letter Ruling and (iii) May 31,
1997, subject however, in the case of clauses (ii) and (iii) to the provisions
of Section 15(b).
(b) On the Grant Date, Holdco shall deliver:
(i) to SpinCo, in respect of the Contract Option,
4,166,667 fully paid and nonassessable shares of Series LMCN-V
Common Stock of Holdco, having the terms set forth on Exhibit
A to the LMC Agreement ("LMCN-V Common Stock");
(ii) to LMC (or its designee pursuant to Section 15),
in respect of LMC's noncompetition agreement with respect to
itself and its Affiliates set forth in Section 11(b)(ix), (A)
833,333 fully paid and nonassessable shares of the LMCN-V
Common Stock, and (B) $66,666,700 payable, at Holdco's option,
in cash or fully paid and nonassessable shares of LMCN-V
Common Stock (if the $66,666,700 is paid in LMCN-V Common
Stock, the number of shares to be delivered in respect of such
amount shall be equal to the quotient obtained by dividing (x)
$66,666,700 by (y) the product of the Formula Number (as
defined in the terms of the LMCN-V Common Stock) and the
Current Market Price of the common stock, par value $0.01 per
share, of Holdco (the "Holdco Common Stock") on the Grant
Date); and
(iii) to LMC and SpinCo an opinion of counsel to
Holdco (which counsel may be an employee of Holdco),
reasonably acceptable to LMC and SpinCo, addressed to LMC and
SpinCo to the effect that the shares of LMCN-V Common Stock
delivered by Holdco to LMC and SpinCo on such date have been
duly
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6
authorized and are validly issued, fully paid, nonassessable
and are not subject to any preemptive rights.
(c) Notwithstanding any other provision of this Agreement, the
obligation of Holdco to deliver the consideration provided for in this Section 2
on the Grant Date is absolute, and not subject to any right of setoff or
counterclaim that Holdco may have or claim, and no consideration paid or
delivered in respect of the Contract Option pursuant to this Section 2 shall be
refunded or refundable, nor may any claim be made for the return thereof, in
whole or in part, unless Holdco proves in a court of law that LMC and SpinCo did
not at the Execution Date have all requisite corporate power to execute, deliver
and perform its obligations, as applicable, under this Agreement and the
Distribution Contract and such lack of power has not been cured.
(d) Holdco may exercise the Contract Option at any time during
the period (the "Exercise Period") commencing on and including the Grant Date
and ending on and including the Termination Date (as defined in Section 10(a)),
by giving written notice of exercise (the "Exercise Notice") to SpinCo pursuant
to Section 16.
(e) If the Contract Option is exercised, the consideration
therefor shall be the amounts payable pursuant to Section 2 of the Distribution
Contract.
(f) Each Party agrees to be bound by and act in accordance
with the payment allocation set forth in Section 2(b) in the preparation and
filing of all tax returns and in any proceeding before any tax authority. In the
event that such payment allocation is disputed by a taxing authority, the Party
receiving notice of the dispute shall promptly notify the other Party hereto of
such dispute and keep such other Party informed with respect to all matters
concerning such dispute.
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7
3. Closing. The closing (the "Closing") of the exercise of the
Contract Option shall occur as soon as practicable after such exercise, but in
no event more than five business days following the satisfaction or waiver (to
the extent waived by the Party entitled to do so) of the conditions to the
Closing described in Sections 5, 6, 7, 8 and 9 (such date for the Closing being
referred to as the "Closing Date"). On the Closing Date, the Distribution
Contract shall become effective.
4. Representations and Warranties as of Execution
Date.
(a) Each of LMC and SpinCo represents and warrants to Holdco,
and Holdco represents to LMC and SpinCo, as of the Execution Date that:
(i) Such party has all requisite corporate power to execute,
deliver and perform its obligations under each of the Relevant
Agreements to which it is a party and such execution, delivery and
performance have been duly authorized by all corporate action on its
part required to be taken.
(ii) Each of the Relevant Agreements to which it is a party is
such party's legal, valid and binding obligation, enforceable in
accordance with its terms, except as may be affected by bankruptcy,
insolvency or similar laws affecting the rights of creditors generally
and by equitable principles of general applicability.
(iii) Neither the execution and delivery by such party of any
of the Relevant Agreements to which it is a party, nor the performance
of its obligations thereunder: (A) will violate or conflict with, or
constitute a breach or default under, (1) the certificate of
incorporation or by-laws of such Party, (2) any law, statute,
regulation, rule, order or other
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8
enactment of any Governmental Entity (as defined in Section 24)
applicable to such party, or (3) any agreement or instrument to which
such party is a party or by which it is bound or affected, except for
any violations, conflicts, breaches or defaults as would not,
individually or in the aggregate, have a material adverse effect on the
legality, validity, binding effect or enforceability of any of the
Relevant Agreements or on the material rights or ability of the other
Party to realize the material benefits intended to be created by the
Relevant Agreements, and except for any violations, conflicts, breaches
or defaults as may be the result of actions taken by Holdco subsequent
to effective date of the Distribution Contract, or (B) result in the
creation or imposition of any lien or other encumbrance on any of its
assets, except for liens or encumbrances as would not, individually or
in the aggregate, have a material adverse effect on the legality,
validity, binding effect or enforceability of any of the Relevant
Agreements or on the material rights or ability of the other party to
realize the material benefits intended to be created hereby and
thereby. No authorization, consent, approval or other action by, and no
notice to or filing with, any Governmental Entity or other third party
is required to be obtained or made in connection with, as applicable,
such party's execution, delivery and performance of the Relevant
Agreements to which it is a party, except any thereof the failure of
which to be obtained, given or made would not, individually or in the
aggregate, have a material adverse effect on the legality, validity,
binding effect or enforceability of any of the Relevant Agreements or
on the material rights or ability of the other Party to realize the
material benefits intended to be created hereby and thereby.
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9
(b) LMC and SpinCo represent and warrant to Holdco as of the
Execution Date that:
(i) Consolidated Return. As of the Execution Date, (A) each of
LMC and SpinCo (and, if LMC shall have designated another person to
receive the Section 2 payment pursuant to Section 15, such designated
person) is a member of the same group of corporations filing a
consolidated return for federal income tax purposes as the Liberty
Subsidiaries (the "LMC affiliated group") and (B) except in connection
with the Spin-off, none of LMC, TCITP, SpinCo or their respective
affiliates (other than the holders of the Excluded Shares, as such term
is defined in the LMC Agreement) has any current plan or intention (1)
to transfer any Holdco equity securities held directly or indirectly by
it immediately following the Execution Date (or to be acquired by it
pursuant to this Agreement) (any such holder or acquirer, a "Holder")
to any person that is not a member of the LMC affiliated group or (2)
to cause any Holder to cease to be a member of the LMC affiliated
group.
(ii) Investment Intent. The shares of LMCN-V Common Stock to
be acquired by each of LMC and SpinCo pursuant to Section 2 will be
acquired for its own account, for investment and not with a view to the
distribution or resale thereof other than as contemplated in connection
with the Spin-off or as contemplated by the Registration Rights
Agreement (and except that LMC currently intends to transfer the shares
of LMCN-V Common Stock that it so acquires to TCITP or a wholly-owned
subsidiary of TCITP). Each of LMC and SpinCo understands that such
shares have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or any state securities or blue sky
laws, by reason of their issuance in a transaction exempt from the
registration requirements thereunder and may not be resold unless the
subsequent
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10
disposition thereof is registered thereunder or is exempt from
registration thereunder.
(c) Holdco represents and warrants to LMC and
SpinCo as of the Execution Date that:
(i) The shares of LMCN-V Common Stock to be delivered as
payment for the Contract Option and the non-competition agreement in
Section 11(b)(ix) will as of their date of issuance be duly authorized
and validly issued, fully paid, nonassessable and free of preemptive
rights.
(ii) Neither the execution and delivery by Holdco of this
Agreement, the Distribution Contract and the Registration Rights
Agreement nor the performance of its obligations hereunder and
thereunder will result in the creation or imposition of any lien or
other encumbrance on the shares of LMCN-V Common Stock to delivered as
payment for the Contract Option and the non-competition agreement in
Section 11(b)(ix).
(d) In addition to the representations and warranties of
Holdco set forth in Section 4(c), the following representations and warranties
of Time Warner Inc., a Delaware corporation ("Old TW"), are hereby incorporated
by reference, with the same effect as if made in this Agreement by Holdco to LMC
and SpinCo on and as of the Execution Date:
(i) the representations and warranties of Old TW contained in
Section 3.02(a) of the Amended and Restated Agreement and Plan of
Merger, dated as of September 22, 1995, as amended as of August , 1996
(the "Merger Agreement"), among Old TW, Holdco, Time Warner Acquisition
Corp., TW Acquisition Corp. and Turner Broadcasting System, Inc., under
the heading entitled "Organization, Standing and Corporate Power";
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11
(ii) the representations and warranties of Old TW contained in
Section 3.02(c) of the Merger Agreement under the heading entitled
"Capital Structure";
(iii) the representations and warranties of Old TW contained
in Section 3.02(e) of the Merger Agreement under the heading entitled
"SEC Documents; Undisclosed Liabilities";
(iv) the representations and warranties of Old TW contained in
Section 3.02(g) of the Merger Agreement under the heading entitled
"Absence of Certain Changes or Events";
(v) the representations and warranties of Old TW contained in
Section 3.02(h) of the Merger Agreement under the heading entitled
"Litigation";
(vi) the representations and warranties of Old TW contained in
Section 3.02(j) of the Merger Agreement under the heading entitled
"Brokers"; and
(vii) the representations and warranties of Old TW contained
in Section 3.02(k) of the Merger Agreement under the heading entitled
"Taxes".
5. Representations and Warranties of Both Parties as of the
Closing Date. If the Contract Option is exercised, it shall be a condition to
the Closing (for the benefit of SpinCo) that, on and as of the Closing Date,
each of the following representations and warranties, if qualified by
materiality, shall be true and complete, or, if not so qualified, shall be true
and complete in all material respects, with respect to Holdco, and it shall be a
condition to the Closing (for the benefit of Holdco) that, on and as of the
Closing Date, each of the following representations and warranties, if qualified
by materiality,
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12
shall be true and complete, or, if not so qualified, shall be true and complete
in all material respects, with respect to LMC and SpinCo:
(a) Such party is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation and
is duly qualified and in good standing to do business as a foreign corporation
in each jurisdiction in which the conduct or nature of its business or the
ownership, leasing or holding of its properties makes such qualification
necessary, except such jurisdictions where the failure to be so qualified or in
good standing, individually or in the aggregate, would not have a Material
Adverse Effect.
(b) Such party has all requisite corporate power to execute,
deliver and perform its obligations under each of the Relevant Agreements to
which it is a party, and such execution, delivery and performance have been duly
authorized by all corporate action on its part required to be taken.
(c) Each of the Relevant Agreements to which it is a party is
such party's legal, valid and binding obligation, enforceable in accordance with
its terms, except as may be affected by bankruptcy, insolvency or similar laws
affecting the rights of creditors generally and by equitable principles of
general applicability.
(d) Neither the execution and delivery by such party of each
of the Relevant Agreements to which it is a party nor, except as set forth below
the applicable party's name on Schedule 5(d) hereto, the performance of its
obligations thereunder: (i) will violate or conflict with, or constitute a
breach or default under, (A) the certificate of incorporation or by-laws of such
party, (B) any law, statute, regulation, rule, order or other enactment of any
Governmental Entity applicable to such party, or (C) any agreement or instrument
to which such party is a party or by
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13
which it is bound or affected, except for any violations, conflicts, breaches or
defaults as would not, individually or in the aggregate, have a material adverse
effect on the legality, validity, binding effect or enforceability of any of the
Relevant Agreements or on the material rights or ability of the other Party to
realize the material benefits intended to be created by the Relevant Agreements
or (ii) result in the creation or imposition of any lien or other encumbrance on
any of its assets, except for liens or encumbrances as would not, individually
or in the aggregate, have a material adverse effect on the legality, validity,
binding effect or enforceability of the Relevant Agreements or on the material
rights or ability of the other Party to realize the material benefits intended
to be created hereby and thereby. No authorization, consent, approval or other
action by, and no notice to or filing with, any Governmental Entity or other
third party is required to be obtained or made in connection with, as
applicable, such party's execution, delivery and any of the Relevant Agreements
to which it is a party, except as set forth below the applicable party's name on
Schedule 5(d) hereto, performance of each of the Relevant Agreements to which it
is a party, or on the material rights or ability of the other Party to realize
the material benefits intended to be created hereby and thereby.
Without limiting the rights or obligations of either Party
under any provision of this Agreement: (1) if the Contract Option is exercised,
each Party shall promptly notify the other Party of any information that should
be set forth below such Party's name on Schedule 5(c); (2) upon receipt of any
such notice, Schedule 5(c) shall automatically be amended to incorporate such
information under the name of such Party; and (3) it shall be a condition to the
obligations of each Party to be performed hereunder on the Closing Date that
such Party shall be reasonably satisfied with the contents of Schedule 5(c) (as
so amended) set forth under the name of the other Party, to the extent such
matters are materially different from the
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14
matters set forth under the name of such other Party on Schedule 4(a)(iii).
6. (a) Representations and Warranties of SpinCo as of the
Closing Date. If the Contract Option is exercised, it shall be a condition to
Closing (for the benefit of Holdco) that, on and as of the Closing Date, each of
the following representations and warranties of SpinCo, if qualified by
materiality, shall be true and complete or, if not so qualified, shall be true
and complete in all material respects, except in each case as shall be set forth
in a letter (the "Disclosure Letter") from SpinCo to Holdco dated as of a date
after the exercise of the Contract Option and not later than the date 10 days
prior to the Closing Date:
(i) Consents. Except as set forth in Schedule 6(a)(i) to the
Disclosure Letter, no consent, approval, license, permit, order or
authorization of, or registration, declaration or filing with, any
governmental entity is required to be obtained or made by or with
respect to SpinCo in connection with (A) the execution, delivery and
performance of this Agreement or the Distribution Contract by SpinCo or
performance by SpinCo of its obligations hereunder or thereunder or (B)
the conduct of the business of SpinCo following the Closing hereof,
other than (1) compliance with and filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR Act"), if
applicable, (2) those that may be required solely by reason of Holdco's
(as opposed to any other third party's) participation in the
transactions contemplated hereby, (3) those that will be obtained by
the Closing and (4) those the failure of which to be obtained or made
by the Closing would not, individually or in the aggregate, have a
Material Adverse Effect.
(ii) Financial Statements. (A) Attached to the Disclosure
Letter as Schedule 6(a)(ii) are (1) the
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15
unaudited consolidated balance sheet of the Business (or, if prior to
the Spin-off, of SpinCo) as of the end of the most recent fiscal period
or calendar month prior to the date of the Disclosure Letter (the
"Balance Sheet"), and (2) the unaudited consolidated statements of
operating results and cash flows of the Business (or, if prior to the
Spin-off, of SpinCo) for the period ended as of the end of the most
recent fiscal period or calendar month prior to the date of the
Disclosure Letter (the financial statements described above, the
"Financial Statements").
(B) The Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently
applied and on that basis fairly present (subject to normal, recurring
year-end adjustments) the consolidated financial condition and results
of operations of the Business (or of SpinCo) as of the date thereof and
for the periods indicated.
(C) To the knowledge of SpinCo and, if prior to the
Spin-off, LMC, as of the Closing Date, the Business (or, if prior to
the Spin-off, SpinCo) does not have any material liabilities or
obligations of any nature (whether accrued, absolute, contingent,
unasserted or otherwise), that are required by generally accepted
accounting principles to be reflected on a consolidated balance sheet,
except (1) as disclosed, reflected or reserved against in the Balance
Sheet, (2) for liabilities and obligations incurred in the ordinary
course of business consistent with past practice since the date of the
Balance Sheet and not in violation of this Agreement and (3) for Taxes.
(iii) Assets. Except as set forth in Schedule 6(a)(iii) to the
Disclosure Letter, SpinCo owns or has sufficient rights to use under
existing
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16
leases and license agreements all material properties, rights and
assets reasonably necessary for the conduct of the Business as then
conducted.
(iv) Contracts. Except as set forth in Schedule 6(a)(iv) to
the Disclosure Letter:
(A) all material agreements, contracts, leases,
licenses, commitments or instruments of SpinCo, as of the
Closing Date that are reasonably necessary for the conduct of
the Business as then conducted (collectively, the
"Contracts"), are valid, binding and in full force and effect
and, as of the Closing Date, are enforceable by SpinCo in
accordance with their terms, except as may be affected by
bankruptcy, insolvency or similar laws affecting the rights of
creditors generally and by equitable principles of general
applicability; and
(B) SpinCo has, as of the Closing Date, performed in
all material respects all material obligations required to be
performed by it under the Contracts and, as of the Closing
Date, is not (with or without the lapse of time or the giving
of notice, or both) in breach or default in any material
respect thereunder and no other party to any of the Contracts
is to the knowledge of SpinCo, as of the Closing Date (with or
without the lapse of time or the giving of notice, or both),
in breach or default in any material respect thereunder,
except in either such case for any such breach or default
resulting from any action or omission by Holdco, Turner
Broadcasting System, Inc. ("TBS") or any of their respective
Affiliates, including without limitation any change in the
programming service known as WTBS on the date of execution of
this Agreement.
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17
(v) Litigation. Except as set forth in Schedule 6(a)(v) to the
Disclosure Letter:
(A) there are not, as of the Closing Date, any
pending lawsuits or claims with respect to the Business to
which SpinCo or, if prior to the Spin- off, LMC has been
contacted in writing by counsel for the plaintiff or claimant,
against or affecting SpinCo or any of its properties, assets,
operations or businesses as to which there is at least a
reasonable possibility of adverse determination, that would
have, if so determined, individually or in the aggregate, a
Material Adverse Effect;
(B) to the knowledge of SpinCo and, if prior to the
Spin-off, LMC, as of the Closing Date, SpinCo is not a party
or subject to or in default under any material judgment,
order, injunction or decree of any Governmental Entity
applicable to it or any of its material properties or assets,
which relates to the Business or could result in a Material
Adverse Effect;
(C) there is not pending against any other person, as
of the Closing Date, any material lawsuit or claim by SpinCo,
which relates to the Business or which, if adversely
determined, could result in a Material Adverse Effect; and
(D) as of the Closing Date, to the knowledge of
SpinCo and, if prior to the Spin-off, LMC, there is not any
pending investigation of or proceeding by any Governmental
Entity which relates to the Business and which if determined
adversely could result in a Material Adverse Effect with
respect to the Business or SpinCo.
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18
(vi) Insurance. SpinCo, through one or more Affiliates,
maintains or has the benefit (through TCI, LMC or otherwise) of
policies of fire and casualty, liability and other forms of insurance
(including self-insurance) in such amounts, with such deductibles and
against such risks and losses as are, in its judgment, reasonable for
the Business under the circumstances in which it is being conducted.
Except as set forth in Schedule 6(a)(vi) to the Disclosure Letter:
(A) all such policies are in full force and effect,
all premiums due and payable thereon as of the Closing Date
have been paid (other than retroactive or retrospective
premium adjustments that may be required to be paid with
respect to any period ending prior to the Closing Date under
comprehensive general liability and workmen's compensation
insurance policies), and no notice of cancelation or
termination as of the Closing Date has been received with
respect to any such policy which has not been replaced prior
to the date of such cancelation; and
(B) to the knowledge of SpinCo and, if prior to the
Spin-off, LMC, its activities and operations with respect to
the Business, as of the Closing Date, have been conducted in a
manner so as to conform in all material respects to all
applicable provisions of such insurance policies, except for
any failures so to conform that could not, individually or in
the aggregate, have a Material Adverse Effect.
(vii) Compliance with Applicable Laws. Except as set forth in
Schedule 6(a)(vii), as of the Closing Date, SpinCo has not received any
written communication during the past two years from a Governmental
Entity that alleges that it or the Business is not in compliance in any
material respect with any applicable
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19
statutes, laws, ordinances, rules, orders and regulations of any
Government Entity, other than any such communications, alleging any
failures to be in compliance that, if true, would not, individually or
in the aggregate, have a Material Adverse Effect.
(viii) Licenses; Permits. Except as set forth in Schedule
6(a)(viii) to the Disclosure Letter, SpinCo possesses all governmental
franchises, licenses, permits, authorizations and approvals necessary
to enable it to own, lease or otherwise hold its properties and assets
with respect to the Business and to carry on the Business as presently
conducted, other than such franchises, licenses, permits,
authorizations and approvals the lack of which, individually or in the
aggregate, would not have a Material Adverse Effect.
(ix) Absence of Changes or Events. Except as set forth in
Schedule 6(a)(ix) to the Disclosure Letter:
(A) since the date of the Balance Sheet, there has
not been any material adverse change in the business, assets,
condition (financial or otherwise) or results of operations of
the Business (or, if prior to the Spin-off, SpinCo); and
(B) since the date of the Balance Sheet, the Business
has been conducted in the ordinary course (in accordance with
the Ordinary Course Guidelines) and in substantially the same
manner as previously conducted except for such changes (in
accordance with the Ordinary Course Guidelines) in the
day-to-day operations of the Business as the management of
SpinCo (or, if prior to the Spin-off, LMC and SpinCo), in the
good faith exercise of their business judgment, shall from
time to time determine to be in the best interests of the
Business) and has made
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20
commercially reasonable efforts consistent with past practices
to preserve the Business' relationships with customers,
suppliers and others with whom SpinCo deals in connection with
the Business.
(b) Certain Representations and Warranties of Holdco as of
Closing Date. If the Contract Option is exercised, it shall be a condition to
the Closing (for the benefit of SpinCo) that, on and as of the Closing Date,
each of the following representations and warranties of Holdco, if qualified by
materiality, shall be true and complete, or, if not so qualified, shall be true
and complete in all material respects:
(i) Neither the execution and delivery by Holdco of this
Agreement, the Distribution Contract and the Registration Rights
Agreement nor the performance of its obligations hereunder and
thereunder resulted in the creation or imposition of any lien or other
encumbrance on the shares of LMCN-V Common Stock delivered by Holdco
pursuant to Section 2 as payment for the Contract Option and the
non-competition agreement in Section 11(b)(ix).
(ii) Old TW and Holdco have, collectively, filed all required
reports, schedules, forms, statements and other documents with the
Securities and Exchange Commission ("SEC") since December 31, 1993 (as
such documents have been amended prior to the Closing Date, the "TW SEC
Documents"). As of their respective dates, the TW SEC Documents
complied in all material respects with the requirements of the
Securities Act or the Securities Exchange Act of 1934, as amended, as
the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such TW SEC Documents, and none of the TW SEC
Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
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21
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the
extent such statements have been modified or superseded by a later TW
SEC Document. Except to the extent that information contained in any TW
SEC Document has been revised or superseded by a later TW SEC Document,
neither Old TW's Annual Report on Form 10-K for the year ended December
31, 1995, nor any TW SEC Document filed after December 31, 1995,
contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading. The consolidated financial statements
of Old TW and Holdco included in TW SEC Documents comply as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with generally accepted accounting
principles (except, in the case of unaudited statements, as permitted
by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and
fairly present the consolidated financial position of Old TW or Holdco,
as applicable, and its consolidated subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except as set forth
in the TW SEC Documents, neither Holdco nor any subsidiary of Holdco
has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) required by generally accepted
accounting principles to be set forth on a consolidated balance sheet
of Holdco and its consolidated subsidiaries or in the notes thereto and
which, individually or in the aggregate,
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22
could reasonably be expected to have a Parent Material Adverse Effect
(as defined in the Merger Agreement).
(iii) Except as disclosed in any TW SEC Document, since the
date of the most recent audited financial statements included in TW SEC
Documents, Holdco has (or, if Holdco shall have not yet filed audited
financial statements as part of the TW SEC Documents, each of Old TW
and Holdco has) conducted its business only in the ordinary course, and
there has not been:
(A) any change or effect (or any development that,
insofar as can reasonably be foreseen, is likely to result in
a change or effect) which, individually or in the aggregate,
has had or is likely to have, a Parent Material Adverse
Effect;
(B) except for regular quarterly dividends not in
excess of $0.09 per share of Holdco Common Stock and the
stated or required amount of dividends on any series of Parent
Preferred Stock (as defined in the Merger Agreement), in each
case with customary record and payment dates, any declaration,
setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to Holdco
Common Stock or any series of Parent Preferred Stock;
(C) any split, combination or reclassification of
Holdco Common Stock or any issuance or the authorization of
any issuance of any other securities in exchange or in
substitution for shares of Holdco Common Stock;
(D) any damage, destruction or loss, whether or not
covered by insurance that has had or is likely to have a
Parent Material Adverse Effect; or
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23
(E) any change in accounting methods, principles or
practices by Holdco or any Material Parent Subsidiary (as
defined in the Merger Agreement) materially affecting its
assets, liabilities or business, except insofar as may have
been required by a change in generally accepted accounting
principles.
(c) Representations and Warranties of Holdco Incorporated by
Reference as of the Closing Date. In addition to the representations and
warranties of Holdco set forth in Section 6(b), the following representations
and warranties of Old TW are hereby incorporated by reference, with the same
effect as if made in this Agreement by Holdco to SpinCo on and as of the Closing
Date:
(i) the representations and warranties of Old TW contained in
Section 3.02(a) of the Merger Agreement under the heading entitled
"Organization, Standing and Corporate Power"; and
(ii) the representations and warranties of Old TW contained in
Section 3.02(j) of the Merger Agreement under the heading entitled
"Brokers".
and it shall be a condition to the Closing (for the benefit of SpinCo) that each
of the representations and warranties so incorporated by reference, if qualified
by materiality, shall be true and complete, or if not so qualified, shall be
true and complete in all material respects, on and as of the Closing Date.
7. Conditions to the Obligations of Each Party. The
obligations of SpinCo and Holdco to consummate the
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24
Closing are conditioned upon the satisfaction, prior to or on the Closing Date,
of the following conditions:
(a) on the Closing Date, no action, proceeding or
investigation commenced or brought by any U.S. Federal Government Entity shall
be pending, the purpose of which is to set aside or modify in any material
respect the authorizations of any of the transactions provided for in this
Agreement and the Distribution Contract or to enjoin or prevent consummation of
any of such transactions, nor shall any restraining order or preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or any other legal restraint or prohibition preventing the
consummation of the transactions contemplated hereby be in effect; and
(b) the receipt of any required regulatory approvals and
authorizations and the making of all filings and the termination of all waiting
periods required in connection with the Closing, with the understanding that, if
the Contract Option is exercised, SpinCo will use its (or, if prior to the
Spin-off, LMC and SpinCo will use their) commercially reasonable efforts to
secure any required regulatory approvals and authorizations prior to the
Closing; provided, however, that nothing in this Agreement shall require, Holdco
or SpinCo (or any of their respective Affiliates) (i) to agree to, approve or
otherwise be bound by or satisfy any condition of any kind referred to in the
second or third sentences of Section 2.1(d) of the LMC Agreement or (ii) to
agree to or enter into or be bound by any settlement or judgment.
8. Conditions to Obligation of Holdco. The obligation of
Holdco to consummate the Closing is also subject to the satisfaction, prior to
or on the Closing
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25
Date, of each of the following additional conditions (unless waived by Holdco):
(a) Each of the Parties (other than Holdco) shall have
performed in all material respects all its obligations hereunder which are
required to be performed prior to the Closing Date.
(b) If prior to the Spin-off, Holdco shall have received a
certificate from an officer of LMC (i) to the effect that LMC has complied, in
all material respects, with all its obligations under this Agreement to be
performed on or before the Closing Date, (ii) as to the incumbency of certain
officers of LMC, (iii) as to the satisfaction of the conditions to Closing set
forth in Section 5 (with respect to the representations and warranties of LMC
contained therein) and Section 6(a) and (iv) attaching certified copies of
SpinCo's certificate of incorporation and by-laws, as amended through and in
effect on the Closing Date, together with all resolutions of LMC's board
authorizing the transactions contemplated by this Agreement and the Distribution
Contract.
(c) If prior to the Spin-off, Holdco shall have received an
opinion of counsel to LMC (which counsel may be an employee of LMC and which
counsel may be counsel to SpinCo), reasonably acceptable to Holdco, addressed to
Holdco and dated the Closing Date, to the effect that:
(i) LMC is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation.
LMC has all requisite corporate power and authority to execute and
deliver the Agreement, to perform its obligations thereunder and to
consummate the transactions contemplated thereby.
(ii) The execution and delivery by LMC of the Agreement, the
performance by LMC of its obligations
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26
thereunder and the consummation by LMC of the transactions contemplated
thereby have been duly and validly authorized by all necessary
corporate action on the part of LMC. The Agreement has been duly
executed and delivered by a duly authorized officer of LMC and
constitutes the legal, valid and binding obligation of LMC enforceable
against LMC in accordance with its terms (subject to all applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws affecting creditors' rights generally and subject, as
to enforceability, to general principles of equity).
(iii) The execution, delivery and performance of the Agreement
by LMC in accordance therewith does not conflict with or result in a
violation of the Delaware Corporation Law or the Certificate of
Incorporation or By-laws of LMC.
(d) Holdco shall have received a certificate from an officer
of SpinCo (i) to the effect that SpinCo has complied, in all material respects,
with all its obligations under this Agreement to be performed on or before the
Closing Date, (ii) as to the incumbency of certain officers of SpinCo, (iii) as
to the satisfaction of the conditions to Closing set forth in Section 5 (with
respect to the representations and warranties of SpinCo contained therein) and
Section 6(a), and (iv) attaching certified copies of SpinCo's certificate of
incorporation and by-laws as amended through and in effect on the Closing Date,
together with all resolutions of SpinCo's board of directors authorizing the
transactions contemplated by this Agreement and the Distribution Contract.
(e) Holdco shall have received an opinion of counsel to SpinCo
(which counsel may be an employee of
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27
SpinCo and may also be counsel to LMC and/or an employee of LMC), reasonably
acceptable to Holdco, addressed to Holdco and dated the Closing Date, to the
effect that:
(i) SpinCo is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of
incorporation. SpinCo has all requisite corporate power and authority
to execute and deliver this Agreement and the Distribution Contract and
to perform its obligations hereunder and thereunder.
(ii) The execution and delivery by SpinCo of this Agreement
and the Distribution Contract and the performance by SpinCo of its
obligations hereunder and thereunder have been duly and validly
authorized by all necessary corporate action on the part of SpinCo.
Each of this Agreement and the Distribution Contract has been duly
executed and delivered by a duly authorized officer of SpinCo and
constitutes the legal, valid and binding obligation of SpinCo
enforceable against SpinCo in accordance with its terms (subject to all
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws affecting creditors' rights generally and
subject, as to enforceability, to general principles of equity).
(iii) The execution and delivery of this Agreement and the
Distribution Contract by SpinCo, and the performance by SpinCo of its
obligations hereunder and thereunder, does not conflict with or result
in a violation of the corporate laws of the State of Georgia, or the
Certificate of Incorporation or by-laws of SpinCo.
(f) The Program and Digitization Agreement attached hereto as
Exhibit 2 (the "Program and Digitization Agreement") shall be in full force and
effect, subject to satisfaction of the conditions set forth therein.
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28
(g) SpinCo shall have received any material third party
consents, approvals and authorizations necessary to cause the effectiveness of
the Distribution Contract.
(h) Subject to Section 15(b), if an Exercise Notice shall have
been delivered on or prior to June 1, 1997, Holdco shall have received the
Disclosure Letter from SpinCo at least 10 days prior to the scheduled Closing
Date and shall be reasonably satisfied with the contents thereof and of all
attachments thereto.
If an Exercise Notice shall have been delivered by Holdco
after June 1, 1997, (i) Holdco shall have received, as contemplated by Section
11(b)(vii), the revised Disclosure Letter from SpinCo at least 10 days prior to
the scheduled Closing Date and (ii) Holdco shall be reasonably satisfied with
the contents of the revised Disclosure Letter and of all attachments thereto, to
the extent (and only to the extent) that such contents and attachments differ in
any material respect from the initial Disclosure Letter delivered to Holdco
pursuant to Section 11(b)(vii), and provided that the incurrence by SpinCo,
TCITP and/or any of their respective subsidiaries of indebtedness for borrowed
money, whether or not secured (unless secured in contravention of Section
11(b)(vi)(C)), shall not be a reasonable basis for Holdco's dissatisfaction
under this Section 8(h).
(i) Subject to Section 15(b), if an Exercise Notice shall have
been delivered on or prior to June 1, 1997, Holdco shall be reasonably satisfied
with the results of its due diligence investigation provided for in Section
11(b)(ii).
9. Conditions to Obligation of SpinCo. The obligation of
SpinCo to consummate the Closing is also
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29
subject to the satisfaction, prior to or on the Closing Date, of each of the
following conditions (unless waived by SpinCo):
(a) Holdco shall have performed in all material respects all
its obligations hereunder which are required to be performed prior to the
Closing Date.
(b) No petition or similar document shall have been filed by
or with respect to Holdco under any bankruptcy, insolvency or similar law.
(c) SpinCo shall have received an opinion of counsel to Holdco
(which counsel may be an employee of Holdco), reasonably acceptable to SpinCo,
addressed to SpinCo and dated the Closing Date, to the effect that:
(i) Holdco is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of
incorporation. Holdco has all requisite corporate power and authority
to perform its obligations under this Agreement, the Distribution
Contract and the Registration Rights Agreement and to consummate the
transactions contemplated hereby and thereby.
(ii) The performance by Holdco of its obligations under this
Agreement, the Distribution Contract and the Registration Rights
Agreement, and the consummation by Holdco of the transactions
contemplated hereby and thereby have been duly and validly authorized
by all necessary corporate action on the part of Holdco. Each of this
Agreement, the Distribution Contract and the Registration Rights
Agreement constitutes the legal, valid and binding obligation of Holdco
enforceable against Holdco in accordance with its terms (subject to all
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws affecting creditors' rights generally and
subject, as
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30
to enforceability, to general principles of equity, and except that the
indemnification obligations set forth in Section 8 of the Registration
Rights Agreement may be subject to considerations of public policy).
(iii) The performance by Holdco of this Agreement, the
Distribution Contract and the Registration Rights Agreement does not
conflict with or result in a violation of the General Corporation Law
of the State of Delaware, or the certificate of incorporation or
by-laws of Holdco.
(d) SpinCo shall have received a certificate from an officer
of Holdco (i) to the effect that Holdco has complied, in all material respects,
with all its obligations under this Agreement, the Distribution Contract and the
Registration Rights Agreement, (ii) as to the incumbency of certain officers of
Holdco, (iii) as to the satisfaction of the conditions to Closing set forth in
Section 5 (with respect to the representations and warranties of Holdco
contained therein), Section 6(b) and Section 6(c), (iv) attaching all
resolutions of Holdco's board of directors authorizing the transactions
contemplated by this Agreement, and (v) any other customary matters as may be
reasonably requested by SpinCo.
10. Termination. (a) Subject to the last two sentences of
Section 14 with respect to the survival of certain provisions, each of LMC's,
SpinCo's and Holdco's rights and obligations under this Agreement (including
with respect to the option granted hereunder, whether or not exercised) will
terminate on the earliest to occur of the following:
(i) if Holdco shall deliver an Exercise Notice on or before
June 1, 1997 (subject to extension as provided in Section 15(b)), the
earlier of (A) the sixth anniversary of the Execution Date and (B) the
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31
conversion of WTBS to a copyright-paid programming service;
(ii) if Holdco shall deliver an Exercise Notice after June 1,
1997 (subject to extension as provided in Section 15(b)), but before
the sixth anniversary of the Execution Date, 60 days after the date of
such Exercise Notice; and
(iii) if Holdco shall not theretofore have delivered an
Exercise Notice, the earlier of (A) the sixth anniversary of the
Execution Date and (B) the conversion of WTBS to a copyright-paid
programming service;
provided in each case that the Closing has not occurred on or prior to such
earliest date (the "Termination Date"). Notwithstanding the foregoing, if
(following the delivery of a timely Exercise Notice) as a result of any action
or failure to act by any unrelated third party, including any Governmental
Entity, the conditions to the Closing have not been satisfied in full on or
prior to the Termination Date, the "Termination Date" shall be extended to the
earlier of (i) five business days after the date as of which all such conditions
have been satisfied in full and (y) the first anniversary of the date of such
Exercise Notice.
(b) The termination of this Agreement will in no way limit any
obligation or liability of any Party based on or arising from a breach or
default by such Party prior to such termination with respect to any of its
representations, warranties or agreements contained in this Agreement, the
Distribution Contract or the Registration Rights Agreement.
11. Covenants. (a) Covenants of Each Party. If the Contract
Option is exercised each of SpinCo (or, if prior to the Spin-off, LMC and
SpinCo) and Holdco agree to use its commercially reasonable efforts to cause the
conditions to the Closing described in Sections 7, 8 and 9
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32
to be satisfied as promptly as practicable following such exercise.
(b) Covenants of LMC and SpinCo.
(i) Disposition of Shares. During the period from the
Execution Date through the earlier to occur of the Grant Date or the
Termination Date, LMC shall not transfer or otherwise dispose of any of
the Shares (other than a transfer of all, but not less than all, the
Shares to any member of the affiliated group (within the meaning of
Section 1504(a) of the Code) of which LMC is (at the time of such
transfer or disposition) a member; provided that (A) such transferee
is, at the time of such transfer or disposition, a Liberty Party (as
defined in the LMC Agreement) and (B) the transferee agrees to be bound
by this Agreement and the provisions of the Distribution Contract to
the same effect as LMC); provided further that LMC shall be entitled to
pledge or otherwise hypothecate the Shares in connection with the
incurrence of bona fide indebtedness to the extent that the applicable
pledgee of the Shares agrees to be bound by the terms of this
Agreement.
(ii) Access. Subject to Section 15(b), (A) during the period
from the Execution Date until and including June 1, 1997, and (B)
during the sixty-day period following the delivery of any Exercise
Notice (including an Exercise Notice delivered on or prior to June 1,
1997), LMC and SpinCo shall give Holdco and its representatives,
employees, counsel and accountants reasonable access, during normal
business hours and upon reasonable notice, and subject to, as
applicable, LMC's and SpinCo's obligations under any then existing
confidentiality or non-disclosure agreements, to the personnel,
properties, books and records of the Business to the extent in their
possession or control, so that Holdco may confirm the satisfaction of
all
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33
conditions precedent to its obligations to be performed hereunder on
the Closing Date; provided, however, that such access does not
unreasonably disrupt the normal operations of LMC or SpinCo. As against
Holdco and its representatives, employees, counsel and accountants,
each of LMC and SpinCo hereby waives any confidentiality or
non-disclosure covenants contained for its benefit in any agreement
concerning the Business (including any WTBS service agreements or
arrangements) and it agrees to execute any acknowledgements with
respect to such waiver as Holdco may reasonably request. Each of LMC
and SpinCo agree to use commercially reasonable efforts in good faith
to obtain all waivers and consents necessary under any existing
confidentiality or non-disclosure agreement to afford full access to
Holdco with respect to the Business; provided, however, that nothing in
this Agreement shall require LMC or SpinCo (or any of their respective
Affiliates) (x) to agree to any material modification or amendment to
any agreement between any of them or any such Affiliate and any third
party, or any other onerous or burdensome condition or requirement or
(y) to make any payment of money or deliver any other consideration to
any third party, as a condition to the receipt of any waiver or consent
hereunder. On the Execution Date and upon Holdco's delivery of the
Exercise Notice, SpinCo shall also give Holdco a list of the WTBS
Distributors (as defined in Section 24). During the period from the
Execution Date through the earlier to occur of the Closing Date or the
Termination Date, if SpinCo proposes to enter into any agreement with a
WTBS Distributor or other third party, which agreement will contain a
confidentiality or non- disclosure covenant relating to the existence,
terms and/or conditions of any material agreement to which it is or
will be a party, or any other material matter relating to the Business,
SpinCo shall use commercially reasonable efforts in good faith to
negotiate a provision in such agreement or covenant to permit it to
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34
disclose the matters subject to such confidentiality or non-disclosure
agreement to Holdco and its representatives, employees, counsel and
accountants; provided, however, that nothing in this Agreement shall
require LMC or SpinCo (or any of their respective Affiliates) (x) to
agree to any material concession, condition or other provision in any
agreement that, in their good faith business judgment, is in any
respect materially less favorable to it or the Business than the
comparable provision that could have been negotiated by it if this
sentence did not apply or (y) to make any payment of money or deliver
any other consideration to any third party, as a condition to receipt
of any provision permitting any disclosure to Holdco or any such other
person.
(iii) Ordinary Conduct. During the period from the Execution
Date through the earlier to occur of the Closing Date or the
Termination Date, SpinCo shall operate the Business in the ordinary
course in substantially the same manner as currently conducted except
for such changes in the day-to-day operations of the Business as the
management of SpinCo (or, if prior to the Spin-off, the management of
LMC and SpinCo), in the good faith exercise of their business judgment,
shall from time to time determine to be in the best interests of the
Business. In that connection, SpinCo shall use its commercially
reasonable efforts to preserve the Business' relationships with
customers, suppliers and others with whom SpinCo deals with respect to
the Business. In addition, SpinCo shall not take any action that could
reasonably be expected to materially impair the business, assets and
financial condition of the Business at the time of the effectiveness of
the Distribution Contract (provided that SpinCo shall be permitted to
discontinue the operations of the Business if because of an act of God,
significant change in law or other occurrence, it would not be
commercially reasonable to continue such
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35
operations). In connection, with its obligation to operate in the
ordinary course, SpinCo shall not cease to be a private carrier with
respect to the Business, as conducted domestically in the U.S., without
the prior written consent of Holdco, which shall not unreasonably be
withheld or delayed; provided, however, that such consent may be
withheld by Holdco in its sole discretion if it determines that such
action impairs the availability of the exception under 17 U.S.C.
ss.111(a)(3). Holdco agrees that it and its Affiliates will not assist
any third party in competing against SpinCo in uplinking the WTBS
broadcast signal.
(iv) [Reserved.]
(v) Insurance. At all times during the period from the
Execution Date through the earlier of the Closing Date and the
Termination Date, SpinCo shall maintain in full force and effect
(through one or more Affiliates or otherwise), insurance policies
meeting the requirements of Section 6(a)(vi).
(vi) Mergers; Business Transfer; Security Arrangements. (A)
SpinCo shall not merge with another corporation or other entity unless
SpinCo is the surviving entity in such merger or the surviving entity
delivers to Holdco prior to such merger an agreement (in form and
substance reasonably satisfactory to Holdco and its counsel) pursuant
to which it agrees to be bound by the terms of this Agreement and the
Distribution Contract.
(B) SpinCo shall not sell, transfer or otherwise
dispose of the Business (other than any security interest
granted in connection with a SpinCo financing covered by
clause (C) below) unless (1) Spinco sells, transfers or
otherwise disposes of the Business in its entirety and (2) the
entity or person so acquiring the Business
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36
prior to such acquisition delivers to Holdco an agreement (in
form and substance reasonably satisfactory to Holdco and its
counsel) pursuant to which it agrees to be bound by the terms
of this Agreement and the Distribution Contract.
(C) SpinCo shall not grant or permit to exist any
lien or other security interest on the assets of the Business
(including the Distribution Contract and its WTBS service
agreements) in connection with any SpinCo financing unless the
secured party or parties prior to any such grant agree in
writing, for the benefit of Holdco, that (1) any foreclosure
or sale of the Business shall involve the foreclosure or sale
of the Business in its entirety and (2) as a condition to such
foreclosure or sale, the entity or person so acquiring the
Business shall be required to deliver to Holdco, prior to such
acquisition, an agreement (in form and substance reasonably
satisfactory to Holdco and its counsel) pursuant to which it
agrees to be bound by the terms of this Agreement and the
Distribution Contract.
(D) In the event that SpinCo or, prior to the
Spin-off, LMC receives any proposal with respect to, or
determines to enter into any transaction involving, any of the
events described in this paragraph (vi), SpinCo and LMC shall
promptly notify Holdco thereof.
(vii) Disclosure Letter and Closing Schedules. If, subject to
Section 15(b), Holdco delivers an Exercise Notice on or prior to June
1, 1997, SpinCo shall as soon as practicable after such delivery (and
in any event not later than 10 days prior to the Closing Date) prepare
and deliver to Holdco the Disclosure Letter and all required schedules
to this Agreement that have not previously been delivered. If Holdco
shall have not
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37
delivered an Exercise Notice on or prior to June 1, 1997, SpinCo shall
as soon as practicable after such date (but in any event not later than
June 16, 1997) deliver to Holdco the Disclosure Letter and all required
schedules to this Agreement as of such date. If thereafter Holdco
delivers an Exercise Notice, Spinco shall as soon as practicable after
such delivery (and in any event not later than ten days prior to the
Closing Date) prepare and deliver to Holdco a revised Disclosure Letter
and all required schedules to this Agreement that have not previously
been delivered.
(viii) Supplemental Disclosure. SpinCo shall promptly notify
Holdco of, and furnish Holdco any information it may reasonably request
with respect to, the occurrence to its knowledge of any event or
condition or the existence to its knowledge of any fact that causes any
of the conditions to Holdco's obligation to cause the effectiveness of
the Distribution Contract not to occur; provided, however, that no such
notification shall be required with respect to any representation or
warranty of LMC or SpinCo hereunder prior to delivery of the Disclosure
Letter.
(ix) Restricted Activities; SpinCo Obligations. Each of LMC
and SpinCo covenants and agrees with Holdco as follows:
(A) During the period from the Execution Date through the
earlier of the Closing Date and the Termination Date, each of LMC and
SpinCo shall not (and each shall cause its Affiliates not to) engage in
the Business, other than through SpinCo.
(B) If the Closing Date occurs, during the period from the
Closing Date through the fifth anniversary of the termination of the
last service agreement between SpinCo and any MVPD (as defined in
Section 24), LMC
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38
shall not, and shall cause its Affiliates not to, engage in the
Business (other than through SpinCo). If the Closing Date occurs,
during the period from the Closing Date through the Termination Date
(as defined in the Distribution Contract) LMC shall not, directly or
indirectly (including through any Affiliate), solicit any MVPD to
terminate carriage of the WTBS programming service (including the
programming of the broadcast television SuperStation known on the
Execution Date as WTBS and any cable programming network established as
the successor thereto) or, except as contemplated by the Distribution
Contract, to terminate any service agreement with SpinCo with respect
to such programming service; provided, however, that the provisions of
this sentence shall not apply with respect to any MVPD that enters into
a WTBS programming agreement with Holdco. By way of example, and
without limiting the generality of the foregoing, it is understood that
the offering of WTBS as a distant broadcast signal (other than through
SpinCo) violates the restrictions of this subparagraph (B).
Anything contained herein to the contrary notwithstanding,
Holdco acknowledges (I) that LMC and its Affiliates represent numerous
programming services that are marketed, distributed and sold to MVPDs
on a continuous basis, in competition with WTBS and other programming
services, (II) that due to limited channel capacity, an MVPD must often
terminate an existing programming service carried by such MVPD in order
to carry a new programming service, and (III) that activities conducted
by LMC and its Affiliates in connection with the marketing of
programming services that compete with WTBS shall not be construed to
violate LMC's covenant in this Section, even if an MVPD terminates
carriage of WTBS to carry a programming service marketed by LMC or any
of its Affiliates, unless LMC or such Affiliate shall have urged or
induced such MVPD to drop WTBS.
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39
(C) If the Closing Date occurs prior to the consummation of
the Spin-off, then, so long as SpinCo is LMC's Controlled Affiliate (as
defined in the LMC Agreement), LMC shall cause SpinCo to comply with
its obligations under this Agreement and the Distribution Contract,
including the provisions of Section 3 thereof.
(D) If the Closing Date occurs, then prior to and after
consummation of the Spin-off, LMC shall provide Holdco and its
representatives reasonable access, on a basis comparable to the access
provided by SpinCo pursuant to Section 2(d) of the Distribution
Contract, to any records of LMC relating to the Business prior to the
Spin-off to confirm amounts payable to SpinCo after the Closing Date
pursuant to the Distribution Contract.
(c) Confidentiality. Until the Closing Date (or if the Closing
does not occur, until the second anniversary of the Termination Date) Holdco
agrees to use the same efforts that it uses with respect to its own confidential
and proprietary information to retain in strict confidence all proprietary and
confidential information concerning the Business or SpinCo which is conveyed to
it by LMC, SpinCo or any of their Affiliates, or any representative of LMC,
SpinCo or any of their Affiliates ("Confidential Information"). Notwithstanding
the foregoing, the term "Confidential Information" does not include: (i)
information which is, at the time of its disclosure to Holdco or any Affiliate
of Holdco or their respective representatives, already in Holdco's, its
Affiliates' or their representatives' possession (without violation, to Holdco's
knowledge, of any legally enforceable confidentiality agreement with LMC, SpinCo
or any of their Affiliates relating to such information), (ii) information which
is or becomes available to the public other than as a result of a disclosure by
Holdco or any Affiliate of Holdco or their respective representatives, (iii)
information which was or becomes available to Holdco or any Affiliate of
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40
Holdco or their respective representatives on a non-confidential basis from a
source other than LMC, SpinCo, any of their Affiliates or their respective
representatives (provided that information contained in any agreement with
respect to the Business obtained solely as a result of the confidentiality
waiver in Section 11(b)(ii) shall not be considered to be obtained on a
non-confidential basis); provided that such source was not known by Holdco to be
bound by the terms of a legally enforceable confidentiality agreement with LMC,
SpinCo or any of their Affiliates relating to such information, (iv) information
which is information that is independently developed by Holdco or its Affiliates
or their respective representatives or (v) any oral information, unless such
information is stated to be proprietary and confidential at the time of
disclosure and such statement and information is summarized in writing within 30
days after such disclosure. In the event that Holdco, any of its Affiliates or
any of their respective representatives is requested or required (by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or other process) to disclose any Confidential
Information, it is agreed that Holdco will provide SpinCo and, prior to the
Spin-off, LMC with prompt notice of any such request or requirement (written if
practical) so that LMC and/or SpinCo may seek at its own expense an appropriate
protective order or waive Holdco's compliance with the provisions of this
Section 11(c). If, failing the entry of a protective order or the receipt of a
waiver hereunder, Holdco, any of its Affiliates or any of their respective
representatives is, in the opinion of its counsel, compelled to disclose any
Confidential Information, Holdco or such Affiliate or representative may
disclose that portion of any Confidential Information which its counsel advises
that it is compelled to disclose and will upon written request and at the
expense of LMC and/or SpinCo use reasonable efforts to cooperate in LMC's and/or
SpinCo's efforts to obtain a protective order or other reasonable assurance that
confidential treatment will be accorded to that portion of such Confidential
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41
Information which is being disclosed. Holdco will use the Confidential
Information only in connection with its due diligence review of the Business and
SpinCo, as contemplated by this Agreement and will not otherwise use it in its
business or disclose it to others, except to its employees, representatives and
Affiliates (and their employees and representatives) who require such
Confidential Information to perform their duties in connection with, or exercise
Holdco's rights under, this Agreement and agree not to disclose or use such
Confidential Information except as provided herein. Holdco agrees that it shall
be responsible for any breach of this Section 11(c) by such persons. In the
event that the Closing does not occur under this Agreement, Holdco shall, at its
option, either (i) return all Confidential Information provided or made
available to it hereunder relating to the Business and SpinCo, whether in
written, computer-readable or other form, together with all copies thereof in
the possession of Holdco or (ii) destroy all such Confidential Information and
certify such destruction to LMC and SpinCo; provided, however, that Holdco's
sole obligation with respect to the disposition of any internal notes, memoranda
or other materials prepared by it that incorporate any Confidential Information
shall be to redact or otherwise expunge all such Confidential Information from
such materials.
(d) Covenant by Satellite Relating to Carriage of WTBS. During
the period from the Execution Date through the earlier of the Closing Date and
the Termination Date, provided that Holdco or any Managed Subsidiary of Holdco
then owns the programming service currently known as "WTBS" (as it may be
renamed in the future) ("WTBS"), Satellite shall cause each of its affiliates
(as such term is defined in Section 1(a) of Satellite's existing affiliation
agreement, dated as of July 15, 1992, with The Cartoon Network, Inc., a copy of
the pertinent provisions of which was attached to a letter dated as of October
2, 1995, from Baker & Botts, L.L.P., counsel to LMC, to Peter R. Haje, the
general counsel of Holdco) (and each affiliate of any other
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42
intermediary (as contemplated by the second sentence of the definition of
"Business" in Section 24(b))) that carries WTBS, and each other entity to which
Satellite (or such other intermediary) provides (or arranges for the provision
of) the WTBS signal, to carry the WTBS signal transmitted by SpinCo (provided
that SpinCo is able to transmit such signal), it being understood that nothing
in this Agreement shall prohibit any such affiliate or other person or entity
from deleting carriage of the WTBS signal transmitted by SpinCo, provided that
upon such deletion such affiliate or other person or entity does not carry the
WTBS signal from any other source (it being understood that nothing in this
Section 11(d) shall limit the effects of the "HITS" provisions of the Program
and Digitization Agreement with respect to the carriage of the WTBS signal, or
the rights and obligations of the parties thereunder, when those provisions
become effective in accordance with their terms).
(e) Acknowledgement by SpinCo and LMC. Each of SpinCo and LMC
acknowledges and agrees for itself and each of its Affiliates that, from and
after the closing of the Mergers (as defined in the LMC Agreement), (i) Holdco
intends to (and may) communicate directly with MVPDs (including MVPDs that are
WTBS Distributors) regarding the transformation of WTBS into a copyright-paid,
satellite delivered, twenty-four-hour-per-day cable television programming
service and (ii) Holdco intends to (and may) communicate with WTBS Distributors
about (x) the terms of a new WTBS distribution contract or arrangement directly
with Holdco or any of its Managed Subsidiaries (conditioned on transformation of
WTBS to such a copyright-paid service) and (y) the possible termination of their
existing contracts or arrangements with SpinCo (upon transformation of WTBS to a
copyright-paid service), and Holdco intends to (and may) enter into agreements
with WTBS Distributors with respect to the foregoing (conditioned upon the
transformation of WTBS to a copyright-paid service), all without creating any
liability to SpinCo, LMC or any of their respective Affiliates. Neither Spinco,
LMC nor any of their respective
<PAGE>
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43
Affiliates will discourage any MVPD from engaging in any such conversations or
negotiations with Holdco or its Affiliates with respect to the converted WTBS
program service or discourage any MVPD from entering into any such contracts or
arrangements with respect to the converted WTBS program service.
(f) Holdco's Right to Assign Program and Digitization
Agreement to Managed Subsidiaries. LMC, SpinCo and Satellite hereby acknowledge
and agree that, from and after the closing of the Mergers (as defined in the LMC
Agreement), the rights (but not the obligations) of TBS under the Program and
Digitization Agreement with respect to the carriage of the copyright-paid WTBS
service may be assigned to any Managed Subsidiary, provided that any such
assignment shall terminate if the assignee ceases to be a Managed Subsidiary.
This Section 11(f) shall survive the exercise of the Contract Option and any
termination of this Agreement.
(g) Non-Exclusive Right to Digitize, Compress and Reuplink.
Reference is made to the "HITS" provisions of the Program and Digitization
Agreement. The Parties hereby consent to any action taken by Satellite during
the term of this Agreement that would be permitted by such provisions of the
Program and Digitization Agreement, as if such agreement were then in effect
with respect to WTBS prior to its conversion to a copyright-paid service and (i)
all references therein to "TBS" referred to SpinCo, (ii) all references therein
to "TBS services" referred to WTBS, and (iii) the reference in the third line to
"licensed by TBS" meant "authorized by SpinCo pursuant to contractual
relationships". In that connection, and on the same basis, Satellite shall
comply with the obligations required to be performed by Satellite in such "HITS"
provisions.
12. [Reserved.]
13. [Reserved.]
<PAGE>
<PAGE>
44
14. Survival. The representations, warranties and agreements
of the Parties in this Agreement and in the other documents and instruments to
be delivered by any Party pursuant to this Agreement will continue in full force
and effect from the time made or deemed to have been made until the Closing,
whereupon such representations, warranties and agreements shall terminate.
Notwithstanding any other provision of this Agreement, the tax representations
and warranties in Section 4(b)(i), and the representations and warranties of
Holdco contained in Sections 4(c)(i) and (ii) and Sections 6(b)(i) and (ii)
shall survive the Execution Date, the Closing and the termination of this
Agreement pursuant to Section 10 and shall continue in full force and effect
indefinitely. In addition, the provisions of Section 2(f) and Section 11(b)(ix)
shall survive the Execution Date, the Closing and the termination of this
Agreement pursuant to Section 10 and shall survive in accordance with their
terms.
15. Parties Obligated and Benefited; LMC's Right to Designate
Recipient; Other Transaction. (a) Subject to the limitations set forth below,
this Agreement will be binding upon the Parties and their respective assigns and
successors in interest and will inure solely to the benefit of the Parties and
their respective assigns and successors in interest, and no other person will be
entitled to any of the benefits conferred by this Agreement. Without the prior
written consent of the other Party, no Party will assign any of its rights or
delegate any of its duties under this Agreement or the Distribution Contract,
except: (i) LMC may assign (without the consent of Holdco) any of its rights
(including, without limitation, the right to receive the Section 2 payment for
the non-competition agreement in Section 11(b)(ix) to any person that, at the
time of such assignment (and, in the case of any such person designated to
receive such payment, at the payment date), is (A) a Liberty Party (as defined
in the LMC Agreement) and (B) a member of the affiliated group (within the
meaning of Section 1504(a) of the Code) of which LMC is (at such time)
<PAGE>
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45
a member; (ii) by operation of law; and (iii) with respect to any merger of
SpinCo or sale or disposition of the Business, in each case, permitted under
Section 11(b)(vi).
(b) If, as contemplated by Section 2, the Letter Ruling shall
have not been obtained by May 31, 1997 or TCI shall have been advised or have
determined that it will not obtain the Letter Ruling (or, that it will not
obtain the Letter Ruling unless TCI and the other parties thereto agree to
changes in the transactions contemplated by the LMC Agreement and the Additional
Agreements (as defined in the LMC Agreement) or any other conditions imposed as
a prerequisite by the Internal Revenue Service), the Parties agree that (i)
notwithstanding the provisions of Section 2, the Grant Date shall be postponed
for 30 days during which period the Parties shall mutually endeavor in good
faith to negotiate the consummation of a transaction that is more tax efficient
to both Parties and (ii) the references to June 1, 1997, in this Agreement
(including as they relate to the definition of the Termination Date, Holdco's
delivery of an Exercise Notice, Holdco's conditions to Closing, Holdco's access
to the Business and SpinCo's delivery of the Disclosure Letter and related
schedules) shall be automatically extended to the date, if later than June 1,
1997, that is five days after the termination of the discussions contemplated by
this Section 15(b).
16. Notices. Any notice, request, demand, waiver or other
communication required or permitted to be given under this Agreement will be in
writing and will be deemed to have been duly given only if delivered in person
or by
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46
first class, postage prepaid, registered or certified mail, or sent by courier
or, if receipt is confirmed, by telecopier:
If to Holdco:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: President
with a copy similarly addressed to the attention
of General Counsel
with a copy (which shall not constitute notice)
to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: William P. Rogers, Jr., Esq.
If to LMC:
Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attention: President
<PAGE>
<PAGE>
47
with copies (which shall not constitute notice)
to:
Stephen M. Brett, Esq.
General Counsel
Tele-Communications, Inc.
Terrace Towers II
5619 DTC Parkway
Englewood, Colorado 80111-3000
and
Baker & Botts, L.L.P.
599 Lexington Avenue
Suite 2800
New York, New York 10022
Attention: Elizabeth Markowski, Esq.
If to SpinCo:
Southern Satellite Systems, Inc.
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attention: President
<PAGE>
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48
with copies (which shall not constitute notice)
to:
Stephen M. Brett, Esq.
General Counsel
Tele-Communications, Inc.
Terrace Towers II
5619 DTC Parkway
Englewood, Colorado 80111-3000
(but only prior to the Spin-off)
and
Baker & Botts, L.L.P.
599 Lexington Avenue
Suite 2800
New York, New York 10022
Attention: Elizabeth Markowski, Esq.
Any party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section 16. All
notices will be deemed to have been received on the date of delivery or on the
fifth business day after mailing in accordance with this Section, except that
any notice of a change of address will be effective only upon actual receipt.
17. Waiver. This Agreement or any of its provisions may not be
waived except in writing. The failure of any Party to enforce any right arising
under this Agreement on one or more occasions will not operate as a waiver of
that or any other right on that or any other occasion.
18. Interpretation. The section captions of this Agreement are
for convenience only and do not constitute a part of this Agreement. When a
reference is made in this Agreement to a Section or Exhibit such reference shall
be to
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<PAGE>
49
a Section of, or an Exhibit to, this Agreement, unless otherwise indicated.
Whenever the words "include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation".
19. Choice of Law. This Agreement and the rights of the
Parties under it will be governed by and construed in all respects in accordance
with the laws of the State of New York applicable to contracts made and
performed wholly therein.
20. Time. If the last day permitted for the timing of any
notice or the performance of any act required or permitted under this Agreement
falls on a day which is not a business day, the time for the giving of such
notice or the performance of such act will be extended to the next succeeding
business day.
21. Counterparts. This Agreement may be executed in one or
more counterparts, each of which will be deemed an original but all of which
together shall constitute a single instrument.
22. Entire Agreement. This Agreement (including all Exhibits
and Schedules attached to this Agreement, the Distribution Contract, the
Registration Rights Agreement, the LMC Agreement and the agreements referenced
herein and therein, each of which shall be deemed to constitute a part of this
Agreement) contains the entire agreement of the Parties, and supersedes all
prior oral or written agreements and understandings with respect to the subject
matter hereof. This Agreement may not be amended or modified except by a writing
signed by the Parties.
23. Severability. Any term or provision of this Agreement
which is held to be invalid or unenforceable in any jurisdiction, as to such
jurisdiction, will be ineffective only to the extent of such invalidity or
<PAGE>
<PAGE>
50
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of the Agreement in any other jurisdiction, and
in the event any provision of this Agreement is held to be invalid or
unenforceable in any jurisdiction, such provision will be reformed with respect
to, and enforced as fully as possible in, such jurisdiction, consistent (to the
extent possible) with the purposes and intents of the parties expressed herein.
24. Certain Definitions. As used in this Agreement, the
following terms have the corresponding meanings:
(a) An "Affiliate" of a person means another person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first person;
(b) "Business" means the business of uplinking and
distributing to MVPDs the signal of the television station broadcasting on the
date hereof in Atlanta, Georgia under the call letters WTBS, and any successor
over-the-air television station in Atlanta, Georgia that broadcasts
substantially similar programming as WTBS following its conversion to a
copyright-paid programming service (as such converted service may be renamed);
provided that the Business shall refer to the business of uplinking and
distributing only one such broadcast television station at any one time.
Anything contained herein to the contrary notwithstanding, neither (i) the
existence of an agreement between SpinCo or any unrelated third party and any
intermediary (such as Satellite and/or Netlink USA) pursuant to which such
intermediary arranges for the WTBS signal transmitted by SpinCo or such
unrelated third party to be received by an "affiliate" of such intermediary as
defined in Section 11(d) of this Agreement (or an analogous definition, if the
intermediary is not Satellite), and any
<PAGE>
<PAGE>
51
other person to whom such intermediary is authorized to arrange for the
transmission of such signal, as contemplated by Section 11(d), nor (ii) any
activities by any intermediary of the type contemplated by Section 11(g) hereof,
shall in itself (A) cause such an intermediary to be construed as engaging in
the "Business" as defined herein or (B) cause such an intermediary to be in
violation of the restrictions of Section 4 pursuant to the last sentence of the
first paragraph thereof;
(c) "Current Market Price", as of any date, means the average
of the daily closing prices for the shares of the Holdco Common Stock for the 20
trading day period ending on the full trading day immediately prior to the date
in question, appropriately adjusted to take into account any stock dividends,
splits, reverse splits, combinations and the like, the ex-dividend date or
effective date for which occurs during (but after the first day of) such 20
trading day period. The closing price for each trading day shall be the last
reported sale price on such day (or if no such reported sale takes place on such
day, the average of the reported closing bid and asked prices) of the Holdco
Common Stock (regular way) as shown on the Composite Tape of the New York Stock
Exchange;
(d) "FTC Agreement in Principle" means the Agreement in
Principle with FTC Staff re: Consent Order dated July 16, 1996, entered into by
the Federal Trade Commission, Holdco and TCI;
(e) "FTC Consent Decree" means the Agreement Containing
Consent Order (including the FTC Agreement in Principle, the "ACCO") dated as of
August , 1996, with the Federal Trade Commission, together with the Order issued
in connection with the ACCO;
(f) "Governmental Entity" means a court, administrative agency
or commission or other governmental authority or instrumentality;
<PAGE>
<PAGE>
52
(g) "Holdco Common Stock" means the Common Stock, $.01 par
value, of Holdco;
(h) "Letter Ruling" means a letter ruling from the Internal
Revenue Service (i) to the effect that, at the time thereof, the Spin-off shall
constitute a tax free distribution under Section 355 of the Internal Revenue
Code of 1986, as amended, and (ii) that is otherwise acceptable to Holdco and
TCI;
(i) "Liberty Subsidiaries" means TCI Turner Preferred, Inc.,
Liberty Broadcasting, Inc., United Cable Turner Investment, Inc. and
Communication Capital Corp.;
(j) "Managed Subsidiary" means, as to Holdco, an Affiliate of
Holdco (i) in which Holdco has, directly or indirectly, a majority ownership
interest and (ii) as to which Holdco has day-to-day management control,
specifically including, without limitation, as of the date hereof, Time Warner
Entertainment Company L.P. and Time Warner Entertainment/ Advance Newhouse
Partnership;
(k) "Material Adverse Effect" means, as to any person, a
material adverse effect on the business, assets, financial condition or results
of operations of such person and its consolidated subsidiaries, taken as a
whole, or on the ability of such person to perform its obligations under any of
the Relevant Agreements to which it is a party;
(l) "MVPDs" means all cable, MMDS, LMDS, TVRO, DBS, video dial
tone and/or other distributors of multichannel video programming by any means;
(m) "Ordinary Course Guidelines" means the general guidelines
with respect to the operation of the Business of SpinCo as set forth on Exhibit
3 hereto;
(n) "Spin-off" means the distribution by TCI of 100% of the
capital stock of SpinCo to holders of record of
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<PAGE>
53
TCI's Tele-Communications, Inc. Series A Liberty Media Group Common Stock and
Tele-Communications, Inc. Series B Liberty Media Group Common Stock;
(o) "Taxing Authority" shall mean any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or regulatory
body.
(p) "Tax" shall mean any Federal, state, local and foreign
taxes and assessments, including all interest penalties and additions imposed
with respect to such amounts; and
(q) "WTBS Distributors" means those persons and entities with
whom SpinCo has an affiliate agreement or other arrangement or agreement for the
distribution of WTBS.
25. Enforcement. The Parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the Parties shall be entitled to seek an injunction
or injunctions to prevent breaches of this Agreement, and to enforce
specifically the terms and provisions of this Agreement in any court of the
United States located in the States of Colorado, Delaware or New York, or in
Delaware or Colorado state court (in addition to any other remedy to which they
are entitled at law or in equity). In addition, each of the Parties hereto (a)
hereby consents and submits itself to the non-exclusive personal jurisdiction of
any Federal court located in the States of Colorado, Delaware and New York or
any Delaware or Colorado state court in the event any dispute arises out of this
Agreement or any of the transactions contemplated by this Agreement, and (b)
agrees that it will not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court.
<PAGE>
<PAGE>
54
26. No Unauthorized Transfer of Control. Nothing in this
Agreement or the Distribution Contract shall, nor shall be construed to,
constitute a transfer of control of the licenses held by SpinCo and its
subsidiaries without prior approval by the Federal Communications Commission
("FCC") of the transfer of all such licenses issued by the FCC to SpinCo and its
subsidiaries. SpinCo shall at all times retain full, exclusive and absolute
control of the licensed facilities as well as ultimate responsibility for the
operation of the FCC licensed facilities pursuant to all applicable rules and
policies of the FCC and the Communications Act of 1934, as the foregoing may be
superseded or amended.
27. Continuation as Passive Carrier. SpinCo is and will
continue to be a passive carrier, and nothing in this Agreement or the
Distribution Contract shall, nor shall be construed to, require SpinCo to
operate with respect to carriage of the WTBS signal other than as a passive
carrier pursuant to 17 U.S.C. ss. 111(a)(3) and as a satellite carrier pursuant
to 17 U.S.C. ss. 119(a), prior to the Converted WTBS, as defined in Section 18
of the Distribution Contract.
IN WITNESS WHEREOF, the Parties have caused this Agreement to
be duly executed and delivered as of the date first written above.
TW INC.,
By /s/ Thomas W. McEnerney
---------------------------
Name: Thomas W. McEnerney
Title: Vice President
<PAGE>
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55
LIBERTY MEDIA CORPORATION,
By /s/ Robert R. Bennett
--------------------------
Name: Robert R. Bennett
Title: Executive Vice
President
SOUTHERN SATELLITE SYSTEMS,
INC.
By /s/ Robert R. Bennett
--------------------------
Name: Robert R. Bennett
Title: Executive Vice
President
With respect to Section 11(d),
Section 11(f) and
Section 11(g) only:
SATELLITE SERVICES, INC.,
By /s/ Stephen M. Brett
--------------------------
Name: Stephen M. Brett
Title: Vice President
<PAGE>
<PAGE>
EXHIBIT 3 TO
THE SSSI AGREEMENT
ORDINARY COURSE GUIDELINES
Under Section 6(a)(ix) of the SSSI Agreement to which this
Exhibit 3 is attached, SpinCo is required to represent on the Closing Date that,
except as set forth in the Disclosure Letter, the Business has been operated in
the ordinary course consistent with past practices and the following guidelines.
Capitalized terms used, but not defined herein, have the
meanings assigned thereto in the SSSI Agreement.
In operating the Business:
(i) SpinCo distributes WTBS only pursuant to service
agreements;
(ii) SpinCo requires that all WTBS Distributors make all
required payments to the Copyright Tribunal;
(iii) SpinCo requires in its service agreements that its WTBS
Distributors receive the WTBS signal from no other source other than
(A) SpinCo or (B) Holdco and its Managed Subsidiaries;
(iv) SpinCo requires mandatory carriage of WTBS on all the
systems covered under its service agreements on all tiers of service
other than the lifeline tier, subject to (A) SpinCo's ability to
provide the WTBS signal and (B) customary termination provisions; and
(v) SpinCo enforces the Copyright Tribunal, exclusivity,
carriage and tiering provisions described in (ii), (iii) and (iv)
above.
<PAGE>
<PAGE>
STOCKHOLDERS' AGREEMENT
Stockholders' Agreement, dated October 10, 1996, by and among
TCI Turner Preferred, Inc., a Colorado corporation ("TCITP"), Liberty
Broadcasting, Inc. ("LBI") and Communication Capital Corp. ("CCC" and, together
with LBI and TCITP, the "TCITP Stockholders"), R.E. Turner, III ("Turner"),
Turner Outdoor, Inc. ("TOI") and Turner Partners, L.P., a Georgia limited
partnership ("TP" and, together with Turner, the "Turner Stockholders"), and TW
Inc., a Delaware corporation, which promptly following the date hereof will
change its name to Time Warner Inc. ("Holdco").
Each of the TCITP Stockholders and the Turner Stockholders is
or may become a beneficial owner of shares of capital stock of Holdco. The
Turner Stockholders, Holdco and the TCITP Stockholders desire to enter into the
arrangements set forth in this Agreement regarding future dispositions of shares
of Holdco capital stock which the Turner Stockholders or the TCITP Stockholders
now or may in the future beneficially own.
Therefore, in consideration of the premises and the mutual
benefits to be derived hereunder and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Definitions: The following terms in this Agreement shall have the
respective meanings listed below:
Affiliate: With respect to any Person, any other Person which
directly or indirectly Controls, is under common Control with or is Controlled
by such first Person. The term "affiliated" (whether or not capitalized) shall
have a correlative meaning. For purposes of this Agreement (i) the Turner
Foundation, Inc. (the "Turner Foundation"), the R.E. Turner Charitable Remainder
Unitrust No. 2 (the "Turner Unitrust") and any other Charitable Transferee or
Qualified Trust
<PAGE>
<PAGE>
2
shall be deemed not to be Affiliates of any Turner Stockholder and (ii)(A) no
TCITP Affiliate shall be deemed to be an Affiliate of any Turner Affiliate, or
vice versa, and (B) no TCITP Affiliate or Turner Affiliate shall be deemed to be
an Affiliate of any Holdco Affiliate, or vice versa.
Affiliated Group: With respect to any Stockholder, the group
consisting of such Stockholder and all Controlled Affiliates of such
Stockholder.
Agreement: This Agreement as the same may be amended from time
to time in accordance with its terms.
Appraised Value: As defined in Section 4.1 hereof.
The "beneficial owner" of any security means a direct or
indirect beneficial owner of such security within the meaning of Rule 13d-3
under the Exchange Act, as in effect on and as interpreted by the Commission
through the date of this Agreement, and the terms (whether or not capitalized)
"beneficially own," "beneficially owned" and "owned beneficially" shall have
correlative meanings; provided, however, that any Person who at any time
beneficially owns any Option or Convertible Security shall also be deemed to
beneficially own the Underlying Securities, whether or not such Option or
Convertible Security then is or within 60 days will be exercisable, exchangeable
or convertible.
Board of Directors: The Board of Directors of Holdco.
Bona Fide Offer: As defined in Section 3.1 hereof.
<PAGE>
<PAGE>
3
Broker Transactions: "Broker's transactions" within the
meaning of paragraph (g) of Rule 144 of the General Rules and Regulations under
the Securities Act.
Charitable Transfer: Any Disposition of Covered Securities by
a Turner Stockholder to the Turner Foundation, any other Charitable Transferee,
the Turner Unitrust or any other Qualified Trust that is not an Exempt Transfer
pursuant to clause (vii) of the definition of Exempt Transfer; provided,
however, that any such transferee shall, by a written instrument in form and
substance reasonably satisfactory to TCITP, agree to be bound by the provisions
of this Agreement with respect to the Covered Securities that are the subject of
such Charitable Transfer to the same extent as the Turner Stockholder making
such Disposition.
Charitable Transferee: Any charitable organization described
in Section 501(c)(3) of the Code.
Code: The Internal Revenue Code of 1986, as amended.
Commission: The Securities and Exchange Commission, or any
other Federal agency at the time administering the Securities Act or the
Exchange Act.
Common Stock: The common stock, par value $.01 per share, of
Holdco or any other shares of capital stock of Holdco into which the Common
Stock may be reclassified or changed.
Contract: Any agreement, contract, commitment, indenture,
lease, license, instrument, note, bond or security.
<PAGE>
<PAGE>
4
Control: As to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person (whether through ownership of securities, partnership
interests or other ownership interests, by contract, or otherwise). The terms
"Controlled," "Controlling" and similar variations shall have correlative
meanings.
Controlled Affiliate: When used with respect to a specified
Person, means each Affiliate of such Person which is Controlled by such Person
and which is not Controlled by or under common Control with any other Person
(except one or more other Controlled Affiliates of such specified Person);
provided, however, that for purposes of any provision of this Agreement which
requires any Stockholder to cause one or more of its Controlled Affiliates to
take or refrain from taking any action (including any action relating to the
Disposition of any Covered Securities) or which otherwise purports to be
applicable to any Covered Securities owned or held by one or more Controlled
Affiliates of such Stockholder, no Affiliate of such Stockholder which otherwise
would be a Controlled Affiliate of such Stockholder shall be deemed to be a
Controlled Affiliate of such Stockholder unless such Stockholder possesses,
directly or indirectly, the power to direct decisions regarding such action or
the Disposition of such Covered Securities.
Convertible Securities: Evidences of indebtedness, shares of
stock or other securities or obligations which are convertible into or
exchangeable, with or without payment of additional consideration in cash or
property, for any Holdco Shares, either immediately or upon the occurrence of a
specified date or a specified event, the satisfaction of or failure to satisfy
any condition or the happening or failure to happen of any other contingency.
<PAGE>
<PAGE>
5
Covered Securities: Any and all Holdco Shares, Convertible
Securities and Options.
Current Market Price: As to any share of Common Stock at any
date, the average of the daily closing prices for shares of the Common Stock for
the 5 consecutive trading days ending on the trading day immediately before the
day in question. The closing price for such shares for each day shall be the
last reported sale price or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either case on
the principal United States securities exchange on which such shares are listed
or admitted to trading, or if they are not listed or admitted to trading on any
such exchange, the last reported sale price (or the average of the quoted
closing bid and asked prices if no sale is reported) as reported on the Nasdaq
Stock Market, or any comparable system, or if such shares are not quoted on the
Nasdaq Stock Market, or any comparable system, the average of the closing bid
and asked prices as furnished by any member of the National Association of
Securities Dealers, Inc. selected by Holdco.
Defensive Provision: (i) any control share acquisition,
interested stockholder, business combination or other similar antitakeover
statute (including the Delaware Statute) applicable to Holdco, (ii) any
provision of the Restated Certificate of Incorporation or Bylaws of Holdco
(including Article V of such Restated Certificate of Incorporation), and (iii)
any plan or agreement to which Holdco is a party, whether now or hereafter
existing, which would constitute a "poison pill" or similar antitakeover device
(including any Rights Plan).
Delaware Statute: Section 203 of the Delaware General
Corporation Law or any successor statutory provision.
<PAGE>
<PAGE>
6
Disadvantageous Result: (i) The breach or violation of any
Restriction applicable to any member of the Group of such Stockholder or its
Affiliates, (ii) any member of the Group of such Stockholder or its Affiliates
becoming subject to any Restriction to which it was not previously subject, or
(iii) the occurrence of any Rights Plan Triggering Event.
Disposition: When used with respect to any Covered Security,
any sale, assignment, alienation, gift, exchange, conveyance, transfer,
hypothecation or other disposition whatsoever, whether voluntary or involuntary
and whether direct or indirect, of such Covered Security or of dispositive
control over such Covered Security. "Disposition" shall not include (i) a
transfer of voting control of a Covered Security to the extent required to avoid
imposition of any prohibition, restriction, limitation or condition on or
requirement under any Requirement of Law or Defensive Provision having any of
the effects described in clauses (A) and (B) of the definition of Restriction
herein, or (ii) delivery of a revocable proxy in the ordinary course of
business. The term "dispose" (whether or not capitalized) shall mean to make a
Disposition. Without limiting the generality of the foregoing:
(i) any redemption, purchase or other acquisition in any manner
(whether or not for any consideration) by Holdco of any Covered
Securities shall be deemed to be a Disposition of such Covered
Securities; and
(ii) none of the conversion or exchange of a Convertible
Security, the exercise of any Option or the failure to convert or
exchange a Convertible Security or to exercise any Option prior to the
expiration of the right of conversion, exchange or exercise shall be
deemed to be a Disposition of such Convertible Security or such Option.
<PAGE>
<PAGE>
7
For purposes of this Agreement any Disposition of any Option or Convertible
Security shall also constitute a Disposition of the Underlying Securities.
Effective Time: "Effective Time of the Merger", as
defined in the Merger Agreement.
Encumbrance: As defined in Section 3.1(f) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended,
or any successor Federal statute, and the rules and regulations of the
Commission promulgated thereunder, as from time to time in effect.
Exempt Transfer: Any Disposition that falls within any one of
the following clauses: (i) An exchange or conversion of Covered Securities which
occurs by operation of law in connection with a merger, consolidation of Holdco
with or into another corporation, or a recapitalization, reclassification or
similar event that has been duly authorized and approved by the required vote of
the Board of Directors and the stockholders of Holdco pursuant to the Restated
Certificate of Incorporation of Holdco and the law of the jurisdiction of
incorporation of Holdco; (ii) any surrender by a Stockholder to Holdco of
Covered Securities upon redemption by Holdco of such Covered Securities pursuant
to any right or obligation under the express terms of such Covered Securities
that is made on a proportionate basis from all holders of such Covered
Securities and is not at the option of such Stockholder; (iii) any Permitted
Pledge and any transfer of such pledged Covered Securities to the Pledgee upon
default of the obligations secured by such pledge; (iv) any transfer solely from
one member of the Affiliated Group of a Stockholder to another member of the
Affiliated Group of a Stockholder; (v) any transfer by a Stockholder who is an
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8
individual to (A) a spouse, (B) any other member of his immediate family (i.e.,
parents, children, including those adopted before the age of 18, grandchildren,
brothers, sisters, and the spouses or children of the foregoing), (C) Qualified
Trust or (D) a custodian under the Uniform Gifts to Minors Act or similar
fiduciary for the exclusive benefit of his children during their lives; (vi)
subject to Section 4, any transfer to the legal representatives of a Stockholder
who is an individual upon his death or adjudication of incompetency or by any
such legal representatives to any Person to whom such Stockholder could have
transferred such Covered Securities pursuant to any clause of this definition;
(vii) a transfer by the Turner Stockholders of up to an aggregate of 12 million
shares (less the product of (A) the number of shares of Class A Common Stock and
Class B Common Stock of TBS that are the subject of a Disposition (as such term
is defined in the TBS Shareholders' Agreement) effected by Turner that is
contemplated by Section 3(a) of the TBS Shareholders' Agreement after September
22, 1995, and (B) the Common Conversion Number (as defined in the Merger
Agreement)) of Common Stock (appropriately adjusted to take into account any
stock split, reverse stock split, reclassification, recapitalization,
conversion, reorganization, merger or other change in such Common Stock) to any
Charitable Transferee if, in the written opinion of legal counsel reasonably
acceptable to TCITP, requiring such Charitable Transferee to become a party to
this Agreement would limit by a material amount the amount of the deduction for
federal income tax purposes that would be available to the applicable Turner
Stockholder in the absence of such requirement, and any subsequent transfer by
any such Charitable Transferee of any such shares; (viii) any exchange,
conversion or transfer of Covered Securities pursuant to Section 4.1 of the LMC
Agreement; and (ix) any sale or transfer permitted by and made in accordance
with Section 3 or 4 hereof; provided, however, that no Disposition pursuant to
clause (iii), (iv), (v) or (vi) shall be
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9
an Exempt Transfer, unless each Person to whom any such Disposition is made,
unless already a party to this Agreement and bound by such provisions or a
Controlled Affiliate of a party to this Agreement who is bound by such
provisions, shall by a written instrument become a party to this Agreement bound
by all of the provisions hereof applicable to the Stockholder making such
Disposition.
Exercise Notice: Either an Other Stockholder Exercise
Notice or a Holdco Exercise Notice, as the context requires.
Fast-Track Offer Notice: As defined in Section 3.3(a)
hereof.
Fast-Track Sale: Any sale of shares of Common Stock for the
account of any Stockholder which meets all of the following requirements as of
the date a Fast-Track Offer Notice is given with respect thereto pursuant to
Section 3.3:
(i) such Stockholder has a bona fide intention to sell such
shares of Common Stock within a period of 115 days after such date and
such sale is not being undertaken as a result of any offer to buy, bid
or request, invitation or solicitation to sell made by any Person
(other than any such offer, bid, request, invitation or solicitation
from a registered broker-dealer or investment banker not intended to
circumvent the provisions of Section 3.1);
(ii) the Common Stock is registered under Section 12(b) or 12(g)
of the Exchange Act and is listed for trading on a national securities
exchange registered under the Exchange Act or traded in the
over-the-counter market and quoted in an automated quotation system of
the National Association of Securities Dealers, Inc.;
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10
(iii) such sale is to be effected through Broker Transactions
or pursuant to a registration statement covering such shares in effect
at the date of the Fast-Track Offer Notice; and
(iv) the following sum does not exceed $100 million:
(A) the aggregate Current Market Price of the shares
of Common Stock to be sold (determined as of the date
a Fast-Track Offer Notice with respect thereto is
given pursuant to Section 3.3), plus
(B) the aggregate sale price of all shares of Common
Stock sold pursuant to Section 3.3 by any member or
former member of the same Group as such Stockholder
during the 90 days immediately preceding the date of
such Fast Track Offer Notice, plus
(C) without duplication, the aggregate Current Market
Price, determined as of the date specified in
subclause (A) of this clause (iv), of all shares of
Common Stock as to which any Fast-Track Offer Notice
is given by any other Stockholder who is a member of
the same Group as such Stockholder within two
business days before or two business days after such
date.
Fast-Track Shares: As defined in Section 3.3(a) hereof.
Free to Sell Date: As defined in Section 3.1(j) hereof.
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11
FTC: The Federal Trade Commission.
FTC Consent Decree: The Agreement Containing Consent Order
(the "ACCO") dated as of August 14, 1996, as amended on September 4, 1996 among
Old TW, TCI, TBS, LMC and the FTC which contemplates the issuance of an Order,
together with such Order and the Interim Agreement attached as Exhibit I to the
ACCO, in each case as the same may be amended from time to time hereafter.
Governmental Authority: Any nation or government, any state or
other political subdivision thereof and any court, commission, agency or other
body exercising executive, legislative, judicial or regulatory functions.
Group: Either the TCITP Stockholders considered collectively
as a group or the Turner Stockholders considered collectively as a group, as the
context requires.
Holdco: As defined in the opening paragraphs of this
Agreement.
Holdco Affiliates: Holdco and Affiliates of Holdco.
Holdco Elected Shares: In the case of any Offer Notice, any
Subject Shares covered thereby as to which Holdco exercises its right of
purchase pursuant to Section 3.1(e).
Holdco Exercise Notice: As defined in Section 3.1(e).
Holdco Shares: Any and all shares of capital stock of Holdco
of any class or series, whether now or hereafter authorized or existing.
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12
Holdco Stockholders Agreement: Any stockholders' agreement
between Holdco and any one or more of the Turner Stockholders in effect on the
date hereof.
Initial Trigger: As of a given time, for either Stockholder,
with respect to the Subject Shares covered by any Offer Notice or Tender Notice,
the greatest number of such Subject Shares as may then be acquired by such
Stockholder (or its Affiliates) without causing a Disadvantageous Result.
Involuntary Event: As defined in Section 4.1 hereof.
Judgment: Any order, judgment, writ, decree, award or other
determination, decision or ruling of any court, judge, justice or magistrate,
any other Governmental Authority or any arbitrator.
LMC Agreement: The Second Amended and Restated LMC Agreement
dated as of September 22, 1995, among Old TW, Holdco, LMC Parent and certain
subsidiaries of LMC Parent.
LMC Parent: Liberty Media Corporation, a Delaware
corporation.
Merger Agreement: The Amended and Restated Agreement and Plan
of Merger dated as of September 22, 1995, among Old TW, Holdco, TW Acquisition
Corp., a Georgia corporation, Time Warner Acquisition Corp., a Delaware
corporation, and TBS, as amended by Amendment No. 1 thereto dated as of August
8, 1996.
Offer Notice: As defined in Section 3.1(a) hereof.
Old TW: The Delaware corporation known on September 22, 1995
as Time Warner Inc.
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13
Old TW Rights Plan: The Rights Agreement dated as of January
20, 1994, between Old TW and Chemical Bank, as Rights Agent.
Options: Any options, warrants or other rights (except
Convertible Securities), however denominated, to subscribe for, purchase or
otherwise acquire any Holdco Shares or Convertible Securities, with or without
payment of additional consideration in cash or property, either immediately or
upon the occurrence of a specified date or a specified event or the satisfaction
or failure to satisfy any condition or the happening or failure to happen of any
other contingency.
Other Stockholder: With respect to a Turner Stockholder, the
"Other Stockholder" shall be TCITP, and with respect to a TCITP Stockholder, the
"Other Stockholder" shall be Turner.
Other Stockholder Elected Shares: As defined in Section 3.1(e)
hereof.
Other Stockholder Exercise Notice: As defined in Section
3.1(e) hereof.
Other Stockholder Group: With respect to any Other
Stockholder, the Group of which such Other Stockholder is a member.
Permitted Pledge: A bona fide pledge of Covered Securities by
a Stockholder to a financial institution to secure borrowings permitted by
applicable law; provided that such financial institution agrees in writing to be
bound by the provisions of Sections 2, 3 and 4 of this Agreement to the same
extent and with the same effect as such Stockholder and the
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14
borrowings so secured are with full recourse against other assets of such
Stockholder or other collateral.
Per-Share Offer Consideration: As defined in Section 3.1(a)
hereof.
Person: Any individual, corporation, limited liability
company, general or limited partnership, joint venture, association, joint stock
company, trust, unincorporated business or organization, governmental authority
or other legal entity or legal person, whether acting in an individual,
fiduciary or other capacity. The term "Person" also includes any group of two or
more Persons formed for any purpose.
Prospective Purchaser: As defined in Section 3.1 hereof.
Public Sale: Any sale to the public for the account of any
Stockholder, (i) in Broker Transactions, (ii) otherwise pursuant to Rule 144 or
(iii) through a registered offering pursuant to an effective registration
statement under the Securities Act which in any case meets both of the following
requirements (to the extent applicable) as of the date an Offer Notice is given:
(A) such Stockholder has a bona fide intention to sell such
shares of Common Stock as promptly as practicable after all applicable
requirements of the Securities Act are satisfied, and such sale is not
being undertaken as a result of any offer to buy, bid or request,
invitation or solicitation to sell made by any Person (other than any
such offer, bid, request, invitation or solicitation from a registered
broker-dealer or investment banker not intended to circumvent the
provisions of Section 3.1); and
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15
(B) in the case of a registered offering, such shares either
have been registered under the Securities Act or such Stockholder has
the immediate right to require Holdco to register such shares under the
Securities Act.
Purchase Price: As defined in Section 3.1(a) hereof.
Purchase Right: As defined in Section 3.1(c) hereof.
Purchased Shares: When used with reference to a Purchaser
which is the Other Stockholder, the Other Stockholder Elected Shares, and when
used with respect to a Purchaser which is a Holdco Affiliate, the Holdco Elected
Shares.
Purchaser: The term "Purchaser" means TCITP, in the case of
any purchase of TCITP Elected Shares pursuant to any Other Stockholder Exercise
Notice, Turner, in the case of any purchase of Turner Elected Shares pursuant to
any Other Stockholder Exercise Notice, and Holdco, in the case of any purchase
of Holdco Elected Shares pursuant to any Holdco Exercise Notice.
Qualified Trust: Any trust described in Section 664 of the
Code of which a Stockholder, members of his family or a Charitable Transferee
(and no other persons) are income beneficiaries.
Related Party: As to any Person, any Affiliate of such Person
and, if such Person is a natural person, such Person's parents, children,
siblings and spouse, the parents and siblings of such Person's spouse and the
spouses of such Person's children who become parties to this Agreement.
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16
Requirement of Law: With respect to any Person, all federal,
state and local laws, rules, regulations, Judgments, injunctions and orders of a
court or other Governmental Authority or an arbitrator, applicable to or binding
upon such Person, any of its property or any business conducted by it or to
which such Person, any of its assets or any business conducted by it is subject.
Restriction: Any prohibition, restriction, limitation or
condition on or requirement under any Defensive Provision or Requirement of Law,
including the FTC Consent Decree, (A) that (i) limits the ability of any
Stockholder to acquire additional Holdco Shares or hold or dispose of any Holdco
Shares or to participate in any material right or benefit otherwise available or
to be distributed to security holders of the same class as the Holdco Shares,
generally, or requires such Stockholder to Dispose of any Holdco Shares, (ii)
reduces or otherwise limits the ability to exercise the voting or other rights
of all or a portion of the Holdco Shares beneficially owned by such Stockholder
below that applicable to Holdco Shares generally, or (iii) limits the ability of
any Stockholder to consummate any merger, consolidation, business combination or
other transaction with, Holdco or any of its subsidiaries or other Affiliates or
substantially increases the cost of consummation or (B) under which the
acquisition or ownership of additional Holdco Shares (i) would result in a
material violation of applicable law, (ii) would require the discontinuance of
any material business or activity or the divestiture of any material portion of
any business or property, or (iii) would make the continuation of any such
business or activity or the ownership of such property illegal or subject to
material damages or penalties.
Rights: The rights issued to the holders of record of
the Common Stock pursuant to any Rights Plan, having the rights
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17
and privileges, and subject to the terms and conditions, set forth in such
Rights Plan, and any other security or right which may be issued or granted in
exchange or substitution therefor or in replacement or upon exercise thereof.
Rights Plan: Any stockholder rights plan or other form of
"poison pill" adopted by Holdco and in effect at any time during the term of
this Agreement, as amended or modified from time to time.
Rights Plan Trigger: As of a given time, for either
Stockholder, with respect to the Subject Shares covered by any Offer Notice or
Tender Notice, the greatest number of such Subject Shares as may then be
acquired by such Stockholder (or its Affiliates) without causing a Rights Plan
Triggering Event; provided, however, that if at such time there shall be no
Rights Plan in effect, the Rights Plan Trigger shall be equal to the total
number of Subject Shares covered by such Offer Notice or Tender Notice.
Rights Plan Triggering Event: Any event under any Rights Plan
analogous (in terms of its effects under such Rights Plan) to one of the
following events under the Old TW Rights Plan:
(i) any member of either Group becoming an "Acquiring
Person" within the meaning of the Old TW Rights Plan or
(ii) the Rights becoming transferable separately from
shares of the Common Stock;
in any such case, in the event of a dispute, as determined in
accordance with Section 3.1(d).
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Sale Agreement: As defined in Section 3.1(f) hereof.
Securities Act: The Securities Act of 1933, as
amended, and the rules and regulations of the Commission
promulgated thereunder, as from time to time in effect.
Selling Stockholder: As defined in Section 3.1 hereof.
Stockholder: Any TCITP Stockholder or Turner Stockholder.
Subject Shares: As defined in Section 3.1 hereof.
TBS: Turner Broadcasting System, Inc.
TBS Shareholders' Agreement: The Shareholders' Agreement dated
as of June 3, 1987, among TBS, Turner and the Original Investors named therein.
TCITP: As defined in the opening paragraphs of this
Agreement.
TCITP Affiliates: TCITP and the Affiliates of TCITP.
TCITP Stockholders: TCITP and all Controlled Affiliates of
TCITP, in each case so long as such Person is or is required to be a party to
this Agreement or is the beneficial owner of any TCITP Holdco Shares.
TCITP Holdco Shares: Any and all Covered Securities of which
any TCITP Stockholder becomes the direct or indirect beneficial owner at the
Effective Time or thereafter.
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Tendering Stockholder: As defined in Section 3.4(a) hereof.
Tender Notice: As defined in Section 3.4(a) hereof.
Tender Shares: As defined in Section 3.4(a) hereof.
TOI: As defined in the opening paragraphs of this Agreement.
TP: As defined in the opening paragraphs of this Agreement.
Turner: As defined in the opening paragraphs of this
Agreement.
Turner Affiliates: The Turner Stockholders and the
Affiliates of the Turner Stockholders.
Turner Stockholders: Turner and all Affiliates of Turner, in
each case so long as such Person is the beneficial owner of any Covered
Securities, the Turner Foundation, the Turner Unitrust or any other Charitable
Transferee if such entity is required to become a party to this Agreement as a
result of a Charitable Transfer (provided, however, that any such entity shall
be deemed a Turner Stockholder only with respect to Turner Holdco Shares
acquired by such entity in a Charitable Transfer) and any Turner Related Party
who is required to become a party to this Agreement pursuant to the terms
hereof.
Turner Holdco Shares: Any and all Covered Securities of which
any Turner Stockholder becomes the direct or indirect beneficial owner at the
Effective Time or thereafter; provided, however, that Covered Securities
beneficially owned by the Turner
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20
Foundation or the Turner Unitrust immediately after the Effective Time shall not
be Turner Holdco Shares.
Underlying Securities: When used with reference to any Option
or Convertible Security as of any time, the Covered Securities issuable or
deliverable upon exercise, exchange or conversion of such Option or Convertible
Security (whether or not such Option or Convertible Security is then
exercisable, exchangeable or convertible). In the case of an Option to acquire a
Convertible Security, the Underlying Securities of such Option shall include the
Underlying Securities of such Convertible Security.
2. Restrictions on Dispositions of Covered Securities. No
Turner Stockholder shall Dispose of any Turner Holdco Shares, except in an
Exempt Transfer or a Charitable Transfer. No TCITP Stockholder shall Dispose of
any TCITP Holdco Shares, except in an Exempt Transfer. Any purported Disposition
of Covered Securities in violation of this Agreement shall be null and void and
of no force or effect, and, if Holdco has actual knowledge of such violation,
Holdco shall (and shall direct each registrar and transfer agent, if any, for
the Covered Securities to) refuse to register or record any such purported
Disposition on its transfer and registration books and records or to otherwise
recognize such purported Disposition. Subject to Section 4, if any Involuntary
Event affecting any Stockholder shall occur, such Stockholder's legal
representatives, heirs, successors or transferees, as the case may be, and all
Covered Securities beneficially owned by them shall be bound by all the terms
and provisions of this Agreement. The Turner Stockholders shall, and shall cause
each Related Party of Turner to, comply with the provisions of this Agreement
intended to be applicable to the Turner Stockholders or any Turner Holdco
Shares. The TCITP Stockholders shall, and shall cause each Related Party of
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21
each TCITP Stockholder to, comply with the provisions of this Agreement intended
to be applicable to the TCITP Stockholders or any TCITP Holdco Shares.
3. Right of First Refusal:
3.1 If any Stockholder (the "Selling Stockholder") desires to
accept an offer (other than with respect to a Public Sale or a Fast-Track Sale,
consistent with the definitions thereof, or a tender or exchange offer to which
Section 3.4 is applicable) (a "Bona Fide Offer") from a Person which is not a
Related Party of such Selling Stockholder (the "Prospective Purchaser") to
purchase any or all of the Covered Securities beneficially owned by such Selling
Stockholder (the "Subject Shares"), such Selling Stockholder shall, in
accordance with the following procedures, terms and conditions, first offer to
sell the Subject Shares to the Other Stockholder for consideration (subject to
subsections (g) and (h) of this Section 3.1) and on terms no more favorable to
the Selling Stockholder than those which would apply if the Selling Stockholder
accepted the Bona Fide Offer:
(a) The Selling Stockholder shall deliver to the
Other Stockholder a written notice (the "Offer Notice", which term shall include
any Offer Notice delivered pursuant to Section 3.2(a)) which shall (i) state the
number of shares or other appropriate unit of Covered Securities of each class,
series or other type that comprise the Subject Shares; (ii) identify the
Prospective Purchaser; and (iii) state the aggregate purchase price to be paid
by the Prospective Purchaser for the Subject Shares (the "Purchase Price") and
the kind and amount of consideration proposed to be paid or delivered by the
Prospective Purchaser for the Subject Shares of each class, series or other type
and the amount thereof allocable to each
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22
share or other appropriate unit of the Subject Shares of that class, series or
other type (the "Per-Share Offer Consideration" for the Covered Securities of
that class, series or other type), the timing and manner of the payment or other
delivery thereof and any other material terms of such Bona Fide Offer. The
Selling Stockholder shall deliver a copy of the Offer Notice to Holdco at the
same time it is delivered to the Other Stockholder.
(b) The Offer Notice shall be accompanied by a
true and complete copy of the Bona Fide Offer.
(c) If an Offer Notice is given by a Selling
Stockholder, the Other Stockholder shall have the right (the "Purchase Right"),
exercisable in the manner hereinafter provided, to require the Selling
Stockholder to sell to the Other Stockholder the number or other amount of the
Subject Shares determined in accordance with this Section 3.1(c). If there is no
Defensive Provision or Requirement of Law in effect at the time any Offer Notice
is given that imposes any Restriction on the Other Stockholder (or that would
impose a Restriction if the Other Stockholder were to exercise the Purchase
Right as to all the Subject Shares), the Other Stockholder may exercise the
Purchase Right only as to all, but not less than all of the Subject Shares. If
there are one or more Defensive Provisions or Requirements of Law in effect at
the time such Offer Notice is given that impose any Restriction on the Other
Stockholder (or that would impose such a Restriction if the Other Stockholder
were to exercise the Purchase Right as to all the Subject Shares), the Other
Stockholder may exercise the Purchase Right only as to a number of Subject
Shares that is greater than or equal to the Initial Trigger relating to the
Other Stockholder at such time and less than or equal to the Rights Plan Trigger
relating to the Other Stockholder at such time. For purposes of
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23
this Section 3.1(c), the Initial Trigger and the Rights Plan Trigger will be
determined as provided in Section 3.1(d).
(d) Commencing not later than the second business
day after an Offer Notice is given if there are one or more Defensive Provisions
in effect at such time, the Selling Stockholder and the Other Stockholder shall
consult with each other and Holdco in an effort to agree with respect to the
Initial Trigger and the Rights Plan Trigger, and upon request Holdco will
provide the Stockholders with information relating thereto pursuant to Section
3.5. If agreement is not reached by the Selling Stockholder and the Other
Stockholder on or prior to the fifth business day after the Offer Notice was
given, then, within two business days after such fifth business day, the Selling
Stockholder and the Other Stockholder shall jointly designate an independent law
firm of recognized national standing, which firm will be directed to submit a
written report regarding its conclusions as to the Initial Trigger and the
Rights Plan Trigger within 5 business days (which report shall include, if
requested, such law firm's conclusion as to whether any specified event under a
Rights Plan constitutes a Rights Plan Triggering Event). The number of Subject
Shares as to which the Other Stockholder may exercise the Purchase Right shall
be determined as follows:
(i) upon such law firm rendering a written report
within such 5 business day period as to the Initial Trigger
and the Rights Plan Trigger, if the Other Stockholder elects
to exercise its Purchase Right, the Other Stockholder may
exercise such Purchase Right only as to a number of Subject
Shares equal to or greater than the Initial Trigger and less
than or equal to the Rights Plan Trigger, as such amounts
shall be specified in such report; and
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(ii) if such law firm does not render a written report
as to the Initial Trigger and the Rights Plan Trigger within
such 5 business day period, if the Other Stockholder elects to
exercise its Purchase Right, the Other Stockholder may
exercise such Purchase Right only as to a number of Subject
Shares equal to or greater than the Initial Trigger and less
than or equal to the Rights Plan Trigger, as determined by
such Other Stockholder.
If any law firm is so retained, Holdco, the Other Stockholder and the Selling
Stockholder shall provide such law firm with such information as may be
reasonably requested in connection with the preparation of such report and shall
otherwise cooperate with each other and such law firm with the goal of allowing
such law firm to render such report as promptly as reasonably practicable. Each
of Holdco, the Other Stockholder and the Selling Stockholder shall be
responsible for the payment of one-third of the fees and disbursements of such
law firm, except that if, at the time such law firm is retained, Holdco waives
its right to purchase any Subject Shares covered by the current Offer Notice,
Holdco shall not be responsible for any such fees and disbursements, which shall
in such case be borne equally by the Selling Stockholder and the Other
Stockholder. If the Selling Stockholder and the Other Stockholder are unable to
agree upon the selection of an independent law firm within the two business day
period provided for in this Section 3.1(d), either such Stockholder may apply to
the American Arbitration Association (or another nationally-recognized
organization that provides alternative dispute resolution services) to appoint
an independent law firm to prepare and submit the report provided for in this
Section 3.1(d), and any law firm so appointed shall constitute the law firm
contemplated by this Section 3.1(d). Anything contained herein to the contrary
notwithstanding, no
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25
determination relating to the Initial Trigger, the Rights Plan Trigger or any
Rights Plan Triggering Event pursuant to this Section 3.1(d) shall be binding
upon Holdco in the absence of a written instrument signed by Holdco agreeing to
such determination (it being understood that Holdco has no obligation to provide
the Stockholders with any such written instrument).
(e) If the Other Stockholder desires to exercise
the Purchase Right with respect to any Subject Shares covered by any Offer
Notice, it shall do so by a written notice (an "Other Stockholder Exercise
Notice") delivered to the Selling Stockholder by the Other Stockholder prior to
5:00 P.M., New York City time, on the eighth business day following the receipt
of an Offer Notice or, if there is any dispute as to the Initial Trigger or the
Rights Plan Trigger, within 3 business days after the resolution of such
dispute. The Other Stockholder Exercise Notice shall state the aggregate number
or other appropriate amount of each class, series or other type of the Subject
Shares to be purchased (the "Other Stockholder Elected Shares"). A copy of the
Other Stockholder Exercise Notice shall be sent to Holdco at the same time it is
given to the Selling Stockholder. If an Other Stockholder Exercise Notice is
given within such period but, in accordance with Sections 3.1(c) and 3.1(d),
such Other Stockholder Exercise Notice specifies that only a portion of the
Subject Shares are elected to be purchased (a "Partial Exercise Notice), then
the Selling Stockholder shall have the right, exercisable by written notice to
each of the Other Stockholder and Holdco given within five business days after
the Partial Exercise Notice was given, to terminate the Offer Notice and abandon
the proposed sale pursuant to the Bona Fide Offer, in which case the provisions
of this Section 3.1 shall be reinstated with respect to any and all proposed
future Dispositions of the same or any Subject Shares pursuant to any subsequent
Bona Fide Offer by the same or any other Prospective Purchaser. If no
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26
Other Stockholder Exercise Notice is delivered within the applicable number of
business days, or if an Other Stockholder Exercise Notice is delivered but the
number of Other Stockholder Elected Shares is less than the number of Covered
Securities that are the subject of such Offer Notice and the Selling Stockholder
does not exercise its right to terminate the Offer Notice and abandon the
proposed sale pursuant to the preceding sentence, Holdco shall have the right,
exercisable by a written notice (a "Holdco Exercise Notice") given to the
Selling Stockholder by Holdco prior to 5:00 P.M., New York City time, on the
second business day following the expiration of such period of 8 or 3 business
days, as the case may be, to elect to purchase all, but not less than all of the
Subject Shares which are not Other Stockholder Elected Shares, in accordance
with the procedures, terms and conditions set forth below in this Section 3.1
and for a consideration (subject to subsections (g) and (h) of this Section 3.1)
and on terms no more favorable to the Selling Stockholder than those which would
apply if the Selling Stockholder accepted the Bona Fide Offer with respect to
the Holdco Elected Shares. A copy of the Holdco Exercise Notice shall be sent to
the Other Stockholder at the same time it is given to the Selling Stockholder.
The Selling Stockholder shall have the right to condition the closing of the
sale of the Other Stockholder Elected Shares to the Other Stockholder upon the
closing of the sale of any Holdco Elected Shares and the closing of the sale of
any Holdco Elected Shares on the closing of the sale of the Other Stockholder
Elected Shares.
(f) If an Exercise Notice is given in accordance
with Section 3.1(e), within 5 business days thereafter the Purchaser and the
Selling Stockholder shall enter into a binding agreement (the "Sale Agreement")
for the sale of the Purchased Shares to the Purchaser, which agreement shall
contain such representations, warranties, covenants and conditions no less
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27
favorable to the Selling Stockholder than the terms contemplated by the Bona
Fide Offer, except with respect to the kind and number or other amount of
Subject Shares to be purchased and the aggregate purchase price payable in the
event that the Purchased Shares constitute fewer than all the Subject Shares.
The Sale Agreement shall provide for the closing of the purchase and sale of the
Purchased Shares to be held at the offices of the Selling Stockholder at 11:00
a.m. local time on the 60th day after the Offer Notice was given (subject to
extension in accordance with Sections 3.1(i) and 5.1) or at such other place or
on such earlier date as the parties to the Sale Agreement may agree. At such
closing, the Purchaser shall (subject to subsections (e), (g) and (h) of this
Section 3.1) purchase the Purchased Shares for cash by wire transfer of
immediately available funds in an account at a bank designated by the Selling
Stockholder, such designation to be made no less than three days prior to
closing. At the closing, the Selling Stockholder shall deliver the certificates
and other evidences of the Purchased Shares to the Purchaser, against payment in
full for the Purchased Shares, free and clear of any pledge, claim, lien,
option, restriction, charge, shareholders' agreement, voting trust or other
encumbrance of any nature whatsoever to which the Purchased Shares are subject
in the hands of the Selling Stockholder other than restrictions on transfer
arising under federal and state securities laws and claims, restrictions,
options and encumbrances arising under this Agreement (an "Encumbrance").
Without limiting the generality of the immediately preceding sentence, if such
Purchased Shares are Other Stockholder Elected Shares and if the Other
Stockholder is TCITP, such Purchased Shares shall be free and clear of all
Encumbrances existing or arising under any Holdco Stockholders Agreement, and
Holdco shall release all such Encumbrances upon the closing of the purchase and
sale of such Purchased Shares pursuant hereto. The certificates evidencing the
Purchased Shares will be in proper
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28
form for transfer, with appropriate stock powers executed in blank attached and
documentary or transfer tax stamps affixed. The Selling Stockholder shall
execute such other documents as shall be necessary to effectuate the sale of the
Purchased Shares and such additional documents as may be contemplated by the
Bona Fide Offer or as may reasonably be requested by any purchaser. The Other
Stockholder may assign any or all of its rights, and delegate any or all of its
obligations, under any Sale Agreement to which it is a party with respect to the
purchase and sale of any or all of the Other Stockholder Elected Shares to any
Controlled Affiliate of the Other Stockholder, provided that no such assignment
or delegation shall release the Other Stockholder from its obligations
thereunder without the written consent of the Selling Stockholder. Holdco may
assign any or all of its rights, and delegate any or all of its obligations,
under any Sale Agreement to which it is a party or otherwise with respect to the
purchase and sale of any or all of the Holdco Elected Shares to any Controlled
Affiliate of Holdco, provided that no such assignment or delegation shall
release Holdco from its obligations thereunder without the written consent of
the Selling Stockholder.
(g) Subject to Section 3.1(h), if the Bona Fide
Offer contemplated that the Purchase Price for the Subject Shares proposed to be
Disposed of by the Selling Stockholder would be paid, in whole or in part, other
than in cash, then the Purchaser shall pay for its Purchased Shares in cash in
lieu of such other consideration in an amount equal to the fair market value of
such other consideration as agreed by the Selling Stockholder and the Other
Stockholder. In the event of any disagreement between the Other Stockholder and
the Selling Stockholder as to the fair market value of any noncash consideration
payable to the Selling Stockholder, then at the request of either such party
given within 5 business days following the delivery of the Offer Notice
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29
such determination shall be conclusively made by a panel of appraisers, one of
whom shall be selected by the Other Stockholder, the second of whom shall be
selected by the Selling Stockholder and the third of whom shall be selected by
the first two appraisers. The Other Stockholder and the Selling Stockholder
shall each designate their appraiser within 3 business days after receipt of any
request for appraisal, and such appraisers shall designate the third appraiser
within 3 business days thereafter. Each appraiser shall submit its determination
of the fair market value of such noncash consideration to the Other Stockholder,
Holdco and the Selling Stockholder within 5 business days after the panel is
empaneled and such fair market value shall be the average of the two closest
valuations (or the middle valuation, if the highest and lowest valuation differ
from the middle valuation by an equal amount). Each appraiser appointed shall be
a nationally recognized investment banking, appraisal or accounting firm which
is not directly or indirectly a Related Party of any party to this Agreement or
any Prospective Purchaser and which has no interest (other than the receipt of
customary fees) in the event giving rise to the need for the appraisal. Each of
the Other Stockholder and the Selling Stockholder shall be responsible for the
payment of one-half of the costs of such appraisal.
(h) If the Bona Fide Offer contemplated that any
part of the Purchase Price for any Subject Shares would be paid in debt
securities, each purchaser of any of such Subject Shares may, in its discretion,
elect to pay the equivalent portion of its allocable share of the Purchase Price
for the Purchased Shares through the issuance of debt securities with
substantially similar terms in an amount the fair market value of which is equal
to the fair market value of the equivalent portion of the debt securities
specified in the Bona Fide Offer, in each case as agreed by such purchaser and
the Selling Stockholder or, failing
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30
such agreement, as determined in accordance with the appraisal procedures
specified in Section 3.1(g), taking into consideration relevant credit factors
relating to the Prospective Purchaser and such purchaser and the marketability
and liquidity of such debt securities.
(i) All time periods specified in subsection (e)
or (f) of this Section 3.1 shall be extended for a number of days equal to the
number of days in the period from the date the request for appraisal is made
pursuant to subsection (g) or (h) of this Section 3.1 or Section 4 (as the case
may be) through and including the date of submission of the last to be submitted
of the required appraisals. Each of the Other Stockholder, the Selling
Stockholder and Holdco shall be responsible for the payment of one-third of the
costs of each appraisal pursuant to subsection (h) of this Section 3.1
(including the fees of all appraisers appointed in accordance with subsection
(h) of this Section 3.1), except that, if, at the time such appraisal is
requested, Holdco waives its right to purchase any Subject Shares covered by the
current Offer Notice, Holdco shall not be responsible for any such fees and
disbursements, which shall in such case be borne equally by the Selling
Stockholder and the Other Stockholder.
(j) The Selling Stockholder shall have the right
to sell Subject Shares to the Prospective Purchaser only in the
following circumstances:
(i) If neither an Other Stockholder Exercise Notice nor a Holdco
Exercise Notice is given in accordance with Section 3.1(e) within the
applicable time period specified therein (as such period may be
extended pursuant to subsection (i) of this Section 3.1), the Selling
Stockholder shall have the right (within the period specified below in
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this subsection) to sell all but not less than all of the Subject
Shares to the Prospective Purchaser, and in such case the "Free to Sell
Date" shall be the business day following the expiration of the last to
expire of all time periods provided for in Section 3.1(e).
(ii) If an Other Stockholder Exercise Notice is given but the
number of Other Stockholder Elected Shares is less than the number of
Covered Securities that are subject to the relevant Offer Notice, and
if no Holdco Exercise Notice is given in accordance with Section 3.1(e)
within the applicable time period specified therein (as such period may
be extended pursuant to subsection (i) of this Section 3.1), then the
Selling Stockholder shall have the right (within the period specified
below in this subsection) to sell all, but not less than all of the
Subject Shares which are not Other Stockholder Elected Shares to the
Prospective Purchaser, and in such case the "Free to Sell Date" shall
be the earlier of the fifth business day following the date the Other
Stockholder Exercise Notice was given and the date that Holdco notifies
the Selling Stockholder that it has determined not to purchase any such
Subject Shares.
(iii) If an Other Stockholder Exercise Notice is given but a Sale
Agreement for the Other Stockholder Elected Shares is not executed by
the Purchaser and tendered to the Selling Stockholder for execution
within the 5 business day period specified in the first sentence of
Section 3.1(f) (as such period may be extended pursuant to subsection
(i) of this Section 3.1), then the Selling Stockholder shall have the
right (within the period specified below in this subsection) to sell
all, but not less than all of the Subject Shares to the Prospective
Purchaser, and in such case the "Free to
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32
Sell Date" shall be the business day after expiration of such 5
business day period.
(iv) If a Holdco Exercise Notice is given but a Sale Agreement
for the Holdco Elected Shares is not executed by the Purchaser and
tendered to the Selling Stockholder for execution within the 5 business
day period specified in the first sentence of Section 3.1(f) (as such
period may be extended pursuant to subsection (i) of this Section 3.1),
then the Selling Stockholder shall have the right (within the period
specified below in this subsection) to sell all, but not less than all
of the Holdco Elected Shares to the Prospective Purchaser, and in such
case the "Free to Sell Date" shall be the business day after the
expiration of such 5 business day period.
(v) If a Sale Agreement for either Other Stockholder Elected
Shares or Holdco Elected Shares is executed by the Purchaser and the
Selling Stockholder, but the closing of the purchase and sale
thereunder shall not occur by the latest date for such closing
determined in accordance with Sections 3.1(f), 3.1(i) and 5.1 for any
reason other than a breach or violation by the Selling Stockholder of
any of such Selling Stockholder's representations, warranties,
covenants or agreements that are a condition to such closing, then the
Selling Stockholder shall have the right (within the period specified
below in this subsection) to sell all, but not less than all of such
Other Stockholder Elected Shares or the Holdco Elected Shares covered
by such Sale Agreement to the Prospective Purchaser, and in such case
the "Free to Sell Date" shall be the business day after such latest
date for such closing as so determined.
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33
(vi) If between the date an Other Stockholder Election Notice is
given with respect to any Other Stockholder Elected Shares and the
closing of the purchase and sale of such Other Stockholder Elected
Shares, there shall be any amendment or modification adverse to the
Other Stockholder of any Defensive Provision in effect on the date the
Other Stockholder Election Notice was given, adoption of any other
Defensive Provision adverse to the Other Stockholder, waiver adverse to
the Other Stockholder of any term or provision of or exercise adverse
to the Other Stockholder of any other discretionary right or power
under any Defensive Provision (whether then or thereafter in effect),
any reorganization, transfer of assets, consolidation, merger, share
exchange, dissolution, issue or sale of securities or any other action
or event which in the opinion of the Other Stockholder would, if such
purchase and sale were consummated, have a Disadvantageous Result, then
notwithstanding any other provision of this Agreement or any provision
of any Sale Agreement to which any member of the Other Stockholder
Group may be a party and without any liability or obligation to the
Selling Stockholder, Holdco, any other party to this Agreement or any
Prospective Purchaser, the Other Stockholder may, by written notice
given to the Selling Stockholder and Holdco within five business days
after the Other Stockholder acquires actual knowledge of such action or
event, rescind the Other Stockholder Election Notice and any Sale
Agreement to which any member of the Other Stockholder Group may be a
party and abandon the purchase and sale of the Other Stockholder
Elected Shares pursuant thereto. In such event, the Selling Stockholder
shall have the right to sell all or any portion of the Subject Shares
to the Prospective Purchaser and the "Free to Sell Date" shall be the
business day following receipt by the Selling Stockholder of such
written notice of abandonment.
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34
Any sale of Subject Shares to the Prospective Purchaser permitted by this
Section shall be for the Purchase Price (or a greater price), payable in the
manner specified in the Bona Fide Offer, and otherwise on terms and conditions
no more favorable to the Prospective Purchaser than those contained in the Bona
Fide Offer; provided, however, that if such Subject Shares constitute fewer than
all the Subject Shares, the purchase price therefor shall be equal to or greater
than the portion of the Purchase Price allocable to such Subject Shares
(determined by multiplying each share or other appropriate unit of such Subject
Shares of each class, series or other type by the Per-Share Offer Consideration
for the Subject Shares of that class, series or other type). In the event that
(i) the Prospective Purchaser has not entered into a binding agreement with the
Selling Stockholder for the purchase of such Subject Shares within the 30-day
period following the Free to Sell Date or (ii) the Prospective Purchaser has not
purchased such Subject Shares within the time period which would be applicable
to a purchase thereof by a Purchaser under the second sentence of Section 3.1(f)
as if calculated from the Free to Sell Date (except that the 60-day period
referred to therein shall be construed as a 120-day period for this purpose),
then, in either such case, the Selling Stockholder's right to sell Subject
Shares to the Prospective Purchaser pursuant to this Section 3.1(j) shall expire
and the provisions of this Section 3.1 shall be reinstated with respect to any
and all proposed future Dispositions of the same or any other Subject Shares
pursuant to any subsequent Bona Fide Offer by the same or any other Prospective
Purchaser.
3.2 Public Sales.
(a) If any Stockholder at any time intends to
effect a Public Sale of Covered Securities (other than a
Fast-Track Sale), such Stockholder may deliver to the Other
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35
Stockholder an Offer Notice pursuant to Section 3.1 offering to sell such
Covered Securities to the Other Stockholder at a price equal to the aggregate
Current Market Price thereof on the date on which such Offer Notice is given. A
copy of such Offer Notice shall be sent to Holdco at the same time it is given
to the Other Stockholder. If any such Offer Notice with respect to any Covered
Securities is given, the Stockholder giving the Offer Notice shall have all
rights and obligations of a "Selling Stockholder" under Section 3.1 and each of
the Other Stockholder and Holdco shall have all of their respective rights and
obligations provided for in Section 3.1, in each case with the same effect as if
such Covered Securities were "Subject Shares" proposed to be sold by the Selling
Stockholder to a Prospective Purchaser for "Per-Share Offer Consideration"
consisting of cash in an amount equal to the Current Market Price of the Covered
Securities on the date such Offer Notice is given and for a "Purchase Price"
equal to the total Current Market Price on such date of all such Subject Shares,
and as if the other terms of the Public Sale were the terms of the "Bona Fide
Offer" made by such assumed Prospective Purchaser, except that subsections (g),
(h) and (i) of Section 3.1 shall not apply and the provisions of subsection (j)
of Section 3.1 shall apply only as modified by subsection (b) of this Section
3.2.
(b) Subject Shares covered by any Offer Notice
given pursuant to this Section 3.2 may be sold (after full compliance with this
Section 3.2 and the applicable provisions of Section 3.1) by the Selling
Stockholder at any available price in a Public Sale of the type described in
such Offer Notice, provided that such sale or sales are completed within the
period of 120 days after the applicable Free to Sell Date; provided, however,
that if the issuer of any Covered Securities exercises any right to delay the
filing or effectiveness of a registration statement relating to such Covered
Securities or to suspend sales
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36
under such registration statement, then the period shall be extended by the
number of days in any such delay or suspension period. If any Subject Shares
covered by such Offer Notice which such Selling Stockholder becomes obligated
under this Section 3.2 to sell to one or more purchasers or their permitted
assignees are not, for any reason, sold to such Persons within any applicable
period determined pursuant to Section 3.1, or if any such Subject Shares which
such Selling Stockholder is entitled, pursuant to the first sentence of this
Section 3.2(b), to sell in the Public Sale are not so sold within the period
provided in such sentence, then in each case the right of such Selling
Stockholder to sell such unsold Subject Shares shall terminate and such Subject
Shares shall thereafter continue to be subject to the restriction on
Dispositions of Covered Securities contained in Section 2.
3.3 Fast-Track Sales.
(a) Any Stockholder who proposes to make a
Fast-Track Sale may deliver to each of the Other Stockholder and Holdco a
written notice (the "Fast-Track Offer Notice") to such effect which states the
number of shares of Common Stock proposed to be sold (the "Fast-Track Shares").
The delivery of any such notice shall constitute the offer by such Stockholder
to sell to the Other Stockholder, Holdco or both all or such portion of the
Fast-Track Shares as it or they may have the right to purchase in accordance
with this Section 3.3 at a price payable in cash equal to the aggregate Current
Market Price thereof on the date on which such Fast-Track Offer Notice is given.
(b) The Other Stockholder shall have the right to
elect to purchase (or to designate any one or more of the members
of the Other Stockholder Group as purchasers of) all or any
number of the Fast-Track Shares. The Other Stockholder and
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37
Holdco shall consult with each other in an effort to resolve any questions as to
the Initial Trigger and the Rights Plan Trigger; provided, that if the Other
Stockholder and Holdco cannot resolve such issue, then the Other Stockholder
shall have the right to purchase only the number of Fast-Track Shares that
Holdco shall specify. Anything contained herein to the contrary notwithstanding,
no determination relating to the Initial Trigger or the Rights Plan Trigger
pursuant to this Section 3.3(b) shall be binding upon Holdco in the absence of a
written instrument signed by Holdco agreeing to such determination (it being
understood that Holdco has no obligation to provide the Other Stockholder with
any such written instrument). If the Other Stockholder desires to exercise its
purchase right under this Section 3.3, it shall do so by a written notice
specifying the number of the Fast-Track Shares to be purchased and identifying
the purchasers thereof, given to the Stockholder who gave the Fast-Track Offer
Notice prior to 5:00 P.M., New York City time, on the third business day
following the receipt by the Other Stockholder of the Fast-Track Offer Notice
(provided that any Fast-Track Offer Notice received on a day that is not a
business day or after 12 noon, New York City time, on a business day, shall be
deemed to have been received on the next following business day). Holdco shall
have the right to elect to purchase any or all of the Fast-Track Shares that the
Other Stockholder does not elect to purchase or have one or more other members
of the Other Stockholder Group purchase in accordance with the immediately
preceding sentence, which right shall be exercisable by a written notice
specifying the number of such Fast-Track Shares to be purchased, which notice
shall be given by Holdco to the Stockholder proposing to sell such Fast-Track
Shares and the Other Stockholder prior to 5:00 P.M., New York City time, on the
fifth business day following the receipt by the Other Stockholder and Holdco of
the Fast-Track Offer Notice. If any such notice is given by either the Other
Stockholder or Holdco, the closing of
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38
the purchase and sale of the Fast-Track Shares covered thereby shall be held at
the offices in the continental United States of the Other Stockholder or Holdco
(as the case may be) specified in such notice, 11:00 A.M., New York City time,
on the fourth business day after such notice was given or at such other place or
date as the Stockholder selling the Fast-Track Shares and the purchasers thereof
may agree, and such closing date shall not be subject to extension pursuant to
Section 5.1 or otherwise unless such selling Stockholder and such purchasers
agree to such extension. At such closing, the purchasers shall purchase such
Fast-Track Shares for cash by wire transfer of immediately available funds in an
account at a bank designated by the selling Stockholder, such designation to be
made no less than three business days prior to closing, against delivery at the
closing by the selling Stockholder of the certificates evidencing the Fast-Track
Shares to be sold to such purchasers, in proper form for transfer, with
appropriate stock powers executed in blank attached and documentary or transfer
tax stamps affixed. Such delivery of such certificates shall constitute the
representation and warranty of such selling Stockholder that upon such delivery,
such selling Stockholder duly transferred good and marketable title to the
shares evidenced thereby, clear of any Encumbrance. Without limiting the
generality of the immediately preceding sentence, if the Other Stockholder is
TCITP, such purchased Fast-Track Shares shall be free and clear of all
Encumbrances existing or arising under any Holdco Stockholders Agreement, and
Holdco shall release all such Encumbrances upon the closing of the purchase and
sale thereof. The purchase price payable for each Fast-Track Share purchased
pursuant to this Section 3.3 shall be the Current Market Price determined as of
the date the Fast-Track Offer Notice was given.
(c) Any Fast-Track Shares not purchased pursuant
to Section 3.3(b) may be sold by the selling Stockholder at any
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39
available price in one or more Fast-Track Sales within the 90-day period
following the twelfth business day after the receipt by both Holdco and the
Other Stockholder of the Fast-Track Offer Notice, and if all Fast-Track Shares
for any reason are not sold within such period either pursuant to Section 3.3(b)
or in one or more Fast-Track Sales, then the right to sell such Fast-Track
Shares shall terminate and such Fast-Track Shares shall thereafter continue to
be subject to the restrictions on Dispositions of Covered Securities contained
in Section 2.
3.4 Tender or Exchange Offer Sales.
(a) If any Person shall make a tender or exchange
offer to acquire any Covered Securities, and if any Stockholder (a "Tendering
Stockholder") intends to tender any Covered Securities, such Tendering
Stockholder shall give the Other Stockholder written notice (the "Tender
Notice") of such intention not later than ten calendar days prior to the latest
time by which securities must be tendered in order to be accepted pursuant to
such offer as such date may from time to time be extended (the "Tender Date"),
specifying the Covered Securities proposed to be tendered (the "Tender Shares"),
together with copies of all written materials by which such offer is being made.
A copy of such Tender Notice shall be sent to Holdco at the same time it is
given to the Other Stockholder.
(b) Any Tender Notice given by any Tendering
Stockholder shall constitute an offer by such Tendering Stockholder to sell to
the Other Stockholder the Tender Shares. The Other Stockholder shall have the
right to elect to purchase (or to designate any one or more of the members of
the Other Stockholder Group as purchasers of) all or any number of the Tender
Shares in accordance with this Section 3.4. The Other Stockholder and Holdco
shall consult with each other in an effort
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to resolve any questions as to the Initial Trigger and the Rights Plan Trigger,
but the rights of the Other Stockholder under this Section 3.4 shall not be
affected by the failure of Holdco to concur in any conclusion of the Other
Stockholder with respect to any such matter. Anything contained herein to the
contrary notwithstanding, no determination relating to the Initial Trigger or
the Rights Plan Trigger pursuant to this Section 3.4(b) shall be binding upon
Holdco in the absence of a written instrument signed by Holdco agreeing to such
determination (it being understood that Holdco has no obligation to provide the
Other Stockholder with any such written instrument). If the Other Stockholder
desires to exercise its purchase right under this Section 3.4, it shall do so by
a written notice specifying the number of the Tender Shares to be purchased and
identifying the purchasers thereof, given to the Tendering Stockholder at least
three business days prior to the Tender Date. If any such notice is given by the
Other Stockholder, the closing of the purchase and sale of the Tender Shares
covered thereby shall be held at the offices of the Other Stockholder within the
continental United States specified in such notice at 11:00 A.M., New York City
time, on a date specified in such notice that is not later than two business
days prior to the Tender Date, or at such other place or date as the Tendering
Stockholder and the Other Stockholder may agree, and such closing date shall not
be subject to extension pursuant to Section 5.1 or otherwise unless the
Tendering Stockholder and the Other Stockholder agree to such extension. At such
closing, the purchasers identified by the Other Stockholder shall purchase such
Tender Shares for cash by wire transfer of immediately available funds to an
account at a bank designated by the Tendering Stockholder in the Tender Notice,
against delivery at the closing by the Tendering Stockholder of the certificates
or other instruments evidencing the Tender Shares to be sold to such purchasers,
in proper form for transfer, with appropriate stock powers executed in blank
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attached and documentary or transfer tax stamps affixed. Such delivery of such
certificates shall constitute the representation and warranty of such Tendering
Stockholder that upon such delivery, such Tendering Stockholder duly transferred
good and marketable title to the shares evidenced thereby, free and clear of any
Encumbrance. Without limiting the generality of the immediately preceding
sentence, such purchased Tender Shares shall be free and clear of all
Encumbrances existing or arising under any Holdco Stockholders Agreement, and
Holdco shall release all such Encumbrances upon the closing of the purchase and
sale thereof. The total purchase price to be paid by such purchasers for such
Tender Shares shall be (i) if such tender or exchange offer is consummated, the
purchase price that the Tendering Stockholder would have received if it had
tendered such Tender Shares and all such Tender Shares had been purchased in
such tender or exchange offer, including any increases in the price paid by the
offeror after exercise by the Other Stockholder of its right of first refusal
under this Section 3.4 or after the closing of the purchase of Tender Shares
pursuant to such exercise, (ii) if such tender or exchange offer is not
consummated, the highest price offered pursuant thereto, or (iii) if any other
tender or exchange offer is commenced prior to the expiration or termination of
such tender or exchange offer, the highest price offered in either such tender
or exchange offers in each case with any offered securities or other property
except cash to be valued as provided in Section 3.4(c).
(c) If the consideration offered in such tender
or exchange offer consists, in whole or in part, of securities or other property
except cash, then the purchasers identified by the Other Stockholder shall pay
for the Tender Shares cash in lieu of such other consideration in an amount
equal to the fair market value of such other consideration as agreed by the
Tendering Stockholder and the Other Stockholder. In the event the
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Tendering Stockholder and the Other Stockholder do not agree as to the fair
market value of any such noncash consideration by the beginning of the second
business day after the Offer Notice is given, then such determination shall be
conclusively made by a panel of appraisers, one of whom shall be selected by the
Other Stockholder, the second of whom shall be selected by the Tendering
Stockholder and the third of whom shall be selected by the first two appraisers.
The Other Stockholder and the Tendering Stockholder shall each designate their
appraiser within three business days after such Offer Notice is given, and such
appraisers shall designate the third appraiser within three business days
thereafter. Each appraiser shall submit its determination of the fair market
value of such noncash consideration within three business days after the panel
is empaneled and such fair market value shall be the average of the two closest
valuations (or the middle valuation, if the highest and lowest valuation differ
from the middle valuation by an equal amount). Each appraiser appointed shall be
a nationally recognized investment banking, appraisal or accounting firm which
is not directly or indirectly a Related Party of any party to this Agreement or
the Person making the tender or exchange offer and which has no interest (other
than the receipt of customary fees) in the event giving rise to the need for the
appraisal. Each of the Other Stockholder and the Tendering Stockholder shall be
responsible for the payment of one-half of the costs of such appraisal.
(d) If the Other Stockholder does not exercise
its right of first refusal under this Section 3.4 by giving a notice of exercise
in accordance with Section 3.4(b) or, having given such notice, fails to
purchase and pay for (or have one or more of its designees purchase and pay for)
such Tender Shares on or prior to the business day prior to the Tender Date,
then the Tendering Stockholder shall be free to accept the tender or
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exchange offer with respect to which the Tender Notice was given or any other
tender or exchange offer commenced during the pendency of the tender or exchange
offer with respect to which the Tender Notice was given.
3.5 Holdco to Provide Certain Information. If
requested at any time or from time to time by any Stockholder,
Holdco shall promptly provide to such Stockholder in writing
(i) all information which such Stockholder reasonably may request
for the purpose of determining whether, based on the facts set
forth by such Stockholder in such request, any acquisition of
beneficial ownership by such Stockholder or the Other Stockholder
would result in the occurrence of a Disadvantageous Result under
or in respect of any Defensive Provision and (ii) such other
non-confidential information known to Holdco as such Stockholder
may reasonably request regarding (A) the number of Covered
Securities issued and outstanding at any time, (B) the number of
Covered Securities owned of record by any person at any time, or
(C) the terms and conditions of any Defensive Provision.
3.6 Certain Actions by Holdco. In the event that Holdco shall
(i) amend or modify any Defensive Provision in effect on the date hereof, or
(ii) adopt any Defensive Provision after the date hereof, or (iii) purchase,
redeem or otherwise acquire any outstanding Covered Securities, directly or
indirectly through any Controlled Affiliate of Holdco, and the result of any
such action is to reduce the Initial Trigger or the Rights Plan Trigger with
respect to any Stockholder Group, then, in the case of any Offer Notice or
Tender Notice delivered after such action, if such action shall have had the
effect of reducing the number of Subject Shares covered by such Offer Notice
that may then be purchased by the Other Stockholder pursuant to this Agreement,
Holdco shall have no right under this Agreement to purchase any Subject Shares
covered by such Offer Notice.
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4. Involuntary Event; Death or Incapacity.
4.1 In the event that (i) any Stockholder shall be adjudicated
bankrupt or insolvent or file a voluntary petition for bankruptcy (or an
involuntary petition for bankruptcy shall have been filed against any
Stockholder and the same shall not have been dismissed within 60 days after the
date of filing), or file a pleading in any court of record admitting his
inability to pay his debts as they become due, or make a general assignment for
the benefit of creditors, or (ii) a receiver, administrator, guardian, legal
committee or other legal custodian of any Stockholder's property shall be
appointed (other than in connection with his death or incapacity) and not
discharged within 60 days, or (iii) a writ of attachment or levy or other
similar court order shall prevent any Stockholder from exercising his or its
right to vote or Dispose of any of his or its Covered Securities and such writ
or levy is not dismissed (or such court order is not reversed) within 60 days,
then such Stockholder shall promptly notify the Other Stockholder of the
occurrence of any such event (the "Involuntary Event"). Simultaneously with the
delivery of any such notice required by this Section 4.1, such Stockholder shall
deliver an Offer Notice to such Other Stockholder pursuant to Section 3.1,
offering to sell all Covered Securities beneficially owned by such Stockholder
to such Other Stockholder at the Appraised Value. Each Stockholder giving such
an Offer Notice shall have, in respect of such Offer Notice, all rights and
obligations under Section 3.1 of a Selling Stockholder, except that if such
Stockholder is a Turner Stockholder, for so long as such Turner Stockholder is
subject to the restrictions on transfer contained in the Holdco Stockholders'
Agreement, it shall not be entitled to sell any Covered Securities to any Person
other than the Purchasers, if any; each Other Stockholder and Holdco shall have,
in respect of such Offer Notice, all rights and obligations under Section 3.1
<PAGE>
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45
which are provided for therein in the case of any Offer Notice given pursuant
thereto. For the purpose hereof, the term "Appraised Value" means the fair
market value of the Covered Securities to be sold as determined by appraisal in
the same manner as provided in Section 3.1(h) with respect to appraisals of
noncash consideration. Each of such Stockholder, the Other Stockholder and
Holdco shall be responsible for the payment of one-third of the costs of such
appraisal, except that, if, at the time such appraisal is requested, Holdco
waives its right to purchase any Subject Shares covered by the current Offer
Notice, Holdco shall not be responsible for any such fees and disbursements,
which shall in such case be borne equally by such Stockholder and the Other
Stockholder. All time periods specified in subsection (e) or (f) of Section 3.1
shall be extended for a number of days equal to the number of days in the period
from the delivery of the Offer Notice pursuant to this Section 4.1 through and
including the date of submission of the last to be submitted of the required
appraisals.
4.2 Any Sale Agreement entered into by any Stockholder and the
Purchaser pursuant to an Offer Notice required by Section 4.1 shall provide that
the closing of the sale of the Covered Securities to be sold and purchased
thereunder may be postponed for such period as may be necessary to effect the
purchase of such Covered Securities free from any claims of a trustee in
bankruptcy, any garnishee or any court order. In the event that any Covered
Securities subject to such Offer Notice are not purchased for any reason, such
Covered Securities shall continue to be subject to this Agreement.
4.3 In the event of Turner's incapacity or death, his legal
representative or the executor or administrator of his estate, as the case may
be, shall be bound by all the terms and provisions of this Agreement as fully as
if such representative,
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46
executor or administrator were a party hereto and his or its name were
substituted for Turner's name herein and shall be entitled to exercise Turner's
rights and required to perform his obligations hereunder.
5. Regulatory Approvals; Certain Representations,
Warranties and Covenants.
5.1 Regulatory Approvals. If any sale of Covered Securities to
any Stockholder, Holdco or any permitted assignee of any Stockholder or Holdco
in accordance with Section 3.1, 3.2 or 4 requires, as a condition to the legal
and valid transfer thereof to such Purchaser, any consent, approval, waiver, or
authorization of, notice to or filing with, any Governmental Authority or the
expiration of any waiting period imposed by applicable law and if Section 3.1,
3.2 or 4 (as the case may be) provides for the closing of such sale to be held
before some fixed or ascertainable date, then such date shall be extended for
the period of time during which efforts to obtain each such consent, approval,
waiver, or authorization, to give such notice or make such filing and to obtain
the termination of each such waiting period at the earliest reasonably
practicable time are diligently being made; provided, however, that in no event
shall the extension of any such closing date pursuant to this Section 5.1 exceed
90 days. Each party shall (and shall cause such party's Controlled Affiliates
to) reasonably cooperate with the other parties in obtaining any such consent,
approval, waiver, or authorization, to give any such notice or make any such
filing and in obtaining the termination of any such waiting period at the
earliest practicable time.
5.2 Representation and Warranty of Holdco. Holdco represents
and warrants to each of TCITP and Turner that, other than the Old TW Rights
Plan, the provisions of TW's Restated
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47
Certificate of Incorporation and By-laws and the Delaware Statute, there were no
Defensive Provisions in effect on September 22, 1995; provided, however, that no
representation is made as to the laws of any jurisdiction other than Delaware.
6. Legend on Stock Certificates; No Recordation of Transfer.
6.1 Each certificate or instrument representing Covered
Securities directly or indirectly beneficially owned by any Stockholder shall
bear the following legend until such time as the shares represented thereby are
no longer subject to this Agreement:
"THE SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE TERMS
AND CONDITIONS OF A STOCKHOLDERS' AGREEMENT DATED AS OF
OCTOBER 10, 1996, AMONG R.E. TURNER, III, TCI TURNER
PREFERRED, INC., TURNER PARTNERS, L.P., TIME WARNER INC. AND
CERTAIN OTHER PERSONS. A COPY OF SUCH AGREEMENT IS ON FILE
AT THE OFFICES OF TIME WARNER INC.
Holdco shall not be responsible for placing the above legend on any certificate
representing Covered Securities, except to the extent that it has actual
knowledge that such certificate has been issued in the name of any Stockholder.
6.2 Holdco agrees not to knowingly effect a transfer of any
Covered Securities which to Holdco's actual knowledge are directly or indirectly
beneficially owned by any Stockholder on its books except as permitted by the
terms of this Agreement. A copy of this Agreement shall be filed with the
Secretary of Holdco.
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48
7. Representations and Warranties; Certain Additional
Covenants.
7.1 Certain Representations and Covenants of the TCITP
Stockholders. Each of the TCITP Stockholders represent and warrant to the Turner
Stockholders and Holdco as follows:
(a) Neither such TCITP Stockholder nor any of its
Controlled Affiliates that hold Holdco Shares is a party to or bound
by, any Contract, Requirement of Law or Judgment, other than
Requirements of Law referred to in Section 7.3(d), that does or may
prevent, impede or delay the due and punctual performance by any such
Person of its agreements, obligations and commitments contained in this
Agreement, and such TCITP Stockholder will not enter into or permit any
of its Controlled Affiliates to enter into any such Contract or take
any other voluntary action or voluntarily omit to take any action that
would have any such effect.
(b) Except for this Agreement and except for any
Permitted Pledge in effect as of the date hereof, there is no option,
warrant, right, call, proxy, or Contract that directly or indirectly
provides for the sale, pledge or other Disposition of any of such TCITP
Holdco Shares or any interest therein or any rights with respect
thereto, relates to the voting, Disposition or control of any thereof
or obligates or may obligate such TCITP Stockholder or any of its
Controlled Affiliates to grant, offer or enter into any of the
foregoing.
No breach or violation of any of the foregoing representations, warranties or
covenants shall result or be deemed to result directly or indirectly from or by
reason of any Contract between
<PAGE>
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49
TCITP and any of its Affiliates and Holdco and any of its Affiliates, directors
or officers, whether now existing or hereafter entered into, nor from or by
reason of the execution, delivery or performance of or action taken or omitted
to be taken pursuant to the terms of any such Contract or the consummation of
any transaction contemplated thereby, nor from or by reason of any option,
warrant, right, call, proxy or other right granted, covenant made or obligation
incurred under any such Contract that directly or indirectly provides for the
sale, pledge or other Disposition of any of the TCITP Holdco Shares or any
interest therein or any rights with respect thereto.
7.2 Certain Representations and Covenants of the
Turner Stockholders. Each of the Turner Stockholders represents
and warrants to the TCITP Stockholders and Holdco as follows:
(a) Neither such Turner Stockholder nor any of his or
its Controlled Affiliates that hold Holdco Shares is a party to or
bound by, any Contract, Requirement of Law or Judgment, other than any
Requirements of Law referred to in Section 7.3(d), that does or may
prevent, impede or delay the due and punctual performance by any such
Person of his or its agreements, obligations and commitments contained
in this Agreement, and such Turner Stockholder will not enter into or
permit any of his or its Controlled Affiliates to enter into any such
Contract or take any other voluntary action or voluntarily omit to take
any action that would have any such effect.
(b) Except for this Agreement and any Holdco
Stockholders Agreement and except for any Permitted Pledge in effect as
of the date hereof, there is no option, warrant, right, call, proxy, or
Contract that directly or indirectly provides for the sale, pledge or
other
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50
Disposition of any of such Turner Holdco Shares or any interest therein
or any rights with respect thereto, relates to the voting, Disposition
or control of any thereof or obligates or may obligate such Turner
Stockholder or any of his or its Controlled Affiliates to grant, offer
or enter into any of the foregoing. Each of the Turner Stockholders has
delivered to TCITP a true and complete copy of each Holdco Stockholders
Agreement to which it is a party, if any, as amended through and in
effect on the date of this Agreement.
No Turner Stockholder shall permit the amendment of any Holdco Stockholders
Agreement to which it is a party in any manner that would have any effect
referred to in Section 7.2(a).
7.3 Representations and Warranties of Each Party. Each party,
severally and not jointly, represents and warrants to each of the other parties
as follows:
(a) If such party is a corporation or partnership,
such party has all requisite corporate power and authority or
partnership power and authority (as the case may be) to execute,
deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. The execution,
delivery and performance by such party of, and the consummation of the
transactions contemplated by, this Agreement have been duly and validly
authorized by all necessary corporate action or partnership action (as
the case may be) on the part of such party.
(b) If such party is a natural person (whether acting
individually or in a fiduciary capacity), such party has full legal
capacity, right, power and authority to
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51
execute, deliver and perform his or her obligations under this
Agreement and to consummate the transactions contemplated hereby.
(c) This Agreement has been duly executed and
delivered by such party. This Agreement constitutes a legal, valid and
binding obligation of such party enforceable in accordance with its
terms, except that (i) such enforceability may be subject to
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights and (ii) such enforceability may be subject to
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
(d) The execution, delivery and performance of this
Agreement by such party do not, either with or without the giving of
notice or the passage of time or both, (i) assuming compliance with the
requirements referred to in clause (ii) of this sentence, violate or
conflict with any Requirement of Law or Judgment applicable to such
party, (ii) except for (A) requirements, if any, arising out of any
required pre-merger notification and related filings with the FTC and
the Antitrust Division of the Department of Justice pursuant to the
Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, (B)
requirements, if any, arising out of the rules and regulations adopted
by the Federal Communications Commission, and (C) requirements, if any,
arising out of the FTC Consent Decree, require the consent or
authorization of or waiver by or filing with any Governmental Authority
or (iii) conflict with, result in the breach of any provision of,
result in the modification or termination of, require the consent or
authorization of or
<PAGE>
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52
waiver by or filing with any other parties to, or result in the
creation or imposition of any Encumbrance pursuant to, or constitute a
default under, any material agreement, permit, indenture, note, lease,
license or franchise or any other material instrument to which such
party is a party or by which such party's properties or assets are
bound or from which such party derives benefit. For purposes of this
Section 7.3(d), the word "party" includes (i) in the case of Holdco,
Holdco and its Affiliates, and (ii) in the case of any Turner
Stockholder, such Turner Stockholder and his or its Related Parties.
8. No Assignment.
This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective successors and permitted
assigns and, in the event of the incapacity or death of any Turner Stockholder
who is a natural person, his legal representatives, the executor or
administrator of his estate, and his heirs and beneficiaries, as provided in
Section 4 hereof. Except as specifically provided herein, this Agreement and the
rights and obligations of the parties hereunder may not be assigned or
delegated, in whole or in part. Without prejudice to the rights of Holdco under
any other provision of this Agreement, none of the provisions of Section 2
(other than the third sentence of Section 2) of this Agreement are intended to
be for the benefit of or enforceable by Holdco, and Holdco shall not have any
right, remedy or claim against any Stockholder by reason of any breach or
violation thereof.
9. Specific Performance. The parties hereto
acknowledge that the benefits to them under this Agreement are
unique, that they are willing to enter into this Agreement only
upon performance by each other of all of their obligations
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53
hereunder and that monetary damage would not afford adequate remedy for failure
to perform any such obligations hereunder. Accordingly, the parties hereby
consent to specific performance of their obligations hereunder and waive any
requirement for securing or posting of any bond in connection with the obtaining
of any injunctive or other equitable relief to enforce their rights hereunder.
10. Termination, Amendment and Waiver. This Agreement shall
terminate as to all parties on the first to occur of (i) the date on which no
TCITP Stockholder beneficially owns any Covered Securities (otherwise than by
reason of any Disposition made in violation of this Agreement), (ii) the date on
which no Turner Stockholder beneficially owns any Covered Securities (otherwise
than by reason of any Disposition made in violation of this Agreement) and (iii)
any date of termination agreed to by TCITP and Turner. If, by reason of one or
more Dispositions, the number of Holdco Shares directly or indirectly
beneficially owned by the TCITP Stockholders, as a group, or the Turner
Stockholders, as a group, is less than one-third of the number of the shares
beneficially owned by such Group immediately after the Effective Time (which
number, in the case of the TCITP Stockholders, shall be calculated after giving
effect to the exchange required by Section 4.1 of the LMC Agreement and, as to
each Group, shall be appropriately adjusted to take into account any stock
split, reverse stock split, reclassification, recapitalization, conversion,
reorganization, merger or other change in such Holdco Shares) then such group
shall no longer have any right of first refusal under Section 3 or Section 4,
but shall continue to be subject to all obligations and restrictions arising
under this Agreement with respect to all Covered Securities which the members of
that group continue to beneficially own. This Agreement may be amended by the
parties hereto only by an instrument in writing signed by each party;
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54
provided, however, that execution of any such amendment by or on behalf of
Holdco shall not be required unless such amendment adversely affects the rights
or obligations of Holdco hereunder. Any term or provisions of this Agreement may
be waived in writing at any time by the party which is entitled to the benefits
thereof.
11. General Provisions
11.1 All periods of time referred to in this Agreement (other
than references to business days ) shall include all Saturdays, Sundays or State
of New York holidays provided that if the date or last date to perform the act
or give any notice with respect to this Agreement shall fall on a Saturday,
Sunday or State of New York holiday, such act or notice may be timely performed
or given if performed or given on the next succeeding day which is not a
Saturday, Sunday or State of New York holiday.
11.2 All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed
effectively given or delivered upon confirmed facsimile transmission, personal
delivery or the day following delivery to a courier service which guarantees
overnight delivery of such notice or five (5) days after deposit with the U.S.
Post Office, by registered or certified mail, return receipt requested, postage
prepaid, and, in the case of courier or mail delivery, addressed to the intended
recipient at his or its address as shown on Schedule I attached hereto or such
other address as a party may specify in writing.
11.3 This Agreement constitutes the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, whether oral or written, relating to the
subject matter hereof (it being
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55
understood that this Section 11.3 is not intended to obviate the respective
rights and obligations of Turner, Holdco and the other parties thereto under the
Investors Agreement (No. 1) dated as of the same date as this Agreement among
Holdco, Turner, TOI and TP).
11.4 Any provision hereof which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof or thereof, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
11.5 The headings of the articles and sections contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not affect the meaning or interpretation of
this Agreement. The definitions in Section 1 and elsewhere in this Agreement
shall apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The words "herein", "hereof" and "hereunder" and words of similar import refer
to this Agreement in its entirety and not to any part hereof unless the context
shall otherwise require. All references herein to Sections, Exhibits and
Schedules shall be deemed references to and Sections of, and Exhibits and
Schedules to, this Agreement unless the context shall otherwise require. Unless
otherwise expressly provided herein or unless the context shall otherwise
require, any references as of any time to the "Certificate of Incorporation",
"Restated Certification of Incorporation", "Articles of Incorporation",
"charter",
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56
"organizational or governing documents" or "By-laws" of any Entity, to any
agreement (including this Agreement) or other Contract, instrument or document
or to any statute or regulation or any specific section or other provision
thereof are to it as amended and supplemented through such time (and, in the
case of a statute or regulation or specific section or other provision thereof,
to any successor of such statute, regulation, section or other provision).
Unless otherwise expressly provided herein or unless the context shall otherwise
require, any provision of this Agreement using a defined term (by way of example
and without limitation, such as "Controlled Affiliate") which is based on a
specified characteristic, qualification, feature, relationship or status shall,
as of any time, refer only to such Persons who have the specified
characteristic, qualification, feature, relationship or status as of that
particular time.
11.6 This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but which together shall
constitute but one and the same instrument.
11.7 This Agreement and the validity, interpretation and
performance of the terms and provisions hereof shall be governed by, and
construed in accordance with, the laws of the State of New York, without regard
to the provisions thereof relating to choice or conflict of laws, except to the
extent that the laws of the jurisdiction of incorporation of Holdco shall be
mandatorily applicable.
11.8 TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH
PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY (I) SUBMITS, FOR ITSELF AND
ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE OR FEDERAL
COURT SITTING IN NEW YORK CITY (AND OF ANY APPELLATE COURT TO WHICH AN APPEAL OF
ANY JUDGMENT, ORDER, DECREE OR DECISION OF ANY SUCH COURT MAY BE
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57
TAKEN) IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT RENDERED IN ANY SUCH
SUIT, ACTION OR PROCEEDING, (II) WAIVES ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING IN
ANY SUCH COURT, INCLUDING ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM AND (III) WAIVES ALL RIGHTS TO A TRIAL BY
JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING.
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58
IN WITNESS WHEREOF, the parties have executed this
Stockholders' Agreement in two or more counterparts as of the day and year first
above written.
TCI TURNER PREFERRED, INC.
By: /s/ Robert R. Bennett
---------------------------------
Name: Robert R. Bennett
Title: Executive Vice President
LIBERTY BROADCASTING, INC.
By: /s/ Robert R. Bennett
---------------------------------
Name: Robert R. Bennett
Title: Executive Vice President
COMMUNICATION CAPITAL CORP.
By: /s/ Robert R. Bennett
---------------------------------
Name: Robert R. Bennett
Title: Executive Vice President
/s/ R. E. Turner
---------------------------------
R.E. TURNER, III
TURNER OUTDOOR, INC.
By: /s/ R.E. Turner
---------------------------------
Name:
Title:
TURNER PARTNERS, L.P.
By: /s/ R. E. Turner
---------------------------------
Name: R.E. Turner, III
Title: General Partner
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59
TW INC. (which promptly following
the date hereof is changing its name
to Time Warner Inc.)
By: /s/ Thomas W. McEnerney
---------------------------------
Name: Thomas W. McEnerney
Title: Vice President
<PAGE>
<PAGE>
EXECUTION COPY
INVESTORS' AGREEMENT (NO. 1) dated as of
October 10, 1996, among TW INC. (to be
renamed TIME WARNER INC.), a Delaware
corporation ("Holdco"), and the other parties
signatory hereto (each an "Investor").
This Agreement is entered into pursuant to Section 6.02(f) of
the Amended and Restated Agreement and Plan of Merger, dated as of September 22,
1995 (the "Amended and Restated Merger Agreement"), among Time Warner Inc., a
Delaware corporation ("Parent"), Holdco, Time Warner Acquisition Corp., a
Delaware corporation ("Delaware Sub") and a direct wholly owned subsidiary of
Holdco, TW Acquisition Corp., a Georgia corporation ("Georgia Sub") and a direct
wholly owned subsidiary of Holdco, and Turner Broadcasting System, Inc., a
Georgia corporation (the "Company"). In connection with the TBS Merger (as
defined in the Amended and Restated Merger Agreement), subject to certain
exceptions, (a) each share of Class A Common Stock, par value $.0625 per share,
of the Company and each share of Class B Common Stock, par value $.0625 per
share, of the Company will be converted into the right to receive 0.75 shares of
Common Stock, par value $0.01 per share, of Holdco ("Holdco Common Stock") and
(b) each share of Class C Convertible Preferred Stock, par value $.125 per
share, of the Company will be converted into the right to receive 4.80 shares of
Holdco Common Stock. As a condition to the obligations of Parent, Holdco,
Delaware Sub and Georgia Sub to effect the Mergers (as defined in the Amended
and Restated Merger Agreement), Parent, Holdco, Delaware Sub and Georgia Sub
have required that each initial Investor enter into this Agreement.
<PAGE>
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2
Accordingly, it is hereby agreed as follows:
ARTICLE I
Definitions
SECTION 1.01. Definitions. Capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Amended and
Restated Merger Agreement. For purposes of this Agreement, the following terms
shall have the following meanings:
"Affiliate" and "Associate", when used with reference to any
person, shall have the respective meanings ascribed to such terms in Rule 12b-2
of the Exchange Act, as in effect on the date of this Agreement. Neither Holdco
nor any of its subsidiaries or controlled Affiliates, on the one hand, nor the
Principal Investor, on the other hand, shall be an "Affiliate" or an "Associate"
of the other. The Turner Foundation, Inc. and the Robert E. Turner Charitable
Foundation Unitrust No. 2 shall be deemed not to be Affiliate or Associates of
any Investor.
A person shall be deemed the "beneficial owner" of, and shall
be deemed to "beneficially own", and shall be deemed to have "beneficial
ownership" of:
(i) any securities that such person or any of such person's
Affiliates or Associates is deemed to "beneficially own" within the
meaning of Rule 13d-3 under the Exchange Act, as in effect on the date
of this Agreement; and
(ii) any securities (the "underlying securities") that such
person or any of such person's Affiliates or Associates has the right
to acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding (written or oral), or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise (it
being understood that such
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3
person shall also be deemed to be the beneficial owner of the
securities convertible into or exchangeable for the underlying
securities).
"Board" shall mean the board of directors of Holdco.
"Charitable Transferee" shall mean any charitable organization
described in Section 501(c)(3) of the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as in effect on the date in question, unless otherwise specifically provided.
"Investor" shall mean each person that executes this Agreement
in such capacity and each successor, assign and other person that pursuant to
the terms hereof is required to become a party hereto as an Investor.
"Investors' Agreement (No. 2)" shall mean an Investors'
Agreement (No. 2), substantially in the form of Exhibit C-2 to the Amended and
Restated Merger Agreement.
"permitted transferee" of any natural person shall mean (i) in
the case of the death of such person, such person's executors, administrators,
testamentary trustees, heirs, devisees and legatees and (ii) such person's
current or future spouse, parents, siblings or descendants or such parents',
siblings' or descendants' spouses (the "Family Members").
"person" shall have the meaning given such term in the Amended
and Restated Merger Agreement.
"Principal Investor" shall mean R.E. Turner.
"Qualified Stockholder" shall mean any Charitable Transferee
or Qualified Trust from time to time bound as an "Investor" under an Investors'
Agreement (No. 2).
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4
"Qualified Trust" shall mean any trust described in Section
664 of the Code of which the Principal Investor or members of his family are
income beneficiaries.
"Voting Power", when used with reference to any class or
series of securities of Holdco, or any classes or series of securities of Holdco
entitled to vote together as a single class or series, shall mean the power of
such class or series (or such classes or series) to vote for the election of
directors. For purposes of determining the percentage of Voting Power of any
class or series (or classes or series) beneficially owned by any person, any
securities not outstanding which are subject to conversion rights, exchange
rights, rights, warrants, options or similar securities held by such person
shall be deemed to be outstanding for the purpose of computing the percentage of
outstanding securities of the class or series (or classes or series)
beneficially owned by such person, but shall not be deemed to be outstanding for
the purpose of computing the percentage of the class or series (or classes or
series) beneficially owned by any other person.
"Voting Securities", when used with reference to any person,
shall mean any securities of such person having Voting Power or any securities
convertible into or exchangeable for any securities having Voting Power.
ARTICLE II
Securities Act; Legend
SECTION 2.01. Transfers of Holdco Common Stock. None of the
Investors may offer for sale or sell any shares of Holdco Common Stock acquired
pursuant to the Amended and Restated Merger Agreement, or any interest therein,
except (a) pursuant to a registration of such shares under the Securities Act
and applicable state securities laws or (b) in a transaction as to which such
Investor has delivered an opinion of counsel or other evidence reasonably
satisfactory to Holdco, to the effect that such transaction is exempt from, or
not subject to, the registration
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5
requirements of, the Securities Act and applicable state
securities laws.
SECTION 2.02. Legends on Certificates. Each Investor shall
hold in certificate form all shares of Holdco Common Stock owned by such
Investor. Each certificate for shares of Holdco Common Stock issued to or
beneficially owned by a person that is subject to the provisions of this
Agreement shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
INVESTORS' AGREEMENT (NO. 1) DATED AS OF OCTOBER 10, 1996 (THE
"INVESTORS' AGREEMENT"), AMONG THE CORPORATION, THE ORIGINAL HOLDER OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND CERTAIN OTHER
STOCKHOLDERS OF THE CORPORATION. A COPY OF THE INVESTORS' AGREEMENT MAY
BE OBTAINED FROM THE CORPORATION FREE OF CHARGE. BY ITS ACCEPTANCE
HEREOF, THE HOLDER OF THIS CERTIFICATE AGREES TO COMPLY IN ALL RESPECTS
WITH THE REQUIREMENTS OF THE INVESTORS' AGREEMENT.
ARTICLE III
Covenants of the Parties
SECTION 3.01. Standstill. None of the Investors may (and each
Investor shall cause its Affiliates and Associates that it controls, and use
reasonable efforts to cause its other Affiliates and Associates, not to),
without the prior written consent of the Board:
(a) publicly propose that any Investor or Qualified
Stockholder or any Affiliate or Associate of any Investor or Qualified
Stockholder enter into, directly or indirectly, any merger or other
business combination involving Holdco or propose to purchase, directly
or indirectly, a material portion of the assets of Holdco or any
material subsidiary of Holdco, or make any such proposal privately if
it would
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6
reasonably be expected to require Holdco to make a public announcement
regarding such proposal;
(b) make, or in any way participate in, directly or
indirectly, any "solicitation" of "proxies" (as such terms are used in
Regulation 14A promulgated under the Exchange Act) to vote or consent
with respect to any Voting Securities of Holdco or become a
"participant" in any "election contest" (as such terms are defined or
used in Rule 14a-11 under the Exchange Act) with respect to Holdco;
(c) form, join or participate in or encourage the formation of
a "group" (within the meaning of Section 13(d)(3) of the Exchange Act)
with respect to any Voting Securities of Holdco, other than a group
consisting solely of Investors and Qualified Stockholders;
(d) deposit any Voting Securities of Holdco into a voting
trust or subject any such Voting Securities to any arrangement or
agreement with respect to the voting thereof, other than any such
trust, arrangement or agreement (i) the only parties to, or
beneficiaries of, which are Investors and Qualified Stockholders and
(ii) the terms of which do not require or expressly permit any party
thereto to act in a manner inconsistent with this Agreement;
(e) initiate, propose or otherwise solicit stockholders of
Holdco for the approval of one or more stockholder proposals with
respect to Holdco as described in Rule 14a-8 under the Exchange Act, or
induce or attempt to induce any other person to initiate any
stockholder proposal with respect to Holdco;
(f) except in accordance with Section 3.04, seek election to
or seek to place a representative on the Board or seek the removal of
any member of the Board;
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7
(g) call or seek to have called any meeting of the
stockholders of Holdco;
(h)(A) solicit, seek to effect, negotiate with or provide
non-public information to any other person with respect to, (B) make
any statement or proposal, whether written or oral, to the Board or any
director or officer of Holdco with respect to, or (C) otherwise make
any public announcement or proposal whatsoever with respect to any form
of business combination transaction (with any person) involving a
change of control of Holdco or the acquisition of a substantial portion
of the equity securities or assets of Holdco or any material subsidiary
of Holdco, including a merger, consolidation, tender offer, exchange
offer or liquidation of Holdco's assets, or any restructuring,
recapitalization or similar transaction with respect to Holdco or any
material subsidiary of Holdco; provided, however, that the foregoing
shall not (x) apply to any discussion between or among the Investors
and the Qualified Stockholders or any of their respective officers,
employees, agents or representatives or (y) in the case of clause (B)
above, be interpreted to limit the ability of any Investor or Qualified
Stockholder, or any designee of any Investor or Qualified Stockholder,
on the Board to make any such statement or proposal or to discuss any
such proposal with any officer or director of or advisor to Holdco or
advisor to the Board unless, in either case, it would reasonably be
expected to require Holdco to make a public announcement regarding such
discussion, statement or proposal;
(i) otherwise act, alone or in concert with others, to seek to
control or influence the management or policies of Holdco (except for
(A) voting as a holder of Voting Securities in accordance with the
terms of such Voting Securities and (B) actions taken as a director or
officer of Holdco);
(j) publicly disclose any intention, plan or
arrangement inconsistent with the foregoing, or make
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8
any such disclosure privately if it would reasonably be expected to
require Holdco to make a public announcement regarding such intention,
plan or arrangement; or
(k) advise, assist (including by knowingly providing or
arranging financing for that purpose) or knowingly encourage any other
person in connection with any of the foregoing.
SECTION 3.02. Transfer Restrictions. None of the Investors
may, without the prior written consent of Holdco, sell, transfer, pledge,
encumber or otherwise dispose of, or agree to sell, transfer, pledge, encumber
or otherwise dispose of, any Voting Securities of Holdco, or any rights or
options to acquire such Voting Securities, except in a transaction complying
with any of the following clauses:
(a) to the underwriters in connection with an underwritten
public offering of shares of such securities on a firm commitment basis
registered under the Securities Act, pursuant to which the sale of such
securities is in a manner that is intended to effect a broad
distribution;
(b) to any wholly owned subsidiary of such Investor or any
partnership of which such Investor is the sole general partner;
provided, however, that such transferee becomes a party to this
Agreement as an Investor;
(c) to any person in a transaction that complies with the
volume and manner of sale provisions contained in Rule 144(e) and Rule
144(f) as in effect on the date hereof under the Securities Act
(whether or not Rule 144 is in effect on the date of such transaction);
provided, however, that dispositions pursuant to this clause (c) may
not be made during any period that a person has made and not withdrawn
or terminated a tender or exchange offer for Voting Securities of
Holdco or announced its intention to make such an offer;
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9
(d) to any person (including any pledgee of shares of Voting
Securities), other than a person that such Investor, or any of its
Affiliates or Associates, knows or, after commercially reasonable
inquiry should have known, beneficially owns or, after giving effect to
such sale, will beneficially own more than 5% of the aggregate Voting
Power of the Voting Securities of Holdco;
(e) in the case of a natural person, to any permitted
transferee of such person; provided, however, that such transferee
becomes a party to this Agreement as an Investor;
(f) in a bona fide pledge of shares of Voting Securities of
Holdco to a financial institution to secure borrowings as permitted by
applicable laws, rules and regulations; provided, however, that (i)
such financial institution agrees to be bound by this Section 3.02 and
(ii) the borrowings so secured are full recourse obligations of the
pledgor and are entered into substantially simultaneously with such
pledge;
(g) upon five Business Days' prior notice to Holdco, pursuant
to the terms of any tender or exchange offer for Voting Securities of
Holdco made pursuant to the applicable provisions of the Exchange Act
or pursuant to any merger or consolidation of Holdco (but in the case
of any tender or exchange offer, only so long as each Investor and
Qualified Stockholder is at the time in substantial compliance with the
provisions of Sections 3.01 and 3.05(c), whether or not bound by such
provisions, and such tender or exchange offer is not materially related
to any past noncompliance with such provisions by any Investor or
Qualified Stockholder (whether or not bound by such provisions));
(h) a gift to a Charitable Transferee or Qualified Trust;
provided, however, that (i) at the time of such gift, the Principal
Investor and his Family Members constitute a sufficient number of the
directors or
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10
trustees, as appropriate, of such Charitable Transferee or Qualified
Trust to permit approval of matters by such Charitable Transferee or
Qualified Trust without the approval of any other director or trustee
of such Charitable Transferee or Qualified Trust and (ii) such
Charitable Transferee or Qualified Trust is or simultaneously becomes a
Qualified Stockholder (and Holdco agrees upon request to enter into an
Investors' Agreement (No. 2) with such Charitable Transferee or
Qualified Trust);
(i) to TCI Turner Preferred, Inc. ("TCITP") or its designee in
accordance with the Stockholders' Agreement dated as of the same date
as this Agreement among TCITP, Holdco and certain stockholders of
Holdco; or
(j) to Holdco.
SECTION 3.03. Additional Agreements. None of the Investors may
(and each Investor shall cause its Affiliates and Associates that it controls,
and use reasonable efforts to cause its other Affiliates and Associates, not to)
(a) publicly request Holdco or any of its agents, directly or indirectly, to
amend or waive any provision of this Agreement or (b) knowingly take any action
that would reasonably be expected to require Holdco to make a public
announcement regarding the possibility of a transaction with such Investor.
SECTION 3.04. Board Representation. (a) Upon execution of this
Agreement, Holdco shall use reasonable efforts to cause to be elected to the
Board two persons designated by the Principal Investor who are Eligible Persons.
"Eligible Person" means (i) the Principal Investor and (ii) any other individual
(A) who is reasonably acceptable to the Board, (B) whose election to the Board
would not, in the opinion of counsel for Holdco, violate or be in conflict with,
or result in any material limitation on the ownership or operation of any
business or assets of Holdco or any of its subsidiaries under, any statute, law,
ordinance, regulation, rule, judgment, decree or order of any Governmental
Entity and (C) who has agreed in writing
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11
with Holdco to comply with Section 3.01 and to resign as a director of Holdco if
requested to do so pursuant to this Section 3.04. With respect to each meeting
of stockholders of Holdco at which any designee of the Principal Investor on the
Board comes up for reelection, Holdco shall use reasonable efforts to cause such
designee (or another Eligible Person designated by the Principal Investor) to be
included in the list of candidates recommended by the Board for election to the
Board. Upon the death, resignation or removal of any designee of the Principal
Investor on the Board, Holdco shall use reasonable efforts to have the vacancy
thereby created filled with an Eligible Person designated by the Principal
Investor.
(b) Upon the Investors and (subject to Section 3.06) the
Qualified Stockholders, taken together, ceasing to own of record and
beneficially at least 50% of the Voting Securities of Holdco owned by the
Investors and the Qualified Stockholders, taken together, immediately following
the Mergers (appropriately adjusted for stock dividends, stock splits, reverse
stock splits and similar transactions), the number of persons that the Principal
Investor shall be entitled to designate for election to the Board shall be
reduced to one. If at such time there are two designees of the Principal
Investor on the Board, the Principal Investor shall specify which of such
designees shall continue to be entitled to the benefits of Section 3.04(a), and
the other designee shall thereafter cease to constitute a designee of the
Principal Investor for the purposes of Section 3.04(a) (and, if requested by
Holdco, such other designee shall resign from the Board).
(c) Upon (i) (A) the Investors and (subject to Section 3.06)
the Qualified Stockholders, taken together, ceasing to own of record and
beneficially at least one-third of the Voting Securities of Holdco owned by the
Investors and the Qualified Stockholders, taken together, immediately following
the Mergers (appropriately adjusted for stock dividends, stock splits, reverse
stock splits and similar transactions) and (B) the Principal Investor ceasing to
be an employee of Holdco or any subsidiary of Holdco, (ii) the death or
incapacity of the Principal Investor, (iii) the
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12
wilful violation in any material respect of this Article by any Investor or (iv)
five business days' prior written notice of termination from the Principal
Investor, the number of persons that the Principal Investor shall be entitled to
designate for election to the Board shall be reduced to zero. At such time, if
requested by Holdco, each designee of the Principal Investor shall resign from
the Board.
(d) The right of the Principal Investor to membership on the
Board, as set forth in his employment agreement with Holdco to be entered into
at the Effective Time of the Mergers, is not in addition to his rights under
this Section 3.04.
(e) For the purposes of the calculations required by the first
sentence of Section 3.04(b) and by Section 3.04(c)(i)(A), any Exempt Stock (as
defined below) shall be excluded from the calculation of each of (i) the Voting
Securities of Holdco owned of record and beneficially by the Qualified
Stockholders on the date of such calculation and (ii) the Voting Securities of
Holdco owned by the Qualified Stockholders immediately following the Mergers.
"Exempt Stock" shall mean (A) any Holdco Common Stock acquired by any Qualified
Stockholder pursuant to the TBS Merger in exchange for Company Capital Stock
owned by such Qualified Stockholder on September 22, 1995, and (B) any Holdco
Common Stock acquired after the Effective Time of the Mergers by any Qualified
Stockholder other than pursuant to Section 3.02(h).
SECTION 3.05. Additional Covenants. (a) None of the Investors
shall permit any other Investor that is at any time after the date hereof a
wholly owned subsidiary of such Investor to cease to be a wholly owned
subsidiary of such Investor for so long as such other Investor owns any Voting
Securities of Holdco.
(b) None of the Investors shall permit any of its
subsidiaries, other than any such subsidiaries that are Investors, to hold,
directly or indirectly, any shares of Voting Securities of Holdco.
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13
(c) Each Investor shall use reasonable efforts to cause each
of its officers, employees, agents and representatives not to take any action
that would be prohibited under Section 3.01 if taken by such Investor.
SECTION 3.06. Certain Special Provisions. If at any time the
Principal Investor and his Family Members cease to constitute a sufficient
number of the directors or trustees, as applicable, of any Qualified Stockholder
to permit approval of matters by such Qualified Stockholder without the approval
of any other director or trustee of such Qualified Stockholder, the Voting
Securities of Holdco held by such Qualified Stockholder shall thereafter be
deemed not to be owned of record and beneficially by such Qualified Stockholder
(or any Investor) for the purposes of Sections 3.04(b) and 3.04(c). The
Principal Investor shall be liable to Holdco under this Agreement for any
actions taken by any Qualified Stockholder that would have been violations of
Section 3.01, 3.03 or 3.05(c) had such Qualified Stockholder been bound by such
Sections.
ARTICLE IV
Miscellaneous
SECTION 4.01. Termination. (a) The covenants and agreements of
the Investors in Sections 3.01, 3.03 and 3.05(c) shall terminate, except with
respect to liability for prior breaches thereof, upon the last to occur of (i)
the Principal Investor ceasing to be an employee of Holdco or any subsidiary of
Holdco, (ii) the Principal Investor ceasing to be a member of the Board, and
(iii) the Principal Investor ceasing pursuant to Section 3.04(c) to be entitled
to designate any Eligible Persons for election to the Board.
(b) The covenants and agreements of the Investors in Section
3.02 shall terminate, except with respect to liability for prior breaches
thereof, on the fifth anniversary of the Effective Time of the Mergers.
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14
(c) The covenants and agreements of Holdco in Section 3.04
shall terminate, except with respect to liability for prior breaches thereof,
upon the Principal Investor ceasing pursuant to Section 3.04(c) to be entitled
to designate any Eligible Persons for election to the Board.
(d) Without limiting Sections 4.01(a) and 4.01(b), the
covenants and agreements of the Investors in Article III shall terminate, except
with respect to liability for prior breaches thereof, if the Board does not (i)
on the date of execution of this Agreement, elect to the Board the two Eligible
Persons designated by the Principal Investor, (ii) recommend for election by the
stockholders of Holdco to the Board any Eligible Person designated by the
Principal Investor in accordance with Section 3.04 or (iii) reasonably promptly
after request from the Principal Investor, fill any vacancy created on the Board
upon the death, resignation or removal of any designee of the Principal Investor
on the Board with another Eligible Person designated by the Principal Investor,
in each case if the effect of such failure is that the Principal Investor does
not have the representation on the Board to which he is entitled under Section
3.04.
(e) The other covenants and agreements set forth in this
Agreement shall terminate, except with respect to liability for prior breaches
thereof, upon the later of (i) the termination of Section 3.01 pursuant to
Section 4.01(a) or 4.01(d) and (ii) the termination of Section 3.02 pursuant to
Section 4.01(b) or 4.01(d).
SECTION 4.02. Entire Agreement; Assignment. This Agreement (i)
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (ii) except as provided in Section 3.02, shall not be assigned by operation
of law or otherwise without the prior written consent of the other parties. Any
person who agrees pursuant to Section 3.02 to become a party to this Agreement
as an Investor shall thereupon become, and have all the rights and obligations
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15
of, an Investor hereunder. Any attempted assignment or transfer in violation of
this Section 4.02 shall be void and of no effect. Subject to the foregoing, the
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective estates, heirs, successors and assigns.
SECTION 4.03. Amendments; Waivers. This Agreement may not be
modified, amended, altered or supplemented, except upon the execution and
delivery of a written agreement executed by the parties hereto. The waiver by
any party of a breach of any provision of this Agreement shall not operate, or
be construed, as a waiver of any subsequent breach thereof.
SECTION 4.04. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be deemed given
(i) on the first Business Day following the date received, if delivered
personally or by telecopy (with telephonic confirmation of receipt by the
addressee), (ii) on the Business Day following timely deposit with an overnight
courier service, if sent by overnight courier specifying next day delivery and
(iii) on the first Business Day that is at least five days following deposit in
the mails, if sent by first class mail, to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to any Investor, to:
R.E. Turner
In care of Turner Broadcasting System,
Inc.
One CNN Center
Box 105366
Atlanta, GA 30348-5366
Facsimile: (404) 827-3000
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16
For Courier delivery:
One CNN Center
Atlanta, GA 30303
Attention: General Counsel
If to Holdco, to:
Time Warner Inc.
75 Rockefeller Plaza
New York, NY 10019
Facsimile: (212) 956-7281
Attention: General Counsel
with a copy (which shall not constitute
notice) to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Facsimile: (212) 474-3700
Attention: Peter S. Wilson, Esq.
SECTION 4.05. Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware.
SECTION 4.06. Specific Performance. Each party recognizes and
acknowledges that a breach by it of Article III would cause the other parties to
sustain damages for which they would not have an adequate remedy at law for
money damages, and therefore each party agrees that in the event of any such
breach any of the other parties shall be entitled to seek the remedy of specific
performance of such Article III and injunctive and other equitable relief in
addition to any other remedy to which it may be entitled, at law or in equity.
SECTION 4.07. Counterparts; Effectiveness. This Agreement may
be executed in two or more counterparts, all of which shall be considered one
and the same agreement, and
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17
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 4.08. Descriptive Headings. The descriptive headings
used herein are inserted for convenience of reference only and are not intended
to be part of or to affect the meaning or interpretation of this Agreement.
SECTION 4.09. Severability. Whenever possible, each provision
or portion of any provision of this Agreement shall be interpreted in such
manner as to be effective but if any provision or portion of any provision of
this Agreement is held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision or portion of any provision, and this Agreement will be reformed,
construed and enforced as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein. The parties shall
endeavor in good faith negotiations to replace any invalid, illegal or
unenforceable provision with a valid provision the effects of which come as
close as possible to those of such invalid, illegal or unenforceable provision.
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18
SECTION 4.10. Attorneys' Fees. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements, in addition to any other relief to which such party may
be entitled.
IN WITNESS WHEREOF, Holdco and each Investor have caused this
Agreement to be duly executed as of the day and year first above written.
TW INC.,
by /s/ Thomas W. McEnerney
------------------------------
Name: Thomas W. McEnerney
Title: Vice President
/s/ R. E. Turner
--------------------------------
R. E. Turner
TURNER OUTDOOR, INC.,
by /s/ R. E. Turner
------------------------------
Name: R. E. Turner
Title: President
TURNER PARTNERS, L.P.,
by /s/ R. E. Turner
------------------------------
Name: R. E. Turner
Title: General Partner
<PAGE>
<PAGE>
EXECUTION COPY
INVESTORS' AGREEMENT (NO. 2) dated as of
October 10, 1996, among TW INC. (to be
renamed TIME WARNER INC.), a Delaware
corporation ("Holdco"), and the other parties
signatory hereto (each an "Investor").
This Agreement is entered into pursuant to Section 6.02(f) of
the Amended and Restated Agreement and Plan of Merger (the "Amended and Restated
Merger A Agreement"), among Time Warner Inc., a Delaware corporation ("Parent"),
Holdco, Time Warner Acquisition Corp., a Delaware corporation and a direct
wholly owned subsidiary of Holdco, TW Acquisition Corp., a Georgia corporation
and a direct wholly owned subsidiary of Holdco, and Turner Broadcasting System,
Inc., a Georgia corporation (the "Company"). In connection with the TBS Merger
(as defined in the Amended and Restated Merger Agreement), subject to certain
exceptions, (a) each share of Class A Common Stock, par value $.0625 per share,
of the Company and each share of Class B Common Stock, par value $.0625 per
share, of the Company will be converted into the right to receive 0.75 shares of
Common Stock, par value $0.01 per share, of Holdco ("Holdco Common Stock") and
(b) each share of Class C Convertible Preferred Stock, par value $.125 per
share, of the Company will be converted into the right to receive 4.80 shares of
Holdco Common Stock.
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2
Accordingly, it is hereby agreed as follows:
ARTICLE I
Definitions
SECTION 1.01. Definitions. Capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Amended and
Restated Merger Agreement. For purposes of this Agreement, the following terms
shall have the following meanings:
"Affiliate" and "Associate", when used with reference to any
person, shall have the respective meanings ascribed to such terms in Rule 12b-2
of the Exchange Act, as in effect on the date of this Agreement.
A person shall be deemed the "beneficial owner" of, and shall
be deemed to "beneficially own", and shall be deemed to have "beneficial
ownership" of:
(i) any securities that such person or any of such person's
Affiliates or Associates is deemed to "beneficially own" within the
meaning of Rule 13d-3 under the Exchange Act, as in effect on the date
of this Agreement; and
(ii) any securities (the "underlying securities") that such
person or any of such person's Affiliates or Associates has the right
to acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding (written or oral), or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise (it
being understood that such person shall also be deemed to be the
beneficial owner of the securities convertible into or exchangeable for
the underlying securities).
"Covered Holdco Common Stock" shall mean (i) any shares of
Holdco Common Stock transferred to an Investor
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3
pursuant to Section 3.02(h) of the Investors' Agreement (No. 1) dated as of
October 10, 1996, among Holdco and certain stockholders of Holdco and (ii) any
shares of Holdco Common Stock acquired by any Investor pursuant to the TBS
Merger otherwise than in exchange for Company Common Stock owned by such
Investor on September 22, 1995.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as in effect on the date in question, unless otherwise specifically provided.
"Investor" shall mean each person that executes this Agreement
in such capacity.
"person" shall have the meaning given such term in the Amended
and Restated Merger Agreement.
"Voting Power", when used with reference to any class or
series of securities of Holdco, or any classes or series of securities of Holdco
entitled to vote together as a single class or series, shall mean the power of
such class or series (or such classes or series) to vote for the election of
directors. For purposes of determining the percentage of Voting Power of any
class or series (or classes or series) beneficially owned by any person, any
securities not outstanding which are subject to conversion rights, exchange
rights, rights, warrants, options or similar securities held by such person
shall be deemed to be outstanding for the purpose of computing the percentage of
outstanding securities of the class or series (or classes or series)
beneficially owned by such person, but shall not be deemed to be outstanding for
the purpose of computing the percentage of the class or series (or classes or
series) beneficially owned by any other person.
"Voting Securities", when used with reference to any person,
shall mean any securities of such person having Voting Power or any securities
convertible into or exchangeable for any securities having Voting Power.
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4
ARTICLE II
Securities Act; Legend
SECTION 2.01. Transfers of Holdco Common Stock. None of the
Investors may offer for sale or sell any shares of Holdco Common Stock acquired
pursuant to the Amended and Restated Merger Agreement, or any interest therein,
except (a) pursuant to a registration of such shares under the Securities Act
and applicable state securities laws or (b) in a transaction as to which such
Investor has delivered an opinion of counsel or other evidence reasonably
satisfactory to Holdco, to the effect that such transaction is exempt from, or
not subject to, the registration requirements of, the Securities Act and
applicable state securities laws.
SECTION 2.02. Legends on Certificates. Each Investor shall
hold in certificate form all shares of Covered Holdco Common Stock owned by such
Investor. Each certificate for shares of Covered Holdco Common Stock issued to
or beneficially owned by a person that is subject to the provisions of this
Agreement shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
INVESTORS' AGREEMENT (NO. 2) DATED AS OF OCTOBER 10, 1996 (THE
"INVESTORS' AGREEMENT"), BETWEEN THE CORPORATION AND THE HOLDER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE. A COPY OF THE INVESTORS'
AGREEMENT MAY BE OBTAINED FROM THE CORPORATION FREE OF CHARGE. BY ITS
ACCEPTANCE HEREOF, THE HOLDER OF THIS CERTIFICATE AGREES TO COMPLY IN
ALL RESPECTS WITH THE REQUIREMENTS OF THE INVESTORS' AGREEMENT.
ARTICLE III
Covenants of the Investors
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5
SECTION 3.01. Transfer Restrictions. None of the Investors
may, without the prior written consent of Holdco, sell, transfer, pledge,
encumber or otherwise dispose of, or agree to sell, transfer, pledge, encumber
or otherwise dispose of, any Covered Holdco Common Stock, or any rights or
options to acquire Covered Holdco Common Stock, except in a transaction
complying with any of the following clauses:
(a) to the underwriters in connection with an underwritten
public offering of shares of such securities on a firm commitment basis
registered under the Securities Act, pursuant to which the sale of such
securities is in a manner that is intended to effect a broad
distribution;
(b) to any person in a transaction that complies with the
volume and manner of sale provisions contained in Rule 144(e) and Rule
144(f) as in effect on the date hereof under the Securities Act
(whether or not Rule 144 is in effect on the date of such transaction);
provided, however, that dispositions pursuant to this clause (b) may
not be made during any period that a person has made and not withdrawn
or terminated a tender or exchange offer for Voting Securities of
Holdco or announced its intention to make such an offer;
(c) to any person (including any pledgee of Covered Holdco
Common Stock), other than a person that such Investor, or any of its
Affiliates, Associates, directors or trustees, knows or, after
commercially reasonable inquiry should have known, beneficially owns
or, after giving effect to such sale, will beneficially own more than
5% of the aggregate Voting Power of the Voting Securities of Holdco;
(d) in a bona fide pledge of shares of Covered Holdco Common
Stock to a financial institution to secure borrowings as permitted by
applicable laws, rules and regulations; provided, however, that (i)
such financial institution agrees to be bound by this Section 3.01 and
(ii) the borrowings so secured are
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6
full recourse obligations of the pledgor and are entered into
substantially simultaneously with such pledge;
(e) upon five Business Days' prior notice to Holdco, pursuant
to the terms of any tender or exchange offer for Covered Holdco Common
Stock made pursuant to the applicable provisions of the Exchange Act or
pursuant to any merger or consolidation of Holdco;
(f) to TCI Turner Preferred, Inc. ("TCITP") or its designee in
accordance with the Stockholders' Agreement dated as of October 10,
1996, among TCITP, Holdco and certain stockholders of Holdco; or
(g) to Holdco.
ARTICLE IV
Miscellaneous
SECTION 4.01. Termination. The covenants and agreements of the
Investors in Section 3.01 shall terminate, except with respect to liability for
prior breaches thereof, on the earlier of (a) the fifth anniversary of the
Effective Time of the Mergers and (b) the date on which the covenants and
agreements contained in Section 3.02 of the Investors' Agreement (No. 1) dated
as of October 10, 1996, among Holdco and certain of its other stockholders, have
been terminated.
SECTION 4.02. Entire Agreement; Assignment. This Agreement (i)
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (ii) shall not be assigned by operation of law or otherwise without the
prior written consent of the other parties. Any attempted assignment or transfer
in violation of this Section 4.02 shall be void and of no effect. Subject to the
foregoing, the provisions of this Agreement shall be binding upon and inure to
the
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7
benefit of the parties hereto and their respective successors and assigns.
SECTION 4.03. Amendments; Waivers. This Agreement may not be
modified, amended, altered or supplemented, except upon the execution and
delivery of a written agreement executed by the parties hereto. The waiver by
any party of a breach of any provision of this Agreement shall not operate, or
be construed, as a waiver of any subsequent breach thereof.
SECTION 4.04. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be deemed given
(i) on the first Business Day following the date received, if delivered
personally or by telecopy (with telephonic confirmation of receipt by the
addressee), (ii) on the Business Day following timely deposit with an overnight
courier service, if sent by overnight courier specifying next day delivery and
(iii) on the first Business Day that is at least five days following deposit in
the mails, if sent by first class mail, to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to any Investor, to:
R.E. Turner
In care of Turner Broadcasting System, Inc.
One CNN Center
Box 105366
Atlanta, GA 30348-5366
Facsimile: (404) 827-3000
For Courier delivery:
One CNN Center
Atlanta, GA 30303
Attention: General Counsel
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8
If to Holdco, to:
Time Warner Inc.
75 Rockefeller Plaza
New York, NY 10019
Facsimile: (212) 956-7281
Attention: General Counsel
with a copy (which shall not constitute notice)
to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Facsimile: (212) 474-3700
Attention: Peter S. Wilson, Esq.
SECTION 4.05. Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware.
SECTION 4.06. Specific Performance. Each party recognizes and
acknowledges that a breach by it of Article III would cause the other parties to
sustain damages for which they would not have an adequate remedy at law for
money damages, and therefore each party agrees that in the event of any such
breach any of the other parties shall be entitled to seek the remedy of specific
performance of such Article III and injunctive and other equitable relief in
addition to any other remedy to which it may be entitled, at law or in equity.
SECTION 4.07. Counterparts; Effectiveness. This Agreement may
be executed in two or more counterparts, all of which shall be considered one
and the same agreement, and shall become effective when two or more counterparts
have been signed by each of the parties and delivered to the other parties.
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9
SECTION 4.08. Descriptive Headings. The descriptive headings
used herein are inserted for convenience of reference only and are not intended
to be part of or to affect the meaning or interpretation of this Agreement.
SECTION 4.09. Severability. Whenever possible, each provision
or portion of any provision of this Agreement shall be interpreted in such
manner as to be effective but if any provision or portion of any provision of
this Agreement is held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision or portion of any provision, and this Agreement will be reformed,
construed and enforced as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein. The parties shall
endeavor in good faith negotiations to replace any invalid, illegal or
unenforceable provision with a valid provision the effects of which come as
close as possible to those of such invalid, illegal or unenforceable provision.
SECTION 4.10. Attorneys' Fees. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements, in addition to any other relief to which such party may
be entitled.
IN WITNESS WHEREOF, Holdco and each Investor have caused this
Agreement to be duly executed as of the day and year first above written.
TW INC.,
by /s/ Thomas W. McEnerney
------------------------------
Name: Thomas W. McEnerney
Title: Vice President
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10
INITIAL INVESTORS:
TURNER FOUNDATION, INC.,
by /s/ R. E. Turner
--------------------------
Name: R. E. Turner
Title: President
ROBERT E. TURNER CHARITABLE
REMAINDER UNITRUST NO. 2,
by /s/ R. E. Turner
--------------------------
Name: R. E. Turner
Title: Trustee
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<PAGE>
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT, dated as of
October 10, 1996, among TW INC. (to be renamed TIME
WARNER INC.), a Delaware corporation (the "Company"),
and the Holders (as defined below).
WHEREAS, in connection with the Amended and Restated Agreement
and Plan of Merger, dated as of September 22, 1995 (the "Amended and Restated
Merger Agreement"), among Time Warner Inc., a Delaware corporation ("Parent"),
the Company, Time Warner Acquisition Corp., a Delaware corporation and a direct
wholly owned subsidiary of the Company, TW Acquisition Corp., a Georgia
corporation and a direct wholly owned subsidiary of the Company, and Turner
Broadcasting System, Inc., a Georgia corporation, each initial Holder will
receive shares of Common Stock (as defined below); and
WHEREAS, in order to induce the initial Holders to execute and
deliver to the Company the letters contemplated by Section 5.11 of the Amended
and Restated Merger Agreement, the Company has agreed to provide each Holder
with the registration rights set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto,
intending to be legally bound hereby, agree as follows:
SECTION 1. Definitions. As used in this Agreement, the
following terms shall have the following meanings:
"Advice" shall have the meaning set forth in Section 5 hereof.
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2
"Affiliate" means, with respect to any specified person, any
other person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified person. For the purposes of this
definition, "control" when used with respect to any specified person means the
power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Amended and Restated Merger Agreement" shall have the meaning
set forth in the introductory clauses hereof.
"Business Day" means any day that is not a Saturday, a Sunday
or a legal holiday on which banking institutions in the State of New York are
not required to be open.
"Capital Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated) of
corporate stock issued by such person, including each class of common stock and
preferred stock of such person.
"Common Stock" means the Common Stock, par value $0.01 per
share, of the Company issued to any Holder named on the signature pages hereof
or any other shares of capital stock or other securities of the Company into
which such shares of Common Stock shall be reclassified or changed, including,
by reason of a merger, consolidation, reorganization or recapitalization. If the
Common Stock has been so reclassified or changed, or if the Company pays a
dividend or makes a distribution on the Common Stock in shares of capital stock,
or subdivides (or combines) its outstanding shares of Common Stock into a
greater (or smaller) number of shares of Common Stock, a share of Common Stock
shall be deemed to be such number of shares of stock and amount of other
securities to which a holder of a share
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3
of Common Stock outstanding immediately prior to such change, reclassification,
exchange, dividend, distribution, subdivision or combination would be entitled.
"Company" shall have the meaning set forth in the introductory
clauses hereof.
"Delay Period" shall have the meaning set forth in Section
2(d) hereof.
"Demand Notice" shall have the meaning set forth in Section
2(a) hereof.
"Demand Registration" shall have the meaning set forth in
Section 2(b) hereof.
"Effectiveness Period" shall have the meaning set forth in
Section 2(d) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder.
"Hold Back Period" shall have the meaning set forth in Section
4 hereof.
"Holder" means a person who owns Registrable Shares and is
either (i) named on the signature pages hereof as a Holder, or (ii) a person who
has agreed to be bound by the terms of this Agreement as if such person were a
Holder and is (A) a person to whom a Holder has transferred Registrable Shares
pursuant to Rule "4(1-1/2)" (or any similar private transfer exemption), (B)
upon the death of any Holder, the executor of the estate of such Holder or any
of such Holder's heirs, devisees, legatees or assigns or (C) upon the disability
of any Holder, any guardian or conservator of such Holder.
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4
"Interruption Period" shall have the meaning set forth in
Section 5 hereof.
"person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Piggyback Registration" shall have the meaning set forth in
Section 3 hereof.
"Prospectus" means the prospectus included in any Registration
Statement (including a prospectus that discloses information previously omitted
from a prospectus filed as part of an effective registration statement in
reliance upon Rule 430A), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Shares covered by such Registration Statement and all other
amendments and supplements to such prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such prospectus.
"Registrable Shares" means shares of Common Stock unless (i)
they have been effectively registered under Section 5 of the Securities Act and
disposed of pursuant to an effective Registration Statement, (ii) such
securities can be freely sold and transferred without restriction under Rule 145
or any other restrictions under the Securities Act or (iii) such securities have
been transferred pursuant to Rule 144 under the Securities Act or any successor
rule such that, after any such transfer referred to in this clause (iii), such
securities may be freely transferred without restriction under the Securities
Act.
"Registration" means registration under the Securities Act of
an offering of Registrable Shares pursuant to a Demand Registration or a
Piggyback Registration.
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5
"Registration Period" shall have the meaning set forth in
Section 2(a) hereof.
"Registration Statement" means any registration statement
under the Securities Act of the Company that covers any of the Registrable
Shares pursuant to the provisions of this Agreement, including the related
Prospectus, all amendments and supplements to such registration statement,
including pre- and post-effective amendments, all exhibits thereto and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the SEC promulgated thereunder.
"Shelf Registration" shall have the meaning set forth in
Section 2(b) hereof.
"underwritten registration or underwritten offering" means a
registration under the Securities Act in which securities of the Company are
sold to an underwriter for reoffering to the public.
SECTION 2. Demand Registration. (a) The Holders shall have the
right, during the period (the "Registration Period") commencing on the date of
this Agreement and ending on the third anniversary of the date of this
Agreement, by written notice (the "Demand Notice") given to the Company, to
request the Company to register under and in accordance with the provisions of
the Securities Act all or any portion of the Registrable Shares designated by
such Holders; provided, however, that the aggregate number of Registrable Shares
requested to be registered pursuant to any Demand Notice and pursuant to any
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6
related Demand Notices received pursuant to the following sentence shall be at
least 5,000,000. Upon receipt of any such Demand Notice, the Company shall
promptly notify all other Holders of the receipt of such Demand Notice and allow
them the opportunity to include Registrable Shares held by them in the proposed
registration by submitting their own Demand Notice. In connection with any
Demand Registration in which more than one Holder participates, in the event
that such Demand Registration involves an underwritten offering and the managing
underwriter or underwriters participating in such offering advise in writing the
Holders of Registrable Shares to be included in such offering that the total
number of Registrable Shares to be included in such offering exceeds the amount
that can be sold in (or during the time of) such offering without delaying or
jeopardizing the success of such offering (including the price per share of the
Registrable Shares to be sold), then the amount of Registrable Shares to be
offered for the account of such Holders shall be reduced pro rata on the basis
of the number of Registrable Shares to be registered by each such Holder. The
Holders as a group shall be entitled to three Demand Registrations pursuant to
this Section 2 unless any Demand Registration does not become effective or is
not maintained for a period (whether or not continuous) of at least 120 days (or
such shorter period as shall terminate when all the Registrable Shares covered
by such Demand Registration have been sold pursuant thereto), in which case the
Holders will be entitled to an additional Demand Registration pursuant hereto.
(b) The Company, within 45 days of the date on which the
Company receives a Demand Notice given by Holders in accordance with Section
2(a) hereof, shall file with the SEC, and the Company shall thereafter use its
best efforts to cause to be declared effective, a Registration Statement on the
appropriate form for the registration and sale, in accordance with the intended
method or methods of distribution, of the total number of Registrable Shares
specified by the Holders in such Demand Notice, which may
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7
include a "shelf" registration (a "Shelf Registration") pursuant to Rule 415
under the Securities Act (a "Demand Registration").
(c) The Company shall use commercially reasonable efforts to
keep each Registration Statement filed pursuant to this Section 2 continuously
effective and usable for the resale of the Registrable Shares covered thereby
(i) in the case of a Registration that is not a Shelf Registration, for a period
of 120 days from the date on which the SEC declares such Registration Statement
effective and (ii) in the case of a Shelf Registration, for a period of 180 days
from the date on which the SEC declares such Registration Statement effective,
in either case (x) until all the Registrable Shares covered by such Registration
Statement have been sold pursuant to such Registration Statement), and (y) as
such period may be extended pursuant to this Section 2.
(d) The Company shall be entitled to postpone the filing of
any Registration Statement otherwise required to be prepared and filed by the
Company pursuant to this Section 2, or suspend the use of any effective
Registration Statement under this Section 2, for a reasonable period of time,
but not in excess of 90 days (a "Delay Period"), if any executive officer of the
Company determines that in such executive officer's reasonable judgment and good
faith the registration and distribution of the Registrable Shares covered or to
be covered by such Registration Statement would materially interfere with any
pending material financing, acquisition or corporate reorganization or other
material corporate development involving the Company or any of its subsidiaries
or would require premature disclosure thereof and promptly gives the Holders
written notice of such determination, containing a general statement of the
reasons for such postponement and an approximation of the period of the
anticipated delay; provided, however, that (i) the aggregate number of days
included in all Delay Periods during any consecutive 12 months shall not exceed
the aggregate of (x) 180 days minus (y) the number of days
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8
occurring during all Hold Back Periods and Interruption Periods during such
consecutive 12 months and (ii) a period of at least 60 days shall elapse between
the termination of any Delay Period, Hold Back Period or Interruption Period and
the commencement of the immediately succeeding Delay Period. If the Company
shall so postpone the filing of a Registration Statement, the Holders of
Registrable Shares to be registered shall have the right to withdraw the request
for registration by giving written notice from the Holders of a majority of the
Registrable Shares that were to be registered to the Company within 45 days
after receipt of the notice of postponement or, if earlier, the termination of
such Delay Period (and, in the event of such withdrawal, such request shall not
be counted for purposes of determining the number of requests for registration
to which the Holders of Registrable Shares are entitled pursuant to this Section
2). The time period for which the Company is required to maintain the
effectiveness of any Registration Statement shall be extended by the aggregate
number of days of all Delay Periods, all Hold Back Periods and all Interruption
Periods occurring during such Registration and such period and any extension
thereof is hereinafter referred to as the "Effectiveness Period". The Company
shall not be entitled to initiate a Delay Period unless it shall (A) to the
extent permitted by agreements with other security holders of the Company,
concurrently prohibit sales by such other security holders under registration
statements covering securities held by such other security holders and (B) in
accordance with the Company's policies from time to time in effect, forbid
purchases and sales in the open market by senior executives of the Company.
(e) Except to the extent required by agreements with other
security holders of the Company or Parent entered into prior to September 22,
1995, the Company shall not include any securities that are not Registrable
Shares in any Registration Statement filed pursuant to this Section 2 without
the prior written consent of the Holders of a
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9
majority in number of the Registrable Shares covered by such Registration
Statement.
(f) Holders of a majority in number of the Registrable Shares
to be included in a Registration Statement pursuant to this Section 2 may, at
any time prior to the effective date of the Registration Statement relating to
such Registration, revoke such request by providing a written notice to the
Company revoking such request. The Holders of Registrable Shares who revoke such
request shall reimburse the Company for all its out-of-pocket expenses incurred
in the preparation, filing and processing of the Registration Statement;
provided, however, that, if such revocation was based on the Company's failure
to comply in any material respect with its obligations hereunder, such
reimbursement shall not be required.
SECTION 3. Piggyback Registration. (a) Right To Piggyback. If
at any time during the Registration Period the Company proposes to file a
registration statement under the Securities Act with respect to a public
offering of securities of the same type as the Registrable Shares pursuant to a
firm commitment underwritten offering solely for cash for its own account (other
than a registration statement (i) on Form S-8 or any successor forms thereto, or
(ii) filed solely in connection with a dividend reinvestment plan or employee
benefit plan covering officers or directors of the Company or its Affiliates) or
for the account of any holder of securities of the same type as the Registrable
Shares (to the extent that the Company has the right to include Registrable
Shares in any registration statement to be filed by the Company on behalf of
such holder), then the Company shall give written notice of such proposed filing
to the Holders at least 15 days before the anticipated filing date. Such notice
shall offer the Holders the opportunity to register such amount of Registrable
Shares as they may request (a "Piggyback Registration"). Subject to Section 3(b)
hereof, the Company shall include in each such Piggyback Registration all
Registrable Shares with respect
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10
to which the Company has received written requests for inclusion therein within
10 days after notice has been given to the Holders. Each Holder shall be
permitted to withdraw all or any portion of the Registrable Shares of such
Holder from a Piggyback Registration at any time prior to the effective date of
such Piggyback Registration; provided, however, that if such withdrawal occurs
after the filing of the Registration Statement with respect to such Piggyback
Registration, the withdrawing Holders shall reimburse the Company for the
portion of the registration expenses payable with respect to the Registrable
Shares so withdrawn.
(b) Priority on Piggyback Registrations. The Company shall
permit the Holders to include all such Registrable Shares on the same terms and
conditions as any similar securities, if any, of the Company included therein.
Notwithstanding the foregoing, if the Company or the managing underwriter or
underwriters participating in such offering advise the Holders in writing that
the total amount of securities requested to be included in such Piggyback
Registration exceeds the amount which can be sold in (or during the time of)
such offering without delaying or jeopardizing the success of the offering
(including the price per share of the securities to be sold), then the amount of
securities to be offered for the account of the Holders and other holders of
securities who have piggyback registration rights with respect thereto shall be
reduced (to zero if necessary) pro rata on the basis of the number of common
stock equivalents requested to be registered by each such Holder or holder
participating in such offering.
(c) Right To Abandon. Nothing in this Section 3 shall create
any liability on the part of the Company to the Holders if the Company in its
sole discretion should decide not to file a registration statement proposed to
be filed pursuant to Section 3(a) hereof or to withdraw such registration
statement subsequent to its filing, regardless of any action whatsoever that a
Holder may have taken,
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11
whether as a result of the issuance by the Company of any notice hereunder or
otherwise.
SECTION 4. Holdback Agreement. If (i) during the Effectiveness
Period, the Company shall file a registration statement (other than in
connection with the registration of securities issuable pursuant to an employee
stock option, stock purchase or similar plan or pursuant to a merger, exchange
offer or a transaction of the type specified in Rule 145(a) under the Securities
Act) with respect to the Common Stock or similar securities or securities
convertible into, or exchangeable or exercisable for, such securities and (ii)
with reasonable prior notice, the Company (in the case of a nonunderwritten
public offering by the Company pursuant to such registration statement) advises
the Holders in writing that a public sale or distribution of such Registrable
Shares would materially adversely affect such offering or the managing
underwriter or underwriters (in the case of an underwritten public offering by
the Company pursuant to such registration statement) advises the Company in
writing (in which case the Company shall notify the Holders) that a public sale
or distribution of Registrable Shares would materially adversely impact such
offering, then each Holder shall, to the extent not inconsistent with applicable
law, refrain from effecting any public sale or distribution of Registrable
Shares during the 10 days prior to the effective date of such registration
statement and until the earliest of (A) the abandonment of such offering, (B) 90
days from the effective date of such registration statement and (C) if such
offering is an underwritten offering, the termination in whole or in part of any
"hold back" period obtained by the underwriter or underwriters in such offering
from the Company in connection therewith (each such period, a "Hold Back
Period").
SECTION 5. Registration Procedures. In connection with the
registration obligations of the Company pursuant to and in accordance with
Sections 2 and 3 hereof (and subject to Sections 2 and 3 hereof), the Company
shall
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12
use commercially reasonable efforts to effect such registration to permit the
sale of such Registrable Shares in accordance with the intended method or
methods of disposition thereof, and pursuant thereto the Company shall as
expeditiously as possible (but subject to Sections 2 and 3 hereof):
(a) prepare and file with the SEC a Registration Statement for
the sale of the Registrable Shares on any form for which the Company
then qualifies or which counsel for the Company shall deem appropriate
in accordance with such Holders' intended method or methods of
distribution thereof, subject to Section 2(b) hereof, and, subject to
the Company's right to terminate or abandon a registration pursuant to
Section 3(c) hereof, use commercially reasonable efforts to cause such
Registration Statement to become effective and remain effective as
provided herein;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) to such Registration Statement, and such
supplements to the related Prospectus, as may be required by the rules,
regulations or instructions applicable to the Securities Act during the
applicable period in accordance with the intended methods of
disposition specified by the Holders of the Registrable Shares covered
by such Registration Statement, make generally available earnings
statements satisfying the provisions of Section 11(a) of the Securities
Act (provided that the Company shall be deemed to have complied with
this clause if it has complied with Rule 158 under the Securities Act),
and cause the related Prospectus as so supplemented to be filed
pursuant to Rule 424 under the Securities Act; provided, however, that
before filing a Registration Statement or Prospectus, or any amendments
or supplements thereto (other than reports required to be filed by it
under the Exchange Act), the Company shall furnish to the Holders of
Registrable Shares
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13
covered by such Registration Statement and their counsel for review and
comment, copies of all documents required to be filed;
(c) notify the Holders of any Registrable Shares covered by
such Registration Statement promptly and (if requested) confirm such
notice in writing, (i) when a Prospectus or any Prospectus supplement
or post-effective amendment has been filed, and, with respect to such
Registration Statement or any post-effective amendment, when the same
has become effective, (ii) of any request by the SEC for amendments or
supplements to such Registration Statement or the related Prospectus or
for additional information regarding such Holders, (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of
such Registration Statement or the initiation of any proceedings for
that purpose, (iv) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for
such purpose, and (v) of the happening of any event that requires the
making of any changes in such Registration Statement, Prospectus or
documents incorporated or deemed to be incorporated therein by
reference so that they will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading:
(d) use commercially reasonable efforts to obtain the
withdrawal of any order suspending the effectiveness of such
Registration Statement, or the lifting of any suspension of the
qualification or exemption from qualification of any Registrable Shares
for sale in any jurisdiction in the United States;
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14
(e) furnish to the Holder of any Registrable Shares covered by
such Registration Statement, each counsel for such Holders and each
managing underwriter, if any, without charge, one conformed copy of
such Registration Statement, as declared effective by the SEC, and of
each post-effective amendment thereto, in each case including financial
statements and schedules and all exhibits and reports incorporated or
deemed to be incorporated therein by reference; and deliver, without
charge, such number of copies of the preliminary prospectus, any
amended preliminary prospectus, each final Prospectus and any
post-effective amendment or supplement thereto, as such Holder may
reasonably request in order to facilitate the disposition of the
Registrable Shares of such Holder covered by such Registration
Statement in conformity with the requirements of the Securities Act;
(f) prior to any public offering of Registrable Shares covered
by such Registration Statement, use commercially reasonable efforts to
register or qualify such Registrable Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Holders of
such Registrable Shares shall reasonably request in writing; provided,
however, that the Company shall in no event be required to qualify
generally to do business as a foreign corporation or as a dealer in any
jurisdiction where it is not at the time so qualified or to execute or
file a general consent to service of process in any such jurisdiction
where it has not theretofore done so or to take any action that would
subject it to general service of process or taxation in any such
jurisdiction where it is not then subject;
(g) upon the occurrence of any event contemplated by paragraph
5(c)(v) above, prepare a supplement or post-effective amendment to such
Registration Statement or the related Prospectus or any document
incorporated
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15
or deemed to be incorporated therein by reference and file any other
required document so that, as thereafter delivered to the purchasers of
the Registrable Shares being sold thereunder (including upon the
termination of any Delay Period), such Prospectus will not contain an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(h) use commercially reasonable efforts to cause all
Registrable Shares covered by such Registration Statement to be listed
on each securities exchange or automated interdealer quotation system,
if any, on which similar securities issued by the Company are then
listed or quoted;
(i) on or before the effective date of such Registration
Statement, provide the transfer agent of the Company for the
Registrable Shares with printed certificates for the Registrable Shares
covered by such Registration Statement, which are in a form eligible
for deposit with The Depository Trust Company;
(j) if such offering is an underwritten offering, make
available for inspection by any Holder of Registrable Shares included
in such Registration Statement, any underwriter participating in any
offering pursuant to such Registration Statement, and any attorney,
accountant or other agent retained by any such Holder or underwriter
(collectively, the "Inspectors"), all financial and other records and
other information, pertinent corporate documents and properties of any
of the Company and its subsidiaries and affiliates (collectively, the
"Records"), as shall be reasonably necessary to enable them to exercise
their due diligence responsibilities; provided, however, that the
Records that the Company determines,
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16
in good faith, to be confidential and which it notifies the Inspectors
in writing are confidential shall not be disclosed to any Inspector
unless such Inspector signs a confidentiality agreement reasonably
satisfactory to the Company (which shall permit the disclosure of such
Records in such Registration Statement or the related Prospectus if
necessary to avoid or correct a material misstatement in or material
omission from such Registration Statement or Prospectus) or either (i)
the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in such Registration Statement or (ii) the
release of such Records is ordered pursuant to a subpoena or other
order from a court of competent jurisdiction; provided further,
however, that (A) any decision regarding the disclosure of information
pursuant to subclause (i) shall be made only after consultation with
counsel for the applicable Inspectors and the Company and (B) with
respect to any release of Records pursuant to subclause (ii), each
Holder of Registrable Shares agrees that it shall, promptly after
learning that disclosure of such Records is sought in a court having
jurisdiction, give notice to the Company so that the Company, at the
Company's expense, may undertake appropriate action to prevent
disclosure of such Records; and
(k) if such offering is an underwritten offering, enter into
such agreements (including an underwriting agreement in form, scope and
substance as is customary in underwritten offerings) and take all such
other appropriate and reasonable actions requested by the Holders of a
majority of the Registrable Shares being sold in connection therewith
(including those reasonably requested by the managing underwriters) in
order to expedite or facilitate the disposition of such Registrable
Shares, and in such connection, (i) use commercially reasonable efforts
to obtain opinions of counsel to the Company and updates thereof (which
counsel and opinions (in form, scope and substance)
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17
shall be reasonably satisfactory to the managing underwriters and
counsel to the Holders of the Registrable Shares being sold), addressed
to each selling Holder of Registrable Shares covered by such
Registration Statement and each of the underwriters as to the matters
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such counsel and
underwriters, (ii) use commercially reasonable efforts to obtain "cold
comfort" letters and updates thereof from the independent certified
public accountants of the Company (and, if necessary, any other
independent certified public accountants of any subsidiary of the
Company or of any business acquired by the Company for which financial
statements and financial data are, or are required to be, included in
the Registration Statement), addressed to each selling holder of
Registrable Shares covered by the Registration Statement (unless such
accountants shall be prohibited from so addressing such letters by
applicable standards of the accounting profession) and each of the
underwriters, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters in connection
with underwritten offerings, (iii) if requested and if an underwriting
agreement is entered into, provide indemnification provisions and
procedures substantially to the effect set forth in Section 8 hereof
with respect to all parties to be indemnified pursuant to said Section.
The above shall be done at each closing under such underwriting or
similar agreement, or as and to the extent required thereunder.
The Company may require each Holder of Registrable Shares
covered by a Registration Statement to furnish such information regarding such
Holder and such Holder's intended method of disposition of such Registrable
Shares as it may from time to time reasonably request in writing. If any such
information is not furnished within a reasonable period
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18
of time after receipt of such request, the Company may exclude such Holder's
Registrable Shares from such Registration Statement.
Each Holder of Registrable Shares covered by a Registration
Statement agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 5(c)(ii), 5(c)(iii),
5(c)(iv) or 5(c)(v) hereof, that such Holder shall forthwith discontinue
disposition of any Registrable Shares covered by such Registration Statement or
the related Prospectus until receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 5(g) hereof, or until such Holder is
advised in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and has received copies of any amended or
supplemented Prospectus or any additional or supplemental filings which are
incorporated, or deemed to be incorporated, by reference in such Prospectus
(such period during which disposition is discontinued being an "Interruption
Period") and, if requested by the Company, the Holder shall deliver to the
Company (at the expense of the Company) all copies then in its possession, other
than permanent file copies then in such holder's possession, of the Prospectus
covering such Registrable Shares at the time of receipt of such request.
Each Holder of Registrable Shares covered by a Registration
Statement further agrees not to utilize any material other than the applicable
current preliminary prospectus or Prospectus in connection with the offering of
such Registrable Shares.
SECTION 6. Registration Expenses. Whether or not any
Registration Statement is filed or becomes effective, the Company shall pay all
costs, fees and expenses incident to the Company's performance of or compliance
with this Agreement, including (i) all registration and filing fees, including
NASD filing fees, (ii) all fees and expenses of
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19
compliance with securities or Blue Sky laws, including reasonable fees and
disbursements of counsel in connection therewith, (iii) printing expenses
(including expenses of printing certificates for Registrable Shares and of
printing prospectuses if the printing of prospectuses is requested by the
Holders or the managing underwriter, if any), (iv) messenger, telephone and
delivery expenses, (v) fees and disbursements of counsel for the Company, (vi)
fees and disbursements of all independent certified public accountants of the
Company (including expenses of any "cold comfort" letters required in connection
with this Agreement) and all other persons retained by the Company in connection
with such Registration Statement, (vii) fees and disbursements of one counsel,
other than the Company's counsel, selected by Holders of a majority of the
Registrable Shares being registered, to represent all such Holders, (viii) fees
and disbursements of underwriters customarily paid by the issuers or sellers of
securities and (ix) all other costs, fees and expenses incident to the Company's
performance or compliance with this Agreement. Notwithstanding the foregoing,
the fees and expenses of any persons retained by any Holder, other than one
counsel for all such Holders, and any discounts, commissions or brokers' fees or
fees of similar securities industry professionals and any transfer taxes
relating to the disposition of the Registrable Shares by a Holder, will be
payable by such Holder and the Company will have no obligation to pay any such
amounts.
SECTION 7. Underwriting Requirements. (a) Subject to Section
7(b) hereof, any Holder shall have the right, by written notice, to request that
any Demand Registration provide for an underwritten offering.
(b) In the case of any underwritten offering pursuant to a
Demand Registration, the Holders of a majority of the Registrable Shares to be
disposed of in connection therewith shall select the institution or institutions
that shall manage or lead such offering, which institution or
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20
institutions shall be reasonably satisfactory to the Company. In the case of any
underwritten offering pursuant to a Piggyback Registration, the Company shall
select the institution or institutions that shall manage or lead such offering.
No Holder shall be entitled to participate in an underwritten offering unless
and until such Holder has entered into an underwriting or other agreement with
such institution or institutions for such offering in such form as the Company
and such institution or institutions shall determine.
SECTION 8. Indemnification. (a) Indemnification by the
Company. The Company shall, without limitation as to time, indemnify and hold
harmless, to the full extent permitted by law, each Holder of Registrable Shares
whose Registrable Shares are covered by a Registration Statement or Prospectus,
the officers, directors and agents and employees of each of them, each Person
who controls each such Holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and the officers, directors,
agents and employees of each such controlling person, to the fullest extent
lawful, from and against any and all losses, claims, damages, liabilities,
judgment, costs (including, without limitation, costs of preparation and
reasonable attorneys' fees) and expenses (collectively, "Losses"), as incurred,
arising out of or based upon any untrue or alleged untrue statement of a
material fact contained in such Registration Statement or Prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out
of or based upon any omission or alleged omission of a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as the same are based upon information furnished in writing to
the Company by or on behalf of such Holder expressly for use therein; provided,
however, that the Company shall not be liable to any such Holder to the extent
that any such Losses arise out of or are based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
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21
preliminary prospectus if (i) having previously been furnished by or on behalf
of the Company with copies of the Prospectus, such Holder failed to send or
deliver a copy of the Prospectus with or prior to the delivery of written
confirmation of the sale of Registrable Shares by such Holder to the person
asserting the claim from which such Losses arise and (ii) the Prospectus would
have corrected in all material respects such untrue statement or alleged untrue
statement or such omission or alleged omission; and provided further, however,
that the Company shall not be liable in any such case to the extent that any
such Losses arise out of or are based upon an untrue statement or alleged untrue
statement or omission or alleged omission in the Prospectus, if (x) such untrue
statement or alleged untrue statement, omission or alleged omission is corrected
in all material respects in an amendment or supplement to the Prospectus and (y)
having previously been furnished by or on behalf of the Company with copies of
the Prospectus as so amended or supplemented, such Holder thereafter fails to
deliver such Prospectus as so amended or supplemented, prior to or concurrently
with the sale of Registrable Shares.
(b) Indemnification by Holder of Registrable Shares. In
connection with any Registration Statement in which a Holder is participating,
such Holder shall furnish to the Company in writing such information as the
Company reasonably requests for use in connection with such Registration
Statement or the related Prospectus and agrees to indemnify, to the full extent
permitted by law, the Company, its directors, officers, agents or employees,
each Person who controls the Company (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act) and the directors, officers,
agents or employees of such controlling Persons, from and against all Losses
arising out of or based upon any untrue or alleged untrue statement of a
material fact contained in such Registration Statement or the related Prospectus
or any amendment or supplement thereto, or any preliminary prospectus, or
arising out of or based upon any omission or
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22
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, to the extent, but only to the
extent, that such untrue or alleged untrue statement or omission or alleged
omission is based upon any information so furnished in writing by or on behalf
of such Holder to the Company expressly for use in such Registration Statement
or Prospectus.
(c) Conduct of Indemnification Proceedings. If any Person
shall be entitled to indemnity hereunder (an "indemnified party"), such
indemnified party shall give prompt notice to the party from which such
indemnity is sought (the "indemnifying party") of any claim or of the
commencement of any proceeding with respect to which such indemnified party
seeks indemnification or contribution pursuant hereto; provided, however, that
the delay or failure to so notify the indemnifying party shall not relieve the
indemnifying party from any obligation or liability except to the extent that
the indemnifying party has been prejudiced by such delay or failure. The
indemnifying party shall have the right, exercisable by giving written notice to
an indemnified party promptly after the receipt of written notice from such
indemnified party of such claim or proceeding, to assume, at the indemnifying
party's expense, the defense of any such claim or proceeding, with counsel
reasonably satisfactory to such indemnified party; provided, however, that (i)
an indemnified party shall have the right to employ separate counsel in any such
claim or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless: (1) the indemnifying party agrees to pay such fees and expenses; (2) the
indemnifying party fails promptly to assume the defense of such claim or
proceeding or fails to employ counsel reasonably satisfactory to such
indemnified party; or (3) the named parties to any proceeding (including
impleaded parties) include both such indemnified party and the indemnifying
party, and such indemnified party shall
<PAGE>
<PAGE>
23
have been advised by counsel that there may be one or more legal defenses
available to it that are inconsistent with those available to the indemnifying
party or that a conflict of interest is likely to exist among such indemnified
party and any other indemnified parties (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of such
indemnified party); and (ii) subject to clause (3) above, the indemnifying party
shall not, in connection with any one such claim or proceeding or separate but
substantially similar or related claims or proceedings in the same jurisdiction,
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one firm of attorneys (together with appropriate
local counsel) at any time for all of the indemnified parties, or for fees and
expenses that are not reasonable. Whether or not such defense is assumed by the
indemnifying party, such indemnified party shall not be subject to any liability
for any settlement made without its consent. The indemnifying party shall not
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release, in form and substance reasonably
satisfactory to the indemnified party, from all liability in respect of such
claim or litigation for which such indemnified party would be entitled to
indemnification hereunder.
(d) Contribution. If the indemnification provided for in this
Section 8 is unavailable to an indemnified party in respect of any Losses (other
than in accordance with its terms), then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party, on the one hand, and such indemnified party, on the other hand, in
connection with the actions, statements or omissions that resulted in such
<PAGE>
<PAGE>
24
Losses as well as any other relevant equitable considerations. The relative
fault of such indemnifying party, on the one hand, and indemnified party, on the
other hand, shall be determined by reference to, among other things, whether any
action in question, including any untrue statement of a material fact or
omission or alleged omission to state a material fact, has been taken by, or
relates to information supplied by, such indemnifying party or indemnified
party, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent any such action, statement or omission. The
amount paid or payable by a party as a result of any Losses shall be deemed to
include any legal or other fees or expenses incurred by such party in connection
with any investigation or proceeding. The parties hereto agree that it would not
be just and equitable if contribution pursuant to this Section 8(d) were
determined by pro rata allocation or by any other method of allocation that does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provision of this Section 8(d), an
indemnifying party that is a Holder shall not be required to contribute any
amount which is in excess of the amount by which the total proceeds received by
such Holder from the sale of the Registrable Shares sold by such Holder (net of
all underwriting discounts and commissions) exceeds the amount of any damages
that such indemnifying party has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
SECTION 9. Miscellaneous. (a) Termination. This Agreement and
the obligations of the Company and the Holders hereunder (other than Section 8
hereof) shall terminate on the first date on which no Registrable Shares remain
outstanding.
<PAGE>
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25
(b) Notices. All notices or communications hereunder shall be
in writing (including telecopy or similar writing), addressed as follows:
To the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, NY 10019
Telecopier: (212) 765-0899
Attention: General Counsel
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Telecopier: (212) 474-3700
Attention: Peter S. Wilson, Esq.
To the Holders:
R.E. Turner
In care of Turner Broadcasting System, Inc.
One CNN Center
Box 105366
Atlanta, GA 30348-5366
Telecopier: (404) 827-3000
For Courier delivery
One CNN Center
Atlanta, GA 30303
Attention: General Counsel
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26
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
300 South Grand Avenue, Suite 3400
Los Angeles, CA 90071
Telecopier: (213) 687-5600
Attention: Thomas C. Janson, Jr., Esq.
Any such notice or communication shall be deemed given (i)
when made, if made by hand delivery, (ii) upon transmission, if sent by
confirmed telecopier, (iii) one business day after being deposited with a
next-day courier, postage prepaid, or (iv) three business days after being sent
certified or registered mail, return receipt requested, postage prepaid, in each
case addressed as above (or to such other address or to such other telecopier
number as such party may designate in writing from time to time).
(c) Separability. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect.
(d) Assignment. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs, devisees,
legatees, legal representatives, successors and assigns.
(e) Entire Agreement. This Agreement represents the entire
agreement of the parties and shall supersede any and all previous contracts,
arrangements or understandings between the parties hereto with respect to the
subject matter hereof.
(f) Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may not be amended, modified or
supplemented, and waivers or consents
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27
to departures from the provisions hereof may not be given, unless the Company
has obtained the written consent of Holders of at least a majority in number of
the Registrable Shares then outstanding.
(g) Publicity. No public release or announcement concerning
the transactions contemplated hereby shall be issued by any party without the
prior consent of the other parties, except to the extent that such party is
advised by counsel that such release or announcement is necessary or advisable
under applicable law or the rules or regulations of any securities exchange, in
which case the party required to make the release or announcement shall to the
extent practicable provide the other party with an opportunity to review and
comment on such release or announcement in advance of its issuance.
(h) Expenses. Whether or not the transactions contemplated
hereby are consummated, except as otherwise provided herein, all costs and
expenses incurred in connection with the execution of this Agreement shall be
paid by the party incurring such costs or expenses, except as otherwise set
forth herein.
(i) Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(j) Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be one and the same agreement, and shall
become effective when counterparts have been signed by each of the parties and
delivered to each other party.
(k) Governing Law. This Agreement shall be construed,
interpreted, and governed in accordance with the internal laws of New York.
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28
(l) Calculation of Time Periods. Except as otherwise
indicated, all periods of time referred to herein shall include all Saturdays,
Sundays and holidays; provided, however, that if the date to perform the act or
give any notice with respect to this Agreement shall fall on a day other than a
Business Day, such act or notice may be timely performed or given if performed
or given on the next succeeding Business Day.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first written above.
TW INC.,
by /s/ Thomas W. McEnerney
------------------------------
Name: Thomas W. McEnerney
Title: Vice President
/s/ R. E. Turner
---------------------------------
R. E. Turner
TURNER OUTDOOR, INC.,
by /s/ R. E. Turner
------------------------------
Name: R. E. Turner
Title: President
TURNER FOUNDATION, INC.,
by /s/ R. E. Turner
------------------------------
Name: R. E. Turner
Title: President
<PAGE>
<PAGE>
29
ROBERT E. TURNER CHARITABLE
REMAINDER UNITRUST NO. 2,
by /s/ R. E. Turner
------------------------------
Name: R. E. Turner
Title: Trustee
TURNER PARTNERS, L.P.,
by /s/ R. E. Turner
------------------------------
Name: R. E. Turner
Title: General Partner
<PAGE>
<PAGE>
AMENDMENT NO. 1
AMENDMENT NO. 1 ("Amendment"), dated as of October 30, 1995, to that
certain Credit Agreement, dated as of June 30, 1995, among TIME WARNER
ENTERTAINMENT COMPANY, L.P., TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE
PARTNERSHIP and TWI CABLE INC., as Borrowers, CHEMICAL BANK, as Administrative
Agent, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, THE BANK OF NEW
YORK and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation and
Syndication Agents, and the lenders party thereto (the "Credit Agreement").
Capitalized terms used but not otherwise defined herein shall have the meanings
assigned to those terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lenders wish to amend the Credit
Agreement as set forth herein;
NOW, THEREFORE, it is agreed:
SECTION 1. Amendments. The Credit Agreement shall be amended as
follows:
1.01. Section 1.01 of the Credit Agreement shall be amended as
follows:
(a) The definition of "Cash Balance" shall be amended by inserting the
following language after the word "Borrower" in clause (i) thereof: "(and, in
the case of TWI Cable, CVI)".
(b) The definition of "Consolidated Net Income" shall be amended by
adding, after the words "the provisions of Section 6.06(a)" in clause (iii)
thereof, ", and, in the case of CVI during the Applicable Period, any agreement
or instrument governing the CVI Assumed Indebtedness".
(c) The definition of "Credit Documents" shall be amended by replacing
the first "and" with "," and adding "and the CVI Guarantees" after the word
"Guarantees".
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(d) The definition of "CVI" shall be amended by deleting the words
"and its Subsidiaries" and adding in its place "(including any successor thereto
by merger)".
(e) The definition of "CVI Acquisition" shall be amended by adding
the words "and its Subsidiaries" after the words "acquisition of CVI".
(f) The definition of "Gerry Acquisition" shall be amended by adding
", CVI" immediately following the word "TWEAN".
(g) The definition of "Restricted Payment" shall be amended by
replacing the word "and" immediately before clause (d) thereof with "," and
adding the following before the period thereof:
", (e) during the Applicable Period, loans by TWI Cable to CVI (the
'CVI Loans', the proceeds of which are to be used by CVI solely (x)
to repay indebtedness assumed in connection with the CVI Acquisition
and the Gerry Acquisition and to pay related fees and expenses and
(y) for general corporate purposes (as defined in Section 4.05(e));
and (f) any payments of principal and/or interest by CVI to TWI
Cable with respect to the CVI Loans".
(h) The definition of "TWI Cable" shall be amended by deleting it in
its entirety and replacing it with the following:
"TWI Cable" shall mean (i) before the Stock Contribution, the
Person defined as such in the first paragraph hereof and (ii) from
and after the Stock Contribution, the Person currently known as CVI,
which shall assume, simultaneously with such contribution, on terms
reasonably satisfactory to the Administrative Agent, all of the
rights, obligations and liabilities of the Person described in
clause (i) under the Credit Documents.
(i) The following definitions shall be added:
"Applicable Period" shall have the meaning
provided in Section 9.15(d).
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"CVI Guarantee" shall mean a guarantee, pursuant to Section
3.02(e), by CVI and certain of its Subsidiaries of all of TWI
Cable's obligations under the Credit Documents, which guarantee is
substantially in the form attached hereto as Exhibit
G-6.
"CVI Loans" shall have the meaning provided in
the definition of "Restricted Payments".
"Stock Contribution" shall mean the contribution by TWI of all
of the outstanding Capital Stock of TWI Cable to CVI, which shall
assume, simultaneously with such contribution, all of TWI Cable's
rights, obligations and liabilities under the Credit Documents.
1.02. Section 3.02(a)(i) of the Credit Agreement shall be amended by
adding, after the words "each Acquiring Borrower" in clause (2) thereof, "(or in
the case of the CVI Acquisition, CVI)."
1.03. Section 3.02(e) of the Credit Agreement shall be amended by
deleting it in its entirety and replacing it with the following:
"(e) Guarantees. CVI and each Person that will become a
Subsidiary of CVI upon consummation of the CVI Acquisition and the
Gerry Acquisition shall have executed and delivered a CVI Guarantee;
provided, however, that no such Person (other than CVI) having,
directly or indirectly, less than 20,000 subscribers shall be
required to deliver a CVI Guarantee if Subsidiaries of CVI that
deliver a CVI Subsidiary Guarantee collectively shall own more than
85% of all of the subscribers of CVI. Each CVI Guarantee shall be in
full force and effect."
1.04. Section 3.02 of the Credit Agreement shall be amended by adding
the following at the end thereof:
"(g) CVI Acquisition. In the case of the CVI Acquisition, (i)
after giving effect thereto, CVI shall be a wholly owned direct or
indirect Subsidiary of TWI and (ii) the Administrative Agent shall
have received reasonably satisfactory evidence of compliance with
the indentures relating to CVI's 9 1/4% Senior Debentures due 2008
and 10 3/4% Senior Notes due 2002."
<PAGE>
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-4-
1.05. Section 4.05(c) of the Credit Agreement shall be amended by (a)
replacing the word "and" at the end of clause (ii) thereof with "," and (b)
adding at the end of clause (iii) thereof the following language: "and (iv) to
make loans to CVI, the proceeds of which loans shall be used by CVI for the
purposes described in clauses (i)-(iii) of this Section 4.05(c)".
1.06. Section 4.21(a) of the Credit Agreement shall be amended by
deleting, from the second sentence thereof, "On and after the closing of the CVI
Acquisition," and adding the following in its place:
"During the Applicable Period, the Subsidiaries of CVI that have not
delivered a CVI Guarantee have less than 15% of the subscribers of
CVI in the aggregate; after the Applicable Period,".
1.07. Section 5.12 of the Credit Agreement shall be amended by (a)
replacing the word "or" at the end of clause (ii) of the proviso of the first
sentence thereof with ","; (b) adding at the end of clause (iii) of the proviso
of the first sentence thereof the following language: "or (iv) CVI and, prior to
the consummation of the Stock Contribution, any Subsidiary of CVI"; and (c)
adding the following before the last sentence thereof:
"Simultaneously with or promptly after the consummation of the Stock
Contribution, each Subsidiary of CVI shall execute and deliver to
the Lenders a Subsidiary Guarantee to the extent necessary to make
the representation and warranty in Section 4.21(a) true and correct;
upon such execution and delivery, each CVI Guarantee shall be
automatically released."
1.08. Section 6.04(a)(v) of the Credit Agreement shall be amended by
deleting "and (2)" and adding in its place "(2) the CVI Loans and (3)".
1.09. Section 6.07 of the Credit Agreement shall be amended by
replacing the word "and" at the end of clause (v) thereof with "," and adding,
at the end of clause (vi) thereof, "and (vii) the CVI Loans and the CVI
Guarantees".
1.10. Section 7.03 of the Credit Agreement shall be amended by
adding, after the words "contained in this
<PAGE>
<PAGE>
-5-
Agreement" in clause (b) thereof, "or in Section 1(b) or (c) of any CVI
Guarantee".
1.11. Section 7.08 of the Credit Agreement shall be amended by
adding the following at the end thereof: "at any time during the Applicable
Period, CVI shall cease to be a direct or indirect Wholly Owned Subsidiary of
TWI; or".
1.12. Section 7.12 of the Credit Agreement shall be amended by
adding "(i)" before the first sentence thereof and adding the following after
the semicolon thereof:
" or (ii) At any time during the Applicable Period, any CVI
Guarantee shall cease to be in full force and effect, or CVI or any
of its Subsidiaries shall disavow its obligations under its CVI
Guarantee; or".
1.13. Article VII of the Credit Agreement shall be amended by adding
the following after the end of Section 7.12:
"SECTION 7.13. Stock Contribution. The Stock Contribution
shall not have been effected within five (5) Business Days (or such
later date as shall be reasonably consented to by the Administrative
Agent but in any event not later than 30 days) after TWI shall
become aware that all legal impediments to the Stock Contribution
have been removed or lifted;".
1.14. Section 9.15 of the Credit Agreement shall be amended by adding
the following at the end thereof:
"(d) From and after the closing of the CVI Acquisition and
until the Stock Contribution and the assumption by CVI of all of TWI
Cable's rights, obligations and liabilities under the Credit
Documents as contemplated by the definition of "TWI Cable" (the
"Applicable Period"), CVI and its Subsidiaries shall be treated as
Restricted Subsidiaries of TWI Cable for all purposes under this
Agreement unless the context specifically requires otherwise."
1.15. Annex I hereto shall be attached to the Credit Agreement as
Exhibit G-6.
SECTION 2. Representations and Warranties and Agreements. In order
to induce the Lenders to enter into this
<PAGE>
<PAGE>
-6-
Amendment, each of the Borrowers makes the following representations, warranties
and agreements to each of the Lenders:
2.01. No Default. No Default or Event of Default has occurred and is
continuing.
2.02. Representations and Warranties. All of the representations and
warranties in the Credit Documents, after giving effect to this Amendment, are
true, correct and accurate in all material respects on and as of the date
hereof, except to the extent that such representations and warranties expressly
relate to an earlier date.
2.03. Agreement. Each of the Borrowers agrees to use its reasonable
best efforts to have all legal impediments to the Stock Contribution removed or
lifted as soon as practicable.
SECTION 3. Conditions. The effectiveness of this Amendment is subject
to the satisfaction of each of the following conditions:
3.01. Execution. The Administrative Agent shall have received duly
executed counterparts hereof from (i) each of the Borrowers and (ii) the Lenders
constituting the Required Lenders.
3.02. Representations and Warranties. All of the representations and
warranties of the Borrowers in Sections 2.01 and 2.02 hereof shall be true and
correct.
3.03. Officers' Certificate. The Administrative Agent shall have
received an Officers' Certificate to the effect that all of the conditions in
this Section 3 are satisfied.
SECTION 4. Miscellaneous.
4.01. Amendment Limited. All terms, provisions, covenants,
representations, warranties, agreements and conditions contained in the Credit
Agreement shall remain in full force and effect except as expressly contemplated
herein and shall not otherwise be deemed waived, modified or amended hereby.
4.02. Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties
<PAGE>
<PAGE>
-7-
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original, but all of such counterparts together shall
constitute one and the same agreement.
4.03. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York without regard
to its principles of conflicts of law.
4.04. Headings. Headings have been inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Amendment.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
TIME WARNER ENTERTAINMENT
COMPANY, L.P.
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Senior Vice President & Chief
Financial Officer
TIME WARNER ENTERTAINMENT-
ADVANCE/NEWHOUSE PARTNERSHIP
By: TIME WARNER ENTERTAINMENT
COMPANY, L.P.,
Managing Partner
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Senior Vice President & Chief
Financial Officer
TWI CABLE INC.
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Vice President
<PAGE>
<PAGE>
Signature pages for the Banks that are Parties to Amendment No. 1 to the TWE
Credit Agreement have been omitted.
<PAGE>
<PAGE>
WAIVER NO. 1
WAIVER NO. 1 ("Waiver"), dated as of December 1, 1995, to that certain
Credit Agreement, dated as of June 30, 1995, as amended, among TIME WARNER
ENTERTAINMENT COMPANY, L.P., TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE
PARTNERSHIP and TWI CABLE INC., as Borrowers, CHEMICAL BANK, as Administrative
Agent, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, THE BANK OF NEW
YORK and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation and
Syndication Agents, and the lenders party thereto (the "Credit Agreement").
Capitalized terms used but not otherwise defined herein shall have the meanings
assigned to those terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Lenders wish to waive certain provisions of the Credit
Agreement on the terms and subject to the conditions provided herein;
NOW, THEREFORE, it is agreed:
SECTION 1. Waivers. Subject to Section 2 below:
1.01. Notwithstanding Section 6.04(a)(v) of the Credit Agreement,
$66,000,000 aggregate principal amount of 9.86% Senior Notes due May 15, 2001 of
Cablevision Industries, Inc. ("CII") and $100,000,000 aggregate principal amount
of 10.36% Senior Notes due July 15, 1999 of CII (together, the "CII Notes") need
not be repaid on the Acquisition Funding Date for the CVI Acquisition (the "CVI
Acquisition Funding Date") but shall be repaid on a date (the "Repayment Date")
not later than the 21st day after such date (or the business day immediately
following such 21st day if such 21st day is not a business day).
1.02. Notwithstanding clause (iii) of the proviso in the definition of
Consolidated Net Income in the Credit Agreement, prior to the Repayment Date,
the income of CII and its Subsidiaries need not be excluded from TWI Cable's
Consolidated Net Income by virtue of the existence of restricted payments
covenants in Section 10.5 of each of the agreements governing the CII Notes.
1.03. Notwithstanding Section 2.01(b)(i) of the
Credit Agreement, up to $200,000,000 of the Total Commitment
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<PAGE>
-2-
need not be used on the CVI Acquisition Funding Date, but shall be used only to
repay the CII Notes (plus any make-whole and other premiums relating thereto) on
the Repayment Date and to pay related fees and expenses.
1.04. To the extent that CII or any of its Subsidiaries is required
under Section 3.02(e) of the Credit Agreement to execute and deliver a CVI
Guarantee on the CVI Acquisition Funding Date, such CVI Guarantee need not be
executed and delivered on such date but shall be executed and delivered to the
Lenders not later than the Repayment Date.
1.05. During the period from the CVI Acquisition Funding Date to the
Repayment Date, the Borrowers shall not be deemed to have breached the
representation set forth in the second sentence of Section 4.21(a) of the Credit
Agreement by virtue of CII and its Subsidiaries not delivering a CVI Guarantee
on the CVI Acquisition Funding Date.
SECTION 2. Covenant. The Borrowers covenant and agree, prior to or
immediately upon consummation of the CVI Acquisition, to cause a notice to be
delivered to the holders of the CII Notes for the optional prepayment thereof in
accordance with the terms of the agreements governing the CII Notes.
SECTION 3. Miscellaneous. All terms, provisions, covenants,
representations, warranties, agreements and conditions contained in the Credit
Agreement shall remain in full force and effect except as expressly contemplated
herein and shall not otherwise be deemed waived, modified or amended hereby.
This Waiver may be executed in any number of counterparts and by the different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original, but all of such counterparts
together shall constitute one and the same agreement. This Waiver shall become
effective upon the execution and delivery to the Administrative Agent of a
counterpart hereof by (i) each of the Borrowers and (ii) the Lenders
constituting the Required Lenders. This Waiver shall be governed by, and
construed in accordance with, the laws of the State of New York without regard
to principles of conflicts of law.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
duly executed as of the date first above written.
TIME WARNER ENTERTAINMENT COM-
PANY, L.P.
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Senior Vice President and Chief
Financial Officer
TIME WARNER ENTERTAINMENT-
ADVANCE/NEWHOUSE PARTNERSHIP
By: TIME WARNER ENTERTAINMENT
COMPANY, L.P.,
Managing Partner
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Senior Vice President and Chief
Financial Officer
TWI CABLE INC.
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Vice President
<PAGE>
<PAGE>
Signature pages for the Banks that are Parties to Waiver No. 1 to the TWE Credit
Agreement have been omitted.
<PAGE>
<PAGE>
AMENDMENT AND WAIVER NO. 2
AMENDMENT AND WAIVER NO. 2 ("Amendment"), dated as of August 26, 1996,
to that certain Credit Agreement, dated as of June 30, 1995, among TIME WARNER
ENTERTAINMENT COMPANY, L.P., TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE
PARTNERSHIP and TWI CABLE INC., as Borrowers, THE CHASE MANHATTAN BANK, as
Administrative Agent, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
THE BANK OF NEW YORK and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Documentation and Syndication Agents, and the lenders party thereto, as amended
to the date hereof (the "Credit Agreement"). Capitalized terms used but not
otherwise defined herein shall have the meanings assigned to those terms in the
Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lenders wish to amend and waive certain
provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, it is agreed:
SECTION 1. Amendments. The Credit Agreement shall be amended as
follows:
1.01. Section 1.01 of the Credit Agreement shall be amended as
follows:
(a) The following definitions shall be added:
"Applicable Amount" shall mean (i) $300,000,000 or (ii) in the
event that any of the TWI Convertible Intercompany Debt shall have
been converted into common equity of TWI Cable, an amount (not less
than $0) equal to $300,000,000 less the amount of the TWI Convertible
Intercompany Debt so converted.
"Free Cash Flow" shall mean, with respect to any New Beneficial
Asset for any period, the net income (or loss) of, or otherwise
derived from, such New Beneficial Asset, as determined in accordance
with or otherwise consistent with GAAP, plus (to the extent deducted
in calculating such net income), the sum of amortization and
depreciation and other non-cash
<PAGE>
<PAGE>
-2-
charges to net income, and, without duplication, the proceeds of any
sale or other disposition of, or any distributions or proceeds of
financings with respect to, such New Beneficial Asset (but only to
the extent that (i) such proceeds are not invested in or otherwise
used in connection with the ownership and operation of such assets
and (ii) the indebtedness relating to such financings will be
assumed by TWEAN), minus the sum of capital expenditures
attributable to such asset and non-cash credits to net income, plus
or minus changes in working capital.
"New Beneficial Assets" shall have the meaning provided in the
definition of "Transfer."
"New Holder Guarantee" shall mean a guarantee of the
Obligations of TWEAN, substantially in the form of Exhibit G-8.
"New Holder Guarantor" shall have the meaning provided in
Section 3.03(h).
"Transaction Summary" shall mean Annex A of Amendment and
Waiver No. 2 to this Agreement, with such changes thereto as are not
materially less favorable to the Lenders and as are reasonably
satisfactory to the Administrative Agent.
"Transfer Date" shall have the meaning provided in the
definition of "Transfer."
"TW Holding" shall mean (i) TW Holding Co., a New York general
partnership, whose partners shall include TWI Cable and certain of
its Subsidiaries; Paragon; and CVI and certain of its Subsidiaries
or (ii) Paragon.
"TW Holding Guarantee" shall mean a guarantee of all of the
Obligations of TWEAN, substantially in the form of Exhibit G-7.
"TW Holding Partner Guarantee" shall mean a pro rata guarantee
of TW Holding's obligations under the TW Holding Guarantee,
substantially in the form of Exhibit G-9.
<PAGE>
<PAGE>
-3-
"TW Holding Partner Guarantor" shall have the meaning provided
in Section 3.03(h).
"TWI Convertible Intercompany Debt" shall mean Convertible
Intercompany Debt of TWI Cable to TWI in an aggregate principal
amount not to exceed $1,500,000,000 (excluding accrued interest
thereon added to principal from time to time in lieu of cash payment
of interest, in accordance with the terms of such Convertible
Intercompany Debt); provided, however, that (x) all of the proceeds
of such Convertible Intercompany Debt shall be used by TWI Cable
upon receipt thereof to repay its outstanding Loans and (y) the rate
of interest on such Convertible Intercompany Debt shall not at any
time exceed the highest rate of interest on the Loans to TWI Cable
hereunder (it being understood, without limiting any other provision
of this Agreement, that the amount of the TWI Convertible
Intercompany Debt in excess of the Applicable Amount shall be
included in the calculation of the Leverage Ratio of TWI Cable for
all purposes under this Agreement).
(b) The definition of "Convertible Intercompany Debt" shall be
amended by replacing it in its entirety with the following:
"Convertible Intercompany Debt" shall mean any Indebtedness
for money borrowed of (a) any Borrower owing to TWI or any of its
Subsidiaries or (b) any Foreign Subsidiary owing to TWI that, in
each case, (i) is issued on terms reasonably satisfactory to the
Administrative Agent, (ii) if owed to a Person other than a Borrower
or a Restricted Subsidiary of a Borrower, is convertible into equity
of the borrower of such Indebtedness or is extinguishable, in each
case, upon (x) the liquidation or dissolution of the borrower of
such Indebtedness, (y) failure to repay any Loans at final maturity
or (z) acceleration of the maturity of any Loans hereunder, and
(iii) provides that principal thereof and interest thereon may not
be paid except to the extent permitted under Section 6.06; provided,
however, that any Convertible Intercompany Debt of a Borrower shall
be subordinated in right of payment to the Obligations on terms and
conditions reasonably satisfactory to the Administrative Agent.
<PAGE>
<PAGE>
-4-
(c) The definition of "Applicable Fee Percentage" shall be amended
by adding the following at the end thereof:
"Notwithstanding anything to the contrary, so long as
any TWI Convertible Intercompany Debt is outstanding,
the Applicable Fee Percentage for TWI Cable shall be determined by
reference to its Leverage Ratio if such Applicable Fee Percentage
would be higher than that determined by reference to TWI Cable's
Debt Ratings."
(d) The definition of "Applicable Margin" shall be amended by adding
the following at the end thereof:
"Notwithstanding anything to the contrary, so long as any TWI
Convertible Intercompany Debt is outstanding, the Applicable Margin
for TWI Cable shall be determined by reference to its Leverage Ratio
if such Applicable Margin would be higher than that determined by
reference to TWI Cable's Debt Ratings."
(e) The definition of "Beneficial Assets" shall be amended by adding
", the New Beneficial Assets" after "TWE Beneficial Assets".
(f) The definition of "Guarantee" shall be amended by adding "TW
Holding Guarantee, New Holder Guarantee, TW Holding Partner Guarantee," before
"TWE Guarantee".
(g) The definition of "Guarantor" shall be amended by adding "any
New Holder Guarantor, any TW Holding Partner Guarantor, TW Holding in its
capacity as a guarantor of the Obligations of TWEAN," after "any Subsidiary
Guarantor".
(h) The definition of "Indebtedness" shall be amended by deleting
"and" before clause (f) of the proviso thereof and adding before the period
thereof "; (g) any Guarantee; and (h) any reimbursement obligation among
Guarantors with respect to any Guarantees; provided, however, that any such
obligation shall be subordinated to the obligations of the Guarantors under the
Credit Documents".
(i) The definition of "Restricted Payment" shall be amended (I) by
replacing the second parenthetical phrase in clause (iv) thereof with the
following:
"(other than (x) any payment by any Subsidiary of a Borrower to any
Wholly Owned Subsidiary of such
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<PAGE>
-5-
Borrower or to such Borrower and (y) so long as no Default or Event
of Default has occurred and be continuing or would result therefrom,
any payment of principal of or interest on such amount of the TWI
Convertible Intercompany Debt that is in excess of the Applicable
Amount)"
and (II) by replacing clause (v) thereof with the following:
"(v) Investments by any Company in any of its Affiliates, other than
any direct or indirect Investment by any Company in (A) any Person
that, after giving effect to such Investment, would be a Restricted
Subsidiary of such Company, (B) any Person that is not an Affiliate
of such Company immediately prior to such Investment or (C) any
joint venture between such Company and one or more Persons who are
not Affiliates of TWI or any Company".
(j) The definition of "Transfer" shall be amended by
replacing it in its entirety with the following:
"Transfer" shall mean a transfer to TWEAN (in such capacity,
the "Transferee Borrower") by TWI Cable or any of its Subsidiaries
of one or more Acquired Cable Businesses (or one or more cable
systems comprising parts thereof), together with the portion of the
then outstanding Loans of TWI Cable (and if the Stock Contribution
shall not have occurred, of the then outstanding CVI Loans)
allocated to the Applicable Acquired Cable Business or applicable
cable system, as the case may be, as described in the Transaction
Summary (the "Allocated Loans"). Notwithstanding the foregoing, if
TWI Cable or such Subsidiary, as the case may be, has not obtained
all of the governmental consents or approvals required for a
transfer of an Acquired Cable Business or cable system prior to the
proposed date of such transfer (the "Transfer Date"), TWI Cable or
such Subsidiary, as the case may be, may, on the Transfer Date,
transfer the Allocated Loans but hold the related assets for the use
and benefit of TWEAN (such assets, collectively, the "New Beneficial
Assets"); provided, however, that TWI Cable shall (i) use its
reasonable best efforts to afford TWEAN the economic benefits
intended to be conferred by the New Beneficial Assets, (ii) assign
to TWEAN the right to
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<PAGE>
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receive all Free Cash Flow derived from the New Beneficial Assets on
and after the Transfer Date, which Free Cash Flow shall be paid to
TWEAN as soon as reasonably practicable but in no event more than 45
days after the end of each fiscal quarter, (iii) take all reasonable
actions to obtain such governmental consents or approvals as soon as
practicable after the Transfer Date and (iv) effectuate the
transfers of New Beneficial Assets after all governmental consents
or approvals required for the transfer of such New Beneficial Assets
are obtained (it being understood that no cable television franchise
comprising a New Beneficial Asset shall be required to be
contributed to TWEAN until governmental consents or approvals have
been obtained with respect to the contribution of all cable
television franchises in the same cable television system).
(k) The definition of "TWE Partnership Agreement" shall be amended
by adding ", as amended on the date hereof and as hereafter amended in
accordance with the terms of this Agreement" before the period thereof.
(l) The definition of "TWEAN Contribution Agreement" shall be
amended by adding ", as amended in accordance with the terms of this Agreement"
before the period thereof.
(m) The definition of "TWEAN Partnership Agreement" shall be amended
by adding ", as amended in accordance with the terms of this Agreement" before
the period thereof.
1.02. Guarantees. Section 3.03(h) of the Credit Agreement shall be
amended by adding the following at the end thereof:
"TW Holding shall have executed and delivered the TW Holding
Guarantee. Each holder of New Beneficial Assets (each, in such
capacity, a "New Holder Guarantor") shall have executed and
delivered a New Holder Guarantee. Each partner of TW Holding that
assigns indebtedness to TW Holding (each, in such capacity, a "TW
Holding Partner Guarantor") shall have executed and delivered a TW
Holding Partner Guarantee. Each such Guarantee shall be in full
force and effect."
1.03. Intercompany Indebtedness. Section 6.04 of the Credit
Agreement shall be amended by deleting "and" at the
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end of clause (v) thereof and adding the following immediately after the end of
clause (vi) thereof:
"(vii) Indebtedness of any Restricted Subsidiary of such Borrower to
a Wholly Owned Restricted Subsidiary of such Borrower or to such
Borrower (other than Indebtedness of TWEAN to TWE or to a Wholly
Owned Restricted Subsidiary of TWE or Indebtedness of a Wholly Owned
Restricted Subsidiary of TWE to TWEAN) or Indebtedness of a Foreign
Subsidiary of such Borrower to another Foreign Subsidiary of such
Borrower;".
1.04. Restricted Payments. Section 6.06(e) of the Credit Agreement
shall be amended by (I) deleting "assuming any Loans of TWI Cable" from clause
(x)(ii) thereof and replacing it with "assuming any Allocated Loans" and (II) by
adding "or (z) any holder of New Beneficial Assets (other than any Borrower or
any Restricted Subsidiary) from distributing or otherwise transferring any
assets other than such New Beneficial Assets" before the period thereof.
1.05. Unrestricted Subsidiaries. Section 6.14(a) of the Credit
Agreement shall be amended by deleting the parenthetical phrase in clause (iii)
thereof.
1.06. Release of Certain Guarantees. Section 9.08 of the Credit
Agreement shall be amended by deleting the text before "(ii)" and replacing it
with the following:
"TWE, TW Holding (other than in its capacity as a Subsidiary
Guarantor) or any TWE Partner Guarantor, TW Holding Partner
Guarantor, Holder Guarantor, holder of TWEAN Material Beneficial
Assets or New Holder Guarantor may, without the consent of any
Lender, be released from its Guarantee if (i) such Guarantor shall
not hold any Material Beneficial Assets or any New Beneficial Assets
(or in the case of any TWE Partner Guarantor, none of its
Subsidiaries that issued a Holder Guarantee shall hold any Material
Beneficial Assets),"
and by deleting from the third sentence thereof "TWE or TWEAN, as the case may
be," and replacing it with "The Borrowers".
1.07. Calculations for Summit and New Beneficial Assets. (a) Section
9.15(a) of the Credit Agreement shall be
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amended by deleting it in its entirety and replacing it with the following:
"All Financial Statements to be furnished to the Lenders hereunder
shall be prepared, and all calculations determining compliance with
Article VI (including the definitions used therein) shall be made,
in accordance with GAAP consistently applied throughout the periods
involved except as set forth in the notes thereto; provided,
however, that except as otherwise specifically provided herein, all
such calculations shall utilize accounting principles and policies
in effect at the time of the preparation of, and in conformity with
those used to prepare, the audited Financial Statements of TWE for
the fiscal year ended December 31, 1994. Notwithstanding the
foregoing:
(i) the assets and liabilities and results of operations of
TWE shall include, without duplication, (x) the TWE Beneficial
Assets and any related liabilities of the holders thereof and (y)
the cash flow received by TWE with respect to TWE Beneficial Assets;
(ii) the assets and liabilities and results of operations of
TWEAN shall include, without duplication, (x) the TWEAN Beneficial
Assets and any related liabilities of the holders thereof, (y) the
New Beneficial Assets and any related liabilities of the holders
thereof and (z) the cash flow received by TWEAN with respect to
TWEAN Beneficial Assets and New Beneficial Assets; and
(iii) to the extent that Beneficial Assets or New Beneficial
Assets and any related liabilities of the holders thereof and the
related cash flows are included in the calculations for TWE or
TWEAN, as the case may be, they shall be excluded from the
calculations for any other Borrower."
(b) Section 9.15(b) of the Credit Agreement shall be amended by
deleting "Notwithstanding paragraph (a) of this Section 9.15, nothing" and
replacing it with the following:
"The covenants contained in Article V and Article VI (other than
Section 6.11) shall apply as if holders of TWE Material Beneficial
Assets were Restricted
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Subsidiaries of TWE and holders of TWEAN Material Beneficial Assets
(other than any Borrower or any Restricted Subsidiary) were
Restricted Subsidiaries of TWEAN during any period and on any date
on which such holders (each, a "Beneficial Subsidiary") own such
Beneficial Assets (but with respect to the Specified Holders, only
to the extent of the assets and liabilities related to Material
Beneficial Assets). Nothing".
(c) Section 9.15(c) of the Credit Agreement shall be amended (I) by
deleting "Sections 6.04(b), 6.06 and 6.11" and replacing it with "Article VI"
and (II) by deleting "and" at the end of clause (ii) thereof and adding the
following immediately after the end of clause (iii) and before the period
thereof:
"; and
(iv) Summit, so long as it is an Unrestricted Subsidiary,
shall be excluded from all such calculations, except as otherwise
expressly provided in the definitions relating thereto."
1.08. Annex I, Annex II and Annex III hereto shall be attached to
the Credit Agreement as Exhibit G-7, Exhibit G-8 and Exhibit G-9, respectively.
SECTION 2. Waivers and Consent.
2.01. Consideration in Transfers. With respect to Section 3.03(d) of
the Credit Agreement, the Lenders agree that the consideration to be received by
TWI Cable in the Transfers to occur on the Transfer Date, as set forth in the
Transaction Summary, is satisfactory to the Lenders.
2.02. Restricted Payment. Notwithstanding Section 6.06 of the Credit
Agreement: (a) Paragon may redeem TWE's partnership interest in Paragon
(anticipated to be approximately 49.8%) by distributing to TWE an undivided
interest of approximately 95.2% in the cable television systems described in
Schedule 1 to the Transaction Summary without any reduction to the Consolidated
Cash Flow of TWI Cable pursuant to Section 9.15(c)(iii); (b) TWE may contribute
to Paragon cable television systems serving approximately 6,500 subscribers in
exchange for an increase in TWE's interest in Paragon; and (c) TWEAN may
distribute to TWE Primestar operations serving
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<PAGE>
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approximately 6,700 subscribers in connection with TWE's contribution to TWEAN
of Primestar operations serving approximately 15,500 subscribers.
2.03. Amendment or Waiver of Organizational Documents.
Notwithstanding Section 6.12 of the Credit Agreement, provisions of the
Partnership Agreements may be amended, modified or waived in connection with the
transactions contemplated by the Transaction Summary; provided, however, that
the Administrative Agent shall have received a copy of each agreement or
instrument evidencing any such amendment, modification or waiver, and shall be
reasonably satisfied with respect thereto.
SECTION 3. Representations and Warranties. In order to induce the
Lenders to enter into this Amendment, each of the Borrowers makes the following
representations, warranties and agreements to each of the Lenders:
3.01. No Default. No Default or Event of Default has occurred and is
continuing.
3.02. Representations and Warranties. All of the representations and
warranties in the Credit Documents, after giving effect to this Amendment, are
true, correct and accurate in all material respects on and as of the date
hereof, except to the extent that such representations and warranties expressly
relate to an earlier date.
SECTION 4. Conditions. The effectiveness of this Amendment is
subject to the satisfaction of each of the following conditions:
4.01. Execution. The Administrative Agent shall have received duly
executed counterparts hereof from (i) each of the Borrowers and (ii) the Lenders
constituting the Required Lenders.
4.02. Representations and Warranties. All of the representations and
warranties of the Borrowers in Sections 3.01 and 3.02 hereof shall be true and
correct.
4.03. Officers' Certificates. The Administrative Agent shall have
received an Officers' Certificate to the effect that all of the conditions in
this Section 4 are satisfied.
<PAGE>
<PAGE>
-11-
SECTION 5. Miscellaneous.
5.01. Amendment Limited. All terms, provisions, covenants,
representations, warranties, agreements and conditions contained in the Credit
Agreement shall remain in full force and effect except as expressly contemplated
herein and shall not otherwise be deemed waived, modified or amended hereby.
5.02. Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original, but
all of such counterparts together shall constitute one and the same agreement.
5.03. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York without regard
to its principles of conflicts of law.
5.04. Headings. Headings have been inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Amendment.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
TIME WARNER ENTERTAINMENT
COMPANY, L.P.
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Senior Vice President and Chief
Financial Officer
TIME WARNER ENTERTAINMENT-
ADVANCE/NEWHOUSE PARTNERSHIP
By: TIME WARNER ENTERTAINMENT
COMPANY, L.P.,
Managing Partner
By: /s/ Richard J. Bressler
________________________________________
Name:
Title: Senior Vice President and Chief
Financial Officer
TWI CABLE INC.
By: /s/ Richard J. Bressler
________________________________________
Name:
Title:
THE CHASE MANHATTAN BANK, as
Administrative Agent and Lender
By: /s/ B.J. Lillis
________________________________________
Name:
Title: Attorney-in-Fact
<PAGE>
<PAGE>
Signature pages for the Banks that are Parties to Amendment and Waiver No. 2 to
the TWE Credit Agreement have been omitted.
<PAGE>
<PAGE>
Execution Counterpart
AMENDMENT NO. 5
AMENDMENT NO. 5 dated as of April 25, 1996 between TURNER
BROADCASTING SYSTEM, INC., a Georgia corporation (the "Company"), the Banks (as
such term is defined below) party hereto and THE CHASE MANHATTAN BANK (NATIONAL
ASSOCIATION) ("Chase"), as agent (the "Agent").
The Company, certain lenders (the "Banks") and the Agent are
party to a Credit Agreement dated as of July 1, 1993 (as amended, supplemented
and otherwise modified and in effect to but excluding the date hereof, the
"Credit Agreement"). The Company has requested that the Banks agree, and the
Banks party hereto are willing, to amend certain provisions of the Credit
Agreement, all on the terms and conditions of this Amendment. Accordingly, in
consideration of the premises and the mutual agreements contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
Section 1. Definitions. Terms used but not defined herein shall
have the respective meanings ascribed to such terms in the Credit Agreement.
Section 2. Amendments. Subject to the satisfaction of the
conditions to effectiveness specified in Section 4 hereof, but with effect on
and after the date hereof, the Credit Agreement shall be amended as follows:
A. Certain New Defined Terms. Section 1.01 of the Credit
Agreement shall be amended by adding the following new definitions and inserting
the same in the appropriate alphabetical locations:
"Atlanta Hawks' shall mean Atlanta Hawks, Ltd., a Georgia
limited partnership."
"'Acquisition Date' shall mean the date that the Company
becomes a Wholly Owned Subsidiary of either Time
Amendment No. 5
---------------
<PAGE>
<PAGE>
-2-
Warner or a Person of which Time Warner is a Wholly Owned Subsidiary."
"'Time Warner" shall mean Time Warner Inc., a Delaware
corporation."
B. Definition of Cash Flow. Clause (i) of the first sentence of
the definition of "Cash Flow" in Section 1.01 of the Credit Agreement shall be
amended to read as follows:
"(i) Atlanta Hawks shall be deemed to be a Consolidated Subsidiary
during such period unless, on the last day of such period, there shall
exist a Lien on any of the revenues of Atlanta Hawks and"
C. Definition of Subsidiary. The definition of "Subsidiary" in
Section 1.01 of the Credit Agreement shall be amended by adding a new sentence
at the end thereof reading as follows:
"Notwithstanding anything to the contrary contained herein (but subject
to clause (i) of the first sentence of the definition of "Cash Flow" in
Section 1.01 hereof), Atlanta Hawks shall not be deemed to be a
Subsidiary or a Wholly Owned Subsidiary of the Company."
D. Funded Debt Ratio. Section 8.13 of the Credit Agreement shall
be amended to read as follows:
"8.13 Funded Debt Ratio. The Company shall not
permit the Funded Debt Ratio to exceed the following
respective ratios at any time during the following
respective periods:
Period Ratio
------ -----
Amendment No. 5
---------------
<PAGE>
<PAGE>
-3-
From and including
the first Delivery Date
after March 31, 1995
through but excluding
the first Delivery Date after
September 30, 1996 6.00 to 1.00
From and including
the first Delivery Date
after September 30, 1996
through but excluding
the first Delivery Date after
December 31, 1996 6.50 to 1.00
From and including
the first Delivery Date
after December 31, 1996
through but excluding
the first Delivery Date after
March 31, 1997 6.00 to 1.00
From and including
the first Delivery Date
after March 31, 1997
through but excluding
the first Delivery Date after
September 30, 1997 5.50 to 1.00
From and including
the first Delivery Date
after September 30, 1997
through but excluding
the first Delivery Date after
March 31, 1998 5.00 to 1.00
From and including
the first Delivery Date
after March 31, 1998
and at all times thereafter 4.50 to 1.00"
Amendment No. 5
---------------
<PAGE>
<PAGE>
-4-
E. Events of Default. Section 9(e) of the Credit
Agreement shall be amended to read as follows:
"(e) Before the Acquisition Date, there shall occur any amendment
in the provisions requiring supermajority vote pursuant to Article 12,
Section 3 of the by-laws of the Company as amended on and through July
21, 1988 or any amendment in the provisions which are subject to special
class vote pursuant to Article 5, Section C.4 of the articles of
incorporation of the Company as amended on and through August 25, 1987;
or"
Section 3. Representations and Warranties. The
Company represents and warrants to the Banks and the Agent that:
(a) this Amendment has been duly and validly executed and
delivered by the Company and constitutes the Company's legal, valid and
binding obligation, enforceable against the Company in accordance with
its terms; and
(b) after giving effect to this Amendment, (i) no Default shall
have occurred and be continuing and (ii) the representations and
warranties made by the Company in Section 7 of the Credit Agreement are
true and correct on and as of the date hereof with the same force and
effect as if made on and as of such date (or, if any such representation
or warranty is expressly stated to have been made as of a specific date,
as of such specific date).
Section 4. Conditions To Effectiveness. The amendments to the
Credit Agreement set forth in Section hereof shall become effective, as of the
date hereof, upon the receipt by the Agent of this Amendment, duly executed and
delivered by the Company, the Majority Banks and the Agent.
Section 5. Documents Otherwise Unchanged. Except as herein
provided, the Credit Agreement shall remain unchanged and in full force and
effect, and each reference to the Credit Agreement and words of similar import
in the Credit Agreement, as amended hereby, and the Notes shall be a reference
to the Credit Agreement as amended hereby and as the same may be further
Amendment No. 5
---------------
<PAGE>
<PAGE>
-5-
amended, supplemented and otherwise modified and in effect from time to time.
Section 6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be identical and all of which, when
taken together, shall constitute one and the same instrument, and any of the
parties hereto may execute this Amendment by signing any such counterpart.
Section 7. Binding Effect. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
Section 8. Governing Law. This Amendment shall be governed by,
and construed in accordance with, the law of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the day and year first above written.
TURNER BROADCASTING SYSTEM, INC.
By /s/ Christian L. Becken
____________________________
Title: VP & Treasurer
Amendment No. 5
---------------
<PAGE>
<PAGE>
Signature pages for the Banks that are Parties to Amendment No. 5 to the 1993
TBS Credit Agreement have been omitted.
<PAGE>
<PAGE>
[Execution Copy]
AMENDMENT NO. 6
AMENDMENT NO. 6 dated as of September 30, 1996 between TURNER
BROADCASTING SYSTEM, INC., a Georgia corporation (the "Company"), the Banks (as
such term is defined below) party hereto and THE CHASE MANHATTAN BANK, successor
by merger to The Chase Manhattan Bank, N.A. ("Chase"), as agent (the "Agent").
The Company, certain lenders (the "Banks") and the Agent are
party to a Credit Agreement dated as of July 1, 1993 (as amended, supplemented
and otherwise modified and in effect to but excluding the date hereof, the
"Credit Agreement"). The Company has requested that the Banks agree, and the
Banks party hereto are willing, to amend certain provisions of the Credit
Agreement, all on the terms and conditions of this Amendment. Accordingly, in
consideration of the premises and the mutual agreements contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
Section 1. Definitions. Terms used but not defined herein shall
have the respective meanings ascribed to such terms in the Credit Agreement.
Section 2. Amendments. Subject to the satisfaction of the
conditions to effectiveness specified in Section 4 hereof, but with effect on
and after the date hereof, the Credit Agreement shall be amended as follows:
A. Definition of Cash Flow. The last sentence of the definition
of "Cash Flow" in Section 1.01 of the Credit Agreement shall be amended in its
entirety to read as follows:
"Solely for the purposes of computations under Sections 8.11,
8.12 and 8.13 hereof, the calculation of "Cash Flow" for any period that
includes any of the fiscal quarters of the Company ending December 31,
1995, and March 31, June 30, September 30 and December 31, 1996, shall
exclude the adjustments described in the letter dated November 4, 1996
of the Company to the Banks titled "TBS Credit Facilities Post Time
Warner Merger" to the extent that the aggregate of
Amendment No. 6
---------------
<PAGE>
<PAGE>
- 2 -
such adjustments for all such fiscal quarters does not exceed 105% of
the aggregate of the "Ultimate Adjustments" and "Merger Adjustments" for
all such fiscal quarters set forth in Annex 1 to Amendment No. 6 hereto
(it being understood that, to the extent the aggregate of such
adjustments shall exceed 105% of the aggregate of such "Ultimate
Adjustments" and "Merger Adjustments", such excess shall be treated as
expense items in the manner otherwise required by this definition in
calculating net income under clause (a) of this definition)."
B. Funded Debt Ratio. Section 8.13 of the Credit
Agreement shall be amended in its entirety to read as follows:
"8.13 Funded Debt Ratio. The Company shall not
permit the Funded Debt Ratio to exceed the following
respective ratios at any time during the following
respective periods:
Period Ratio
------ -----
From and including
the first Delivery Date
after September 30, 1996
through but excluding
the first Delivery Date after
December 31, 1996 6.50 to 1
From and including
the first Delivery Date
after December 31, 1996
through but excluding
the first Delivery Date after
March 31, 1997 6.50 to 1
From and including
the first Delivery Date
after March 31, 1997
through but excluding
the first Delivery Date after
September 30, 1997 5.50 to 1
Amendment No. 6
---------------
<PAGE>
<PAGE>
- 3 -
From and including
the first Delivery Date
after September 30, 1997
through but excluding
the first Delivery Date after
March 31, 1998 5.00 to 1
From and including
the first Delivery Date
after March 31, 1998
and at all times thereafter 4.50 to 1"
Section 3. Representations and Warranties. The
Company represents and warrants to the Banks and the Agent that:
(a) this Amendment has been duly and validly executed and
delivered by the Company and constitutes the Company's legal, valid and
binding obligation, enforceable against the Company in accordance with
its terms; and
(b) after giving effect to this Amendment, (i) no Default shall
have occurred and be continuing and (ii) the representations and
warranties made by the Company in Section 7 of the Credit Agreement are
true and correct on and as of the date hereof with the same force and
effect as if made on and as of such date (or, if any such representation
or warranty is expressly stated to have been made as of a specific date,
as of such specific date).
Section 4. Conditions To Effectiveness. The amendments to the
Credit Agreement set forth in Section hereof shall become effective, as of the
date hereof, upon the receipt by the Agent of this Amendment, duly executed and
delivered by the Company, the Majority Banks and the Agent.
Section 5. Documents Otherwise Unchanged. Except as herein
provided, the Credit Agreement shall remain unchanged and in full force and
effect, and each reference to the Credit Agreement and words of similar import
in the Credit Agreement, as amended hereby, and the Notes shall be a reference
to the Credit Agreement as amended hereby and as the same may be further
Amendment No. 6
---------------
<PAGE>
<PAGE>
- 4 -
amended, supplemented and otherwise modified and in effect from time to time.
Section 6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be identical and all of which, when
taken together, shall constitute one and the same instrument, and any of the
parties hereto may execute this Amendment by signing any such counterpart.
Section 7. Binding Effect. This Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
Section 8. Governing Law. This Amendment shall be
governed by, and construed in accordance with, the law of the
State of New York.
Amendment No. 6
---------------
<PAGE>
<PAGE>
- 5 -
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the day and year first above written.
TURNER BROADCASTING SYSTEM, INC.
By /s/ William P. Eddy
____________________________
Title: Assistant Treasurer
Amendment No. 6
---------------
<PAGE>
<PAGE>
Signature pages for the Banks that are Parties to Amendment No. 6 to the 1993
TBS Credit Agreement have been omitted.
<PAGE>
<PAGE>
TBS Inc.
Debt Covenant Projections
Post Merger 1996 Forecast
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter Quarter Full Year
12/31/95 3/31/96 6/30/96 9/30/96 12/31/96 12/31/96
-------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flow As Adjusted 75,391 118,072 142,000 179,000 514,463
Adjustments:
CRE ultimate adjustments (42,000)a (30,000)a (72,000)
NLC ultimate adjustments (50,000)a (49,000)a (99,000)
TPS contract (4,000)b (4,000)
Merger costs (9,749) b (951)b (5,762)b (2,089)b (43,000)b (51,802)
Severance costs (37,000)b (37,000)
Affiliation agreements (2,000)b (2,000)
Development costs:
Castle Rock Entertainment (25,000)b (25,000)
New Line Cinema (45,000)b (45,000)
TBS (48,000)b (48,000)
Licensed and Produced Prog:
TNT (10,000)b (10,000)
WTBS (73,000)b (73,000)
---------- ---------- ---------- ---------- ---------- ----------
Reported OCF 74,440 112,310 47,911 (187,000) 47,661
Ultimate Adjustments sum of a (92,000) (79,000) (171,000)
Merger Adjustments sum of b (9,749) (951) (5,762) (2,089) (287,000) (295,802)
</TABLE>
NOTE: The above adjustments are estimates based on facts existing as of October
31, 1996. Due to the subjective nature of the estimation process, the
adjustments may change.
<PAGE>
<PAGE>
Execution Counterpart
AMENDMENT NO. 2
AMENDMENT NO. 2 dated as of April 26, 1996 between TURNER
BROADCASTING SYSTEM, INC., a Georgia corporation (the "Company"), the Banks (as
such term is defined below) party hereto and THE CHASE MANHATTAN BANK (NATIONAL
ASSOCIATION) ("Chase"), as agent (the "Agent").
The Company, certain lenders (the "Banks") and the Agent are
party to a Credit Agreement dated as of September 7, 1994 (as amended,
supplemented and otherwise modified and in effect to but excluding the date
hereof, the "Credit Agreement"). The Company has requested that the Banks agree,
and the Banks party hereto are willing, to amend certain provisions of the
Credit Agreement, all on the terms and conditions of this Amendment.
Accordingly, in consideration of the premises and the mutual agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions. Terms used but not defined
herein shall have the respective meanings ascribed to such terms
in the Credit Agreement.
Section 2. Amendments. Subject to the satisfaction of
the conditions to effectiveness specified in Section 4 hereof,
but with effect on and after the date hereof, the Credit
Agreement shall be amended as follows:
A. Certain New Defined Terms. Section 1.01 of the
Credit Agreement shall be amended by adding the following new
definitions and inserting the same in the appropriate
alphabetical locations:
"Atlanta Hawks' shall mean Atlanta Hawks, Ltd., a
Georgia limited partnership."
"'Acquisition Date' shall mean the date that the Company
becomes a Wholly Owned Subsidiary of either Time
Amendment No. 2
<PAGE>
<PAGE>
- 2 -
Warner or a Person of which Time Warner is a Wholly Owned Subsidiary."
"'Time Warner" shall mean Time Warner Inc., a
Delaware corporation."
B. Definition of Cash Flow. Clause (i) of the first
sentence of the definition of "Cash Flow" in Section 1.01 of the
Credit Agreement shall be amended to read as follows:
"(i) Atlanta Hawks shall be deemed to be a Consolidated Subsidiary
during such period unless, on the last day of such period, there shall
exist a Lien on any of the revenues of Atlanta Hawks and"
C. Definition of Subsidiary. The definition of
"Subsidiary" in Section 1.01 of the Credit Agreement shall be
amended by adding a new sentence at the end thereof reading as follows:
"Notwithstanding anything to the contrary contained herein (but subject
to clause (i) of the first sentence of the definition of "Cash Flow" in
Section 1.01 hereof), Atlanta Hawks shall not be deemed to be a
Subsidiary or a Wholly Owned Subsidiary of the Company."
D. Funded Debt Ratio. Section 8.13 of the Credit
Agreement shall be amended to read as follows:
"8.13 Funded Debt Ratio. The Company shall not
permit the Funded Debt Ratio to exceed the following
respective ratios at any time during the following
respective periods:
Period Ratio
Amendment No. 2
<PAGE>
<PAGE>
- 3 -
From and including the first
Delivery Date after March 31,
1995 through but excluding the
first Delivery Date after
September 30, 1996 6.00 to 1.00
From and including the first
Delivery Date after September
30, 1996 through but excluding
the first Delivery Date after
December 31, 1996 6.50 to 1.00
From and including the first
Delivery Date after December
31, 1996 through but excluding
the first Delivery Date after
March 31, 1997 6.00 to 1.00
From and including the first
Delivery Date after March 31,
1997 through but excluding the
first Delivery Date after
September 30, 1997 5.50 to 1.00
From and including the first
Delivery Date after September
30, 1997 through but excluding
the first Delivery Date after
March 31, 1998 5.00 to 1.00
From and including the first
Delivery Date after March 31,
1998 and at all times
thereafter 4.50 to 1.00"
Amendment No. 2
<PAGE>
<PAGE>
- 4 -
E. Events of Default. Section 9(e) of the Credit
Agreement shall be amended to read as follows:
"(e) Before the Acquisition Date, there shall occur any amendment
in the provisions requiring supermajority vote pursuant to Article 12,
Section 3 of the by-laws of the Company as amended on and through July
21, 1988 or any amendment in the provisions which are subject to special
class vote pursuant to Article 5, Section C.4 of the articles of
incorporation of the Company as amended on and through August 25, 1987;
or"
Section 3. Representations and Warranties. The
Company represents and warrants to the Banks and the Agent that:
(a) this Amendment has been duly and validly executed and
delivered by the Company and constitutes the Company's legal, valid and
binding obligation, enforceable against the Company in accordance with
its terms; and
(b) after giving effect to this Amendment, (i) no Default shall
have occurred and be continuing and (ii) the representations and
warranties made by the Company in Section 7 of the Credit Agreement are
true and correct on and as of the date hereof with the same force and
effect as if made on and as of such date (or, if any such representation
or warranty is expressly stated to have been made as of a specific date,
as of such specific date).
Section 4. Conditions To Effectiveness. The
amendments to the Credit Agreement set forth in Section hereof
shall become effective, as of the date hereof, upon the receipt
by the Agent of this Amendment, duly executed and delivered by the Company, the
Majority Banks and the Agent.
Section 5. Documents Otherwise Unchanged. Except as herein
provided, the Credit Agreement shall remain unchanged and in full force and
effect, and each reference to the Credit Agreement and words of similar import
in the Credit Agreement, as amended hereby, and the Notes shall be a reference
to the Credit Agreement as amended hereby and as the same may be further
Amendment No. 2
<PAGE>
<PAGE>
- 5 -
amended, supplemented and otherwise modified and in effect from time to time.
Section 6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be identical and all of which, when
taken together, shall constitute one and the same instrument, and any of the
parties hereto may execute this Amendment by signing any such counterpart.
Section 7. Binding Effect. This Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
Section 8. Governing Law. This Amendment shall be
governed by, and construed in accordance with, the law of the
State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the day and year first above written.
TURNER BROADCASTING SYSTEM, INC.
By /s/ Christian L. Becken
____________________________
Title: VP & Treasurer
Amendment No. 2
<PAGE>
<PAGE>
Signature pages for the Banks that are Parties to Amendment No. 2 to the 1994
TBS Credit Agreement have been omitted.
<PAGE>
<PAGE>
[Execution Copy]
AMENDMENT NO. 3
AMENDMENT NO. 3 dated as of September 30, 1996 between TURNER
BROADCASTING SYSTEM, INC., a Georgia corporation (the "Company"), the Banks (as
such term is defined below) party hereto and THE CHASE MANHATTAN BANK, successor
by merger to The Chase Manhattan Bank, N.A. ("Chase"), as agent (the "Agent").
The Company, certain lenders (the "Banks") and the Agent are
party to a Credit Agreement dated as of September 7, 1994 (as amended,
supplemented and otherwise modified and in effect to but excluding the date
hereof, the "Credit Agreement"). The Company has requested that the Banks agree,
and the Banks party hereto are willing, to amend certain provisions of the
Credit Agreement, all on the terms and conditions of this Amendment.
Accordingly, in consideration of the premises and the mutual agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions. Terms used but not defined herein shall
have the respective meanings ascribed to such terms in the Credit Agreement.
Section 2. Amendments. Subject to the satisfaction of the
conditions to effectiveness specified in Section 4 hereof, but with effect on
and after the date hereof, the Credit Agreement shall be amended as follows:
A. Definition of Cash Flow. The last sentence of the definition
of "Cash Flow" in Section 1.01 of the Credit Agreement shall be amended in its
entirety to read as follows:
"Solely for the purposes of computations under Sections 8.11,
8.12 and 8.13 hereof, the calculation of "Cash Flow" for any period that
includes any of the fiscal quarters of the Company ending December 31,
1995, and March 31, June 30, September 30 and December 31, 1996, shall
exclude the adjustments described in the letter dated November 4, 1996
of the Company to the Banks titled "TBS Credit Facilities Post Time
Warner Merger" to the extent that the aggregate of such adjustments for
all such fiscal quarters does not exceed 105% of the aggregate of the
"Ultimate Adjustments" and "Merger Adjustments" for all such fiscal
quarters set forth in Annex 1 to Amendment No. 3 hereto (it being
understood that, to the extent the aggregate of
Amendment No. 3
<PAGE>
<PAGE>
- 2 -
such adjustments shall exceed 105% of the aggregate of such "Ultimate
Adjustments" and "Merger Adjustments", such excess shall be treated as
expense items in the manner otherwise required by this definition in
calculating net income under clause (a) of this definition)."
B. Funded Debt Ratio. Section 8.13 of the Credit
Agreement shall be amended in its entirety to read as follows:
"8.13 Funded Debt Ratio. The Company shall not
permit the Funded Debt Ratio to exceed the following
respective ratios at any time during the following
respective periods:
Period Ratio
From and including the first
Delivery Date after September
30, 1996 through but excluding
the first Delivery Date after
December 31, 1996 6.50 to 1
From and including the first
Delivery Date after December
31, 1996 through but excluding
the first Delivery Date after
March 31, 1997 6.50 to 1
From and including the first
Delivery Date after March 31,
1997 through but excluding the
first Delivery Date after
September 30, 1997 5.50 to 1
Amendment No. 3
<PAGE>
<PAGE>
- 3 -
From and including the first
Delivery Date after September
30, 1997 through but excluding
the first Delivery Date after
March 31, 1998 5.00 to 1
From and including the first
Delivery Date after March 31,
1998 and at all times
thereafter 4.50 to 1"
Section 3. Representations and Warranties. The Company represents
and warrants to the Banks and the Agent that:
(a) this Amendment has been duly and validly executed and
delivered by the Company and constitutes the Company's legal, valid and
binding obligation, enforceable against the Company in accordance with
its terms; and
(b) after giving effect to this Amendment, (i) no Default shall
have occurred and be continuing and (ii) the representations and
warranties made by the Company in Section 7 of the Credit Agreement are
true and correct on and as of the date hereof with the same force and
effect as if made on and as of such date (or, if any such representation
or warranty is expressly stated to have been made as of a specific date,
as of such specific date).
Section 4. Conditions To Effectiveness. The amendments to the
Credit Agreement set forth in Section hereof shall become effective, as of the
date hereof, upon the receipt by the Agent of this Amendment, duly executed and
delivered by the Company, the Majority Banks and the Agent.
Section 5. Documents Otherwise Unchanged. Except as herein
provided, the Credit Agreement shall remain unchanged and in full force and
effect, and each reference to the Credit Agreement and words of similar import
in the Credit Agreement, as amended hereby, and the Notes shall be a reference
to the Credit Agreement as amended hereby and as the same may be further
Amendment No. 3
<PAGE>
<PAGE>
- 4 -
amended, supplemented and otherwise modified and in effect from time to time.
Section 6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be identical and all of which, when
taken together, shall constitute one and the same instrument, and any of the
parties hereto may execute this Amendment by signing any such counterpart.
Section 7. Binding Effect. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
Section 8. Governing Law. This Amendment shall be governed by,
and construed in accordance with, the law of the State of New York.
Amendment No. 3
<PAGE>
<PAGE>
- 5 -
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the day and year first above written.
TURNER BROADCASTING SYSTEM, INC.
By /s/ William P. Eddy
______________________________
Title: Assistant Treasurer
Amendment No. 3
<PAGE>
<PAGE>
Signature pages for the Banks that are Parties to Amendment No. 3 to the 1994
TBS Credit Agreement have been omitted.
<PAGE>
<PAGE>
TBS Inc.
Debt Covenant Projections
Post Merger 1996 Forecast
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter Quarter Full Year
12/31/95 3/31/96 6/30/96 9/30/96 12/31/96 12/31/96
-------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash Flow As Adjusted 75,391 118,072 142,000 179,000 514,463
Adjustments:
CRE ultimate adjustments (42,000)a (30,000)a (72,000)
NLC ultimate adjustments (50,000)a (49,000)a (99,000)
TPS contract (4,000)b (4,000)
Merger costs (9,749)b (951)b (5,762)b (2,089)b (43,000)b (51,802)
Severance costs (37,000)b (37,000)
Affiliation agreements (2,000)b (2,000)
Development costs:
Castle Rock Entertainment (25,000)b (25,000)
New Line Cinema (45,000)b (45,000)
TBS (48,000)b (48,000)
Licensed and Produced Prog:
TNT (10,000)b (10,000)
WTBS (73,000)b (73,000)
---------- ---------- --------- ---------- ---------- ----------
Reported OCF 74,440 112,310 47,911 (187,000) 47,661
Ultimate Adjustments sum of a (92,000) (79,000) (171,000)
Merger Adjustments sum of b (9,749) (951) (5,762) (2,089) (287,000) (295,802)
</TABLE>
NOTE: The above adjustments are estimates based on facts existing as of October
31, 1996. Due to the subjective nature of the estimation process, the
adjustments may change.
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF TIME WARNER INC.
Set forth below are the names of certain subsidiaries, at least 50% owned,
directly or indirectly, of Time Warner and TWE as of December 31, 1996, unless
otherwise indicated. Certain subsidiaries which when considered in the aggregate
would not constitute a significant subsidiary are omitted from the list below.
Indented subsidiaries are direct subsidiaries of the company under which they
are indented.
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
TIME WARNER INC. (Registrant): Delaware
Turner Broadcasting System, Inc............................................... 100 Georgia
Turner Arena Productions and Sales, Inc.................................... 100 Georgia
Atlanta Coliseum, Inc.................................................... 100 Georgia
The Omni Promotions Management Company................................... 100 Georgia
Seats, Inc............................................................... 100 Georgia
Atlanta National League Baseball Club, Inc................................. 100 Georgia
Hawks Basketball, Inc...................................................... 100 Georgia
Atlanta Hawks, L.P....................................................... 100 Georgia
Cable News Network, Inc.................................................... 100 Georgia
Cable News International, Inc............................................ 100 Delaware
CNN America, Inc......................................................... 100 Delaware
CNN Germany, Inc......................................................... 100 Georgia
CNN Newsource Sales, Inc................................................... 100 Georgia
Castle Rock Entertainment Inc.............................................. 100 Georgia
Castle Rock Entertainment................................................ 100(1) California
Goodwill Games, Inc........................................................ 100 Georgia
HB Holding Co.............................................................. 100 Delaware
Hanna-Barbera Entertainment Co., Inc..................................... 100 California
New Line Cinema Corporation................................................ 100 Delaware
Turner Entertainment Group, Inc............................................ 100 Georgia
Turner Entertainment Networks, Inc....................................... 100 Georgia
Turner Entertainment Networks Asia, Inc............................... 100 Georgia
Turner Network Television, Inc........................................ 100 Georgia
Superstation, Inc................................................... 100 Georgia
Turner Original Productions, Inc................................. 100 Georgia
The Cartoon Network, Inc............................................ 100 Georgia
Turner Classic Movies, Inc.......................................... 100 Georgia
Turner Home Entertainment, Inc........................................ 100 Georgia
Turner Learning, Inc................................................ 100 Georgia
Turner Publishing, Inc.............................................. 100 Georgia
Turner Retail Company............................................... 100 Georgia
Turner Pictures Group, Inc................................................. 100 Georgia
Turner Entertainment Co............................................. 100 Georgia
H-B Distribution Co.............................................. 100 Georgia
TBS Funding Corp........................................................... 100 Georgia
Turner Broadcasting Sales, Inc............................................. 100 Georgia
Turner Broadcasting System Asia Pacific, Inc............................... 100 Georgia
Turner Home Satellite, Inc................................................. 100 Georgia
</TABLE>
1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
Turner Broadcasting System Limited......................................... 100 U.K.
Turner International Advertising Sales Limited........................... 100 U.K.
Turner International Network Sales Limited............................... 100 U.K.
Turner International, Inc.................................................. 100 Georgia
Turner Network Sales, Inc.................................................. 100 Georgia
Turner Omni Venture, Inc................................................... 100 Georgia
ICC Ventures, Inc.......................................................... 100 Georgia
CNN Center Ventures...................................................... 100(2)
Turner Private Networks, Inc............................................... 100 Georgia
Turner Properties, Inc..................................................... 100 Georgia
Turner Sports, Inc......................................................... 100 Georgia
Turner Sports International Enterprises, Inc............................. 100 Georgia
World Championship Wrestling, Inc.......................................... 100 Georgia
Time Warner Companies, Inc.................................................... 100 Delaware
Asiaweek Limited........................................................... 80 Hong Kong
Sunset Publishing Corporation.............................................. 100 Delaware
Time International Inc..................................................... 100 Delaware
Time Inc.(3)............................................................... 100 Delaware
American Family Enterprises (partnership)................................ 50 New York
Book-of-the-Month Club, Inc.............................................. 100 New York
Entertainment Weekly, Inc................................................ 100 Delaware
Little, Brown and Company (Inc.)......................................... 100 Massachusetts
Time Distribution Services, Inc.......................................... 100 Delaware
Time Customer Serivce, Inc............................................... 100 Delaware
Time Publishing Ventures, Inc............................................ 100 Delaware
Southern Progress Corporation(4)...................................... 100 Delaware
Time Inc. Ventures....................................................... 100 Delaware
Health Publications, Inc.............................................. 100 Delaware
Hippocrates Partners (partnership).................................. 50 California
TWC Ventures............................................................. 100 Delaware
Time Life Inc............................................................ 100 Delaware
Time-Life Customer Service, Inc....................................... 100 Delaware
Warner Books, Inc........................................................ 100 New York
Warner Publisher Services Inc............................................ 100 New York
Time TBS Holdings, Inc..................................................... 100 Delaware
TW Service Holding I, L.P. (partnership)................................... (5) Delaware
TW Service Holding II, L.P. (partnership).................................. (5) Delaware
TW Programming Co. (partnership)......................................... (6) New York
TW Cable Service Co. (partnership)....................................... (7) New York
Time Warner Connect (partnership)........................................ (7) New York
WCI Record Club Inc........................................................ 100(8) Delaware
The Columbia House Company (partnership)................................. 50 New York
Warner Communications Inc.................................................. 100 Delaware
DC Comics (partnership).................................................. 50(9) New York
Warner Bros. Music International Inc..................................... 100 Delaware
Warner-Tamerlane Publishing Corp......................................... 100 California
WB Music Corp............................................................ 100 California
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
W Cinemas Holding Inc.................................................... 100 Delaware
W Cinemas Inc......................................................... 100 Delaware
Alpha Theatres Inc.................................................... 100 Delaware
NPP Music Corp........................................................... 100 Delaware
Warner/Chappell Music, Inc............................................... 100 Delaware
New Chappell Music, Inc(10)........................................... 100 Delaware
Super Hype Publishing, Inc............................................ 100 New York
Cotillion Music, Inc.................................................. 100 Delaware
Walden Music, Inc..................................................... 100 New York
Summy-Birchard, Inc................................................... 100 Wyoming
Warner Bros. Publications U.S. Inc.................................... 100 New York
CPP/Belwin, Inc....................................................... 100 Delaware
Lorimar Motion Picture Management, Inc................................... 100 California
E.C. Publications, Inc................................................... 100 New York
WCI/Am Law Inc........................................................... 100 Delaware
American Lawyer Media, L.P............................................ 83.25 Delaware
Warner Music Group Inc................................................... 100 Delaware
Warner Bros. Records Inc................................................. 100 Delaware
Atlantic Recording Corporation........................................ 100 Delaware
Warner-Elektra-Atlantic Corporation................................... 100 New York
WEA International Inc.(11)............................................... 100 Delaware
Warner Music Canada Ltd............................................... 100 Canada
The Columbia House Company (Canada) (partnership)................... 50 Canada
Warner Special Products Inc.............................................. 100 Delaware
Warner Custom Music Corp.............................................. 100 California
WEA Manufacturing Inc.................................................... 100 Delaware
Allied Record Company................................................. 100 California
Time Warner Limited...................................................... 100 U.K.
Warner Music International Services Ltd............................... 100 U.K.
Time Warner UK Limited.............................................. 100 U.K.
Warner Chappell Music Group (UK) Ltd................................ 100 U.K.
Warner Chappell Music Limited.................................... 100 U.K.
Magnet Music Ltd............................................... 100 U.K.
Warner Music (U.K.) Limited......................................... 100 U.K.
Ivy Hill Corporation..................................................... 100 Delaware
Warner Cable Communications Inc.......................................... 100 Delaware
TWI Ventures Ltd......................................................... 100 Delaware
American Television and Communications Corporation......................... 100(12) Delaware
American Communications Corporation...................................... 100 Indiana
American Digital Communications, Inc..................................... 100 Delaware
ATC Holdings II, Inc..................................................... 100 Delaware
ARP 113, Inc.......................................................... 100 Delaware
Paragon Communications (partnership).................................. 50(13) Colorado
ATC/PPV, Inc............................................................. 100 Delaware
Carolina Network Corporation............................................. 100 Delaware
Philadelphia Community Antenna Television Company........................ 100 Pennsylvania
Lower Bucks Cablevision, Inc.......................................... 100 Pennsylvania
Tri-County Cable Television Company................................... 100 New Jersey
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
Public Cable Company..................................................... 100 Maine
Public Cable Company (partnership).................................... 77 Maine
TWI Cable Inc.(14)......................................................... 100 Delaware
TW/Kblcom Inc.(15)....................................................... 100 Delaware
KBL Communications, Inc............................................... 100 Delaware
Paragon Communications (partnership)................................ 50(13) Colorado
Summit Communications Group, Inc......................................... 100 Delaware
Summit Cable Inc...................................................... 100 Delaware
Summit Cable Services of Georgia, Inc............................... 100 Delaware
Summit Cable Services of Forsyth County, Inc........................ 100 Delaware
Summit Cable Services of Thom-A-Lex, Inc............................ 100 Delaware
Time Warner Operations Inc................................................. 100(16) Delaware
HBO Film Management, Inc................................................. 100 Delaware
TW/TAE Holding, Inc........................................................ 100 Delaware
TW/TAE, Inc.............................................................. 100 Delaware
SUBSIDIARIES OF TIME WARNER ENTERTAINMENT COMPANY, L.P.
Time Warner Entertainment-Advance/Newhouse Partnership.......................... 66.67 New York
CV of Viera Joint Venture (partnership)....................................... 50 Florida
Time Warner Communications Holdings Inc.(17).................................... 100 Delaware
Century Venture Corporation..................................................... 50 Delaware
Erie Telecommunications, Inc.................................................... 54.19 Pennsylvania
Kansas City Cable Partners...................................................... 50 Colorado
Time Warner Cable New Zealand Holdings Ltd...................................... 100(18) New Zealand
Queens Inner Unity Cable System................................................. 56.21 New York
Comedy Partners, L.P. (partnership)............................................. 50 New York
Warner Cable of Vermont Inc..................................................... 100 Delaware
HBO Direct, Inc................................................................. 100 Delaware
TWE Asia, Inc................................................................. 100 Delaware
TW Buffer Inc................................................................. 100 Delaware
Warner Bros. (F.E.) Inc.................................................... 100 Delaware
Warner Bros. (Japan) Inc................................................... 100 Delaware
Warner Bros. (South) Inc................................................... 100 Delaware
Warner Bros. (Transatlantic) Inc........................................... 100 Delaware
Bethel Productions Inc................................................... 100 Delaware
Warner Films Consolidated Inc.............................................. 100 Delaware
Exeter Distributing Inc.................................................. 100 Delaware
Riverside Avenue Distributing Inc........................................ 100 Delaware
HBO Asia Holdings, L.P. (partnership)........................................... 100(19) Delaware
HBO Pacific Partners, C.V..................................................... 83.33 Neth. Antiles
Home Box Office (Singapore) Pty. Ltd....................................... 100 Singapore
Turner/HBO Ltd. Purpose Joint Venture (partnership)............................. 50 New York
Acapulco 37 S.A. de C.V......................................................... 100 Mexico
Warner Bros. Gesellschaft mbH................................................... 100 Austria
Time Warner Entertainment Limited............................................... 100 U.K.
The Bountiful Company Limited................................................. 50 U.K.
Warner Bros. Studio Stores Ltd................................................ 100 U.K.
Warner Bros. Consumer Products (UK) Ltd....................................... 100 U.K.
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
TWE Finance Limited........................................................... 100 U.K.
Warner Bros. Theatres Ltd..................................................... 100 U.K.
Warner Bros. Distributors Ltd................................................. 100 U.K.
Lorimar Telepictures International Ltd..................................... 100 U.K.
Warner Bros. International Television Distribution Italia S.p.A.......... 100 Italy
Warner Bros. Theatres (U.K.) Limited.......................................... 100 U.K.
Warner Bros. Theatres Advertising Agency Limited........................... 100 U.K.
Warner Bros. Productions Limited.............................................. 100 U.K.
Warner Home Video (U.K.) Limited.............................................. 100 U.K.
Metro Color Laboratories (U.K.) Ltd............................................. 100 U.K.
Kay Holdings Ltd.............................................................. 100 U.K.
Metrocolor (London) Limited................................................ 100 U.K.
Lorimar Distribution International (Canada) Corp................................ 100 Canada
Lorimar Canada Inc.............................................................. 100 Canada
Productions et Editions Cinematographiques Francaises SARL (PECF)............... 100 France
Warner Home Video France S.A.................................................. 100 France
Time Warner Entertainment Australia Pty. Ltd.................................... 100 Australia
Lorimar Telepictures Pty. Limited............................................. 100 Australia
Warner Bros. (Australia) Pty. Ltd............................................. 100 Australia
Warner Holdings Australia Pty. Limited........................................ 100 Australia
Warner Bros. Properties (Australia) Pty. Ltd............................... 100 Australia
Warner Bros. Theatres (Australia) Pty. Limited............................. 100 Australia
Warner World Australia Pty. Limited........................................ 100 Australia
Movie World Enterprises Partnership (partnership)........................ 50 Australia
Warner Home Video Pty. Limited............................................. 100 Australia
Warner Bros. Video Pty. Ltd.............................................. 100 Australia
Warner Sea World Aviation Pty. Ltd......................................... 100 Australia
Sea World Aviation Partnership (partnership)............................. 50 Australia
Warner Sea World Investments Pty. Limited.................................. 100 Australia
Sari Lodge Pty. Limited.................................................. 50 Australia
Sea World Management Pty. Ltd......................................... 100 Australia
Warner Sea World Operations Pty. Ltd....................................... 100 Australia
Sea World Enterprises Partnership (partnership).......................... 50 Australia
Warner Sea World Units Pty. Ltd............................................ 100 Australia
Time Warner Germany Holding GmbH................................................ 100(20) Germany
Time Warner Entertainment Germany GmbH........................................ 100 Germany
Time Warner Entertainment Germany GmbH and Co. OHG......................... 100(21) Germany
Warner Bros. Movie World GmbH & Co. KG................................... 60 Germany
Warner Bros. Deutschland Pay TV GmbH....................................... 100 Germany
Warner Home Video GmbH..................................................... 100 Germany
Warner Home Video Spol SRO............................................... 100 Czech Republic
GWHS Grundstrucks Verwaltungs GmbH......................................... 100 Germany
Warner Bros. Film GmbH..................................................... 100 Germany
Warner Bros. Film GmbH Kinobetriebe...................................... 100 Germany
Warner Bros. Film GmbH Multiplex Cinemas Mulheim......................... 100 Germany
Time Warner Merchandising Canada Inc............................................ 100 Canada
Warner Bros. Canada Inc......................................................... 100 Canada
Warner Bros. Distributing (Canada) Limited...................................... 100 Canada
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
Warner Home Video (Canada) Ltd.................................................. 100 Canada
Warner Bros. (Africa) (Pty) Ltd................................................. 100 So. Africa
Warner Bros. Belgium SA/NV...................................................... 100 Belgium
Warner Bros. (D) A/S............................................................ 100 Denmark
Warner & Metronome Films A/S.................................................. 50 Denmark
Warner Bros. Theatres Denmark A/S............................................. 100 Denmark
Scala Biografome I/S (partnership)......................................... 50 Denmark
Dagmar Teatret I/S (partnership)........................................... 50 Denmark
Warner Bros. Film Ve Video Sanayi Ve Ticaret A.S................................ 100 Turkey
Warner Bros. Finland OY......................................................... 100 Finland
Warner Bros. (Holland) B.V...................................................... 100 Netherlands
Warner Home Video (Nederland) B.V............................................. 100 Netherlands
Warner Bros. Theatres (Holland) B.V........................................... 100 Netherlands
Warner Bros. Holdings Sweden AB................................................. 100 Sweden
Warner Bros. (Sweden) AB...................................................... 100 Sweden
Warner Home Video (Sweden) AB................................................. 100 Sweden
Warner Bros. Italia S.p.A....................................................... 100 Italy
Warner Entertainment Italia S.r.L............................................. 100 Italy
Warner Bros. (Korea) Inc........................................................ 100 Korea
Warner Bros. (Mexico) S.A....................................................... 100 Mexico
Warner Bros. (N.Z.) Limited..................................................... 100 New Zealand
Warner Home Video (N.Z.) Limited.............................................. 100 New Zealand
Warner Bros. Norway A/S......................................................... 100 Norway
Warner Bros. Singapore Pte. Ltd................................................. 100 Singapore
Warner Home Video (Ireland) Ltd................................................. 100 Ireland
Warner Home Video Portugal Lda.................................................. 100 Portugal
Warner-Lusomundo Sociedade Iberica de Cinemas Lda............................... 50 Portugal
Warner Home Video Espanola S.A.................................................. 100 Spain
Warner Bros. Consumer Products S.A............................................ 100 Spain
Warner Mycal Corporation........................................................ 50 Japan
Kabelkom Management Co. (partnership)(22)....................................... 50 Delaware
Hungary Holding Co.............................................................. 100(20) New York
Kabelkom Holding Co. (partnership)(22)........................................ 50 Delaware
Quincy Jones Entertainment Company L.P. (partnership)........................... 50 Delaware
DC Comics (partnership)......................................................... 50(9) New York
HBO Ceska Republika, S.R.O...................................................... 100 Czech Republic
</TABLE>
- ------------
(1) TBS owns 58.75% and Castle Rock Entertainment, Inc. owns 41.25%.
(2) Turner Omni Venture, Inc. owns 75% and ICC Ventures, Inc. owns 25%.
(3) The names of five subsidiaries of Time Inc. carrying on the magazine
publishing business are omitted.
(4) The names of nine subsidiaries of Southern Progress Corporation carrying on
the magazine or book publishing business are omitted.
(5) The General Partners of TWE own 87.5% and TW/TAE, Inc. and Time Warner
Companies, Inc. each own 6.25% as limited partners.
(6) TWE owns 99% and TW Service Holding II, L.P. owns 1%.
(footnotes continued on next page)
6
<PAGE>
<PAGE>
(footnotes continued from previous page)
(7) TW Service Holding I, L.P. owns 99% and TW Service Holding II, L.P. owns
1%.
(8) Time Warner Companies, Inc. owns 80% and Warner Communications Inc. owns
20%.
(9) Warner Communications Inc. owns 50% and TWE owns 50%.
(10) The names of 16 subsidiaries of New Chappell Inc. carrying on substantially
the same music publishing operations in foreign countries are omitted.
(11) The names of 34 subsidiaries of WEA International Inc. carrying on
substantially the same record, tape and video cassette distribution
operations in foreign countries are omitted.
(12) Time Warner Companies, Inc. owns 86.34%, Warner Communications Inc. owns
7.8% and Time TBS Holdings, Inc. owns 5.86%.
(13) American Television and Communications Corporation indirectly owns 50% of
Paragon Communications and the remaining 50% is owned indirectly by TWI
Cable Inc.
(14) The names of 42 subsidiaries of TWI Cable Inc. carrying on the cable
television business are omitted.
(15) The names of 21 subsidiaries of TW/Kblcom Inc. carrying on the cable
television business are omitted.
(16) Time Warner Companies, Inc. owns 87.21% and Warner Communications Inc. owns
12.79%.
(17) The names of 21 subsidiaries of Time Warner Communications Holdings Inc.
carrying on the same alternate access operations are omitted.
(18) TWE owns 99% and Time Warner Companies, Inc. owns 1%.
(19) TWE owns 99% and TWE Asia Inc. owns 1%.
(20) TWE owns 99% and HBO Direct, Inc. owns 1%.
(21) Time Warner Entertainment Germany GmbH owns 85% and Time Warner Germany
Holding GmbH owns 15%.
(22) The names of 13 subsidiaries of Kabelkom Management Co. and Kabelkom
Holding Co. carrying on substantially the same cable television operations
in Hungary are omitted.
7
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of (i) our reports dated
February 11, 1997, with respect to the (a) consolidated financial statements,
schedules and supplementary information of Time Warner Inc. ('Time Warner') and
(b) consolidated financial statements and schedule of Time Warner Entertainment
Company, L.P. ('TWE') included in this Annual Report on Form 10-K for the year
ended December 31, 1996, and (ii) our report dated March 3, 1995, with respect
to the combined financial statements of the Time Warner Service Partnerships
included in TWE's Annual Report on Form 10-K for the year ended December 31,
1994, in each of the following:
1. Registration Statement No. 333-11471 on Form S-4;
2. Post-Effective Amendment No. 1 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
3. Post-Effective Amendment No. 2 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
4. Post-Effective Amendment No. 3 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
5. Post-Effective Amendment No. 4 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
6. Post-Effective Amendment No. 5 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No.
333-14053 on Form S-8;
8. Registration Statement No. 333-14611 on Form S-3;
9. Registration Statement No. 333-17171 on Form S-3 (and Registration
Statement No. 333-17171-01 of Time Warner Companies, Inc. as to which the
prospectus also relates to post-effective amendment to Registration
Statement No. 33-50237 of Time Warner Companies, Inc.);
10. Registration Statement No. 33-61497 on Form S-8 of Time Warner
Companies, Inc.
ERNST & YOUNG LLP
New York, New York
March 21, 1997
<PAGE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated
January 19, 1995, except as to Note 6, which is as of January 27, 1995, with
respect to the financial statements and schedule of Paragon Communications which
are incorporated by reference in this Annual Report on Form 10-K for the year
ended December 31, 1994, in each of the following:
1. Registration Statement No. 333-11471 on Form S-4;
2. Post-Effective Amendment No. 1 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
3. Post-Effective Amendment No. 2 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
4. Post-Effective Amendment No. 3 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
5. Post-Effective Amendment No. 4 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
6. Post-Effective Amendment No. 5 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No.
333-14053 on Form S-8;
8. Registration Statement No. 333-14611 on Form S-3;
9. Registration Statement No. 333-17171 on Form S-3 (and Registration
Statement No. 333-17171-01 of Time Warner Companies, Inc. as to which the
prospectus also relates to post-effective amendment to Registration
Statement No. 33-50237 of Time Warner Companies, Inc.); and
10. Registration Statement No. 33-61497 on Form S-8 of Time Warner
Companies, Inc.
PRICE WATERHOUSE LLP
Denver, Colorado
March 21, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Time Warner Inc. for the twelve months ended
December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 514
<SECURITIES> 0
<RECEIVABLES> 3,397
<ALLOWANCES> 976
<INVENTORY> 941
<CURRENT-ASSETS> 4,821
<PP&E> 3,028
<DEPRECIATION> 1,042
<TOTAL-ASSETS> 35,064
<CURRENT-LIABILITIES> 4,012
<BONDS> 12,713
<COMMON> 6
1,672
4
<OTHER-SE> 9,492
<TOTAL-LIABILITY-AND-EQUITY> 35,064
<SALES> 10,064
<TOTAL-REVENUES> 10,064
<CGS> 5,922
<TOTAL-COSTS> 5,922
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 968
<INCOME-PRETAX> 4
<INCOME-TAX> 160
<INCOME-CONTINUING> (156)
<DISCONTINUED> 0
<EXTRAORDINARY> (35)
<CHANGES> 0
<NET-INCOME> (191)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
