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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, 1997.
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
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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. [x]
As of March 23, 1998, there were 532,707,059 shares of registrant's Common
Stock and 57,061,942 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 23, 1998) was
approximately $35.5 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 1998 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 Magazine and Book Publishing, TWI
Cable and the Time Warner General and Limited Partners.(1)
Time Warner General and Limited Partners own 100% of 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 65.2% of the TWE - A/N Partnership (Cable).
The TWE - A/N Partnership is also 33.3% - owned by Advance/Newhouse and 1.5% -
owned by TWI Cable.(3)
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(1) Time Warner Companies, 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 interests
senior and junior to the pro rata priority capital interests. (See Note 4 to the
Company's consolidated statements.)
(3) Direct or indirect common equity interests. In addition, TWI Cable
indirectly owns preferred partnership interests.
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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, recorded music
and music publishing; Cable Networks, consisting principally of interests in
cable television programming; 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.
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, 1997, see Note 16 'Segment
Information,' to the Company's consolidated financial statements, at pages F-51
through F-55 herein.
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 page F-31 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
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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
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.
In 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 is
the managing partner of the TWE-A/N Partnership.
RECENT EVENTS
In early 1998, the Company, through wholly owned subsidiaries, contributed
or beneficially assigned to the TWE-A/N Partnership additional cable television
systems serving approximately 650,000 subscribers, subject to approximately $1
billion of debt, in exchange for common and preferred interests in the TWE-A/N
Partnership. In addition, TWE contributed or beneficially assigned to the
TWE-A/N Partnership its interest in cable television systems serving
approximately 500,000 subscribers formerly owned by Paragon Communications in
satisfaction of certain commitments made by TWE to the TWE-A/N Partnership at
the time of its formation. Following these transactions, the common equity of
the TWE-A/N Partnership is owned approximately as follows: 33.3% by
Advance/Newhouse, 65.2% by TWE and 1.5% indirectly by Time Warner.
In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags Entertainment Corporation ('Six Flags') to Premier Parks
Inc. ('Premier'), a regional theme park operator, for approximately $375 million
of cash and $100 million of convertible preferred stock, before transaction
costs. Under the terms of the transaction, Premier will continue to license the
use of Warner Bros.' and DC Comics' cartoon characters at the Six Flags parks,
and the license will be extended to Premier's other parks in the United States
and Canada. Subject to the satisfaction of certain conditions, the closing of
the transaction is expected in the second quarter of 1998.
In September 1997, the Company, TWE, the TWE-A/N Partnership and a
subsidiary of Tele-Communications, Inc. entered into a letter of intent to form
two new cable television joint ventures in Texas that will be managed by TWE,
expand an existing joint venture in Kansas City, and exchange various cable
television systems to enhance clustering of properties. These transactions,
which are each subject to execution of definitive agreements and customary
closing conditions, are expected to close periodically during 1998.
In June 1997, TWE, Advance/Newhouse and the other partners of Primestar
Partners L.P. ('Primestar') agreed to restructure the business of Primestar by
contributing, in a series of transactions, the separate Primestar direct
broadcast satellite distribution business of each of the Primestar partners
together with their partnership interests into a new corporation. Subject to
regulatory approval, the restructuring is currently expected to close on or
about April 1, 1998. In a separate pending transaction which is also subject to
regulatory approval, the new Primestar would acquire certain high power
satellites and FCC permits from MCI Communications Corporation and The News
Corporation Limited.
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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 television network,
produce and distribute recorded music, license rights to the Company's
characters, operate retail stores featuring consumer products based on the
Company's characters and brands and also operate international theme parks and
motion picture theaters.
FILMED ENTERTAINMENT
The Company's filmed entertainment business includes the production,
financing and distribution of feature motion pictures, 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 broadcast television network and
the distribution of 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, operation and franchising of retail
stores, international movie theaters and theme parks.
The filmed entertainment business also includes New Line Cinema Corporation
and Castle Rock Entertainment ('Castle Rock'), 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 and is compensated for certain distribution and
other services for these businesses.
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. Warner Bros. also acquires
for distribution completed films produced by others. Acquired distribution
rights may be limited to specified territories, media and/or 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. It is expected that the agreements with Morgan
Creek will be renewed. Under this arrangement, Warner Bros. released 'Wild
America' in 1997 and anticipates releasing 'Wrongfully Accused,' 'Incognito' and
'Major League 3,' among others, in 1998. An affiliate of Warner Bros. is a party
to co-financing and distribution agreements with Monarchy Enterprises C.V. and
its affiliate, Regency Entertainment U.S.A. (collectively 'Monarchy/Regency').
These agreements expire in 1998 and will not be renewed. Among the remaining
Monarchy/Regency productions to be distributed by Warner Bros. in 1998 are
'Dangerous Beauty,' 'Goodbye Lover' and 'The Negotiator.' It is anticipated that
'City of Angels' will be released as a co-financed picture in l998.
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In July l997, an affiliate of Warner Bros. and an affiliate of Canal Plus
formed a joint venture to co-finance on a 50/50 basis a total of approximately
20 to 25 motion pictures over a five-year period. Warner Bros. acquired all
distribution rights in the U.S. and Canada and substantially all international
distribution rights to these pictures. Warner Bros. will advance marketing and
distribution costs and will receive a distribution fee in connection with the
exploitation of the pictures. It is anticipated that 'Message in a Bottle' will
be released under this arrangement in 1998.
Warner Bros. and one of its affiliates have reached an agreement in
principle with Village Roadshow Pictures and certain of its affiliates ('VRP')
to co-finance under a cost sharing arrangement the production of up to 20 motion
pictures over a five-year period. Approximately 50% of the production costs of
those pictures will be provided by Warner Bros. and its affiliate, and the
balance will be provided by VRP. Warner Bros. will acquire all distribution
rights in the U.S. and Canada and substantially all international distribution
rights to the co-financed pictures. Warner Bros. will advance marketing and
distribution costs and will receive a distribution fee in connection with the
exploitation of the pictures.
Warner Bros. and Polygram Filmed Entertainment ('Polygram') have agreed to
co-finance on a 50/50 basis the production of motion pictures developed and
produced by Castle Rock through 2000. Warner Bros. and Polygram will each
acquire distribution rights in the U.S. and Canada to half of the Castle Rock
pictures and international distribution rights to the other half on an
alternating picture-by-picture basis. Warner Bros. and Polygram will each
advance marketing and distribution costs and will receive distribution fees in
connection with the exploitation of the Castle Rock pictures. Among the Castle
Rock releases anticipated for l998 are 'Mickey Blue Eyes,' which Warner Bros.
will distribute in the U.S. and Canada, and 'The Last Days of Disco,' to be
distributed by Warner Bros. internationally.
During 1997, Warner Bros. domestically released 25 motion pictures for
theatrical exhibition, of which 11 were produced by or with others. In addition,
Warner Bros. released ten motion pictures in foreign markets, all of which were
produced by others. The following motion pictures released in 1997 produced
substantial domestic gross theatrical receipts: 'Contact,' 'Batman and Robin,'
'Conspiracy Theory,' 'Devil's Advocate' and 'L.A. Confidential.' During 1997,
approximately 54% of film rentals from Warner Bros. theatrical distribution were
generated in the United States and 46% in international territories.
During 1998, Warner Bros. expects to release domestically approximately 28
motion pictures, of which 14 are expected to be produced by or with others.
During the first quarter of 1998, Warner Bros. released 'U.S. Marshals' and
'Sphere.' Other 1998 releases include 'The Avengers,' 'Lethal Weapon 4,' 'You
Have Mail' and 'Quest for Camelot,' the first fully animated feature film
produced by Warner Bros.' feature animation division.
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 on a growing array of international television
distribution outlets. With the TBS Transaction, the distribution library owned
or managed by Warner Bros. grew to more than 6,000 feature films, 28,500
television titles, l0,000 animated titles plus l,500 classic animated shorts.
The acquisition reunites the entire Warner Bros. film and animation library and
adds classic MGM and RKO titles, and animation from Hanna-Barbera and MGM.
Warner Bros. acts as distributor of the programming owned by subsidiaries of
TBS.
Warner Bros.' television programming is produced by Warner Bros.
Television, which produces dramatic and comedy programming, and Telepictures
Productions ('Telepictures'), 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 1997-1998 season, Warner Bros. Television successfully launched
several new network primetime series, including 'Veronica's Closet.' Returning
network primetime series included, among others,
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the top-rated series 'ER' and 'Friends' (both in their fourth season); 'Murphy
Brown' (in its tenth and final season); 'Family Matters' (in its ninth season);
'Step by Step' (in its seventh season); 'The Parent 'Hood' and 'The Wayans
Bros.' (each in its fourth season); 'The Drew Carey Show' (in its third season);
and 'Suddenly Susan' (in its second season).
Telepictures launched in 1996 the syndicated daytime television hit 'The
Rosie O'Donnell Show.' Telepictures also produces for syndicated television such
popular series as 'Jenny Jones' (in its seventh season) and, through
Time-Telepictures Television, 'Change of Heart' (in its first season) and
'EXTRA' (in its fourth season). Telepictures also produces 'How'd They Do That'
(in its second season) for cable television.
Warner Bros. Television Animation ('WBTA') is responsible for the creation,
development and production of contemporary television animation, as well as for
the creative use and production of classic animated characters from Warner
Bros.', TBS's and DC Comic's libraries, including 'Looney Tunes' and the Hanna-
Barbera and MGM libraries. 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 and direct-to-video projects, with such programs as 'Steven
Spielberg Presents Animaniacs,' 'Steven Spielberg presents Pinky & The Brain,'
'The Sylvester and Tweety Mysteries,' 'The New Batman/Superman Adventures' and
'Superman,' the upcoming edu-tainment series 'Histeria' and Batman's
direct-to-video release 'Sub-Zero.' Since the TBS Transaction, WBTA has managed
Hanna-Barbera programming, which includes the television series 'Dexter's
Laboratory,' 'Cow and Chicken,' 'Johnny Bravo' and 'Scooby Doo's Zombie Island'
direct-to-video.
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 TBS 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 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,' 'Living Single,' 'The Fresh Prince of Bel Air' and
'Family Matters.' The top-rated series 'ER' was sold to Turner Network
Television for syndication commencing in 1998, and 'Friends' was sold for
syndication commencing in 1998 to stations covering over 85% of the country.
Warner Bros. International Television Distribution ('WBITD') is the world's
largest distributor of feature and television programming for television
exhibition outside of the United States. WBITD distributes programming in more
than 175 countries and in more than 40 languages. During l997, WBITD entered
into new significant licensing agreements with Sogecable, the leading Spanish
pay television operator, and Channel 5, the United Kingdom's newest free
television broadcaster.
The introduction of new technologies and programming services throughout
the world has created many new opportunities for WBITD. In conjunction with
these new services seeking Warner Bros.' programming, WBITD is seeking to form
strategic alliances with some of the world's leading satellite, cable and
over-the-air television broadcasters. In December l997, WBITD acquired a l0%
interest in Canal Satellite, a partnership with Canal Plus and Pathe, which is
the largest digital direct-to-home satellite television service in France.
WBITD has recently commenced the development and production of television
programming with international partners. In l997, WBITD completed and sold four
new co-produced series internationally: the live-
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action television series 'The New Adventures of Robin Hood' and 'Police Academy:
The Series' and the animated television series 'The Fantastic Voyages of Sinbad
the Sailor' and 'Zorro.'
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 $2.1 billion at December 31, 1997, compared to $1.5
billion at December 31, 1996 (including amounts relating to the licensing of
product to Time Warner's and TWE's cable television networks of $719 million as
of December 31, 1997, and $463 million as of December 31, 1996, respectively).
The backlog excludes advertising barter contracts. See also 'Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Filmed Entertainment Backlog.'
HOME VIDEO
Warner Home Video ('WHV') distributes for home video use pre-recorded
videocassettes, laser optical videodiscs and digital versatile discs or 'DVDs'
(as described below) containing the filmed entertainment product of (i) Warner
Bros., (ii) Home Box Office, (iii) WarnerVision Entertainment, (iv) Castle Rock,
(v) MGM/UA and (vi) New Line Cinema. WHV also distributes (or services the
distribution of) other companies' product for which it has acquired home video
distribution or servicing rights. In August l997, WHV granted exclusive
laserdisc distribution rights in North America to Image Entertainment Inc. for
five years in order to concentrate on the videocassette and DVD markets.
During 1997, WHV released five titles in the North American rental market
with sales exceeding 400,000 units each: 'Contact,' 'Conspiracy Theory,'
'Sleepers,' 'Michael' and 'Absolute Power.' Internationally, the following
titles generated substantial home video revenue in 1997: 'Space Jam,' 'Mars
Attacks,' 'Batman & Robin,' 'Eraser' and the first and second seasons of the
television series 'Friends.' Additionally, the Warner Bros. Family Entertainment
label continued to expand through affordably-priced North American video
releases, including 'Space Jam,' 'Free Willy 3: The Rescue,' 'Wild America,'
'Cats Don't Dance,' 'The Swan Princess: Escape from Castle Mountain' and
'Shiloh' which generated combined videocassette sales in excess of 14 million
units. Also, WHV released for home sale in North America 'Batman & Robin' which
generated sales of more than six million units. During l997, approximately 55%
of WHV's revenue was generated in the United States and approximately 45% in
other territories.
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. DVD product is
replicated by Warner Advance Media Operations, a Warner Music Group company, and
third parties.
In December l995, a consortium of nine major consumer electronics
manufacturers and TWE announced agreement on a standard for a high density
digital optical technology ('DVD') that is capable of storing large volumes of
digitalized 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, along with several other
studios, released software titles in the DVD format in l997 in the United
States, Canada, Japan and certain countries in Asia. Additionally, WHV is
currently benefiting by releasing first-run feature motion pictures in the DVD
format as well as re-releasing titles from the extensive WHV catalogue of
feature motion pictures. By year-end l998, WHV plans to have DVD distribution in
all major territories worldwide.
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 of
DC Comics, Hanna-Barbera characters and Turner classic films.
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In 1997, Warner Bros. Studio Stores continued its expansion with the
opening of eight outlets in the United States and 16 internationally by
franchisees. Of the total of 185 stores at the end of 1997, 157 are wholly owned
and 28 are operated outside the United States by franchisees. Six stores are
currently planned to be opened overseas in 1998.
THEATERS
Through joint ventures, Warner Bros. International Theatres operates 72
multi-screen cinema complexes with 625 screens in seven foreign countries,
including 28 theatres in Australia, 17 in the United Kingdom, 13 in Japan, five
in Portugal, four in Germany, three in Italy and two in Spain. During l998,
Warner Bros. International Theatres plans to open a further 28 cinemas and 281
screens, including expansion into Taiwan with the opening of a l7-screen
multiplex in the city of Taipei.
FILMED ENTERTAINMENT -- TBS
Theatrical films are also produced by New Line Cinema Corporation, which is
a wholly owned subsidiary of TBS and not a part of TWE. New Line Cinema is a
leading independent producer and distributor of theatrical motion pictures.
During 1997, through its two film divisions, New Line Cinema and Fine Line
Features, New Line distributed such films as 'Austin Powers,' 'Boogie Nights,'
'Spawn,' 'Money Talks' and 'Wag the Dog.' During the first quarter of l998, New
Line released 'The Wedding Singer;' 'Lost in Space' and 'Blade' will be among
the films to be released by New Line later in 1998.
Castle Rock Television has produced the critically acclaimed and highly
rated Emmy-winning series 'Seinfeld' for the past nine years. This year will be
the last year of production. 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 incorporates the Hanna-Barbera,
MGM and RKO libraries, which include classic films such as 'Gone With the Wind'
and cartoons such as the 'Flintstones,' 'Yogi Bear,' 'Huckleberry Hound,' 'Tom &
Jerry' and 'Popeye.' Distribution of these libraries is managed by Warner Bros.
THE WB TELEVISION NETWORK
The WB Television Network ('The WB') completed its third year of broadcast
operations in January l998. In January l998, five major market affiliates were
added to The WB station line-up bringing total coverage to 97 stations
representing 88% of U.S. households. During the l997/98 broadcast season, The
WB's primetime program schedule was expanded to a fourth night, broadcasting on
Sunday, Monday, Tuesday and Wednesday nights. A fifth night of primetime
programming is scheduled to be added in January l999.
Kids' WB! children's programming expanded in September l997 with the
addition of ten hours per week of programming. Kids' WB! currently airs l9 hours
per week, including Saturday morning, weekday mornings and weekday afternoons.
The WeB, The WB's satellite-delivered program service, is expected to
launch in September l998 with initial penetration of about eight to ten percent
of U.S. TV households. This is a program service that, in partnership with local
broadcasters in smaller markets, will create an affiliate of The WB on local
cable systems.
Tribune Broadcasting owns a 22.25% interest in The WB. Key employees of The
WB hold an ll% interest in the network.
OTHER ENTERTAINMENT ASSETS
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. Warner Bros. Movie World, a regional theme
park and studio complex, was opened in 1996 in the Rhine/Ruhr area of Germany.
The park
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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.
The Company has announced that it is studying the feasibility of building the
first movie-based theme park in Spain.
In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier, a regional theme park operator, for
approximately $375 million of cash and $100 million of convertible preferred
stock, before transaction costs. Under the terms of the transaction, Premier
will continue to license the use of Warner Bros.' and DC Comics' cartoon
characters at the Six Flags parks, and the license will be extended to Premier's
other parks in the United States and Canada. Subject to the satisfaction of
certain conditions, the closing of the transaction is expected in the second
quarter of 1998.
DC COMICS AND MAD MAGAZINE
TWE and Warner Communications Inc. ('WCI'), which is wholly owned by Time
Warner, each own 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 collections
sold as books. DC Comics also derives revenues from motion pictures, television,
product licensing, books for juvenile and adult markets and foreign publishing.
Time Warner wholly owns E.C. Publications, Inc., the publisher of MAD, a
magazine featuring articles of humorous and satirical interest, which is
regularly published 12 times a year and also in periodic special editions.
REGULATION AND LEGISLATION
The Telecommunications Competition and Deregulation Act of 1996 (the '1996
Telecommunications Act') substantially revised 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 Federal Communications
Commission ('FCC') rules regarding the manufacture of such sets, originally
scheduled for March 8, 1998, has been deferred for one year. 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 has been 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. In 1997,
the FCC sought public comment on whether the voluntary industry guidelines
comply with the requirements of the 1996 Telecommunications Act. That proceeding
remains pending.
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 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 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
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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.
Pursuant to the 1996 Telecommunications Act, the FCC must conduct a
biennial review of its ownership rules and repeal or modify any regulation that
it deems to be no longer in the public interest. The first such biennial review
will commence in 1998. Among the ownership rules which will be reviewed are the
daily newspaper-television station and cable system-television station
cross-ownership prohibitions.
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.
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 for viewers' attention, as well as
with other forms of entertainment and leisure time activities, including video
games, the Internet and other computer-related activities. Furthermore, there is
increased competition in the television industry evidenced by the increasing
number and variety of broadcast networks and 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.
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, 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, Elektra Entertainment Group and the newly formed Sire Records Group
Inc. 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), 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
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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 1997, more than 55% of WMG's recorded music
revenues came from outside the United States.
DOMESTIC
WMG's record labels in the United States -- Warner Bros., Atlantic, Elektra
and Sire -- 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-refundable 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.
Product is also beginning to be sold directly to consumers through the Internet.
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 in perpetuity. 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 the WMG label or by
both parties. Included among these arrangements are the labels Maverick, Tommy
Boy, Sub Pop, Qwest and 143 Records. WMG labels also enter into agreements with
unaffiliated third-party record labels such as Curb 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 albums resulting in significant sales for WMG during 1997 were
the Space Jam soundtrack and Madonna's 'Evita' soundtrack, as well as releases
by Paula Cole, Fleetwood Mac, Jewel, matchbox20, Metallica, Sugar Ray and LeAnn
Rimes.
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.
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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.
Among the artists whose albums resulted in significant sales for WMI in
1997 were Enya, Noriyuki Makihara, Luis Miguel and Alejandro Sanz.
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
Warner Bros. Publications and CPP/Belwin, two 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 recorded music outlets over the
past several years led to the closing of many such stores during 1996 and 1997,
which has resulted in further increased competition among recorded music
companies. Competition during 1997, as in past years, also reflected the 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 and parallel imports and may in the future be
affected by consumers' ability to download quality sound reproductions from the
Internet without authorization from the Company. 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.
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CABLE NETWORKS
The Company's Cable Networks business consists of domestic and
international basic cable networks and 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'), TBS Superstation, Turner Network Television
('TNT'), Turner Classic Movies, Cartoon Network, CNN/SI and CNN en Espanol, all
operated by TBS, which is wholly owned by the Company. Pay television
programming consists of the multi-channel HBO and Cinemax pay television
programming services, operated by the Home Box Office division of TWE ('Home Box
Office'). The Company also has interests in certain other domestic and
international programming networks.
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, sports and general entertainment, all-news and all-sports
news programming. Through TWE's Home Box Office division, 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 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 distribute their programming via cable and other
distribution technologies, including satellite distribution. A separate
distribution subsidiary handles the sales and marketing of all of TBS's domestic
basic cable networks to cable, satellite master antenna television ('SMATV') and
multichannel MDS ('MMDS') systems and direct-to-home satellite ('DTH')
distribution companies 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, SMATV, MMDS and DTH distribution companies 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, 1997, 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 21% of TBS's cable subscribers
and 17% of HBO's and Cinemax's combined subscribers. (TCI, through subsidiaries,
owns approximately 57 million shares of Series LMCN-V 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,
1997, Time Warner Cable (see
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'Cable') accounted for an additional 18% and 14%, respectively of TBS's cable
subscribers 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 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
Effective at year-end 1997, TBS Superstation converted to a copyright-paid
cable network from an independent UHF television station whose signal was
retransmitted by a third party common carrier via satellite. The network, while
still transmitted over-the-air in the Atlanta market, is now retransmitted by
TBS and delivered via satellite to cable systems in all 50 states, Puerto Rico
and the Virgin Islands, and is seen by approximately 73 million subscribers. Its
programming includes movies, sports, original productions and classic television
comedies. As a broadcast television station, TBS Superstation relied principally
on advertising revenue and received no direct compensation for its signal from
cable systems. As a cable network, TBS Superstation will also receive
subscription revenue directly from cable and other systems that carry the
service.
Other entertainment networks produced and distributed by TBS are TNT, which
as of December 31, 1997 had approximately 72 million subscribers in the United
States; Cartoon Network, with more than 46 million subscribers in the United
States; 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 20 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 completed negotiations to acquire programming rights from the
National Basketball Association (the 'NBA') to televise a certain number of
regular season and playoff games through the 2001-02 season for which it has
agreed to pay fees plus a share of the advertising revenues generated in excess
of specified amounts. 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. TNT's rights
to televise National Football League games expired at the end of the 1997
season.
CNN, launched in 1980, is a 24-hour per day cable television news service
and, with CNN International, is distributed to approximately 200 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 in December 1995, featuring business
and consumer news; and CNN/SI, launched in December 1996, featuring sports news
and features. The Company has also expanded into a number of special market
networks.
CNN owns and operates 32 permanent news bureaus, of which nine are in the
United States and 23 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
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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.
In addition to its cable networks, CNN operates seven Web sites on the
Internet. With approximately 292 million page views in January 1998, CNN
believes that its family of Web sites is utilized more than the Web sites of any
other news organization in the world. Overall, the CNN family of Web sites had
more than 1.9 billion page views in 1997.
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. In March 1997, TBS launched CNN en Espanol, a Spanish language
all-news network in Latin America which, as of December 31, 1997, had over 4
million subscribers.
Each of CNNI and CNN en Espanol derives its revenues primarily from fees
charged to cable operators, fees paid by other recipients of the CNNI and CNN en
Espanol signals, including hotels and international over-the-air television
stations, and the sale of advertising time.
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.
In the fall of 1997, Cartoon Network Japan, a Japanese-language, all
animation (including a significant amount of locally sourced, Japanese product)
24-hour network, was launched in Japan. Cartoon Network Japan is a joint venture
owned 40% by TBS, 40% by ITOCHU and 20% by Time Warner Entertainment Japan Inc.,
which is 37.5% owned by Time Warner. Revenue sources for the Network will
include both subscription and advertising sales.
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 49.8%-owned, in the aggregate, by TBS and a subsidiary of TWE and
managed by TBS. n-tv relies principally on advertising revenues and receives no
compensation for its signal from cable systems. TBS also manages the Company's
interest in music video channels in Germany, Hungary and Asia.
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 33.6 million subscriptions as of December
31, 1997.
PROGRAMMING
A majority of HBO's programming and a large portion of that on Cinemax
consists of recently released, uncut and uncensored theatrical 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.
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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 agreements
with DreamWorks SKG, Regency Entertainment, Sony Pictures Entertainment, Inc.
('Sony Pictures'), 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 Pictures Corporation, Sony Pictures and Walt
Disney Pictures for older, library films.
HBO also defines itself by the exhibition of sporting events such as boxing
matches and Wimbledon, sports documentaries, contemporary and sometimes
controversial pay television premiere movies and mini-series, dramatic and
comedy specials, concert events, family programming, television series and
documentaries that are produced by HBO for initial exhibition on HBO.
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 1997, Home Box Office's own production company, HBO Independent
Productions, produced 'Everybody Loves Raymond,' in its second season on CBS.
Divisions of Home Box Office also produce comedy programming for HBO, Comedy
Central, broadcast networks and syndication. 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.
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 its original programming into domestic
syndication and foreign television.
INTERNATIONAL
HBO Ole, a 37.5%-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. TWE also has interests in
several advertiser-supported television services distributed by HBO Ole in Latin
America. 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, the Slovak
Republic, Poland and Romania.
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 approximately 46 million homes at
year-end 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 33 million viewers
at year-end 1997. 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. The FCC has recently proposed to amend the rules to strengthen the
enforcement process. 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, any changes in the FCC's interpretation of the
1992 Cable Act and existing 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.
These provisions prohibit the Company from increasing the pre-TBS Transaction
pricing ratios which existed between large and small 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.
Internationally, the expected entry of Poland and other eastern European
countries into the European Union may result in the imposition of local content
quotas or other restrictions on pay television services in those countries,
which may adversely affect services in which Home Box Office has an interest.
OTHER CABLE NETWORK ASSETS
THE ATLANTA BRAVES
Through a wholly owned subsidiary, TBS owns the Atlanta Braves (the
'Braves'), a major league baseball club. 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.
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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 and expansion fees of Major League
Baseball and the national licensing activities of Major League Baseball
Enterprises.
The Braves play their home games at Turner Field in Atlanta. The stadium
was originally constructed for the 1996 Summer Olympic Games and has been
converted for use by the Braves as a Major League Baseball stadium.
THE ATLANTA HAWKS
Through wholly owned subsidiaries, TBS owns the Atlanta Hawks basketball
team (the 'Hawks'), a member of the NBA. The Hawks derive income from gate
receipts, concessions and related sales, local sponsorships and local media and
also share pro rata in proceeds from national media contracts and expansion fees
of the NBA and the national licensing activities of NBA Properties. The team is
subject to NBA regulations.
A new, state-of-the-art arena adjacent to CNN Center is under construction
and will be the future home of the Hawks beginning in the 1999-2000 NBA season.
The arena is being developed by a TBS subsidiary and the cost of the arena will
be funded primarily with the proceeds from bonds issued by the City of
Atlanta-Fulton County Recreation Authority. TBS will contribute approximately
$20 million towards the cost of certain infrastructure improvements on the site
and, through a subsidiary, will operate the new arena.
ATLANTA THRASHERS
TBS, through a wholly owned subsidiary, has been conditionally granted a
National Hockey League ('NHL') expansion franchise team to be known as the
Thrashers that will begin play in the 1999-2000 NHL season at the new arena also
to be used by the Atlanta Hawks. TBS must meet certain sales and other
objectives applicable to all other expansion teams prior to a formal grant of
franchise rights. The team will derive income from gate receipts, concessions
and related sales, local sponsorship and local media and will share pro rata in
proceeds from national media contracts and certain future expansion fees of the
NHL and the national licensing activities of NHL Enterprises. The team will be
subject to NHL regulations.
WRESTLING
Through World Championship Wrestling, TBS produces wrestling programming
for TBS Superstation and TNT, the domestic syndication markets and pay-per-view
television.
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, ENTERTAINMENT WEEKLY and
InSTYLE. 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.
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 of readers.
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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, Florida. Some
of the development properties and overseas operations employ independent
fulfillment services and make their own arrangements for 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, which celebrates its 75th anniversary in 1998, 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 and TIME FOR KIDS, Primary Edition,
are in-school weekly news magazines aimed at elementary school students. 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 that covers and is designed to
appeal to enthusiasts in virtually all forms of recreational and competitive
sports. In addition, SPORTS ILLUSTRATED has created a special custom edition,
GOLF PLUS, to deliver advertisers more highly targeted audiences and has
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 sports news cable television network and
Internet site 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 NBA 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 has developed two PEOPLE
offspring that were launched during 1997: PEOPLE en Espanol, a Spanish-language
edition currently published ten times a year aimed primarily at Hispanic readers
in the United States, and TEEN PEOPLE, aimed at teenage girls. WHO WEEKLY is an
Australian version of PEOPLE.
Time Inc. has other magazines also 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. 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 ten 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, COASTAL LIVING, a bi-monthly magazine for people who 'love the coast,'
and PROGRESSIVE FARMER, a monthly regional farming magazine. Southern Progress
has also 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, 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 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 eight
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 marketing, fulfillment and 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 WALLPAPER, acquired in 1997, 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. In 1998, American Express Publishing expects to
launch Travel & Leisure Golf magazine. 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 by wholesalers or directly from a Time Inc. subsidiary.
Circulation drives 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 December 31, 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............................................................................ 1,900,000
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 either through a magazine wholesaler network which services retail
outlets such as newsstands, supermarkets, convenience and drug stores or in some
cases directly to retailers.
Warner Publisher Services ('WPS') is a major distributor of magazines and
paperback books sold through wholesalers in the United States and Canada. WPS is
the sole national distributor for MAD magazine, the publications of DC Comics,
and certain publications and paperback books published by other publishers,
including Conde Nast, Petersen and Ziff-Davis.
ADVERTISING
Advertising carried in Time Inc. magazines is predominantly consumer
advertising. In 1997, 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. 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................................................ 12
ENTERTAINMENT WEEKLY................................... 19
MONEY.................................................. 21
SOUTHERN LIVING........................................ 23
</TABLE>
The five leading categories of advertising carried in Time Inc. magazines
in 1997, according to PIB were, in descending order, domestic automobile
manufacturers, toiletries and cosmetics, computers, food and pharmaceuticals.
Time Inc. also entered the local advertising market in 1997 with the
purchase of Media Networks, Inc. ('MNI'). MNI partners with the country's
leading national magazines, including several Time Inc. magazines, to offer
local marketers the opportunity to advertise to select targeted areas defined by
sectional postal centers.
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
1997, Time Inc. purchased paper principally from six independent manufacturers,
with the larger relationships 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 1997 increased slightly for all major
grades of paper for which Time Inc. has substantial demand.
Printing and binding for Time Inc. magazines are accomplished primarily by
major domestic and international independent printing concerns in approximately
20 locations. Magazine printing contracts are either fixed-term or open-ended at
fixed prices with, in some cases, adjustments based on certain criteria.
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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 1997, Time Warner Trade Publishing placed 32 books on The
New York Times best-seller lists.
WARNER BOOKS
Warner Books primarily publishes hardcover, mass market and trade paperback
books. Among its best selling hardcover books in 1997 were: 'Simple Abundance,'
by Sarah Ban Breathnach; 'The Notebook,' by Nicholas Sparks and 'Plum Island,'
by Nelson DeMille. Best selling mass market paperbacks in 1997 included 'Jack &
Jill,' by James Patterson and 'Absolute Power,' by David Baldacci.
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 primarily engaged in on-line 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 1997 were: 'Gift of Fear,'
by Gavin DeBecker; 'Snow in August,' by Pete Hamill and 'Naked,' by David
Sedaris.
Little, Brown handles book distribution for itself and Warner Books as well
as other publishers through its new state-of-the-art distribution center in
Indiana. 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.
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. In addition to continuity, it sells single
shot products and products in sets. Its products are sold by direct response,
including mail order, television and telephone, through retail, institutional
and learning channels, catalogs, and in some markets by independent
distributors. 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 introduced by Time Life during 1997 include 'What Life
is Like' and 'Student Library.' The Music division successfully released two
sets in 1997: 70's Dance Party and RIAA Gold & Platinum -- a compilation of rock
& roll hits over the past three decades certified 'gold' or 'platinum' by the
Recording Industry Association of America.
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Book editorial material is created by in-house staffs as well as through
outside publishers. Music and video rights are acquired through outside sources
and compiled internally into finished products. Time Life's domestic direct
response fulfillment activities are conducted from a centralized facility in
Richmond, Virginia. Fulfillment of other business lines is done through a
combination of in-house and outside fulfillment companies.
BOOK-OF-THE-MONTH CLUB
Book-of-the-Month Club currently operates eleven distinct book clubs and
two continuity businesses with a combined membership of more than 4.5 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, 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 and other merchandise are offered through the clubs. Book-of-the-Month
Club's international businesses operate in over 40 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
Time Inc. holds a 50% equity interest in 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 1997, postal rates remained constant.
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 directly compete with other distributors operating
throughout the United States and Canada in the distribution of magazines and
paperback books.
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CABLE
The Company's Cable business consists principally of interests in cable
television systems that, in general, are managed by Time Warner Cable, a
division of TWE. Of the approximately 12.6 million subscribers owned by the
Company, approximately 2.1 million are in systems owned by TWI Cable Inc. ('TWI
Cable'), a wholly owned subsidiary of Time Warner which is not a part of TWE,
and approximately 10.5 million are in systems owned by TWE. TWE's cable systems
include approximately 5.8 million subscribers in a joint venture between TWE and
Advance/Newhouse known as the TWE-A/N Partnership. Time Warner Cable generally
manages all such systems and receives a fee for management of the systems owned
by TWI Cable and the TWE-A/N Partnership.
CABLE TELEVISION SYSTEMS
GENERAL
Time Warner Cable is the second-largest multiple system cable operator in
the United States. As of March 1, 1998, Time Warner Cable serves 12.6 million
cable subscribers geographically concentrated in 34 groupings of more than
100,000 subscribers each. This includes the approximately 5.8 million
subscribers in the TWE-A/N Partnership, in which TWE owns a 65.2% common equity
interest (and TWI Cable owns a 1.5% common equity interest) and is paid a fee to
manage. Approximately 58% 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
WGN), advertiser-supported video programming (such as ESPN and CNN) and premium
programming services (such as HBO, Cinemax, Showtime and The Movie Channel). In
many 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 the
technological upgrade of a substantial portion of its cable systems by the end
of 1998. As of December 31, 1997, more than half of Time Warner Cable's systems
have been upgraded. Such upgrades include the broad deployment of fiber and
electronics in order to provide expanded programming options, high-speed
Internet access and other service. As systems are designated for 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 to rebuild and
upgrade systems over a five-year period ending November 30, 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 bandwidth in its upgraded
systems for its high speed online service for personal computers, called Road
Runner'tm'. Road Runner provides Internet access and proprietary local, national
and international content through the cable network to customers' home (or small
office) computers. The service has been launched commercially in Time Warner
Cable's Akron/Canton; Albany; Binghamton; Columbus; El Paso; Hawaii; Memphis;
Portland, Maine; San Diego and Tampa systems, and will continue to expand into
other systems during 1998. In December 1997, Road Runner announced plans to
merge with US West's Media One Express, also a cable modem online service
provider. Based on current roll-outs in the Time Warner Cable and Media One
cable systems, at the time of the consummation of the merger, the venture's high
speed online services would immediately be available in at least 13 states
serving approximately 5 million homes.
The number of subscribers managed by Time Warner Cable has grown primarily
as a result of the acquisition of cable systems, the formation of the TWE-A/N
Partnership and increases in the number of subscribers to its existing cable
television systems. Time Warner Cable has also sought to concentrate its
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subscriber base in geographically-clustered systems through the exchange or
purchase of cable television systems, and expects to continue these efforts.
In September 1997, the Company, TWE, the TWE-A/N Partnership and a
subsidiary of TCI signed a letter of intent to enter into a series of agreements
to, among other things, (i) form two new cable television joint ventures in the
Houston and south Texas areas that will be managed by TWE and will own cable
television systems serving an aggregate of approximately 1.1 million
subscribers, (ii) expand an existing joint venture in Kansas City, which is
managed by TWE, through the contribution by TCI of a contiguous cable television
system serving approximately 95,000 subscribers, and (iii) exchange various
cable television systems owned by Time Warner and TWE serving over 500,000
subscribers (of which cable television systems serving approximately 400,000
subscribers are owned by TWE) for other cable television systems of comparable
size in an effort to enhance each company's geographic clusters of cable
(collectively, the 'TCI Cable Transactions'). The TCI Cable Transactions are
expected to close periodically throughout 1998, subject to execution of
definitive agreements and customary closing conditions.
In early 1998, Time Warner Cable transferred or beneficially assigned
ownership of franchises in 43 cable systems serving approximately 1.1 million
customers primarily in Florida, North Carolina and upstate New York from Paragon
Communications ('Paragon') and various TWI Cable-owned entities to the TWE-A/N
Partnership. As a result of this and related transactions, the TWE-A/N
Partnership serves approximately 5.8 million customers, and Paragon, which is
now 100% owned by wholly owned subsidiaries of the Company, serves approximately
770,000 customers primarily in New York City, Texas and California. Following
these transactions, the common equity of the TWE-A/N Partnership is owned
approximately as follows: 33.3% by Advance/Newhouse, 65.2% by TWE and 1.5%
indirectly by Time Warner.
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
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.
As of December 31, 1997, the TWE-A/N Partnership beneficially owned a 31%
equity interest in Primestar Partners L.P. ('Primestar'), a satellite
distribution company offering packages of programming services to customers
owning DTH receiving dishes, and Time Warner Satellite Services generally had
the non-exclusive right to distribute Primestar service to customers in Time
Warner Cable's service areas (including TWI Cable and the TWE-A/N Partnership)
and also in certain adjacent areas.
In June 1997, TWE, Advance/Newhouse and the other partners of Primestar
entered into agreements to consolidate the separate Primestar direct broadcast
satellite distribution business of such partners (including Time Warner
Satellite Services) with the business of Primestar into a new company ('New
Primestar'), into which the partners will also contribute their respective
partnership interests. The restructuring is currently expected to close on or
about April 1, 1998. Thereafter, TCI Satellite Entertainment, Inc., a public
company that is one of the current partners of Primestar, is expected to merge
into New Primestar, subject to certain conditions, including regulatory
approval. If the merger is approved and completed, TWE's 24% equity ownership in
New Primestar will not be affected. In a separate pending transaction, New
Primestar would acquire certain high power satellite assets and FCC permits from
MCI Communications Corporation and The News Corporation Limited, in exchange for
nonvoting stock and notes of New Primestar (the 'News/MCI transaction'). This
transaction is subject to approval from the Department of Justice and the FCC.
If regulatory approvals are obtained and the News/MCI transaction is completed,
TWE would then have approximately 16% of the outstanding equity of New Primestar
on a fully diluted basis.
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
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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. It is
unknown whether the loss of any one popular supplier would 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. Rates for certain programming and for equipment and installation are
generally regulated pursuant to Federal law. See 'Regulation and
Legislation -- Rate Regulation,' below.
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.
INTERNATIONAL
TWE and the TWE-A/N Partnership collectively have a 53.75% interest in a
joint venture established to invest in, and further develop, cable television
systems and programming in Hungary. In France, TWE and TWE-A/N own 100% of Cite
Reseau and 49.9% of Rhone Vision Cable both of which were established to acquire
new franchises, build and operate cable systems in France. In China, TWE and the
TWE-A/N Partnership own 75% of the Beijing-Time Warner Cable Television
Engineering Company. In Japan, TWE and TWE-A/N beneficially own, directly or
indirectly, 25% of Titus Communications Corporation and 19.2% of Chofu Cable
Television Company. TWE sold its 13% indirect interest in Sky Network
Television, an over-the-air subscription service in New Zealand, in September
1997.
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 for public, educational and
governmental programming; (iv) leased access terms and conditions; (v)
horizontal and vertical ownership of cable systems; (vi) consumer protection and
customer service requirements; (vii) franchise renewals; (viii) television
broadcast signal carriage requirements 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 federal laws, 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, known as 'cable programming service tiers' ('CPST'), other than
per-channel or per-program services, in response to complaints filed by
franchising authorities; 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
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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 CPST services under certain limited circumstances.
Under the 1996 Telecommunications Act, regulation of CPST rates is
scheduled to terminate on March 31, 1999. Regulation of both basic and CPST
rates also ceases for any cable system subject to 'effective competition.' The
1996 Telecommunications Act expanded 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 has found Time Warner
Cable to be subject to 'effective competition' in certain jurisdictions.
The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and CPST 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 programming 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 CPST services and associated equipment, and refunds can be
required.
In November 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 November 30, 2000; and Time Warner Cable is allowed to increase the non-basic
service tier by $1.00 per year over the term of the Social Contract. 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. A petition
was also filed with the FCC seeking reconsideration of the Social Contract,
which is currently pending.
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 WGN. Time Warner Cable has obtained any necessary
retransmission consents from all stations carried, which consents have varying
expiration dates. In
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those cases where the expiration date of particular agreements has not been
contractually varied from the original schedule set up by the 1996 Act, the next
three-year election between mandatory carriage and retransmission consent for
local commercial television stations will occur on October 1, 1999.
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. Time Warner Cable obtained a temporary waiver from this rule, and is
now seeking a permanent waiver, so that it can continue to own certain Atlanta
area cable systems located within the Grade B signal coverage area of WTBS. The
FCC denied the permanent waiver request, but that denial is presently stayed
pending resolution of a petition for reconsideration. Finally, the 1992 Cable
Act prohibits common ownership, control or interest in cable television systems
and MMDS facilities or 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.
The FCC has initiated a rulemaking proceeding in which it asks what
restrictions, if any, should be placed on a cable operator's ownership of a DTH
service. This could affect Time Warner, in that TWE has an ownership interest in
Primestar, a DTH service, which is seeking to obtain FCC approval for the
transfer of certain DTH licenses. See 'Cable -- Cable Television
Systems -- General.'
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 1992 Cable Act
also directed the FCC to adopt regulations establishing reasonable limits on the
number of cable subscribers an operator may reach through systems in which it
holds an attributable interest. The FCC has stayed the effectiveness of such
regulations pending final judicial resolution of a federal district court
decision finding the statutory ownership limit provision to be unconstitutional.
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; closed captioning; equal employment opportunity; pole attachments;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts;
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customer service; technical standards; home wiring; and limitations on
advertising contained in nonbroadcast children's programming. Pursuant to the
1996 Telecommunications Act, the FCC changed the formula for pole attachment
fees which will result in substantial increases in payments by cable operators
to utilities for pole attachment rights when telecommunications services are
delivered by cable systems. This new higher rate formula will be phased in
beginning in February 2001.
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, 1998, 518 franchises serving approximately 2,600,000 subscribers expire
during the period ending December 31, 2000. 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.
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
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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 permits to several companies for orbital slots
from which medium- or 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 June 1997, satellite-delivered DTH
services including Echostar, DirecTV, USSB and Primestar, a medium-power DTH
service partially owned by TWE, were reported to be serving over five million
subscribers. Echostar has announced that, unlike other DTH services, it 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 1.1 million subscribers nationwide as of June 1997. 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. One municipally-owned system is presently in
operation in a Time Warner Cable franchise area and several other municipalities
have indicated an interest in operating a cable system.
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 (subject to the restriction
against acquisition of greater than 10% of existing cable systems described
under 'Regulation and Legislation -- Ownership,' above). 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, 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.
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.
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TELEPHONY
Time Warner Communications, a subsidiary of TWE, is a facilities-based
competitive local exchange carrier ('CLEC') in selected metropolitan markets
across the United States, offering a wide range of business telephony services,
primarily to medium and large-sized business customers and other carriers. Time
Warner Communications' customers are principally telecommunications-intensive
businesses, long distance carriers, Internet service providers, wireless
communications companies and governmental entities. Such customers are offered a
wide range of integrated telecommunications services, including dedicated
transmission, local switched, data and video transmission services and certain
Internet services. As of March 1, 1998, Time Warner Communications had deployed
switches in 16 of its 19 metropolitan markets. Its networks have been
constructed primarily through licensing the use of fiber capacity from Time
Warner Cable.
Time Warner Communications' business was commenced in 1993 by Time Warner
Cable, originally to provide residential and business telephony services
together with cable television. Since January 1997, Time Warner Communications
has focused exclusively on the business segments.
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 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 Series
LMCN-V Common Stock. In June 1997, LMC and its affiliates received 6.4 million
additional shares of Series LMCN-V Common Stock pursuant to the provisions of an
option agreement between the Company and LMC and its affiliates. Shares of
Series LMCN-V Common Stock receive the same dividends and otherwise have the
same rights as shares of Time Warner Common Stock except that (a) holders of
Series LMCN-V 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 Series LMCN-V Common Stock adverse to such holders, and (b) unlike
shares of Time Warner Common Stock, shares of Series LMCN-V 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 Series LMCN-V Common Stock
is not transferable, except in limited circumstances, and is not listed on any
securities exchange.
LMC exchanged its shares of Time Warner Common Stock for Series LMCN-V
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
Series LMCN-V 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.
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
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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).
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.
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 'Cable Management
Committee,' below.
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Cable Management Committee. Subject to obtaining necessary franchise and
other approvals, the businesses and operations of the cable television systems
of TWE and TWE-A/N are governed by a Cable Management Committee (the 'Management
Committee'). The systems that have been designated from time to time to be
governed by the management committee and with respect to which all necessary
franchise and other approvals have been obtained are referred to as the
'Designated Systems.' The Management Committee is comprised of six voting
members, three designated by US West and three designated by TWE. If US 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 US West
occurs, US West's right to designate any members of the Management Committee
will terminate. The Designated Systems are 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 Designated Systems, including, among other things, the sale, pledge or
encumbrance of assets of the Designated Systems, the acquisition of cable
assets, the making of commitments or expenditures relating to the Designated
Systems, in each case subject to agreed upon thresholds, certain decisions with
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
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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 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
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<PAGE>
<PAGE>
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 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.
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 15 'Financial Instruments -- Foreign Currency Risk
Management' to the consolidated financial statements set forth at pages F-26 and
F-51, respectively, herein. For the revenues of foreign operations, see Note 16
'Segment Information' to the consolidated financial statements set forth on page
F-55 herein.
EMPLOYEES
At December 31, 1997, the Company employed a total of approximately 67,900
persons. This number includes approximately 29,700 persons employed by TWE.
I-34
<PAGE>
<PAGE>
ITEM 2. PROPERTIES
CORPORATE, TBS, PUBLISHING AND MUSIC
The following table sets forth certain information as of December 31, 1997
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 90,800 sq. ft. are sublet to
outside tenants.
New York, New York Business and editorial offices 1,502,000 Leased by the Company. Most
Time & Life Bldg. (Publishing and Corporate) leases expire in 2007.
Rockefeller Center Approximately 33,000 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.
Lebanon, Indiana Warehouse space (Publishing) 500,455 Leased by the Company. Lease
121 N. Enterprise Blvd. expires in 2006.
Mechanicsburg, Office and warehouse space 358,000 Owned and occupied by the
Pennsylvania (Publishing) Company.
1225 S. Market St.
Indianapolis, Indiana Warehouse space (Publishing) 252,000 Owned and occupied by the
4200 N. Industrial Company.
Street
Olyphant, Manufacturing, warehouses, 1,058,000 Owned and occupied by the
Pennsylvania distribution and office space Company.
1400 and 1444 East (Music)
Lackawanna Avenue
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>
CABLE NETWORKS -- HBO, FILMED ENTERTAINMENT AND CABLE
The following table sets forth certain information as of December 31, 1997
with respect to principal properties (over 250,000 square feet in area) owned or
leased by the Company's Cable Networks -- HBO, Filmed Entertainment 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
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)
Baltimore, Maryland Warehouse (Filmed 387,000 sq. ft. Owned by TWE.
White Marsh 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 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 (the '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
I-36
<PAGE>
<PAGE>
RICO claim, denying its material allegations and alleging defenses. After
certain discovery, the defendants, on January 29, 1997, moved for summary
judgment. 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 moved to dismiss
the newly-added counts on December 18, 1996. On August 14, 1997, the Court
granted the record company defendants' motion to dismiss the new ERISA claims
but denied the defendants' motion to dismiss the newly-added state law claims
for breach of contract and fraud and their motion for summary judgment on the
RICO claims. The Court also denied a motion by the Fund and the Fund Trustees to
dismiss the claims asserted against them. On January 20, 1998, the Court denied
plaintiffs' motions for class certification of the remaining claims against the
record company defendants and against the Fund and Fund Trustees. Accordingly,
the case is now limited to the individual claims of the 15 named plaintiffs,
which remain pending before the Court. Plaintiffs have filed a motion seeking
certification of the Court's Order of January 20, 1998, so that an appeal can
immediately be taken to the Eleventh Circuit Court of Appeals. Additionally,
plaintiffs have filed a motion seeking either entry of final judgment on the
ERISA claims dismissed by the Court's Order of August 14, 1997, or, in the
alternative, certification of that Order for immediate appeal. Both motions
remain pending.
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 and provided information and produced documents as required by a 1997
decision of the United States District Court for the District of Columbia.
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. The plaintiff, representing a class of direct purchasers of
recorded music compact discs ('CDs'), alleged that Warner Elektra 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. On July 3, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the dismissal of
the amended complaint and remanded the case to the District Court, holding that
the amended complaint was sufficient to meet the pleading requirements of the
Federal Rules and that the action should proceed. On October 29, 1997, the
District Court stayed proceedings in the action due to the filing on May 12,
1997 of a Chapter 7 Petition under the U.S. Bankruptcy Code by plaintiff.
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.
As the Company has disclosed and discussed more fully in previous reports
on Form 10-K filed by the Company, three complaints (two on October 30, 1995 and
one on March 12, 1996) were filed in the Court of Chancery of the State of
Delaware in and for New Castle County 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. These complaints allege,
among other things, that in connection with the then proposed TBS Transaction,
some or all of the defendants violated various fiduciary duties owed to the
Company and its stockholders. Among other relief demanded, these complaints
sought an injunction against consummation of the TBS Transaction, an accounting
to the Company for individual defendants' alleged profits and plaintiffs'
alleged damages. There has been no activity in these actions since defendants
made motions to dismiss two of them in November 1995 and April 1996,
respectively.
As the Company has disclosed and discussed more fully in previous reports
on Form 10-K filed by the Company, fifteen actions against TBS, the Company,
certain officers and directors of TBS or TWE, and other
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<PAGE>
<PAGE>
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') alleging, among other things, that the terms of the
TBS Transaction were unfair to TBS shareholders and that, in connection with the
TBS Transaction, the defendants acted fraudulently, had breached or aided and
abetted the breach of fiduciary common law and statutory duties owed to TBS
shareholders and that the vote of the TBS Board approving the TBS Transaction
did not comply with legal requirements. 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. Plaintiffs'
request for a preliminary injunction was denied in October 1996 and in December
1996, the Court granted defendants' motion for judgment on the pleadings with
respect to certain claims in the Third Amended Complaint and also granted
plaintiffs' motion for leave to file a fourth amended complaint. In January
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 14, 1997, defendants' motion for summary
judgment on plaintiffs' fourth amended complaint and defendants' motion for
final judgment on the Third Amended Complaint were both granted. On July 23,
1997, plaintiffs filed a notice of appeal from these decisions; the appeal has
now been fully briefed and is awaiting decision.
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. By letter dated January 8, 1998, WEA was notified
by the Office of the Attorney General of the State of Florida that certain
documents that WEA had produced to its office were shared under a
confidentiality provision in the Florida statutes with the Office of the
Attorney General of the State of Illinois and the Office of the Attorney General
of the State of New York. To date, no action has been taken by the Attorney
Generals of these states.
On March 19, 1997, Six Flags Theme Parks Inc. ('Six Flags') and its
wholly-owned subsidiary Six Flags Over Georgia, Inc. commenced a declaratory
judgment action in the Superior Court of Gwinnett County, Georgia, entitled Six
Flags Over Georgia, Inc. and Six Flags Theme Parks, Inc. v. Six Flags Fund, Ltd.
and Avram Salkin, as Trustee of the Claims Trust. The action sought, among other
things, a declaration and determination of the rights and obligations of the
partners of Six Flags Over Georgia, L.P. with respect to certain disputed
partnership matters and an accounting of all partnership affairs. The parties
have since been realigned, so that the original defendants are now the
plaintiffs in the action and Six Flags Entertainment Corporation, the parent
company of Six Flags that is 49% owned by TWE, and certain of its subsidiaries
and TWE are now the defendants against whom additional claims have been made.
These claims seek imposition of a constructive trust, compensatory damages of in
excess of $250 million and unspecified punitive damages for alleged breach of
fiduciary duty, conversion, fraud and conspiracy allegedly committed by the
counterclaim-defendants in connection with the management of the Six Flags Over
Georgia theme park. The parties are currently engaged in document discovery. TWE
and its 51% partner in Six Flags will retain financial responsibility for this
litigation following completion of the sale of Six Flags. (See Item 1.
'Entertainment -- Other Entertainment Assets').
On April 11, 1997, the Washington and Dallas offices of the Federal Trade
Commission notified WEA that they had commenced a preliminary investigation into
whether WEA and others may be violating or have violated laws against unfair
competition by the adoption, implementation or maintenance of minimum advertised
pricing programs. On September 23, 1997, Warner Communications Inc. was served
by the Federal Trade Commission with a subpoena duces tecum calling for the
production of documents in connection with a nonpublic investigation into
whether the recorded music distribution companies and others may be engaging or
may have engaged in unfair methods of competition through the adoption,
implementation and maintenance of cooperative advertising programs that included
minimum advertised price provisions. WEA produced documents in response to the
subpoena.
I-38
<PAGE>
<PAGE>
On September 30, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Chandu
Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music
Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, Universal Music and Video Distribution, Bertelsmann Music Group,
Inc. and Polygram Group Distribution, Inc., No. 97-7226. On October 16, 1997,
plaintiffs filed a first amended complaint. The plaintiffs, purporting to
represent a class of direct purchasers of CDs, allege that WEA, along with five
other distributors of CDs, violated the federal and state antitrust laws by
engaging in a conspiracy to fix the prices of CDs and seek an injunction and
treble damages. On December 22, 1997, WEA answered the action, denying the
material allegations of the amended complaint, asserting affirmative defenses
and demanding judgment against plaintiffs.
On December 2, 1997, a purported class action was commenced in the United
States District Court for the Central District of California entitled Third
Street Jazz and Rock Holding Corporation v. EMI Music Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music and
Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97-8864. The claims asserted are substantially the same
as those asserted in the Chandu Dani action reported above. On December 24,
1997, WEA answered the action, denying the material allegations of the
complaint, asserting affirmative defenses and demanding judgment against
plaintiffs.
On January 28, 1998, a purported class action was commenced in the United
States District Court for the Southern District of New York entitled Nathan
Muchnick, Inc. v. Sony Music Entertainment, Inc., PolyGram Group Distribution,
Inc., Bertelsmann Music Group, Inc., Universal Music and Video Distribution,
Warner Elektra Atlantic Corporation and EMI Music Distribution, No. 98 Civ.
0612. The claims asserted are substantially the same as those asserted in the
Chandu Dani action reported above. On February 23, 1998, WEA answered the
action, denying the material allegations of the complaint, asserting affirmative
defenses and demanding judgment against plaintiffs.
On February 2, 1998, a complaint was filed by the Attorney General of the
State of Florida in The Circuit Court of the Thirteenth Judicial District in
Hillsborough Country Florida against American Family Publishers ('AFP'). AFP is
50% owned by the Company. This complaint, and publicity surrounding it and AFP's
sweepstakes solicitations, has resulted in the filing of additional actions
against AFP by the Attorney General of Connecticut and by various private
parties both as individuals and as purported class representatives. As of March
13, 1998, there have been 20 such actions filed against AFP in various state and
federal courts. Seven of these actions, including the action by the Florida
Attorney General, name as a party AFP's processing and customer service vendor,
Time Customer Service Inc., a wholly owned subsidiary of the Company. One
private action is filed against Time Warner 'doing business as American Family
Publishers.' All of the actions allege that AFP's sweepstakes magazine
solicitations misrepresent that the recipient has won the grand prize in AFP's
sweepstakes. The actions seek restitution, attorneys's fees and injunctive
relief. To date, no replies or motions have been filed. On March 16, 1998, AFP
and the Attorneys General of 32 states and the District of Columbia announced
the settlement of previously commenced investigations. AFP admitted no
wrongdoing and agreed to a payment in reimbursement of investigative expenses.
By letter dated February 12, 1998, the New York State Attorney General
advised the Company of the termination of an antitrust investigation begun in
1996 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.
On February 17, 1998, a purported class action was commenced in the Circuit
Court of Cocke County, Tennessee at Newport, entitled Ottinger & Silvey, et.
al., 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. The action is brought on
behalf of persons who from January 29, 1993 to the present, purchased CDs
indirectly from the defendants in Alabama, Arizona, California, the District of
Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico,
North Carolina, North Dakota, South Dakota, Tennessee, West Virginia and
Wisconsin, 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.
I-39
<PAGE>
<PAGE>
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
Not Applicable.
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<PAGE>
<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, 1998, of
such officer:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Gerald M. Levin.............................. 58 Chairman of the Board and Chief Executive Officer
R.E. Turner.................................. 59 Vice Chairman of the Board
Richard D. Parsons........................... 49 President
Richard J. Bressler.......................... 40 Executive Vice President and Chief Financial Officer
Peter R. Haje................................ 63 Executive Vice President, General Counsel and Secretary
Timothy A. Boggs............................. 47 Senior Vice President
John A. LaBarca.............................. 55 Senior Vice President and Controller
Philip R. Lochner, Jr. ...................... 55 Senior Vice President
</TABLE>
Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1993:
<TABLE>
<S> <C>
Mr. Levin.............................. Chairman of the Board of Directors and Chief Executive Officer since
January 21, 1993.
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. Bressler........................... Executive Vice President and Chief Financial Officer since January 15,
1998. Prior to that, he served as Senior Vice President and Chief
Financial Officer from March 16, 1995; as Senior Vice President,
Finance from January 2, 1995; and as a Vice President prior to that.
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.
Mr. LaBarca............................ Senior Vice President and Controller since May 15, 1997. Prior to that,
he served as Vice President and Controller from January 19, 1995; Vice
President, Director of Internal Audit from May 1, 1993; and Senior
Partner at Ernst & Young LLP prior to that.
Mr. Lochner............................ Senior Vice President since July 18, 1991.
</TABLE>
I-41
<PAGE>
<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, 1997, see 'Quarterly Financial
Information' at page F-62 herein, which information is incorporated herein by
reference. The approximate number of holders of record of the Company's Common
Stock as of January 30, 1998 was 25,000.
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, 1997, see
'Quarterly Financial Information' at page F-62 herein, which information is
incorporated herein by reference.
There is no established public trading market for the Company's Series
LMCN-V Common Stock, which as of January 30, 1998 was held of record by four
holders. Information with respect to the issuance of the outstanding shares of
Series LMCN-V Common Stock pursuant to Section 4(2) of the Securities Act of
1933 in connection with the TBS Transaction is set forth in Note 2, 'Mergers and
Acquisitions,' to the Company's consolidated financial statements included in
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information of the Company for the five years ended
December 31, 1997 is set forth at pages F-60 and F-61 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-20 herein is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the caption 'Interest Rate and Foreign
Currency Risk Management' at pages F-19 and F-20 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-21 through
F-57, F-63 and F-64, and F-58 herein are incorporated herein by reference.
Quarterly Financial Information set forth at page F-62 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 1998 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 Turner Broadcasting System,
Inc. for the quarterly period ended September 30, 1996 are incorporated
herein by reference from pages 2 to 9 of the Quarterly Report on Form 10-Q
for the nine months ended September 30, 1996 of Turner Broadcasting System,
Inc. and are filed as an exhibit to this report.
(iii) The financial statements of Turner Broadcasting System, Inc. and
the report of independent accountants thereon are incorporated herein by
reference from pages 31 to 53 of the Annual Report to Shareholders
incorporated by reference into the Annual Report on Form 10-K for the year
ended December 31, 1995 of Turner Broadcasting System, Inc. and are filed
as an exhibit to this report.
(iv) 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.
(v) 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.
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 10.19 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 November 13,
1997 setting forth in Item 7 certain pro forma financial statements of the
Company and the Time Warner Entertainment Group as of and for the nine
months ended September 30, 1997 and for the year ended December 31, 1996,
giving effect to the transfer by a wholly owned subsidiary of Time Warner
of cable television systems serving approximately 650,000 subscribers to
the Time Warner Entertainment-Advance/Newhouse Partnership ('TWE-A/N')
subject to approximately $1 billion of debt, in exchange for equity
interests in TWE-A/N, as well as certain related transactions.
(ii) The Company filed a Current Report on Form 8-K dated February 10,
1998 setting forth in Item 5 the Company's results of operations for the
quarter and year ended December 31, 1997.
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, 1998
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, 1998
......................................... Executive Officer (principal executive
(GERALD M. LEVIN) officer)
/s/ Richard J. Bressler Executive Vice President and Chief Financial March 25, 1998
......................................... Officer (principal financial officer)
(RICHARD J. BRESSLER)
/s/ John A. LaBarca Senior Vice President and Controller March 25, 1998
......................................... (principal accounting officer)
(JOHN A. LABARCA)
/s/ Merv Adelson Director March 25, 1998
.........................................
(MERV ADELSON)
/s/ J. Carter Bacot Director March 25, 1998
.........................................
(J. CARTER BACOT)
/s/ Stephen F. Bollenbach Director March 25, 1998
.........................................
(STEPHEN F. BOLLENBACH)
/s/ Beverly Sills Greenough Director March 25, 1998
.........................................
(BEVERLY SILLS GREENOUGH)
/s/ Gerald Greenwald Director March 25, 1998
.........................................
(GERALD GREENWALD)
/s/ Carla A. Hills Director March 25, 1998
.........................................
(CARLA A. HILLS)
</TABLE>
IV-2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------- -------------------
<C> <S> <C>
/s/ Reuben Mark Director March 25, 1998
.........................................
(REUBEN MARK)
/s/ Michael A. Miles Director March 25, 1998
.........................................
(MICHAEL A. MILES)
/s/ Richard D. Parsons Director March 25, 1998
.........................................
(RICHARD D. PARSONS)
/s/ Donald S. Perkins Director March 25, 1998
.........................................
(DONALD S. PERKINS)
/s/ Raymond S. Troubh Director March 25, 1998
.........................................
(RAYMOND S. TROUBH)
/s/ R. E. Turner Director March 25, 1998
.........................................
(R. E. TURNER)
/s/ Francis T. Vincent, Jr. Director March 25, 1998
.........................................
(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-66
Consolidated Financial Statements:
Balance Sheet.............................................................................. F-21 F-77
Statement of Operations.................................................................... F-22 F-78
Statement of Cash Flows.................................................................... F-23 F-79
Statement of Shareholders' Equity and Partnership Capital.................................. F-24 F-80
Notes to Consolidated Financial Statements................................................. F-25 F-81
Report of Management............................................................................ F-58
Report of Independent Auditors.................................................................. F-59 F-105
Selected Financial Information.................................................................. F-60 F-106
Quarterly Financial Information................................................................. F-62 F-107
Supplementary Information....................................................................... F-63
Financial Statement Schedule II -- Valuation and Qualifying Accounts............................ F-65 F-108
</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 (the 'TBS Transaction'). As a result of this
transaction, a new parent company with the name 'Time Warner Inc.' replaced the
old parent company of the same name (now known as Time Warner Companies, Inc.,
'TW Companies'), and TW Companies and TBS became separate, wholly owned
subsidiaries of the new parent company. References herein to 'Time Warner' or
the 'Company' refer to TW Companies prior to October 10, 1996 and Time Warner
Inc. 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 and television
broadcasting; Cable Networks, consisting principally of interests in cable
television programming; 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 cable television systems, and a portion of its interests in
cable television programming 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.
OVERVIEW
Time Warner and the Entertainment Group each had a strong financial
performance in 1997, as measured by the operating performance of their
businesses and the improved strength of their financial condition, as more fully
described herein. This performance was driven by solid business fundamentals at
most of their businesses and a disciplined financial focus on cost management
and controlling capital spending.
USE OF EBITA
During 1997, management concluded that the most appropriate measure for
evaluating the operating performance of Time Warner's and the Entertainment
Group's business segments is operating income before noncash amortization of
intangible assets ('EBITA'). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. In addition, EBITA eliminates the uneven effect across all
business segments of considerable amounts of noncash amortization of intangible
assets recognized in business combinations accounted for by the purchase method,
including the $14 billion acquisition of Warner Communications Inc. in 1989, the
$6.2 billion acquisition of TBS in 1996 and the $2.3 billion of cable
acquisitions in 1996 and 1995. The exclusion of noncash amortization charges is
also consistent with management's belief that Time Warner's intangible assets,
such as cable television and sports franchises, music catalogues and copyrights,
film and television libraries and the goodwill associated with its brands, are
generally increasing in value and importance to Time Warner's business objective
of creating, extending and distributing recognizable brands and copyrights
throughout the world. As such, the following comparative discussion of the
results of operations of Time Warner and the Entertainment Group includes, among
other factors, an analysis of changes in business segment EBITA. However, EBITA
should be considered in addition to, not as a substitute for, operating income,
net income and other measures of financial performance reported in accordance
with generally accepted accounting principles.
F-2
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
Time Warner and the Entertainment Group completed a number of transactions
in 1996 and 1995 which have affected the comparability of each entity's results
of operations. For Time Warner, these transactions included the TBS Transaction
in 1996, the Cable Acquisitions in 1996 and 1995, the ITOCHU/Toshiba Transaction
in 1995, the Preferred Stock Refinancing in 1996 and certain other debt
refinancings in 1996 and 1995 (the 'TW Transactions'). For the Entertainment
Group, these transactions included the formation of the TWE-Advance/Newhouse
Partnership ('TWE-A/N') in 1995, the refinancing of TWE's bank debt and certain
asset sales in 1995, including the initial 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'). These transactions are more
fully discussed in the notes to the accompanying consolidated financial
statements.
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 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
1997 VS. 1996
EBITA and operating income for Time Warner and the Entertainment Group in
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
EBITA OPERATING INCOME
------------------------------------- -------------------------------------
HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL
1997 1996 1996 1997 1996 1996
---------- --------- ---------- ---------- --------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Time Warner:
Publishing................................ $ 529 $ 464 $ 464 $ 481 $ 418 $ 418
Music..................................... 467 653 653 166 361 361
Cable Networks-TBS........................ 573 472 142 374 297 99
Filmed Entertainment-TBS.................. 200 (116) 30 113 (202) 8
Cable..................................... 427 353 353 150 75 75
Intersegment elimination.................. (13) (10) 5 (13) (10) 5
---------- --------- ---------- ---------- --------- ----------
Total..................................... $2,183 $ 1,816 $1,647 $1,271 $ 939 $ 966
---------- --------- ---------- ---------- --------- ----------
---------- --------- ---------- ---------- --------- ----------
Entertainment Group:
Filmed Entertainment-Warner Bros.......... $ 404 $ 379 $ 379 $ 281 $ 254 $ 254
Broadcasting-The WB Network............... (88) (98) (98) (88) (98) (98)
Cable Networks-HBO........................ 391 328 328 391 328 328
Cable(1).................................. 1,184 917 917 877 606 606
---------- --------- ---------- ---------- --------- ----------
Total..................................... $1,891 $ 1,526 $1,526 $1,461 $ 1,090 $1,090
---------- --------- ---------- ---------- --------- ----------
---------- --------- ---------- ---------- --------- ----------
</TABLE>
- ------------
(1) Includes net gains of approximately $200 million recognized in 1997 related
to the sale or exchange of certain cable television systems.
Time Warner had revenues of $13.294 billion, income of $301 million before
an extraordinary loss on the retirement of debt ($.03 loss per common share
after preferred dividend requirements) and net income of $246 million ($.13 loss
per common share after preferred dividend requirements) in 1997, compared to
revenues of $10.064 billion, a loss of $156 million before an extraordinary loss
on the retirement of debt ($.95 per
F-3
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
common share) and a net loss of $191 million ($1.04 per common share) in 1996.
Time Warner's equity in the pretax income of the Entertainment Group was $686
million in 1997, compared to $290 million in 1996.
Time Warner's historical results of operations include the operating
results of TBS from October 10, 1996. On a pro forma basis, giving effect to the
Time Warner Transactions that occurred in 1996 as if each of such transactions
had occurred at the beginning of 1996, Time Warner would have reported for the
year ended December 31, 1996, revenues of $12.799 billion, depreciation expense
of $368 million, EBITA of $1.816 billion, operating income of $939 million,
equity in the pretax income of the Entertainment Group of $290 million, a loss
before extraordinary item of $282 million ($1.04 per common share) and a net
loss of $317 million ($1.10 per common share). No pro forma financial
information has been presented for Time Warner for the year ended December 31,
1997 because all of such transactions are already reflected in the historical
financial statements of Time Warner.
Time Warner's operating results improved from a pro forma net loss of $317
million for the year ended December 31, 1996 to net income of $246 million for
the year ended December 31, 1997. As discussed more fully below, this
improvement principally resulted from an overall increase in Time Warner's EBITA
and operating income, a significant increase in income from its equity in the
pretax income of the Entertainment Group and a $200 million pretax gain
recognized in 1997 in connection with the redemption of certain mandatorily
redeemable preferred securities and the related disposal of its interest in
Hasbro, Inc., offset in part by a $20 million increase in extraordinary losses
on the retirement of debt recorded in each period. On a historical basis, such
underlying operating trends were mitigated by an overall increase in interest
expense principally relating to the assumption of approximately $2.8 billion of
debt in the TBS Transaction, and an increase in noncash amortization of
intangible assets, also relating to the TBS Transaction. On a historical basis,
after preferred dividend requirements that increased by $62 million due to the
April 1996 issuance of Series M Preferred Stock, Time Warner's net loss
applicable to common shares improved to $73 million for the year ended December
31, 1997, compared to $448 million for the year ended December 31, 1996. This
improvement, as well as the dilutive effect from issuing 179.8 million shares of
common stock in connection with the TBS Transaction, resulted in a net loss per
common share of $.13 for the year ended December 31, 1997, compared to a $1.04
net loss per common share for the year ended December 31, 1996.
On a historical basis, the Entertainment Group had revenues of $11.328
billion, income of $642 million before an extraordinary loss on the retirement
of debt and net income of $619 million in 1997, compared to revenues of $10.861
billion and net income of $220 million in 1996. As discussed more fully below,
the Entertainment Group's net income increased significantly in 1997 as compared
to 1996 due to an overall increase in EBITA and operating income generated by
its business segments, including approximately $200 million of net gains
recognized in 1997 related to the sale or exchange of certain cable television
systems, and the recognition of an approximate $250 million gain in 1997 related
to the sale of TWE's interest in E! Entertainment Television, Inc. These
increases were offset in part by the recognition of a $23 million extraordinary
loss on the retirement of debt in 1997 and an increase in minority interest
expense related to TWE-A/N.
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 $4.290 billion, compared to $4.117
billion in 1996. EBITA increased to $529 million from $464 million. Operating
income increased to $481 million from $418 million. Excluding
F-4
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
the effect of operations that were either recently sold or acquired, revenues
benefited from a significant increase in magazine advertising revenues, as well
as increases in circulation and direct marketing revenues. Contributing to the
revenue gains were increases achieved by People, Sports Illustrated, Time,
Entertainment Weekly, In Style and direct marketer Book-of-the-Month Club. EBITA
and operating income increased principally as a result of the revenue gains and,
to a lesser extent, continued cost savings.
Music. Revenues decreased to $3.691 billion, compared to $3.949 billion in
1996. EBITA decreased to $467 million from $653 million. Operating income
decreased to $166 million from $361 million. Despite the Music division having a
leading domestic market share for the year of 20%, the decline in revenues
principally related to softness in the overexpanded U.S. retail marketplace,
artist delays affecting the timing of releases of new product and a decline in
international recorded music sales. EBITA and operating income decreased
principally as a result of the decline in revenues and lower results from direct
marketing activities, offset in part by certain one-time gains. Management
expects that these domestic and international trends will continue through the
first quarter of 1998, after which the Music division is expected to benefit
from the release of new products from popular established artists.
Cable Networks-TBS. Cable Networks results reflect the acquisition of TBS
effective in October 1996. Such operating results are not comparable to the
prior year and, accordingly, are discussed on a pro forma basis.
Revenues increased to $2.900 billion, compared to $2.477 billion on a pro
forma basis in 1996. EBITA increased to $573 million from $472 million.
Operating income increased to $374 million from $297 million. Revenues benefited
from increases in advertising and subscription revenues. Advertising revenues
increased due to a strong overall advertising market for the division's major
branded networks, including TNT, TBS Superstation, CNN and Cartoon Network.
Subscription revenues increased as a result of higher rates and an increase in
subscriptions, primarily at TNT, CNN, Cartoon Network and Turner Classic Movies.
EBITA and operating income increased principally as a result of the revenue
gains, offset in part by start-up costs for new networks, including the sports
news network CNN/SI and the Spanish-language news network CNN en Espanol.
On December 31, 1997, the TBS Superstation was converted from an
advertiser-supported broadcast super-station to a copyright-paid, cable
television service, which allows it to charge cable operators for the right to
carry its cable television programming. The creation of this new subscription
revenue stream is expected to contribute positively to operating results
beginning in 1998.
Filmed Entertainment-TBS. Filmed Entertainment results reflect the
acquisition of TBS effective in October 1996. Such operating results are not
comparable to the prior year and, accordingly, are discussed on a pro forma
basis.
Revenues increased to $1.531 billion, compared to $1.458 billion on a pro
forma basis in 1996. EBITA increased to $200 million from a loss of $116
million. Operating income increased to $113 million from a loss of $202 million.
Revenues benefited from increases in worldwide theatrical, home video and
television distribution revenues. EBITA and operating income increased
principally as a result of the revenue gains, merger-related cost savings and
the absence of approximately $200 million of write-offs recorded in 1996 that
related to disappointing results for theatrical releases.
Cable. Revenues increased to $997 million, compared to $909 million in
1996. EBITA increased to $427 million from $353 million. Operating income
increased to $150 million from $75 million. 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 advertising and pay-per-view revenues.
EBITA and operating income increased principally as a result of the revenue
gains, as well as gains of approximately $12 million recognized in 1997 in
connection with the sale of certain investments.
Interest and Other, Net. Interest and other, net, decreased to $1.044
billion in 1997, compared to $1.174 billion in 1996. Interest expense increased
to $1.049 billion, compared to $968 million, principally due to the
F-5
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
assumption of approximately $2.8 billion of debt in the TBS Transaction. There
was other income, net, of $5 million in 1997 compared to other expense, net, of
$206 million in 1996, principally because of the recognition of a $200 million
pretax gain in 1997 in connection with the redemption of certain mandatorily
redeemable preferred securities and the related disposal of Time Warner's
interest in Hasbro, Inc. and lower losses from the reduction in carrying value
of certain investments, offset in part by costs associated with the Company's
receivables securitization program.
ENTERTAINMENT GROUP
Filmed Entertainment-Warner Bros. Revenues decreased to $5.472 billion,
compared to $5.648 billion in 1996. EBITA increased to $404 million from $379
million. Operating income increased to $281 million from $254 million. Revenues
decreased principally as a result of lower worldwide theatrical and home video
revenues, offset in part by increases in worldwide television distribution
revenues. EBITA and operating income increased principally as a result of
high-margin sales of library product that contributed to the strong performance
of worldwide television distribution operations, cost savings and certain
one-time gains, offset in part by higher depreciation principally relating to
the expansion of theme parks and consumer products operations.
Broadcasting-The WB Network. Revenues increased to $136 million, compared
to $87 million in 1996. EBITA and operating losses improved to a loss of $88
million from a loss of $98 million. The increase in revenues primarily resulted
from the expansion of programming in September 1996 to three nights of primetime
scheduling and the expansion of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. The 1997 operating loss improved
principally as a result of the revenue gains and the effect of an increase in a
limited partner's interest in the network that occurred in early 1997. Due to
the start-up nature of this national broadcast operation and the addition of a
fourth night of primetime programming in January 1998, losses are expected to
continue.
Cable Networks-HBO. Revenues increased to $1.923 billion, compared to
$1.763 billion in 1996. EBITA and operating income increased to $391 million
from $328 million. Revenues benefited primarily from an increase in
subscriptions to 33.6 million from 32.4 million at the end of 1996. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings.
Cable. Revenues increased to $4.243 billion, compared to $3.851 billion in
1996. EBITA increased to $1.184 billion from $917 million. Operating income
increased to $877 million from $606 million. Revenues benefited from an increase
in basic cable and Primestar-related, direct broadcast satellite subscribers,
increases in regulated cable rates as permitted under Time Warner Cable's
'social contract' with the FCC and an increase in advertising and pay-per-view
revenues. EBITA and operating income increased principally as a result of the
revenue gains, as well as net gains of approximately $200 million recognized in
1997 in connection with the sale or exchange of certain cable systems. The
increases in EBITA and operating income were partially offset by higher
depreciation related to capital spending.
As of December 31, 1997, including the wholly owned cable operations of TWI
Cable Inc. ('TWI Cable'), there were 12.6 million subscribers under the
management of the Entertainment Group's Cable division, as compared to 12.3
million subscribers at the end of 1996.
Interest and Other, Net. Interest and other, net, decreased to $357
million in 1997, compared to $524 million in 1996. Interest expense increased to
$494 million, compared to $478 million in 1996. There was other income, net, of
$137 million in 1997, compared to other expense, net, of $46 million in 1996,
principally due to higher gains on asset sales, including an approximate $250
million pretax gain on the sale of an interest in E! Entertainment Television,
Inc. recognized in 1997. This income was offset in part by higher losses from
reductions in the carrying value of certain investments and the dividend
requirements on preferred stock of a subsidiary issued in February 1997.
F-6
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
1996 VS. 1995
EBITA and operating income for Time Warner and the Entertainment Group in
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
EBITA 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................................. $ 464 $ 417 $ 464 $ 417 $ 418 $ 381 $ 418 $ 381
Music(1)................................... 653 595 653 595 361 321 361 321
Cable Networks-TBS......................... 472 445 142 -- 297 267 99 --
Filmed Entertainment-TBS................... (116) 28 30 -- (202) (62) 8 --
Cable...................................... 353 307 353 63 75 29 75 (5)
Intersegment elimination................... (10) 6 5 -- (10) 6 5 --
------ ------ ------ ------ ------ ------ ------ ------
Total...................................... $1,816 $1,798 $1,647 $1,075 $ 939 $ 942 $ 966 $ 697
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Entertainment Group:
Filmed Entertainment-Warner Bros........... $ 379 $ 377 $ 379 $ 377 $ 254 $ 253 $ 254 $ 253
Six Flags Theme Parks(2)................... -- -- -- 40 -- -- -- 29
Broadcasting-The WB Network................ (98) (66) (98) (66) (98) (66) (98) (66)
Cable Networks-HBO......................... 328 275 328 275 328 274 328 274
Cable...................................... 917 842 917 810 606 533 606 502
------ ------ ------ ------ ------ ------ ------ ------
Total...................................... $1,526 $1,428 $1,526 $1,436 $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 $156 million before
an extraordinary loss on the retirement of debt ($.95 per common share) and a
net loss of $191 million ($1.04 per common share) in 1996, compared to revenues
of $8.067 billion, a loss of $124 million before an extraordinary loss on the
retirement of debt ($.46 per common share) 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 EBITA, operating income 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 connection with the Preferred Stock Refinancing, the Cable
Acquisitions and the ITOCHU/Toshiba Transaction, offset in part by the dilutive
effect from issuing 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
F-7
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
$12.154 billion, depreciation expense of $368 million and $349 million, EBITA of
$1.816 billion and $1.798 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 $282 million and $230
million ($1.04 and $.96 per common share) and a net loss of $317 million and
$272 million ($1.10 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, depreciation expense of $644 million,
EBITA of $1.428 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 EBITA and 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 TWE-A/N. 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.
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. EBITA increased to $464 million from $417 million. 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. EBITA 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. EBITA increased to $653 million from $595 million. 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
F-8
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
domestic market share of 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 EBITA 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.
Cable Networks-TBS. Cable Networks results reflect the acquisition of TBS
effective in October 1996 and include revenues of $680 million, EBITA of $142
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. EBITA increased to $472 million from $445 million.
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. EBITA 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, EBITA of $30 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. EBITA decreased from $28 million in 1995 to a loss of
$116 million in 1996. 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, EBITA 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. EBITA increased to $353 million from $63 million. 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, EBITA of $307 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 FCC and an increase in
pay-per-view and advertising revenues. EBITA and operating income increased
principally as a result of revenue gains, offset in part by higher depreciation
relating to increased capital spending.
F-9
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 its 8.75% Convertible
Subordinated Debentures due 2015 (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. EBITA increased to $379 million from $377
million. 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. EBITA and operating income benefited principally from the revenue
gains, offset in large part by a $54 million increase in depreciation
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 Entertainment Corporation ('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. In February 1998, TWE entered into an agreement to sell its
remaining 49% interest. See Note 4 to the accompanying consolidated financial
statements.
Broadcasting-The WB Network. The WB Network recorded EBITA and operating
losses of $98 million on $87 million of revenues in 1996, compared to EBITA and
operating losses 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 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. EBITA increased to $328 million from $275 million.
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. EBITA 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. EBITA increased to $917 million from $810 million. 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 TWE-A/N
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, EBITA of $842 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 advertising
and pay-per-view revenues. EBITA and operating income increased principally as a
result of revenue gains, offset in part by higher depreciation relating to
increased capital spending.
F-10
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
As of December 31, 1996, including the wholly owned cable operations of TWI
Cable, there were 12.3 million subscribers under the management of the
Entertainment Group's Cable division, as compared to 10.4 million subscribers at
the end of 1995.
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 assets. 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.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1997
TIME WARNER
1997 FINANCIAL CONDITION
At December 31, 1997, Time Warner had $11.8 billion of debt, $645 million
of available cash and equivalents (net debt of $11.2 billion), $533 million of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of subsidiaries, $1.9 billion of Series M
Preferred Stock and $9.4 billion of shareholders' equity, compared to $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 at December 31, 1996.
INVESTMENT IN TWE
Time Warner's investment in TWE at December 31, 1997 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. Such 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 $6 billion at December 31, 1997. 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 received a $535 million distribution relating to
its Senior Capital interest in 1997. Time Warner's remaining $1.1 billion Senior
Capital interest and any undistributed partnership income allocated thereto
(based on an 8% annual rate of return) are required to be distributed to Time
Warner in two annual installments on July 1, 1998 and 1999.
F-11
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
COMMON STOCK REPURCHASE PROGRAM
In November 1997, Time Warner's Board of Directors authorized a 20 million
share increase in Time Warner's existing common stock repurchase program that,
along with previous authorizations, will allow the Company to repurchase, from
time to time, up to 35 million shares of Time Warner common stock. Common stock
repurchases have been funded with borrowings under Time Warner's Stock Option
Proceeds Credit Facility, as described more fully below. The common stock
repurchased under the program is expected to continue to be used to satisfy
future share issuances related to the exercise of existing employee stock
options and the potential conversion of certain convertible securities. Actual
repurchases in any period will be subject to market conditions. As of December
31, 1997, Time Warner had acquired approximately 17.6 million shares of its
common stock for an aggregate cost of $800 million.
In connection with Time Warner's expanded common stock repurchase program,
Time Warner entered into a new five-year, $1.3 billion revolving credit facility
(the 'Stock Option Proceeds Credit Facility') in early 1998, which replaced its
previously existing facility. Borrowings under the Stock Option Proceeds Credit
Facility are principally used to fund stock repurchases and approximately $125
million of future preferred dividend requirements on Time Warner's Series G, H,
I and J Preferred Stock as of December 31, 1997. At December 31, 1997 and 1996,
Time Warner had outstanding borrowings against future stock option proceeds of
$533 million and $488 million, respectively.
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 preferred dividend requirements on its Series G, H, I
and J Preferred Stock, and has entered into certain escrow arrangements, Time
Warner's principal credit rating agencies similarly exclude such preferred
dividend requirements for purposes of evaluating Time Warner's coverage ratio.
See Note 8 to the accompanying consolidated financial statements for a summary
of the principal terms of the Stock Option Proceeds Credit Facility.
FINANCING TRANSACTIONS
In 1997, Time Warner and its consolidated subsidiaries continued to
capitalize on favorable market conditions by completing a series of financing
transactions that has resulted in the refinancing of approximately $4.5 billion
of debt, which lowered interest rates, staggered debt maturities and, with
respect to the redemption of certain convertible securities, eliminated the
potential dilution from the conversion of such securities into 5.6 million
shares of Time Warner common stock. In addition to these debt refinancings, Time
Warner reduced debt by approximately $1 billion (excluding the approximate $100
million increase in debt relating to the noncash accretion of original issue
discounts on certain zero-coupon debt securities).
As part of these debt refinancings, Time Warner, together with certain of
its consolidated and unconsolidated subsidiaries, entered into a new, five-year
revolving credit facility in November 1997 (the '1997 Credit Agreement') and
terminated its subsidiaries' financing arrangements under certain previously
existing bank credit facilities (the 'Old Credit Agreements'). This enabled Time
Warner to reduce its aggregate borrowing availability from $10.3 billion to $7.5
billion, lower interest rates and refinance outstanding borrowings under the Old
Credit Agreements in the amounts of approximately $2.4 billion by subsidiaries
of Time Warner and $2.1 billion by TWE. See Note 7 to the accompanying
consolidated financial statements for a summary of the principal terms of the
1997 Credit Agreement.
F-12
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
CREDIT SIMPLIFICATION
In December 1997, in order to simplify its credit structure, Time Warner
implemented a cross-corporate guarantee structure, whereby Time Warner and each
of TW Companies and TBS (the 'Guarantor Subsidiaries') have fully and
unconditionally guaranteed any outstanding publicly traded indebtedness of each
other and, along with TWI Cable, have similarly guaranteed each other's
outstanding borrowings under the 1997 Credit Agreement. As a result of
implementing this unified credit structure, the credit profile associated with
the indebtedness of Time Warner or any of the Guarantor Subsidiaries is
substantially the same.
CREDIT STATISTICS
The combination of EBITA growth, controlled capital spending and debt
reduction has resulted in improvements in Time Warner's financial condition and
overall financial flexibility, as reflected in its strengthening financial
ratios. These ratios, consisting of commonly used financial measures such as
leverage and coverage ratios, are used by credit rating agencies and other
credit analysts to measure the ability of a company to repay debt (leverage) and
to pay interest and preferred dividends (coverage). As a result of the
improvements in Time Warner's financial performance, each of Standard & Poor's
and Moody's, Time Warner's principal credit rating agencies, recently improved
the credit rating outlook for Time Warner.
The leverage and coverage ratios, on a historical basis for 1997 and on a
pro forma basis for 1996 and 1995, 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. The leverage ratio
represents the ratio of total debt, less available cash and equivalents, to
total business segment operating income before depreciation and amortization,
less corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the
ratio of Adjusted EBITDA to total interest expense and/or preferred dividends.
<TABLE>
<CAPTION>
PRO FORMA(a)
HISTORICAL ------------------
1997 1996 1995
---------- ------- -------
<S> <C> <C> <C>
Time Warner and Entertainment Group combined:
Leverage ratio...................................................................... 3.2x 4.1x 4.3x
Interest coverage ratio (b)......................................................... 3.5x 2.9x 2.5x
Interest and preferred dividends coverage ratio (b)(c).............................. 2.8x 2.3x 2.0x
Time Warner:
Leverage ratio...................................................................... 4.5x 5.9x 5.7x
Interest coverage ratio (b)......................................................... 2.5x 2.0x 1.9x
Interest and preferred dividends coverage ratio (b)(c).............................. 1.9x 1.5x 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 paid to TWE in connection with borrowings under Time
Warner's $400 million credit agreement with TWE and excludes interest on
borrowings under the Stock Option Proceeds Credit Facility.
(c) Includes dividends related to certain preferred securities of subsidiaries.
Excludes preferred dividends related to Time Warner's Series G, H, I and J
Preferred Stock, which Time Warner has committed to fund with borrowings
under the Stock Option Proceeds Credit Facility.
Time Warner's stand-alone leverage and coverage ratios for 1998 are
expected to be positively affected by the transfer of approximately $1 billion
of debt to TWE-A/N in connection with the TWE-A/N Transfers (as described more
fully hereinafter). The TWE-A/N Transfers will have no impact on the combined
financial ratios of Time Warner and the Entertainment Group.
F-13
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
CASH FLOWS
During 1997, Time Warner's cash provided by operations amounted to $1.408
billion and reflected $2.183 billion of EBITA from its Publishing, Music, Cable
Networks-TBS, Filmed Entertainment-TBS and Cable businesses, $382 million of
noncash depreciation expense, $479 million of distributions from TWE (excluding
$455 million representing the return of a portion of the Time Warner General
Partners' Senior Capital interest that has been classified as a source of cash
from investing activities) and $108 million from the securitization of
receivables, less $929 million of interest payments, $253 million of income
taxes, $81 million of corporate expenses and $481 million related to an increase
in other working capital requirements, balance sheet accounts and noncash items.
Cash provided by operations of $253 million in 1996 reflected $1.647 billion of
business segment EBITA, $307 million of noncash depreciation expense, $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 used by investing activities decreased to $45 million in 1997,
compared to $424 million in 1996, principally as a result of lower investment
spending and the receipt of $455 million of proceeds representing the return of
a portion of the Time Warner General Partners' Senior Capital interest in TWE,
offset in part by higher capital expenditures and a decrease in investment
proceeds. Capital expenditures increased to $574 million in 1997, compared to
$481 million in 1996, principally as a result of capital spending by the TBS
businesses acquired in October 1996.
Cash used by financing activities was $1.232 billion in 1997, compared to
$500 million in 1996. The use of cash in 1997 principally resulted from
approximately $1 billion of debt reduction, the repurchase of approximately 6.2
million shares of Time Warner common stock at an aggregate cost of $344 million
and the payment of $338 million of dividends, offset in part by proceeds
received from the exercise of employee stock options. The use of cash in 1996
principally resulted from approximately $1.8 billion of debt reduction, the
repurchase of approximately 11.4 million shares of Time Warner common stock at
an aggregate cost of $456 million and the payment of $287 million of dividends,
offset in part by $488 million of borrowings against future stock option
proceeds and approximately $1.55 billion of net proceeds raised from the
issuance of 1.6 million shares of Series M Preferred Stock. The proceeds from
the Series M Preferred Stock were used to reduce debt.
Cash used by financing activities excludes preferred dividend requirements
on Time Warner's Series M Preferred Stock that were paid in-kind, at Time
Warner's election, with additional shares of Series M Preferred Stock in 1997
and 1996. Time Warner elected to begin to use cash to satisfy such dividend
requirements in 1998, which is expected to increase annual cash dividend
payments by approximately $200 million.
The assets and cash flows of TWE are restricted by certain borrowing and
partnership agreements and are unavailable to Time Warner except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. Under the 1997 Credit Agreement, TWE 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.
Management believes that Time Warner's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future without distributions and loans
from TWE above those permitted by existing agreements.
F-14
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
ENTERTAINMENT GROUP
1997 FINANCIAL CONDITION
At December 31, 1997, the Entertainment Group had $6.0 billion of debt,
$322 million of cash and equivalents (net debt of $5.7 billion), $233 million of
preferred stock of a subsidiary, $1.1 billion of Time Warner General Partners'
Senior Capital and $6.4 billion of partners' capital, compared to $5.7 billion
of debt, $216 million of cash and equivalents (net debt of $5.5 billion), $1.5
billion of Time Warner General Partners' Senior Capital and $6.7 billion of
partners' capital at December 31, 1996.
CREDIT STATISTICS
Entertainment Group leverage and coverage ratios for 1997, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
HISTORICAL
-------------- PRO FORMA
1997 1996 1995(a)
----- ----- ---------
<S> <C> <C> <C>
Leverage ratio...................................................................... 2.0x 2.4x 2.9x
Interest coverage ratio (b)......................................................... 5.4x 4.8x 3.8x
</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.
(b) Includes dividends related to the preferred stock of a subsidiary.
The Entertainment Group's leverage and coverage ratios for 1998 are
expected to be negatively affected by TWE-A/N's assumption of approximately $1
billion of debt in connection with the TWE-A/N Transfers (as described more
fully hereinafter). Nevertheless, management believes that the Entertainment
Group's operating cash flow will continue to be sufficient to service its debt
requirements.
CASH FLOWS
In 1997, the Entertainment Group's cash provided by operations amounted to
$1.799 billion and reflected $1.891 billion of EBITA from the Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $956 million of noncash depreciation expense and $300 million
from the securitization of backlog, less $493 million of interest payments, $95
million of income taxes, $72 million of corporate expenses and $688 million
related to an increase in working capital requirements, other balance sheet
accounts and noncash items. Cash provided by operations of $1.912 billion in
1996 reflected $1.526 billion of business segment EBITA, $808 million of noncash
depreciation expense 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 used by investing activities was $1.217 billion in 1997, compared to
$1.253 billion in 1996, principally as a result of lower capital expenditures,
offset by a decrease in investment proceeds. Capital expenditures were $1.565
billion in 1997, compared to $1.719 billion in 1996.
Cash used by financing activities was $476 million in 1997, compared to
$652 million in 1996, principally as a result of an increase in debt used to
fund cash distributions to Time Warner and the issuance of 250,000 shares of
preferred stock of a subsidiary for aggregate net proceeds of $243 million,
offset in part by a $706 million increase in distributions paid to Time Warner
and the absence of $169 million of collections on the note receivable from U S
WEST that was fully paid in 1996.
Management believes that the Entertainment Group's operating cash flow,
cash and equivalents and additional borrowing capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future.
F-15
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
CABLE CAPITAL SPENDING
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 $1.683 billion in 1997, compared to $1.563
billion in 1996. Capital spending includes over $100 million in each year
relating to Primestar, which is expected to be eliminated in 1998 upon the
consummation of the Primestar Transactions (as described more fully
hereinafter). Cable capital spending for 1998 is budgeted to be approximately
$1.6 billion and is expected to continue to be funded by cable operating cash
flow. In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996 and
consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable
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
TWE-A/N. As discussed more fully below, management expects to continue to
finance such level of investment through cable operating cash flow and the
development of new revenue streams from expanded programming options, high-speed
Internet access, telephony and other services.
CABLE FINANCING STRATEGY
Time Warner's cable financing strategy is to continue to use cable
operating cash flow to finance the level of capital spending necessary to
upgrade the technological capability of its cable television systems and develop
new services, while pursuing opportunities to reduce both existing debt and its
share of future funding requirements related to the cable television business
and related ancillary businesses. Consistent with this strategy, Time Warner,
TWE and TWE-A/N have recently announced or consummated certain transactions,
primarily consisting of (i) a series of transactions with TCI Communications,
Inc. ('TCI'), a subsidiary of Tele-Communications, Inc., to establish two, new
strategic joint ventures, expand an existing joint venture and exchange certain
cable television systems (collectively, the 'TCI Cable Transactions'), (ii) the
transfer of TWE's and TWE-A/N's direct broadcast satellite operations and
related assets to a separate entity, as well as certain related transactions and
(iii) the transfer by a wholly owned subsidiary of Time Warner of cable
television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, as well as certain
related transactions (collectively, the 'TWE-A/N Transfers'). Each of these
transactions is discussed more fully below.
TCI Cable Transactions
In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter of
intent to enter into a series of agreements to (i) form two cable television
joint ventures in the Houston and south Texas areas that will be managed by Time
Warner Cable, a division of TWE, and own cable television systems serving an
aggregate 1.1 million subscribers, subject to approximately $1.4 billion of
debt, (ii) expand an existing joint venture in Kansas City, which is managed by
Time Warner Cable, through the contribution by TCI of a contiguous cable
television system serving approximately 95,000 subscribers, subject to
approximately $200 million of debt, and (iii) exchange various cable television
systems serving over 500,000 subscribers for other cable television systems of
comparable size in an effort to enhance each company's geographic clusters of
cable television properties. The joint ventures will be accounted for under the
equity method of accounting.
F-16
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
As a result of these transactions, Time Warner expects to reduce combined
debt of itself and TWE by approximately $650 million, benefit from the
geographic clustering of cable television systems and increase the number of
subscribers under the management of Time Warner Cable by approximately 675,000
subscribers, thereby becoming the largest cable television operator in the U.S.
The TCI Cable Transactions are expected to close periodically throughout 1998
and are subject to the execution of definitive agreements by the parties and
customary closing conditions, including all necessary governmental and
regulatory approvals. There can be no assurance that such agreements will be
completed or that such approvals will be obtained.
Primestar Transactions
In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is referred
to herein as the 'Primestar Roll-up Transaction.'
In a related transaction, Primestar also entered into an agreement in June
1997 with The News Corporation Limited, MCI Telecommunications Corporation and
American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar (or, under
certain circumstances, Newco) will acquire certain assets relating to the
high-power, direct broadcast satellite business of ASkyB (the 'Primestar ASkyB
Transaction' and, when taken together with the Primestar Roll-up Transaction,
the 'Primestar Transactions'). In exchange for such assets, ASkyB will receive
non-voting securities of Newco that will be convertible into non-voting common
stock of Newco and, accordingly, will reduce TWE's equity interest in Newco to
approximately 16% on a fully diluted basis.
The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and regulatory approvals, including the approval of the
FCC. There can be no assurance that such approvals will be obtained.
TWE-A/N Transfers
In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions. The cable television systems transferred to TWE-A/N were
formerly owned by TWI Cable, a wholly owned subsidiary of Time Warner, and
Paragon Communications ('Paragon'), a partnership formerly owning cable
television systems serving approximately 1 million subscribers that was wholly
owned by subsidiaries of Time Warner, with 50% beneficially owned in the
aggregate by TWE and TWE-A/N. The TWE-A/N Transfers reduced Time Warner's debt
by approximately $1 billion and increased the under-leveraged capitalization of
TWE-A/N and consequently, TWE. The debt assumed by TWE-A/N has been guaranteed
by TWI Cable and certain of its subsidiaries, including Paragon.
F-17
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
As part of the TWE-A/N Transfers, TWE and TWE-A/N exchanged substantially
all of their respective beneficial interests in Paragon for an equivalent share
of Paragon's cable television systems (or interests therein) serving
approximately 500,000 subscribers, resulting in wholly owned subsidiaries of
Time Warner owning 100% of the restructured Paragon entity, with less than 1%
beneficially held for TWE. Accordingly, effective as of January 1, 1998, Time
Warner will consolidate Paragon. Because this transaction represented an
exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an
equivalent amount of its cable television systems, it did not have a significant
economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998. Time Warner did not recognize
a gain or loss on the TWE-A/N Transfers. TWE will continue to consolidate
TWE-A/N and Time Warner will account for its interest in TWE-A/N under the
equity method of accounting.
SIX FLAGS
In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
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 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 the
potential exploitation of 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-
F-18
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 $2.126 billion and $1.502 billion at December 31, 1997 and
1996, respectively (including amounts relating to the licensing of film product
to Time Warner's and TWE's cable television networks of $719 million in 1997 and
$463 million in 1996).
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. In order to accelerate the
receipt of cash under these licensing contracts, TWE established a $600 million
securitization facility in 1997 and received approximately $300 million of net
proceeds thereunder. The remaining portion of backlog for which cash advances
have not already been received continues to have 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,
1997, Time Warner had interest rate swap contracts to pay floating-rates of
interest (average six-month LIBOR rate of 5.8%) and receive fixed-rates of
interest (average rate of 5.5%) on $2.3 billion notional amount of indebtedness,
which resulted in approximately 52% of Time Warner's underlying debt, and 46% of
the debt of Time Warner and the Entertainment Group combined, being subject to
variable interest rates. At December 31, 1996, Time Warner had interest rate
swap contracts on $2.3 billion notional amount of indebtedness.
Based on Time Warner's variable-rate debt and related interest rate swap
contracts outstanding at December 31, 1997, 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 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 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 ensuing
twelve month period. At December 31, 1997, Time Warner had effectively hedged
approximately half of the combined estimated foreign currency exposures that
principally relate to anticipated cash flows to be
F-19
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 is reimbursed by or reimburses TWE 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, 1997, Time Warner had contracts for the sale of $507 million and
the purchase of $139 million of foreign currencies at fixed rates, compared to
contracts for the sale of $447 million and the purchase of $104 million of
foreign currencies at December 31, 1996.
Based on the foreign exchange contracts outstanding at December 31, 1997,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1997 would result
in approximately $25 million of unrealized losses and $7 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 $25 million of unrealized gains and $7 million of unrealized losses,
respectively. At December 31, 1997, none of Time Warner's foreign exchange
purchase contracts relates to TWE's foreign currency exposure. However, with
regard to the $25 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.
Asian Financial Markets
During 1997, the Asian financial markets experienced significant
instability. Because less than 5% of the combined revenues of Time Warner and
the Entertainment Group are derived from the sale of products and services in
Asia, management does not believe that the state of the Asian financial markets
poses a material risk to the operations of Time Warner and the Entertainment
Group.
YEAR 2000 TECHNOLOGY PREPAREDNESS
Time Warner, together with its Entertainment Group, is currently working to
resolve the potential impact of the year 2000 on the processing of
time-sensitive information by its computerized information systems. Year 2000
issues may arise if computer programs have been written using two digits (rather
than four) to define the applicable year. In such case, programs that have
time-sensitive logic may recognize a date using '00' as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.
Management is in the process of completing a review of significant software and
equipment used in Time Warner's operations and, to the extent practicable, in
the operations of its key business partners, in order to determine if any year
2000 risks exist that may be material to Time Warner as a whole. This process
includes an assessment of year 2000 risks on an ongoing basis and the
identification of practical remediation measures that could be taken on a timely
basis to alter, validate or replace time-sensitive software and equipment.
Management has already begun implementing certain of these measures and intends
to complete its remediation efforts prior to any anticipated material impact on
its computerized information systems. Costs of addressing potential problems
have not been material to date and, based on preliminary information, are not
currently expected to have a material adverse impact on Time Warner's financial
position, results of operations or cash flows in future periods. However, if
Time Warner, its customers or vendors are unable to resolve such processing
issues in a timely manner, it could result in a material financial risk.
Accordingly, management plans to devote the resources it concludes are
appropriate to resolve all significant year 2000 issues in a timely manner.
F-20
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents.......................................................................... $ 645 $ 452
Receivables, less allowances of $991 and $976 million......................................... 2,447 2,421
Inventories................................................................................... 830 941
Prepaid expenses.............................................................................. 1,089 1,007
------- -------
Total current assets.......................................................................... 5,011 4,821
Noncurrent cash and equivalents............................................................... -- 62
Noncurrent inventories........................................................................ 1,766 1,698
Investments in and amounts due to and from Entertainment Group................................ 5,549 5,814
Other investments............................................................................. 1,495 1,919
Property, plant and equipment, net............................................................ 2,089 1,986
Music catalogues, contracts and copyrights.................................................... 928 1,035
Cable television and sports franchises........................................................ 3,982 4,203
Goodwill...................................................................................... 12,572 12,421
Other assets.................................................................................. 771 1,105
------- -------
Total assets.................................................................................. $34,163 $35,064
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.............................................................................. $ 912 $ 715
Participations, royalties and programming costs payable....................................... 1,072 1,196
Debt due within one year...................................................................... 8 11
Other current liabilities..................................................................... 2,379 2,090
------- -------
Total current liabilities..................................................................... 4,371 4,012
Long-term debt................................................................................ 11,833 12,713
Borrowings against future stock option proceeds............................................... 533 488
Deferred income taxes......................................................................... 3,960 4,082
Unearned portion of paid subscriptions........................................................ 672 679
Other liabilities............................................................................. 1,006 967
Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely
subordinated notes and debentures of subsidiaries of the Company............................ 575 949
Series M exchangeable preferred stock, $.10 par value, 1.9 and 1.7 million shares outstanding
and $1.903 and $1.720 billion liquidation preference........................................ 1,857 1,672
Shareholders' equity
Preferred stock, $.10 par value, 35.4 and 35.6 million shares outstanding, $3.539 and $3.559
billion liquidation preference.............................................................. 4 4
Series LMCN-V Common Stock, $.01 par value, 57.1 and 50.7 million shares outstanding.......... 1 1
Common stock, $.01 par value, 519.0 and 508.4 million shares outstanding...................... 5 5
Paid-in capital............................................................................... 12,680 12,250
Accumulated deficit........................................................................... (3,334) (2,758)
------- -------
Total shareholders' equity.................................................................... 9,356 9,502
------- -------
Total liabilities and shareholders' equity.................................................... $34,163 $35,064
------- -------
------- -------
</TABLE>
See accompanying notes.
F-21
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Revenues (a)........................................................................ $13,294 $10,064 $8,067
------- ------- ------
Cost of revenues (a)(b)............................................................. 7,542 5,922 4,682
Selling, general and administrative (a)(b).......................................... 4,481 3,176 2,688
------- ------- ------
Operating expenses.................................................................. 12,023 9,098 7,370
------- ------- ------
Business segment operating income................................................... 1,271 966 697
Equity in pretax income of Entertainment Group (a).................................. 686 290 256
Interest and other, net (a)......................................................... (1,044) (1,174) (877)
Corporate expenses (a).............................................................. (81) (78) (74)
------- ------- ------
Income before income taxes.......................................................... 832 4 2
Income taxes........................................................................ (531) (160) (126)
------- ------- ------
Income (loss) before extraordinary item............................................. 301 (156) (124)
Extraordinary loss on retirement of debt, net of $37, $22 and $26 million income tax
benefit........................................................................... (55) (35) (42)
------- ------- ------
Net income (loss)................................................................... 246 (191) (166)
Preferred dividend requirements..................................................... (319) (257) (52)
------- ------- ------
Net loss applicable to common shares................................................ $ (73) $ (448) $ (218)
------- ------- ------
------- ------- ------
Basic and diluted loss per common share:
Loss before extraordinary item...................................................... $ (.03) $ (.95) $ (.46)
------- ------- ------
------- ------- ------
Net loss............................................................................ $ (.13) $ (1.04) $ (.57)
------- ------- ------
------- ------- ------
Average common shares............................................................... 567.7 431.2 383.8
------- ------- ------
------- ------- ------
</TABLE>
- ------------
(a) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the years ended
December 31, 1997, 1996 and 1995, respectively: revenues-$384 million, $224
million and $211 million; cost of revenues-$(245) million, $(177) million
and $(108) million; selling, general and administrative-$(53) million, $34
million and $46 million; equity in pretax income of Entertainment Group-$5
million, $(29) million and $(95) million; interest and other, net-$(36)
million, $(33) million and $(27) million; and corporate expenses-$72
million, $69 million and $64 million (Note 18).
<TABLE>
<S> <C> <C> <C>
(b) Includes depreciation and amortization expense of:.............................. $ 1,294 $ 988 $ 559
------- ------- ------
------- ------- ------
</TABLE>
See accompanying notes.
F-22
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
OPERATIONS
Net income (loss)................................................................... $ 246 $ (191) $ (166)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................ 55 35 42
Depreciation and amortization....................................................... 1,294 988 559
Noncash interest expense............................................................ 98 96 176
Excess (deficiency) of distributions over equity in pretax income of Entertainment
Group............................................................................. (207) (62) 807
Equity in losses (income) of other investee companies, net of distributions......... 36 (53) (16)
Changes in operating assets and liabilities:
Receivables..................................................................... (167) (39) (68)
Inventories..................................................................... (84) (180) (52)
Accounts payable and other liabilities.......................................... 501 (408) 160
Other balance sheet changes..................................................... (364) 67 (391)
------- ------- -------
Cash provided by operations......................................................... 1,408 253 1,051
------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions........................................................ (113) (261) (381)
Capital expenditures................................................................ (574) (481) (266)
Investment proceeds................................................................. 187 318 376
Proceeds received from return of Senior Capital contributed to TWE.................. 455 -- --
------- ------- -------
Cash used by investing activities................................................... (45) (424) (271)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.......................................................................... 5,413 3,431 2,023
Debt repayments..................................................................... (6,394) (5,271) (2,693)
Borrowings against future stock option proceeds..................................... 230 488 --
Repayments of borrowings against future stock option proceeds....................... (185) -- --
Repurchases of Time Warner common stock............................................. (344) (456) --
Issuance of Series M Preferred Stock................................................ -- 1,550 --
Issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiaries...................................................................... -- -- 949
Dividends paid...................................................................... (338) (287) (171)
Proceeds received from stock option and dividend reinvestment plans................. 454 105 106
Other, principally financing costs.................................................. (68) (60) (91)
------- ------- -------
Cash provided (used) by financing activities........................................ (1,232) (500) 123
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS......................................... 131 (671) 903
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a)..................................... 514 1,185 282
------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD (a)........................................... $ 645 $ 514 $ 1,185
------- ------- -------
------- ------- -------
</TABLE>
- ------------
(a) Includes current and noncurrent cash and equivalents at December 31, 1996
and 1995.
See accompanying notes.
F-23
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(MILLIONS)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
--------- ---------- ------- ----------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994............................... $ 1 $379 $ 2,588 $(1,820) $1,148
Net loss................................................... (166) (166)
Decrease in unrealized gains on securities, net of $9
million tax benefit...................................... (14) (14)
Foreign currency translation adjustments................... 18 18
----------- ------
Comprehensive income (loss)............................ (162) (162)
Common stock dividends..................................... (138) (138)
Preferred stock dividends.................................. 3 (52) (49)
Issuance of common and preferred stock in the KBLCOM and
Summit acquisitions...................................... 14 3 1,367 1,384
Issuance of preferred stock in the ITOCHU/Toshiba
Transaction.............................................. 15 1,335 1,350
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans........................... 4 122 126
Other...................................................... 2 7 (1) 8
--- ----- ------- ----------- ------
BALANCE AT DECEMBER 31, 1995............................... 30 388 5,422 (2,173) 3,667
Net loss................................................... (191) (191)
Increase in unrealized gains on securities, net of $11
million tax expense...................................... 17 17
Foreign currency translation adjustments................... 9 9
----------- ------
Comprehensive income (loss)............................ (165) (165)
Common stock dividends..................................... (155) (155)
Preferred stock dividends.................................. (257) (257)
Issuance of common and preferred stock in the CVI
acquisition.............................................. 6 3 671 680
Reduction in par value of common and preferred stock due to
TBS Transaction.......................................... (32) (387) 419 --
Issuance of common stock in the TBS Transaction............ 2 6,025 6,027
Repurchases of Time Warner common stock.................... (456) (456)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans........................... 163 (8) 155
Other...................................................... 6 6
--- ----- ------- ----------- ------
BALANCE AT DECEMBER 31, 1996............................... 4 6 12,250 (2,758) 9,502
Net income................................................. 246 246
Decrease in unrealized gains on securities, net of $89
million tax benefit (a).................................. (128) (128)
Foreign currency translation adjustments................... (76) (76)
----------- ------
Comprehensive income (loss)............................ 42 42
Common stock dividends..................................... (204) (204)
Preferred stock dividends.................................. (319) (319)
Issuance of common stock in connection with the TBS
Transaction.............................................. 67 67
Repurchases of Time Warner common stock.................... (344) (344)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans........................... 711 (98) 613
Other...................................................... (4) 3 (1)
--- ----- ------- ----------- ------
BALANCE AT DECEMBER 31, 1997............................... $ 4 $ 6 $12,680 $(3,334) $9,356
--- ----- ------- ----------- ------
--- ----- ------- ----------- ------
</TABLE>
- ------------
(a) Includes a $13 million reduction related to realized gains on the sale of
securities in 1997 that represents the turnaround of previous unrealized
gains included in comprehensive income in prior periods, net of $9 million
tax effect.
See accompanying notes.
F-24
<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 (now known as Time Warner
Companies, Inc., 'TW Companies'), and TW Companies and TBS became separate,
wholly owned subsidiaries of the new parent company. References herein to 'Time
Warner' or the 'Company' refer to TW Companies prior to October 10, 1996 and
Time Warner Inc. 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 and television broadcasting; Cable
Networks, consisting principally of interests in cable television programming;
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 cable
television systems, and a portion of its interests in cable television
programming 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, Atlantic Records, Elektra
Entertainment 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) leading cable
television networks, such as HBO, Cinemax, CNN, TNT and the TBS Superstation,
(5) 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 (6) Time
Warner Cable, currently 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 16). 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 recorded by Time Warner's business interests,
including the unconsolidated business interests of the Entertainment Group,
amounted to $1.342 billion in 1997, $1.117 billion in 1996 and $822 million in
1995.
F-25
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1997 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 18).
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 a 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.
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.
F-26
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Thereafter,
feature films are distributed 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 the related 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.'
Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost principally consists of direct
production costs and production overhead. 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 animation library of
Hanna-Barbera Inc. and 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
F-27
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 that 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 $244 million and $217 million at December 31,
1997 and 1996, respectively. Advertising expense, excluding theatrical and
television product, amounted to $1.080 billion in 1997, $1.050 billion in 1996
and $1.045 billion in 1995.
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 8).
FINANCIAL INSTRUMENTS
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.
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
F-28
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
----------------
1997 1996
------ ------
(MILLIONS)
<S> <C> <C>
Land and buildings............................................................................. $ 962 $ 914
Cable television equipment..................................................................... 941 777
Furniture, fixtures and other equipment........................................................ 1,337 1,337
------ ------
3,240 3,028
Less accumulated depreciation.................................................................. (1,151) (1,042)
------ ------
Total.......................................................................................... $2,089 $1,986
------ ------
------ ------
</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, film and
television libraries, 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 television 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, film
and television libraries, music catalogues, contracts and copyrights, and other
intangible assets are amortized over periods up to twenty years using the
straight-line method. Amortization of intangible assets amounted to $912 million
in 1997, $681 million in 1996 and $378 million in 1995. Accumulated amortization
of intangible assets at December 31, 1997 and 1996 amounted to $3.181 billion
and $2.452 billion, respectively.
Time Warner periodically reviews the carrying value of acquired intangible
assets for each acquired entity 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. If it is determined that the carrying value of intangible assets will
not be recovered from the undiscounted future cash flows of the acquired
business, the
F-29
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrying value of such intangible assets would be considered impaired and
reduced by a charge to operations in the amount of the impairment. An impairment
charge is measured as any deficiency in the amount of estimated undiscounted
future cash flows of the acquired business available 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. The subsequent realization of net
operating loss and investment tax credit carryforwards 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
Effective December 31, 1997, Time Warner adopted FASB Statement No. 128,
'Earnings per Share' ('FAS 128'), which established simplified standards for
computing and presenting earnings per share information. The adoption of FAS 128
did not have any effect on Time Warner's financial statements.
Basic 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. Diluted loss per common share
adjusts for the effect of convertible securities and stock options only in the
periods presented in which such effect would have been dilutive. Such effect was
not dilutive in any of the periods presented herein.
COMPREHENSIVE INCOME
Effective January 1, 1997, Time Warner adopted FASB Statement No. 130,
'Reporting Comprehensive Income' ('FAS 130'). The new rules establish standards
for the reporting of comprehensive income and its components in financial
statements. Comprehensive income consists of net income and other gains and
losses affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income. For Time Warner, such items consist
primarily of unrealized gains and losses on marketable equity investments and
foreign currency translation gains and losses. The adoption of FAS 130 did not
have a material effect on Time Warner's primary financial statements, but did
affect the presentation of the accompanying consolidated statement of
shareholders' equity.
F-30
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
On December 31, 1997, Time Warner adopted FASB Statement No. 131,
'Disclosures about Segments of an Enterprise and Related Information' ('FAS
131'). The new rules establish revised standards for public companies relating
to the reporting of financial and descriptive information about their operating
segments in financial statements. The adoption of FAS 131 did not have a
material effect on Time Warner's primary financial statements, but did affect
the disclosure of segment information contained elsewhere herein (Note 16).
2. MERGERS AND ACQUISITIONS
TBS TRANSACTION
On October 10, 1996, Time Warner acquired the remaining 80% interest in TBS
that it did not already own (the 'TBS Transaction'). As part of the transaction,
each of TW Companies and TBS became a separate, wholly owned subsidiary of Time
Warner which combines, for financial reporting purposes, the consolidated net
assets and operating results of TW Companies and TBS. Each issued and
outstanding share of each class of capital stock of TW Companies was converted
into one share of a substantially identical class of capital stock of Time
Warner.
In connection with the TBS Transaction, Time Warner issued (i)
approximately 179.8 million shares of common stock (including 57.1 million
shares of a special class of non-redeemable common stock having 1/100th of a
vote per share on certain limited matters ('Series LMCN-V Common Stock') to
affiliates of Liberty Media Corporation ('LMC'), a subsidiary of
Tele-Communications, Inc.), in exchange for shares of TBS capital stock and
pursuant to a separate option agreement with LMC and its affiliates (the 'SSSI
Option Agreement') and (ii) approximately 14 million stock options to replace
all outstanding TBS stock options. Time Warner also assumed approximately $2.8
billion of indebtedness.
Of the aggregate consideration issued in the TBS Transaction, 6.4 million
shares of Series LMCN-V Common Stock were issued to LMC and its affiliates in
June 1997 pursuant to the SSSI Option Agreement. The SSSI Option Agreement
enabled Time Warner to acquire substantially all of the assets of Southern
Satellite Systems, Inc. and its affiliates ('SSSI'), a subsidiary of LMC that
formerly provided uplink and distribution services for WTBS (the 'TBS
Superstation'), for approximately $213 million effective as of December 31,
1997, the date on which the TBS Superstation was converted to a copyright-paid,
cable television programming service.
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 allocated to the net assets acquired in proportion to their
respective fair values, as follows: goodwill-$6.842 billion; other current and
noncurrent assets-$3.624 billion; long-term debt-$2.765 billion; deferred income
taxes-$117 million; and other current and noncurrent liabilities-$1.410 billion.
CABLE ACQUISITIONS
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') 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.
F-31
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, at such time, owned cable television systems
serving an additional 972,000 subscribers. The acquisition of the 50% interest
in Paragon resulted in it becoming wholly owned by subsidiaries of Time Warner,
with 50% beneficially owned in the aggregate by TWE and the TWE-Advance/Newhouse
Partnership (Note 3). 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')
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').
In October 1996, Time Warner reorganized the legal ownership of its wholly
owned cable subsidiaries, whereby the equity ownership of KBLCOM and Summit was
contributed to CVI. In connection therewith, CVI was renamed TWI Cable Inc.
('TWI Cable').
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 Acquisitions, (iii) the 1995 formation of the
TWE-Advance/Newhouse Partnership (Note 3), (iv) the ITOCHU/Toshiba Transaction
(Note 4), (v) the Preferred Stock Refinancing (Note 11), (vi) Time Warner's and
TWE's 1996 and 1995 debt refinancings and (vii) certain asset sales in 1995,
including the sale of 51% of TWE's interest in Six Flags Entertainment
Corporation ('Six Flags') (Note 4), as if each of such transactions had occurred
at the beginning of the respective periods presented, 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 expense of $368 million and
$349 million, operating income before noncash amortization of intangible assets
of $1.816 billion and $1.798 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 $282 million and $230
million ($1.04 and $.96 per common share) and a net loss of $317 million and
$272 million ($1.10 and $1.04 per common share). No pro forma information has
been presented for 1997 because all of such transactions are already reflected
in the historical financial statements of Time Warner.
3. TWE-A/N TRANSFERS
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
F-32
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interests therein) serving approximately 4.5 million subscribers, as well as
certain foreign cable investments and programming investments that included an
aggregate 31% interest in Primestar Partners, L.P. ('Primestar'). Upon formation
of the TWE-Advance/Newhouse Partnership ('TWE-A/N'), TWE, which is the managing
partner, owned a 66.7% common partnership interest in TWE-A/N and
Advance/Newhouse owned a 33.3% common partnership interest. TWE consolidates the
partnership and the common partnership 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. In addition,
beginning on April 1, 1998, TWE or Advance/Newhouse can initiate a restructuring
of the partnership, in which Advance/Newhouse would withdraw from the
partnership and 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.
In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions (collectively, the 'TWE-A/N Transfers'). The cable
television systems transferred to TWE-A/N were formerly owned by TWI Cable and
Paragon, a partnership formerly owning cable television systems serving
approximately 1 million subscribers that, as previously described, was wholly
owned by subsidiaries of Time Warner, with 50% beneficially owned in the
aggregate by TWE and TWE-A/N. The debt assumed by TWE-A/N has been guaranteed by
TWI Cable and certain of its subsidiaries, including Paragon.
As part of the TWE-A/N Transfers, TWE and TWE-A/N exchanged substantially
all of their respective beneficial interests in Paragon for an equivalent share
of Paragon's cable television systems (or interests therein) serving
approximately 500,000 subscribers, resulting in wholly owned subsidiaries of
Time Warner owning 100% of the restructured Paragon entity, with less than 1%
beneficially held for TWE. Accordingly, effective as of January 1, 1998, Time
Warner will consolidate Paragon. Because this transaction represented an
exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an
equivalent amount of its cable television systems, it did not have a significant
economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998. Time Warner did not recognize
a gain or loss on the TWE-A/N Transfers. TWE will continue to consolidate
TWE-A/N and Time Warner will account for its interest in TWE-A/N under the
equity method of accounting.
F-33
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(MILLIONS)
<S> <C> <C>
Investment in TWE.............................................................................. $5,577 $6,254
Stock option related distributions due from TWE................................................ 417 93
Credit agreement debt due to TWE............................................................... (400) (400)
Other net liabilities due to TWE, principally related to home video distribution............... (141) (256)
------ ------
Investment in and amounts due to and from TWE.................................................. 5,453 5,691
Investment in other Entertainment Group companies.............................................. 96 123
------ ------
Total.......................................................................................... $5,549 $5,814
------ ------
------ ------
</TABLE>
PARTNERSHIP STRUCTURE
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 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.
Time Warner acquired the aggregate 11.22% limited partnership interests
previously held by subsidiaries 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.
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to TWE ('Undistributed 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, provides for the various priority capital rates of return as specified
in the table below. The sum of Undistributed 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
F-34
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Partners. Furthermore, the ultimate realization of Cumulative Priority Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
A summary of the priority of Undistributed Contributed Capital, Time
Warner's ownership of Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 1997 and priority capital rates of return thereon is as
set forth below:
<TABLE>
<CAPTION>
PRIORITY
UNDISTRIBUTED CUMULATIVE CAPITAL
CONTRIBUTED PRIORITY RATES OF % OWNED BY
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL CAPITAL(a) CAPITAL RETURN(b) TIME WARNER
------------- ---------- --------- --------------
(BILLIONS)
<S> <C> <C> <C> <C>
Senior Capital........................................ $ 0.9 $ 1.1 8.00% 100.00%
Series A Capital...................................... 5.6 11.3 13.00% 74.49%
Series B Capital...................................... 2.9(d) 6.0 13.25% 100.00%
Residual Capital...................................... 3.3(d) 3.3(c) --(c) 74.49%
</TABLE>
- ------------
(a) Excludes partnership income or loss allocated thereto.
(b) To the extent income allocations are concurrently distributed, the priority
capital rates of return on the Series A Capital and Series B Capital are 11%
and 11.25%, respectively.
(c) Residual Capital is not entitled to stated priority rates of return and, as
such, its Cumulative Priority Capital is equal to its Undistributed
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.
(d) The Undistributed Contributed Capital relating to the Series B Capital has
priority over the priority returns on the Series A Capital. The
Undistributed Contributed Capital relating to the Residual Capital has
priority over the priority returns on the Series B Capital and the Series A
Capital.
Because Undistributed Contributed Capital is generally based on the fair
value of the net assets that each partner initially 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'). After any special tax allocations, partnership income is
allocated 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
Undistributed 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. TWE reported
net income of $614 million, $210 million and $73 million in 1997, 1996 and 1995,
respectively, no portion of which was allocated to the limited partners.
The Series B Capital owned by the Time Warner General Partners may be
increased if certain operating performance targets are achieved over a ten-year
period ending on December 31, 2001. In addition, 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,
F-35
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SUMMARIZED FINANCIAL INFORMATION OF THE ENTERTAINMENT GROUP
Set forth below is summarized financial information of the Entertainment
Group, which reflects the formation by TWE of TWE-A/N effective as of April 1,
1995 (Note 3), the deconsolidation of Six Flags effective as of June 23, 1995
and the consolidation of Paragon effective as of July 6, 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
(MILLIONS)
<S> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues.......................................................................... $11,328 $10,861 $9,629
Depreciation and amortization..................................................... (1,386) (1,244) (1,060)
Business segment operating income(1).............................................. 1,461 1,090 992
Interest and other, net(2)........................................................ (357) (524) (539)
Minority interest................................................................. (305) (207) (133)
Income before income taxes........................................................ 727 290 256
Income before extraordinary item.................................................. 642 220 170
Net income........................................................................ 619 220 146
</TABLE>
- ------------
(1) Includes net gains of approximately $200 million recognized in 1997 related
to the sale or exchange of certain cable television systems.
(2) Includes a gain of approximately $250 million recognized in 1997 related to
the sale of an interest in E! Entertainment Television, Inc.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
CASH FLOW INFORMATION
Cash provided by operations.......................................................... $1,799 $1,912 $1,495
Capital expenditures................................................................. (1,565) (1,719) (1,653)
Investments and acquisitions......................................................... (172) (146) (217)
Investment proceeds.................................................................. 520 612 1,120
Borrowings........................................................................... 3,400 215 2,484
Debt repayments...................................................................... (3,085) (716) (3,596)
Issuance of preferred stock of subsidiary............................................ 243 -- --
Collections on note receivable from U S WEST......................................... -- 169 602
Capital distributions................................................................ (934) (228) (1,063)
Other financing activities, net...................................................... (100) (92) (34)
Increase (decrease) in cash and equivalents.......................................... 106 7 (862)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................................................ $ 322 $ 216
Total current assets........................................................................ 3,623 3,147
Total assets................................................................................ 20,739 20,027
Total current liabilities................................................................... 3,976 4,092
Long-term debt.............................................................................. 5,990 5,676
Minority interests.......................................................................... 1,210 1,020
Preferred stock of subsidiary............................................................... 233 --
Time Warner General Partners' Senior Capital................................................ 1,118 1,543
Partners' capital........................................................................... 6,430 6,681
</TABLE>
F-36
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL DISTRIBUTIONS
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.
In July 1997, the Time Warner General Partners received a $535 million
distribution from TWE relating to their Senior Capital interests, thereby
increasing the cumulative cash distributions received from TWE on such interests
to $901 million. The Time Warner General Partners' remaining $1.1 billion Senior
Capital interests and any undistributed partnership income allocated thereto
(based on an 8% annual rate of return) are required to be distributed in two
annual installments on July 1, 1998 and 1999.
At December 31, 1997 and 1996, the Time Warner General Partners had
recorded $417 million and $93 million, respectively, of stock option related
distributions due from TWE, based on closing prices of Time Warner common stock
of $62.00 and $37.50, respectively. Time Warner is paid when the options are
exercised. The Time Warner General Partners also receive tax-related
distributions from TWE on a current basis. During 1997, the Time Warner General
Partners received distributions from TWE in the amount of $934 million,
consisting of $535 million of Senior Capital distributions (representing the
return of $455 million of contributed capital and the distribution of $80
million of priority capital return), $324 million of tax-related distributions
and $75 million of stock option related distributions. 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 Senior Capital distributions (representing a
portion of the priority capital return), $680 million of tax-related
distributions and $17 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 capital distributions to its partners that are
also subject to certain limitations contained in the TWE partnership and credit
agreements.
TIME WARNER GENERAL PARTNER GUARANTEES
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.8 billion of TWE's debt and accrued interest at December 31,
1997, based on the relative fair value of the net assets each Time Warner
General Partner (or its predecessor) contributed to TWE. Such indebtedness is
recourse to each Time Warner General Partner only to the extent of its
guarantee. 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.
SIX FLAGS
In June 1995, TWE sold an initial 51% 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 was deconsolidated and TWE's remaining 49% interest in Six Flags has
been 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 was deferred by TWE principally as a
result of its guarantee of certain third-party, zero-coupon indebtedness of Six
Flags due in 1999.
In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
F-37
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
5. OTHER INVESTMENTS
Time Warner's other investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(MILLIONS)
<S> <C> <C>
Equity method investments...................................................................... $1,350 $1,392
Market value method investments................................................................ -- 401
Cost method investments........................................................................ 145 126
------ ------
Total.......................................................................................... $1,495 $1,919
------ ------
------ ------
</TABLE>
Market value method investments at December 31, 1996 included 18.1 million
shares of common stock of Hasbro, Inc. ('Hasbro'). Such shares were used in
December 1997 to redeem certain Company-obligated mandatorily redeemable
preferred securities of a subsidiary. In connection with such redemption and the
related disposal of its interest in Hasbro, Time Warner recognized a $200
million pretax gain in 1997, which has been classified in interest and other,
net, in the accompanying consolidated statement of operations.
In addition to TWE and its equity investees, companies accounted for using
the equity method include: The Columbia House Company partnerships (50% owned),
other music joint ventures (generally 50% owned), Cinamerica Theatres, L.P.
(sold in 1997, but previously 50% owned) and TBS (acquired in full in 1996, but
previously 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,
--------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues............................................................................. $1,336 $1,773 $5,123
Depreciation and amortization........................................................ (13) (29) (219)
Operating income..................................................................... 80 173 547
Net income (loss).................................................................... (36) 61 188
Current assets....................................................................... 792 1,002 2,272
Total assets......................................................................... 1,132 1,616 5,851
Current liabilities.................................................................. 418 517 1,318
Long-term debt....................................................................... 1,303 1,360 3,826
Total liabilities.................................................................... 1,791 1,999 5,886
Total shareholders' deficit or partners' capital..................................... (659) (383) (35)
</TABLE>
F-38
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization..................................... $ 68 $ 228 $ 209 $ 142
Completed and not released...................................... 88 48 54 --
In process and other............................................ -- 141 24 251
Library, less amortization...................................... -- 1,064 -- 1,116
Programming costs, less amortization................................. 293 285 213 189
Magazines, books and recorded music.................................. 381 -- 441 --
------- ---------- ------- ----------
Total................................................................ $ 830 $1,766 $ 941 $1,698
------- ---------- ------- ----------
------- ---------- ------- ----------
</TABLE>
Excluding the Library, the total cost incurred in the production of
theatrical and television product (including direct production costs, production
overhead and certain exploitation costs, such as film prints and home
videocassettes) amounted to $506 million in 1997 and $339 million in 1996; and
the total cost amortized amounted to $613 million and $239 million,
respectively. Excluding the Library, the unamortized cost of completed films at
December 31, 1997 amounted to $432 million, more than 90% of which is expected
to be amortized within three years after release.
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT ------------------
DECEMBER 31, 1997 MATURITIES 1997 1996
------------------ ---------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
Bank credit agreement borrowings.......................... 6.4% 2002 $ 2,600 $ 3,207
Fixed-rate senior notes and debentures.................... 8.1% 1998-2036 6,909 7,081
Variable-rate senior notes................................ 5.1% 2009-2031 1,200 454
Zero-coupon senior notes.................................. 5.0% 2013 1,124 1,971
------- -------
Total..................................................... $11,833 $12,713
------- -------
------- -------
</TABLE>
Substantially all of Time Warner's long-term debt represents the
obligations of its wholly owned subsidiaries TW Companies, TBS and TWI Cable. In
December 1997, in order to simplify its credit structure, Time Warner
implemented a cross-corporate guarantee structure, whereby Time Warner and each
of TW Companies and TBS (the 'Guarantor Subsidiaries') have fully and
unconditionally guaranteed any outstanding publicly traded indebtedness of each
other and, along with TWI Cable, have similarly guaranteed each other's
outstanding borrowings under their joint bank credit agreement. As a result of
implementing this unified credit structure, the credit profile associated with
the indebtedness of Time Warner or any of the Guarantor Subsidiaries is
substantially the same.
FINANCING TRANSACTIONS
During the past three years, in response to favorable market conditions and
in connection with certain acquisitions, Time Warner and its consolidated
subsidiaries have entered into a series of financing transactions that has
resulted in the refinancing of approximately $10.2 billion of debt and the
reduction of an additional $3.2 billion of debt. The debt refinancings have had
the positive effect of lowering interest rates, staggering debt
F-39
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturities and, with respect to the redemption of certain convertible
securities, eliminating the potential dilution from the conversion of such
securities into 52.2 million shares of Time Warner common stock. In turn, the
reduction in debt, of which $2.5 billion was attributable to 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. In connection with these financing
transactions, Time Warner recognized an extraordinary loss on the retirement of
debt of $55 million in 1997, $35 million in 1996 and $42 million in 1995.
BANK CREDIT AGREEMENT
As part of these debt refinancings, Time Warner, together with certain of
its consolidated and unconsolidated subsidiaries, entered into a new, five-year
revolving credit facility in November 1997 (the '1997 Credit Agreement') and
terminated its subsidiaries' financing arrangements under certain previously
existing bank credit facilities (the 'Old Credit Agreements'). This enabled Time
Warner to reduce its aggregate borrowing availability from $10.3 billion to $7.5
billion, lower interest rates and refinance outstanding borrowings under the Old
Credit Agreements in the amounts of approximately $2.4 billion by subsidiaries
of Time Warner and $2.1 billion by TWE.
The 1997 Credit Agreement permits borrowings in an aggregate amount of up
to $7.5 billion, with no scheduled reduction in credit availability prior to
maturity in November 2002. The borrowers under the 1997 Credit Agreement are
Time Warner, TW Companies, TBS, TWI Cable, TWE and TWE-A/N. Borrowings under the
1997 Credit Agreement are limited to (i) $6 billion in the aggregate for Time
Warner, TW Companies, TBS and TWI Cable, (ii) $7.5 billion in the case of TWE
and (iii) $2 billion in the case of TWE-A/N, subject in each case to an
aggregate borrowing limit of $7.5 billion and certain other limitations and
adjustments. Such borrowings bear interest at specific rates for each of the
borrowers (generally equal to LIBOR plus a margin initially ranging from 35 to
40 basis points) and each borrower is required to pay a commitment fee on the
unused portion of its commitment (initially ranging from .125% to .15% per
annum), which margin and fee vary based on the credit rating or financial
leverage of the applicable borrower. Borrowings may be used for general business
purposes and unused credit is available to support commercial paper borrowings.
The 1997 Credit Agreement contains certain covenants generally for each borrower
relating to, among other things, additional indebtedness; liens on assets; cash
flow coverage and leverage ratios; and dividends, distributions and other
restricted cash payments or transfers of assets from the borrowers to their
respective shareholders, partners or affiliates.
VARIABLE-RATE NOTES
Variable-rate notes at December 31, 1997 consist of $600 million principal
amount of Floating Rate Reset Notes due July 29, 2009 that are redeemable at the
election of the holders, in whole but not in part, on July 29, 1999 (the
'Two-Year Floating Rate Notes') and $600 million principal amount of Floating
Rate Reset Notes due December 30, 2031 that are similarly redeemable at the
election of the holders on December 30, 2001 (the 'Five-Year Floating Rate
Notes'). The Two-Year Floating Rate Notes bear interest at a floating rate equal
to LIBOR less 115 basis points until July 29, 1999, at which time, if not
redeemed, the interest rate will be reset at a fixed rate equal to 6.16% plus a
margin based upon the credit risk of TW Companies at such time. The Five-Year
Floating Rate Notes bear interest at a floating rate equal to LIBOR less 25
basis points until December 30, 2001, at which time, if not redeemed, the
interest rate will be reset at a fixed rate equal to 6.59% plus a margin based
upon the credit risk of TW Companies at such time.
F-40
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ZERO-COUPON NOTES
At December 31, 1997, the only remaining debt securities convertible into
Time Warner common stock are the zero-coupon convertible notes due June 22,
2013. Such notes do not pay interest until maturity and 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. Subject to each holder's right to convert, Time Warner can elect to
redeem the notes any time after June 22, 1998 at the issue price plus accrued
original issue discount (calculated at 5% per annum). Holders also can elect to
have the notes redeemed at the issue price plus accrued original issue discount
on June 22, 1998, 2003 and 2008, subject to Time Warner's right to pay in whole
or in part with Time Warner common stock instead of cash. 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 these zero-coupon notes was $1.291 billion and $1.345 billion at
December 31, 1997 and 1996, respectively.
CREDIT AGREEMENT WITH TWE
Time Warner has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum. All
amounts due to TWE under this agreement have been reclassified to Time Warner's
investment in and amounts due to and from the Entertainment Group in the
accompanying consolidated balance sheet.
INTEREST EXPENSE AND MATURITIES
At December 31, 1997, 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 52% of Time
Warner's underlying debt being subject to variable interest rates (Note 15).
Interest expense amounted to $1.049 billion in 1997, $968 million in 1996
and $877 million in 1995, including $19 million in 1997, $26 million in 1996 and
$28 million in 1995 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 7.2% and 7.5% at December 31, 1997 and 1996, respectively.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1997 consist of $500 million due in 1998, $500 million due in 2000
and $2.6 billion due in 2002. Such repayments exclude the aggregate repurchase
or redemption prices of $1.151 billion in 1998, $600 million in 1999 and $600
million in 2001 relating to certain debt securities, in the years in which the
holders thereof may first exercise their redemption options.
8. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with Time Warner's expanded common stock repurchase program
(Note 12), Time Warner entered into a new five-year, $1.3 billion revolving
credit facility (the 'Stock Option Proceeds Credit Facility') in early 1998,
which replaced its previously existing facility. Borrowings under the Stock
Option Proceeds Credit Facility are principally used to fund stock repurchases
and approximately $125 million of future preferred dividend requirements on Time
Warner's Series G, H, I and J Preferred Stock as of December 31, 1997. At
December 31, 1997 and 1996, Time Warner had outstanding borrowings against
future stock option proceeds of $533 million and $488 million, respectively.
The Stock Option Proceeds Credit Facility initially provides for borrowings
of up to $1.3 billion, of which up to $125 million is reserved solely for the
payment of interest and fees thereunder. Borrowings under the
F-41
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in excess of $500 million
through March 2000, and thereafter in full on a cumulative basis, permanently
reduces the borrowing availability under the facility. At December 31, 1997,
based on a closing market price of Time Warner common stock of $62.00, 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 $2.3 billion, representing a 1.8 to 1 coverage ratio over the
related $1.3 billion 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 future 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 any excess of the unpaid, future preferred dividend
requirements on such series of convertible preferred stock over the borrowing
availability under the facility at any time. Under these arrangements, Time
Warner had placed 51 million shares in escrow at December 31, 1997, 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 105 million shares
held in escrow.
9. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ----- -----
(MILLIONS)
<S> <C> <C> <C>
Domestic............................................................................. $728 $(193) $(203)
Foreign.............................................................................. 104 197 205
---- ----- -----
Total................................................................................ $832 $ 4 $ 2
---- ----- -----
---- ----- -----
</TABLE>
Current and deferred income taxes (tax benefits) provided are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ----- -----
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current(1)...................................................................... $191 $ 50 $ 42
Deferred........................................................................ 49 (143) (167)
Foreign:
Current(2)...................................................................... 205 230 215
Deferred........................................................................ (3) (16) 8
State and Local:
Current(1)...................................................................... 88 89 78
Deferred........................................................................ 1 (50) (50)
---- ----- -----
Total................................................................................ $531 $ 160 $ 126
---- ----- -----
---- ----- -----
</TABLE>
- ------------
(1) Includes utilization of tax carryforwards of $109 million in 1997, $77
million in 1996 and $101 million in 1995. Excludes current federal and state
and local tax benefits, respectively, of $132 million and $33 million in
1997, $16 million and $4 million in 1996, and $9 million and $5 million in
1995 resulting from the exercise of stock options and vesting of restricted
stock awards, which were credited directly to paid-in-capital. Excludes
current federal tax benefits of $30 million in 1997, $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 $114 million in 1997, $101 million in
1996 and $102 million in 1995.
F-42
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between income taxes expected at the U.S. federal statutory
income tax rate and income taxes provided are as set forth below. The
relationship between income before income taxes and income tax expense is most
affected by the amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Taxes on income at U.S. federal statutory rate........................................ $291 $ 2 $ 1
State and local taxes, net............................................................ 58 26 18
Nondeductible goodwill amortization................................................... 170 131 100
Other nondeductible expenses.......................................................... 11 10 10
Foreign income taxed at different rates, net of U.S. foreign tax credits.............. 9 4 3
Other................................................................................. (8) (13) (6)
---- ---- ----
Total................................................................................. $531 $160 $126
---- ---- ----
---- ---- ----
</TABLE>
Significant components of Time Warner's net deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(MILLIONS)
<S> <C> <C>
Assets acquired in business combinations....................................................... $3,352 $3,788
Depreciation and amortization.................................................................. 1,152 912
Unrealized appreciation of certain marketable securities....................................... 4 91
Other.......................................................................................... 449 463
------ ------
Deferred tax liabilities....................................................................... 4,957 5,254
------ ------
Tax carryforwards.............................................................................. 327 458
Accrued liabilities............................................................................ 381 322
Receivable allowances and return reserves...................................................... 203 222
Other.......................................................................................... 86 170
------ ------
Deferred tax assets............................................................................ 997 1,172
------ ------
Net deferred tax liabilities................................................................... $3,960 $4,082
------ ------
------ ------
</TABLE>
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $875 million at December 31, 1997. 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, 1997 consisted of $745
million of net operating losses, $48 million of investment tax credits and $19
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
F-43
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
OPERATING TAX
LOSSES CREDITS
--------- ----------
(MILLIONS)
<S> <C> <C>
1998...................................................................................... $ 4 $ 1
1999...................................................................................... 3 1
2000...................................................................................... 8 --
2001...................................................................................... 27 --
Thereafter up to 2010..................................................................... 703 46
--------- ---
$ 745 $ 48
--------- ---
--------- ---
</TABLE>
10. 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 PERCS
were mandatorily redeemable in December 1997 for an amount per PERCS equal to
the lesser of $54.41, and the market value of 1.5 shares of Hasbro common stock
on December 17, 1997, payable in cash or, at Time Warner's option, Hasbro common
stock. Pursuant to these terms, Time Warner redeemed the PERCS in December 1997
for all of its 18.1 million shares of Hasbro common stock. In connection with
this redemption and the related disposal of its interest in Hasbro, Time Warner
recognized a $200 million pretax gain in 1997, which has been classified in
interest and other, net, in the accompanying consolidated statement of
operations.
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 TW Companies 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 Preferred Trust
Securities which amount to a full and unconditional guaranty (on a subordinated
basis) of its subsidiary's obligations with respect thereto.
11. 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 to a portion of
Time Warner's currently non-cash-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'). Time Warner is
authorized to issue up to 15.2 million shares of Series M Preferred Stock.
F-44
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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 generally 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 scheduled 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.
Time Warner is required to redeem any remaining outstanding shares of Series M
Preferred Stock on July 1, 2016 at the Mandatory Redemption Price, subject to
certain limitations 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.
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') that would have terms
similar to those of the Series M 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. 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 having a principal amount equal to the liquidation preference of
the Series L Preferred Stock plus any accrued and unpaid dividends thereon.
12. SHAREHOLDERS' EQUITY
Shareholders' equity of Time Warner at December 31, 1997 included 35.4
million shares of convertible preferred stock, 57.1 million shares of Series
LMCN-V Common Stock and 519 million shares of common stock (net of 39.4 million
shares of common stock in treasury). Time Warner is authorized to issue up to
250 million shares of preferred stock, up to 65 million shares of Series LMCN-V
Common Stock and up to 2 billion shares of common stock. At February 28, 1998,
there were approximately 25,000 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 November 1997, Time Warner's Board of Directors authorized a 20 million
share increase in Time Warner's existing common stock repurchase program that,
along with previous authorizations, will allow the
F-45
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company to repurchase, from time to time, up to 35 million shares of Time Warner
common stock. Common stock repurchases have been funded with borrowings under
Time Warner's Stock Option Proceeds Credit Facility (Note 8). The common stock
repurchased under the program is expected to continue to be used to satisfy
future share issuances related to the exercise of existing employee stock
options and the potential conversion of certain convertible securities. Actual
repurchases in any period will be subject to market conditions. In 1997, Time
Warner acquired 6.2 million shares of its common stock, thereby increasing the
cumulative shares purchased under this program through 1997 to approximately
17.6 million shares at an aggregate cost of $800 million.
During 1996 and 1995, Time Warner issued over 35 million shares of
convertible preferred stock in connection with the ITOCHU/Toshiba Transaction
and the Cable Acquisitions. Set forth below is a summary of the principal terms
of Time Warner's outstanding issues of convertible 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...................... 3.1 6.6 1/4/96 1/4/01 1/4/01
Series F Preferred Stock...................... 3.0 6.2 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, 1997........................... 35.4 73.7
----- -----
----- -----
</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
F-46
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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, 1997, Time Warner had convertible securities and
outstanding stock options that were convertible or exercisable into
approximately 180 million shares of common stock.
13. 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 made
subsequent to 1994 consistent with the method set forth under FASB Statement No.
123, 'Accounting for Stock-Based Compensation' ('FAS 123'), Time Warner's net
income (loss) and net loss per common share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
----- ------ -----
(MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss):
As reported.................................................................. $ 246 $ (191) $(166)
----- ------ -----
----- ------ -----
Pro forma.................................................................... $ 200 $ (216) $(178)
----- ------ -----
----- ------ -----
Net loss per common share:
As reported.................................................................. $(.13) $(1.04) $(.57)
----- ------ -----
----- ------ -----
Pro forma.................................................................... $(.21) $(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 for 1996 and 1995 is
not comparable to the impact on pro forma net income for 1997, when the pro
forma effect of the three-year vesting period has been fully reflected.
For purposes of applying FAS 123, 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 1997, 1996 and
1995: dividend yields of 1% in all periods; expected volatility of 21.9%, 21.7%
and 22.3%, respectively; risk-free interest rates of 6.4%, 6.1% and 7.1%,
respectively; and expected lives of 5 years in all periods. The weighted average
fair value of an option granted during the year was $13.15 ($7.76, net of
taxes), $11.55 ($6.81, net of taxes) and $11.95 ($7.05, net of taxes) for the
years ended December 31, 1997, 1996 and
F-47
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995, respectively. In 1997 and 1996, Time Warner granted options to certain
executives at exercise prices exceeding the market price of Time Warner common
stock on the date of grant. These above-market options had a weighted average
exercise price and fair value of $64.89 and $12.58 ($7.42, net of taxes),
respectively, in 1997 and $52.88 and $8.87 ($5.23, net of taxes), respectively,
in 1996.
A summary of stock option activity under all plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
THOUSANDS AVERAGE
OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at January 1, 1995................................................................ 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
Granted................................................................................... 8,272 44.82
Exercised................................................................................. (16,316) 27.32
Cancelled................................................................................. (471) 37.78
---------
Balance at December 31, 1997.............................................................. 89,352 $ 33.98
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable.......................................................................... 72,808 82,697 66,242
Available for future grants.......................................................... 6,385 8,032 7,884
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<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 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ----------------- ---------- ----------- --------- ----------- ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $17 1,639 2.1 years $ 13.11 1,639 $ 13.11
$17.00 to $25.00 14,856 3.3 years $ 21.15 14,856 $ 21.15
$25.01 to $35.00 20,659 4.0 years $ 29.94 20,546 $ 29.92
$35.01 to $40.00 32,708 4.7 years $ 36.89 27,993 $ 36.79
$40.01 to $50.00 17,620 7.4 years $ 43.38 7,449 $ 42.51
$50.01 to $70.79 1,870 8.5 years $ 59.03 325 $ 57.35
----------- ------------
Total 89,352 4.9 years $ 33.98 72,808 $ 31.80
----------- ------------
----------- ------------
</TABLE>
F-48
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For options exercised by employees of TWE, Time Warner is reimbursed by TWE
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 29.5 million options held by employees of TWE at December 31, 1997,
21.5 million of which were exercisable.
14. 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 7% and 5% of plan assets at December 31, 1997 and 1996,
respectively.
Pension expense included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
----- ---- -----
(MILLIONS)
<S> <C> <C> <C>
Service cost.......................................................................... $ 45 $ 49 $ 29
Interest cost......................................................................... 68 64 53
Actual return on plan assets.......................................................... (162) (90) (137)
Net amortization and deferral......................................................... 101 37 89
----- ---- -----
Total................................................................................. $ 52 $ 60 $ 34
----- ---- -----
----- ---- -----
</TABLE>
The status of funded pension plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(MILLIONS)
<S> <C> <C>
Accumulated benefit obligation (90% vested)....................................................... $650 $550
Effect of future salary increase.................................................................. 246 210
---- ----
Projected benefit obligation...................................................................... 896 760
Plan assets at fair value......................................................................... 839 704
---- ----
Projected benefit obligation in excess of plan assets............................................. (57) (56)
Unamortized actuarial losses...................................................................... (23) 2
Unamortized plan changes.......................................................................... 2 3
Other............................................................................................. -- (2)
---- ----
Accrued pension expense........................................................................... $(78) $(53)
---- ----
---- ----
</TABLE>
The following assumptions were used in accounting for pension plans:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Weighted average discount rate................................ 7.25% 7.75% 7.25%
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 $83 million in
1997, $67 million in 1996 and $51 million in 1995. Contributions
F-49
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 boards of directors of the
participating companies.
15. 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.
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, 1997, Time Warner had interest rate swap contracts to pay
floating-rates of interest (average six-month LIBOR rate of 5.8%) and receive
fixed-rates of interest (average rate of 5.5%) on $2.3 billion notional amount
of indebtedness, which resulted in approximately 52% of Time Warner's underlying
debt, and 46% 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, 1997 is as follows: 1998-$700
million; 1999-$1.2 billion; and 2000-$400 million. At December 31, 1996, Time
Warner had interest rate swap contracts on $2.3 billion notional amount of
indebtedness.
Based on the level of interest rates prevailing at December 31, 1997, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by $753
million and it would have cost $25 million to terminate the related interest
rate swap contracts, which combined is the equivalent of an unrealized loss of
$778 million. 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 its
interest rate swap contracts, which combined was the equivalent of an unrealized
loss of $274 million. Unrealized gains or losses on debt or interest rate swap
contracts do not result in the realization or expenditure of cash and are not
recognized for financial reporting purposes unless the debt is retired or the
contracts are terminated prior to their maturity.
F-50
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY 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, 1997, 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, 1997, Time Warner had contracts for the sale
of $507 million and the purchase of $139 million of foreign currencies at fixed
rates, primarily Japanese yen (20% of contract value), English pounds (19%),
German marks (19%), Canadian dollars (15%) and French francs (15%), compared to
contracts for the sale of $447 million and the purchase of $104 million of
foreign currencies at December 31, 1996.
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,
1997 and 1996 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, 1997, 1996 and 1995, Time Warner
recognized $27 million in gains, $15 million in gains and $20 million in losses,
respectively, and TWE recognized $14 million in gains, $6 million in gains and
$11 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.
16. 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 and television
broadcasting; Cable Networks, consisting principally of interests in cable
television programming; 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 cable television systems, and a portion of its interests in
cable television programming 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 based on the nature of the
products and services offered. Time Warner evaluates performance based on
several factors, of which the primary financial measure is business segment
operating income before noncash amortization of intangible assets ('EBITA'). The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies (Note 1). Intersegment sales are
accounted for at fair value as if the sales were to third parties.
The operating results of Time Warner reflect the cable-related acquisitions
of Summit effective as of May 2, 1995, KBLCOM effective as of July 6, 1995 and
CVI effective as of January 4, 1996; and the cable networks and filmed
entertainment-related acquisition of TBS effective as of October 10, 1996. The
operating results of
F-51
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Entertainment Group reflect the cable-related formation of TWE-A/N effective
as of April 1, 1995, the deconsolidation of Six Flags effective as of June 23,
1995 and the cable-related 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,
----------------------------
1997 1996 1995
------- ------- ------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
Time Warner:
Publishing........................................................................ $ 4,290 $ 4,117 $3,722
Music............................................................................. 3,691 3,949 4,196
Cable Networks-TBS................................................................ 2,900 680 --
Filmed Entertainment-TBS.......................................................... 1,531 455 --
Cable............................................................................. 997 909 172
Intersegment elimination.......................................................... (115) (46) (23)
------- ------- ------
Total............................................................................. $13,294 $10,064 $8,067
------- ------- ------
------- ------- ------
Entertainment Group:
Filmed Entertainment-Warner Bros.................................................. $ 5,472 $ 5,648 $5,078
Six Flags Theme Parks............................................................. -- -- 227
Broadcasting-The WB Network....................................................... 136 87 33
Cable Networks-HBO................................................................ 1,923 1,763 1,607
Cable............................................................................. 4,243 3,851 3,094
Intersegment elimination.......................................................... (446) (488) (410)
------- ------- ------
Total............................................................................. $11,328 $10,861 $9,629
------- ------- ------
------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
EBITA(1)
Time Warner:
Publishing........................................................................... $ 529 $ 464 $ 417
Music(2)............................................................................. 467 653 595
Cable Networks-TBS................................................................... 573 142 --
Filmed Entertainment-TBS............................................................. 200 30 --
Cable................................................................................ 427 353 63
Intersegment elimination............................................................. (13) 5 --
------ ------ ------
Total................................................................................ $2,183 $1,647 $1,075
------ ------ ------
------ ------ ------
Entertainment Group:
Filmed Entertainment-Warner Bros..................................................... $ 404 $ 379 $ 377
Six Flags Theme Parks................................................................ -- -- 40
Broadcasting-The WB Network.......................................................... (88) (98) (66)
Cable Networks-HBO................................................................... 391 328 275
Cable(3)............................................................................. 1,184 917 810
------ ------ ------
Total................................................................................ $1,891 $1,526 $1,436
------ ------ ------
------ ------ ------
</TABLE>
- ------------
(1) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, Time Warner's business segment operating income was
$1.271 billion in 1997, $966 million in 1996 and $697 million in 1995.
Similarly, business segment operating income of the Entertainment Group was
$1.461 billion in 1997, $1.090 billion in 1996 and $992 million in 1995.
(2) Includes 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.
(3) Includes net gains of approximately $200 million recognized in 1997 related
to the sale or exchange of certain cable television systems.
F-52
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing............................................................................ $ 79 $ 71 $ 59
Music................................................................................. 83 91 95
Cable Networks-TBS.................................................................... 87 20 --
Filmed Entertainment-TBS.............................................................. 7 2 --
Cable................................................................................. 126 123 27
---- ---- ----
Total................................................................................. $382 $307 $181
---- ---- ----
---- ---- ----
Entertainment Group:
Filmed Entertainment-Warner Bros...................................................... $197 $167 $113
Six Flags Theme Parks................................................................. -- -- 20
Broadcasting-The WB Network........................................................... 1 -- --
Cable Networks-HBO.................................................................... 22 22 18
Cable................................................................................. 736 619 465
---- ---- ----
Total................................................................................. $956 $808 $616
---- ---- ----
---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Time Warner:
Publishing............................................................................ $ 48 $ 46 $ 36
Music................................................................................. 301 292 274
Cable Networks-TBS.................................................................... 199 43 --
Filmed Entertainment-TBS.............................................................. 87 22 --
Cable................................................................................. 277 278 68
---- ---- ----
Total................................................................................. $912 $681 $378
---- ---- ----
---- ---- ----
Entertainment Group:
Filmed Entertainment-Warner Bros...................................................... $123 $125 $124
Six Flags Theme Parks................................................................. -- -- 11
Broadcasting-The WB Network........................................................... -- -- --
Cable Networks-HBO.................................................................... -- -- 1
Cable................................................................................. 307 311 308
---- ---- ----
Total................................................................................. $430 $436 $444
---- ---- ----
---- ---- ----
</TABLE>
- ------------
(1) Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including the $14 billion acquisition
of Warner Communications Inc. in 1989, the $6.2 billion acquisition of TBS
in 1996 and the $2.3 billion of cable acquisitions in 1996 and 1995.
F-53
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information as to the assets and capital expenditures of Time Warner and
the Entertainment Group is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Time Warner:
Publishing....................................................................... $ 2,490 $ 2,418 $ 2,175
Music............................................................................ 6,507 7,478 7,828
Cable Networks-TBS............................................................... 8,372 7,860 --
Filmed Entertainment-TBS......................................................... 2,950 3,232 --
Cable............................................................................ 7,043 7,257 3,875
Entertainment Group(1)........................................................... 5,549 5,814 5,734
Corporate(2)..................................................................... 1,252 1,005 2,520
------- ------- -------
Total............................................................................ $34,163 $35,064 $22,132
------- ------- -------
------- ------- -------
Entertainment Group:
Filmed Entertainment-Warner Bros................................................. $ 8,106 $ 8,111 $ 7,389
Broadcasting-The WB Network...................................................... 113 67 63
Cable Networks-HBO............................................................... 1,080 997 935
Cable............................................................................ 10,771 10,202 9,842
Corporate(2)..................................................................... 669 650 731
------- ------- -------
Total............................................................................ $20,739 $20,027 $18,960
------- ------- -------
------- ------- -------
</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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Time Warner:
Publishing........................................................................... $ 77 $ 76 $ 70
Music................................................................................ 87 142 121
Cable Networks-TBS................................................................... 113 34 --
Filmed Entertainment-TBS............................................................. 3 2 --
Cable................................................................................ 282 215 56
Corporate............................................................................ 12 12 19
------ ------ ------
Total................................................................................ $ 574 $ 481 $ 266
------ ------ ------
------ ------ ------
Entertainment Group:
Filmed Entertainment-Warner Bros..................................................... $ 144 $ 340 $ 294
Six Flags Theme Parks................................................................ -- -- 43
Broadcasting-The WB Network.......................................................... 1 2 --
Cable Networks-HBO................................................................... 19 29 20
Cable(1)............................................................................. 1,401 1,348 1,293
Corporate............................................................................ -- -- 3
------ ------ ------
Total................................................................................ $1,565 $1,719 $1,653
------ ------ ------
------ ------ ------
</TABLE>
- ------------
(1) Cable capital expenditures were funded in part through collections on the
US WEST Note Receivable in the amount of $169 million in 1996 and $602
million in 1995 (Note 4). The U S WEST Note Receivable was fully collected
during 1996.
F-54
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information as to Time Warner's operations in different geographical areas
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
(MILLIONS)
<S> <C> <C> <C>
REVENUES(1)
Time Warner:
United States..................................................................... $10,159 $ 7,262 $5,344
United Kingdom.................................................................... 449 372 348
Germany........................................................................... 420 452 500
Japan............................................................................. 417 399 483
Canada............................................................................ 262 209 213
France............................................................................ 195 229 219
Other international............................................................... 1,392 1,141 960
------- ------- ------
Total............................................................................. $13,294 $10,064 $8,067
------- ------- ------
------- ------- ------
Entertainment Group:
United States..................................................................... $ 9,096 $ 8,727 $7,647
United Kingdom.................................................................... 488 383 338
Germany........................................................................... 284 374 247
Japan............................................................................. 172 196 245
Canada............................................................................ 137 157 144
France............................................................................ 152 143 141
Other international............................................................... 999 881 867
------- ------- ------
Total............................................................................. $11,328 $10,861 $9,629
------- ------- ------
------- ------- ------
</TABLE>
- ------------
(1) Revenues are attributed to countries based on location of customer.
Because a substantial portion of Time Warner's international revenues is
derived from the sale of U.S. copyrighted products abroad, assets located
outside the United States are not material.
17. COMMITMENTS AND CONTINGENCIES
Time Warner's total rent expense amounted to $237 million in 1997, $192
million in 1996 and $174 million in 1995. The minimum rental commitments under
noncancellable long-term operating leases are: 1998-$235 million; 1999-$221
million; 2000-$205 million; 2001-$188 million; 2002-$175 million and after
2002 - $980 million.
Time Warner's minimum commitments and guarantees under certain programming,
licensing, artists, athletes, franchise and other agreements aggregated
approximately $6.4 billion at December 31, 1997, which are payable principally
over a five-year period. Such amounts do not include the Time Warner General
Partner guarantees of approximately $5.8 billion of TWE's debt and accrued
interest.
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of Time Warner and alleged damages in connection
with class action lawsuits. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the financial
statements of Time Warner.
18. 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.
F-55
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $72 million, $69 million and $64 million in 1997, 1996 and 1995,
respectively.
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.
Similarly, Time Warner receives fees from TWE's cable television systems for the
right to carry cable television programming provided by Time Warner'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.
Time Warner has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum.
In addition to transactions with TWE and other Entertainment Group
companies, Time Warner has had transactions with the Columbia House Company
partnerships, Comedy Partners, L.P., Six Flags and other equity investees of
Time Warner and the Entertainment Group, generally with respect to sales of
products and services in the ordinary course of business.
19. ADDITIONAL FINANCIAL INFORMATION
CASH FLOWS
As of December 31, 1997, Time Warner had certain accounts receivable
securitization facilities, which provide for the accelerated receipt of up to
$700 million of cash on available receivables. In connection with each of these
securitization facilities, Time Warner sells, on a revolving and nonrecourse
basis, certain of its accounts receivables ('Pooled Receivables') to a wholly
owned, special purpose entity which, in turn, sells a percentage ownership
interest in the Pooled Receivables to a third-party, commercial paper conduit
sponsored by a financial institution. These securitization transactions have
been accounted for as a sale in accordance with FASB Statement No. 125,
'Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.' Accordingly, accounts receivables sold under this
securitization program have been reflected as a reduction in receivables in the
accompanying consolidated balance sheet. Net proceeds received under this
securitization program were $108 million in 1997, $147 million in 1996 and $35
million in 1995.
F-56
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Cash payments made for interest....................................................... $929 $839 $659
Cash payments made for income taxes................................................... 305 382 302
Tax-related distributions received from TWE........................................... 324 215 680
Income tax refunds received........................................................... 52 44 24
Noncash dividends..................................................................... 185 122 --
</TABLE>
Noncash financing activities in 1997 included the redemption of the PERCS
in exchange for Time Warner's interest in Hasbro (Note 10). 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 4) and the $1.8 billion
redemption of Time Warner's Redeemable Reset Notes due August 15, 2002 in
exchange for other debt securities.
OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses............................................................................... $1,716 $1,410
Accrued compensation........................................................................... 430 351
Accrued income taxes........................................................................... 28 81
Deferred revenues.............................................................................. 205 248
------ ------
Total.......................................................................................... $2,379 $2,090
------ ------
------ ------
</TABLE>
F-57
<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 Executive Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
F-58
<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, 1997 and 1996, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule and supplementary information listed in the Index
at Item 14(a). These financial statements, schedule and supplementary
information are the responsibility of Time Warner's management. Our
responsibility is to express an opinion on these financial statements, schedule
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, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule 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 10, 1998
F-59
<PAGE>
<PAGE>
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1997 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 1996 reflects (a) the TBS
Transaction, including the assumption of approximately $2.8 billion of
indebtedness, (b) the use of approximately $1.55 billion of net proceeds from
the issuance of 1.6 million shares of Series M exchangeable preferred stock,
having an aggregate liquidation preference of $1.6 billion, to reduce
outstanding indebtedness and (c) the acquisition of CVI, including the
assumption or incurrence of approximately $2 billion of indebtedness. The
selected historical financial information for 1995 reflects (a) the acquisitions
of KBLCOM and Summit, including the assumption or incurrence of approximately
$1.3 billion of indebtedness and (b) the exchange by Toshiba and ITOCHU of their
direct and indirect interests in TWE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION 1997 1996 1995 1994 1993
------- ------- ------ ------ ------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues....................................................... $13,294 $10,064 $8,067 $7,396 $6,581
Depreciation and amortization.................................. (1,294) (988) (559) (437) (424)
Business segment operating income (a).......................... 1,271 966 697 713 591
Equity in pretax income of Entertainment Group (b)............. 686 290 256 176 281
Interest and other, net (c).................................... (1,044) (1,174) (877) (724) (718)
Income (loss) before extraordinary item........................ 301 (156) (124) (91) (164)
Net income (loss) (d).......................................... 246 (191) (166) (91) (221)
Net loss applicable to common shares (after preferred
dividends)................................................... (73) (448) (218) (104) (339)
Per share of common stock:
Basic and diluted net loss (d)............................ $ (0.13) $ (1.04) $(0.57) $(0.27) $(0.90)
Dividends................................................. $ 0.36 $ 0.36 $ 0.36 $ 0.35 $ 0.31
Average common shares.......................................... 567.7 431.2 383.8 378.9 374.7
</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) Time Warner's equity in the pretax income of the Entertainment Group for
the year ended December 31, 1997 includes approximately $450 million of
net gains relating to the sale or exchange of certain assets.
(c) Interest and other, net, for the year ended December 31, 1997 includes a
$200 million pretax gain relating to Time Warner's redemption of certain
mandatorily redeemable preferred securities of a subsidiary and the
related disposal of Time Warner's interest in Hasbro, Inc.
(d) Net income (loss) for each of the years ended December 31, 1997, 1996,
1995 and 1993 includes an extraordinary loss on the retirement of debt of
$55 million ($.10 per common share), $35 million ($.09 per common share),
$42 million ($.11 per common share) and $57 million ($.15 per common
share), respectively. In addition, the net loss for the year ended
December 31, 1993 includes an unusual charge of $70 million ($.19 per
common share) from the effect of changes in the income tax laws on Time
Warner's deferred income tax liability.
F-60
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash and equivalents (a)................................... $ 645 $ 514 $ 1,185 $ 282 $ 200
Total assets............................................... 34,163 35,064 22,132 16,716 16,892
Debt due within one year................................... 8 11 34 355 120
Long-term debt............................................. 11,833 12,713 9,907 8,839 9,291
Borrowings against future stock option proceeds............ 533 488 -- -- --
Company-obligated mandatorily redeemable preferred
securities of subsidiaries............................... 575 949 949 -- --
Series M exchangeable preferred stock...................... 1,857 1,672 -- -- --
Shareholders' equity:
Preferred stock liquidation preference................ 3,539 3,559 2,994 140 140
Equity applicable to common stock..................... 5,817 5,943 673 1,008 1,230
Total shareholders' equity............................ 9,356 9,502 3,667 1,148 1,370
Total capitalization....................................... 24,162 25,335 14,557 10,342 10,781
</TABLE>
- ------------
(a) Includes $62 million of noncurrent cash and equivalents at December 31,
1996 that was held in escrow for purposes of funding certain preferred
dividend requirements.
F-61
<PAGE>
<PAGE>
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
BASIC DILUTED
EQUITY IN NET INCOME EARNINGS EARNINGS
OPERATING PRETAX (LOSS) (LOSS) PER (LOSS) PER DIVIDENDS
INCOME OF INCOME OF NET APPLICABLE TO COMMON COMMON PER
BUSINESS ENTERTAINMENT INCOME COMMON SHARE SHARE COMMON
QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(e) (e)(f) (e)(f) SHARE
- ------------ -------- --------- ------------- ------ ------------- ---------- ---------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
1st (a)(b) $3,034 $ 194 $ 318 $ 35 $ (43) $(0.08) $(0.08) $0.09
2nd 3,193 345 108 30 (49) (0.09) (0.09) 0.09
3rd (a) 3,231 263 96 (35) (116) (0.20) (0.20) 0.09
4th (a)(b) 3,836 469 164 216 135 0.23 0.22 0.09
Year 13,294 1,271 686 246 (73) (0.13) (0.13) 0.36
1996 (c)
1st (d) $2,068 $ 110 $ 116 $(119) $(153) $(0.39) $(0.39) $0.09
2nd (d) 2,139 215 93 (40) (110) (0.28) (0.28) 0.09
3rd 2,157 139 61 (91) (167) (0.43) (0.43) 0.09
4th 3,700 502 20 59 (18) (0.03) (0.03) 0.09
Year 10,064 966 290 (191) (448) (1.04) (1.04) 0.36
<CAPTION>
AVERAGE COMMON STOCK
COMMON ------------
QUARTER SHARES HIGH LOW
- ------------ ------ ---- ----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
1997
1st (a)(b) 558.9 $ 45 $ 36 3/8
2nd 561.0 50 3/4 40 3/8
3rd (a) 573.3 56 3/8 38 1/2
4th (a)(b) 577.5 62 53
Year 567.7 62 36 3/8
1996 (c)
1st (d) 391.7 $ 45 1/4 $ 37 1/4
2nd (d) 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 431.2 45 1/4 29 3/4
</TABLE>
- ------------
(a) Net income (loss) for each of the first, third and fourth quarters of 1997
includes an extraordinary loss on the retirement of debt of $17 million
($.03 per common share), $7 million ($.01 per common share) and $31
million ($.06 per common share), respectively. In addition, net income for
the fourth quarter of 1997 includes an after-tax gain of approximately
$120 million ($.20 per common share) relating to Time Warner's redemption
of certain mandatorily redeemable preferred securities of a subsidiary and
the related disposal of its interest in Hasbro, Inc.
(b) Time Warner's equity in the pretax income of the Entertainment Group for
the first quarter of 1997 includes a $250 million pretax gain relating to
the sale of TWE's interest in E! Entertainment Television, Inc. Time
Warner's equity in the pretax income of the Entertainment Group for 1997
also includes net gains of approximately $200 million for the year
relating to the sale or exchange of certain cable television systems, of
which approximately $160 million was recorded in the fourth quarter of
1997.
(c) 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.
(d) Net loss for each of the first and second quarters of 1996 includes an
extraordinary loss on the retirement of debt of $26 million ($.07 per
common share) and $9 million ($.02 per common share), respectively.
(e) After preferred dividend requirements.
(f) Per common share amounts for the quarters and full years have each been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amounts because of differences in the average common shares
outstanding during each period and, with regard to diluted per common
share amounts only, because of the inclusion of the effect of potentially
dilutive securities only in the periods in which such effect would have
been dilutive.
F-62
<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. ('Time Warner') 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 (now known as Time Warner Companies, Inc., 'TW Companies') and TW
Companies and TBS became separate, wholly owned subsidiaries of the new parent
company. Time Warner, TW Companies and TBS have fully and unconditionally
guaranteed all of the outstanding publicly traded indebtedness of each other.
Set forth below is summarized financial information of each of TW Companies
and TBS presented for the information of their respective debtholders.
Summarized financial information of TW Companies presented below includes TW
Companies'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 Time Warner's basis of accounting. 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.
TW COMPANIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
OPERATING STATEMENT INFORMATION 1997 1996 1995
------ ------- ------
(MILLIONS)
<S> <C> <C> <C>
Revenues............................................................................ $8,950 $ 8,951 $8,067
Depreciation and amortization....................................................... (914) (902) (559)
Business segment operating income (a)............................................... 763 853 697
Equity in pretax income of Entertainment Group (b).................................. 727 290 256
Interest and other, net (c)......................................................... (755) (1,096) (877)
Income (loss) before extraordinary item............................................. 291 (145) (124)
Net income (loss) (d)............................................................... 240 (180) (166)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
BALANCE SHEET INFORMATION 1997 1996
------- -------
(MILLIONS)
<S> <C> <C>
Total current assets........................................................................ $ 3,823 $ 3,529
Investments in and amounts due to and from Entertainment Group.............................. 5,590 5,814
Total assets................................................................................ 25,625 25,595
Total current liabilities................................................................... 2,911 2,831
Long-term debt.............................................................................. 11,085 11,002
Total liabilities........................................................................... 18,860 18,532
TW Companies-obligated mandatorily redeemable preferred securities of subsidiaries holding
solely subordinated notes and debentures of TW Companies.................................. 575 949
Series M exchangeable preferred stock (e)................................................... -- 1,672
Shareholders' equity (e).................................................................... 6,190 4,442
</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) TW Companies' equity in the pretax income of the Entertainment Group for
the year ended December 31, 1997 includes approximately $450 million of
net pretax gains relating to the sale or exchange of certain assets.
(c) Interest and other, net, for the year ended December 31, 1997 includes a
$200 million pretax gain relating to Time Warner's redemption of certain
mandatorily redeemable preferred securities of a subsidiary and the
related disposal of TW Companies' interest in Hasbro, Inc.
(d) The net income or loss for each of the years ended December 31, 1997, 1996
and 1995 includes an extraordinary loss on the retirement of debt of $51
million, $35 million and $42 million, respectively.
(e) TW Companies was recapitalized in 1997. In connection with such
recapitalization, all outstanding shares of preferred stock held by Time
Warner were exchanged or converted into an aggregate of approximately 128
thousand shares of common stock of TW Companies.
F-63
<PAGE>
<PAGE>
TBS
<TABLE>
<CAPTION>
THREE NINE MONTHS
YEAR ENDED MONTHS ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1997 1996 1996 1995
------------ ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues............................................ $4,366 $1,124 $2,735 $3,412
Depreciation and amortization....................... (380) (86) (141) (188)
Business segment operating income................... 508 113 123 415
Interest and other, net............................. (231) (62) (143) (215)
Income before extraordinary item.................... 90 3 (20) 103
Net income (loss) (a)............................... 86 3 (20) 103
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION
Total current assets........................................................................ $ 1,183 $ 1,286
Total assets................................................................................ 11,319 11,092
Total current liabilities................................................................... 954 934
Long-term debt.............................................................................. 748 1,711
Debt due to Time Warner..................................................................... 1,722 985
Total liabilities........................................................................... 3,978 3,989
Shareholders' equity........................................................................ 7,341 7,103
</TABLE>
- ------------
(a) Net income for the year ended December 31, 1997 includes an extraordinary
loss on the retirement of debt of $4 million.
F-64
<PAGE>
<PAGE>
TIME WARNER INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- --------------------------------------------------------- ---------- ---------- ---------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
1997:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts..................... $ 236 $ 379 $ (304)(c) $ 311
Reserves for sales returns and allowances........... 740 2,599 (2,659)(d)(e) 680
---------- ---------- ---------- ---------
Total.......................................... $ 976 $ 2,978 $ (2,963) $ 991
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns............. $ (179) $ (1,070) $ 1,078(e) $(171)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
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)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</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-65
<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 and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems. TWE also manages the cable
properties owned by Time Warner and the combined cable television operations are
conducted under the name of Time Warner Cable. Capitalized terms are as defined
and described in the accompanying consolidated financial statements, or
elsewhere herein.
OVERVIEW
TWE had a strong financial performance in 1997, as measured by the
operating performance of its businesses and the improved strength of its
financial condition, as more fully discussed herein. This performance was driven
by solid business fundamentals at its businesses and a disciplined financial
focus on cost management and controlling capital spending.
USE OF EBITA
During 1997, management concluded that the most appropriate measure for
evaluating the operating performance of TWE's business segments is operating
income before noncash amortization of intangible assets ('EBITA'). Consistent
with management's financial focus on controlling capital spending, EBITA
measures operating performance after charges for depreciation. In addition,
EBITA eliminates the uneven effect across all business segments of considerable
amounts of noncash amortization of intangible assets recognized in business
combinations accounted for by the purchase method, including Time Warner's $14
billion acquisition of Warner Communications Inc. in 1989 and $1.3 billion
acquisition of the minority interest in American Television and Communications
Corporation in 1992. The exclusion of noncash amortization charges is also
consistent with management's belief that TWE's intangible assets, such as cable
television franchises, film and television libraries and the goodwill associated
with its brands, are generally increasing in value and importance to TWE's
business objective of creating, extending and distributing recognizable brands
and copyrights throughout the world. As such, the following comparative
discussion of the results of operations of TWE includes, among other factors, an
analysis of changes in business segment EBITA. However, EBITA should be
considered in addition to, not as a substitute for, operating income, net income
and other measures of financial performance reported in accordance with
generally accepted accounting principles.
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
TWE completed a number of transactions in 1995 that have affected the
comparability of its operating results for such year. These 1995 transactions
include the formation of the TWE-Advance/Newhouse Partnership ('TWE-A/N'), the
consolidation of Paragon Communications ('Paragon'), the refinancing of its bank
debt, the reacquisition of the Time Warner Service Partnership Assets and
certain asset sales, including the initial sale of 51% of TWE's interest in Six
Flags Entertainment Corporation ('Six Flags'), all of which are more fully
discussed herein. Such transactions are collectively referred to herein as the
'1995 Transactions.'
In order to enhance comparability, the following discussion of results of
operations for TWE is supplemented, where appropriate, by pro forma financial
information that gives effect to the 1995 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-66
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
RESULTS OF OPERATIONS
1997 VS. 1996
EBITA and operating income for TWE in 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
EBITA OPERATING INCOME
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros...................................... $ 387 $ 367 $ 264 $ 242
Broadcasting-The WB Network........................................... (88) (98) (88) (98)
Cable Networks-HBO.................................................... 391 328 391 328
Cable(1).............................................................. 1,184 917 877 606
------ ------ ------ ------
Total................................................................. $1,874 $1,514 $1,444 $1,078
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ------------
(1) Includes net gains of approximately $200 million recognized in 1997 related
to the sale or exchange of certain cable television systems.
TWE had revenues of $11.318 billion, income of $637 million before an
extraordinary loss on the retirement of debt and net income of $614 million for
the year ended December 31, 1997, compared to revenues of $10.852 billion and
net income of $210 million for the year ended December 31, 1996.
As discussed more fully below, TWE's net income increased significantly in
1997 as compared to 1996 due to an overall increase in EBITA and operating
income generated by its business segments, including approximately $200 million
of net gains recognized in 1997 related to the sale or exchange of certain cable
television systems, and the recognition of an approximate $250 million gain in
1997 related to the sale of TWE's interest in E! Entertainment Television, Inc.
These increases were offset in part by the recognition of a $23 million
extraordinary loss on the retirement of debt in 1997 and an increase in minority
interest expense related to TWE-A/N.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $85 million in the year ended December
31, 1997, and $70 million in the year ended December 31, 1996, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment-Warner Bros. Revenues decreased to $5.462 billion,
compared to $5.639 billion in 1996. EBITA increased to $387 million from $367
million. Operating income increased to $264 million from $242 million. Revenues
decreased principally as a result of lower worldwide theatrical and home video
revenues, offset in part by increases in worldwide television distribution
revenues. EBITA and operating income increased principally as a result of
high-margin sales of library product that contributed to the strong performance
of worldwide television distribution operations, cost savings and certain
one-time gains, offset in part by higher depreciation principally relating to
the expansion of theme parks and consumer products operations.
Broadcasting-The WB Network. Revenues increased to $136 million, compared
to $87 million in 1996. EBITA and operating losses improved to a loss of $88
million from a loss of $98 million. The increase in revenues primarily resulted
from the expansion of programming in September 1996 to three nights of primetime
scheduling and the expansion of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. The 1997 operating loss improved
principally as a result of the revenue gains and the effect of an increase in a
limited partner's interest in the network that occurred in early 1997. Due to
the start-up nature of this national broadcast operation and the addition of a
fourth night of primetime programming in January 1998, losses are expected to
continue.
F-67
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Cable Networks-HBO. Revenues increased to $1.923 billion, compared to
$1.763 billion in 1996. EBITA and operating income increased to $391 million
from $328 million. Revenues benefited primarily from an increase in
subscriptions to 33.6 million from 32.4 million at the end of 1996. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings.
Cable. Revenues increased to $4.243 billion, compared to $3.851 billion in
1996. EBITA increased to $1.184 billion from $917 million. Operating income
increased to $877 million from $606 million. Revenues benefited from an increase
in basic cable and Primestar-related, direct broadcast satellite subscribers,
increases in regulated cable rates as permitted under Time Warner Cable's
'social contract' with the Federal Communications Commission (the 'FCC') and an
increase in advertising and pay-per-view revenues. EBITA and operating income
increased principally as a result of the revenue gains, as well as net gains of
approximately $200 million recognized in 1997 in connection with the sale or
exchange of certain cable systems. The increases in EBITA and operating income
were partially offset by higher depreciation relating to capital spending.
As of December 31, 1997, including the wholly owned cable operations of
Time Warner, there were 12.6 million subscribers under the management of TWE's
cable division, as compared to 12.3 million subscribers at the end of 1996.
Interest and Other, Net. Interest and other, net, decreased to $345
million, compared to $522 million in 1996. Interest expense increased to $490
million, compared to $475 million in 1996. There was other income, net, of $145
million in 1997, compared to other expense, net, of $47 million in 1996,
principally due to higher gains on asset sales, including an approximate $250
million pretax gain on the sale of an interest in E! Entertainment Television,
Inc. recognized in 1997. This income was offset in part by higher losses from
reductions in the carrying value of certain investments and the dividend
requirements on preferred stock of a subsidiary issued in February 1997.
1996 VS. 1995
EBITA and operating income for TWE in 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
OPERATING
EBITA INCOME
----------------- ---------------
1996 1995 1996 1995
------ ------ ------ ----
(MILLIONS)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros........................................ $ 367 $ 352 $ 242 $228
Six Flags Theme Parks(1)................................................ -- 40 -- 29
Broadcasting-The WB Network............................................. (98) (66) (98) (66)
Cable Networks-HBO...................................................... 328 275 328 274
Cable................................................................... 917 803 606 495
------ ------ ------ ----
Total................................................................... $1,514 $1,404 $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 1995 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, depreciation
expense of $635 million, EBITA of $1.396 billion, operating income of $962
million, income before extraordinary item of $172 million and net income of $148
million. No pro forma financial
F-68
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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
EBITA and 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 TWE-A/N. 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.
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. EBITA increased to $367 million from $352
million. 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. EBITA and operating income benefited principally from the revenue
gains, offset in large part by a $51 million increase in depreciation
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. In February 1998, TWE entered into an
agreement to sell its remaining 49% interest. See Note 2 to the accompanying
consolidated financial statements.
Broadcasting-The WB Network. The WB Network recorded EBITA and operating
losses of $98 million on $87 million of revenues in 1996, compared to EBITA and
operating losses 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 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. EBITA increased to $328 million from $275 million.
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. EBITA 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. EBITA increased to $917 million from $803 million. 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
TWE-A/N effective as of April 1, 1995 and the consolidation of Paragon effective
as of July 6, 1995.
On a pro forma basis, TWE's Cable division had 1995 revenues of $3.368
billion, EBITA of $837 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 advertising and
pay-per-view revenues. EBITA and operating income increased principally as a
result of revenue gains, offset in part by higher depreciation relating to
increased capital spending.
F-69
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
As of December 31, 1996, including the wholly owned cable operations of
Time Warner, there were 12.3 million subscribers under the management of TWE's
cable division, as compared to 10.4 million subscribers at the end of 1995.
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 assets. 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.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1997
1997 FINANCIAL CONDITION
At December 31, 1997, TWE had $6.0 billion of debt, $322 million of cash
and equivalents (net debt of $5.7 billion), $233 million of preferred stock of a
subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital and
$6.3 billion of partners' capital, compared to $5.7 billion of debt, $216
million of cash and equivalents (net debt of $5.5 billion), $1.5 billion of Time
Warner General Partners' Senior Capital and $6.6 billion of partners' capital at
December 31, 1996.
DEBT REFINANCINGS
In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, entered into a new, five-year
revolving credit facility (the '1997 Credit Agreement') and terminated their
previously existing bank credit facility (the 'Old Credit Agreement'). This
enabled TWE to reduce its aggregate borrowing availability from $8.3 billion to
$7.5 billion, lower interest rates and refinance approximately $2.1 billion of
its outstanding borrowings under the Old Credit Agreement. See Note 5 to the
accompanying consolidated financial statements for a summary of the principal
terms of the 1997 Credit Agreement.
CREDIT STATISTICS
The combination of EBITA growth and controlled capital spending has
resulted in improvements in TWE's financial condition and overall financial
flexibility, as reflected in its strengthening financial ratios. These ratios,
consisting of commonly used financial measures such as leverage and coverage
ratios, are used by credit rating agencies and other credit analysts to measure
the ability of a company to repay debt (leverage) and to pay interest
(coverage). The leverage ratio represents the ratio of total debt, less cash to
total business segment operating income before depreciation and amortization,
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 1997 and 1996 and on a pro forma basis for 1995 are as set
forth below:
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL
------------- PRO FORMA
1997 1996 1995(a)
---- ---- ---------
<S> <C> <C> <C>
Leverage ratio...................................................................... 2.1x 2.4x 3.0x
Interest coverage ratio(b).......................................................... 5.4x 4.7x 3.7x
</TABLE>
- ------------
(a) Pro forma ratios for 1995 give effect to the 1995 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.
(b) Includes dividends related to the preferred stock of a subsidiary.
TWE's leverage and coverage ratios for 1998 are expected to be negatively
affected by TWE-A/N's assumption of approximately $1 billion of debt in
connection with the TWE-A/N Transfers (as described more fully hereinafter).
Nevertheless, management believes that TWE's operating cash flow will continue
to be sufficient to service its debt requirements.
CASH FLOWS
In 1997, TWE's cash provided by operations amounted to $1.834 billion and
reflected $1.874 billion of EBITA from the Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, $940
million of noncash depreciation expense and $300 million from the securitization
of backlog, less $493 million of interest payments, $95 million of income taxes,
$72 million of corporate expenses and $620 million related to an increase in
working capital requirements, other balance sheet accounts and noncash items.
Cash provided by operations of $1.912 billion in 1996 reflected $1.514 billion
of business segment EBITA, $799 million of noncash depreciation expense 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 used by investing activities was $1.252 billion in 1997, compared to
$1.253 billion in 1996, principally as a result of lower capital expenditures,
offset by a decrease in investment proceeds. Capital expenditures were $1.565
billion in 1997, and $1.719 billion in 1996.
Cash used by financing activities was $476 million in 1997, compared to
$652 million in 1996, principally as a result of an increase in debt used to
fund cash distributions to Time Warner and the issuance of 250,000 shares of
preferred stock of a subsidiary for aggregate net proceeds of $243 million,
offset in part by a $706 million increase in distributions paid to Time Warner
and the absence of $169 million of collections on the note receivable from U S
WEST that was fully paid in 1996.
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
Time Warner Cable has been engaged in a plan to upgrade the technological
capability and reliability of its cable television systems and develop new
services, which it believes will position the business for sustained, long-term
growth. Capital spending by TWE's Cable division amounted to $1.401 billion in
1997, compared to $1.348 billion in 1996. Capital spending includes over $100
million in each year relating to Primestar, which is expected to be eliminated
in 1998 upon the consummation of the Primestar Transactions (as described more
fully hereinafter). Capital spending by TWE's Cable division for 1998 is
budgeted to be approximately $1.4 billion and is expected to continue to be
funded by cable operating cash flow. In exchange for certain flexibility in
establishing cable rate pricing structures for regulated services that went into
effect on January 1, 1996 and
F-71
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable
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, TWE-A/N and Time
Warner. As discussed more fully below, management expects to continue to finance
such level of investment through cable operating cash flow and the development
of new revenue streams from expanded programming options, high-speed Internet
access, telephony and other services.
CABLE FINANCING STRATEGY
Time Warner's and TWE's cable financing strategy is to continue to use
cable operating cash flow to finance the level of capital spending necessary to
upgrade the technological capability of its cable television systems and develop
new services, while pursuing opportunities to reduce both existing debt and its
share of future funding requirements related to the cable television business
and related ancillary businesses. Consistent with this strategy, Time Warner,
TWE and TWE-A/N have recently announced or consummated certain transactions,
primarily consisting of (i) a series of transactions with TCI Communications,
Inc. ('TCI'), a subsidiary of Tele-Communications, Inc., to establish two, new
strategic joint ventures, expand an existing joint venture and exchange certain
cable television systems (collectively, the 'TCI Cable Transactions'), (ii) the
transfer of TWE's and TWE-A/N's direct broadcast satellite operations and
related assets to a separate entity, as well as certain related transactions and
(iii) the transfer by a wholly owned subsidiary of Time Warner of cable
television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, as well as certain
related transactions (collectively, the 'TWE-A/N Transfers'). Each of these
transactions is discussed more fully below.
TCI Cable Transactions
In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter of
intent to enter into a series of agreements to (i) form two cable television
joint ventures in the Houston and south Texas areas that will be managed by TWE
and own cable television systems serving an aggregate 1.1 million subscribers,
subject to approximately $1.4 billion of debt, (ii) expand an existing joint
venture in Kansas City, which is managed by TWE, through the contribution by TCI
of a contiguous cable television system serving approximately 95,000
subscribers, subject to approximately $200 million of debt, and (iii) exchange
various cable television systems owned by Time Warner and TWE serving over
500,000 subscribers (of which cable television systems serving approximately
400,000 subscribers are owned by TWE) for other cable television systems of
comparable size in an effort to enhance each company's geographic clusters of
cable television properties. The joint ventures will be accounted for under the
equity method of accounting.
As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its management
by approximately 675,000 subscribers, thereby becoming the largest cable
television operator in the U.S. The TCI Cable Transactions are expected to close
periodically throughout 1998 and are subject to the execution of definitive
agreements by the parties and customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance that
such agreements will be completed or that such approvals will be obtained.
Primestar Transactions
In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is referred
to herein as the 'Primestar Roll-up Transaction.'
In a related transaction, Primestar also entered into an agreement in June
1997 with The News Corporation Limited, MCI Telecommunications Corporation and
American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar (or, under
certain circumstances, Newco) will acquire certain assets relating to the
high-power, direct broadcast satellite business of ASkyB (the 'Primestar ASkyB
Transaction' and, when taken together with the Primestar Roll-up Transaction,
the 'Primestar Transactions'). In exchange for such assets, ASkyB will receive
non-voting securities of Newco that will be convertible into non-voting common
stock of Newco and, accordingly, will reduce TWE's equity interest in Newco to
approximately 16% on a fully diluted basis.
The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and regulatory approvals, including the approval of the
FCC. There can be no assurance that such approvals will be obtained.
TWE-A/N Transfers
In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions. The cable television systems transferred to TWE-A/N were
formerly owned by TWI Cable Inc. ('TWI Cable'), a wholly owned subsidiary of
Time Warner, and Paragon, a partnership formerly owning cable television systems
serving approximately 1 million subscribers that was previously wholly owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N. The TWE-A/N Transfers increased the under-leveraged capitalization
of TWE-A/N and consequently, TWE. The debt assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries, including Paragon.
As part of the TWE-A/N Transfers, TWE exchanged substantially all of its
beneficial interests in Paragon for an equivalent share of Paragon's cable
television systems (or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in
wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon
entity, with less than 1% beneficially held for TWE. Accordingly, effective as
of January 1, 1998, TWE will deconsolidate Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial interests in Paragon
for an equivalent amount of its cable television systems, it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
65.2% by TWE, 33.3% by Advance/Newhouse and 1.5% indirectly by Time Warner. The
TWE-A/N Transfers will be accounted for effective as of January 1, 1998.
SIX FLAGS
In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
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 the potential
exploitation of 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, basic cable, network and syndicated television
exhibition, amounted to $2.126 billion at December 31, 1997, compared to $1.502
billion at December 31, 1996 (including amounts relating to TWE's cable
television networks of $238 million and $189 million, respectively, and to Time
Warner's cable television networks of $481 million in 1997 and $274 million in
1996).
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
F-74
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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. In order to
accelerate the receipt of cash under these licensing contracts, TWE established
a $600 million securitization facility in 1997 and received approximately $300
million of net proceeds thereunder. The remaining portion of backlog for which
cash advances have not already been received continues to have 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
Foreign Exchange Contracts
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, 1997, 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 are generally 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, 1997,
Time Warner had contracts for the sale of $507 million and the purchase of $139
million of foreign currencies at fixed rates. Of Time Warner's $368 million net
sale contract position, none of the foreign exchange purchase contracts and $105
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, compared to contracts for the sale of $102 million of foreign
currencies at December 31, 1996.
Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1997, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1997 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, 1997 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.
Asian Financial Markets
During 1997, the Asian financial markets experienced significant
instability. Because less than 5% of TWE's revenues are derived from the sale of
products and services in Asia, management does not believe that the state of the
Asian financial markets poses a material risk to TWE's operations.
F-75
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
YEAR 2000 TECHNOLOGY PREPAREDNESS
TWE is currently working to resolve the potential impact of the year 2000
on the processing of time-sensitive information by its computerized information
systems. Year 2000 issues may arise if computer programs have been written using
two digits (rather than four) to define the applicable year. In such case,
programs that have time-sensitive logic may recognize a date using '00' as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures. Management is in the process of completing a review of
significant software and equipment used in TWE's operations and, to the extent
practicable, in the operations of its key business partners, in order to
determine if any year 2000 risks exist that may be material to TWE as a whole.
This process includes an assessment of year 2000 risks on an ongoing basis and
the identification of practical remediation measures that could be taken on a
timely basis to alter, validate or replace time-sensitive software. Management
has already begun implementing certain of these measures and intends to complete
its remediation efforts prior to any anticipated material impact on its
computerized information systems. Costs of addressing potential problems have
not been material to date and, based on preliminary information, are not
currently expected to have a material adverse impact on TWE's financial
position, results of operations or cash flows in future periods. However, if
TWE, its customers or vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly,
management plans to devote the resources it concludes are appropriate to resolve
all significant year 2000 issues in a timely manner.
F-76
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.......................................................................... $ 322 $ 216
Receivables, including $385 and $383 million due from Time Warner,
less allowances of $424 and $373 million.................................................... 1,914 1,637
Inventories................................................................................... 1,204 1,134
Prepaid expenses.............................................................................. 182 159
------- -------
Total current assets.......................................................................... 3,622 3,146
Noncurrent inventories........................................................................ 2,254 2,263
Loan receivable from Time Warner.............................................................. 400 400
Investments................................................................................... 315 351
Property, plant and equipment, net............................................................ 6,557 5,999
Cable television franchises................................................................... 3,063 3,054
Goodwill...................................................................................... 3,859 3,996
Other assets.................................................................................. 661 764
------- -------
Total assets.................................................................................. $20,731 $19,973
------- -------
------- -------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.............................................................................. $ 1,123 $ 935
Participations and programming costs payable.................................................. 1,176 1,393
Debt due within one year...................................................................... 8 7
Other current liabilities, including $184 and $82 million due to Time Warner.................. 1,667 1,740
------- -------
Total current liabilities..................................................................... 3,974 4,075
Long-term debt................................................................................ 5,990 5,676
Other long-term liabilities, including $477 and $138 million due to Time Warner............... 1,873 1,085
Minority interests............................................................................ 1,210 1,020
Preferred stock of subsidiary holding solely a mortgage note of its parent.................... 233 --
Time Warner General Partners' Senior Capital.................................................. 1,118 1,543
PARTNERS' CAPITAL
Contributed capital........................................................................... 7,537 7,537
Undistributed partnership earnings (deficit).................................................. (1,204) (963)
------- -------
Total partners' capital....................................................................... 6,333 6,574
------- -------
Total liabilities and partners' capital....................................................... $20,731 $19,973
------- -------
------- -------
</TABLE>
See accompanying notes.
F-77
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Revenues (a)........................................................................ $11,318 $10,852 $9,517
------- ------- ------
Cost of revenues (a)(b)............................................................. 7,406 7,441 6,597
Selling, general and administrative (a)(b).......................................... 2,468 2,333 1,960
------- ------- ------
Operating expenses.................................................................. 9,874 9,774 8,557
------- ------- ------
Business segment operating income................................................... 1,444 1,078 960
Interest and other, net (a)......................................................... (345) (522) (580)
Minority interest................................................................... (305) (207) (133)
Corporate services (a).............................................................. (72) (69) (64)
------- ------- ------
Income before income taxes.......................................................... 722 280 183
Income taxes........................................................................ (85) (70) (86)
------- ------- ------
Income before extraordinary item.................................................... 637 210 97
Extraordinary loss on retirement of debt............................................ (23) -- (24)
------- ------- ------
Net income.......................................................................... $ 614 $ 210 $ 73
------- ------- ------
------- ------- ------
</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, 1997, 1996 and 1995, respectively: revenues-$431 million, $198 million
and $56 million; cost of revenues-$(167) million, $(95) million and $(54)
million; selling, general and administrative-$18 million, $(38) million and
$(61) million; interest and other, net-$30 million, $30 million and $24
million; and corporate expenses-$(72) million, $(69) million and $(64)
million (Note 14).
<TABLE>
<S> <C> <C> <C>
(b) Includes depreciation and amortization expense of:.............................. $ 1,370 $ 1,235 $1,039
------- ------- ------
------- ------- ------
</TABLE>
See accompanying notes.
F-78
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
OPERATIONS
Net income.......................................................................... $ 614 $ 210 $ 73
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................ 23 -- 24
Depreciation and amortization....................................................... 1,370 1,235 1,039
Equity in losses of investee companies, net of distributions........................ 57 38 84
Changes in operating assets and liabilities:
Receivables..................................................................... (273) (50) (159)
Inventories..................................................................... (114) (637) (118)
Accounts payable and other liabilities.......................................... 393 970 679
Other balance sheet changes..................................................... (236) 146 (103)
------- ------- -------
Cash provided by operations......................................................... 1,834 1,912 1,519
------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions........................................................ (172) (146) (203)
Capital expenditures................................................................ (1,565) (1,719) (1,535)
Investment proceeds................................................................. 485 612 1,050
------- ------- -------
Cash used by investing activities................................................... (1,252) (1,253) (688)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.......................................................................... 3,400 215 2,484
Debt repayments..................................................................... (3,085) (716) (3,596)
Issuance of preferred stock of subsidiary........................................... 243 -- --
Collections on note receivable from U S WEST........................................ -- 169 602
Capital distributions............................................................... (934) (228) (1,088)
Other............................................................................... (100) (92) (95)
------- ------- -------
Cash used by financing activities................................................... (476) (652) (1,693)
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS......................................... 106 7 (862)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......................................... 216 209 1,071
------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD............................................... $ 322 $ 216 $ 209
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes.
F-79
<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, 1994................... $ 1,663 $ 7,398 $ (394) $ (771) $ 6,233
Net income..................................... 73 73
Decrease in unrealized gains on securities..... (4) (4)
Foreign currency translation adjustments....... -- --
------------- ---------
Comprehensive income....................... 69 69
Distributions.................................. (366) (421) (421)
Reacquisition of Time Warner Service
Partnership Assets........................... 124 124
Allocation of income........................... 129 (129) (129)
Collections.................................... 602 602
----------- ----------- ------------- ----- ---------
BALANCE AT DECEMBER 31, 1995................... 1,426 7,522 (875) (169) 6,478
Net income..................................... 210 210
Increase in unrealized gains on securities..... 4 4
Foreign currency translation adjustments....... 14 14
------------- ---------
Comprehensive income....................... 228 228
Distributions.................................. (199) (199)
Capital contributions.......................... 15 15
Allocation of income........................... 117 (117) (117)
Collections.................................... 169 169
----------- ----------- ------------- ----- ---------
BALANCE AT DECEMBER 31, 1996................... 1,543 7,537 (963) -- 6,574
Net income..................................... 614 614
Increase in unrealized gains on securities..... 7 7
Foreign currency translation adjustments....... (29) (29)
------------- ---------
Comprehensive income....................... 592 592
Distributions.................................. (535) (723) (723)
Allocation of income........................... 110 (110) (110)
----------- ----------- ------------- ----- ---------
BALANCE AT DECEMBER 31, 1997................... $ 1,118 $ 7,537 $(1,204) $ -- $ 6,333
----------- ----------- ------------- ----- ---------
----------- ----------- ------------- ----- ---------
</TABLE>
See accompanying notes.
F-80
<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 and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems.
Each of the business interests within Entertainment, Cable Networks and
Cable is important to TWE's objective of increasing partner value through the
creation, extension and distribution of recognizable brands and copyrights
throughout the world. Such brands and copyrights include (1) the unique and
extensive film, television and animation libraries of Warner Bros. and
trademarks such as the Looney Tunes characters and Batman, (2) The WB Network, a
national broadcasting network launched in 1995 as an extension of the Warner
Bros. brand and as an additional distribution outlet for Warner Bros.'
collection of children's cartoons and television programming, (3) HBO and
Cinemax, the leading pay television services and (4) Time Warner Cable,
currently the second largest operator of cable television systems in the U.S.
The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 12). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ('Time Warner')* $14 billion acquisition of Warner
Communications Inc. ('WCI') in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ('ATC') in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $430 million in 1997, $436 million in 1996 and $444
million in 1995.
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. Certain of
Time Warner's subsidiaries are the general partners of TWE ('Time Warner General
Partners').
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
Communications ('Paragon') effective as of July 6, 1995. Certain
reclassifications have been made to the prior years' financial statements to
conform to the 1997 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
- ------------
* On October 10, 1996, Time Warner Inc. acquired the remaining 80% interest in
Turner Broadcasting System, Inc. ('TBS') that it did not already own. As a
result of this transaction, a new parent company with the name 'Time Warner
Inc.' replaced the old parent company of the same name (now known as Time
Warner Companies, Inc., 'TW Companies'), and TW Companies and TBS became
separate, wholly owned subsidiaries of the new parent company. Unless the
context indicates otherwise, references herein to 'Time Warner' refer to TW
Companies.
F-81
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 14).
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.
Investments in companies in which TWE does not have a 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 in
partners' capital 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.
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 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
F-82
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. Thereafter,
feature films are distributed 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 the related 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 $2.126 billion and $1.502 billion
at December 31, 1997 and 1996, respectively (including amounts relating to the
licensing of film product to TWE's cable television networks of $238 million and
$189 million, respectively, and to Time Warner's cable television networks of
$481 million and $274 million, respectively).
Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost principally consists of direct
production costs and production overhead. 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-83
<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 that
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 $288 million in 1997, $332 million in 1996 and $241 million in 1995.
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.
FINANCIAL INSTRUMENTS
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.
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,
-------------------
1997 1996
------- -------
(MILLIONS)
<S> <C> <C>
Land and buildings......................................................................... $ 804 $ 780
Cable television equipment................................................................. 7,423 6,602
Furniture, fixtures and other equipment.................................................... 2,310 2,129
------- -------
10,537 9,511
Less accumulated depreciation.............................................................. (3,980) (3,512)
------- -------
Total...................................................................................... $ 6,557 $ 5,999
------- -------
------- -------
</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, film and television libraries
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.
F-84
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, film and television libraries
and other intangible assets are amortized over periods up to twenty years using
the straight-line method. Amortization of intangible assets amounted to $430
million in 1997, $436 million in 1996 and $444 million in 1995. Accumulated
amortization of intangible assets at December 31, 1997 and 1996 amounted to
$3.020 billion and $2.623 billion, respectively.
TWE periodically reviews the carrying value of acquired intangible assets
for each acquired entity 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. If it is
determined 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 reduced by a
charge to operations in the amount of the impairment. An impairment charge is
measured as any deficiency in the amount of estimated undiscounted future cash
flows of the acquired business available 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
prescribed by FASB Statement No. 109, 'Accounting for Income Taxes.'
COMPREHENSIVE INCOME
Effective January 1, 1997, TWE adopted FASB Statement No. 130, 'Reporting
Comprehensive Income' ('FAS 130'). The new rules establish standards for the
reporting of comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses affecting
partners' capital that, under generally accepted accounting principles, are
excluded from net income. For TWE, such items consist primarily of unrealized
gains and losses on marketable equity investments and foreign currency
translation gains and losses. The adoption of FAS 130 did not have a material
effect on TWE's primary financial statements, but did affect the presentation of
the accompanying consolidated statement of partnership capital.
SEGMENT INFORMATION
On December 31, 1997, TWE adopted FASB Statement No. 131, 'Disclosures
about Segments of an Enterprise and Related Information' ('FAS 131'). The new
rules establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. The adoption of FAS 131 did not have a material effect on
TWE's primary financial statements, but did affect the disclosure of segment
information contained elsewhere herein (Note 12).
F-85
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS AND DISPOSITIONS
TCI CABLE TRANSACTIONS
In September 1997, Time Warner Inc., TWE, the TWE-Advance/Newhouse
Partnership ('TWE-A/N') and TCI Communications, Inc. ('TCI'), a subsidiary of
Tele-Communications, Inc., signed a letter of intent to enter into a series of
agreements to (i) form two cable television joint ventures in the Houston and
south Texas areas that will be managed by TWE and own cable television systems
serving an aggregate 1.1 million subscribers, subject to approximately $1.4
billion of debt, (ii) expand an existing joint venture in Kansas City, which is
managed by TWE, through the contribution by TCI of a contiguous cable television
system serving approximately 95,000 subscribers, subject to approximately $200
million of debt, and (iii) exchange various cable television systems owned by
Time Warner and TWE and serving over 500,000 subscribers (of which cable
television systems serving approximately 400,000 subscribers are owned by TWE)
for other cable television systems of comparable size in an effort to enhance
each company's geographic clusters of cable television properties (collectively,
the 'TCI Cable Transactions'). The joint ventures will be accounted for under
the equity method of accounting.
As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its management
by approximately 675,000 subscribers. The TCI Cable Transactions are expected to
close periodically throughout 1998, subject to the execution of definitive
agreements by the parties and customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance that
such agreements will be completed or that such approvals will be obtained.
PRIMESTAR TRANSACTIONS
In June 1997, TWE and the Advance/Newhouse Partnership ('Advance/Newhouse')
entered into agreements to transfer the direct broadcast satellite operations
conducted by TWE and TWE-A/N (the 'DBS Operations') and the 31% partnership
interest in Primestar Partners, L.P. held by TWE-A/N ('Primestar' and
collectively, the 'Primestar Assets') to a new holding company ('Newco') that is
ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. ('TSAT'). Newco will also own the DBS Operations and
Primestar partnership interests currently owned by TSAT and other existing
partners of Primestar. In exchange for contributing its interests in the
Primestar Assets, TWE will receive an approximate 24% equity interest in Newco
and realize approximately $260 million of debt reduction, as well as eliminate
its share of future funding requirements for these operations that will be
separately financed by Newco. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse will
receive an approximate 6% equity interest in Newco. This transaction is
collectively referred to herein as the 'Primestar Roll-up Transaction.'
In a related transaction, Primestar also entered into an agreement in June
1997, with The News Corporation Limited, MCI Telecommunications Corporation
('MCI') and American Sky Broadcasting LLC ('ASkyB'), pursuant to which Primestar
(or, under certain circumstances, Newco) will acquire certain assets relating to
the high-power, direct broadcast satellite business of ASkyB (the 'Primestar
ASkyB Transaction' and, when taken together with the Primestar Roll-up
Transaction, the 'Primestar Transactions'). In exchange for such assets, ASkyB
will receive non-voting securities of Newco that will be convertible into
non-voting common stock of Newco and, accordingly, will reduce TWE's equity
interest in Newco to approximately 16% on a fully diluted basis.
The Primestar Transactions are not conditioned on each other and are
expected to close independently. The Primestar Roll-up Transaction is expected
to close on or about April 1, 1998. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions, including all
necessary governmental and
F-86
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
regulatory approvals, including the approval of the Federal Communications
Commission. There can be no assurance that such approvals will be obtained.
TWE-A/N TRANSFERS
In April 1995, TWE formed a cable television joint venture with
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 an aggregate 31% interest in Primestar. Upon formation of TWE-A/N, TWE,
which is the managing partner, owned a 66.7% common partnership interest therein
and Advance/Newhouse owned a 33.3% common partnership interest. TWE consolidates
the partnership and the common partnership 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. In addition,
beginning on April 1, 1998, TWE or Advance/Newhouse can initiate a restructuring
of the partnership, in which Advance/Newhouse would withdraw from the
partnership and 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.
In early 1998, Time Warner (through a wholly owned subsidiary) contributed
cable television systems (or interests therein) serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in exchange
for common and preferred partnership interests therein, and completed certain
related transactions (collectively, the 'TWE-A/N Transfers'). The cable
television systems transferred to TWE-A/N were formerly owned by TWI Cable Inc.
('TWI Cable'), a wholly owned subsidiary of Time Warner, and Paragon, a
partnership formerly owning cable television systems serving approximately 1
million subscribers that was previously wholly owned by subsidiaries of Time
Warner, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. The
debt assumed by TWE-A/N has been guaranteed by TWI Cable and certain of its
subsidiaries, including Paragon.
As part of the TWE-A/N Transfers, TWE exchanged substantially all of its
beneficial interest in Paragon for an equivalent share of Paragon's cable
television systems (or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in
wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon
entity, with less than 1% beneficially held for TWE. Accordingly, effective as
of January 1, 1998, TWE will deconsolidate Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial interests in Paragon
for an equivalent amount of its cable television systems, it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.2% by TWE, 33.3% by
Advance/Newhouse and 1.5% indirectly by Time Warner. The TWE-A/N Transfers will
be accounted for effective as of January 1, 1998.
SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS
In 1997, in an effort to enhance its geographic clustering of cable
television properties, TWE sold or exchanged various cable television systems.
As a result of these transactions, TWE recognized net, pretax gains of
approximately $200 million, which have been included in operating income in the
accompanying consolidated statement of operations.
F-87
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIX FLAGS
In June 1995, TWE sold an initial 51% 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 was deconsolidated and TWE's remaining 49% interest in Six Flags has
been 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 was deferred by TWE principally as a
result of its guarantee of certain third-party, zero-coupon indebtedness of Six
Flags due in 1999.
In February 1998, TWE entered into an agreement to sell its remaining 49%
interest in Six Flags to Premier Parks Inc. ('Premier'), a regional theme park
operator, for approximately $375 million of cash and $100 million of convertible
preferred stock. TWE expects to use the net proceeds from this transaction,
after taxes and transaction costs, to reduce debt. As part of the transaction,
TWE will continue to license its animated cartoon and comic book characters to
Six Flags's theme parks and will similarly license such rights to Premier's
theme parks in the United States and Canada under a long-term agreement covering
an aggregate of twenty-five existing and all future locations. The transaction
is expected to close in the second quarter of 1998, subject to customary closing
conditions, including the successful completion of certain equity offerings by
Premier.
PRO FORMA FINANCIAL INFORMATION
Along with the formation of TWE-A/N and the partial sale of Six Flags in
1995, TWE completed a number of other transactions that also affected the
comparability of its 1995 operating results (the '1995 Transactions'). The pro
forma effect of these transactions on 1995 operating results is set forth below.
No pro forma information has been presented for 1997 and 1996 because such
transactions are already reflected in TWE's historical financial statements for
such periods and, with regard to the acquisitions and dispositions announced or
closed subsequent to 1995 as described above, there was no material effect on
the comparability of the accompanying consolidated financial statements.
On a pro forma basis, giving effect to the 1995 Transactions, including (i)
the formation of TWE-A/N, (ii) the refinancing of approximately $2.6 billion of
bank debt, (iii) the consolidation of Paragon, (iv) the reacquisition of the
Time Warner Service Partnership Assets (Note 8), (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 expense of $635 million,
operating income before noncash amortization of intangible assets of $1.396
billion, operating income of $962 million, income before extraordinary item of
$172 million and net income of $148 million.
F-88
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
TWE's inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996
---------------------- ----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization................................ $ 545 $ 658 $ 544 $ 535
Completed and not released................................. 170 50 168 42
In process and other....................................... 27 595 21 704
Library, less amortization................................. -- 612 -- 664
Programming costs, less amortization............................ 382 339 319 318
Merchandise..................................................... 80 -- 82 --
------- ---------- ------- ----------
Total........................................................... $1,204 $2,254 $1,134 $2,263
------- ---------- ------- ----------
------- ---------- ------- ----------
</TABLE>
Excluding the Library, the total cost incurred in the production of
theatrical and television product (including direct production costs, production
overhead and certain exploitation costs, such as film prints and home
videocassettes) amounted to $2.360 billion in 1997, $2.543 billion in 1996 and
$2.011 billion in 1995; and the total cost amortized amounted to $2.329 billion,
$1.998 billion and $2 billion, respectively. Excluding the Library, the
unamortized cost of completed films at December 31, 1997 amounted to $1.423
billion, more than 90% of which is expected to be amortized within three years
after release.
4. INVESTMENTS
TWE's investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------- -------
(MILLIONS)
<S> <C> <C>
Equity method investments.................................................................... $ 238 $ 298
Cost method investments...................................................................... 77 53
------- -------
Total........................................................................................ $ 315 $ 351
------- -------
------- -------
</TABLE>
In the first quarter of 1997, TWE sold its 58% interest in E! Entertainment
Television, Inc. A pretax gain of approximately $250 million relating to this
sale has been included in the accompanying consolidated statement of operations.
F-89
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, companies accounted for using the equity method
included: 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 (25% to 50% owned) and
Courtroom Television Network (33% owned). A summary of combined financial
information as reported by the equity investees of TWE is set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues.......................................................................... $2,207 $1,823 $1,450
Depreciation and amortization..................................................... (235) (197) (195)
Operating income (loss)........................................................... 118 62 (9)
Net loss.......................................................................... (82) (138) (168)
Current assets.................................................................... 412 624 455
Total assets...................................................................... 3,046 3,193 2,416
Current liabilities............................................................... 993 431 405
Long-term debt.................................................................... 1,625 2,853 1,778
Total liabilities................................................................. 2,734 2,829 2,323
Total shareholders' equity or partners' capital................................... 312 340 93
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT -----------------
DECEMBER 31, 1997 MATURITIES 1997 1996
----------------- ----------- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Bank credit agreement borrowings........................... 6.4% 2002 $1,970 $1,555
Commercial paper........................................... 6.2% 1998 210 310
Fixed-rate senior notes and debentures..................... 8.6% 2002-2033 3,810 3,811
------ ------
Total...................................................... $5,990 $5,676
------ ------
------ ------
</TABLE>
BANK CREDIT AGREEMENT
In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, entered into a new, five-year
revolving credit facility (the '1997 Credit Agreement') and terminated their
previously existing bank credit facility (the 'Old Credit Agreement'). This
enabled TWE to reduce its aggregate borrowing availability from $8.3 billion to
$7.5 billion, lower interest rates and refinance approximately $2.1 billion of
its outstanding borrowings under the Old Credit Agreement. In connection
therewith, TWE recognized an extraordinary loss of $23 million in 1997. In
addition, TWE recognized a $24 million extraordinary loss in 1995 related to
certain other bank refinancings.
The 1997 Credit Agreement permits borrowings in an aggregate amount of up
to $7.5 billion, with no scheduled reduction in credit availability prior to
maturity in November 2002. The borrowers under the 1997 Credit Agreement are
TWE, TWE-A/N, Time Warner Inc., TW Companies, TBS and TWI Cable. Borrowings
under the 1997 Credit Agreement are limited to (i) $7.5 billion in the case of
TWE, (ii) $2 billion in the case of TWE-A/N and (iii) $6 billion in the
aggregate for Time Warner Inc., TW Companies, TBS and TWI Cable, subject in each
case to an aggregate borrowing limit of $7.5 billion and certain other
limitations and adjustments. Such borrowings bear interest at specific rates for
each of the borrowers (generally equal to LIBOR plus a margin initially equal to
40 basis points for TWE and 35 basis points for TWE-A/N) and each borrower is
required to pay a commitment fee on the unused portion of its commitment
(initially equal to .15% per annum for TWE and .125% per annum for TWE-A/N),
which margin and fee vary based on the credit rating or financial leverage of
the applicable borrower. Borrowings may be used for general business purposes
and unused credit is available to support commercial paper borrowings. The 1997
Credit Agreement contains certain covenants generally for each borrower relating
to, among other things, additional indebtedness; liens on assets;
F-90
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash flow coverage and leverage ratios; and dividends, distributions and other
restricted cash payments or transfers of assets from the borrowers to their
respective shareholders, partners or affiliates.
TIME WARNER GENERAL PARTNER GUARANTEES
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.8 billion of TWE's debt and accrued interest thereon based on
the relative fair value of the net assets each Time Warner General Partner (or
its predecessor) 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 majority consent
of the holders of the notes and debentures to terminate the Time Warner General
Partner Guarantees. 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 AND MATURITIES
Interest expense was $490 million in 1997, $475 million in 1996 and $571
million in 1995. The weighted average interest rate on TWE's total debt was 7.8%
at December 31, 1997 and 1996.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1997 consist only of $2.78 billion due in 2002. This includes all
borrowings under the 1997 Credit Agreement, as well as any commercial paper
borrowings supported thereby. TWE has the intent and ability under the 1997
Credit Agreement to continue to refinance its commercial paper borrowings on a
long-term basis.
6. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Domestic............................................................................ $654 $263 $191
Foreign............................................................................. 68 17 (8)
---- ---- ----
Total............................................................................... $722 $280 $183
---- ---- ----
---- ---- ----
</TABLE>
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,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current(1)....................................................................... $ 2 $ 4 $ 7
Deferred......................................................................... (10) (3) (5 )
Foreign:
Current(2)....................................................................... 69 86 74
Deferred......................................................................... 22 (21) 6
State and local:
Current.......................................................................... 4 5 7
Deferred......................................................................... (2) (1) (3 )
---- ---- ----
Total income taxes.................................................................... $ 85 $ 70 $86
---- ---- ----
---- ---- ----
</TABLE>
- ------------
(1) Includes utilization of Six Flags's tax carryforwards in the amount of $16
million in 1995.
(2) Includes foreign withholding taxes of $58 million in 1997, $54 million in
1996 and $60 million in 1995.
F-91
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $8.1 billion at December 31, 1997, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
7. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned subsidiary of TWE
(the 'REIT') issued 250,000 shares of preferred stock ('REIT Preferred Stock').
The REIT is intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended. TWE used the aggregate net proceeds
from the transaction of $243 million to reduce its bank debt. The sole asset of
the REIT is a $432 million mortgage note payable by TWE, which has been secured
by certain real estate owned by TWE or its affiliates.
Each share of REIT Preferred Stock is entitled to a liquidation preference
of $1,000 and entitles the holder thereof to receive cumulative cash dividends,
payable quarterly, at the rate of 14.253% per annum through December 30, 2006
and 1% per annum thereafter, which results in an effective dividend yield of
8.48%. Shares of REIT Preferred Stock are redeemable only in the event of
certain changes or proposed changes to the tax laws or regulations to the effect
that dividends paid by the REIT or interest paid under the mortgage note would
not be fully deductible for federal income tax purposes. TWE has the right to
liquidate or dissolve the REIT at any time after December 30, 2006 or, at any
time prior thereto, upon the approval of the holders of at least two-thirds of
the outstanding shares of REIT Preferred Stock.
8. TWE PARTNERS' CAPITAL
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to the partnership ('Undistributed 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, provides for the various priority capital
rates of return as specified in the table below. The sum of Undistributed
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-92
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the priority of Undistributed Contributed Capital, ownership
of Undistributed Contributed Capital and Cumulative Priority Capital at December
31, 1997 and priority capital rates of return thereon is set forth below:
<TABLE>
<CAPTION>
LIMITED
PRIORITY TIME PARTNERS
UNDISTRIBUTED CUMULATIVE CAPITAL WARNER ---------------
CONTRIBUTED PRIORITY RATES OF GENERAL TIME U S
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL CAPITAL(a) CAPITAL RETURN(B) PARTNERS WARNER WEST
- --------------------------------------------- ------------- ---------- ---------- -------- ------ -----
(BILLIONS) (OWNERSHIP%)
<S> <C> <C> <C> <C> <C> <C>
Senior Capital............................... $ 0.9 $ 1.1 8.00% 100.00% -- --
Series A Capital............................. 5.6 11.3 13.00% 63.27% 11.22 % 25.51%
Series B Capital............................. 2.9(d) 6.0 13.25% 100.00% -- --
Residual Capital............................. 3.3(d) 3.3(c) --(c) 63.27% 11.22 % 25.51%
</TABLE>
- ------------
(a) Excludes partnership income or loss allocated thereto.
(b) To the extent income allocations are concurrently distributed, the priority
capital rates of return on the Series A Capital and Series B Capital are 11%
and 11.25%, respectively.
(c) Residual Capital is not entitled to stated priority rates of return and, as
such, its Cumulative Priority Capital is equal to its Undistributed
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.
(d) The Undistributed Contributed Capital relating to the Series B Capital has
priority over the priority returns on the Series A Capital. The
Undistributed Contributed Capital relating to the Residual Capital has
priority over the priority returns on the Series B Capital and the Series A
Capital.
Because Undistributed Contributed Capital is generally based on the fair
value of the net assets that each partner initially 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'). After any special tax allocations, partnership income is
allocated 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
Undistributed 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 Series B Capital owned by subsidiaries of Time Warner may be increased
if certain operating performance targets are achieved over a ten-year period
ending on December 31, 2001. In addition, 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.
F-93
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL DISTRIBUTIONS
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 July 1997, the Time Warner General Partners received a $535 million
distribution from TWE relating to their Senior Capital interests (representing
the return of $455 million of contributed capital and the distribution of $80
million of priority capital return), which, when taken together with a $366
million distribution in 1995 (representing a portion of the priority capital
return) increased the cumulative cash distributions received from TWE on such
interests to $901 million. The Time Warner General Partners' remaining $1.1
billion Senior Capital interests and any undistributed partnership income
allocated thereto (based on an 8% annual rate of return) are required to be
distributed in two annual installments on July 1, 1998 and 1999.
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,
1997 and 1996, TWE had recorded a liability for Stock Option Distributions of
$417 million and $93 million, respectively, based on the unexercised options and
the market prices at such dates of $62.00 and $37.50, respectively, per Time
Warner common share. This liability reflects the accrual of $399 million and $50
million of Stock Option Distributions in 1997 and 1995, respectively, when the
market price of Time Warner common stock increased during such periods, and the
reversal of $16 million of previously accrued Stock Option Distributions in 1996
when the market price of Time Warner common stock declined. TWE paid Stock
Option Distributions to Time Warner in the amount of $75 million in 1997, $13
million in 1996 and $17 million in 1995.
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 are paid to the partners on a current basis. TWE paid Tax
Distributions to the Time Warner General Partners in the amount of $324 million
in 1997, $215 million in 1996 and $680 million in 1995 (of which $334 million
was accrued in prior periods).
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
F-94
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in 1995, which was recorded as a reduction of Time
Warner General Partners' Series B Capital.
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. Such
cash distributions will generally be made on a priority and pro rata basis with
respect to each partner's interest in the Series A Capital, Series B Capital and
Residual Capital. However, cash distributions to the Time Warner General
Partners with respect to their Series A Capital and Residual Capital interests
will be deferred until the limited partners receive aggregate distributions
(excluding Tax Distributions) of approximately $800 million. Similarly, cash
distributions with respect to the Time Warner General Partners' Series B Capital
interest will be deferred until the limited partners receive aggregate
distributions of $1.6 billion. 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, 1997, 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.
9. 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
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," 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 made subsequent to 1994 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,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Net income:
As reported...................................................................... $614 $210 $73
---- ---- ----
---- ---- ----
Pro forma........................................................................ $584 $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 for 1996 and 1995 is
not comparable to the impact on pro forma net income for 1997, when the pro
forma effect of the three-year vesting period has been fully reflected.
For purposes of applying FAS 123, 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
F-95
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to TWE employees in 1997, 1996 and 1995: dividend yields of 1% in all periods;
expected volatility of 22.2%, 21.7% and 22.3%, respectively; risk-free interest
rates of 6.3%, 5.7% and 6.6%, respectively; and expected lives of 5 years in all
periods. The weighted average fair value of an option granted to TWE employees
during the year was $12.18, $10.43 and $11.46 and for the years ended December
31, 1997, 1996 and 1995, respectively. In 1996, Time Warner granted options to
certain TWE executives at exercise prices exceeding the market price of Time
Warner common stock on the date of grant. These above-market options had a
weighted average exercise price and fair value of $48.51 and $6.82.
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, 1995............................................................... 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
Granted.................................................................................. 3,920 41.35
Exercised................................................................................ (3,523) 28.74
Cancelled(a)............................................................................. (1,206) 33.52
---------
Balance at December 31, 1997............................................................. 29,502 $ 36.56
---------
---------
</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,
--------------------------
1997 1996 1995
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable.......................................................................... 21,511 22,772 21,846
</TABLE>
F-96
<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, 1997:
<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 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ------------------------------------------------------ ----------- ----------- --------- ------------ ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $17............................................. 245 2.4 years $ 16.63 245 $ 16.63
$17.00 to $25.00...................................... 2,132 2.5 years $ 21.73 2,132 $ 21.73
$25.01 to $35.00...................................... 4,724 3.9 years $ 29.16 4,672 $ 29.11
$35.01 to $40.00...................................... 12,364 4.8 years $ 36.76 9,068 $ 36.43
$40.01 to $50.00...................................... 9,917 6.7 years $ 43.26 5,394 $ 42.51
$50.01 to $60.41...................................... 120 9.1 years $ 58.68 -- --
------------ ------------
Total................................................. 29,502 5.2 years $ 36.56 21,511 $ 34.68
------------ ------------
------------ ------------
</TABLE>
TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 8.
10. 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 7% and 5% of plan assets at December 31, 1997 and 1996,
respectively.
Pension expense included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost.......................................................................... $ 33 $ 33 $ 20
Interest cost......................................................................... 31 28 21
Actual return on plan assets.......................................................... (71) (27) (55)
Net amortization and deferral......................................................... 45 7 37
---- ---- ----
Total................................................................................. $ 38 $ 41 $ 23
---- ---- ----
---- ---- ----
</TABLE>
F-97
<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,
-------------
1997 1996
---- ----
(MILLIONS)
<S> <C> <C>
Accumulated benefit obligation (90% vested)..................................................... $275 $212
Effect of future salary increases............................................................... 157 124
---- ----
Projected benefit obligation.................................................................... 432 336
Plan assets at fair value....................................................................... 364 284
---- ----
Projected benefit obligation in excess of plan assets........................................... (68) (52)
Unamortized actuarial losses.................................................................... (1) 1
Unamortized plan changes........................................................................ 3 3
Other........................................................................................... (1) (2)
---- ----
Accrued pension expense......................................................................... $(67) $(50)
---- ----
---- ----
</TABLE>
The following assumptions were used in accounting for pension plans:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average discount rate........................................................ 7.25% 7.75% 7.25%
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 $29 million in 1997, $30 million in
1996 and $21 million in 1995. Employees of TWE's operations in foreign countries
participate to varying degrees in local pension plans, which in the aggregate
are not significant.
Certain TWE employees also participate in Time Warner's savings and profit
sharing plans, as to which the expense amounted to $30 million in 1997, $28
million in 1996 and $25 million in 1995. 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.
11. 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.
LONG-TERM DEBT
Based on the level of interest rates prevailing at December 31, 1997, the
fair value of TWE's fixed-rate debt exceeded its carrying value by $532 million
which represents an unrealized loss. 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 also 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.
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
F-98
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, 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, 1997,
Time Warner had contracts for the sale of $507 million and the purchase of $139
million of foreign currencies at fixed rates. Of Time Warner's $368 million net
sale contract position, none of the foreign exchange purchase contracts and $105
million of the foreign exchange sale contracts related to TWE's foreign currency
exposure, primarily Japanese yen (27% of net contract position related to TWE),
French francs (24%), German marks (11%) and Canadian dollars (12%), compared to
a net sale contract position of $102 million of foreign currencies at December
31, 1996.
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,
1997 and 1996. 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, 1997, 1996 and 1995, TWE recognized $14 million in
gains, $6 million in gains and $11 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.
12. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable Networks, consisting
principally of interests in cable television programming; and Cable, consisting
principally of interests in cable television systems.
Information as to the operations of TWE in different business segments is
set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ('EBITA'). The accounting policies of the business segments
are the same as those described in the summary of significant accounting
policies (Note 1). Intersegment sales are accounted for at fair value as if the
sales were to third parties.
The operating results of TWE reflect the cable-related formation of TWE-A/N
effective as of April 1, 1995, the deconsolidation of Six Flags effective as of
June 23, 1995 and the cable-related 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.
F-99
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
Filmed Entertainment-Warner Bros.................................................. $ 5,462 $ 5,639 $5,069
Six Flags Theme Parks............................................................. -- -- 227
Broadcasting-The WB Network....................................................... 136 87 33
Cable Networks-HBO................................................................ 1,923 1,763 1,593
Cable............................................................................. 4,243 3,851 3,005
Intersegment elimination.......................................................... (446) (488) (410)
------- ------- ------
Total............................................................................. $11,318 $10,852 $9,517
------- ------- ------
------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
EBITA(1)
Filmed Entertainment-Warner Bros..................................................... $ 387 $ 367 $ 352
Six Flags Theme Parks................................................................ -- -- 40
Broadcasting-The WB Network.......................................................... (88) (98) (66)
Cable Networks-HBO................................................................... 391 328 275
Cable(2)............................................................................. 1,184 917 803
------ ------ ------
Total................................................................................ $1,874 $1,514 $1,404
------ ------ ------
------ ------ ------
</TABLE>
- ------------
(1) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, TWE's business segment operating income was $1.444
billion in 1997, $1.078 billion in 1996 and $960 million in 1995.
(2) Includes net gains of approximately $200 million recognized in 1997 related
to the sale or exchange of certain cable television systems.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros...................................................... $181 $158 $107
Six Flags Theme Parks................................................................. -- -- 20
Broadcasting-The WB Network........................................................... 1 -- --
Cable Networks-HBO.................................................................... 22 22 16
Cable................................................................................. 736 619 452
---- ---- ----
Total................................................................................. $940 $799 $595
---- ---- ----
---- ---- ----
</TABLE>
F-100
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment-Warner Bros...................................................... $123 $125 $124
Six Flags Theme Parks................................................................. -- -- 11
Broadcasting-The WB Network........................................................... -- -- --
Cable Networks-HBO.................................................................... -- -- 1
Cable................................................................................. 307 311 308
---- ---- ----
Total................................................................................. $430 $436 $444
---- ---- ----
---- ---- ----
</TABLE>
- ------------
(1) Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including Time Warner's $14 billion
acquisition of WCI in 1989 and $1.3 billion acquisition of the minority
interest in ATC in 1992.
Information as to the assets and capital expenditures of TWE is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Filmed Entertainment-Warner Bros................................................. $ 8,098 $ 8,057 $ 7,334
Six Flags Theme Parks............................................................ -- -- --
Broadcasting-The WB Network...................................................... 113 67 63
Cable Networks-HBO............................................................... 1,080 997 935
Cable............................................................................ 10,771 10,202 9,842
Corporate(1)..................................................................... 669 650 731
------- ------- -------
Total............................................................................ $20,731 $19,973 $18,905
------- ------- -------
------- ------- -------
</TABLE>
- ------------
(1) Consists principally of cash, cash equivalents and other investments.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros................................................. $ 144 $ 340 $ 294
Six Flags Theme Parks............................................................ -- -- 43
Broadcasting-The WB Network...................................................... 1 2 --
Cable Networks-HBO............................................................... 19 29 20
Cable(1)......................................................................... 1,401 1,348 1,178
------ ------ ------
Total............................................................................ $1,565 $1,719 $1,535
------ ------ ------
------ ------ ------
</TABLE>
- ------------
(1) Cable capital expenditures were funded in part through collections on the
US WEST Note Receivable in the amount of $169 million in 1996 and $602
million in 1995 (Note 1). The U S WEST Note Receivable was fully collected
during 1996.
F-101
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information as to TWE's operations in different geographical areas is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
(MILLIONS)
<S> <C> <C> <C>
REVENUES(1)
United States..................................................................... $ 9,086 $ 8,718 $7,535
United Kingdom.................................................................... 488 383 338
Germany........................................................................... 284 374 247
Japan............................................................................. 172 196 245
France............................................................................ 152 143 141
Canada............................................................................ 137 157 144
Other international............................................................... 999 881 867
------- ------- ------
Total............................................................................. $11,318 $10,852 $9,517
------- ------- ------
------- ------- ------
</TABLE>
- ------------
(1) Revenues are attributed to countries based on location of customer.
Because a substantial portion of TWE's international revenues is derived
from the sale of U.S. copyrighted products abroad, assets located outside the
United States are not material.
13. COMMITMENTS AND CONTINGENCIES
TWE's total rent expense amounted to $218 million in 1997, $205 million in
1996 and $176 million in 1995. The minimum rental commitments under
noncancellable long-term operating leases are: 1998-$178 million; 1999-$171
million; 2000-$163 million; 2001-$160 million; 2002-$151 million and after
2002-$859 million.
TWE's minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements aggregated approximately $7.4 billion
at December 31, 1997, which are payable principally over a five-year period.
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements.
14. 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 $72 million, $69 million and $64 million in 1997, 1996 and
1995, respectively.
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 technological upgrade of TWE's cable systems. TWE has made
cumulative payments to U S WEST of $70 million under this arrangement and the
remaining installment is scheduled to be paid on September 15, 1998.
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
F-102
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
systems also pay fees to TWE for the right to carry cable television programming
provided by TWE's cable networks. Similarly, TWE's cable television systems pay
fees to Time Warner for the right to carry cable television programming provided
by Time Warner'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 has a credit agreement with TWE that allows it to borrow up to
$400 million from TWE through September 15, 2000. Outstanding borrowings from
TWE in the amount of $400 million bear interest at LIBOR plus 1% per annum.
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, Comedy Partners, L.P., Six Flags
and other equity investees of Time Warner and the Entertainment Group, generally
with respect to sales of products and services in the ordinary course of
business.
15. ADDITIONAL FINANCIAL INFORMATION
CASH FLOWS
TWE established an asset securitization facility on December 31, 1997,
which effectively provides for the accelerated receipt of up to $600 million of
cash through the year 2000 on available licensing contracts. Assets securitized
under this facility consist of cash contracts for the licensing of theatrical
and television product for broadcast network and syndicated television
exhibition, under which revenues have not been recognized because such product
is not available for telecast until a later date ('Backlog Contracts'). In
connection with this securitization facility, TWE sells, on a revolving and
nonrecourse basis, certain of its Backlog Contracts ('Pooled Backlog Contracts')
to a wholly owned, special purpose entity which, in turn, sells a percentage
ownership interest in the Pooled Backlog Contracts to a third-party, commercial
paper conduit sponsored by a financial institution.
Because the Backlog Contracts securitized under this facility consist of
cash contracts for the licensing of theatrical and television product that have
already been produced, the recognition of revenue for such completed product is
only dependent upon the commencement of the availability period for telecast
under the terms of the licensing agreements. Accordingly, the proceeds received
under the program are classified as deferred revenues in long-term liabilities
in the accompanying consolidated balance sheet. Net proceeds of approximately
$300 million were received under this securitization program in 1997.
F-103
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Cash payments made for interest....................................................... $493 $513 $571
Cash payments made for income taxes, net.............................................. 95 74 75
Noncash capital contributions (distributions), net.................................... 399 (1) 50
</TABLE>
Noncash investing activities in 1995 included the formation of TWE-A/N in
April 1995 (Note 2) and the reacquisition of the Time Warner Service Partnership
Assets in September 1995 (Note 8).
OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses............................................................................. $1,159 $1,200
Accrued compensation......................................................................... 253 247
Deferred revenues............................................................................ 255 293
------ ------
Total........................................................................................ $1,667 $1,740
------ ------
------ ------
</TABLE>
F-104
<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, 1997 and 1996, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, 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 10, 1998
F-105
<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, 1997 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 TWE-A/N 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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues................................................... $11,318 $10,852 $ 9,517 $ 8,460 $ 7,946
Depreciation and amortization.............................. (1,370) (1,235) (1,039) (943) (902)
Business segment operating income(1)....................... 1,444 1,078 960 848 883
Interest and other, net(2)................................. (345) (522) (580) (587) (551)
Income before extraordinary item........................... 637 210 97 161 208
Net income(3).............................................. 614 210 73 161 198
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash and equivalents....................................... $ 322 $ 216 $ 209 $ 1,071 $ 1,338
Total assets............................................... 20,731 19,973 18,905 18,662 17,963
Debt due within one year................................... 8 7 47 32 24
Long-term debt............................................. 5,990 5,676 6,137 7,160 7,125
Preferred stock of subsidiary.............................. 233 -- -- -- --
Time Warner General Partners' Senior Capital............... 1,118 1,543 1,426 1,663 1,536
Partners' capital.......................................... 6,333 6,574 6,478 6,233 6,000
</TABLE>
- ------------
(1) Includes net gains of approximately $200 million recognized in 1997 related
to the sale or exchange of certain cable television systems.
(2) Includes a gain of approximately $250 million in 1997 related to the sale of
an interest in E! Entertainment Television, Inc.
(3) Net income for each of the years ended December 31, 1997, 1995 and 1993
includes an extraordinary loss on the retirement of debt of $23 million, $24
million and $10 million, respectively.
F-106
<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>
1997
1st(1)............................................................................ $ 2,600 $ 329 $320
2nd............................................................................... 2,728 320 82
3rd............................................................................... 2,855 335 81
4th(2)(3)......................................................................... 3,135 460 131
Year.............................................................................. 11,318 1,444 614
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
</TABLE>
- ------------
(1) Net income in the first quarter of 1997 includes a gain of approximately
$250 million related to the sale of an interest in E! Entertainment
Television, Inc.
(2) Operating income for 1997 includes net gains of approximately $200 million
for the year relating to the sale or exchange of certain cable television
systems, of which approximately $160 million was recorded in the fourth
quarter of 1997.
(3) Net income for the fourth quarter of 1997 includes an extraordinary loss on
the retirement of debt of $23 million.
F-107
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------------------------------------- ---------- ---------- ---------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
1997:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............................. $195 $113 $ (90)(a) $ 218
Reserves for sales returns and allowances................... 178 289 (261)(b) 206
---------- ---------- ---------- ---------
Total.................................................. $373 $402 $ (351) $ 424
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
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
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
- ------------
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
F-108
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
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 Registration Statement on Form S-4 filed with the Commission on
October 11, 1996 (Registration No. 333-11471) (the "S-8 Registration Statement"))....... *
3.(i)(b) Certificate of Increase of the Number of Shares of Series Common Stock of the Registrant
Designated as Series LMCN-V Common Stock as filed with the Secretary of State of the
State of Delaware on August 13, 1997 (which is incorporated herein by reference to
Exhibit 3.(i)(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997)..................................................................... *
3.(i)(c) Certificate of Amendment of Restated Certificate of Incorporation of the Registrant as
filed with the Secretary of State of the State of Delaware on May 19, 1997 (which is
incorporated herein by reference to Exhibit 3.(i)(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 (the "June 1997 Form 10-Q")).... *
3.(i)(d) 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)(e) 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)(f) 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)(g) 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)(h) 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)(i) 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)(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 E Convertible Preferred
Stock of the Registrant as filed with the Secretary of State of the State of Delaware on
November 13, 1996 (which is incorporated herein by reference to Exhibit 3.i(h) to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996
Form 10-K"))............................................................................ *
</TABLE>
1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
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 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)..... *
3.(i)(l) 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 (which is incorporated herein by reference to Exhibit 3.(i)(j) to the
Registrant's 1996 Form 10-K)............................................................ *
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 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)(n) 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)(o) 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)(p) 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)(q) 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 May 22, 1997 (which are incorporated herein by reference
to Exhibit 3.(ii) to the Registrant's June 1997 Form 10-Q).............................. *
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"), Time
Warner Companies, Inc. ("TWCI"), certain of TWCI's subsidiaries that are parties thereto
and The Bank of New York ("BONY"), 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 BONY, 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"))................................................................ *
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
4.4 Third Supplemental Indenture, dated as of October 12, 1993, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and BONY, 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 BONY, 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"))....................................... *
4.6 Fifth Supplemental Indenture, dated as of December 28, 1994, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and BONY, 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)................................................................ *
4.7 Sixth Supplemental Indenture, dated as of September 29, 1997, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and BONY, as Trustee.......................
4.8 Seventh Supplemental Indenture, dated as of December 29, 1997, among TWE, TWCI, certain of
TWCI's subsidiaries that are parties thereto and BONY, as Trustee.......................
4.9 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 (File No. 1-8637)).................................................... *
4.10 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)................................ *
4.11 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).......... *
4.12 Third Supplemental Indenture dated as of December 31, 1996 among the Registrant, TWCI and
Chase Manhattan, as Trustee (which is incorporated herein by reference to Exhibit 4.10
to the Registrant's 1996 Form 10-K)..................................................... *
4.13 Fourth Supplemental Indenture dated as of December 17, 1997 among the Registrant, TWCI,
Turner Broadcasting System, Inc. ("TBS") and Chase Manhattan, as Trustee (which is
incorporated herein by reference to Exhibit 4.4 to the Registrant's, TWCI's and TBS's
Registration Statement on Form S-4 (Registration Nos. 333-45703, 333-45703-02 and
333-45703-01) filed with the Commission on February 5, 1998 (the "1998 Form S-4"))...... *
4.14 Fifth Supplemental Indenture dated as of January 12, 1998 among the Registrant, TWCI, TBS
and Chase Manhattan, as Trustee (which is incorporated herein by reference to Exhibit
4.5 to the Registrant's, TWCI's and TBS's 1998 Form S-4)................................ *
4.15 Sixth Supplemental Indenture dated as of March 17, 1998 among the Registrant, TWCI, TBS
and Chase Manhattan, as Trustee.........................................................
4.16 Trust Agreement effective as of April 1, 1998 among the Registrant, as Grantor, and U.S.
Trust Company of California, N.A., as Trustee...........................................
10.1 Time Warner 1986 Stock Option Plan, as amended through March 20, 1997.....................
10.2 1988 Stock Incentive Plan of Time Warner Inc., as amended through March 20, 1997..........
10.3 Time Warner 1989 Stock Incentive Plan, as amended through March 20, 1997..................
10.4 Time Warner 1994 Stock Option Plan, as amended through March 20, 1997.....................
10.5 Time Warner Corporate Group Stock Incentive Plan, as amended through March 20, 1997.......
10.6 Time Warner 1997 Stock Option Plan (which is incorporated herein by reference to Annex A
to the Registrant's definitive Proxy Statement dated March 28, 1997 used in connection
with the Registrant's 1997 Annual Meeting of Stockholders).............................. *
10.7 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 of TWCI's
Annual Report on Form 10-K for the year ended December 31, 1993 ("TWCI's 1993 Form
10-K"))................................................................................. *
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
10.8 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)..................... *
10.9 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)................................................................................... *
10.10 Time Warner Retirement Plan for Outside Directors, as amended through May 16, 1996 (which
is incorporated herein by reference to Exhibit 10.9 to the Registrant's 1996 Form
10-K)................................................................................... *
10.11 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)...... *
10.12 Amended and Restated Employment Agreement effective as of January 1, 1998, between the
Registrant and Gerald M. Levin..........................................................
10.13 Amended and Restated Employment Agreement effective as of January 1, 1998, between the
Registrant and R.E. Turner ("Turner")...................................................
10.14 Amended and Restated Employment Agreement effective as of January 1, 1998, between the
Registrant and Richard D. Parsons.......................................................
10.15 Amended and Restated Employment Agreement effective as of January 1, 1998 between the
Registrant and Peter R. Haje............................................................
10.16 Amended and Restated Employment Agreement effective as of January 1, 1998, between the
Registrant and Richard J. Bressler......................................................
10.17 Amended and Restated Employment Agreement effective as of January 1, 1998, between the
Registrant and Timothy A. Boggs.........................................................
10.18 Amended and Restated Employment Agreement effective as of January 1, 1998, between the
Registrant and John A. LaBarca..........................................................
10.19 Amended and Restated Employment Agreement effective as of January 1, 1998, between the
Registrant and Philip R. Lochner, Jr. ..................................................
10.20 Second Amended and Restated LMC Agreement dated as of September 22, 1995 among TWCI,
Liberty Media Corporation ("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 TWCI's Current Report on Form 8-K dated
September 6, 1996 ("TWCI's September 1996 Form 8-K"))................................... *
10.21 Agreement Containing Consent Order dated August 14, 1996 among TWCI, TBS, Tele-
Communications, Inc., 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") (which is incorporated herein by reference to
Exhibit 10.22 to the Registrant's 1996 Form 10-K)....................................... *
10.23 Investors Agreement (No. 1) dated as of October 10, 1996 among the Registrant, Turner,
Turner Outdoor and Turner Partners (which is incorporated herein by reference to Exhibit
10.23 to the Registrant's 1996 Form 10-K)............................................... *
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") (which is incorporated herein by reference to Exhibit
10.24 to the Registrant's 1996 Form 10-K)............................................... *
10.25 Registration Rights Agreement dated as of October 10, 1996 among the Registrant, Turner,
Turner Outdoor, Turner Foundation, Turner Trust and Turner Partners (which is
incorporated herein by reference to Exhibit 10.25 to the Registrant's 1996 Form 10-K)... *
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
10.26 Credit Agreement dated as of November 10, 1997 among the Registrant, TWCI, TWE, TBS, Time
Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N Partnership"), and TWI Cable
Inc., as Credit Parties, Chase Manhattan, as Administrative Agent, Bank of America
National Trust and Savings Association, BONY and Morgan Guaranty Trust Company of New
York, as Documentation and Syndication Agents and Chase Securities Inc., as Arranger....
10.27 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") ("TWE Partnership Agreement, as amended") (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).... *
10.28 Admission Agreement, dated as of May 16, 1993, between TWE and US WEST, Inc. ("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)............................................................ *
10.29 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)................................................................................... *
10.30 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"))....... *
10.31 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)..................... *
10.32 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)............... *
10.33 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-AN 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")).............................. *
10.34 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).................................................................................... *
10.35 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)................................................. *
10.36 Amended and Restated Transaction Agreement, dated as of October 27, 1997 among Advance
Publications, Advance/Newhouse, TWE, TW Holding Co. and TWE-AN Partnership (which is
incorporated herein by reference to Exhibit 99(c) to the Registrant's Current Report on
Form 8-K dated October 27, 1997)........................................................ *
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 unaudited financial statements of TBS for the quarterly period ended September 30,
1996 (which is incorporated herein by reference to the Quarterly Report on Form 10-Q of
TBS for the nine months ended September 30, 1996)....................................... *
99.2 The 1995 financial statements and report of independent accountants thereon of TBS (which
is incorporated herein by reference to the Annual Report on Form 10-K of TBS for the
year ended December 31, 1995)........................................................... *
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ------------------------------------------------------------------------------------------ ----------
<S> <C> <C>
99.3 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")).................................................................................. *
99.4 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 Savings Plan for the period ended December
31, 1997 (to be filed by amendment).....................................................
99.6 Annual Report on Form 11-K of the Time Warner Thrift Plan for the year ended December 31,
1997 (to be filed by amendment).........................................................
99.7 Annual Report on Form 11-K of the TWC Savings Plan for the year ended December 31, 1997
(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.
6
<PAGE>
<PAGE>
- ------------------------------------------------------------
TIME WARNER INC.,
TIME WARNER ENTERTAINMENT COMPANY, L.P.
AND THE TW PARTNERS SIGNATORY HERETO
TO
THE BANK OF NEW YORK,
TRUSTEE
----------------------------------------------------
SIXTH SUPPLEMENTAL INDENTURE
DATED AS OF SEPTEMBER 29, 1997
----------------------------------------------------
<PAGE>
<PAGE>
SIXTH SUPPLEMENTAL INDENTURE dated as of September 29, 1997 among
TIME WARNER INC., a corporation duly organized and existing under the laws of
the State of Delaware ("Time Warner"), TIME WARNER ENTERTAINMENT COMPANY, L.P.,
a Delaware limited partnership ("TWE"), each of the other Persons signatories
hereto (the "TW Partners") and THE BANK OF NEW YORK, a banking corporation duly
organized and existing under the laws of New York, Trustee (the "Trustee").
RECITALS
Time Warner, TWE, the TW Partners and the Trustee have executed
and delivered an Indenture dated as of April 30, 1992, as amended by a First
Supplemental Indenture dated as of June 30, 1992, a Second Supplemental
Indenture dated as of December 9, 1992, a Third Supplemental Indenture dated as
of October 12, 1993, a Fourth Supplemental Indenture dated as of March 29, 1994,
and a Fifth Supplemental Indenture dated as of December 28, 1994 (the
"Indenture"), providing for, among other things, (i) the issuance from time to
time of unsecured debentures, notes or other evidences of indebtedness (the
"Securities"), to be issued in one or more series as provided in the Indenture
and (ii) the guaranties of the Securities by the TW Partners (the "TW Partner
Guaranties").
Time Warner, TWE and each of the TW Partners have duly authorized
the execution and delivery of this Sixth Supplemental Indenture to provide for
the assumption of the obligations of Time Warner Operations Inc. ("TWOI") under
its TW Partner Guaranty by Warner Communications Inc. ("WCI") upon consummation
of the merger of TWOI with and into WCI.
This Sixth Supplemental Indenture is being executed pursuant to
and in accordance with Section 901 of the Indenture.
All things necessary to make this Sixth Supplemental Indenture a
valid and binding agreement of Time Warner, TWE and the TW Partners have been
done.
NOW, THEREFORE, WITNESSETH:
For and in consideration of the premises and other good and
valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, it is mutually agreed, for the equal and proportionate benefit of
all Holders of the Securities, as follows:
ARTICLE ONE
INCORPORATION OF PREVIOUS DOCUMENTS
SECTION 101. INCORPORATION OF PREVIOUS DOCUMENTS.
This Sixth Supplemental Indenture is a supplemental indenture
within the meaning of the Indenture and shall be read together and shall have
the same effect as though all the provisions thereof and hereof were contained
in one instrument. Unless otherwise expressly provided, the provisions of the
Indenture are incorporated herein by reference.
SECTION 102. DEFINITIONS.
Unless otherwise provided herein, the terms used herein shall
have the meanings ascribed to such terms in the Indenture.
<PAGE>
<PAGE>
2
SECTION 103. GOVERNING LAW.
This Sixth Supplemental Indenture, the Indenture and the
Securities shall be governed by and construed in accordance with the laws of the
State of New York.
ARTICLE TWO
AMENDMENTS TO EXHIBIT A TO THE FIRST SUPPLEMENTAL INDENTURE
Upon consummation of the merger of TWOI with and into WCI, WCI
shall assume all of TWOI's obligations under its TW Partner Guaranty. After
giving effect to the foregoing, Exhibit A to the First Supplemental Indenture
shall be amended and restated in its entirety as set forth on Exhibit A hereto.
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth
Supplemental Indenture to be duly executed by their respective officers or
agents, and their respective seals to be hereunto affixed and attested, all as
of the day and year first above written.
[Corporate Seal] TIME WARNER INC.
Attest:
/s/ Susan A. Waxenberg By: /s/ Thomas W. McEnerney
- --------------------------------- ----------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
[Seal] TIME WARNER ENTERTAINMENT
Attest: COMPANY, L.P.
/s/ Susan A. Waxenberg By: /s/ Thomas W. McEnerney
- -------------------------------- ----------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
<PAGE>
<PAGE>
3
TW Partners
[Corporate Seal] -----------
Attest: American Television and Communications
Corporation
Warner Cable Communications Inc.
Warner Communications Inc.
Time Warner Operations Inc.
/s/ Susan A. Waxenberg By: /s/ Thomas W. McEnerney
- -------------------------------- ----------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
[Corporate Seal] THE BANK OF NEW YORK, Trustee
Attest:
By:
- -------------------------------- ----------------------------------
Assistant Secretary Name:
Title:
<PAGE>
<PAGE>
3
TW Partners
[Corporate Seal] -----------
Attest: American Television and Communications
Corporation
Warner Cable Communications Inc.
Warner Communications Inc.
Time Warner Operations Inc.
By:
- ----------------------------------- -------------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
[Corporate Seal] THE BANK OF NEW YORK, Trustee
Attest:
/s/ Timothy Shea By: /s/ Remo J. Reale
- ----------------------------------- -----------------------------------
Assistant Treasurer Name: Remo J. Reale
Title: Assistant Vice President
<PAGE>
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 27th day of September, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of TIME WARNER INC., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
/s/ Elisa N. Sheridan
_________________________________________
ELISA N. SHERIDAN
Notary Public, State of New York
No. 31-4850509
Qualified in New York County
Commission Expires Feb. 17, 1998
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 29th day of September, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of TIME WARNER ENTERTAINMENT COMPANY, L.P., the
Delaware limited partnership described in and which executed the foregoing
instrument; that he knows the seal of said limited partnership; that the seal
affixed to said instrument is such seal; that it was so affixed by authority of
the Board of Representatives or the Managing General Partners of said limited
partnership, and that he signed his name thereto by like authority.
/s/ Elisa N. Sheridan
_________________________________________
ELISA N. SHERIDAN
Notary Public, State of New York
No. 31-4850509
Qualified in New York County
Commission Expires Feb. 17, 1998
<PAGE>
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 29th day of September, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of American Television and Communications
Corporation, Warner Cable Communications Inc., Warner Communications Inc. and
Time Warner Operations Inc., some of the entities described in and which
executed the foregoing instrument; that he knows the seal of said entities; that
the seals affixed to said instrument are such entities' seals; that they were so
affixed by authority of the appropriate Board of Directors or similar governing
body of said entities; and that he signed his name thereto by like authority.
/s/ Elisa N. Sheridan
_________________________________________
ELISA N. SHERIDAN
Notary Public, State of New York
No. 31-4850509
Qualified in New York County
Commission Expires Feb. 17, 1998
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ day of September, 1997, before me personally came
________________, to me known, who, being by me duly sworn, did depose and say
that he is the ____________ of THE BANK OF NEW YORK, one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
_________________________________________
<PAGE>
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ day of September, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of American Television and Communications
Corporation, Warner Cable Communications Inc., Warner Communications Inc. and
Time Warner Operations Inc., some of the entities described in and which
executed the foregoing instrument; that he knows the seal of said entities; that
the seals affixed to said instrument are such entities' seals; that they were so
affixed by authority of the appropriate Board of Directors or similar governing
body of said entities; and that he signed his name thereto by like authority.
_________________________________________
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 29th day of September, 1997, before me personally came
Remo J. Reale, to me known, who, being by me duly sworn, did depose and say that
he is the A.V.P. of THE BANK OF NEW YORK, one of the corporations described in
and which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
/s/ William J. Cassels
_________________________________________
WILLIAM J. CASSELS
Notary Public, State of New York
No. 01CA5027729
Qualified in Bronx County
Certificate Filed in New York County
Commission Expires May 16, 1998
<PAGE>
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
GUARANTEED
GUARANTOR PERCENTAGE
--------- -----------
<S> <C>
American Television and Communications Corporation...................... 40.73%
Warner Cable Communications Inc......................................... 14.39%
Warner Communications Inc............................................... 44.88%
-------
100.00%
-------
-------
</TABLE>
<PAGE>
<PAGE>
- ------------------------------------------------------------
TIME WARNER INC.,
TIME WARNER ENTERTAINMENT COMPANY, L.P.
AND THE TW PARTNERS SIGNATORY HERETO
TO
THE BANK OF NEW YORK,
TRUSTEE
-----------------------------------------------------
SEVENTH SUPPLEMENTAL INDENTURE
DATED AS OF DECEMBER 29, 1997
----------------------------------------------------
<PAGE>
<PAGE>
SEVENTH SUPPLEMENTAL INDENTURE dated as of December 29, 1997
among TIME WARNER INC., a corporation duly organized and existing under the laws
of the State of Delaware ("Time Warner"), TIME WARNER ENTERTAINMENT COMPANY,
L.P., a Delaware limited partnership ("TWE"), each of the other Persons
signatories hereto (the "TW Partners") and THE BANK OF NEW YORK, a banking
corporation duly organized and existing under the laws of New York, Trustee (the
"Trustee").
RECITALS
Time Warner, TWE, the TW Partners and the Trustee have executed
and delivered an Indenture dated as of April 30, 1992, as amended by a First
Supplemental Indenture dated as of June 30, 1992, a Second Supplemental
Indenture dated as of December 9, 1992, a Third Supplemental Indenture dated as
of October 12, 1993, a Fourth Supplemental Indenture dated as of March 29, 1994,
a Fifth Supplemental Indenture dated as of December 28, 1994, and a Sixth
Supplemental Indenture dated as of September 29, 1997 (the "Indenture"),
providing for, among other things, (i) the issuance from time to time of
unsecured debentures, notes or other evidences of indebtedness (the
"Securities"), to be issued in one or more series as provided in the Indenture
and (ii) the guaranties of the Securities by the TW Partners (the "TW Partner
Guaranties").
Time Warner, TWE and each of the TW Partners have duly authorized
the execution and delivery of this Seventh Supplemental Indenture to provide for
the assumption of the obligations of Warner Cable Communications Inc. ("WCCI")
under its TW Partner Guaranty by Warner Communications Inc. ("WCI") upon
consummation of the merger of WCCI with and into WCI.
This Seventh Supplemental Indenture is being executed pursuant to
and in accordance with Section 901 of the Indenture.
All things necessary to make this Seventh Supplemental Indenture
a valid and binding agreement of Time Warner, TWE and the TW Partners have been
done.
NOW, THEREFORE, WITNESSETH:
For and in consideration of the premises and other good and
valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, it is mutually agreed, for the equal and proportionate benefit of
all Holders of the Securities, as follows:
ARTICLE ONE
INCORPORATION OF PREVIOUS DOCUMENTS
SECTION 101. INCORPORATION OF PREVIOUS DOCUMENTS.
This Seventh Supplemental Indenture is a supplemental indenture
within the meaning of the Indenture and shall be read together and shall have
the same effect as though all the provisions thereof and hereof were contained
in one instrument. Unless otherwise expressly provided, the provisions of the
Indenture are incorporated herein by reference.
SECTION 102. DEFINITIONS.
Unless otherwise provided herein, the terms used herein shall
have the meanings ascribed to such terms in the Indenture.
<PAGE>
<PAGE>
2
SECTION 103. GOVERNING LAW.
This Seventh Supplemental Indenture, the Indenture and the
Securities shall be governed by and construed in accordance with the laws of the
State of New York.
ARTICLE TWO
AMENDMENTS TO EXHIBIT A TO THE FIRST SUPPLEMENTAL INDENTURE
Upon consummation of the merger of WCCI with and into WCI, WCI
shall assume all of WCCI's obligations under its TW Partner Guaranty. After
giving effect to the foregoing, Exhibit A to the First Supplemental Indenture
shall be amended and restated in its entirety as set forth on Exhibit A hereto.
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Seventh
Supplemental Indenture to be duly executed by their respective officers or
agents, and their respective seals to be hereunto affixed and attested, all as
of the day and year first above written.
[Corporate Seal] TIME WARNER INC.
Attest:
/s/ Susan A. Waxenberg By: /s/ Thomas W. McEnerney
- ---------------------------------- ------------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
[Seal] TIME WARNER ENTERTAINMENT
Attest: COMPANY, L.P.
/s/ Susan A. Waxenberg By: /s/ Thomas W. McEnerney
- ---------------------------------- -------------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
<PAGE>
<PAGE>
3
TW Partners
[Corporate Seal] -----------
Attest: American Television and Communications
Corporation
Warner Cable Communications Inc.
Warner Communications Inc.
/s/ Susan A. Waxenberg By: /s/ Thomas W. McEnerney
- ---------------------------------- -------------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
[Corporate Seal] THE BANK OF NEW YORK, Trustee
Attest:
- ---------------------------------- -------------------------------------
Assistant Secretary Name:
Title:
<PAGE>
<PAGE>
3
TW Partners
[Corporate Seal] -----------
Attest: American Television and Communications
Corporation
Warner Cable Communications Inc.
Warner Communications Inc.
By:
- ---------------------------------- -------------------------------------
Assistant Secretary Name: Thomas W. McEnerney
Title: Vice President
[Corporate Seal] THE BANK OF NEW YORK, Trustee
Attest:
/s/ Barbara Kaczman By: /s/ Remo J. Reale
- ---------------------------------- -------------------------------------
Assistant Treasurer Name: Remo J. Reale
Title: Assistant Vice President
<PAGE>
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 24th day of December, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of TIME WARNER INC., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
/s/ Elisa N. Sheridan
_________________________________________
ELISA N. SHERIDAN
Notary Public, State of New York
No. 31-4850509
Qualified in New York County
Commission Expires Feb. 17, 1998
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 24th day of December, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of TIME WARNER ENTERTAINMENT COMPANY, L.P., the
Delaware limited partnership described in and which executed the foregoing
instrument; that he knows the seal of said limited partnership; that the seal
affixed to said instrument is such seal; that it was so affixed by authority of
the Board of Representatives or the Managing General Partners of said limited
partnership, and that he signed his name thereto by like authority.
/s/ Elisa N. Sheridan
_________________________________________
ELISA N. SHERIDAN
Notary Public, State of New York
No. 31-4850509
Qualified in New York County
Commission Expires Feb. 17, 1998
<PAGE>
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 24th day of December, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of American Television and Communications
Corporation, Warner Cable Communications Inc. and Warner Communications Inc.,
some of the entities described in and which executed the foregoing instrument;
that he knows the seal of said entities; that the seals affixed to said
instrument are such entities' seals; that they were so affixed by authority of
the appropriate Board of Directors or similar governing body of said entities;
and that he signed his name thereto by like authority.
/s/ Elisa N. Sheridan
_________________________________________
ELISA N. SHERIDAN
Notary Public, State of New York
No. 31-4850509
Qualified in New York County
Commission Expires Feb. 17, 1998
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ day of December, 1997, before me personally came
________________, to me known, who, being by me duly sworn, did depose and say
that he is the ____________ of THE BANK OF NEW YORK, one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
_________________________________________
<PAGE>
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ day of December, 1997, before me personally came
Thomas W. McEnerney, to me known, who, being by me duly sworn, did depose and
say that he is a Vice President of American Television and Communications
Corporation, Warner Cable Communications Inc. and Warner Communications Inc.,
some of the entities described in and which executed the foregoing instrument;
that he knows the seal of said entities; that the seals affixed to said
instrument are such entities' seals; that they were so affixed by authority of
the appropriate Board of Directors or similar governing body of said entities;
and that he signed his name thereto by like authority.
_________________________________________
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the ____ day of December, 1997, before me personally came
Remo J. Reale, to me known, who, being by me duly sworn, did depose and say
that he is the A.V.P. of THE BANK OF NEW YORK, one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
/s/ William J. Cassels
_________________________________________
WILLIAM J. CASSELS
Notary Public, State of New York
No. 01CA5027729
Qualified in Bronx County
Certified Filed in New York County
Commission Expires May 16, 1998
<PAGE>
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
GUARANTEED
GUARANTOR PERCENTAGE
--------- ----------
<S> <C>
American Television and Communications Corporation...................... 40.73%
Warner Communications Inc............................................... 59.27%
------
100.00%
------
------
</TABLE>
<PAGE>
<PAGE>
EXECUTION COPY
SIXTH SUPPLEMENTAL INDENTURE (this "Sixth
Supplemental Indenture") dated as of March 17, 1998,
among TIME WARNER COMPANIES, INC., a Delaware
corporation formerly known as Time Warner, Inc. (the
"Company"), TIME WARNER INC., a Delaware corporation
formerly known as TW Inc. ("TWI"), TURNER
BROADCASTING SYSTEM, INC., a Georgia corporation
("TBS"), and THE CHASE MANHATTAN BANK, a New York
banking corporation, as successor trustee (the
"Trustee").
WHEREAS the Company has executed and delivered to the Trustee
an Indenture (the "Original Indenture"), dated as of January 15, 1993, as
amended from time to time, including by way of the First Supplemental Indenture,
dated as of June 15, 1993, between the Company and the Trustee (the "First
Supplemental Indenture"), the Second Supplemental Indenture, dated as of October
10, 1996, among the Company, TWI and the Trustee (the "Second Supplemental
Indenture"), the Third Supplemental Indenture, dated as of December 31, 1996
among the Company, TWI and the Trustee (the "Third Supplemental Indenture"), the
Fourth Supplemental Indenture, dated as of December 17, 1997 among the Company,
TWI, TBS and the Trustee (the "Fourth Supplemental Indenture") and the Fifth
Supplemental Indenture, dated as of January 12, 1998 among the Company, TWI, TBS
and the Trustee (the "Fifth Supplemental Indenture") (the Original Indenture, as
so amended, is herein called the "Indenture"), 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 TWI has, by way of the Second Supplemental Indenture,
unconditionally guaranteed the obligations of the Company under the Indenture
(the "TWI Guarantee") and has, by way of the Third Supplemental Indenture,
extended to the
<PAGE>
<PAGE>
2
Holders of Securities certain rights and privileges in connection with the TWI
Guarantee;
WHEREAS TBS has, by way of the Fourth Supplemental Indenture,
unconditionally guaranteed the obligations of the Company under the Indenture
(the "TBS Guarantee") and has extended to the Holders of Securities certain
rights and privileges in connection with the TBS Guarantee;
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 Company proposes in and by this Sixth Supplemental
Indenture to supplement and amend the Indenture in certain respects as it
applies to Securities issued thereunder and TWI desires to unconditionally and
irrevocably guarantee all monetary obligations of TBS under the TBS Guarantee
(including obligations to the Trustee) and the full and punctual performance
within applicable grace periods of all other obligations of TBS under the TBS
Guarantee and the Securities (the "Additional TWI Guarantee", and together with
the TWI Guarantee, the "TWI Guarantees") and to extend to the Holders of
Securities certain rights and privileges in connection with the Additional TWI
Guarantee; and
WHEREAS the Company, TWI and TBS have requested that the
Trustee execute and deliver this Sixth Supplemental Indenture and all
requirements necessary to make this Sixth Supplemental Indenture a valid
instrument in accordance with its terms and to make the Additional TWI Guarantee
the valid obligation of TWI, and the execution and delivery of this Sixth
Supplemental Indenture has been duly authorized in all respects.
NOW THEREFORE, the Company, TWI, TBS and the Trustee hereby
agree that the following Sections of this
<PAGE>
<PAGE>
3
Sixth 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. The Additional TWI Guarantee. (a) TWI irrevocably
and unconditionally guarantees, to each Holder of Securities (including each
Holder of Securities issued under the Indenture after the date of this Sixth
Supplemental Indenture) and to the Trustee and its successors and assigns, (i)
the full and punctual payment of all monetary obligations of TBS under the TBS
Guarantee (including obligations to the Trustee) and (ii) the full and punctual
performance within applicable grace periods of all other obligations of TBS
under the TBS Guarantee.
(b) TWI further agrees that the Additional TWI Guarantee
constitutes a guarantee of payment, performance and compliance and not merely of
collection.
(c) The obligation of TWI to make any payment hereunder may be
satisfied by causing the Company or TBS to make such payment.
(d) TWI also agrees to pay any and all costs and expenses
(including reasonable attorneys' fees) incurred by the Trustee or any Holder of
Securities in enforcing any of their respective rights under the Additional TWI
Guarantee.
(e) Any term or provision of this Sixth Supplemental Indenture
to the contrary notwithstanding, the maximum aggregate amount of the Additional
TWI Guarantee shall not exceed the maximum amount that can be hereby guaranteed
without rendering this Sixth Supplemental Indenture, as it relates to TWI,
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally.
SECTION 3. Amendment to Defeasance upon Deposit of Funds or
Government Obligations. The sentence following
<PAGE>
<PAGE>
4
clause (5) of Section 403 of Article 4 of the Indenture is hereby supplemented
and amended to read in its entirety as follows:
"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,
TWI shall be deemed to have paid and discharged the entire indebtedness
represented by, and obligations under, the TWI Guarantees 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, TWI 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 4. This Sixth Supplemental Indenture. This Sixth
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.
SECTION 5. GOVERNING LAW. THIS SIXTH SUPPLEMENTAL INDENTURE
SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
SECTION 6. Counterparts. This Sixth 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.
<PAGE>
<PAGE>
5
SECTION 7. Headings. The headings of this Sixth Supplemental
Indenture are for reference only and shall not limit or otherwise affect the
meaning hereof.
SECTION 8. Trustee Not Responsible for Recitals. The recitals
herein contained are made by the Company, TWI and TBS, and not by the Trustee,
and the Trustee assumes no responsibility for the correctness thereof. The
Trustee shall not be responsible in any manner whatsoever for or in respect of
the validity or sufficiency of this Sixth Supplemental Indenture.
SECTION 9. Separability. In case any one or more of the
provisions contained in this Sixth 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 the Sixth Supplemental Indenture or of the Securities, but
this Sixth Supplemental Indenture and the Securities shall be construed as if
such invalid or illegal or unenforceable provision had never been contained
herein or therein.
<PAGE>
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have caused this Sixth
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
TURNER BROADCASTING SYSTEM, 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>
TRUST AGREEMENT
TIME WARNER INC., (the "Company"), a Delaware corporation, and U.S.
TRUST COMPANY OF CALIFORNIA, N.A. (the "Trustee"), a national association, have
entered into this grantor trust agreement (the "Trust Agreement"), effective as
of April 1, 1998.
WITNESSETH:
WHEREAS, the Company from time to time enters into individual employment
agreements containing deferred compensation provisions (collectively, the
"Contracts") with certain senior officers and key personnel (the "Executives");
WHEREAS, the Company has incurred and expects to incur financial
obligations under the terms of the Contracts with respect to the Executives and
their designated beneficiary(ies) or estates (the "Beneficiary(ies)");
WHEREAS, the Company wishes to establish a trust (the "Trust") and to
contribute to the Trust assets to provide itself with a source of funds to
assist it in the meeting of its financial obligations under the Contracts, and
such assets shall be held therein, subject to the claims of the Company's
creditors in the event of the Company becoming Insolvent, as herein defined,
until paid to the Executives or Beneficiaries in such manner and at such times
as specified in the Contracts, or as otherwise provided herein;
WHEREAS, it is the intention of the parties that the Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Contracts as unfunded arrangements maintained for the purpose of providing
deferred compensation for the Executives;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST
(a) The Company hereby establishes this revocable Trust with the
Trustee, to be called the Time Warner Inc. Grantor Trust, which shall
automatically become irrevocable upon a "Change of Control", as defined in
Section 12 hereof, or upon such earlier date as may be determined by the General
Counsel of the Company by providing notice to the Trustee.
(b) The Trust shall consist of an initial contribution of money and
other property made by the Company and acceptable to the Trustee, which shall
become the principal of the Trust to be held, administered and disposed of by
the Trustee as provided in this Trust Agreement.
TWI/UST Trust Agreement
<PAGE>
<PAGE>
(c) The Trust is intended to be a grantor trust, of which the Company is
the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended (the "Code'), and
shall be construed accordingly.
(d) Subject to Sections 2(b) and 2(d), the principal of the Trust, and
any earnings thereon (the "Trust Fund") shall be held separate and apart from
the Company's other funds and shall be used exclusively for the uses and
purposes of the Executives and Beneficiaries and the Company's general creditors
as herein set forth. The Executives and Beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Contracts and this Trust Agreement shall be mere
unsecured contractual rights of the Executives and Beneficiaries against the
Company. Any assets held by the Trust will be subject to the claims of the
Company's general creditors under federal and state law in the event the Company
is "Insolvent", as defined in Section 3(a) hereof. Except as contemplated by
Section 3(b)(3) (relating to the holding of Trust assets for the benefit of the
Company's creditors in the event the Company becomes Insolvent), the assets
allocated to the account maintained in respect of any Executive or Beneficiary
shall not be applied to or used for the benefit of any other Executive or
Beneficiary.
(e) The Company, in its sole discretion, may at any time, or from time
to time, make additional deposits of cash or other property in trust with the
Trustee to augment the principal to be held, administered and disposed of by the
Trustee as provided in this Trust Agreement. Neither the Trustee nor any
Executive or Beneficiary shall have any right or duty under this Trust Agreement
to compel such additional deposits or determine the sufficiency thereof. The
Contracts require the Company to make contributions in specific amounts.
(f) The Company shall at all times ensure that the Contracts and the
Trust shall have characteristics supporting a determination that the Contracts
are unfunded arrangements maintained for the purpose of providing deferred
compensation to a select group of management or highly compensated employees for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended.
SECTION 2. PAYMENTS TO EXECUTIVES AND BENEFICIARIES
(a) Prior to a Change of Control, the entitlement of an Executive or
Beneficiary to deferred compensation under the Contracts shall be determined by
the Company or such party as it shall designate under the Contracts, and any
claim for such deferred compensation shall be determined in accordance with the
provisions of the Contracts. The Trustee or its agent shall not be required to
make any such determination prior to a Change of Control. Also prior to a Change
of Control, the Company shall be responsible for maintaining all records
contemplated under the Contracts and this Trust Agreement, and the Trustee shall
not be responsible in any respect for administering the Contracts. After a
Change of Control, all such entitlements shall be determined solely by the
Trustee or its agent based on the Payment Schedules as described in Section
2(e), and the Trustee or its agent shall be responsible for maintaining all
records contemplated under the Contracts and this Trust Agreement and for
administering those provisions of the Contracts relating
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to deferred compensation.
(b) Prior to a Change of Control, the Company shall make payments of
deferred compensation directly to the Executives or Beneficiaries as they become
due under the terms of the Contracts. The Company shall notify the Trustee of
each amount of deferred compensation due at the time it becomes payable to an
Executive or Beneficiary and the Company shall be entitled to withdraw such
amount from the Trust Fund. After a Change of Control, all payments of deferred
compensation will be made directly to the Executives or Beneficiaries solely by
the Trustee or its agents out of Trust Fund assets.
(c) Prior to a Change of Control, the Company shall make provision for
the reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of the deferred compensation
due under the terms of the Contracts and shall pay amounts withheld to the
appropriate taxing authorities. After a Change of Control, the Trustee shall
make provision for the reporting and withholding of any such taxes that may be
required to be withheld with respect to the payment of such deferred
compensation and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by the Company. The Company shall cooperate with the Trustee in making such
determination.
(d) The Company and the Trustee recognize that all economic activity of
the Trust, including but not limited to security transactions, the receipt of
dividends and other income as well as the payment of expenses, is economic
activity of the Company for tax purposes. Prior to a Change of Control, the
Company shall be entitled to withdraw from the Trust Fund an amount equal to
such tax liability incurred in accordance with the terms of the Contracts. After
a Change of Control, the Company shall be entitled to reimbursement from the
Trust for such tax liability to the extent not previously withdrawn pursuant to
the preceding sentence. Additionally, the Company shall be entitled to
reimbursement from the Trust for any out of pocket expenditures by the Company
which, pursuant to the terms of the Contracts, are obligations of the Trust.
(e) Prior to a Change of Control, the Company shall deliver to the
Trustee a schedule (a "Payment Schedule") for each Executive whose deferred
compensation under a Contract may be paid from the Trust Fund after a Change of
Control. To the extent such information has not already been made available to
the Trustee in the Contracts or relevant excerpts thereof, or such other
documents as may be supplied to the Trustee from time to time, any of which may
constitute such Payment Schedule, the Payment Schedule shall:
(1) specify the value of the Executive's deferred compensation
under the Contract as of the most recent valuation date;
(2) describe the events that must occur in order for the
Executive's deferred compensation to become payable under the
terms of the Contract;
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(3) provide such instructions as will enable the Trustee to
determine the amount of the Executive's deferred compensation as
of the time it becomes payable under the terms of the Contract;
(4) specify the form in which the Executive's deferred
compensation is to be paid, as provided for or available under
the Contract (including, if such form is not a lump sum, the
frequency of such payments);
(5) specify the Term Date (as defined in the Contract) or other
time for commencement of payment of the Executive's deferred
compensation under the Contract; and
(6) specify the name, address and social security number of the
Executive as well as the name, address, social security number
and relation to the Executive of each Beneficiary.
(f) Prior to a Change of Control, the Company may from time to time
substitute a new Payment Schedule by delivering a new or amended Payment
Schedule to the Trustee. Upon receipt of such a new or amended Payment Schedule,
the previous Payment Schedule shall be deemed revoked. Prior to a Change of
Control, any Payment Schedule previously filed with the Trustee may be revoked
by the Company by filing notice of such revocation with the Trustee without
delivering a new or amended Payment Schedule to the Trustee. No Payment Schedule
may be amended or revoked after a Change of Control. Notwithstanding any other
provision herein to the contrary, after a Change of Control, no payment shall be
made from the Trust with respect to an Executive's deferred compensation under
such Executive's Contract unless a Payment Schedule (which has not been revoked)
for such Executive's deferred compensation under such Contract is on file with
the Trustee at the time a Change of Control occurs. Except as otherwise provided
herein, the Trustee shall make payments to Executives and Beneficiaries in
accordance with such Payment Schedule.
(g) Any Executive or Beneficiary seeking to obtain payment from the
Trust Fund after a Change of Control shall deliver to the Trustee a written
request for payment. As soon as practicable after a request for payment has been
received by the Trustee, the Trustee, solely out of the Trust Fund and with no
obligation otherwise to make any payments, shall make payment to such Executive
or Beneficiary in such manner, and at such times, and in such amounts, as the
Trustee shall determine to be payable to such Executive or Beneficiary under the
Contract based on the most recent Payment Schedule applicable to the Executive
or Beneficiary that was furnished to the Trustee by the Company prior to a
Change of Control.
(h) After a Change of Control, any Executive or Beneficiary for whom a
Payment Schedule is on file with the Trustee at the time of such Change of
Control shall be presumed conclusively, for all purposes of this Trust
Agreement, to be entitled to any deferred compensation that the Trustee
determines to be payable to such Executive or Beneficiary on the basis of
information contained in such Payment Schedule and in any written request for
payment signed by
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the Executive or Beneficiary, and the Trustee's determination as to the amount
and the form of payment of the deferred compensation so payable shall be
conclusive and binding on all parties, including Executives and Beneficiaries.
(i) Notwithstanding any other provision in this Trust Agreement to the
contrary, if at any time the Trust is finally determined by the Internal Revenue
Service (the "IRS") not to be a "grantor trust" with the result that the income
of the Trust Fund is not treated as income of the Company pursuant to Sections
671 through 679 of the Code, then the Trust shall immediately terminate. The
Trustee shall immediately distribute the interest of each Executive or
Beneficiary entitled thereto in a lump sum regardless of whether such
Executive's employment has terminated and regardless of the form and time of
payments specified in or pursuant to the Contracts as directed by the Company.
Any remaining assets (less any expenses or costs due under Section 9 hereof)
shall then be paid by the Trustee to the Company in such amounts, and in the
manner instructed by the Company.
(j) The Company's establishment of the Trust and the making of
contributions thereto shall not release the Company from its obligation to pay
the deferred compensation contemplated by the Contracts to the Executives or the
Beneficiaries except to the extent that the Trust has actually paid such
deferred compensation. If for any reason there are inadequate assets held in the
Trust under the terms of the Contract to pay the Executive or the Beneficiary
his or her deferred compensation (for example, if the Trust assets are applied
to the benefit of the Company's general creditors if the Company becomes
Insolvent as provided herein), the inadequacy of the Trust assets shall not
deprive the Executive or the Beneficiary of the right to be paid by the Company
his or her deferred compensation amount.
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO EXECUTIVES AND
BENEFICIARIES WHEN THE COMPANY IS INSOLVENT
(a) The Trustee shall cease payment of deferred compensation to the
Executives and Beneficiaries if the Company is "Insolvent". The Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) the Company
is unable to pay its debts as they become due, or (ii) the Company is subject to
a pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of the Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below.
(1) The board of directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing if
the Company becomes Insolvent. If a person claiming to be a
creditor of the Company notifies the Trustee that the Company has
become Insolvent, the Trustee shall provide the board of
directors and the Chief Executive Officer with a copy of such
writing and absent the Company's
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provision of an independent expert's opinion reasonably
satisfactory to the Trustee that the Company is not Insolvent,
the Trustee shall discontinue payment of deferred compensation to
the Executives or Beneficiaries.
(2) Unless the Trustee has actual knowledge of the Company
becoming Insolvent, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company is
Insolvent, the Trustee shall have no duty to inquire whether the
Company is Insolvent.
(3) If at any time the Trustee has received a notice containing
information or allegations described in Section 3(b)(1) hereof
that the Company is Insolvent, the Trustee shall discontinue
payments of deferred compensation to the Executives or
Beneficiaries and shall hold the assets of the Trust for the
benefit of the Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of the Executives
or Beneficiaries to pursue their rights as general creditors of
the Company with respect to deferred compensation due under the
Contracts or otherwise.
(4) The Trustee shall resume the payment of deferred compensation
to the Executives or Beneficiaries in accordance with Section 2
hereof only after it has been demonstrated to the Trustee's
reasonable satisfaction that the Company is not Insolvent (or is
no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of deferred compensation from the Trust pursuant to
Section 3(b) hereof and subsequently resumes such payments, the first payment
following such discontinuance shall include the aggregate amount of all payments
due to the Executives or Beneficiaries under the terms of the Contracts for the
period of such discontinuance, less the aggregate amount of any payments made to
the Executives or Beneficiaries by the Company in lieu of the payments provided
for hereunder during any such period of discontinuance.
SECTION 4. PAYMENTS TO THE COMPANY
Except as provided in Sections 2 and 3 hereof, after the Trust has
become irrevocable, as provided in Section 1(a) hereof, the Company shall have
no right or power to withdraw any of the assets of the Trust Fund or to direct
the Trustee to return to the Company or to divert to others such assets before
all payments of deferred compensation due to the Executives and Beneficiaries
have been made pursuant to the terms of the Contracts.
SECTION 5. INVESTMENT AUTHORITY
(a) The Trustee shall have, without exclusion, all powers conferred on
the Trustee by applicable law, unless expressly provided otherwise herein, and
all rights associated with assets of
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the Trust shall be exercised by the Trustee, and shall in no event be
exercisable by or rest with the Executives or Beneficiaries. Subject to the
provisions of the Contracts, and except as expressly provided otherwise herein,
the Trustee shall have full power and authority to invest and reinvest the Trust
Fund in any investment permitted by law, exercising the judgment and care that
persons of prudence, discretion and intelligence would exercise under the
circumstances then prevailing considering the probable income and safety of
their capital, including, without limiting the generality of the foregoing, the
power:
(1) To invest and reinvest the Trust Fund, together with the
income therefrom, in common stock, preferred stock, mutual funds,
bonds, mortgages, notes, time certificates of deposit, commercial
paper and other evidences of indebtedness (including those issued
by the Trustee or any of its affiliates), other securities,
options to buy or sell securities or other assets, and other
property of any kind (personal, real or mixed, and tangible or
intangible);
(2) To deposit or invest all or any part of the assets of the
Trust Fund in savings accounts or certificates of deposit or
other deposits which bear a reasonable interest rate in a bank,
including the commercial department of the Trustee, if such bank
is supervised by the United States or any state;
(3) To hold, manage, improve and control all property, real or
personal, forming part of the Trust Fund and to sell, convey,
transfer, exchange, partition, lease for any term, even extending
beyond the duration of the Trust, and otherwise dispose of the
same from time to time in such manner, for such consideration and
upon such terms and conditions as the Trustee shall determine;
(4) To have, respecting securities, all the rights, powers and
privileges of an owner, including the power to give proxies, pay
assessments and other sums deemed by the Trustee to be necessary
for the protection of the Trust Fund; to participate in voting
trusts, pooling agreements, foreclosures, reorganizations,
consolidations, mergers and liquidations and, in connection
therewith, to deposit securities with and transfer title to any
protective or other committee under such terms as the Trustee may
deem advisable; to exercise or sell stock subscriptions or
conversion rights; and regardless of any limitation elsewhere in
this document relative to investment by the Trustee, to accept
and retain as an investment any securities or other property
received through the exercise of any of the foregoing powers;
(5) To hold in cash, without liability for interest, such portion
of the Trust Fund which, in its discretion, shall be reasonable
under the circumstances, pending investments or payments of
expenses, or the distribution of deferred compensation;
(6) To take such actions as may be necessary or desirable to
protect the Trust Fund from loss due to the default on mortgages
held in the Trust including the
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appointment of agents or trustees in such other jurisdictions as
may seem desirable, to transfer property to such agents or
trustees, to grant such powers as are necessary or desirable to
protect the Trust or its assets, to direct such agents or
trustees, or to delegate such power to direct and to remove such
agents or trustees;
(7) To employ such agents, including investment advisors,
custodians, sub-custodians and counsel as may be reasonably
necessary and to pay them reasonable compensation; to settle,
compromise or abandon all claims and demands in favor of or
against the Trust Fund assets;
(8) To cause title to property of the Trust to be issued, held or
registered in the individual name of the Trustee or in the name
of its nominee(s) or agents, or in such form that title will pass
by delivery;
(9) To exercise all of the further rights, powers, options and
privileges granted, provided for or vested in trustees generally
under the laws of the State of New York, so that powers conferred
upon the Trustee herein shall not be in limitation of any
authority conferred by law, but shall be in addition thereto;
(10) To borrow money from any source (including the Trustee) and
to execute promissory notes, mortgages, or other obligations and
to pledge or mortgage any Trust assets as security;
(11) To institute, compromise and defend actions and proceedings;
to pay or contest any claim; to settle a claim by or against the
Trustee by compromise, arbitration, or otherwise to release, in
whole or in part, any claim belonging to the Trust to the extent
that the claim is uncollectible;
(12) To use securities, depositories or custodians and to allow
such securities as may be held by a depository or custodian to be
registered in the name of such depository or its nominee or in
the name of such custodian or its nominee;
(13) To invest the Trust Fund from time to time in one or more
investment funds, which funds shall be registered under the
Investment Company Act of 1940; and
(14) To do all other acts necessary or desirable for the proper
administration of the Trust Fund, as if the Trustee were the
absolute owner thereof. However, nothing in this section shall be
construed to mean the Trustee assumes any responsibility for the
performance of any investment made by the Trustee in its capacity
as trustee under this Trust Agreement. Notwithstanding any powers
granted to the Trustee pursuant to this Trust Agreement or to
applicable law, the Trustee shall not have any power that could
give the Trust the objective of carrying on a business and
dividing the
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gains therefrom within the meaning of Section 301.7701-2 of the
Procedure and Administrative Regulations promulgated pursuant to
the Code.
(b) Notwithstanding any other provision in this Trust Agreement to the
contrary:
(1) Prior to a Change of Control, the Company may in its sole
discretion appoint one or more investment advisors to manage the
investment of any part or all of the Trust Fund. The Company
shall notify the Trustee of any such appointment by delivering to
the Trustee an executed copy of the instrument making such
appointment. Any such instrument shall require that the
investment advisor provide its directions to the Trustee or
directly to the Trustee's agent or custodian, provided the
Trustee receives copies of any instructions, confirmations, and
notifications given to the custodian or agent; and permit the
Trustee, after a Change of Control, to terminate the investment
advisor pursuant to, and in accordance with, the terms of this
Trust Agreement. During the term of the investment advisor's
appointment, the investment advisor shall have the sole
responsibility for the investment and reinvestment of that
portion of the Trust Fund subject to its investment management.
The Trustee shall have no responsibility for, or liability with
respect to, the selection of the investment advisor by the
Company, the investment of such portion of the Trust Fund, or the
acts or omissions of such investment advisor.
(2) In exercising the powers granted to it hereunder, the
Trustee, or its agent or custodian, shall follow the direction of
any investment advisor with respect to the portion of the Trust
Fund subject to the management by such investment advisor. The
investment advisor may provide its directions in writing, signed
by an officer of the investment advisor, or transmit its
directions to the Trustee or directly to the Trustee's agent or
custodian by such other means of communication as the investment
advisor, with the consent of the Trustee, may deem appropriate or
necessary. The Trustee shall be under no duty to question, or
make inquiries as to, any action or direction of any investment
advisor taken as provided herein, or any failure to give
directions, or to review the securities held pursuant to any
investment advisor's direction, or to make suggestions to the
investment advisor or the Company with respect to the investment,
reinvestment, or disposition of any assets subject to management
by the investment advisor.
(3) After a Change of Control, the Trustee shall have the
exclusive authority to retain or to terminate any and all
investment advisors, and appoint successor investment advisors
(including any affiliate of the Trustee), to manage the Trust
Fund assets in accordance with the terms of the Contracts,
provided that any such appointments shall be subject to the
approval of the Executives as provided in the Contracts.
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(4) All rights associated with Trust Fund assets shall be
exercised by the Trustee, a person designated by the Trustee, or
the investment advisor, and shall in no event be exercisable by
or rest with the Executives or Beneficiaries, except that prior
to a Change of Control voting rights with respect to the Trust
Fund assets shall be exercised by the Company or its agent.
(c) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or applicable law, to the extent that the Trustee directly
exercises investment authority, the Trustee shall not invest Trust Fund assets
in securities (including stock or rights to acquire stock) or obligations issued
by the Company or any of its subsidiaries or affiliates, other than a de minimis
amount held in common investment vehicles in which the Trustee invests.
SECTION 6. DISPOSITION OF INCOME
During the term of the Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
SECTION 7. ACCOUNTING BY TRUSTEE
The Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between the
Company and the Trustee. After a Change of Control, the Trustee shall cause the
Company to continue to receive copies of all trade confirmations, purchase and
subscription agreements, statements, reports, analyses, summaries and related
documents pertaining to the holding, investing and reinvesting of the securities
and other property held in the Trust Fund at substantially the same time as
copies of the same are first received by the Trustee or an investment advisor
(but in no event later than five business days thereafter). Within 120 days
following the close of each calendar year and within 120 days after the removal
or resignation of the Trustee, the Trustee shall deliver to the Company a
written account of its administration of the Trust during such year or during
the period from the close of the last preceding year to the date of such removal
or resignation, setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such purchases
or sales (accrued interest paid or receivable being shown separately), and
showing all cash, securities and other property held in the Trust at the end of
such year or as of the date of such removal or resignation, as the case may be.
SECTION 8. RESPONSIBILITY OF TRUSTEE
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a
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direction, request or approval given by any officer of the Company which is
contemplated by, and in conformity with, the terms of the Contracts or the Trust
(as these are in effect immediately prior to a Change of Control) and is given
in writing by any officer of the Company. In the event of a dispute between the
Company and a party, the Trustee may apply to a court of competent jurisdiction
to resolve the dispute.
(b) If the Trustee undertakes or defends any administrative, adversarial
or other litigation or proceeding arising in connection with the Trust, the
Company shall indemnify the Trustee against the Trustee's costs, expenses and
liabilities (including without limitation, attorney's fees and expenses)
relating thereto and to be primarily liable for such payments. If the Company
does not pay such costs, expenses and liabilities in a reasonably timely manner,
the Trustee may obtain payment from the Trust without notice to any party.
(c) The Trustee may consult with legal counsel (who may also, but need
not, be counsel for the Company) generally with respect to any of its duties or
obligations hereunder at the Company's expense which, should it remain unpaid,
may be paid from the Trust without notice to any party. The Trustee shall incur
no liability to any person for acting or refraining from acting in accordance
with the advice of such counsel.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder at the Company's expense
which, should it remain unpaid, may be paid from the Trust without notice to any
party. The Trustee shall incur no liability to any person for acting or
refraining from acting in accordance with the advice of such agents,
accountants, actuaries, investment advisors, financial consultants or other
professionals.
(e) The Trustee shall have, without exclusion, all powers conferred on
trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
the Trustee shall have no power to name a beneficiary of the policy other than
the Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(f) The Company shall indemnify and hold the Trustee harmless from and
against all loss or liability (including expenses and reasonable attorneys'
fees), to which it may be subject by reason of its execution of its duties under
the Trust, or by reason of any acts taken in good faith in accordance with any
directions, or acts omitted in good faith due to absence of directions, from the
Company, an Executive or Beneficiary or an investment advisor (other than an
investment advisor appointed by, or an affiliate of, the Trustee) unless, and
only to the extent, such loss or liability is due to the Trustee's negligence or
misconduct.
(g) In the event that the Trustee is named as a defendant in a lawsuit
or proceeding involving the Contracts or the Trust Fund, the Trustee shall be
entitled to receive payments on a
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current basis pursuant to the indemnity provisions provided for in this section,
provided however, that if the final judgment entered in the lawsuit or
proceeding holds that Trustee is guilty of negligence or misconduct with respect
to the Trust Fund, the Trustee shall be required to refund the indemnity
payments that it has received.
(h) All releases and indemnities provided in this Trust Agreement shall
survive the termination of this Trust Agreement.
SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE
(a) The Trustee is authorized to incur reasonable obligations in
connection with the administration of the Trust including attorney's fees,
administrative fees and appraisal fees. Such obligations shall be paid by the
Company. The Trustee is authorized to pay such amounts from the Trust Fund if
the Company fails to pay them within 60 days of presentation of a statement of
the amounts due.
(b) The Trustee shall be entitled to reasonable compensation for its
services, including extraordinary services, as agreed upon between the Trustee
and the Company and as set forth in Schedule A attached hereto and made a part
hereof, and such other fees as may be negotiated between the parties. If the
Trustee and the Company fail to agree upon a compensation agreement, the Trustee
shall be entitled to compensation at a rate equal to the rate charged by the
Trustee for similar services rendered by it during the current fiscal year for
other trusts similar to this Trust. The Trustee shall be entitled to
reimbursement for expenses incurred by it in the performance of its duties as
the Trustee including reasonable fees for legal counsel. The Trustee's
compensation and expenses shall be paid by the Company. The Trustee is
authorized to withdraw such amounts from the Trust Fund if the Company fails to
pay them within 60 days of presentation of a statement of the amounts due.
SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE
(a) The Trustee may resign at any time by notice to the Company, which
shall be effective 90 days after receipt of such notice unless the Company and
the Trustee agree otherwise.
(b) Prior to a Change of Control, the Trustee may be removed by the
Company on 30 days notice or upon shorter notice accepted by the Trustee.
(c) Upon resignation or removal of the Trustee and appointment of a
successor trustee, all assets shall subsequently be transferred to the successor
trustee. The transfer shall be completed within 30 days after receipt of notice
of resignation, removal or transfer, unless the Company extends the time limit.
(d) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraph (a) or (b) of
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this section. In the event of a Change of Control, or if no such appointment has
been made, the Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of the Trustee in
connection with the proceeding shall be paid by the Company, and if not, from
the Trust as administrative expenses of the Trust.
SECTION 11. APPOINTMENT OF SUCCESSOR
(a) If the Trustee resigns (or is removed) in accordance with Section
10(a) or (b) hereof prior to a Change of Control, the Company shall appoint any
third party, such as a bank trust department or other party that may be granted
corporate trustee powers under federal or state law, as a successor to replace
the Trustee. The appointment shall be effective when accepted in writing by the
new trustee, who shall have all of the rights and powers of the Trustee,
including ownership rights in the Trust Fund assets upon transfer of same to the
new trustee. The Trustee shall execute any instrument necessary or reasonably
requested by the Company or the successor trustee to evidence the transfer.
(b) If the Trustee resigns in accordance with Section 10(a) hereof after
a Change of Control, the Trustee shall appoint any third party such as a bank
trust department or other party that may be granted corporate trustee powers
under federal or state law as a successor to replace the Trustee. The
appointment of a successor trustee shall be effective when accepted in writing
by the new trustee. The new trustee shall have all the rights and powers of the
Trustee, including ownership rights in Trust Fund assets upon transfer of same
to the new trustee. The Trustee shall execute any instrument necessary or
reasonably requested by the successor trustee to evidence the transfer.
(c) The successor trustee need not examine the records and acts of the
Trustee and may retain or dispose of existing Trust Fund assets, subject to the
provisions of this Trust Agreement. The successor trustee shall not be
responsible for, and the Company shall indemnify and defend the successor
trustee from, any claim or liability resulting from any action or inaction of
the Trustee or from any other past event, or any condition existing at the time
it becomes successor trustee.
SECTION 12. CHANGE OF CONTROL
For purposes of this Trust Agreement, "Change of Control" shall mean:
The date upon which (i) the board of directors of the Company (or, if approval
of the board of directors of the Company 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 the Company's common stock would be converted
into cash, securities or other property, other than a merger of the Company in
which the holders of the Company's common stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, (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
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liquidation or dissolution of the Company, (ii) (a) any person (as such term is
defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), corporation, or other entity 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 of
directors of the Company, or (b) any such person, corporation or other entity
(other than the Company or any benefit plan sponsored by the Company or other
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 twenty percent (20%) 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 (2) consecutive years, individuals who at the beginning
of such period constitute the entire board of directors of the Company 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.
(i) The Company's board of directors (as constituted immediately
prior to a Change of Control) acting in such capacity shall have the duty to
inform the Trustee in writing that a Change of Control has occurred. Any one
member of the Company's board of directors may provide such a writing. If an
Executive alleges in writing to the Trustee that a Change of Control has
occurred, the Trustee shall deliver a copy of the Executive's allegation to the
Company within three days of delivery to the Trustee, and the Trustee may engage
one or more independent attorneys, accountants, consultants, or other experts
(the "Experts") to determine whether a Change of Control has occurred. The
Experts shall be engaged at the expense of the Company. The determination of the
Experts or the Trustee as to whether a Change of Control has occurred shall be
binding on the Company and the Executives.
(ii) Unless the Trustee has received notice from a member of the
Company's board of directors or an Executive alleging that a Change of Control
has occurred, the Trustee shall have no duty to inquire whether a Change of
Control has occurred.
SECTION 13. AMENDMENT OR TERMINATION
(a) This Trust Agreement may be amended by a written instrument executed
by the Trustee and the Company. Notwithstanding the foregoing, no such amendment
shall conflict with the terms of the Contracts or shall make the Trust revocable
after it has become irrevocable in accordance with Section 1(a) hereof, and
provided further, that this Trust Agreement may not be amended or modified in
whole or in part following a Change of Control, except (i) to reflect changes in
applicable law or (ii) amendments made in furtherance of the Contracts, subject
to the consent of the Executives.
TWI/UST Trust Agreement
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(b) The Trust shall not terminate until the date on which all payments
of deferred compensation pursuant to the terms of the Contracts have been made
to the Executives and Beneficiaries, unless sooner revoked in accordance with
Section 1(a) hereof. Upon termination of the Trust, any assets remaining in the
Trust shall be returned to the Company. Such remaining assets shall be paid by
the Trustee to the Company in such amounts and in the manner instructed by the
Company, whereupon the Trustee shall be released and discharged from all
obligations hereunder. From and after the date of termination, and until final
distribution of the Trust Fund, the Trustee shall continue to have all of the
powers provided herein as are necessary or expedient for the orderly liquidation
and distribution of the Trust Fund.
SECTION 14. MISCELLANEOUS
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Deferred compensation payable to the Executives and Beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(d) This Trust Agreement shall be binding on, and the powers granted to
the Company and the Trustee, respectively, shall be exercisable by the
respective successors and assigns of the Company and the Trustee. Any
corporation that succeeds to substantially all of the business of the Trustee by
merger, consolidation, purchase or otherwise shall upon succession and without
appointment or other action by the Company be and become successor trustee
hereunder.
(e) Any communication to the Trustee, including any notice, direction,
designation, certification, order, instruction or objection shall be in writing
and signed by an officer of the Company or by the person authorized under the
Contracts or this Trust Agreement to govern same. The Trustee shall be fully
protected and indemnified by the Company in acting in accordance with such
written communications. Any such communication required or permitted to be given
hereunder shall be deemed given if written and hand delivered, mailed, postage
prepaid, certified mail, return receipt requested or transmitted by facsimile to
the Company or the Trustee at the following address or such other address as a
party may specify:
TWI/UST Trust Agreement
15
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(i) if to the Company:
General Counsel
Time Warner Inc.
75 Rockefeller Plaza
New York, NY 10019
Facsimile No. (212) 956-7281
(ii) If to the Trustee:
U.S. Trust Company
114 W. 47th Street, 8th Floor
New York, NY 10036
Facsimile No. (212) 852-3036
Attention: Otis A. Sinnott, Jr.
(f) Any obligation of the Company and/or the Trust to repay the Trustee
amounts pursuant to any provision of this Trust Agreement shall survive any
amendment or termination hereof or the Trustee's resignation or removal.
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement
to be executed by their duly authorized officers as of the day and year first
above written.
TIME WARNER INC. U.S. TRUST COMPANY OF CALIFORNIA, N.A.
By: /s/ Carolyn K. McCandless By: /s/ Otis A. Sinnott, Jr.
______________________________ __________________________________
Carolyn K. McCandless Otis A. Sinnott, Jr.
Title: Vice President Title: Vice President
___________________________ _______________________________
TWI/UST Trust Agreement
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As Amended through
March 20, 1997
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 $.01 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.
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
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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 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
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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 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.
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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 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
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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 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
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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 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
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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.
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
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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
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
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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 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
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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 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
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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 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. LIMITED TRANSFERABILITY OF OPTIONS.
Except as set forth in this paragraph 10 and paragraph 21, options and
SARs granted under the Plan shall not be transferable other than by will or the
laws of descent and distribution, and such 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 option 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 option agreement.
11. TERMINATION OF EMPLOYMENT.
If a holder's employment shall be terminated by the Company or any of it
subsidiaries prior to the complete exercise of an option, then such option shall
thereafter be exercisable, solely to the extent provided in the applicable
option agreement; provided, however, that (a) no option granted under the Plan
may be exercised after the scheduled expiration date of such option; (b) if the
holder's employment terminates by reason of death or permanent and
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total disability as defined in Section 22(e)(3) of the Code, as the same may be
amended from time to time, 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 the next succeeding
paragraph.
If a holder's employment with the Company or any of its subsidiaries
shall be terminated by the Company 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 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 mean only a felony conviction for fraud,
misappropriation or embezzlement), then all options held by such holder and any
permitted transferee pursuant to paragraph 10 shall immediately terminate.
Notwithstanding any other provision of the Plan, the Board may provide
in the applicable option agreement that the options and/or SARs granted under
the Plan shall become and/or remain exercisable at rates and times at variance
with the rules otherwise herein set forth; provided, however, that any such
option 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.
The Board may determine whether any given leave of absence constitutes a
termination of employment. Options and SARs 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 one of its subsidiaries.
12. INTENTIONALLY OMITTED.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Notwithstanding any other provisions of the Plan, option agreements may
contain such provisions as the Board shall determine
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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 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 time), then such terms or provisions shall be deemed inoperative to
the extent they so
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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.
21. BENEFICIARIES.
Each holder 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 Secretary of the Company or
his or her designee and may be revoked or changed by such holder at any time by
filing written notice of such revocation or change with the Secretary of the
Company or his or her designee. If no person shall be designated by a holder as
his or her beneficiary or if no person designated as a beneficiary survives such
holder, the holder's beneficiary shall be his or her estate.
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As Amended through
March 20, 1997
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
$.01 per share, of the Company.
(g) "Company" means Time Warner Inc., a Delaware
corporation.
(h) "Composite Tape" means the New York Stock Exchange
Composite Tape.
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(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 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
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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.
(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.
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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 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
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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.
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
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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 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
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entitled as a result of the exercise of the Option. Except as provided in
paragraphs 9 and 25 and subparagraph 6G 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 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
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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, 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.
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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.
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.
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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.
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
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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 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. Limited Transferability of Options. Except as set forth in this
subparagraph G and paragraph 23, Options shall not be transferable other than by
will or the laws of descent and distribution, and Options may be exercised
during the lifetime of the Holder thereof only by such Holder (or his or her
court appointed legal representative). The Stock Option Agreement may provide
that Options are transferable by gift to such persons or entities and upon such
terms and conditions 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 vesting of such Restricted
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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 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,
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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 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
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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 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
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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. General. If a Holder's employment shall be terminated by
the Company or any Subsidiary or the Holder shall cease to be an
Employee of an Affiliated Entity prior to the complete exercise of
an Option (or deemed exercise thereof, as provided in subparagraphs
6E and 6F), or prior to the complete vesting of any Restricted
Shares, then such Option shall thereafter be exercisable, and the
Restricted Shares shall vest, solely to the extent provided in the
applicable Stock Option Agreement or Restricted Shares 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 or the Holder ceases to be an Employee of an
Affiliated Entity 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 the Restricted Shares and any Retained
Distributions shall vest in full; and (c) any termination by the
employing company for cause will be treated in accordance with the
provisions of subparagraph 9B.
B. Termination for Cause. If a Holder's employment with the
Company or any of its Subsidiaries shall be terminated by the
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Company or such Subsidiary or the Holder shall cease to be an Employee of an
Affiliated Entity prior to the exercise of any Option, or the complete vesting
of any Restricted Shares, 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 subparagraph 6G shall
immediately terminate and all Restricted Shares and Retained Distributions shall
be forfeited.
C. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Stock Option Agreement or Restricted Shares
Agreement that the Award shall become and/or remain exercisable or shall vest at
rates and times at variance with the rules otherwise herein set forth; provided,
however, that any such Stock Option Agreement or Restricted Shares Agreement
provisions at variance with the exercisability and vesting rules otherwise set
forth herein shall be effective only if reflected in the terms of an employment
agreement approved or ratified by the Board.
D. Miscellaneous. The Board may determine whether any given
leave of absence constitutes a termination of employment or the
termination of the Holder's status as an Employee of an Affiliated
Entity. 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 one of its Subsidiaries 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 Company by reason of any stock dividend,
distribution, split-up, recapitalization, combination or exchange of shares,
merger, consolidation or liquidation and the
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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 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)
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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 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.
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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
"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.
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22. GOVERNING LAW.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
23. BENEFICIARIES
Each Holder 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 Secretary of the Company or
his or her designee and may be revoked or changed by such Holder at any time by
filing written notice of such revocation or change with the Secretary of the
Company or his or her designee. If no person shall be designated by a Holder as
his or her beneficiary or if no person designated as a beneficiary survives such
Holder, the Holder's beneficiary shall be his or her estate.
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As Amended through
March 20, 1997
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 of the Company, or (iii) the adoption of any plan
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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
$.01 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
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more of the combined voting power of the then 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,
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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.
(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
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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 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
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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 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).
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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
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.
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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 from the Company 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 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
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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 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.
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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. Limited Transferability of Options and SARs. Except as set forth in
this Section 6.6 and Section 23, 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. 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
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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, 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.
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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. 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
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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 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.
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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 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
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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.
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 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 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
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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 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
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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 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
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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.
23. BENEFICIARIES
Each Holder 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 Secretary of the Company or
his or her designee and may be revoked or changed by such Holder at any time by
filing written notice of such revocation or change with the Secretary of the
Company or his or her designee. If no person shall be designated by a Holder as
his or her beneficiary or if no person designated as a beneficiary survives such
Holder, the Holder's beneficiary shall be his or her estate.
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As Amended through
March 20, 1997
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
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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 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
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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 $.01 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
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
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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
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.
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(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 (a) 1.5% (one and one-half percent) of the
number of shares of Common Stock outstanding on December 31, 1993, (b) 1.25%
(one and one-quarter percent) of the number of shares of Common Stock
outstanding on December 31, 1994, (c) 1% (one percent) of the number of shares
of Common Stock outstanding on December 31, 1995, (d) 1.2% (one and two-tenths
percent) of the aggregate number of shares of Common Stock and Series LMCN-V
Common Stock, par value $.01 per share, outstanding on December
31, 1996 and (e) 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 considered to have been exercised as provided in Section
6.5(a)), the shares of Common Stock subject to such expired,
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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.
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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 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
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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.
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.
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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.
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.
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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 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
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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 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
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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. Limited Transferability of Options and SARs. Except as set forth in
this Section 6.6 and Section 22, 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
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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 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
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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.
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
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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 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
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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
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.
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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
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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.
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
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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 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.
22. BENEFICIARIES
Each Holder 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 Secretary of Time Warner or
his or her designee and may be revoked or changed by such Holder at any time by
filing written notice of such revocation or change with the Secretary of Time
Warner or his or her designee. If no person shall be designated by a Holder as
his or her beneficiary or if no person designated as a beneficiary survives such
Holder, the Holder's beneficiary shall be his or her estate.
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As Amended through
March 20, 1997
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
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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
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.
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(i) "Common Stock" means the common stock, par value $.01 per
share, of Time Warner.
(j) "Composite Tape" means the New York Stock
Exchange Composite Tape.
(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.
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(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).
(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.
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(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 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.
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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.
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
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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 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.
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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.
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
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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 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.
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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, 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.
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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 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.
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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. Limited Transferability of Options and SARs. Except as set forth in
this Section 6.6 and Section 23, 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. 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.
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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, 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
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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. 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
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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
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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 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
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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 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
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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 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.
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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 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
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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 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
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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 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.
23. BENEFICIARIES
Each Holder 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 Secretary of Time Warner or
his or her designee and may be revoked or changed by such Holder at any time by
filing written notice of such revocation or change with the Secretary of Time
Warner or his or her designee. If no person shall be designated by a Holder as
his or her beneficiary or if no person designated as a beneficiary survives such
Holder, the Holder's beneficiary shall be his or her estate.
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AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 19,
1998 effective as of January 1, 1998 (the "Effective Date"), between TIME WARNER
INC., a Delaware corporation (the "Company"), and Gerald M. Levin (the
"Executive").
The Executive is currently employed by the Company pursuant to an
Employment Agreement dated as of November 15, 1990, as amended by an amendment
dated as of May 22, 1992 (the "Prior Agreement"). The Company wishes to restate
the Prior Agreement and secure the services of the Executive on a full-time
basis for an extended period to and including December 31, 2003 (the "Term
Date") on and subject to the terms and conditions set forth in this Agreement,
and the Executive is willing for the Prior Agreement to be so restated and 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. Notwithstanding the foregoing
or anything to the contrary contained in this Agreement, the "term of
employment", as used in Section 3.6, 3.7, 3.8 and 8 through 12 shall include the
term of any Advisory Period (as defined in Section 13).
2. Employment. The Company shall employ the Executive, and the
Executive shall serve, as Chairman of the Board and Chief Executive Officer 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 of the Company may from time to
time delegate to the Executive in addition thereto. 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.
During the term of employment, (i) the Executive's services shall be rendered on
a substantially full-time, exclusive basis and he will apply on a full-time
basis all of his skill and experience to the performance of his duties in such
employment, (ii) the Executive shall report only to the Company's Board of
Directors; (iii) the Executive shall have no other employment and, without the
prior consent of a majority of the members of the Company's Board of Directors,
no outside business activities which require the devotion of substantial amounts
of the Executive's time and (iv) the place for the performance of the
Executive's services shall be the principal executive offices of the Company
which shall be in the New York City metropolitan area, subject to such
reasonable travel as may be appropriate or
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2
required in the performance of the Executive's duties in the business of the
Company. The foregoing shall be subject to the Company's written 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 shall not interfere with the performance of his duties hereunder,
provided that the Executive complies with the provisions of Sections 9 and 10
and any of the Company's written policies on conflicts of interest and service
as a director of another corporation, partnership, trust or other entity
("Entity").
The Company shall use its best efforts to cause the Executive to be a
member of its Board of Directors throughout the term of employment during the
term of employment and shall include him in the management slate for election
during the term of employment as a director at every stockholders' meeting at
which his term as a director would otherwise expire.
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 $1,000,000 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 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.
3.2 Bonus. In addition to Base Salary, the Executive may
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 actual amount of any
such annual cash bonus to be paid to the Executive will be determined by the
Compensation Committee of the Company's Board of Directors. 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. 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,
but in no event later than 90 days after the end of the period for which the
bonus is payable.
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
a defined contribution which shall be determined and paid out on a deferred
basis ("deferred compensation") as provided in this Agreement, including Annex A
hereto. During the term of employment, the Company shall pay to the trustee
(the "Trustee") of a Company grantor trust (the "Rabbi
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3
Trust") for credit to a special account maintained on the books of the Rabbi
Trust for the Executive (the "Trust 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 pay to the
Trustee for credit to the Trust Account at the time of such payment an amount
equal to 50% of the Base Salary portion of such lump sum payment. The Trust
Account shall be maintained by the Trustee in accordance with the terms of this
Agreement, including Annex A, and the trust agreement (the "Trust Agreement")
establishing the Rabbi Trust (which Trust Agreement shall in all respects be in
furtherance of, and not inconsistent 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. Effective April 1, 1998, the Company
shall establish and maintain the Rabbi Trust as a grantor trust within the
meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code
and shall pay all fees and expenses of the Trustee and shall enforce the
provisions of the Trust Agreement for the benefit of the Executive. Prior to
April 1, 1998, the Company shall credit the Executive with deferred compensation
in accordance with the provisions of Section 3.3 of the Prior Agreement.
3.4 Deferred Salary and Bonus. In addition to any other
deferred salary or 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 commencement of any calendar year during the term
of employment, to defer payment of and to have the Company pay to the Trustee
for credit to the Trust Account all or any portion of the Executive's salary
and/or 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 pay to the Trustee for
credit to the Trust Account $300,000 of the Base Salary payable to the Executive
for the period beginning on the Effective Date and ending on the Term Date. The
Executive may change the election provided in the preceding sentence for any
calendar year by written notice delivered to the Company at least 10 days prior
to the commencement of any such calendar year.
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. The Prior Account shall be
promptly transferred to, and shall for all purposes be deemed part of, the Trust
Account and shall be maintained by the Trustee in accordance with this Agreement
and the Trust 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
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4
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 reasonably promptly
pay or reimburse the Executive for all reasonable travel, 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 written 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.
3.7 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 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.
3.8 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 an officer or 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 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.
4. Termination.
4.1 Termination for Cause. The Company may terminate the
term of employment, the Advisory Period (if any) and all of the Company's
obligations under this Agreement, other than its obligations set forth below in
this Section 4.1, for "cause" but only if the term of employment or any Advisory
Period 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
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5
(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 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
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 such termination by the Company for cause,
without prejudice to any other rights or remedies that the Company may have at
law or in 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 Trust Account, or to pay Advisory Period compensation, if applicable,
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 and (iii) with respect to any rights the Executive has in respect of
amounts credited to the Trust Account 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 fourth sentence of Section 3.3 and the provisions
of Sections 3.8, 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 Termination by the Company Without Cause. 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 or, if applicable, the Advisory Period, 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, 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 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 the title
specified in the first sentence of Section 2 during the term of employment; (ii)
the Executive being required to report to persons other than those specified in
Section 2 during the term of employment; (iii) the Company
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6
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) during the term of employment; (iv) the Company requiring the
Executive's primary services to be rendered at a place other than at the
Company's principal executive offices in the New York City metropolitan 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 Company shall have the right, exercisable by written
notice to the Executive, to terminate the Executive's employment under this
Agreement without cause, effective at least 30 days after the giving of such
notice, which notice shall specify the effective date of such termination.
In the event of a termination pursuant to this Section
4.2, the Executive shall be entitled to elect by delivery of written notice to
the Company, within 30 days after written notice of such termination is given
pursuant to this Section 4.2, either (A) to cease being an employee of the
Company and receive a lump sum payment as provided 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
pursuant to the preceding paragraph, (i) after the effective date of such
termination, the Executive shall have no further obligations or liabilities to
the Company whatsoever, except that Sections 4.4 and 4.5 and Sections 6 through
12 shall survive such termination, and (ii) the Executive shall be entitled to
receive any earned and unpaid Base Salary and deferred compensation or Advisory
Period compensation, as the case may be, accrued through the effective date of
such termination and if such termination occurs during the term of employment, 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) in respect of the two calendar years during the most recent five
calendar years for which the regular annual bonus received by the Executive from
the Company was the greatest, all or a portion of which pro rata bonus will be
credited to the Trust 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 make the election
provided in clause (A) above, the Company shall pay to the Executive as damages
in a lump sum within 30 days thereafter (provided that if the Executive was
named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such notice of termination is
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7
given) an amount (discounted as provided in the immediately following sentence)
equal to (a) in the event such termination occurs during the term of employment,
all amounts otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year
in which such termination occurs and for each subsequent year through the Term
Date, assuming that annual bonuses are required to be paid for each such year,
with each such annual bonus being equal to the average of the regular annual
bonus amounts (excluding the amount of any special or spot bonuses) in respect
of the two calendar years during the most recent five calendar years for which
the regular annual bonus received by the Executive from the Company was the
greatest (assuming that no portion of such bonus is deferred pursuant to Section
3.4) and (b) in the event such termination occurs during the Advisory Period,
all amounts otherwise payable pursuant to Section 13 from the date of such
termination through the Term Date. 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, 3.2 and 13 and the credit to the Trust Account provided for in the
third 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 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 term of employment or, if applicable, the
Advisory Period shall continue and the Executive shall remain an employee of the
Company through 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) in the event such termination occurs during the term
of employment, (i) Base Salary (all or a portion of which may be deferred by the
Executive pursuant to Section 3.4) at an annual rate equal to his Base Salary in
effect immediately prior to the notice of termination as provided in Section
3.1, (ii) 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)
equal to the average of the regular annual bonus amounts (excluding the amount
of any special or spot bonuses) in respect of the two calendar years during the
most recent five calendar years for which the regular annual bonus received by
the Executive from the Company was the greatest and (iii) deferred compensation
as provided in Section 3.3 and (b) in the event such termination occurs during
the Advisory Period, Advisory Period compensation as provided in Section 13.
Except as provided in the next sentence, if the Executive accepts full-time
employment with any other Entity during such period or notifies
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8
the Company in writing of his intention to terminate his status as an employee
during such period, then the term of employment or, if applicable, the Advisory
Period shall cease 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 severance in a
lump sum within 30 days after such commencement or such effective date (provided
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such lump sum payment shall be made within 30 days
after the end of the calendar year in which such commencement or effective date
occurred) an amount (discounted as provided in the second sentence of Section
4.2.2, except that the "applicable Federal rate" shall be determined as of the
date the Executive shall cease to be an employee of the Company) for the balance
of (x) the Base Salary (assuming no deferral pursuant to Section 3.4), deferred
compensation (which shall be credited to the Trust Account as provided in the
third sentence of Section 3.3) and regular annual bonuses (assuming no deferral
pursuant to Section 3.4) or (y) the Advisory Period compensation, as the case
may be, 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 charitable or not-for-profit Entity, or any family-owned
corporation, trust or partnership, 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 or, if applicable, the Advisory
Period 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 but taking into account the Executive's reduced need for such office
space, secretarial services and office facilities, services and furnishings as a
result of the Executive no longer being a full-time employee.
4.4 Release. In partial consideration for the Company's
obligation to make the payments described in Section 4.2, the Executive shall
execute and deliver to the
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9
Company a release in substantially the form attached hereto as Annex B.
The Company shall deliver such release to the Executive within 10 days after the
written notice of termination is delivered pursuant to Section 4.2 and the
Executive shall execute and deliver such release to the Company within 21 days
after receipt thereof. If the Executive shall fail to execute and deliver such
release to the Company within such 21 day period, or if the Executive shall
revoke his consent to such release as provided therein, the Executive's term of
employment shall terminate as provided in Section 4.2, but the Executive shall
receive, in lieu of the payments provided for in said Section 4.2, a lump sum
cash payment in an amount determined in accordance with the written personnel
policies of the Company relating to notice and severance then generally
applicable to employees with length of service and compensation level of the
Executive.
4.5 Mitigation. In the event of termination of the term of
employment or, if applicable, the Advisory Period pursuant to Section 4.2, 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 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 Entity, the total cash salary and bonus received in
connection with such other employment, whether paid to him or deferred for his
benefit, for any services through the Term Date if such termination occurs
during the term of employment and for services as a full-time employee through
the Term Date if such termination occurs during the Advisory Period, in either
case up to an amount equal to (x) the discounted lump sum payment received by or
for the account of the Executive with respect to Base Salary, annual bonus and
deferred compensation under Section 3 or, if applicable the Advisory Period
compensation under Section 13 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 on the date of such
termination, provided that if such termination occurs during the Advisory
Period, the amount determined pursuant to this clause (y) shall be zero, shall
reduce, pro tanto, any amount which the Company would otherwise be required to
pay to the Executive as a result of such termination and, to the extent amounts
have theretofore been paid to him 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
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10
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 term of
employment and the Advisory Period by the Executive or the Company pursuant to
Section 4.2 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 discounted amount
received by him or credited to the Trust Account with respect to Base Salary,
annual bonus and deferred compensation under Section 3 or, if applicable, with
respect to Advisory Period compensation under Section 13 for such year. Any
obligation of the Executive to mitigate his damages pursuant to this Section 4.5
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, 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.
4.6 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.
5. Disability. If during the term of employment and prior to any
termination 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 Trust 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 for the year in which the Disability
Date occurs and shall pay the Executive disability benefits for the period
ending on the Term Date (the "Disability Period"), in an annual 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 Trust 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 during the most recent five
calendar years for which the annual bonus received by the Executive from the
Company was the greatest (all or a portion of which may be deferred by the
Executive pursuant to Section 3.4). If during the Disability Period the
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11
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 and the Advisory Period 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; and (ii) the provisions of Sections 9 and 10 shall
ontinue to apply to the Executive during the Disability Period. 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 Board of Directors or 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 both parties. 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. If a Disability Date occurs during the
Advisory Period, the Company shall pay to the Executive the full amount of the
Advisory Period compensation in accordance with Section 13 through the Term Date
without regard to the preceding two sentences. Except as otherwise provided in
this Section 5, the during the Disability Period and the Advisory Period, 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 or, if applicable, the Advisory Period shall
end and the Executive shall cease to be an employee of the Company on the Term
Date 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 or, if applicable, the Advisory Period, this Agreement and all
obligations of the Company to make any payments under Sections 3, 4, 5 and 13
shall terminate except that (i) the Executive's
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12
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 or, if applicable, Advisory Period compensation, to the
last day of the month in which his death occurs and if such death occurs during
the term of employment, bonus compensation (at the time bonuses are normally
paid) based on the average of the regular annual bonuses (excluding the amount
of any special or spot bonuses) in respect of the two calendar years during the
most recent five calendar 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 calendar year, and (ii) the Trust 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 Trust 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. The Company shall maintain $6,000,000
face amount of split ownership 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. 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). The Company shall
not borrow from the cash value of such policy. 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 but only
to the extent necessary to secure the reimbursement obligation contained in the
preceding sentence. In addition to the foregoing, during the Executive's
employment with the Company, the Company shall (x) provide the Executive with
$50,000 of group life insurance and (y) pay to the Executive annually an amount
equal to the premium that the Executive would have to pay to obtain life
insurance under the Group Universal Life ("GUL") insurance program made
available by the Company in an amount equal to (i) twice the Executive's Base
Salary minus (ii) $50,000. The Executive shall be under no obligation to use the
payments made by the
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13
Company pursuant to the preceding sentence to purchase GUL insurance or to
purchase any other life insurance. If the Company discontinues its GUL insurance
program, the Company shall nevertheless make the payments required by this
Section 7 as if such program were still in effect. The payments made to the
Executive pursuant to this Section 7 shall not be considered as "salary" or
"compensation" or "bonus" in determining the amount of any payment under any
pension, retirement, profit-sharing or other benefit plan of the Company or any
subsidiary of the Company.
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 any Advisory Period 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 life insurance (to the extent set forth in Section 7), hospitalization,
medical, dental, accident, disability or similar plan or program of the Company
now existing or established hereafter. In addition, 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 executives of the Company to the
extent the Executive 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.
8.2 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 and any Advisory
Period, the Executive shall continue to be eligible to participate in the
benefit plans and to receive the benefits required to be provided to the
Executive under Sections 7 and 8.1 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. 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 any Advisory Period and until such time
as the Executive shall leave the payroll of the Company. At the time the
Executive's term of employment and any Advisory Period terminates and he leaves
the payroll of the Company pursuant to the provisions of Section 4.1, 4.2, 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
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14
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
(but without affecting any less restrictive or more favorable to the Executive
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
(i) all stock options granted to the Executive by the Company shall vest and
become immediately exercisable at the time the Executive shall leave the payroll
of the Company pursuant to Section 4.2, (ii) all stock options granted to
the Executive by the Company shall remain exercisable (but not beyond the term
thereof) during the remainder of the term of employment and any Advisory Period
and for a period of three months thereafter or such longer period as shall be
specified in any applicable stock option agreement and (iii) the Company
shall not be permitted to determine that the Executive's employment was
terminated for "unsatisfactory performance" within the meaning of any stock
option agreement between the Company and the Executive.
8.3 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 clause (A) or (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.
9. Protection of Confidential Information; Non-Compete. The
provisions of Section 9.2 shall continue to apply through the latest of (i) the
date the Executive ceases to be an employee of the Company and leaves the
payroll of the Company for any reason and (ii) for twelve months after the
effective date of any notice of termination of the Executive's
employment pursuant to Section 4.1, 4.2 or 4.3. The provisions of Sections 9.1
and 9.3 shall continue to apply until three years after the latest of the events
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 and any Advisory Period, 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
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15
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 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 and
any Advisory Period, 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;
9.1.2 The Executive shall 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;
and
9.1.3 If the term of employment is terminated pursuant to
Section 4.1 or 4.2, for a period of one year after such termination, without the
prior writtenconsent 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 exempt employee of the Company at the date of such termination or
within six months prior thereto.
9.2 Non-Compete. The Executive shall not, directly or
indirectly, without the prior consent of a majority of the members of the
Company's Board of Directors, render any services to any person or Entity or
acquire any interest of any type in any Entity, that might be deemed in
competition with the Company; provided, however, that the forego ing 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 one
percent (1%) 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,
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16
directly or indirectly, in competition with the Company, (c) serving as a
director of any Entity that is not in competition with the Company or (d) during
the Advisory Period, being a partner in or of counsel to a law firm that
represents any person or Entity that is in competition with the Company so long
as the Executive does not personally provide or assist in the provision of
services to any such person or Entity. For purposes of the foregoing, a person
or Entity shall be deemed to be in competition with the Company if such person
or it engages in any line of business that is substantially the same as either
(i) 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 or
(ii) any operating business that is engaged in or conducted by the Company and
as to which, to the knowledge of the Executive, the Company covenants in
writing, in connection with the disposition of such business, not to compete
therewith.
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, 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 commits a
material breach of the provisions of Section 9.2, the Executive shall pay to the
Company as liquidated damages an amount equal to two and one-half times the
Executive's then current Base Salary, or if the Executive is not employed by the
Company at the time of such breach, an amount equal to two and one-half times
the most recent Base Salary paid to the Executive by the Company. 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 Section 4.2. 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, 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
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17
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 participa tion 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 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 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 prepaid telegram, 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: President
(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.
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18
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.
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, 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 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, cancelled, 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 Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement shall, at the election of either the
Company or the Executive, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceeding or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. Any such
proceedings shall take place in New York City before a single arbitrator
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19
(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 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 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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20
12.11 No Offset. Except as provided in Section 9.4 of this
Agreement, 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 Retained Income - Section A.6 of Annex A
Advisory Period - Section 13
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
deferred compensation - Section 3.3
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 2
Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
Investment Advisor - Section A.1 of Annex A
Pay-Out Period - Section A.6 of Annex A
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3
senior executives - Section 3.1
Term Date - the second paragraph on page 1
term of employment - Section 1
Trust Account - Section 3.3
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21
Trust Agreement - Section 3.3
Trustee - Section 3.3
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
13. Advisory Services. Notwithstanding anything to the contrary
contained in this Agreement (except the last sentence of Section 1), the
Executive shall have the right to elect by delivery of written notice to the
Company, which notice may be delivered at any time on or after January 1, 2002,
to terminate the term of employment and his position as Chairman and Chief
Executive Officer of the Company effective six months after the delivery of such
notice and to serve as an advisor to the Company for the period from the
effective date of such notice through the Term Date (the "Advisory Period").
During the Advisory Period, the Executive will provide such advisory services
concerning the business, affairs and management of the Company as may be
required by the Board of Directors or the Chief Executive Officer of the
Company, but shall not be
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22
required to devote more than five days (up to eight hours per day) each month to
such service, which shall be performed at a time and place mutually convenient
to both parties and consistent with the Executive's other activities. If at any
time during the Advisory Period, the Executive engages in other full-time
employment, the Executive shall not be deemed to be in breach of this Section
13, but unless such employment consists of the Executive providing services to
one or more (i) charitable or non-profit organizations or (ii) family-owned
corporations, trusts, or partnerships, the Advisory Period shall terminate, the
Executive shall leave the payroll of the Company and the Company shall have no
further obligations under this agreement other than with respect to earned and
unpaid compensation and benefits. Notwithstanding the foregoing, but subject to
Section 9 of this Agreement, during the Advisory Period the Executive may
provide part-time services to third parties (including serving as a member of
the Board of Directors of any such party). During the Advisory Period, the
Executive shall be entitled to receive annual compensation in an amount equal to
the Base Salary and deferred compensation being received by the Executive
pursuant to Sections 3.1 and 3.3 at the time the Executive delivers the notice
provided for in this Section 13 and shall continue to be entitled to the
benefits described in Sections 7 and 8 hereof; provided, however, that the
Executive shall not be entitled to an annual bonus or any additional grants of
stock options during the Advisory Period, shall not accrue any vacation time
during the Advisory Period and shall not be entitled to any severance pay at the
end thereof. In addition, during the Advisory Period the Company shall provide
the Executive with an office, office facilities and a secretary in accordance
with the provisions of Section 4.3.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of the date first above written.
TIME WARNER INC.
By /s/ Richrard D. Parsons
------------------------------
Richard D. Parsons
President
/s/ Gerald M. Levin
-------------------------------
Gerald M. Levin
<PAGE>
<PAGE>
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of his or her Trust Account. In the
case of any purchase, the Trust Account shall be charged with a dollar amount
equal to the quantity and kind of securities 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. In the case of any sale,
the Trust Account shall be charged with the quantity and kind of securities
sold, and shall be credited with a dollar amount equal to the quantity and kind
of securities sold multiplied by the fair market value of such securities on the
date of reference. Such charges and credits to the Trust 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 Rabbi Trust on the date of reference, the
actual purchase or sale price per security to the Rabbi Trust 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,
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A-2
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 Trustee
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 Trust Account, including determining the fair market value of
such security. The Trust Account shall be charged currently with all interest
paid by the Trust Account with respect to any credit extended to the Trust
Account. Such interest shall be charged to the Trust Account, for margin
purchases actually made, at the rates and times actually paid by the Trust
Account. 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 the Trustee 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 Trust Account at the rates and times
actually paid.
A.2 Dividends and Interest. The Trust Account shall be credited
with dollar amounts equal to cash dividends paid from time to time upon the
stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted to
reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the
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A-3
Trustee for credit to the Trust Account in accordance with the provisions of
Section 3.3 of the Agreement, to use due care in selecting the Trustee or any
successor trustee and to in all respects work cooperatively with the Trustee to
fulfill the obligations of the Company and the Trustee to the Executive. The
Trust Account shall be charged with all taxes (including stock transfer taxes),
interest, brokerage fees and investment advisory fees, if any, payable by the
Company and attributable to the purchase or disposition of securities designated
by the Investment Advisor (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) and only in the event of a default by the
Company of its obligation to pay such fees and expenses, the fees and expenses
of the Trustee in accordance with the terms of the Trust Agreement, but no other
costs of the Company. Subject to the terms of the Trust Agreement, the
securities purchased for the Trust Account as designated by the Investment
Advisor shall remain the sole property of the Company, subject to the claims of
its general creditors, as provided in the Trust Agreement. Neither the Executive
nor his legal representative nor any beneficiary designated by the Executive
shall have any right, other than the right of an unsecured general creditor,
against the Company or the Trust in respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such income
and gains within the Trust Account. For the purposes of this Section A.5, all
charges and credits to the Trust 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 Trust Account that cannot be offset against
income and
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A-4
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 Trust Account for such year) shall be credited to the
Trust Account on the last day of such year. If and to the extent that any such
net loss of the Trust Account shall be utilized to determine a credit to the
Trust 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. Unless the Executive makes the election referred
to in the next succeeding sentence, deferred compensation shall be paid
bi-weekly for a period of ten years (the "Pay-Out Period") commencing on the
first Company payroll date in the month following 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, 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 the first Company payroll date
in January of the year following the year in which the latest of such events
occurs. The Executive may elect a shorter Pay-Out Period by delivering written
notice to the Company or the Trustee at least one-year prior to the commencement
of the Pay-Out Period, which notice shall specify the shorter Pay-Out Period. On
each payment date, the Trust Account shall be charged with the dollar amount of
such payment. On each payment date, the amount of cash held in the Trust Account
shall be not less than the payment then due and the Company or the Trustee may
select the securities to be 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 Trust 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 payments during the Pay-Out Period, the
Trust Account shall be valued on the fifth trading day prior to the end of the
month preceding the first payment of each year of the Pay-Out Period, or more
frequently at the Company's or the Trustee's election (the "Valuation Date"), by
adjusting all of the securities held in the Trust Account to their fair market
value (net of the tax adjustment that would be made thereon if sold, as
estimated by the Company or the Trustee) and by deducting from the Trust Account
the amount of all outstanding indebtedness. The extent, if any, by which the
Trust Account, valued as provided in the immediately preceding sentence, exceeds
the aggregate amount of credits to the Trust 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
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A-5
"Account Retained Income". The amount of each payment for the year, or such
shorter period as may be determined by the Company or the Trustee, 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 Trust
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 Trust
Account, after all the securities held therein 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 in the Trust 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 in breach of this
Agreement, the Trust 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 Trust Account, after the securities held
therein 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 in the Trust 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 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
bi-weekly during the Pay-Out Period commencing on the first Company payroll date
in 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 Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6, if
the Rabbi Trust shall terminate in accordance with the provisions of the Trust
Agreement, the Trust Account
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A-6
shall be valued as of the date of such termination and the balance of the Trust
Account shall be paid to the Executive within 15 days of such termination in
accordance with the provisions of the third preceding paragraph.
Within 90 days after the end of each taxable year of the Company
in which payments have been made from the Trust Account and at the time of the
final payment from the Trust Account, the Company or the Trustee shall compute
and the Company shall pay to the Trustee for credit to the Trust Account, the
amount of the tax benefit assumed to be received by the Company 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 Trust Account pursuant to the preceding sentence in
respect of the amounts credited to the Trust 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 Trust 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 Trust Account pursuant to this
Annex A (excluding credits made pursuant to the second preceding sentence),
after all credits and charges to the Trust 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 Trust 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.
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ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
, 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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[Name]
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AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 25, 1998
and effective as of January 1, 1998, (the "Effective Date"), between TIME WARNER
INC., a Delaware corporation (the "Company"), and R.E. Turner III (the
"Executive").
The Executive is currently employed by the Company pursuant to an
Employment Agreement dated as of October 10, 1996 (the "Prior Agreement"). The
Company wishes to amend and restate the Prior Agreement and 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 for the Prior Agreement to be so amended
and restated and 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 Video Division (the "Video
Division"). The Video Division shall consist of (i) Turner Broadcasting System,
Inc. ("TBS"), including all of the businesses conducted by TBS and its
subsidiaries on October 10, 1996, 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 on October 10, 1996, (iii) the Company's
interest in Court TV, and (iv) subject only 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
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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 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 written 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 October 10,
1996; provided,
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however, that the Executive shall in any event comply with the provisions of
Sections 9 and 10 and any Company written 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.
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, but in no event later than 90 days
after the end of the period for which the bonus is payable.
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 a
defined contribution which shall be determined and paid out on a deferred basis
("deferred compensation") as provided in this Agreement, including Annex A
hereto. During the term of employment, the Company shall pay to the trustee (the
"Trustee") of a Company grantor trust (the "Rabbi
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Trust") for credit to a special account maintained on the books of the Rabbi
Trust for the Executive (the "Trust 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 pay to the
Trustee for credit to the Trust Account at the time of such payment an amount
equal to 50% of the Base Salary portion of such lump sum payment. The Trust
Account shall be maintained by the Trustee in accordance with the terms of this
Agreement, including Annex A, and the trust agreement (the "Trust Agreement")
establishing the Rabbi Trust (which Trust Agreement shall in all respects be in
furtherance of, and not inconsistent 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; provided, that in case of any conflict
between the provisions of this Agreement and the Trust Agreement, the provisions
of this Agreement shall control. Effective April 1, 1998, the Company shall
establish and maintain the Rabbi Trust as a grantor trust within the meaning of
subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue
Code of 1986, as amended, and shall pay all fees and expenses of the Trustee and
shall enforce the provisions of the Trust Agreement for the benefit of the
Executive. Prior to April 1, 1998, the Company shall credit the Executive with
deferred compensation in accordance with the provisions of Section 3.3 of the
Prior Agreement.
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
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 Trust 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. On or promptly after April 1,
1998, the entire balance of the Prior Account shall be transferred to, and
thereafter shall for all purposes be made and deemed part of, the Trust Account
and shall be maintained by the Trustee in accordance with this Agreement and the
Trust 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
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decreases to the Prior Account as a result of income, gains, losses and other
charges shall be deemed to have been made under this Agreement.
3.6 Reimbursement. The Company shall reasonably promptly 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
written 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.
3.7 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.
3.8 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 an officer or 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 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.
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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, 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 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 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 Trust 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 not yet
been paid as of the date of such termination, such bonus payable as determined
in the ordinary course and (iii) with respect to any rights the Executive has in
respect of amounts credited to the Trust 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
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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 fourth sentence of
Section 3.3, the provisions of Section 3.6 with respect to expenses incurred
prior to such termination and the provisions of Sections 3.8, 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 Termination by the Company Without Cause. 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 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, the occurrence of any of the following: (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; or (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.
The Company shall have the right, exercisable by written notice to
the Executive, to terminate the Executive's employment under this Agreement
without cause, effective no less than 30 days after the giving of such notice,
which notice shall specify the effective date of such termination.
In the event of a termination pursuant to this Section 4.2,(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 this Section 4.2 or any time prior to 10 days
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after written notice of such termination is given by the Company pursuant to
this Section 4.2, 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 date of such termination, (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 annual bonus has not yet been paid
as of the date of such termination, such bonus payable as determined in the
ordinary course 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 (it being
understood that for purposes of determining such average bonus, the bonus paid
by the Company to the Executive with respect to the period from October 10, 1996
through December 31, 1996, shall be deemed to be "grossed up" on an annualized
basis), all or a portion of which pro rata bonus will be credited to the Trust
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 (iii) Executive
shall retain all rights with respect to amounts credited to the Trust Account.
In addition, the fourth sentence of Section 3.3, the provisions of Section 3.6
with respect to expenses incurred prior to such termination and the provisions
of Section 3.8 and Annex A shall survive any termination pursuant to this
Section 4.2.
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 (it being
understood that for purposes of determining such average bonus, the bonus paid
by the Company to the Executive with respect to the period from October 10, 1996
through December 31, 1996, shall be deemed to be "grossed up" on an
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annualized basis), 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 Trust Account provided for in the third 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
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
(it being understood that for purposes of determining such average bonus, the
bonus paid by the Company to the Executive with respect to the period from
October 10, 1996 through December 31, 1996, shall be deemed to be "grossed up"
on an annualized basis), 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, except that the "applicable Federal rate" shall be determined as
of the date the Executive shall cease to be an employee of
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the Company) for the balance of the Base Salary, deferred compensation (which
shall be credited to the Trust Account as provided in the third sentence of
Section 3.3) and regular annual bonuses (assuming no deferral pursuant to
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 pursuant to Section 4.2, 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 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 pursuant to Section 4.2 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
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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 Trust 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 not yet been
paid as of the date of such termination, such bonus payable as determined in the
ordinary course, (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 (it being understood that for
purposes of determining such average bonus, the bonus paid by the Company to the
Executive with respect to the period from October 10, 1996 through December 31,
1996, shall be deemed to be "grossed up" on an annualized basis), all or a
portion of which pro rata bonus will be credited to the Trust 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 Trust 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 fourth sentence of Section 3.3, the provisions of Section 3.6 with respect
to expenses incurred prior to such termination and the provisions of Sections
3.8, 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
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aggregating six months in any twelve-month period, the Company shall,
nevertheless, contin ue to pay the Executive his full compensation and continue
to credit the Trust 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 (it being understood that for purposes
of determining such average bonus, the bonus paid by the Company to the
Executive with respect to the period from October 10, 1996 through December 31,
1996, shall be deemed to be "grossed up" on an annualized basis), and shall pay
the Executive disability benefits until the Term Date (the "Disability Period"),
in an annual 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
Trust Account pursuant to Section 3.3 and Annex A as 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 (it being understood that for purposes of determining
such average bonus, the bonus paid by the Company to the Executive with respect
to the period from October 10, 1996 through December 31, 1996, shall be deemed
to be "grossed up" on an annualized basis), 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 Sec tions 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
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13
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
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 (it being understood that for purposes of
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14
determining such average bonus, the bonus paid by the Company to the Executive
with respect to the period from October 10, 1996 through December 31, 1996,
shall be deemed to be "grossed up" on an annualized basis), 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 Trust 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 Trust 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.
7.1 Split Ownership 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). The
Company shall not borrow from the cash value of such policy. 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
but only to the extent necessary to secure the reimbursement obligation
contained in the preceding sentence.
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15
7.2 Group Life Insurance. In addition to the foregoing, during the
term of employment, the Company shall (x) provide the Executive with $50,000 of
group life insurance and (y) pay to the Executive annually an amount equal to
the premium that the Executive would have to pay to obtain life insurance under
the Group Universal Life ("GUL") insurance program made available by the Company
in an amount equal to (i) twice the Executive's Base Salary minus (ii) $50,000.
The Executive shall be under no obligation to use the payments made by the
Company pursuant to the preceding sentence to purchase GUL insurance or to
purchase any other life insurance. If the Company discontinues its GUL insurance
program, the Company shall nevertheless make the payments required by this
Section 7 as if such program were still in effect. The payments made to the
Executive pursuant to this Section 7 shall not be considered as "salary" or
"compensation" or "bonus" in determining the amount of any payment under any
pension, retirement, profit-sharing or other benefit plan of the Company or any
subsidiary of the Company.
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 life insurance (to the extent
set forth in Section 7), 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 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.
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
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16
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.
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 participate in the benefit plans and to receive the benefits
required to be provided to the Executive under Sections 7.2 and 8.1 to the
extent such benefits are maintained in effect by the Company for its senior
executives (and under Section 7.1 without regard to whether such benefits are
maintained in effect for other senior executives of the Company); 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, if the Executive leaves the payroll of the Company as
a result of a termination pursuant to Section 4.2, then (i) 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, (ii) all stock options granted to the Executive by the Company
shall remain exercisable (but not beyond the expiration of the option term)
during the remainder of the term of employment and for a period of three months
thereafter or such longer period as shall be specified in any applicable stock
option agreement and (iii) the Company shall not be permitted to determine that
the Executive's employment was terminated for "unsatisfactory performance"
within the meaning of any stock option agreement between the Company and the
Executive.
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
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17
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.
9. Protection of Confidential Information; Non-Compete. Except as
provided in Section 5, 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 pro cesses 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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18
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 termination, 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 pur chases, 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 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
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19
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 participa tion
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 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):
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20
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.
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, 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
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21
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
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
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22
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.
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 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
deferred compensation - Section 3.3
Contract Options - Section 8.2
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23
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
Pay-Out Period - Section A.6 of Annex A
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3 senior executives - Section 3.1
TBS - Section 2
Term Date - the second paragraph on page 1 term of
employment - Section 1
Trust Account - Section 3.3
Trust Agreement - Section 3.3
Trustee - Section 3.3
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.
By /s/ Gerald M. Levin
_____________________________
Gerald M. Levin
Chairman and Chief Executive
Officer
/s/ R.E. Turner
_____________________________
R.E. Turner III
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A-1
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of the Executive's Trust Account. In
the case of any purchase, the Trust Account shall be charged with a dollar
amount equal to the quantity and kind of securities 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. In the case of
any sale, the Trust Account shall be charged with the quantity and kind of
securities sold, and shall be credited with a dollar amount equal to the
quantity and kind of securities sold multiplied by the fair market value of such
securities on the date of reference. Such charges and credits to the Trust
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 Rabbi Trust on the date of
reference, the actual purchase or sale price per security to the Rabbi Trust 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
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A-2
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 Trustee 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 Trust Account, including determining the fair
market value of such security. The Trust Account shall be charged currently with
all interest paid by the Trust Account with respect to any credit extended to
the Trust Account. Such interest shall be charged to the Trust Account, for
margin purchases actually made, at the rates and times actually paid by the
Trust Account. 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 the Trustee 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 Trust Account at the rates and times
actually paid.
A.2 Dividends and Interest. The Trust Account shall be
credited with dollar amounts equal to cash dividends paid from time to time upon
the stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted
to reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the Trustee for credit to the Trust Account
in accordance with the provisions of Section 3.3 of the Agreement, to use due
care in selecting the Trustee or any successor trustee and to in all
<PAGE>
<PAGE>
A-3
respects work cooperatively with the Trustee to fulfill the obligations of the
Company and the Trustee to the Executive. The Trust Account shall be charged
with all taxes (including stock transfer taxes), interest, brokerage fees and
investment advisory fees, if any, payable by the Company and attributable to the
purchase or disposition of securities designated by the Investment Advisor (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) and
only in the event of a default by the Company of its obligation to pay such fees
and expenses, the fees and expenses of the Trustee in accordance with the terms
of the Trust Agreement, but no other costs of the Company. Subject to the terms
of the Trust Agreement, the securities purchased for the Trust Account as
designated by the Investment Advisor shall remain the sole property of the
Company, subject to the claims of its general creditors, as provided in the
Trust Agreement. Neither the Executive nor his legal representative nor any
beneficiary designated by the Executive shall have any right, other than the
right of an unsecured general creditor, against the Company or the Trust in
respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such income
and gains within the Trust Account. For the purposes of this Section A.5, all
charges and credits to the Trust 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 Trust 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
<PAGE>
<PAGE>
A-4
net capital loss of the Trust Account for such year) shall be credited to the
Trust Account on the last day of such year. If and to the extent that any such
net loss of the Trust Account shall be utilized to determine a credit to the
Trust 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. Unless the Executive makes the election
referred to in the next succeeding sentence, deferred compensation shall be paid
bi-weekly for a period of ten years (the "Pay-Out Period") commencing on the
first Company payroll date in the month following 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. The Executive may elect a
shorter Pay-Out Period by delivering written notice to the Company or the
Trustee at least one-year prior to the commencement of the Pay-Out Period, which
notice shall specify the shorter Pay-Out Period. On each payment date, the Trust
Account shall be charged with the dollar amount of such payment. On each payment
date, the amount of cash held in the Trust Account shall be not less than the
payment then due and the Company or the Trustee may select the securities to be
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 Trust
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 payments during the Pay-Out Period, the Trust Account shall be valued
on the fifth trading day prior to the end of the month preceding the first
payment of each year of the Pay-Out Period, or more frequently at the Company's
or the Trustee's election (the "Valuation Date"), by adjusting all of the
securities held in the Trust Account to their fair market value (net of the tax
adjustment that would be made thereon if sold, as estimated by the Company or
the Trustee) and by deducting from the Trust Account the amount of all
outstanding indebtedness. The extent, if any, by which the Trust Account, valued
as provided in the immediately preceding sentence, exceeds the aggregate amount
of credits to the Trust 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 or the Trustee, 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 Trust Account, as valued and
adjusted
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<PAGE>
A-5
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 Trust Account, after all the securities held
therein 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 in the
Trust 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 Trust 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 Trust Account,
after the securities held therein 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 in the Trust 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 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 bi-weekly during the Pay-Out Period commencing on the
first Company payroll date in 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 Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6,
if the Rabbi Trust shall terminate in accordance with the provisions of the
Trust Agreement, the Trust Account shall be valued as of the date of such
termination and the balance of the Trust Account shall be paid to the Executive
within 15 days of such termination in accordance with the provisions of the
third preceding paragraph.
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A-6
Within 90 days after the end of each taxable year of the
Company in which payments have been made from the Trust Account and at the time
of the final payment from the Trust Account, the Company or the Trustee shall
compute and the Company shall pay to the Trustee for credit to the Trust
Account, the amount of the tax benefit assumed to be received by the Company
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 Trust Account pursuant to the
preceding sentence in respect of the amounts credited to the Trust 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 Trust 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 Trust Account pursuant to this Annex A (excluding credits made
pursuant to the second preceding sentence), after all credits and charges to the
Trust 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 Trust 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.
<PAGE>
<PAGE>
ANNEX B
CONTRACT OPTIONS
To be granted promptly after October 10, 1996 :
Options to purchase not less than 1,300,000 shares of Common Stock,
allocated as follows:
<TABLE>
<CAPTION>
No. of Shares Exercise Price
------------- ---------------
<S> <C>
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 October 10,
1996 :
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.
<PAGE>
<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18,
1998, effective as of January 1, 1998 (the "Effective Date"), between TIME
WARNER INC., a Delaware corporation (the "Company"), and Richard D. Parsons (the
"Executive").
The Executive is currently employed by the Company pursuant to an
Employment Agreement dated as of November 2, 1994 (the "Prior Agreement"). The
Company wishes to amend and restate the Prior Agreement and secure the services
of the Executive on a full-time basis for the period to and including December
31, 1999 (the "Term Date") on and subject to the terms and conditions set forth
in this Agreement, and the Executive is willing for the Prior Agreement to be so
amended and restated and 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. The Company shall employ the Executive, and the
Executive shall serve, as the President of the Company during the term of
employment. The Executive shall have responsibility for the direction and
supervision of the following functions of the Company, with the authority,
duties and powers appropriate and customary to discharge such responsibility:
all corporate staff functions, including without limitation, legal, finance,
communications and public affairs and administration, and each of the Executive
Vice Presidents or Senior Vice Presidents in charge of each such function shall
report to the Executive. In addition, the Executive 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 his stature as
the President of the Company. 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. During the term of
employment, (i) the Executive's services shall be rendered on a substantially
full-time, exclusive basis and he will apply on a full-time basis all of his
skill
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2
and experience to the performance of his duties in such employment, (ii) the
Executive shall report only to the Company's Board of Directors and to the
Company's Chief Executive Officer, (iii) 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 the Executive's time and (iv) the place for the
performance of the Executive's services shall be the principal executive offices
of the Company which shall be in the New York City 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. The foregoing shall be
subject to the Company's written 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 shall not interfere
with the performance of his duties hereunder, provided that the Executive
complies with the provisions of Sections 9 and 10 and any generally applicable
written policies of the Company on conflicts of interest and service as a
director of another corporation, partnership, trust or other entity ("Entity").
The Company shall use its best efforts to cause the Executive to
be a member of its Board of Directors throughout the term of employment and
shall include him in the management slate for election as a director at every
stockholders' meeting at which his term as a director would otherwise expire.
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 $600,000 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 (subject to Section 5). 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.
3.2 Bonus. In addition to Base Salary, the Executive
shall be eligible to receive during the term of employment an annual cash bonus
based on the performance of the Company and of the Executive in an amount
commensurate with the position and duties of the Executive relative to other
senior executives of the Company. The actual amount of any such annual cash
bonus to be paid to the Executive will be determined by the Compensation
Committee of the Company's Board of Directors based upon a recommendation of the
Company's Chief Executive Officer. Such determination with respect to the
amount, if any,
<PAGE>
<PAGE>
3
of annual cash bonuses to be paid to the Executive under this Agreement shall be
final and conclusive except as specifically provided otherwise in this
Agreement. 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, but in no event later than 90 days after the end
of the period for which the bonus is payable. Notwithstanding the foregoing,
determination and payment of any bonus compensation under this Section 3.2 may
be made pursuant to a plan intended to assure the deductibility of such bonus
compensation pursuant to Section 162(m) of the Internal Revenue Code of 1986
(the "Code").
3.3 Deferred Compensation. In addition to Base Salary
and annual bonus as set forth in Sections 3.1 and 3.2, the Executive shall be
credited with a defined contribution which shall be determined and paid out on a
deferred basis ("deferred compensation") as provided in this Agreement,
including Annex A hereto. During the term of employment, the Company shall pay
to the trustee (the "Trustee") of a Company grantor trust (the "Rabbi Trust")
for credit to a special account maintained on the books of the Rabbi Trust for
the Executive (the "Trust 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, 4.2.3, 4.3.2 or 4.3.3, the Company shall pay
to the Trustee for credit to the Trust Account at the time of such payment an
amount equal to 50% of the Base Salary portion of such lump sum payment. The
Trust Account shall be maintained by the Trustee in accordance with the terms of
this Agreement, including Annex A, and the trust agreement (the "Trust
Agreement") establishing the Rabbi Trust (which Trust Agreement shall in all
respects be in furtherance of, and not inconsistent 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. Effective April 1, 1998,
the Company shall establish and maintain the Rabbi Trust as a grantor trust
within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of
the Code and shall pay all fees and expenses of the Trustee and shall enforce
the provisions of the Trust Agreement for the benefit of the Executive. Prior to
April 1, 1998, the Company shall credit the Executive with deferred compensation
in accordance with the provisions of Section 3.3 of the Prior Agreement.
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 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 Trust 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
<PAGE>
<PAGE>
4
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. The Prior Account shall be
promptly transferred to, and shall for all purposes be deemed part of, the Trust
Account and shall be maintained by the Trustee in accordance with this Agreement
and the Trust 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 reasonably
promptly pay or reimburse the Executive for all reasonable travel, 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 written 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.
3.7 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 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.
3.8 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 an officer or member of the Board of
Representatives or other governing body of any partnership or joint venture in
which the Company has an equity interest or as a trustee or fiduciary of any
plan, program, trust or other entity established for the benefit of the Company,
its subsidiaries or any of their respective employees in connection with the
business of the Company (and after the term of employment, to the extent
relating to his service as such officer, director, member, trustee or fiduciary)
to the benefit of the indemnification provisions contained on the date hereof in
the Certificate of Incorporation and
<PAGE>
<PAGE>
5
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.
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, 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 action of the Company's Board of Directors, or a committee
thereof, after a hearing at which the Executive has had the opportunity to
address the Board, 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 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 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 such termination by the Company for cause,
without prejudice to any other rights or remedies that the Company may have at
law or in 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 Trust 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 and (iii) with respect to any rights the Executive has
in respect of amounts credited to the Trust 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.
<PAGE>
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6
The fourth sentence of Section 3.3 and the provisions of Sections 3.8, 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 Termination by the Company Without Cause. 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 (other than those provisions that specifically survive such
termination) 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, 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 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 the title specified in the first sentence 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 or any written delegation from the Chief Executive Officer 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 Company's principal executive offices in the New York City
metropolitan area; (v) the Company breaching its obligations under the last
paragraph of Section 2; and (vi) 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 Company shall have the right, exercisable by written
notice to the Executive, to terminate the Executive's employment under this
Agreement without cause, effective at least 30 days after the giving of such
notice, which notice shall specify the effective date of such termination.
In the event of a termination pursuant to this Section
4.2, the Executive shall be entitled to elect by delivery of written notice to
the Company, within 30 days after written notice of such termination is given
pursuant to this Section 4.2, either (A) to cease being an employee of the
Company and receive a lump sum payment (and credits) as provided 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:
<PAGE>
<PAGE>
7
4.2.1 Regardless of the election made by the
Executive pursuant to the preceding paragraph, (i) after the effective date of
such termination, the Executive shall have no further obligations or liabilities
to the Company whatsoever, except that Sections 3.8, 4.5 and 4.7 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 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) in
respect of the two calendar years immediately preceding the calendar year in
which such termination occurs, all or a portion of which pro rata bonus will be
credited to the Trust 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 make the
election provided in clause (A) of Section 4.2 above, the Company shall pay to
the Executive (or credit to the Trust Account with respect to Section 3.3) as
damages in a lump sum within 30 days thereafter (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such notice of termination is given) an amount
(discounted as provided in the immediately following sentence) equal to the
greater of (i) all amounts otherwise payable (or to be credited) pursuant to
Sections 3.1, 3.2 and 3.3 for the year in which such termination occurs and for
each subsequent year through and including the Term Date and (ii) all amounts
that would be payable (or credited) pursuant to Sections 3.1, 3.2 and 3.3 if the
Term Date had been a date one year after the date of such notice of termination
(assuming, in the case of either (i) or (ii) above, that annual bonuses are
required to be paid for each such year, with each such annual bonus being equal
to the average of the regular annual bonus amounts (excluding the amount of any
special or spot bonuses) in respect of the two calendar years immediately
preceding the calendar year in which such termination occurs (assuming that no
portion of such bonus is deferred pursuant to Section 3.4), with the bonus for
any partial calendar year appropriately pro rated according to the number of
whole or partial months the Executive was employed by the Company in such
calendar year. 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 Trust Account provided for in the third 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
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8
Revenue Code of 1986 (the "Code")), in effect on the date of such termination,
compounded semi-annually.
4.2.3 In the event the Executive shall make the
election provided in clause (B) above, the term of employment shall continue and
the Executive shall remain an employee of the Company for the period ending on
the later of (i) the Term Date and (ii) the date which is one year after the
date notice of termination is given under this Section 4.2, and during such
period the Executive shall be entitled to receive, whether or not the Executive
becomes disabled during such period but subject to Section 6, (a) salary at an
annual rate equal to the Base Salary, (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 of the
regular annual bonus amounts (excluding the amount of any special or spot
bonuses) in respect of the two calendar years immediately preceding the calendar
year in which such termination occurs (with any partial calendar year bonus
appropriately pro rated according to the number of whole or partial months the
Executive was employed by the Company in such calendar year) 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 cease 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 severance in a
lump sum within 30 days after such commencement or such effective date (provided
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such lump sum payment shall be made within 30 days
after the end of the calendar year in which such commencement or effective date
occurred) an amount (discounted as provided in the second sentence of Section
4.2.2, except that the "applicable Federal rate" shall be determined as of the
date the Executive shall cease to be an employee of the Company) equal to the
balance of the Base Salary, deferred compensation (which shall be credited to
the Trust Account as provided in the third sentence of Section 3.3) and regular
annual bonuses (assuming no deferral pursuant to 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 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 if the Executive accepts full-time employment with any
affiliate of the Company, then the payments (and credits) provided for
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9
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 After the Term Date. If at the Term Date, the term
of employment shall not have been previously terminated pursuant to the
provisions of this Agreement, no Disability Period is then in effect and the
parties shall not have agreed in writing to an extension or renewal of this
Agreement or on the terms of a new written employment agreement, then the term
of employment shall continue and the Executive shall continue to be employed by
the Company pursuant to the terms of this Agreement, subject to termination by
either party hereto on 90 days written notice delivered to the other party. Such
90-day notice may be given by either party on or after October 1, 1999 so that
the term of employment may end on the Term Date or any date thereafter. If the
Executive shall terminate this Agreement on or after the Term Date, then the
Executive shall receive Base Salary, deferred compensation and a pro rata annual
bonus through the effective date of termination with the pro rata annual bonus
being equal to the portion of the average of the regular annual bonus amounts
(excluding the amount of any special or spot bonuses) in respect of the two
calendar years immediately preceding the calendar year in which such termination
occurs based on the number of whole or partial months in such year prior to the
date of termination. If the Company shall terminate the term of employment
(other than those provisions that specifically survive such termination) 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), which the Company shall have the right
to do so long as no Disability Date (as defined in Section 5) has occurred prior
to the delivery by the Company of written notice of termination, then in lieu of
the provisions of Section 4.2, the Executive 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.
After the Executive makes such election, the following provisions shall apply:
4.3.1 Regardless of the election made by the
Executive pursuant to the preceding paragraph, at the end of the 90-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, 4.5 and 4.7 and Sections 6 through 12 and Annex A shall
survive such termination.
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10
4.3.2 In the event the Executive shall make the
election provided in clause (A) above, the Company shall pay to the Executive
(or credit to the Trust Account with respect to Section 3.3) in a lump sum at
the end of the 90-day notice period provided for in the first sentence of
Section 4.3 (provided that if the Executive was named in the compensation table
in the Company's then most recent proxy statement, such lump sum payment shall
be made within 30 days after the end of the year in which such notice of
termination is given) an amount (discounted as provided in the second sentence
of Section 4.2.2) equal to the sum of (i) one year's Base Salary, (ii) 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 for
the two calendar years immediately preceding the calendar year in which such
termination occurs plus a pro rata portion of such annual bonus for any elapsed
portion of the calendar year preceding such notice of termination and (iii) the
annual amount of deferred compensation to be credited to the Trust Account
pursuant to Section 3.3 (which shall be credited to the Trust Account as
provided in the third sentence of Section 3.3).
4.3.3 In the event the Executive shall make the
election provided in clause (B) above, the term of employment shall continue and
the Executive shall remain an employee of the Company until the date which is
twelve months after the end of the 90-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 the Executive becomes disabled during such period but
subject to Section 6, (i) salary at an annual rate equal to the Base Salary,
(ii) 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 for the two calendar years immediately preceding
the calendar year in which such termination occurs plus a pro rata portion of
such annual bonus for any portion of such twelve month period included in the
succeeding calendar year and (iii) credits to the Trust Account of deferred
compensation as provided in Section 3.3 of this Agreement. 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 terminate his employment during such period, the Executive shall
cease to be an employee of the Company and the term of employment shall cease
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 (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the year in which such commencement or effective date occurred) an amount
(discounted as provided in the second sentence of
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11
Section 4.2.2, except that "applicable Federal rate" shall be determined as of
the date of such commencement or such effective date, as the case may be) for
the balance of the Base Salary, deferred compensation (which shall be credited
to the Trust Account as provided in the third sentence of Section 3.3) 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 term of employment and 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 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 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 but taking into account the Executive's reduced need
for such office space, secretarial services and office facilities, services and
furnishings as a result of the Executive no longer being a full-time employee.
4.5 Release. In partial consideration for the Company's
obligation to make the payments described in Sections 4.2 and 4.3, the Executive
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 elect, the Company shall deliver such release to the Executive within 10 days
after the 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. Upon receipt by the Company of such
release signed by the Executive, the Company shall deliver to the Executive a
release substantially in the form attached hereto as Annex C, signed by the
Company. If the Company shall request the Executive to execute an Annex B
release and the Executive shall fail to execute and deliver such release to the
Company within such 21 day period, or if the Executive shall revoke his consent
to such release as provided therein, the Company shall have no obligation to
deliver the Annex C release and the Executive's term of employment shall
terminate as provided in Section 4.2 or 4.3, as applicable, 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
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12
accordance with the written personnel policies of the Company relating to notice
and severance then generally applicable to senior executives of the Company with
length of service and compensation level of the Executive.
4.6 Retirement. Notwithstanding the provisions of
Sections 4.2, 4.3 or 5, if the term of employment is in effect and the Executive
is still employed by the Company pursuant to this Agreement on the date the
Executive first becomes eligible for normal retirement as defined in any
applicable retirement plan of the Company or any subsidiary of the Company (the
"Retirement Date"), then this Agreement shall terminate automatically on such
date and the Executive's employment with the Company shall thereafter be
governed by the policies generally applicable to employees of the Company, and
the Executive shall not thereafter be entitled to the payments provided in such
Sections to the extent not received by the Executive on or prior to the
Retirement Date. In addition, no benefits or payments provided in Sections 4.2,
4.3 or 5 shall include any period after the Retirement Date and if the provision
of benefits or calculation of payments provided in any such Section would
include any period subsequent to the Retirement Date, such provision of benefits
shall end on the Retirement Date and the calculation of payments shall cover
only the period ending on the Retirement Date. Notwithstanding the foregoing,
the provisions of Annex A and the Trust Agreement shall apply to the investment
and payment of deferred compensation after such termination, the provisions of
Section 7 of this Agreement shall survive any such termination and the
provisions of Sections 12.1 and 12.7 shall apply to any dispute with respect to
this Agreement that arises after any such termination.
4.7 Mitigation. In the event of termination of the
term of employment pursuant to Section 4.2 or 4.3, 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 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 Entity or a
governmental agency or body, 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 (i) in the case of a termination pursuant to
Section 4.2, the later of (x) the
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13
Term Date or (y) one year after the date notice of termination is delivered
pursuant to Section 4.2, and (ii) in the case of a termination pursuant to
Section 4.3, the date which is one year after the end of the 90-day notice
period referred to in the first sentence of Section 4.3, in either case up to an
amount equal to (x) the discounted lump sum payment and credit to the Trust
Account received by or for the account of the Executive with respect to Base
Salary, annual bonus and deferred compensation under Section 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 the Executive as a result of such termination
and, to the extent amounts have theretofore been paid to him 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 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
pursuant to Section 4.2 or 4.3 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
discounted amount received by him or credited to the Trust Account with respect
to Base Salary, annual bonus and deferred compensation under Section 3 for such
year. Any obligation of the Executive to mitigate his damages pursuant to this
Section 4.7 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, 4.2.3, 4.3.2 or
4.3.3, 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.
4.8 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 or
4.3 shall be made at the same times as such payments are made to senior
executives of the Company or such subsidiary.
5. Disability. If during the term of employment and prior to any
termination of this Agreement under Section 4.2 or 4.3, 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 Trust Account, when otherwise due, as
provided in Section 3 and Annex A, through the last day of the sixth consecutive
month of disability or
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14
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 for the portion of the calendar year in which the Disability Date
occurs that shall precede such date and shall pay the Executive disability
benefits for the longer of (i) the period from the Disability Date through the
Term Date or (ii) one year following the Disability Date (in the case of either
(i) or (ii), the "Disability Period"), in an annual amount equal to 75% of (a)
the Base Salary (and this reduced amount shall also be deemed to be the Base
Salary for purposes of determining the amounts to be credited to his Trust
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 immediately
preceding the year in which the Disability Date occurs (all or a portion of
which may be deferred by the Executive pursuant to Section 3.4), with the bonus
for any partial calendar year pro rated according to the number of whole or
partial months the Executive was employed by the Company in such calendar year.
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. The Disability Period
shall continue during such 60-day period. 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, including without limitation, the provisions of
Section 3 which shall apply in lieu of the Disability provisions of this Section
5, 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 may terminate this Agreement by written notice
to the Company within 60 days after the termination of the sixty-day period
provided for above, in which case neither party shall have any further
obligations hereunder after the date of such termination. If the Company elects
not to restore the Executive to full-time service and the Executive does not
elect to terminate this Agreement, 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; and (ii) the provisions of Sections 9 and 10 shall continue to apply to
the Executive during the Disability Period. 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 Board of Directors or 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 both parties. 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
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15
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
with respect to periods 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 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 regular annual bonuses (excluding the amount of any
special or spot bonuses) in respect of the two calendar years immediately
preceding the calendar year in which such death occurs, 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 Trust 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 Trust 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.
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16
7. Life Insurance. The Company shall maintain $4,000,000 face
amount of split ownership 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. 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). The Company shall
not borrow from the cash value of such policy. The Executive shall be entitled
to designate the beneficiary or beneficiaries of such policy, which may include
a trust. At the death of the Executive, or on the earlier surrender of such
policy by the owner, the Executive agrees that the Executive's estate or 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 but in no event shall such payment to the Company exceed
the amount of the death benefit paid under the policy. If other than the
Company, 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 but only to the extent
necessary to secure the reimbursement obligation contained in the preceding
sentence. In addition to the foregoing, during the Executive's employment with
the Company, the Company shall (x) provide the Executive with $50,000 of group
life insurance and (y) pay to the Executive annually an amount equal to the
premium that the Executive would have to pay to obtain life insurance under the
Group Universal Life ("GUL") insurance program made available by the Company in
an amount equal to (i) twice the Executive's Base Salary minus (ii) $50,000. The
Executive shall be under no obligation to use the payments made by the Company
pursuant to the preceding sentence to purchase GUL insurance or to purchase any
other life insurance. If the Company discontinues its GUL insurance program, the
Company shall nevertheless make the payments required by this Section 7 as if
such program were still in effect. The payments made to the Executive pursuant
to this Section 7 shall not be considered as "salary" or "compensation" or
"bonus" in determining the amount of any payment under any pension, retirement,
profit-sharing or other benefit plan of the Company or any subsidiary of the
Company.
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
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17
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 life insurance (to the extent set forth
in Section 7), 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 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.
In addition to any retirement benefits to which the
Executive is entitled under the Time Warner Employees' Pension Plan, any
supplemental retirement or excess benefit plan maintained by the Company or any
of its affiliates or any successor plans thereto (hereinafter collectively
referred to as the "Pension Plan"), the Company will, following the Executive's
termination of employment for any reason, except by the Company for cause
pursuant to Section 4.1 and except for a termination by the Executive in breach
of this Agreement, pay or cause to be paid to the Executive or his beneficiary
as the case may be, in accordance with the following provisions, an amount which
is equivalent to the excess of (the "Excess Amount") (i) the amount such
Executive or beneficiary would be entitled to receive under the Pension Plan
assuming the Executive had five additional years of service (as such term is
defined in the Pension Plan) taking into account all the provisions of the
Pension Plan as are from time to time in effect and applicable to the Executive
or his beneficiary over (ii) the amount such Executive or beneficiary would be
entitled to receive under the Pension Plan based on actual years of service
taking into account all the provisions of the Pension Plan as are from time to
time in effect and applicable to the Executive or his beneficiary.
If the Executive or his beneficiary is entitled to an
Excess Amount as described in the preceding paragraph, the Company shall pay the
Excess Amount to the Executive or his beneficiary as follows. If the Executive
is otherwise entitled to benefits under the Pension Plan, then the Excess Amount
shall be paid at the same times and in the same manner as shall be elected by
the Executive or his beneficiary for payment of amounts under the Pension Plan.
If the Executive is not otherwise entitled to benefits under the Pension Plan,
then the Excess Amount shall be paid at the time(s) and in one of the forms of
payment permitted under the Pension Plan as elected by the Executive or his
beneficiary. If the Executive or his beneficiary dies before any payments
described above have been made, the payments shall be made to the beneficiary
thereof at the same time and in the same manner as they would have been paid if
the payments were to be made under the Pension Plan.
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8.2 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 or 4.3 and during the Disability Period, the
Executive shall continue to be eligible to participate in the benefit plans and
to receive the benefits required to be provided to the Executive under Sections
7 and 8.1 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. 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, 4.3, 5 or 6, the Executive's rights to benefits and payments under any
benefit plans, programs or practices 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,
programs or practices 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 (i) all stock options
granted to the Executive by the Company shall vest and become immediately
exercisable at the time the Executive shall leave the payroll of the Company
pursuant to Section 4.2, (ii) all stock options granted to the Executive by the
Company shall remain exercisable (but not beyond the expiration of the option
term) during the remainder of the term of employment and for a period of three
months thereafter or such longer period as shall be specified in any applicable
stock option agreement and (iii) the Company shall not be permitted to determine
that the Executive's employment was terminated for "unsatisfactory performance"
within the meaning of any stock option agreement between the Company and the
Executive.
8.3 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, 4.3, 5 or 6 (and regardless of whether
the Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), 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.
9. Protection of Confidential Information; Non-Compete. The
Executive acknowledges that his employment by the Company (which, for purposes
of this Section 9
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19
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 as set forth below in this
Section 9.
9.1 Confidentiality Covenant. The Executive covenants
and agrees that (i) through the date he ceases to be an employee of the Company
and leaves the payroll of the Company for any reason, and (ii) for twelve months
after the effective date of termination of the Executive's employment and of the
other provisions of this Agreement pursuant to Section 4.1, 4.2 or 4.3, and
(iii) with respect to Sections 9.1.1. and 9.1.2, for an additional 36 months
after the later of the dates described in clauses (i) and (ii) above:
9.1.1 The Executive shall keep secret all
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 during the term of employment, in connection with his duties
hereunder, or 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.
9.1.2 The Executive shall 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, other than publicly available documents or documents
relating to the terms and conditions of the Executive's employment, 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; provided that
if the Executive is to continue as a director, consultant or advisor to the
Company after such
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20
termination, the Executive may retain such documents as are necessary or
appropriate to the performance of his duties unless and until the Company
requests that such documents be delivered to it; and
9.1.3 If the term of employment is terminated
pursuant to Section 4.1, 4.2 or 4.3, the Executive shall not employ, and shall
not cause any Entity of which he is an affiliate to employ, without the prior
written consent of the Company, any person who was a full-time exempt employee
of the Company at the date of such termination or within six months prior
thereto.
9.2 Non-Compete. The Executive covenants and agrees
that (i) through the date the Executive ceases to be an employee of the Company
and leaves the payroll of the Company for any reason, and (ii) with respect to
an Entity that is engaged in competition with the Company and that had, or the
parent Entity or predecessor Entity of which had, consolidated gross revenues
from all sources, including non-competitive businesses, of $2 billion or more
for the fiscal year preceding the Executive's commencement of service for such
Entity, through the date that is twelve months after the effective date of any
notice of termination of the Executive's employment with the Company pursuant to
Section 4.1, 4.2 or 4.3, 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 shall be deemed 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, securi ties
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 one percent (1%) of the outstanding voting power of
that Entity or (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. For purposes of the
foregoing, a person or Entity shall be deemed to be in competition with the
Company if such person or it engages in any line of business that is
substantially the same as either (i) 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 or (ii) any operating business that is
engaged in or conducted by the Company and as to which, to the knowledge of the
Executive, the Company covenants in writing, in connection with the disposition
of such business, not to compete therewith.
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
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21
Executive commits a material breach of any of the provisions of Section 9.1, 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 commits a
material breach of the provisions of Section 9.2, the Executive shall pay to the
Company as liquidated damages an amount equal to two and one-half times the
Executive's then current Base Salary, or if the Executive is not employed by the
Company at the time of such breach, an amount equal to two and one-half times
the most recent Base Salary paid to the Executive by the Company. 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, 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 participa tion
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 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
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22
date hereof. Notwithstanding the foregoing, the Executive may, provided that
Section 9.2 is complied with, acquire an interest in any business opportunity
presented to the Company hereunder if the Company declines to pursue such
business opportunity and if such investment is approved by the Chief Executive
Officer of the Company in writing.
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 prepaid telegram, 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.
12.3 Entire Agreement. This Agreement, including
Annexes A, B and C, 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, including without limitation, the Prior Agreement.
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23
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 all or substantially all of the business
and assets of the Company (as the case may be), 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, cancelled, 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 Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement shall, at the election of either the
Company or the Executive, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceeding or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. 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 may be entered in any court having jurisdiction thereof, and the
parties consent
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24
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 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.
12.11 No Offset. Except as provided in Section 9.4 of
this Agreement, 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.
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25
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 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,
deferred compensation - Section 3.3
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 2
Excess Amount - Section 8.1
Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
Investment Advisor - Section A.1 of Annex A
Pay-Out Period - Section A.6 of Annex A
Pension Plan - Section 8.1
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3
Retirement Date - Section 4.6
senior executives - Section 3.1
Term Date - the second paragraph on page 1
term of employment - Section 1
Trust Account - Section 3.3
Trust Agreement - Section 3.3
Trustee - Section 3.3
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
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26
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of the date first above written.
TIME WARNER INC.
By /s/ Gerald M. Levin
----------------------------
Gerald M. Levin
Chairman and Chief
Executive Officer
/s/ Richard D. Parsons
----------------------------
Richard D. Parsons
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<PAGE>
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of his or her Trust Account. In the
case of any purchase, the Trust Account shall be charged with a dollar amount
equal to the quantity and kind of securities 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. In the case of any sale,
the Trust Account shall be charged with the quantity and kind of securities
sold, and shall be credited with a dollar amount equal to the quantity and kind
of securities sold multiplied by the fair market value of such securities on the
date of reference. Such charges and credits to the Trust 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 Rabbi Trust on the date of reference, the
actual purchase or sale price per security to the Rabbi Trust or (ii) if the
security is not purchased or sold on the date of reference, in the case of a
listed security, the closing
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A-2
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 Trustee 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 Trust
Account, including determining the fair market value of such security. The Trust
Account shall be charged currently with all interest paid by the Trust Account
with respect to any credit extended to the Trust Account. Such interest shall be
charged to the Trust Account, for margin purchases actually made, at the rates
and times actually paid by the Trust Account. 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 the Trustee 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 Trust Account at
the rates and times actually paid.
A.2 Dividends and Interest. The Trust Account shall be credited
with dollar amounts equal to cash dividends paid from time to time upon the
stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted to
reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
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A-3
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the Trustee for credit to the Trust Account
in accordance with the provisions of Section 3.3 of the Agreement, to use due
care in selecting the Trustee or any successor trustee and to in all respects
work cooperatively with the Trustee to fulfill the obligations of the Company
and the Trustee to the Executive. The Trust Account shall be charged with all
taxes (including stock transfer taxes), interest, brokerage fees and investment
advisory fees, if any, payable by the Company and attributable to the purchase
or disposition of securities designated by the Investment Advisor (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) and only in the
event of a default by the Company of its obligation to pay such fees and
expenses, the fees and expenses of the Trustee in accordance with the terms of
the Trust Agreement, but no other costs of the Company. Subject to the terms of
the Trust Agreement, the securities purchased for the Trust Account as
designated by the Investment Advisor shall remain the sole property of the
Company, subject to the claims of its general creditors, as provided in the
Trust Agreement. Neither the Executive nor his legal representative nor any
beneficiary designated by the Executive shall have any right, other than the
right of an unsecured general creditor, against the Company or the Trust in
respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such
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A-4
income and gains within the Trust Account. For the purposes of this Section A.5,
all charges and credits to the Trust 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 Trust 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 Trust Account for such year) shall be credited to
the Trust Account on the last day of such year. If and to the extent that any
such net loss of the Trust Account shall be utilized to determine a credit to
the Trust 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. Unless the Executive makes the election referred
to in the next succeeding sentence, deferred compensation shall be paid
bi-weekly for a period of ten years (the "Pay-Out Period") commencing on the
first Company payroll date in the month following 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, 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 the first Company payroll date
in January of the year following the year in which the latest of such events
occurs. The Executive may elect a shorter Pay-Out Period by delivering written
notice to the Company or the Trustee at least one-year prior to the commencement
of the Pay-Out Period, which notice shall specify the shorter Pay-Out Period. On
each payment date, the Trust Account shall be charged with the dollar amount of
such payment. On each payment date, the amount of cash held in the Trust Account
shall be not less than the payment then due and the Company or the Trustee may
select the securities to be 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 Trust 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 payments during the Pay-Out Period, the
Trust Account shall be valued on the fifth trading day prior to the end of the
month preceding
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A-5
the first payment of each year of the Pay-Out Period, or more frequently at the
Company's or the Trustee's election (the "Valuation Date"), by adjusting all of
the securities held in the Trust Account to their fair market value (net of the
tax adjustment that would be made thereon if sold, as estimated by the Company
or the Trustee) and by deducting from the Trust Account the amount of all
outstanding indebtedness. The extent, if any, by which the Trust Account, valued
as provided in the immediately preceding sentence exceeds the aggregate amount
of credits to the Trust 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 or the Trustee, 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 Trust 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 Trust Account, after all the
securities held therein 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 in the Trust 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 Trust 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 Trust Account,
after the securities held therein 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 in the Trust 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 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
bi-weekly during the Pay-Out Period commencing on the first Company payroll date
in the month following the
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A-6
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 Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6, if
the Rabbi Trust shall terminate in accordance with the provisions of the Trust
Agreement, the Trust Account shall be valued as of the date of such termination
and the balance of the Trust Account shall be paid to the Executive within 15
days of such termination in accordance with the provisions of the third
preceding paragraph.
Within 90 days after the end of each taxable year of the Company
in which payments have been made from the Trust Account and at the time of the
final payment from the Trust Account, the Company or the Trustee shall compute
and the Company shall pay to the Trustee for credit to the Trust Account, the
amount of the tax benefit assumed to be received by the Company 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 Trust Account pursuant to the preceding sentence in
respect of the amounts credited to the Trust 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 Trust 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 Trust Account pursuant to this
Annex A (excluding credits made pursuant to the second preceding sentence),
after all credits and charges to the Trust 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 Trust 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.
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ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
_____________, 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 ___________ , ____.
---------------------------
[Name]
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ANNEX C
RELEASE
In connection with the Employment Agreement made as of ____ ,
between TIME WARNER INC., (the "Company"), and [TK] (the "Agreement"), the
Company does hereby release and forever discharge [TK] and his estate, heirs,
beneficiaries and representatives, 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 his
employment with the Company or any of its affiliates or the termination of such
employment, which the Company may now or hereafter have under any federal, state
or local law, regulation or order, through and including the date of this
Release; provided, however, that the execution of this Release shall not prevent
the Company from bringing a lawsuit against [TK] (x) to enforce his obligations
under [Section 9] of the Agreement or (y) to seek damages or reimbursement for
fraud or embezzlement committed by him during his employment with the Company.
IN WITNESS WHEREOF the Company has caused this Release to be
executed on its behalf by a duly authorized officer this ______ day of __, 199_.
TIME WARNER INC.
---------------------------
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<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18,
1998 effective as of January 1, 1998 (the "Effective Date"), between TIME WARNER
INC., a Delaware corporation (the "Company"), and Peter R. Haje (the
"Executive").
The Executive is currently employed by the Company pursuant to
an Employment Agreement dated as of May 17, 1995 (the "Prior Agreement"). The
Company wishes to restate the Prior Agreement and secure the services of the
Executive on a full-time basis for the period to and including December 31, 1999
(the "Term Date") and thereafter for a two-year advisory period on and subject
to the terms and conditions set forth in this Agreement, and the Executive is
willing for the Prior Agreement to be so restated and 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. Notwithstanding the
foregoing or anything to the contrary contained in this Agreement, the "term of
employment", as used in Section 3.6, 3.7, 3.8 and 8 through 12 shall mean the
period ending at the end of the Advisory Period (as defined in Section 13).
2. Employment. The Company shall employ the Executive, and the
Executive shall serve, as Executive Vice President, Secretary and General
Counsel 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 or the President of the Company may from time to time delegate to the
Executive in addition thereto. 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. During the term of
employment, (i) the Executive's services shall be rendered on a substantially
full-time, exclusive basis and he will apply on a full-time basis all of his
skill and experience to the performance of his duties in such employment, (ii)
the Executive shall report only to the Company's Board of Directors, its Chief
Executive Officer, its President or its Chief Operating Officer, (iii) the
Executive shall have no other
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2
employment and, without the prior written consent of the Chief Executive Officer
or the President of the Company, no outside business activities which require
the devotion of substantial amounts of the Executive's time and (iv) the place
for the performance of the Executive's services shall be the principal executive
offices of the Company which shall be in the New York City 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. The
foregoing shall be subject to the Company's written 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 shall
not interfere with the performance of his duties hereunder, provided that the
Executive complies with the provisions of Sections 9 and 10 and any of the
Company's written policies on conflicts of interest and service as a director of
another corporation, partnership, trust or other entity ("Entity").
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 $550,000 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 then current practices and
policies with respect to senior executives. For the purposes of this Agreement
"senior executives" shall mean executives of the Company at the same executive
level as the Executive.
3.2 Bonus. In addition to Base Salary, the Executive may
be entitled to receive during the term of employment an annual cash bonus based
on the performance of the Company and of the Executive. Bonuses for senior
executives may be determined by the Compensation Committee of the Company's
Board of Directors or by the Chief Executive Officer or the President of the
Company. 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. 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, but in no event later than 90 days after the end of the period for
which the bonus is payable.
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
a defined contribution which shall be determined and paid out on a deferred
basis ("deferred compensation") as
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3
provided in this Agreement, including Annex A hereto. During the term of
employment, the Company shall pay to the trustee (the "Trustee") of a Company
grantor trust (the "Rabbi Trust") for credit to a special account maintained on
the books of the Rabbi Trust for the Executive (the "Trust 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 pay to the Trustee for credit to the Trust Account at the time of
such payment an amount equal to 50% of the Base Salary portion of such lump sum
payment. The Trust Account shall be maintained by the Trustee in accordance with
the terms of this Agreement, including Annex A, and the trust agreement (the
"Trust Agreement") establishing the Rabbi Trust (which Trust Agreement shall in
all respects be in furtherance of, and not inconsistent 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. Effective April 1, 1998,
the Company shall establish and maintain the Rabbi Trust as a grantor trust
within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of
the Code and shall pay all fees and expenses of the Trustee and shall enforce
the provisions of the Trust Agreement for the benefit of the Executive. Prior to
April 1, 1998, the Company shall credit the Executive with deferred compensation
in accordance with the provisions of Section 3.3 of the Prior Agreement.
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 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 Trust 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. The Prior Account shall be
promptly transferred to, and shall for all purposes be deemed part of, the Trust
Account and shall be maintained by the Trustee in accordance with this Agreement
and the Trust 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.
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4
3.6 Reimbursement. The Company shall reasonably promptly
pay or reimburse the Executive for all reasonable travel, 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 written 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.
3.7 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 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.
3.8 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 an officer or 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 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.
4. Termination.
4.1 Termination for Cause. The Company may terminate the
term of employment, the Advisory Period and all of the Company's obligations
under this Agreement, other than its obligations set forth below in this Section
4.1, for "cause" but only if the term of employment and Advisory Period have 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
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5
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 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 such termination by the Company for
cause, without prejudice to any other rights or remedies that the Company may
have at law or in 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 Trust Account, or to pay Advisory Period compensation, as
the case may be, 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 and (iii) with respect to any rights the Executive has
in respect of amounts credited to the Trust Account 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 fourth sentence of Section 3.3 and the
provisions of Sections 3.8, 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 Termination by the Company Without Cause. 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 and the Advisory Period 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, 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 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 the title
specified in the first sentence of Section 2 or a more senior title; (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
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6
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 Company's principal executive offices in the New York City
metropolitan 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 Company shall have the right, exercisable by written
notice to the Executive, to terminate the Executive's employment under this
Agreement without cause, effective at least 30 days after the giving of such
notice, which notice shall specify the effective date of such termination.
In the event of a termination pursuant to this Section
4.2, the Executive shall be entitled to elect by delivery of written notice to
the Company, within 30 days after written notice of such termination is given
pursuant to this Section 4.2, either (A) to cease being an employee of the
Company and receive a lump sum payment as provided 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 pursuant to the preceding paragraph, (i) after the effective date of
such termination, the Executive shall have no further obligations or liabilities
to the Company whatsoever, except that Sections 4.4 and 4.5 and Sections 6
through 12 shall survive such termination, and (ii) the Executive shall be
entitled to receive any earned and unpaid Base Salary and deferred compensation
or Advisory Period compensation, as the case may be, accrued through the
effective date of such termination and if such termination occurs during the
term of employment, 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) in respect of the two calendar years during the most
recent five calendar years for which the regular annual bonus received by the
Executive from the Company was the greatest, all or a portion of which pro rata
bonus will be credited to the Trust 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 make the
election provided in clause (A) above, the Company shall pay to the Executive as
damages in a lump sum within 30 days thereafter (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such notice of termination is
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7
given) an amount (discounted as provided in the immediately following sentence)
equal to all amounts otherwise payable pursuant to Sections 3.1, 3.2, 3.3 and 13
for the year in which such termination occurs and for each subsequent year
through the end of the Advisory Period, assuming that annual bonuses are
required to be paid for each such year during the term of employment, with each
such annual bonus being equal to the average of the regular annual bonus amounts
(excluding the amount of any special or spot bonuses) in respect of the two
calendar years during the most recent five calendar years for which the regular
annual bonus received by the Executive from the Company was the greatest
(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, 3.2 and 13 and the credit to
the Trust Account provided for in the third 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 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 term of employment and the Advisory
Period shall continue and the Executive shall remain an employee of the Company
through the end of the Advisory Period 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 notice of termination as provided
in Section 3.1, (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 the term of employment equal to the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses) in
respect of the two calendar years during the most recent five calendar years for
which the regular annual bonus received by the Executive from the Company was
the greatest, (c) deferred compensation as provided in Section 3.3 and (d)
Advisory Period compensation as provided in Section 13. 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 and the Advisory Period shall cease and the Executive shall cease to
be an employee of the Company effective upon the
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8
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 severance in a lump sum within 30 days
after such commencement or such effective date (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such commencement or effective date occurred) an
amount (discounted as provided in the second sentence of Section 4.2.2, except
that the "applicable Federal rate" shall be determined as of the date the
Executive shall cease to be an employee of the Company) for the balance of the
Base Salary, deferred compensation (which shall be credited to the Trust Account
as provided in the third sentence of Section 3.3), regular annual bonuses
(assuming no deferral pursuant to Section 3.4) and Advisory Period compensation
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
Advisory Period. Notwithstanding the preceding sentence, if the Executive
accepts employment with any charitable or not-for-profit Entity, or any
family-owned corporation, trust or partnership, 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 and the
Advisory Period 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 but taking into account the Executive's reduced need for such office
space, secretarial services and office facilities, services and furnishings as a
result of the Executive no longer being a full-time employee.
4.4 Release. In partial consideration for the Company's
obligation to make the payments described in Section 4.2, the Executive shall
execute and deliver to the Company a release in substantially the form attached
hereto as Annex B. The Company shall deliver such release to the Executive
within 10 days after the written notice of termination is delivered pursuant to
Section 4.2 and the Executive shall execute and deliver such release to
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9
the Company within 21 days after receipt thereof. If the Executive shall fail to
execute and deliver such release to the Company within such 21 day period, or if
the Executive shall revoke his consent to such release as provided therein, the
Executive's term of employment shall terminate as provided in Section 4.2, but
the Executive shall receive, in lieu of the payments provided for in said
Section 4.2, a lump sum cash payment in an amount determined in accordance with
the written personnel policies of the Company relating to notice and severance
then generally applicable to employees with length of service and compensation
level of the Executive.
4.5 Mitigation. In the event of termination of the term
of employment and Advisory Period pursuant to Section 4.2, 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 connection with such
damages if they were not so "contingent on a change". In addition to any
obligation under the preceding sentence, and without dupli cation 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 Entity, the total cash salary and bonus received in
connection with such other employment, whether paid to him or deferred for his
benefit, for any services through December 31, 1999 and for services as a
full-time employee from January 1, 2000 through December 31, 2001, up to an
amount equal to (x) the discounted lump sum payment received by or for the
account of the Executive with respect to Base Salary, annual bonus and deferred
compensation under Section 3 and Advisory Period compensation under Section 13
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 on the date of such termination, provided that
if such termination occurs during the Advisory Period, the amount determined
pursuant to this clause (y) shall be zero, shall reduce, pro tanto, any amount
which the Company would otherwise be required to pay to the Executive as a
result of such termination and, to the extent amounts have theretofore been paid
to him 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
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10
termination of the term of employment and the Advisory Period by the Executive
or the Company pursuant to Section 4.2 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
discounted amount received by him or credited to the Trust Account with respect
to Base Salary, annual bonus and deferred compensation under Section 3 and
Advisory Period compensation under Section 13 for such year. Any obligation of
the Executive to mitigate his damages pursuant to this Section 4.5 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, 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.
4.6 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.
5. Disability. If during the term of employment and prior to
any termination 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 Trust 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 for the year in which the Disability
Date occurs and shall pay the Executive disability benefits for the period
ending on the Term Date (the "Disability Period"), in an annual 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 Trust 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 during the most recent five
calendar years for which the annual bonus received by the Executive from the
Company was the greatest (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
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11
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 and the Advisory Period 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; and (ii)
the provisions of Sections 9 and 10 shall continue to apply to the Executive
during the Disability Period. 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 or the President 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 both parties. 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. At the
end of a Disability Period or if a Disability Date occurs during the Advisory
Period, the Company shall pay to the Executive the full amount of the Advisory
Period compensation in accordance with Section 13 without regard to the
preceding two sentences. Except as otherwise provided in this Section 5, the
during the Disability Period and the Advisory Period, 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
Advisory Period and the term of employment and the Advisory Period shall end and
the Executive shall cease to be an employee of the Company at the end of the
Advisory 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
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12
be entitled to receive, to the extent being received by the Executive
immediately prior to his death, Base Salary and deferred compensation or, if
applicable, Advisory Period 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 regular annual bonuses (excluding the amount of any
special or spot bonuses) in respect of the two calendar years during the most
recent five calendar 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 calendar
year, and (ii) the Trust 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 Trust 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. The Company shall maintain $4,000,000 face
amount of split ownership 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. 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). The Company shall
not borrow from the cash value of such policy. 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 but only
to the extent necessary to secure the reimbursement obligation contained in the
preceding sentence. In addition to the foregoing, during the Executive's
employment with the Company, the Company shall (x) provide the Executive with
$50,000 of group life insurance and (y) pay to the Executive annually an amount
equal to the premium that the Executive would have to pay to obtain life
insurance under the Group Universal Life ("GUL") insurance program made
available by the Company in an amount equal to (i) twice the Executive's Base
Salary minus (ii) $50,000. The Executive shall be under no obligation to
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13
use the payments made by the Company pursuant to the preceding sentence to
purchase GUL insurance or to purchase any other life insurance. If the Company
discontinues its GUL insurance program, the Company shall nevertheless make the
payments required by this Section 7 as if such program were still in effect. The
payments made to the Executive pursuant to this Section 7 shall not be
considered as "salary" or "compensation" or "bonus" in determining the amount of
any payment under any pension, retirement, profit-sharing or other benefit plan
of the Company or any subsidiary of the Company.
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 the Advisory Period 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 life insurance (to the extent set forth in Section 7), hospitalization,
medical, dental, accident, disability or similar plan or program of the Company
now existing or established hereafter. In addition, so long as the Executive is
an employee of the Company during the term of employment (but not the Advisory
Period) the Executive shall be entitled to receive other benefits generally
available to all senior executives of the Company to the extent the Executive 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.
8.2 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 and the
Advisory Period, the Executive shall continue to be eligible to participate in
the benefit plans and to receive the benefits required to be provided to the
Executive under Sections 7 and 8.1 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. 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 the Advisory Period and until such time
as the Executive shall leave the payroll of the Company. At the time the
Executive's term of employment and Advisory Period terminates and he leaves the
payroll of the Company pursuant to the provisions of Section 4.1, 4.2, 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,
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14
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 any more restrictive provisions of any such
plan or agreement (but without affecting any less restrictive or more favorable
to the Executive 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 (i) all stock options granted to the Executive by the Company
shall vest and become immediately exercisable at the time the Executive shall
leave the payroll of the Company pursuant to Section 4.2, (ii) all stock options
granted to the Executive by the Company shall remain exercisable (but not beyond
the term thereof) during the remainder of the term of employment and the
Advisory Period and for a period of three months thereafter or such longer
period as shall be specified in any applicable stock option agreement and (iii)
the Company shall not be permitted to determine that the Executive's employment
was terminated for "unsatisfactory performance" within the meaning of any stock
option agreement between the Company and the Executive.
8.3 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 clause (A) or (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.
9. Protection of Confidential Information; Non-Compete. The
provisions of Section 9.2 shall continue to apply through the latest of (i) the
end of the Advisory Period (but not later than three years after the effective
date of any termination of this Agreement pursuant to Section 4.2) or (ii) the
date the Executive ceases to be an employee of the Company and leaves the
payroll of the Company for any reason. The provisions of Sections 9.1 and 9.3
shall continue to apply until three years after the latest of the events
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 and the Advisory Period, 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
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15
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
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 and the Advisory Period, 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;
9.1.2 The Executive shall 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; and
9.1.3 If the term of employment is terminated
pursuant to Section 4.1 or 4.2, for a period of one year after such termination,
without the prior written 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 exempt employee of the Company at the date of
such termination or within six months prior thereto.
9.2 Non-Compete. 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 person or Entity or
acquire any interest of any type in any Entity, that might be deemed 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,
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16
so long as he is not part of any control group of such Entity and such
securities, if converted, do not constitute more than one percent (1%) 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 indirectly, in competition with
the Company, (c) serving as a director of any Entity that is not in competition
with the Company or (d) during the Advisory Period, being a partner in or of
counsel to a law firm that represents any person or Entity that is in
competition with the Company so long as the Executive does not personally
provide or assist in the provision of services to any such person or Entity. For
purposes of the foregoing, a person or Entity shall be deemed to be in
competition with the Company if such person or it engages in any line of
business that is substantially the same as either (i) 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 or (ii) any operating
business that is engaged in or conducted by the Company and as to which, to the
knowledge of the Executive, the Company covenants in writing, in connection with
the disposition of such business, not to compete therewith.
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, 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 commits a
material breach of the provisions of Section 9.2, the Executive shall pay to the
Company as liquidated damages an amount equal to two and one-half times the
Executive's then current Base Salary, or if the Executive is not employed by the
Company at the time of such breach or such breach occurs during the Advisory
Period, an amount equal to two and one-half times the most recent Base Salary
paid to the Executive by the Company. 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 Section 4.2. 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,
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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, 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 participa tion
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 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 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 prepaid telegram, 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):
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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: Senior Vice President -
Administration)
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.
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, 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 all or substantially all of the business
and
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19
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, cancelled, 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 Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement shall, at the election of either the
Company or the Executive, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceeding or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. 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 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.
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20
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.
12.11 No Offset. Except as provided in Section 9.4 of
this Agreement, 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:
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Account Retained Income - Section A.6 of Annex A
Advisory Period - Section 13
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
deferred compensation - Section 3.3
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 2 Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
Investment Advisor - Section A.1 of Annex A
Pay-Out Period - Section A.6 of Annex A
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3
senior executives - Section 3.
Term Date - the second paragraph on page 1
term of employment - Section 1
Trust Account - Section 3.3
Trust Agreement - Section 3.3
Trustee - Section 3.3
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
13. Advisory Services. The Executive shall render the advisory
services described in this Section for the period beginning on January 1, 2000
and ending on December 31, 2001 (the "Advisory Period"). During the Advisory
Period, the Executive will provide such advisory services concerning the
business, affairs and management of the Company as may be required by the Board
of Directors, the Chief Executive Officer or the President of the Company, but
shall not be required to devote more than five days (up to eight hours per day)
each month to such service, which shall be performed at a time and place
mutually convenient to both parties and consistent with the Executive's other
activities. If at any time during the Advisory Period, the Executive engages in
other full-time employment, the Executive shall not be deemed to be in breach of
this Section 13, but unless such employment consists of the Executive providing
services to one or more (i) charitable or non-profit organizations or (ii)
family-owned corporations, trusts, or partnerships, the term of
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22
employment and the Advisory Period shall terminate, the Executive shall leave
the payroll of the Company and the Company shall have no further obligations
under this agreement other than with respect to earned and unpaid compensation
and benefits. Notwithstanding the foregoing, but subject to Section 9 of this
Agreement, during the Advisory Period the Executive may provide part-time
services to third parties (including serving as a member of the Board of
Directors of any such party). During the Advisory Period, the Executive shall be
entitled to receive compensation in an amount equal to $400,000 per annum and
shall continue to be entitled to the benefits described in Sections 7 and 8
hereof; provided, however, that the Executive shall not be entitled to a driver
or automobile allowance or financial counseling during the Advisory Period,
shall not accrue any vacation time during the Advisory Period and shall not be
entitled to any severance pay at the end thereof. In addition, during the first
year of the Advisory Period the Company shall provide the Executive with an
office, office facilities and a secretary in accordance with the provisions of
Section 4.3.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
TIME WARNER INC.
By /s/ Richard D. Parsons
-------------------------------
Richard D. Parsons, President
/s/ Peter R. Haje
-------------------------------
Peter R. Haje
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<PAGE>
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of his or her Trust Account. In the
case of any purchase, the Trust Account shall be charged with a dollar amount
equal to the quantity and kind of securities 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. In the case of any sale,
the Trust Account shall be charged with the quantity and kind of securities
sold, and shall be credited with a dollar amount equal to the quantity and kind
of securities sold multiplied by the fair market value of such securities on the
date of reference. Such charges and credits to the Trust 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 Rabbi Trust on the date of reference, the
actual purchase or sale price per security to the Rabbi Trust or (ii) if the
security
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A-2
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 Trustee
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 Trust Account, including determining the fair market value of
such security. The Trust Account shall be charged currently with all interest
paid by the Trust Account with respect to any credit extended to the Trust
Account. Such interest shall be charged to the Trust Account, for margin
purchases actually made, at the rates and times actually paid by the Trust
Account. 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 the Trustee 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 Trust Account at the rates and times
actually paid.
A.2 Dividends and Interest. The Trust Account shall be
credited with dollar amounts equal to cash dividends paid from time to time upon
the stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted
to reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
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A-3
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the Trustee for credit to the Trust Account
in accordance with the provisions of Section 3.3 of the Agreement, to use due
care in selecting the Trustee or any successor trustee and to in all respects
work cooperatively with the Trustee to fulfill the obligations of the Company
and the Trustee to the Executive. The Trust Account shall be charged with all
taxes (including stock transfer taxes), interest, brokerage fees and investment
advisory fees, if any, payable by the Company and attributable to the purchase
or disposition of securities designated by the Investment Advisor (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) and only in the
event of a default by the Company of its obligation to pay such fees and
expenses, the fees and expenses of the Trustee in accordance with the terms of
the Trust Agreement, but no other costs of the Company. Subject to the terms of
the Trust Agreement, the securities purchased for the Trust Account as
designated by the Investment Advisor shall remain the sole property of the
Company, subject to the claims of its general creditors, as provided in the
Trust Agreement. Neither the Executive nor his legal representative nor any
beneficiary designated by the Executive shall have any right, other than the
right of an unsecured general creditor, against the Company or the Trust in
respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such income
and gains within the Trust Account. For the purposes of this Section A.5, all
charges
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A-4
and credits to the Trust 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 Trust 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 Trust Account for such year) shall be credited to the
Trust Account on the last day of such year. If and to the extent that any such
net loss of the Trust Account shall be utilized to determine a credit to the
Trust 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. Unless the Executive makes the election
referred to in the next succeeding sentence, deferred compensation shall be paid
bi-weekly for a period of ten years (the "Pay-Out Period") commencing on the
first Company payroll date in the month following the later of (i) the end of
the Advisory Period and (ii) 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 the
first Company payroll date in January of the year following the year in which
the latest of such events occurs. The Executive may elect a shorter Pay-Out
Period by delivering written notice to the Company or the Trustee at least
one-year prior to the commencement of the Pay-Out Period, which notice shall
specify the shorter Pay-Out Period. On each payment date, the Trust Account
shall be charged with the dollar amount of such payment. On each payment date,
the amount of cash held in the Trust Account shall be not less than the payment
then due and the Company or the Trustee may select the securities to be 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 Trust 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
payments during the Pay-Out Period, the Trust Account shall be valued on the
fifth trading day prior to the end of the month preceding the first payment of
each year of the Pay-Out Period, or more frequently at the Company's or the
Trustee's election (the "Valuation Date"), by adjusting all
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A-5
of the securities held in the Trust Account to their fair market value (net of
the tax adjustment that would be made thereon if sold, as estimated by the
Company or the Trustee) and by deducting from the Trust Account the amount of
all outstanding indebtedness. The extent, if any, by which the Trust Account,
valued as provided in the immediately preceding sentence, exceeds the aggregate
amount of credits to the Trust 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 or the Trustee, 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 Trust 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 Trust Account, after all the
securities held therein 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 in the Trust 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 Trust Account shall be valued as of
the later of (i) December 31, 2001 or (ii) twelve months after termination of
the Executive's employment with the Company, and the balance of the Trust
Account, after the securities held therein 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 in the Trust 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
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 bi-weekly during the Pay-Out Period commencing on the
first Company payroll date in the month following the end of the Disability
Period in accordance with the provisions of the first paragraph of this Section
A.6.
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A-6
If the Executive shall die at any time whether during or after
the term of employment, the Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6,
if the Rabbi Trust shall terminate in accordance with the provisions of the
Trust Agreement, the Trust Account shall be valued as of the date of such
termination and the balance of the Trust Account shall be paid to the Executive
within 15 days of such termination in accordance with the provisions of the
third preceding paragraph.
Within 90 days after the end of each taxable year of the
Company in which payments have been made from the Trust Account and at the time
of the final payment from the Trust Account, the Company or the Trustee shall
compute and the Company shall pay to the Trustee for credit to the Trust
Account, the amount of the tax benefit assumed to be received by the Company
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 Trust Account pursuant to the
preceding sentence in respect of the amounts credited to the Trust 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 Trust 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 Trust Account pursuant to this Annex A (excluding credits made
pursuant to the second preceding sentence), after all credits and charges to the
Trust 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 Trust 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.
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ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
_____________, 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 ___________ , ____.
---------------------------
[Name]
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<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18,
1998, effective as of January 1, 1998 (the "Effective Date"), between TIME
WARNER INC., a Delaware corporation (the "Company"), and Richard J. Bressler
(the "Executive").
The Executive is currently employed by the Company pursuant to
an Employment Agreement made as of December 1, 1994 (the "Prior Agreement"). The
Company wishes to restate the Prior Agreement and secure the services of the
Executive on a full-time basis for the period to and including December 31, 1999
(the "Term Date") on and subject to the terms and conditions set forth in this
Agreement, and the Executive is willing for the Prior Agreement to be so
restated and 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. The Company shall employ the Executive, and the
Executive shall serve, as Executive Vice President and Chief Financial Officer
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 or
the President of the Company may from time to time delegate to the Executive in
addition thereto. 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. During the term of employment, (i)
the Executive's services shall be rendered on a substantially full-time,
exclusive basis and he will apply on a full-time basis all of his skill and
experience to the performance of his duties in such employment, (ii) the
Executive shall report only to the Company's Board of Directors, its Chief
Executive Officer or its President, (iii) the Executive shall have no other
employment and, without the prior written consent of the Chief Executive Officer
or the President of the Company, no outside business activities which require
the devotion of substantial amounts of the Executive's time
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2
and (iv) the place for the performance of the Executive's services shall be the
principal executive offices of the Company which shall be in the New York City
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. The foregoing shall be subject to the Company's written 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 shall not interfere with the performance of his duties hereunder,
provided that the Executive complies with the provisions of Sections 9 and 10
and any of the Company's written policies on conflicts of interest and service
as a director of another corporation, partnership, trust or other entity
("Entity").
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 $450,000, 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 then current practices and
policies with respect to senior executives. For the purposes of this Agreement
"senior executives" shall mean executives of the Company at the same executive
level as the Executive.
3.2 Bonus. In addition to Base Salary, the Executive may
be entitled to receive during the term of employment an annual cash bonus based
on the performance of the Company and of the Executive. Bonuses for senior
executives may be determined by the Compensation Committee of the Company's
Board of Directors or by the Chief Executive Officer or the President of the
Company. 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. 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, but in no event later than 90 days after the end of the period for
which the bonus is payable.
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
a defined contribution deferred compensation which shall be determined and paid
out on a deferred basis ("deferred compensation") as provided in this Agreement,
including Annex A hereto. Subject to the provisions of Section A.7 of Annex A,
During the term of employment, the Company shall
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3
pay to the trustee (the "Trustee") of a Company grantor trust (the "Rabbi
Trust") for credit to a special account maintained on the books of the Rabbi
Trust for the Executive (the "Trust 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, 4.2.3, 4.3.2 or 4.3.3, the Company
shall pay to the Trustee for credit to the Trust Account at the time of such
payment an amount equal to 50% of the Base Salary portion of such lump sum
payment. The Trust Account shall be maintained by the Trustee in accordance with
the terms of this Agreement, including Annex A, and the trust agreement (the
"Trust Agreement") establishing the Rabbi Trust (which Trust Agreement shall in
all respects be in furtherance of, and not inconsistent 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. Effective April 1, 1998,
the Company shall establish and maintain the Rabbi Trust as a grantor trust
within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of
the Code and shall pay all fees and expenses of the Trustee and shall enforce
the provisions of the Trust Agreement for the benefit of the Executive. Prior to
April 1, 1998, the Company shall credit the Executive with deferred compensation
in accordance with the provisions of Section 3.3 of the Prior Agreement.
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 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 Trust 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. The Prior Account shall be
promptly transferred to, and shall for all purposes be deemed part of, the Trust
Account and shall be maintained by the Trustee in accordance with this Agreement
and the Trust 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.
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4
3.6 Reimbursement. The Company shall reasonably promptly
pay or reimburse the Executive for all reasonable travel, 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 written 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.
3.7 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 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.
3.8 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 an officer or 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 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.
4. Termination.
4.1 Termination for Cause. The Company may terminate the
term of employment and all of the Company's obligations under this Agreement,
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 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 breach of any
of the covenants provided for in
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5
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
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 such termination by the Company for
cause, without prejudice to any other rights or remedies that the Company may
have at law or in 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 Trust 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 and (iii) with
respect to any rights the Executive has in respect of amounts credited to the
Trust Account 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 fourth sentence of Section 3.3 and the provisions of Sections 3.8,
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 Termination by the Company Without Cause. 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, 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 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 the title specified in the first sentence of
Section 2 or a more senior title; (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
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6
change in title); (iv) the Company requiring the Executive's primary services to
be rendered at a place other than at the Company's principal executive offices
in the New York City metropolitan area; or (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 Company shall have the right, exercisable by written
notice to the Executive, to terminate the Executive's employment under this
Agreement without cause, effective at least 30 days after the giving of such
notice, which notice shall specify the effective date of such termination.
In the event of a termination pursuant to this Section
4.2, the Executive shall be entitled to elect by delivery of written notice to
the Company, within 30 days after written notice of such termination is given
pursuant to this Section 4.2, either (A) to cease being an employee of the
Company and receive a lump sum payment as provided 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 pursuant to the preceding paragraph, (i) after the effective date of
such termination, the Executive shall have no further obligations or liabilities
to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6
through 12 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) in respect
of the two calendar years during the most recent five calendar years for which
the regular annual bonus received by the Executive from the Company was the
greatest, all or a portion of which pro rata bonus will be credited to the Trust
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 make the
election provided in clause (A) above, the Company shall pay to the Executive as
damages in a lump sum within 30 days thereafter (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such notice of termination is given) an amount
(discounted as provided in the immediately following sentence) equal to the
greater of (i) all amounts otherwise payable pursuant to Sections 3.1, 3.2 and
3.3 for the year
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7
in which such termination occurs and for each subsequent year through and
including the Term Date and (ii) all amounts that would be payable pursuant to
Sections 3.1, 3.2 and 3.3 if the Term Date had been a date three years after the
date of such notice of termination (assuming, in the case of either (i) or (ii)
above, that annual bonuses are required to be paid for each such year, with each
such annual bonus being equal to the average of the regular annual bonus amounts
(excluding the amount of any special or spot bonuses) in respect of the two
calendar years during the most recent five calendar years for which the regular
annual bonus received by the Executive from the Company was the greatest
(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
Trust Account provided for in the third 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 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 term of employment shall continue and
the Executive shall remain an employee of the Company for the period ending on
the later of (i) the Term Date and (ii) the date which is three years after the
date notice of termination is given 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 6, (a) Base Salary at an
annual rate equal to his Base Salary in effect immediately prior to 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 of the regular annual bonus
amounts (excluding the amount of any special or spot bonuses) in respect of the
two calendar years during the most recent five calendar years for which the
regular annual bonus received by the Executive from the Company was the greatest
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 cease and the Executive shall cease to be an employee of the
Company effective upon the commencement of such employment or the
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8
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
severance in a lump sum within 30 days after such commencement or such effective
date (provided that if the Executive was named in the compensation table in the
Company's then most recent proxy statement, such lump sum payment shall be made
within 30 days after the end of the calendar year in which such commencement or
effective date occurred) an amount (discounted as provided in the second
sentence of Section 4.2.2, except that the "applicable Federal rate" shall be
determined as of the date the Executive shall cease to be an employee of the
Company) for the balance of the Base Salary, deferred compensation (which shall
be credited to the Trust Account as provided in the third sentence of Section
3.3) and regular annual bonuses (assuming no deferral pursuant to 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 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 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 After the Term Date. If at the Term Date, the term of
employment shall not have been previously terminated pursuant to the provisions
of this Agreement, no Disability Period is then in effect and the parties shall
not have agreed to an extension or renewal of this Agreement or on the terms of
a new employment agreement, then the term of employment shall continue and the
Executive shall continue to be employed by the Company pursuant to the terms of
this Agreement, subject to termination by either party hereto on 60 days written
notice delivered to the other party (which notice may be delivered by either
party at any time on or after the date which is 60 days prior to the Term Date).
If the Company shall terminate the term of employment 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), which the Company shall have the right to do so long
as no Disability Date (as defined in Section 5) has occurred prior to the
delivery by the Company of written notice of termination, then in lieu of the
provisions of Section 4.2, the Executive 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 as provided in Section 4.3.2 or (B) remain an
employee of the Company for a period of twelve months pursuant to
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9
Section 4.3.3 and receive the payments provided in Section 4.3.3. After the
Executive makes such election, the following provisions shall apply:
4.3.1 Regardless of the election made by the
Executive pursuant to the preceding paragraph, 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 4.5 and 4.7 and Sections 6 through 12 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 to the Executive in
a lump sum at the end of the 60-day notice period provided for in the first
sentence of Section 4.3 (provided that if the Executive was named in the
compensation table in the Company's then most recent proxy statement, such lump
sum payment shall be made within 30 days after the end of the year in which such
notice of termination is given) an amount (discounted as provided in the second
sentence of Section 4.2.2) equal to three times the sum of (i) the Executive's
Base Salary as in effect immediately prior to such notice of termination, (ii)
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 for the two calendar years during the most recent five calendar years
for which the regular annual bonus received by the Executive was the greatest
(assuming that no portion of such bonus is deferred pursuant to Section 3.4) and
(iii) the annual amount of deferred compensation payable by the Company to the
Trust Account pursuant to Section 3.3 as in effect immediately prior to such
notice of termination (which shall be credited to the Trust Account as provided
in the third sentence of Section 3.3).
4.3.3 In the event the Executive shall make the
election provided in clause (B) above, the term of employment shall continue and
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 becomes disabled during such period but subject to
Section 6, (i) the Executive's Base Salary as in effect immediately prior to
such notice of termination, (ii) 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 for the two calendar years
during the most recent five calendar years for which the regular annual bonus
received by the Executive was the greatest and (iii) deferred compensation as
provided in Section 3.3 of this Agreement. At the end of such twelve month
period the term of employment shall cease, the Executive shall cease to be an
employee of the Company and the Company shall pay to the Executive in a lump sum
(discounted as provided
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10
in the second sentence of Section 4.2.2, except that "applicable Federal rate"
shall be determined as of the end of such twelve-month period) an amount equal
to two times the sum of the amounts described in clauses (i), (ii) and (iii) of
this Section 4.3.3. 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 terminate his
employment during such period, the Executive shall cease to be an employee of
the Company and the term of employment shall cease 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 (provided that if the Executive was named in the
compensation table in the Company's then most recent proxy statement, such lump
sum payment shall be made within 30 days after the end of the year in which such
commencement or effective date occurred) an amount (discounted as provided in
the second sentence of Section 4.2.2, except that "applicable Federal rate"
shall be determined as of the date of such commencement or such effective date,
as the case may be) for the balance of the Base Salary, deferred compensation
(which shall be credited to the Trust Account as provided in third sentence of
Section 3.3) and regular annual bonuses the Executive would have been entitled
to receive pursuant to this Section 4.3.3 (including the lump sum) 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 term of employment and
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 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 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 but taking into account the Executive's reduced need
for such office space, secretarial services and office facilities, services and
furnishings as a result of the Executive no longer being a full-time employee.
4.5 Release. In partial consideration for the Company's
obligation to make the payments described in Sections 4.2 and 4.3, the Executive
shall execute and deliver
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11
to the Company a release in substantially the form attached hereto as Annex B.
The Company shall deliver such release to the Executive within 10 days after the
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 shall fail to execute and deliver
such release to the Company within such 21 day period, or if the Executive shall
revoke his consent to such release as provided therein, the Executive's term of
employment shall terminate as provided in Section 4.2 or 4.3, as applicable, 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 written personnel policies of the Company relating to notice
and severance then generally applicable to employees with length of service and
compensation level of the Executive.
4.6 Retirement. Notwithstanding the provisions of
Sections 4.2, 4.3 or 5, if the term of employment is in effect and the Executive
is still employed by the Company pursuant to this Agreement on the date the
Executive first becomes eligible for normal retirement as defined in any
applicable retirement plan of the Company or any subsidiary of the Company (the
"Retirement Date"), then this Agreement shall terminate automatically on such
date and the Executive's employment with the Company shall thereafter be
governed by the policies generally applicable to employees of the Company, and
the Executive shall not thereafter be entitled to the payments provided in such
Sections to the extent not received by the Executive on or prior to the
Retirement Date. In addition, no benefits or payments provided in Sections 4.2,
4.3 or 5 shall include any period after the Retirement Date and if the provision
of benefits or calculation of payments provided in any such Section would
include any period subsequent to the Retirement Date, such provision of benefits
shall end on the Retirement Date and the calculation of payments shall cover
only the period ending on the Retirement Date. Notwithstanding the foregoing,
the Company's obligations under Section 7 of this Agreement shall continue after
any such termination and the provisions of Sections 12.1 and 12.7 shall apply to
any dispute with respect to this Agreement that arises after any such
termination.
4.7 Mitigation. In the event of termination of the term
of employment pursuant to Section 4.2 or 4.3, 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 connection with such damages if they were not so
"contingent on a
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12
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 Entity, 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 (i) in the case of a termination
pursuant to Section 4.2, the later of (x) the Term Date or (y) three years after
the date notice of termination is delivered pursuant to Section 4.2, and (ii) in
the case of a termination pursuant to Section 4.3, the date which is three years
after the end of the 60-day notice period referred to in the first sentence of
Section 4.3, in either case up to an amount equal to (x) the discounted lump sum
payment received by or for the account of the Executive with respect to Base
Salary, annual bonus and deferred compensation under Section 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 the Executive as a result of such termination
and, to the extent amounts have theretofore been paid to him 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 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
pursuant to Section 4.2 or 4.3 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
discounted amount received by him or credited to the Trust Account with respect
to Base Salary, annual bonus and deferred compensation under Section 3 for such
year. Any obligation of the Executive to mitigate his damages pursuant to this
Section 4.7 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, 4.2.3, 4.3.2 or
4.3.3, 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.
4.8 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 or
4.3 shall be made at the same times as such payments are made to senior
executives of the Company or such subsidiary.
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13
5. Disability. If during the term of employment and prior to
any termination of this Agreement under Section 4.2 or 4.3, 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 Trust 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 for the year in which the Disability
Date occurs and shall pay the Executive disability benefits for the longer of
(i) the period ending on the Term Date or (ii) three years (in the case of
either (i) or (ii), the "Disability Period"), in an annual 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 Trust 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 during the most recent five calendar years
for which the annual bonus received by the Executive from the Company was the
greatest (all or a portion of which may be deferred by the Executive pursuant to
Section 3.4). If during the Disability Period the Execu tive 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; and (ii) the provisions of Sections
9 and 10 shall continue to apply to the Executive during the Disability Period.
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 or the
President 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 both parties. 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
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14
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 Sections 4.2 and
4.3 shall not apply during the Disability Period 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
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 regular annual bonuses (excluding the amount of any
special or spot bonuses) in respect of the two calendar years during the most
recent five calendar 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 calendar
year, and (ii) the Trust 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 Trust 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 for any increased life
insurance, the Company shall obtain $4,000,000 face amount of split ownership
life insurance on the life of the Executive, to be owned by the Executive or
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15
the trustees of a trust for the benefit of the Executive's spouse and/or
descendants. 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). The Company shall not borrow from
the cash value of such policy. 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. In the event the Executive's advises the Company in writing within 30
days of the execution 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
spouse and/or descendants, the Company shall permit such ownership provided the
trustees of the trust execute, deliver and maintain a customary split dollar
insurance and collateral assignment form, assigning to the Company the proceeds
of such policy but only to the extent necessary to secure the reimbursement
obligation contained in the preceding sentence. In addition to the foregoing,
during the Executive's employment with the Company, the Company shall (x)
provide the Executive with $50,000 of group life insurance and (y) pay to the
Executive annually an amount equal to the premium that the Executive would have
to pay to obtain life insurance under the Group Universal Life ("GUL") insurance
program made available by the Company in an amount equal to (i) twice the
Executive's Base Salary minus (i) $50,000. The Executive shall be under no
obligation to use the payments made by the Company pursuant to the preceding
sentence to purchase GUL insurance or to purchase any other life insurance. If
the Company discontinues its GUL insurance program, the Company shall
nevertheless make the payments required by this Section 7 as if such program
were still in effect. The payments made to the Executive pursuant to this
Section 7 shall not be considered as "salary" or "compensation" or "bonus" in
determining the amount of any payment under any pension, retirement,
profit-sharing or other benefit plan of the Company or any subsidiary of the
Company.
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
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16
any pension, profit-sharing, stock option or similar plan or program and in any
group life insurance (to the extent set forth in Section 7), 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 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.
8.2 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 or 4.3 and during the Disability Period, the
Executive shall continue to be eligible to participate in the benefit plans and
to receive the benefits required to be provided to the Executive under Sections
7 and 8.1 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. 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, 4.3, 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 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 (i) all
stock options granted to the Executive by the Company shall vest and become
immediately exercisable at the time the Executive shall leave the payroll of the
Company pursuant to Section 4.2, (ii) all stock options granted to the Executive
by the Company shall remain exercisable (but not beyond the term thereof) during
the remainder of the term of employment and for a period of three months
thereafter or such longer period as may be specified in any stock option
agreement and (iii) the Company shall not be permitted to determine that the
Executive's employment was terminated for "unsatisfactory performance" within
the meaning of any stock option agreement between the Company and the Executive.
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17
8.3 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, 4.3, 5 or 6 (and regardless of whether the
Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), 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.
9. Protection of Confidential Information; Non-Compete. The
provisions of Section 9.2 shall continue to apply through the latest of (i) the
Term Date, (ii) the date the Executive ceases to be an employee of the Company
and leaves the payroll of the Company for any reason and (iii) twelve months
after the termination of the Executive's employment with the Company pursuant to
Section 4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue
to apply until three years after the latest of the events 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 pro cesses 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
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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18
9.1.2 The Executive shall 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; and
9.1.3 If the term of employment is terminated
pursuant to Section 4.1, 4.2 or 4.3, for a period of one year after such
termination, without the prior written 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 employee of the Company at the date of
such termination or within six months prior thereto but such prohibition shall
not apply to the Executive's secretary or executive assistant or to any other
employee eligible to receive overtime pay.
9.2 Non-Compete. 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 person or Entity or
acquire any interest of any type in any Entity, that might be deemed 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 one percent (1%)
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 indirectly,
in competition with the Company or (c) serving as a director of any Entity that
is not 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 it engages in any line of business that is substantially the same as either
(i) 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 or
(ii) any operating business that is engaged in or conducted by the Company and
as to which, to the knowledge of the Executive, the Company covenants in
writing, in connection with the disposition of such business, not to compete
therewith.
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
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19
Executive commits a material breach of any of the provisions of Section 9.1, 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 commits a
material breach of the provisions of Section 9.2, the Executive shall pay to the
Company as liquidated damages an amount equal to two and one-half times the
Executive's then current Base Salary, or if the Executive is not employed by the
Company at the time of such breach, an amount equal to two and one-half times
the most recent Base Salary paid to the Executive by the Company. 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, 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 participa tion
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 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
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20
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 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 prepaid telegram, 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.
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, including without limitation, the Prior Agreement.
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21
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 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, cancelled, 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 Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement shall, at the election of either the
Company or the Executive, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceeding or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. 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 may be entered in any court having jurisdiction thereof, and the
parties consent
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22
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 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.
12.11 No Offset. Except as provided in Section 9.4 of
this Agreement, 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.
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23
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 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
deferred compensation - Section 3.3
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 2
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
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3
Retirement Date - Section 4.6
senior executives - Section 3.1
Term Date - the second paragraph on page 1
term of employment - Section 1
Trust Account - Section 3.3
Trust Agreement - Section 3.3
Trustee - Section 3.3
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
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24
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
TIME WARNER INC.
By /s/ Richard D. Parsons
------------------------------
Richard D. Parsons
President
/s/ Richard J. Bressler
--------------------------------
Richard J. Bressler
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ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of his or her Trust Account. In the
case of any purchase, the Trust Account shall be charged with a dollar amount
equal to the quantity and kind of securities 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. In the case of any sale,
the Trust Account shall be charged with the quantity and kind of securities
sold, and shall be credited with a dollar amount equal to the quantity and kind
of securities sold multiplied by the fair market value of such securities on the
date of reference. Such charges and credits to the Trust 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 Rabbi Trust on the date of reference, the
actual purchase or sale price per security to the Rabbi Trust 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
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A-2
available. If no bid or asked price information is available with respect to a
particular security, the price quoted to the Trustee 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 Trust
Account, including determining the fair market value of such security. The Trust
Account shall be charged currently with all interest paid by the Trust Account
with respect to any credit extended to the Trust Account. Such interest shall be
charged to the Trust Account, for margin purchases actually made, at the rates
and times actually paid by the Trust Account. 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 the Trustee 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 Trust Account at
the rates and times actually paid.
A.2 Dividends and Interest. The Trust Account shall be
credited with dollar amounts equal to cash dividends paid from time to time upon
the stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted
to reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the Trustee for credit to the Trust Account
in accordance with the provisions of Section 3.3 of the Agreement, to use due
care in selecting the Trustee or any successor trustee and to in all respects
work cooperatively with the Trustee to fulfill the obligations of the Company
and the Trustee to the Executive. The Trust Account shall be charged with all
taxes (including stock transfer taxes), interest, brokerage fees and investment
advisory fees, if any, payable by the Company and attributable to the purchase
or disposition of securities designated by the Investment Advisor (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) and
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A-3
only in the event of a default by the Company of its obligation to pay such fees
and expenses, the fees and expenses of the Trustee in accordance with the terms
of the Trust Agreement, but no other costs of the Company. Subject to the terms
of the Trust Agreement, the securities purchased for the Trust Account as
designated by the Investment Advisor shall remain the sole property of the
Company, subject to the claims of its general creditors, as provided in the
Trust Agreement. Neither the Executive nor his legal representative nor any
beneficiary designated by the Executive shall have any right, other than the
right of an unsecured general creditor, against the Company or the Trust in
respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such income
and gains within the Trust Account. For the purposes of this Section A.5, all
charges and credits to the Trust 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 Trust 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 Trust Account for such year) shall be credited to
the Trust Account on the last day of such year. If and to the extent that any
such net loss of the Trust Account shall be utilized to determine a credit to
the Trust 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
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A-4
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. Unless the Executive makes the election
referred to in the next succeeding sentence, deferred compensation shall be paid
bi-weekly for a period of ten years (the "Pay-Out Period") commencing on the
first Company payroll date in the month following 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, 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 the first Company payroll date
in January of the year following the year in which the latest of such events
occurs. The Executive may elect a shorter Pay-Out Period by delivering written
notice to the Company or the Trustee at least one-year prior to the commencement
of the Pay-Out Period, which notice shall specify the shorter Pay-Out Period. On
each payment date, the Trust Account shall be charged with the dollar amount of
such payment. On each payment date, the amount of cash held in the Trust Account
shall be not less than the payment then due and the Company or the Trustee may
select the securities to be 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 Trust 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 payments during the Pay-Out Period, the
Trust Account shall be valued on the fifth trading day prior to the end of the
month preceding the first payment of each year of the Pay-Out Period, or more
frequently at the Company's or the Trustee's election (the "Valuation Date"), by
adjusting all of the securities held in the Trust Account to their fair market
value (net of the tax adjustment that would be made thereon if sold, as
estimated by the Company or the Trustee) and by deducting from the Trust Account
the amount of all outstanding indebtedness. The extent, if any, by which the
Trust Account, valued as provided in the immediately preceding sentence, exceeds
the aggregate amount of credits to the Trust 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 or the Trustee, 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 Trust
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 Trust
Account, after all the securities held therein 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 in the Trust Account since the
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A-5
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 Trust 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 Trust Account,
after the securities held therein 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 in the Trust 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 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 bi-weekly during the Pay-Out Period commencing on the
first Company payroll date in 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 Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6,
if the Rabbi Trust shall terminate in accordance with the provisions of the
Trust Agreement, the Trust Account shall be valued as of the date of such
termination and the balance of the Trust Account shall be paid to the Executive
within 15 days of such termination in accordance with the provisions of the
third preceding paragraph.
Within 90 days after the end of each taxable year of the
Company in which payments have been made from the Trust Account and at the time
of the final payment from the Trust Account, the Company or the Trustee shall
compute and the Company shall pay to the Trustee for credit to the Trust
Account, the amount of the tax benefit assumed to be received by the Company
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 Trust Account pursuant to the
preceding sentence in respect of the amounts credited to the Trust 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
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A-6
credits made to the Trust 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 Trust Account pursuant to this Annex A (excluding
credits made pursuant to the second preceding sentence), after all credits and
charges to the Trust 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 Trust 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.
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<PAGE>
ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
_____________, 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 ___________, ____.
---------------------------
[Name]
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<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18,
1998, effective as of January 1, 1998 (the "Effective Date"), between TIME
WARNER INC., a Delaware corporation (the "Company"), and Timothy A. Boggs (the
"Executive").
The Executive is currently employed by the Company pursuant to an
Employment Agreement dated as of May 15, 1996 (the "Prior Agreement"). The
Company wishes to restate the Prior Agreement and secure the services of the
Executive on a full-time basis for the period to and including December 31, 2000
(the "Term Date") on and subject to the terms and conditions set forth in this
Agreement, and the Executive is willing for the Prior Agreement to be so
restated and 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. The Company shall employ the Executive, and the
Executive shall serve, as Senior Vice President and 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 or the President of the Company may from time to time delegate to the
Executive in addition thereto. 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. During the term of
employment, (i) the Executive's services shall be rendered on a substantially
full-time, exclusive basis and he will apply on a full-time basis all of his
skill and experience to the performance of his duties in such employment, (ii)
the Executive shall report only to the President of the Company, the Company's
Board of Directors, and if so requested, to such other corporate officer(s) of
the Company more senior than the Executive as the Board of Directors shall
determine, (iii) the Executive shall have no other employment and, without the
prior written consent of the Chief Executive Officer or the President of the
Company, no
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2
outside business activities which require the devotion of substantial amounts of
the Executive's time and (iv) the place for the performance of the Executive's
services shall be the principal executive offices of the Company in the greater
Washington D.C. 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. The foregoing shall be subject to the Company's written 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 shall not interfere with the performance of his duties hereunder,
provided that the Executive complies with the provisions of Sections 9 and 10
and any of the Company's written policies on conflicts of interest and service
as a director of another corporation, partnership, trust or other entity
("Entity").
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 person or Entity or
acquire any interest of any type in any Entity, that might be deemed in
competition with the Company or any of its subsidiaries 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
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 one percent (1%) 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 indirectly, in competition with the Company or
any of its subsidiaries or (c) serving as a director of any other public company
that is not in competition with the Company or any of its subsidiaries. For
purposes of the foregoing, a person or Entity shall be deemed to be in
competition with the Company or any of its subsidiaries if such person 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 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 and as to which, to the knowledge of the Executive, the Company or
any of its subsidiaries covenants in writing, in connection with the disposition
of such business, not to compete therewith (in each case, a "Competitive
Entity").
3. Compensation.
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3
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 then current practices and
policies with respect to senior executives. For the purposes of this Agreement
"senior executives" shall mean executives of the Company at the same executive
level as the Executive.
3.2 Bonus. In addition to Base Salary, the Executive shall
be eligible to receive during the term of employment 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 by the Chief
Executive Officer or the President of the Company, 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 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. 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,
but in no event later than 90 days after the end of the period for which the
bonus is payable.
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
a defined contribution which shall be determined and paid out on a deferred
basis ("deferred compensation") as provided in this Agreement and in Annex A
hereto. During the term of employment, the Company shall pay to the trustee (the
"Trustee") of a Company grantor trust (the "Rabbi Trust") for credit to a
special account maintained on the books of the Rabbi Trust for the Executive
(the "Trust Account"), monthly, an amount equal to 25% of one-twelfth of the
Executive's then current Base Salary. If a lump sum payment is made pursuant to
Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, the Company shall pay to the Trustee for
credit to the Trust 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 Trust
Account shall be maintained by the Trustee in accordance with the terms of this
Agreement and Annex A and the trust agreement (the "Trust Agreement")
establishing the Rabbi Trust (which Trust Agreement shall in all respects be
in furtherance of, and not inconsistent with, the terms of this Agreement,
including Annex A), until the full amount which the Executive is entitled to
receive therefrom has been
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4
paid in full. The Company shall establish and maintain the Rabbi Trust as a
grantor trust within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Code and shall pay all fees and expenses of the Trustee and
shall enforce the provisions of the Trust Agreement for the benefit of the
Executive. Prior to April 1, 1998, the Company shall credit the Executive with
deferred compensation in accordance with the provisions of Section 3.3 of the
Prior Agreement.
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 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 Trust 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 (or any preceding agreement).
The Prior Account shall be promptly transferred to, and shall for all purposes
be deemed part of, the Trust Account and shall be maintained by the Trustee in
accordance with this Agreement and the Trust 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 reasonably promptly
pay or reimburse the Executive for all reasonable travel, 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 written 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.
3.7 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
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5
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 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.
3.8 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 an officer or 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 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.
4. Termination.
4.1 Termination for Cause. The Company may terminate the
term of employment and all of the Company's obligations under this Agreement,
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 action of 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
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 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 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, the Company shall
have no further obligations to the Executive other than (i) to pay Base Salary
and make credits of deferred compensation
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6
to the Trust 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 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 Trust 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 fourth sentence of Section 3.3 and the provisions of
Sections 3.6, 3.8, 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 Termination by the Company Without Cause. 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, 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 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 the title specified in the first sentence of
Section 2 or a more senior title; (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 Company's principal executive offices in
the 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 Company shall have the right, exercisable by written
notice to the Executive, to terminate the Executive's employment under this
Agreement without cause, effective at least 30 days after the giving of such
notice, which notice shall specify the effective date of such termination.
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7
In the event of a termination pursuant to this Section
4.2, the Executive shall be entitled to elect by delivery of written notice to
the Company, within 30 days after written notice of such termination is given
pursuant to this Section 4.2, either (A) to cease being an employee of the
Company and receive a 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
pursuant to the preceding paragraph, (i) after the effective date of such
termination, the Executive shall have no further obligations or liabilities to
the Company whatsoever, except that the last paragraph of Section 2, Sections
3.8, 4.5 and 4.6 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) in respect of the two calendar years during the
most recent five calendar years for which the regular annual bonus received by
the Executive from the Company was the greatest, provided that such annual bonus
shall not be less than $437,500, all or a portion of which pro rata bonus will
be credited to the Trust 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 make the election
provided in clause (A) above, the Company shall pay to the Executive as damages
(or pay to the Trustee for credit to the Trust Account with respect to Section
3.3) in a lump sum within 30 days thereafter (provided that if the Executive was
named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such notice of termination is given) an amount
(discounted as provided in the immediately following sentence) equal to the
greater of (i) 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 through and including the Term Date and (ii) all amounts that
would be payable (whether or not deferred) pursuant to Section 3 if the Term
Date had been a date one year after the date of such notice of termination
(assuming, in the case of either (i) or (ii) above, that annual bonuses are
required to be paid for each such year, with each such annual bonus being equal
to the average of the regular annual bonus amounts (excluding the amount of
any special or spot bonuses) in respect of the two calendar years during the
most recent five calendar years for which the regular annual bonus received by
the Executive from the Company was the greatest (assuming that no portion of
such bonus is deferred pursuant to Section 3.4), provided that such annual
bonus shall not be less than $437,500. Any payments required to be made to the
Executive pursuant to this
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8
Section 4.2.2 upon such termination in respect of Sections 3.1 and 3.2 and the
credit to the Trust Account provided for in the third 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 Sec tion 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 term of employment shall continue and the
Executive shall remain an employee of the Company for the period ending on the
later of (i) the Term Date and (ii) the date which is one year after the
effective date of termination 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 6, (a) Base Salary at an annual rate
equal to his Base Salary in effect immediately prior to 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 of the regular annual bonus
amounts (excluding the amount of any special or spot bonuses) in respect of the
two calendar years during the most recent five calendar years for which the
regular annual bonus received by the Executive from the Company was the
greatest, provided that such annual bonus shall not be less than $437,500 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 cease 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 severance in a
lump sum within 30 days after such commencement or such effective date (provided
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such lump sum payment shall be made within 30 days
after the end of the calendar year in which such commencement or effective date
occurred) an amount (discounted as provided in the second sentence of
Section 4.2.2, except that the "applicable Federal rate" shall be determined as
of the date the Executive shall cease to be an employee of the Company) for the
balance of the Base Salary, deferred compensation (which shall be credited to
the Trust Account as provided in the third sentence of Section 3.3) and
regular annual bonuses
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9
(assuming no deferral pursuant to 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 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 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 After the Term Date. At least 120 days prior to the
Term Date, the Company and the Executive shall commence discussions regarding a
renewed or extension of this Agreement on terms and conditions mutually
agreeable to the parties. If at the Term Date, the term of employment shall not
have been previously terminated pursuant to the provisions of this Agreement, no
Disability Period is then in effect and the parties shall not have agreed to an
extension or renewal of this Agreement or on the terms of a new employment
agreement, then the term of employment shall continue and the Executive shall
continue to be employed by the Company pursuant to the terms of this Agreement,
subject to termination by either party hereto on 60 days written notice
delivered to the other party (which notice may be delivered by either party at
any time on or after the date which is 60 days prior to 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 terminate the term of employment 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 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
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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
pursuant to the preceding paragraph, 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, 4.5 and 4.6 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 to the Executive (or pay to
the Trustee for credit to the Trust 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 (provided that if the Executive was named in the
compensation table in the Company's then most recent proxy statement, such lump
sum payment shall be made within 30 days after the end of the year in which such
notice of termination is given) an amount (discounted as provided in the second
sentence of Section 4.2.2) equal to the sum of (i) one year's Base Salary as in
effect immediately prior to such notice of termination, (ii) 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 for the two
calendar years during the most recent five calendar years for which the regular
annual bonus received by the Executive was the greatest (assuming that no
portion of such bonus is deferred pursuant to Section 3.4), provided that such
annual bonus shall not be less than $437,500 and (iii) the annual amount of
deferred compensation payable by the Company to the Trust Account pursuant to
Section 3.3 as in effect immediately prior to such notice of termination (which
shall be credited to the Trust Account as provided in the third sentence of
Section 3.3).
4.3.3 In the event the Executive shall make the election
provided in clause (B) above, the term of employment shall continue and 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 6, (i) the Executive's Base Salary as in effect immediately prior to
such notice of termination, (ii) 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
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11
Executive from the Company (or credited to the Trust Account) for the two
calendar years during the most recent five calendar years for which the regular
annual bonus received by the Executive was the greatest, provided that such
annual bonus shall not be less than $437,500 and (iii) credits to the Trust
Account of deferred compensation as provided in Section 3.3 of this Agreement.
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 and the
term of employment shall cease 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 (provided that if the Executive was named in the compensation
table in the Company's then most recent proxy statement, such lump sum payment
shall be made within 30 days after the end of the year in which such
commencement or effective date occurred) an amount (discounted as provided in
the second sentence of Section 4.2.2, except that "applicable Federal rate"
shall be determined as of the date of such commencement or such effective date,
as the case may be) for the balance of the Base Salary, deferred compensation
(which shall be credited to the Trust Account as provided in the third sentence
of Section 3.3) 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 term of employment and
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 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 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 but taking into account the Executive's reduced need
for such office space, secretarial services and office facilities, services and
furnishings as a result of the Executive no longer being a full-time employee.
4.5 Release. In partial consideration for and as an
express condition of the Company's obligation to make the payments described in
Sections 4.2 and 4.3, the
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12
Executive 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 the 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 his consent to such release as provided therein, the
Executive's term of employment shall terminate as provided in Section 4.2 or
4.3, as applicable, 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 written personnel policies of the Company
relating to notice and severance then generally applicable to employees with
length of service and compensation level of the Executive.
4.6 Mitigation. In the event of termination of the term of
employment pursuant to Section 4.2 or 4.3, 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 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 Entity
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 discounted lump sum payment actually received
by or for the account of the Executive with respect to Base Salary, annual bonus
and deferred compensation under Section 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
the Executive as a result of such termination and, to the extent amounts have
theretofore been paid to him 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
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13
Executive is entitled by reason of the termination of the term of employment
pursuant to Section 4.2 or 4.3 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
discounted amount received by him or credited to the Trust Account with respect
to Base Salary, annual bonus and deferred compensation under Section 3 for such
year. Any obligation of the Executive to mitigate his damages pursuant to this
Section 4.6 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, 4.2.3, 4.3.2 or
4.3.3, 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.
4.7 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 or
4.3 shall be made at the same times as such payments are made to senior
executives of the Company or such subsidiary.
5. Disability. If during the term of employment and prior to any
termination of this Agreement under Section 4.2 or 4.3, 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 Trust 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 for the year in which the
Disability Date occurs and shall pay the Executive disability benefits for the
longer of (i) the period ending on the Term Date or (ii) one year following the
Disability Date (in the case of either (i) or (ii), the "Disability Period"),
in an annual amount equal to 75% of (a) what the Executive's 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 Trust 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 during the most recent
five calendar years for which the annual bonus received by the Executive from
the Company was the greatest, provided that such annual bonus shall not be
less than $437,500 (all or a portion of 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 his disability, the
Company shall have the right (exercis able within 60 days after notice
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14
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 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
paragraph of Section 2 shall continue to apply to the Executive during the
Disability Period. 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 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 Company shall be entitled to deduct from all pay ments 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 (but only with
respect to that portion of the Disability Period occurring during the term of
employment) from Work men'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
and unless the Company has restored the Executive to fill-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 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, 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
thereof) shall be entitled to receive, to the
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15
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 regular annual bonuses (excluding the amount of any special
or spot bonuses) in respect of the two calendar years during the most recent
five calendar years for which the annual bonus received by the Executive from
the Company was the greatest, provided that such annual bonus shall not be less
than $437,500, 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
Trust 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 Trust 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. During the Executive's employment with
the Company, the Company shall provide the Executive with $50,000 group life
insurance. In addition, during each year of the Executive's employment, the
Company shall pay to the Executive annually an amount equal to two times the
premium that the Executive would have to pay to obtain life insurance under the
Group Universal Life ("GUL") insurance program made available by the Company in
an amount equal to (i) $1.5 million plus (ii) twice the Executive's Base Salary
less $50,000. The Executive shall be under no obligation to use the payments
made by the Company pursuant to the preceding sentence to purchase GUL insurance
or to purchase any other life insurance. If the Company discontinues its GUL
insurance program, the Company shall nevertheless make the payments required by
this Section 7 as if such program were still in effect. The payments made to the
Executive pursuant to this Section 7 shall not be considered as "salary" or
"compensation" or "bonus" in determining the amount of any payment under any
pension, retirement, profit-sharing or other benefit plan of the Company or any
subsidiary of the Company.
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 life
insurance (to the extent set forth in Section 7), 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
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16
employee of the Company, to receive other benefits generally available to all
senior executives of the Company to the extent the Executive 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.
8.2 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 or 4.3 and during the Disability Period, the Executive
shall continue to be eligible to participate in the benefit plans and to receive
the benefits required to be provided to the Executive under Sections 7 and 8.1
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. 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, 4.3, 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 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 (i) all stock options
granted to the Executive by the Company shall vest and become immediately
exercisable at the time the Executive shall leave the payroll of the Company
pursuant to Section 4.2, (ii) all stock options granted to the Executive by the
Company shall remain exercisable (but not beyond the expiration of the option
term) for the later of the remainder of the term of employment or through the
Term Date, and for a period of three months thereafter or such longer period as
may be specified in any stock option agreement and (iii) the Company shall not
be permitted to determine that the Executive's employment was terminated for
"unsatisfactory performance" within the meaning of any stock option agreement
between the Company and the Executive. The Executive's rights to receive payment
of deferred compensation from the Trust Account, and the Company's and the
Trustee's obligations with respect to the maintenance of the Trust Account and
the payment of such deferred compensation, shall be governed by the provisions
of Section 3.3, Annex A and the Trust Agreement.
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8.3 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, 4.3, 5 or 6 (and regardless of whether the
Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), 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.
9. Protection of Confidential Information; Non-Compete.
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 pro cesses 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 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;
9.1.2 The Executive shall 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;
and
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9.1.3 If the term of employment is terminated pursuant to
Section 4.1, 4.2 or 4.3, for a period of one year after such termination,
without the prior written 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 exempt employee of the Company 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 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 Executiveis 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 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
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.
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
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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, 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 participa tion
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 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 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 prepaid telegram, or mailed first-class,
postage prepaid, by registered or certified mail, as follows (or to
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20
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.
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, 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
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21
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, cancelled, 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 Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement shall, at the election of either the
Company or the Executive, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceeding or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. 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 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.
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22
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.
12.11 No Offset. Except as provided in Section 9.4 of this
Agreement, 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 Retained Income - Section A.6 of Annex A
affiliate - Section 4.2.3
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23
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
Competitive Entity - Section 2
deferred compensation - Section 3.3
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 2
Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
GUL - Section 7
Investment Advisor - Section A.1 of Annex A
Lobbying Services - Section 9.2
Pay-Out Period - Section A.6 of Annex A
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Prohibited Entity - Section 9.2
Rabbi Trust - Section 3.3
Retirement Date - Section 4.6
senior executives - Section 3.1
Term Date - the second paragraph on page 1
term of employment - Section 1
Trust Account - Section 3.3
Trust Agreement - Section 3.3
Trustee - Section 3.3
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of the date first above written.
TIME WARNER INC.
By /s/ Richard D. Parsons
-----------------------------
Richard D. Parsons
President
/s/ Timothy A. Boggs
-----------------------------
Timothy A. Boggs
<PAGE>
<PAGE>
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of his or her Trust Account. In the
case of any purchase, the Trust Account shall be charged with a dollar amount
equal to the quantity and kind of securities 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. In the case of any sale,
the Trust Account shall be charged with the quantity and kind of securities
sold, and shall be credited with a dollar amount equal to the quantity and kind
of securities sold multiplied by the fair market value of such securities on the
date of reference. Such charges and credits to the Trust 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 Rabbi Trust on the date of reference, the
actual purchase or sale price per security to the Rabbi Trust 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 Trustee
as the value of
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A-2
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
Trust Account, including determining the fair market value of such security. The
Trust Account shall be charged currently with all interest paid by the Trust
Account with respect to any credit extended to the Trust Account. Such interest
shall be charged to the Trust Account, for margin purchases actually made, at
the rates and times actually paid by the Trust Account. 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 the Trustee
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 Trust Account at
the rates and times actually paid.
A.2 Dividends and Interest. The Trust Account shall be credited
with dollar amounts equal to cash dividends paid from time to time upon the
stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted to
reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the Trustee for credit to the Trust Account
in accordance with the provisions of Section 3.3 of the Agreement, to use due
care in selecting the Trustee or any successor trustee and to in all respects
work cooperatively with the Trustee to fulfill the obligations of the Company
and the Trustee to the Executive. The Trust Account shall be charged with all
taxes (including stock transfer taxes), interest, brokerage fees and investment
advisory fees, if any, payable by the Company and attributable to the purchase
or disposition of securities designated by the Investment Advisor (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) and only in the
event of a default by the Company of its obligation to pay such fees and
expenses, the fees and expenses of the Trustee in accordance with the terms of
the Trust Agreement, but no
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A-3
other costs of the Company. Subject to the terms of the Trust Agreement, the
securities purchased for the Trust Account as designated by the Investment
Advisor shall remain the sole property of the Company, subject to the claims of
its general creditors, as provided in the Trust Agreement. Neither the Executive
nor his legal representative nor any beneficiary designated by the Executive
shall have any right, other than the right of an unsecured general creditor,
against the Company or the Trust in respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such income
and gains within the Trust Account. For the purposes of this Section A.5, all
charges and credits to the Trust 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 Trust 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 Trust Account for such year) shall be credited to
the Trust Account on the last day of such year. If and to the extent that any
such net loss of the Trust Account shall be utilized to determine a credit to
the Trust 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. Unless the Executive makes the election referred
to in the next succeeding
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A-4
sentence, deferred compensation shall be paid bi-weekly for a period of ten
years (the "Pay-Out Period") commencing on the first Company payroll date in the
month following 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, 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 the first Company payroll date in January of the year
following the year in which the latest of such events occurs. The Executive may
elect a shorter Pay-Out Period by delivering written notice to the Company or
the Trustee at least one-year prior to the commencement of the Pay-Out Period,
which notice shall specify the shorter Pay-Out Period. On each payment date, the
Trust Account shall be charged with the dollar amount of such payment. On each
payment date, the amount of cash held in the Trust Account shall be not less
than the payment then due and the Company or the Trustee may select the
securities to be 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 Trust 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 payments during the Pay-Out Period, the Trust Account
shall be valued on the fifth trading day prior to the end of the month preceding
the first payment of each year of the Pay-Out Period, or more frequently at the
Company's or the Trustee's election (the "Valuation Date"), by adjusting all of
the securities held in the Trust Account to their fair market value (net of the
tax adjustment that would be made thereon if sold, as estimated by the Company
or the Trustee) and by deducting from the Trust Account the amount of all
outstanding indebtedness. The extent, if any, by which the Trust Account, valued
as provided in the immediately preceding sentence, exceeds the aggregate amount
of credits to the Trust 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 or the Trustee, 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 Trust 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 Trust Account, after all the
securities held therein 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 in the Trust 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 Trust 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
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A-5
the Trust Account, after the securities held therein 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 in the Trust
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
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
bi-weekly during the Pay-Out Period commencing on the first Company payroll date
in 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 Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6, if
the Rabbi Trust shall terminate in accordance with the provisions of the Trust
Agreement, the Trust Account shall be valued as of the date of such termination
and the balance of the Trust Account shall be paid to the Executive within 15
days of such termination in accordance with the provisions of the third
preceding paragraph.
Within 90 days after the end of each taxable year of the Company
in which payments have been made from the Trust Account and at the time of the
final payment from the Trust Account, the Company or the Trustee shall compute
and the Company shall pay to the Trustee for credit to the Trust Account, the
amount of the tax benefit assumed to be received by the Company 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 Trust Account pursuant to the preceding sentence in
respect of the amounts credited to the Trust 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 Trust 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 Trust Account pursuantto this
Annex A (excluding credits made pursuant to the second preceding sentence),
after all credits and charges to the Trust 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
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A-6
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
Trust 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.
<PAGE>
<PAGE>
ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
_____________, 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 ___________ , ____.
---------------------------
[Name]
<PAGE>
<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18,
1998, effective as of January 1, 1998 (the "Effective Date"), between TIME
WARNER INC., a Delaware corporation (the "Company"), and John A. LaBarca (the
"Executive").
The Executive is currently employed by the Company pursuant to
an Employment Agreement made as of July 14, 1997 (the "Prior Agreement"). The
Company wishes to restate the Prior Agreement and secure the services of the
Executive on a full-time basis for the period to and including April 30, 2002
and thereafter for a one-year advisory period on and subject to the terms and
conditions set forth in this Agreement, and the Executive is willing for the
Prior Agreement to be so restated and 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 April 30, 2002, subject, however,
to the terms and conditions set forth in this Agreement. Notwithstanding the
foregoing or anything to the contrary contained in this Agreement, the "term of
employment" as used in Section 3.6, 3.7, 3.8 and 8 through 12 shall mean the
period ending at the end of the Advisory Period (as defined in Section 13).
2. Employment. The Company shall employ the Executive, and the
Executive shall serve, as Senior Vice President, Financial Operations and
Controller 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 Chief Financial Officer of the Company may from
time to time delegate to the Executive in addition thereto. 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. During the term of employment, (i) the Executive's services shall
be rendered on a substantially full-time, exclusive basis and he will apply on a
full-time basis all of his skill and experience to the performance of his duties
in such employment, (ii) the Executive shall report only to the Chief Financial
Officer of the
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2
Company, (iii) the Executive shall have no other employment and, without the
prior written consent of the Chief Executive Officer, the President or the Chief
Financial Officer of the Company, no outside business activities which require
the devotion of substantial amounts of the Executive's time and (iv) the place
for the performance of the Executive's services shall be the principal executive
offices of the Company which shall be in the New York City 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. The
foregoing shall be subject to the Company's written 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 shall
not interfere with the performance of his duties hereunder, provided that the
Executive complies with the provisions of Sections 9 and 10 and any of the
Company's written policies on conflicts of interest and service as a director of
another corporation, partnership, trust or other entity ("Entity").
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 $325,000 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 then current practices and
policies with respect to senior executives. For the purposes of this Agreement
"senior executives" shall mean executives of the Company at the same executive
level as the Executive.
3.2. Bonus. In addition to Base Salary, the Executive may
be entitled to receive during the term of employment an annual cash bonus based
on the performance of the Company and of the Executive. Bonuses for senior
executives may be determined by the Compensation Committee of the Company's
Board of Directors or by the Chief Executive Officer or the Chief Financial
Officer of the Company. 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. 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, but in no event later than 90 days after the end
of the period for which the bonus is payable.
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 a defined contribution
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3
which shall be determined and paid out on a deferred basis ("deferred
compensation") as provided in this Agreement, including Annex A hereto. During
the term of employment, the Company shall pay to the trustee (the "Trustee") of
a Company grantor trust (the "Rabbi Trust") for credit to a special account
maintained on the books of the Rabbi Trust for the Executive (the "Trust
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 pay to the Trustee for credit to the Trust
Account at the time of such payment an amount equal to 50% of the Base Salary
portion of such lump sum payment. The Trust Account shall be maintained by the
Trustee in accordance with the terms of this Agreement, including Annex A, and
the trust agreement (the "Trust Agreement") establishing the Rabbi Trust (which
Trust Agreement shall in all respects be in furtherance of, and not inconsistent
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.
Effective April 1, 1998, the Company shall establish and maintain the Rabbi
Trust as a grantor trust within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Code and shall pay all fees and expenses of the
Trustee and shall enforce the provisions of the Trust Agreement for the benefit
of the Executive. Prior to April 1, 1998, the Company shall credit the Executive
with deferred compensation in accordance with the provisions of Section 3.3 of
the Prior Agreement.
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 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 Trust 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. The Prior Account shall be
promptly transferred to, and shall for all purposes be deemed part of, the Trust
Account and shall be maintained by the Trustee in accordance with this Agreement
and the Trust 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.
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4
3.6. Reimbursement. The Company shall reasonably promptly
pay or reimburse the Executive for all reasonable travel, 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 written 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.
3.7. 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 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.
3.8. 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 an officer or 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 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.
4. Termination.
4.1. Termination for Cause. The Company may terminate the
term of employment and all of the Company's obligations under this Agreement,
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 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 breach of any
of the covenants provided for in
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5
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
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 such termination by the Company for
cause, without prejudice to any other rights or remedies that the Company may
have at law or in 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 Trust 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 and (iii) with
respect to any rights the Executive has in respect of amounts credited to the
Trust Account 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 fourth sentence of Section 3.3 and the provisions of Sections 3.8,
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 Termination by the Company Without Cause. Unless previously
terminated pursuant to any other provision of this Agreement and unless a
Disability Date has occurred and the disability period remains 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, 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 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 the title
specified in the first sentence of Section 2 or a more senior title; (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
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6
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
Company's principal executive offices in the New York City metropolitan 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 Company shall have the right, exercisable by written
notice to the Executive, to terminate the Executive's employment under this
Agreement without cause, effective at least 30 days after the giving of such
notice, which notice shall specify the effective date of such termination.
In the event of a termination pursuant to this Section
4.2, the Executive shall be entitled to elect by delivery of written notice to
the Company, within 30 days after written notice of such termination is given
pursuant to this Section 4.2, either (A) to cease being an employee of the
Company and receive a lump sum payment as provided 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 pursuant to the preceding paragraph, (i) after the effective date of
such termination, the Executive shall have no further obligations or liabilities
to the Company whatsoever, except that Sections 4.4 and 4.5 and Sections 6
through 12 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) in respect
of the two calendar years during the most recent five calendar years for which
the regular annual bonus received by the Executive from the Company was the
greatest, provided that such annual bonus shall not be less than $462,500, all
or a portion of which pro rata bonus will be credited to the Trust 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 make the
election provided in clause (A) above, the Company shall pay to the Executive as
damages in a lump sum within 30 days thereafter (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such notice of termination is given) an amount
(discounted as provided in the immediately following sentence) equal to all
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7
amounts otherwise payable pursuant to Sections 3.1, 3.2, 3.3 and 13 for the year
in which such termination occurs and for each subsequent year of the term of
employment and the Advisory Period (assuming that annual bonuses are required to
be paid for each such year of the term of employment, with each such annual
bonus being equal to the average of the regular annual bonus amounts (excluding
the amount of any special or spot bonuses) in respect of the two calendar years
during the most recent five calendar years for which the regular annual bonus
received by the Executive from the Company was the greatest (assuming that no
portion of such bonus is deferred pursuant to Section 3.4), with the bonus for
any partial calendar year appropriately annualized, provided that such annual
bonus shall not be less than $462,500. 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, 3.2 and 13 and the credit to the Trust Account provided for in the
third 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 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 term of employment shall continue and
the Executive shall remain an employee of the Company until the end of the term
of employment and the Advisory Period 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 notice of termination for each year
through the term of employment, (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 during the term of employment (in which case a
pro rata portion of such annual bonus will be payable) during such period equal
to the average of the regular annual bonus amounts (excluding the amount of any
special or spot bonuses) in respect of the two calendar years during the most
recent five calendar years for which the regular annual bonus received by the
Executive from the Company was the greatest (with any partial calendar year
bonus appropriately annualized) as provided in Section 3.2, provided that such
annual bonus shall not be less than $462,500, (c) deferred compensation as
provided in Section 3.3 and (d) Advisory Period compensation as provided in
Section 13. Except as provided in the next sentence, if the Executive accepts
full-time employment with any other Entity during such
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8
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 and the
Advisory Period shall cease 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 (provided
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such lump sum payment shall be made within 30 days
after the end of the calendar year in which such commencement or effective date
occurred) an amount (discounted as provided in the second sentence of Section
4.2.2 except that the "applicable Federal rate" shall be determined as of the
date the Executive shall cease to be an employee of the Company) for the balance
of the Base Salary, deferred compensation (which shall be credited to the Trust
Account as provided in the third sentence of Section 3.3), regular annual
bonuses (assuming no deferral pursuant to Section 3.4) and Advisory Period
compensation 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 Advisory 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 4.2.3; 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 and the
Advisory Period 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 but taking into account the Executive's reduced need for such office
space, secretarial services and office facilities, services and furnishings as a
result of the Executive no longer being a full-time employee.
4.4. Release. In partial consideration for the Company's
obligation to make the payments described in Section 4.2, the Executive shall
execute and deliver to the Company a release in substantially the form attached
hereto as Annex B. The Company shall
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9
deliver such release to the Executive within 10 days after the written notice of
termination is delivered pursuant to Section 4.2 and the Executive shall execute
and deliver such release to the Company within 21 days after receipt thereof. If
the Executive shall fail to execute and deliver such release to the Company
within such 21 day period, or if the Executive shall revoke his consent to such
release as provided therein, the Executive's term of employment shall terminate
as provided in Section 4.2, but the Executive shall receive, in lieu of the
payments provided for in said Section 4.2, a lump sum cash payment in an amount
determined in accordance with the written personnel policies of the Company
relating to notice and severance then generally applicable to employees with
length of service and compensation level of the Executive.
4.5. Mitigation. In the event of termination of the term
of employment pursuant to Section 4.2, 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 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 Entity, 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 April 30,
2003 up to an amount equal to (x) the discounted lump sum payment received by or
for the account of the Executive with respect to Base Salary, annual bonus and
deferred compensation under Section 3 and Advisory Period compensation under
Section 13 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 the Executive as a result of
such termination and, to the extent amounts have theretofore been paid to him 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 a termination pursuant to Section 4.2 shall be considered as damages
hereunder. With respect to the second preceding
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10
sentence, the Executive shall in no event be required to pay the Company with
respect to any calendar year more than the discounted amount received by him or
credited to the Trust Account with respect to Base Salary, annual bonus,
deferred compensation under Section 3 and Advisory Period compensation under
Section 13 for such year. Any obligation of the Executive to mitigate his
damages pursuant to this Section 4.5 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, 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.
4.6. 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.
5. Disability. If during the term of employment or the
Advisory Period and prior to any termination 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, contin ue to pay
the Executive his full compensation and continue to credit the Trust Account,
when otherwise due, as provided in Section 3 and 13 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 for the year in which the Disability Date occurs and shall pay the
Executive annual disability benefits (a) for the balance of the term of
employment in an annual amount equal to 75% of (i) 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 Trust Account pursuant to Section 3.3 and Annex A as further
disability benefits) and (ii) the average of the regular annual bonuses
(excluding the amount of any special or spot bonuses) in respect of the two
calendar years during the most recent five calendar years for which the annual
bonus received by the Executive from the Company was the greatest, provided that
such annual bonus shall not be less than $462,500 (all or a portion of which may
be deferred by the Executive pursuant to Section 3.4) and (b) for the balance of
the Advisory Period in an amount equal to $350,000 per annum. If during the term
of employment and subsequent to the Disability Date 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
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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 of employment shall not be extended by virtue of
the occurrence of the disability. 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 term of
employment and Advisory Period; and (ii) the provisions of Sections 9 and 10
shall continue to apply to the Executive during such period. 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, the President or the
Chief Financial 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
both parties. 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 pay ments to be made to the Executive during any
disability period pursuant to this Section 5 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 and the Advisory
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
and the Advisory Period 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 unless the Company has restored the Executive to fill-time service at
full compensation prior to April 30, 2002, the term of employment and the
Advisory Period shall end as provided in this Agreement and the Executive shall
cease to be an employee of the Company at the end of the Advisory 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 or the Advisory Period, this Agreement and all obligations of the
Company to make any payments under Sections 3, 4, 5 and 13 shall terminate
except that (i) the Executive's estate
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(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 or Advisory Period compensation, as applicable, to the
last day of the month in which his death occurs and if the Executive dies during
the term of employment, shall be entitled to receive bonus compensation (at the
time bonuses are normally paid) based on the average of the regular annual
bonuses (excluding the amount of any special or spot bonuses) in respect of the
two calendar years during the most recent five calendar years for which the
annual bonus received by the Executive from the Company was the greatest,
provided that such annual bonus shall not be less than $462,500, 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 Trust 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 Trust 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. The Company shall continue to maintain
$1,500,000 face amount of split ownership life insurance on the life of the
Executive, to be owned by the Company or the trustees of a trust for the benefit
of the Executive's spouse and/or descendants. The Company shall pay all premiums
on such policy and shall maintain such policy (without reduction of the face
amount of the coverage) until the Executive reaches age 65, whether or not the
Executive is an employee of the Company or any of its affiliates; provided,
however, that the Company's obligation to pay such premiums shall terminate on
the date the Executive's employment with the Company is terminated for cause
pursuant to Section 4.1 or the Executive terminates his employment in breach of
this Agreement. The Company shall not borrow from the cash value of such policy.
The Executive shall be entitled from time to time to designate the beneficiary
or beneficiaries of such policy which may include a trust. At the death of the
Executive, or on the earlier surrender of such policy by the owner, the
Executive agrees that the Executive's estate or 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. Unless the policy is
owned by a trust, the Company shall own the policy and shall provide by
endorsement or collateral assignment as it may deem appropriate for the payment
of benefits
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on the death of the Executive. If the owner of the policy is a trust, such owner
shall execute, deliver and maintain a customary split dollar insurance and
collateral assignment form, assigning to the Company the proceeds of such policy
but only to the extent necessary to secure the reimbursement obligation
contained in the preceding sentence. At the time the Executive reaches age 65,
the Company shall offer the Executive the opportunity to purchase such policy
for the lesser of the net premiums paid by the Company or the cash surrender
value of such policy. The provisions of this Section 7 shall be in addition to
any other insurance normally provided by the Company 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 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.
8.2. 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 participate in the benefit plans and
to receive the benefits required to be provided to the Executive under Sections
7 and 8.1 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. 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, 5, 6 or 13, 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
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14
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 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 (i) all stock options granted to the Executive by the Company shall vest
and become immediately exercisable at the time the Executive shall leave the
payroll of the Company pursuant to Section 4.2, (ii) all stock options granted
to the Executive by the Company shall remain exercisable (but not beyond the
term thereof) during the remainder of the term of employment and the Advisory
Period and for a period of three months thereafter or such longer period as may
be specified in any stock option agreement and (iii) the Company shall not be
permitted to determine that the Executive's employment was terminated for
"unsatisfactory performance" within the meaning of any stock option agreement
between the Company and the Executive.
8.3. 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, 6 or 13 (and regardless of whether the
Executive elects clause (A) or (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.
8.4. Retirement Benefits. Upon the Executive's
termination of employment for any reason, except by the Company for cause
pursuant to Section 4.1 and except for a termination by the Executive in breach
of this Agreement, the Company will calculate the retirement benefits to which
the Executive is entitled under the Time Warner Employees' Pension Plan, any
supplemental retirement or excess benefit plan maintained by the Company or any
of its affiliates or any successor plans thereto (hereinafter collectively
referred to as the "Pension Plan"), by crediting the Executive with an extra .9
(nine-tenths) of a year of service for each year the Executive is employed by
the Company up to a maximum of nine additional years of service. Such additional
pension benefits shall be paid at the same times and in the same manner as shall
be elected by the Executive or his beneficiary for payment of amounts under the
Pension Plan.
9. Protection of Confidential Information; Non-Compete. The
provisions of Section 9.2 shall continue to apply through the latest of (i) the
end of the Advisory Period, (ii) the date the Executive ceases to be an employee
of the Company and leaves the payroll of the Company for any reason and (iii)
twelve months after the termination of the Executive's employment with the
Company pursuant to Section 4.1 or 4.2. The provisions of Sections 9.1
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15
and 9.3 shall continue to apply until three years after the latest of the events
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 pro cesses 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
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;
9.1.2. The Executive shall 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; and
9.1.3. If the term of employment is terminated
pursuant to Section 4.1 or 4.2, for a period of one year after such termination,
without the prior written consent of the Company, the Executive shall not
employ, and shall not cause any Entity of
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16
which he is an affiliate to employ, any person who was a full-time exempt
employee of the Company at the date of such termination or within six months
prior thereto.
9.2. Non-Compete. 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 person or Entity or
acquire any interest of any type in any Entity, that might be deemed 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 one percent (1%)
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 indirectly,
in competition with the Company, or (c) serving as a director of any Entity that
is not 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 it engages in any line of business that is substantially the same as either
(i) 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, or
(ii) any operating business that is engaged in or conducted by the Company and
as to which, to the knowledge of the Executive, the Company covenants in
writing, in connection with the disposition of such business, not to compete
therewith.
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, 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 commits a
material breach of the provisions of Section 9.2, the Executive shall pay to the
Company as liquidated damages an amount equal to two and one-half times the
Executive's then current Base Salary, or if the Executive is not employed by the
Company at the time of such breach, an amount equal to two and one-half times
the most recent Base Salary paid to the Executive by the Company. The Company
shall be entitled to offset any amounts owed by the Executive to the
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17
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. 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 and the Advisory Period, 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 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
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 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 prepaid telegram, 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):
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18
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.
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, 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 all or substantially all of the business
and
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19
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, cancelled, 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. Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement shall, at the election of either the
Company or the Executive, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceedings or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. 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 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.
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20
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.
12.11. No Offset. Except as provided in Section 9.4 of
this Agreement, 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:
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21
Account Retained Income - Section A.6 of Annex A
Advisory Period - Section 13
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
deferred compensation - Section 3.3
Disability Date - Section 5
Effective Date - the first paragraph on page 1
eligible securities - Section A.1 of Annex A
Entity - Section 2
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
Pension Plan - Section 8.4
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3
senior executives - Section 3.1
term of employment - Section 1
Trust Account - Section 3.3
Trust Agreement - Section 3.3
Trustee - Section 3.3
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
13. Advisory Services. The Executive shall render the advisory
services described in this Section for the period beginning on May 1, 2002 and
ending on April 30, 2003 (the "Advisory Period"). During the Advisory Period,
the Executive will provide such advisory services concerning the business,
affairs and management of the Company as may be requested by the Board of
Directors, the Chief Financial Officer or the President of the Company, but
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 and consistent with the Executive's other
activities. If at any time during the Advisory Period, the Executive engages in
other full-time employment, the Executive shall not be deemed to be in breach of
this Section 13, but unless such employment consists of the Executive providing
services to one or more (i) charitable or non-profit organizations or (ii)
family-owned corporations, trusts, or partnerships, the term of
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22
employment and the Advisory Period shall terminate, the Executive shall leave
the payroll of the Company and the Company shall have no further obligations
under this Agreement other than with respect to earned and unpaid compensation
and benefits. Notwithstanding the foregoing, but subject to Section 9.2 of this
Agreement, during the Advisory Period the Executive may provide part-time
services to third parties (including serving as a member of the Board of
Directors of any such party). During the Advisory Period, the Executive shall be
entitled to receive compensation in an amount equal to $350,000 per annum and
shall continue to be entitled to the benefits described in Sections 7 and 8
hereof; provided, however, that the Executive shall not be entitled to a driver
or automobile allowance or financial counseling during the Advisory Period,
shall not accrue any vacation time during the Advisory Period and shall not be
entitled to any severance pay at the end thereof. In addition, during the
Advisory Period the Company shall provide the Executive with an office, office
facilities and a secretary as described in Section 4.3 hereof.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
TIME WARNER INC.
By /s/ Richard D. Parsons
-------------------------------
Richard D. Parsons
President
/s/ John A. LaBarca
---------------------------------
John A. LaBarca
<PAGE>
<PAGE>
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of his or her Trust Account. In the
case of any purchase, the Trust Account shall be charged with a dollar amount
equal to the quantity and kind of securities 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. In the case of any sale,
the Trust Account shall be charged with the quantity and kind of securities sold
and shall be credited with a dollar amount equal to the quantity and kind of
securities sold multiplied by the fair market value of such securities on the
date of reference. Such charges and credits to the Trust 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 Rabbi Trust on the date of reference, the
actual purchase or sale price per security to the Rabbi Trust 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
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A-2
available. If no bid or asked price information is available with respect to a
particular security, the price quoted to the Trustee 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 Trust
Account, including determining the fair market value of such security. The Trust
Account shall be charged currently with all interest paid by the Trust Account
with respect to any credit extended to the Trust Account. Such interest shall be
charged to the Trust Account, for margin purchases actually made, at the rates
and times actually paid by the Trust Account. 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 the Trustee 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 Trust Account at
the rates and times actually paid.
A.2 Dividends and Interest. The Trust Account shall be
credited with dollar amounts equal to cash dividends paid from time to time upon
the stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted
to reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the Trustee for credit to the Trust Account
in accordance with the provisions of Section 3.3 of the Agreement, to use due
care in selecting the Trustee or any successor trustee and to in all respects
work cooperatively with the Trustee to fulfill the obligations of the Company
and the Trustee to the Executive. The Trust Account shall be charged with all
taxes (including stock transfer taxes), interest, brokerage fees and investment
advisory fees, if any, payable by the Company and attributable to the purchase
or disposition of securities designated by the Investment Advisor (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) and
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A-3
only in the event of a default by the Company of its obligation to pay such fees
and expenses, the fees and expenses of the Trustee in accordance with the terms
of the Trust Agreement, but no other costs of the Company. Subject to the terms
of the Trust Agreement, the securities purchased for the Trust Account as
designated by the Investment Advisor, shall remain the sole property of the
Company, subject to the claims of its general creditors as provided in the Trust
Agreement. Neither the Executive nor his legal representative nor any
beneficiary designated by the Executive shall have any right, other than the
right of an unsecured general creditor, against the Company or the Trust in
respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such income
and gains within the Trust Account. For the purposes of this Section A.5, all
charges and credits to the Trust 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 Trust 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 Trust Account for such year) shall be credited to
the Trust Account on the last day of such year. If and to the extent that any
such net loss of the Trust Account shall be utilized to determine a credit to
the Trust 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
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A-4
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. Unless the Executive makes the election
referred to in the next succeeding sentence, deferred compensation shall be paid
bi-weekly for a period of ten years (the "Pay-Out Period") commencing on the
first Company payroll date in the month following the later of (i) the date the
Advisory Period is scheduled to terminate and (ii) 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 the first Company payroll date in January of the year following the
year in which the latest of such events occurs. The Executive may elect a
shorter Pay-Out Period by delivering written notice to the Company or the
Trustee at least one-year prior to the commencement of the Pay- Out Period,
which notice shall specify the shorter Pay-Out Period. On each payment date, the
Trust Account shall be charged with the dollar amount of such payment. On each
payment date, the amount of cash held in the Trust Account shall be not less
than the payment then due and the Company or the Trustee may select the
securities to be 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 Trust 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 payments during the Pay-Out Period, the Trust Account
shall be valued on the fifth trading day prior to the end of the month preceding
the first payment of each year of the Pay- Out Period, or more frequently at the
Company's or the Trustee's election (the "Valuation Date"), by adjusting all of
the securities held in the Trust Account to their fair market value (net of the
tax adjustment that would be made thereon if sold, as estimated by the Company
or the Trustee) and by deducting from the Trust Account the amount of all
outstanding indebtedness. The extent, if any, by which the Trust Account, valued
as provided in the immediately preceding sentence, exceeds the aggregate amount
of credits to the Trust 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 or the Trustee, 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 Trust 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 Trust Account, after all the
securities held therein 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 in the Trust Account since the
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A-5
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 Trust 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 Trust Account,
after the securities held therein 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 in the Trust 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 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 bi-weekly during the Pay-Out Period commencing on the
first Company payroll date in 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 Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6,
if the Rabbi Trust shall terminate in accordance with the provisions of the
Trust Agreement, the Trust Account shall be valued as of the date of such
termination and the balance of the Trust Account shall be paid to the Executive
within 15 days of such termination in accordance with the provisions of the
third preceding paragraph.
Within 90 days after the end of each taxable year of the
Company in which payments have been made from the Trust Account and at the time
of the final payment from the Trust Account, the Company or the Trustee shall
compute and the Company shall pay to the Trustee for credit to the Trust
Account, the amount of the tax benefit assumed to be received by the Company
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 Trust Account pursuant to the
preceding sentence in respect of the amounts credited to the Trust 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
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A-6
credits made to the Trust 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 Trust Account pursuant to this Annex A (excluding
credits made pursuant to the second preceding sentence), after all credits and
charges to the Trust 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 Trust 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.
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<PAGE>
ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
_____________, 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 ___________ , ____.
---------------------------
[Name]
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<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18,
1998, effective as of January 1, 1998 (the "Effective Date"), between TIME
WARNER INC., a Delaware corporation (the "Company"), and Philip R. Lochner, Jr.
(the "Executive").
The Executive is currently employed by the Company pursuant to
an Employment Agreement dated as of February 15, 1994 (the "Prior Agreement").
The Company wishes to restate the Prior Agreement and secure the services of the
Executive on a full-time basis for the period to and including December 31, 1998
(the "Term Date") on and subject to the terms and conditions set forth in this
Agreement, and the Executive is willing for the Prior Agreement to be so
restated and 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. The Company shall employ the Executive, and the
Executive shall serve, as Senior Vice President - Administration 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 or the
President of the Company may from time to time delegate to the Executive in
addition thereto. 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. During the term of employment, (i)
the Executive's services shall be rendered on a substantially full-time,
exclusive basis and he will apply on a full-time basis all of his skill and
experience to the performance of his duties in such employment, (ii) the
Executive shall report only to the Company's Board of Directors, its Chief
Executive Officer or its President, (iii) the Executive shall have no other
employment and, without the prior written consent of the Chief Executive Officer
or the President of the Company, no outside business activities which require
the devotion of substantial amounts of the Executive's time and (iv) the place
for the performance of the Executive's services shall be the principal executive
offices of the Company which shall
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2
be in the New York City 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. The foregoing shall be subject to the Company's
written 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 shall not interfere with the performance of his
duties hereunder, provided that the Executive complies with the provisions of
Sections 9 and 10 and any of the Company's written policies on conflicts of
interest and service as a director of another corporation, partnership, trust or
other entity ("Entity").
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 $350,000 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 then current practices and
policies with respect to senior executives. For the purposes of this Agreement
"senior executives" shall mean executives of the Company at the same executive
level as the Executive.
3.2 Bonus. In addition to Base Salary, the Executive may
be entitled to receive during the term of employment an annual cash bonus based
on the performance of the Company and of the Executive. Bonuses for senior
executives may be determined by the Compensation Committee of the Company's
Board of Directors or by the Chief Executive Officer or the President of the
Company. 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. 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, but in no event later than 90 days after the end of the period for
which the bonus is payable.
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
a defined contribution which shall be determined and paid out on a deferred
basis ("deferred compensation") as provided in this Agreement, including Annex A
hereto. During the term of employment, the Company shall pay to the trustee (the
"Trustee") of a Company grantor trust (the "Rabbi Trust") for credit to a
special account maintained on the books of the Rabbi Trust for the Executive
(the "Trust Account"), monthly, an amount equal to 50% of one-twelfth of the
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3
Executive's then current Base Salary. If a lump sum payment is made pursuant to
Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, the Company shall pay to the Trustee for
credit to the Trust Account at the time of such payment an amount equal to 50%
of the Base Salary portion of such lump sum payment. The Trust Account shall be
maintained by the Trustee in accordance with the terms of this Agreement,
including Annex A, and the trust agreement (the "Trust Agreement") establishing
the Rabbi Trust (which Trust Agreement shall in all respects be in furtherance
of, and not inconsistent 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. Effective April 1, 1998, the Company shall establish and
maintain the Rabbi Trust as a grantor trust within the meaning of subpart E,
part I, subchapter J, chapter 1, subtitle A of the Code and shall pay all fees
and expenses of the Trustee and shall enforce the provisions of the Trust
Agreement for the benefit of the Executive. Prior to April 1, 1998, the Company
shall credit the Executive with deferred compensation in accordance with the
provisions of Section 3.3 of the Prior Agreement.
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 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 Trust 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. The Prior Account shall be
promptly transferred to, and shall for all purposes be deemed part of, the Trust
Account and shall be maintained by the Trustee in accordance with this Agreement
and the Trust 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 reasonably promptly
pay or reimburse the Executive for all reasonable travel, 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
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4
accordance with the Company's then current written 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.
3.7 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 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.
3.8 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 an officer or 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 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.
4. Termination.
4.1 Termination for Cause. The Company may terminate the
term of employment and all of the Company's obligations under this Agreement,
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 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 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 the Executive's willful refusal without proper cause
to perform any one or more of his obligations under this Agreement, (ii) such
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5
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 such termination by the Company for
cause, without prejudice to any other rights or remedies that the Company may
have at law or in 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 Trust 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 and (iii) with
respect to any rights the Executive has in respect of amounts credited to the
Trust Account 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 fourth sentence of Section 3.3 and the provisions of Sections 3.8,
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 Termination by the Company Without Cause. 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, 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 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 the title specified in the first sentence of
Section 2 or a more senior title; (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 Company's principal executive offices in
the New York City metropolitan area; and (v) the Company failing to cause the
successor to all or substantially
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6
all of the business and assets of the Company expressly to assume the
obligations of the Company under this Agreement.
The Company shall have the right, exercisable by written
notice to the Executive, to terminate the Executive's employment under this
Agreement without cause, effective at least 30 days after the giving of such
notice, which notice shall specify the effective date of such termination.
In the event of a termination pursuant to this Section
4.2, the Executive shall be entitled to elect by delivery of written notice to
the Company, within 30 days after written notice of such termination is given
pursuant to this Section 4.2, either (A) to cease being an employee of the
Company and receive a lump sum payment as provided 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 pursuant to the preceding paragraph, (i) after the effective date of
such termination, the Executive shall have no further obligations or liabilities
to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6
through 12 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) in respect
of the two calendar years during the most recent five calendar years for which
the regular annual bonus received by the Executive from the Company was the
greatest, provided that such annual bonus shall not be less than $450,000, all
or a portion of which pro rata bonus will be credited to the Trust 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 make the
election provided in clause (A) above, the Company shall pay to the Executive as
damages in a lump sum within 30 days thereafter (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the calendar year in which such notice of termination is given) an amount
(discounted as provided in the immediately following sentence) equal to the
greater of (i) all amounts otherwise payable pursuant to Sections 3.1, 3.2 and
3.3 for the year in which such termination occurs and for each subsequent year
through and including the Term Date and (ii) all amounts that would be payable
pursuant to Sections 3.1, 3.2 and 3.3 if
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7
the Term Date had been a date three years after the date of such notice of
termination (assuming, in the case of either (i) or (ii) above, that annual
bonuses are required to be paid for each such year, with each such annual bonus
being equal to the average of the regular annual bonus amounts (excluding the
amount of any special or spot bonuses) in respect of the two calendar years
during the most recent five calendar years for which the regular annual bonus
received by the Executive from the Company was the greatest (assuming that no
portion of such bonus is deferred pursuant to Section 3.4), provided that such
annual bonus shall not be less than $450,000. 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 Trust Account provided for in the
third 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 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 term of employment shall continue and
the Executive shall remain an employee of the Company for the period ending on
the later of (i) the Term Date and (ii) the date which is three years after the
date notice of termination is given 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 6, (a) Base Salary at an
annual rate equal to his Base Salary in effect immediately prior to 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 of the regular annual bonus
amounts (excluding the amount of any special or spot bonuses) in respect of the
two calendar years during the most recent five calendar years for which the
regular annual bonus received by the Executive from the Company was the
greatest, provided that such annual bonus shall not be less than $450,000 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 cease 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
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8
termination as specified by the Executive in such notice, whichever is
applicable, and the Executive shall be entitled to receive as severance in a
lump sum within 30 days after such commencement or such effective date (provided
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such lump sum payment shall be made within 30 days
after the end of the calendar year in which such commencement or effective date
occurred) an amount (discounted as provided in the second sentence of Section
4.2.2, except that the "applicable Federal rate" shall be determined as of the
date the Executive shall cease to be an employee of the Company) for the balance
of the Base Salary, deferred compensation (which shall be credited to the Trust
Account as provided in the third sentence of Section 3.3) and regular annual
bonuses (assuming no deferral pursuant to 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 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 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 After the Term Date. If at the Term Date, the term of
employment shall not have been previously terminated pursuant to the provisions
of this Agreement, no Disability Period is then in effect and the parties shall
not have agreed to an extension or renewal of this Agreement or on the terms of
a new employment agreement, then the term of employment shall continue and the
Executive shall continue to be employed by the Company pursuant to the terms of
this Agreement, subject to termination by either party hereto on 60 days written
notice delivered to the other party (which notice may be delivered by either
party at any time on or after the date which is 60 days prior to the Term Date).
If the Company shall terminate the term of employment 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), which the Company shall have the right to do so long
as no Disability Date (as defined in Section 5) has occurred prior to the
delivery by the Company of written notice of termination, then in lieu of the
provisions of Section 4.2, the Executive 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 as provided in Section 4.3.2 or (B) remain an
employee of the Company for a period of twelve months pursuant to
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9
Section 4.3.3 and receive the payments provided in Section 4.3.3. After the
Executive makes such election, the following provisions shall apply:
4.3.1 Regardless of the election made by the
Executive pursuant to the preceding paragraph, 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 4.5 and 4.7 and Sections 6 through 12 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 to the Executive in
a lump sum at the end of the 60-day notice period provided for in the first
sentence of Section 4.3 (provided that if the Executive was named in the
compensation table in the Company's then most recent proxy statement, such lump
sum payment shall be made within 30 days after the end of the year in which such
notice of termination is given) an amount (discounted as provided in the second
sentence of Section 4.2.2) equal to three times the sum of (i) the Executive's
Base Salary as in effect immediately prior to such notice of termination, (ii)
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 for the two calendar years during the most recent five calendar years
for which the regular annual bonus received by the Executive was the greatest
(assuming that no portion of such bonus is deferred pursuant to Section 3.4),
provided that such annual bonus shall not be less than $450,000 and (iii) the
annual amount of deferred compensation payable by the Company to the Trust
Account pursuant to Section 3.3 as in effect immediately prior to such notice of
termination (which shall be credited to the Trust Account as provided in the
third sentence of Section 3.3).
4.3.3 In the event the Executive shall make the
election provided in clause (B) above, the term of employment shall continue and
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 becomes disabled during such period but subject to
Section 6, (i) the Executive's Base Salary as in effect immediately prior to
such notice of termination, (ii) 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 for the two calendar years
during the most recent five calendar years for which the regular annual bonus
received by the Executive was the greatest, provided that such annual bonus
shall not be less than $450,000 and (iii) deferred compensation as provided in
Section 3.3 of this Agreement. At the end of such twelve month period the term
of employment shall
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10
cease, the Executive shall cease to be an employee of the Company and the
Company shall pay to the Executive in a lump sum (discounted as provided in the
second sentence of Section 4.2.2, except that "applicable Federal rate" shall be
determined as of the end of such twelve-month period) an amount equal to two
times the sum of the amounts described in clauses (i), (ii) and (iii) of this
Section 4.3.3. 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 terminate his employment
during such period, the Executive shall cease to be an employee of the Company
and the term of employment shall cease 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 (provided that if the Executive was named in the compensation
table in the Company's then most recent proxy statement, such lump sum payment
shall be made within 30 days after the end of the year in which such
commencement or effective date occurred) an amount (discounted as provided in
the second sentence of Section 4.2.2, except that "applicable Federal rate"
shall be determined as of the date of such commencement or such effective date,
as the case may be) for the balance of the Base Salary, deferred compensation
(which shall be credited to the Trust Account as provided in the third sentence
of Section 3.3) and regular annual bonuses the Executive would have been
entitled to receive pursuant to this Section 4.3.3 (including the lump sum) 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 term of
employment and 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 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 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 but taking into account the Executive's reduced need
for such office space, secretarial services and office facilities, services and
furnishings as a result of the Executive no longer being a full-time employee.
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11
4.5 Release. In partial consideration for the Company's
obligation to make the payments described in Sections 4.2 and 4.3, the Executive
shall execute and deliver to the Company a release in substantially the form
attached hereto as Annex B. The Company shall deliver such release to the
Executive within 10 days after the 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
shall fail to execute and deliver such release to the Company within such 21 day
period, or if the Executive shall revoke his consent to such release as provided
therein, the Executive's term of employment shall terminate as provided in
Section 4.2 or 4.3, as applicable, 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 written personnel policies of the
Company relating to notice and severance then generally applicable to employees
with length of service and compensation level of the Executive.
4.6 Retirement. Notwithstanding the provisions of
Sections 4.2, 4.3 or 5, if the term of employment is in effect and the Executive
is still employed by the Company pursuant to this Agreement on the date the
Executive first becomes eligible for normal retirement as defined in any
applicable retirement plan of the Company or any subsidiary of the Company (the
"Retirement Date"), then this Agreement shall terminate automatically on such
date and the Executive's employment with the Company shall thereafter be
governed by the policies generally applicable to employees of the Company, and
the Executive shall not thereafter be entitled to the payments provided in such
Sections to the extent not received by the Executive on or prior to the
Retirement Date. In addition, no benefits or payments provided in Sections 4.2,
4.3 or 5 shall include any period after the Retirement Date and if the provision
of benefits or calculation of payments provided in any such Section would
include any period subsequent to the Retirement Date, such provision of benefits
shall end on the Retirement Date and the calculation of payments shall cover
only the period ending on the Retirement Date. Notwithstanding the foregoing,
the Company's obligations under Section 7 of this Agreement shall continue after
any such termination and the provisions of Sections 12.1 and 12.7 shall apply to
any dispute with respect to this Agreement that arises after any such
termination.
4.7 Mitigation. In the event of termination of the term
of employment pursuant to Section 4.2 or 4.3, 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
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12
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 Entity, 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 (i) in the
case of a termination pursuant to Section 4.2, the later of (x) the Term Date or
(y) three years after the date notice of termination is delivered pursuant to
Section 4.2, and (ii) in the case of a termination pursuant to Section 4.3, the
date which is three years after the end of the 60-day notice period referred to
in the first sentence of Section 4.3, in either case up to an amount equal to
(x) the discounted lump sum payment received by or for the account of the
Executive with respect to Base Salary, annual bonus and deferred compensation
under Section 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 the Executive as a result of
such termination and, to the extent amounts have theretofore been paid to him 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 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 pursuant to Section 4.2 or 4.3 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
discounted amount received by him or credited to the Trust Account with respect
to Base Salary, annual bonus and deferred compensation under Section 3 for such
year. Any obligation of the Executive to mitigate his damages pursuant to this
Section 4.7 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, 4.2.3, 4.3.2 or
4.3.3, 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.
4.8 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 or
4.3 shall be made at the same times as such payments are made to senior
executives of the Company or such subsidiary.
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13
5. Disability. If during the term of employment and prior to
any termination of this Agreement under Section 4.2 or 4.3, 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 Trust 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 for the year in which the Disability
Date occurs and shall pay the Executive disability benefits for the longer of
(i) the period ending on the Term Date or (ii) three years (in the case of
either (i) or (ii), the "Disability Period"), in an annual 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 Trust 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 during the most recent five calendar years
for which the annual bonus received by the Executive from the Company was the
greatest, provided that such annual bonus shall not be less than $450,000 (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; and (ii) the provisions of Sections 9 and 10 shall
continue to apply to the Executive during the Disability Period. 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 or the President 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 both parties. 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
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14
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 Sections 4.2 and 4.3 shall not apply during
the Disability Period and unless the Company has restored the Executive to
fill-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 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 regular annual bonuses (excluding the amount of any
special or spot bonuses) in respect of the two calendar years during the most
recent five calendar years for which the annual bonus received by the Executive
from the Company was the greatest, provided that such annual bonus shall not be
less than $450,000, 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 Trust 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 Trust 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. The Company shall maintain $2,000,000 face
amount of split ownership life insurance on the life of the Executive, to be
owned by the Executive or the
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15
trustees of a trust for the benefit of the Executive's spouse and/or
descendants. 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). The Company shall not borrow from
the cash value of such policy. 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 but only to the extent
necessary to secure the reimbursement obligation contained in the preceding
sentence. In addition to the foregoing, during the Executive's employment with
the Company, the Company shall (x) provide the Executive with $50,000 of group
life insurance and (y) pay to the Executive annually an amount equal to the
premium that the Executive would have to pay to obtain life insurance under the
Group Universal Life ("GUL") insurance program made available by the Company in
an amount equal to (i) twice the Executive's Base Salary minus (ii) $50,000. The
Executive shall be under no obligation to use the payments made by the Company
pursuant to the preceding sentence to purchase GUL insurance or to purchase any
other life insurance. If the Company discontinues its GUL insurance program, the
Company shall nevertheless make the payments required by this Section 7 as if
such program were still in effect. The payments made to the Executive pursuant
to this Section 7 shall not be considered as "salary" or "compensation" or
"bonus" in determining the amount of any payment under any pension, retirement,
profit-sharing or other benefit plan of the Company or any subsidiary of the
Company.
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 life
insurance (to the extent set forth in Section 7), hospitalization, medical,
dental, accident, disability or similar plan or program of the Company now
existing or established hereafter. In
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16
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 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.
8.2 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 or 4.3 and during the Disability Period, the
Executive shall continue to be eligible to participate in the benefit plans and
to receive the benefits required to be provided to the Executive under Sections
7 and 8.1 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. 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, 4.3, 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 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 (i) all
stock options granted to the Executive by the Company shall vest and become
immediately exercisable at the time the Executive shall leave the payroll of the
Company pursuant to Section 4.2, (ii) all stock options granted to the Executive
by the Company shall remain exercisable (but not beyond the term thereof) during
the remainder of the term of employment and for a period of three months
thereafter or such longer period as may be specified in any stock option
agreement and (iii) the Company shall not be permitted to determine that the
Executive's employment was terminated for "unsatisfactory performance" within
the meaning of any stock option agreement between the Company and the Executive.
8.3 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, 4.3, 5 or 6 (and regardless of whether the
Executive elects clause (A) or (B)
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as provided in Section 4.2 and 4.3), 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.
9. Protection of Confidential Information; Non-Compete. The
provisions of Section 9.2 shall continue to apply through the latest of (i) the
Term Date, (ii) the date the Executive ceases to be an employee of the Company
and leaves the payroll of the Company for any reason and (iii) twelve months
after the termination of the Executive's employment with the Company pursuant to
Section 4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue
to apply until three years after the latest of the events 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 pro cesses 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
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;
9.1.2 The Executive shall deliver promptly to the
Company on termination of his employment by the Company, or at any other time
the Company may so
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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; and
9.1.3 If the term of employment is terminated
pursuant to Section 4.1, 4.2 or 4.3, for a period of one year after such
termination, without the prior written 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 exempt employee of the Company at the
date of such termination or within six months prior thereto.
9.2 Non-Compete. 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 person or Entity or
acquire any interest of any type in any Entity, that might be deemed 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 one percent (1%)
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 indirectly,
in competition with the Company or (c) serving as a director of any Entity that
is not 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 it engages in any line of business that is substantially the same as either
(i) 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 or
(ii) any operating business that is engaged in or conducted by the Company and
as to which, to the knowledge of the Executive, the Company covenants in
writing, in connection with the disposition of such business, not to compete
therewith.
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, 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
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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 commits a
material breach of the provisions of Section 9.2, the Executive shall pay to the
Company as liquidated damages an amount equal to two and one-half times the
Executive's then current Base Salary, or if the Executive is not employed by the
Company at the time of such breach, an amount equal to two and one-half times
the most recent Base Salary paid to the Executive by the Company. 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, 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 participa tion
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 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.
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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 prepaid telegram, 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.
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, 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.
<PAGE>
<PAGE>
21
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, cancelled, 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 Resolution of Disputes. Any dispute or controversy
arising with respect to this Agreement shall, at the election of either the
Company or the Executive, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceeding or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. 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 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
<PAGE>
<PAGE>
22
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 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.
12.11 No Offset. Except as provided in Section 9.4 of
this Agreement, 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.
<PAGE>
<PAGE>
23
12.13 Definitions. The following terms are defined in
this Agreement in the places indicated:
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
deferred compensation - Section 3.3
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 2
Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
Investment Advisor - Section A.1 of Annex A
Pay-Out Period - Section A.6 of Annex A
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3
Retirement Date - Section 4.6
senior executives - Section 3.1
Term Date - the second paragraph on page 1
term of employment - Section 1
Trust Account - Section 3.3
Trust Agreement - Section 3.3 Trustee - Section 3.3
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
<PAGE>
<PAGE>
24
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
TIME WARNER INC.
By /s/ Richard D. Parsons
------------------------------
Richard D. Parsons
/s/ Philip R. Lochner, Jr.
-------------------------------
Philip R. Lochner, Jr.
<PAGE>
<PAGE>
ANNEX A
DEFERRED COMPENSATION ACCOUNT
A.1 Investments. Funds credited to the Trust Account shall be
actually 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
actually purchased and sold for the Trust Account on the date of reference. Such
purchases may be made on margin; provided that the Company may, from time to
time, by written notice to the Executive, the Trustee 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, the Trustee and the
Investment Advisor, cause all eligible securities theretofore purchased on
margin to be sold. The Investment Advisor shall send notification to the
Executive and the Trustee in writing of each transaction within five business
days thereafter and shall render to the Executive and the Trustee written
quarterly reports as to the current status of his or her Trust Account. In the
case of any purchase, the Trust Account shall be charged with a dollar amount
equal to the quantity and kind of securities 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. In the case of any sale,
the Trust Account shall be charged with the quantity and kind of securities
sold, and shall be credited with a dollar amount equal to the quantity and kind
of securities sold multiplied by the fair market value of such securities on the
date of reference. Such charges and credits to the Trust 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 Rabbi Trust on the date of reference, the
actual purchase or sale price per security to the Rabbi Trust 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
<PAGE>
<PAGE>
A-2
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 Trustee 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 Trust Account, including determining the fair market value of such security.
The Trust Account shall be charged currently with all interest paid by the Trust
Account with respect to any credit extended to the Trust Account. Such interest
shall be charged to the Trust Account, for margin purchases actually made, at
the rates and times actually paid by the Trust Account. 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 the Trustee
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 Trust Account at
the rates and times actually paid.
A.2 Dividends and Interest. The Trust Account shall be
credited with dollar amounts equal to cash dividends paid from time to time upon
the stocks held therein. Dividends shall be credited as of the payment date. The
Trust Account shall similarly be credited with interest payable on interest
bearing securities held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-bearing securities the
Trust 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 Trust 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
Trust 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 Trust Account.
A.3 Adjustments. The Trust Account shall be equitably adjusted
to reflect stock dividends, stock splits, recapitalizations, mergers,
consolidations, reorganizations and other changes affecting the securities held
therein.
A.4 Obligation of the Company. Without in any way limiting the
obligations of the Company otherwise set forth in the Agreement or this Annex A,
the Company shall have the obligation to establish, maintain and enforce the
Rabbi Trust and to make payments to the Trustee for credit to the Trust Account
in accordance with the provisions of Section 3.3 of the Agreement, to use due
care in selecting the Trustee or any successor trustee and to in all respects
work cooperatively with the Trustee to fulfill the obligations of the Company
and the Trustee to the Executive. The Trust Account shall be charged with all
taxes (including stock transfer taxes), interest, brokerage fees and investment
advisory fees, if any, payable by the Company and attributable to the purchase
or disposition of securities designated by the Investment Advisor (in all cases
net after any tax benefits that the Company would be deemed
<PAGE>
<PAGE>
A-3
to derive from the payment thereof, as and when determined pursuant to Section
A.5) and only in the event of a default by the Company of its obligation to pay
such fees and expenses, the fees and expenses of the Trustee in accordance with
the terms of the Trust Agreement, but no other costs of the Company. Subject to
the terms of the Trust Agreement, the securities purchased for the Trust Account
as designated by the Investment Advisor shall remain the sole property of the
Company, subject to the claims of its general creditors, as provided in the
Trust Agreement. Neither the Executive nor his legal representative nor any
beneficiary designated by the Executive shall have any right, other than the
right of an unsecured general creditor, against the Company or the Trust in
respect of any portion of the Trust Account.
A.5 Taxes. The Trust 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 by the Trust Account
pursuant to Section A.2 and gains recognized upon sales of any of the securities
which are sold pursuant to Section A.1 or A.6. The Trust 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 pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment advisory fees made
pursuant to Section A.1. If any of the sales of the securities which are sold
pursuant to Section A.1 or A.6 results in a loss to the Trust 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 Trust 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 Trust Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed payable on such income
and gains within the Trust Account. For the purposes of this Section A.5, all
charges and credits to the Trust 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 Trust 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 Trust Account for such year) shall be credited to
the Trust Account on the last day of such year. If and to the extent that any
such net loss of the Trust Account shall be utilized to determine a credit to
the Trust 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
<PAGE>
<PAGE>
A-4
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. Unless the Executive makes the election
referred to in the next succeeding sentence, deferred compensation shall be paid
bi-weekly for a period of ten years (the "Pay-Out Period") commencing on the
first Company payroll date in the month following the later of (i) 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, 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 the first Company payroll date
in January of the year following the year in which the latest of such events
occurs. The Executive may elect a shorter Pay-Out Period by delivering written
notice to the Company or the Trustee at least one-year prior to the commencement
of the Pay-Out Period, which notice shall specify the shorter Pay-Out Period. On
each payment date, the Trust Account shall be charged with the dollar amount of
such payment. On each payment date, the amount of cash held in the Trust Account
shall be not less than the payment then due and the Company or the Trustee may
select the securities to be 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 Trust 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 payments during the Pay-Out Period, the
Trust Account shall be valued on the fifth trading day prior to the end of the
month preceding the first payment of each year of the Pay-Out Period, or more
frequently at the Company's or the Trustee's election (the "Valuation Date"), by
adjusting all of the securities held in the Trust Account to their fair market
value (net of the tax adjustment that would be made thereon if sold, as
estimated by the Company or the Trustee) and by deducting from the Trust Account
the amount of all outstanding indebtedness. The extent, if any, by which the
Trust Account, valued as provided in the immediately preceding sentence, exceeds
the aggregate amount of credits to the Trust 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 or the Trustee, 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 Trust
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 Trust
Account, after all the securities held therein 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 in the Trust Account since the
<PAGE>
<PAGE>
A-5
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 Trust 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 Trust Account,
after the securities held therein 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 in the Trust 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 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 bi-weekly during the Pay-Out Period commencing on the
first Company payroll date in 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 Trust Account shall be valued as of the date of the
Executive's death and the balance of the Trust 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.
Notwithstanding the foregoing provisions of this Section A.6,
if the Rabbi Trust shall terminate in accordance with the provisions of the
Trust Agreement, the Trust Account shall be valued as of the date of such
termination and the balance of the Trust Account shall be paid to the Executive
within 15 days of such termination in accordance with the provisions of the
third preceding paragraph.
Within 90 days after the end of each taxable year of the
Company in which payments have been made from the Trust Account and at the time
of the final payment from the Trust Account, the Company or the Trustee shall
compute and the Company shall pay to the Trustee for credit to the Trust
Account, the amount of the tax benefit assumed to be received by the Company
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 Trust Account pursuant to the
preceding sentence in respect of the amounts credited to the Trust 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
<PAGE>
<PAGE>
A-6
credits made to the Trust 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 Trust Account pursuant to this Annex A (excluding
credits made pursuant to the second preceding sentence), after all credits and
charges to the Trust 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 Trust 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.
<PAGE>
<PAGE>
ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
_____________, 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 ___________ , ____.
---------------------------
[Name]
<PAGE>
<PAGE>
$7,500,000,000
CREDIT AGREEMENT
dated as of
November 10, 1997
among
TIME WARNER INC.
TIME WARNER COMPANIES, INC.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
TURNER BROADCASTING SYSTEM, INC.
TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP
TWI CABLE INC.
and
The Lenders Party Hereto
and
THE CHASE MANHATTAN BANK,
as Administrative Agent
---------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
THE BANK OF NEW YORK
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Documentation and Syndication Agents
---------------------------
CHASE SECURITIES INC.,
as Arranger
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I.
DEFINITIONS
SECTION 1.1. Defined Terms ............................................... 1
SECTION 1.2. Classification of Loans and Borrowings ...................... 32
SECTION 1.3. Terms Generally ............................................. 32
SECTION 1.4. Accounting Terms; GAAP ...................................... 32
ARTICLE II.
THE CREDITS
SECTION 2.1. Commitments ................................................. 32
SECTION 2.2. Loans and Borrowings ........................................ 33
SECTION 2.3. Requests for Revolving Borrowings ........................... 33
SECTION 2.4. Swingline Loans ............................................. 34
SECTION 2.5. Funding of Borrowings ....................................... 35
SECTION 2.6. Interest Elections .......................................... 36
SECTION 2.7. Termination and Reduction of Commitments and Borrowings Caps 37
SECTION 2.8. Repayment of Loans; Evidence of Debt ........................ 38
SECTION 2.9. Prepayment of Loans ......................................... 39
SECTION 2.10. Fees ....................................................... 39
SECTION 2.11. Interest ................................................... 40
SECTION 2.12. Alternate Rate of Interest ................................. 40
SECTION 2.13. Increased Costs ............................................ 41
SECTION 2.14. Break Funding Payments ..................................... 42
SECTION 2.15. Taxes ...................................................... 43
SECTION 2.16. Payments Generally; Pro Rata Treatment; Sharing of Set-offs 44
SECTION 2.17. Mitigation Obligations; Replacement of Lenders ............. 45
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Organization; Powers ........................................ 46
SECTION 3.2. Authorization; Enforceability ............................... 46
SECTION 3.3. Governmental Approvals; No Conflicts ........................ 47
SECTION 3.4. Financial Condition; No Material Adverse Change ............. 47
SECTION 3.5. Properties .................................................. 48
SECTION 3.6. Litigation and Environmental Matters ........................ 48
SECTION 3.7. Compliance with Laws and Agreements ......................... 48
SECTION 3.8. Government Regulation ....................................... 49
SECTION 3.9. Taxes ....................................................... 49
-i-
<PAGE>
<PAGE>
Page
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SECTION 3.10. ERISA ...................................................... 49
SECTION 3.11. True and Complete Disclosure ............................... 49
SECTION 3.12. Partnership Tax Matters .................................... 50
SECTION 3.13. Beneficial Assets .......................................... 50
SECTION 3.14. Guarantees ................................................. 50
ARTICLE IV.
CONDITIONS PRECEDENT
SECTION 4.1. Initial Loans ............................................... 50
SECTION 4.2. Assumptions ................................................. 52
SECTION 4.3. Diamond Implementation ...................................... 54
SECTION 4.4. Each Credit Event ........................................... 54
ARTICLE V.
AFFIRMATIVE COVENANTS
SECTION 5.1. Financial Statements and Other Information .................. 55
SECTION 5.2. Notices of Material Events .................................. 57
SECTION 5.3. Existence; Conduct of Business .............................. 57
SECTION 5.4. Payment of Obligations ...................................... 57
SECTION 5.5. Maintenance of Properties; Insurance ........................ 57
SECTION 5.6. Books and Records; Inspection Rights ........................ 58
SECTION 5.7. Compliance with Laws ........................................ 58
SECTION 5.8. Use of Proceeds ............................................. 58
SECTION 5.9. Fiscal Periods; Accountants ................................. 58
SECTION 5.10. Enforcement of Rights Under Partnership Agreements ......... 58
SECTION 5.11. TWE Beneficial Assets ...................................... 58
SECTION 5.12. TWEAN Beneficial Assets .................................... 59
SECTION 5.13. Guarantees ................................................. 59
ARTICLE VI.
NEGATIVE COVENANTS
SECTION 6.1. Changes in Business ......................................... 60
SECTION 6.2. Mergers, Etc ................................................ 60
SECTION 6.3. Liens ....................................................... 61
SECTION 6.4. Indebtedness ................................................ 63
SECTION 6.5. Investments ................................................. 64
SECTION 6.6. Restricted Payments ......................................... 64
SECTION 6.7. Transactions with Affiliates ................................ 66
SECTION 6.8. ERISA ....................................................... 66
SECTION 6.9. Financial Covenants ......................................... 67
-ii-
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SECTION 6.10. Amendment or Waiver of Organizational Documents ............ 68
SECTION 6.11. Certain Agreements ......................................... 68
SECTION 6.12. Unrestricted Subsidiaries .................................. 69
ARTICLE VII.
EVENTS OF DEFAULT
SECTION 7.1. Payments .................................................... 69
SECTION 7.2. Representations, Etc ........................................ 70
SECTION 7.3. Covenants ................................................... 70
SECTION 7.4. Default Under Other Agreements .............................. 70
SECTION 7.5. Bankruptcy, Etc ............................................. 70
SECTION 7.6. ERISA ....................................................... 71
SECTION 7.7. Judgments ................................................... 71
SECTION 7.8. Change of Control ........................................... 71
SECTION 7.9. Dissolution ................................................. 71
SECTION 7.10. Taxation ................................................... 72
SECTION 7.11. Conflicting Agreements ..................................... 72
SECTION 7.12. Certain Guarantees ......................................... 72
ARTICLE VIII.
THE ADMINISTRATIVE AGENT
ARTICLE IX.
MISCELLANEOUS
SECTION 9.1. Notices ..................................................... 75
SECTION 9.2. Waivers; Amendments ......................................... 75
SECTION 9.3. Expenses; Indemnity; Damage Waiver .......................... 76
SECTION 9.4. Successors and Assigns ...................................... 77
SECTION 9.5. Survival .................................................... 80
SECTION 9.6. Counterparts; Integration; Effectiveness .................... 80
SECTION 9.7. Severability ................................................ 80
SECTION 9.8. Right of Setoff ............................................. 80
SECTION 9.9. Governing Law; Jurisdiction; Consent to Service of Process .. 81
SECTION 9.10. WAIVER OF JURY TRIAL ....................................... 81
SECTION 9.11. Headings ................................................... 81
SECTION 9.12. Confidentiality ............................................ 82
SECTION 9.13. Independence of Representations, Warranties and Covenants .. 82
SECTION 9.14. Release of Certain Guarantees .............................. 82
SECTION 9.15. Partners ................................................... 83
SECTION 9.16. Calculations; Computations; Interpretation ................. 83
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SECTION 9.17. Distribution of Documents .................................. 85
SCHEDULES:
Schedule A Guarantors
Schedule 2.1 Lenders and Commitments
Schedule 3.13A TWE Material Beneficial Assets
Schedule 3.13B TWEAN Material Beneficial Assets
Schedule 6.3 Existing Liens
Schedule 6.12 Unrestricted Subsidiaries
EXHIBITS:
Exhibit A Form of Assignment and Acceptance
Exhibit B Form of Officer's Solvency Certificate
Exhibit C Form of Interest Rate Certificate
Exhibit D-1 Form of Subsidiary Guarantee
Exhibit D-2 Form of TWE Partner Guarantee
Exhibit D-3 Form of TWI Guarantee
Exhibit D-4 Form of TWEAN Holder Guarantee
Exhibit D-5 Form of Paragon Guarantee
Exhibit D-6 Form of TWE Guarantee
Exhibit D-7 Form of TWIC Guarantee
Exhibit D-8 Form of Diamond Guarantee
Exhibit E-1 Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
(Closing)
Exhibit E-2 Form of Opinion of General Counsel (Closing)
Exhibit F Form of Advance Letter/Newhouse Letter
Exhibit G-1 Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
(Transfers)
Exhibit G-2 Form of Opinion of General Counsel (Transfers)
Exhibit H Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
(Diamond Implementation)
-iv-
<PAGE>
<PAGE>
CREDIT AGREEMENT, dated as of November 10, 1997, among TIME WARNER
INC., TIME WARNER COMPANIES, INC., TIME WARNER ENTERTAINMENT COMPANY, L.P.,
TURNER BROADCASTING SYSTEM, INC., TIME WARNER ENTERTAINMENT--ADVANCE/NEWHOUSE
PARTNERSHIP, TWI CABLE INC., the LENDERS party hereto, and THE CHASE MANHATTAN
BANK, as Administrative Agent.
The parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. Defined Terms. As used in this Agreement, the following
terms have the meanings specified below:
"ABR", when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are bearing interest
at a rate determined by reference to the Alternate Base Rate.
"Acquired Indebtedness" shall mean (i) Indebtedness of an entity, which
entity is acquired by any Borrower or any of its Subsidiaries after the Closing
Date; provided that such Indebtedness shall be outstanding at the time of the
acquisition of such entity, shall not be created in contemplation of or in
connection with such acquisition and shall not be, directly or indirectly,
recourse (including by way of setoff) to any Company or any asset thereof other
than to the entity and its Subsidiaries so acquired and the assets of the entity
and its Subsidiaries so acquired or (ii) Indebtedness of any Borrower or any of
its Subsidiaries that is not, directly or indirectly, recourse (including by way
of setoff) to any Company or any asset thereof other than to specified assets
acquired by such Borrower or such Subsidiary after the Closing Date, which
Indebtedness is outstanding at the time of the acquisition of such assets and is
not created in contemplation of or in connection with such acquisition and the
holder of which waives, for the benefit of the other lenders thereto, any claims
against any other assets of any Company or against the general credit of any
Company (which waiver shall, in the judgment of the Administrative Agent after
consultation with its counsel, constitute a satisfactory waiver under Section
1111(b) of the Bankruptcy Code).
"Adjusted Financial Statements" shall mean, of any Person for any
period, (x) the balance sheet of such Person and its Restricted Subsidiaries
(treating Unrestricted Subsidiaries as equity investments of such Person to the
extent that such Unrestricted Subsidiaries would not otherwise be treated as
equity investments of such Person in accordance with GAAP) as of the end of such
period and (y) the related statements of operations and stockholders' or
partners' equity for such period and, if such period is not a fiscal year, for
the then elapsed portion of the fiscal year (treating Unrestricted Subsidiaries
as equity investments to the extent that such Unrestricted Subsidiaries would
not otherwise be treated as equity investments of such Person in accordance with
GAAP).
"Adjusted LIBO Rate" shall mean, with respect to any Eurodollar
Borrowing for any Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such
Interest Period multiplied by (b) the Statutory Reserve Rate.
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"Administrative Agent" shall mean Chase, in its capacity as
administrative agent for the Lenders hereunder.
"Administrative Questionnaire" shall mean an Administrative
Questionnaire in a form supplied by the Administrative Agent.
"Advance" shall mean Advance Communication Corp., a New York
corporation.
"Advance/Newhouse" shall mean Advance/Newhouse Partnership, a New York
general partnership, of which Advance and Newhouse are general partners.
"Affiliate" shall mean, with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, Controls
or is Controlled by or is under common Control with the specified Person;
provided that two or more Persons shall not be deemed Affiliates solely because
an individual is a director and/or officer of each such Person.
"Agreement" shall mean this Credit Agreement.
"Allocated Loans" shall have the meaning provided in the definition of
"Transfer."
"Alternate Base Rate" shall mean, for any day, a rate per annum equal
to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD
Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in
effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to
a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate
shall be effective from and including the effective date of such change in the
Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively.
"Applicable Percentage" shall mean, with respect to any Lender, the
percentage of the Total Commitment represented by such Lender's Commitment. If
the Commitments have terminated or expired, the Applicable Percentages shall be
determined based upon the Commitments most recently in effect, giving effect to
any assignments.
"Applicable Rate" shall mean, for any day, with respect to any
Eurodollar Loan or the Commitment Fee of any Borrower, the applicable rate per
annum set forth below under the caption "Eurodollar Spread" or "Commitment Fee,"
as the case may be, based upon the ratings by Moody's and S&P, respectively,
applicable on such date to the Index Debt of such Borrower:
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Index Debt Ratings
------------------
Moody's S&P Eurodollar Spread Commitment Fee
------- --- ----------------- --------------
Baa1 or higher BBB+ or higher 0.300% 0.100%
Baa2 BBB 0.350% 0.125%
Baa3 BBB- 0.400% 0.150%
Ba1 BB+ 0.600% 0.225%
Ba2 BB 0.750% 0.250%
Ba3 BB- 0.875% 0.300%
For purposes of the foregoing, (i) if the Index Debt of any Borrower is rated by
only one Rating Agency (other than by reason of the circumstances referred to in
the last sentence of this paragraph), then the rating assigned by such Rating
Agency shall be used; (ii) if the ratings assigned by Moody's and S&P for the
Index Debt of such Borrower shall fall within different levels (including
numerical modifiers and (+) and (-) as levels), the Applicable Rate shall be
based on the higher of the two ratings unless one of the two ratings is two or
more levels (including numerical modifiers and (+) and (-) as levels) lower than
the other, in which case the Applicable Rate shall be determined by reference to
the level next below that of the higher of the two ratings; and (iii) if the
ratings assigned by Moody's and S&P for the Index Debt of such Borrower shall be
changed (other than as a result of a change in the rating system of Moody's or
S&P), such change shall be effective as of the date on which it is first
announced by the applicable Rating Agency. Each change in the Applicable Rate
shall apply during the period commencing on the effective date of such change
and ending on the date immediately preceding the effective date of the next such
change. If the rating system of Moody's or S&P shall change, or if either such
Rating Agency shall cease to be in the business of rating corporate debt
obligations, the Borrowers and the Lenders shall negotiate in good faith to
amend this definition to reflect such changed rating system or the
unavailability of ratings from such Rating Agency and, pending the effectiveness
of any such amendment, the Applicable Rate shall be determined by reference to
the rating most recently in effect prior to such change or cessation. If a
Rating Agency shall cease to assign a rating to a Borrower's Index Debt solely
because such Borrower elects not to participate or otherwise cooperate in the
ratings process of such Rating Agency, the Applicable Rate for such Borrower
shall not be less than that before such Rating Agency's rating became
unavailable.
If neither Rating Agency has assigned a rating to a Borrower's Index
Debt, then the "Applicable Rate" shall mean, for any day, with respect to any
Eurodollar Loan or the Commitment Fee of such Borrower, the applicable rate per
annum set forth below under the caption "Eurodollar Spread" or "Commitment Fee,"
as the case may be, opposite the Leverage Ratio of such Borrower on such day:
<PAGE>
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<TABLE>
<CAPTION>
Leverage Ratio Eurodollar Spread Commitment Fee
-------------- ----------------- --------------
<S> <C> <C>
less than 4.0 0.350% 0.125%
less than 4.5 and greater than or equal to 4.0 0.400% 0.150%
less than 5.0 and greater than or equal to 4.5 0.600% 0.225%
less than 5.5 and greater than or equal to 5.0 0.750% 0.250%
greater than or equal to 5.5 0.875% 0.300%
</TABLE>
Any change in the Leverage Ratio of such Borrower shall be effective to adjust
the Applicable Rate as of the date for which the Leverage Ratio is calculated in
the Interest Rate Certificate delivered pursuant to Section 5.1(c).
Notwithstanding the foregoing, (I) prior to the Diamond Implementation,
the Applicable Rate for TWIC will be what the Applicable Rate for TWI or TWCI
(whichever is lower) would be if TWI and TWCI were Borrowers and (II) at or
after the Diamond Implementation, the Applicable Rate for TBS and TWIC will be
the same as the Applicable Rate for TWI or TWCI (whichever is lower).
"Applicable Transfer" shall mean, for any representation or warranty or
any condition precedent, the Transfer being consummated on the date such
representation or warranty is to be made or such condition precedent is to be
satisfied.
"Assessment Rate" shall mean, for any day, the annual assessment rate
in effect on such day that is payable by a member of the Bank Insurance Fund
classified as "well-capitalized" and within supervisory subgroup "B" (or a
comparable successor risk classification) within the meaning of 12 C.F.R. Part
327 (or any successor provision) to the Federal Deposit Insurance Corporation
for insurance by such Corporation of time deposits made in dollars at the
offices of such member in the United States; provided that if, as a result of
any change in any law, rule or regulation, it is no longer possible to determine
the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual
rate as shall be determined by the Administrative Agent to be representative of
the cost of such insurance to the Lenders.
"Assignment and Acceptance" shall mean an assignment and acceptance
entered into by a Lender and an assignee (with the consent of any party whose
consent is required by Section 9.4), and accepted by the Administrative Agent,
in the form of Exhibit A or any other form approved by the Administrative Agent.
"Assumption" shall mean the assumption of the Allocated Loans of TWIC
by TWEAN in a Transfer.
"Assumption Date" shall mean the date of any Assumption.
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"Authorized Officer" shall mean, with respect to any Person, any
officer of such Person reasonably acceptable to the Administrative Agent and
designated as such in writing to the Administrative Agent by such Person.
"Availability" shall mean, with respect to any Borrower, the excess, if
any, of such Borrower's Borrowing Cap then in effect (after giving effect to the
proviso in Section 2.1) over the aggregate amount of Loans then outstanding to
such Borrower, but in no event shall the aggregate Availability of all the
Borrowers at any time exceed the Total Unutilized Commitment then in effect. The
amount of Loans outstanding for purposes of calculating Availability under
Section 2.10(a) shall not include Swingline Loans. In allocating Availability
among Borrowers for purposes of determining the Commitment Fee, Availability
shall first be allocated to the Borrower with the highest Applicable Rate then
in effect, next to the Borrower with the next highest Applicable Rate then in
effect, and so on.
"Availability Period" shall mean the period from and including the
Effective Date to but excluding the earlier of the Maturity Date and the date of
termination of the Commitments.
"Bankruptcy Code" shall have the meaning provided in Section 7.5.
"Base CD Rate" shall mean the sum of (a) the Three-Month Secondary CD
Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate.
"Beneficial Assets" shall mean the TWE Beneficial Assets and the TWEAN
Beneficial Assets, and the related net cash flows.
"Beneficial Subsidiary" shall have the meaning provided in Section
9.16(b).
"Borrowers" shall mean (i) TWE, (ii) TBS, (iii) TWEAN, (iv) TWIC, (v)
at or after the Diamond Implementation, TWI, and (vi) at or after the Diamond
Implementation, TWCI, collectively; and "Borrower" shall mean any of them;
provided that from and after the date on which any Borrower shall terminate its
Borrowing Cap in accordance with Section 2.7(c) and all of such Borrower's
Obligations shall have been paid in full, such Borrower shall cease to be a
"Borrower" under the Credit Documents and shall cease to be subject as a
Borrower to Articles V and VI.
"Borrowing" shall mean (a) Revolving Loans of the same Type, made,
converted or continued on the same date and, in the case of Eurodollar Loans, as
to which a single Interest Period is in effect, or (b) a Swingline Loan.
"Borrowing Cap" shall mean, (i) with respect to TWE, $7.5 billion, (ii)
with respect to TWEAN, $2.0 billion and (iii) with respect to each other
Borrower, (x) prior to the Diamond Implementation, $4.0 billion and (y) at or
after the Diamond Implementation, $6.0 billion, in each case, as such amount may
be reduced from time to time pursuant to Section 2.7.
<PAGE>
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"Borrowing Request" shall mean a request by the Borrower for a
Revolving Borrowing in accordance with Section 2.3.
"Business Day" shall mean any day that is not a Saturday, Sunday or
other day on which commercial banks in New York City are authorized or required
by law to remain closed; provided that, when used in connection with a
Eurodollar Loan, the term "Business Day" shall also exclude any day on which
banks are not open for dealings in dollar deposits in the London interbank
market.
"Cable Business" shall mean a business substantially all of which
consists of the construction, ownership, operation, management, promotion,
extension or other utilization of any type of cable television distribution
system or any similar distribution business, including the obtaining of a
license or franchise to operate such a system or business.
"Capital Lease Obligations" of any Person shall mean the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"Capital Stock" shall mean, with respect to any Person, any and all
shares, partnership interests or other equivalents (however designated and
whether voting or non-voting) of, such Person's equity, whether outstanding on
the date hereof or hereafter issued, and any and all rights, warrants or options
to purchase or acquire or exchangeable for or convertible into such shares,
partnership interests or other equivalents.
"Cash Balance" shall mean, with respect to any Borrower, the aggregate
amount of cash and Cash Equivalents held by such Borrower.
"Cash Equivalents" shall mean (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) that (a) have maturities of not
more than six months from the date of acquisition thereof or (b) are subject to
a repurchase agreement with an institution described in clause (ii)(x) or (y)
below exercisable within six months from the date of acquisition thereof, (ii)
U.S. Dollar-denominated and Eurodollar time deposits, certificates of deposit
and bankers' acceptances of (x) any domestic commercial bank of recognized
standing having capital and surplus in excess of $500.0 million or (y) any bank
whose short-term commercial paper rating from S&P is at least A-2 or the
equivalent thereof or from Moody's is at least P-2 or the equivalent thereof
(any such bank, an "Approved Lender"), in each case with maturities of not more
than six months from the date of acquisition thereof, (iii) commercial paper and
variable and fixed rate notes issued by any Lender or Approved Lender or by the
parent company of any Lender or Approved Lender and commercial paper and
variable rate notes issued by, or guaranteed by, any industrial or financial
company with a short-term commercial paper rating of at least A-2 or the
equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody's,
and
<PAGE>
<PAGE>
-7-
in each case maturing within six months after the date of acquisition
thereof, and (iv) tax-exempt commercial paper of United States municipal, state
or local governments rated at least A-2 or the equivalent thereof by S&P or at
least P-2 or the equivalent thereof by Moody's and maturing within six months
after the date of acquisition thereof.
"Change in Law" shall mean (a) the adoption of any law, rule or
regulation after the date of this Agreement, (b) any change in any law, rule or
regulation or in the interpretation or application thereof by any Governmental
Authority after the date of this Agreement or (c) compliance by any Lender (or,
for purposes of Section 2.13(b), by any lending office of such Lender or by such
Lender's holding company, if any) with any request, guideline or directive
(whether or not having the force of law) of any Governmental Authority made or
issued after the date of this Agreement.
"Change of Control" shall mean any of the following:
(i) with respect to TWI, either (a) a Person or "group" (within the
meaning of Sections 13(d) and 14(d) of the Exchange Act) acquiring or
having beneficial ownership (it being understood that a tender of shares or
other equity interests shall not be deemed acquired or giving beneficial
ownership until such shares or other equity interests have been accepted
for payment) of securities (including options) having a majority of the
ordinary voting power of TWI (including options to acquire such voting
power) or (b) persons who are directors of TWI as of the date hereof or
persons designated or approved by such directors ceasing to constitute a
majority of the board of directors of TWI;
(ii) with respect to TWCI, TWCI ceasing to be a direct or indirect
Wholly Owned Subsidiary of TWI;
(iii) with respect to TWE, (a) TWI ceasing to own beneficially,
directly or indirectly through Subsidiaries, at least 43-3/4% of the total
equity in TWE, (b) a Person or "group" (within the meaning of Sections
13(d) and 14(d) of the Exchange Act) owning an equity interest in TWE
greater than that owned by TWI and its Wholly Owned Subsidiaries or (c)
there being any managing General Partner of TWE other than TWI and/or one
or more of its Wholly Owned Subsidiaries;
(iv) with respect to TBS, (a) until the Leverage Ratio of TBS is less
than 5.0:1.0, TBS ceasing to be a direct or indirect Wholly Owned
Subsidiary of TWI or (b) after such time, TWI ceasing to own, directly or
indirectly through Subsidiaries, Capital Stock representing at least 66-
2/3% of the ordinary voting power or value of the Capital Stock of TBS;
(v) with respect to TWEAN, (a) TWE and TWI together ceasing to own
beneficially, directly or indirectly, a majority of the TWEAN Partnership
Interests, (b) TWE ceasing to own beneficially, directly or indirectly
through Subsidiaries, at least 40% of the TWEAN Partnership Interests or
(c) TWE ceasing to have management or operational control over TWEAN under
the TWEAN Partnership Agreement comparable in all material respects
<PAGE>
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-8-
to such control on the Closing Date (it being understood that a liquidation
of TWEAN permitted under Section 6.2(b) shall not be deemed a Change of
Control); or
(vi) with respect to TWIC, (a) until the Leverage Ratio of TWIC is less
than 3.5:1.0, TWIC ceasing to be a direct or indirect Wholly Owned
Subsidiary of TWI, (b) after such time, TWI ceasing to own beneficially,
directly or indirectly through Subsidiaries, Capital Stock representing at
least 66-2/3% of the ordinary voting power or value of the Capital Stock of
TWIC or (c) TWI ceasing to have the managerial and operational control over
TWIC that it would have if TWIC were a Subsidiary of TWE or TWEAN;
provided that the events described in paragraphs (i) through (vi) shall not
constitute a "Change of Control" with respect to any Person if such event arises
out of a liquidation, consolidation or merger of such Person permitted by
Section 6.2(b).
"Chase" shall mean The Chase Manhattan Bank.
"Class," when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans
or Swingline Loans.
"Closing Date" shall mean November 14, 1997, the date of the Initial
Loans.
"Code" shall mean the Internal Revenue Code of 1986.
"Commitment" shall mean, with respect to each Lender, the commitment of
such Lender to make Revolving Loans and to acquire participations in Swingline
Loans hereunder, expressed as an amount representing the maximum aggregate
amount of such Lender's Revolving Credit Exposure hereunder, as such commitment
may be (a) reduced from time to time pursuant to Section 2.8 and (b) reduced or
increased from time to time pursuant to assignments by or to such Lender
pursuant to Section 9.4. The initial amount of each Lender's Commitment is set
forth on Schedule 2.1, or in the Assignment and Acceptance pursuant to which
such Lender shall have assumed its Commitment, as applicable.
"Commitment Fee" shall have the meaning provided in Section 2.10(a).
"Commitment Termination Date" shall mean the Business Day immediately
preceding the Maturity Date.
"Companies" shall mean each of the Credit Parties and their respective
Subsidiaries, collectively; and "Company" shall mean any of them.
"Confidential Information Memorandum" shall mean the Confidential
Information Memorandum dated October 1997 relating to the loan facilities
hereunder.
<PAGE>
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-9-
"Consolidated Amortization Expense" shall mean, for any period, for any
Person, the amortization expense of such Person and its consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP.
"Consolidated Cash Flow" shall mean, for any period, for any Person,
(A) the Consolidated Net Income of such Person and its consolidated Subsidiaries
for such period plus (B) (to the extent deducted in calculating such
Consolidated Net Income) the sum of (i) Consolidated Depreciation Expense, (ii)
Consolidated Amortization Expense (excluding amortization of film inventory that
does not constitute amortization of capitalized interest expense, capitalized
depreciation expense and purchase price amortization), (iii) Consolidated
Interest Expense, (iv) income tax expenses of such Person and its Subsidiaries,
(v) non-recurring non-cash items and (vi) minority interest expense in respect
of preferred stock of Subsidiaries of such Person minus (C) the sum of (i) to
the extent included in calculating such Consolidated Net Income, interest income
(including interest on cash or Cash Equivalents) and (ii) to the extent not
previously deducted as an expense in determining Consolidated Net Income,
Management Fees actually paid in cash or other consideration in such period by
such Person or its Subsidiaries, all as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Cash Fixed Charges" shall mean the sum of Consolidated
Cash Interest Expense plus Consolidated Cash Preferred Dividends.
"Consolidated Cash Interest Expense" shall mean, for any period, for
any Person, Consolidated Interest Expense of such Person, but excluding, to the
extent otherwise included therein, interest expense to the extent not payable in
cash (e.g., interest on securities paid in additional securities, imputed
interest and amortization of original issue discount), amortization of discount
and deferred financing costs.
"Consolidated Cash Preferred Dividends" shall mean, for any period, for
any Person, dividends payable in cash during such period in respect of any
preferred stock of such Person and its consolidated Subsidiaries, determined on
a consolidated basis in accordance with GAAP, but decreased by the amount of
such dividends paid with the proceeds of Stock Option Loans and excluding any
dividends with respect to preferred stock of any other Person accrued during any
period that the income (or loss) of such other Person is excluded from
Consolidated Net Income of such Person by reason of clause (i) of the definition
thereof.
"Consolidated Depreciation Expense" shall mean, for any period, for any
Person, the depreciation expense of such Person and its consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" shall mean, for any period, for any
Person, the interest expense of such Person and its consolidated Subsidiaries,
including, without duplication, total interest expense for such period
(including that attributable to Capital Lease Obligations in accordance with
GAAP) with respect to all outstanding Indebtedness of such Person and its
consolidated Subsidiaries, including all capitalized interest, all commissions,
discounts and other fees and charges
<PAGE>
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owed with respect to letters of credit and bankers' acceptance financing, as
such amount may be increased or decreased by the net income or loss from
Interest Rate Agreements for such period determined in accordance with GAAP, but
excluding, without duplication, (i) any amounts payable pursuant to Section
2.10, (ii) any amounts with respect to Indebtedness of any other Person accrued
during any period that the income (or loss) of such other Person is excluded
from Consolidated Net Income of such Person by reason of clause (i) of the
definition thereof and (iii) interest on Stock Option Loans, all determined on a
consolidated basis for such period taken as a single accounting period.
"Consolidated Net Income" shall mean, for any period, for any Person,
the net income (or loss) of such Person and its consolidated Subsidiaries on a
consolidated basis for such period taken as a single accounting period
determined in accordance with GAAP; provided that the following, without
duplication, shall be excluded: (i) the income (or loss) of any other Person
accrued prior to the date that it becomes a Subsidiary of such Person or is
merged into or consolidated with such Person or any of its Subsidiaries or that
such other Person's assets are acquired by such Person or any of its
Subsidiaries, (ii) the income of any Subsidiary of such Person to the extent
that the declaration or payment of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted by operation of the terms
of its charter or any agreement or instrument (other than this Agreement),
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary (provided that the income of any Subsidiary of such Person shall
not be excluded by reason of this clause (ii) so long as such Subsidiary
guarantees the Obligations of such Person), (iii) dividends, interest, income or
other distributions or payments on any investment in or with respect to any
Unrestricted Subsidiary or with respect to any other Person (including, when
calculating Consolidated Net Income of TWE or TWEAN, Paragon to the extent
treated as an equity investment of TWE and/or TWEAN as a result of the operation
of Section 9.16(c)(iii)) which is not a consolidated Subsidiary of such Person
(other than with respect to calculations made pursuant to Section 6.9(I)(b) or
(II)(b) to the extent any such dividends, interest, or other distributions or
payments are actually paid or made), (iv) the income (or loss) realized by such
Person or any of its consolidated Subsidiaries from dispositions of assets
otherwise than in the ordinary course of business (including as the result of
the sale of any business assets, business segment, business operation or
Investment), (v) the income resulting from any write-up of any asset, (vi) the
aggregate net gain (or loss) arising from any revaluation (but not sale) of
readily marketable securities, (vii) the aggregate net gain (or loss) arising
from extraordinary transactions and (viii) the income (or loss) from
discontinued operations.
"Consolidated Total Debt" of any Person shall mean, as at any time of
determination, the total Indebtedness (other than any Stock Option Loans and, in
the case of TWE and TBS, up to $250.0 million of Film Financing in the aggregate
for both of TWE and TBS) of such Person and its consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as at such time.
"Contingent Obligations," as applied to any Person, shall mean any
direct or indirect liability, contingent or otherwise, of that Person (x) with
respect to any indebtedness, lease, dividend, letter of credit or other monetary
obligation of another if the primary purpose or intent thereof by the
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Person incurring the Contingent Obligation is to provide assurance to the
obligee of such obligation of another that such obligation of another will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such obligation will be protected (in whole or in
part) against loss in respect thereof, (y) under any letter of credit issued for
the account of that Person or for which that Person is otherwise liable for
reimbursement thereof, or (z) under Currency Agreements or Interest Rate
Agreements. Contingent Obligations shall include (a) the direct or indirect
guarantee, endorsement (otherwise than for collection or deposit in the ordinary
course of business), co-making, discounting with recourse or sale with recourse
by such Person of the obligation of another, and (b) any liability of such
Person for the obligations of another through any agreement (contingent or
otherwise) (i) to purchase, repurchase, or otherwise acquire such obligation or
any security therefor, or to provide funds for the payment or discharge of such
obligation (whether in the form of loans, advances, stock purchases, capital
contributions or otherwise), (ii) to maintain the solvency or any balance sheet
item, level of income or financial condition of another, or (iii) to make
take-or-pay or similar payments if required regardless of non-performance by any
other party or parties to an agreement, if in the case of any agreement
described under clause (i) or (ii) the primary purpose or intent thereof is as
described in the preceding sentence; provided that Contingent Obligations shall
not include obligations (not otherwise constituting Indebtedness) of any Person
in respect of customary representations, warranties and covenants made or agreed
to by such Person in connection with the sale and securitization of accounts
receivable or similar contract rights. The amount of any Contingent Obligation
shall be equal to the amount of the obligation so guaranteed or otherwise
supported.
"Control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise. A Person shall be deemed to Control another Person if such Person
possesses, directly or indirectly, the power to direct or cause the direction of
the management and policies of such Person, whether through the ownership of
voting securities, by contract or otherwise. "Controlling" and "Controlled" have
meanings correlative thereto.
"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 and (ii) if owed by a
Borrower 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; provided 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.
"Copyright Liens" shall mean any Liens granted by any Borrower or any
of its Subsidiaries on copyrights relating to movies or other programming that
is subject to contracts entitling such Borrower or Subsidiary to future payments
in respect of such movies or other programming, which contractual rights to
future payments are to be transferred by such Borrower or Subsidiary to a
special purpose Subsidiary of such Borrower or Subsidiary organized for the
purpose
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of monetizing such rights to future payments and which Liens (x) are granted
directly or indirectly for the benefit of the special purpose Subsidiary and/or
the Persons who purchase such contractual rights to future payments from such
special purpose Subsidiary and (y) extend only to the copyrights for the movies
or other programming subject to such contracts for the purpose of permitting the
completion, distribution and exhibition of such movies or other programming.
"Coverage Ratio" as of any date shall mean, with respect to any
Borrower, the ratio of Consolidated Cash Flow to Consolidated Cash Fixed Charges
of such Borrower, in each case for the Four Quarter Period ending on such date.
"Credit Documents" shall mean this Agreement and each of the
Guarantees, including the exhibits, schedules and any other attachments hereto
and thereto.
"Credit Event" shall mean (i) the effectiveness of the obligations of
the Lenders to make Loans hereunder, (ii) any Transfer or Assumption, (iii) the
Diamond Implementation or (iv) the making of any Loan hereunder (it being
understood that the continuation or conversion of any Loan shall not be deemed
the making of a Loan).
"Credit Parties" shall mean the Borrowers and the Guarantors; and
"Credit Party" shall mean any of them.
"Currency Agreement" shall mean any foreign exchange contract, currency
swap agreement, futures contract, option contract, synthetic cap or other
similar agreement designed to protect the Persons entering into same against
fluctuations in currency values.
"Default" shall mean any event, act or condition which constitutes, or
with notice or lapse of time, or both, would constitute, an Event of Default.
"Diamond Guarantee" shall mean a guarantee by TWI, TWCI, TBS and TWIC
of all of the Obligations (other than the Obligations of TWE Entities),
substantially in the form of Exhibit D-8.
"Diamond Implementation" shall mean the addition of TWI and TWCI as
Borrowers, which shall become effective upon TWI, TWCI and TBS executing and
delivering the Diamond Guarantee and the satisfaction or waiver of each of the
other conditions set forth in Section 4.3.
"Diamond Parties" shall mean (i) TWI, (ii) TWCI, (iii) TBS and (iv)
TWIC, collectively; and "Diamond Party" shall mean any of them.
"Documents" shall mean the Credit Documents and the Transfer Documents.
"dollars" or "$" refers to lawful money of the United States of
America.
"Effective Date" shall have the meaning provided in Section 9.6.
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"Environmental Laws" shall mean all laws, rules, regulations, codes,
ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or reclamation of natural
resources, the management, release or threatened release of any Hazardous
Material or to health and safety matters.
"Environmental Liability" shall mean any liability, contingent or
otherwise (including any liability for damages, costs of environmental
remediation, fines, penalties or indemnities), of any Company directly or
indirectly resulting from or based upon (a) violation of any Environmental Law,
(b) the generation, use, handling, transportation, storage, treatment or
disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials,
(d) the release or threatened release of any Hazardous Materials into the
environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974.
"ERISA Affiliate" shall mean, with respect to any Credit Party, any
trade or business (whether or not incorporated) that, together with such Credit
Party, is treated as a single employer under Section 414(b) or (c) of the Code
or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is
treated as a single employer under Section 414 of the Code.
"ERISA Entity" shall mean each of the Credit Parties and each of their
respective ERISA Affiliates, collectively; and "ERISA Entity" shall mean any of
them.
"ERISA Event" shall mean (a) any "reportable event," as defined in
Section 4043 of ERISA or the regulations issued thereunder with respect to a
Plan (other than an event for which the 30-day notice period is waived); (b) the
existence with respect to any Plan of an "accumulated funding deficiency" (as
defined in Section 412 of the Code or Section 302 of ERISA), whether or not
waived, or the failure to make by its due date a required installment under
Section 412(m) of the Code with respect to any Plan or the failure to make any
required contribution to a Multiemployer Plan; (c) the filing pursuant to
Section 412(d) of the Code or Section 303(d) of ERISA of an application for a
waiver of the minimum funding standard with respect to any Plan; (d) the
incurrence by any ERISA Entity of any liability under Title IV of ERISA with
respect to the termination of any Plan; (e) the receipt by any ERISA Entity from
the PBGC or a plan administrator of any notice relating to an intention to
terminate any Plan or Plans or to appoint a trustee to administer any Plan, or
the occurrence of any event or condition which could reasonably be expected to
constitute grounds under ERISA for the termination of, or the appointment of a
trustee to administer, any Plan; (f) the incurrence by any ERISA Entity of any
liability with respect to the withdrawal or partial withdrawal from any Plan or
Multiemployer Plan; (g) the receipt by any ERISA Entity of any notice, or the
receipt by any Multiemployer Plan from any ERISA Entity of any notice,
concerning the imposition of Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA; or (h) the occurrence of a non exempt
prohibited transaction (within the meaning of Section 4975 of the Code or
Section 406 of ERISA) which could result in liability to a Credit Party.
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"Eurodollar," when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate.
"Event of Default" has the meaning assigned to such term in Article
VII.
"Exchange Act" shall mean the Securities Exchange Act of 1934.
"Excluded Taxes" shall mean, with respect to the Administrative Agent,
any Lender or any other recipient of any payment to be made by or on account of
any obligation of any Credit Party hereunder, (a) income or franchise taxes
imposed on (or measured by) its net income, assets or net worth by the United
States of America, or by the jurisdiction under the laws of which such recipient
is organized or in which its principal office is located or, in the case of any
Lender, in which its applicable lending office is located, (b) any branch
profits taxes imposed by the United States of America or any similar tax
imposed by any other jurisdiction in which any Credit Party is located and (c)
in the case of a Foreign Lender (other than an assignee pursuant to a request by
the Borrowers under Section 2.17(b)), any withholding tax that is imposed on
amounts payable to such Foreign Lender at the time such Foreign Lender becomes a
party to this Agreement (or designates a new lending office) or is attributable
to such Foreign Lender's failure to comply with Section 2.15(f), except to the
extent that such Foreign Lender (or its assignor, if any) was entitled, at the
time of designation of a new lending office (or assignment), to receive
additional amounts from any Borrower with respect to such withholding tax
pursuant to Section 2.15(a).
"Existing Credit Agreements" shall mean (i) the Credit Agreement dated
as of June 30, 1995 among TWE, TWEAN and TWIC, as borrowers, Chase, as
administrative agent, and the lenders party thereto, (ii) the Credit Agreement
dated as of July 1, 1993 among TBS, as borrower, Chase, as administrative agent,
and the lenders party thereto and (iii) the Credit Agreement dated as of
September 7, 1994 among TBS, as borrower, Chase, as administrative agent, and
the lenders party thereto.
"FCC" shall mean the Federal Communications Commission.
"Federal Funds Effective Rate" shall mean, for any day, the weighted
average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.
"Film Financing" shall mean, without duplication, monetary obligations
arising out of transactions in which so-called tax-based financing groups or
other third-party investors provide financing for the acquisition, production or
distribution of motion pictures, television programs, sound recordings or books
or rights with respect thereto in exchange, in part, for certain tax or other
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benefits which are derived from such motion pictures, television programs, sound
recordings, books or rights; provided that no such monetary obligations shall
be, directly or indirectly, recourse (including by way of set-off) to any
Restricted Company or any of its assets other than to the profits or
distribution rights related to such motion pictures, television programs, sound
recordings, books or rights and other than to a Subsidiary of TWE or TBS
substantially all of the assets of which consist of the motion pictures, video
and television programming or rights which are the subject of such transaction
and related cash and Cash Equivalents.
"Financial Officer" shall mean, with respect to any Person, the chief
financial officer, principal accounting officer, treasurer or controller of such
Person.
"Financial Statements" shall mean, of any Person for any period, (x)
the balance sheet of such Person and its Subsidiaries, on a consolidated basis,
as of the end of such period and (y) the related statements of operations,
stockholders' or partners' equity and cash flows for such period and, if such
period is not a fiscal year, for the then elapsed portion of the fiscal year.
"Foreign Lender" shall mean any Lender that is organized under the laws
of a jurisdiction other than that in which the Borrowers are located. For
purposes of this definition, the United States of America, each state thereof
and the District of Columbia shall be deemed to constitute a single
jurisdiction.
"Foreign Subsidiary" shall mean any Subsidiary of a Borrower that is
incorporated or organized under the laws of any jurisdiction other than the
United States or any state thereof, the U.S. Virgin Islands and Puerto Rico and
does substantially all of its business outside the United States, the U.S.
Virgin Islands and Puerto Rico.
"Four Quarter Period" shall mean a period consisting of four full
consecutive fiscal quarters.
"Franchise" shall mean, with respect to any Person, a franchise,
license, authorization or right to construct, own, operate, manage, promote,
extend or otherwise utilize any cable television distribution system operated or
to be operated by such Person or any of its Subsidiaries granted by any state,
county, city, town, village or other local government authority or by the FCC,
but shall not include any such franchise, license, authorization or right that
is incidentally required for the purpose of installing, constructing or
extending a cable television system.
"GAAP" shall mean generally accepted accounting principles in the
United States of America. See Section 1.4 and 9.16.
"General Partner" shall mean any Person defined as such in the TWE
Partnership Agreement or any TWEAN Partner.
"Governmental Authority" shall mean the government of the United States
of America, any other nation or any political subdivision thereof, whether state
or local, and any agency,
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authority, instrumentality, regulatory body, court, central bank or other entity
exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government.
"guarantee" of or by any Person (the "guarantor") means any obligation,
contingent or otherwise, of the guarantor guaranteeing or having the economic
effect of guaranteeing any Indebtedness or other monetary obligation of any
other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor, direct or indirect,
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation or to purchase (or to advance or
supply funds for the purchase of) any security for the payment thereof, (b) to
purchase or lease property, securities or services for the purpose of assuring
the owner of such Indebtedness or other monetary obligation of the payment
thereof, (c) to maintain working capital, equity capital or any other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness or other monetary obligation or (d) as
an account party in respect of any letter of credit or letter of guaranty issued
to support such Indebtedness or monetary obligation; provided, that the term
guarantee shall not include endorsements for collection or deposit in the
ordinary course of business.
"Guarantees" shall mean (i) the TWE Partner Guarantees, (ii) the TWI
Guarantee, (iii) the TWEAN Holder Guarantees, (iv) the Subsidiary Guarantees,
(v) the TWE Guarantee, (vi) the Paragon Guarantee, (vii) the TWIC Guarantee and
(viii) the Diamond Guarantee, collectively; and "Guarantee" shall mean any of
them.
"Guaranteed Percentage" shall mean, with respect to any TWE
Partner Guarantor, the percentage of the obligations of TWE hereunder being
guaranteed by such TWE Partner Guarantor. The Guaranteed Percentage of each TWE
Partner Guarantor shall be as follows: Warner Communications Inc.: 44.88%;
American Television and Communications Corporation: 40.73%; and Warner Cable
Communications Inc.: 14.39%; provided that the Guaranteed Percentage of any TWE
Partner Guarantor may be changed by TWE from time to time by written notice to
the Administrative Agent in connection with the merger or consolidation of such
TWE Partner Guarantor; provided that (i) at all times the sum of the Guaranteed
Percentages of all TWE Partner Guarantors shall equal 100% and (ii) with respect
to any TWE Partner Guarantor that owns, directly or indirectly, any Beneficial
Assets, such TWE Partner Guarantor's Guaranteed Percentage may not be changed
unless at the time of such change the representations and warranties contained
in Section 3.13(a) shall be true and correct.
"Guarantors" shall mean (i) the TWE Partner Guarantors, (ii) TWI in its
capacity as guarantor under the TWI Guarantee, (iii) the TWEAN Holder
Guarantors, (iv) the Subsidiary Guarantors, (v) TWE in its capacity as guarantor
under the TWE Guarantee, (vi) Paragon in its capacity as guarantor under the
Paragon Guarantee, (vii) TWI and TWCI in their capacities as guarantors under
the TWIC Guarantee and (viii) TWI, TWCI, TBS and TWIC in their capacities as
guarantors under the Diamond Guarantee, collectively; and "Guarantor" shall mean
any of them, each of which is designated as such on Schedule A.
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"Hazardous Materials" means all explosive or radioactive substances or
wastes and all hazardous or toxic substances, wastes or other pollutants,
including petroleum or petroleum distillates, asbestos or asbestos containing
materials, polychlorinated biphenyls, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law.
"Incur" shall mean, with respect to any Indebtedness, to incur, create,
issue, assume, guarantee or otherwise become liable for or with respect to, or
become responsible for the payment of, contingently or otherwise, such
Indebtedness; provided that the term "Incur" shall not include conversions or
continuations of Loans.
"Indebtedness" of any Person shall mean, without duplication, (i) all
indebtedness of such Person for borrowed money or evidenced by bonds, notes,
debentures or similar instruments, (ii) the deferred purchase price of any
acquisition of a business, operation, business segment or other group of
operating or revenue-producing assets (including any payments in respect of
non-compete or other similar arrangements entered into in connection with such
acquisition), whether or not such acquisition was made in the ordinary course of
business, (iii) the face amount of all letters of credit issued for the account
of such Person to the extent of all drafts drawn thereunder, (iv) all
indebtedness of a second Person secured by any Lien on any property owned by
such first Person (other than any Lien permitted by Section 6.3(b)(iv) and any
Copyright Lien), whether or not such indebtedness has been assumed (but only to
the extent of the lesser of the fair market value of the property subject to
such Lien and the amount of indebtedness of such second Person), (v) all
Capitalized Lease Obligations of such Person, (vi) all obligations of such
Person to pay a specified purchase price for goods or services whether or not
delivered or accepted (i.e., take-or-pay and similar obligations) (other than
where the obligation is classified on such Person's financial statements in
accordance with GAAP as an account payable), (vii) all Contingent Obligations of
such Person to the extent such Contingent Obligations relate to any obligation
that would otherwise constitute Indebtedness and (viii) Film Financings and all
other obligations that would otherwise be Film Financings but for the proviso
contained in the definition thereof. Notwithstanding the foregoing, Indebtedness
shall not include (a) obligations in respect of trade payables and accrued
expenses, in each case arising in the ordinary course of business (including up
to $150,000,000 in the aggregate at any time outstanding for all of the
Borrowers of undrawn obligations with respect to commercial letters of credit
supporting lease payment obligations, insurance premium payment obligations and
other trade payables entered into in the ordinary course of business that, in
each case, are not secured by the related assets); (b) any obligation of such
Person or any Subsidiary thereof to purchase products and services utilized in
its business pursuant to agreements entered into the ordinary course of business
(including under Negative Pick-Up Facilities); (c) any obligation of such Person
to guarantee performance of, or enter into indemnification agreements with
respect to, obligations, entered into in the ordinary course of business, under
any and all Franchises, leases, performance bonds, franchise bonds, obligations
to reimburse drawings under letters of credit issued in lieu of performance or
franchise bonds; (d) completion bonds or guarantees or indemnities of a similar
nature issued in the ordinary course of business in connection with the
production of motion pictures and video and television programming (including
under Negative PickUp Facilities); (e) obligations, if any, to make Tax
Distributions; (f) amounts owed to TWI by any TWE Partner Guarantor or any
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holder of TWE Material Beneficial Assets arising in the ordinary course of
business with respect to deferred tax payments arising out of assets (other than
Beneficial Assets) held by such holder but only if such obligations are
subordinated to the Guarantee of such holder; (g) any Guarantee or any guarantee
by TWIC or any of its Subsidiaries of the Obligations of (x) TWEAN or (y) any
Guarantor of the Obligations of TWEAN; (h) any reimbursement obligation among
Guarantors with respect to any Guarantees or among TWIC and its Subsidiaries
with respect to any guarantees by TWIC or any of its Subsidiaries of any
Obligations of (x) TWEAN or (y) any Guarantor of the Obligations of TWEAN;
provided that any such obligation shall be subordinated to the obligations of
the Guarantors under the Credit Documents. The Indebtedness of any Person shall
include the Indebtedness of any other entity (including any partnership in which
such Person is a general partner) to the extent such Person is liable therefor
as a result of such Person's ownership interest in or other relationship with
such entity, except to the extent the terms of such Indebtedness provide that
such Person is not liable therefor.
"Indemnified Taxes" shall mean Taxes other than Excluded Taxes.
"Indemnitee" shall have the meaning provided in Section 9.3.
"Index Debt," of any Borrower, shall mean each separate issuance or
series of outstanding long term debt of such Borrower that is (a) unsecured, (b)
not subordinated in right of payment to any other Indebtedness of such Borrower
and (c) (i) not guaranteed and not otherwise credit enhanced, directly or
indirectly, by any other Person or (ii) guaranteed or otherwise credit enhanced
so long as the Loans of such Borrower, if any, are equally and ratably
guaranteed or otherwise credit enhanced, as the case may be; provided that if at
any time no such Indebtedness shall be outstanding, Index Debt shall include the
Revolving Loans.
"Information" shall have the meaning specified in Section 9.12.
"Initial Loans" shall mean the initial Loans to be made hereunder.
"Interest Election Request" shall mean a request by the Borrower to
convert or continue a Revolving Borrowing in accordance with Section 2.6.
"Interest Payment Date" shall mean (a) with respect to any ABR Loan
(other than a Swingline Loan), the last day of each March, June, September and
December, (b) with respect to any Eurodollar Loan, the last day of the Interest
Period applicable to the Borrowing of which such Loan is a part and, in the case
of a Eurodollar Borrowing with an Interest Period of more than three months'
duration, each day prior to the last day of such Interest Period that occurs at
intervals of three months' duration after the first day of such Interest Period,
and (c) with respect to any Swingline Loan, the day that such Loan is required
to be repaid.
"Interest Period" shall mean (a) as to any Eurodollar Borrowing of any
Borrower, the period commencing on the date of such Borrowing or on the last day
of the immediately preceding Interest Period applicable to such Borrowing, as
the case may be, and ending on the numerically
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corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is (i) one, two, three or six months thereafter,
as such Borrower may elect, (ii) twelve months thereafter if such Borrower shall
have so elected and the Administrative Agent, after consultation with the
Lenders, shall have determined in good faith based on then prevailing conditions
in the interbank Eurodollar market that U.S. Dollar deposits are generally then
being offered to first class banks in the interbank Eurodollar market for a
comparable maturity and all of the Lenders shall have agreed to such Interest
Period or (iii) one month thereafter if such Borrower shall have made no
election as to the Interest Period; and (b) as to any ABR Borrowing, the period
commencing on the date of such Borrowing or on the last day of the immediately
preceding Interest Period applicable to such Borrowing, as the case may be, and
ending on the earliest of (i) the next succeeding March 31, June 30, September
30 or December 31, (ii) the Maturity Date, and (iii) the date such Borrowing is
converted to a Borrowing of a different Type in accordance with Section 2.6 or
repaid or prepaid in accordance with Section 2.9 or 2.10; provided that (x) if
any Interest Period would end on a day other than a Business Day, such Interest
Period shall be extended to the next succeeding Business Day unless, in the case
of Eurodollar Loans only, such next succeeding Business Day would fall in the
next calendar month, in which case such Interest Period shall end on the next
preceding Business Day and (y) any Interest Period pertaining to a Eurodollar
Borrowing that commences on the last Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the last calendar
month of such Interest Period) shall end on the last Business Day of the last
calendar month of such Interest Period. For purposes hereof, the date of a
Borrowing initially shall be the date on which such Borrowing is made and, in
the case of a Revolving Borrowing, thereafter shall be the effective date of the
most recent conversion or continuation of such Borrowing.
"Interest Rate Agreement" shall mean any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, interest rate
futures contract, interest rate option contract or other similar agreement or
arrangement designed to manage the exposure of a Person or any of its
Subsidiaries to fluctuating interest rates.
"Interest Rate Certificate" shall mean an Officers' Certificate
substantially in the form of Exhibit B, delivered pursuant to Section
4.1(c)(iii) or 5.1(f).
"Interest Rate Determination Date" shall mean each date for calculating
the Eurodollar Rate for purposes of determining the interest rate in respect of
an Interest Period. The Interest Rate Determination Date shall be the second
Business Day prior to the first day of the related Interest Period.
"Investment" by any Person means any direct or indirect (i) loan,
advance or other extension of credit or contribution to any other Person (by
means of transfers of cash or other property to others, payments for property or
services for the account or use of others, mergers or otherwise), (ii) purchase
or acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidences of Indebtedness issued by any other Person (whether by merger,
consolidation, amalgamation or otherwise and whether or not purchased directly
from the issuer of such securities or evidences of Indebtedness), and (iii) all
other items that would be classified as investments on a balance sheet of such
Person prepared in accordance with GAAP. Investments shall exclude
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extensions of trade credit and advances to customers and suppliers to the extent
in the ordinary course of business and made in accordance with customary
industry practice. The amount of any Investment shall be the original cost of
such Investment plus the cost of all additions thereto, without any adjustments
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment.
"Lenders" shall mean the Persons listed on Schedule 2.1 and any other
Person that shall have become a party hereto pursuant to an Assignment and
Acceptance, other than any such Person that ceases to be a party hereto pursuant
to an Assignment and Acceptance. Unless the context otherwise requires, the term
"Lenders" includes the Swingline Lender.
"Leverage Ratio" shall mean, as of any date, (i) with respect to any
Person (other than TWI prior to the Diamond Implementation for purposes of
Section 6.4(I)(c)), the ratio of Net Total Debt of such Person as of such date
to Consolidated Cash Flow of such Person for the Four Quarter Period ending on
such date, and (ii) with respect to TWI prior to the Diamond Implementation for
purposes of Section 6.4(I)(c), the ratio of Consolidated Total Debt of TWI as of
such date to Consolidated Cash Flow of TWI for such Four Quarter Period. For
purposes of calculating the Leverage Ratio, in the event of any material
acquisition or disposition by any Company during any Four Quarter Period,
Consolidated Cash Flow shall be adjusted to give effect to such acquisition or
disposition by including or excluding, as the case may be, from Consolidated
Cash Flow of such Person all Consolidated Cash Flow derived from the asset
acquired or disposed of for that portion of such Four Quarter Period occurring
before such acquisition or disposition.
"LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for
any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or
on any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to those
currently provided on such page of such Service, as determined by the
Administrative Agent from time to time for purposes of providing quotations of
interest rates applicable to dollar deposits in the London interbank market) at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the "LIBO Rate" with respect to such
Eurodollar Borrowing for such Interest Period shall be the rate at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period are
offered by the principal London office of the Administrative Agent in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such
Interest Period.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any
financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities, including any agreement to give any of the foregoing.
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"Loans" shall mean the loans made by the Lenders to the Borrowers
pursuant to this Agreement.
"Management Fees" shall mean (i) the management fees payable by TWE to
TWI in an amount equal to $5.0 million per month, as adjusted to reflect
increases in the Consumer Price Index from January 1, 1991, (ii) without
duplication of any amounts paid under clause (iii) below, the management fees
payable by TWE to USW pursuant to Section 8(h) of the Admission Agreement dated
as of May 16, 1993 between TWE and USW, in an aggregate amount equal to $60.0
million, (iii) the management fees payable by TWEAN to TWE pursuant to Section
3.1(h) of the TWEAN Partnership Agreement and (iv) the management fees paid by
TWIC to TWE in consideration of TWE's managing and providing other services to
the Cable Businesses owned by TWIC, which fees shall be determined on an arms'
length basis.
"Margin Stock" shall have the meaning provided in Regulation U.
"Material Adverse Effect" shall mean a material adverse effect on (i)
the condition (financial or other), business, results of operations, properties
or liabilities of any Borrower and its Subsidiaries, taken as a whole, or of TWI
and its Subsidiaries, taken as a whole, (ii) the ability of any Credit Party to
perform its obligations to the Lenders under any Credit Document to which it is,
or will be, a party or (iii) the rights of or benefits available to the Lenders
under any Credit Document.
"Material Beneficial Asset" shall mean a TWE Material Beneficial Asset
or a TWEAN Material Beneficial Asset.
"Material Plan" shall have the meaning provided in Section 7.6.
"Material Subsidiary," of any Person, at any date, shall mean each
Subsidiary of such Person which, either alone or together with the Subsidiaries
of such Subsidiary, meets any of the following conditions:
(i) as of the last day of such Person's most recently ended fiscal
quarter for which financial statements have been filed with the SEC or have
become generally available the investments of such Person and its
Subsidiaries in, or their proportionate share (based on their equity
interests) of the fair market or book value of the total assets (after
intercompany eliminations) of, the Subsidiary in question exceeds 5% of the
fair market or book value, respectively, of the total assets of such Person
and its consolidated Subsidiaries;
(ii) for the Four Quarter Period ended on the last day of such Person's
most recently ended fiscal quarter for which financial statements have been
filed with the SEC or have become generally available, the equity of such
Person and its Subsidiaries in the revenues from continuing operations of
the Subsidiary in question exceeds 5% of the revenues from continuing
operations of such Person and its consolidated Subsidiaries; or
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(iii) for the Four Quarter Period ended on the last day of such
Person's most recently ended fiscal quarter for which financial statements
have been filed with the SEC or have become generally available, the equity
of such Person and its Subsidiaries in the Consolidated Cash Flow of the
Subsidiary in question exceeds 5% of the Consolidated Cash Flow of such
Person.
For purpose of Section 7.4, "Material Subsidiary" shall include any
Person that is defined as such under the Indenture dated as of April 30, 1992
among TWI, TWE, the TWE Partners signatory thereto and The Bank of New York, as
trustee.
"Maturity Date" shall mean the fifth anniversary of the Closing Date
and, if such day is not a Business Day, the next preceding Business Day.
"Maximum Permitted Indebtedness" shall mean, with respect to any
Borrower at any time, the maximum amount of Indebtedness that such Borrower
could then have outstanding pursuant to this Agreement without giving rise to a
Default.
"Minimum Borrowing Amount" shall mean $20.0 million.
"Moody's" shall mean Moody's Investors Service, Inc.
"Multiemployer Plan" shall mean a "multiemployer plan," as defined in
Section 4001(a)(3) of ERISA, (i) to which any ERISA Entity is contributing, or
at any time within the immediately preceding five calendar years has
contributed, (ii) to which any ERISA Entity has, or, at any time within the
immediately preceding five calendar years has had, an obligation to contribute
or (iii) with respect to which any ERISA Entity retains any liability.
"Negative Pick-Up Facilities" shall mean (i) the Loan and
Security Agreement dated as of June 27, 1997 among LIS Financing, Inc. and the
other borrowers from time to time party thereto, ABN AMRO Bank N.V., as agent
and as enhancer, the liquidity providers from time to time party thereto and
Amsterdam Funding Corporation, as in effect on the date hereof, and (ii)
facilities substantially similar to the foregoing (with appropriate
modifications for single picture facilities).
"Net Total Debt" shall mean, for any Borrower, the excess, if
any, over the Cash Balance of the sum of, without duplication, (i) Consolidated
Total Debt of such Borrower, (ii) in the case of TWE, any unpaid Tax
Distributions of such Person, whether or not accrued or required to be accrued
under applicable accounting principles and (iii) in the case of TWE or TWEAN,
any Indebtedness of any holder of TWE Material Beneficial Assets or TWEAN
Material Beneficial Assets, as the case may be, other than (x) the Specified
Holders and (y) in the case of TWEAN, TWE and its Restricted Subsidiaries (other
than TWEAN and its Restricted Subsidiaries) or TWIC and its Restricted
Subsidiaries; provided that any Indebtedness of any holder of TWE Material
Beneficial Assets or TWEAN Material Beneficial Assets included in the Net Total
Debt of TWE or TWEAN, as applicable, shall be excluded from the Net Total Debt
of the Borrower of which such holder of Material Beneficial Assets is legally a
Subsidiary.
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"Newhouse" shall mean Newhouse Broadcasting Corporation, a New
York corporation.
"Non-Recourse Purchase Money Indebtedness" shall mean Purchase
Money Indebtedness for which the sole legal recourse for collection of principal
and interest on such Indebtedness is against the property acquired with the
proceeds thereof, which property is specifically identified in the instruments
evidencing or securing such Indebtedness.
"Obligations" shall mean all amounts, direct or indirect,
contingent or absolute, of every type or description, and at any time existing,
owing to the Administrative Agent or any Lender pursuant to any Credit Document.
"Officers' Certificate" shall mean, with respect to any
Person, a certificate executed on behalf of such Person by one of its Authorized
Officers and by a Financial Officer; provided that every Officers' Certificate
with respect to the compliance with a condition precedent to any Credit Event
shall include (i) a statement that the officer or officers making or giving such
Officers' Certificate have read such condition and any definitions or other
provisions contained in this Agreement relating thereto, (ii) a statement that
they have made or have caused to be made such examination or investigation as is
necessary, in the opinion of the signers, to enable them to express an informed
opinion as to whether or not such condition has been complied with, and (iii) a
statement as to whether, in the opinion of the signers, such condition has been
complied with.
"Officer's Solvency Certificate" shall mean a solvency
certificate signed by the Chief Financial Officer (or its equivalent) of a
Borrower, substantially in the form of Exhibit C.
"Organizational Documents" shall mean (i) the Certificate of
Limited Partnership of TWE filed with the Secretary of State of the State of
Delaware, (ii) the Partnership Agreements, (iii) the TWEAN Contribution
Agreement, (iv) the articles of incorporation of each Credit Party that is a
corporation, which for purposes of Section 4.1(e) shall be certified as of a
recent date by the Secretary of State of the state of incorporation of such
Credit Party, (v) the bylaws of each Credit Party that is a corporation, which
for purposes of Section 4.1(e) shall be certified as of a recent date by the
secretary or any assistant secretary of such Credit Party, and (vi) the
organizational documents of each Credit Party (other than any Borrower) that is
not a corporation.
"Other Taxes" shall mean any and all present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies arising from any payment made hereunder or from the execution, delivery
or enforcement of, or otherwise with respect to, any Credit Document.
"Paragon" shall mean Paragon Communications, a Colorado general
partnership.
"Paragon Guarantee" shall mean a guarantee by Paragon of all of the
Obligations of TWIC and of TWEAN, substantially in the form of Exhibit D-5.
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"Partner" shall mean a TWE Partner or a TWEAN Partner.
"Partnership Agreements" shall mean the TWE Partnership Agreement and
the TWEAN Partnership Agreement; and "Partnership Agreement" shall mean any of
them.
"Partnership Borrowers" shall mean TWE and TWEAN.
"Partnership Interest" shall mean a TWE Partnership Interest or a TWEAN
Partnership Interest.
"Payment Office" shall mean 270 Park Avenue, New York, New York 10017
or such other place as shall be designated by the Administrative Agent to the
Borrowers in writing.
"PBGC" shall mean Pension Benefit Guaranty Corporation.
"Permitted Intercompany Indebtedness" shall mean:
(a) prior to the Diamond Implementation, Indebtedness for money
borrowed of any Borrower or any of its Restricted Subsidiaries
owing to such Borrower or any of its Restricted Subsidiaries; and
(b) at or after the Diamond Implementation, Indebtedness for money
borrowed of any Test Party or any of its Restricted Subsidiaries
owing to such Test Party or any of its Restricted Subsidiaries;
provided that for purposes of this definition only, (i) TWE and its Restricted
Subsidiaries shall be deemed not to be Restricted Subsidiaries of TWI and (ii)
TWEAN and its Restricted Subsidiaries shall be deemed not to be Restricted
Subsidiaries of TWE or TWI.
"Permitted Lien" shall mean any of the Liens described in Section
6.3(b).
"Person" shall mean any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.
"Plan" shall mean any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and (i) which is maintained or
contributed to by any Credit Party or any of their respective ERISA Affiliates
or (ii) with respect to which any Credit Party retains any liability.
"Prime Rate" shall mean the rate of interest per annum publicly
announced from time to time by Chase as its prime rate in effect at its
principal office in New York City; each change in the Prime Rate shall be
effective from and including the date such change is publicly announced as being
effective.
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"Purchase Money Indebtedness" of any Person shall mean Indebtedness of
such Person Incurred for the purpose of financing all or any part of the
purchase price, or the cost of construction or improvement, of any property to
be used in the ordinary course of business by such Person and its Restricted
Subsidiaries; provided that (i) the aggregate principal amount of such
Indebtedness shall not exceed such purchase price or cost and (ii) such
Indebtedness shall be Incurred no later than 90 days after the acquisition of
such property or completion of such construction or improvement.
"Rating Agency" shall mean each of Moody's and S&P.
"Register" shall have the meaning provided in Section 9.4(c).
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing reserve requirements.
"Regulation U" shall mean Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing margin requirements.
"Related Parties" shall mean, with respect to any specified Person,
such Person's Affiliates and the respective directors, officers, employees,
agents and advisors of such Person and such Person's Affiliates.
"Requesting Borrower" shall mean the Borrower requesting a Loan or a
conversion or a continuation of a Loan.
"Required Lenders" shall mean, at any time, Lenders having Revolving
Credit Exposures and unused Commitments representing more than 50% of the sum of
the total Revolving Credit Exposures and the Total Unutilized Commitment at such
time.
"Restricted Companies" shall mean the Companies other than any
Unrestricted Subsidiaries.
"Restricted Material Subsidiary" is a Material Subsidiary that is a
Restricted Subsidiary.
"Restricted Payments" shall mean, with respect to any Person, any
direct or indirect (i) dividend or other payment or distribution on account of
or with respect to any Capital Stock (including, in the case of TWE, A, B, C or
D sub-accounts, senior sub-accounts, special sub-accounts or common
sub-accounts) of such Person, (ii) redemption, purchase, retirement, sinking
fund or similar payment or other acquisition for value of any Capital Stock
(including, in the case of TWE, A, B, C or D sub-accounts, senior sub-accounts,
special sub-accounts or common sub-accounts) of such Person, or (iii) entering
into any obligation to effect any of the foregoing, except in each case
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any made (or, in the case of clause (iii), permitted to be made) solely by the
issuance of additional common equity of the issuer of such Capital Stock
(including, in the case of TWE, payments under Article VIII, XIII or XV of the
TWE Partnership Agreement). Notwithstanding the foregoing, so long as no Default
is continuing or would occur after giving effect to such transaction, the
following shall not constitute Restricted Payments: (a) the payment of
Management Fees and Tax Distributions in accordance with the definitions
thereof; and (b) any payment by any Borrower (or any Test Party, as applicable)
to the extent of any cash common equity contributions made to such Borrower (or
such Test Party, as applicable) following the Closing Date (including such
contributions consisting of the cash received as the exercise price of stock
options (other than any applied toward repayment of Stock Option Loans)).
"Restricted Subsidiaries" of any Borrower as of any date shall mean all
Subsidiaries of such Borrower that have not been designated as Unrestricted
Subsidiaries by such Borrower pursuant to Section 6.12 or have been so
designated as Unrestricted Subsidiaries by such Borrower but prior to such date
have been (or have been deemed to be) redesignated by such Borrower as
Restricted Subsidiaries pursuant to Section 6.12.
"Revolving Credit Exposure" shall mean, with respect to any Lender at
any time, the sum of the outstanding principal amount of such Lender's Revolving
Loans and its Swingline Exposure at such time.
"Revolving Loan" shall mean a Loan made pursuant to Section 2.3.
"S&P" shall mean Standard & Poor's Ratings Group.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933.
"Specified Holders" shall mean Advance, Newhouse and Advance/Newhouse.
"Specified Indebtedness" shall mean Indebtedness described in clauses
(i), (ii) and (vii) of the definition thereof, other than any Permitted
Intercompany Indebtedness or Convertible Intercompany Debt.
"Statutory Reserve Rate" shall mean a fraction (expressed as a
decimal), the numerator of which is the number one and the denominator of which
is the number one minus the aggregate of the maximum reserve percentages
(including any marginal, special, emergency or supplemental reserves) expressed
as a decimal established by the Board of Governors of the Federal Reserve System
to which the Administrative Agent is subject (a) with respect to the Base CD
Rate, for new negotiable nonpersonal time deposits in dollars of over $100,000
with maturities approximately equal to three months and (b) with respect to the
Adjusted LIBO Rate, for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Board of Governors of the
Federal Reserve System). Such reserve percentages shall include those
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imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to
constitute eurocurrency funding and to be subject to such reserve requirements
without benefit of or credit for proration, exemptions or offsets that may be
available from time to time to any Lender under such Regulation D or any
comparable regulation. The Statutory Reserve Rate shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
"Stock Option Loans" shall mean (i) borrowings under that certain
Credit Agreement dated as of May 23, 1996 between TWI, The Chase Manhattan Bank,
as administrative agent, and the lenders party thereto, as such agreement is in
effect on the date hereof or as amended hereafter in any manner not materially
less favorable either to the lenders thereunder or to the other creditors of
TWI; provided the lenders thereunder shall not have the benefit of any Lien
other than on the Capital Stock of TWI and proceeds therefrom or (ii) borrowings
under substantially similar facilities.
"Subsidiary" of any Person shall mean and include (a) (i) any
corporation more than 50% of whose Capital Stock of any class or classes having
by the terms thereof ordinary voting power to elect a majority of the directors
of such corporation (irrespective of whether or not at the time stock of any
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by such Person
directly or indirectly through Subsidiaries and (ii) any partnership,
association, joint venture or other entity in which such Person directly or
indirectly through Subsidiaries has more than a 50% equity interest at the time,
and (b) with respect to TWIC, Paragon so long as Paragon shall be consolidated
with TWIC pursuant to Section 9.16(c)(iii).
"Subsidiary Guarantee" shall mean a guarantee by a Subsidiary Guarantor
of the Obligations of the Borrower that is its most immediate direct or indirect
parent, substantially in the form of Exhibit D-1.
"Subsidiary Guarantor" shall mean any Person that is required to
execute and deliver a Subsidiary Guarantee pursuant to Section 5.13.
"Summit" shall mean Summit Communications Group, Inc., a Delaware
corporation.
"Swingline Borrowers" shall mean TWE and, following the Diamond
Implementation, TWI.
"Swingline Exposure" shall mean, at any time, the aggregate principal
amount of all Swingline Loans outstanding at such time. The Swingline Exposure
of any Lender at any time shall be its Applicable Percentage of the total
Swingline Exposure at such time.
"Swingline Lender" shall mean Chase, in its capacity as lender of
Swingline Loans hereunder.
"Swingline Loan" shall mean a Loan made pursuant to Section 2.4.
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"Swingline Loan Commitment" shall mean $50.0 million for each Swingline
Borrower.
"Tax Distributions" shall mean, with respect to any period,
distributions made (i) to TWE Partners by TWE on or with respect to income and
other taxes under the TWE Partnership Agreement, (ii) to TWEAN Partners by TWEAN
on or with respect to income and other taxes under the TWEAN Partnership
Agreement, (iii) to TWI by TWIC on or with respect to income and other taxes,
which distributions are not in excess of the tax liabilities that would have
been payable by TWIC and its Subsidiaries on a stand-alone basis, or (iv) to TWI
by TBS on or with respect to income and other taxes, which distributions are not
in excess of the tax liabilities that would have been payable by TBS and its
Subsidiaries on a stand-alone basis, in each case, which distributions are
calculated in accordance with, and made no earlier than as required by, the
terms of the applicable agreement.
"Taxes" shall mean any and all present or future taxes, levies,
imposts, duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"TBS" shall mean Turner Broadcasting System, Inc., a Georgia
corporation.
"Test Parties" shall mean (i) TWI, (ii) TWE and (iii) TWEAN; and "Test
Party" shall mean any of them.
"Three-Month Secondary CD Rate" shall mean, for any day, the secondary
market rate for three-month certificates of deposit reported as being in effect
on such day (or, if such day is not a Business Day, the next preceding Business
Day) by the Board of Governors of the Federal Reserve System through the public
information telephone line of the Federal Reserve Bank of New York (which rate
will, under the current practices of the Board of Governors of the Federal
Reserve System, be published in Federal Reserve Statistical Release H.15(519)
during the week following such day) or, if such rate is not so reported on such
day or such next preceding Business Day, the average of the secondary market
quotations for three-month certificates of deposit of major money center banks
in New York City received at approximately 10:00 a.m. on such day (or, if such
day is not a Business Day, on the next preceding Business Day) by the
Administrative Agent from three negotiable certificate of deposit dealers of
recognized standing selected by it.
"Total Commitment" shall mean, at any date of determination, the sum of
the Commitments then in effect of each of the Lenders and shall initially equal
$7.5 billion.
"Total Unutilized Commitment" shall mean, at any time, the excess of
the Total Commitment then in effect over the Total Utilized Commitment at such
time.
"Total Utilized Commitment" shall mean, at any time, the sum of (i) the
aggregate principal amount of Revolving Loans then outstanding and (ii) the
aggregate principal amount of Swingline Loans then outstanding.
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"Transactions" shall mean the execution, delivery and performance by
the Credit Parties of the Credit Documents, the borrowing of Loans and the use
of the proceeds thereof.
"Transfer" shall mean the transfer or beneficial assignment to TWEAN by
TWIC or any of its Subsidiaries of one or more Cable Businesses (or one or more
cable systems comprising parts thereof), together with the portion of the then
outstanding Loans (the "Allocated Loans") of TWIC allocated to the applicable
Cable Business or applicable cable system, as the case may be, including the
Transfers contemplated by the TWEAN Transaction Agreement.
"Transfer Documents" shall mean, with respect to any Transfer, the
TWEAN Transaction Agreement or any other documents, agreements and instruments
relating to, or delivered in connection with, such Transfer.
"TWCI" shall mean Time Warner Companies, Inc., a Delaware corporation.
"TWE" shall mean Time Warner Entertainment Company, L.P., a Delaware
limited partnership.
"TWE Beneficial Asset" shall have the meaning given to the term
"Beneficial Asset" in the TWE Partnership Agreement.
"TWE Entities" shall mean TWE, TWEAN and their respective Restricted
Subsidiaries; and "TWE Entity" shall mean any of them.
"TWE Guarantee" shall mean a guarantee by TWE of the Obligations of
TWEAN, substantially in the form of Exhibit D-6.
"TWE Material Beneficial Asset" shall mean any TWE Beneficial Asset
that is (i) a cable franchise and related assets that together have a book or
fair market value of greater than $25.0 million or (ii) any other asset
(including Capital Stock), related group of assets, business or division of TWI
or any of its Subsidiaries (other than TWE and its Subsidiaries) that (x) for
the most recently ended fiscal year of TWE accounted for more than 1% of the
Consolidated Cash Flow of TWE and its Subsidiaries taken as a whole for such
period or (y) has a book or fair market value of greater than $25.0 million.
"TWE Partner" shall mean each Person who shall from time to time be
admitted as a partner of TWE in accordance with the terms hereof and the TWE
Partnership Agreement.
"TWE Partner Guarantee" shall mean a guarantee by a TWE Partner
Guarantor of its Guaranteed Percentage of the Obligations of TWE, substantially
in the form of Exhibit D-2.
"TWE Partner Guarantor" shall mean American Television and
Communications Corporation, Warner Communications Inc. and Warner Cable
Communications Inc.
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"TWE Partnership Agreement" shall mean the Agreement of Limited
Partnership of TWE dated as of October 29, 1991 by and among TWI, USW and
certain of their respective subsidiaries.
"TWE Partnership Interest" shall have the meaning given to the term
"Partnership Interest" in the TWE Partnership Agreement.
"TWEAN" shall mean Time Warner Entertainment-Advance/Newhouse
Partnership, a New York general partnership.
"TWEAN Beneficial Asset" shall have the meaning given to the term
"Beneficial Asset" in the TWEAN Contribution Agreement, including any asset
beneficially assigned pursuant to the TWEAN Transaction Agreement or other
Transfer Document and treated as such pursuant to Section 6.7 of the TWEAN
Contribution Agreement.
"TWEAN Contribution Agreement" shall mean the Contribution Agreement
dated as of September 9, 1994 by and among TWE, Advance, Newhouse and
Advance/Newhouse.
"TWEAN Holder Guarantee" shall mean a guarantee by a TWEAN Holder
Guarantor of the Obligations of TWEAN, substantially in the form of Exhibit D-4.
"TWEAN Holder Guarantor" shall mean a holder of TWEAN Material
Beneficial Assets (other than Advance, Newhouse, Advance/Newhouse and TWE).
"TWEAN Material Beneficial Asset" shall mean any TWEAN Beneficial Asset
that is (i) a cable franchise and related assets that together have a book or
fair market value of greater than $25.0 million or (ii) any other asset
(including Capital Stock), related group of assets, business or division of TWE,
Advance/Newhouse or any of their Subsidiaries (other than TWEAN and its
Subsidiaries) that (x) for the most recently ended fiscal year of TWE or
Advance/Newhouse, as the case may be, would have accounted for more than 1% of
the Consolidated Cash Flow of TWEAN and its Subsidiaries taken as a whole for
such period or (y) has a book or fair market value of greater than $25.0
million.
"TWEAN Partner" shall mean TWE, Advance/Newhouse and each other Person
who shall from time to time be admitted as a partner of TWEAN in accordance with
the terms hereof and the TWEAN Partnership Agreement.
"TWEAN Partnership Agreement" shall mean the Partnership Agreement
dated as of September 9, 1994 by and between Advance/Newhouse and TWE.
"TWEAN Partnership Interest" shall have the meaning given to the term
"Partnership Interest" in the TWEAN Partnership Agreement.
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"TWEAN Transaction Agreement" shall mean the Amended and Restated
Transaction Agreement dated as of October 27, 1997 among Advance, Newhouse,
Advance/Newhouse, TWE, TW Holding Co. and TWEAN.
"TWI" shall mean Time Warner Inc., a Delaware corporation.
"TWI Guarantee" shall mean a guarantee by TWI of the Obligations of
TBS, substantially in the form of Exhibit D-3.
"TWIC" shall mean TWI Cable Inc., a Delaware corporation.
"TWIC Guarantee" shall mean a guarantee by TWI and TWCI of all of the
Obligations of TWIC, substantially in the form of Exhibit D-7.
"Two Thirds Lenders" shall mean, at any time, Lenders having Revolving
Credit Exposures and unused Commitments representing at least two-thirds of the
sum of the total Revolving Credit Exposures and the Total Unutilized Commitment
at such time.
"Type," when used in reference to any Loan or Borrowing, refers to
whether the rate of interest on such Loan, or on the Loans comprising such
Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate
Base Rate.
"Unrestricted Subsidiary" of any Borrower shall mean a Subsidiary of
such Borrower that is not a Restricted Subsidiary.
"U.S. Dollars" shall mean dollars in lawful currency of the United
States of America.
"USW" shall mean U S WEST, Inc., a Delaware corporation.
"Wholly Owned Restricted Subsidiary" of any Person shall mean a Wholly
Owned Subsidiary of such Person that is a Restricted Subsidiary of such Person.
"Wholly Owned Subsidiary" of any Person shall mean any Subsidiary of
such Person to the extent all of the capital stock or other ownership interests
in such Subsidiary, other than directors' or nominees' qualifying shares, are
owned by such Person and its Subsidiaries.
"Withdrawal Liability" shall mean liability to a Multiemployer Plan as
a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part 1 of Subtitle E of Title IV of ERISA.
"written" or "in writing" shall mean any form of written communication
or a communication by means of telex, telecopier device, telegraph or cable.
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SECTION 1.2. Classification of Loans and Borrowings. For purposes of
this Agreement, Loans may be classified and referred to by Class (e.g., a
"Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class and Type
(e.g., a "ABR Revolving Loan"). Borrowings also may be classified and referred
to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar
Borrowing") or by Class and Type (e.g., a "ABR Revolving Borrowing").
SECTION 1.3. Terms Generally. The definitions of terms herein shall
apply equally to 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 word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise, (a) the words "herein," "hereof" and
"hereunder," and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (b) the
words "asset" and "property" shall be construed to have the same meaning and
effect and to refer to any and all tangible and intangible assets and
properties, including cash, securities, accounts and contract rights, and (c)
all references herein to (i) Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement, (ii) Persons include their respective permitted successors and
assigns or, in the case of governmental Persons, Persons succeeding to the
relevant functions of such Persons, (iii) agreements and other contractual
instruments include subsequent amendments, assignments, and other modifications
thereto to the date hereof and thereafter, but in the case of any amendment,
assignment or modification after the date hereof, only to the extent such
amendments, assignments or other modifications thereto are not prohibited by
Section 6.10, (iv) statutes and related regulations include any amendments of
same and any successor statutes and regulations, and (v) time shall be deemed to
be to New York City time.
SECTION 1.4. Accounting Terms; GAAP. Except as otherwise expressly
provided herein, all terms of an accounting or financial nature shall be
construed in accordance with GAAP. Calculations shall be made in accordance with
Section 9.16.
ARTICLE II.
THE CREDITS
SECTION 2.1. Commitments. Subject to the terms and conditions set forth
herein, each Lender agrees to make Revolving Loans to each Borrower from time to
time during the Availability Period in an aggregate principal amount that will
not result in (a) such Lender's Revolving Credit Exposure exceeding such
Lender's Commitment or (b) the sum of the total Revolving Credit Exposures
exceeding the Total Commitment; provided that (i) the aggregate amount of Loans
outstanding to any one Borrower shall not at any time exceed such Borrower's
Borrowing Cap, (ii) prior to the Diamond Implementation, the aggregate amount of
Loans outstanding to TWIC and TWEAN shall not at any time exceed $5.0 billion
and (iii) at or after the Diamond Implementation, the aggregate amount of Loans
outstanding to the Borrowers (other than TWE or TWEAN) shall not at any time
exceed $6.0 billion. Within the foregoing limits and subject to the
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terms and conditions set forth herein, each Borrower may borrow, prepay and
reborrow Revolving Loans.
SECTION 2.2. Loans and Borrowings. (a) Each Revolving Loan shall be
made as part of a Borrowing consisting of Revolving Loans made by the Lenders
ratably in accordance with their respective Commitments. The failure of any
Lender to make any Loan required to be made by it shall not relieve any other
Lender of its obligations hereunder; provided that the Commitments of the
Lenders are several and no Lender shall be responsible for any other Lender's
failure to make Loans as required.
(b) Subject to Section 2.12, each Revolving Borrowing shall be
comprised entirely of ABR Loans or Eurodollar Loans as the Requesting Borrower
may request in accordance herewith. Each Swingline Loan shall be an ABR Loan.
Each Lender at its option may make any Eurodollar Loan by causing any domestic
or foreign branch or Affiliate of such Lender to make such Loan; provided that
any exercise of such option shall not affect the obligation of the Borrower
thereof to repay such Loan in accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any Eurodollar
Borrowing, such Borrowing shall be in an aggregate amount that is an integral
multiple of $1.0 million and not less than the Minimum Borrowing Amount. At the
time that each ABR Revolving Borrowing is made, such Borrowing shall be in an
aggregate amount that is an integral multiple of $1.0 million and not less than
the Minimum Borrowing Amount; provided that an ABR Revolving Borrowing may be in
an aggregate amount that is equal to the Total Unutilized Commitment. Each
Swingline Loan shall be in an amount that is an integral multiple of $1.0
million and not less than $5.0 million. Borrowings of more than one Type and
Class may be outstanding at the same time; provided that there shall not at any
time be more than a total of twenty (20) Eurodollar Borrowings outstanding.
(d) Notwithstanding any other provision of this Agreement, no Borrower
shall be entitled to request, or to elect to convert or continue, any Borrowing
if the Interest Period requested with respect thereto would end after the
Maturity Date.
SECTION 2.3. Requests for Revolving Borrowings. To request a Revolving
Borrowing, a Borrower shall notify the Administrative Agent of such request by
telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m.,
three Business Days before the date of the proposed Borrowing or (b) in the case
of an ABR Borrowing, not later than 11:00 a.m., one Business Day before the date
of the proposed Borrowing. Each such telephonic Borrowing Request shall be
irrevocable and shall be confirmed promptly by hand delivery or telecopy to the
Administrative Agent of a written Borrowing Request in a form approved by the
Administrative Agent and signed by the Borrower. Each such telephonic and
written Borrowing Request shall specify the following information in compliance
with Section 2.2:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day;
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(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar
Borrowing;
(iv) in the case of a Eurodollar Borrowing, the initial Interest Period
to be applicable thereto, which shall be a period contemplated by the
definition of the term "Interest Period"; and
(v) the location and number of the Requesting Borrower's account to
which funds are to be disbursed, which shall comply with the requirements
of Section 2.5.
If no election as to the Type of Revolving Borrowing is specified, then the
requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period
is specified with respect to any requested Eurodollar Borrowing, then the
Borrower shall be deemed to have selected an Interest Period of one month's
duration. Promptly following receipt of a Borrowing Request in accordance with
this Section, the Administrative Agent shall advise each Lender of the details
thereof and of the amount of such Lender's Loan to be made as part of the
requested Borrowing.
SECTION 2.4. Swingline Loans. (a) Subject to the terms and conditions
set forth herein, the Swingline Lender agrees to make Swingline Loans to each
Swingline Borrower from time to time during the Availability Period, in an
aggregate principal amount at any time outstanding that will not result in (i)
the aggregate principal amount of outstanding Swingline Loans to such Swingline
Borrower exceeding its Swingline Loan Commitment, (ii) the aggregate principal
amount of outstanding Loans to such Swingline Borrower exceeding its Borrowing
Cap or (iii) the sum of the total Revolving Credit Exposures exceeding the Total
Commitment; provided that the Swingline Lender shall not be required to make a
Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing
limits and subject to the terms and conditions set forth herein, each Swingline
Borrower may borrow, prepay and reborrow its Swingline Loans.
(b) Notwithstanding paragraph (a), the Administrative Agent (i) shall
not be required to make or to continue to make Swingline Loans to any Swingline
Borrower if it shall have notified such Swingline Borrower of the unavailability
(for any or no reason, in the Administrative Agent's sole discretion) of
Swingline Loans hereunder at least three Business Days prior to the date on
which such Swingline Borrower shall have made its telephonic request therefor,
which notice shall remain effective until rescinded by the Administrative Agent.
(c) To request a Swingline Loan, a Swingline Borrower shall notify the
Administrative Agent of such request by telephone (confirmed by telecopy), not
later than 12:00 noon on the day of a proposed Swingline Loan. Each such notice
shall be irrevocable and shall specify the requested date (which shall be a
Business Day) and amount of the requested Swingline Loan. The Administrative
Agent will promptly advise the Swingline Lender of any such notice received from
a Swingline Borrower. The Swingline Lender shall make each Swingline Loan
available to the requesting Swingline Borrower by means of a credit to the
general deposit account of such Swingline Borrower with the Swingline Lender by
3:00 p.m. on the requested date of such Swingline Loan.
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(d) The Swingline Lender may by written notice given to the
Administrative Agent not later than 10:00 a.m. on any Business Day require the
Lenders to acquire participations on such Business Day in all or a portion of
the Swingline Loans outstanding. Such notice shall specify the aggregate amount
of Swingline Loans in which Lenders will participate. Promptly upon receipt of
such notice, the Administrative Agent will give notice thereof to each Lender,
specifying in such notice such Lender's Applicable Percentage of such Swingline
Loan or Loans. Each Lender hereby absolutely and unconditionally agrees, upon
receipt of notice as provided above, to pay to the Administrative Agent, for the
account of the Swingline Lender, such Lender's Applicable Percentage of such
Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation
to acquire participations in Swingline Loans pursuant to this paragraph is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including the occurrence and continuance of a Default or reduction
or termination of the Commitments, and that each such payment shall be made
without any offset, abatement, withholding or reduction whatsoever. Each Lender
shall comply with its obligation under this paragraph by wire transfer of
immediately available funds, in the same manner as provided in Section 2.5 with
respect to Loans made by such Lender (and Section 2.5 shall apply, mutatis
mutandis, to the payment obligations of the Lenders), and the Administrative
Agent shall promptly pay to the Swingline Lender the amounts so received by it
from the Lenders. The Administrative Agent shall notify each Swingline Borrower
of any participations in any Swingline Loan to it acquired pursuant to this
paragraph, and thereafter payments in respect of such Swingline Loan shall be
made to the Administrative Agent and not to the Swingline Lender. Any amounts
received by the Swingline Lender from a Swingline Borrower (or other party on
behalf of a Swingline Borrower) in respect of a Swingline Loan to it after
receipt by the Swingline Lender of the proceeds of a sale of participations
therein shall be promptly remitted to the Administrative Agent; any such amounts
received by the Administrative Agent shall be promptly remitted by the
Administrative Agent to the Lenders that shall have made their payments pursuant
to this paragraph and to the Swingline Lender, as their interests may appear.
The purchase of participations in a Swingline Loan to any Swingline Borrower
pursuant to this paragraph shall not relieve such Swingline Borrower of any
default in the payment thereof. Notwithstanding the foregoing, a Lender shall
not have any obligation to acquire a participation in a Swingline Loan pursuant
to this paragraph if an Event of Default shall have occurred and be continuing
at the time such Swingline Loan was made and such Lender shall have notified the
Swingline Lender in writing, at least one Business Day prior to the time such
Swingline Loan was made, that such Event of Default has occurred and that such
Lender will not acquire participations in Swingline Loans made while such Event
of Default is continuing.
SECTION 2.5. Funding of Borrowings. (a) Each Lender shall make each
Loan to be made by it hereunder on the proposed date thereof by wire transfer of
immediately available funds by 12:00 noon to the account of the Administrative
Agent most recently designated by it for such purpose by notice to the Lenders;
provided that Swingline Loans shall be made as provided in Section 2.4. The
Administrative Agent will make such Loans available to the Requesting Borrower
by promptly crediting the amounts so received, in like funds, to an account of
the Requesting Borrower maintained with the Administrative Agent in New York
City and designated by the Requesting Borrower in the applicable Borrowing
Request.
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(b) Unless the Administrative Agent shall have received notice from a
Lender prior to the proposed date of any Borrowing that such Lender will not
make available to the Administrative Agent such Lender's share of such
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with paragraph (a) of this Section
and may, in reliance upon such assumption, make available to the Requesting
Borrower a corresponding amount. In such event, if a Lender has not in fact made
its share of the applicable Borrowing available to the Administrative Agent,
then the applicable Lender and the Requesting Borrower severally agree to pay to
the Administrative Agent forthwith on demand such corresponding amount with
interest thereon, for each day from and including the date such amount is made
available to the Requesting Borrower to but excluding the date of payment to the
Administrative Agent, at (i) in the case of such Lender, the greater of the
Federal Funds Effective Rate and a rate determined by the Administrative Agent
in accordance with banking industry rules on interbank compensation or (ii) in
the case of the Requesting Borrower, the interest rate applicable to ABR Loans.
If such Lender pays such amount to the Administrative Agent, then such amount
shall constitute such Lender's Loan included in such Borrowing.
SECTION 2.6. Interest Elections. (a) Each Revolving Borrowing initially
shall be of the Type specified in the applicable Borrowing Request and, in the
case of a Eurodollar Borrowing, shall have an initial Interest Period as
specified in such Borrowing Request. Thereafter, the Borrower may elect to
convert such Borrowing to a different Type or to continue such Borrowing and, in
the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as
provided in this Section. The Borrower may elect different options with respect
to different portions of the affected Borrowing, in which case each such portion
shall be allocated ratably among the Lenders holding the Loans comprising such
Borrowing, and the Loans comprising each such portion shall be considered a
separate Borrowing. This Section shall not apply to Swingline Borrowings, which
may not be converted or continued.
(b) To make an election pursuant to this Section, the Requesting
Borrower shall notify the Administrative Agent of such election by telephone by
the time that a Borrowing Request would be required under Section 2.3 if the
Requesting Borrower were requesting a Revolving Borrowing of the Type resulting
from such election to be made on the effective date of such election. Each such
telephonic Interest Election Request shall be irrevocable and shall be confirmed
promptly by hand delivery or telecopy to the Administrative Agent of a written
Interest Election Request in a form approved by the Administrative Agent and
signed by the Requesting Borrower.
(c) Each telephonic and written Interest Election Request shall specify
the following information in compliance with Section 2.2:
(i) the Borrowing to which such Interest Election Request applies and,
if different options are being elected with respect to different portions
thereof, the portions thereof to be allocated to each resulting Borrowing
(in which case the information to be specified pursuant to clauses (iii)
and (iv) below shall be specified for each resulting Borrowing);
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(ii) the effective date of the election made pursuant to such Interest
Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR Borrowing or a
Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest
Period to be applicable thereto after giving effect to such election, which
shall be a period contemplated by the definition of the term "Interest
Period."
If any such Interest Election Request requests a Eurodollar Borrowing but does
not specify an Interest Period, then the Requesting Borrower shall be deemed to
have selected an Interest Period of one month's duration.
(d) Promptly following receipt of an Interest Election Request, the
Administrative Agent shall advise each Lender of the details thereof and of such
Lender's portion of each resulting Borrowing.
(e) If the Requesting Borrower fails to deliver a timely Interest
Election Request with respect to a Eurodollar Borrowing prior to the end of the
Interest Period applicable thereto, then, unless such Borrowing is repaid as
provided herein, at the end of such Interest Period such Borrowing shall be
converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if
an Event of Default has occurred and is continuing and the Administrative Agent,
at the request of the Required Lenders, so notifies the Borrower, then, so long
as an Event of Default is continuing (i) no outstanding Revolving Borrowing may
be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid,
each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of
the Interest Period applicable thereto.
SECTION 2.7. Termination and Reduction of Commitments and Borrowings
Caps. (a) Unless previously terminated, the Commitments shall terminate on the
Maturity Date.
(b) The Borrowers may at any time terminate, or from time to time
reduce, the Total Commitment; provided that (i) each reduction of the Total
Commitment shall be in an amount that is an integral multiple of $1.0 million
and not less than the Minimum Borrowing Amount and (ii) the Borrowers shall not
terminate or reduce the Total Commitment if, after giving effect to any
concurrent repayment of the Loans in accordance with Section 2.9, the Revolving
Credit Exposures would exceed the Total Commitment. Any reduction or termination
of the Total Commitment shall reduce Borrowing Caps to the extent necessary so
that no Borrowing Cap will be in excess of the Total Commitment.
(c) Any Borrower may at any time terminate, or from time to time
reduce, its Borrowing Cap; provided that (i) each reduction of a Borrowing Cap
shall be in an amount that is an integral multiple of $1.0 million and not less
than the Minimum Borrowing Amount and (ii) a Borrower shall not terminate or
reduce its Borrowing Cap if, after giving effect to any concurrent
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repayment of the Loans to it in accordance with Section 2.9, the Revolving
Credit Exposures to such Borrower would exceed its Borrowing Cap.
(d) Notice shall be made to the Administrative Agent of any election
under paragraph (b) or (c) of this Section at least three Business Days prior to
the effective date of such termination or reduction, specifying such election
and the effective date thereof. Promptly following receipt of any notice, the
Administrative Agent shall advise the Lenders of the contents thereof. Each
notice delivered by a Borrower pursuant to this Section shall be irrevocable;
provided that a notice of termination of the Total Commitment delivered by the
Borrowers may state that such notice is conditioned upon the effectiveness of
other credit facilities, in which case such notice may be revoked by the
Borrowers (by notice to the Administrative Agent on or prior to the specified
effective date) if such condition is not satisfied. Any termination or reduction
of the Total Commitment or a Borrowing Cap shall be permanent. Each reduction of
the Total Commitment shall reduce the Commitment of each Lender ratably.
SECTION 2.8. Repayment of Loans; Evidence of Debt. (a) In the event
that any limitation set forth in Section 2.1 is exceeded, the applicable
Borrowers shall repay Loans so that such limitation is not exceeded. Each
Borrower hereby unconditionally promises to pay to the Administrative Agent for
the account of each Lender the then unpaid principal amount of each Revolving
Loan to it on the Maturity Date. Each Swingline Borrower hereby unconditionally
promises to pay to the Swingline Lender the then unpaid principal amount of each
Swingline Loan to it on the earlier of the Maturity Date and the first date
after such Swingline Loan is made that is the 15th or last day of a calendar
month and is at least two Business Days after such Swingline Loan is made;
provided that on each date that a Revolving Borrowing is made to any Swingline
Borrower, such Swingline Borrower shall repay all Swingline Loans to it then
outstanding.
(b) Each Lender shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness of each Borrower to such Lender
resulting from each Loan made by such Lender, including the amounts of principal
and interest payable and paid to such Lender from time to time hereunder.
(c) The Administrative Agent shall maintain accounts in which it shall
record (i) the amount of each Loan made hereunder, the Class and Type thereof
and the Interest Period applicable thereto, (ii) the amount of any principal or
interest due and payable or to become due and payable from each Borrower to each
Lender hereunder and (iii) the amount of any sum received by the Administrative
Agent hereunder for the account of the Lenders and each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to paragraph
(b) or (c) of this Section shall be prima facie evidence of the existence and
amounts of the obligations recorded therein; provided that the failure of any
Lender or any Administrative Agent to maintain such accounts or any error
therein shall not in any manner affect the obligation of any Borrower to repay
the Loans in accordance with the terms of this Agreement.
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(e) Any Lender may request that Loans made by it be evidenced by a
promissory note. In such event, each Borrower shall prepare, execute and deliver
to such Lender a promissory note payable to the order of such Lender (or, if
requested by such Lender, to such Lender and its registered assigns) and in a
form approved by the Administrative Agent. Thereafter, the Loans evidenced by
such promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 9.4) be represented by one or more promissory
notes in such form payable to the order of the payee named therein (or, if such
promissory note is a registered note, to such payee and its registered assigns).
SECTION 2.9. Prepayment of Loans. (a) Each Borrower shall have the
right at any time and from time to time to prepay any Borrowing in whole or in
part, subject to prior notice in accordance with paragraph (b) of this Section.
(b) The Borrower that desires to make a prepayment shall notify the
Administrative Agent (and, in the case of prepayment of a Swingline Loan, the
Swingline Lender) by telephone (confirmed by telecopy) of any prepayment
hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later
than 11:00 a.m., three Business Days before the date of prepayment, (ii) in the
case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., one
Business Day before the date of prepayment or (iii) in the case of prepayment of
a Swingline Loan, not later than 12:00 noon on the date of prepayment. Each such
notice shall be irrevocable and shall specify the prepayment date and the
principal amount of each Borrowing or portion thereof to be prepaid; provided
that, if a notice of prepayment is given in connection with a conditional notice
of termination of the Total Commitment as contemplated by Section 2.7, then such
notice of prepayment may be revoked if such notice of termination is revoked in
accordance with Section 2.7. Promptly following receipt of any such notice
relating to a Revolving Borrowing, the Administrative Agent shall advise the
Lenders of the contents thereof. Each partial prepayment of any Revolving
Borrowing shall be in an amount that would be permitted in the case of an
advance of a Revolving Borrowing of the same Type as provided in Section 2.2.
Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans
included in the prepaid Borrowing. Prepayments shall be accompanied by accrued
interest to the extent required by Section 2.11 and such other payments as may
be required by Section 2.14.
SECTION 2.10. Fees. (a) Commitment Fee. The Borrowers, jointly and
severally, shall pay to the Administrative Agent for the ratable account of the
Lenders, on each March 31, June 30, September 30, and December 31 and on the
Maturity Date, an aggregate commitment fee (the "Commitment Fee") equal to the
Applicable Rate of each Borrower on the daily average amount of each Borrower's
Availability. The Commitment Fee shall begin to accrue on and after the
Effective Date and shall cease to accrue on the earlier of the Maturity Date and
the date on which the Total Commitment shall have been terminated in full. The
Commitment Fee shall be computed on the basis of a year of 360 days and shall be
payable for the actual number of days elapsed (including the first day but
excluding the last day).
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(b) The Borrowers agree, jointly and severally, to pay to the
Administrative Agent, for its own account, fees payable in the amounts and at
the times separately agreed upon between the Borrowers and the Administrative
Agent.
(c) All fees payable hereunder shall be paid on the dates due, in
immediately available funds, to the Administrative Agent for distribution, in
the case of the Commitment Fee, to the Lenders. Fees paid shall not be
refundable under any circumstances.
SECTION 2.11. Interest. (a) The Loans comprising each ABR Borrowing
(including each Swingline Loan) shall bear interest at the Alternate Base Rate.
(b) The Loans comprising each Eurodollar Borrowing shall bear interest
at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing
plus the Applicable Rate.
(c) Notwithstanding the foregoing, if any principal of or interest on
any Loan or any fee or other amount payable hereunder is not paid when due,
whether at stated maturity, upon acceleration or otherwise, such overdue amount
shall bear interest, after as well as before judgment, at a rate per annum equal
to (i) in the case of overdue principal of any Loan, the greater of (x) 2% plus
the rate otherwise applicable to such Loan as provided in the preceding
paragraphs of this Section and (y) 2% plus the rate applicable to ABR Loans and
(ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans
as provided in paragraph (a) of this Section.
(d) Accrued interest on each Loan shall be payable in arrears on each
Interest Payment Date for such Loan and, in the case of Revolving Loans, upon
termination of the Commitments; provided that (i) interest accrued pursuant to
paragraph (c) of this Section shall be payable on demand, (ii) in the event of
any repayment or prepayment of any Loan (other than a prepayment of an ABR
Revolving Loan prior to the end of the Availability Period), accrued interest on
the principal amount repaid or prepaid shall be payable on the date of such
repayment or prepayment and (iii) in the event of any conversion of any
Eurodollar Revolving Loan prior to the end of the current Interest Period
therefor, accrued interest on such Loan shall be payable on the effective date
of such conversion.
(e) All interest hereunder shall be computed on the basis of a year of
360 days, except that interest computed by reference to the Alternate Base Rate
at times when the Alternate Base Rate is based on the Prime Rate shall be
computed on the basis of a year of 365 days (or 366 days in a leap year), and in
each case shall be payable for the actual number of days elapsed (including the
first day but excluding the last day). The applicable Alternate Base Rate or
Adjusted LIBO Rate shall be determined by the Administrative Agent, and such
determination shall be conclusive absent manifest error.
SECTION 2.12. Alternate Rate of Interest. If prior to the commencement
of any Interest Period for a Eurodollar Borrowing:
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(a) the Administrative Agent determines (which determination shall be
conclusive absent manifest error) that adequate and reasonable means do not
exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or
(b) the Administrative Agent is advised by the Required Lenders that
the Adjusted LIBO Rate for such Interest Period will not adequately and
fairly reflect the cost to such Lenders (or Lender) of making or
maintaining their Loans included in such Borrowing for such Interest
Period;
then the Administrative Agent shall give notice thereof to the Borrowers and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrowers and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Revolving Borrowing to, or
continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be
ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing,
such Borrowing shall be made as an ABR Borrowing.
SECTION 2.13. Increased Costs. (a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit or
similar requirement against assets of, deposits with or for the account of,
or credit extended by, any Lender (except any such reserve requirement
reflected in the Adjusted LIBO Rate); or
(ii) impose on any Lender or the London interbank market any other
condition affecting this Agreement or Eurodollar Loans made by such Lender;
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan (or of maintaining its
obligation to make any such Loan) or to increase the cost to such Lender or to
reduce the amount of any sum received or receivable by such Lender hereunder
(whether of principal, interest or otherwise) by an amount deemed by such Lender
in good faith to be material, then the Borrowers will, jointly and severally,
pay to such Lender such additional amount or amounts as will compensate such
Lender for such additional costs incurred or reduction suffered.
(b) If any Lender determines that any Change in Law regarding capital
requirements has or would have the effect of reducing the rate of return on such
Lender's capital or on the capital of such Lender's holding company, if any, as
a consequence of this Agreement or the Loans made by such Lender to a level
below that which such Lender or such Lender's holding company could have
achieved but for such Change in Law (taking into consideration such Lender's
policies and the policies of such Lender's holding company with respect to
capital adequacy) by an amount deemed by such Lender in good faith to be
material, then from time to time the Borrowers will, jointly and severally, pay
to such Lender such additional amount or amounts as will compensate such Lender
or such Lender's holding company for any such reduction suffered.
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(c) A certificate of a Lender setting forth the amount or amounts
necessary to compensate such Lender or its holding company, as the case may be,
as specified in paragraph (a) or (b) of this Section shall be delivered to the
Borrowers and shall be conclusive absent manifest error. The Borrowers shall,
jointly and severally, pay such Lender the amount shown as due on any such
certificate within 10 days after receipt thereof.
(d) Failure or delay on the part of any Lender to demand compensation
pursuant to this Section shall not constitute a waiver of such Lender's right to
demand such compensation; provided that the Borrowers shall not be required to
compensate a Lender pursuant to this Section for any increased costs or
reductions incurred more than 90 days prior to the date that such Lender
notifies the Borrowers of the Change in Law giving rise to such increased costs
or reductions and of such Lender's intention to claim compensation therefor;
provided further that, if the Change in Law giving rise to such increased costs
or reductions is retroactive, then the 90-day period referred to above shall be
extended to include the period of retroactive effect thereof. Notwithstanding
any other provision of this Section 2.13, no Lender shall demand compensation
for any increased costs or reduction referred to above if it shall not be the
general policy or practice of such Lender to demand such compensation in similar
circumstances under comparable provisions of other credit agreements, if any (it
being understood that this sentence shall not in any way limit the discretion of
any Lender to waive the right to demand such compensation in any given case).
SECTION 2.14. Break Funding Payments. In the event of (a) the payment
of any principal of any Eurodollar Loan other than on the last day of an
Interest Period applicable thereto (including as a result of an Event of
Default), (b) the conversion of any Eurodollar Loan other than on the last day
of the Interest Period applicable thereto, (c) the failure to borrow, convert,
continue or prepay any Revolving Loan on the date specified in any notice
delivered pursuant hereto (regardless of whether such notice may be revoked
under Section 2.9(b) and is revoked in accordance therewith) or (d) the
assignment of any Eurodollar Loan other than on the last day of the Interest
Period applicable thereto as a result of a request by a Borrower pursuant to
Section 2.17, then, in any such event, the Borrowers shall compensate each
Lender for the loss, cost and expense attributable to such event. Such loss,
cost or expense to any Lender shall be deemed to include an amount determined by
such Lender to be the excess, if any, of (i) the amount of interest which would
have accrued on the principal amount of such Loan had such event not occurred,
at the Adjusted LIBO Rate that would have been applicable to such Loan, for the
period from the date of such event to the last day of the then current Interest
Period therefor (or, in the case of a failure to borrow, convert or continue,
for the period that would have been the Interest Period for such Loan), over
(ii) the amount of interest which would accrue on such principal amount for such
period at the interest rate which such Lender would bid were it to bid, at the
commencement of such period, for dollar deposits of a comparable amount and
period from other banks in the eurodollar market. A certificate of any Lender
setting forth any amount or amounts that such Lender is entitled to receive
pursuant to this Section shall be delivered to the Borrowers and shall be
conclusive absent manifest error. The applicable Borrower shall pay such Lender
the amount shown as due on any such certificate within 10 days after receipt
thereof.
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SECTION 2.15. Taxes. (a) Any and all payments by or on account of any
obligation of any Borrower hereunder shall be made free and clear of and without
deduction for any Indemnified Taxes or Other Taxes; provided that if any
Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from
such payments, then (i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section) the Administrative Agent or each
Lender (as the case may be) receives an amount equal to the sum it would have
received had no such deductions been made, (ii) such Borrower shall make such
deductions and (iii) such Borrower shall pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable law.
(b) In addition, each Borrower shall pay any Other Taxes arising out of
its Loans or its or any of its Subsidiaries' being party to any Credit Document
to the relevant Governmental Authority in accordance with applicable law.
(c) Each Borrower shall indemnify the Administrative Agent and each
Lender within 10 days after written demand therefor, for the full amount of any
Indemnified Taxes or Other Taxes paid by the Administrative Agent or such
Lender, as the case may be, on or with respect to any payment by or on account
of any obligation of such Borrower hereunder (including Indemnified Taxes or
Other Taxes imposed or asserted on or attributable to amounts payable under this
Section) and any penalties, interest and reasonable expenses arising therefrom
or with respect thereto, whether or not such Indemnified Taxes or Other Taxes
were correctly or legally imposed or asserted by the relevant Governmental
Authority. A certificate as to the amount of such payment or liability delivered
to such Borrower by a Lender or by the Administrative Agent on its own behalf or
on behalf of a Lender shall be conclusive absent manifest error.
(d) If a Lender or the Administrative Agent shall become aware that it
is entitled to claim a refund from a taxation authority in respect of
Indemnified Taxes or Other Taxes or Other Taxes as to which it has been
indemnified by a Borrower or with respect to which a Borrower has paid
additional amounts pursuant to this Section 2.15, it shall promptly notify such
Borrower of the availability of such refund claim and shall, within 30 days
after receipt of a request by such Borrower, make a claim to such taxation
authority for such refund at such Borrower's expense. If a Lender or the
Administrative Agent receives a refund (including pursuant to a claim for refund
made pursuant to the preceding sentence) in respect of any Indemnified Taxes or
Other Taxes as to which it has been indemnified by a Borrower or with respect to
which a Borrower has paid additional amounts pursuant to this Section 2.15, it
shall within 30 days from the date of such receipt pay over such refund to such
Borrower (but only to the extent of indemnity payments made, or additional
amounts paid, by such Borrower under this Section 2.15 with respect to the
Indemnified Taxes or Other Taxes giving rise to such refund, as determined by
such Lender in its sole discretion), net of all out-of-pocket expenses of such
Lender or the Administrative Agent and without interest (other than interest
paid by the relevant taxation authority with respect to such refund); provided
that such Borrower, upon the request of such Lender or the Administrative Agent,
agrees to repay the amount paid over to such Borrower (plus penalties, interest
or other charges) to such Lender or the Administrative Agent in the event such
Lender or the Administrative Agent is required to repay such refund to such
taxation authority.
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(e) As soon as practicable after any payment of Indemnified Taxes or
Other Taxes by any Borrower to a Governmental Authority, such Borrower shall
deliver to the Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such payment, a copy of
the return reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.
(f) Any Foreign Lender that is entitled to an exemption from or
reduction of withholding tax under the law of the jurisdiction in which any
Borrower is located, or any treaty to which such jurisdiction is a party, with
respect to payments under this Agreement shall deliver to such Borrower (with a
copy to the Administrative Agent), at the time or times prescribed by applicable
law, such properly completed and executed documentation prescribed by applicable
law or reasonably requested by such Borrower as will permit such payments to be
made without withholding or at a reduced rate.
SECTION 2.16. Payments Generally; Pro Rata Treatment; Sharing of
Set-offs. (a) Each Borrower shall make each payment required to be made by it
hereunder (whether of principal, interest or fees, or of amounts payable under
Section 2.13, 2.14 or 2.15, or otherwise) prior to 1:00 p.m. on the date when
due, in immediately available funds, without set-off or counterclaim. Any
amounts received after such time on any date may, in the discretion of the
Administrative Agent, be deemed to have been received on the next succeeding
Business Day for purposes of calculating interest thereon. All such payments
shall be made to the Administrative Agent at its offices at 270 Park Avenue, New
York, New York, except payments to be made directly to the Swingline Lender as
expressly provided herein and except that payments pursuant to Sections 2.13,
2.14, 2.15 and 9.3 shall be made directly to the Persons entitled thereto. The
Administrative Agent shall distribute any such payments received by it for the
account of any other Person to the appropriate recipient promptly following
receipt thereof. If any payment hereunder shall be due on a day that is not a
Business Day, the date for payment shall (subject to the proviso contained in
the definition of "Interest Period") be extended to the next succeeding Business
Day, and, in the case of any payment accruing interest, interest thereon shall
be payable for the period of such extension. All payments hereunder shall be
made in U.S. Dollars.
(b) If at any time insufficient funds are received by and available to
the Administrative Agent to pay fully all amounts of principal, interest and
fees then due hereunder, such funds shall be applied (i) first, towards payment
of interest and fees then due hereunder, ratably among the parties entitled
thereto in accordance with the amounts of interest and fees then due to such
parties, and (ii) second, towards payment of principal then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
principal then due to such parties.
(c) If any Lender shall, by exercising any right of set-off or
counterclaim or otherwise, obtain payment in respect of any principal of or
interest on any of its Revolving Loans or participations in Swingline Loans
resulting in such Lender receiving payment of a greater proportion of the
aggregate amount of its Revolving Loans and participations in Swingline Loans
and accrued interest thereon than the proportion received by any other Lender,
then the Lender receiving such greater proportion shall purchase (for cash at
face value) participations in the Revolving Loans and
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participations in Swingline Loans of other Lenders to the extent necessary so
that the benefit of all such payments shall be shared by the Lenders ratably in
accordance with the aggregate amount of principal of and accrued interest on
their respective Revolving Loans and participations in Swingline Loans; provided
that (i) if any such participations are purchased and all or any portion of the
payment giving rise thereto is recovered, such participations shall be rescinded
and the purchase price restored to the extent of such recovery, without
interest, and (ii) the provisions of this paragraph shall not be construed to
apply to any payment made by any Borrower pursuant to and in accordance with the
express terms of this Agreement or any payment obtained by a Lender as
consideration for the assignment of or sale of a participation in any of its
Loans to any assignee or participant, other than to any Borrower or any
Subsidiary or Affiliate thereof (as to which the provisions of this paragraph
shall apply). Each Borrower consents to the foregoing and agrees, to the extent
it may effectively do so under applicable law, that any Lender acquiring a
participation pursuant to the foregoing arrangements may exercise against such
Borrower rights of set-off and counterclaim with respect to such participation
as fully as if such Lender were a direct creditor of such Borrower in the amount
of such participation.
(d) Unless the Administrative Agent shall have received notice from a
Borrower prior to the date on which any payment is due from such Borrower to the
Administrative Agent for the account of the Lenders hereunder that such Borrower
will not make such payment, the Administrative Agent may assume that such
Borrower has made such payment on such date in accordance herewith and may, in
reliance upon such assumption, distribute to the Lenders the amount due. In such
event, if such Borrower has not in fact made such payment, then each of the
Lenders severally agrees to repay to the Administrative Agent forthwith on
demand the amount so distributed to such Lender with interest thereon, for each
day from and including the date such amount is distributed to it to but
excluding the date of payment to the Administrative Agent, at the greater of the
Federal Funds Effective Rate and a rate determined by the Administrative Agent
in accordance with banking industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be made by
it pursuant to Section 2.4(c), 2.5(b) or 2.16(d), then the Administrative Agent
may, in its discretion (notwithstanding any contrary provision hereof), apply
any amounts thereafter received by the Administrative Agent for the account of
such Lender to satisfy such Lender's obligations under such Sections until all
such unsatisfied obligations are fully paid.
SECTION 2.17. Mitigation Obligations; Replacement of Lenders. (a) If
any Lender requests compensation under Section 2.13, or if any Borrower is
required to pay any additional amount to any Lender or any Governmental
Authority for the account of any Lender pursuant to Section 2.15, then such
Lender shall use reasonable efforts to designate a different lending office for
funding or booking its Loans hereunder or to assign its rights and obligations
hereunder to another of its offices, branches or affiliates, if, in the judgment
of such Lender, such designation or assignment (i) would eliminate or reduce
amounts payable pursuant to Section 2.13 or 2.15, as the case may be, in the
future and (ii) would not subject such Lender to any unreimbursed cost or
expense and would not otherwise be disadvantageous to such Lender. Such Borrower
hereby agrees to pay all reasonable costs and expenses incurred by any Lender in
connection with any such designation or assignment.
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(b) If any Lender requests compensation under Section 2.13, or if the
Borrowers are required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section 2.15,
or if any Lender defaults in its obligation to fund Loans hereunder, then the
Borrowers may, at their sole expense and effort, upon notice to such Lender and
the Administrative Agent, require such Lender to assign and delegate, without
recourse (in accordance with and subject to the restrictions contained in
Section 9.4), all its interests, rights and obligations under this Agreement to
an assignee that shall assume such obligations (which assignee may be another
Lender, if a Lender accepts such assignment); provided that (i) the Borrowers
shall have received the prior written consent of the Administrative Agent (and,
if a Commitment is being assigned, the Swingline Lender), which consent shall
not unreasonably be withheld, (ii) such Lender shall have received payment of an
amount equal to the outstanding principal of its Loans and participations in
Swingline Loans, accrued interest thereon, accrued fees and all other amounts
payable to it hereunder, from the assignee (to the extent of such outstanding
principal and accrued interest and fees) or the Borrowers (in the case of all
other amounts) and (iii) in the case of any such assignment resulting from a
claim for compensation under Section 2.13 or payments required to be made
pursuant to Section 2.15, such assignment will result in a reduction in such
compensation or payments. A Lender shall not be required to make any such
assignment and delegation if, prior thereto, as a result of a waiver by such
Lender or otherwise, the circumstances entitling the Borrowers to require such
assignment and delegation cease to apply.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
Each of TWI and the Borrowers represents and warrants (as to itself and
its Subsidiaries) to the Lenders that:
SECTION 3.1. Organization; Powers. Each Credit Party is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, has all requisite power and authority to carry on its business as
now conducted and, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, is qualified to do business in, and is in good standing in, every
jurisdiction where such qualification is required. Each other Company is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, has all requisite power and authority to carry
on its business as now conducted and is qualified to do business in, and is in
good standing in, every jurisdiction where such qualification is required, in
each case except where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect.
SECTION 3.2. Authorization; Enforceability. The Transactions are within
the Credit Parties' organizational powers and have been duly authorized by all
necessary organizational action. Each Credit Document has been duly executed and
delivered by the Credit Parties party thereto and constitutes a legal, valid and
binding obligation of each such Credit Party, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
or other laws
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affecting creditors' rights generally and subject to general principles of
equity, regardless of whether considered in a proceeding in equity or at law.
SECTION 3.3. Governmental Approvals; No Conflicts. The Transactions (a)
do not require any consent or approval of, registration or filing with, or any
other action by, any Governmental Authority, except such as have been obtained
or made and are in full force and effect, (b) will not violate (i) any
applicable law or regulation or any order of any Governmental Authority or (ii)
any Organizational Document of any Company, (c) will not violate or result in a
default under any indenture, agreement or other instrument binding upon any
Company or its assets, or give rise to a right thereunder to require any payment
to be made by any Company, and (d) will not result in the creation or imposition
of any Lien on any asset of any Company, except, in each case (other than clause
(b)(ii) with respect to any Credit Party), such as could not, individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.
SECTION 3.4. Financial Condition; No Material Adverse Change. (a) Each
of TWI, TWE, TBS, TWEAN and TWIC has heretofore furnished to the Lenders its
audited Financial Statements for the fiscal year ended December 31, 1996 and the
unaudited Financial Statements for the three months and six months ended June
30, 1997 and 1996 (it being understood that the audited Financial Statements of
TBS for the fiscal year ended December 31, 1996 were prepared on a historical
basis without giving effect to the merger of TBS with a wholly owned subsidiary
of TWI). Such Financial Statements present fairly, in all material respects, the
financial position and results of operations and cash flows of the entities to
which they relate as of the dates and for the periods to which they relate in
accordance with GAAP, subject to year-end audit adjustments and the absence of
footnotes in the case of the interim statements.
(b) The projected financial statements of any Person included in the
Confidential Information Memorandum were prepared by management of such Person
on the basis of the assumptions set forth therein that such management
reasonably believed were reasonable at the date of such projected financial
statements in light of the historical financial performance of such Person and
its Subsidiaries and of their current and reasonably foreseeable business
conditions.
(c) After giving effect to all Indebtedness and other obligations to be
Incurred by the Companies as of each date this representation is required to be
made and after giving effect to the application of the proceeds of any such
Indebtedness and other obligations (including to the repayment of other
Indebtedness), (i) no final judgments against any Company in actions for money
damages with respect to pending or threatened litigation will have been rendered
in an amount such that such Company will be unable to satisfy any such judgments
promptly in accordance with their terms (taking into account the maximum
reasonable amount of such judgments in any such actions and the earliest
reasonable time at which such judgments might be rendered), (ii) the sum of the
assets, at a fair valuation, of each Credit Party will exceed its debts, (iii)
no Credit Party will have incurred or intended to, or believe that it will,
incur debts beyond its ability to pay such debts as such debts mature and (iv)
each Credit Party will have sufficient capital with which to conduct its
business. For purposes of this Section 3.4, "debt" shall mean any liability on a
claim; and "claim" shall mean any (x) right to payment whether or not such a
right is reduced to judgment, liquidated, unliquidated,
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fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured or unsecured, or (y) right to an equitable remedy for breach of
performance if such breach gives rise to a payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured or unsecured.
(d) Since December 31, 1996, there has been no material adverse change
in the business, assets, operations or condition, financial or otherwise, of TWI
and its Subsidiaries, taken as a whole, or of any Borrower and its Subsidiaries,
taken as a whole.
SECTION 3.5. Properties. (a) Each Borrower and its Subsidiaries and TWI
and its Subsidiaries (other than any Borrower and its Subsidiaries) have good
title to, or valid leasehold interests in, all its real and personal property
material to the business of such Borrower and its Subsidiaries taken as a whole
or TWI and such Subsidiaries taken as a whole, as the case may be, except for
minor defects in title that do not interfere with its ability to conduct its
business as currently conducted or to utilize such properties for their intended
purposes.
(b) Each Borrower and its Subsidiaries and TWI and its Subsidiaries
(other than any Borrower and its Subsidiaries) own, or are licensed to use, all
trademarks, tradenames, copyrights, patents and other intellectual property
material to the business of such Borrower and its Subsidiaries taken as a whole
or TWI and such Subsidiaries taken as a whole, as the case may be, and the use
thereof by such Company does not infringe upon the rights of any other Person,
except for any such infringements that, individually or in the aggregate, could
not reasonably be expected to result in a Material Adverse Effect.
SECTION 3.6. Litigation and Environmental Matters. (a) There are no
actions, suits or proceedings by or before any arbitrator or Governmental
Authority pending against or, to the knowledge of the Borrowers, threatened
against or affecting any Company as to which there is a reasonable possibility
of an adverse determination and that, if adversely determined, could reasonably
be expected, individually or in the aggregate, to result in a Material Adverse
Effect.
(b) Except with respect to any matters that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, (x) no Company (i) has failed to comply with any Environmental Law or to
obtain, maintain or comply with any permit, license or other approval required
under any Environmental Law, (ii) has become subject to any Environmental
Liability, or (iii) has received notice of any claim with respect to any
Environmental Liability and (y) no Borrower has knowledge of any basis for any
Environmental Liability on the part of any Restricted Company.
SECTION 3.7. Compliance with Laws and Agreements. Each Company is in
compliance with all laws, regulations and orders of any Governmental Authority
applicable to it or its property and all indentures, agreements and other
instruments binding upon it or its property, except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect. No Default has occurred and is continuing.
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SECTION 3.8. Government Regulation. No Company (i) is a "holding
company," or a "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company," within
the meaning of the Public Utility Holding Company Act of 1935, (ii) is subject
to regulation under the Federal Power Act or the Interstate Commerce Act, (iii)
is an "investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, or (iv) is subject to
any other statute or regulation which regulates the incurrence of indebtedness
for borrowed money, other than, in the case of this clause (iv), Federal and
state securities laws and as could not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
SECTION 3.9. Taxes. Each Company has timely filed or caused to be filed
all Tax returns and reports required to have been filed and has paid or caused
to be paid all Taxes required to have been paid by it, except (a) Taxes that are
being contested in good faith by appropriate proceedings and for which such
Company has set aside on its books adequate reserves in accordance with GAAP or
(b) to the extent that the failure to do so could not, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.
SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably
expected to occur that, when taken together with all other such ERISA Events for
which liability is reasonably expected to occur, could reasonably be expected to
result in a Material Adverse Effect. The present value of all accumulated
benefit obligations of all underfunded Plans of all Companies (based on the
assumptions used for purposes of Statement of Financial Accounting Standards No.
87) did not, as of the date of the most recent financial statements reflecting
such amounts, exceed by more than $50.0 million the fair market value of the
assets of all such underfunded Plans.
SECTION 3.11. True and Complete Disclosure. As of the date hereof and
as of the Closing Date, all information heretofore or contemporaneously
furnished by or on behalf of any Company (including all information contained in
the Documents, the Confidential Information Memorandum and the annexes,
schedules and other attachments thereto but not including any projected
financial statements), when taken together with the reports and other filings
with the SEC made under the Exchange Act by TWI, TWE and TWIC in 1997, is, and
all other such information hereafter furnished, including all information
contained in any of the Documents, including any annexes or schedules thereto,
by or on behalf of any Company to or on behalf of any Lender is and will be (as
of their respective dates, the Effective Date and the Closing Date), true and
accurate in all material respects and not incomplete by omitting to state a
material fact necessary to make such information not misleading at such time.
There is no fact of which TWI or any Borrower is aware which has not been
disclosed to the Lenders in writing pursuant to the terms of this Agreement
prior to the date hereof and which, singly or in the aggregate with all such
other facts of which TWI or such Borrower is aware, could reasonably be expected
to result in a Material Adverse Effect. All statements of fact and
representations concerning the present and anticipated business, operations and
assets of each Company, the Documents and the transactions referred to therein
are true and correct in all material respects, and all assumptions with respect
thereto contained therein are reasonable in all material respects.
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SECTION 3.12. Partnership Tax Matters. As of the Closing Date, each of
TWE and TWEAN will be treated as a partnership for federal income tax purposes,
and not as a publicly traded partnership within the meaning of Section 7704 of
the Code.
SECTION 3.13. Beneficial Assets. (a) The fair market value (in the
reasonable good faith judgment of TWE) at the Closing Date of all TWE Beneficial
Assets (without duplication) will not exceed $2.0 billion. Schedule 3.13A sets
forth a complete and accurate list of all TWE Material Beneficial Assets and the
holders thereof as of the date hereof. All TWE Material Beneficial Assets are
directly held by TWE Partner Guarantors. The fair market value of all TWE
Beneficial Assets held by Persons other than TWE Partner Guarantors does not
exceed $100.0 million in the aggregate.
(b) The fair market value (in the reasonable good faith judgment of
TWEAN) at the Closing Date of all TWEAN Beneficial Assets (without duplication)
will not exceed $2.0 billion. Schedule 3.13B sets forth a complete and accurate
list of all TWEAN Material Beneficial Assets and the holders thereof as of the
date hereof. Except as set forth in Schedule 3.13B, all TWEAN Material
Beneficial Assets are held by Guarantors of the Obligations of TWEAN. The fair
market value of all TWEAN Beneficial Assets held by Persons other than
Guarantors of the Obligations of TWEAN does not exceed $100.0 million in the
aggregate, and the number of subscribers served by cable television systems
constituting TWEAN Material Beneficial Assets held by Persons other than
Guarantors of the Obligations of TWEAN does not exceed 20,000.
SECTION 3.14. Guarantees. Schedule A sets forth a true and complete
list as of the date hereof of all the Persons that are required to be Guarantors
hereunder and the Guarantees required to be delivered by each.
ARTICLE IV.
CONDITIONS PRECEDENT
SECTION 4.1. Initial Loans. The Initial Loans shall be subject to the
satisfaction of each of the following conditions:
(a) Credit Agreement. The Administrative Agent (or its counsel) shall
have received from each Credit Party listed on the signature pages hereof a
duly executed counterpart of this Agreement.
(b) Opinions of Counsel. The Administrative Agent shall have received a
favorable written opinion (addressed to the Administrative Agent and the
Lenders and dated the Closing Date) of Paul, Weiss, Rifkind, Wharton &
Garrison, counsel for the Credit Parties, substantially in the form of
Exhibit E-1, and of Peter R. Haje, Esq., General Counsel of the Borrowers,
substantially in the form of Exhibit E-2, and, in each case, with such
changes and covering such other matters as the Administrative Agent shall
reasonably agree to or request. The Credit Parties hereby request such
counsel to deliver such opinion.
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(c) Officers' Certificates.
(i) The Administrative Agent shall have received (with copies for
each Lender) an Officers' Certificate from TWI and each Borrower dated
the Closing Date, in form and substance reasonably satisfactory to the
Administrative Agent, stating that each of the conditions set forth in
Sections 4.1(d), (e) (only as to the second sentence thereof), and (j)
and 4.4 are, as to such Person and its Subsidiaries, satisfied as of
the Closing Date.
(ii) The Administrative Agent shall have received (with copies for
each Lender) an Officer's Solvency Certificate dated the Closing Date
from each Borrower.
(iii) The Administrative Agent shall have received (with copies for
each Lender) a certificate from each Borrower setting forth the
Applicable Rate for such Borrower and (i) if based on ratings, such
Borrower's Index Debt and the ratings therefor and (ii) if based on
such Borrower's Leverage Ratio, the calculation of such Leverage Ratio
in reasonable detail.
(d) No Defaults. No default shall have occurred, and no event shall
have occurred and no condition shall exist that with the lapse of time or
notice or both would constitute a default, before giving effect to the
Initial Loans and the other transactions to occur on the Closing Date,
under the Existing Credit Agreements.
(e) Organizational Documents, Etc. The Administrative Agent shall have
received copies of (i) each Organizational Document and (ii) any material
agreements entered into by any Credit Party, as of the Closing Date,
governing the terms and relative rights of the Capital Stock of any Credit
Party and any such agreements entered into by partners or shareholders (as
applicable) relating to any Credit Party, certified as true and complete by
an appropriate officer or Governmental Authority, and the provisions of
each of the foregoing shall be reasonably satisfactory to the
Administrative Agent. Each Organizational Document shall be in full force
and effect.
(f) Corporate Proceedings. All corporate, partnership, legal and other
proceedings in connection with the authorization, execution and delivery by
the Credit Parties of the Credit Documents and the transactions to occur on
the Closing Date shall be reasonably satisfactory in form and substance to
the Administrative Agent. The Administrative Agent shall have received all
information and copies of all certificates, documents and papers, including
records of corporate, partnership and other proceedings and governmental
approvals, if any, which the Administrative Agent reasonably may have
requested in connection therewith, such documents and papers where
appropriate to be certified by proper corporate or partnership authorities
or Governmental Authorities.
(g) Payment of Fees. All fees and reimbursable expenses due and payable
to the Lenders and the Administrative Agent and its counsel pursuant to the
Credit Documents and
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their respective commitment letters, fee letters and otherwise, and
pursuant to the Existing Credit Agreements and otherwise, shall have been
paid in full to each such Person.
(h) Guarantees. There shall have been duly executed and delivered to
the Administrative Agent: (i) a TWE Partner Guarantee from each TWE Partner
Guarantor; (ii) the TWI Guarantee; (iii) a TWEAN Holder Guarantee from each
TWEAN Holder Guarantor; (iv) the TWE Guarantee; (v) the Paragon Guarantee;
(vi) the TWIC Guarantee; and (vii) each Subsidiary Guarantee required at
such time by Section 5.13.
(i) Beneficial Assets. To the extent that any TWEAN Beneficial Assets
held by an affiliate of Advance or Newhouse are to be included in the
covenant calculations pursuant to Section 9.16, the Administrative Agent
shall have received a letter from each of Advance and Newhouse addressed to
the Lenders, in the form of Exhibit F, stating that Advance or Newhouse, as
the case may be, agrees to comply, and cause each other holder of TWEAN
Beneficial Assets that is an Affiliate of Advance or Newhouse, as the case
may be, to comply, with each and every covenant or other provision of the
Credit Agreement applicable to Advance or Newhouse, as the case may be, in
its capacity as a holder of TWEAN Material Beneficial Assets or to such
other holder.
(j) Termination of Existing Credit Agreements. Simultaneously with the
making of the Initial Loans, all Indebtedness outstanding under the
Existing Credit Agreements shall be repaid, together with all interest
thereon and other amounts owing in respect thereof, all commitments
thereunder shall be cancelled and the Existing Credit Agreements shall be
terminated, all on terms reasonably satisfactory to the Administrative
Agent.
Notwithstanding the foregoing, the obligations of the Lenders to make Initial
Loans shall not become effective unless each of the foregoing conditions is
satisfied at or prior to 3:00 p.m. on November 30, 1997 (and, in the event such
conditions are not so satisfied, the Commitments shall terminate at such time).
SECTION 4.2. Assumptions. Each Assumption is subject to the
satisfaction of each of the following conditions:
(a) Officers' Certificates.
(i) Each Lender shall have received, seven (7) Business Days prior to
the applicable Assumption Date (or at such other time as the Administrative
Agent shall agree), an Officers' Certificate that shall (1) outline the
material terms and conditions of the Applicable Transfer, including the
consideration to be received (including the amount of Allocated Loans to be
assigned) by TWIC and its Subsidiaries, (2) list the Persons, if any, that
will cease to be Subsidiaries of TWIC and become Subsidiaries of TWEAN upon
consummation of the Applicable Transfer, (3) state the Leverage Ratio of
each Borrower as of the last day of the most recently ended fiscal quarter
for which financial statements have been filed with the SEC or become
generally
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available, determined on a pro forma basis after giving effect to the
Applicable Transfer, (4) set forth the amount of the Allocated Loans and
(5) set forth such other information as the Administrative Agent or the
Required Lenders shall reasonably request, and each of the foregoing shall
be reasonably satisfactory to the Administrative Agent and the Required
Lenders.
(ii) The Administrative Agent shall have received an Officers'
Certificate from TWIC dated such Assumption Date stating that, in form and
substance reasonably satisfactory to the Administrative Agent, the
conditions set forth in Sections 4.2(c) (only as to the first sentence
thereof), (d), (e) and (f) and 4.4 are satisfied.
(b) Opinions of Counsel. The Administrative Agent shall have received
opinions in form and substance reasonably satisfactory to the Administrative
Agent, addressed to the Administrative Agent and to each Lender and dated such
Assumption Date, from (i) Paul, Weiss, Rifkind, Wharton & Garrison or such other
counsel for the Credit Parties acceptable to the Administrative Agent, which
opinion shall cover the matters contained in Exhibit G-1, and (ii) Peter R.
Haje, Esq., General Counsel of the Borrowers, which opinion shall cover the
matters contained in Exhibit G-2, and, in each case, with such changes and
covering such other matters as the Administrative Agent shall reasonably agree
to or request. The Credit Parties hereby request such counsel to deliver such
opinion.
(c) Terms of Transfer. The consideration to be paid (including TWEAN's
assumption of the Allocated Loans) by TWEAN shall not exceed the fair market
value of the assets to be acquired (including by beneficial assignment) by
TWEAN. The terms and conditions of the Applicable Transfer shall be reasonably
satisfactory to the Administrative Agent (it being understood that the
provisions of the TWEAN Transaction Agreement are satisfactory to the
Administrative Agent).
(d) Assumption of Loans. The Assumption of the Allocated Loans shall
occur simultaneously with the consummation of the Applicable Transfer.
(e) Borrowing Cap. After giving pro forma effect to the Applicable
Transfer, including the Assumption of the Allocated Loans, all Loans then
outstanding to each of TWIC and TWEAN shall not exceed such Borrower's Borrowing
Cap and the limitations set forth in the proviso of Section 2.1.
(f) Transfer Documents. The Administrative Agent shall have received
true and complete copies of all of the applicable Transfer Documents. Any
amendment, modification, waiver or forbearance of any provision of any of the
applicable Transfer Documents shall be in form and substance reasonably
satisfactory to the Administrative Agent.
(g) Guarantees. Each Guarantee required by Section 5.13 shall have been
executed and delivered to the Administrative Agent.
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(h) Corporate Proceedings. All corporate, partnership, legal
and other proceedings shall be reasonably satisfactory in form and
substance to the Administrative Agent. The Administrative Agent shall
have received all information and copies of all certificates, documents
and papers, including records of corporate, partnership and other
proceedings and governmental approvals, if any, which the
Administrative Agent reasonably may have requested in connection
therewith, such documents and papers where appropriate to be certified
by proper corporate or partnership authorities or Governmental
Authorities.
SECTION 4.3. Diamond Implementation. The effectiveness of the addition
of TWI and TWCI as Borrowers is subject to the satisfaction of each of the
following conditions:
(a) Guarantees. The Diamond Guarantee and each Guarantee required by
5.13 shall have been duly executed and delivered to the Administrative
Agent.
(b) Corporate Proceedings. All corporate, partnership, legal and other
proceedings in connection with the authorization, execution and delivery of
the Diamond Guarantee and the transactions to occur at the Diamond
Implementation shall be reasonably satisfactory in form and substance to
the Administrative Agent. The Administrative Agent shall have received all
information and copies of all certificates, documents and papers, including
records of corporate, partnership and other proceedings and governmental
approvals, if any, which the Administrative Agent reasonably may have
requested in connection therewith, such documents and papers where
appropriate to be certified by proper corporate or partnership authorities
or Governmental Authorities.
(c) Opinion of Counsel. The Administrative Agent shall have received an
opinion in form and substance reasonably satisfactory to the Administrative
Agent, addressed to the Administrative Agent and each Lender and dated the
date of the Diamond Implementation, from Paul, Weiss, Rifkind, Wharton &
Garrison or such other counsel for the Credit Parties acceptable to the
Administrative Agent, which opinion shall cover the matters contained in
Exhibit H, with such changes and covering such other matters as the
Administrative Agent shall reasonably agree to or request. The Credit
Parties hereby request such counsel to deliver such opinion.
(d) Other. Any obligation of TWI or any of its Subsidiaries (other than
any Borrower or any of its Subsidiaries) to effect any transaction limited
by Section 6.6(b) shall be permitted under Section 6.6 (treating such
obligation as if it were being entered into as of the proposed date of the
Diamond Implementation).
SECTION 4.4. Each Credit Event. Each Credit Event is subject to the
satisfaction (or waiver in accordance with Section 9.2) of each of the following
conditions:
(a) The representations and warranties of the Credit Parties set forth
in this Agreement shall be true and correct on and as of the date of such
Credit Event, except to the extent expressly made as of an earlier date.
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(b) At the time of and immediately after giving effect to such Credit
Event, no Default shall have occurred and be continuing.
Each Borrowing shall be deemed to constitute a representation and warranty by
the Credit Parties on the date thereof as to the matters specified in paragraphs
(a) and (b) of this Section.
ARTICLE V.
AFFIRMATIVE COVENANTS
Until the Commitments have expired or been terminated and the principal
of and interest on each Loan, all fees payable hereunder and all other
Obligations, are paid in full (but with respect to such other Obligations only
to the extent that actual amounts hereunder are owing at the time the Loans,
together with interest and fees, have been paid in full), TWI (prior to the
Diamond Implementation as to Sections 5.1, 5.2, 5.9 and 5.11 only) and each
Borrower (for itself and its Subsidiaries), covenants and agrees with the
Lenders that:
SECTION 5.1. Financial Statements and Other Information. (x) Prior to
the Diamond Implementation, TWI and such Borrower and (y) at or after the
Diamond Implementation, each Test Party will furnish to the Administrative Agent
and each Lender:
(a) within 105 days after the end of each fiscal year of such Person,
its audited Financial Statements and unaudited Adjusted Financial
Statements for such year, setting forth in each case in comparative form
the figures for the previous fiscal year (it being understood that, in the
case of TBS, no such comparative figures shall be required for any period
prior to January 1, 1997), and, in the case of the audited Financial
Statements, reported on by Ernst & Young LLP or other independent public
accountants of recognized national standing (without a "going concern"
qualification or exception and without any qualification or exception as to
the scope of such audit) to the effect that such Financial Statements
present fairly in all material respects the financial condition and results
of operations of such Person and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently applied; provided
that, so long as no Default has occurred and is continuing, such Person
shall not be required to furnish Adjusted Financial Statements for any
fiscal year if all Unrestricted Subsidiaries of such Person (other than any
such Unrestricted Subsidiaries that are already treated as equity
investments on such Person's Financial Statements) on a combined basis
would not have constituted a Material Subsidiary of such Person for such
fiscal year;
(b) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year of such Person (beginning with the fiscal
quarter ended September 30, 1997), its Financial Statements and Adjusted
Financial Statements for such fiscal quarter and the then elapsed portion
of the fiscal year, setting forth in each case in comparative form the
figures for (or, in the case of the balance sheet, as of the end of) the
corresponding period or periods of the previous fiscal year (it being
understood that, in the case of TBS, no such comparative
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figures shall be required for any period prior to January 1, 1997), all
certified by one of its Financial Officers as presenting fairly in all
material respects the financial condition and results of operations of such
Person and its consolidated Subsidiaries on a consolidated basis in
accordance with GAAP consistently applied, subject to normal year-end audit
adjustments and the absence of footnotes; provided that, so long as no
Default has occurred and is continuing, such Person shall not be required
to furnish Adjusted Financial Statements for any fiscal quarter if all
Unrestricted Subsidiaries of such Person (other than any such Unrestricted
Subsidiaries that are already treated as equity investments on such
Person's Financial Statements) on a combined basis would not have
constituted a Material Subsidiary of such Person for such fiscal quarter;
(c) concurrently with any delivery of Financial Statements under clause
(a) or (b) above, a certificate of a Financial Officer of such Person, (i)
certifying as to whether a Default has occurred and, if a Default has
occurred, specifying the details thereof and any action taken or proposed
to be taken with respect thereto and (ii) setting forth (1) reasonably
detailed calculations demonstrating compliance with Sections 6.6 and 6.9,
(2) prior to the Diamond Implementation, a reasonably detailed calculation
of the ratio described in Section 6.4(I)(c) as of the last day of the
fiscal period covered by such Financial Statements, (3) in the case of TWE,
a list of the TWE Material Beneficial Assets then still held by TWI and its
Affiliates, (4) in the case of TWEAN, a list of the TWEAN Material
Beneficial Assets held by TWEAN Partners and their Affiliates and (5) a
reasonably detailed calculation of each Borrower's Maximum Permitted
Indebtedness;
(d) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by
any Company with respect to its securities with the SEC, or with any
national securities exchange, or distributed by any Company to its security
holders generally, as the case may be (other than registration statements
on Form S- 8, filings under Section 16(a) of the Exchange Act and routine
filings relating to employee benefit plans);
(e) (i) within 60 days after the close of each of the first three
fiscal quarters and within 105 days after the close of each fiscal year
of such Borrower or, after the Diamond Implementation, such Test Party,
an Interest Rate Certificate setting forth the Applicable Rate for such
Borrower and (i) if based on ratings, such Borrower's Index Debt and
the ratings therefor and (ii) if based on such Borrower's Leverage
Ratio, the calculation of such Leverage Ratio in reasonable detail as
at the end of such fiscal quarter or fiscal year;
(ii) within 5 Business Days after any change in any rating of the
Index Debt of such Borrower or, after the Diamond Implementation, such
Test Party, an Interest Rate Certificate setting forth the new rating
and the effective date thereof; and
(f) promptly following any request therefor, such other information
regarding the operations, business affairs and financial condition of TWI
or such Borrower or any of their
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respective Subsidiaries, or compliance with the terms of this Agreement, as
the Administrative Agent or any Lender may reasonably request, including
quarterly cable television statistical data.
SECTION 5.2. Notices of Material Events. Promptly after obtaining
knowledge thereof, TWI and such Borrower will furnish to the Administrative
Agent and each Lender written notice of the following:
(a) the occurrence of any Default;
(b) the filing or commencement of any action, suit or proceeding by or
before any arbitrator or Governmental Authority against or affecting any
Company that, if adversely determined, could reasonably be expected to
result in a Material Adverse Effect;
(c) the occurrence of any ERISA Event that, alone or together with any
other ERISA Events that have occurred, could reasonably be expected to
result in liability to the Companies in an aggregate amount exceeding $10.0
million; and
(d) any other development that results in, or could reasonably be
expected to result in, a Material Adverse Effect.
Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of each Borrower setting forth
the details of the event or development requiring such notice and any action
taken or proposed to be taken with respect thereto.
SECTION 5.3. Existence; Conduct of Business. Such Borrower will, and
will cause each of its Restricted Material Subsidiaries to, do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its legal existence and, except as could not reasonably be expected to have a
Material Adverse Effect, the rights, licenses, permits, privileges and
franchises for the conduct of its business; provided that the foregoing shall
not prohibit any merger, consolidation, liquidation or dissolution permitted
under Section 6.2.
SECTION 5.4. Payment of Obligations. Such Borrower will, and will cause
each of its Subsidiaries to, pay its obligations, including Tax liabilities,
that, if not paid, could result in a Material Adverse Effect before the same
shall become delinquent or in default, except where (a) the validity or amount
thereof is being contested in good faith by appropriate proceedings, (b) such
Borrower or such Subsidiary has set aside on its books adequate reserves with
respect thereto in accordance with GAAP and (c) the failure to make payment
pending such contest could not reasonably be expected to result in a Material
Adverse Effect.
SECTION 5.5. Maintenance of Properties; Insurance. Such Borrower will,
and will cause each of its Restricted Subsidiaries to, (a) keep and maintain all
property material to the conduct of the business of such Borrower and its
Subsidiaries, taken as a whole in good working order and condition, ordinary
wear and tear excepted, and (b) maintain, with financially sound and reputable
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insurance companies, insurance in such amounts and against such risks as are
customarily maintained by companies engaged in the same or similar businesses
operating in the same or similar locations.
SECTION 5.6. Books and Records; Inspection Rights. Such Borrower will,
and will cause each of its Subsidiaries to, keep proper books of record and
account in which full, true and correct entries are made of all dealings and
transactions in relation to its business and activities. Such Borrower will, and
will cause each of its Subsidiaries to, permit any representatives designated by
the Administrative Agent or any Lender, upon reasonable prior notice, to visit
and inspect its properties, to examine and make extracts from its books and
records, and to discuss its affairs, finances and condition with its officers
and independent accountants, all at such reasonable times and as often as
reasonably requested.
SECTION 5.7. Compliance with Laws. Such Borrower will, and will cause
each of its Subsidiaries to, comply with all laws, rules, regulations and orders
of any Governmental Authority applicable to it or its property, except where the
failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.
SECTION 5.8. Use of Proceeds. The proceeds of the Loans will be used to
refinance indebtedness (including the Existing Credit Agreements and certain
intercompany indebtedness), and for general corporate purposes, including
capital expenditures, working capital needs, acquisitions, dividends,
distributions and other payments permitted hereunder. No part of the proceeds of
any Loan will be used, whether directly or indirectly, for any purpose that
entails a violation of any of the Regulations of the Board of Governors of the
Federal Reserve System, including Regulations G, U and X.
SECTION 5.9. Fiscal Periods; Accountants. (a) TWI and its Subsidiaries
will keep the same financial reporting periods as are in effect on the date
hereof.
(b) Unless the Administrative Agent shall have otherwise consented in
writing (which consent shall not be unreasonably withheld), such Borrower will
maintain the same firm of certified independent accountants as the other
Borrowers and TWI, which firm shall be of national standing.
SECTION 5.10. Enforcement of Rights Under Partnership Agreements. Each
of the Partnership Borrowers will take all reasonable action, on a reasonably
timely basis, to enforce all of its rights against its respective Partners and
their Affiliates under the applicable Partnership Agreement or otherwise, except
to the extent that a failure to do so could not reasonably be expected to result
in a Material Adverse Effect (provided that such exception shall not apply with
respect to the right of TWE and TWEAN to receive contributions of cash flow from
TWE Material Beneficial Assets and TWEAN Material Beneficial Assets,
respectively).
SECTION 5.11. TWE Beneficial Assets. TWI will (i) cause each holder of
TWE Beneficial Assets to comply with each and every covenant or other provision
of this Agreement applicable to such holder and (y) use its best efforts
(subject to its reasonable business judgment) to
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continue to seek all relevant authorizations, orders, approvals and franchises
with respect to the transfer of such TWE Beneficial Assets to TWE, and
contribute any assets contemplated to be transferred to TWE but not so
transferred as of the Closing Date.
SECTION 5.12. TWEAN Beneficial Assets. TWE will, or will cause each
holder of TWEAN Beneficial Assets that is an Affiliate of TWE, to (i) comply
with each and every covenant or other provision of this Agreement applicable to
such holder and (ii) use its best efforts (subject to its reasonable business
judgment) to continue to seek all relevant authorizations, orders, approvals and
fran chises with respect to the transfer of such TWEAN Beneficial Assets to
TWEAN), and to contribute any assets contemplated to be transferred to TWEAN but
not so transferred as of the Closing Date (subject to Section 6.7 of the TWEAN
Contribution Agreement).
SECTION 5.13. Guarantees. (a) Such Borrower will cause each of its
Restricted Subsidiaries that guarantees, or otherwise provides credit support
with respect to, any Indebtedness of TWI or any of TWI's Subsidiaries (other
than Subsidiaries of such Restricted Subsidiary) to execute and deliver to the
Administrative Agent a Subsidiary Guarantee, guaranteeing the Obligations of
such Borrower.
(b) TBS will cause its Restricted Subsidiaries to execute and deliver
to the Administrative Agent a Subsidiary Guarantee, guaranteeing the Obligations
of TBS, to the extent necessary so that the aggregate amount of Specified
Indebtedness owed by Restricted Subsidiaries of TBS that are not Guarantors does
not exceed $100.0 million.
(c) At or after the Diamond Implementation, TWI will cause its
Restricted Subsidiaries to execute and deliver to the Administrative Agent a
Subsidiary Guarantee, guaranteeing the Obligations of TWI, to the extent
necessary so that the aggregate amount of Specified Indebtedness owed by
Restricted Subsidiaries of TWI (other than any Borrower and any Subsidiary of
any Borrower) that are not Guarantors does not exceed $150.0 million.
(d) Each of TWEAN and TWIC will cause each of its Wholly Owned
Restricted Subsidiaries that has Specified Indebtedness outstanding and is, or
together with any other such Subsidiary that has Specified Indebtedness
outstanding and is not already party to a Subsidiary Guarantee would be, a
Material Subsidiary to execute and deliver a Subsidiary Guarantee guaranteeing
the Obligations of its Borrower parent (it being understood that Subsidiaries
that collectively would not be a Material Subsidiary need not execute a
Subsidiary Guarantee unless any such Subsidiary conducts a business that is part
of that conducted by another Subsidiary that executes or is required to execute
a Subsidiary Guarantee).
(e) Section 5.13(b), (c) or (d) shall not require a Subsidiary
Guarantee from any Subsidiary that is (a) a Foreign Subsidiary, (b) a domestic
Subsidiary whose only assets are (x) the Capital Stock of one or more Foreign
Subsidiaries or (y) foreign business operations or (c) subject to a contractual
restriction that prohibits such Subsidiary from issuing a Subsidiary Guarantee
(so long as such restriction is in effect), which restriction is existing at the
Closing Date or at the time such Subsidiary is acquired.
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(f) TWEAN will cause holders of TWEAN Beneficial Assets to execute and
deliver a TWEAN Holder Guarantee to the extent necessary so that the
representation in the second and third sentences of Section 3.13(b) will
continue to be accurate.
(g) Each Guarantee shall be delivered together with board resolutions
authorizing the same and an opinion of counsel as to its due authorization,
execution, delivery and enforceability (with customary exceptions), to the
Administrative Agent.
ARTICLE VI.
NEGATIVE COVENANTS
Until the Commitments have expired or terminated and the principal of
and interest on each Loan, all fees payable hereunder and all other Obligations
are paid in full (but with respect to such other Obligations only to the extent
that actual amounts hereunder are owing at the time the Loans, together with
interest and fees, have been paid in full), TWI (prior to the Diamond
Implementation as to Section 6.3(c) only) and each Borrower, or Test Party, as
applicable (for itself and its Subsidiaries), covenants and agrees with the
Lenders that:
SECTION 6.1. Changes in Business. Such Borrower will not, and will not
cause or permit any of its Restricted Material Subsidiaries to, directly or
indirectly, alter in a fundamental and substantial manner the character or scope
of the businesses of such Borrower and its Subsidiaries taken as a whole from
that conducted by its respective businesses immediately prior to the Closing
Date (other than as would occur as a result of any Transfer).
SECTION 6.2. Mergers, Etc. (a) (i) Prior to the Diamond Implementation,
such Borrower will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, in a single transaction or series of
related transactions, sell, transfer or otherwise dispose of all or a
substantial portion of such Borrower's consolidated assets (other than in a
Transfer and other than a sale, transfer or disposition to such Borrower or any
Restricted Subsidiary of such Borrower).
(ii) At or after the Diamond Implementation, such Test Party will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, in a single transaction or series of related transactions, sell,
transfer or otherwise dispose of all or a substantial portion of such Test
Party's consolidated assets (other than in a Transfer and other than a sale,
transfer or disposition to such Test Party or any Restricted Subsidiary of such
Test Party).
(b) Such Borrower will not, directly or indirectly, cause or suffer the
wind up, liquidation or dissolution of its affairs (other than, in the case of a
Partnership Borrower, a temporary dissolution immediately followed by
reformation deemed to occur because of a transfer of a Partnership Interest);
provided that (i) if (x) all Loans to TWEAN have been or are being repaid in
full (together with all interest thereon and all other amounts then owing in
respect thereof) and (y) the Borrowing Cap of TWEAN is permanently reduced to
$0, TWEAN may be dissolved or liquidated in
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accordance with the terms of the TWEAN Partnership Agreement; or (ii) following
the Diamond Implementation, any Diamond Party may liquidate or merge into its
Diamond Party parent.
(c) Such Borrower will not enter into a transaction of consolidation or
merger unless (i) before and after giving effect on a pro forma basis to such
consolidation or merger, no Default shall have occurred and be continuing and
(ii) such Borrower shall survive the consolidation or merger, unless such
consolidation or merger is with another Borrower or a Restricted Subsidiary of
any Borrower and the survivor of such consolidation or merger assumes all of the
Obligations of such Borrower on terms reasonably satisfactory to the
Administrative Agent.
(d) No holder of TWE Material Beneficial Assets shall enter into a
transaction of consolidation or merger with any Person; provided that, if before
and after giving effect thereto, no Default shall have occurred and be
continuing, the foregoing clause shall not prohibit a consolidation or merger
with (i) a TWE Partner Guarantor, (ii) any Person that holds TWE Material
Beneficial Assets or (iii) any other Person that guarantees the Obligations of
TWE on terms reasonably satisfactory to the Administrative Agent. No holder of
TWEAN Material Beneficial Assets (other than Advance, Newhouse or
Advance/Newhouse) shall enter into a transaction of consolidation or merger with
any Person; provided that, if before and after giving effect thereto, no Default
shall have occurred and be continuing, the foregoing clause shall not prohibit a
consolidation or merger with (x) another Person that holds TWEAN Material
Beneficial Assets or (y) any other Person that guarantees the Obligations of
TWEAN on terms reasonably satisfactory to the Administrative Agent.
SECTION 6.3. Liens. (a) Such Borrower will not, and will not cause or
permit any of its Restricted Subsidiaries to, create, incur, assume or suffer to
exist any Lien upon or with respect to any of its property or assets (whether
real or personal, tangible or intangible and whether now owned or here after
acquired) to secure Indebtedness.
(b) The foregoing shall not prohibit:
(i) Liens existing on the date hereof described on Schedule 6.3,
without giving effect to any subsequent extension, renewal or
refunding, which Liens do not secure Indebtedness in excess of $10.0
million in the aggregate for each such Borrower and its Subsidiaries
(other than any Borrower and its Subsidiaries) or apply to property or
assets of each such Borrower and its Subsidiaries (other than any
Borrower and its Subsidiaries) having a fair market value in excess of
$10.0 million in the aggregate;
(ii) Liens (including security interests arising under or in
connection with Capital Lease Obligations) securing Indebtedness of any
Borrower or any of its Restricted Subsidiaries otherwise permitted to
be outstanding hereunder, so long as at the time of the securing of any
such Indebtedness, the aggregate amount of such secured Indebtedness of
(x) prior to the Diamond Implementation, such Borrower and its
Restricted Subsidiaries in the aggregate does not exceed 10% (5% in the
case of TWIC) of such Borrower's Maximum Permitted Indebtedness
(calculated on a pro
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forma basis) and (y) at or after the Diamond Implementation, such Test
Party and its Restricted Subsidiaries in the aggregate does not exceed
10% of such Test Party's Maximum Permitted Indebtedness (calculated on
a pro forma basis); provided that the fair market value of all assets
subject to Liens under this clause (ii) shall not at the time of
creation of any such Lien exceed 120% of the total amount of
Indebtedness so secured (it being understood that the fair market value
used for the foregoing calculation shall be the fair market value of
each relevant asset at the time of creation of the Lien with respect to
such asset, without a re-determination of such fair market value being
made at the time of creation of any subsequent Liens on any other
asset);
(iii) Liens securing Indebtedness of any Borrower or any Subsidiary
of such Borrower to such Borrower or to a Wholly Owned Restricted
Subsidiary of such Borrower;
(iv) Liens on interests in or investments in any Unrestricted
Subsidiary or in any other Person that is not a Subsidiary of such
Borrower securing Indebtedness of such Unrestricted Subsidiary or such
other Person;
(v) with respect to TWE or TBS, Liens to secure Film Financings
permitted under Section 6.4(I)(a)(i)(1) or (ii)(1) or Section
6.4(II)(ii)(1) or (iii)(1); provided that such Liens shall extend only
to the property or assets acquired with such Film Financing;
(vi) any Lien securing Acquired Indebtedness or Purchase Money
Indebtedness (including security interests arising under or in
connection with Capital Lease Obligations); provided that such Liens
shall not extend to any asset or Person other than the asset or Person
acquired or subject to such capital lease;
(vii) Liens on Capital Stock of TWI and proceeds therefrom securing
Stock Option Loans to the extent permitted by the definition thereof;
and
(viii) any Copyright Liens securing obligations specified in the
definition thereof.
(c) TWI will not cause or permit any Capital Stock owned by it or any
of its Subsidiaries in any Borrower (other than Capital Stock of TWI) to be
subject to any Lien. Such Borrower will not cause or permit any Capital Stock
owned by it or any of its Subsidiaries in any Material Restricted Subsidiary of
such Borrower to be subject to any Lien. The foregoing shall not prohibit any
Lien (i) permitted by Section 6.3(b)(iii), (ii) constituting a restriction on
transfer of Capital Stock contained in a partnership or stockholders agreement,
(iii) arising by operation of law and being contested in good faith or (iv) on
Capital Stock of any Material Restricted Subsidiary existing at the time it
became a Subsidiary of a Borrower (and not incurred in anticipation of such
Material Restricted Subsidiary becoming a Subsidiary of a Borrower).
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SECTION 6.4. Indebtedness. (I) Prior to the Diamond Implementation:
(a) Such Borrower will not cause or permit any of its Restricted
Subsidiaries (other than a Borrower) or any holder of Material Beneficial Assets
(other than any Specified Holder or any Borrower) to Incur any Indebtedness
other than:
(i) with respect to Restricted Subsidiaries of TWE (other than TWEAN
and its Subsidiaries) and holders of TWE Material Beneficial Assets (other
than any Specified Holder), (1) Film Financings and (2) other Indebtedness
of up to $350.0 million in the aggregate at any time outstanding;
(ii) with respect to Restricted Subsidiaries of TBS, (1) Film
Financings and (2) other Indebtedness of up to $250.0 million in the
aggregate at any time outstanding;
(iii) with respect to Restricted Subsidiaries of TWEAN, Indebtedness of
up to $100.0 million in the aggregate at any time outstanding;
(iv) with respect to Restricted Subsidiaries of TWIC, Indebtedness of
up to $50.0 million in the aggregate at any time outstanding;
(v) Convertible Intercompany Debt and Permitted Intercompany
Indebtedness;
(vi) the Guarantees and any guarantee by TWIC or any of its
Subsidiaries of the Obligations of (x) TWEAN or (y) any Guarantor of the
Obligations of TWEAN (and equal and ratable guarantees of pari passu debt,
to the extent required by contractual provisions then in effect);
(vii) Non-Recourse Purchase Money Debt; or
(viii) Acquired Indebtedness.
(b) Neither TBS nor any of its Subsidiaries may guarantee any
obligation of TWI, TWCI or any of their respective Subsidiaries (other than TBS
or any of its Subsidiaries).
(c) Such Borrower (other than TWEAN) will not, and will not cause or
permit any of its Restricted Subsidiaries (other than TWEAN) to, Incur any
Indebtedness if, before or after giving effect thereto, the Leverage Ratio of
TWI, determined on a pro forma basis, would exceed 7.0:1.0 as of the last day of
the most recently ended fiscal quarter for which financial statements have been
filed with the SEC or have become generally available.
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(II) At or after the Diamond Implementation, such Test Party will not
cause or permit any of its Restricted Subsidiaries (other than a Borrower) or
any holder of Material Beneficial Assets (other than any Specified Holder) to
Incur any Indebtedness other than:
(i) with respect to Restricted Subsidiaries of TWI (other than a
Borrower), (1) Indebtedness of up to $350.0 million in the aggregate at any
time outstanding and (2) as otherwise permitted by clauses (ii) through
(vi);
(ii) with respect to Restricted Subsidiaries of TWE (other than TWEAN
and its Subsidiaries) and holders of TWE Material Beneficial Assets, (1)
Film Financings and (2) other Indebtedness of up to $350.0 million in the
aggregate at any time outstanding;
(iii) with respect to Restricted Subsidiaries of TBS, (1) Film
Financings and (2) other Indebtedness of up to $250.0 million in the
aggregate at any time outstanding;
(iv) with respect to Restricted Subsidiaries of TWEAN, Indebtedness of
up to $100.0 million in the aggregate at any time outstanding;
(v) with respect to Restricted Subsidiaries of TWIC, Indebtedness of up
to $50.0 million in the aggregate at any time outstanding;
(vi) Permitted Intercompany Indebtedness;
(vii) the Guarantees and any guarantee by TWIC or any of its
Subsidiaries of the Obligations of (x) TWEAN or (y) any Guarantor of the
Obligations of TWEAN (and equal and ratable guarantees of pari passu debt,
to the extent required by contractual provisions then in effect);
(viii) Non-Recourse Purchase Money Debt; or
(ix) Acquired Indebtedness.
(III) Neither TWIC nor any of its Restricted Subsidiaries may guarantee
any obligation (other than any Obligation) of TWI, TWCI or TBS or any of their
respective Restricted Subsidiaries (other than TWIC or any of its Restricted
Subsidiaries).
SECTION 6.5. Investments. Such Borrower will not, and will not cause or
permit any of its Restricted Subsidiaries to, make any Investment if, before or
after giving effect thereto on a pro forma basis, a Default shall have occurred
and be continuing.
SECTION 6.6. Restricted Payments. (a) Prior to the Diamond
Implementation, (i) such Borrower will not, directly or indirectly, make or
declare any Restricted Payment and (ii) such
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Borrower will not, and will not suffer or permit any of its Restricted
Subsidiaries to, directly or indirectly, purchase or otherwise acquire for value
(or enter into any obligation to purchase or otherwise acquire for value) any
Capital Stock of TWI or any of its Subsidiaries (other than any Borrower or any
Restricted Subsidiary of any Borrower), unless:
(i) in the case of TWE or TWEAN or any of their respective Restricted
Subsidiaries, after giving effect thereto on a pro forma basis, no Default
shall have occurred and be continuing; and
(ii) in the case of TBS or TWIC or any of their respective Restricted
Subsidiaries, (x) after giving effect thereto on a pro forma basis, no
Default shall have occurred and be continuing and (y) at the time of such
Restricted Payment and after giving effect thereto on a pro forma basis,
the Leverage Ratio of the applicable Borrower as of the last day of the
most recently ended fiscal quarter for which financial statements have been
filed with the SEC or have become generally available would not exceed,
during any period set forth below, the ratio set forth opposite such
period:
Period Ratio
------ -----
Closing to September 30, 1999 6.0x
October 1, 1999 to September 30, 2000 5.5
October 1, 2000 to Maturity Date 5.0
(b) At or after the Diamond Implementation, (i) such Test Party will
not, directly or indirectly, make or declare any Restricted Payment and (ii)
such Test Party will not, and will not suffer or permit any of its Restricted
Subsidiaries to, directly or indirectly, purchase or otherwise acquire for value
(or enter into any obligation to purchase or otherwise acquire for value) any
Capital Stock of TWI, unless:
(i) in the case of TWE or TWEAN or any of their respective Restricted
Subsidiaries, after giving effect thereto on a pro forma basis, no Default
shall have occurred and be continuing; and
(ii) in the case of TWI or any of its Restricted Subsidiaries, (x)
after giving effect thereto on a pro forma basis, no Default shall have
occurred and be continuing and (y) at the time of such Restricted Payment
and after giving effect thereto on a pro forma basis, the Leverage Ratio of
TWI as of the last day of the most recently ended fiscal quarter for which
financial statements have been filed with the SEC or have become generally
available would not exceed, during any period set forth below, the ratio
set forth opposite such period:
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Period Ratio
------ -----
Closing to June 30, 1998 6.25x
July 1, 1998 to September 30, 1999 6.0
October 1, 1999 to September 30, 2000 5.5
October 1, 2000 to Maturity Date 5.0
; provided that so long as no Default shall have occurred and be continuing
on a pro forma basis after giving effect to such Restricted Payment, TWI
may (x) purchase, redeem or otherwise refinance its Series M Preferred
Stock, (y) defease dividends payable with respect to existing preferred
stock with the cash proceeds of Stock Option Loans and (z) pay regular
quarterly cash dividends on the common stock and required cash dividends on
preferred stock (including dividends on preferred stock that may be paid in
cash or in kind at the option of TWI).
(c) The limitations in this Section 6.6 will not prevent (x) any
Company from entering into any commercial transaction in the ordinary course of
its business not prohibited by Section 6.7, (y) any holder of Material
Beneficial Assets (other than TWE) from distributing or otherwise transferring
any assets other than such Material Beneficial Assets or (z) TWEAN from assuming
any Allocated Loans (subject to satisfaction of the conditions in Sections 4.3
and 4.4).
SECTION 6.7. Transactions with Affiliates. Such Borrower will not, and
will not cause or permit any of its Restricted Subsidiaries to, enter into any
transaction or series of transactions, whether or not in the ordinary course of
business, with any Affiliate of such Borrower other than on terms and conditions
substantially as favorable to such Borrower or such Subsidiary as would be
obtainable by such Borrower or such Subsidiary at the time in a comparable
arm's-length transaction with a Person other than any Affiliate of such
Borrower; provided that the foregoing restrictions shall not apply to (i)
transactions between Subsidiaries of such Borrower, or among such Borrower and
its Subsidiaries and with existing joint ventures, in each case, in accordance
with arrangements existing on the date hereof or in the ordinary course of
business of such Borrower and its Subsidiaries, (ii) transactions between or
among Restricted Companies of the type existing on the Closing Date and
consistent with past practice, (iii) any arrangements with officers, directors,
representatives or other employees of such Borrower and its Subsidiaries
relating specifically to employment as such and (iv) transactions expressly
permitted by Section 6.6 or the definition of Restricted Payments.
SECTION 6.8. ERISA. Such Borrower will not, and will not cause or
permit any of its ERISA Affiliates to:
(i) engage in any transaction which is not timely corrected and in
connection with which such Borrower or any of its ERISA Affiliates is
reasonably likely to be subject to either a civil penalty assessed pursuant
to Section 502(i) of ERISA or a tax imposed by Section 4975
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of the Code, which penalties and taxes for all such transactions could,
singly or in the aggregate, reasonably be expected to result in a Material
Adverse Effect;
(ii) permit to exist any accumulated funding deficiency (within the
meaning of Section 302 of ERISA and Section 412 of the Code), whether or
not a waiver has been obtained from the Internal Revenue Service, with
respect to any Pension Plan;
(iii) permit any failure to make contributions or any amount of
Unfunded Benefit Liabilities which creates, or with the passage of time
would create, any statutory Lien under ERISA or the Code in favor of the
PBGC or any Pension Plan or other entity; or
(iv) permit any failure to make contributions to any Multiemployer Plan
which, singly or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.
SECTION 6.9. Financial Covenants.
(I) Prior to the Diamond Implementation:
(a) Leverage. None of TWE, TBS, TWEAN or TWIC will cause or permit its
Leverage Ratio as of the end of any fiscal quarter (commencing with the first
fiscal quarter ending after the Closing Date) to exceed the ratio set forth
opposite such period below for such Borrower:
Period TWE TBS TWEAN TWIC
- ------ ---- ---- ----- ----
Closing to September 30, 1999 5.00x 6.50x 5.00x 6.50x
October 1, 1999 to September 30, 2000 5.00 6.00 5.00 6.00
October 1, 2000 to Maturity Date 5.00 5.00 5.00 5.00
(b) Coverage. None of TWE, TBS or TWIC will cause or permit its
Coverage Ratio as of the end of any fiscal quarter (commencing with the first
fiscal quarter ending after the Closing Date) to be less than the ratio set
forth opposite such period below for such Borrower:
Period TWE TBS TWIC
- ------ ---- ---- ----
Closing to September 30, 1999 2.50x 1.50x 1.50x
October 1, 1999 to September 30, 2000 2.50 1.75 1.75
October 1, 2000 to Maturity Date 2.50 2.00 2.00
(II) At or after the Diamond Implementation:
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(a) Leverage. Such Test Party will not cause or permit its Leverage
Ratio as of the end of any fiscal quarter (commencing with the first fiscal
quarter ending at or after the Diamond Implementation) to exceed the ratio set
forth opposite such period below for such Borrower:
Period TWI TWE TWEAN
- ------ ---- ---- -----
Closing to September 30, 1999 6.50x 5.00x 5.00x
October 1, 1999 to September 30, 2000 6.00 5.00 5.00
October 1, 2000 to Maturity Date 5.00 5.00 5.00
(b) Coverage. Neither TWI nor TWE will cause or permit its Coverage
Ratio as of the end of any fiscal quarter (commencing with the first fiscal
quarter ending at or after the Diamond Implementation) to be less than the ratio
set forth opposite such period below for such Borrower:
Period TWI TWE
- ----- ---- ----
Closing to September 30, 1999 1.50x 2.50x
October 1, 1999 to September 30, 2000 1.75 2.50
October 1, 2000 to Maturity Date 2.00 2.50
SECTION 6.10. Amendment or Waiver of Organizational Documents. Such
Borrower will not cause or permit to be amended, modified or waived, or cause or
permit any of its Restricted Sub sidiaries to amend, modify or, in any material
respect, waive, any provision of any Organizational Document or the TWEAN
Transaction Agreement, or, in the case of any Partnership Borrower, admit any
additional Partners, unless the Administrative Agent shall have determined,
after consultation with its counsel, that such amendment, modification or waiver
(taken as a whole, together with any other amendments, modifications or waivers
occurring at such time) are not more onerous to the Lenders than are the
Organizational Documents or the TWEAN Transaction Agreement, as applicable, in
effect prior to such amendment, modification or waiver, as the case may be;
provided that this Section 6.10 shall not prevent (i) TWIC or any of its
Restricted Subsidiaries from receiving any Partnership Interest as partial
consideration from and in TWEAN in any Transfer or (ii) any amendments or
modifications of any Organizational Document resulting from a liquidation,
merger or consolidation of any Borrower that is not prohibited by Section 6.2.
SECTION 6.11. Certain Agreements. Such Borrower will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any agreement (other than any Franchise or the Partnership Agreements
as in effect on the date hereof or modified in a manner not inconsistent with
this Agreement and other than this Agreement) that would, in effect, prohibit
such Borrower or any of its Restricted Subsidiaries from granting Liens or
agreeing to grant Liens; provided that any Company may (i) enter into agreements
with lenders (including holders of debt
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securities) to such Company or any of its Subsidiaries of Indebtedness for money
borrowed that prohibit the granting of Liens to third parties unless said
lenders are equally and ratably secured, (ii) agree that an asset subject to a
Permitted Lien will not be subject to any other Lien or (iii) agree that in
connection with the sale of accounts receivable or similar contract rights such
Company will not grant a Lien on or with respect to any such accounts receivable
or contract rights or any proceeds therefrom.
SECTION 6.12. Unrestricted Subsidiaries. (a) Schedule 6.12 sets forth
those Subsidiaries of each Borrower that have been designated Unrestricted
Subsidiaries. Such Borrower will not designate any of its Subsidiaries an
Unrestricted Subsidiary unless (i) such Subsidiary is designated an Unrestricted
Subsidiary at the time it becomes a Subsidiary of any Credit Party; and (ii) at
the time such Subsidiary is designated an Unrestricted Subsidiary, before and
after giving effect to such designation on a pro forma basis, no Default shall
have occurred and be continuing, as shown in an Officers' Certificate delivered
to the Administrative Agent at the time of such designation. Such Officers'
Certificate shall also state the specific purpose for which such designation is
being made. All Subsidiaries of Unrestricted Subsidiaries shall be Unrestricted
Subsidiaries.
(b) Such Borrower will not re-designate any Unrestricted Subsidiary a
Restricted Subsidiary unless at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary, before and after giving effect to such
redesignation on a pro forma basis, no Default shall have occurred and be
continuing, as shown in an Officer's Certificate delivered to the Administrative
Agent at the time of such designation.
(c) An Unrestricted Subsidiary shall be deemed to be redesignated a
Restricted Subsidiary at any time if (a) any Restricted Company (i) provides
guarantees or similar credit support for any Indebtedness or other monetary
obligations of such Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness or other monetary
obligations) or (ii) is directly or indirectly liable for any Indebtedness of
such Unrestricted Subsidiary or (b) such Unrestricted Subsidiary incurs
Indebtedness or other monetary obligations pursuant to which the lender has
recourse (including by way of set-off) to any of the assets of any Restricted
Company; provided that the foregoing shall not apply to (x) a pledge of the
Capital Stock of any Unrestricted Subsidiary to secure Indebtedness or other
obligations of such Unrestricted Subsidiary, (y) any Copyright Lien or (z) any
recourse to any Restricted Company in respect of customary representations,
warranties and covenants made or agreed to by such Restricted Company in
connection with the sale and securitization of accounts receivable or similar
contract rights.
ARTICLE VII.
EVENTS OF DEFAULT
If any of the following events ("Events of Default") shall occur:
SECTION 7.1. Payments. Any Borrower shall (i) default in the payment
when due of any principal of the Loans when due; or (ii) default in the payment
when due of any interest on the
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Loans or any fees or any other amounts owing under any Credit Document, which
default under this clause (ii) shall have continued unremedied for at least five
days but in no event less than three Business Days; or
SECTION 7.2. Representations, Etc. Any representation, warranty or
statement made or deemed made by, or on behalf of, any Credit Party in any
Credit Document or in any other Document or in any statement or certificate
delivered or required to be delivered pursuant hereto or thereto shall prove to
be untrue in any material respect on the date as of which made or deemed made;
or
SECTION 7.3. Covenants. Any Borrower shall (a) default in the due
performance or observance of any term, covenant or agreement contained in
Section 5.2(a), (b) or (d) or Article VI, or (b) default in the due performance
or observance of any term, covenant or agreement (other than those referred to
in Section 7.1 or 7.2 or clause (a) of this Section 7.3) contained in this
Agreement and such default under this clause (b) shall continue unremedied for a
period of at least 30 days after notice from the Administrative Agent or the
Required Lenders, in each case acting on behalf of the Lenders; or
SECTION 7.4. Default Under Other Agreements. (a) Any Restricted Company
or any Material Subsidiary of any Borrower shall (i) default in any payment with
respect to any Indebtedness (other than the Loans) in excess of $10.0 million
individually or $50.0 million in the aggregate beyond the period of grace, if
any, provided in the instrument or agreement governing such Indebtedness or (ii)
default in the observance or performance of any agreement or condition relating
to any such Indebtedness referred to in clause (i) above in excess of the
thresholds set forth therein or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or con
dition exist, the effect of which default or other event or condition is to
cause, or to permit the holder or holders of such Indebtedness (or a trustee or
agent on behalf of such holder or holders) to cause, any such Indebtedness to
become due prior to its stated maturity and such default or event or condition
shall continue beyond the period of grace, if any, provided in the instrument or
agreement governing such Indebtedness (after giving effect to any consent or
waiver obtained and then in effect thereunder); or (b) any such Indebtedness
referred to in clause (a)(i) above in excess of the thresholds set forth therein
shall, in accordance with its terms, be declared to be due and payable, or
required to be prepaid other than by a regularly scheduled or required
prepayment prior to the stated maturity thereof; or
SECTION 7.5. Bankruptcy, Etc. Any Borrower, any Material Subsidiary of
any Borrower, TWI or any General Partner (each, a "Default Entity") shall
commence a voluntary case con cerning itself, or any Partner shall commence such
a case concerning any Borrower, under Title 11 of the United States Code
entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto
or any similar foreign statute (the "Bankruptcy Code"); or an involuntary case
is commenced against any Default Entity and the petition is not controverted
within 10 days, or is not dismissed within 60 days, after commencement of the
case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or
takes charge of, all or substantially all of the property of any Default Entity;
or any Default Entity commences any other proceeding under any reorganization,
arrangement,
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adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect relating to
any Default Entity; or there is commenced against any Default Entity any such
proceeding which remains undismissed for a period of 60 days; or any Default
Entity is adjudicated (by any court of competent jurisdiction) insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or any Default Entity suffers any appointment of any
custodian or the like for it or any substantial part of its property to continue
undischarged or unstayed for a period of 60 days; or any Default Entity makes a
general assignment for the benefit of creditors; or any Default Entity shall
admit in writing its inability to pay its debts as they become due or any
General Partner shall admit in writing the inability of the partnership of which
it is General Partner to pay its debts as they become due; or any corporate or
other action is taken by any Default Entity for the purpose of effecting any of
the foregoing; or
SECTION 7.6. ERISA. Any ERISA Entity shall fail to pay when due an
amount or amounts aggregating in excess of $25.0 million which it shall have
become liable to pay to the PBGC; or notice of intent to terminate one or more
Plans having aggregate Unfunded Current Liabilities in excess of $25.0 million
(collectively, a "Material Plan") shall be filed under Title IV of ERISA by any
ERISA Entity, any Plan administrator or any combination of the foregoing; or the
PBGC shall institute proceedings under Title IV of ERISA to terminate or to
cause a trustee to be appointed to administer any Material Plan; or any other
event or condition that the Required Lenders determine constitutes reasonable
grounds under Section 4042 of ERISA for the termination of a Material Plan by
the PBGC or for the appointment by the appropriate United States District Court
of a trustee to administer or liquidate any Material Plan shall have occurred;
or a proceeding shall be instituted by a fiduciary of any Multiemployer Plan
against any ERISA Entity (i) to enforce Section 515 of ERISA with respect to
amounts in excess of $25.0 million (which amount is not being disputed, or as to
which all administrative remedies under Title I of ERISA have been exhausted) or
(ii) to require immediate payment of withdrawal liability (which is not being
disputed, or as to which all remedies under Title IV of ERISA have been
exhausted) in excess of $25.0 million following a "default" (as defined in
Section 4219(c)(5) of ERISA), and such proceeding shall not have been stayed or
dismissed within sixty (60) days thereafter; or
SECTION 7.7. Judgments. One or more judgments, attachments or decrees
shall be entered against TWI, any General Partner, one or more of the Borrowers
and/or any of their Material Subsidiaries involving a liability of $20.0 million
or more in the case of any one such judgment or decree and $50.0 million or more
in the aggregate at any one time for all such judgments and decrees for such
Persons (not paid or to the extent not fully covered by insurance provided by a
carrier that has acknowledged coverage) and any such judgments or decrees shall
not have been vacated, discharged or stayed or bonded pending appeal within 60
days from the entry thereof; or
SECTION 7.8. Change of Control. A Change of Control shall have
occurred; or
SECTION 7.9. Dissolution. There shall be a dissolution or liquidation
for any reason (whether voluntary or involuntary) of any Partnership Borrower
other than as permitted by Section 6.2(b); or
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SECTION 7.10. Taxation. Any Partnership Borrower shall, for any reason,
(i) not be treated as a partnership for federal income tax purposes or (ii) be
treated as a publicly traded partnership under Section 7704 of the Code; or
SECTION 7.11. Conflicting Agreements. Any Company shall enter into any
contract, agreement, instrument or understanding (other than any Franchise or
the Partnership Agreements as in effect on the Closing Date (or modified in a
manner not inconsistent with this Agreement) and any contract, agreement or
instrument governing long-term debt of any Company) that has the effect of
restricting (x) any Borrower from Incurring or repaying Indebtedness or (y) any
Borrower or any Restricted Subsidiary of any Borrower from granting Liens (other
than (i) any contract, agreement or instrument that requires the obligations
thereunder to be equally and ratably secured with any other obligations that
become secured, (ii) that prohibits an asset subject to a Permitted Lien from
being subject to any other Lien or (iii) prohibits a seller of accounts
receivable or similar contract rights from granting any Lien on or with respect
to such accounts receivable or other contract rights or proceeds therefrom) to
any Person; or
SECTION 7.12. Certain Guarantees. Except as otherwise expressly
permitted by this Agreement (including Section 9.14) or such Guarantee, any
Guarantee shall cease to be in full force and effect, or any Guarantor shall
disavow its obligations under its Guarantee;
THEN (i) upon the occurrence of any Event of Default described in the
foregoing Section 7.5 in respect of any Borrower or TWI, the unpaid principal
amount of and accrued interest on all Loans and Notes then outstanding to each
Borrower shall automatically become immediately due and payable, without
presentment, demand, protest or other requirements of any kind, all of which are
hereby expressly waived by each Borrower, and the obligation of each Lender to
make any Loan hereunder shall thereupon terminate, and (ii) upon the occurrence
and during the continuance of any other Event of Default, the Administrative
Agent shall, upon the written request of the Required Lenders, by written notice
to the Borrowers, declare all Loans and all Notes then outstanding to each
Borrower to be, and the same shall forthwith become, due and payable, together
with accrued interest thereon and any other Obligations and the obligation of
each Lender to make any Loan hereunder shall thereupon terminate.
Notwithstanding anything contained in the foregoing paragraph, if at
any time within 60 days after an acceleration of the Loans pursuant to the
preceding paragraph, the Borrowers shall pay all arrears of interest and all
payments on account of principal which shall have become due otherwise than by
acceleration (with interest on principal and, to the extent permitted by law, on
overdue interest, at the rates specified in this Agreement) and all Defaults
(other than non-payment of the principal of and accrued interest on the Loans,
in each case which is due and payable solely by virtue of acceleration) shall be
remedied or waived pursuant to Section 9.2, then the Two Thirds Lenders, by
written notice to the Borrowers, may at their option rescind and annul the
acceleration and its consequences; but such action shall not affect any
subsequent Default or impair any right consequent thereon. The provisions of
this paragraph are intended merely to bind the Lenders to a decision which may
be made at the election of the Two Thirds Lenders and are not intended to
benefit
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the Borrowers and do not grant the Borrowers the right to require the Lenders to
rescind or annul any acceleration hereunder, even if the conditions set forth
herein are met.
ARTICLE VIII.
THE ADMINISTRATIVE AGENT
Each of the Lenders hereby irrevocably appoints the Administrative
Agent as its agent and authorizes the Administrative Agent to take such actions
on its behalf and to exercise such powers as are delegated to the Administrative
Agent by the terms hereof, together with such actions and powers as are
reasonably incidental thereto. The Administrative Agent agrees to give promptly
to each Lender a copy of each notice or other document received by it pursuant
to any Credit Document (other than any that are required to be delivered
directly to the Lenders by any Credit Party).
The bank serving as the Administrative Agent hereunder shall have the
same rights and powers in its capacity as a Lender as any other Lender and may
exercise the same as though it were not the Administrative Agent, and such bank
and its Affiliates may accept deposits from, lend money to and generally engage
in any kind of business with any Company or Affiliate thereof as if it were not
the Administrative Agent hereunder.
The Administrative Agent shall not have any duties or obligations
except those expressly set forth herein. Without limiting the generality of the
foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or
other implied duties, regardless of whether a Default has occurred and is
continuing, (b) the Administrative Agent shall not have any duty to take any
discretionary action or exercise any discretionary powers, except discretionary
rights and powers expressly contemplated hereby that the Administrative Agent is
required to exercise in writing by the Required Lenders (or such other number or
percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 9.2), and (c) except as expressly set forth herein, the
Administrative Agent shall not have any duty to disclose, and shall not be
liable for the failure to disclose, any information relating to any Company that
is communicated to or obtained by the bank serving as Administrative Agent or
any of its Affiliates in any capacity. The Administrative Agent shall not be
liable for any action taken or not taken by it with the consent or at the
request of the Required Lenders (or such other number or percentage of the
Lenders as shall be necessary under the circumstances as provided in Section
9.2) or in the absence of its own gross negligence or wilful misconduct. The
Administrative Agent shall be deemed not to have knowledge of any Default unless
and until written notice thereof is given to the Administrative Agent by the
Borrowers or a Lender, and the Administrative Agent shall not be responsible for
or have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with this Agreement, (ii) the contents
of any certificate, report or other document delivered hereunder or in
connection herewith, (iii) the performance or observance of any of the
covenants, agreements or other terms or conditions set forth herein, (iv) the
validity, enforceability, effectiveness or genuineness of this Agreement or any
other agreement, instrument or document, or (v) the satisfaction of any
condition set forth in Article IV or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the Administrative Agent.
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The Administrative Agent shall be entitled to rely upon, and shall not
incur any liability for relying upon, any notice, request, certificate, consent,
statement, instrument, document or other writing believed by it to be genuine
and to have been signed or sent by the proper Person. The Administrative Agent
also may rely upon any statement made to it orally or by telephone and believed
by it to be made by the proper Person, and shall not incur any liability for
relying thereon. The Administrative Agent may consult with legal counsel (who
may be counsel for the Borrowers), independent accountants and other experts
selected by it, and shall not be liable for any action taken or not taken by it
in accordance with the advice of any such counsel, accountants or experts.
The Administrative Agent may perform any and all its duties and
exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers
through their respective Related Parties. The exculpatory provisions of the
preceding paragraphs shall apply to any such sub-agent and to the Related
Parties of the Administrative Agent and any such subagent, and shall apply to
their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent.
Subject to the appointment and acceptance of a successor Administrative
Agent as provided in this paragraph, the Administrative Agent may resign at any
time by notifying the Lenders and the Borrowers. Upon any such resignation, the
Required Lenders shall have the right to appoint a successor which, so long as
no Event of Default is continuing shall be reasonably acceptable to the
Borrowers. If no successor shall have been so appointed by the Required Lenders
and shall have accepted such appointment within 30 days after the retiring
Administrative Agent gives notice of its resignation, then the retiring
Administrative Agent may, on behalf of the Lenders appoint a successor
Administrative Agent which shall be a bank with an office in New York, New York,
or an Affiliate of any such bank. Upon the acceptance of its appointment as
Administrative Agent hereunder by a successor, such successor shall succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations hereunder. The fees payable by the
Borrower to a successor Administrative Agent shall be the same as those payable
to its predecessor unless otherwise agreed between the Borrowers and such
successor. After the Administrative Agent's resignation hereunder, the
provisions of this Article and Section 9.3 shall continue in effect for the
benefit of such retiring Administrative Agent, its sub-agents and their
respective Related Parties in respect of any actions taken or omitted to be
taken by any of them while it was acting as Administrative Agent.
Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement,
any related agreement or any document furnished hereunder or thereunder.
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ARTICLE IX.
MISCELLANEOUS
SECTION 9.1. Notices. Except in the case of notices and other
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
(a) if to any Borrower, to it at 75 Rockefeller Plaza, New York, New
York 10019, Attention: Chief Financial Officer (Telecopy No. 212-307-0126),
with copies to its General Counsel (Telecopy No. 212-956-7281) and to Paul,
Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York,
New York 10019, Attention: Robert B. Schumer, Esq. (Telecopy No.
212-373-2348);
(b) if to the Administrative Agent or the Swingline Lender, to The
Chase Manhattan Bank, Agent Bank Services Group, Grand Central Tower, One
Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention:
Janet Belden (Telecopy No. (212) 552-5658), with a copy to The Chase
Manhattan Bank, 270 Park Avenue, New York 10017, Re: Time Warner (Telecopy
No. (212) 270-4164);
(c) if to any other Lender, to it at its address (or telecopy number)
set forth in its Administrative Questionnaire.
Any party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto. All notices and
other communications given to any party hereto in accordance with the provisions
of this Agreement shall be deemed to have been given on the date of receipt.
SECTION 9.2. Waivers; Amendments. (a) No failure or delay by the
Administrative Agent or any Lender in exercising any right or power hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
the exercise of any other right or power. The rights and remedies of the
Administrative Agent and the Lenders hereunder are cumulative and are not
exclusive of any rights or remedies that they would otherwise have. No waiver of
any provision of this Agreement or consent to any departure by any Borrower
therefrom shall in any event be effective unless the same shall be permitted by
paragraph (b) of this Section, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
Without limiting the generality of the foregoing, the making of a Loan shall not
be construed as a waiver of any Default, regardless of whether the
Administrative Agent or any Lender may have had notice or knowledge of such
Default at the time.
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(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Borrowers and the Required Lenders or by the Borrowers and
the Administrative Agent with the consent of the Required Lenders; provided that
no such agreement shall (i) increase the Commitment of any Lender without the
written consent of such Lender, (ii) reduce the principal amount of any Loan or
reduce the rate of interest thereon, or reduce any fees payable hereunder,
without the written consent of each Lender affected thereby, (iii) postpone the
scheduled date of payment of the principal amount of any Loan, or any interest
thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse
any such payment, or postpone the scheduled date of expiration of any
Commitment, without the written consent of each Lender affected thereby, (iv)
change Section 2.16(b) or (c) in a manner that would alter the pro rata sharing
of payments required thereby, without the written consent of each Lender, (v)
increase the Borrowing Cap of any Borrower or the limitations specified in
clause (ii) or (iii) of the proviso in Section 2.1, without the written consent
of each Lender, (vi) limit or release any Guarantee (other than as permitted by
Section 9.14), without the written consent of each Lender, (vii) waive any
provision of Section 4.1, 4.2 or 4.3 without the written consent of each Lender,
or (viii) change any of the provisions of this Section or the definition of
"Required Lenders" or any other provision hereof specifying the number or
percentage of Lenders required to waive, amend or modify any rights hereunder or
make any determination or grant any consent hereunder, without the written
consent of each Lender; provided further that no such agreement shall amend,
modify or otherwise affect the rights or duties of the Administrative Agent or
the Swingline Lender hereunder without the prior written consent of the
Administrative Agent or the Swingline Lender, as the case may be.
SECTION 9.3. Expenses; Indemnity; Damage Waiver. (a) The Borrowers
shall, jointly and severally, pay (i) all reasonable out-of-pocket expenses
incurred by the Administrative Agent and its Affiliates, including the
reasonable fees, charges and disbursements of counsel for the Administrative
Agent, in connection with the syndication of the credit facilities provided for
herein, the preparation and administration of the Credit Documents or any
amendments, modifications or waivers of the provisions thereof (whether or not
the transactions contemplated hereby or thereby shall be consummated), and (ii)
all reasonable out-of-pocket expenses incurred by the Administrative Agent or
any Lender, including the reasonable fees, charges and disbursements of any
counsel for the Administrative Agent or any Lender, in connection with the
enforcement or protection of its rights in connection with the Credit Documents,
including its rights under this Section, or in connection with the Loans made
hereunder, including all such reasonable out-of-pocket expenses incurred during
any workout, restructuring or negotiations in respect of such Loans.
(b) The Borrowers shall, jointly and severally, indemnify the
Administrative Agent and each Lender, and each Related Party of any of the
foregoing Persons (each such Person being called an "Indemnitee") against, and
hold each Indemnitee harmless from, any and all losses, claims, damages,
liabilities and related expenses, including the reasonable fees, charges and
disbursements of any counsel for any Indemnitee, incurred by or asserted against
any Indemnitee arising out of, in connection with, or as a result of (i) the
execution or delivery of any Credit Document or any agreement or instrument
contemplated thereby, the performance by the parties hereto of their respective
obligations hereunder or the consummation of the Transactions or any other
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transactions contemplated hereby, (ii) any Loan or the use of the proceeds
therefrom, (iii) any actual or alleged presence or release of Hazardous
Materials on or from any property owned or operated by any Company, or any
Environmental Liability related in any way to any Company, or (iv) any actual or
prospective claim, litigation, investigation or proceeding relating to any of
the foregoing, whether based on contract, tort or any other theory and
regardless of whether any Indemnitee is a party thereto; provided that (x) such
indemnity shall not, as to any Indemnitee, be available to the extent that such
losses, claims, damages, liabilities or related expenses are determined by a
court of competent jurisdiction by final and nonappealable judgment to have
resulted from the gross negligence or wilful misconduct of such Indemnitee and
(y) the foregoing shall not constitute a joint and several obligation to repay
the Loans or any interest thereon.
(c) To the extent that the Borrower fails to pay any amount required to
be paid by them to the Administrative Agent or the Swingline Lender under
paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the
Administrative Agent or the Swingline Lender, as the case may be, such Lender's
Applicable Percentage (determined as of the time that the applicable
unreimbursed expense or indemnity payment is sought) of such unpaid amount;
provided that the unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was incurred by or asserted
against the Administrative Agent or the Swingline Lender in its capacity as
such.
(d) Each Credit Party acknowledges that neither the Administrative
Agent nor any Lender has any fiduciary relationship with or fiduciary duty to
any Credit Party arising out of or in connection with any Credit Document and
the relationship between the Administrative Agent and the Lenders, on the one
hand, and the Credit Parties, on the other hand, in connection therewith is
solely that of debtor and creditor. To the extent permitted by applicable law,
no Borrower shall assert, and each Borrower hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential or
punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement, any agreement or instrument
contemplated hereby, or the Transactions.
(e) All amounts due under this Section shall be payable promptly after
written demand therefor.
SECTION 9.4. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns permitted hereby, except that no
Credit Party may assign or otherwise transfer any of its rights or obligations
hereunder without the prior written consent of each Lender (and any attempted
assignment or transfer by such Credit Party without such consent shall be null
and void), except pursuant to a Transfer as permitted by the other provisions of
this Agreement. Nothing in this Agreement, expressed or implied, shall be
construed to confer upon any Person (other than the parties hereto, their
respective successors and assigns permitted hereby and, to the extent expressly
contemplated hereby, the Related Parties of each of the Administrative Agent and
the Lenders) any legal or equitable right, remedy or claim under or by reason of
this Agreement.
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(b) Any Lender may assign to one or more assignees all or a portion of
its rights and obligations under this Agreement (including all or a portion of
its Commitment and the Loans at the time owing to it); provided that (i) except
in the case of an assignment to a Lender or an Affiliate of a Lender, the
Administrative Agent (and, in the case of an assignment of all or a portion of a
Commitment or any Lender's obligations in respect of its Swingline Exposure, the
Swingline Lender) must give its prior written consent to such assignment (which
consent shall not be unreasonably withheld or delayed), (ii) except in the case
of an assignment to a Lender or an Affiliate of a Lender or an assignment of the
entire remaining amount of the assigning Lender's Commitment, the amount of the
Commitment of the assigning Lender subject to each such assignment (determined
as of the date the Assignment and Acceptance with respect to such assignment is
delivered to the Administrative Agent) shall not be less than $10.0 million (or
such lesser amount as the Borrowers and the Administrative Agent otherwise agree
from time to time), (iii) each partial assignment shall be made as an assignment
of a proportionate part of all the assigning Lender's rights and obligations
under this Agreement, (iv) except in the case of an assignment to an Affiliate
of the Assigning Lender on the Effective Date, the parties to each assignment
shall execute and deliver to the Administrative Agent an Assignment and
Acceptance, together with a processing and recordation fee of $3,500, and (v)
the assignee, if it shall not be a Lender, shall deliver to the Administrative
Agent an Administrative Questionnaire; and provided further that any consent of
the Borrowers otherwise required under this paragraph shall not be required if
any Event of Default has occurred and is continuing. Subject to acceptance and
recording thereof pursuant to paragraph (d) of this Section, from and after the
effective date specified in each Assignment and Acceptance the assignee
thereunder shall be a party hereto and, to the extent of the interest assigned
by such Assignment and Acceptance, have the rights and obligations of a Lender
under this Agreement, and the assigning Lender thereunder shall, to the extent
of the interest assigned by such Assignment and Acceptance, be released from its
obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all of the assigning Lender's rights and obligations under
this Agreement, such Lender shall cease to be a party hereto but shall continue
to be entitled to the benefits of Sections 2.13, 2.14, 2.15 and 9.3). Any
assignment or transfer by a Lender of rights or obligations under this Agreement
that does not comply with this paragraph shall be treated for purposes of this
Agreement as a sale by such Lender of a participation in such rights and
obligations in accordance with paragraph (e) of this Section.
(c) The Administrative Agent, acting for this purpose as an agent of
the Borrowers, shall maintain at one of its offices in The City of New York a
copy of each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitment of,
and principal amount of the Loans owing to, each Lender pursuant to the terms
hereof from time to time (the "Register"). The entries in the Register shall be
conclusive, and the Borrower, the Administrative Agent and the Lenders may treat
each Person whose name is recorded in the Register pursuant to the terms hereof
as a Lender hereunder for all purposes of this Agreement, notwithstanding notice
to the contrary. The information in the Register shall be available to the
Borrowers and any Lender, at any reasonable time and from time to time upon
reasonable prior notice.
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(d) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee, the assignee's completed
Administrative Questionnaire (unless the assignee shall already be a Lender
hereunder), the processing and recordation fee referred to in paragraph (b) of
this Section and any written consent to such assignment required by paragraph
(b) of this Section, the Administrative Agent shall accept such Assignment and
Acceptance and record the information contained therein in the Register. No
assignment shall be effective for purposes of this Agreement unless it has been
recorded in the Register as provided in this paragraph.
(e) Any Lender may, without the consent of any Borrower, the
Administrative Agent or the Swingline Lender, sell participations to one or more
banks or other entities (a "Participant") in all or a portion of such Lender's
rights and obligations under this Agreement (including all or a portion of its
Commitment and the Loans owing to it); provided that (i) such Lender's
obligations under this Agreement shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (iii) the Borrowers, the Administrative Agent and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement. Any
agreement or instrument pursuant to which a Lender sells such a participation
shall provide that such Lender shall retain the sole right to enforce this
Agreement and to approve any amendment, modification or waiver of any provision
of this Agreement; provided that such agreement or instrument may provide that
such Lender will not, without the consent of the Participant, agree to any
amendment, modification or waiver described in the first proviso to Section
9.2(b) that affects such Participant. Subject to paragraph (f) of this Section,
each Borrower agrees that each Participant shall be entitled to the benefits of
Sections 2.13, 2.14 and 2.15 to the same extent as if it were a Lender and had
acquired its interest by assignment pursuant to paragraph (b) of this Section.
To the extent permitted by law, each Participant also shall be entitled to the
benefits of Section 9.8 as though it were a Lender, provided such Participant
agrees to be subject to Section 2.16(c) as though it were a Lender.
(f) A Participant shall not be entitled to receive any greater payment
under Section 2.13 or 2.15 than the applicable Lender would have been entitled
to receive with respect to the participation sold to such Participant, unless
the sale of the participation to such Participant is made with the Borrowers'
prior written consent. A Participant that would be a Foreign Lender if it were a
Lender shall not be entitled to the benefits of Section 2.15 unless the
Borrowers are notified of the participation sold to such Participant and such
Participant agrees, for the benefit of the Borrowers, to comply with Section
2.15(e) as though it were a Lender.
(g) Any Lender may at any time pledge or assign a security interest in
all or any portion of its rights under this Agreement to secure obligations of
such Lender, including any pledge or assignment to secure obligations to a
Federal Reserve Bank, and this Section shall not apply to any such pledge or
assignment of a security interest; provided that no such pledge or assignment of
a security interest shall release a Lender from any of its obligations hereunder
or substitute any such pledgee or assignee for such Lender as a party hereto.
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SECTION 9.5. Survival. All covenants, agreements, representations and
warranties made by the Credit Parties herein and in the certificates or other
instruments delivered in connection with or pursuant to the Credit Documents
shall be considered to have been relied upon by the other parties hereto and
shall survive the execution and delivery of the Credit Documents and the making
of any Loans, regardless of any investigation made by any such other party or on
its behalf and notwithstanding that the Administrative Agent or any Lender may
have had notice or knowledge of any Default or incorrect representation or
warranty at the time of any Credit Event, and shall continue in full force and
effect as long as the principal of or any accrued interest on any Loan or any
fee or any other amount payable under any Credit Document is outstanding and
unpaid and so long as the Commitments have not expired or terminated. The
provisions of Sections 2.13, 2.14, 2.15 and 9.3 and Article VIII shall survive
and remain in full force and effect regardless of the consummation of the
transactions contemplated hereby, the repayment of the Loans, the expiration or
termination of the Commitments or the termination of the Credit Documents or any
provision thereof.
SECTION 9.6. Counterparts; Integration; Effectiveness. This Agreement
may be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This Agreement, the other
Credit Documents and any separate letter agreements with respect to fees payable
to the Administrative Agent constitute the entire contract among the parties
relating to the subject matter hereof and supersede any and all previous
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective when it shall have been executed
by the Administrative Agent and when the Administrative Agent shall have
received counterparts hereof which, when taken together, bear the signatures of
each of the other parties hereto (such time, the "Effective Date"). Delivery of
an executed counterpart of a signature page of this Agreement by telecopy shall
be effective as delivery of a manually executed counterpart of this Agreement.
SECTION 9.7. Severability. Any provision of this Agreement held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a particular provision in
a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.
SECTION 9.8. Right of Setoff. If an Event of Default shall have
occurred and be continuing, each Lender and each of its Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other obligations at any time
owing by such Lender or Affiliate to or for the credit or the account of any
Credit Party against any of and all the obligations of any Credit Party now or
hereafter existing under this Agreement held by such Lender, irrespective of
whether or not such Lender shall have made any demand under any Credit Document
and although such obligations may be unmatured. The rights of each Lender under
this Section are in addition to other rights and remedies (including other
rights of setoff) which such Lender may have.
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SECTION 9.9. Governing Law; Jurisdiction; Consent to Service of
Process. (a) Each Credit Document shall be construed in accordance with and
governed by the law of the State of New York.
(b) Each Credit Party hereby irrevocably and unconditionally submits,
for itself and its property, to the nonexclusive jurisdiction of the Supreme
Court of the State of New York sitting in New York County and of the United
States District Court of the Southern District of New York, and any appellate
court from any thereof, in any action or proceeding arising out of or relating
to any Credit Document or for recognition or enforcement of any judgment, and
each of the parties hereto hereby irrevocably and unconditionally agrees that
all claims in respect of any such action or proceeding may be heard and
determined in such New York State or, to the extent permitted by law, in such
Federal court. Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in any Credit Document shall affect any right that the Administrative
Agent or any Lender may otherwise have to bring any action or proceeding
relating to this Agreement against any Credit Party or its properties in the
courts of any jurisdiction.
(c) Each Credit Party hereby irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection which it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to any Credit Document in any court
referred to in paragraph (b) of this Section. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
(d) Each party to any Credit Document irrevocably consents to service
of process in the manner provided for notices in Section 9.1. Nothing in any
Credit Document will affect the right of any party to any Credit Document to
serve process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO ANY CREDIT DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER
BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THE CREDIT
DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION.
SECTION 9.11. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.
<PAGE>
<PAGE>
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SECTION 9.12. Confidentiality. Each of the Administrative Agent and the
Lenders agrees to maintain the confidentiality of the Information (as defined
below), except that Information may be disclosed (a) to its and its Affiliates'
directors, officers, employees and agents, including accountants, legal counsel
and other advisors (it being understood that the Persons to whom such disclosure
is made will be informed of the confidential nature of such Information and
instructed to keep such Information confidential), (b) to the extent requested
by any regulatory authority, (c) to the extent required by applicable laws or
regulations or by any subpoena or similar legal process, (d) to any other party
to this Agreement, (e) in connection with the exercise of any remedies hereunder
or any suit, action or proceeding relating to any Credit Document or the
enforcement of rights thereunder, (f) subject to an agreement containing
provisions substantially the same as those of this Section, to any assignee of
or Participant in, or any prospective assignee of or Participant in, any of its
rights or obligations under this Agreement, (g) with the consent of the
Borrowers or (h) to the extent such Information (i) becomes publicly available
other than as a result of a breach of this Section or (ii) becomes available to
the Administrative Agent or any Lender on a nonconfidential basis from a source
other than the Borrowers or another Person known to be disclosing such
information in breach of a duty of confidentiality. For the purposes of this
Section, "Information" shall mean all information received from the Borrowers
relating to the Borrowers or their business, other than any such information
that is or becomes available to the Administrative Agent or any Lender on a
nonconfidential basis; provided that, in the case of information received from
the Borrowers after the date hereof, such information is clearly identified at
the time of delivery as confidential. Any Person required to maintain the
confidentiality of Information as provided in this Section shall be considered
to have complied with its obligation to do so if such Person has exercised the
same degree of care to maintain the confidentiality of such Information as such
Person would accord to its own confidential information.
SECTION 9.13. Independence of Representations, Warranties and
Covenants. The representations, warranties and covenants contained herein shall
be independent of each other, and no exception to any representation, warranty
or covenant shall be deemed to be an exception to any other representation,
warranty or covenant contained herein unless expressly provided, nor shall any
such exception be deemed to permit any action or omission that would be in
contravention of applicable law.
SECTION 9.14. Release of Certain Guarantees. (a) Any TWE Partner
Guarantee, any TWEAN Holder Guarantee and the TWE Guarantee may be released
without the consent of any Lender if (i) the Guarantor thereof shall no longer
hold any Material Beneficial Assets (or in the case of TWE, any TWEAN Beneficial
Assets), (ii) such Guarantor shall not be in breach of its Guarantee, (iii) no
Default shall have occurred and be continuing, (iv) such Guarantee is not, by
operation of Section 5.13, required to be in effect and (v) no Obligations with
respect to principal or interest are then due and owing by such Guarantor. Such
release shall in all respects be subject to any reinstatement provisions set
forth in such Guarantee. TWE or TWEAN, as the case may be, shall notify the
Administrative Agent upon any such release, and the Administrative Agent shall
notify the Lenders of such release. Nothing in this Section 9.14 shall prohibit
the merger or consolidation of any TWE Partner Guarantor with or into any other
Person so long as, after giving effect to such merger or
<PAGE>
<PAGE>
-83-
consolidation on a pro forma basis, (x) no Default shall have occurred and be
continuing and (y) the representations and warranties set forth in Section 3.13
shall be true and correct.
(b) The Paragon Guarantee may be released without the consent of any
Lender at such time as Paragon shall become substantially wholly-owned by TWIC
if (i) Paragon shall no longer hold any TWEAN Material Beneficial Assets, (ii)
such Paragon Guarantee is not, by operation of Section 5.13, required to be in
effect, and (iii) no Obligations with respect to principal or interest are then
due and owing by Paragon.
SECTION 9.15. Partners. Each Lender (a) acknowledges that each of TWE
and TWEAN is a partnership and (b) agrees that it will not cause or seek to
cause any Partner or any assignee of any Partner's Partnership Interest to be
liable, as a Partner, to such Lender with respect to any of the Loans or any
fees or other amounts payable to such Lender or participant by the partnership
in which such Partner is a partner under this Agreement (except as set forth
below or pursuant to any other written agreement or understanding between or
among such Persons), it being agreed that (i) recourse for such purposes and any
claim in respect thereof shall be limited to the Partnership Interests of such
Persons and the assets and properties of TWE and TWEAN and (ii) no judgment,
order or execution entered in any suit, action or proceeding (whether legal or
equitable) in respect thereof shall be enforced or obtained against any Partner
or any assignee of any Partner's Partnership Interest beyond the extent of such
Person's Partnership Interest; provided that this paragraph shall not (x)
operate as a waiver of any rights or claims against any Partner or any assignee
of any Partner's Partnership Interest arising out of or resulting from such
Person's misrepresentations, misconduct or violation of law or (y) affect the
validity or enforceability of any direct obligations of any Partner hereunder or
under any of the other Credit Documents, including the direct obligations of TWE
hereunder and under the TWE Guarantee and the obligations of TWE Partners under
the TWE Partner Guarantees.
SECTION 9.16. Calculations; Computations; Interpretation. (a) 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, for the relevant Person and its
consolidated Subsidiaries on a consolidated basis in accordance with GAAP
consistently applied throughout the periods involved except as set forth in the
notes thereto; provided that except as otherwise specifically provided herein,
all calculations for determining compliance with Article VI shall utilize
accounting principles and policies in effect at the time of the preparation of,
and in conformity with those used to prepare, (x) in the case of TWI and each
Borrower other than TBS, the audited Financial Statements of such Person for the
fiscal year ended December 31, 1996 and (y) in the case of TBS, its unaudited
Financial Statements for the fiscal quarter ended June 30, 1997. 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;
<PAGE>
<PAGE>
-84-
(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 and (z) the cash flow received
by TWEAN with respect to TWEAN Beneficial Assets; and
(iii) to the extent that 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 (except to the extent that the
calculations for such other Borrower otherwise include the assets,
liabilities and results of operations and cash flows of TWE or TWEAN, as
the case may be).
(b) The covenants contained in Article V and Article VI (other than
Section 6.9) shall apply as if holders of TWE Material Beneficial Assets were
Restricted Subsidiaries of TWE and holders of TWEAN Material Beneficial Assets
(other than any Borrower or any Restricted Subsidiary of any Borrower) 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 contained in this
Agreement shall prohibit or otherwise limit or restrict (i) any merger of a
Beneficial Subsidiary into a Borrower, a TWE Partner Guarantor or into another
Beneficial Subsidiary, (ii) the distribution or other payment by a Beneficial
Subsidiary of any amounts distributed to it by TWE or TWEAN in accordance with
the terms hereof (such amounts so distributed or paid by such Beneficial
Subsidiary shall not be deemed Restricted Payments for purposes of this
Agreement) or (iii) the ability of any holder of Beneficial Assets from selling,
transferring, distributing or encumbering any assets, other than the Beneficial
Assets.
(c) Calculations pursuant to the covenants set forth in Article VI
shall be made for each Person and its Restricted Subsidiaries on a consolidated
basis in accordance with GAAP and the related definitions set forth in Article
I, it being understood that:
(i) prior to the Diamond Implementation, for purposes of determining
compliance with Section 6.4(I)(c), TWE and any entity (including TWEAN) in
which TWI owns, directly or indirectly, at least 50% of the common equity
(including Restricted Subsidiaries and Unrestricted Subsidiaries of TWI)
shall be so consolidated with TWI as if each were a Wholly Owned Subsidiary
of TWI;
(ii) with respect to TWE, only such percentage of the results of
operations and assets and liabilities of TWEAN as is equal to the
percentage of the common equity of TWEAN owned by TWE shall be so included
in the results of operations and assets and liabilities of TWE;
(iii) as long as (x) TWIC owns, directly or indirectly, at least 50% of
the common equity of Paragon and (y) the Borrowers collectively own,
directly or indirectly, 100% of the common equity of Paragon, (A) Paragon
shall be consolidated with TWIC as if it were a Wholly Owned Subsidiary of
TWIC and (B) if so consol-
<PAGE>
<PAGE>
-85-
idated, Paragon shall still be treated as an equity investment by TWE and
TWEAN (to the extent of their respective interests therein); provided that
the amount of any distributions actually received from Paragon by TWE
and/or TWEAN or their respective Subsidiaries shall, without duplication,
be deducted from the Consolidated Cash Flow of TWIC in the period of such
distribution; provided however that Paragon may make distributions to its
partners of up to $250.0 million in the aggregate and the portion of such
distribution received by TWE and/or TWEAN or their Subsidiaries shall not
be deducted from the Consolidated Cash Flow of TWIC; and
(iv) All Unrestricted Subsidiaries shall be excluded from all such
calculations, except as otherwise expressly provided in the definitions
relating thereto.
SECTION 9.17. Distribution of Documents. If any provision hereof
requires the Borrowers to provide a document to the Lenders, the Borrowers shall
be entitled to provide such document to the Administrative Agent (with
sufficient copies for the Lenders) for distribution to the Lenders.
<PAGE>
<PAGE>
S-1
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
TIME WARNER INC.
By: /s/ R. M. Ruckman
-----------------------------------
Name: R. Mackereth Ruckman
Title: Vice President & Treasurer
TIME WARNER COMPANIES, INC
By: /s/ R. M. Ruckman
----------------------------------
Name: R. Mackereth Ruckman
Title: Vice President & Treasurer
TURNER BROADCASTING SYSTEM, INC.
By: /s/ Thomas W. McEnerney
----------------------------------
Name: Thomas W. McEnerney
Title: Vice President
TIME WARNER ENTERTAINMENT-
ADVANCE/NEWHOUSE PARTNERSHIP
By: TIME WARNER ENTERTAINMENT
COMPANY, L.P., Managing Partner
By: /s/ R. M. Ruckman
----------------------------------
Name: R. Mackereth Ruckman
Title: Vice President & Treasurer
TWI CABLE INC.
By: /s/ R. M. Ruckman
----------------------------------
Name: R. Mackereth Ruckman
Title: Vice President & Treasurer
<PAGE>
<PAGE>
S-1a
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
TIME WARNER ENTERTAINMENT
COMPANY, L.P.
By: /s/ R. M. Ruckman
-----------------------------------
Name: R. Mackereth Ruckman
Title: Vice Presdient & Treasurer
<PAGE>
<PAGE>
S-2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
THE CHASE MANHATTAN BANK,
as Lender and as Administrative Agent,
By: /s/ Tracey A. Navin
-----------------------------------
Name: Tracey A. Navin
Title: Vice President
<PAGE>
<PAGE>
S-3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
----------------------------------,
as Lender (type full name)
By:
-----------------------------------
Name:
Title:
<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, 1997, 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
Turner Broadcasting System Limited......................................... 100 U.K.
Turner International Advertising Sales Limited........................... 100 U.K.
Turner International Network Sales Limited............................... 100 U.K.
</TABLE>
1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
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) Georgia
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-Tamerlane Publishing Corp......................................... 100 California
WB Music Corp............................................................ 100 California
HBO Film Management, Inc................................................. 100 Delaware
NPP Music Corp........................................................... 100 Delaware
Warner/Chappell Music, Inc............................................... 100 Delaware
Warner Bros. Music International Inc.................................. 100 Delaware
Warner Bros. Publications U.S. Inc............................... 100 New York
New Chappell Inc.(10).......................................... 100 Delaware
Super Hype Publishing, Inc............................................ 100 New York
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
Cotillion Music, Inc.................................................. 100 Delaware
Walden Music, Inc..................................................... 100 New York
Summy-Birchard, Inc................................................... 100 Wyoming
CPP/Belwin, Inc....................................................... 100 Delaware
Lorimar Motion Picture Management, Inc................................... 100 California
E.C. Publications, Inc................................................... 100 New York
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
TWI Ventures Ltd......................................................... 100 Delaware
American Television and Communications Corporation ('ATC')................. 100(12) Delaware
ATC/PPV, Inc............................................................. 100 Delaware
Philadelphia Community Antenna Television Company........................ 100 Pennsylvania
TWI Cable Inc.(13)......................................................... 100 Delaware
TW/Kblcom Inc.(14)....................................................... 100 Delaware
KBL Communications, Inc............................................... 100 Delaware
Paragon Communications (partnership)................................ 100(15) 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
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.(16).................................... 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(17) New Zealand
Public Cable Company (partnership).............................................. 77 Maine
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
Queens Inner Unity Cable System................................................. 66.01 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(18) 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.
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.
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
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
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(19) Germany
Time Warner Entertainment Germany GmbH........................................ 100 Germany
Time Warner Entertainment Germany GmbH and Co. OHG......................... 100(20) 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
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)(21)....................................... 50 Delaware
</TABLE>
5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
- -------------------------------------------------------------------------------- ---------- ---------------------
<S> <C> <C>
Hungary Holding Co.............................................................. 100(19) Delaware
Kabelkom Holding Co. (partnership)(21)........................................ 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 69.31% and Castle Rock Entertainment, Inc. owns 30.69%.
(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%.
(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) The names of 42 subsidiaries of TWI Cable Inc. carrying on the cable
television business are omitted.
(14) The names of 21 subsidiaries of TW/Kblcom Inc. carrying on the cable
television business are omitted.
(15) KBL Communications Inc. owns 54.0797% of Paragon Communications, ATC owns
0.6672% and the remaining 45.2531% is owned by TWI Cable Inc. through its
subsidiaries.
(16) The names of 21 subsidiaries of Time Warner Communications Holdings Inc.
carrying on the same alternate access operations are omitted.
(17) TWE owns 99% and Time Warner Companies, Inc. owns 1%.
(18) TWE owns 99% and TWE Asia Inc. owns 1%.
(19) TWE owns 99% and HBO Direct, Inc. owns 1%.
(20) Time Warner Entertainment Germany GmbH owns 85% and Time Warner Germany
Holding GmbH owns 15%.
(21) 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.
6
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our reports dated February
10, 1998, with respect to the (a) consolidated financial statements, schedule
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, 1997, in each of the following:
1. Registration Statement No. 333-11471 on Form S-4 for Time Warner
Inc. (formerly named TW Inc.);
2. Post-Effective Amendment No. 1 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
3. Post-Effective Amendment No. 2 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
4. Post-Effective Amendment No. 3 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
5. Post-Effective Amendment No. 4 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
6. Post-Effective Amendment No. 5 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
7. Registration Statement on Form S-8 and Post-Effective Amendment
No. 1 (Registration No. 333-14053) of Time Warner Inc.;
8. Registration Statement No. 333-14611 on Form S-3 of Time Warner
Inc.;
9. Registration Statement No. 333-27265 on Form S-8 of Time Warner
Inc.;
10. Registration Statement No. 333-39647 on Form S-3 of Time Warner
Inc.;
11. Registration Statement No. 333-44255 on Form S-3 of Time Warner
Inc. (and Registration No. 333-44255-01 of Turner Broadcasting
System, Inc. and Registration No. 333-44255-02 of Time Warner
Companies, Inc.);
12. Registration Statement No. 333-37827 on Form S-3 of Time Warner
Inc. (and Registration No. 333-37827-01 of Time Warner
Companies, Inc.) (prospectus also relates and constitutes a
post-effective amendment to Registration No. 333-32813);
13. Registration Statement No. 33-61497 on Form S-8 of Time Warner
Companies, Inc.; and
14. Registration Statement No. 333-45703 on Form S-4 of Time Warner
Companies, Inc. (and Registration No. 333-45703-01 of Turner
Broadcasting System, Inc. and Registration No. 333-45703-02 of
Time Warner Inc.).
ERNST & YOUNG LLP
New York, New York
March 23, 1998
<PAGE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated
February 5, 1996, which appears on page 53 of Turner Broadcasting System, Inc.'s
1995 Annual Report to Shareholders, which is incorporated by reference in Turner
Broadcasting System, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995 and which report has been incorporated by reference in this
Annual Report on Form 10-K for the year ended December 31, 1997, in each of the
following:
1. Registration Statement No. 333-11471 on Form S-4 for Time Warner
Inc. (formerly named TW Inc.);
2. Post-Effective Amendment No. 1 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
3. Post-Effective Amendment No. 2 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
4. Post-Effective Amendment No. 3 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
5. Post-Effective Amendment No. 4 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
6. Post-Effective Amendment No. 5 to Registration Statement No.
333-11471 on Form S-4 filed on Form S-8 of Time Warner Inc.;
7. Registration Statement on Form S-8 and Post-Effective Amendment
No. 1 (Registration No. 333-14053) of Time Warner Inc.;
8. Registration Statement No. 333-14611 on Form S-3 of Time Warner
Inc.;
9. Registration Statement No. 333-27265 on Form S-8 of Time Warner
Inc.;
10. Registration Statement No. 333-39647 on Form S-3 of Time Warner
Inc.;
11. Registration Statement No. 333-44255 on Form S-3 of Time Warner
Inc. (and Registration No. 333-44255-01 of Turner Broadcasting
System, Inc. and Registration No. 333-44255-02 of Time Warner
Companies, Inc.);
12. Registration Statement No. 333-37827 on Form S-3 of Time Warner
Inc. (and Registration No. 333-37827-01 of Time Warner Companies,
Inc.) (prospectus also relates and constitutes a post-effective
amendment to Registration No. 333-32813);
13. Registration Statement No. 33-61497 on Form S-8 of Time Warner
Companies, Inc.; and
14. Registration Statement No. 333-45703 on Form S-4 of Time Warner
Companies, Inc. (and Registration No. 333-45703-01 of Turner
Broadcasting System, Inc. and Registration No. 333-45703-02
of Time Warner Inc.).
PRICE WATERHOUSE LLP
Atlanta, Georgia
March 23, 1998
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 645
<SECURITIES> 0
<RECEIVABLES> 3,438
<ALLOWANCES> 991
<INVENTORY> 2,596
<CURRENT-ASSETS> 5,011
<PP&E> 3,240
<DEPRECIATION> 1,151
<TOTAL-ASSETS> 34,163
<CURRENT-LIABILITIES> 4,371
<BONDS> 11,833
<COMMON> 6
1,857
4
<OTHER-SE> 9,346
<TOTAL-LIABILITY-AND-EQUITY> 34,163
<SALES> 13,294
<TOTAL-REVENUES> 13,294
<CGS> 7,542
<TOTAL-COSTS> 7,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,049
<INCOME-PRETAX> 832
<INCOME-TAX> 531
<INCOME-CONTINUING> 301
<DISCONTINUED> 0
<EXTRAORDINARY> (55)
<CHANGES> 0
<NET-INCOME> 246
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.13)
</TABLE>
