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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, 1998.
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 NEW YORK STOCK EXCHANGE
PREFERRED STOCK
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 1999, there were 1,133,899,660 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 15, 1999) was
approximately $70.65 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 Part III (Item 10 through Item 13)
be used in connection with the registrant's
1999 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 the Publishing division, TWI Cable
and the Time Warner General and Limited Partners.(1)
Time Warner General and Limited Partners own 100% of the Music division and
74.49% of Time Warner Entertainment Company, L.P. ("TWE"). TWE is also
25.51%-owned by MediaOne Limited Partner.(2)
TWE owns 100% of Time Warner Cable, Cable Networks - HBO and Filmed
Entertainment-Warner Bros., and 64.8% of the TWE - A/N Partnership (Cable). The
TWE - A/N Partnership is also 1.9%-owned by TWI Cable and 33-1/3% - owned by
Advance/Newhouse.(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 1
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 into four fundamental
areas:
- CABLE NETWORKS, consisting principally of interests in cable television
programming;
- PUBLISHING, consisting principally of interests in magazine publishing,
book publishing and direct marketing;
- ENTERTAINMENT, consisting principally of interests in filmed
entertainment, television production, television broadcasting, recorded
music and music publishing; 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 subsidiaries.
In October 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. Information on
the TBS Transaction is set forth in Note 3, "TBS Transaction," to the Company's
consolidated financial statements, at pages F-38 and F-39 herein. 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.
TWE
TWE is a Delaware limited partnership that was formed 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. Currently, the Company, through its wholly owned subsidiaries, owns
general and limited partnership interests in 74.49% of the pro rata priority
capital ("Series A Capital") and residual equity capital ("Residual Capital") of
TWE and 100% of the senior priority capital and junior priority 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 MediaOne Group, Inc.
("MediaOne"). The Company does not consolidate TWE and certain related companies
(the "Entertainment Group") for financial reporting purposes. Two Time Warner
subsidiaries are the general partners of TWE. 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 TWE-A/N. As of
December 31, 1998, TWE-A/N owned cable television systems (or interests) serving
6.3 million subscribers. TWE is the managing partner of TWE-A/N, which is owned
64.8% by TWE, 33.3% by Advance/Newhouse and 1.9% by TWI Cable Inc. For
information about certain transactions affecting TWE-A/N during 1998, see Note
2, "Cable Transactions," to the Company's consolidated financial statements on
pages F-35 through F-38 herein.
RECENT EVENTS
On February 1, 1999, the Company announced that it intended to form a joint
venture with AT&T Corp. ("AT&T") pursuant to which the joint venture will have
the right for up to a 20-year term to offer AT&T-
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branded cable telephone service to residential and small business customers over
Time Warner Cable's existing cable network. Under the preliminary terms
announced by the parties, the joint venture will be 77.5% owned by AT&T and
22.5% owned by TWE, TWE-A/N and TWI Cable, Inc., collectively. The joint venture
is expected to make payments to Time Warner Cable initially based on the number
of homes included in the cable network that have been upgraded to fiber optic
capacity and will pay a monthly fee during the term per telephony subscriber,
subject to guaranteed minimums, and is expected to make future revenue sharing
payments if the joint venture surpasses targeted monthly subscriber revenue
levels. The joint venture is also expected to purchase telephony equipment and
fund Time Warner Cable's expenses of installing and maintaining such equipment.
It is expected that AT&T will fund all of the joint venture's negative cash
flow. See also "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Cable Strategy" at pages F-16 through F-18 herein.
The joint venture is subject to the negotiation and execution of definitive
agreements, approval of the final terms by MediaOne and Advance/Newhouse and
certain regulatory and other approvals. No assurances can be given that such
agreements and approvals will be completed or obtained.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on management's current expectations and are
naturally subject to uncertainty and changes in circumstances. Actual results
may vary materially from the expectations contained herein due to changes in
economic, business, competitive, technological and/or regulatory factors. More
detailed information about those factors is set forth on pages F-22 and F-23 of
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." Time Warner is under no obligation to (and expressly disclaims any
such obligation to) update or alter its forward-looking statements whether as a
result of new information, future events or otherwise.
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CABLE NETWORKS
The Company's Cable Networks business consists principally of domestic and
international basic cable networks and pay television programming services and
the operation of World Championship Wrestling and 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/Sports Illustrated and CNN en Espanol, all operated by TBS, which
is wholly owned by the Company. TBS also operates several large advertiser-
supported online sites, including the CNN family of Internet sites. Pay
television programming consists of the multichannel HBO and Cinemax pay
television programming services (collectively, the "Home Box Office Services"),
operated by the Home Box Office division of TWE ("Home Box Office").
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, general entertainment, all-news and all-sports news
programming. Through TWE's Home Box Office division, the Company distributes
HBO, the leading domestic 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, mini-series and television
series produced specifically by or for HBO.
The Turner Networks and the Home Box Office Services (collectively, the
"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. The Networks 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. 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 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 Turner Networks (other than Turner Classic Movies, which is commercial
free) generate their revenue principally from the sale of advertising time and
from receipt of monthly per subscriber fees paid by cable system operators, DTH
distribution companies, hotels and other customers (known as affiliates) that
have contracted to receive and distribute such networks. The Home Box Office
Services and Turner Classic Movies, 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 the Home
Box Office Services are 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 the Networks' revenue from affiliates that are
large DTH distribution companies or multiple system cable operators, such as
Tele-Communications, Inc., a subsidiary of AT&T ("TCI") or Time Warner Cable,
has increased. The Networks 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 respective Networks by the larger
affiliates are good, the loss of one or more of them as distributors of any
individual network or service could have a material adverse effect on their
respective businesses.
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Advertising revenue on 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 audiences, 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 NETWORKS
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 has approximately 76 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 also receives subscription
revenue directly from cable and other distribution systems that carry the
service.
Other entertainment networks produced and distributed by TBS are TNT, which
as of December 31, 1998 had approximately 75 million subscribers in the United
States; Cartoon Network, with approximately 55 million subscribers in the United
States; and Turner Classic Movies, a 24-hour, commercial-free network which
presents classic films from TBS's MGM, RKO and pre-1950 Warner Bros. film
libraries and which has approximately 31 million subscribers. Programming for
these entertainment networks is derived, in part, 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. In February, TBS announced that it will launch a new
regional entertainment network, Turner South, in the fall of 1999. Targeting the
Southeast, Turner South will feature movies and sitcoms from the Turner library
and original regional programming such as performance shows, regional news and
sports.
TBS has acquired programming rights from the National Basketball
Association (the "NBA") to televise a certain number of regular season and
playoff games on TBS Superstation and TNT 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 Superstation also televises 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 Major League
Baseball's central fund for distribution to all Major League Baseball clubs.
CNN is a 24-hour per day cable television news service which has more than
75 million subscribers. Together with CNN International, which is distributed
outside the United States, CNN reaches more than 200 million homes in 212
countries and territories as of December 31, 1998. 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/Sports Illustrated, a venture with Sports
Illustrated, a Time Warner publication, which was 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 34 permanent news bureaus, of which ten are in the
United States and 24 are located around the world. In addition, a network of
satellite newsgathering trucks, portable satellite uplinks and a network of
approximately 600 domestic and 200 international broadcast television affiliates
on six continents permit CNN to report live from virtually anywhere in the
world. These affiliate arrangements, from
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which CNN obtains substantial news coverage, are generally pursuant to contracts
having terms of one or more years.
INTERNATIONAL NETWORKS
CNN International ("CNNI") is a television news service which is
distributed to multiple distribution platforms for delivery to cable systems,
broadcasters, hotels and other viewers around the world on a network of 16
regional satellites. In 1997, TBS launched CNN en Espanol, a Spanish language
all-news network in Latin America which, as of December 31, 1998, had 7.6
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 over-the-air television stations, and the
sale of advertising time.
TBS also distributes region specific versions of TNT and Cartoon Network,
on either a single channel basis or a combined channel basis, in approximately
120 countries in Latin America and the Caribbean, Europe, the Middle East,
Africa and Asia. Each such network features all or a portion of its schedule in
more than one language through dubbing or subtitling. Revenues from these
services are derived both from subscription fees and advertising sales.
CNN+, a Spanish language 24-hour news network, was launched for
distribution in Spain and Andorra on January 27, 1999. This new network is a
50/50 joint venture between TBS and Sogecable, S.A., an affiliate of Canal Plus.
CNN+ will derive revenues from cable and satellite subscription fees and
advertising sales.
Cartoon Network Japan, a Japanese-language, all animation (including a
significant amount of locally sourced, Japanese product) 24-hour network, was
launched in Japan in 1997. Cartoon Network Japan is a joint venture owned 40% by
TBS, 40% by ITOCHU and 20% by Time Warner Entertainment Japan Inc. ("TWE
Japan"), which is 37.5% owned by Time Warner. Revenue sources for this network
include both subscription and advertising sales.
n-tv, a German language news network currently reaching nearly 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 division 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.
INTERNET SITES
In addition to its cable networks, TBS operates various
advertiser-supported Internet sites. CNN News Group operates multiple sites,
primarily through CNN Interactive. CNN Interactive operates CNN.com as its
general news service and online companion to CNN and six additional web sites,
including AllPolitics.com, a U.S. political newssite produced in conjunction
with TIME magazine and Congressional Quarterly; CNN CustomNews, a personalized
news site operated by Oracle technology; and additional online services in
Spanish, Portuguese, Swedish and Norwegian. The CNN News Group also produces two
other major news sites: CNNfn.com, a unit of CNN Financial News, and CNNSI.com,
a sports site developed jointly with Sports Illustrated. The CNN News Group
sites received 4.4 billion page impressions during 1998, more than double the
aggregate traffic of the CNN News Group sites during 1997.
In addition to producing content for the Internet, CNN Interactive produces
and distributes CNN digital content for different platforms and technologies,
including pagers, push technology, European teletext and certain mobile
telephone technologies.
In the entertainment field, as of November 1998, TBS's advertiser-supported
CartoonNetwork.com was ranked by Media Metrix (based on audience composition) as
one of the top three information and entertainment sites for children ages two
to eleven.
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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 34.6 million subscriptions as of December
31, 1998. Both HBO and Cinemax are available in multichannel format.
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 subscription
levels and the films' box office performances.
Home Box Office attempts to ensure access to future movies in a number of
ways. In addition to its exhibition of movies distributed by Warner Bros. and
its regular licensing agreements with numerous distributors, it has agreements
with DreamWorks SKG, Regency Entertainment, Sony Pictures Entertainment, Inc.
("Sony Pictures"), and Twentieth Century Fox Film Corporation ("Fox") pursuant
to which the Home Box Office Services have acquired exclusive and non-exclusive
rights to exhibit 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 contemporary and sometimes
controversial pay television original movies and mini-series, sporting events
such as boxing matches and Wimbledon, sports documentaries and the sports news
program "Real Sports," dramatic and comedy specials and series, concert events,
family programming, and documentaries that are produced by independent
production companies for initial exhibition on HBO.
OTHER INTERESTS
Time Warner Sports, a division of Home Box Office, operates TVKO
Pay-Per-View from HBO, an entity that distributes pay-per-view prize fights and
other pay-per-view programming.
In 1998, Home Box Office's own production company, HBO Independent
Productions, produced "Everybody Loves Raymond," in its third 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 of a separate joint venture for the
international 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 for home video and distributes its original
programming into domestic syndication and abroad for television and home video
viewing.
INTERNATIONAL
HBO Ole, a 33.46%-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, a movie-based pay television service which,
together with Cinemax, is distributed to various countries in Southeast Asia.
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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 56 million homes at
year-end 1998.
The Company, through TWE, also holds a 50% interest in Court TV, which was
available in approximately 32 million homes at year-end 1998. Court TV is an
advertiser-supported basic cable television service providing coverage of live
and taped legal proceedings during the day and a mix of fictional and real crime
stories in the evening.
COMPETITION
The Networks all face strong competition. Each of the Networks competes
with other television programming services for distribution on the limited
number of channels available on cable and other television 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, online activities and other forms of news, information
and entertainment. In addition, the 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 TBS's Internet sites compete for
advertising with numerous direct competitors and other media, as well.
The Networks' production divisions compete with other producers and
distributors of programs for air time on broadcast networks, independent
commercial television stations, and pay and basic cable television networks.
OTHER CABLE NETWORK ASSETS
WORLD CHAMPIONSHIP WRESTLING
Through World Championship Wrestling ("WCW"), TBS produces wrestling
programming for TBS Superstation and TNT, the domestic syndication markets and
pay-per-view television. In addition to television programming, WCW is involved
in ancillary businesses such as licensing and merchandising from which it
derives revenues worldwide.
SPORTS FRANCHISES
Through wholly owned subsidiaries, TBS owns the Atlanta Braves major league
baseball club and the Atlanta Hawks basketball team and has been conditionally
granted a National Hockey League expansion franchise team to be known as the
Atlanta Thrashers that will begin play in the 1999-2000 hockey season. TBS must
meet certain sales and other objectives applicable to all other hockey expansion
teams prior to a formal grant of right to operate the hockey team. Each national
sports team is subject to the rules and regulations of the league to which it
belongs.
The teams derive income from gate receipts, advertising and related sales,
suite sales, local sponsorships and local media, and share pro rata in proceeds
from national media contracts and licensing activities of the relevant league,
as well as expansion fees.
A new, state-of-the-art arena adjacent to CNN Center is under construction
and will be the future home of the Hawks and the Thrashers. The arena is being
developed by a TBS subsidiary and the cost of the arena is being funded
primarily with the proceeds from bonds issued by the City of Atlanta-Fulton
County Recreation Authority.
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PUBLISHING
The Company's Publishing business is conducted primarily by Time Inc., a
wholly owned subsidiary of the Company, either directly or through its
subsidiaries. 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, 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.
Magazine production 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 production 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 aimed at particular readership groups,
publication of editorial content developed by the magazine staffs through
different media, such as the Internet, hardcover books and television, and use
of the brand name and reach of the core publications to expand into related
products, such as merchandise. In June 1998, CNN and Time Inc. launched CNN
Newstand, a collaboration between CNN and TIME, FORTUNE and ENTERTAINMENT WEEKLY
which airs four nights a week on CNN.
DESCRIPTION OF MAGAZINES
The Company's magazines and their areas of interest are summarized below:
TIME, which celebrated 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 such as TIME FOR KIDS, an in-school weekly news
magazine, and TIME DIGITAL, a supplement to TIME which covers technology-related
issues. 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 news magazine that covers virtually all
forms of recreational and competitive sports. In addition, SPORTS ILLUSTRATED
has developed SPORTS ILLUSTRATED FOR KIDS, a monthly sports-oriented magazine
geared to children, and a special edition, GOLF PLUS. New venues for its
editorial content have also been developed, including CNN/Sports Illustrated, a
sports news cable television network and web site that is operated as a joint
venture between SPORTS ILLUSTRATED and CNN.
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 recently developed two
PEOPLE
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offspring: PEOPLE en Espanol, a Spanish-language edition aimed primarily at
Hispanic readers in the United States launched in 1997, and TEEN PEOPLE, aimed
at teenage readers, launched in 1998. WHO WEEKLY is an Australian version of
PEOPLE.
Time Inc. has other magazines also directed at readers' interests in
celebrities and entertainers. InSTYLE is a monthly magazine which focuses on
celebrity lifestyles and includes reports and advice on beauty and fashion.
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.
FORTUNE is a bi-weekly 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 primarily on personal finance and provides
information on topics such as investing, planning for retirement and financing
children's college educations. Time Inc. also publishes YOUR COMPANY, a
bi-monthly magazine focusing on success stories, growth advice and operational
issues for small businesses, and in 1998 acquired MUTUAL FUNDS, a monthly
magazine featuring extensive reports on mutual funds, including stories about
retirement and college planning.
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 western lifestyles
published by Sunset Publishing Corporation ("Sunset Publishing"). 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, arts and travel, COASTAL LIVING, a bi-monthly magazine for people who
"love the coast," PROGRESSIVE FARMER, a monthly regional farming magazine and
WEIGHT WATCHERS, a magazine published nine times a year under a license from
Weight Watchers International, Inc.
Time Publishing Ventures, Inc. ("TPV") manages Time Inc.'s specialty
publishing titles. Parents and families are addressed by PARENTING and BABY
TALK, both of which are published ten times a year. In 1998, TPV acquired First
Moments, Inc., a sampling company that targets newlyweds and new mothers. HEALTH
is a women's consumer magazine about health and fitness published eight times in
1998 and HIPPOCRATES is a monthly trade magazine targeted at primary care
physicians. TPV also publishes THIS OLD HOUSE magazine ten times a year pursuant
to a licensing arrangement with public television station WGBH in Boston based
on the popular home renovation television series.
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, 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
Platinum Card issued by American Express. In 1998, American Express Publishing
launched TRAVEL & LEISURE GOLF magazine. Time Inc. receives a fee for managing
these properties.
Time Inc. Custom Publishing is a marketing division of Time Inc. producing
magazines and newsletters for corporate clients utilizing content from Time Inc.
magazines and archival photography from the Time Inc. photography collection, as
well as original content.
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CIRCULATION
Time Inc.'s magazines are sold primarily by subscription and delivered to
subscribers through the mail. Subscriptions are sold by direct mail and online
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, 1998 were:
<TABLE>
<CAPTION>
TITLE RATE BASE
- ----- ---------
<S> <C>
TIME........................................................ 4,000,000
PEOPLE...................................................... 3,250,000
SPORTS ILLUSTRATED.......................................... 3,150,000
SOUTHERN LIVING............................................. 2,450,000
MONEY....................................................... 1,900,000
LIFE........................................................ 1,500,000
SUNSET...................................................... 1,425,000
COOKING LIGHT............................................... 1,350,000
ENTERTAINMENT WEEKLY........................................ 1,350,000
PARENTING................................................... 1,350,000
</TABLE>
Time Distribution Services Inc. ("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 Inc. ("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 1998, Time Inc. magazines accounted for 21% of the total
advertising revenue in consumer magazines, as measured by the Publishers
Information Bureau ("PIB"), which measures advertising placed in consumer
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
TIME........................................................ 2
SPORTS ILLUSTRATED.......................................... 3
FORTUNE..................................................... 10
ENTERTAINMENT WEEKLY........................................ 18
MONEY....................................................... 21
SOUTHERN LIVING............................................. 25
</TABLE>
The five leading categories of advertising carried in Time Inc. magazines
in 1998, according to PIB were, in descending order, domestic automobile
manufacturers, toiletries and cosmetics, food, computers and financial. Time
Inc. places local advertising for local and national advertisers through its
subsidiary, Media Networks, Inc. ("MNI"). MNI partners with some of the
country's leading national magazines, including
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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
1998, 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.
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.
ONLINE MEDIA
Time Inc. New Media ("New Media"), the online unit of Time Inc., is one of
the largest creators of online digital content, producing electronic versions of
TIME, PEOPLE, FORTUNE, MONEY, ENTERTAINMENT WEEKLY and LIFE. New Media also
develops and manages new brands that are accessible only on the Internet, such
as "Ask Dr. Weil" and "ParentTime". New Media launched the Pathfinder online
network in November 1994 to provide easy access and simple navigation to Time
Inc.'s websites. The sites generate revenue from advertising, subscription-based
access and fee-based downloads to premium content, selected e-commerce
offerings, and the licensing of digital content. In 1998, New Media agreed to
make its heavily trafficked PEOPLE online content available exclusively on AOL's
proprietary network starting in early 1999. TEEN PEOPLE has also entered into an
exclusive arrangement with AOL. Also in 1999, Time Inc. announced that it will
direct a major expansion of Time Warner's e-commerce effort.
DIRECT MARKETING
TIME LIFE
Time Life Inc. is one of the nation's largest direct marketers of
continuity series of books, music and videos. In addition to continuity series,
it sells single 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.
Editorial material for its books 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, Inc. ("BOMC") 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; other clubs specialize in history, business,
children's books, women's lifestyle, spiritual, self-help and health topics, or
the books of a particular author. In addition, multimedia, audio and video
products and other merchandise are offered through the clubs. BOMC operates in
over 40 countries worldwide.
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BOMC acquires the rights from publishers to manufacture and distribute
books and then has them printed by independent printing concerns. BOMC operates
its own fulfillment and warehousing operations in Mechanicsburg, Pennsylvania.
AMERICAN FAMILY PUBLISHERS
A wholly-owned subsidiary of Time Inc. is a 50% partner in the parent
entity of American Family Publishers ("AFP"), whose principal business is
selling magazine subscriptions through the use of sweepstakes promotions. Time
Inc. has no management role in the day-to-day operation of AFP's business.
During 1998, a number of state attorneys general launched investigations of
AFP's sweepstakes business, while other atttorneys general and private
plaintiffs filed lawsuits that alleged AFP's mailings were misleading. AFP has
entered into an assurance of voluntary compliance ("AVC") with a number of
states, and has substantially revised the wording of its sweepstakes mailings to
conform with the AVC. These matters have had a significant adverse impact on
AFP's business. See also Item 3, "Legal Proceedings" for additional information
about the AFP matters.
BOOKS
TRADE PUBLISHING
Time Inc.'s trade publishing operations are conducted primarily by Time
Warner Trade Publishing Inc. through its two major publishing houses, Warner
Books and Little, Brown. In 1998, Time Warner Trade Publishing placed 31 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 1998 were "Simple Abundance,"
by Sarah Ban Breathnach; "The Weaver," by David Baldacci and "The Celestine
Vision," by James Redfield. Best selling mass market paperbacks in 1998 included
"Jack & Jill," by James Patterson; "The Notebook," by Nicholas Sparks and "Blood
Work," by Michael Connelly.
Time Warner Audiobooks develops and markets audio versions of books and
other materials published by both Warner Books and Little, Brown.
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 1998 were: "Cat & Mouse,"
by James Patterson; "Making Faces," by Kevyn Aucoin and "The Dark Side of
Camelot," by Seymour M. Hersh.
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, Inc., a subsidiary of Southern Progress, markets how-to books
on a wide variety of topics including food and crafts, and Leisure Arts, Inc.,
also a subsidiary of Southern Progress, is 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, markets books on topics
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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.
POSTAL RATES
Postal costs represent a significant operating expense for the Company's
publishing activities. In January 1999, the United States post office raised
postal rates for all classes of mail.
Publishing operations strive to minimize postal expense through the use of
certain cost-saving measures, including the utilization of contract carriers to
transport books and magazines to central postal centers. It has been the
Company's practice in selling books and other products by mail to include a
charge for postage and handling, which is adjusted from time to time to
partially offset any increased postage or handling costs.
COMPETITION
Time Inc.'s magazine and Internet media operations compete for audience and
advertising with numerous other publishers and retailers, as well as other
media. These businesses compete for advertising directed at the general public
and also advertising directed at more focused demographic groups.
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 compete directly with other distributors operating
throughout the United States and Canada in the distribution of magazines and
paperback books.
Time Inc.'s direct marketing operations compete with other direct marketers
through all media for the consumer's attention. In addition to the traditional
media sources for product sales, the Internet is becoming a strong vehicle in
the direct marketing business.
ENTERTAINMENT
The Company's Entertainment businesses produce and distribute theatrical
motion pictures, television shows, animation and other programming, distribute
home video product, operate The WB Television Network, maintain
advertiser-supported entertainment sites on the Internet, license rights to the
Company's characters, operate retail stores featuring consumer products based on
the Company's characters and brands, operate theme parks and motion picture
theaters internationally and also produce and distribute recorded music. All of
the foregoing businesses are principally conducted by Warner Bros., which is a
division of TWE, except the recorded music business which is wholly owned by the
Company and is not part of TWE.
The filmed entertainment business also includes New Line Cinema Corporation
("New Line") 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. 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 many of these businesses.
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 wholly owned music publishing business with offices around
the world, and is a joint venture partner of music and video clubs in North
America through its 50% ownership of The Columbia House Company.
The Company's Entertainment operations are conducted in the United States
and around the world. During 1998, approximately 42% of worldwide theatrical
revenues and more than 52% of WMG's recorded music revenues were generated
outside the United States.
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FILMED ENTERTAINMENT -- WARNER BROS.
WARNER BROS. FEATURE FILMS
Warner Bros. produces feature films both wholly on its own and under
co-financing arrangements with other motion picture companies. 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.
In response to the rising cost of producing theatrical films, Warner Bros.
has signed joint venture agreements with several companies to co-finance films,
decreasing its financial risk while retaining substantially all worldwide
distribution rights. Warner Bros. and Canal Plus have formed a joint venture,
known as Bel-Air Entertainment, to co-finance on primarily a 50/50 basis the
production, overhead and development costs of a total of approximately 10 to 20
motion pictures through 2003. 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 in
the territories where it distributes and will receive a distribution fee in
connection with the exploitation of the pictures. "Message in a Bottle" was
released under a separate arrangement with Bel-Air in the first quarter of 1999.
In 1998 Warner Bros. entered into an agreement with Village Roadshow
Pictures ("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 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 in the territories in which it distributes and will receive a
distribution fee in connection with the exploitation of the pictures. "Practical
Magic" was co-financed under this arrangement and distributed by Warner Bros.
during 1998. Among others, "Analyze This," "Gossip," "Three Kings" and "The
Matrix" are scheduled for release in 1999.
Warner Bros. and Polygram Filmed Entertainment ("Polygram") have agreed to
co-finance on a 50/50 basis through 2000 the production, overhead and
development costs of motion pictures produced or acquired by Castle Rock, a
subsidiary of Time Warner. Warner Bros. and Polygram (now Universal Studios)
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 basis. Warner Bros. and Polygram will each advance marketing and
distribution costs in connection with the exploitation of the Castle Rock
pictures. During l998, Warner Bros. distributed "The Last Days of Disco,"
internationally, under this arrangement. Among the Castle Rock releases
anticipated for l999 are "Mickey Blue Eyes" and "The Green Mile," which will be
distributed by Warner Bros. domestically.
Warner Bros. has extended the term of its distribution servicing agreements
with Morgan Creek Productions Inc. ("Morgan Creek") through up to June 2003
pursuant to which, among other things, Warner Bros. provides domestic
distribution services for all Morgan Creek pictures for a period of ten years
from delivery of a picture, and certain foreign distribution services for
selected pictures. Under this arrangement, Warner Bros. released "Wrongfully
Accused," "Incognito" and "Major League 3" in l998.
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Warner Bros.' co-financing and distribution agreement with Monarchy
Enterprises C.V. and Regency Entertainment U.S.A. ("Monarchy/Regency") expired
in 1998. Warner Bros. distributed "Dangerous Beauty" and "The Negotiator" for
Monarchy/Regency and released "City of Angels" as a co-financed picture with
them in 1998.
During 1998, Warner Bros. released 27 motion pictures for theatrical
exhibition, of which 15 were produced by or with others and four were released
solely in international markets. The following motion pictures, among others,
were released by Warner Bros. in 1998: "City of Angels," "Lethal Weapon 4,"
"Practical Magic," "A Perfect Murder" and "You've Got Mail."
During 1999, Warner Bros. expects to release approximately 22 motion
pictures, of which 14 are expected to be produced by or with others. In addition
to the co-financed pictures mentioned above, during 1999 Warner Bros. will
release "True Crime," "Wild, Wild West" and "Eyes Wide Shut."
HOME VIDEO
Warner Home Video ("WHV") distributes for home video use pre-recorded
videocassettes and digital video discs ("DVDs") containing the filmed
entertainment product of (i) Warner Bros., (ii) Home Box Office, (iii)
WarnerVision Entertainment, (iv) Castle Rock and (v) New Line Cinema. In March
1999, WHV and MGM agreed to terminate the parties' video distribution agreement.
WHV will receive $225 million plus, effective January 1, 1999, video
distribution rights in the Turner Entertainment library, which includes all of
the classic pre-1948 Warner Bros. and pre-1986 MGM films. In return, MGM was
granted early termination, effective January 31, 2000, of WHV's rights with
respect to the United Artists film library and post-1986 MGM video product. WHV
also distributes other companies' product for which it has acquired home video
distribution or servicing rights. In l998, WHV commenced distributing DVDs on
behalf of Disney in Europe, the Middle East and Africa.
WHV sells its product in the United States and in major international
territories to retailers and wholesalers through its own sales force, with
warehousing and fulfillment handled by divisions of Warner Music Group and third
parties. In some international countries, WHV's product is distributed through
licensees. Videocassette product is generally manufactured under contract with
independent duplicators. DVD product is replicated by Warner Music Group
companies and third parties.
During 1998, WHV released five titles in North America for home rental with
sales and licensed units exceeding 400,000 units each: "Lethal Weapon 4," "L.A.
Confidential," "Devil's Advocate," "City of Angels" and "U.S. Marshals." WHV
entered into revenue sharing license agreements with rental customers, including
distributors, in l998. Under such agreements, WHV licenses video product and
shares in revenues generated by its customers. Additionally, WHV released nine
titles in the North American sell-through market which generated sales of more
than one million units each. Internationally, the following titles generated
substantial home video revenue in 1998: "Tomorrow Never Dies," "Conspiracy
Theory," "Contact," "L.A. Confidential" and the first four seasons of the
television series "Friends."
DVDs, capable of storing large volumes of digitized information -- enough
storage capacity for two full-length feature films on a double-sided or
dual-layered disc -- increased their presence in North American markets during
1998. The DVD technology offers picture quality significantly superior to
existing home video technology as well as premium features such as multiple
language soundtracks. WHV is currently benefiting by releasing in DVD format
both first-run feature motion pictures and titles from WHV's extensive
catalogue. At year-end l998, WHV had DVD distribution in major international
territories.
TELEVISION
Warner Bros. 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, reality-based entertainment shows and
animation programs and also distributes television programming for exhibition on
all national networks, syndicated domestic television, cable syndication and a
growing array of international television distribution outlets. The distribution
library owned or managed by Warner Bros. currently has some 5,700 feature films,
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32,000 television titles, 12,000 animated titles and 1,500 classic animated
shorts, including classic MGM and RKO titles such as "The Wizard of Oz" and
"Gone With The Wind," as well as animation from Hanna-Barbera and MGM. Warner
Bros. acts as distributor of the programming owned by subsidiaries of TBS.
Warner Bros.' television programming is primarily produced by Warner Bros.
Television, which produces dramatic and comedy programming, and Telepictures
Productions ("Telepictures"), which specializes in reality-based and
talk/variety series. During the 1998-1999 season, Warner Bros. Television
launched several new network primetime series, including "Jesse," "Whose Line is
it Anyway" and "Two of a Kind." Returning network primetime series included,
among others, the top-rated series "ER" and "Friends," "The Parent Hood" and
"The Wayans Bros." (each in its fifth season); "The Drew Carey Show" (in its
fourth season); "Suddenly Susan" (in its third season); and "Veronica's Closet"
and "For Your Love" (in their second season).
Telepictures is responsible for the development and production of original
programming primarily for syndicated television. In this capacity, Telepictures
has successfully launched "The Rosie O'Donnell Show" (third season), "The Jenny
Jones Show" (eighth season), "EXTRA" (fifth season), and "Change of Heart"
(first season).
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 an important source of initial and on- going
programming for various distribution outlets, including those owned by the
Company (including Cartoon Network and Kids' WB!).
WBTA continues to be a leading producer of original children's animation
programming and direct-to-video projects, with such programs as "Steven
Spielberg Presents Pinky, Elmyra & The Brain," "The New Batman/Superman
Adventures" and "Batman Beyond." WBTA also distributes "Pokemon" in the U.S. and
manages production of, among others, the Cartoon Network series "Cow and
Chicken," "Johnny Bravo," "Powerpuff Girls" and "I Am Weasel." Direct-to-video
projects for 1999 include "Steven Spielberg Presents Animaniacs: Wakko's Wish"
and a second Scooby-Doo feature-length video.
The expansion of off-network, pay-per-view, pay and basic cable and
satellite broadcasting has increased the distribution opportunities for 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.
The top-rated series "ER" and "Friends" debuted in syndication in September
1998. Other television programs currently in off-network syndication include,
among others, "Murphy Brown," "Full House," "The Fresh Prince of Bel Air" and
"Family Matters."
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. 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 has formed strategic alliances with some of the
world's leading satellite, cable and over-the-air television broadcasters, and
has also commenced the development and production of television programming with
international partners. In 1998,
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Warner Bros. formed a joint venture with Nippon Television Network, Toshiba and
TWE Japan to produce and distribute movies and television programs in Japan and
worldwide.
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 $2.298 billion at December 31, 1998 (including amounts
relating to the licensing of product to Time Warner's and TWE's cable television
networks of $769 million as of December 31, 1998). The backlog excludes
advertising barter contracts. See also "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Filmed Entertainment Backlog"
at page F-18 herein.
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.
At December 31, 1998, Warner Bros. Studio Stores was operating more than
180 stores in the United States and in 15 countries or territories throughout
the world, including 44 stores owned by international franchisees.
THEATERS
Through joint ventures, Warner Bros. International Theaters operates
approximately 90 multi-screen cinema complexes with approximately 800 screens in
seven foreign countries, including 30 theaters in Australia, 22 in the United
Kingdom, 20 in Japan, eight in Portugal, four in Italy and four in Spain. During
l999, Warner Bros. International Theaters plans to open more than 15 cinemas
with over 150 screens.
FILMED ENTERTAINMENT -- TBS
Theatrical films are also produced by New Line and Castle Rock, which are
wholly owned subsidiaries of TBS and not a part of TWE. New Line is a leading
independent producer and distributor of theatrical motion pictures. During 1998,
through its two film divisions, New Line Cinema and Fine Line Features, New Line
releases included "Rush Hour," "The Wedding Singer," "Lost in Space," "Blade"
and "Pleasantville." For 1999, New Line anticipates that it will release, among
others, "Austin Powers: The Spy Who Shagged Me," "Town & Country" and "The
Bachelor."
Castle Rock's films are currently being co-financed and distributed under
an arrangement with Warner Bros. and Polygram (see also, "Filmed
Entertainment -- Warner Bros." above). Castle Rock Television produced the
critically acclaimed and highly rated Emmy award winning series "Seinfeld" for
the past ten years. The series, which is distributed by a third party for a fee,
began its first domestic syndication cycle in September 1995 and also continues
to be aired throughout the world. In 1998 it was successfully sold to broadcast
television stations for a second syndication cycle commencing in 2001 as well as
to TBS Superstation for basic cable exhibition commencing in 2002.
TBS's filmed entertainment business also includes the Hanna-Barbera, MGM
and RKO libraries, which include classic films such as "The Wizard of Oz" and
"Gone With the Wind" and cartoons such as the "Flintstones," "Yogi Bear,"
"Huckleberry Hound" and "Tom & Jerry." Distribution of these libraries is
managed by Warner Bros.
TBS's 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 $636 million at December 31, 1998 (including amounts relating to the
licensing of film product to Time Warner's and TWE's cable television networks
of $226 million). The backlog excludes advertising barter contracts. See also
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Filmed Entertainment Backlog" at page F-18 herein.
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THE WB TELEVISION NETWORK
The WB Television Network ("The WB") completed its fourth year of broadcast
operations in January l999. During the l998/99 broadcast season, The WB expanded
its prime time program line-up to five nights and is now airing ll hours of
series programming from Sunday to Thursday nights. The network's line-up
includes the family series "7th Heaven," as well as programming aimed at a teen
and young adult audience, such as "Dawson's Creek," "Charmed," "Buffy the
Vampire Slayer," and the Golden Globe award winning "Felicity."
During 1998, The WB's broadcast coverage (with 88 over-the-air affiliates)
grew to approximately 90% of U.S. TV households with the addition of key
affiliates in Pittsburgh, Cincinnati, Baltimore, San Antonio and Oklahoma City.
The WeB, a distribution alliance for The WB, was launched in September 1998 in
smaller broadcast markets. WeB programming is distributed to local broadcast
affiliates who then disseminate WeB programming via local cable systems.
The WB's children's network, Kids' WB!, airs l9 hours of programming per
week with programming on weekday mornings, weekday afternoons and Saturday
mornings.
Tribune Broadcasting owns a 22.25% interest in The WB. Key employees of The
WB hold an ll% interest in the network.
WARNER BROS. ONLINE
Warner Bros. Online, established in l995, is responsible for all of Warner
Bros. commercial advertiser-supported online initiatives and, according to Media
Metrix, has established itself as one of the most-visited studio sites on the
Internet. The division recently entered into a joint venture with
FortuneCity.com, called ACMEcity.com, to create a global advertiser-supported
community network which will enable fans of Warner Bros. movies, music and
television shows to build personal home pages. In connection with the formation
of this joint venture, Warner Bros. received equity in FortuneCity.com equal to
approximately 13% of its outstanding shares.
In the second quarter of l999, Warner Bros. Online plans to launch a
vertical advertiser-supported entertainment portal called "Entertaindom" to be
co-branded and distributed in partnership with computer manufacturers, Internet
service providers and portal sites. Entertaindom will offer entertainment
information and services, as well as a mix of content, community sites and
e-commerce, featuring video-based entertainment, animation, music and
multiplayer games.
Warner Bros. Online is currently producing broadband interactive
entertainment in the form of WebDVD shows and content for broadband networks.
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 Inc. and 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 DVDs for WMG's record labels,
Warner Home Video and for outside companies; Ivy Hill Corporation, which
produces printed material and packaging for WMG's recorded music products as
well as for a wide variety of other consumer products; and
Warner-Elektra-Atlantic Corporation ("WEA Corp."), which markets and distributes
WMG's recorded music products to retailers and wholesale distributors. WMG also
owns a majority interest in Alternative Distribution Alliance ("ADA"), a
so-called "independent" distribution company specializing in alternative rock
music with a focus on new artists and smaller retailers.
WMG's recorded music activities are conducted in more than 60 countries
outside the United States by Warner Music International and its subsidiaries,
affiliates and non-affiliated licensees.
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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 the sales of their
recordings and music videos, and many receive non-refundable advance payments
recoupable from 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. CDs
and tapes are also beginning to be sold directly to consumers through online
retailers on the Internet, such as CD Now, Amazon.com and Columbia House's Total
E. WMG, working with IBM and several other music companies, has announced a test
of the digital distribution of music, named the Madison Project, which will seek
to evaluate consumer interest in purchasing electronically distributed music via
the Internet.
At the same time a recording is being distributed, 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 outlets. Label personnel may also help
organize a concert 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,
which became wholly owned by WMG during 1998, specializes in compilations and
reissues 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 Records to manufacture and
distribute recordings that are marketed under the owner's proprietary label.
Through a 50/50 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. According to Media Metrix, The
Columbia House Internet sites are among the top 15 most visited retail sites on
the Internet.
Among the albums resulting in significant U.S. sales for WMG during 1998
were the City of Angels soundtrack and releases from matchbox20, Brandy,
Madonna, Barenaked Ladies, Jewel, Alanis Morissette, Third Eye Blind and
Metallica.
INTERNATIONAL
Operating in more than 60 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 two video companies that coordinate the
international release of music and non-music video titles.
Among the artists whose albums resulted in significant sales for WMI in
1998 were Madonna, Enya, Alejandro Sanz, Eric Clapton and Tatsuro Yamashita.
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, Madonna and Cole Porter. Warner/Chappell also administers the music of
several television and motion picture companies, including Lucasfilm, Ltd. and
Samuel Goldwyn Productions.
Warner/Chappell also owns Warner Bros. Publications and CPP/Belwin, two of
the world's largest publishers of printed music. These two companies market
publications throughout the world containing the works of such artists as
Alabama, The Grateful Dead, Led Zeppelin, Madonna, Bob Seger and many others.
The principal source of revenues to Warner/Chappell is 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.
OTHER ENTERTAINMENT ASSETS
THEME PARKS
With local partners, Warner Bros. has developed movie-related theme parks
in Australia and Germany which feature Warner Bros.' movie, cartoon and
superhero characters. Warner Bros. has announced that it is studying the
feasibility of operating the first movie-based theme park in Spain.
In April 1998, TWE sold its remaining 49% interest in Six Flags
Entertainment Corporation ("Six Flags") to Premier Parks Inc. ("Premier"), a
regional theme park operator. 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 25 existing and
all future locations. See also Item 3, "Legal Proceedings" for information about
certain litigation involving Six Flags.
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.
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COMPETITION
The production and distribution of theatrical motion pictures, television
and animation product and videocassettes/videodiscs/DVDs 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. 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. Network television is extremely competitive as
networks seek to attract audience share, television stations for affiliation,
advertisers and broadcast rights to television programming. 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 films and attracting patrons.
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 in the U.S.
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. The recorded music business continues to be adversely affected
by counterfeiting of both audio cassettes and CDs, piracy and parallel imports
and may be affected by consumers' ability to download quality sound
reproductions from the Internet in sound files without authorization from the
Company. In response, the recorded music industry is engaged in a coordinated
effort to develop a secure technology for digital music delivery. In addition,
the recorded music business also has 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 one of 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
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 served by the
Company at December 31, 1998, approximately 1.8 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 10.8 million are in systems owned or
managed by TWE. TWE's cable systems include approximately 6.3 million
subscribers in a joint venture between TWE and Advance/Newhouse known as
TWE-A/N. Time Warner Cable generally manages all such systems and receives a fee
for management of the systems owned by TWI Cable and TWE-A/N. As of March 1,
1999, TWE-A/N was owned 33.3% by Advance/Newhouse, 64.8% by TWE and 1.9% by TWI
Cable.
SYSTEMS OPERATIONS
Time Warner Cable is the largest operator of cable television systems in
the United States. As of December 31, 1998, 82% of Time Warner Cable customers
were served by clustered cable systems (as described below) with 100,000
subscribers or more, and approximately 70% of Time Warner Cable's systems have
been upgraded for higher channel capacity and new and advanced services.
Over the past several years, Time Warner Cable has pursued a strategic goal
of upgrading its cable systems generally to 750 MHz capability, based on a
hybrid fiber optic/coaxial cable architecture. Those systems not upgraded to 750
MHz will be upgraded to a level of 550 MHz. Upgraded systems can deliver
increased channel capacity and provide two-way transmission capability, with
improved network management systems. The system architecture is also flexible,
in that system capacity for future needs can be expanded by various means
without major additional capital expenditures.
Approximately 70% of Time Warner Cable's systems had completed upgrades by
December 31, 1998. These upgrades have enabled Time Warner Cable to expand its
core cable programming, so that average channel capacity of Time Warner Cable
systems has generally increased from approximately 50 channels to approximately
70 channels at the end of 1998. Over time, the upgrading will also permit Time
Warner Cable to roll out new and advanced services, including digital and
high-definition television ("HDTV") programming, high-speed Internet access,
telephony and other services including video-on-demand. See "Cable -- New Cable
Services" below.
Time Warner Cable entered into a Social Contract with the Federal
Communications Commission ("FCC") in 1996 that required upgrades of generally
all domestic systems managed by Time Warner Cable by December 31, 2000. The
total capital investment to be made by Time Warner Cable for the upgrades is
estimated to be approximately $4 billion of which, by the end of 1998,
approximately $3 billion had been spent.
Time Warner Cable believes that its clustering strategy has enabled, among
other things, significant cost and marketing efficiencies, more effective
pursuit of local and regional cable advertisers, the development of local news
channels and the roll-out of advanced services over a geographically
concentrated customer base. Several transactions entered into or completed in
1998 or scheduled to close in 1999 will further Time Warner Cable's clustering
strategy. As of December 31, 1998, Time Warner Cable had 33 distinct geographic
system groupings, each serving more than 100,000 subscribers.
During 1998, TWE-A/N and subsidiaries of TCI Communications Inc. ("TCIC")
formed a new 50-50 joint venture (the "Texas Venture") to provide cable
television to the Houston area and to certain other communities in south and
west Texas. The two partners each contributed systems serving approximately
550,000 subscribers to the Texas Venture, which is managed by Time Warner Cable.
TCIC also contributed a cable television system serving approximately 95,000
subscribers to the existing Kansas City Cable Partners joint venture. In
November 1998, Time Warner Cable entered into a series of asset exchange
agreements with certain subsidiaries of TCIC under which TCIC will receive
systems serving approximately 575,000 subscribers in areas not strategic to Time
Warner Cable and Time Warner Cable will receive systems serving approximately
625,000 subscribers adjacent to or near major clusters in Florida, Hawaii,
Maine, New York,
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Ohio, Texas and Wisconsin. These trades are expected to close periodically
throughout 1999, subject to obtaining required regulatory approvals.
FRANCHISES
Cable systems are constructed and operated under non-exclusive franchises
granted by state or local governmental authorities. Franchises typically contain
many conditions, such as time limitations on commencement or completion of
construction; conditions of service, including number of channels, provision of
free services to schools and other public institutions; and the maintenance of
insurance and indemnity bonds. Cable franchises are subject to various federal,
state and local regulations. See "Regulation and Legislation" below.
PROGRAMMING
Programming is generally made available to customers through programming
tiers, which are packages of different programming services provided for
prescribed monthly fees. The available analog channel capacity of Time Warner
Cable's systems has been expanding as system upgrades are completed. Digital
services will further increase the number of channels of video programming a
customer may elect to receive.
Video programming available to customers includes local and distant
broadcast television signals, cable programming services like CNN, TNT and ESPN,
and premium cable services like HBO, Cinemax, Showtime and Starz! The terms and
conditions of carriage of programming services are generally established through
programming affiliation agreements with Time Warner Cable. Many programming
services impose a monthly license fee per subscriber upon the cable operator.
Programming costs generally have been increasing sharply in recent years and
depending on the terms of any specific agreement, the cost of providing any
cable programming service may continue to rise. While Time Warner Cable
sometimes has the right to cancel contracts, and can in any event refuse to
renew them, it is unknown whether the loss of any one popular supplier would
have a material adverse effect on Time Warner Cable's operations.
SERVICE CHARGES AND ADVERTISING
Subscribers to the Company's cable systems 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 $8 to $30 for residential customers. Other services
offered include equipment rentals, for an additional monthly fee. A one-time
installation fee is generally charged for connecting subscribers to the cable
television system. Although regulation of certain cable programming rates is
scheduled to "sunset" on March 31, 1999, rates for "basic" programming and for
equipment and installation will continue to be regulated pursuant to federal
law. See "Regulation and Legislation" 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. Pay-per-view programming offers movies and special events, such as
boxing, for a separate charge. Systems offering pay-per-view movies generally
charge between $3 and $4 per movie, and systems offering pay-per-view events
charge between $6 and $50, depending on the event. Time Warner Cable's systems
increasingly offer pay-per-view services on an "impulse" basis, permitting a
subscriber to place an order over the cable system through his or her remote
control or cable set-top box.
Subscription revenues continue to account for most of Time Warner Cable's
revenues, with pay-per-view and premium services contributing additional
revenues. Subscribers may discontinue purchasing services at any time.
Time Warner Cable also generates revenue by selling advertising time to
national, regional and local businesses. Cable television operators receive an
allocation of advertising time availabilities on certain cable programming
services into which commercials can be inserted at the local system level. In
this regard, Time Warner Cable competes against broadcast TV stations, radio
stations and newspapers for a share of local media revenues. The clustering of
Time Warner Cable's systems expands the reach of viewers to cable
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programs over the local area and helps local ad sales personnel to compete more
effectively. In addition, in many localities, contiguous cable system operators
have formed advertising interconnects to deliver locally inserted commercials
across wider geographic areas, replicating the reach of the broadcast stations
as much as possible. Fifteen of Time Warner Cable's 43 field divisions
participate in a cable advertising interconnect.
LOCAL NEWS CHANNELS
Time Warner Cable operates 24-hour local news channels in New York City
(NY1 News), Tampa Bay (Bay News 9), Orlando (Central Florida News 13) and
Rochester, NY (R/News) and has announced that its fifth local news channel will
launch in Austin, Texas in the summer of 1999. Local news programming increases
local advertising revenues. Further, Time Warner Cable believes that providing
news programming specifically focused on a local region strengthens its ability
to compete with other multichannel video providers operating in the region.
NEW CABLE SERVICES
ROAD RUNNER
In June 1998, TWE, TWE-A/N, TWI Cable, MediaOne, and subsidiaries of
Microsoft Corp. ("Microsoft") and Compaq Computer Corp. ("Compaq") formed a
joint venture to operate and expand Time Warner Cable's and MediaOne's existing
high-speed online service business (the "Road Runner Joint Venture"). The Road
Runner cable service provides high-speed Internet access and also offers
original content for broadband-capable networks. Road Runner affiliates with
local cable television system operators, principally Time Warner Cable and
MediaOne, in exchange for a percentage of the cable operator's retail revenue
from subscribers for the Road Runner service. Customers who elect to subscribe
connect their personal computers to the Road Runner service for access at high
speeds to the Internet and to Road Runner's content.
The ownership of the equity in the Road Runner Joint Venture is presently
as follows: TWI Cable -- 10.7%, TWE -- 25%, TWE-A/N -- 32.9%, and
MediaOne -- 31.4%. In exchange for Microsoft and Compaq contributing $425
million to the Road Runner Joint Venture, Microsoft and Compaq each received a
preferred equity interest in the Venture that is convertible into a 10% common
equity interest. Accordingly, on a fully diluted basis, the Road Runner Joint
Venture is owned 8.6% by TWI Cable, 20% by TWE, 26.3% by TWE-A/N, 25.1% by
MediaOne, 10% by Microsoft and 10% by Compaq. See also Note 2, "Cable
Transactions -- Road Runner Joint Venture" to the Company's consolidated
financial statements at page F-36 herein.
As of December 31, 1998, the Road Runner Joint Venture had affiliations in
24 locations with access to 7 million cable homes and the service had
approximately 180,000 subscribers. The Road Runner service has been launched by
Time Warner Cable in the following areas: Albany, Austin, Binghamton, Charlotte,
Columbus and Northeast Ohio, El Paso, Hawaii, Memphis, Portland, Rochester, San
Diego, Syracuse and Tampa Bay. Roll-outs will continue during 1999.
DIGITAL CABLE SERVICES
Following testing in 1998 and early 1999, Time Warner Cable will begin a
roll-out of digital cable service for certain of its cable systems, including
Austin, Texas, Tampa, Florida and Columbus, Ohio. The digital format of the
signals allows compression of the signals so that they occupy less bandwidth.
This substantially increases the number of channels that can be provided over a
system, when compared to standard analog signals. Time Warner Cable's digital
cable service will present customers with the option to subscribe to a new
digital programming service providing up to 100 digital program networks and
music services for a separate monthly fee. The programming on the digital
set-top boxes delivered to subscribing customers will also offer more
pay-per-view options, more channels of multiplexed premium services, a digital
interactive program guide, a digital programming tier, CD-quality music and
other features such as parental lockout options. Digital service roll-outs are
expected to increase over time as additional set-top equipment becomes
available.
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HDTV
Pursuant to FCC order, each television broadcast station has been granted
additional over-the-air spectrum to provide, under a prescribed roll-out
schedule, high definition and digital television signals to the public.
Depending on the speed with which HDTV and digital signals are developed, it can
be expected that such signals will vie with the many other sources of
programming for cable carriage. In 1998, Time Warner Cable agreed to carry the
high-definition television signals and other digital signals that will be
broadcast by television stations owned and operated by the CBS network.
RECENT EVENTS
PROPOSED AT&T JOINT VENTURE
On February 1, 1999, the Company announced that it intended to form a joint
venture with AT&T pursuant to which the joint venture will have the right for up
to a 20-year term to offer AT&T-branded cable telephone service to residential
and small business customers over Time Warner Cable's existing cable network.
Under the preliminary terms announced by the parties, the joint venture will be
77.5% owned by AT&T and 22.5% owned by TWE, TWE-A/N and TWI Cable, collectively.
The joint venture is expected to make payments to Time Warner Cable initially
based on the number of homes included in the cable network that have been
upgraded to fiber optic capacity and will pay a monthly fee during the term per
telephony subscriber, subject to guaranteed minimums, and is expected to make
future revenue sharing payments if the joint venture surpasses targeted monthly
subscriber revenue levels. The joint venture is also expected to purchase
telephony equipment and fund Time Warner Cable's expenses of installation and
maintenance. It is expected that AT&T will fund all of the joint venture's
negative cash flow. For additional information, see also "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Cable Strategy" at pages F-16 through F-18 herein.
The joint venture is subject to the negotiation and execution of definitive
agreements, approval of the final terms by MediaOne and Advance/Newhouse and
certain regulatory and other approvals.
PRIMESTAR
In April 1998, TWE and Advance/Newhouse transferred the direct broadcast
satellite ("DBS") operations conducted by TWE and TWE-A/N and the 31%
partnership interest in Primestar Partners, L.P. held by TWE-A/N to Primestar,
Inc., a separate holding company ("Primestar"). Following Primestar's decision
to abandon its proposed acquisition of certain high-power satellite assets from
a joint venture between The News Corporation Ltd. and MCI Telecommunications
Corp., due to inability to obtain regulatory approvals, Primestar recently
entered into an agreement to sell Primestar's medium-power DBS business and
assets to DirecTV, a competitor of Primestar owned by Hughes Electronics Corp.
Also, Primestar, Primestar Partners, the stockholders of Primestar and Tempo
Satellite, Inc. ("Tempo"), a wholly owned subsidiary of TCI Satellite
Entertainment, Inc., entered into a second agreement with DirecTV, pursuant to
which DirecTV will purchase high-power satellites from Tempo and Primestar and
Primestar Partners will relinquish their respective rights to acquire or use
such high-power satellites.
The ultimate disposition of the medium-power assets of Primestar is subject
to Primestar bondholders' and regulatory approvals and the disposition of
certain of Tempo's high-power satellites is subject to regulatory approvals.
There can be no assurance that such approvals will be obtained. For further
information with respect to Primestar, see Note 2, "Cable
Transactions -- Primestar" to the Company's consolidated financial statements at
pages F-36 and F-37 herein.
INTERNATIONAL
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 Japan, TWE and TWE-A/N beneficially own,
directly or indirectly, 25% of Titus Communications Corporation, which
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provides cable, telephony and Internet access service primarily in the Tokyo
area, and 19.2% of Chofu Cable Television Company, which provides cable service
in the suburban Tokyo area.
BUSINESS TELEPHONY
In July 1998, TWE, TWE-A/N and TWI Cable combined the business telephony
operations formerly owned by them into a new entity named Time Warner Telecom
LLC ("Time Warner Telecom") that is intended to be self-financing. Time Warner
Telecom is a facilities-based competitive local exchange carrier ("CLEC") that
offers a wide range of business telephony services in selected metropolitan
markets across the United States. The equity interests of Time Warner Telecom
are owned 61.98% by Time Warner, 18.85% by MediaOne and 19.17% by
Advance/Newhouse. In connection with its formation in July 1998, Time Warner
Telecom raised approximately $400 million in a public debt offering, the
proceeds of which are being used by Time Warner Telecom to further develop and
expand its telephony networks and services and for general corporate and working
capital purposes. In January 1999, Time Warner Telecom updated a previously
filed, preliminary registration statement with the Securities and Exchange
Commission to conduct an initial public offering of a minority interest of its
common stock, subject to market and other conditions.
Time Warner Telecom's customers are principally medium and large-sized
telecommunications-intensive business end-users, 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
December 31, 1998, Time Warner Telecom 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.
COMPETITION
Cable television systems face strong competition for viewer attention and
subscriptions from a wide variety of news, information and entertainment
providers. These include multichannel video providers like DTH, MMDS, SMATV
systems and telephone companies, other sources of video programs (such as
broadcast television and videocassettes) and additional sources for news,
entertainment and information, including the Internet. Cable television systems
also face strong competition from all 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 services that can be received by
relatively small and inexpensive receiving dishes. As of June 1998,
satellite-delivered DTH services were reported to be serving over 7.2 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. Legislation has been introduced in Congress to include
carriage of local signals by DTH providers under the copyright compulsory
license now granted to cable television operators. The ability of DTH services
to deliver local signals on an equal economic basis will eliminate a significant
advantage that cable operators currently have over DTH providers.
MMDS/Wireless Cable. Wireless cable operators, including digital wireless
operators, use microwave technology to distribute video programming. Wireless
cable has grown rapidly, reportedly servicing over 1.0 million subscribers
nationwide as of June 1998. In recent years, the FCC has adopted rules to
facilitate the use of greater numbers of channels by wireless cable operators.
SMATV. Additional competition comes 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
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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," below). 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" subject to certain local
authorizations, including payments to local governmental bodies in lieu of cable
franchise fees.
Additional Competition. In addition to multichannel video providers, cable
television systems compete with all other sources of news, information and
entertainment for viewer attention and for subscription revenues. This includes
over-the-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, and the Internet. 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.
REGULATION AND LEGISLATION
The Company's cable television systems, cable network, television network
and original programming businesses are subject, in part, to regulation by the
FCC, and the cable television systems business is also subject to regulation by
some state governments and substantially all local governments. The following is
a summary of current federal laws and regulations affecting the growth and
operation of these businesses and a description of certain state and local laws.
In addition, various legislative and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past
materially affected, and may in the future materially affect, the Company.
PROGRAMMING AND CABLE NETWORKS
The Telecommunications Competition and Deregulation Act of 1996 (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 rules currently prohibit an entity from having an attributable
interest in two local TV stations with overlapping specified signal contours. In
an ongoing rulemaking proceeding, the FCC has proposed to relax this rule in
certain circumstances and sought comment on a possible waiver mechanism. In
another rulemaking, the FCC has sought comment on possible changes to its
attribution rules, which define the type of interests in television stations
that are recognizable for purposes of its ownership rules. Under one such
proposal, certain currently nonattributable debt or passive equity interests
would become attributable if held in conjunction with certain other interests in
or relationships with the TV licensee, such as the provision of programming.
Such a proposal, if adopted, could adversely affect The WB's efforts to add new
television stations as affiliates.
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Under the 1992 Cable Act, the FCC has issued regulations which generally
prohibit vertically integrated programmers, which currently include the Turner
Networks and the Home Box Office Services, 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 1996 Telecommunications Act also 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 FCC has adopted rules requiring
television manufacturers to include blocking technology in at least half of
their new product models with a picture screen of 13 inches or greater by July
1, 1999; the remaining such models will be required to contain blocking
technology by January 1, 2000. 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. In
March 1998, the FCC determined that the system of voluntary parental guidelines
adopted by television broadcasters, networks and program producers, and cable
systems and networks, was acceptable and in compliance with the 1996
Telecommunications Act.
CABLE
The following discussion summarizes the significant federal, state and
local laws and regulations affecting the Company's cable television systems
operations.
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 1992 Cable Act required the FCC to review rates for nonbasic
service tiers, known as "cable programming service tiers" ("CPST"), comprised of
cable programming services 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
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 direct-to-home ("DTH"). The FCC has
found Time Warner Cable to be subject to "effective competition" in certain
jurisdictions.
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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 that exceed the maximum permitted level for either
basic and/or CPST services and associated equipment, and refunds can be
required.
In 1996, the FCC adopted a Social Contract with Time Warner Cable which
resolved all of the cable television rate complaints then pending against Time
Warner Cable and requires Time Warner Cable to upgrade its domestic cable
television systems. The Social Contract was negotiated in accordance with the
FCC's authority to consider and adopt "social contracts" as alternatives to
other regulatory approaches applicable to cable television rates. Specifically,
the Social Contract provides for an estimated $4.7 million plus interest in
refunds in the form of bill credits to subscribers of certain designated Time
Warner Cable systems, a commitment by Time Warner Cable to establish a lifeline
basic service priced at 10% below Time Warner Cable's benchmark regulated rates
with an adjustment to the nonbasic tier to recoup the reduced basic service tier
revenue; and a commitment by Time Warner Cable to upgrade its domestic systems
by December 31, 2000. Time Warner Cable is allowed to increase the non-basic
service tier by $1.00 per year over the term of the Social Contract. At Time
Warner Cable's election, the Social Contract's limitation on non-basic service
tier rates would no longer be effective after March 31, 1999. Court appeals that
were filed seeking review of the FCC decision adopting the Social Contract have
all been resolved. An appeal filed by Middletown Township, PA in 1999 remains
pending but is limited to the question whether Time Warner Cable owes refunds to
subscribers in that Township.
Carriage of Broadcast Television Signals. The 1992 Cable Act allows
commercial television broadcast stations that 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 may 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,
non-commercial 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 those cases where the expiration date of particular
agreements has not been contractually varied from the original schedule set up
by the 1992 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 non-local
television stations which are carried by the cable system.
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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" ("OVS") which are not subject to the full array of
regulatory obligations imposed on traditional cable systems, although OVS
operators can be required to obtain a franchise by a local governmental body
and/or to make payments in lieu of cable franchise fees. A number of separate
entities have been certified to operate open video systems in areas where the
Company operates cable systems, including New York City.
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 the outcome of a pending
review by the FCC. Time Warner Cable obtained a temporary waiver from this rule,
and has sought a permanent waiver, so that it could continue to own certain
Atlanta area cable systems located within the Grade B signal coverage area of
television station WTBS. The FCC denied the permanent waiver request, but that
denial is presently stayed pending resolution of a petition for reconsideration.
This matter will be rendered moot upon consummation of a proposed exchange of
cable systems with MediaOne. 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. This concern would no longer exist if the proposed
sale of Primestar to DirectTV is consummated. See "Cable -- Primestar," above.
The 1992 Cable Act directed the FCC to adopt so-called subscriber-limit
rules, 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 promulgated a rule imposing a limit of 30% of homes passed, but it
is currently conducting further rulemaking proceedings in which it may revisit
the substance of that rule. Pursuant to the 1992 Cable Act, the FCC has also
adopted so-called channel-occupancy rules that, 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. Time Warner Cable is a party to a
federal-court challenge to the validity of both the channel-occupancy rules and
the subscriber-limit rules. Pending this challenge, the FCC has voluntarily
stayed the effectiveness of the subscriber-limit rules (with the exception of
certain reporting requirements) but not the channel-occupancy rules.
Other FCC Regulations. 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; 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
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attachment rights when telecommunications services are delivered by cable
systems. This new higher rate formula will be phased in beginning in February
2001.
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.
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, 1999, approximately 180 franchises serving approximately 580,000 subscribers
expire during the period ending December 31, 2001. 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 manner in
which cable television systems operate.
FTC CONSENT DECREE
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 certain of its cable programming
services. These provisions, among other things, 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
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Warner Cable. In addition, under the terms of the FTC Consent Decree, 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. Compliance with the FTC Consent Decree is not
expected to cause an undue financial burden on the Company.
NEW COPYRIGHT LEGISLATION
In 1998 two important pieces of federal legislation were enacted that will
benefit the Company's businesses: The Sonny Bono Copyright Term Extension Act
extends the term of copyright protection in the United States by 20 years, and
the Digital Millennium Copyright Act ("DMCA") prohibits the circumvention of
copy protection technologies and establishes rules with respect to the liability
of online service providers for copyright infringements when users or
subscribers transmit or provide infringing material.
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DESCRIPTION OF AGREEMENT WITH
LIBERTY MEDIA CORPORATION
The following description summarizes certain provisions of the Company's
agreement with Liberty Media Corporation (an affiliate 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. Each share of
Series LMCN-V Common Stock receives the same dividends and otherwise has the
same rights as two shares of Time Warner Common Stock except that (a) holders of
Series LMCN-V Common Stock are entitled to 1/50th 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. Each share
of Series LMCN-V Common Stock is convertible into two 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 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.
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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"). A subsidiary of MediaOne (formerly US
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 MediaOne 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 the authority of the Cable 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 MediaOne (the "MediaOne
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 MediaOne 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 MediaOne Representatives. However, see "Cable Management
Committee," below.
Cable Management Committee. Subject to obtaining necessary franchise and
other approvals, the businesses and operations of the cable television systems
("Cable Systems") of TWE and the TWE-A/N Partnership are governed by a Cable
Management Committee (the "Management Committee"). The Management Committee is
comprised of six voting members, three designated by MediaOne and three
designated by TWE. Advance/Newhouse has the right to designate a non-voting
member to the Management Committee. If MediaOne 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 MediaOne occurs, MediaOne's
right to designate or maintain any members of the Management Committee will
terminate. The Cable Systems are managed on a day-to-day basis by Time Warner
Cable. The approval of a majority of the members of the Management Committee is
required for certain significant transactions relating to the Cable Systems,
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including, among other things, the sale, pledge or encumbrance of assets of any
Cable System, the acquisition of cable assets, the making of commitments or
expenditures relating to any Cable System, 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.
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 divisions is managed on a
day-to-day basis by the officers of such division. The officers of Time Warner
are also officers of TWE.
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) MediaOne from conducting cable and certain regional programming
businesses in the 14-state region in which US WEST, Inc. 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
certain types of arrangements, TWE has agreed not to enter into transactions
with any partner or any of its affiliates other than on an arm's-length basis.
REGISTRATION RIGHTS
Beginning on June 30, 2002 (or as early as June 30, 1999 if certain
threshold cash distributions are not made to the Class A Partners), the Class A
Partners holding, individually or in the aggregate, at least 10% of the residual
equity of TWE will have the right to request that TWE reconstitute itself as a
corporation and register for sale in a public offering an amount of partnership
interests held by such Class A Partners determined by an investment banking firm
so as to maximize trading liquidity and minimize the initial public offering
discount, if any. Upon any such request, the parties will cause an investment
banker to determine the price at which the interests sought to be registered
could be sold in a public offering (the "Appraised Value"). Upon determination
of the Appraised Value, TWE may elect either to register such interests or
purchase such interests at the Appraised Value, subject to certain adjustments.
If TWE elects to register the interests and the proposed public offering price
(as determined immediately prior to the time the public offering is to be
declared effective) is less than 92.5% of the Appraised Value, TWE will have a
second option to purchase such interests immediately prior to the time such
public offering would otherwise have been declared effective by the Securities
and Exchange Commission at the proposed public offering price less underwriting
fees and discounts. If TWE exercises its purchase option, it will be required to
pay the fees and expenses of the underwriters. Upon exercise of either purchase
option, TWE may also elect to purchase the entire partnership interests of the
Class A Partners requesting registration at the relevant price, subject to
certain adjustments.
In addition to the foregoing, MediaOne 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.
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<PAGE> 38
Upon any reconstitution of TWE into a corporation, each partner will
acquire preferred and common equity in the corporation corresponding in both
relative value, rate of return and priority to the partnership interests it held
prior to such reconstitution, subject to certain adjustments to compensate the
partners for the effects of converting their partnership interests into capital
stock.
CERTAIN PUT RIGHTS OF THE CLASS A PARTNERS
Change in Control Put. Upon the occurrence of a change in control of Time
Warner, at the request of any Class A Partner, TWE will be required to elect
either to liquidate TWE within a two-year period or to purchase the interest of
such partner at fair market value (without any minority discount) as determined
by investment bankers. A "change in control" of Time Warner shall be deemed to
have occurred:
(x) whenever, in any three-year period, a majority of the members of the
Board of Directors of the Company elected during such three-year period shall
have been so elected against the recommendation of the management of the Company
or the Board of Directors shall be deemed to have been elected against the
recommendation of such Board of Directors of the Company in office immediately
prior to such election; provided, however, that for purposes of this clause (x)
a member of such Board of Directors shall be deemed to have been elected against
the recommendation of such Board of Directors if his or her initial election
occurs as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended) or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than such Board of
Directors; or
(y) whenever any person shall acquire (whether by merger, consolidation,
sale, assignment, lease, transfer or otherwise, in one transaction or any
related series of transactions), or otherwise beneficially owns voting
securities of the Company that represent in excess of 50% of the voting power of
all outstanding voting securities of the Company generally entitled to vote for
the election of directors, if such person acquires or publicly announces its
intention to initially acquire ten percent or more of such voting securities in
a transaction that has not been approved by the management of the Company within
30 days after the date of such acquisition or public announcement.
Assignment of Put Rights, etc. TWE, with the consent of such assignee, may
assign to the Company, any general partner or any third party, the obligation to
pay the applicable put price in connection with the exercise of a change in
control put right by a Class A Partner and the right to receive the partnership
interests in payment therefor.
With respect to any of the put rights of the Class A Partners, TWE may pay
the applicable put price in cash or Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or quoted
on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put price
to the Company, by the Company). The amount of any Marketable Securities
comprising the applicable put price shall be determined based on the market
price of such securities during the seven months following the closing of such
put transaction.
RESTRICTIONS ON TRANSFER BY TIME WARNER GENERAL PARTNERS
Time Warner General Partners. Any Time Warner General Partner is permitted
to dispose of any partnership interest (and any Time Warner General Partner and
any parent of any Time Warner General Partner may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) the Company would
not own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the date on which the Class A Partners
have received cash distributions of $500 million per $1 billion of investment,
and (b) 35% of the residual equity of TWE if such disposition occurs after such
date, (ii) no person or entity would own, directly or indirectly, a partnership
interest greater than that owned, directly or indirectly, by the Company, and
(iii) a subsidiary of the Company would be a managing general partner of TWE.
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<PAGE> 39
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-29 and
F-56, respectively, herein. For the revenues of international operations, see
Note 16 "Segment Information" to the consolidated financial statements set forth
on page F-58 herein.
EMPLOYEES
At December 31, 1998, the Company employed a total of approximately 67,500
persons, including approximately 29,400 persons employed by TWE.
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<PAGE> 40
ITEM 2. PROPERTIES
CORPORATE, TBS, PUBLISHING AND MUSIC
The following table sets forth certain information as of December 31, 1998
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.
Rockefeller Center Approximately 94,368 sq. ft.
are sublet to outside
tenants.
New York, New York Business and editorial offices 1,506,000 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.
New York, New York Offices (Music) 273,800 Leased by the Company.
1290 Ave. of the Leases expire 2000-2012.
Americas Approximately 30,850 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) retail, Approximately 131,140 sq.
hotel and theatres ft. are 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) 500,450 Leased by the Company. Lease
121 N. Enterprise expires in 2006.
Blvd.
Mechanicsburg, Office and warehouse space 358,000 Owned and occupied by the
Pennsylvania (Publishing) Company.
1225 S. Market St.
Indianapolis, Indiana Warehouse space (Publishing) 253,000 Owned and occupied by the
4200 N. Industrial Company.
Street
Olyphant, Pennsylvania Manufacturing, warehouses, 1,012,000 Owned and occupied by the
1400 and 1444 East distribution and office space Company.
Lackawanna Avenue (Music)
Nortorf, Germany Manufacturing, distribution and 550,000 Owned and occupied by the
Niedernstrasse 3-7 office space (Music) Company.
Alsdorf, Germany Manufacturing, distribution and 269,000 Owned and occupied by the
Max-Planck Strasse office space (Music) Company.
1-9
Terre Haute, Indiana Manufacturing and office space 269,000 Leased by the Company. Lease
4025 3rd Parkway (Music) expires in 2001.
</TABLE>
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<PAGE> 41
CABLE NETWORKS -- HBO, FILMED ENTERTAINMENT AND CABLE
The following table sets forth certain information as of December 31, 1998
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 TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE FLOOR SPACE/ACRES EXPIRATION DATE OF LEASE
-------- ------------- ----------------- ------------------------
<S> <C> <C> <C>
New York, New York Business offices (HBO) 335,000 sq. ft. Leased by TWE.
1100 and 1114 Avenue and 241,390 sq. Leases expire in 2004 and
of the Americas ft. 2006.
Burbank, California Sound stages, administrative, 3,303,000 sq. ft. Owned by TWE.
The Warner Bros. technical and dressing room of improved space
Studio structures, screening theaters, on 158 acres(a)
machinery and equipment
facilities, 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, administrative, 350,000 sq. ft. Owned by TWE.
California technical and dressing room of improved space
The Warner Hollywood structures, screening theaters, on 11 acres
Studio machinery and 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
In the matter of Six Flags Fund, Ltd., Six Flags Over Georgia, LLC and
George DeRay v. Time Warner Entertainment Company, L.P., Six Flags Entertainment
Corporation, Six Flags Theme Parks Inc., and Six Flags Over Georgia, Inc., which
has been pending in the Superior Court for Gwinnett County, Georgia and which is
described further in the Form 10-K filed by the Company for the year ended
December 31, 1997, plaintiffs sought imposition of a constructive trust,
compensatory damages in excess of $250 million and unspecified punitive damages
for alleged breaches of fiduciary duty, conversion, fraud and conspiracy
allegedly committed by the defendants in connection with the management of the
Six Flags Over Georgia theme park. On October 22, 1998, following the close of
discovery, plaintiffs amended their complaint so as to drop their claim for
fraud and to modify their claim for breach of contract. Following trial, on
December 18, 1998, the jury returned a verdict in favor of the plaintiffs and
awarded the two plaintiffs a total of approximately $197 million in compensatory
damages on their claims for breach of fiduciary duty. On December 21, 1998, the
same jury awarded plaintiffs an additional $257 million in punitive damages.
Defendants moved on February 1, 1999, for judgment notwithstanding the verdict,
for a new trial and for the remittur of all or part of the damages awarded by
the jury based on defendants' assertion that the trial court committed legal
error. Among other grounds, defendants argue that defendants complied with all
fiduciary duties as are defined by the operative legal agreement between the
parties; that defendants' conduct in the context of arm's length negotiations
was not a breach of fiduciary duty as a matter of law; that defendants cannot be
held liable for their good-faith business judgments; that as a matter of law the
defendants did not have a fiduciary duty to make capital expenditures in amounts
that exceeded those that were otherwise contractually agreed to by the
I-39
<PAGE> 42
parties; that the Court improperly prevented defendants from introducing
relevant and important evidence; and that the Court improperly commented on
evidence received during the trial. Defendants' papers also argue that the Court
provided a number of erroneous instructions to the jury or, in other cases,
failed to provide any instruction to the jury on pertinent legal issues,
including the application of law with respect to alleged fiduciary duties in
matters specifically addressed by contract. With respect to damages, defendants
argue that the evidence presented concerning compensatory damages was unduly
speculative and excessive as a matter of law, and that the evidence and
applicable law cannot support the award of punitive damages. TWE and its 51%
partner in Six Flags retained financial responsibility for this litigation
following completion of the sale of the Six Flags companies to Premier Parks,
Inc.
On September 13, 1995, Francis Ford Coppola, Fred Fuchs and FFC, Inc.
("Coppola") filed a lawsuit in the Superior Court of California, County of Los
Angeles against Warner Bros., alleging that Warner Bros. unlawfully interfered
with Coppola's efforts to develop with another film studio a previously
undeveloped film project based on "Pinocchio." Among other things, Coppola asked
that the Court declare that any prior agreement between Coppola and Warner Bros.
to produce the film was void or that it be rescinded. In 1997, the Court granted
the plaintiffs' motion to declare that any alleged agreement between Warner
Bros. and Coppola was void under the Copyright Act's statute of frauds
provision. On June 1, 1998, the case went to trial and on July 2, 1998, the jury
found in Coppola's favor with respect to the interference claims and awarded $20
million in compensatory damages; on July 9, 1998, the jury awarded an additional
$60 million in punitive damages for these claims. Warner Bros. subsequently
filed motions for judgment notwithstanding the verdict, for a new trial and to
set aside the damages awarded, as a result of which, on October 15, 1998, the
Court vacated the $60 million punitive damages award. Both sides have taken
appeals from the Court's rulings.
On February 4, 1999, the Department of Justice served a Civil Investigative
Demand ("CID") on various motion picture studios including Warner Bros., calling
for the production of certain information and documents about distribution
licenses and relationships between the studios and movie theaters. The CID
served upon Warner Bros. also calls for responsive information about the
operations of New Line.
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 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,
and that the American Federation of Television and Radio Artists ("AFTRA")
(their union), and the AFTRA Health and Retirement Fund (the "Fund") had
breached their fiduciary duties and acted in violation of ERISA in failing to
enforce the recording companies' obligations. Plaintiffs sought substantial, but
unquantified, monetary damages, treble damages, attorneys' fees and costs and
the imposition of a constructive trust over their master recordings. The Court
has dismissed all claims against AFTRA. The Court also consolidated with this
action a second, similar lawsuit, commenced by the same plaintiffs in the United
States District Court for the Southern District of New York. Through various
Orders during this litigation, the Court has granted the record company
defendants' motion to dismiss the ERISA claims but denied the defendants' motion
to dismiss state law claims for breach of contract and fraud and a motion for
summary judgment on the RICO claims. The Court has also declined to dismiss the
claims against the Fund and the Fund Trustees. 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 remaining claims of the
15 named plaintiffs. By Order dated June 22, 1998, the Court granted plaintiffs'
motion to certify its order denying class certification for appeal to the
Eleventh Circuit Court of Appeals, and granted plaintiffs' motion for entry of
judgment pursuant to Rule 54(b) in favor of the recording company defendants on
the ERISA claims. On October 6, 1998, the Eleventh Circuit accepted
interlocutory review of the District Court's Order denying class certification
and consolidated that appeal with the appeal on the plaintiffs' ERISA claims.
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 Distribu-
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<PAGE> 43
tion, 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 (the "CD Price-Fixing
Class Action"). 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. Subsequently, the
Bankruptcy Court permitted plaintiff to proceed and the stay was lifted. On
April 22, 1998, the Judicial Panel on Multidistrict Litigation consolidated for
pretrial purposes various other actions, including 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 (C.D. Cal. 1997); Obie, inc. d/b/a Chestnut Hill
Compact Disc 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
(S.D.N.Y. 1997); 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 (C.D. Cal. 1997) and
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(S.D.N.Y.1998). The consolidated actions are captioned In re
Compact Disc Antitrust Litigation. The Court has outlined certain pretrial
procedures and discovery is proceeding pursuant to those procedures.
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. On May 11, 1998,
WEA and the other defendants filed a motion to dismiss the complaint for failure
to state a cause of action. Plaintiffs have not yet responded to the motion.
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 has produced documents in response to
the subpoena.
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
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<PAGE> 44
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.
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.
A subsidiary of Time Inc. holds a 50% interest in the parent entity of
American Family Publishers ("AFP"). AFP's principal business is direct mail
magazine solicitation based on sweepstakes promotions. On February 2, 1998,
Florida's Attorney General filed a lawsuit which charged that AFP's mailings
were false and deceptive. The publicity surrounding this lawsuit quickly led to
additional suits, filed by other attorneys general as well as private
plaintiffs. To date, 54 actions have been filed against AFP and other defendants
in various state and federal courts; 23 of these actions name as a party AFP's
processing and customer service vendor, Time Customer Service Inc., a wholly
owned subsidiary of Time Inc. Of the 54 cases, 26 are class actions, and five
are brought by State Attorneys General; 37 cases are in Federal court and the
remaining 17 cases are in State court. These actions allege, among other things,
that AFP's sweepstakes magazine solicitations misrepresent that the recipient
has won the grand prize in AFP's sweepstakes. The actions seek damages,
attorney's fees and injunctive relief. On March 16, 1998, AFP entered into an
"assurance of voluntary compliance" with the Attorneys General of 32 states and
the District of Columbia. AFP admitted no wrongdoing but agreed to a payment in
reimbursement of investigative expenses. Subsequently, AFP entered into a
settlement with the New York Attorney General. AFP admitted no wrongdoing but
agreed to contribute towards a special fund created by the New York Attorney
General and also agreed to pay investigative costs.
On March 29, 1996, Bartholdi Cable f/k/a Liberty Cable Co., Inc, and LVE,
LLC filed suit against TWI, TWE, various cable division subsidiaries and Gerald
Levin in the Eastern District of New York. The action alleges claims for
monopolization; attempted monopolization; conspiracy to monopolize in violation
of the antitrust laws; violations of the Lanham Act for purportedly misleading
advertising and deceptive trade practices. Defendants answered the complaint and
filed counterclaims on June 18, 1997, against Bartholdi and certain individuals.
The Court has declined motions to dismiss plaintiffs' claims or defendants'
counterclaims. On September 25, 1998, defendants filed a motion for summary
judgment, which was denied by the Court on November 17, 1998, with leave for
resubmission after six months. Discovery is now ongoing. Plaintiffs Andrew
Parker and Eric DeBrauwere, on behalf of a purported nationwide class, brought
this action on June 16, 1998, against defendants TWE and Time Warner Cable in
the Eastern District of New York. After defendants filed a motion to dismiss on
August 6, 1998, plaintiffs filed an amended complaint, which claims violations
of the Cable Act's privacy provisions, 47 U.S.C. sec. 551, related to the
alleged disclosure by defendants of personally identifiable information about
plaintiffs through sales of customer lists. Plaintiffs also have asserted claims
for violation of New York law for deceptive trade practices, negligent
misrepresentation and unjust enrichment. The lawsuit seeks damages under the
Cable Act, restitution of profits from the sale of such information, interest,
costs and attorney's fees. On December 18, 1998, defendants filed a motion to
dismiss the Amended Complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE> 45
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 1 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 12, 1999, of
such officer:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Gerald M. Levin........................... 59 Chairman of the Board and Chief Executive Officer
R.E. Turner............................... 60 Vice Chairman of the Board
Richard D. Parsons........................ 50 President
Richard J. Bressler....................... 41 Executive Vice President and Chief Financial Officer
Peter R. Haje............................. 64 Executive Vice President, General Counsel and
Secretary
Timothy A. Boggs.......................... 48 Senior Vice President
Andrew J. Kaslow.......................... 49 Senior Vice President
John A. LaBarca........................... 56 Senior Vice President and Controller
</TABLE>
Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1994:
Mr. Levin..................... Chairman of the Board of Directors and Chief
Executive Officer since January 1993.
Mr. Turner.................... Vice Chairman since the consummation of the TBS
Transaction in October 1996. Prior to that,
he served as Chairman of the Board and
President of TBS from 1970.
Mr. Parsons................... President since February 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 1998. Prior to that, he
served as Senior Vice President and Chief
Financial Officer from March 1995; as Senior
Vice President, Finance from January 1995;
and as a Vice President prior to that.
Mr. Haje...................... Executive Vice President and General Counsel
since October 1990 and Secretary since May
1993.
Mr. Boggs..................... Senior Vice President since November 1992.
Mr. Kaslow.................... Senior Vice President since January 1999. Prior
to that, he served as Senior Vice President,
Human Resources at Becton Dickinson and
Company (medical supplies and devices) from
April 1996 and prior to that he served as
Vice President, Human Resources at Pepsico
Inc. (beverages and snack foods), from
September 1994; and Vice President of
Pepsico's KFC International division prior to
that.
Mr. LaBarca................... Senior Vice President and Controller since May
1997. Prior to that, he served as Vice
President and Controller from January 1995;
Vice President, Director of Internal Audit
from May 1993; and Senior Partner at Ernst &
Young LLP prior to that.
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<PAGE> 46
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, 1998, see "Quarterly Financial
Information" at page F-69 herein, which information is incorporated herein by
reference. The approximate number of holders of record of the Company's Common
Stock as of February 28, 1999 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, 1998, see
"Quarterly Financial Information" at page F-69 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 February 28, 1999 was held of record by nine
holders.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial information of the Company for the five years ended
December 31, 1998 is set forth at pages F-67 and F-68 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-23 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 page F-19 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-24 through
F-64, F-70 through F-77 and F-66 herein are incorporated herein by reference.
Quarterly Financial Information set forth at page F-69 herein is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
II-1
<PAGE> 47
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Information called for by PART III (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive Proxy Statement to be
filed in connection with its 1999 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> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)-(2) Financial Statements and Schedules:
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.
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 10.20 listed on the
accompanying Exhibit Index identify management contracts or compensatory plans
or arrangements required to be filed as exhibits to this report, and such
listing is incorporated herein by reference.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K dated November 19,
1998 in which it reported in Item 5 that the Company had declared a
two-for-one split of the Company's common stock and set forth restated
historical earnings per share data reflecting such stock split.
(ii) The Company filed a Current Report on Form 8-K dated December 18,
1998 in which it reported in Item 5 the jury verdict with respect to the
litigation entitled Six Flags Over Georgia, Inc., et al, v. Six Flags Fund,
Ltd., et al. described on pages I-39 and I-40 herein.
IV-1
<PAGE> 49
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 26, 1999
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 March 26, 1999
- --------------------------------------------- Chief Executive Officer (principal
(Gerald M. Levin) executive officer)
/s/ RICHARD J. BRESSLER Executive Vice President and Chief March 26, 1999
- --------------------------------------------- Financial Officer (principal
(Richard J. Bressler) financial officer)
/s/ JOHN A. LABARCA Senior Vice President and Controller March 26, 1999
- --------------------------------------------- (principal accounting officer)
(John A. LaBarca)
/s/ MERV ADELSON Director March 26, 1999
- ---------------------------------------------
(Merv Adelson)
/s/ J. CARTER BACOT Director March 26, 1999
- ---------------------------------------------
(J. Carter Bacot)
/s/ STEPHEN F. BOLLENBACH Director March 26, 1999
- ---------------------------------------------
(Stephen F. Bollenbach)
/s/ JOHN C. DANFORTH Director March 26, 1999
- ---------------------------------------------
(John C. Danforth)
/s/ BEVERLY SILLS GREENOUGH Director March 26, 1999
- ---------------------------------------------
(Beverly Sills Greenough)
/s/ GERALD GREENWALD Director March 26, 1999
- ---------------------------------------------
(Gerald Greenwald)
</TABLE>
IV-2
<PAGE> 50
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CARLA A. HILLS Director March 26, 1999
- ---------------------------------------------
(Carla A. Hills)
/s/ REUBEN MARK Director March 26, 1999
- ---------------------------------------------
(Reuben Mark)
/s/ MICHAEL A. MILES Director March 26, 1999
- ---------------------------------------------
(Michael A. Miles)
/s/ RICHARD D. PARSONS Director March 26, 1999
- ---------------------------------------------
(Richard D. Parsons)
/s/ R.E. TURNER Director March 26, 1999
- ---------------------------------------------
(R.E. Turner)
/s/ FRANCIS T. VINCENT, JR. Director March 26, 1999
- ---------------------------------------------
(Francis T. Vincent, Jr.)
</TABLE>
IV-3
<PAGE> 51
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-79
Consolidated Financial Statements:
Balance Sheet............................................. F-24 F-92
Statement of Operations................................... F-25 F-93
Statement of Cash Flows................................... F-26 F-94
Statement of Shareholders' Equity and Partnership
Capital................................................ F-27 F-95
Notes to Consolidated Financial Statements................ F-28 F-96
Report of Management........................................ F-65
Report of Independent Auditors.............................. F-66 F-120
Selected Financial Information.............................. F-67 F-121
Quarterly Financial Information............................. F-69 F-122
Supplementary Information................................... F-70
Financial Statement Schedule II-Valuation and Qualifying
Accounts.................................................. F-78 F-123
</TABLE>
F-1
<PAGE> 52
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DESCRIPTION OF BUSINESS
Time Warner Inc. ("Time Warner" or the "Company"), together with its
consolidated and unconsolidated subsidiaries, is the world's largest media and
entertainment company. Time Warner's 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: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; 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
MediaOne Group, Inc. ("MediaOne"), formerly U S WEST, Inc. 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.
OVERVIEW
Time Warner and the Entertainment Group demonstrated strong financial
performances in 1998, as measured by the operating performance of their
businesses and the improved strength of their combined financial condition, as
more fully described herein. This performance was driven primarily by solid
business fundamentals and a disciplined financial focus on cost management and
controlling capital spending.
USE OF EBITA
Time Warner evaluates operating performance based on several factors, of
which the primary financial measure 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 Turner Broadcasting
System, Inc. ("TBS") in 1996 and the $2.3 billion of cable acquisitions in 1996
and 1995. The exclusion of noncash amortization charges also is 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, generally are
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> 53
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
As more fully described herein, the comparability of Time Warner's and the
Entertainment Group's operating results has been affected by certain significant
transactions and nonrecurring items in each period.
For 1998, these significant transactions related to Time Warner's cable
business and included (i) the transfer of cable television systems (or interests
therein) serving approximately 650,000 subscribers that were formerly owned by
subsidiaries of Time Warner to the TWE-Advance/Newhouse Partnership ("TWE-A/N"),
subject to approximately $1 billion of debt, in exchange for common and
preferred partnership interests in TWE-A/N, as well as certain related
transactions (collectively, the "TWE-A/N Transfers"), (ii) the transfer of TWE's
and TWE-A/N's direct broadcast satellite operations and related assets to
Primestar, Inc. ("Primestar"), a separate holding company (the "Primestar
Roll-up Transaction"), (iii) the reorganization of Time Warner Cable's business
telephony operations into a separate entity named Time Warner Telecom LLC (the
"Time Warner Telecom Reorganization") and (iv) the formation of a joint venture
to operate and expand Time Warner Cable's and MediaOne's existing high-speed
online businesses (the "Road Runner Joint Venture" and collectively, the "1998
Cable Transactions").
In addition, there were a number of other significant, nonrecurring items
recognized in 1998 and 1997, consisting of (i) net pretax gains in the amount of
approximately $108 million in 1998 and $212 million in 1997 relating to the sale
or exchange of various cable television systems by Time Warner and TWE, (ii) a
pretax gain of approximately $250 million in 1997 relating to TWE's sale of its
interest in E! Entertainment Television, Inc. ("E! Entertainment"), (iii) a
pretax gain of $200 million in 1997 relating to Time Warner's disposal of its
interest in Hasbro, Inc. ("Hasbro"), (iv) a charge of approximately $210 million
in 1998 principally to reduce TWE's carrying value of its interest in Primestar,
(v) an increase of $234 million in Time Warner's 1998 preferred dividend
requirements relating to the premium paid in connection with its redemption of
Series M exchangeable preferred stock ("Series M Preferred Stock") and (vi) an
extraordinary loss of $55 million in 1997 on the retirement of debt.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for 1998 and 1997 should be analyzed
after excluding the effects of these significant nonrecurring items. As such,
the following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
The comparability of Time Warner's 1997 and 1996 operating results also was
affected by certain significant transactions, consisting of (i) Time Warner's
October 1996 acquisition of TBS (the "TBS Transaction"), (ii) Time Warner's use
of approximately $1.55 billion of net proceeds from the issuance of Series M
Preferred Stock in April 1996 to reduce outstanding indebtedness and (iii)
certain other debt refinancings during the year (collectively, the "1996 Time
Warner Transactions"). Accordingly, the following discussion of operating
results for those periods is supplemented, where appropriate, by pro forma
financial information that gives effect to the 1996 Time Warner Transactions as
if they had occurred at the beginning of 1996. This pro forma information is
presented for informational purposes only and is not necessarily indicative of
the operating results that would have occurred had the transactions actually
occurred at the beginning of that period, nor is it necessarily indicative of
future operating results.
Finally, per common share amounts for prior years have been restated to
give effect to a two-for-one common stock split that occurred on December 15,
1998.
F-3
<PAGE> 54
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
RESULTS OF OPERATIONS
1998 VS. 1997
EBITA and operating income in 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
EBITA OPERATING INCOME
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Time Warner:
Publishing.............................................. $ 607 $ 529 $ 569 $ 481
Music................................................... 493 467 213 166
Cable Networks-TBS...................................... 706 573 506 374
Filmed Entertainment-TBS................................ 192 200 110 113
Cable(1)................................................ 325 427 125 150
Intersegment elimination................................ (27) (13) (27) (13)
------ ------ ------ ------
Total................................................... $2,296 $2,183 $1,496 $1,271
====== ====== ====== ======
Entertainment Group:
Filmed Entertainment-Warner Bros........................ $ 503 $ 404 $ 374 $ 281
Broadcasting-The WB Network............................. (93) (88) (96) (88)
Cable Networks-HBO...................................... 454 391 454 391
Cable(2)................................................ 1,369 1,184 992 877
------ ------ ------ ------
Total................................................... $2,233 $1,891 $1,724 $1,461
====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes net pretax gains of approximately $18 million in 1998 and $12
million in 1997 related to the sale or exchange of certain cable television
systems.
(2) Includes net pretax gains of approximately $90 million in 1998 and $200
million in 1997 related to the sale or exchange of certain cable television
systems.
Time Warner had revenues of $14.582 billion and net income of $168 million
($.31 loss per common share after preferred dividend requirements) in 1998,
compared to revenues of $13.294 billion, income of $301 million before an
extraordinary loss on the retirement of debt ($.01 loss per common share after
preferred dividend requirements) and net income of $246 million ($.06 loss per
common share after preferred dividend requirements) in 1997. Time Warner's
equity in the pretax income of the Entertainment Group was $356 million in 1998,
compared to $686 million in 1997.
As previously described, the comparability of Time Warner's and the
Entertainment Group's operating results for 1998 and 1997 has been affected by
certain significant nonrecurring items recognized in each period, consisting of
gains and losses relating to the sale or exchange of cable television systems
and other investment-related activity. These nonrecurring items amounted to
approximately $100 million of net pretax losses in 1998, compared to
approximately $660 million of net pretax gains in 1997. In addition, preferred
dividend requirements for 1998 included a $234 million one-time increase
relating to the premium paid in connection with Time Warner's redemption of its
Series M Preferred Stock. Lastly, 1997 included a $55 million extraordinary loss
on the retirement of debt. The aggregate net effect of these significant,
nonrecurring items was a decrease in income per common share of $.25 per common
share in 1998, compared to an increase of $.27 per common share in 1997.
Time Warner's net income decreased to $168 million in 1998, compared to net
income of $246 million in 1997. However, excluding the significant effect of the
nonrecurring items referred to above, net income
F-4
<PAGE> 55
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
increased by $300 million to $236 million in 1998, compared to a net loss of $64
million in 1997. As discussed more fully below, this improvement principally
resulted from an overall increase in Time Warner's business segment operating
income, an increase in income from its equity in the pretax income of the
Entertainment Group and lower interest expense associated with Time Warner's
debt reduction efforts and the TWE-A/N Transfers, offset in part by higher
losses from certain investments accounted for under the equity method of
accounting and lower gains on foreign exchange contracts. Similarly, excluding
the effect of these nonrecurring items, normalized net loss per common share was
$.06 in 1998, compared to a normalized net loss per common share of $.33 in
1997.
The Entertainment Group had revenues of $12.256 billion and net income of
$331 million in 1998, compared to 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. Similarly, excluding the portion of the nonrecurring items
referred to above that was recognized by the Entertainment Group, net income
increased by $229 million to $465 million in 1998, compared to $236 million in
1997. As discussed more fully below, this improvement principally resulted from
an overall increase in the Entertainment Group's business segment operating
income (including the positive effect of the TWE-A/N Transfers), offset in part
by an increase in interest expense associated with the TWE-A/N Transfers and
higher losses from certain investments accounted for under the equity method of
accounting.
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 $4.496 billion, compared to $4.290
billion in 1997. EBITA increased to $607 million from $529 million. Operating
income increased to $569 million from $481 million. Revenues benefited primarily
from significant increases in magazine advertising revenues, as well as
increases in magazine circulation revenues. The increase in advertising revenues
was principally due to a strong overall advertising market for most of the
division's magazines, primarily led by People, Time, Entertainment Weekly,
Fortune and In Style. The increase in circulation revenues was principally due
to higher subscription and newsstand revenues, primarily led by the same
magazines. EBITA and operating income increased principally as a result of the
revenue gains, cost savings and one-time gains on the sale of certain assets,
offset in part by lower results from direct marketing operations.
Music. Revenues increased to $4.025 billion, compared to $3.691 billion in
1997. EBITA increased to $493 million from $467 million. Operating income
increased to $213 million from $166 million. Revenues benefited from an increase
in domestic and international recorded music sales principally relating to
higher compact disc sales of a broad range of popular releases from new and
established artists and movie soundtracks, as well as lower returns of product.
At the end of December 1998, the Music division had a domestic market share of
19.8%, as measured by SoundScan. EBITA and operating income increased
principally as a result of the revenue gains and cost savings, offset in part by
lower results from direct marketing operations, higher artist costs and the
absence of certain one-time gains recognized in 1997.
Cable Networks-TBS. Revenues increased to $3.325 billion, compared to
$2.900 billion in 1997. EBITA increased to $706 million from $573 million.
Operating income increased to $506 million from $374 million. Revenues benefited
from an increase in subscription and advertising revenues. The increase in
subscription revenues principally related to the conversion of TBS Superstation
from an advertiser-supported broadcast superstation to a copyright-paid, cable
television service, which allows TBS Superstation to charge cable
F-5
<PAGE> 56
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
operators for the right to carry its cable television programming. Subscription
revenues also increased as a result of an increase in subscriptions, primarily
at CNN, CNN International, TNT/Cartoon Europe and Turner Classic Movies, and
higher rates. The increase in advertising revenues was principally due to a
strong overall advertising market for most of the division's networks, including
TNT, Cartoon Network, TNT/ Cartoon Europe, CNN and CNN Headline News. EBITA and
operating income increased principally as a result of the revenue gains and
lower programming costs at TNT, offset in part by higher programming costs at
CNN and losses associated with the Goodwill Games.
Filmed Entertainment-TBS. Revenues increased to $1.917 billion, compared
to $1.531 billion in 1997. EBITA decreased to $192 million from $200 million.
Operating income decreased to $110 million from $113 million. Revenues benefited
from a significant increase in syndication sales resulting from the renewal by
existing television station customers of second-cycle broadcasting rights for
Seinfeld, as well as an increase in worldwide theatrical and home video revenues
at New Line Cinema. Despite the revenue increase, EBITA and operating income
decreased principally as a result of film write-offs relating to disappointing
results for theatrical releases of Castle Rock Entertainment in the first half
of 1998.
Cable. Revenues decreased to $964 million, compared to $997 million in
1997. EBITA decreased to $325 million from $427 million. Operating income
decreased to $125 million from $150 million. The Cable division's 1998 operating
results were negatively affected by the aggregate net impact of the
deconsolidation of certain of its operations in connection with the 1998 Cable
Transactions. Excluding the effect of the 1998 Cable Transactions, revenues
increased principally as a result of an increase in basic cable subscribers,
increases in regulated cable rates and an increase in advertising revenues.
Similarly excluding the effect of the 1998 Cable Transactions, EBITA and
operating income increased principally as a result of the revenue gains and
approximately $6 million of higher, net pretax gains relating to the sale or
exchange of certain cable television systems, offset in part by higher
depreciation related to capital spending.
Interest and Other, Net. Interest and other, net, increased to $1.180
billion in 1998, compared to $1.044 billion in 1997. Interest expense decreased
to $891 million, compared to $1.049 billion, principally due to lower average
debt levels associated with the Company's debt reduction efforts and the TWE-A/N
Transfers. There was other expense, net, of $289 million in 1998 compared to
other income, net of $5 million in 1997, primarily due to lower
investment-related income, as well as lower gains on foreign exchange contracts
and higher losses associated with the Company's asset securitization program.
The significant decrease in investment-related income principally resulted from
the absence of a $200 million pretax gain recognized in 1997 in connection with
the disposal of Time Warner's interest in Hasbro and higher losses in 1998 from
certain investments accounted for under the equity method of accounting.
ENTERTAINMENT GROUP
Filmed Entertainment-Warner Bros. Revenues increased to $6.061 billion,
compared to $5.472 billion in 1997. EBITA increased to $503 million from $404
million. Operating income increased to $374 million from $281 million. Revenues
benefited from a significant increase in licensing fees from television
production and distribution operations, principally relating to the initial
off-network domestic syndication availability of Friends and the initial
off-network basic cable availability of ER, as well as an increase in revenues
from consumer products licensing operations. EBITA and operating income
benefited principally from the revenue gains and cost savings, offset in part by
lower international syndication sales of library product and lower results from
theatrical releases. In addition, EBITA and operating income for each period
included certain one-time gains on the sale of assets that were comparable in
amount and therefore, did not have any significant effect on operating trends.
Broadcasting-The WB Network. Revenues increased to $260 million, compared
to $136 million in 1997. EBITA decreased to a loss of $93 million from a loss of
$88 million. Operating losses increased to $96 million
F-6
<PAGE> 57
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
from $88 million. Revenues increased as a result of higher advertising sales
relating to improved television ratings and the addition of a fourth night of
prime-time programming in January 1998 and a fifth night in September 1998.
Despite the revenue increase, operating losses increased because of a lower
allocation of losses to a minority partner in the network. However, excluding
this minority interest effect, operating losses improved principally as a result
of the revenue gains, which outweighed higher programming costs associated with
the expanded programming schedule.
Cable Networks-HBO. Revenues increased to $2.052 billion, compared to
$1.923 billion in 1997. EBITA and operating income increased to $454 million
from $391 million. Revenues benefited primarily from an increase in
subscriptions to 34.6 million from 33.6 million at the end of 1997. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings and higher income from Comedy Central, a 50%-owned
equity investee.
Cable. Revenues increased to $4.378 billion, compared to $4.243 billion in
1997. EBITA increased to $1.369 billion from $1.184 billion. Operating income
increased to $992 million from $877 million. The Cable division's 1998 operating
results were positively affected by the aggregate net impact of the 1998 Cable
Transactions. Excluding the effect of the 1998 Cable Transactions, revenues
increased principally as a result of an increase in basic cable subscribers,
increases in regulated cable rates and an increase in advertising revenues.
Similarly excluding the effect of the 1998 Cable Transactions, EBITA and
operating income increased principally as a result of the revenue gains, offset
in part by higher depreciation related to capital spending and approximately
$110 million of lower, net pretax gains relating to the sale or exchange of
certain cable television systems.
As of December 31, 1998, including the cable operations of TWE-A/N and TWI
Cable Inc. ("TWI Cable"), there were 12.6 million subscribers under the
management of TWE's Cable division, as compared to 12.0 million subscribers at
the end of 1997. The number of subscribers at the end of 1997 excludes all
direct broadcast satellite subscribers that were transferred to Primestar in
1998 in connection with the Primestar Roll-up Transaction.
Interest and Other, Net. Interest and other, net, increased to $965
million in 1998, compared to $357 million in 1997. Interest expense increased to
$566 million, compared to $494 million in 1997, principally due to higher
average debt levels associated with the TWE-A/N Transfers. There was other
expense, net, of $399 million in 1998, compared to other income, net, of $137
million in 1997, primarily due to lower investment-related income, as well as
higher losses associated with TWE's asset securitization program. The
significant decrease in investment-related income principally resulted from the
absence of an approximate $250 million pretax gain recognized in 1997 in
connection with the sale of an interest in E! Entertainment, the inclusion of an
approximate $210 million charge recorded in 1998 principally to reduce the
carrying value of an interest in Primestar and higher losses in 1998 from
certain investments accounted for under the equity method of accounting.
F-7
<PAGE> 58
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
1997 VS. 1996
EBITA and operating income 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(1)........................... 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 pretax gains in 1997 of approximately $12 million for Time
Warner and $200 million for the Entertainment Group related to the sale or
exchange of certain cable television systems.
Time Warner had revenues of $13.294 billion, income of $301 million before
an extraordinary loss on the retirement of debt ($.01 loss per common share
after preferred dividend requirements) and net income of $246 million ($.06 loss
per common share after preferred dividend requirements) in 1997, compared to
revenues of $10.064 billion, a loss of $156 million before an extraordinary loss
on the retirement of debt ($.48 per common share after preferred dividend
requirements) and a net loss of $191 million ($.52 per common share after
preferred dividend requirements) 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
1996 Time Warner Transactions 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 $282 million ($.52 per common share) and a net loss of
$317 million ($.55 per common share). No pro forma financial information has
been presented for Time Warner for the year ended December 31, 1997 because the
1996 Time Warner Transactions are already reflected in the historical financial
statements of Time Warner.
As previously described, the comparability of Time Warner's and the
Entertainment Group's historical operating results for 1997 and pro forma
results for 1996 has been affected further by certain significant nonrecurring
items recognized in 1997, consisting of net pretax gains relating to the sale or
exchange of cable
F-8
<PAGE> 59
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
television systems and other investment-related activity. These nonrecurring
items amounted to approximately $660 million of net pretax gains in 1997. In
addition, net income (loss) in each period included extraordinary losses on the
retirement of debt of $55 million in 1997 and $35 million in 1996. The aggregate
net effect of these significant, nonrecurring items was an increase in income
per common share of $.27 in 1997, compared to a decrease of $.03 per common
share in 1996.
Time Warner's operating results improved from a pro forma net loss of $317
million in 1996 to net income of $246 million in 1997. Excluding the significant
effect of the nonrecurring items referred to above, Time Warner's net loss
improved by $218 million to a net loss of $64 million in 1997, compared to a net
loss of $282 million on a pro forma basis in 1996. As discussed more fully
below, this improvement principally resulted from an overall increase in Time
Warner's EBITA and operating income and an increase in income from its equity in
the pretax income of the Entertainment Group. Similarly, excluding the effect of
these nonrecurring items, normalized net loss per common share was $.33 in 1997,
compared to a normalized net loss per common share of $.52 on a pro forma basis
in 1996.
On a historical basis, these 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
359.6 million equivalent shares of common stock in connection with the TBS
Transaction, resulted in a net loss per common share of $.06 for the year ended
December 31, 1997, compared to a $.52 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. Similarly, excluding the portion
of the nonrecurring items referred to above that was recognized by the
Entertainment Group, net income increased by $16 million to $236 million in
1997, compared to $220 million in 1996. As discussed more fully below, this
improvement principally resulted from an overall increase in EBITA and operating
income generated by the Entertainment Group's business segments, offset in part
by 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 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.
F-9
<PAGE> 60
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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
domestic market share for the year of 20% as measured by SoundScan, 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.
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.
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 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 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 and lower losses from the reduction in carrying value of certain
investments, offset in part by costs associated with the Company's asset
securitization program.
F-10
<PAGE> 61
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 prime-
time 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.
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 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 Primestar-related, direct broadcast
satellite subscribers and the cable operations of TWE-A/N and TWI Cable, 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 $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 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-11
<PAGE> 62
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1998
TIME WARNER
1998 FINANCIAL CONDITION
At December 31, 1998, Time Warner had $10.9 billion of debt, $442 million
of available cash and equivalents (net debt of $10.5 billion), $895 million of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of a subsidiary and $8.9 billion of
shareholders' equity, compared to $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 a subsidiary, $1.9 billion of Series M
Preferred Stock and $9.4 billion of shareholders' equity at December 31, 1997.
FINANCING ACTIVITIES
During 1998, Time Warner continued its debt reduction efforts. Debt
reduction of approximately $3 billion was partially offset by a $2.1 billion
increase in debt in order to fund the 1998 redemption of Time Warner's Series M
Preferred Stock. This debt reduction was achieved principally by using cash
provided by operations, proceeds from certain asset sales, cash distributions
from TWE and the noncash transfer of approximately $1 billion of debt to TWE-A/N
as part of the TWE-A/N Transfers.
In addition, during 1998, holders of Time Warner's $1.15 billion of
zero-coupon convertible notes due 2013 (the "Zero-Coupon Convertible Notes")
converted their notes into an aggregate 37.4 million shares of Time Warner
common stock. In order to partially offset the dilution resulting from this
conversion, Time Warner incurred a corresponding $1.15 billion of debt and used
the proceeds to repurchase common stock.
STOCK OPTION PROCEEDS CREDIT FACILITY
In early 1998, Time Warner entered into a new five-year, $1.3 billion
revolving credit facility (the "Stock Option Proceeds Credit Facility"), which
replaced its previously existing facility. Borrowings under the Stock Option
Proceeds Credit Facility are principally used to fund stock repurchases and
approximately $12 million of future preferred dividend requirements on Time
Warner's convertible preferred stock. At December 31, 1998 and 1997, Time Warner
had outstanding borrowings against future stock option proceeds of $895 million
and $533 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 certain series of its
convertible 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.
REDEMPTION OF SERIES M PREFERRED STOCK
In December 1998, Time Warner redeemed all of its outstanding shares of
10 1/4% Series M Preferred Stock. The aggregate redemption cost of approximately
$2.1 billion was funded with proceeds from the
F-12
<PAGE> 63
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
issuance of lower-cost debt (the "1998 Series M Refinancing"). Because the
weighted-average interest rate of the debt is approximately 375 basis points
lower than the dividend rate of the Series M Preferred Stock and the interest on
the debt is tax deductible (whereas dividends are not), Time Warner expects to
realize approximately $100 to $125 million of annual cash savings as a result of
this redemption.
PREFERRED STOCK CONVERSIONS
During 1998 and January 1999, Time Warner issued approximately 66 million
shares of common stock in connection with the conversion of 15.8 million shares
of convertible preferred stock. These conversions are expected to result in
approximately $60 million of cash dividend savings in the aggregate for Time
Warner through the end of 1999.
COMMON STOCK REPURCHASE PROGRAM
During 1998, Time Warner acquired 59.9 million shares of its common stock
at an aggregate cost of $2.24 billion under its existing common stock repurchase
program, thereby increasing the cumulative shares purchased to approximately
95.1 million shares at an aggregate cost of $3.04 billion. Except for
repurchases of common stock using borrowings in 1998 that offset $1.15 billion
of debt reduction associated with the conversion of the Zero-Coupon Convertible
Notes into common stock, these repurchases were funded with stock option
exercise proceeds and borrowings under Time Warner's Stock Option Proceeds
Credit Facility.
In January 1999, Time Warner's Board of Directors authorized a new common
stock repurchase program that allows the Company to repurchase, from time to
time, up to $5 billion of common stock. This program is expected to be completed
over a three-year period. However, actual repurchases in any period will be
subject to market conditions. Along with stock option exercise proceeds and
borrowings under the Stock Option Proceeds Credit Facility, additional funding
for this program is expected to be provided by anticipated future free cash flow
and financial capacity.
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
continuing improvements in Time Warner's financial performance, each of Standard
& Poor's and Moody's, Time Warner's principal credit rating agencies, upgraded
Time Warner in 1998 to an improved investment-grade credit rating.
The leverage and coverage ratios are 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.
F-13
<PAGE> 64
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ---------
1998 1997 1996(a)
------- ------- ---------
<S> <C> <C> <C>
Time Warner and Entertainment Group combined:
Leverage ratio............................................ 3.0x 3.2x 4.1x
Interest coverage ratio(b)................................ 4.0x 3.5x 2.9x
Interest and preferred dividends coverage ratio(b)(c)..... 3.3x 2.8x 2.3x
Time Warner:
Leverage ratio............................................ 4.1x 4.5x 5.9x
Interest coverage ratio(b)................................ 3.1x 2.5x 2.0x
Interest and preferred dividends coverage ratio(b)(c)..... 2.3x 1.9x 1.5x
</TABLE>
- ---------------
(a) Pro forma ratios for 1996 give effect to the 1996 Time Warner Transactions
as if they had occurred at the beginning of 1996. Historical ratios for 1996
are not meaningful and have not been presented because they reflect the
operating results of TBS 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 that Time Warner has funded with borrowings
under the Stock Option Proceeds Credit Facility.
CASH FLOWS
During 1998, Time Warner's cash provided by operations amounted to $1.845
billion and reflected $2.296 billion of EBITA from its Publishing, Music, Cable
Networks-TBS, Filmed Entertainment-TBS and Cable businesses, $378 million of
noncash depreciation expense, $17 million of proceeds from Time Warner's asset
securitization program and $698 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), less $812 million of interest payments, $209 million
of income taxes, $86 million of corporate expenses and $437 million related to
an increase in other working capital requirements, balance sheet accounts and
noncash items. Cash provided by operations of $1.408 billion in 1997 reflected
$2.183 billion of business segment EBITA, $382 million of noncash depreciation
expense, $108 million of proceeds from Time Warner's asset securitization
program and $479 million of distributions from TWE (similarly 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), 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 investing activities was $353 million in 1998, compared to
cash used by investing activities of $45 million in 1997, principally as a
result of lower capital expenditures and an increase in investment proceeds
relating to Time Warner's debt reduction efforts, partially offset by an
increase in cash used for investments and acquisitions. Cash used for
investments and acquisitions in 1998 was offset in part by the effect of
consolidating approximately $200 million of cash of Paragon Communications
("Paragon") in connection with the TWE-A/N Transfers. Capital expenditures
decreased to $512 million in 1998, compared to $574 million in 1997.
Cash used by financing activities was $2.401 billion in 1998, compared to
$1.232 billion in 1997. During 1998, Time Warner issued approximately $2.1
billion of debt and used the proceeds therefrom to redeem its Series M Preferred
Stock. Time Warner also had additional borrowings in 1998 that offset the
noncash reduction of $1.15 billion of debt relating to the conversion of the
Zero-Coupon Convertible Notes into common stock. Time Warner used the proceeds
from these borrowings, together with most of the combined
F-14
<PAGE> 65
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
$740 million of proceeds received from the exercise of employee stock options
and $362 million of net borrowings against future stock option proceeds, to
repurchase approximately 59.9 million shares of Time Warner common stock at an
aggregate cost of $2.24 billion. In addition, Time Warner paid $524 million of
dividends in 1998, reflecting its election in 1998 to pay dividends on its
Series M Preferred Stock in cash rather than in-kind. Cash used by financing
activities in 1997 principally resulted from approximately $1 billion of debt
reduction, the repurchase of approximately 12.4 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 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 its bank 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.
ENTERTAINMENT GROUP
1998 FINANCIAL CONDITION
At December 31, 1998, the Entertainment Group had $6.6 billion of debt, $87
million of cash and equivalents (net debt of $6.5 billion), $217 million of
preferred stock of a subsidiary, $603 million of Time Warner General Partners'
Senior Capital and $5.2 billion of partners' capital, compared to $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 at December 31,
1997. Net debt of the Entertainment Group increased in 1998 principally as a
result of the TWE-A/N Transfers and increased borrowings to fund cash
distributions paid to Time Warner, partially offset by approximately $650
million of debt reduction associated with the formation of a cable television
joint venture in Texas (the "Texas Cable Joint Venture") with TCI
Communications, Inc. ("TCI"), a subsidiary of Tele-Communications, Inc.
CREDIT STATISTICS
Entertainment Group leverage and coverage ratios for 1998, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
HISTORICAL
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Leverage ratio......................................... 2.1x 2.0x 2.4x
Interest coverage ratio(a)............................. 5.3x 5.4x 4.8x
</TABLE>
- ---------------
(a) Includes dividends related to the preferred stock of a subsidiary.
CASH FLOWS
In 1998, the Entertainment Group's cash provided by operations amounted to
$2.288 billion and reflected $2.233 billion of EBITA from the Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $927 million of noncash depreciation expense and $166 million
from TWE's asset securitization program, less $537 million of interest payments,
$91 million of income taxes,
F-15
<PAGE> 66
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
$72 million of corporate expenses and $338 million related to an increase in
working capital requirements, other balance sheet accounts and noncash items.
Cash provided by operations of $1.799 billion in 1997 reflected $1.891 billion
of business segment EBITA, $956 million of noncash depreciation expense and $300
million from TWE's asset securitization program, 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 used by investing activities was $745 million in 1998, compared to
$1.217 billion in 1997, principally as a result of a $726 million increase in
investment proceeds, offset in part by a reduction of cash flows from
investments and acquisitions related to the deconsolidation of approximately
$200 million of Paragon's cash in connection with the TWE-A/N Transfers.
Investment proceeds increased principally due to TWE's debt reduction efforts,
including proceeds from the sale of TWE's remaining interest in Six Flags
Entertainment Corporation and the receipt of approximately $650 million of
proceeds upon the formation of the Texas Cable Joint Venture. Capital
expenditures were $1.603 billion in 1998, compared to $1.565 billion in 1997.
Cash used by financing activities was $1.778 billion in 1998, compared to
$476 million in 1997. The use of cash in 1998 principally reflected $1.153
billion of distributions paid to Time Warner and the use of investment proceeds
to reduce debt in connection with TWE's debt reduction efforts. The use of cash
in 1997 principally reflected $934 million of distributions paid to Time Warner,
offset in part by $243 million of aggregate net proceeds from the issuance of
preferred stock of a subsidiary and an increase in borrowings used to fund cash
distributions to Time Warner.
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.
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 keep the business positioned for sustained,
long-term growth. Capital spending by Time Warner Cable, including the cable
operations of both Time Warner and TWE, amounted to $1.676 billion in 1998,
compared to $1.683 billion in 1997. Cable capital spending for 1999 is budgeted
to be approximately $1.5 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 and consistent with Time
Warner Cable's long-term strategic plan, Time Warner Cable agreed with the
Federal Communications Commission (the "FCC") in 1996 to invest a total of $4
billion in capital costs in connection with the upgrade of its cable
infrastructure. 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 of December 31, 1998, Time Warner Cable had
approximately $1 billion remaining under this commitment. Management expects to
satisfy this commitment by December 31, 2000 when Time Warner Cable's
technological upgrade of its cable television systems is scheduled to be
substantially completed.
CABLE STRATEGY
In addition to using cable operating cash flow to finance the level of
capital spending necessary to upgrade the technological capability of cable
television systems and develop new services, Time Warner, TWE and TWE-A/N have
completed or announced a series of transactions over the past year related to
the cable television business and related ancillary businesses. These
transactions consist of the TWE-A/N Transfers, the Primestar Roll-up
Transaction, the Time Warner Telecom Reorganization, the formation of the Road
Runner Joint Venture, the formation of the Texas Cable Joint Venture and other
TCI-related cable
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<PAGE> 67
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
transactions and the anticipated formation with AT&T Corp. ("AT&T") of a cable
telephony joint venture (the "AT&T Cable Telephony Joint Venture").
All of these transactions have reduced, or will reduce, either existing
debt and/or Time Warner's and TWE's share of future funding requirements for
these businesses. In addition, the formation of the Road Runner Joint Venture
and, ultimately, the AT&T Cable Telephony Joint Venture, when completed, will
enable Time Warner Cable to leverage its technologically advanced, high-capacity
cable architecture into new opportunities to create incremental value through
the development and exploitation of new services with strategic partners, such
as AT&T, Microsoft Corp. and Compaq Computer Corp.
The proposed AT&T Cable Telephony Joint Venture is discussed more fully
below and the other transactions are described in Note 2 to the accompanying
consolidated financial statements.
AT&T Cable Telephony Joint Venture
In February 1999, Time Warner, TWE and AT&T announced their intention to
form a strategic joint venture. This joint venture will offer AT&T-branded cable
telephony service to residential and small business customers over Time Warner
Cable's television systems for up to a twenty-year period. This transaction
effectively will allow Time Warner Cable to leverage its existing cable
infrastructure into a new growth opportunity in a non-core business, without the
need for any incremental capital investment.
Under the preliminary terms announced by the parties, the joint venture
will be owned 22.5% by Time Warner Cable and 77.5% by AT&T. AT&T will be
responsible for funding all of the joint venture's negative cash flow and Time
Warner Cable's equity interest in the joint venture will not be diluted as a
result of AT&T's funding obligations. Because AT&T is expected to have
significant funding obligations through at least the first three years of the
joint venture's operations when capital will be deployed and services first
rolled-out, Time Warner Cable expects to benefit from the additional value
created from its "carried" interest.
In addition to its equity interest, Time Warner Cable is expected to
receive the following payments from the joint venture:
(i) Approximately $300 million of initial access fees, based on a rate of
$15 per home passed that is payable in two annual installments once a
particular service area has been upgraded and powered for cable
telephony service. Time Warner Cable is expected to receive additional
access fees in the future as its cable television systems continue to
pass new homes.
(ii) Recurring monthly subscriber fees in the initial amount of $1.50 per
telephony subscriber, to be adjusted periodically to up to $6.00 per
telephony subscriber in the sixth year of providing cable telephony
service to any particular area. In addition, the joint venture is
expected to guarantee certain minimum penetration levels to Time
Warner Cable, ranging from 5% in the second year of providing cable
telephony service to any particular area to up to 25% in the sixth
year and thereafter.
(iii) Additional monthly subscriber fees equal to 15% of the excess, if
any, of monthly average cable telephony revenues in a particular
service area over $100, after the fifth year of providing cable
telephony service to any particular area.
Further, management believes that the opportunity for consumers to select
one provider of AT&T-branded, "all-distance" wireline and wireless communication
services will contribute to increased cable television penetration in Time
Warner Cable's service areas and the continuing growth in Time Warner Cable's
revenues from the delivery of cable television services.
This transaction is expected to close in the second half of 1999, subject
to the execution of definitive agreements by the parties and customary closing
conditions, including the approval of Advance/Newhouse
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<PAGE> 68
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
and MediaOne and all necessary governmental and regulatory approvals. There can
be no assurance that such agreements will be completed or that such approvals
will be obtained.
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 normally 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,
potentially, the current exploitation of the digital video disc, have
historically generated significant revenue opportunities through the repackaging
and sale of such copyrighted products in the new technological format.
Accordingly, such intangible assets have significant off-balance sheet asset
value that is not fully reflected in the consolidated balance sheets of Time
Warner and the Entertainment Group.
Filmed Entertainment Backlog
Backlog represents the amount of future revenue not yet recorded from cash
contracts for the licensing of theatrical and television product for pay cable,
basic cable, network and syndicated television exhibition. Backlog of TWE's
Filmed Entertainment-Warner Bros. division amounted to $2.298 billion at
December 31, 1998 (including amounts relating to the licensing of film product
to Time Warner's and TWE's cable television networks of $769 million). In
addition, backlog of Time Warner's Filmed Entertainment-TBS division amounted to
$636 million at December 31, 1998 (including amounts relating to the licensing
of film product to Time Warner's and TWE's cable television networks of $226
million).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are received periodically
over the term of the related licensing agreements or on an accelerated basis
using TWE's $500 million securitization facility. The portion of backlog for
which cash has not already been received has significant off-balance sheet asset
value as a source of future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
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<PAGE> 69
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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,
1998, Time Warner had interest rate swap contracts to pay floating-rates of
interest (average six-month LIBOR rate of 5.5%) and receive fixed-rates of
interest (average rate of 5.5%) on $1.6 billion notional amount of indebtedness,
which resulted in approximately 37% of Time Warner's underlying debt, and 39% of
the debt of Time Warner and the Entertainment Group combined, being subject to
variable interest rates. At December 31, 1997, 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, 1998, 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 $11 million, including $4 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, 1998, 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. To hedge this exposure, Time Warner used foreign
exchange contracts that generally have maturities of three months or less, which
generally will be 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, 1998, Time Warner had contracts for the sale of $755
million and the purchase of $259 million of foreign currencies at fixed rates,
compared to contracts for the sale of $507 million and the purchase of $139
million of foreign currencies at December 31, 1997.
Based on the foreign exchange contracts outstanding at December 31, 1998,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1998 would result
in approximately $38 million of unrealized losses and $13 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 $38 million of unrealized gains and $13 million of unrealized losses,
respectively. With regard to the net $25 million of unrealized losses or gains
on foreign exchange contracts, Time Warner would be reimbursed by TWE, or would
reimburse TWE, respectively, for approximately $10 million, net, 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.
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<PAGE> 70
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
GLOBAL FINANCIAL MARKETS
During 1998, certain financial markets, mainly Brazil, Russia and a number
of Asian countries, 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 these countries, management does not
believe that the state of these financial markets poses a material risk to the
operations of Time Warner and the Entertainment Group.
EURO CONVERSION
Effective January 1, 1999, the "euro" was established as a single currency
valid in more than two-thirds of the member countries of the European Union.
These member countries have a three-year transitional period to physically
convert their sovereign currencies to the euro. By July 1, 2002, all
participating member countries must eliminate their currencies and replace their
legal tender with euro-denominated bills and coins. Notwithstanding this
transitional period, many commercial transactions are expected to become euro-
denominated well before the July 2002 deadline. Accordingly, Time Warner
continues to evaluate the short-term and long-term effects of the euro
conversion on its European operations, principally publishing, music, cable
networks and filmed entertainment.
Time Warner believes that the most significant short-term impact of the
euro conversion is the need to modify its accounting and information systems to
handle an increasing volume of transactions during the transitional period in
both the euro and sovereign currencies of the participating member countries.
Time Warner has identified its accounting and information systems in need of
modification and an action plan has been formulated to address the nature and
timing of remediation efforts. Remediation efforts have begun and the plan is
expected to be substantially completed well before the end of the transitional
period. This timetable will be adjusted, if necessary, to meet the anticipated
needs of Time Warner's vendors and customers. Based on preliminary information,
costs to modify its accounting and information systems are not expected to be
material.
Time Warner believes that the most significant long-term business risk of
the euro conversion may be increased pricing pressures for its products and
services brought about by heightened consumer awareness of possible cross-border
price differences. However, Time Warner believes that these business risks may
be offset to some extent by lower material costs, other cost savings and
marketing opportunities. Notwithstanding such risks, management does not believe
that the euro conversion will have a material effect on Time Warner's financial
position, results of operations or cash flows in future periods.
YEAR 2000 TECHNOLOGY PREPAREDNESS
Time Warner, together with its Entertainment Group and like most large
companies, depends on many different computer systems and other chip-based
devices for the continuing conduct of its business. Older computer programs,
computer hardware and chip-based devices may fail to recognize dates beginning
on January 1, 2000 as being valid dates, and as a result may fail to operate or
may operate improperly when such dates are introduced.
Time Warner's exposure to potential Year 2000 problems arises both in
technological operations under the control of the Company and in those dependent
on one or more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of Time Warner's potential Year 2000
exposures are dependent to some degree on one or more third parties. Failure to
achieve high levels of Year 2000 compliance could have a material adverse impact
on Time Warner and its financial statements.
F-20
<PAGE> 71
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
The Company's Year 2000 initiative is being conducted at the operational
level by divisional project managers and senior technology executives overseen
by senior divisional executives, with assistance internally as well as from
outside professionals. The progress of each division through the different
phases of remediation-inventorying, assessment, remediation planning,
implementation and final testing-is actively overseen and reviewed on a regular
basis by an executive oversight group that reports through the Company's Chief
Financial Officer to the Audit Committee of the Board of Directors.
The Company has generally completed the process of identifying potential
Year 2000 difficulties in its technological operations, including IT
applications, IT technology and support, desktop hardware and software, non-IT
systems and important third party operations, and distinguishing those that are
"mission critical" from those that are not. An item is considered "mission
critical" if its Year 2000-related failure would significantly impair the
ability of one of the Company's major business units to (1) produce, market and
distribute the products or services that generate significant revenues for that
business, (2) meet its obligations to pay its employees, artists, vendors and
others or (3) meet its obligations under regulatory requirements and internal
accounting controls. The Company and its divisions, including the Entertainment
Group, have identified approximately 1,000 worldwide, "mission critical"
potential exposures. Of these, as of December 31, 1998, approximately 39% have
been identified by the divisions as Year 2000 compliant, approximately 46% as in
the remediation implementation or final testing stages, approximately 14% as in
the remediation planning stage and less than 1% as still in the assessment
stage. The Company currently expects that the assessment phase for the few
remaining potential exposures should be completed during the first quarter of
1999 and that remediation with respect to approximately 80% of all these
identified operations will be substantially completed in all material respects
by the end of the second quarter of 1999. The Company, however, could experience
unexpected delays. The Company is currently planning to impose a "quiet" period
at the beginning of the fourth quarter of 1999 during which any remaining
remediation involving installation or modification of systems that interface
with other systems will be minimized to permit the Company to conduct testing in
a stable environment.
As stated above, however, the Company's business is heavily dependent on
third parties and these parties are themselves heavily dependent on technology.
In some cases, the Company's third party dependence is on vendors of technology
who are themselves working towards solutions to Year 2000 problems. For example,
in a situation endemic to the cable industry, much of the Company's headend
equipment that controls cable set-top boxes was not Year 2000 compliant as of
December 31, 1998. The box manufacturers are working with cable industry groups
and have developed solutions that the Company is installing in its headend
equipment. It is currently expected that these solutions will be substantially
implemented by the end of the second quarter of 1999. In other cases, the
Company's third party dependence is on suppliers of products or services that
are themselves computer-intensive. For example, if a television broadcaster or
cable programmer encounters Year 2000 problems that impede its ability to
deliver its programming, the Company will be unable to provide that programming
to its cable customers. Similarly, because the Company is also a programming
supplier, third-party signal delivery problems could affect its ability to
deliver its programming to its customers. The Company has attempted to include
in its "mission critical" inventory significant service providers, vendors,
suppliers, customers and governmental entities that are believed to be critical
to business operations and is in various stages of ascertaining their state of
Year 2000 readiness through various means, including questionnaires, interviews,
on-site visits, system interface testing and industry group participation.
Moreover, Time Warner is dependent, like all large companies, on the continued
functioning, domestically and internationally, of basic, heavily computerized
services such as banking, telephony and power, and various distribution
mechanisms ranging from the mail, railroads and trucking to high-speed data
transmission. Time Warner is taking steps to attempt to satisfy itself that the
third parties on which it is heavily reliant are Year 2000 compliant or that
alternate means of meeting its requirements are available, but cannot predict
the likelihood of such compliance nor the direct or indirect costs to the
Company of non-compliance by those third parties or of securing such services
from alternate compliant third parties. In areas in which the Company is
uncertain
F-21
<PAGE> 72
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
about the anticipated Year 2000 readiness of a significant third party, the
Company is investigating available alternatives, if any.
The Company, including the Entertainment Group, currently estimates that
the aggregate cost of its Year 2000 remediation program, which started in 1996,
will be approximately $125 to $175 million, of which an estimated 45% to 55% has
been incurred through December 31, 1998. These costs include estimates of the
costs of assessment, replacement, repair and upgrade, both planned and
unplanned, of certain IT and non-IT systems and their implementation and
testing. The Company anticipates that its remediation program, and related
expenditures, may continue into 2001 as temporary solutions to Year 2000
problems are replaced with upgraded equipment. These expenditures have been and
are expected to continue to be funded from the Company's operating cash flow and
have not and are not expected to impact materially the Company's financial
statements.
Management believes that it has established an effective program to resolve
all significant Year 2000 issues in its control in a timely manner. As noted
above, however, the Company has not yet completed all phases of its program and
is dependent on third parties whose progress is not within its control. In the
event that the Company does not complete any of its currently planned additional
remediation prior to the Year 2000, management believes that the Company could
experience significant difficulty in producing and delivering its products and
services and conducting its business in the Year 2000 as it has in the past. In
addition, disruptions experienced by third parties with which the Company does
business as well as by the economy generally could also materially adversely
affect the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
The Company has been focusing its efforts on identification and remediation
of its Year 2000 exposures and has not yet developed significant, specific
contingency plans in the event it does not successfully complete all phases of
its Year 2000 program. The Company, however, has begun to examine its existing
standard business interruption strategies to evaluate whether they would
satisfactorily meet the demands of failures arising from Year 2000-related
problems. The Company intends to examine its status periodically to determine
the necessity of establishing and implementing such contingency plans or
additional strategies, which could involve, among other things, manual
workarounds, adjusting staffing strategies and sharing resources across
divisions.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document, together
with management's public commentary related thereto, contains such "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, particularly statements anticipating future growth in
revenues, EBITA and cash flow. Words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," "believes" and words and terms of
similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are management's present expectations of future
events. As with any projection or forecast, they are inherently susceptible to
changes in circumstances, and the Company is under no obligation to (and
expressly disclaims any such obligation to) update or alter its forward-looking
statements whether as a result of such changes, new information or otherwise.
Time Warner operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political and social conditions in the countries in
which they operate, consumer demand for their products and services,
technological developments and (particularly in view of technological changes)
protection of their intellectual property rights. Time Warner's actual results
could differ materially from management's expectations because
F-22
<PAGE> 73
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
of changes in such factors. Some of the other factors that also could cause
actual results to differ from those contained in the forward-looking statements
include those identified in Time Warner's other filings and:
- For Time Warner's cable business, more aggressive than expected
competition from new technologies and other types of video programming
distributors, including DBS; increases in government regulation of cable
or equipment rates (or any failure to reduce rate regulation as is
presently mandated by statute) or other terms of service (such as
"digital must-carry" or "unbundling" requirements); increased difficulty
in obtaining franchise renewals; the failure of new equipment (such as
digital set-top boxes) or services (such as high-speed online services or
telephony over cable or video on demand) to function properly, to appeal
to enough consumers or to be available at reasonable prices and to be
delivered in a timely fashion; and greater than expected increases in
programming or other costs.
- For Time Warner's cable programming and television businesses, greater
than expected programming or production costs; public and cable operator
resistance to price increases (and the negative impact on premium
programmers of increases in basic cable rates); increased regulation of
distribution agreements; the sensitivity of advertising to economic
cyclicality; and greater than expected fragmentation of consumer
viewership due to an increased number of programming services or the
increased popularity of alternatives to television.
- For Time Warner's film and television businesses, their ability to
continue to attract and select desirable talent and scripts at manageable
costs; increases in production costs generally; fragmentation of consumer
leisure and entertainment time (and its possible negative effects on the
broadcast and cable networks, which are significant customers of these
businesses); continued popularity of merchandising; and the uncertain
impact of technological developments such as DVD and the Internet.
- For Time Warner's music business, its ability to continue to attract and
select desirable talent at manageable costs; the timely completion of
albums by major artists; the popular demand for particular artists and
albums; its ability to continue to enforce its intellectual property
rights in digital environments; and the overall strength of global music
sales.
- For Time Warner's print media and publishing businesses, increases in
paper and distribution costs; the introduction and increased popularity
of alternative technologies for the provision of news and information,
such as the Internet; and fluctuations in advertiser and consumer
spending.
- The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Year 2000
issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays
in the implementation of the Company's remediation plans and the ability
of third parties to address adequately their own Year 2000 issues.
In addition, Time Warner's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in Time Warner's plans,
strategies and intentions.
F-23
<PAGE> 74
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................ $ 442 $ 645
Receivables, less allowances of $1.007 billion and $991
million................................................... 2,885 2,447
Inventories................................................. 946 830
Prepaid expenses............................................ 1,176 1,089
------- -------
Total current assets........................................ 5,449 5,011
Noncurrent inventories...................................... 1,900 1,766
Investments in and amounts due to and from Entertainment
Group..................................................... 4,980 5,549
Other investments........................................... 794 1,495
Property, plant and equipment, net.......................... 1,991 2,089
Music catalogues, contracts and copyrights.................. 876 928
Cable television and sports franchises...................... 2,868 3,982
Goodwill.................................................... 11,919 12,572
Other assets................................................ 863 771
------- -------
Total assets................................................ $31,640 $34,163
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 996 $ 912
Participations, royalties and programming costs payable..... 1,199 1,072
Debt due within one year.................................... 19 8
Other current liabilities................................... 2,404 2,379
------- -------
Total current liabilities................................... 4,618 4,371
Long-term debt.............................................. 10,925 11,833
Borrowings against future stock option proceeds............. 895 533
Deferred income taxes....................................... 3,491 3,960
Unearned portion of paid subscriptions...................... 741 672
Other liabilities........................................... 1,543 1,006
Company-obligated mandatorily redeemable preferred
securities of a subsidiary holding solely subordinated
debentures of a subsidiary of the Company................. 575 575
Series M exchangeable preferred stock, $.10 par value, 1.9
million shares outstanding in 1997 with a $1.903 billion
liquidation preference.................................... -- 1,857
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value, 22.6 and 35.4 million
shares outstanding, $2.260 and $3.539 billion liquidation
preference................................................ 2 4
Series LMCN-V Common Stock, $.01 par value, 57.1 million
shares outstanding........................................ 1 1
Common stock, $.01 par value, 1.118 and 1.038 billion shares
outstanding............................................... 11 10
Paid-in capital............................................. 13,134 12,675
Accumulated deficit......................................... (4,296) (3,334)
------- -------
Total shareholders' equity.................................. 8,852 9,356
------- -------
Total liabilities and shareholders' equity.................. $31,640 $34,163
======= =======
</TABLE>
See accompanying notes.
F-24
<PAGE> 75
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenues(a)................................................. $ 14,582 $ 13,294 $10,064
-------- -------- -------
Cost of revenues(a)(b)...................................... 8,210 7,542 5,922
Selling, general and administrative(a)(b)................... 4,876 4,481 3,176
-------- -------- -------
Operating expenses.......................................... 13,086 12,023 9,098
-------- -------- -------
Business segment operating income........................... 1,496 1,271 966
Equity in pretax income of Entertainment Group(a)........... 356 686 290
Interest and other, net(a).................................. (1,180) (1,044) (1,174)
Corporate expenses(a)....................................... (86) (81) (78)
-------- -------- -------
Income before income taxes.................................. 586 832 4
Income taxes................................................ (418) (531) (160)
-------- -------- -------
Income (loss) before extraordinary item..................... 168 301 (156)
Extraordinary loss on retirement of debt, net of $37 and $22
million income tax benefit in 1997 and 1996,
respectively.............................................. -- (55) (35)
-------- -------- -------
Net income (loss)........................................... 168 246 (191)
Preferred dividend requirements(c).......................... (540) (319) (257)
-------- -------- -------
Net loss applicable to common shares........................ $ (372) $ (73) $ (448)
======== ======== =======
Basic and diluted loss per common share:
Loss before extraordinary item.............................. $ (.31) $ (.01) $ (.48)
======== ======== =======
Net loss.................................................... $ (.31) $ (.06) $ (.52)
======== ======== =======
Average common shares....................................... 1,194.7 1,135.4 862.4
======== ======== =======
</TABLE>
- ---------------
(a) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the years ended
December 31, 1998, 1997 and 1996, respectively: revenues-$487 million, $384
million and $224 million; cost of revenues-$(322) million, $(245) million
and $(177) million; selling, general and administrative-$(40) million, $(53)
million and $34 million; equity in pretax income of Entertainment Group-$105
million, $5 million and $(29) million; interest and other, net-$(9) million,
$(36) million and $(33) million; and corporate expenses-$72 million, $72
million and $69 million (Note 18).
<TABLE>
<S> <C> <C> <C>
(b) Includes depreciation and amortization expense of:...... $ 1,178 $ 1,294 $ 988
======== ======== =======
</TABLE>
(c) Preferred dividend requirements for 1998 include a one-time effect of $234
million ($.19 loss per common share) relating to the premium paid in
connection with the redemption of the Company's 10 1/4% Series M
exchangeable preferred stock ("Series M Preferred Stock") at an aggregate
cost of approximately $2.1 billion (Note 11).
See accompanying notes.
F-25
<PAGE> 76
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
OPERATIONS
Net income (loss)........................................... $ 168 $ 246 $ (191)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.................... -- 55 35
Depreciation and amortization............................... 1,178 1,294 988
Noncash interest expense.................................... 30 98 96
Excess (deficiency) of distributions over equity in pretax
income of Entertainment Group............................. 342 (207) (62)
Equity in losses (income) of other investee companies after
distributions............................................. 147 36 (53)
Changes in operating assets and liabilities:
Receivables............................................... (597) (167) (39)
Inventories............................................... (312) (84) (180)
Accounts payable and other liabilities.................... 810 501 (408)
Other balance sheet changes............................... 79 (364) 67
------- ------- -------
Cash provided by operations................................. 1,845 1,408 253
------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions................................ (159) (113) (261)
Capital expenditures........................................ (512) (574) (481)
Investment proceeds......................................... 569 187 318
Proceeds received from distribution of TWE Senior Capital... 455 455 --
------- ------- -------
Cash provided (used) by investing activities................ 353 (45) (424)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.................................................. 3,743 5,413 3,431
Debt repayments............................................. (2,317) (6,394) (5,271)
Borrowings against future stock option proceeds............. 1,015 230 488
Repayments of borrowings against future stock option
proceeds.................................................. (653) (185) --
Repurchases of Time Warner common stock..................... (2,240) (344) (456)
Redemption of Series M Preferred Stock...................... (2,093) -- --
Issuance of Series M Preferred Stock........................ -- -- 1,550
Dividends paid.............................................. (524) (338) (287)
Proceeds received from stock option and dividend
reinvestment plans........................................ 740 454 105
Other, principally financing costs.......................... (72) (68) (60)
------- ------- -------
Cash used by financing activities........................... (2,401) (1,232) (500)
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................. (203) 131 (671)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD(a).............. 645 514 1,185
------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD(a).................... $ 442 $ 645 $ 514
======= ======= =======
</TABLE>
- ---------------
(a) Includes current and noncurrent cash and equivalents at December 31, 1996
and 1995.
See accompanying notes.
F-26
<PAGE> 77
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, 1995................................ $ 30 $ 776 $ 5,034 $(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 6 668 680
Reduction in par value of common and preferred stock due to
TBS Transaction........................................... (32) (774) 806 --
Issuance of common stock in the TBS Transaction............. 3 6,024 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 11 12,245 (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 11 12,675 (3,334) 9,356
Net income.................................................. 168 168
Foreign currency translation adjustments.................... 4 4
Increase in realized and unrealized losses on derivative
financial instruments, net of $13 million tax benefit..... (20) (20)
Cumulative effect of change in accounting for derivative
financial instruments, net of $3 million tax benefit...... (18) (18)
------- -------
Comprehensive income (loss)............................... 134 134
Common stock dividends...................................... (216) (216)
Preferred stock dividends................................... (540) (540)
Issuance of common stock in connection with the conversion
of zero-coupon convertible notes due 2013................. 1,150 1,150
Issuance of common stock in connection with the conversion
of convertible preferred stock............................ (2) 1 151 (150) --
Repurchases of Time Warner common stock..................... (1) (2,239) (2,240)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans............................ 1 1,397 (190) 1,208
---- ----- ------- ------- -------
BALANCE AT DECEMBER 31, 1998................................ $ 2 $ 12 $13,134 $(4,296) $ 8,852
==== ===== ======= ======= =======
</TABLE>
- ---------------
(a) Includes a $13 million reduction (net of a $9 million tax effect) related to
realized gains on the sale of securities in 1997. In prior periods, this
amount was included in comprehensive income as a component of Time Warner's
unrealized gains on securities.
See accompanying notes.
F-27
<PAGE> 78
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Inc. ("Time Warner" or the "Company"), together with its
consolidated and unconsolidated subsidiaries, is the world's leading media and
entertainment company. Time Warner's 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: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; 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
MediaOne Group, Inc. ("MediaOne"), formerly U S WEST, Inc. 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 Cable Networks, Publishing,
Entertainment 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) leading cable television networks, such as HBO, Cinemax,
CNN, TNT and the TBS Superstation, (2) magazine franchises such as Time, People
and Sports Illustrated and direct marketing brands such as Time Life Inc. and
Book-of-the-Month Club, (3) 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, (4) unique and extensive film,
television and animation libraries of Warner Bros. and Turner Broadcasting
System, Inc. ("TBS"), and trademarks such as the Looney Tunes characters, Batman
and The Flintstones, (5) 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 and (6) Time Warner Cable, currently the 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 $1.309 billion in 1998, $1.342 billion in 1997 and $1.117 billion in
1996.
BASIS OF PRESENTATION
The consolidated financial statements of Time Warner reflect the
acquisition on October 10, 1996 of the remaining 80% interest in TBS that it did
not already own and certain cable-related transactions, as more fully described
herein (Notes 2 and 3). As a result of the acquisition of TBS, a new parent
company with the name "Time Warner Inc." replaced the old parent company of the
same name (now known as Time Warner
F-28
<PAGE> 79
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Common stock, paid-in-capital, stock options, per common share and average
common share amounts for all prior periods have been restated to give effect to
a two-for-one common stock split that occurred on December 15, 1998. In
addition, certain reclassifications have been made to the prior years' financial
statements to conform to the 1998 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 TRANSLATION
The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on
the balance sheet date, and local currency revenues and expenses are translated
at average rates of exchange during the period. Resulting translation gains or
losses, which have not been material, are included in accumulated deficit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the sale of future and existing music and publishing-related
products, as well as from the distribution of theatrical and television product,
in order to
F-29
<PAGE> 80
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Publishing and Music
The unearned portion of paid magazine subscriptions is deferred until
magazines are delivered to subscribers. Upon each delivery, a proportionate
share of the gross subscription price is included in revenues. Magazine
advertising revenues are recognized when the advertisements are published.
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 are recognized
when the products are shipped based on gross sales less a provision for future
returns.
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. Returned
goods included in inventory are valued at estimated realizable value, but not in
excess of cost.
Cable and Cable Networks
A significant portion of cable system and cable network 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
costs of rights to exhibit feature films and other programming on the cable
networks during one or more availability periods ("programming costs") generally
are recorded when the programming is initially available for exhibition, and are
allocated to the appropriate availability periods and amortized as the
programming is exhibited.
Filmed Entertainment
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 under these licensing agreements. For
F-30
<PAGE> 81
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash contracts, the related revenues will not be recognized until such product
is available for telecast under the contractual terms of the related license
agreement. For barter contracts, the related revenues will not be recognized
until the product is available for telecast and the advertising spots received
under such contracts are either used or sold to third parties. All of these
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"). Library product 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
generally 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 generally include the unamortized cost of completed
theatrical and television films allocated to the secondary markets, theatrical
films in production and the Library.
Proposed Changes to Film Accounting Standards
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued an exposure
draft of a proposed Statement of Position, "Accounting by Producers and
Distributors of Films" (the "SOP"). The proposed rules would establish new
accounting standards for producers and distributors of films. Among its many
provisions, the SOP would require revenue for the licensing of film and
television product to be recognized generally over the term of the related
agreement. This would represent a significant change to existing industry
practice, which generally requires such licensing revenue to be recognized when
the product is first available for telecast. This is because, after that date,
licensors have no further significant obligations under the terms of the related
licensing agreements.
While the SOP's proposals in many other areas (i.e., advertising and film
cost amortization) generally are consistent with Time Warner's accounting
policies, this is not the case with the proposed changes in revenue recognition
for licensed product. Adopting the proposed accounting standards for licensed
product would result in a significant one-time, noncash charge to earnings upon
adoption that would be reflected as a cumulative effect of a change in
accounting principle. This one-time, noncash charge would be reversed in future
periods as an increase to operating income when Time Warner re-recognizes the
revenues associated with the licensing of its film and television product over
the periods of the related licensing agreements. The SOP proposes an effective
date of January 1, 2000 for calendar year-end companies, with earlier
application encouraged. The provisions of the SOP are still being deliberated by
AcSEC and could change significantly prior to the issuance of a final standard.
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
F-31
<PAGE> 82
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $282 million and
$244 million at December 31, 1998 and 1997, respectively. Advertising expense,
excluding theatrical and television product, amounted to $1.154 billion in 1998,
$1.080 billion in 1997 and $1.050 billion in 1996.
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
Effective July 1, 1998, Time Warner adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 requires that all derivative financial instruments, such as interest rate
swap contracts and foreign exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments are
either recognized periodically in income or shareholders' equity (as a component
of comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The adoption of FAS 133 did not have
a material effect on Time Warner's primary financial statements, but did reduce
comprehensive income by $18 million in the accompanying consolidated statement
of shareholders' equity.
The carrying value of Time Warner's financial instruments approximates fair
value, except for differences with respect to long-term, fixed-rate debt (Note
7) and certain differences relating to cost method investments and other
financial instruments that are not significant. The fair value of financial
instruments 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
sixteen years for furniture, fixtures, cable television and other equipment.
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(MILLIONS)
<S> <C> <C>
Land and buildings....................................... $ 963 $ 962
Cable television equipment............................. 1,035 941
Furniture, fixtures and other equipment................ 1,400 1,337
------- -------
3,398 3,240
Less accumulated depreciation.......................... (1,407) (1,151)
------- -------
Total.................................................... $ 1,991 $ 2,089
======= =======
</TABLE>
F-32
<PAGE> 83
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, Time Warner has a significant and growing number 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, new television networks and Internet sites, 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 $800 million
in 1998, $912 million in 1997 and $681 million in 1996. Accumulated amortization
of intangible assets at December 31, 1998 and 1997 amounted to $3.9 billion and
$3.181 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 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.
F-33
<PAGE> 84
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Generally, 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 computed by dividing the net loss applicable
to common shares after preferred dividend requirements by the weighted average
of common shares outstanding during the period. Diluted loss per common share
adjusts basic loss per common share for the effects of convertible securities,
stock options and other potentially dilutive financial instruments, only in the
periods in which such effect is 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 established
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, gains and losses on certain derivative financial instruments 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.
The following summary sets forth the components of other comprehensive
income (loss) accumulated in shareholders' equity:
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN DERIVATIVE OTHER
UNREALIZED CURRENCY FINANCIAL COMPREHENSIVE
GAINS ON TRANSLATION INSTRUMENT INCOME
SECURITIES GAINS (LOSSES) LOSSES (LOSS)
---------- -------------- ---------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
Balance at December 31, 1997...... $5 $(87) $ -- $ (82)
1998 activity..................... -- 4 (38) (34)
-- ---- ---- -----
Balance at December 31, 1998...... $5 $(83) $(38) $(116)
== ==== ==== =====
</TABLE>
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 established 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).
F-34
<PAGE> 85
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CABLE TRANSACTIONS
In addition to continuing to use cable operating cash flow to finance the
level of capital spending necessary to upgrade the technological capability of
cable television systems and develop new services, Time Warner, TWE and the
TWE-Advance/Newhouse Partnership ("TWE-A/N") completed a series of transactions
in 1998. These transactions related to the cable television business and related
ancillary businesses that either reduced existing debt and/or Time Warner's and
TWE's share of future funding requirements for such businesses. These
transactions and a cable-related acquisition of Cablevision Industries
Corporation and related companies ("CVI") in 1996 are discussed more fully
below.
TCI CABLE TRANSACTIONS
During 1998, Time Warner, TWE, TWE-A/N and TCI Communications, Inc.
("TCI"), a subsidiary of Tele-Communications, Inc., consummated or agreed to
complete a number of cable-related transactions. These transactions consisted of
(i) the formation in December 1998 of a cable television joint venture in Texas
(the "Texas Cable Joint Venture") that is managed by Time Warner Cable, a
division of TWE, and owns cable television systems serving an aggregate 1.1
million subscribers, subject to approximately $1.3 billion of debt, (ii) the
expansion in August 1998 of 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) the agreement to exchange in 1999
various cable television systems serving approximately 575,000 subscribers for
other cable television systems of comparable size in an effort to enhance each
company's geographic clusters of cable television properties (the "TCI Cable
Trades"). The Texas and Kansas City joint ventures are being accounted for under
the equity method of accounting.
As a result of the Texas transaction, the combined debt of Time Warner and
TWE was reduced by approximately $650 million. Also, as a result of the Texas
and Kansas City transactions, Time Warner and TWE benefited from the geographic
clustering of cable television systems and the number of subscribers under the
management of Time Warner Cable was increased by approximately 660,000
subscribers, thereby making Time Warner Cable the largest cable television
operator in the U.S. The TCI Cable Trades are expected to close periodically
throughout 1999 and are subject to customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance that
such approvals will be obtained.
TIME WARNER TELECOM REORGANIZATION
In July 1998, in an effort to combine their business telephony operations
into a single entity that is intended to be self-financing, Time Warner, TWE and
TWE-A/N completed a reorganization of their business telephony operations (the
"Time Warner Telecom Reorganization") whereby (i) those operations conducted by
Time Warner, TWE and TWE-A/N were each contributed to a new holding company
named Time Warner Telecom LLC ("Time Warner Telecom"), and then (ii) TWE's and
TWE-A/N's interests in Time Warner Telecom were distributed to their partners,
Time Warner, MediaOne and the Advance/ Newhouse Partnership
("Advance/Newhouse"), a limited partner in TWE-A/N. As a result of the Time
Warner Telecom Reorganization, Time Warner, MediaOne and Advance/Newhouse own
interests in Time Warner Telecom of 61.98%, 18.85% and 19.17%, respectively.
Time Warner's interest in Time Warner Telecom is being accounted for under the
equity method of accounting because of certain approval rights held by MediaOne
and Advance/Newhouse.
Time Warner Telecom is a competitive local exchange carrier (CLEC) in
selected metropolitan areas across the United States where it offers a wide
range of telephony services to business customers. Following the Time Warner
Telecom Reorganization, Time Warner Telecom raised approximately $400 million of
cash in July 1998 through the issuance of public notes that mature in 2008. Such
notes are non-recourse to Time
F-35
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warner and the proceeds are being used by Time Warner Telecom to expand and
further develop its telephony networks and services.
In January 1999, Time Warner Telecom updated a previously filed,
preliminary registration statement with the Securities and Exchange Commission
to conduct an initial public offering of a minority interest of its common stock
(the "Time Warner Telecom IPO"). The Time Warner Telecom IPO was previously
postponed when the IPO market deteriorated and remains subject to market and
other conditions. There can be no assurance that it will be completed.
ROAD RUNNER JOINT VENTURE
In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp.
("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture to
operate and expand Time Warner Cable's and MediaOne's existing high-speed online
businesses (the "Road Runner Joint Venture"). In exchange for contributing these
operations, Time Warner received a common equity interest in the Road Runner
Joint Venture of 10.7%, TWE received a 25% interest, TWE-A/N received a 32.9%
interest and MediaOne received a 31.4% interest. In exchange for Microsoft and
Compaq contributing $425 million of cash to the Road Runner Joint Venture,
Microsoft and Compaq each received a preferred equity interest therein that is
convertible into a 10% common equity interest. Accordingly, on a fully diluted
basis, the Road Runner Joint Venture is owned 8.6% by Time Warner, 20% by TWE,
26.3% by TWE-A/N, 25.1% by MediaOne, 10% by Microsoft and 10% by Compaq. Each of
Time Warner's, TWE's and TWE-A/N's interest in the Road Runner Joint Venture is
being accounted for under the equity method of accounting.
The aggregate $425 million of capital contributed by Microsoft and Compaq
is being used by the Road Runner Joint Venture to continue to expand the roll
out of high-speed online services. Time Warner Cable has entered into an
affiliation agreement with the Road Runner Joint Venture, pursuant to which Time
Warner Cable provides Road Runner's high-speed online services to customers in
its cable franchise areas through its technologically advanced, high-capacity
cable architecture. In exchange, Time Warner Cable initially retains 70% of the
subscription revenues and 30% of the national advertising and transactional
revenues generated from the delivery of these online services to its cable
subscribers. Time Warner Cable's share of these subscription revenues will
change periodically to 75% by 2006.
PRIMESTAR
In April 1998, TWE and Advance/Newhouse transferred 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
Partners" and collectively, the "Primestar Assets") to Primestar, Inc.
("Primestar"), a separate holding company. As a result of that transfer and
similar transfers by the other previously existing partners of Primestar
Partners, Primestar Partners became an indirect wholly owned subsidiary of
Primestar. In exchange for contributing its interests in the Primestar Assets,
TWE received approximately 48 million shares of Primestar common stock
(representing an approximate 24% equity interest) and realized approximately
$240 million of debt reduction. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse received
an approximate 6% equity interest in Primestar. As a result of this transaction,
effective as of April 1, 1998, TWE deconsolidated the DBS Operations and the 24%
equity interest in Primestar received in the transaction is being accounted for
under the equity method of accounting. This transaction is referred to as the
"Primestar Roll-up Transaction."
In connection with the Primestar Roll-up Transaction, Primestar and
Primestar Partners own and operate the medium-power direct broadcast satellite
business, portions of which were formerly owned by TCI Satellite Entertainment,
Inc. ("TSAT") and the other previously existing partners of Primestar Partners.
Certain high-power system assets, including two high-power satellites, continue
to be owned by Tempo Satellite, Inc.
F-36
<PAGE> 87
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("Tempo"), a wholly owned subsidiary of TSAT. However, Primestar Partners has an
option to lease or purchase the entire capacity of the high-power system from
Tempo. In addition, Primestar has an option to purchase the stock or assets of
Tempo from TSAT.
In a related transaction, Primestar Partners also entered into an agreement
in June 1997 with The News Corporation Limited ("News Corp."), MCI WorldCom,
Inc. ("MCI") and American Sky Broadcasting LLC ("ASkyB"), pursuant to which
Primestar would acquire certain assets relating to the high-power, direct
broadcast satellite business of ASkyB (the "Primestar ASkyB Transaction"). In
May 1998, the U.S. Department of Justice brought a civil action against
Primestar, each of its cable owners, including TWE, and News Corp. and MCI, to
enjoin on antitrust grounds the Primestar ASkyB Transaction. Although the
parties had discussions with the U.S. Department of Justice in an attempt to
restructure the transaction, no resolution was reached and the parties
terminated their agreement in October 1998.
In the fourth quarter of 1998, TWE recorded a charge of approximately $210
million principally to reduce the carrying value of its interest in Primestar.
This charge reflected a significant decline in the fair value of Primestar
during the quarter and has been included in interest and other, net, in TWE's
1998 consolidated statement of operations.
In addition, Primestar, Primestar Partners and the stockholders of
Primestar have entered into an agreement to sell the medium-power direct
broadcast satellite business and assets to DirecTV, a competitor of Primestar
owned by Hughes Electronics Corp. Also, Primestar, Primestar Partners, the
stockholders of Primestar and Tempo entered into a second agreement with
DirecTV, pursuant to which DirecTV will purchase the high-power satellites from
Tempo, and Primestar and Primestar Partners will relinquish their respective
rights to acquire or use such high-power satellites. The price to be paid by
DirecTV pursuant to these agreements confirmed the decline in value of TWE's
interest in Primestar. The ultimate disposition of the medium-power assets of
Primestar is subject to Primestar bondholder and regulatory approvals, and the
disposition of certain of the high-power satellite rights is also subject to
regulatory approvals. Accordingly, there can be no assurance that such approvals
will be obtained and that these transactions will be consummated.
TWE-A/N TRANSFERS
As of December 31, 1998, TWE-A/N owned cable television systems (or
interests therein) serving approximately 6.3 million subscribers, of which 5.2
million subscribers were served by consolidated, wholly owned cable television
systems and 1.1 million subscribers were served by unconsolidated, partially
owned cable television systems. TWE-A/N had approximately $1.2 billion of debt
at December 31, 1998.
TWE-A/N is owned approximately 64.8% by TWE, the managing partner, 33.3% by
Advance/ Newhouse and 1.9% indirectly by Time Warner. TWE consolidates the
partnership, and the partnership interests owned by Advance/Newhouse and Time
Warner are 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, 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.
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 in TWE-A/N, 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
Communications ("Paragon"), a partnership formerly owning cable television
systems serving approximately 1 million subscribers that was wholly owned by
subsidiaries of Time Warner,
F-37
<PAGE> 88
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 has consolidated 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.
The TWE-A/N Transfers were accounted for effective as of January 1, 1998.
Time Warner did not recognize a gain or loss on the TWE-A/N Transfers. TWE has
continued to consolidate TWE-A/N and Time Warner has accounted for its interest
in TWE-A/N under the equity method of accounting.
On a pro forma basis, giving effect to the TWE-A/N Transfers as if they had
occurred at the beginning of 1997, Time Warner would have reported for the year
ended December 31, 1997 revenues of $13.233 billion, depreciation expense of
$375 million, operating income before noncash amortization of intangible assets
of $2.068 billion, operating income of $1.219 billion, equity in the pretax
income of the Entertainment Group of $679 million, income before extraordinary
item of $307 million ($.01 loss per common share) and net income of $252 million
($.06 loss per common share).
CVI ACQUISITION
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 5.8 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.
In October 1996, Time Warner reorganized the legal ownership of its wholly
owned cable subsidiaries, whereby the equity ownership of its other wholly owned
cable subsidiaries was contributed to CVI. In connection therewith, CVI was
renamed TWI Cable Inc.
3. 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 359.6 million shares of common stock (including 114.2 million
equivalent shares of common stock in the form of a special class of
non-redeemable common stock ("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
F-38
<PAGE> 89
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) approximately 28 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, 12.8 million
equivalent shares of common stock in the form 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.
4. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Investment in TWE........................................... $3,850 $5,577
Stock option related distributions due from TWE............. 1,130 417
Credit agreement debt due to TWE............................ (400) (400)
Other net amounts due to TWE, principally related to home
video distribution........................................ (395) (141)
------ ------
Investment in and amounts due to and from TWE............... 4,185 5,453
Investment in TWE-A/N and other Entertainment Group
companies................................................. 795 96
------ ------
Total....................................................... $4,980 $5,549
====== ======
</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, 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 MediaOne, which acquired such
interests in 1993 for $1.532 billion of cash and a $1.021 billion 4.4% note (the
"MediaOne Note Receivable") that was fully collected during 1996.
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
F-39
<PAGE> 90
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
A summary of the priority of Undistributed Contributed Capital, Time
Warner's ownership of Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 1998 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........................ $0.5 $ 0.6 8.00% 100.00%
Series A Capital...................... 5.6 12.8 13.00% 74.49%
Series B Capital...................... 2.9(d) 6.8 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
F-40
<PAGE> 91
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $326 million, $614 million and $210 million in
1998, 1997 and 1996, 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, although it does not appear likely at this
time that such targets will be achieved. In addition, MediaOne 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
at any time through May 2005 at a maximum exercise price of $1.25 billion to
$1.8 billion, depending on the year of exercise. Either MediaOne 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 TWE-A/N Transfers effective as of January 1, 1998, the
Primestar Roll-up Transaction effective as of April 1, 1998, the formation of
the Road Runner Joint Venture effective as of June 30, 1998 and the Time Warner
Telecom Reorganization effective as of July 1, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues.............................................. $12,256 $11,328 $10,861
Depreciation and amortization......................... (1,436) (1,386) (1,244)
Business segment operating income(1).................. 1,724 1,461 1,090
Interest and other, net(2)............................ (965) (357) (524)
Minority interest..................................... (264) (305) (207)
Income before income taxes............................ 423 727 290
Income before extraordinary item...................... 331 642 220
Net income............................................ 331 619 220
</TABLE>
- ---------------
(1) Includes net pretax gains of approximately $90 million in 1998 and $200
million in 1997 related to the sale or exchange of certain cable television
systems.
(2) Includes a charge of approximately $210 million in 1998 principally to
reduce the carrying value of an interest in Primestar. 1997 includes a gain
of approximately $250 million related to the sale of an interest in E!
Entertainment Television, Inc. ("E! Entertainment").
F-41
<PAGE> 92
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
CASH FLOW INFORMATION
Cash provided by operations........................... $ 2,288 $ 1,799 $ 1,912
Capital expenditures.................................. (1,603) (1,565) (1,719)
Investments and acquisitions.......................... (388) (172) (146)
Investment proceeds................................... 1,246 520 612
Borrowings............................................ 1,514 3,400 215
Debt repayments....................................... (1,898) (3,085) (716)
Issuance of preferred stock of subsidiary............. -- 243 --
Collections on note receivable from MediaOne.......... -- -- 169
Capital distributions................................. (1,153) (934) (228)
Other financing activities, net....................... (241) (100) (92)
Increase (decrease) in cash and equivalents........... (235) 106 7
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................ $ 87 $ 322
Total current assets........................................ 4,187 3,623
Total assets................................................ 22,241 20,739
Total current liabilities................................... 4,940 3,976
Long-term debt.............................................. 6,578 5,990
Minority interests.......................................... 1,522 1,210
Preferred stock of subsidiary............................... 217 233
Time Warner General Partners' Senior Capital................ 603 1,118
Partners' capital........................................... 5,210 6,430
</TABLE>
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.
The Time Warner General Partners received $579 million and $535 million in
1998 and 1997, respectively, of distributions from TWE relating to their Senior
Capital interests, thereby increasing the cumulative cash distributions received
from TWE on such interests to $1.5 billion. The Time Warner General Partners'
remaining $603 million Senior Capital interests and any undistributed
partnership income allocated thereto (based on an 8% annual rate of return) are
required to be distributed on July 1, 1999.
At December 31, 1998 and 1997, the Time Warner General Partners had
recorded $1.130 billion and $417 million, respectively, of stock option related
distributions due from TWE, based on closing prices of Time Warner common stock
of $62.06 and $31.00, 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 1998, the Time Warner General
Partners received distributions from TWE in the amount of $1.153 billion,
consisting of $579 million of Senior Capital distributions (representing the
return of $455 million of contributed capital and the distribution of $124
million of priority capital return), $314 million of tax-related distributions
and $260 million of stock option related distributions. During 1997, the Time
Warner General Partners received distributions from TWE in the amount of $934
million, consisting of $535 million of
F-42
<PAGE> 93
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
In addition, in connection with the Time Warner Telecom Reorganization, TWE
made a $191 million noncash distribution to its partners, of which certain
wholly owned subsidiaries of Time Warner received an interest in Time Warner
Telecom recorded at $143 million based on TWE's historical cost of the net
assets (Note 2).
DEBT GUARANTEES
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.5 billion of TWE's debt and accrued interest at December 31,
1998, 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. In addition, in connection with the TWE-A/N Transfers (Note
2), approximately $1.2 billion of TWE-A/N's debt and accrued interest at
December 31, 1998 has been guaranteed by TWI Cable and certain of its
subsidiaries.
SIX FLAGS
In April 1998, TWE sold its remaining 49% interest in Six Flags
Entertainment Corporation ("Six Flags") to Premier Parks Inc. ("Premier"), a
regional theme park operator, for approximately $475 million of cash. TWE used
the net, after-tax proceeds from this transaction to reduce debt by
approximately $300 million. 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. A substantial portion of the gain
on this transaction has been deferred by TWE, principally as a result of
uncertainties surrounding realization that relate to ongoing litigation and
TWE's continuing guarantees of certain significant long-term obligations
associated with the Six Flags Over Texas and Six Flags Over Georgia theme parks.
5. OTHER INVESTMENTS
Time Warner's other investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
---- ------
(MILLIONS)
<S> <C> <C>
Equity method investments................................... $483 $1,350
Cost and fair-value method investments...................... 311 145
---- ------
Total....................................................... $794 $1,495
==== ======
</TABLE>
In addition to TWE and its equity investees, companies accounted for using
the equity method include: Time Warner Telecom (62% owned), the Columbia House
Company partnerships (50% owned), other music joint ventures (generally 50%
owned) and Cinamerica Theatres, L.P. (sold in 1997, but previously 50%
F-43
<PAGE> 94
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues................................................. $1,275 $1,336 $1,773
Depreciation and amortization............................ (43) (13) (29)
Operating income (loss).................................. (1) 80 173
Net income (loss)........................................ (109) (36) 61
Current assets........................................... 1,183 792 1,002
Total assets............................................. 2,065 1,132 1,616
Current liabilities...................................... 587 418 517
Long-term debt........................................... 1,807 1,303 1,360
Total liabilities........................................ 2,464 1,791 1,999
Total shareholders' deficit or partners' capital......... (399) (659) (383)
</TABLE>
In addition to the equity investees listed above, TWE's equity investees at
December 31, 1998 included: Comedy Partners, L.P. (50% owned), certain cable
television system joint ventures (generally 50% owned), the Road Runner Joint
Venture (57.9% owned, excluding Time Warner's direct 10.7% interest), Primestar
(24% owned), Six Flags (49% owned in 1997 and 1996), certain international cable
and programming joint ventures (25% to 50% owned) and Courtroom Television
Network (50% 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,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues................................................. $2,329 $2,207 $1,823
Depreciation and amortization............................ (706) (235) (197)
Operating income (loss).................................. (265) 118 62
Net loss................................................. (352) (82) (138)
Current assets........................................... 665 412 624
Total assets............................................. 5,228 3,046 3,193
Current liabilities...................................... 628 993 407
Long-term debt........................................... 2,917 1,625 2,197
Total liabilities........................................ 3,699 2,734 2,829
Total shareholders' equity or partners' capital.......... 1,529 312 364
</TABLE>
Included in the foregoing summary is combined financial information of Time
Warner Cable's unconsolidated cable television systems that serve an aggregate
of 2.3 million subscribers as of December 31, 1998. Time Warner Cable has an
approximate 50% weighted-average interest in these cable television systems. For
1998, excluding the operating results of the Texas Cable Joint Venture which was
formed at the end of the year, these cable television systems reported combined
operating income of $93 million and combined depreciation and amortization of
$160 million. Similarly, at the end of 1998, including approximately $1.3
billion of debt of the Texas Cable Joint Venture, these cable television systems
had debt of approximately $2.4 billion.
F-44
<PAGE> 95
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization............... $ 51 $ 308 $ 68 $ 228
Completed and not released................ 20 -- 88 48
In process and other...................... 2 240 -- 141
Library, less amortization................ -- 1,007 -- 1,064
Programming costs, less amortization........ 457 345 293 285
Magazines, books and recorded music......... 416 -- 381 --
---- ------ ---- ------
Total....................................... $946 $1,900 $830 $1,766
==== ====== ==== ======
</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 $633 million in 1998 and $506 million in 1997; and
the total cost amortized amounted to $585 million and $613 million,
respectively. Excluding the Library, the unamortized cost of completed films at
December 31, 1998 amounted to $379 million, approximately 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, 1998 MATURITIES 1998 1997
----------------- ---------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
Bank credit agreement borrowings.... 6.0% 2002 $ 1,234 $ 2,600
Fixed-rate senior notes and
debentures........................ 7.8% 2000-2036 8,491 6,909
Variable-rate senior notes.......... 4.8% 2009-2031 1,200 1,200
Zero-coupon convertible notes....... -- -- -- 1,124
------- -------
Total............................... $10,925 $11,833
======= =======
</TABLE>
Substantially all of Time Warner's long-term debt represents the
obligations of its wholly owned subsidiaries TW Companies, TBS and TWI Cable.
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, the credit profile associated with the indebtedness of Time Warner or
any of the Guarantor Subsidiaries is substantially the same.
FINANCING ACTIVITIES
During the past three years, in response to favorable market conditions and
in connection with certain acquisitions, Time Warner and its consolidated
subsidiaries have refinanced approximately $8.5 billion of debt. These debt
refinancings have had the positive effect of lowering the Company's cost of
borrowing, staggering debt maturities and, with respect to the redemption of
certain convertible securities, eliminating the potential dilution from the
conversion of such securities into 62.5 million shares of Time Warner common
stock. In connection with these refinancings, Time Warner recognized an
extraordinary loss on the retirement of debt of $55 million in 1997 and $35
million in 1996.
F-45
<PAGE> 96
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to these refinancings, Time Warner continued its debt reduction
efforts in 1998. Debt reduction of approximately $3 billion was partially offset
by a $2.1 billion increase in debt in order to fund the 1998 redemption of Time
Warner's Series M Preferred Stock (Note 11). This debt reduction was achieved
principally by using cash provided by operations, proceeds from certain asset
sales, cash distributions from TWE and the noncash transfer of approximately $1
billion of debt to TWE-A/N as part of the TWE-A/N Transfers (Note 2).
ZERO-COUPON CONVERTIBLE NOTES
During 1998, approximately $1.15 billion accreted amount of zero-coupon
convertible notes due 2013 (the "Zero-Coupon Convertible Notes") were converted
into an aggregate 37.4 million shares of Time Warner common stock. To partially
offset the dilution resulting from this conversion, Time Warner incurred a
corresponding $1.15 billion of debt and used the proceeds therefrom to
repurchase common stock (Note 12).
VARIABLE-RATE NOTES
At December 31, 1998, variable-rate senior notes consisted 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.
BANK CREDIT AGREEMENT
As part of the debt refinancings referred to above, Time Warner, together
with certain of its consolidated and unconsolidated subsidiaries, entered into a
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.
F-46
<PAGE> 97
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, Time Warner had interest rate swap contracts to pay
floating-rates of interest and receive fixed-rates of interest on $1.6 billion
notional amount of indebtedness, which resulted in approximately 37% of Time
Warner's underlying debt being subject to variable interest rates (Note 15).
Interest expense amounted to $891 million in 1998, $1.049 billion in 1997
and $968 million in 1996, including $6 million in 1998, $19 million in 1997 and
$26 million in 1996 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% at December 31, 1998 and 1997.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1998 consist of $500 million due in 2000, and $1.234 billion due in
2002. Such repayments exclude the aggregate redemption prices of $600 million in
1999 and $600 million in 2001 relating to the variable-rate senior notes, in the
years in which the holders thereof may first exercise their redemption options.
FAIR VALUE OF DEBT
Based on the level of interest rates prevailing at December 31, 1998 and
1997, the fair value of Time Warner's fixed-rate debt exceeded its carrying
value by $1.098 billion and $753 million, respectively. Unrealized gains or
losses on debt do not result in the realization or expenditure of cash and
generally are not recognized for financial reporting purposes unless the debt is
retired prior to its maturity.
8. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In 1998, 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"), which
replaced its previously existing facility. Borrowings under the Stock Option
Proceeds Credit Facility are principally used to fund stock repurchases and
approximately $12 million of future preferred dividend requirements on Time
Warner's convertible preferred stock as of December 31, 1998. At December 31,
1998 and 1997, Time Warner had outstanding borrowings against future stock
option proceeds of $895 million and $533 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 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 $900 million through March 2000, and
thereafter in full on a cumulative basis, permanently reduces the borrowing
availability under the facility. At December 31, 1998, based on a closing market
price of Time Warner common stock of $62.06, the aggregate value of potential
proceeds to Time Warner from the exercise of outstanding vested, "in the money"
stock options covered under the facility was approximately $1.9 billion,
representing a 1.5 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
F-47
<PAGE> 98
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Time Warner had placed 76 million shares in escrow at
December 31, 1998, 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 210 million shares held in escrow. 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 certain classes of its convertible
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.
9. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
---- ---------- -----
(MILLIONS)
<S> <C> <C> <C>
Domestic.................................................. $486 $728 $(193)
Foreign................................................... 100 104 197
---- ---- -----
Total..................................................... $586 $832 $ 4
==== ==== =====
</TABLE>
Current and deferred income taxes (tax benefits) provided are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
----- ---------- -----
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current(1)............................................. $ 436 $191 $ 50
Deferred............................................... (259) 49 (143)
Foreign:
Current(2)............................................. 260 205 230
Deferred............................................... (49) (3) (16)
State and Local:
Current(1)............................................. 166 88 89
Deferred............................................... (136) 1 (50)
----- ---- -----
Total.................................................... $ 418 $531 $ 160
===== ==== =====
</TABLE>
- ---------------
(1) Includes utilization of tax carryforwards of $126 million in 1998, $109
million in 1997 and $77 million in 1996. Excludes current federal and state
and local tax benefits of $478 million in 1998, $165 million in 1997 and $20
million in 1996 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 and $4 million
in 1996 resulting from the retirement of debt, which reduced the
extraordinary losses in such years.
(2) Includes foreign withholding taxes of $113 million in 1998, $114 million in
1997 and $101 million in 1996.
The differences between income taxes expected at the U.S. federal statutory
income tax rate of 35% 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.
F-48
<PAGE> 99
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Taxes on income at U.S. federal statutory rate.............. $205 $291 $ 2
State and local taxes, net of federal tax benefits.......... 20 58 26
Nondeductible goodwill amortization......................... 170 170 131
Other nondeductible expenses................................ 13 11 10
Foreign income taxed at different rates, net of U.S. foreign
tax credits............................................... -- 9 4
Other....................................................... 10 (8) (13)
---- ---- ----
Total....................................................... $418 $531 $160
==== ==== ====
</TABLE>
Significant components of Time Warner's net deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Assets acquired in business combinations.................... $3,158 $3,352
Depreciation and amortization............................... 1,112 1,152
Unrealized appreciation of certain marketable securities.... 4 4
Other....................................................... 452 449
------ ------
Deferred tax liabilities.................................... 4,726 4,957
------ ------
Tax carryforwards........................................... 304 327
Accrued liabilities......................................... 513 381
Receivable allowances and return reserves................... 217 203
Other....................................................... 201 86
------ ------
Deferred tax assets......................................... 1,235 997
------ ------
Net deferred tax liabilities................................ $3,491 $3,960
====== ======
</TABLE>
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $945 million at December 31, 1998. 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, 1998 consisted of $456
million of net operating losses, $109 million of investment tax credits and $34
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
F-49
<PAGE> 100
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum tax credits which do not expire, the other U.S. federal tax
carryforwards expire in varying amounts as follows for income tax reporting
purposes:
<TABLE>
<CAPTION>
CARRYFORWARDS
-----------------------
NET INVESTMENT
OPERATING TAX
LOSSES CREDITS
--------- ----------
(MILLIONS)
<S> <C> <C>
1999........................................................ $ 3 $ 1
2000........................................................ 1 12
2001........................................................ 2 35
2002........................................................ -- 32
Thereafter up to 2011....................................... 450 29
---- ----
$456 $109
==== ====
</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 common stock of
Hasbro, Inc. ("Hasbro") 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. REDEMPTION OF SERIES M PREFERRED STOCK
In December 1998, Time Warner redeemed all of its outstanding shares of
10 1/4% Series M Preferred Stock, which were issued initially in April 1996. The
aggregate redemption cost of approximately $2.1 billion was funded with proceeds
from the issuance of lower-cost debt. As a result of this redemption, preferred
dividend requirements in Time Warner's 1998 consolidated statement of operations
include a one-time effect of $234 million ($.19 loss per common share) relating
to the redemption premium paid in connection therewith.
Because the weighted-average interest rate of the debt is approximately 375
basis points lower than the dividend rate of the Series M Preferred Stock and
the interest on the debt is tax deductible (whereas
F-50
<PAGE> 101
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dividends are not), Time Warner expects to realize approximately $100 to $125
million of annual cash savings as a result of this redemption.
12. SHAREHOLDERS' EQUITY
At December 31, 1998, shareholders' equity of Time Warner included 22.6
million shares of convertible preferred stock that are convertible into 94.1
million shares of common stock, 57.1 million shares of Series LMCN-V Common
Stock that are convertible into 114.2 million shares of common stock and 1.118
billion shares of common stock (net of 18.7 million shares of common stock in
treasury). Time Warner currently is authorized to issue up to 250 million shares
of preferred stock, up to 2 billion shares of common stock and up to 200 million
shares of additional classes of common stock, including Series LMCN-V Common
Stock.
In December 1998, a two-for-one common stock split was effectuated by the
payment of a 100% stock dividend in the amount of 558.2 million shares of common
stock (the "1998 Stock Split"). The 1998 Stock Split did not affect the number
of shares of Series LMCN-V Common Stock outstanding. Accordingly, each share of
Series LMCN-V Common Stock now is equivalent effectively to two shares of common
stock. Shares of Series LMCN-V Common Stock continue to have limited voting
rights.
During 1998 and January 1999, Time Warner issued approximately 66 million
shares of common stock in connection with the conversion of 15.8 million shares
of convertible preferred stock. These conversions are expected to result in
approximately $60 million of cash dividend savings in the aggregate for Time
Warner through the end of 1999.
During 1998, Time Warner acquired 59.9 million shares of its common stock
at an aggregate cost of $2.24 billion under its existing common stock repurchase
program, thereby increasing the cumulative shares purchased to approximately
95.1 million shares at an aggregate cost of $3.04 billion. Except for
repurchases of common stock using borrowings in 1998 that offset $1.15 billion
of debt reduction associated with the conversion of the Zero-Coupon Convertible
Notes into common stock, these repurchases were funded with stock option
exercise proceeds and borrowings under Time Warner's Stock Option Proceeds
Credit Facility.
In January 1999, Time Warner's Board of Directors authorized a new common
stock repurchase program that allows the Company to repurchase, from time to
time, up to $5 billion of common stock. This program is expected to be completed
over a three-year period. However, actual repurchases in any period will be
subject to market conditions. Along with stock option exercise proceeds and
borrowings under the Stock Option Proceeds Credit Facility, additional funding
for this program is expected to be provided by anticipated future free cash flow
and financial capacity.
As of December 31, 1998, Time Warner had approximately 22.6 million shares
of convertible preferred stock outstanding. However, in January 1999, all of the
outstanding shares of Series G and Series H preferred
F-51
<PAGE> 102
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock were converted into 12.5 million shares of common stock. Set forth below
is a summary of the principal terms of Time Warner's classes of convertible
preferred stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES FINAL $3.75
OF COMMON STOCK PER SHARE EARLIEST EARLIEST
SHARES ISSUABLE UPON DIVIDEND EXCHANGE REDEMPTION
DESCRIPTION OUTSTANDING CONVERSION DATE DATE DATE
- ----------- ----------- ---------------- ----------- -------- ----------
(MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C>
Series D preferred stock.......... 11.0 45.8 7/6/99 7/6/99 7/6/00
Series E preferred stock.......... 3.1 13.0 1/4/01 1/4/01 1/4/01
Series F preferred stock.......... 3.0 12.4 1/4/00 1/4/00 1/4/01
Series G preferred stock.......... 1.2 5.0 9/5/99 9/5/99 9/5/99
Series H preferred stock.......... 1.8 7.5 9/5/99 9/5/00 9/5/99
Series I preferred stock.......... 0.7 2.9 10/2/99 10/2/99 10/2/99
Series J preferred stock.......... 1.8 7.5 5/2/00 5/2/00 5/2/00
---- -----
Total shares outstanding at
December 31, 1998............... 22.6 94.1
Conversion of Series G and H
preferred stock in January
1999............................ (3.0) (12.5)
---- -----
Total shares outstanding at
January 31, 1999................ 19.6 81.6
==== =====
</TABLE>
The principal terms of each outstanding series of convertible preferred
stock (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 4.16528 shares of Time Warner common stock at a conversion
price of $24 per share (based on its liquidation value), (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) 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 four 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. In addition, Time Warner has the right to
redeem each series of Convertible Preferred Stock, in whole or in part, for cash
at the liquidation value plus accrued dividends, at any time on or after the
respective redemption date.
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 $75
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, 1998, Time Warner had convertible securities and
outstanding stock options that were convertible or exercisable into
approximately 230 million shares of common stock (as adjusted for the January
1999 conversion of Series G and Series H preferred stock).
F-52
<PAGE> 103
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At February 28, 1999, 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.
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 with
exercise prices equal to, or in excess of, fair market value at the date of
grant. Accordingly, in accordance with APB 25 and related interpretations,
compensation cost is not generally 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,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $ 168 $ 246 $(191)
===== ===== =====
Pro forma................................................. $ 106 $ 200 $(216)
===== ===== =====
Net loss per common share:
As reported............................................... $(.31) $(.06) $(.52)
===== ===== =====
Pro forma................................................. $(.36) $(.10) $(.55)
===== ===== =====
</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 is not
comparable to the impact on pro forma net income for 1998 and 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 1998, 1997 and
1996: dividend yields of 0.5%, 1% and 1%, respectively; expected volatility of
21.6%, 21.9% and 21.7%, respectively; risk-free interest rates of 5.5%, 6.4% and
6.1%, respectively; and expected lives of 5 years in all periods. The weighted
average fair value of an option granted during the year was $11.13 ($6.57, net
of taxes), $6.58 ($3.88, net of taxes) and $5.78 ($3.41, net of taxes) for the
years ended December 31, 1998, 1997 and 1996, respectively. In each period, 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
$49.54 and $9.45 ($5.58, net of taxes), respectively, in 1998; $32.45 and $6.29
($3.71, net of taxes), respectively, in 1997; and $26.44 and $4.44 ($2.62, net
of taxes), respectively, in 1996.
F-53
<PAGE> 104
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996.................................. 157,238 $15.68
Granted..................................................... 18,920 21.65
Exercised................................................... (7,372) 13.45
Assumed in connection with the TBS Transaction.............. 27,425 13.20
Cancelled................................................... (477) 20.41
-------
Balance at December 31, 1996................................ 195,734 $15.98
Granted..................................................... 16,544 22.41
Exercised................................................... (32,632) 13.66
Cancelled................................................... (942) 18.89
-------
Balance at December 31, 1997................................ 178,704 $16.99
Granted..................................................... 18,100 37.71
Exercised................................................... (48,323) 15.01
Cancelled................................................... (417) 28.01
-------
Balance at December 31, 1998................................ 148,064 $20.14
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable........................................... 112,471 145,616 165,394
Available for future grants........................... 11,207 12,771 16,063
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $10................. 7,726 1.7 years $ 8.98 7,726 $ 8.98
$10.00 to $15.00.......... 25,239 3.1 years $12.14 25,239 $12.14
$15.01 to $20.00.......... 59,851 4.3 years $18.20 55,545 $18.16
$20.01 to $30.00.......... 35,538 6.4 years $22.02 23,056 $21.73
$30.01 to $45.00.......... 16,573 8.9 years $35.09 905 $31.75
$45.01 to $54.05.......... 3,137 9.1 years $48.44 -- --
------- -------
Total..................... 148,064 5.1 years $20.14 112,471 $17.02
======= =======
</TABLE>
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 $13.88 for options granted prior to the TWE capitalization on June 30, 1992.
There were 47.7 million options held by employees of TWE at December 31, 1998,
33.4 million of which were exercisable.
F-54
<PAGE> 105
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Time Warner's common stock represents
approximately 12% and 7% of plan assets at December 31, 1998 and 1997,
respectively. A summary of activity for Time Warner's defined benefit pension
plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
COMPONENTS OF PENSION EXPENSE
Service cost................................................ $ 53 $ 45 $ 49
Interest cost............................................... 74 68 64
Expected return on plan assets.............................. (73) (62) (57)
Net amortization and deferral............................... 2 1 4
---- ---- ----
Total....................................................... $ 56 $ 52 $ 60
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------ -----
(MILLIONS)
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year........... $ 990 $ 850
Service cost................................................ 53 45
Interest cost............................................... 74 68
Actuarial loss.............................................. 98 78
Benefits paid............................................... (52) (51)
------ -----
Projected benefit obligation at end of year................. 1,163 990
------ -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 839 704
Actual return on plan assets................................ 191 162
Employer contribution....................................... 16 15
Benefits paid............................................... (46) (42)
------ -----
Fair value of plan assets at end of year.................... 1,000 839
------ -----
Unfunded projected benefit obligation....................... (163) (151)
Additional minimum liability(a)............................. (33) (38)
Unrecognized actuarial loss (gain).......................... (16) 3
Unrecognized prior service cost............................. 16 15
------ -----
Accrued pension expense..................................... $ (196) $(171)
====== =====
</TABLE>
- ---------------
(a) The additional minimum liability is offset fully by a corresponding
intangible asset recognized in the consolidated balance sheet.
F-55
<PAGE> 106
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate............................................... 6.75% 7.25% 7.75%
Expected return on plan assets.............................. 9% 9% 9%
Rate of compensation increase............................... 6% 6% 6%
</TABLE>
Included above are projected benefit obligations and accumulated benefit
obligations for unfunded defined benefit pension plans of $118 million and $97
million as of December 31, 1998, respectively; and $94 million and $72 million
as of December 31, 1997, respectively.
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 $84 million in
1998, $83 million in 1997 and $67 million in 1996. Contributions to the savings
plans are based upon a percentage of the employees' elected contributions.
Contributions to the profit sharing plans are generally determined by management
and approved by the boards of directors of the participating companies.
15. DERIVATIVE FINANCIAL INSTRUMENTS
Time Warner uses derivative financial instruments principally to manage the
risk that changes in interest rates will affect either the fair value of its
debt obligations or the amount of its future interest payments and, with regard
to foreign currency exchange rates, to manage the risk that changes in exchange
rates will affect the amount of unremitted or future royalties and license fees
to be received from the sale of U.S. copyrighted products abroad. The following
is a summary of Time Warner's risk management strategies and the effect of these
strategies on Time Warner's consolidated financial statements.
INTEREST RATE RISK MANAGEMENT
Interest Rate Swap Contracts
Interest rate swap contracts are used to adjust the proportion of total
debt that is subject to variable and fixed interest rates. Under an interest
rate swap contract, Time Warner either agrees to pay an amount equal to a
specified variable-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 variable-rate
amount and to pay a fixed-rate amount. The notional amounts of the contract 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 counterparty credit risk.
Time Warner accounts for its interest rate swap contracts differently based
on whether it has agreed to pay an amount based on a variable-rate or fixed-rate
of interest. For interest rate swap contracts under which Time Warner agrees to
pay variable-rates of interest, these contracts are considered to be a hedge
against changes in the fair value of Time Warner's fixed-rate debt obligations.
Accordingly, the interest rate swap contracts are reflected at fair value in
Time Warner's consolidated balance sheet and the related portion of fixed-rate
debt being hedged is reflected at an amount equal to the sum of its carrying
value plus an adjustment representing the change in fair value of the debt
obligations attributable to the interest rate risk being hedged. In addition,
changes during any accounting period in the fair value of these interest rate
swap contracts, as well as offsetting changes in the adjusted carrying value of
the related portion of fixed-rate debt
F-56
<PAGE> 107
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
being hedged, are recognized as adjustments to interest expense in Time Warner's
consolidated statement of operations. The net effect of this accounting on Time
Warner's operating results is that interest expense on the portion of fixed-rate
debt being hedged is generally recorded based on variable interest rates.
For interest rate swap contracts under which Time Warner agrees to pay
fixed-rates of interest, these contracts are considered to be a hedge against
changes in the amount of future cash flows associated with Time Warner's
interest payments of Time Warner's variable-rate debt obligations. Accordingly,
the interest rate swap contracts are reflected at fair value in Time Warner's
consolidated balance sheet and the related gains or losses on these contracts
are deferred in shareholders' equity (as a component of comprehensive income).
These deferred gains and losses are then amortized as an adjustment to interest
expense over the same period in which the related interest payments being hedged
are recognized in income. However, to the extent that any of these contracts are
not considered to be perfectly effective in offsetting the change in the value
of the interest payments being hedged, any changes in fair value relating to the
ineffective portion of these contracts are immediately recognized in income. The
net effect of this accounting on Time Warner's operating results is that
interest expense on the portion of variable-rate debt being hedged is generally
recorded based on fixed interest rates.
At December 31, 1998, Time Warner had interest rate swap contracts to pay
variable-rates of interest (average six-month LIBOR rate of 5.5%) and receive
fixed-rates of interest (average rate of 5.5%) on $1.6 billion notional amount
of indebtedness, which resulted in approximately 37% of Time Warner's underlying
debt, and 39% 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, 1998 is as follows: 1999-$1.2
billion; and 2000-$400 million. At December 31, 1997, Time Warner had interest
rate swap contracts on $2.3 billion notional amount of indebtedness. The net
gain or loss on the ineffective portion of these interest rate swap contracts
was not material in any period.
Interest Rate Lock Agreements
In the past, Time Warner sometimes has used interest rate lock agreements
to hedge the risk that the cost of a future issuance of fixed-rate debt may be
adversely affected by changes in interest rates. Under an interest rate lock
agreement, Time Warner agrees to pay or receive an amount equal to the
difference between the net present value of the cash flows for a notional
principal amount of indebtedness based on the existing yield of a U.S. treasury
bond at the date when the agreement is established and at the date when the
agreement is settled, typically when Time Warner issues new debt. The notional
amounts of the agreement are not exchanged. Interest rate lock agreements are
entered into with a number of major financial institutions in order to minimize
counterparty credit risk.
Interest rate lock agreements are reflected at fair value in Time Warner's
consolidated balance sheet and the related gains or losses on these agreements
are deferred in shareholders' equity (as a component of comprehensive income).
These deferred gains and losses are then amortized as an adjustment to interest
expense over the same period in which the related interest costs on the new debt
issuances are recognized in income.
At December 31, 1998, Time Warner had outstanding interest rate lock
agreements for an aggregate $650 million notional principal amount of
indebtedness, which were settled in January 1999. Time Warner no longer intends
to use interest rate lock agreements to hedge the cost of future issuances of
fixed-rate debt. At December 31, 1998, Time Warner had deferred approximately
$32 million of net losses on interest rate lock agreements, of which
approximately $2 million is expected to be recognized in income over the next
twelve months.
F-57
<PAGE> 108
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, 1998, 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. To hedge this exposure, Time
Warner used foreign exchange contracts that generally have maturities of three
months or less, which generally will be rolled over to provide continuing
coverage throughout the year. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting purchase contract. Time Warner reimburses
or is reimbursed by TWE for contract gains and losses related to TWE's foreign
currency exposure. Foreign exchange contracts are placed with a number of major
financial institutions in order to minimize credit risk.
Time Warner records these foreign exchange contracts at fair value in its
consolidated balance sheet and the related gains or losses on these contracts
are deferred in shareholders' equity (as a component of comprehensive income).
These deferred gains and losses are recognized in income in the period in which
the related royalties and license fees being hedged are received and recognized
in income. However, to the extent that any of these contracts are not considered
to be perfectly effective in offsetting the change in the value of the royalties
and license fees being hedged, any changes in fair value relating to the
ineffective portion of these contracts are immediately recognized in income.
Gains and losses on foreign exchange contracts are generally included as a
component of interest and other, net, in Time Warner's consolidated statement of
operations.
At December 31, 1998, Time Warner had contracts for the sale of $755
million and the purchase of $259 million of foreign currencies at fixed rates,
primarily Japanese yen (40% of net contract value), English pounds (4%), German
marks (28%), Canadian dollars (10%) and French francs (16%), compared to
contracts for the sale of $507 million and the purchase of $139 million of
foreign currencies at December 31, 1997. Time Warner had deferred approximately
$6 million of net losses on foreign exchange contracts at December 31, 1998,
which is all expected to be recognized in income over the next twelve months.
For the years ended December 31, 1998, 1997 and 1996, Time Warner recognized $8
million in losses, $27 million in gains and $15 million in gains, respectively,
and TWE recognized $2 million in losses, $14 million in gains and $6 million in
gains, 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.
16. SEGMENT INFORMATION
Time Warner classifies its businesses into four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Publishing, consisting principally of interests in magazine publishing, book
publishing and direct marketing; Entertainment, consisting principally of
interests in recorded music and music publishing, filmed entertainment,
television production and television broadcasting; 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
F-58
<PAGE> 109
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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's and the Entertainment Group's cable
segments reflect the TWE-A/N Transfers effective as of January 1, 1998, the
Primestar Roll-up Transaction effective as of April 1, 1998, the formation of
the Road Runner Joint Venture effective as of June 30, 1998 and the Time Warner
Telecom Reorganization effective as of July 1, 1998. In addition, the operating
results of Time Warner reflect the cable networks and filmed
entertainment-related acquisition of TBS effective as of October 10, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
Time Warner:
Publishing............................................ $ 4,496 $ 4,290 $ 4,117
Music................................................. 4,025 3,691 3,949
Cable Networks-TBS.................................... 3,325 2,900 680
Filmed Entertainment-TBS.............................. 1,917 1,531 455
Cable................................................. 964 997 909
Intersegment elimination.............................. (145) (115) (46)
------- ------- -------
Total................................................. $14,582 $13,294 $10,064
======= ======= =======
Entertainment Group:
Filmed Entertainment-Warner Bros...................... $ 6,061 $ 5,472 $ 5,648
Broadcasting-The WB Network........................... 260 136 87
Cable Networks-HBO.................................... 2,052 1,923 1,763
Cable................................................. 4,378 4,243 3,851
Intersegment elimination.............................. (495) (446) (488)
------- ------- -------
Total................................................. $12,256 $11,328 $10,861
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
EBITA(1)
Time Warner:
Publishing............................................... $ 607 $ 529 $ 464
Music.................................................... 493 467 653
Cable Networks-TBS....................................... 706 573 142
Filmed Entertainment-TBS................................. 192 200 30
Cable(2)................................................. 325 427 353
Intersegment elimination................................. (27) (13) 5
------ ------ ------
Total.................................................... $2,296 $2,183 $1,647
====== ====== ======
Entertainment Group:
Filmed Entertainment-Warner Bros......................... $ 503 $ 404 $ 379
Broadcasting-The WB Network.............................. (93) (88) (98)
Cable Networks-HBO....................................... 454 391 328
Cable(3)................................................. 1,369 1,184 917
------ ------ ------
Total.................................................... $2,233 $1,891 $1,526
====== ====== ======
</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
$1.496 billion in 1998, $1.271 billion in 1997 and $966 million in 1996.
Similarly, business segment operating income of the Entertainment Group was
$1.724 billion in 1998, $1.461 billion in 1997 and $1.090 billion in 1996.
(2) Includes net pretax gains of approximately $18 million in 1998 and $12
million in 1997 related to the sale or exchange of certain cable television
systems.
(3) Includes net pretax gains of approximately $90 million in 1998 and $200
million in 1997 related to the sale or exchange of certain cable television
systems.
F-59
<PAGE> 110
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing.................................................. $ 80 $ 79 $ 71
Music....................................................... 72 83 91
Cable Networks-TBS.......................................... 93 87 20
Filmed Entertainment-TBS.................................... 6 7 2
Cable....................................................... 127 126 123
---- ---- ----
Total....................................................... $378 $382 $307
==== ==== ====
Entertainment Group:
Filmed Entertainment-Warner Bros. .......................... $166 $197 $167
Broadcasting-The WB Network................................. 1 1 --
Cable Networks-HBO.......................................... 23 22 22
Cable....................................................... 737 736 619
---- ---- ----
Total....................................................... $927 $956 $808
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Time Warner:
Publishing.................................................. $ 38 $ 48 $ 46
Music....................................................... 280 301 292
Cable Networks-TBS.......................................... 200 199 43
Filmed Entertainment-TBS.................................... 82 87 22
Cable....................................................... 200 277 278
---- ---- ----
Total....................................................... $800 $912 $681
==== ==== ====
Entertainment Group:
Filmed Entertainment-Warner Bros. .......................... $129 $123 $125
Broadcasting-The WB Network................................. 3 -- --
Cable Networks-HBO.......................................... -- -- --
Cable....................................................... 377 307 311
---- ---- ----
Total....................................................... $509 $430 $436
==== ==== ====
</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-60
<PAGE> 111
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,
-----------------------------
1998 1997 1996
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Time Warner:
Publishing............................................ $ 2,726 $ 2,490 $ 2,418
Music................................................. 7,354 6,507 7,478
Cable Networks-TBS.................................... 8,485 8,372 7,860
Filmed Entertainment-TBS.............................. 2,774 2,950 3,232
Cable................................................. 4,434 7,043 7,257
Entertainment Group(1)................................ 4,980 5,549 5,814
Corporate(2).......................................... 887 1,252 1,005
------- ------- -------
Total................................................. $31,640 $34,163 $35,064
======= ======= =======
Entertainment Group:
Filmed Entertainment-Warner Bros. .................... $ 8,811 $ 8,106 $ 8,111
Broadcasting-The WB Network........................... 244 113 67
Cable Networks-HBO.................................... 1,159 1,080 997
Cable................................................. 11,314 10,771 10,202
Corporate(2).......................................... 713 669 650
------- ------- -------
Total................................................. $22,241 $20,739 $20,027
======= ======= =======
</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,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Time Warner:
Publishing............................................... $ 58 $ 77 $ 76
Music.................................................... 92 87 142
Cable Networks-TBS....................................... 120 113 34
Filmed Entertainment-TBS................................. 3 3 2
Cable.................................................... 225 282 215
Corporate................................................ 14 12 12
------ ------ ------
Total.................................................... $ 512 $ 574 $ 481
====== ====== ======
Entertainment Group:
Filmed Entertainment-Warner Bros. ....................... $ 122 $ 144 $ 340
Broadcasting-The WB Network.............................. 1 1 2
Cable Networks-HBO....................................... 23 19 29
Cable(1)................................................. 1,451 1,401 1,348
Corporate................................................ 6 -- --
------ ------ ------
Total.................................................... $1,603 $1,565 $1,719
====== ====== ======
</TABLE>
- ---------------
(1) Cable capital expenditures were funded in part through collections on the
MediaOne Note Receivable in the amount of $169 million in 1996 (Note 4). The
MediaOne Note Receivable was fully collected during 1996.
F-61
<PAGE> 112
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,
-----------------------------
1998 1997 1996
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
REVENUES(1)
Time Warner:
United States......................................... $11,220 $10,159 $ 7,262
United Kingdom........................................ 542 449 372
Germany............................................... 432 420 452
Japan................................................. 405 417 399
Canada................................................ 284 262 209
France................................................ 227 195 229
Other international................................... 1,472 1,392 1,141
------- ------- -------
Total................................................. $14,582 $13,294 $10,064
======= ======= =======
Entertainment Group:
United States......................................... $10,177 $ 9,096 $ 8,727
United Kingdom........................................ 459 488 383
Germany............................................... 263 284 374
Japan................................................. 162 172 196
Canada................................................ 145 137 157
France................................................ 163 152 143
Other international................................... 887 999 881
------- ------- -------
Total................................................. $12,256 $11,328 $10,861
======= ======= =======
</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 $286 million in 1998, $237
million in 1997 and $192 million in 1996. The minimum rental commitments under
noncancellable long-term operating leases are: 1999-$259 million; 2000-$244
million; 2001-$222 million; 2002-$205 million; 2003-$193 million; and after
2003-$940 million.
Time Warner's minimum commitments and guarantees under certain programming,
licensing, artists, athletes, franchise and other agreements aggregated
approximately $6.6 billion at December 31, 1998, which are payable principally
over a five-year period. Such amounts do not include the Time Warner General
Partner and TWI Cable guarantees of approximately $6.7 billion of TWE's and
TWE-A/N's debt and accrued interest.
Time Warner is subject to numerous legal proceedings, including certain
litigation relating to Six Flags. In management's opinion and considering
established reserves, the resolution of these matters will not have a material
effect, individually and in the aggregate, on Time Warner's financial
statements.
F-62
<PAGE> 113
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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, $72 million and $69 million in 1998, 1997 and
1996, 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 and TWE's Cable division have sold or exchanged, or agreed to
sell or exchange, various cable television systems to MediaOne in an effort to
strengthen their geographic clustering of cable television properties.
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., Time Warner Telecom, the Road Runner Joint
Venture 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, 1998, Time Warner had certain asset securitization
facilities, which provide for the accelerated receipt of up to approximately $1
billion 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 $17 million in 1998, $108 million in 1997 and $147
million in 1996.
F-63
<PAGE> 114
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,
--------------------------
1998 1997 1996
---- ---------- ----
(MILLIONS)
<S> <C> <C> <C>
Cash payments made for interest............................ $812 $929 $839
Cash payments made for income taxes........................ 261 305 382
Tax-related distributions received from TWE................ 314 324 215
Income tax refunds received................................ 52 52 44
</TABLE>
Noncash investing activities in 1998 included the Time Warner Telecom
Reorganization, the formation of the Road Runner Joint Venture and the TWE-A/N
Transfers (Note 2). Noncash financing activities included the conversion of
$1.15 billion of Zero-Coupon Convertible Notes into 37.4 million shares of
common stock in 1998 (Note 7) and the conversion of 12.8 million shares of
convertible preferred stock into approximately 53.5 million shares of common
stock (Note 12). Noncash financing activities in 1997 included the redemption of
the PERCS in exchange for Time Warner's interest in Hasbro (Note 10) and the
payment of $185 million of noncash dividends on the Series M Preferred Stock.
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 (Notes
2 and 3). Noncash financing activities in 1996 included the payment of $122
million of noncash dividends on the Series M Preferred Stock.
OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses............................................ $1,542 $1,716
Accrued compensation........................................ 538 430
Accrued income taxes........................................ 93 28
Deferred revenues........................................... 231 205
------ ------
Total....................................................... $2,404 $2,379
====== ======
</TABLE>
F-64
<PAGE> 115
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>
Richard J. Bressler John A. LaBarca
Executive Vice President and Senior Vice President and
Chief Financial Officer Controller
</TABLE>
F-65
<PAGE> 116
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, 1998 and 1997, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, 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 3, 1999
F-66
<PAGE> 117
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1998 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 1998 reflects (a) the
TWE-A/N Transfers and (b) the redemption of Series M Preferred Stock at an
aggregate cost of approximately $2.1 billion using proceeds from the issuance of
lower-cost debt. 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 Series M Preferred Stock 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 Incorporated and
Summit Communications Group, Inc., including the assumption or incurrence of
approximately $1.3 billion of indebtedness and (b) the exchange by Toshiba
Corporation and ITOCHU Corporation of their direct and indirect interests in
TWE.
Per common share amounts and average common shares have been restated to
give effect to the two-for-one common stock split that occurred on December 15,
1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING STATEMENT INFORMATION
Revenues................................... $14,582 $13,294 $10,064 $8,067 $7,396
Depreciation and amortization.............. (1,178) (1,294) (988) (559) (437)
Business segment operating income(a)....... 1,496 1,271 966 697 713
Equity in pretax income of Entertainment
Group(b)................................. 356 686 290 256 176
Interest and other, net(c)................. (1,180) (1,044) (1,174) (877) (724)
Income (loss) before extraordinary item.... 168 301 (156) (124) (91)
Net income (loss)(d)....................... 168 246 (191) (166) (91)
Net loss applicable to common shares (after
preferred dividends)(d)(e)............... (372) (73) (448) (218) (104)
Per share of common stock:
Basic and diluted net loss(d)(e)......... $ (0.31) $ (0.06) $ (0.52) $(0.28) $(0.14)
Dividends................................ $ 0.18 $ 0.18 $ 0.18 $ 0.18 $0.175
Average common shares...................... 1,194.7 1,135.4 862.4 767.6 757.8
</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
years ended December 31, 1998 and 1997 includes approximately $120 million
of net losses and $450 million of gains, respectively, relating to the sale
or exchange of various cable television systems and other investment-related
activity.
(c) Interest and other, net, for the year ended December 31, 1997 includes a
$200 million pretax gain relating to the disposal of Time Warner's interest
in Hasbro and the related redemption of certain mandatorily redeemable
preferred securities of a subsidiary.
(d) Net income (loss) for each of the years ended December 31, 1997, 1996 and
1995 includes an extraordinary loss on the retirement of debt of $55 million
($.05 per common share), $35 million ($.04 per common share) and $42 million
($.05 per common share), respectively.
(e) Preferred dividend requirements for the year ended December 31, 1998 include
a one-time effect of $234 million ($.19 loss per common share) relating to
the premium paid in connection with the redemption of Time Warner's Series M
Preferred Stock.
F-67
<PAGE> 118
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET INFORMATION
Cash and equivalents..................... $ 442 $ 645 $ 514 $ 1,185 $ 282
Total assets............................. 31,640 34,163 35,064 22,132 16,716
Debt due within one year................. 19 8 11 34 355
Long-term debt........................... 10,925 11,833 12,713 9,907 8,839
Borrowings against future stock option
proceeds............................... 895 533 488 -- --
Company-obligated mandatorily redeemable
preferred securities of subsidiaries... 575 575 949 949 --
Series M exchangeable preferred stock.... -- 1,857 1,672 -- --
Shareholders' equity:
Preferred stock liquidation
preference.......................... 2,260 3,539 3,559 2,994 140
Equity applicable to common stock...... 6,592 5,817 5,943 673 1,008
Total shareholders' equity............. 8,852 9,356 9,502 3,667 1,148
Total capitalization..................... 21,266 24,162 25,335 14,557 10,342
</TABLE>
F-68
<PAGE> 119
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
NET
EQUITY INCOME BASIC
IN PRETAX (LOSS) INCOME
OPERATING INCOME APPLICABLE (LOSS) PER
INCOME OF (LOSS) OF NET TO COMMON
BUSINESS ENTERTAINMENT INCOME COMMON SHARE
QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(E) (E)(F)(G)
------- -------- --------- ------------- ------ ---------- ----------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
1998
1st.................. $ 3,137 $ 170 $107 $(62) $(144) $(0.12)
2nd(a)(b)............ 3,672 384 166 101 23 0.02
3rd.................. 3,578 315 164 39 (37) (0.03)
4th(a)(b)............ 4,195 627 (81) 90 (214) (0.17)
Year(a)(b)........... 14,582 1,496 356 168 (372) (0.31)
1997
1st(c)(d)............ $ 3,034 $ 194 $318 $ 35 $ (43) $(0.04)
2nd.................. 3,193 345 108 30 (49) (0.04)
3rd(c)............... 3,231 263 96 (35) (116) (0.10)
4th(c)(d)............ 3,836 469 164 216 135 0.12
Year(c)(d)........... 13,294 1,271 686 246 (73) (0.06)
<CAPTION>
DILUTED
INCOME
(LOSS) PER DIVIDENDS COMMON
COMMON PER AVERAGE STOCK(G)
SHARE COMMON COMMON -----------
QUARTER (E)(F)(G) SHARE(G) SHARES(G) HIGH LOW
------- ---------- --------- --------- ---- ---
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
1st.................. $(0.12) $0.045 1,156.6 $37 3/4 $29 1/16
2nd(a)(b)............ 0.02 0.045 1,192.6 44 7/16 36 1/16
3rd.................. (0.03) 0.045 1,202.6 50 39
4th(a)(b)............ (0.17) 0.045 1,227.2 63 1/8 37 9/16
Year(a)(b)........... (0.31) 0.18 1,194.7 63 1/8 29 1/16
1997
1st(c)(d)............ $(0.04) $0.045 1,117.8 $22 1/2 $18 3/16
2nd.................. (0.04) 0.045 1,122.0 25 3/8 20 3/16
3rd(c)............... (0.10) 0.045 1,146.6 28 3/16 19 1/4
4th(c)(d)............ 0.11 0.045 1,155.0 31 26 1/2
Year(c)(d)........... (0.06) 0.18 1,135.4 31 18 3/16
</TABLE>
- ---------------
(a) As indicated below, Time Warner's income (loss) per common share in 1998 has
been affected by certain significant nonrecurring items. These items
consisted of gains and losses relating to the sale or exchange of various
cable television systems and other investment-related activity and the
effect of redeeming Time Warner's Series M Preferred Stock. The aggregate
net effect of these items in 1998 was to increase (decrease) income per
common share by $.03 in the second quarter of 1998, and $(.28) in the fourth
quarter of 1998, thereby aggregating $(.25) per common share for the year.
(b) Time Warner's equity in the pretax income (loss) of the Entertainment Group
for 1998 includes net gains of approximately $90 million for the year
relating to the sale or exchange of certain cable television systems, of
which approximately $70 million was recorded in the second quarter of 1998.
In addition, Time Warner's equity in the pretax income (loss) of the
Entertainment Group for the fourth quarter of 1998 includes a charge of
approximately $210 million principally to reduce the carrying value of an
interest in Primestar.
(c) Time Warner's income (loss) per common share in 1997 has been affected by
certain significant nonrecurring items. These items consisted of net pretax
gains relating to the sale or exchange of various cable television systems
and other investment-related activity and extraordinary losses on the
retirement of debt. The aggregate net effect of these items in 1997 was to
increase (decrease) income per common share by $.13 in the first quarter of
1997, $(.01) in the third quarter of 1997 and $.15 in the fourth quarter of
1997, thereby aggregating $.27 per common share for the year. Included in
these amounts are extraordinary losses on the retirement of debt of $17
million ($.02 per common share) in the first quarter of 1997, $7 million
($.01 per common share) in the third quarter of 1997 and $31 million ($.02
per common share) in the fourth quarter of 1997. Also included in these
amounts for the fourth quarter of 1997 is a $200 million pretax gain ($.10
per common share) relating to the disposal of Time Warner's interest in
Hasbro and its related redemption of certain mandatorily redeemable
preferred securities of a subsidiary.
(d) Time Warner's equity in the pretax income of the Entertainment Group for the
first quarter of 1997 includes an approximate $250 million pretax gain
relating to the sale of TWE's interest in E! Entertainment. 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.
(e) After preferred dividend requirements. Preferred dividend requirements for
the fourth quarter of 1998 include a one-time increase of $234 million ($.19
loss per common share) relating to the premium paid in connection with the
redemption of Time Warner's Series M Preferred Stock.
(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.
(g) Previously reported amounts have been restated for the two-for-one common
stock split that occurred on December 15, 1998.
F-69
<PAGE> 120
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Time Warner Companies, Inc. ("TW Companies") and Turner Broadcasting
System, Inc. ("TBS" and, together with TW Companies, the "Guarantor
Subsidiaries") are wholly owned subsidiaries of Time Warner Inc. ("Time
Warner"). Time Warner, TW Companies and TBS have fully and unconditionally
guaranteed all of the outstanding publicly traded indebtedness of each other.
Set forth below are condensed consolidating financial statements of Time Warner,
including each of the Guarantor Subsidiaries, presented for the information of
each company's public debtholders. Separate financial statements and other
disclosures relating to the Guarantor Subsidiaries have not been presented
because management has determined that this information would not be material to
such debtholders. The following condensed consolidating financial statements
present the results of operations, financial position and cash flows of (i) Time
Warner, TW Companies and TBS (in each case, reflecting investments in its
consolidated subsidiaries under the equity method of accounting), (ii) the
direct and indirect non-guarantor subsidiaries of Time Warner and (iii) the
eliminations necessary to arrive at the information for Time Warner on a
consolidated basis. These condensed consolidating financial statements should be
read in conjunction with the accompanying consolidated financial statements of
Time Warner.
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- ----- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ -- $ 720 $13,886 $ (24) $14,582
----- ------ ----- ------- ------- -------
Cost of revenues(1)...................... -- -- 303 7,931 (24) 8,210
Selling, general and administrative(1)... -- -- 211 4,665 -- 4,876
----- ------ ----- ------- ------- -------
Operating expenses....................... -- -- 514 12,596 (24) 13,086
----- ------ ----- ------- ------- -------
Business segment operating income........ -- -- 206 1,290 -- 1,496
Equity in pretax income of consolidated
subsidiaries........................... 770 1,283 327 -- (2,380) --
Equity in pretax income of Entertainment
Group.................................. -- -- -- 423 (67) 356
Interest and other, net.................. (98) (756) (159) (103) (64) (1,180)
Corporate expenses....................... (86) (55) (16) (64) 135 (86)
----- ------ ----- ------- ------- -------
Income before income taxes............... 586 472 358 1,546 (2,376) 586
Income taxes............................. (418) (322) (212) (816) 1,350 (418)
----- ------ ----- ------- ------- -------
Net income............................... $ 168 $ 150 $ 146 $ 730 $(1,026) $ 168
===== ====== ===== ======= ======= =======
- ---------------
(1) Includes depreciation and
amortization expense of:............. $ -- $ -- $ 9 $ 1,169 $ -- $ 1,178
===== ====== ===== ======= ======= =======
</TABLE>
F-70
<PAGE> 121
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- ----- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ -- $ 523 $12,771 $ -- $13,294
----- ------ ----- ------- ------- -------
Cost of revenues(1)...................... -- -- 250 7,292 -- 7,542
Selling, general and administrative(1)... -- -- 171 4,310 -- 4,481
----- ------ ----- ------- ------- -------
Operating expenses....................... -- -- 421 11,602 -- 12,023
----- ------ ----- ------- ------- -------
Business segment operating income........ -- -- 102 1,169 -- 1,271
Equity in pretax income of consolidated
subsidiaries........................... 922 1,729 378 -- (3,029) --
Equity in pretax income of Entertainment
Group.................................. -- -- -- 727 (41) 686
Interest and other, net.................. (9) (994) (203) 211 (49) (1,044)
Corporate expenses....................... (81) (54) (12) (60) 126 (81)
----- ------ ----- ------- ------- -------
Income before income taxes............... 832 681 265 2,047 (2,993) 832
Income taxes............................. (531) (390) (175) (1,032) 1,597 (531)
----- ------ ----- ------- ------- -------
Income before extraordinary item......... 301 291 90 1,015 (1,396) 301
Extraordinary loss on retirement of debt,
net of tax............................. (55) (51) (4) (51) 106 (55)
----- ------ ----- ------- ------- -------
Net income............................... $ 246 $ 240 $ 86 $ 964 $(1,290) $ 246
===== ====== ===== ======= ======= =======
- ---------------
(1) Includes depreciation and
amortization expense of:............. $ -- $ -- $ 21 $ 1,273 $ -- $ 1,294
===== ====== ===== ======= ======= =======
</TABLE>
F-71
<PAGE> 122
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- ---- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ -- $ -- $128 $9,936 $ -- $10,064
---- ----- ---- ------ ----- -------
Cost of revenues(1)....................... -- -- 52 5,870 -- 5,922
Selling, general and administrative(1).... -- -- 58 3,118 -- 3,176
---- ----- ---- ------ ----- -------
Operating expenses........................ -- -- 110 8,988 -- 9,098
---- ----- ---- ------ ----- -------
Business segment operating income......... -- -- 18 948 -- 966
Equity in pretax income of consolidated
subsidiaries............................ 156 776 63 -- (995) --
Equity in pretax income of Entertainment
Group................................... -- -- -- 290 -- 290
Interest and other, net................... (16) (729) (29) (400) -- (1,174)
Corporate expenses........................ (17) (62) (10) (64) 75 (78)
---- ----- ---- ------ ----- -------
Income (loss) before income taxes......... 123 (15) 42 774 (920) 4
Income taxes.............................. (64) (130) (39) (494) 567 (160)
---- ----- ---- ------ ----- -------
Income (loss) before extraordinary item... 59 (145) 3 280 (353) (156)
Extraordinary loss on retirement of debt,
net of tax.............................. -- (35) -- -- -- (35)
---- ----- ---- ------ ----- -------
Net income (loss)......................... $ 59 $(180) $ 3 $ 280 $(353) $ (191)
==== ===== ==== ====== ===== =======
- ---------------
(1) Includes depreciation and amortization
expense of:........................... $ -- $ -- $ 6 $ 982 $ -- $ 988
==== ===== ==== ====== ===== =======
</TABLE>
F-72
<PAGE> 123
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- --------- ------- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.............................. $ -- $ 66 $ 25 $ 351 $ -- $ 442
Receivables, net.................................. 10 56 78 2,750 (9) 2,885
Inventories....................................... -- -- 131 815 -- 946
Prepaid expenses.................................. 17 5 -- 1,166 (12) 1,176
------- ------- ------- ------- -------- -------
Total current assets.............................. 27 127 234 5,082 (21) 5,449
Noncurrent inventories............................ -- -- 156 1,744 -- 1,900
Investments in and amounts due to and from
consolidated subsidiaries....................... 15,222 13,745 9,465 -- (38,432) --
Investments in and amounts due to and from
Entertainment Group............................. -- 919 -- 4,169 (108) 4,980
Other investments................................. 211 15 24 1,194 (650) 794
Property, plant and equipment, net................ 55 -- 44 1,892 -- 1,991
Music catalogues, contracts and copyrights........ -- -- -- 876 -- 876
Cable television and sports franchises............ -- -- -- 2,868 -- 2,868
Goodwill.......................................... -- -- -- 11,919 -- 11,919
Other assets...................................... 65 116 59 631 (8) 863
------- ------- ------- ------- -------- -------
Total assets...................................... $15,580 $14,922 $ 9,982 $30,375 $(39,219) $31,640
======= ======= ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 20 $ -- $ 11 $ 965 $ -- $ 996
Participations, royalties and programming
costs payable................................... -- -- 31 1,168 -- 1,199
Debt due within one year.......................... -- -- -- 19 -- 19
Other current liabilities......................... 308 229 176 1,705 (14) 2,404
------- ------- ------- ------- -------- -------
Total current liabilities......................... 328 229 218 3,857 (14) 4,618
Long-term debt.................................... 1,584 7,346 747 1,248 -- 10,925
Debt due to affiliates............................ -- -- 1,647 158 (1,805) --
Borrowings against future stock option proceeds... 895 -- -- -- -- 895
Deferred income taxes............................. 3,491 3,324 246 3,570 (7,140) 3,491
Unearned portion of paid subscriptions............ -- -- -- 741 -- 741
Other liabilities................................. 430 -- 116 997 -- 1,543
TW Companies-obligated mandatorily redeemable
preferred securities of a subsidiary holding
solely subordinated debentures of TW
Companies....................................... -- -- -- 575 -- 575
SHAREHOLDERS' EQUITY
Due to (from) Time Warner and subsidiaries........ -- (2,313) (479) (2,317) 5,109 --
Other shareholders' equity........................ 8,852 6,336 7,487 21,546 (35,369) 8,852
------- ------- ------- ------- -------- -------
Total shareholders' equity........................ 8,852 4,023 7,008 19,229 (30,260) 8,852
------- ------- ------- ------- -------- -------
Total liabilities and shareholders' equity........ $15,580 $14,922 $ 9,982 $30,375 $(39,219) $31,640
======= ======= ======= ======= ======== =======
</TABLE>
F-73
<PAGE> 124
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- --------- ------- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.............................. $ -- $ 372 $ 9 $ 264 $ -- $ 645
Receivables, net.................................. 34 82 9 2,350 (28) 2,447
Inventories....................................... -- -- 112 718 -- 830
Prepaid expenses.................................. 21 14 5 1,063 (14) 1,089
------- ------- ------- ------- -------- -------
Total current assets.............................. 55 468 135 4,395 (42) 5,011
Noncurrent inventories............................ -- -- 123 1,643 -- 1,766
Investments in and amounts due to and from
consolidated subsidiaries....................... 16,189 14,995 9,950 -- (41,134) --
Investments in and amounts due to and from
Entertainment Group............................. -- 970 -- 4,620 (41) 5,549
Other investments................................. 106 1 24 1,957 (593) 1,495
Property, plant and equipment, net................ 68 -- 48 1,973 -- 2,089
Music catalogues, contracts and copyrights........ -- -- -- 928 -- 928
Cable television and sports franchises............ -- -- -- 3,982 -- 3,982
Goodwill.......................................... -- -- -- 12,572 -- 12,572
Other assets...................................... 54 124 118 483 (8) 771
------- ------- ------- ------- -------- -------
Total assets...................................... $16,472 $16,558 $10,398 $32,553 $(41,818) $34,163
======= ======= ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 24 $ -- $ 11 $ 877 $ -- $ 912
Participations, royalties and programming costs
payable......................................... -- -- 10 1,062 -- 1,072
Debt due within one year.......................... -- -- -- 8 -- 8
Other current liabilities......................... 442 284 234 1,371 48 2,379
------- ------- ------- ------- -------- -------
Total current liabilities......................... 466 284 255 3,318 48 4,371
Long-term debt.................................... -- 8,462 747 2,624 -- 11,833
Debt due to affiliates............................ -- -- 1,722 158 (1,880) --
Borrowings against future stock option proceeds... 533 -- -- -- -- 533
Deferred income taxes............................. 3,960 3,797 243 4,040 (8,080) 3,960
Unearned portion of paid subscriptions............ -- -- -- 672 -- 672
Other liabilities................................. 300 20 90 596 -- 1,006
TW Companies-obligated mandatorily redeemable
preferred securities of a subsidiary holding
solely subordinated debentures of TW
Companies....................................... -- -- -- 575 -- 575
Series M exchangeable preferred stock............. 1,857 -- -- -- -- 1,857
SHAREHOLDERS' EQUITY
Due to (from) Time Warner and subsidiaries........ -- (2,195) -- (256) 2,451 --
Other shareholders' equity........................ 9,356 6,190 7,341 20,826 (34,357) 9,356
------- ------- ------- ------- -------- -------
Total shareholders' equity........................ 9,356 3,995 7,341 20,570 (31,906) 9,356
------- ------- ------- ------- -------- -------
Total liabilities and shareholders' equity........ $16,472 $16,558 $10,398 $32,553 $(41,818) $34,163
======= ======= ======= ======= ======== =======
</TABLE>
F-74
<PAGE> 125
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- --------- ----- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income........................................... $ 168 $ 150 $ 146 $ 730 $(1,026) $ 168
Adjustments for noncash and nonoperating items:
Depreciation and amortization........................ -- -- 9 1,169 -- 1,178
Noncash interest expense............................. -- 30 -- -- -- 30
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries......... 1,767 (666) 374 -- (1,475) --
Excess of distributions over equity in pretax income
of Entertainment Group............................. -- -- -- 275 67 342
Equity in losses of other investee companies after
distributions...................................... -- -- -- 90 57 147
Changes in operating assets and liabilities.......... 212 2,869 (426) (538) (2,137) (20)
------- ------- ----- ------- ------- -------
Cash provided by operations.......................... 2,147 2,383 103 1,726 (4,514) 1,845
------- ------- ----- ------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions......................... (213) -- -- 54 -- (159)
Advances to parents and consolidated subsidiaries.... -- (2,716) -- (263) 2,979 --
Repayments of advances from consolidated
subsidiaries....................................... 75 -- -- -- (75) --
Capital expenditures................................. -- -- (12) (500) -- (512)
Investment proceeds.................................. -- -- -- 569 -- 569
Proceeds received from distribution of TWE Senior
Capital............................................ -- -- -- 455 -- 455
------- ------- ----- ------- ------- -------
Cash provided (used) by investing activities......... (138) (2,716) (12) 315 2,904 353
------- ------- ----- ------- ------- -------
FINANCING ACTIVITIES
Borrowings........................................... 1,584 498 -- 1,661 -- 3,743
Debt repayments...................................... -- (500) (75) (1,817) 75 (2,317)
Change in due to/from parent......................... 220 43 -- (1,798) 1,535 --
Borrowings against future stock option proceeds...... 1,015 -- -- -- -- 1,015
Repayments of borrowings against future stock option
proceeds........................................... (653) -- -- -- -- (653)
Repurchases of Time Warner common stock.............. (2,240) -- -- -- -- (2,240)
Redemption of Series M Preferred Stock............... (2,093) -- -- -- -- (2,093)
Dividends paid....................................... (524) -- -- -- -- (524)
Proceeds received from stock option and dividend
reinvestment plans................................. 740 -- -- -- -- 740
Other, principally financing costs................... (58) (14) -- -- -- (72)
------- ------- ----- ------- ------- -------
Cash provided (used) by financing activities......... (2,009) 27 (75) (1,954) 1,610 (2,401)
------- ------- ----- ------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......... -- (306) 16 87 -- (203)
------- ------- ----- ------- ------- -------
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.......... -- 372 9 264 -- 645
------- ------- ----- ------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD................ $ -- $ 66 $ 25 $ 351 $ -- $ 442
======= ======= ===== ======= ======= =======
</TABLE>
F-75
<PAGE> 126
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- ----- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income........................................... $ 246 $ 240 $ 86 $ 964 $(1,290) $ 246
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............. 55 51 4 51 (106) 55
Depreciation and amortization........................ -- -- 21 1,273 -- 1,294
Noncash interest expense............................. -- 95 3 -- -- 98
Excess of distributions over equity in pretax income
of consolidated subsidiaries....................... 558 89 119 -- (766) --
Deficiency of distributions over equity in pretax
income of Entertainment Group...................... -- -- -- (248) 41 (207)
Equity in losses (income) of other investee companies
after distributions................................ -- -- -- (9) 45 36
Changes in operating assets and liabilities.......... (95) 633 13 (668) 3 (114)
----- ------- ----- ------- ------- -------
Cash provided by operations.......................... 764 1,108 246 1,363 (2,073) 1,408
----- ------- ----- ------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions......................... (19) -- -- (94) -- (113)
Advances to parents and consolidated subsidiaries.... (778) (134) -- (113) 1,025 --
Repayments of advances from consolidated
subsidiaries....................................... 41 -- -- 385 (426) --
Capital expenditures................................. -- -- (11) (563) -- (574)
Investment proceeds.................................. -- -- -- 187 -- 187
Proceeds received from distribution of TWE Senior
Capital............................................ -- -- -- 455 -- 455
----- ------- ----- ------- ------- -------
Cash provided (used) by investing activities......... (756) (134) (11) 257 599 (45)
----- ------- ----- ------- ------- -------
FINANCING ACTIVITIES
Borrowings........................................... -- 2,443 737 3,104 (871) 5,413
Debt repayments...................................... -- (1,887) (963) (3,544) -- (6,394)
Change in due to/from parent......................... 113 (1,281) -- (1,177) 2,345 --
Borrowings against future stock option proceeds...... 230 -- -- -- -- 230
Repayments of borrowings against future stock option
proceeds........................................... (185) -- -- -- -- (185)
Repurchases of Time Warner common stock.............. (344) -- -- -- -- (344)
Dividends paid....................................... (338) -- -- -- -- (338)
Proceeds received from stock option and dividend
reinvestment plans................................. 454 -- -- -- -- 454
Other, principally financing costs................... -- (14) -- (54) -- (68)
----- ------- ----- ------- ------- -------
Cash used by financing activities.................... (70) (739) (226) (1,671) 1,474 (1,232)
----- ------- ----- ------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......... (62) 235 9 (51) -- 131
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.......... 62 137 -- 315 -- 514
----- ------- ----- ------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD................ $ -- $ 372 $ 9 $ 264 $ -- $ 645
===== ======= ===== ======= ======= =======
</TABLE>
F-76
<PAGE> 127
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- --------- ------- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income (loss)................................. $ 59 $ (180) $ 3 $ 280 $ (353) $ (191)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.......... -- 35 -- -- -- 35
Depreciation and amortization..................... -- -- 6 982 -- 988
Noncash interest expense.......................... -- 91 5 -- -- 96
Excess (deficiency) of distributions over equity
in pretax income of consolidated subsidiaries... 213 (330) 91 -- 26 --
Deficiency of distributions over equity in pretax
income of Entertainment Group................... -- -- -- (62) -- (62)
Equity in income of other investee companies after
distributions................................... -- -- -- (53) -- (53)
Changes in operating assets and liabilities....... 35 530 (27) (685) (413) (560)
------- ------- ------- ------- ------- -------
Cash provided by operations....................... 307 146 78 462 (740) 253
------- ------- ------- ------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions...................... 58 -- -- (293) (26) (261)
Advances to parents and consolidated
subsidiaries.................................... (1,300) (155) -- -- 1,455 --
Repayments of advances from consolidated
subsidiaries.................................... 1,000 -- -- -- (1,000) --
Capital expenditures.............................. -- -- (5) (476) -- (481)
Investment proceeds............................... -- -- -- 318 -- 318
------- ------- ------- ------- ------- -------
Cash used by investing activities................. (242) (155) (5) (451) 429 (424)
------- ------- ------- ------- ------- -------
FINANCING ACTIVITIES
Borrowings........................................ -- 864 985 2,591 (1,009) 3,431
Debt repayments................................... -- (1,634) (1,058) (2,579) -- (5,271)
Change in due to/from parent...................... -- (1,349) -- 29 1,320 --
Borrowings against future stock option proceeds... 63 425 -- -- -- 488
Repurchases of Time Warner common stock........... (4) (452) -- -- -- (456)
Issuance of Series M Preferred Stock.............. -- 1,550 -- -- -- 1,550
Dividends paid.................................... (84) (203) -- -- -- (287)
Proceeds received from stock option and dividend
reinvestment plans.............................. 22 83 -- -- -- 105
Other, principally financing costs................ -- (60) -- -- -- (60)
------- ------- ------- ------- ------- -------
Cash provided (used) by financing activities...... (3) (776) (73) 41 311 (500)
------- ------- ------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS....... 62 (785) -- 52 -- (671)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD....... -- 922 -- 263 -- 1,185
------- ------- ------- ------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD............. $ 62 $ 137 $ -- $ 315 $ -- $ 514
======= ======= ======= ======= ======= =======
</TABLE>
F-77
<PAGE> 128
TIME WARNER INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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>
1998:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............. $ 311 $ 323 $ (318)(c) $ 316
Reserves for sales returns and allowances... 680 2,490 (2,479)(d)(e) 691
----- ------- ------- ------
Total......................................... $ 991 $ 2,813 $(2,797) $1,007
===== ======= ======= ======
Reserves deducted from amounts due to
publishers (accounts payable)
Allowance for magazine and book returns..... $(171) $(1,206) $ 1,157(e) $ (220)
===== ======= ======= ======
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)
===== ======= ======= ======
</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 and books 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 and book revenues to the provision charged to the reserve
for magazine and book returns that is deducted from accounts receivable
without also considering the related offsetting activity in the reserve for
magazine and book returns that is deducted from the liability due to the
publishers.
F-78
<PAGE> 129
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DESCRIPTION OF BUSINESS
Time Warner Entertainment Company, L.P. ("TWE" or the "Company") classifies
its business interests into three fundamental areas: Cable Networks, consisting
principally of interests in cable television programming; Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; 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.
USE OF EBITA
TWE evaluates operating performance based on several factors, of which the
primary financial measure 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 also is 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, generally are 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
As more fully described herein, the comparability of TWE's operating
results has been affected by certain significant transactions and nonrecurring
items in each period.
For 1998, these significant transactions related to TWE's cable business
and included (i) the transfer of cable television systems (or interests therein)
serving approximately 650,000 subscribers that were formerly owned by
subsidiaries of Time Warner to the TWE-Advance/Newhouse Partnership ("TWE-A/N"),
subject to approximately $1 billion of debt, in exchange for common and
preferred partnership interests in TWE-A/N, as well as certain related
transactions (collectively, the "TWE-A/N Transfers"), (ii) the transfer of TWE's
and TWE-A/N's direct broadcast satellite operations and related assets to
Primestar, Inc. ("Primestar"), a separate holding company (the "Primestar
Roll-up Transaction"), (iii) the reorganization of Time Warner Cable's Time
Warner Telecom operations into a separate entity named Time Warner Telecom LLC
(the "Time Warner Telecom Reorganization") and (iv) the formation of a joint
venture to operate and expand Time Warner Cable's and MediaOne Group Inc.'s
("MediaOne") existing high-speed online businesses (the "Road Runner Joint
Venture" and collectively, the "1998 Cable Transactions").
In addition, there were a number of other significant, nonrecurring items
recognized in 1998 and 1997, consisting of (i) net pretax gains in the amount of
approximately $90 million in 1998 and $200 million in 1997 relating to the sale
or exchange of various cable television systems, (ii) a pretax gain of
approximately $250 million in 1997 relating to the sale of its interest in E!
Entertainment Television, Inc. ("E! Entertainment"), (iii) a charge of
approximately $210 million in 1998 principally to reduce the carrying value of
its interest in Primestar and (iv) an extraordinary loss of $23 million in 1997
on the retirement of debt.
F-79
<PAGE> 130
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for 1998 and 1997 should be analyzed
after excluding the effects of these significant nonrecurring items. As such,
the following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
RESULTS OF OPERATIONS
1998 VS. 1997
EBITA and operating income in 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
EBITA OPERATING INCOME
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros................ $ 498 $ 387 $ 369 $ 264
Broadcasting-The WB Network..................... (93) (88) (96) (88)
Cable Networks-HBO.............................. 454 391 454 391
Cable(1)........................................ 1,369 1,184 992 877
------ ------ ------ ------
Total........................................... $2,228 $1,874 $1,719 $1,444
====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes net gains of approximately $90 million and $200 million recognized
in 1998 and 1997, respectively, related to the sale or exchange of certain
cable television systems.
TWE had revenues of $12.246 billion and net income of $326 million for the
year ended December 31, 1998, compared to 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.
As previously described, the comparability of TWE's operating results for
1998 and 1997 has been affected by certain significant nonrecurring items
recognized in each period, consisting of gains and losses relating to the sale
or exchange of cable television systems and other investment-related activity.
These nonrecurring items amounted to approximately $120 million of net pretax
losses in 1998, compared to approximately $450 million of net pretax gains in
1997. In addition, net income in 1997 included an extraordinary loss on the
retirement of debt of $23 million.
TWE's net income decreased to $326 million in 1998, compared to $614
million in 1997. However, excluding the significant effect of the nonrecurring
items referred to above, net income increased by $229 million to $460 million in
1998, compared to $231 million in 1997. As discussed more fully below, this
improvement principally resulted from an overall increase in TWE's business
segment operating income (including the positive effect of the TWE-A/N
Transfers), offset in part by an increase in interest expense associated with
the TWE-A/N Transfers and higher losses from certain investments accounted for
under the equity method of accounting.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $92 million in the year ended December
31, 1998, and $85 million in the year ended December 31, 1997, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $6.051 billion,
compared to $5.462 billion in 1997. EBITA increased to $498 million from $387
million. Operating income increased to $369 million
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
from $264 million. Revenues benefited from a significant increase in licensing
fees from television production and distribution operations, principally
relating to the initial off-network domestic syndication availability of Friends
and the initial off-network basic cable availability of ER, as well as an
increase in revenues from consumer products licensing operations. EBITA and
operating income benefited principally from the revenue gains and cost savings,
offset in part by lower international syndication sales of library product and
lower results from theatrical releases. In addition, EBITA and operating income
for each period included certain one-time gains on the sale of assets that were
comparable in amount and therefore, did not have any significant effect on
operating trends.
Broadcasting-The WB Network. Revenues increased to $260 million, compared
to $136 million in 1997. EBITA decreased to a loss of $93 million from a loss of
$88 million. Operating losses increased to $96 million from $88 million.
Revenues increased as a result of higher advertising sales relating to improved
television ratings and the addition of a fourth night of prime-time programming
in January 1998 and a fifth night in September 1998. Despite the revenue
increase, operating losses increased because of a lower allocation of losses to
a minority partner in the network. However, excluding this minority interest
effect, operating losses improved principally as a result of the revenue gains,
which outweighed higher programming costs associated with the expanded
programming schedule.
Cable Networks-HBO. Revenues increased to $2.052 billion, compared to
$1.923 billion in 1997. EBITA and operating income increased to $454 million
from $391 million. Revenues benefited primarily from an increase in
subscriptions to 34.6 million from 33.6 million at the end of 1997. EBITA and
operating income improved principally as a result of the revenue gains and, to a
lesser extent, cost savings and higher income from Comedy Central, a 50%-owned
equity investee.
Cable. Revenues increased to $4.378 billion, compared to $4.243 billion in
1997. EBITA increased to $1.369 billion from $1.184 billion. Operating income
increased to $992 million from $877 million. The Cable division's 1998 operating
results were positively affected by the aggregate net impact of the 1998 Cable
Transactions. Excluding the effect of the 1998 Cable Transactions, revenues
increased principally as a result of an increase in basic cable subscribers,
increases in regulated cable rates and an increase in advertising revenues.
Similarly excluding the effect of the 1998 Cable Transactions, EBITA and
operating income increased principally as a result of the revenue gains, offset
in part by higher depreciation related to capital spending and approximately
$110 million of lower, net pretax gains relating to the sale or exchange of
certain cable television systems.
As of December 31, 1998, including the cable operations of TWE-A/N and Time
Warner, there were 12.6 million subscribers under the management of TWE's Cable
division, as compared to 12.0 million subscribers at the end of 1997. The number
of subscribers at the end of 1997 excludes all direct broadcast satellite
subscribers that were transferred to Primestar in 1998 in connection with the
Primestar Roll-up Transaction.
Interest and Other, Net. Interest and other, net, increased to $965
million, compared to $345 million in 1997. Interest expense increased to $566
million, compared to $490 million in 1997 principally due to higher average debt
levels associated with the TWE-A/N Transfers. There was other expense, net, of
$399 million in 1998, compared to other income, net, of $145 million in 1997,
primarily due to lower investment-related income, as well as higher losses
associated with TWE's asset securitization program. The significant decrease in
investment-related income principally resulted from the absence of an
approximate $250 million pretax gain recognized in 1997 in connection with the
sale of an interest in E! Entertainment, the inclusion of an approximate $210
million charge recorded in 1998 principally to reduce the carrying value of an
interest in Primestar and higher losses in 1998 from certain investments
accounted for under the equity method of accounting.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
1997 VS. 1996
EBITA and operating income 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 previously described, the comparability of TWE's operating results for
1997 and 1996 has been affected by certain significant nonrecurring items
recognized in 1997, consisting of net pretax gains relating to the sale or
exchange of cable television systems and other investment-related activity.
These nonrecurring items amounted to approximately $450 million of net pretax
gains in 1997. In addition, net income in 1997 included an extraordinary loss on
the retirement of debt of $23 million.
TWE's net income increased to $614 million in 1997, compared to $210
million in 1996. Excluding the significant effect of the nonrecurring items
referred to above, net income increased by $21 million to $231 million in 1997,
compared to $210 million in 1996. As discussed more fully below, this
improvement principally resulted from an overall increase in EBITA and operating
income generated by TWE's business segments, offset in part by an increase in
minority interest expense related to TWE-A/N.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $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 prime-
time scheduling and the expansion of Kids' WB!, the network's animated
programming lineup on Saturday
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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.
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 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 Primestar-related, direct broadcast
satellite subscribers and the cable operations of TWE-A/N and 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 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.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1998
1998 FINANCIAL CONDITION
At December 31, 1998, TWE had $6.6 billion of debt, $87 million of cash and
equivalents (net debt of $6.5 billion), $217 million of preferred stock of a
subsidiary, $603 million of Time Warner General Partners' Senior Capital and
$5.1 billion of partners' capital, compared to $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 at December 31, 1997. Net
debt increased in 1998 principally as a result of the TWE-A/N Transfers and
increased borrowings to fund cash distributions paid to Time Warner, partially
offset by approximately $650 million of debt reduction associated with the
formation of a cable television joint venture in Texas (the "Texas Cable Joint
Venture") with TCI Communications, Inc. ("TCI"), a subsidiary of
Tele-Communications, Inc.
CREDIT STATISTICS
TWE's financial 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
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
("Adjusted EBITDA"). The coverage ratio represents the ratio of Adjusted EBITDA
to total interest expense. Those ratios are set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Leverage ratio.............................................. 2.1x 2.1x 2.4x
Interest coverage ratio(a).................................. 5.3x 5.4x 4.7x
</TABLE>
- ---------------
(a) Includes dividends related to the preferred stock of a subsidiary.
CASH FLOWS
In 1998, TWE's cash provided by operations amounted to $2.288 billion and
reflected $2.228 billion of EBITA from the Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, $927
million of noncash depreciation expense and $166 million from the securitization
of backlog, less $537 million of interest payments, $91 million of income taxes,
$72 million of corporate expenses and $333 million related to an increase in
working capital requirements, other balance sheet accounts and noncash items.
Cash provided by operations of $1.834 billion in 1997 reflected $1.874 billion
of business segment EBITA, $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 used by investing activities was $745 million in 1998, compared to
$1.252 billion in 1997, principally as a result of a $761 million increase in
investment proceeds, offset in part by a reduction of cash flows from
investments and acquisitions related to the deconsolidation of approximately
$200 million of cash of Paragon Communications in connection with the TWE-A/N
Transfers. Investment proceeds increased principally due to TWE's debt reduction
efforts, including proceeds from the sale of TWE's remaining interest in Six
Flags Entertainment Corporation and the receipt of approximately $650 million of
proceeds upon the formation of the Texas Cable Joint Venture with TCI. Capital
expenditures were $1.603 billion in 1998, and $1.565 billion in 1997.
Cash used by financing activities was $1.778 million in 1998, compared to
$476 million in 1997. The use of cash in 1998 principally reflected $1.153
billion of distributions paid to Time Warner and the use of investment proceeds
to reduce debt in connection with TWE's debt reduction efforts. The use of cash
in 1997 principally reflected $934 million of distributions paid to Time Warner,
offset in part by $243 million of aggregate net proceeds from the issuance of
preferred stock of a subsidiary and an increase in borrowings used to fund cash
distributions to Time Warner.
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 keep the business positioned for sustained,
long-term growth. Capital spending by TWE's Cable division amounted to $1.451
billion in 1998, compared to $1.401 billion in 1997. Capital spending by TWE's
Cable division for 1999 is budgeted to be approximately $1.2 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 and consistent with Time Warner Cable's long-term strategic plan, Time
Warner Cable agreed with the Federal Communications Commission (the "FCC") in
1996 to invest a total of $4 billion in capital costs in connection with the
upgrade
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
of its cable infrastructure. 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 of December 31, 1998, Time Warner
Cable had approximately $1 billion remaining under this commitment, of which
approximately $700 million is expected to be incurred for the upgrade of TWE's
and TWE-A/N's owned and managed cable television systems. Management expects to
satisfy this commitment by December 31, 2000 when Time Warner Cable's
technological upgrade of its cable television systems is scheduled to be
substantially completed.
CABLE STRATEGY
In addition to using cable operating cash flow to finance the level of
capital spending necessary to upgrade the technological capability of cable
television systems and develop new services, Time Warner, TWE and TWE-A/N have
completed or announced a series of transactions over the past year related to
the cable television business and related ancillary businesses. These
transactions consist of the TWE-A/N Transfers, the Primestar Roll-up
Transaction, the Time Warner Telecom Reorganization, the formation of the Road
Runner Joint Venture, the formation of the Texas Cable Joint Venture and other
TCI-related cable transactions and the anticipated formation with AT&T Corp.
("AT&T") of a cable telephony joint venture (the "AT&T Cable Telephony Joint
Venture").
Except for the TWE-A/N Transfers, these transactions have reduced, or will
reduce, either existing debt and/or TWE's share of future funding requirements
for these businesses. In addition, the formation of the Road Runner Joint
Venture and, ultimately, the AT&T Cable Telephony Joint Venture, when completed,
will enable Time Warner Cable to leverage its technologically advanced,
high-capacity cable architecture into new opportunities to create incremental
value through the development and exploitation of new services with strategic
partners, such as AT&T, Microsoft Corp. and Compaq Computer Corp.
The proposed AT&T Cable Telephony Joint Venture is discussed more fully
below and the other transactions are described in Note 2 to the accompanying
consolidated financial statements.
AT&T Cable Telephony Joint Venture
In February 1999, Time Warner, TWE and AT&T announced their intention to
form a strategic joint venture. This joint venture will offer AT&T-branded cable
telephony service to residential and small business customers over Time Warner
Cable's television systems for up to a twenty-year period. This transaction
effectively will allow Time Warner Cable to leverage its existing cable
infrastructure into a new growth opportunity in a non-core business, without the
need for any incremental capital investment.
Under the preliminary terms announced by the parties, the joint venture
will be owned 22.5% by Time Warner Cable and 77.5% by AT&T. AT&T will be
responsible for funding all of the joint venture's negative cash flow and Time
Warner Cable's equity interest in the joint venture will not be diluted as a
result of AT&T's funding obligations. Because AT&T is expected to have
significant funding obligations through at least the first three years of the
joint venture's operations when capital will be deployed and services first
rolled-out, Time Warner Cable expects to benefit from the additional value
created from its "carried" interest.
In addition to its equity interest, Time Warner Cable is expected to
receive the following payments from the joint venture:
(i) Approximately $300 million of initial access fees, based on a rate of
$15 per home passed that is payable in two annual installments once a
particular service area has been upgraded and powered for cable
telephony service. Time Warner Cable is expected to receive additional
access fees in the future as its cable television systems continue to
pass new homes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
(ii) Recurring monthly subscriber fees in the initial amount of $1.50 per
telephony subscriber, to be adjusted periodically to up to $6.00 per
telephony subscriber in the sixth year of providing cable telephony
service to any particular area. In addition, the joint venture is
expected to guarantee certain minimum penetration levels to Time
Warner Cable, ranging from 5% in the second year of providing cable
telephony service to any particular area to up to 25% in the sixth
year and thereafter.
(iii) Additional monthly subscriber fees equal to 15% of the excess, if
any, of monthly average cable telephony revenues in a particular
service area over $100, after the fifth year of providing cable
telephony service to any particular area.
Further, management believes that the opportunity for consumers to select
one provider of AT&T-branded, "all-distance" wireline and wireless communication
services will contribute to increased cable television penetration in Time
Warner Cable's service areas and the continuing growth in Time Warner Cable's
revenues from the delivery of cable television services.
This transaction is expected to close in the second half of 1999, subject
to the execution of definitive agreements by the parties and customary closing
conditions, including the approval of Advance/Newhouse and MediaOne and all
necessary governmental and regulatory approvals. There can be no assurance that
such agreements will be completed or that such approvals will be obtained.
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 normally owns the copyrights to such creative material, it
continually generates revenue through the sale of such products across different
media and in new and existing markets. The value of film and television-related
copyrighted product and trademarks is continually realized by the licensing of
films and television series to secondary markets and the licensing of
trademarks, such as the Looney Tunes characters and Batman, to the retail
industry and other markets. In addition, technological advances, such as the
introduction of the home videocassette in the 1980's and, potentially, the
current exploitation of the digital video disc, 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 $2.298 billion at December 31, 1998 (including amounts
relating to TWE's cable television networks of $199 million and $570 million to
Time Warner's cable television networks).
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 received periodically
over the term of the related licensing agreements or on an accelerated basis
using a $500 million securitization facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as a source of future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
FOREIGN CURRENCY RISK MANAGEMENT
Time Warner uses foreign exchange contracts primarily to hedge the risk
that unremitted or future license fees owed to TWE domestic companies for the
sale or anticipated sale of U.S. copyrighted products abroad may be adversely
affected by changes in foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period, including those
related to TWE. At December 31, 1998, 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. To hedge this exposure, Time Warner used foreign
exchange contracts that generally have maturities of three months or less, which
generally will be 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, 1998, Time Warner had contracts for the sale of $755 million and
the purchase of $259 million of foreign currencies at fixed rates. Of Time
Warner's $496 million net sale contract position, $298 million of the foreign
exchange sale contracts and $101 million of the foreign exchange purchase
contracts related to TWE's foreign currency exposure, compared to contracts for
the sale of $105 million of foreign currencies at December 31, 1997.
Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1998, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1998 would result in approximately $10 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, 1998 would result in $10 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.
GLOBAL FINANCIAL MARKETS
During 1998, certain financial markets, mainly Brazil, Russia and a number
of Asian countries, experienced significant instability. Because less than 5% of
the revenues of TWE are derived from the sale of products and services in these
countries, management does not believe that the state of these financial markets
poses a material risk to the operations of TWE.
EURO CONVERSION
Effective January 1, 1999, the "euro" was established as a single currency
valid in more than two-thirds of the member countries of the European Union.
These member countries have a three-year transitional period to physically
convert their sovereign currencies to the euro. By July 1, 2002, all
participating member countries must eliminate their currencies and replace their
legal tender with euro-denominated bills and coins.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Notwithstanding this transitional period, many commercial transactions are
expected to become euro-denominated well before the July 2002 deadline.
Accordingly, TWE continues to evaluate the short-term and long-term effects of
the euro conversion on its European Operations, principally filmed
entertainment.
TWE believes that the most significant short-term impact of the euro
conversion is the need to modify its accounting and information systems to
handle an increasing volume of transactions during the transitional period in
both the euro and sovereign currencies of the participating member countries.
TWE has identified its accounting and information systems in need of
modification and an action plan has been formulated to address the nature and
timing of remediation efforts. Remediation efforts have begun and the plan is
expected to be substantially completed well before the end of the transitional
period. This timetable will be adjusted, if necessary, to meet the anticipated
needs of TWE's vendors and customers. Based on preliminary information, costs to
modify its accounting and information systems are not expected to be material.
TWE believes that the most significant long-term business risk of the euro
conversion may be increased pricing pressures for its products and services
brought about by heightened consumer awareness of possible cross-border price
differences. However, TWE believes that these business risks may be offset to
some extent by lower material costs, other cost savings and marketing
opportunities. Notwithstanding such risks, management does not believe that the
euro conversion will have a material effect on TWE's financial position, results
of operations or cash flows in future periods.
YEAR 2000 TECHNOLOGY PREPAREDNESS
TWE, like most large companies, depends on many different computer systems
and other chip-based devices for the continuing conduct of its business. Older
computer programs, computer hardware and chip-based devices may fail to
recognize dates beginning on January 1, 2000 as being valid dates, and as a
result may fail to operate or may operate improperly when such dates are
introduced.
TWE's exposure to potential Year 2000 problems arises both in technological
operations under the control of the Company and in those dependent on one or
more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of TWE's potential Year 2000 exposures
are dependent to some degree on one or more third parties. Failure to achieve
high levels of Year 2000 compliance could have a material adverse impact on TWE
and its financial statements.
The Company's Year 2000 initiative is being conducted at the operational
level by divisional project managers and senior technology executives overseen
by senior divisional executives, with assistance internally as well as from
outside professionals. The progress of each division through the different
phases of remediation-inventorying, assessment, remediation planning,
implementation and final testing-is actively overseen and reviewed on a regular
basis by an executive oversight group.
The Company has generally completed the process of identifying potential
Year 2000 difficulties in its technological operations, including IT
applications, IT technology and support, desktop hardware and software, non-IT
systems and important third party operations, and distinguishing those that are
"mission critical" from those that are not. An item is considered "mission
critical" if its Year 2000-related failure would significantly impair the
ability of one of the Company's major business units to (1) produce, market and
distribute the products or services that generate significant revenues for that
business, (2) meet its obligations to pay its employees, artists, vendors and
others or (3) meet its obligations under regulatory requirements and internal
accounting controls. The Company and its divisions have identified approximately
600 worldwide, "mission critical" potential exposures. Of these, as of December
31, 1998, approximately 41% have been identified by the divisions as Year 2000
compliant, approximately 41% as in the remediation implementation or final
testing stages, approximately 18% as in the remediation planning stage and less
than 1% as in the assessment stage. The Company currently expects that the
assessment phase for these few remaining potential
F-88
<PAGE> 139
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
exposures should be completed during the first quarter of 1999 and that
remediation with respect to approximately 80% of all these identified operations
will be substantially completed in all material respects by the end of the
second quarter of 1999. The Company, however, could experience unexpected
delays. The Company is currently planning to impose a "quiet" period at the
beginning of the fourth quarter of 1999 during which any remaining remediation
involving installation or modification of systems that interface with other
systems will be minimized to permit the Company to conduct testing in a stable
environment.
As stated above, however, the Company's business is heavily dependent on
third parties and these parties are themselves heavily dependent on technology.
In some cases, the Company's third party dependence is on vendors of technology
who are themselves working towards solutions to Year 2000 problems. For example,
in a situation endemic to the cable industry, much of the Company's headend
equipment that controls cable set-top boxes was not Year 2000 compliant as of
December 31, 1998. The box manufacturers are working with cable industry groups
and have developed solutions that the Company is installing in its headend
equipment. It is currently expected that these solutions will be substantially
implemented by the end of the second quarter of 1999. In other cases, the
Company's third party dependence is on suppliers of products or services that
are themselves computer-intensive. For example, if a television broadcaster or
cable programmer encounters Year 2000 problems that impede its ability to
deliver its programming, the Company will be unable to provide that programming
to its cable customers. Similarly, because the Company is also a programming
supplier, third-party signal delivery problems could affect its ability to
deliver its programming to its customers. The Company has attempted to include
in its "mission critical" inventory significant service providers, vendors,
suppliers, customers and governmental entities that are believed to be critical
to business operations and is in various stages of ascertaining their state of
Year 2000 readiness through various means, including questionnaires, interviews,
on-site visits, system interface testing and industry group participation.
Moreover, TWE is dependent, like all large companies, on the continued
functioning, domestically and internationally, of basic, heavily computerized
services such as banking, telephony and power, and various distribution
mechanisms ranging from the mail, railroads and trucking to high-speed data
transmission. TWE is taking steps to attempt to satisfy itself that the third
parties on which it is heavily reliant are Year 2000 compliant or that alternate
means of meeting its requirements are available, but cannot predict the
likelihood of such compliance nor the direct or indirect costs to the Company of
non-compliance by those third parties or of securing such services from
alternate compliant third parties. In areas in which the Company is uncertain
about the anticipated Year 2000 readiness of a significant third party, the
Company is investigating available alternatives, if any.
The Company currently estimates that the aggregate cost of its Year 2000
remediation program, which started in 1996, will be approximately $50 to $85
million, of which an estimated 45% to 55% has been incurred through December 31,
1998. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT systems
and their implementation and testing. The Company anticipates that its
remediation program, and related expenditures, may continue into 2001 as
temporary solutions to Year 2000 problems are replaced with upgraded equipment.
These expenditures have been and are expected to continue to be funded from the
Company's operating cash flow and have not and are not expected to impact
materially the Company's financial statements.
Management believes that it has established an effective program to resolve
all significant Year 2000 issues in its control in a timely manner. As noted
above, however, the Company has not yet completed all phases of its program and
is dependent on third parties whose progress is not within its control. In the
event that the Company does not complete any of its currently planned additional
remediation prior to the Year 2000, management believes that the Company could
experience significant difficulty in producing and delivering its products and
services and conducting its business in the Year 2000 as it has in the past. In
addition, disruptions experienced by third parties with which the Company does
business as well as by the economy generally could also materially adversely
affect the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
F-89
<PAGE> 140
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
The Company has been focusing its efforts on identification and remediation
of its Year 2000 exposures and has not yet developed significant, specific
contingency plans in the event it does not successfully complete all phases of
its Year 2000 program. The Company, however, has begun to examine its existing
standard business interruption strategies to evaluate whether they would
satisfactorily meet the demands of failures arising from Year 2000-related
problems. The Company intends to examine its status periodically to determine
the necessity of establishing and implementing such contingency plans or
additional strategies, which could involve, among other things, manual
workarounds, adjusting staffing strategies and sharing resources across
divisions.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document, together
with management's public commentary related thereto, contains such "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, particularly statements anticipating future growth in
revenues, EBITA and cash flow. Words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," "believes" and words and terms of
similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are management's present expectations of future
events. As with any projection or forecast, they are inherently susceptible to
changes in circumstances, and TWE is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking statements
whether as a result of such changes, new information or otherwise.
TWE operates in highly competitive, consumer driven and rapidly changing
media and entertainment businesses that are dependent on government regulation
and economic, political and social conditions in the countries in which they
operate, consumer demand for their products and services, technological
developments and (particularly in view of technological changes) protection of
their intellectual property rights. TWE's actual results could differ materially
from management's expectations because of changes in such factors. Some of the
other factors that also could cause actual results to differ from those
contained in the forward-looking statements include those identified in TWE's
other filings and:
- For TWE's cable business, more aggressive than expected competition from
new technologies and other types of video programming distributors,
including DBS; increases in government regulation of cable or equipment
rates (or any failure to reduce rate regulation as is presently mandated
by statute) or other terms of service (such as "digital must-carry" or
"unbundling" requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as high-speed online services or telephony over cable or
video on demand) to function properly, to appeal to enough consumers or
to be available at reasonable prices and to be delivered in a timely
fashion; and greater than expected increases in programming or other
costs.
- For TWE's cable programming and television businesses, greater than
expected programming or production costs; public and cable operator
resistance to price increases (and the negative impact on premium
programmers of increases in basic cable rates); increased regulation of
distribution agreements; the sensitivity of advertising to economic
cyclicality; and greater than expected fragmentation of consumer
viewership due to an increased number of programming services or the
increased popularity of alternatives to television.
- For TWE's film and television businesses, their ability to continue to
attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer
leisure and entertainment time (and its possible negative effects on the
broadcast and cable networks,
F-90
<PAGE> 141
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
which are significant customers of these businesses); continued
popularity of merchandising; and the uncertain impact of technological
developments such as DVD and the Internet.
- The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Year 2000
issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays
in the implementation of the Company's remediation plans and the ability
of third parties to address adequately their own Year 2000 issues.
In addition, TWE's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in TWE's plans, strategies and
intentions.
F-91
<PAGE> 142
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................ $ 87 $ 322
Receivables, including $765 and $385 million due from Time
Warner, less allowances of $506 and $424 million.......... 2,618 1,914
Inventories................................................. 1,312 1,204
Prepaid expenses............................................ 166 182
------- -------
Total current assets........................................ 4,183 3,622
Noncurrent inventories...................................... 2,327 2,254
Loan receivable from Time Warner............................ 400 400
Investments................................................. 886 315
Property, plant and equipment, net.......................... 6,041 6,557
Cable television franchises................................. 3,773 3,063
Goodwill.................................................... 3,854 3,859
Other assets................................................ 766 661
------- -------
Total assets................................................ $22,230 $20,731
======= =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................ $ 1,473 $ 1,123
Participations and programming costs payable................ 1,515 1,176
Debt due within one year.................................... 6 8
Other current liabilities, including $370 and $184 million
due to Time Warner........................................ 1,942 1,667
------- -------
Total current liabilities................................... 4,936 3,974
Long-term debt.............................................. 6,578 5,990
Other long-term liabilities, including $1.130 billion and
$477 million due to Time Warner........................... 3,267 1,873
Minority interests.......................................... 1,522 1,210
Preferred stock of subsidiary holding solely a mortgage note
of its parent............................................. 217 233
Time Warner General Partners' Senior Capital................ 603 1,118
PARTNERS' CAPITAL
Contributed capital......................................... 7,341 7,537
Undistributed partnership earnings (deficit)................ (2,234) (1,204)
------- -------
Total partners' capital..................................... 5,107 6,333
------- -------
Total liabilities and partners' capital..................... $22,230 $20,731
======= =======
</TABLE>
See accompanying notes.
F-92
<PAGE> 143
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues (a)................................................ $12,246 $11,318 $10,852
------- ------- -------
Cost of revenues (a)(b)..................................... 8,196 7,406 7,441
Selling, general and administrative (a)(b).................. 2,331 2,468 2,333
------- ------- -------
Operating expenses.......................................... 10,527 9,874 9,774
------- ------- -------
Business segment operating income........................... 1,719 1,444 1,078
Interest and other, net (a)................................. (965) (345) (522)
Minority interest........................................... (264) (305) (207)
Corporate services (a)...................................... (72) (72) (69)
------- ------- -------
Income before income taxes.................................. 418 722 280
Income taxes................................................ (92) (85) (70)
------- ------- -------
Income before extraordinary item............................ 326 637 210
Extraordinary loss on retirement of debt.................... -- (23) --
------- ------- -------
Net income.................................................. $ 326 $ 614 $ 210
======= ======= =======
</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, 1998, 1997 and 1996, respectively: revenues-$695 million, $431 million
and $198 million; cost of revenues-$(220) million, $(167) million and $(95)
million; selling, general and administrative-$(26) million, $18 million and
$(38) million; interest and other, net-$6 million, $30 million and $30
million; and corporate services-$(72) million, $(72) million and $(69)
million (Note 14).
<TABLE>
<S> <C> <C> <C>
(b) Includes depreciation and amortization expense of....... $ 1,436 $ 1,370 $ 1,235
======= ======= =======
</TABLE>
See accompanying notes.
F-93
<PAGE> 144
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
OPERATIONS
Net income.................................................. $ 326 $ 614 $ 210
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.................... -- 23 --
Depreciation and amortization............................... 1,436 1,370 1,235
Equity in losses of investee companies after
distributions............................................. 149 57 38
Changes in operating assets and liabilities:
Receivables............................................... (825) (273) (50)
Inventories............................................... (238) (114) (637)
Accounts payable and other liabilities.................... 1,178 393 970
Other balance sheet changes............................... 262 (236) 146
------- ------- -------
Cash provided by operations................................. 2,288 1,834 1,912
------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions................................ (388) (172) (146)
Capital expenditures........................................ (1,603) (1,565) (1,719)
Investment proceeds......................................... 1,246 485 612
------- ------- -------
Cash used by investing activities........................... (745) (1,252) (1,253)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.................................................. 1,514 3,400 215
Debt repayments............................................. (1,898) (3,085) (716)
Issuance of preferred stock of subsidiary................... -- 243 --
Collections on note receivable from MediaOne................ -- -- 169
Capital distributions....................................... (1,153) (934) (228)
Other....................................................... (241) (100) (92)
------- ------- -------
Cash used by financing activities........................... (1,778) (476) (652)
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................. (235) 106 7
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 322 216 209
------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 87 $ 322 $ 216
======= ======= =======
</TABLE>
See accompanying notes.
F-94
<PAGE> 145
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(MILLIONS)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
TIME WARNER ----------------------------------------------------
GENERAL UNDISTRIBUTED
PARTNERS' PARTNERSHIP MEDIAONE TOTAL
SENIOR CONTRIBUTED EARNINGS NOTE PARTNERS'
CAPITAL CAPITAL (DEFICIT) RECEIVABLE CAPITAL
----------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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
Stock option and tax-related 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
Stock option, tax-related and Senior Capital
distributions......................................... (535) (723) (723)
Allocation of income.................................... 110 (110) (110)
------ ------ ------- ----- -------
BALANCE AT DECEMBER 31, 1997............................ 1,118 7,537 (1,204) -- 6,333
Net income.............................................. 326 326
Increase in unrealized gains on securities.............. 2 2
Foreign currency translation adjustments................ (1) (1)
Increase in realized and unrealized losses on derivative
financial instruments................................. (6) (6)
------- -------
Comprehensive income................................ 321 321
Stock option, tax-related and Senior Capital
distributions......................................... (579) (1,287) (1,287)
Distribution of Time Warner Telecom interests........... (191) (191)
Allocation of income.................................... 64 (64) (64)
Other................................................... (5) (5)
------ ------ ------- ----- -------
BALANCE AT DECEMBER 31, 1998............................ $ 603 $7,341 $(2,234) $ -- $ 5,107
====== ====== ======= ===== =======
</TABLE>
See accompanying notes.
F-95
<PAGE> 146
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: Cable
Networks, consisting principally of interests in cable television programming;
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and Cable, consisting
principally of interests in cable television systems.
Each of the business interests within Cable Networks, Entertainment 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) HBO and Cinemax,
the leading pay television services (2) the unique and extensive film,
television and animation libraries of Warner Bros. and trademarks such as the
Looney Tunes characters and Batman, (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 Warner Bros.' collection of children's
cartoons and television programming and (4) Time Warner Cable, currently the
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 $509 million in 1998, $430 million in 1997 and $436
million in 1996.
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 MediaOne Group, Inc. ("MediaOne"), formerly U S WEST,
Inc., which acquired such interests in 1993 for $1.532 billion of cash and a
$1.021 billion 4.4% note (the "MediaOne 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 certain cable-related
transactions as more fully described herein (Note 2). Certain reclassifications
have been made to the prior years' financial statements to conform to the 1998
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 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).
F-96
<PAGE> 147
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 TRANSLATION
The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on
the balance sheet date, and local currency revenues and expenses are translated
at average rates of exchange during the period. Resulting translation gains or
losses, which have not been material, are included in partners' capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the distribution of theatrical and television product in order to
evaluate the ultimate recoverability of accounts receivables and film inventory
recorded as assets in the consolidated balance sheet. Accounts receivables and
sales related to the distribution of home video product in the filmed
entertainment industry are subject to customers' rights to return unsold items.
Management periodically reviews such estimates and it is reasonably possible
that management's assessment of recoverability of accounts receivables and
individual films and television product may change based on actual results and
other factors.
REVENUES AND COSTS
Cable and Cable Networks
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 costs of rights to exhibit feature films and
other programming on pay cable services during one or more availability periods
("programming costs") generally are recorded when the programming is initially
available for exhibition, and are allocated to the appropriate availability
periods and amortized as the programming is exhibited.
Filmed Entertainment
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
F-97
<PAGE> 148
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 under these licensing agreements. For cash contracts, the
related revenues will not be recognized until such product is available for
telecast under the contractual terms of the related license agreement. For
barter contracts, the related revenues will not be recognized until the product
is available for telecast and the advertising spots received under such
contracts are either used or sold to third parties. All of these contractual
rights for which revenue is not yet recognizable is referred to as "backlog."
Excluding advertising barter contracts, Warner Bros.' backlog amounted to $2.298
billion at December 31, 1998 (including amounts relating to the licensing of
film product to TWE's cable television networks of $199 million and $570 million
to Time Warner's cable television networks).
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"). Library product 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 generally 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
generally include the unamortized cost of completed theatrical and television
films allocated to the secondary markets, theatrical films in production and the
Library.
Proposed Changes to Film Accounting Standards
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued an exposure
draft of a proposed Statement of Position, "Accounting by Producers and
Distributors of Films" (the "SOP"). The proposed rules would establish new
accounting standards for producers and distributors of films. Among its many
provisions, the SOP would require revenue for the licensing of film and
television product to be recognized generally over the term of the related
agreement. This would represent a significant change to existing industry
practice, which generally requires such licensing revenue to be recognized when
the product is first available for telecast. This is because, after that date,
licensors have no further significant obligations under the terms of the related
licensing agreements.
While the SOP's proposals in many other areas (i.e., advertising and film
cost amortization) generally are consistent with TWE's accounting policies, this
is not the case with the proposed changes in revenue recognition for licensed
product. Adopting the proposed accounting standards for licensed product would
F-98
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result in a significant one-time, noncash charge to earnings upon adoption that
would be reflected as a cumulative effect of a change in accounting principle.
This one-time, noncash charge would be reversed in future periods as an increase
to operating income when TWE re-recognizes the revenues associated with the
licensing of its film and television product over the periods of the related
licensing agreements. The SOP proposes an effective date of January 1, 2000 for
calendar year-end companies, with earlier application encouraged. The provisions
of the SOP are still being deliberated by AcSEC and could change significantly
prior to the issuance of a final standard.
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 $284 million in 1998, $288 million in 1997 and $332 million in 1996.
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
Effective July 1, 1998, TWE adopted FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires
that all derivative financial instruments, such as foreign exchange contracts,
be recognized in the financial statements and measured at fair value regardless
of the purpose or intent for holding them. Changes in the fair value of
derivative financial instruments are either recognized periodically in income or
shareholders' equity (as a component of comprehensive income), depending on
whether the derivative is being used to hedge changes in fair value or cash
flows. The adoption of FAS 133 did not have a material effect on TWE's financial
statements.
The carrying value of TWE's financial instruments approximates fair value,
except for differences with respect to long-term, fixed-rate debt (Note 5) and
certain differences relating to cost method investments and other financial
instruments that are not significant. The fair value of financial instruments 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, fair value is based 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
F-99
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method over useful lives ranging up to thirty years for buildings and
improvements and up to sixteen years for furniture, fixtures, cable television
and other equipment. Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(MILLIONS)
<S> <C> <C>
Land and buildings.......................................... $ 797 $ 804
Cable television equipment.................................. 6,612 7,423
Furniture, fixtures and other equipment..................... 2,313 2,310
------- -------
9,722 10,537
Less accumulated depreciation............................... (3,681) (3,980)
------- -------
Total....................................................... $ 6,041 $ 6,557
======= =======
</TABLE>
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant and growing number 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. 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 and
Internet sites, 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 $509
million in 1998, $430 million in 1997 and $436 million in 1996. Accumulated
amortization of intangible assets at December 31, 1998 and 1997 amounted to
$3.505 billion and $3.020 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.
F-100
<PAGE> 151
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 established 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.
The following summary sets forth the components of other comprehensive
income (loss) accumulated in partners' capital:
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN DERIVATIVE OTHER
UNREALIZED CURRENCY FINANCIAL COMPREHENSIVE
GAINS ON TRANSLATION INSTRUMENT INCOME
SECURITIES LOSSES LOSSES (LOSS)
---------- ----------- ---------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
Balance at December 31, 1997......... $7 $(42) $-- $(35)
1998 activity........................ 2 (1) (6) (5)
-- ---- --- ----
Balance at December 31, 1998......... $9 $(43) $(6) $(40)
== ==== === ====
</TABLE>
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 established 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).
2. ACQUISITIONS AND DISPOSITIONS
CABLE TRANSACTIONS
In addition to continuing to use cable operating cash flow to finance the
level of capital spending necessary to upgrade the technological capability of
cable television systems and develop new services, Time Warner, TWE and the
TWE-Advance/Newhouse Partnership ("TWE-A/N") completed a series of transactions
in 1998. These transactions related to the cable television business and related
ancillary businesses that either reduced existing debt and/or TWE's share of
future funding requirements for such businesses. These transactions are
discussed more fully below.
TCI CABLE TRANSACTIONS
During 1998, Time Warner, TWE, TWE-A/N and TCI Communications, Inc.
("TCI"), a subsidiary of Tele-Communications, Inc., consummated or agreed to
complete a number of cable-related transactions.
F-101
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These transactions consisted of (i) the formation in December 1998 of a cable
television joint venture in Texas (the "Texas Cable Joint Venture") that is
managed by Time Warner Cable, a division of TWE, and owns cable television
systems serving an aggregate 1.1 million subscribers, subject to approximately
$1.3 billion of debt, (ii) the expansion in August 1998 of 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) the agreement to exchange in 1999 various cable television systems
serving approximately 575,000 subscribers for other cable television systems of
comparable size in an effort to enhance each company's geographic clusters of
cable television properties (the "TCI Cable Trades"). The Texas and Kansas City
joint ventures are being accounted for under the equity method of accounting.
As a result of the Texas transaction, the combined debt of TWE and TWE-A/N
was reduced by approximately $650 million. Also, as a result of the Texas and
Kansas City transactions, TWE benefited from the geographic clustering of cable
television systems and the number of subscribers under its management was
increased by approximately 660,000 subscribers, thereby making Time Warner Cable
the largest cable television operator in the U.S. The TCI Cable Trades are
expected to close periodically throughout 1999 and are subject to customary
closing conditions, including all necessary governmental and regulatory
approvals. There can be no assurance that such approvals will be obtained.
TIME WARNER TELECOM REORGANIZATION
In July 1998, in an effort to combine their Time Warner Telecom operations
into a single entity that is intended to be self-financing, Time Warner, TWE and
TWE-A/N completed a reorganization of their Time Warner Telecom operations (the
"Time Warner Telecom Reorganization"), whereby (i) those operations conducted by
Time Warner, TWE and TWE-A/N were each contributed to a new holding company
named Time Warner Telecom LLC ("Time Warner Telecom"), and then (ii) TWE's and
TWE-A/N's interests in Time Warner Telecom were distributed to their partners,
Time Warner, MediaOne and the Advance/ Newhouse Partnership
("Advance/Newhouse"), a limited partner in TWE-A/N. Time Warner Telecom is a
competitive local exchange carrier (CLEC) in selected metropolitan areas across
the United States where it offers a wide range of telephony services to business
customers. As a result of the Time Warner Telecom Reorganization, Time Warner,
MediaOne and Advance/Newhouse own interests in Time Warner Telecom of 61.98%,
18.85% and 19.17%, respectively. TWE and TWE-A/N do not have continuing equity
interests in these Time Warner Telecom operations. TWE and TWE-A/N recorded the
distribution of their Time Warner Telecom operations to their respective
partners based on the $242 million historical cost of the net assets, of which
$191 million was recorded as a reduction in partners' capital and $51 million
was recorded as a reduction in minority interest in TWE's consolidated balance
sheet.
ROAD RUNNER JOINT VENTURE
In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp.
("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture to
operate and expand Time Warner Cable's and MediaOne's existing high-speed online
businesses (the "Road Runner Joint Venture"). In exchange for contributing these
operations, Time Warner received a common equity interest in the Road Runner
Joint Venture of 10.7%, TWE received a 25% interest, TWE-A/N received a 32.9%
interest and MediaOne received a 31.4% interest. In exchange for Microsoft and
Compaq contributing $425 million of cash to the Road Runner Joint Venture,
Microsoft and Compaq each received a preferred equity interest therein that is
convertible into a 10% common equity interest. Accordingly, on a fully diluted
basis, the Road Runner Joint Venture is owned 8.6% by Time Warner, 20% by TWE,
26.3% by TWE-A/N, 25.1% by MediaOne, 10% by Microsoft and 10% by Compaq. Each of
Time Warner's, TWE's and TWE-A/N's interest in the Road Runner Joint Venture is
being accounted for under the equity method of accounting.
F-102
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate $425 million of capital contributed by Microsoft and Compaq
is being used by the Road Runner Joint Venture to continue to expand the roll
out of high-speed online services. Time Warner Cable has entered into an
affiliation agreement with the Road Runner Joint Venture, pursuant to which Time
Warner Cable provides Road Runner's high-speed online services to customers in
its cable franchise areas through its technologically advanced, high-capacity
cable architecture. In exchange, Time Warner Cable initially retains 70% of the
subscription revenues and 30% of the national advertising and transactional
revenues generated from the delivery of these on-line services to its cable
subscribers. Time Warner Cable's share of these subscription revenues will
change periodically to 75% by 2006.
PRIMESTAR
In April 1998, TWE and Advance/Newhouse transferred 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
Partners" and collectively, the "Primestar Assets") to Primestar, Inc.
("Primestar"), a separate holding company. As a result of that transfer and
similar transfers by the other previously existing partners of Primestar
Partners, Primestar Partners became an indirect wholly owned subsidiary of
Primestar. In exchange for contributing its interests in the Primestar Assets,
TWE received approximately 48 million shares of Primestar common stock
(representing an approximate 24% equity interest) and realized approximately
$240 million of debt reduction. In partial consideration for contributing its
indirect interest in certain of the Primestar Assets, Advance/Newhouse received
an approximate 6% equity interest in Primestar. As a result of this transaction,
effective as of April 1, 1998, TWE deconsolidated the DBS Operations and the 24%
equity interest in Primestar received in the transaction is being accounted for
under the equity method of accounting. This transaction is referred to as the
"Primestar Roll-up Transaction."
In connection with the Primestar Roll-up Transaction, Primestar and
Primestar Partners own and operate the medium-power direct broadcast satellite
business, portions of which were formerly owned by TCI Satellite Entertainment,
Inc. ("TSAT") and the other previously existing partners of Primestar Partners.
Certain high-power system assets, including two high-power satellites, continue
to be owned by Tempo Satellite, Inc. ("Tempo"), a wholly owned subsidiary of
TSAT. However, Primestar Partners has an option to lease or purchase the entire
capacity of the high-power system from Tempo. In addition, Primestar has an
option to purchase the stock or assets of Tempo from TSAT.
In a related transaction, Primestar Partners also entered into an agreement
in June 1997 with The News Corporation Limited ("News Corp."), MCI WorldCom,
Inc. ("MCI") and American Sky Broadcasting LLC ("ASkyB"), pursuant to which
Primestar would acquire certain assets relating to the high-power, direct
broadcast satellite business of ASkyB (the "Primestar ASkyB Transaction"). In
May 1998, the U.S. Department of Justice brought a civil action against
Primestar, each of its cable owners, including TWE, and News Corp. and MCI, to
enjoin on antitrust grounds the Primestar ASkyB Transaction. Although the
parties had discussions with the U.S. Department of Justice in an attempt to
restructure the transaction, no resolution was reached and the parties
terminated their agreement in October 1998.
In the fourth quarter of 1998, TWE recorded a charge of approximately $210
million principally to reduce the carrying value of its interest in Primestar.
This charge reflected a significant decline in the fair value of Primestar
during the quarter and has been included in interest and other, net, in TWE's
1998 consolidated statement of operations.
In addition, Primestar, Primestar Partners and the stockholders of
Primestar have entered into an agreement to sell the medium-power direct
broadcast satellite business and assets to DirecTV, a competitor of Primestar
owned by Hughes Electronics Corp. Also, Primestar, Primestar Partners, the
stockholders of Primestar and Tempo entered into a second agreement with
DirecTV, pursuant to which DirecTV will purchase the high-power satellites from
Tempo, and Primestar and Primestar Partners will relinquish their
F-103
<PAGE> 154
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respective rights to acquire or use such high-power satellites. The price to be
paid by DirecTV pursuant to these agreements confirmed the decline in value of
TWE's interest in Primestar. The ultimate disposition of the medium-power assets
of Primestar is subject to Primestar bondholder and regulatory approvals, and
the disposition of certain of the high-power satellite rights is also subject to
regulatory approvals. Accordingly, there can be no assurance that such approvals
will be obtained and that these transactions will be consummated.
TWE-A/N TRANSFERS
As of December 31, 1998, TWE-A/N owns cable television systems (or
interests therein) serving approximately 6.3 million subscribers, of which 5.2
million subscribers were served by consolidated, wholly owned cable television
systems and 1.1 million subscribers were served by unconsolidated, partially
owned cable television systems. TWE-A/N had approximately $1.2 billion of debt
at December 31, 1998.
TWE-A/N is owned approximately 64.8% by TWE, the managing partner, 33.3% by
Advance/ Newhouse and 1.9% indirectly by Time Warner. TWE consolidates the
partnership, and the partnership interests owned by Advance/Newhouse and Time
Warner are 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, 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.
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 in TWE-A/N, 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
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 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 has consolidated 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.
The TWE-A/N Transfers were accounted for effective as of January 1, 1998
and TWE has continued to consolidate TWE-A/N.
On a pro forma basis, giving effect to the TWE-A/N Transfers as if they had
occurred at the beginning of 1997, TWE would have reported for the year ended
December 31, 1997, respectively, revenues of $11.379 billion, depreciation
expense of $947 million, operating income before noncash amortization of
intangible assets of $1.989 billion, operating income of $1.496 billion, and net
income of $607 million.
SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS
In 1998 and 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,
F-104
<PAGE> 155
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pretax gains of approximately $90 million and $200 million in 1998 and 1997,
respectively, which have been included in operating income in the accompanying
consolidated statement of operations.
SIX FLAGS
In April 1998, TWE sold its remaining 49% interest in Six Flags
Entertainment Corporation ("Six Flags") to Premier Parks Inc. ("Premier"), a
regional theme park operator, for approximately $475 million of cash. TWE used
the net, after-tax proceeds from this transaction to reduce debt by
approximately $300 million. 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. A substantial portion of the gain
on this transaction has been deferred by TWE, principally as a result of
uncertainties surrounding realization that relate to ongoing litigation and
TWE's continuing guarantees of certain significant long-term obligations
associated with the Six Flags Over Texas and Six Flags Over Georgia theme parks.
3. INVENTORIES
TWE's inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997
--------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization.............. $ 614 $ 744 $ 545 $ 658
Completed and not released............... 179 76 170 50
In process and other..................... 23 572 27 595
Library, less amortization............... -- 560 -- 612
Programming costs, less amortization....... 426 375 382 339
Merchandise................................ 70 -- 80 --
------ ------ ------ ------
Total...................................... $1,312 $2,327 $1,204 $2,254
====== ====== ====== ======
</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 $2.665 billion in 1998, $2.360 billion in 1997 and
$2.543 billion in 1996; and the total cost amortized amounted to $2.502 billion,
$2.329 billion and $1.998 billion, respectively. Excluding the Library, the
unamortized cost of completed films at December 31, 1998 amounted to $1.613
billion, approximately 90% of which is expected to be amortized within three
years after release.
4. INVESTMENTS
TWE's investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Equity method investments................................... $574 $238
Cost and fair-value method investments...................... 312 77
---- ----
Total....................................................... $886 $315
==== ====
</TABLE>
F-105
<PAGE> 156
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the first quarter of 1997, TWE sold its 58% interest in E! Entertainment
Television, Inc. ("E! Entertainment"). A pretax gain of approximately $250
million relating to this sale has been included in the accompanying consolidated
statement of operations.
At December 31, 1998, companies accounted for using the equity method
included: Comedy Partners, L.P. (50% owned), certain cable system joint ventures
(generally 50% owned), the Road Runner Joint Venture (57.9% owned, excluding
Time Warner's direct 10.7% interest), Primestar (24% owned), Six Flags (49%
owned in 1997 and 1996), certain international cable and programming joint
ventures (25% to 50% owned) and Courtroom Television Network (50% 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,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues................................................. $2,329 $2,207 $1,823
Depreciation and amortization............................ (706) (235) (197)
Operating income (loss).................................. (265) 118 62
Net loss................................................. (352) (82) (138)
Current assets........................................... 665 412 624
Total assets............................................. 5,228 3,046 3,193
Current liabilities...................................... 628 993 407
Long-term debt........................................... 2,917 1,625 2,197
Total liabilities........................................ 3,699 2,734 2,829
Total shareholders' equity or partners' capital.......... 1,529 312 364
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE DECEMBER 31,
INTEREST RATE AT ----------------
DECEMBER 31, 1998 MATURITIES 1998 1997
----------------- ---------- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Bank credit agreement borrowings..... 6.0% 2002 $2,711 $1,970
Commercial paper..................... 5.4% 1999 62 210
Fixed-rate senior notes and
debentures......................... 8.6% 2002-2033 3,805 3,810
------ ------
Total...................... $6,578 $5,990
====== ======
</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 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.
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
F-106
<PAGE> 157
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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; 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.
DEBT GUARANTEES
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.5 billion of TWE's debt and accrued interest at December 31,
1998, 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. In addition,
in connection with the TWE-A/N Transfers (Note 2), approximately $1.2 billion of
TWE-A/N's debt and accrued interest at December 31, 1998 has been guaranteed by
TWI Cable and certain of its subsidiaries.
INTEREST EXPENSE AND MATURITIES
Interest expense was $566 million in 1998, $490 million in 1997 and $475
million in 1996. The weighted average interest rate on TWE's total debt was 7.5%
and 7.8% at December 31, 1998 and 1997, respectively.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1998 consist only of $3.373 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.
FAIR VALUE OF DEBT
Based on the level of interest rates prevailing at December 31, 1998 and
1997, the fair value of TWE's fixed-rate debt exceeded its carrying value by
$764 million and $532 million, respectively. Unrealized gains or losses on debt
do not result in the realization or expenditure of cash and generally are not
recognized for financial reporting purposes unless the debt is retired prior to
its maturity.
6. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Domestic.................................................... $438 $654 $263
Foreign..................................................... (20) 68 17
---- ---- ----
Total....................................................... $418 $722 $280
==== ==== ====
</TABLE>
F-107
<PAGE> 158
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a partnership, TWE is not subject to U.S. federal, state or local income
taxation. However, certain of TWE's operations are conducted by subsidiary
corporations that are subject to domestic or foreign taxation. Income taxes
(benefits) of TWE and subsidiary corporations are as set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current................................................... $ 6 $ 2 $ 4
Deferred.................................................. (7) (10) (3)
Foreign:
Current(1)................................................ 106 69 86
Deferred.................................................. (15) 22 (21)
State and local:
Current................................................... 4 4 5
Deferred.................................................. (2) (2) (1)
---- ---- ----
Total income taxes.......................................... $ 92 $ 85 $ 70
==== ==== ====
</TABLE>
- ---------------
(1) Includes foreign withholding taxes of $62 million in 1998, $58 million in
1997 and $54 million in 1996.
The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $7.5 billion at December 31, 1998, 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 currently because the REIT
has received a legal opinion stating that certain proposed changes to the tax
regulations have substantially increased the likelihood that the dividends paid
by the REIT or interest paid under the mortgage note will 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
F-108
<PAGE> 159
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
A summary of the priority of Undistributed Contributed Capital, ownership
of Undistributed Contributed Capital and Cumulative Priority Capital at December
31, 1998 and priority capital rates of return thereon is set forth below:
<TABLE>
<CAPTION>
PRIORITY TIME LIMITED PARTNERS
UNDISTRIBUTED CUMULATIVE CAPITAL WARNER ------------------
PRIORITY OF UNDISTRIBUTED CONTRIBUTED PRIORITY RATES OF GENERAL TIME
CONTRIBUTED CAPITAL CAPITAL(A) CAPITAL RETURN(B) PARTNERS WARNER MEDIAONE
- ------------------------- ------------- ---------- --------- -------- ------ --------
(BILLIONS) (OWNERSHIP %)
<S> <C> <C> <C> <C> <C> <C>
Senior Capital............. $0.5 $ 0.6 8.00% 100.00% -- --
Series A Capital........... 5.6 12.8 13.00% 63.27% 11.22% 25.51%
Series B Capital........... 2.9(d) 6.8 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
F-109
<PAGE> 160
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, although it does not appear likely at this time
that such targets will be achieved. In addition, MediaOne 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
at any time through May 2005 at a maximum exercise price of $1.25 billion to
$1.8 billion, depending on the year of exercise. Either MediaOne or TWE may
elect that the exercise price be paid with partnership interests rather than
cash.
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 1998 and 1997, the Time Warner General Partners received $579 million
and $535 million, respectively, of distributions from TWE relating to their
Senior Capital interests (representing the return of $455 million of contributed
capital in each period and the distribution of $124 million and $80 million,
respectively, 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 $1.5 billion. The Time Warner General Partners' remaining $603
million Senior Capital interests and any undistributed partnership income
allocated thereto (based on an 8% annual rate of return) are required to be
distributed on July 1, 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 $13.88, 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,
1998 and 1997, TWE had recorded a liability for Stock Option Distributions of
$1.130 billion and $417 million, respectively, based on the unexercised options
and the market prices at such dates of $62.06 and $31.00, respectively, per Time
Warner common share. This liability reflects the accrual of $973 million and
$399 million of Stock Option Distributions in 1998 and 1997, 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 $260 million in 1998, $75
million in 1997 and $13 million in 1996.
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 $314 million
in 1998, $324 million in 1997 and $215 million in 1996.
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
F-110
<PAGE> 161
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, 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.
In addition, in connection with the Time Warner Telecom Reorganization, TWE
recorded a $191 million noncash distribution to its partners based on the
historical cost of the net assets (Note 2).
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 with exercise prices
equal to, 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,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net income:
As reported............................................... $326 $614 $210
==== ==== ====
Pro forma................................................. $285 $584 $193
==== ==== ====
</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 is not
comparable to the impact on pro forma net income for 1998 and 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 to TWE employees in
1998, 1997 and 1996: dividend yields of 0.5%, 1% and 1%, respectively; expected
volatility of 21.7%, 22.2% and 21.7%, respectively; risk-free interest rates of
5.5%, 6.3% and 5.7%, respectively; and expected lives of 5 years in all periods.
F-111
<PAGE> 162
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1998, Time Warner completed a two-for-one common stock split.
Accordingly, the following stock option information for all prior periods has
been restated to give effect to this stock split.
The weighted average fair value of an option granted to TWE employees
during the year was $11.03, $6.09 and $5.22 for the years ended December 31,
1998, 1997 and 1996, 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 $24.26 and $3.41.
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, 1996.................................. 57,069 $16.63
Granted..................................................... 9,021 21.24
Exercised................................................... (2,485) 14.34
Cancelled(a)................................................ (2,983) 15.68
-------
Balance at December 31, 1996................................ 60,622 $17.46
Granted..................................................... 7,839 20.68
Exercised................................................... (7,045) 14.37
Cancelled(a)................................................ (2,412) 16.76
-------
Balance at December 31, 1997................................ 59,004 $18.28
Granted..................................................... 5,767 37.82
Exercised................................................... (15,957) 16.42
Cancelled(a)................................................ (1,073) 14.36
-------
Balance at December 31, 1998................................ 47,741 $21.35
=======
</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,
--------------------------
1998 1997 1996
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable.............................................. 33,370 43,022 45,544
</TABLE>
F-112
<PAGE> 163
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, 1998:
<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 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- ------------------------ ----------- ----------- --------- ----------- ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $10.................. 374 1.1 years $ 8.37 374 $ 8.37
$10.00 to $15.00........... 5,183 2.8 years $12.54 5,183 $12.54
$15.01 to $20.00........... 17,035 5.2 years $18.34 13,433 $18.21
$20.01 to $30.00........... 19,254 5.7 years $21.66 14,329 $21.46
$30.01 to $45.00........... 4,582 9.0 years $34.70 51 $30.28
$45.01 to $52.39........... 1,313 9.1 years $47.82 -- --
------ ------
Total...................... 47,741 5.6 years $21.35 33,370 $18.63
====== ======
</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. Time Warner's common stock represents approximately 12%
and 7% of plan assets at December 31, 1998 and 1997, respectively. A summary of
activity for TWE's defined benefit pension plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
COMPONENTS OF PENSION EXPENSE
Service cost................................................ $ 42 $ 33 $ 33
Interest cost............................................... 36 31 28
Expected return on plan assets.............................. (35) (26) (23)
Net amortization and deferral............................... -- -- 3
---- ---- ----
Total....................................................... $ 43 $ 38 $ 41
==== ==== ====
</TABLE>
F-113
<PAGE> 164
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1998 1997
----- ----
(MILLIONS)
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year........... $ 461 $359
Service cost................................................ 42 33
Interest cost............................................... 36 31
Actuarial loss.............................................. 61 48
Benefits paid............................................... (14) (10)
----- ----
Projected benefit obligation at end of year................. 586 461
----- ----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 364 284
Actual return on plan assets................................ 112 71
Employer contribution....................................... 18 19
Benefits paid............................................... (14) (10)
----- ----
Fair value of plan assets at end of year.................... 480 364
----- ----
Unfunded projected benefit obligation....................... (106) (97)
Additional minimum liability(a)............................. (4) (10)
Unrecognized actuarial loss (gain).......................... (10) 3
Unrecognized prior service cost............................. 5 8
----- ----
Accrued pension expense..................................... $(115) $(96)
===== ====
</TABLE>
- ---------------
(a) The additional minimum liability is offset fully by a corresponding
intangible asset recognized in the consolidated balance sheet.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate............................................... 6.75% 7.25% 7.75%
Expected return on plan assets.............................. 9% 9% 9%
Rate of compensation increase............................... 6% 6% 6%
</TABLE>
Included above are projected benefit obligations and accumulated benefit
obligations for unfunded defined benefit pension plans of $39 million and $27
million as of December 31, 1998, respectively; and $29 million and $19 million
as of December 31, 1997, respectively.
Certain domestic employees of TWE participate in multi-employer pension
plans as to which the expense amounted to $35 million in 1998, $29 million in
1997 and $30 million in 1996. 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 $35 million in 1998, $30
million in 1997 and $28 million in 1996. 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. DERIVATIVE FINANCIAL INSTRUMENTS
TWE uses derivative financial instruments principally to manage the risk
that changes in exchange rates will affect the amount of unremitted or future
license fees to be received from the sale of U.S. copyrighted
F-114
<PAGE> 165
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products abroad. The following is a summary of TWE's foreign currency risk
management strategy and the effect of this strategy on TWE's consolidated
financial statements.
FOREIGN CURRENCY RISK MANAGEMENT
Foreign exchange contracts are used primarily by Time Warner 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, 1998, 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. To hedge this exposure, Time Warner used foreign
exchange contracts that generally have maturities of three months or less, which
generally will be rolled over to provide continuing coverage throughout the
year. Time Warner often closes foreign exchange sale contracts by purchasing an
offsetting purchase contract. Time Warner reimburses or is reimbursed by TWE for
contract gains and losses related to TWE's foreign currency exposure. Foreign
exchange contracts are placed with a number of major financial institutions in
order to minimize credit risk.
TWE records these foreign exchange contracts at fair value in its
consolidated balance sheet and the related gains or losses on these contracts
are deferred in partners' capital (as a component of comprehensive income).
These deferred gains and losses are recognized in income in the period in which
the related license fees being hedged are received and recognized in income.
However, to the extent that any of these contracts are not considered to be
perfectly effective in offsetting the change in the value of the license fees
being hedged, any changes in fair value relating to the ineffective portion of
these contracts are immediately recognized in income. Gains and losses on
foreign exchange contracts are generally included as a component of interest and
other, net, in TWE's consolidated statement of operations.
At December 31, 1998, Time Warner had contracts for the sale of $755
million and the purchase of $259 million of foreign currencies at fixed rates.
Of Time Warner's $496 million net sale contract position, $298 million of the
foreign exchange sale contracts and $101 million of the foreign exchange
purchase contracts related to TWE's foreign currency exposure, primarily
Japanese yen (29% of net contract position related to TWE), French francs (29%),
German marks (32%) and Canadian dollars (5%), compared to a net sale contract
position of $105 million of foreign currencies at December 31, 1997. TWE had
deferred approximately $6 million of net losses on foreign exchange contracts at
December 31, 1998, which is all expected to be recognized in income over the
next twelve months. For the years ended December 31, 1998, 1997 and 1996, TWE
recognized $2 million in losses, $14 million in gains and $6 million in gains,
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 counterparty credit risk.
12. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; 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
F-115
<PAGE> 166
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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's cable segment reflect the TWE-A/N Transfers
effective as of January 1, 1998, the Primestar Roll-up Transaction effective as
of April 1, 1998, the formation of the Road Runner Joint Venture effective as of
June 30, 1998 and the Time Warner Telecom Reorganization effective as of July 1,
1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ---------- -------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
Filmed Entertainment-Warner Bros...................... $ 6,051 $ 5,462 $ 5,639
Broadcasting-The WB Network........................... 260 136 87
Cable Networks-HBO.................................... 2,052 1,923 1,763
Cable................................................. 4,378 4,243 3,851
Intersegment elimination.............................. (495) (446) (488)
------- ------- -------
Total................................................. $12,246 $11,318 $10,852
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ---------- -------
(MILLIONS)
<S> <C> <C> <C>
EBITA(1)
Filmed Entertainment-Warner Bros...................... $498 $387 $367
Broadcasting-The WB Network........................... (93) (88) (98)
Cable Networks-HBO.................................... 454 391 328
Cable(2).............................................. 1,369 1,184 917
------- ------- -------
Total................................................. $2,228 $1,874 $1,514
======= ======= =======
</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 $1.719
billion in 1998, $1.444 billion in 1997 and $1.078 billion in 1996.
(2) Includes net gains of approximately $90 million and $200 million recognized
in 1998 and 1997, respectively, related to the sale or exchange of certain
cable television systems.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ---------- -------
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros...................... $166 $181 $158
Broadcasting-The WB Network........................... 1 1 --
Cable Networks-HBO.................................... 23 22 22
Cable................................................. 737 736 619
------- ------- -------
Total................................................. $927 $940 $799
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ---------- -------
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment-Warner Bros...................... $129 $123 $125
Broadcasting-The WB Network........................... 3 -- --
Cable Networks-HBO.................................... -- -- --
Cable................................................. 377 307 311
------- ------- -------
Total................................................. $509 $430 $436
======= ======= =======
</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.
F-116
<PAGE> 167
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information as to the assets and capital expenditures of TWE is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Filmed Entertainment-Warner Bros...................... $ 8,800 $ 8,098 $ 8,057
Broadcasting-The WB Network........................... 244 113 67
Cable Networks-HBO.................................... 1,159 1,080 997
Cable................................................. 11,314 10,771 10,202
Corporate(1).......................................... 713 669 650
------- ------- -------
Total................................................. $22,230 $20,731 $19,973
======= ======= =======
</TABLE>
- ---------------
(1) Consists principally of cash, cash equivalents and other investments.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros......................... $ 122 $ 144 $ 340
Broadcasting-The WB Network.............................. 1 1 2
Cable Networks-HBO....................................... 23 19 29
Cable(1)................................................. 1,451 1,401 1,348
Corporate................................................ 6 -- --
------ ------ ------
Total.................................................... $1,603 $1,565 $1,719
====== ====== ======
</TABLE>
- ---------------
(1) Cable capital expenditures were funded in part through collections on the
MediaOne Note Receivable in the amount of $169 million in 1996 (Note 1). The
MediaOne Note Receivable was fully collected during 1996.
Information as to TWE's operations in different geographical areas is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
REVENUES(1)
United States......................................... $10,167 $ 9,086 $ 8,718
United Kingdom........................................ 459 488 383
Germany............................................... 263 284 374
Japan................................................. 162 172 196
France................................................ 163 152 143
Canada................................................ 145 137 157
Other international................................... 887 999 881
------- ------- -------
Total................................................. $12,246 $11,318 $10,852
======= ======= =======
</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 1998, $218 million in
1997 and $205 million in 1996. The minimum rental commitments under
noncancellable long-term operating leases are: 1999-$186 million; 2000-$175
million; 2001-$164 million; 2002-$155 million; 2003-$136 million; and after
2003-$736 million.
F-117
<PAGE> 168
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TWE's minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements aggregated approximately $6.3 billion
at December 31, 1998, which are payable principally over a five-year period.
TWE is subject to numerous legal proceedings (including certain litigation
relating to Six Flags). In management's opinion and considering established
reserves, the resolution of these matters will not have a material effect,
individually and in the aggregate, on TWE's 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, $72 million and $69 million in 1998, 1997 and
1996, respectively.
TWE was required to pay a $130 million advisory fee to MediaOne over a
five-year period that ended September 15, 1998 for MediaOne's expertise in
telecommunications, telephony and information technology, and its participation
in the management and technological upgrade of TWE's cable systems.
TWE has management services agreements with Time Warner's Cable division,
pursuant to which TWE manages, or provides services to, the cable television
systems owned by Time Warner. Such cable television systems also pay fees to TWE
for the right to carry cable television programming provided by TWE's cable
networks. 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 Cable division has agreed to sell or exchange various cable
television systems to MediaOne in an effort to strengthen its geographic
clustering of cable television properties.
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.
In addition to transactions with its partners, TWE has had transactions
with the Columbia House Company partnerships, Comedy Partners, L.P., Time Warner
Telecom, the Road Runner Joint Venture 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. 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.
F-118
<PAGE> 169
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $500 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
$166 million were received under this securitization program in 1998.
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Cash payments made for interest............................. $537 $493 $513
Cash payments made for income taxes, net.................... 91 95 74
Noncash capital contributions (distributions), net.......... 973 399 (1)
</TABLE>
Noncash investing and financing activities in 1998 included the Time Warner
Telecom Reorganization, the TWE-A/N Transfers, the Primestar Roll-up Transaction
and the exchange of certain cable television systems (Note 2).
OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses............................................ $1,395 $1,159
Accrued compensation........................................ 298 253
Deferred revenues........................................... 249 255
------ ------
Total....................................................... $1,942 $1,667
====== ======
</TABLE>
F-119
<PAGE> 170
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, 1998 and 1997, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, 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 3, 1999
F-120
<PAGE> 171
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, 1998 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 1998 reflects (a) the
TWE-A/N Transfers effective as of January 1, 1998, (b) the Primestar Roll-up
Transaction effective as of April 1, 1998, (c) the formation of the Road Runner
Joint Venture effective as of June 30, 1998 and (d) the Time Warner Telecom
Reorganization effective as of July 1, 1998. 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 deconsolidation of Six Flags resulting
from the disposition by TWE of a 51% interest in Six Flags effective as of June
23, 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING STATEMENT INFORMATION
Revenues.................................. $12,246 $11,318 $10,852 $ 9,517 $8,460
Depreciation and amortization............. (1,436) (1,370) (1,235) (1,039) (943)
Business segment operating income(1)...... 1,719 1,444 1,078 960 848
Interest and other, net(2)................ (965) (345) (522) (580) (587)
Income before extraordinary item.......... 326 637 210 97 161
Net income(3)............................. 326 614 210 73 161
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET INFORMATION
Cash and equivalents..................... $ 87 $ 322 $ 216 $ 209 $ 1,071
Total assets............................. 22,230 20,731 19,973 18,905 18,662
Debt due within one year................. 6 8 7 47 32
Long-term debt........................... 6,578 5,990 5,676 6,137 7,160
Preferred stock of subsidiary............ 217 233 -- -- --
Time Warner General Partners' Senior
Capital................................ 603 1,118 1,543 1,426 1,663
Partners' capital........................ 5,107 6,333 6,574 6,478 6,233
</TABLE>
- ---------------
(1) Includes net gains of approximately $90 million and $200 million recognized
in 1998 and 1997, respectively, related to the sale or exchange of certain
cable television systems.
(2) Includes a charge of approximately $210 million in 1998 to reduce the
carrying value of an interest in Primestar and a gain of approximately $250
million in 1997 related to the sale of an interest in E! Entertainment.
(3) Net income for each of the years ended December 31, 1997 and 1995 includes
an extraordinary loss on the retirement of debt of $23 million and $24
million, respectively.
F-121
<PAGE> 172
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>
1998
1st......................................................... $ 2,910 $ 369 $ 108
2nd(a)...................................................... 2,850 455 155
3rd......................................................... 3,220 468 172
4th(b)...................................................... 3,266 427 (109)
Year(a)(b).................................................. 12,246 1,719 326
1997
1st(c)...................................................... $ 2,600 $ 329 $ 320
2nd......................................................... 2,728 320 82
3rd......................................................... 2,855 335 81
4th(d)(e)................................................... 3,135 460 131
Year........................................................ 11,318 1,444 614
</TABLE>
- ---------------
(a) Operating income includes net gains of approximately $90 million for the
year relating to the sale or exchange of certain cable television systems,
of which approximately $70 million was recorded in the second quarter of
1998.
(b) Net income (loss) for the fourth quarter of 1998 includes a charge of
approximately $210 million principally to reduce the carrying value of an
interest in Primestar.
(c) 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.
(d) 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.
(e) Net income for the fourth quarter of 1997 includes an extraordinary loss on
the retirement of debt of $23 million.
F-122
<PAGE> 173
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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>
1998:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts................ $218 $144 $ (91)(a) $271
Reserves for sales returns and allowances...... 206 338 (309)(b) 235
---- ---- ----- ----
Total............................................ $424 $482 $(400) $506
==== ==== ===== ====
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
==== ==== ===== ====
</TABLE>
- ---------------
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
F-123
<PAGE> 174
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).
</TABLE>
i
<PAGE> 175
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
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")).
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) of the Registrant's 1996 Form
10-K).
3.(i)(m) Certificate of Elimination 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 G Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware
on March 18, 1999.
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 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)(o) Certificate of Elimination 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 H Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware
on March 18, 1999.
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 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).
</TABLE>
ii
<PAGE> 176
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
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 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)(r) 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)(s) Certificate of Elimination 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 March 18,
1999.
3.(i)(t) Certificate of the Voting Powers, Designations, Preferences *
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of 10 1/4% Series M Exchangeable Preferred Stock of
the Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.15 to the Registrant's S-8
Registration Statement).
3.(ii) By-laws of the Registrant as of November 19, 1998.
4.1 Rights Agreement (the "Rights Agreement") dated as of *
October 10, 1996 between the Registrant and ChaseMellon
Shareholder Services L.L.C. ("ChaseMellon") (which is
incorporated herein by reference to Exhibit 4.17 to the
Registrant's S-8 Registration Statement).
4.2 Amendment No. 1 to the Rights Agreement dated as of December
15, 1998 between the Registrant and ChaseMellon.
4.3 Amendment No. 2 to the Rights Agreement dated as of January
21, 1999 between the Registrant and ChaseMellon.
4.4 Indenture dated as of June 1, 1998 among the Registrant, *
Time Warner Companies, Inc. ("TWCI"), Turner Broadcasting
System, Inc. ("TBS") and The Chase Manhattan Bank, as
Trustee ("Chase Manhattan") (which is incorporated herein by
reference to Exhibit 4 to the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 1998).
4.5 Indenture dated as of April 30, 1992, as amended by the *
First Supplemental Indenture, dated as of June 30, 1992,
among Time Warner Entertainment Company, L.P. ("TWE"), TWCI,
certain of TWCI's subsidiaries that are parties thereto and
The Bank of New York ("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")).
</TABLE>
iii
<PAGE> 177
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
4.6 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")).
4.7 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).
4.8 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 (File No.
1-12259) ("TWE's 1993 Form 10-K")).
4.9 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 (File No.
1-12259)).
4.10 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 (which is
incorporated herein by reference to Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 (the "1997 Form 10-K)).
4.11 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 (which is
incorporated herein by reference to Exhibit 4.7 to the
Registrant's 1997 Form 10-K).
4.12 Indenture dated as of January 15, 1993 between TWCI and *
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)).
4.13 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 (File No. 1-8637)).
4.14 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).
4.15 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).
</TABLE>
iv
<PAGE> 178
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
4.16 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").
4.17 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).
4.18 Sixth Supplemental Indenture dated as of March 17, 1998 *
among the Registrant, TWCI, TBS and Chase Manhattan, as
Trustee (which is incorporated herein by reference to
Exhibit 4.15 to the Registrant's 1997 Form 10-K).
4.19 Trust Agreement dated as of April 1, 1998 among the *
Registrant, as Grantor and U.S. Trust Company of California,
N.A., as Trustee (which is incorporated herein by reference
to Exhibit 4.16 to the Registrant's 1997 Form 10-K).
10.1 Time Warner 1986 Stock Option Plan, as amended through March *
20, 1997 (which is incorporated herein by reference to
Exhibit 10.1 to the Registrant's 1997 Form 10-K).
10.2 1988 Stock Incentive Plan of Time Warner Inc., as amended *
through March 20, 1997 (which is incorporated herein by
reference to Exhibit 10.2 to the Registrant's 1997 Form
10-K).
10.3 Time Warner 1989 Stock Incentive Plan, as amended through *
March 20, 1997 (which is incorporated herein by reference to
Exhibit 10.3 to the Registrant's 1997 Form 10-K).
10.4 Time Warner 1994 Stock Option Plan, as amended through
November 19, 1998.
10.5 Time Warner Corporate Group Stock Incentive Plan, as amended *
through March 20, 1997 (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's 1997 Form
10-K).
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 (File No. 1-8637) ("TWCI's 1993 Form 10-K")).
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
(File No. 1-8637)).
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).
</TABLE>
v
<PAGE> 179
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
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 Time Warner Inc. Deferred Compensation Plan (which is *
incorporated herein by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-8 filed with
the Commission on December 18, 1998 (Registration No.
333-69161)).
10.13 Amended and Restated Employment Agreement effective as of
January 1, 1998, as amended December 2, 1998, between the
Registrant and Gerald M. Levin.
10.14 Amended and Restated Employment Agreement effective as of
January 1, 1998, as amended December 15, 1998, between the
Registrant and R.E. Turner ("Turner").
10.15 Amended and Restated Employment Agreement effective as of
January 1, 1999, between the Registrant and Richard D.
Parsons.
10.16 Amended and Restated Employment Agreement effective as of
January 1, 1998, as amended December 2, 1998, between the
Registrant and Peter R. Haje.
10.17 Amended and Restated Employment Agreement effective as of
January 1, 1999, between the Registrant and Richard J.
Bressler.
10.18 Amended and Restated Employment Agreement effective as of
April 1, 1998, as amended December 2, 1998, between the
Registrant and Timothy A. Boggs.
10.19 Amended and Restated Employment Agreement effective as of
April 1, 1998, as amended December 2, 1998, between the
Registrant and John A. LaBarca.
10.20 Employment Agreement effective as of January 11, 1999,
between the Registrant and Andrew J. Kaslow.
10.21 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")).
10.22 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).
10.23 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's Partners") (which is incorporated
herein by reference to Exhibit 10.22 to the Registrant's
1996 Form 10-K).
10.24 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).
10.25 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).
</TABLE>
vi
<PAGE> 180
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
10.26 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).
10.27 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 (which is
incorporated herein by reference to Exhibit 10.26 to the
Registrant's 1997 Form 10-K).
10.28 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).
10.29 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 (File No. 1-2878)).
10.30 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 (File No.
1-2878)).
10.31 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")).
10.32 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).
10.33 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 (File No. 1-2878)).
10.34 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")).
10.35 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).
</TABLE>
vii
<PAGE> 181
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
10.36 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).
10.37 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).
10.38 Transaction Agreement No. 2 dated as of June 23, 1998 among
Advance Publications, Newhouse, Advance/Newhouse, TWE,
Paragon Communications ("Paragon") and TWE-AN Partnership.
10.39 Transaction Agreement No. 3 dated as of September 15, 1998
among Advance Publications, Newhouse, Advance/Newhouse, TWE,
Paragon and TWE-AN Partnership.
10.40 First Amendment to the Partnership Agreement of TWE-AN
Partnership dated as of February 12, 1998 among TWE,
Advance/Newhouse and TW Holding Co.
10.41 Second Amendment to the Partnership Agreement of TWE-AN
Partnership dated as of December 31, 1998 among TWE,
Advance/Newhouse and Paragon.
10.42 Third Amendment to the Partnership Agreement of TWE-AN
Partnership dated as of March 1, 1999 among TWE,
Advance/Newhouse and Paragon.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
99.1 Annual Report on Form 11-K of the Time Warner Savings Plan
for the year ended December 31, 1998 (to be filed by
amendment).
99.2 Annual Report on Form 11-K of the Time Warner Thrift Plan
for the year ended December 31, 1998 (to be filed by
amendment).
99.3 Annual Report on Form 11-K of the TWC Savings Plan for the
year ended December 31, 1998 (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.
viii
<PAGE> 1
Exhibit 3(i)(m)
CERTIFICATE OF ELIMINATION
of
TIME WARNER INC.
TIME WARNER INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (formerly known as "TW Inc.")
(the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the
Corporation on March 18, 1999, resolutions were duly adopted authorizing
elimination of the Series G Convertible Preferred Stock of the Corporation (for
which the Certificate of the Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions thereof, was filed with the Secretary of State of
the State of Delaware on October 10, 1996 (at which time the Corporation was
named "TW Inc.")) (the "Series G Stock"), as set forth herein:
RESOLVED, that all shares of the Series G Stock outstanding have
been converted pursuant to their terms into shares of the Corporation's
Common Stock and no shares of Series G Stock remain outstanding or will be
issued; and it is further
RESOLVED, that a Certificate of Elimination be prepared, which shall
have the effect when filed with the Secretary of State of the State of
Delaware of eliminating from the Restated Certificate of Incorporation of
the Corporation all matters set forth in the Certificate of Designation
previously filed with respect to the Series G Stock, and that the
appropriate officers of the Corporation be, and they hereby are,
authorized to execute and file, on behalf of the Corporation and under its
corporate seal, such Certificate of Elimination with the Secretary of
State of the State of Delaware.
SECOND: That in accordance with the provisions of Section 151(g) of
the General Corporation Law of the State of Delaware, the Restated Certificate
of Incorporation of the Corporation is hereby amended to eliminate all matters
set forth in the Certificate of Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions thereof, filed on October 10, 1996 with respect to
the Series G Stock.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed by Thomas W. McEnerney, its Vice President, on this 18th day of March,
1999.
TIME WARNER INC.
/s/ Thomas W. McEnerney
---------------------------------
Name: Thomas W. McEnerney
Title: Vice President
Attest:
By: /s/ Susan A. Waxenberg
----------------------------------
Name: Susan A. Waxenberg
Title: Assistant Secretary
2
<PAGE> 1
Exhibit 3(i)(o)
CERTIFICATE OF ELIMINATION
of
TIME WARNER INC.
TIME WARNER INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (formerly known as "TW Inc.")
(the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the
Corporation on March 18, 1999, resolutions were duly adopted authorizing
elimination of the Series H Convertible Preferred Stock of the Corporation (for
which the Certificate of the Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions thereof, was filed with the Secretary of State of
the State of Delaware on October 10, 1996 (at which time the Corporation was
named "TW Inc.")) (the "Series H Stock"), as set forth herein:
RESOLVED, that all shares of the Series H Stock outstanding have
been exchanged for the Corporation's Common Stock and no shares of Series
H Stock remain outstanding or will be issued; and it is further
RESOLVED, that a Certificate of Elimination be prepared, which shall
have the effect when filed with the Secretary of State of the State of
Delaware of eliminating from the Restated Certificate of Incorporation of
the Corporation all matters set forth in the Certificate of Designation
previously filed with respect to the Series H Stock, and that the
appropriate officers of the Corporation be, and they hereby are,
authorized to execute and file, on behalf of the Corporation and under its
corporate seal, such Certificate of Elimination with the Secretary of
State of the State of Delaware.
SECOND: That in accordance with the provisions of Section 151(g) of
the General Corporation Law of the State of Delaware, the Restated Certificate
of Incorporation of the Corporation is hereby amended to eliminate all matters
set forth in the Certificate of Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions thereof, filed on October 10, 1996 with respect to
the Series H Stock.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed by Thomas W. McEnerney, its Vice President, on this 18th day of March,
1999.
TIME WARNER INC.
/s/ Thomas W. McEnerney
--------------------------------
Name: Thomas W. McEnerney
Title: Vice President
Attest:
By: /s/ Susan A. Waxenberg
----------------------------------
Name: Susan A. Waxenberg
Title: Assistant Secretary
2
<PAGE> 1
Exhibit 3(i)(s)
CERTIFICATE OF ELIMINATION
Of
TIME WARNER INC.
TIME WARNER INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (formerly known as "TW Inc.")
(the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the
Corporation on March 18, 1999, resolutions were duly adopted authorizing
elimination of the 10 1/4% Series M Exchangeable Preferred Stock of the
Corporation (for which the Certificate of the Voting Powers, Designations,
Preferences and Relative, Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions thereof, was filed with the
Secretary of State of the State of Delaware on October 10, 1996 (at which time
the Corporation was named "TW Inc.")) (the "Series M Stock"), as set forth
herein:
RESOLVED, that all shares of the Series M Stock outstanding have
been exchanged for the Corporation's Common Stock and no shares of Series
M Stock remain outstanding or will be issued; and it is further
RESOLVED, that a Certificate of Elimination be prepared, which shall
have the effect when filed with the Secretary of State of the State of
Delaware of eliminating from the Restated Certificate of Incorporation of
the Corporation all matters set forth in the Certificate of Designation
previously filed with respect to the Series M Stock, and that the
appropriate officers of the Corporation be, and they hereby are,
authorized to execute and file, on behalf of the Corporation and under its
corporate seal, such Certificate of Elimination with the Secretary of
State of the State of Delaware.
SECOND: That in accordance with the provisions of Section 151(g) of
the General Corporation Law of the State of Delaware, the Restated Certificate
of Incorporation of the Corporation is hereby amended to eliminate all matters
set forth in the Certificate of Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions thereof, filed on October 10, 1996 with respect to
the Series M Stock.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed by Thomas W. McEnerney, its Vice President, on this 18th day of March,
1999.
TIME WARNER INC.
/s/ Thomas W. McEnerney
---------------------------------
Name: Thomas W. McEnerney
Title: Vice President
Attest:
By: /s/ Susan A. Waxenberg
----------------------------------
Name: Susan A. Waxenberg
Title: Assistant Secretary
2
<PAGE> 1
Exhibit 3.(ii)
BY-LAWS
OF
TIME WARNER INC.
Incorporated under the Laws of the State of Delaware
Effective November 19, 1998
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I: Offices .................................... 1
Registered Office........................................................ 1
Other Offices............................................................ 1
ARTICLE II: Meetings of Stockholders .................. 1
Place of Meeting......................................................... 1
Annual Meetings.......................................................... 1
Special Meetings......................................................... 1
Notice of Meetings....................................................... 2
Quorum................................................................... 2
Adjournments............................................................. 2
Order of Business........................................................ 2
List of Stockholders..................................................... 4
Voting................................................................... 4
Inspectors............................................................... 5
Public Announcements..................................................... 5
ARTICLE III: Board of Directors ...................... 5
General Powers........................................................... 5
Number, Qualification and Election....................................... 5
Notification of Nominations ............................................. 6
Quorum and Manner of Acting.............................................. 7
Place of Meeting......................................................... 7
Regular Meetings......................................................... 7
Special Meetings......................................................... 8
Notice of Meetings....................................................... 8
Rules and Regulations.................................................... 8
i
<PAGE> 3
Participation in Meeting by Means of
Communications Equipment........................................ 8
Action without Meeting................................................... 8
Resignations............................................................. 8
Removal of Directors..................................................... 8
Vacancies................................................................ 9
Compensation............................................................. 9
Independent Directors.................................................... 9
ARTICLE IV: Committees of the Board of Directors ...... 10
Establishment of Committees of the Board of Directors;
Election of Members of Committees of the Board of
Directors; Functions of Committees of the Board of Directors...... 10
Procedure; Meetings; Quorum............................................. 10
ARTICLE V: Officers ..................................... 11
Number; Term of Office.................................................. 11
Removal................................................................. 11
Resignation............................................................. 11
Vacancies............................................................... 12
Chairman of the Board................................................... 12
Chief Executive Officer................................................. 12
The President........................................................... 12
Chief Operating Officer ................................................ 12
Vice-Chairman of the Board.............................................. 13
Chairman of the Executive Committee..................................... 13
Chief Financial Officer................................................. 13
Vice-Presidents......................................................... 13
Treasurer............................................................... 13
Controller.............................................................. 14
Secretary............................................................... 14
Assistant Treasurers and Assistant Secretaries ........................ 14
ii
<PAGE> 4
ARTICLE VI: Indemnification ............................. 15
Right to Indemnification................................................ 15
Insurance, Contracts and Funding........................................ 15
Indemnification Not Exclusive Right..................................... 16
Advancement of Expenses; Procedures; Presumptions
and Effect of Certain Proceedings; Remedies.................... 16
Severability............................................................ 19
Indemnification of Employees Serving as Directors...................... 20
Indemnification of Employees and Agents................................. 20
ARTICLE VII: Capital Stock .............................. 21
Certificates for Shares................................................. 21
Transfer of Shares...................................................... 21
Registered Stockholders and Addresses of Stockholders................... 22
Lost, Destroyed and Mutilated Certificates.............................. 22
Regulations............................................................. 22
Fixing Date for Determination of Stockholders of Record................ 22
Transfer Agents and Registrars.......................................... 23
ARTICLE VIII: Seal ....................................... 23
ARTICLE IX: Fiscal Year ................................. 23
ARTICLE X: Waiver of Notice ............................. 23
ARTICLE XI: Amendments ................................... 24
iii
<PAGE> 5
ARTICLE XII: Miscellaneous ............................... 24
Execution of Documents.................................................. 24
Deposits................................................................ 24
Checks.................................................................. 24
Proxies in Respect of Stock or Other Securities of Other Corporations.. 25
Subject to Law and Certificate of Incorporation........................ 25
iv
<PAGE> 6
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of Time Warner Inc.
(hereinafter called the Corporation) in the State of Delaware shall be at 32
Loockerman Square, Suite L-100, Dover, Delaware 19901 and the registered agent
shall be The Prentice-Hall Corporation System, Inc., or such other office or
agent as the Board of Directors of the Corporation (the "Board") shall from time
to time select.
SECTION 2. Other Offices. The Corporation may also have an office or
offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board may from time to time determine or
the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of Meeting. All meetings of the stockholders of the
Corporation (the "stockholders") shall be held at the office of the Corporation
or at such other places, within or without the State of Delaware, as may from
time to time be fixed by the Board.
SECTION 2. Annual Meetings. The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on such date and at such hour as
shall from time to time be fixed by the Board. Any previously scheduled annual
meeting of the stockholders may be postponed by action of the Board taken prior
to the time previously scheduled for such annual meeting of stockholders.
SECTION 3. Special Meetings. Except as otherwise required by law or the
Restated Certificate of Incorporation of the Corporation (the "Certificate") and
subject to the rights of the holders of any series of Preferred Stock or Series
Common Stock or any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, special meetings of the stockholders
for any purpose or purposes may be called by the Chairman, either Co-Chief
Executive Officer, or the President or a majority of the entire Board. Only such
business as is specified in the notice of any special meeting of the
stockholders shall come before such meeting.
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SECTION 4. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of the stockholders, whether annual or special,
shall be given, either by personal delivery or by mail, not less than 10 nor
more than 60 days before the date of the meeting to each stockholder of record
entitled to notice of the meeting. If mailed, such notice shall be deemed given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall attend such meeting in person
or by proxy without protesting, prior to or at the commencement of the meeting,
the lack of proper notice to such stockholder, or who shall waive notice thereof
as provided in Article X of these By-laws. Notice of adjournment of a meeting of
stockholders need not be given if the time and place to which it is adjourned
are announced at such meeting, unless the adjournment is for more than 30 days
or, after adjournment, a new record date is fixed for the adjourned meeting.
SECTION 5. Quorum. Except as otherwise provided by law or by the
Certificate, the holders of a majority of the votes entitled to be cast by the
stockholders entitled to vote generally, present in person or by proxy, shall
constitute a quorum at any meeting of the stockholders; provided, however, that
in the case of any vote to be taken by classes, the holders of a majority of the
votes entitled to be cast by the stockholders of a particular class, present in
person or by proxy, shall constitute a quorum of such class.
SECTION 6. Adjournments. The chairman of the meeting or the holders of
a majority of the votes entitled to be cast by the stockholders who are present
in person or by proxy may adjourn the meeting from time to time whether or not a
quorum is present. In the event that a quorum does not exist with respect to any
vote to be taken by a particular class, the chairman of the meeting or the
holders of a majority of the votes entitled to be cast by the stockholders of
such class who are present in person or by proxy may adjourn the meeting with
respect to the vote(s) to be taken by such class. At any such adjourned meeting
at which a quorum may be present, any business may be transacted which might
have been transacted at the meeting as originally called.
SECTION 7. Order of Business. At each meeting of the stockholders, the
Chairman or, in the absence of the Chairman, the President, or in the absence of
both the Chairman and the President, such person as shall be selected by the
Board shall act as chairman of the meeting. The order of business at each such
meeting shall be as determined by the chairman of the meeting. The chairman of
the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the maintenance of order and
safety, limitations on the time allotted to questions or comments on the affairs
of the Corporation,
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restrictions on entry to such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls.
At any annual meeting of stockholders, only such business shall be
conducted as shall have been brought before the annual meeting (i) by or at the
direction of the chairman of the meeting or (ii) by any stockholder who is a
holder of record at the time of the giving of the notice provided for in this
Section 7, who is entitled to vote at the meeting and who complies with the
procedures set forth in this Section 7.
For business properly to be brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation (the "Secretary"). To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 70 days nor
more than 120 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days earlier or more than 60 days later than such
anniversary date, notice by the stockholder to be timely must be so delivered or
received not earlier than the 120th day prior to such annual meeting and not
later than the close of business on the later of the 70th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made. To be in proper written form, a
stockholder's notice to the Secretary shall set forth in writing as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting; (ii) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business; (iii) the class and number of shares of the Corporation
which are beneficially owned by the stockholder; (iv) any material interest of
the stockholder in such business; and (v) if the stockholder intends to solicit
proxies in support of such stockholder's proposal, a representation to that
effect. The foregoing notice requirements shall be deemed satisfied by a
stockholder if the stockholder has notified the Corporation of his or her
intention to present a proposal at an annual meeting and such stockholder's
proposal has been included in a proxy statement that has been prepared by
management of the Corporation to solicit proxies for such annual meeting;
provided, however, that if such stockholder does not appear or send a qualified
representative to present such proposal at such annual meeting, the Corporation
need not present such proposal for a vote at such meeting, notwithstanding that
proxies in respect of such vote may have been received by the Corporation.
Notwithstanding anything in the By-laws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 7. The chairman of an annual meeting may refuse to permit
any business to be brought before an annual meeting which fails to comply with
the foregoing procedures or, in the case of a stockholder proposal, if the
stockholder solicits proxies in support of such stockholder's proposal without
having made the representation required by clause (v) of the second preceding
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sentence.
SECTION 8. List of Stockholders. It shall be the duty of the Secretary
or other officer who has charge of the stock ledger to prepare and make, at
least 10 days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote thereat, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in
such stockholder's name. Such list shall be produced and kept available at the
times and places required by law.
SECTION 9. Voting. Except as otherwise provided by law or by the
Certificate, each stockholder of record of any series of Preferred Stock or
Series Common Stock shall be entitled at each meeting of stockholders to such
number of votes, if any, for each share of such stock as may be fixed in the
Certificate or in the resolution or resolutions adopted by the Board providing
for the issuance of such stock, and each stockholder of record of Common Stock
shall be entitled at each meeting of stockholders to one vote for each share of
such stock, in each case, registered in such stockholder's name on the books of
the Corporation:
(1) on the date fixed pursuant to Section 6 of Article VII of
these By-laws as the record date for the determination of stockholders
entitled to notice of and to vote at such meeting; or
(2) if no such record date shall have been so fixed, then at
the close of business on the day next preceding the day on which notice
of such meeting is given, or, if notice is waived, at the close of
business on the day next preceding the day on which the meeting is
held.
Each stockholder entitled to vote at any meeting of stockholders may
authorize not in excess of three persons to act for such stockholder by proxy.
Any such proxy shall be delivered to the secretary of such meeting at or prior
to the time designated for holding such meeting, but in any event not later than
the time designated in the order of business for so delivering such proxies. No
such proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period.
At each meeting of the stockholders, all corporate actions to be taken
by vote of the stockholders (except as otherwise required by law and except as
otherwise provided in the Certificate or these By-laws) shall be authorized by a
majority of the votes cast by the stockholders entitled to vote thereon who are
present in person or represented by proxy, and where a separate vote by class is
required, a majority of the votes cast by the stockholders of such class who are
present in person or represented by proxy shall be the act of such class.
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Unless required by law or determined by the chairman of the meeting to
be advisable, the vote on any matter, including the election of directors, need
not be by written ballot. In the case of a vote by written ballot, each ballot
shall be signed by the stockholder voting, or by such stockholder's proxy, and
shall state the number of shares voted.
SECTION 10. Inspectors. The chairman of the meeting shall appoint two
or more inspectors to act at any meeting of stockholders. Such inspectors shall
perform such duties as shall be required by law or specified by the chairman of
the meeting. Inspectors need not be stockholders. No director or nominee for the
office of director shall be appointed such inspector.
SECTION 11. Public Announcements. For purpose of Section 7 of this
Article II and Section 3 of Article III, "public announcement" shall mean
disclosure (i) in a press release reported by the Dow Jones News Service,
Reuters Information Service or any similar or successor news wire service or
(ii) in a writing distributed generally to stockholders and in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934 or
any successor provisions thereto.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by law or by the Certificate directed or required to be exercised or done by the
stockholders.
SECTION 2. Number, Qualification and Election. Except as otherwise
fixed by or pursuant to the provisions of Article IV of the Certificate relating
to the rights of the holders of any series of Preferred Stock or Series Common
Stock or any class or series of stock having preference over the Common Stock as
to dividends or upon liquidation, the number of directors of the Corporation
shall be determined from time to time by the Board by the affirmative vote of
directors constituting at least a majority of the entire Board; provided that
the number thereof may not be less than three.
The directors, other than those who may be elected by the holders of
shares of any series of Preferred Stock or Series Common Stock or any class or
series of stock having a preference over the Common Stock of the Corporation as
to dividends or upon liquidation pursuant to the terms of Article IV of the
Certificate or any resolution or resolutions providing for the issuance of such
stock
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adopted by the Board, shall be elected by the stockholders entitled to vote
thereon at each annual meeting of the stockholders, and shall hold office until
the next annual meeting of stockholders and until each of their successors shall
have been duly elected and qualified.
Each director shall be at least 21 years of age. Directors need not be
stockholders of the Corporation.
In any election of directors, the persons receiving a plurality of the
votes cast, up to the number of directors to be elected in such election, shall
be deemed elected.
SECTION 3. Notification of Nominations. Subject to the rights of the
holders of any series of Preferred Stock or Series Common Stock or any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation, nominations for the election of directors may be made by the
Board or by any stockholder who is a stockholder of record at the time of giving
of the notice of nomination provided for in this Section 3 and who is entitled
to vote for the election of directors. Any stockholder of record entitled to
vote for the election of directors at a meeting may nominate persons for
election as directors only if timely written notice of such stockholder's intent
to make such nomination is given, either by personal delivery or by United
States mail, postage prepaid, to the Secretary. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation (i) with respect to an election to be held at an
annual meeting of stockholders, not less than 70 nor more than 120 days prior to
the anniversary date of the immediately preceding annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days earlier or more than 60 days later than such anniversary date, notice by
the stockholder to be timely must be so delivered or received not earlier than
the 120th day prior to such annual meeting and not later than the close of
business on the later of the 70th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such meeting
is first made and (ii) with respect to an election to be held at a special
meeting of stockholders for the election of directors, not earlier than the 90th
day prior to such special meeting and not later than the close of business on
the later of the 60th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees to be elected at such meeting. Each such
notice shall set forth: (a) the name and address of the stockholder who intends
to make the nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would have been required to be included in a proxy
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statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had each nominee been nominated, or intended to be nominated, by the
Board; (e) the consent of each nominee to serve as a director of the Corporation
if so elected and (f) if the stockholder intends to solicit proxies in support
of such stockholder's nominee(s), a representation to that effect. The chairman
of the meeting may refuse to acknowledge the nomination of any person not made
in compliance with the foregoing procedure or if the stockholder solicits
proxies in favor of such stockholder's nominee(s) without having made the
representation required by the immediately preceding sentence. Only such persons
who are nominated in accordance with the procedures set forth in this Section 3
shall be eligible to serve as directors of the Corporation.
Notwithstanding anything in the immediately preceding paragraph of this
Section 3 to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation at an annual meeting of
stockholders is increased and there is no public announcement naming all of the
nominees for directors or specifying the size of the increased Board of
Directors made by the Corporation at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a shareholder's notice
required by this Section 3 shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered to or mailed to and received by the secretary at the principal
executive offices of the Corporation not later than the close of business on the
10th day following the day on which such public announcement is first made by
the Corporation.
SECTION 4. Quorum and Manner of Acting. Except as otherwise provided by
law, the Certificate or these By-laws, a majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting of the Board,
and, except as so provided, the vote of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board. The
chairman of the meeting or a majority of the directors present may adjourn the
meeting to another time and place whether or not a quorum is present. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called.
SECTION 5. Place of Meeting. The Board may hold its meetings at such
place or places within or without the State of Delaware as the Board may from
time to time determine or as shall be specified or fixed in the respective
notices or waivers of notice thereof.
SECTION 6. Regular Meetings. Regular meetings of the Board shall be
held at such times and places as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday under
the laws of the place where the meeting is to be held, the meeting which would
otherwise be held on that day shall be held at the same hour on the next
succeeding business day.
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SECTION 7. Special Meetings. Special meetings of the Board shall be
held whenever called by the Chairman, either Co-Chief Executive Officer, or the
President or by a majority of the directors.
SECTION 8. Notice of Meetings. Notice of regular meetings of the Board
or of any adjourned meeting thereof need not be given. Notice of each special
meeting of the Board shall be given by overnight delivery service or mailed to
each director, in either case addressed to such director at such director's
residence or usual place of business, at least two days before the day on which
the meeting is to be held or shall be sent to such director at such place by
telegraph or telecopy or be given personally or by telephone, not later than the
day before the meeting is to be held, but notice need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of such notice or who shall attend such meeting without protesting, prior to or
at its commencement, the lack of notice to such director. Every such notice
shall state the time and place but need not state the purpose of the meeting.
SECTION 9. Rules and Regulations. The Board may adopt such rules and
regulations not inconsistent with the provisions of law, the Certificate or
these By-laws for the conduct of its meetings and management of the affairs of
the Corporation as the Board may deem proper.
SECTION 10. Participation in Meeting by Means of Communications
Equipment. Any one or more members of the Board or any committee thereof may
participate in any meeting of the Board or of any such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at such meeting.
SECTION 11. Action without Meeting. Any action required or permitted to
be taken at any meeting of the Board or any committee thereof may be taken
without a meeting if all of the members of the Board or of any such committee
consent thereto in writing and the writing or writings are filed with the
minutes or proceedings of the Board or of such committee.
SECTION 12. Resignations. Any director of the Corporation may at any
time resign by giving written notice to the Board, the Chairman, the President
or the Secretary. Such resignation shall take effect at the time specified
therein or, if the time be not specified therein, upon receipt thereof; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 13. Removal of Directors. Directors may be removed only as
provided in Section 4 of Article VI of the Certificate.
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SECTION 14. Vacancies. Subject to the rights of the holders of any
series of Preferred Stock or Series Common Stock or any class or series of stock
having a preference over the Common Stock of the Corporation as to dividends or
upon liquidation, any vacancies on the Board resulting from death, resignation,
removal or other cause shall only be filled by the Board by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of the Board, or by a sole remaining director, and newly created
directorships resulting from any increase in the number of directors shall be
filled by the Board, or if not so filled, by the stockholders at the next annual
meeting thereof or at a special meeting called for that purpose in accordance
with Section 3 of Article II of these By-laws. Any director elected in
accordance with the preceding sentence of this Section 14 shall hold office
until the next annual meeting of stockholders and until such director's
successor shall have been elected and qualified.
SECTION 15. Compensation. Each director, in consideration of such
person serving as a director, shall be entitled to receive from the Corporation
such amount per annum and such fees (payable in cash or stock) for attendance at
meetings of the Board or of committees of the Board, or both, as the Board shall
from time to time determine. In addition, each director shall be entitled to
receive from the Corporation reimbursement for the reasonable expenses incurred
by such person in connection with the performance of such person's duties as a
director. Nothing contained in this Section shall preclude any director from
serving the Corporation or any of its subsidiaries in any other capacity and
receiving proper compensation therefor.
SECTION 16. Independent Directors.
(a) Independence of Members of Board of Directors at Time
of Nomination. At the time that the Board determines the slate of directors for
election at an Annual Meeting of Stockholders, a majority of the members of the
Board, assuming the election of the nominated slate and taking into account
resignations effective on or prior to such Annual Meeting, shall be determined
by the Board to be eligible to be classified as independent directors.
(b) Directors Elected to Fill Vacancies on the Board or
Newly Created Directorships. If the Board elects directors between Annual
Meetings of Stockholders to fill vacancies or newly created directorships, the
majority of all directors holding office immediately after such elections shall
be determined by the Board to be eligible to be classified as independent
directors.
(c) Determination of Independence of Directors. In its
determination of a director's eligibility to be classified as an independent
director pursuant to this Section 16, the Board shall consider, among such other
factors as it may in any case deem relevant, that the director: (i) has not been
employed by the Corporation as an executive officer within the past three years;
(ii) is
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not a paid adviser or consultant to the Corporation and derives no financial
benefit from any entity as a result of advice or consultancy provided to the
Corporation by such entity; (iii) is not an executive officer, director or
significant stockholder of a significant customer or supplier of the
Corporation; (iv) has no personal services contract with the Corporation; (v) is
not an executive officer or director of a tax-exempt entity receiving a
significant part of its annual contributions from the Corporation; (vi) is not a
member of the immediate family of any director who is not considered an
independent director; and (vii) is free of any other relationship that would
interfere with the exercise of independent judgment by such director.
ARTICLE IV
Committees of the Board of Directors
SECTION 1. Establishment of Committees of the Board of Directors;
Election of Members of Committees of the Board of Directors; Functions of
Committees of the Board of Directors. The Board may, in accordance with and
subject to the General Corporation Law of the State of Delaware, from time to
time establish committees of the Board to exercise such powers and authorities
of the Board, and to perform such other functions, as the Board may from time to
time determine.
SECTION 2. Procedure; Meetings; Quorum. Regular meetings of committees
of the Board, of which no notice shall be necessary, may be held at such times
and places as shall be fixed by resolution adopted by a majority of the members
thereof. Special meetings of any committee of the Board shall be called at the
request of any member thereof. Notice of each special meeting of any committee
of the Board shall be sent by overnight delivery service, or mailed to each
member thereof, in either case addressed to such member at such member's
residence or usual place of business, at least two days before the day on which
the meeting is to be held or shall be sent to such member at such place by
telegraph or telecopy or be given personally or by telephone, not later than the
day before the meeting is to be held, but notice need not be given to any member
who shall, either before or after the meeting, submit a signed waiver of such
notice or who shall attend such meeting without protesting, prior to or at its
commencement, the lack of such notice to such member. Any special meeting of any
committee of the Board shall be a legal meeting without any notice thereof
having been given, if all the members thereof shall be present thereat and no
member shall protest the lack of notice to such member. Notice of any adjourned
meeting of any committee of the Board need not be given. Any committee of the
Board may adopt such rules and regulations not inconsistent with the provisions
of law, the Certificate or these By-laws for the conduct of its meetings as such
committee of the Board may deem proper. A majority of the members of any
committee of the Board shall constitute a quorum for the transaction of business
at any meeting, and the vote of a majority of the members thereof present at any
meeting at which a quorum is present
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shall be the act of such committee. Each committee of the Board shall keep
written minutes of its proceedings and shall report on such proceedings to the
Board.
ARTICLE V
Officers
SECTION 1. Number; Term of Office. The officers of the Corporation
shall be such officers, which may include a Chairman of the Board, Chief
Executive Officer or Co-Chief Executive Officers, President, Chief Operating
Officer, Chairman of the Executive Committee and one or more Vice Chairmen and
Vice Presidents (including, without limitation, Assistant, Executive, Senior and
Group Vice Presidents) and a Treasurer, Secretary and Controller and such other
officers or agents with such titles and such duties as the Board may from time
to time determine, each to have such authority, functions or duties as in these
By-laws provided or as the Board may from time to time determine, and each to
hold office for such term as may be prescribed by the Board and until such
person's successor shall have been chosen and shall qualify, or until such
person's death or resignation, or until such person's removal in the manner
hereinafter provided. The Chairman, the Chief Executive Officers, the
Vice-Chairmen, the Chairman of the Executive Committee, and the President, if
any, shall be elected from among the directors. One person may hold the offices
and perform the duties of any two or more of said officers; provided, however,
that no officer shall execute, acknowledge or verify any instrument in more than
one capacity if such instrument is required by law, the Certificate or these
By-laws to be executed, acknowledged or verified by two or more officers. The
Board may from time to time authorize any officer to appoint and remove any such
other officers and agents and to prescribe their powers and duties. The Board
may require any officer or agent to give security for the faithful performance
of such person's duties.
Except as otherwise provided by these By-laws, any reference to the
Chairman or Chief Executive Officer in these By-laws shall be deemed to mean, if
there are Co-Chairmen or Co-Chief Executive Officers, either Co-Chairmen or
either Co-Chief Executive Officer, each of whom may severally exercise the full
powers and authorities of the office of Chairman or Chief Executive Officer, as
the case may be.
SECTION 2. Removal. Any officer may be removed, either with or without
cause, by the Board at any meeting thereof called for the purpose or, except in
the case of any officer elected by the Board, by any superior officer upon whom
such power may be conferred by the Board.
SECTION 3. Resignation. Any officer may resign at any time by giving
notice to the Board, the Chairman or the Secretary. Any such resignation shall
take effect at the date of receipt
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of such notice or at any later date specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these By-laws for election to such
office.
SECTION 5. Chairman of the Board. The Chairman shall, if present,
preside at meetings of the Board and, if present, preside at meetings of the
stockholders, and, if present and in the absence of the Chairman of the
Executive Committee, preside at meetings of the Executive Committee. The
Chairman may sign and execute in the name of the Corporation deeds, mortgages,
bonds, contracts or other instruments. The Chairman shall, when requested,
counsel with and advise the other officers of the Corporation and shall perform
such other duties as he may agree with the Chief Executive Officer or as the
Board may from time to time determine.
SECTION 6. Chief Executive Officer. The Chief Executive Officer shall
have general supervision and direction of the business and affairs of the
Corporation, subject to the control of the Board. The Chief Executive Officer
may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts or other instruments. The Chief Executive Officer shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other duties as the Board may from time to time determine.
SECTION 7. The President. The President shall perform such senior
executive duties as the Board shall from time to time determine. The President
shall, if present and in the absence of the Chairman, preside at meetings of the
stockholders and, if present and in the absence of the Chairman, preside at
meetings of the Board and, if present and in the absence of the Chairman of the
Executive Committee and the Chairman of the Board, preside at meetings of the
Executive Committee. The President may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts or other instruments. The
President shall, when requested, counsel with and advise the other officers of
the Corporation and shall perform such other duties as he may agree with the
Chief Executive Officer or as the Board may from time to time determine.
SECTION 8. Chief Operating Officer. The Chief Operating Officer shall
perform such senior duties in connection with the operations of the Corporation
as the Board or the Chief Executive Officer shall from time to time determine.
The Chief Operating Officer may sign and execute in the name of the Corporation
deeds, mortgages, bonds, contracts and other instruments. The Chief Operating
Officer, shall, when requested, counsel with and advise the other officers of
the Corporation and shall perform such other duties as he may agree with the
Chief Executive Officer or as the Board may from time to time determine.
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SECTION 9. Vice-Chairman of the Board. In the absence of the Chairman
of the Board and the President, the Vice-Chairman of the Board (the "Vice
Chairman") if one shall have been elected, or if there shall be more than one, a
Vice-Chairman as designated by the Chairman or the President, or, in the absence
of such designation, as designated by the Board, shall, if present, preside at
meetings of the Board. The Vice Chairman may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts or other instruments. The Vice
Chairman shall, when requested, counsel with and advise the other officers of
the Corporation and shall perform such other duties as he may agree with the
Chief Executive Officer or as the Board may from time to time determine.
SECTION 10. Chairman of the Executive Committee. The Chairman of the
Executive Committee shall, if present, preside at meetings of the Executive
Committee. The Chairman of the Executive Committee shall perform such other
duties as the Board or the Executive Committee may from time to time determine.
The Chairman of the Executive Committee shall, when requested, counsel with and
advise the other officers of the Corporation and shall perform such other duties
as he may agree with the Chief Executive Officer or as the Board may from time
to time determine.
SECTION 11. Chief Financial Officer. The Chief Financial Officer of the
Corporation, if one shall have been elected, shall perform all the powers and
duties of the office of the chief financial officer and in general have overall
supervision of the financial operations of the Corporation. The Chief Financial
Officer may sign and execute in the name of the Corporation deeds, mortgages,
bonds, contracts or other instruments. The Chief Financial Officer shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other duties as he may agree with the Chief Executive Officer
or as the Board may from time to time determine.
SECTION 12. Vice-Presidents. Any Vice-President shall have such powers
and duties as shall be prescribed by his superior officer or the Board. Any
Vice-President may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments. The Vice President shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other duties as he may agree with the Chief Executive Officer
or as the Board may from time to time determine.
SECTION 13. Treasurer. The Treasurer, if one shall have been elected,
shall supervise and be responsible for all the funds and securities of the
Corporation; the deposit of all moneys and other valuables to the credit of the
Corporation in depositories of the Corporation; borrowings and compliance with
the provisions of all indentures, agreements and instruments governing such
borrowings to which the Corporation is a party; the disbursement of funds of the
Corporation and the investment of its funds; and in general shall perform all of
the duties incident to the office of the
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Treasurer. The Treasurer may sign and execute in the name of the Corporation
deeds, mortgages, bonds, contracts or other instruments. The Treasurer shall,
when requested, counsel with and advise the other officers of the Corporation
and shall perform such other duties as he may agree with the Chief Executive
Officer or as the Board may from time to time determine.
SECTION 14. Controller. The Controller shall be the chief accounting
officer of the Corporation. The Controller may sign and execute in the name of
the Corporation deeds, mortgages, bonds, contracts or other instruments. The
Controller shall, when requested, counsel with and advise the other officers of
the Corporation and shall perform such other duties as he may agree with the
Chief Executive Officer or the Chief Financial Officer or as the Board may from
time to time determine.
SECTION 15. Secretary. It shall be the duty of the Secretary to act as
secretary at all meetings of the Board, of the committees of the Board and of
the stockholders and to record the proceedings of such meetings in a book or
books to be kept for that purpose; the Secretary shall see that all notices
required to be given by the Corporation are duly given and served; the Secretary
shall be custodian of the seal of the Corporation and shall affix the seal or
cause it to be affixed to all certificates of stock of the Corporation (unless
the seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and to all documents, the execution of which on behalf of
the Corporation under its seal is duly authorized in accordance with the
provisions of these By-laws; the Secretary shall have charge of the books,
records and papers of the Corporation and shall see that the reports, statements
and other documents required by law to be kept and filed are properly kept and
filed; and in general shall perform all of the duties incident to the office of
Secretary. The Secretary shall, when requested, counsel with and advise the
other officers of the Corporation and shall perform such other duties as he may
agree with the Chief Executive Officer or as the Board may from time to time
determine.
SECTION 16. Assistant Treasurers and Assistant Secretaries. Any
Assistant Treasurers and Assistant Secretaries shall perform such duties as
shall be assigned to them by the Board. Any Assistant Treasurer or Assistant
Secretary shall perform such duties as shall be assigned to them by the
Treasurer or Secretary, respectively, or by the Chairman of the Board or by the
Chief Executive Officer.
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ARTICLE VI
Indemnification
SECTION 1. Right to Indemnification. The Corporation, to the fullest
extent permitted or required by Delaware General Corporation Law or other
applicable law, as the same exists or may hereafter be amended (but, in the case
of any such amendment and unless applicable law otherwise requires, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), shall indemnify and hold harmless any person who is or was a
director or officer of the Corporation and who is or was involved in any manner
(including, without limitation, as a party or a witness) or is threatened to be
made so involved in any threatened, pending or completed investigation, claim,
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including, without limitation, any action, suit or proceedings by
or in the right of the Corporation to procure a judgment in its favor) (a
"Proceeding") by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (including,
without limitation, any employee benefit plan) (a "Covered Entity") against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such Proceeding; provided, however, that the foregoing shall not apply to a
director or officer of the Corporation with respect to a Proceeding that was
commenced by such director or officer unless the proceeding was commenced after
a Change in Control (as hereinafter defined in Section 4(e) of this Article).
Any director or officer of the Corporation entitled to indemnification as
provided in this Section 1 is hereinafter called an "Indemnitee". Any right of
an Indemnitee to indemnification shall be a contract right and shall include the
right to receive, prior to the conclusion of any Proceeding, payment of any
expenses incurred by the Indemnitee in connection with such proceeding,
consistent with the provisions of applicable law as then in effect and the other
provisions of this Article.
SECTION 2. Insurance, Contracts and Funding. The Corporation may
purchase and maintain insurance to protect itself and any director, officer,
employee or agent of the Corporation or of any Covered Entity against any
expenses, judgments, fines and amounts paid in settlement as specified in
Section 1 of this Article or incurred by any such director, officer, employee or
agent in connection with any Proceeding referred to in Section 1 of this
Article, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the DGCL. The Corporation
may enter into contracts with any director, officer, employee or agent of the
Corporation or of any Covered Entity in furtherance of the provisions of this
Article and may create a trust fund, grant a security interest or use other
means (including, without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect
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indemnification as provided or authorized in this Article.
SECTION 3. Indemnification Not Exclusive Right. The right of
indemnification provided in this Article shall not be exclusive of any other
rights to which an Indemnitee may otherwise be entitled, and the provisions of
this Article shall inure to the benefit of the heirs and legal representatives
of any Indemnitee under this Article and shall be applicable to Proceedings
commenced or continuing after the adoption of this Article, whether arising from
acts or omissions occurring before or after such adoption.
SECTION 4. Advancement of Expenses; Procedures; Presumptions and Effect
of Certain Proceedings; Remedies. In furtherance, but not in limitation of the
foregoing provisions, the following procedures, presumptions and remedies shall
apply with respect to advancement of expenses and the right to indemnification
under this Article:
(a) Advancement of Expenses. All reasonable expenses
(including attorney's fees) incurred by or on behalf of the Indemnitee in
connection with any Proceeding shall be advanced to the Indemnitee by the
Corporation within 20 days after the receipt by the Corporation of a statement
or statements from the Indemnitee requesting such advance or advances from time
to time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the expenses incurred by the
Indemnitee and, if required by law at the time of such advance, shall include or
be accompanied by an undertaking by or on behalf of the Indemnitee to repay the
amounts advanced if ultimately it should be determined that the Indemnitee is
not entitled to be indemnified against such expenses pursuant to this Article.
(b) Procedure for Determination of Entitlement to
Indemnification. (i) To obtain indemnification under this Article, an Indemnitee
shall submit to the Secretary a written request, including such documentation
and information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification (the "Supporting Documentation"). The determination of the
Indemnitee's entitlement to indemnification shall be made not later than 60 days
after receipt by the Corporation of the written request for indemnification
together with the Supporting Documentation. The Secretary shall, promptly upon
receipt of such a request for indemnification, advise the Board in writing that
the Indemnitee has requested indemnification.
(ii) The Indemnitee's entitlement to indemnification under
this Article shall be determined in one of the following ways: (A) by a majority
vote of the Disinterested Directors (as hereinafter defined in Section 4(e) of
this Article), whether or not they constitute a quorum of the Board; (B) by a
written opinion of Independent Counsel (as hereinafter defined in Section 4(e)
of this Article) if (x) a Change in Control (as hereinafter defined in Section
4(e) of this Article) shall
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have occurred and the Indemnitee so requests or (y) there are no Disinterested
Directors or a majority of such Disinterested Directors so directs; (C) by the
stockholders of the Corporation; or (D) as provided in Section 4(c) of this
Article.
(iii) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 4(b)
(ii) of this Article, a majority of the Disinterested Directors shall select the
Independent Counsel, but only an Independent Counsel to which the Indemnitee
does not reasonably object; provided, however, that if a Change in Control shall
have occurred, the Indemnitee shall select such Independent Counsel, but only an
Independent Counsel to which a majority of the Disinterested Directors does not
reasonably object.
(c) Presumptions and Effect of Certain Proceedings. Except
as otherwise expressly provided in this Article, if a Change in Control shall
have occurred, the Indemnitee shall be presumed to be entitled to
indemnification under this Article (with respect to actions or omissions
occurring prior to such Change in Control) upon submission of a request for
indemnification together with the Supporting Documentation in accordance with
Section 4(b)(i) of this Article, and thereafter the Corporation shall have the
burden of proof to overcome that presumption in reaching a contrary
determination. In any event, if the person or persons empowered under Section
4(b) of this Article to determine entitlement to indemnification shall not have
been appointed or shall not have made a determination within 60 days after
receipt by the Corporation of the request therefor, together with the Supporting
Documentation, the Indemnitee shall be deemed to be, and shall be, entitled to
indemnification unless (A) the Indemnitee misrepresented or failed to disclose a
material fact in making the request for indemnification or in the Supporting
Documentation or (B) such indemnification is prohibited by law. The termination
of any Proceeding described in Section 1 of this Article, or of any claim, issue
or matter therein, by judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, adversely affect the
right of the Indemnitee to indemnification or create a presumption that the
Indemnitee did not act in good faith and in a manner which the Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Corporation or, with respect to any criminal proceeding, that the Indemnitee had
reasonable cause to believe that such conduct was unlawful.
(d) Remedies of Indemnitee. (i) In the event that a
determination is made pursuant to Section 4(b) of this Article that the
Indemnitee is not entitled to indemnification under this Article, (A) the
Indemnitee shall be entitled to seek an adjudication of entitlement to such
indemnification either, at the Indemnitee's sole option, in (x) an appropriate
court of the State of Delaware or any other court of competent jurisdiction or
(y) an arbitration to be conducted by a single arbitrator pursuant to the rules
of the American Arbitration Association; (B) any such judicial proceeding or
arbitration shall be de novo and the Indemnitee shall not be prejudiced by
reason of such adverse determination; and (C) if a Change in Control shall have
occurred, in any such judicial
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proceeding or arbitration, the Corporation shall have the burden of proving that
the Indemnitee is not entitled to indemnification under this Article (with
respect to actions or omissions occurring prior to such Change in Control).
(ii) If a determination shall have been made or deemed to
have been made, pursuant to Section 4(b) or (c) of this Article, that the
Indemnitee is entitled to indemnification, the Corporation shall be obligated to
pay the amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination unless (A) the Indemnitee
misrepresented or failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (B) such indemnification
is prohibited by law. In the event that (X) advancement of expenses is not
timely made pursuant to Section 4(a) of this Article or (Y) payment of
indemnification is not made within five days after a determination of
entitlement to indemnification has been made or deemed to have been made
pursuant to Section 4(b) or (c) of this Article, the Indemnitee shall be
entitled to seek judicial enforcement of the Corporation's obligation to pay to
the Indemnitee such advancement of expenses or indemnification. Notwithstanding
the foregoing, the Corporation may bring an action, in an appropriate court in
the State of Delaware or any other court of competent jurisdiction, contesting
the right of the Indemnitee to receive indemnification hereunder, due to the
occurrence of an event described in sub-clause (A) or (B) of this clause (ii) (a
"Disqualifying Event"); provided, however, that in any such action the
Corporation shall have the burden of proving the occurrence of such
Disqualifying Event.
(iii) The Corporation shall be precluded from asserting in
any judicial proceeding or arbitration commenced pursuant to this Section 4(d)
that the procedures and presumptions of this Article are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Article.
(iv) In the event that the Indemnitee, pursuant to this
Section 4(d), seeks a judicial adjudication of or an award in arbitration to
enforce rights under, or to recover damages for breach of, this Article, the
Indemnitee shall be entitled to recover from the Corporation, and shall be
indemnified by the Corporation against, any expenses actually and reasonably
incurred by the Indemnitee if the Indemnitee prevails in such judicial
adjudication or arbitration. If it shall be determined in such judicial
adjudication or arbitration that the Indemnitee is entitled to receive part but
not all of the indemnification or advancement of expenses sought, the expenses
incurred by the Indemnitee in connection with such judicial adjudication or
arbitration shall be prorated accordingly.
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(e) Definitions. For purposes of this Section 4:
(i) "Authorized Officer" means any one of the Chairman,
the President, a Vice Chairman, the Chief Financial Officer, any Vice President
or the Secretary of the Corporation.
(ii) "Change in Control" means the occurrence of any of
the following (w) any merger or consolidation of the Corporation in which the
Corporation is not the continuing or surviving corporation or pursuant to which
shares of the Corporation's Common Stock would be converted into cash,
securities or other property, other than a merger of the Corporation in which
the holders of the Corporation's Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, (x) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, the assets of the Corporation, or the liquidation or
dissolution of the Corporation, (y) any person (as such term is defined in
Section 4(c) of Article V of the Certificate of Incorporation) shall become an
Interested Stockholder (as defined therein) without the prior consent of the
Board, or (z) during any period of two consecutive years, individuals who at the
beginning of such period who shall have constituted the entire Board shall have
ceased for any reason to constitute a majority thereof unless the election, or
the nomination for election by the Corporation's stockholders, of each new
director shall have been approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of the
period.
(iii) "Disinterested Director" means a director of the
Corporation who is not or was not a party to the Proceeding in respect of which
indemnification is sought by the Indemnitee.
(iv) "Independent Counsel" means a law firm or a member of
a law firm that neither presently is, nor in the past five years has been,
retained to represent: (x) the Corporation or the Indemnitee in any matter
material to either such party or (y) any other party to the Proceeding giving
rise to a claim for indemnification under this Article. Notwithstanding the
foregoing, the term "Independent Counsel" shall not include any person who,
under the applicable standards of professional conduct then prevailing under the
law of the State of Delaware, would have a conflict of interest in representing
either the Corporation or the Indemnitee in an action to determine the
Indemnitee's rights under this Article.
SECTION 5. Severability. If any provision or provisions of this Article
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining provisions of
this Article (including, without limitation, all portions of any paragraph of
this Article containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Article
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(including, without limitation, all portions of any paragraph of this Article
containing any such provision held to be invalid, illegal or unenforceable, that
are not themselves invalid, illegal or enforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
SECTION 6. Indemnification of Employees Serving as Directors. The
Corporation, to the fullest extent of the provisions of this Article with
respect to the indemnification of directors and officers of the Corporation,
shall indemnify any person who is or was an employee of the Corporation and who
is or was involved in any manner (including, without limitation, as a party or a
witness) or is threatened to be made so involved in any threatened, pending or
completed Proceeding by reason of the fact that such employee is or was serving
(a) as a director of a corporation in which the Corporation had at the time of
such service, directly or indirectly, a 50 percent or greater equity interest (a
"Subsidiary Director") and (b) at the written request of an Authorized Officer,
as a director of another corporation in which the Corporation had at the time of
such service, directly or indirectly, a less than 50 percent equity interest (or
no equity interest at all) or in a capacity equivalent to that of a director for
any partnership, joint venture, trust or other enterprise (including, without
limitation, any employee benefit plan) in which the Corporation has an interest
(a "Requested Employee"), against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such Subsidiary Director or Requested Employee in connection with such
Proceeding. The Corporation may also advance expenses incurred by any such
Subsidiary Director or Requested Employee in connection with any such
Proceeding, consistent with the provisions of this Article with respect to the
advancement of expenses of directors and officers of the Corporation.
SECTION 7. Indemnification of Employees and Agents. Notwithstanding any
other provision or provisions of this Article, the Corporation, to the fullest
extent of the provisions of this Article with respect to the indemnification of
directors and officers of the Corporation, may indemnify any person other than a
director or officer of the Corporation, a Subsidiary Director or a Requested
Employee, who is or was an employee or agent of the Corporation and who is or
was involved in any manner (including, without limitation, as a party or a
witness) or is threatened to be made so involved in any threatened, pending or
completed Proceeding by reason of the fact that such person is or was a
director, officer, employee or agent of a Covered Entity against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
Proceeding. The Corporation may also advance expenses incurred by such employee
or agent in connection with any such Proceeding, consistent with the provisions
of this Article with respect to the advancement of expenses of directors and
officers of the Corporation.
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ARTICLE VII
Capital Stock
SECTION 1. Certificates for Shares. The shares of stock of the
Corporation shall be represented by certificates, or shall be uncertificated
shares that may be evidenced by a book-entry system maintained by the registrar
of such stock, or a combination of both. To the extent that shares are
represented by certificates, such certificates whenever authorized by the Board,
shall be in such form as shall be approved by the Board. The certificates
representing shares of stock of each class shall be signed by, or in the name
of, the Corporation by the Chairman or the President, a Vice Chairman or any
Vice-President and by the Secretary or any Assistant Secretary or the Treasurer
or any Assistant Treasurer of the Corporation, and sealed with the seal of the
Corporation, which may be a facsimile thereof. Any or all such signatures may be
facsimiles if countersigned by a transfer agent or registrar. Although any
officer, transfer agent or registrar whose manual or facsimile signature is
affixed to such a certificate ceases to be such officer, transfer agent or
registrar before such certificate has been issued, it may nevertheless be issued
by the Corporation with the same effect as if such officer, transfer agent or
registrar were still such at the date of its issue.
The stock ledger and blank share certificates shall be kept by the
Secretary or by a transfer agent or by a registrar or by any other officer or
agent designated by the Board.
SECTION 2. Transfer of Shares. Transfers of shares of stock of each
class of the Corporation shall be made only on the books of the Corporation upon
authorization by the registered holder thereof, or by such holder's attorney
thereunto authorized by a power of attorney duly executed and filed with the
Secretary or a transfer agent for such stock, if any, and if such shares are
represented by a certificate, upon surrender of the certificate or certificates
for such shares properly endorsed or accompanied by a duly executed stock
transfer power (or by proper evidence of succession, assignment or authority to
transfer) and the payment of any taxes thereon; provided, however, that the
Corporation shall be entitled to recognize and enforce any lawful restriction on
transfer. The person in whose name shares are registered on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation; provided, however, that whenever any transfer of shares shall be
made for collateral security and not absolutely, and written notice thereof
shall be given to the Secretary or to such transfer agent, such fact shall be
stated in the entry of the transfer. No transfer of shares shall be valid as
against the Corporation, its stockholders and creditors for any purpose, except
to render the transferee liable for the debts of the Corporation to the extent
provided by law, until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
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SECTION 3. Registered Stockholders and Addresses of Stockholders. The
Corporation shall be entitled to recognize the exclusive right of a person
registered on its records as the owner of shares of stock to receive dividends
and to vote as such owner, shall be entitled to hold liable for calls and
assessments a person registered on its records as the owner of shares of stock,
and shall not be bound to recognize any equitable or other claim to or interest
in such share or shares of stock on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
Each stockholder shall designate to the Secretary or transfer agent of
the Corporation an address at which notices of meetings and all other corporate
notices may be served or mailed to such person, and, if any stockholder shall
fail to designate such address, corporate notices may be served upon such person
by mail directed to such person at such person's post office address, if any, as
the same appears on the stock record books of the Corporation or at such
person's last known post office address.
SECTION 4. Lost, Destroyed and Mutilated Certificates. The holder of
any certificate representing any shares of stock of the Corporation shall
immediately notify the Corporation of any loss, theft, destruction or mutilation
of such certificate; the Corporation may issue to such holder a new certificate
or certificates for shares, upon the surrender of the mutilated certificate or,
in the case of loss, theft or destruction of the certificate, upon satisfactory
proof of such loss, theft or destruction; the Board, or a committee designated
thereby, or the transfer agents and registrars for the stock, may, in their
discretion, require the owner of the lost, stolen or destroyed certificate, or
such person's legal representative, to give the Corporation a bond in such sum
and with such surety or sureties as they may direct to indemnify the Corporation
and said transfer agents and registrars against any claim that may be made on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
SECTION 5. Regulations. The Board may make such additional rules and
regulations as it may deem expedient concerning the issue, transfer and
registration of certificated or uncertificated shares of stock of each class of
the Corporation and may make such rules and take such action as it may deem
expedient concerning the issue of certificates in lieu of certificates claimed
to have been lost, destroyed, stolen or mutilated.
SECTION 6. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
or any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of
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such meeting, nor more than 60 days prior to any other action. A determination
of stockholders entitled to notice of or to vote at a meeting of the
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
SECTION 7. Transfer Agents and Registrars. The Board may appoint, or
authorize any officer or officers to appoint, one or more transfer agents and
one or more registrars.
ARTICLE VIII
Seal
The Board shall provide a corporate seal, which shall be in the form of
a circle and shall bear the full name of the Corporation and the words and
figures of "Corporate Seal Delaware 1996", or such other words or figures as the
Board may approve and adopt. The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall end on the 31st day of
December in each year.
ARTICLE X
Waiver of Notice
Whenever any notice whatsoever is required to be given by these
By-laws, by the Certificate or by law, the person entitled thereto may, either
before or after the meeting or other matter in respect of which such notice is
to be given, waive such notice in writing, which writing shall be filed with or
entered upon the records of the meeting or the records kept with respect to such
other matter, as the case may be, and in such event such notice need not be
given to such person and such waiver shall be deemed equivalent to such notice.
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ARTICLE XI
Amendments
Any By-law (other than this Article XI) may be adopted, repealed,
altered or amended by a majority of the entire Board at any meeting thereof,
provided that such proposed action in respect thereof shall be stated in the
notice of such Meeting. The stockholders of the Corporation shall have the power
to amend, alter or repeal any provision of these By-laws only to the extent and
in the manner provided in the Certificate.
ARTICLE XII
Miscellaneous
SECTION 1. Execution of Documents. The Board or any committee thereof
shall designate the officers, employees and agents of the Corporation who shall
have power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, notes, checks, drafts and other orders for the payment of money and
other documents for and in the name of the Corporation and may authorize
(including authority to redelegate) by written instrument to other officers,
employees or agents of the Corporation. Such delegation may be by resolution or
otherwise and the authority granted shall be general or confined to specific
matters, all as the Board or any such committee may determine. In the absence of
such designation referred to in the first sentence of this Section, the officers
of the Corporation shall have such power so referred to, to the extent incident
to the normal performance of their duties.
SECTION 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as the Board or any committee thereof or any officer of the
Corporation to whom power in respect of financial operations shall have been
delegated by the Board or any such committee or in these By-laws shall select.
SECTION 3. Checks. All checks, drafts and other orders for the payment
of money out of the funds of the Corporation, and all notes or other evidences
of indebtedness of the Corporation, shall be signed on behalf of the Corporation
in such manner as shall from time to time be determined by resolution of the
Board or of any committee thereof or by any officer of the Corporation to whom
power in respect of financial operations shall have been delegated by the Board
or any such committee thereof or as set forth in these By-laws.
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SECTION 4. Proxies in Respect of Stock or Other Securities of Other
Corporations. The Board or any committee thereof shall designate the officers of
the Corporation who shall have authority from time to time to appoint an agent
or agents of the Corporation to exercise in the name and on behalf of the
Corporation the powers and rights which the Corporation may have as the holder
of stock or other securities in any other corporation or other entity, and to
vote or consent in respect of such stock or securities; such designated officers
may instruct the person or persons so appointed as to the manner of exercising
such powers and rights; and such designated officers may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal, or otherwise, such written proxies, powers of attorney or other
instruments as they may deem necessary or proper in order that the Corporation
may exercise its said powers and rights.
SECTION 5. Subject to Law and Certificate of Incorporation. All powers,
duties and responsibilities provided for in these By-laws, whether or not
explicitly so qualified, are qualified by the provisions of the Certificate and
applicable laws.
-25-
<PAGE> 1
Exhibit 4.2
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
AMENDMENT No. 1 dated as of December 15, 1998 to the RIGHTS AGREEMENT
dated as of October 10, 1996 (the "Rights Agreement"), between TIME WARNER INC.,
a Delaware corporation formerly named TW Inc. (the "Company"), and CHASEMELLON
SHAREHOLDER SERVICES L.L.C., as Rights Agent (the "Rights Agent").
WHEREAS, the Company has determined that, in connection with a
two-for-one common stock split effective on December 15, 1998, it is
advantageous to adopt a book-entry form of registration for its Common Stock,
that permits uncertificated shares of Common Stock, through the Direct
Registration System and has done so;
WHEREAS, the Company considers it advisable to amend the Rights
Agreement explicitly to provide for uncertificated shares of Common Stock; and
WHEREAS, pursuant to Section 26 of the Rights Agreement, prior to the
Distribution Date, the Company may, and the Rights Agent shall if the Company so
directs, amend the Rights Agreement to provide for uncertificated shares of
Common Stock with associated Rights.
NOW, THEREFORE, the Company and the Rights Agent hereby agree that the
Rights Agreement is hereby amended as follows by this Amendment No. 1 thereto
(the "Amendment"):
1. Definitions. Capitalized terms used herein and not defined herein
have the meanings ascribed to such terms in the Rights Agreement.
2. Amendments to Section 3 Regarding Issue of Rights and Rights
Certificates.
(a) Subsection 3(b)(x) of the Rights Agreement is hereby amended to
read in its entirety as follows:
"(x) the Rights will be evidenced by the certificates for Common Shares
registered in the names of the holders thereof, or by a current
ownership statement issued with respect to uncertificated Common Shares
in lieu of such a
<PAGE> 2
certificate (an "Ownership Statement"), and not by separate Rights Certificates
and"
(b) Subsection 3(c) of the Rights Agreement is hereby amended
to read in its entirety as follows:
"(c) With respect to any certificate for Common Shares, or any
Ownership Statement, until the earliest of the Distribution Date, the
Redemption Date or the Expiration Date, the Rights associated with the
Common Shares represented by any such certificate, or covered by an
Ownership Statement, shall be evidenced by such certificate, or
Ownership Statement, alone, the registered holders of the Common Shares
shall also be the registered holders of the associated Rights and the
surrender for transfer of any such certificate, or the transfer of any
Common Shares covered by such an Ownership Statement, shall also
constitute the transfer of the Rights associated with the Common Shares
represented or covered thereby."
(c) Subsection 3(d) of the Rights Agreement is hereby amended
to read in its entirety as follows:
"(d) Certificates (or Ownership Statements) issued for Common
Shares after the Record Date (including, without limitation, upon
transfer or exchange of outstanding Common Shares), but prior to the
earliest of the Distribution Date, the Redemption Date or the
Expiration Date, may have printed on, written on or otherwise affixed
to them the following, or a substantially similar, legend:
This [certificate][statement] also evidences and
entitles the holder hereof to certain Rights as set forth in a
Rights Agreement dated as of October 10, 1996, as it may be
amended from time to time (the "Rights Agreement"), between
Time Warner Inc. (the "Company") and ChaseMellon Shareholder
Services L.L.C., as Rights Agent (the "Rights Agent"), the
terms of which are hereby incorporated herein by reference and
a copy of which is on file at the principal executive offices
of the Company. Under certain circumstances, as set forth in
the Rights Agreement, such Rights will be evidenced by
separate certificates and will no longer be evidenced by this
[certificate][statement]. The Rights Agent will mail to the
holder hereof a copy of the Rights Agreement without charge
after receipt of a written request
2
<PAGE> 3
therefor. Rights beneficially owned by Acquiring Persons or
their Affiliates or Associates (as such terms are defined in
the Rights Agreement) and by any subsequent holder of such
Rights are null and void and nontransferable."
3. Amendment to Section 17(c). Section 17(c) of the Rights Agreement is
hereby amended to read in its entirety as follows:
"(c) the Company and the Rights Agent may deem and treat the
Person in whose name a Right Certificate (or, prior to the Distribution
Date, the associated Common Shares) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any
notations of ownership or writing on the Right Certificates or the
associated certificate for Common Shares or Ownership Statement made by
anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary."
4. Amendment to Section 21(j). Section 21(j) of the Rights Agreement is
hereby amended by adding the following sentence at the end thereof:
"Anything to the contrary notwithstanding, the Rights Agent shall not
be liable for indirect, consequential or incidental loss or damage of
any kind whatsoever (including but not limited to lost profits) except
for any such loss or damage determined by a court of competent
jurisdiction to be as a result of, or arising out of, the Rights
Agent's bad faith or willful misconduct, even if the Rights Agent has
been advised of the likelihood of such loss or damage."
5. Amendment to Section 22. The fourth sentence of Section 22 of the
Rights Agreement is hereby amended to read in its entirety as follows:
"If the Company shall fail to make such appointment within a period of
30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning
or incapacitated Rights Agent or by the holder of a Right Certificate
(or, prior to the Distribution Date, of the Common Shares) (who shall,
with such notice, submit his Right Certificate or, prior to the
Distribution Date, the certificate representing his Common Shares or an
Ownership Statement, for inspection by
3
<PAGE> 4
the Company), then the registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares) may apply to any
court of competent jurisdiction for the appointment of a new Rights
Agent."
6. Effect on Rights Agreement. Except as expressly modified by this
Amendment, the Rights Agreement is in all respects ratified and confirmed and
all the terms, conditions and provisions thereof shall remain in full force and
effect.
7. Governing Law. This Amendment shall be governed by and construed in
accordance with the law of the state of Delaware applicable to contracts to be
made and performed entirely within such state.
8. Descriptive Headings. Descriptive headings used in this Amendment
are inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions of this Amendment.
9. Counterparts. This Amendment may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1
to the Rights Agreement to be duly executed as of the day and year first above
written.
TIME WARNER INC.
By /s/Thomas W. McEnerney
---------------------------------
Name: Thomas W. McEnerney
Title: Vice President
CHASEMELLON SHAREHOLDER
SERVICES L.L.C., as Rights
Agent
By /s/Gary D'Alessandro
---------------------------------
Name: Gary D'Alessandro
Title: Vice President
4
<PAGE> 1
Exhibit 4.3
AMENDMENT NO. 2 TO RIGHTS AGREEMENT
AMENDMENT No. 2 dated as of January 21, 1999 to the RIGHTS AGREEMENT
dated as of October 10, 1996, as amended (the "Rights Agreement"), between TIME
WARNER INC., a Delaware corporation formerly named TW Inc. (the "Company"), and
CHASEMELLON SHAREHOLDER SERVICES L.L.C., as Rights Agent (the "Rights Agent").
The Company and the Rights Agent hereby agree that the Rights Agreement
is hereby amended as follows by this Amendment No. 2 thereto (the "Amendment"):
1. Definitions. Capitalized terms used herein and not defined herein
have the meanings ascribed to such terms in the Rights Agreement.
2. Amendment to Section 1. The following definitions included in
Section 1 of the Rights Agreement are hereby amended to read in their entirety
as follows:
"Acquiring Person" shall after the date hereof mean, as of any
time, any Person who or which, alone or together with all Affiliates and
Associates of such Person, shall be the Beneficial Owner of more than 15% of the
Common Shares outstanding as of such time, other than (a) the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any of
its Subsidiaries, or any Person holding Common Shares for or pursuant to the
terms of any such employee benefit plan, or (b) any Person who or which, alone
or together with one or more of its Affiliates or Associates, becomes or became
the Beneficial Owner of more than 15% of the Common Shares outstanding as of
such time pursuant to a Qualifying Offer. Notwithstanding the foregoing, the
term "Acquiring Person" shall not include any Person who or which as of any time
becomes the Beneficial Owner of more than 15% of the Common Shares outstanding
as of such time (i) solely as the result of a change in the number of Common
Shares outstanding since the most recent preceding date on which such Person
acquired Beneficial Ownership of any Common Shares or (ii) solely as the result
of the acquisition by such Person or one or more of its Affiliates
<PAGE> 2
or Associates of Beneficial Ownership of additional Common Shares if such
acquisition was made in the good faith belief that such acquisition would not
cause either the number of Common Shares beneficially owned by such Person,
together with its Affiliates and Associates, to exceed 15% of the Common Shares
outstanding at the time of such acquisition or otherwise cause a Distribution
Date or the adjustment provided in Section 11(a) to occur and such good faith
belief was based on the good faith reliance on information contained in publicly
filed reports or documents of the Company which were inaccurate or out-of-date
or (iii) solely as the result of the acquisition of beneficial ownership of any
Common Shares by any of such Person's Affiliates or Associates who or which are
not Controlled Related Parties of such Person or (iv) solely as the result of
any transaction or event pursuant to which any Person who or which beneficially
owns any Common Shares and was not previously an Affiliate or Associate of such
Person becomes an Affiliate or Associate of such Person or (v) solely as the
result of the acquisition by such Person or one or more of its Affiliates or
Associates of Beneficial Ownership of additional Common Shares if such
acquisition was made in the good faith belief that such acquisition would not
cause the number of Common Shares beneficially owned by such Person, together
with its Affiliates and Associates, to exceed 15% of the Common Shares
outstanding at the time of such acquisition or otherwise cause a Distribution
Date or the adjustment provided in Section 11(a) to occur and such good faith
belief was based on the good faith reliance on inaccurate or out-of-date
information concerning the number of Common Shares beneficially owned by any
Affiliates or Associates of such Person who or which are not Controlled Related
Parties of such Person; provided, however, that in the case of any of clauses
(i) through (v), the percentage of the Common Shares outstanding represented by
the number of Common Shares beneficially owned by such Person is reduced to 15%
or less within the applicable cure period. For purposes of the immediately
preceding sentence, the "applicable cure period" shall be the period commencing
on (and including) the date that such Person becomes aware that the number of
Common Shares beneficially owned by such Person exceeds 15% of the Common Shares
outstanding (except that if such Person has separately agreed in writing with
the Company to notify the Company once such Person becomes aware of such fact,
the cure period shall commence on (and include) the date of receipt by such
Person of written notice from the Company that the number of Common Shares
beneficially owned by such Person exceeds, as of the date such notice is given,
15% of the Common Shares outstanding as of such date) and ending upon the Close
of
2
<PAGE> 3
Business on (i) the fifth Business Day after such date in the case of any Person
described in clause (i) or (ii) of the immediately preceding sentence or (ii)
the tenth Business Day after such date in the case of any Person described in
clause (iii), (iv) or (v) of the immediately preceding sentence; provided,
however, that if such reduction would require the disposition by such Person or
any of its Affiliates or Associates of any Common Shares and such Person
notifies the Company in writing that, in such Person's good faith belief, such
disposition within such period could not reasonably be accomplished without
violation of applicable law or could reasonably be accomplished only for
consideration or on terms materially disadvantageous as compared to the
consideration or terms on which such disposition could be accomplished during
some longer period of time, then such period shall be extended for such time as
the Board of Directors of the Company shall reasonably deem to be required in
order to prevent such violation of applicable law or shall reasonably deem to be
sufficient to minimize such disadvantageous effect (as the case may be), subject
to the condition that such Person shall during the cure period, as extended (or
until such earlier time at which such Person, together with its Affiliates and
Associates, otherwise ceases to beneficially own more than 15% of the
outstanding Common Shares), diligently and in good faith proceed to effect the
required disposition as expeditiously as reasonably practicable and comply with
any arrangements regarding the voting of a number of Common Shares beneficially
owned by such Person, together with its Affiliates and Associates, equal to the
number so required to be disposed of pending completion of such disposition as
the Board of Directors of the Company shall request (including arrangements not
to vote such number of Common Shares or only to vote such number of Common
Shares in a manner approved by the Board of Directors of the Company). For
purposes of this definition, the determination of whether any Person (other than
a director of the Company, in his or her capacity as a director of the Company)
acted in "good faith" shall be conclusively determined in good faith by the
Board of Directors of the Company."
"A Person shall be deemed the "Beneficial Owner" of, and shall
be deemed to "beneficially own", and shall be deemed to have "Beneficial
Ownership" of, any securities:
(i) which such Person or any of such Person's Affiliates or
Associates is deemed to "beneficially own" within the meaning of Rule
13d-3 of the General Rules and
3
<PAGE> 4
Regulations under the Exchange Act, as in effect on the date of this
Rights Agreement;
(ii) which such Person or any of such Person's Affiliates or
Associates has: (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (written or oral), or upon
the exercise of conversion rights, exchange rights, rights (other than
the Rights), warrants or options, or otherwise; provided, however, that
a Person shall not be deemed under this clause (A) to be the Beneficial
Owner of, or to beneficially own, or to have Beneficial Ownership of,
any securities tendered pursuant to a tender or exchange offer made by
or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange thereunder; or (B) the right to vote pursuant to any
agreement, arrangement or understanding (written or oral); provided,
however, that a Person shall not be deemed under this clause (B) to be
the Beneficial Owner of, or to beneficially own, any security if (1)
the agreement, arrangement or understanding (written or oral) to vote
such security arises solely from a revocable proxy or consent given to
such Person in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable rules and
regulations under the Exchange Act and (2) the beneficial ownership of
such security is not also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (written or oral) for the purpose of acquiring, holding,
voting or disposing of any Common Shares, any other securities of the
Company generally entitled to vote together with the Common Shares or
any rights, warrants, options or other securities exercisable or
exchangeable for, or convertible into, Common Shares or other
securities of the Company generally entitled to vote together with the
Common Shares.
A Person shall also be deemed to be the "Beneficial Owner" of,
and to "beneficially own", and to have "Beneficial Ownership" of, Common Shares
of the Company if such Person is the Beneficial Owner of, or beneficially owns,
or has Beneficial
4
<PAGE> 5
Ownership of (as the case may be), any other securities of the Company (whether
or not convertible into or exchangeable for Common Shares) generally entitled to
vote together with the Common Shares. If the preceding sentence is applicable in
any case, such Person shall be deemed by virtue of Beneficial Ownership of such
other securities to be the "Beneficial Owner" of, and to "beneficially own", and
to have "Beneficial Ownership" of, that number of Common Shares of the Company
equal to the greater of (x) the number of votes entitled to be cast in respect
of such other securities upon any matter being voted upon by the holders of
Common Shares and the holders of such other securities, voting together as a
single class, and (y) if applicable, the number of Common Shares of the Company
issuable upon conversion in full into, or exchange in full for, Common Shares of
the Company of such other securities.
In the event any Common Shares are subject to a voting trust
approved by the Board of Directors of the Company, then (x) the trustee or
trustees under such voting trust shall be deemed not to be the "Beneficial
Owner" of any such Common Shares and (y) each beneficiary of such voting trust
shall be deemed to be the "Beneficial Owner" of all such Common Shares.
Notwithstanding the foregoing, (a) no Person ordinarily engaged in business as
an underwriter of securities shall be deemed to be the "Beneficial Owner" of, to
"beneficially own", or to have any "Beneficial Ownership" of, any securities
acquired in a bona fide firm commitment underwriting pursuant to an underwriting
agreement with the Company; and (b) no Person shall be deemed to be the
"Beneficial Owner" of, to "beneficially own", or to have any "Beneficial
Ownership" of, any securities by reason of such Person or any of such Person's
Affiliates or Associates having the right to acquire (whether such right is
exercisable immediately or only after the passage of time) such securities
pursuant to a right of first refusal, right of first offer or similar agreement,
arrangement or understanding (written or oral) granted by another Person (the
"subject Person") (I) that does not provide any direct or indirect limitations
or restrictions on the ability of the subject Person to exercise (or refrain
from exercising) any voting rights associated with such securities or contain
any other agreement, arrangement or understanding with respect to such voting
rights, (II) that does not contain any incentive for the subject Person to
support or oppose any particular Business Combination or otherwise to exercise
(or refrain from exercising) any voting rights associated with such securities
in a manner advantageous to such Person or any of such Person's Affiliates or
Associates and
5
<PAGE> 6
(III) prior written notice of which shall have been given to the Company."
3. Amendment to Section 24. Section 24 of the Rights Agreement is
hereby amended to read in its entirety as follows:
"SECTION 24. Redemption and Termination. (a) The Board of Directors
of the Company may, at its option, at any time prior to the earlier of (i) such
time as a Person becomes an Acquiring Person and (ii) the Expiration Date, order
the redemption of all, but not fewer than all, the then outstanding Rights at
the Redemption Price (the date of such redemption being the "Redemption Date"),
and the Company, at its option, may pay the Redemption Price either in cash or
Common Shares or other securities of the Company deemed by the Board of
Directors of the Company, in the exercise of its sole discretion, to be at least
equivalent in value to the Redemption Price.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, and without any further action
and without any notice, the right to exercise the Rights will terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price. Within 10 Business Days after the action of the Board of
Directors of the Company ordering the redemption of the Rights, the Company
shall give notice of such redemption to the holders of the then outstanding
Rights by mailing such notice to all such holders at their last addresses as
they appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Shares. Each such notice of redemption will state the method by which payment of
the Redemption Price will be made. The notice, if mailed in the manner herein
provided, shall be conclusively presumed to have been duly given, whether or not
the holder of Rights receives such notice. In any case, failure to give such
notice by mail, or any defect in the notice, to any particular holder of Rights
shall not affect the sufficiency of the notice to other holders of Rights."
4. Amendment to Section 26. Section 26 of the Rights Agreement is
hereby amended to read in its entirety as follows:
"SECTION 26. Supplements and Amendments. At any time prior to the
Distribution Date and subject to the last sentence of this Section 26, the
Company may, and the Rights Agent shall if the Company so directs, supplement or
amend any
6
<PAGE> 7
provision of this Rights Agreement (including, without limitation, the date on
which the Distribution Date shall occur, the time during which the Rights may be
redeemed pursuant to Section 24 or any provision of the Certificate of
Designation) without the approval of any holder of the Rights. From and after
the Distribution Date and subject to applicable law, the Company may, and the
Rights Agent shall if the Company so directs, amend this Rights Agreement
without the approval of any holders of Right Certificates (i) to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision of this Rights Agreement
or (ii) to make any other provisions in regard to matters or questions arising
hereunder which the Company may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Right Certificates (other than
an Acquiring Person or an Affiliate or Associate of an Acquiring Person). Any
supplement or amendment adopted during any period after any Person has become an
Acquiring Person but prior to the Distribution Date shall be null and void
unless such supplement or amendment could have been adopted under the prior
sentence from and after the Distribution Date. Any supplement or amendment to
this Rights Agreement duly approved by the Company that does not amend Sections
19, 20, 21 or 22 in a manner adverse to the Rights Agent shall become effective
immediately upon execution by the Company, whether or not also executed by the
Rights Agent. In addition, notwithstanding anything to the contrary contained in
this Rights Agreement, no supplement or amendment to this Rights Agreement shall
be made which (a) reduces the Redemption Price (except as required by Section
12(a)) or (b) provides for an earlier Expiration Date."
5. Effect on Rights Agreement. Except as expressly modified by this
Amendment, the Rights Agreement is in all respects ratified and confirmed and
all the terms, conditions and provisions thereof shall remain in full force and
effect.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the law of the state of Delaware applicable to contracts to be
made and performed entirely within such state.
7. Descriptive Headings. Descriptive headings used in this Amendment
are inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions of this Amendment.
7
<PAGE> 8
8. Counterparts. This Amendment may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2
to the Rights Agreement to be duly executed as of the day and year first above
written.
TIME WARNER INC.
By /s/Thomas W. McEnerney
-------------------------------------
Name: Thomas W. McEnerney
Title: Vice President
CHASEMELLON SHAREHOLDER
SERVICES L.L.C., as Rights
Agent
By /s/Gary D'Alessandro
-------------------------------------
Name: Gary D'Alessandro
Title: Vice President
8
<PAGE> 1
EXHIBIT 10.4
As Amended through
November 19, 1998
TIME WARNER INC.
1994 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner Inc. 1994 Stock Option Plan (hereinafter
the "Plan") is to provide for the granting of nonqualified stock options and
stock appreciation rights to certain employees of and consultants and advisors
to Time Warner Inc. and its Subsidiaries in recognition of the valuable services
provided, and contemplated to be provided, by such employees, consultants and
advisors. The general purpose of the Plan is to promote the interests of Time
Warner and its stockholders and to reward dedicated employees, consultants and
advisors of Time Warner and its Subsidiaries by providing them additional
incentives to continue and increase their efforts with respect to, and to remain
in the employ of, Time Warner or its Subsidiaries. This plan is being adopted in
connection with the development of an overall long-term compensation program for
Time Warner and its Subsidiaries.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement and stock
appreciation rights agreement specified in Section 12, both individually
and collectively, as the context so requires.
(b) "Approved Transaction" means any transaction in which the Board
(or, if approval of the Board is not required as a matter of law, the
stockholders of Time Warner) shall approve (i) any consolidation or merger
of Time Warner in which Time Warner is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted
into cash, securities or other property, other than a merger of Time
Warner (x) as contemplated in the Amended and Restated Agreement and Plan
of Merger dated as of September 22, 1995 among Time Warner Inc., TW Inc.,
Time Warner Acquisition Corp., TW Acquisition Corp. and Turner
Broadcasting System, Inc., as
<PAGE> 2
the same may be amended from time to time, or (y) in which the holders of
Common Stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after
the merger, or (ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially
all, of the assets of Time Warner, or (iii) the adoption of any plan or
proposal for the liquidation or dissolution of Time Warner.
(c) "Award" means grants of Options and/or SARs under this Plan.
(d) "Board" means the Board of Directors of Time Warner.
(e) "Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board ceased for any reason to constitute a majority thereof unless
the election, or the nomination for election by Time Warner's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute or statutes thereto. Reference to
any specific Code section shall include any successor section.
(g) "Committee" means the Committee comprised of members of the
Board appointed pursuant to Section 4.
(h) "Common Stock" means the common stock, par value $.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,
2
<PAGE> 3
securities or any other consideration pursuant to a tender offer or
exchange offer, without the prior consent of the Board, or (ii) shall
become the "beneficial owner" (as such term is defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Time Warner
representing 20% or more of the combined voting power of the then
outstanding securities of Time Warner ordinarily (and apart from the
rights accruing under special circumstances) having the right to vote in
the election of directors (calculated as provided in Rule 13d-3(d) in the
case of rights to acquire Time Warner's securities).
(k) "Effective Date" means the date the Plan becomes effective
pursuant to Section 15.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any successor
section.
(m) "Fair Market Value" of a share of Common Stock means the average
of the high and low sales prices of a share of Common Stock on the
Composite Tape on the date in question, except as otherwise provided in
Section 6.5.
(n) "General SARs" means stock appreciation rights subject to the
terms of Section 6.5(b).
(o) "Holder" means an employee of or a consultant or advisor to Time
Warner or any of its Subsidiaries who has received an Award under this
Plan.
(p) "Limited SARs" means stock appreciation rights subject to the
terms of Section 6.5(c).
(q) "Minimum Price Per Share" means the highest gross price (before
brokerage commissions, soliciting dealers' fees and similar charges) paid
or to be paid for any share of Common Stock (whether by way of exchange,
conversion, distribution, liquidation or otherwise) in, or in connection
with, any Approved Transaction or Control Purchase which occurs at any
time during the period beginning on the sixtieth day prior to the date on
which Limited SARs are exercised and ending on the date on which Limited
SARs are exercised. If the consideration paid or to be paid in any such
Approved Transaction or Control Purchase shall consist, in whole or in
part, of
3
<PAGE> 4
consideration other than cash, the Board shall take such action, as in its
judgment it deems appropriate, to establish the cash value of such
consideration, but such valuation shall not be less than the value, if
any, attributed to such consideration by any other party to such Approved
Transaction or Control Purchase.
(r) "Option" means any nonqualified stock option granted pursuant to
this Plan.
(s) "Plan" has the meaning ascribed thereto in Section 1.
(t) "SARs" means General SARs and Limited SARs.
(u) "SEC" means the Securities and Exchange Commission.
(v) "Subsidiary" of a person means any present or future subsidiary
of such person as such term is defined in section 425 of the Code and any
present or future trade or business, whether or not incorporated,
controlled by or under common control with such person. An entity shall be
deemed a Subsidiary of a person only for such periods as the requisite
ownership or control relationship is maintained.
(w) "Time Warner" means Time Warner Inc., a Delaware corporation,
and any successor thereto.
(x) "Total Disability" means a permanent and total disability as
defined in section 22(e)(3) of the Code.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 12 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is the sum of (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
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31, 1996, (e) 1.4% (one and four-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, 1997, (f) 1.05% (one and five-hundredths percent) of
the aggregate number of shares of Common Stock (including Series LMCN-V Common
Stock, par value $.01 per share, as if converted to Common Stock) outstanding on
December 31, 1998 and (g) 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, 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
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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 meetings at such times and places as it shall deem advisable. A
majority of members shall constitute a quorum and all determinations shall be
made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
Awards may be made only to (a) employees of Time Warner or any of its
Subsidiaries (including officers and directors of any of Time Warner's
Subsidiaries), other than officers or directors of Time Warner who are subject
to Section 16 of the Exchange Act, (b) prospective employees of Time Warner or
any of its Subsidiaries and (c) consultants or advisors to Time Warner or any of
its Subsidiaries. The exercise of Options and SARs granted to a prospective
employee shall be conditioned
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<PAGE> 7
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.
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
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<PAGE> 8
thereafter such transfer shall be evidenced on the books of Time Warner. No
Holder or other person exercising an Option shall have any of the rights of a
stockholder of Time Warner with respect to shares of Common Stock subject to an
Option granted under the Plan until due exercise and full payment has been made.
No adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date of such due exercise and full payment.
6.5. SARs. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
A SAR may be granted either concurrently with the grant of the related
Option or at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Subject to the terms and
provisions of this Section 6.5, each SAR shall be exercisable to the extent the
related Option is then exercisable (and may be subject to such additional
limitations on exercisability as the Agreement may provide), and in no event
after the complete termination or full exercise of the related Option. SARs
shall be exercisable in whole or in part upon notice to Time Warner upon such
terms and conditions as provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered to have
been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock in respect of which other Awards may be granted. Upon the exercise
or termination of the related Option, the SARs with respect thereto shall be
considered to have been exercised or terminated to the extent of the number of
shares of Common Stock with respect to which the related Option was so exercised
or terminated.
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
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<PAGE> 9
the terms and provisions of this Section 6.5, upon the exercise of General SARs,
the person exercising the General SAR shall be entitled to receive consideration
(in the form hereinafter provided) equal in value to the excess of the Fair
Market Value on the date of exercise of the shares of Common Stock with respect
to which such General SARs have been exercised over the aggregate related Option
purchase price for such shares; provided, however, that the Board may, in any
Agreement granting General SARs provide that the appreciation realizable upon
exercise thereof shall be measured from a base higher than the related Option
purchase price.
Upon the exercise of a General SAR, the person exercising the General SAR
may specify the form of consideration to be received by such person exercising
the General SAR, which shall be in shares of Common Stock (valued at Fair Market
Value on the date of exercise of such General SAR), or in cash, or partly in
cash and partly in shares of Common Stock. Any election by the person exercising
the General SAR to receive cash in full or partial settlement of such General
SAR shall comply with all applicable laws 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
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<PAGE> 10
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
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.
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<PAGE> 11
8. TERMINATION OF EMPLOYMENT
8.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the applicable Agreement; provided, however, that (a) no
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates by reason of death or Total Disability,
the Option shall remain exercisable for a period of at least one year following
such termination (but not later than the scheduled expiration of such Option);
and (c) any termination by the employing company for cause will be treated in
accordance with the provisions of Section 8.2.
8.2. Termination for Cause. If a Holder's employment with Time Warner or
any of its Subsidiaries shall be terminated by Time Warner or such Subsidiary
prior to the exercise of any Option for cause (for these purposes, cause shall
have the meaning ascribed thereto in any employment agreement to which such
Holder is a party or, in the absence thereof, shall include but not be limited
to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct
of any kind and the refusal to perform his duties and responsibilities for any
reason other than illness or incapacity; provided, however, that if such
termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, termination for cause shall mean only a felony
conviction for fraud, misappropriation or embezzlement), then all Options held
by such Holder and any permitted transferee pursuant to Section 6.6 shall
immediately terminate.
8.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
8.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or one of its Subsidiaries.
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<PAGE> 12
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 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 90 days after the date the
Agreement is sent to such grantee for signature. 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
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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
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
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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.
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.
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16. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject to
all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner 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
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<PAGE> 16
desirable, including, without limitation, the granting of stock options and the
awarding of stock and cash otherwise than under the Plan, and such arrangements
may be either generally applicable or applicable only in specific cases.
20. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award, each Holder shall be deemed to have agreed that
such Award is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment 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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<PAGE> 1
EXHIBIT 10.13
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 19, 1998
effective as of January 1, 1998 (the "Effective Date"), as amended on December
2, 1998, 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
<PAGE> 2
2
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").
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
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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. Unless
the Executive shall make the election described in the last sentence of this
Section 3.3, 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; provided, however, that the Executive
may elect by written notice to the Company no later than the date the Executive
makes the election provided for in the first paragraph of Section 4.2 to have
such amount credited instead to the Deferred Compensation Plan established by
the Company on November 18, 1998, as the same may be amended from time to time
(as so amended, the "Deferred Plan"). 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. 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 (except that for
calendar year 1999, such election shall be made no later than January 31, 1999)
to have (a) all of the payments to be made to the Rabbi Trust pursuant to the
second sentence of this Section 3.3 to be credited instead to the Deferred Plan
or (b) to have 50% of the payments to be made by the Company pursuant to the
second sentence of this Section 3.3 to be credited instead to the Deferred Plan
and the remaining 50% to be paid to the Rabbi Trust.
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 (except that for calendar year 1999, such election shall be made
no later than January 31, 1999), to defer payment of and to have the Company
credit all or any portion of the Executive's salary and/or bonus for such year
to either the Trust Account or the Deferred Plan, or a combination of both,
subject
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in the case of a deferral to the Deferred Plan to the terms and conditions of
the Deferred Plan. 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 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.
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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 (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 as
provided in Sections 3.1 and 3.3, 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
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(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 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
<PAGE> 7
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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 or the Deferred Plan in accordance with any
previous election made by the Executive 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 (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 payment 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
<PAGE> 8
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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 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 as provided in the third sentence of
Section 3.3) and regular annual bonuses (assuming no deferral
<PAGE> 9
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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 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.
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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 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
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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 make the deferred compensation credits, when
otherwise due, as provided in Section 3, 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 by the Company
pursuant to Section 3.3 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 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
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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 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
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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 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.
<PAGE> 14
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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 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
<PAGE> 15
15
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 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:
<PAGE> 16
16
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 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 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 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, (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
<PAGE> 17
17
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, 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
<PAGE> 18
18
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):
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.
<PAGE> 19
19
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
<PAGE> 20
20
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.
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.
<PAGE> 21
21
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
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
<PAGE> 22
22
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
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 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.
<PAGE> 23
23
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> 24
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
<PAGE> 25
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.
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
<PAGE> 26
A-3
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 Sections A.1, A.6 or A.7. 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 Sections A.1, A.6 or A.7 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
<PAGE> 27
A-4
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 One-Time Transfer to Deferred Plan. So long as the Executive is
an employee of the Company, the Executive shall have the right to elect at any
time, but only once during the Executive's lifetime, by written notice to the
Company to transfer to the Deferred Plan all or a portion of the Net
Transferable Balance (determined as provided in the next sentence) of the Trust
Account. If the Executive shall make such an election, the Net Transferable
Balance shall be determined as of the end of the calendar quarter following the
date of such election (unless such election is made during the ten calendar days
following the end of a calendar quarter, in which case such determination shall
be made as of the end of such preceding calendar quarter) 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 such value the amount of all outstanding
indebtedness and any other amounts payable by the Trust Account. Transfers to
the Deferred Plan shall be made in cash as promptly as reasonably practicable
after the end of such calendar quarter and the Investment Advisor (or the
Company or the Trustee if the Investment Advisor shall fail to act in a timely
manner) shall cause securities held in the Trust Account to be sold to provide
cash equal to the portion of the Net Transferable Balance of the Trust Account
selected to be transferred by the Executive. If the Executive elects to transfer
more than 75% of the Net Transferable Balance of the Trust Account to the
Deferred Plan, the Company or the Trustee shall be permitted to take such action
as they may deem reasonably appropriate, including but not limited to, retaining
a portion of such Net Transferable Balance in the Trust Account, to ensure that
the Trust Account will have sufficient assets to pay the Company the amount of
taxes payable on such sales of securities at the end of the year in which such
sales are made.
<PAGE> 28
A-5
A.7 Payments. Payments of deferred compensation shall be made as
provided in this Section A.7. 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, plus
any amounts that have been transferred to the Deferred Plan pursuant to section
A.6 hereof and not theretofore distributed or deemed distributed therefrom,
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.7 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
<PAGE> 29
A-6
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.7.
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.7, 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.
If a transfer to the Deferred Plan has been made pursuant to Section
A.6 hereof, payments made to the Executive from the Deferred Plan (a) shall be
deemed made first from the amounts transferred to the Deferred Plan pursuant to
Section A.6 and (b) shall be deemed made first out of Account Retained Income.
<PAGE> 30
A-7
Within 90 days after the end of each taxable year of the Company in
which payments are made, directly or indirectly, to the Executive from the Trust
Account or from the Deferred Plan with respect to amounts transferred to the
Deferred Plan from the Trust Account pursuant to Section A.6 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.7, the Executive shall not be entitled to receive pursuant to this
Annex A (including any amounts that have been transferred to the Deferred Plan
pursuant to Section A.6 hereof) 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, (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.7 shall
be determined in accordance with Section A.5 above.
<PAGE> 1
Exhibit 10.14
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 25, 1998
and effective as of January 1, 1998, (the "Effective Date"), as amended December
15, 1998, 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
<PAGE> 2
2
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,
<PAGE> 3
3
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. Unless the Executive shall make the
<PAGE> 4
4
election described in the last sentence of this Section 3.3, 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; provided, however, that the Executive may elect by written notice to
the Company no later than the expiration of the 15-day period provided for in
the first paragraph of Section 4.2 or the expiration of the 30-day period
provided for in the second paragraph of Section 4.2, as the case may be, to have
such amount credited instead to the Deferred Compensation Plan established by
the Company on November 18, 1998, as the same may be amended from time to time
(as so amended, the "Deferred Plan"). 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 the 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 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. 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 (except that for
calendar year 1999, such election shall be made no later than January 31, 1999)
to have (a) all of the payments to be made to the Rabbi Trust pursuant to the
second sentence of this Section 3.3 to be credited instead to the Deferred Plan
or (b) to have 50% of the payments to be made by the Company pursuant to the
second sentence of this Section 3.3 to be credited instead to the Deferred Plan
and the remaining 50% to be paid to the Rabbi Trust.
<PAGE> 5
5
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 (except
that for calendar year 1999, such election shall be made no later than January
31, 1999), to defer payment of and to have the Company credit all or any portion
of the Executive's bonus for such year to either the Trust Account or the
Deferred Plan, or a combination of both, subject in the case of a deferral to
the Deferred Plan to the terms and conditions of the Deferred Plan. 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 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
<PAGE> 6
6
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.
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
<PAGE> 7
7
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 as provided in Sections
3.1 and 3.3 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 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
<PAGE> 8
8
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 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
<PAGE> 9
9
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
or the Deferred Plan in accordance with any previous election made by the
Executive 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 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 payment
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
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10
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 the Company) for the balance of the Base Salary,
deferred compensation (which shall be credited 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
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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 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 or the Deferred Plan 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
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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 or the Deferred Plan
in accordance with any previous election made by the Executive 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 aggregating six months in any
twelve-month period, the Company shall, nevertheless, continue to pay the
Executive his full compensation and continue to make the deferred compensation
credits, when otherwise due, as provided in Section 3, 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 by the
Company pursuant to Section 3.3 as further
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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 Sections 9.1, 9.3 and 10 shall continue to apply to the
Executive during the Disability Period; and (iii) if the Executive renders any
services to any persons that are in competition with the Company or any of its
subsidiaries or affiliates (which, notwithstanding Section 9.2, the parties
agree the Executive shall be permitted to do if the Company elects not to
restore the Executive to full-time service, as described above), the total cash
salary and bonus received in connection therewith, whether paid to the Executive
or deferred for his benefit, prior to the last day of the Disability Period,
shall reduce, pro tanto, any amount that the Company would otherwise be required
to pay to him hereunder. The advisory services referred to in clause (i) of the
immediately preceding sentence shall consist of rendering advice concerning the
business, affairs and management of the Company as requested by the Chief
Executive Officer of the Company but the Executive shall not be required to
devote more than five days (up to eight hours per day) each month to such
services, which shall be performed at a time and place mutually convenient to
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
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(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 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
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15
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.
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
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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 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,
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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 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 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
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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;
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
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competition with the Company; provided, however, that the foregoing shall not be
deemed to prohibit the Executive from (a) acquiring, solely as an investment and
through market purchases, securities of any Entity which are registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are
publicly traded, so long as he is not part of any control group of such Entity
and such securities, if converted, do not constitute more than three percent
(3%) of the outstanding voting power of that Entity, (b) acquiring, solely as an
investment, any securities of an Entity (other than an Entity that has
outstanding securities covered by the preceding clause (a)) so long as he
remains a passive investor in such Entity and does not become part of any
control group thereof and so long as such Entity is not, directly or through
subsidiaries, in competition with the Company, or (c) serving as a director of
any Entity that is not in competition with the Company. For purposes of the
foregoing, a person or Entity shall be deemed to be in competition with the
Company if such person or Entity engages in any line of business that is
substantially the same as any line of operating business which the Company
engages in, conducts or, to the knowledge of the Executive, has definitive plans
to engage in or conduct.
9.3 Specific Remedy. In addition to such other rights and
remedies as the Company may have at equity or in law with respect to any breach
of this Agreement, if the Executive commits a material breach of any of the
provisions of Section 9.1 or 9.2, the Company shall have the right and remedy to
have such provisions specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, 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
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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):
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.
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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, 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
<PAGE> 22
22
Executive arising in connection with any actual, threatened or contemplated
litigation or legal, administrative or other proceeding relating to this
Agreement to which the Executive is or expects to become a party. Subject to any
rights of the Executive under Section 3.8, if the Company or, if the Company is
not a party to such litigation or proceeding, the party opposing the Executive,
shall substantially prevail on the material issues involved in any such
litigation or proceeding (but in no other case), then, after all rights of
appeal have been exercised or lapsed, the Executive shall promptly repay to the
Company all amounts previously paid to the Executive under this Section in
respect of such litigation or proceeding, but without interest thereon.
12.8 Beneficiaries. Whenever this Agreement provides for any
payment to the Executive's estate, such payment may be made instead to such
beneficiary or beneficiaries as the Executive may designate by written notice to
the Company. The Executive shall have the right to revoke any such designation
and to redesignate a beneficiary or beneficiaries by written notice to the
Company (and to any applicable insurance company) to such effect.
12.9 No Conflict. The Executive represents and warrants to the
Company that this Agreement is legal, valid and binding upon the Executive and
the execution of this Agreement and the performance of the Executive's
obligations hereunder does not and will not constitute a breach of, or conflict
with the terms or provisions of, any agreement or understanding to which the
Executive is a party (including, without limitation, any other employment
agreement). The Company represents and warrants to the Executive that this
Agreement is legal, valid and binding upon the Company and the execution of this
Agreement and the performance of the Company's obligations hereunder does not
and will not constitute a breach of, or conflict with the terms or provisions
of, any agreement or understanding to which the Company is a party.
12.10 Withholding Taxes. Payments made to the Executive
pursuant to this Agreement shall be subject to withholding and social security
taxes and other ordinary and customary payroll deductions.
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.
<PAGE> 23
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
Contract Options - Section 8.2
Disability Date - Section 5
Disability Period - Section 5
Effective Date - the first paragraph on page 1
eligible securities - Section A.1 of Annex A
Entity - Section 3.6
Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
Investment Advisor - Section A.1 of Annex A
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
<PAGE> 24
24
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 III
-------------------------------------
R.E. Turner III
<PAGE> 25
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
the case of an unlisted security, the mean between the bid and asked prices per
security on the
<PAGE> 26
A-2
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 respects
work cooperatively with the Trustee to fulfill the obligations of the Company
and the Trustee to the Executive. The Trust Account shall be
<PAGE> 27
A-3
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, A.6 or A.7. 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, A.6 or A.7 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> 28
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 One-Time Transfer to Deferred Plan. So long as the Executive is
an employee of the Company, the Executive shall have the right to elect at any
time, but only once during the Executive's lifetime, by written notice to the
Company to transfer to the Deferred Plan all or a portion of the Net
Transferable Balance (determined as provided in the next sentence) of the Trust
Account. If the Executive shall make such an election, the Net Transferable
Balance shall be determined as of the end of the calendar quarter following the
date of such election (unless such election is made during the ten calendar days
following the end of a calendar quarter, in which case such determination shall
be made as of the end of such preceding calendar quarter) 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 such value the amount of all outstanding
indebtedness and any other amounts payable by the Trust Account. Transfers to
the Deferred Plan shall be made in cash as promptly as reasonably practicable
after the end of such calendar quarter and the Investment Advisor (or the
Company or the Trustee if the Investment Advisor shall fail to act in a timely
manner) shall cause securities held in the Trust Account to be sold to provide
cash equal to the portion of the Net Transferable Balance of the Trust Account
selected to be transferred by the Executive. If the Executive elects to transfer
more than 75% of the Net Transferable Balance of the Trust Account to the
Deferred Plan, the Company or the Trustee shall be permitted to take such action
as they may deem reasonably appropriate, including but not limited to, retaining
a portion of such Net Transferable Balance in the Trust Account, to ensure that
the Trust Account will have sufficient assets to pay the Company the amount of
taxes payable on such sales of securities at the end of the year in which such
sales are made.
A.7 Payments. Payments of deferred compensation shall be made as
provided in this Section A.7. 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
<PAGE> 29
A-5
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,
plus any amounts that have been transferred to the Deferred Plan pursuant to
Section A.6 hereof and not theretofore distributed or deemed distributed
therefrom, 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.7 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.
<PAGE> 30
A-6
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.7.
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.7, 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.
If a transfer to the Deferred Plan has been made pursuant to Section
A.6 hereof, payments made to the Executive from the Deferred Plan (a) shall be
deemed made first from the amounts transferred to the Deferred Plan pursuant to
Section A.6 and (b) shall be deemed made first out of Account Retained Income.
Within 90 days after the end of each taxable year of the Company in
which payments are made, directly or indirectly, to the Executive from the Trust
Account or from the Deferred Plan with respect to amounts transferred to the
Deferred Plan from the Trust Account pursuant to Section A.6 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
<PAGE> 31
A-7
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.7, the Executive shall not be entitled to receive pursuant to
this Annex A (including any amounts that have been transferred to the Deferred
Plan pursuant to Section A.6 hereof) 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, (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.7 shall
be determined in accordance with Section A.5 above.
<PAGE> 32
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> 1
EXHIBIT 10.15
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 25,
1999, effective as of January 1, 1999 (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 made as of March 18, 1998 (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, 2004 (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 the President of
the Company. In his capacity as President, 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. If the
Company shall designate the Executive as the President and Chief Operating
Officer of the Company, the Executive shall also serve in such capacity, without
additional compensation, and such title and any additional authority and duties
assumed in connection therewith shall not thereafter be diminished. 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 or the President and
Chief Operating Officer, as the case may be, of the Company. The Executive
shall, subject to his election as such from time to time and without
additional compensation,
<PAGE> 2
2
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 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 $750,000 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.
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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, 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 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. Unless the Executive shall make the election described in the last
sentence of this Section 3.3, 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, 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; provided, however, that
the Executive may elect by written notice to the Company at least 15 days prior
to the date of any such lump sum payment, to have such amount credited instead
to the Deferred Compensation Plan established by the Company on November 18,
1998, as the same may be amended from time to time (as so amended, the "Deferred
Plan"). 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. The Company shall 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
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enforce the provisions of the Trust Agreement for the benefit of the Executive.
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 (except that for calendar year 1999, such election shall be made no
later than January 31, 1999) to have (a) all of the payments to be made to the
Rabbi Trust pursuant to the second sentence of this Section 3.3 to be credited
instead to the Deferred Plan or (b) to have 50% of the payments to be made by
the Company pursuant to the second sentence of this Section 3.3 to be credited
instead to the Deferred Plan and the remaining 50% to be paid to the Rabbi
Trust.
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 (except
that for calendar year 1999, such election shall be made no later than January
31, 1999), to defer payment of and to have the Company credit all or any portion
of the Executive's bonus for such year to either the Trust Account or the
Deferred Plan, or a combination of both, subject in the case of a deferral to
the Deferred Plan to the terms and conditions of the Deferred Plan. 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 accordance with the Company's
then current written practices and policies with respect to
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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 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
<PAGE> 6
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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 as provided in Sections 3.1 and 3.3 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. 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 of President or, if the Executive is
appointed President and Chief Operating Officer, to thereafter retain such
title, (ii) the Executive being required to report to persons other than
<PAGE> 7
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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 remain an employee of the Company as provided in Section
4.2.2. In such case, the following provisions shall apply:
4.2.1 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, 4.6 and 4.8 and Sections 6 through 12 and
Annex A shall survive such termination, and 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 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 or the Deferred Plan in accordance with any previous election
made by the Executive to defer all or any portion of the Executive's bonus for
such year pursuant to Section 3.4.
4.2.2 After the effective date of termination
pursuant to this Section 4.2, the Executive shall remain an employee of the
Company for the period ending on the Term Date, 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
<PAGE> 8
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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 second succeeding 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 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 immediately following) equal
to the balance of the Base Salary, deferred compensation (which shall be
credited 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 4.2.2 had the Executive
remained on the Company's payroll until the Term Date. The lump sum payment
required to be made to the Executive pursuant to this Section 4.2.2 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 Code), in effect on the date
of such termination, compounded semi-annually. Notwithstanding the foregoing, 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 4.2.2; and if the
Executive accepts full-time employment with any affiliate of the Company, then
the payments (and credits) provided for in this Section 4.2.2 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 Automatic Termination. If the Company does not
designate the Executive as President and Chief Operating Officer on or prior to
June 30, 2001 or such appointment does not become effective on or prior to
January 1, 2002, then the term of employment shall automatically terminate on
December 31, 2001 and the Executive shall
<PAGE> 9
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cease to be an employee of the Company at the close of business on that date. In
such event, the provisions of Section 4.2.1 shall apply and the Executive shall
receive an annual bonus for calendar year 2001 calculated as provided in section
4.2.1.
4.4 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, 2004 so that
the term of employment may end on the Term Date or any date thereafter. If this
Agreement shall be terminated on or after the Term Date for any reason (other
than by the Company for cause as defined in Section 4.1, in which case Section
4.1 shall apply), 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. At the end of the
90-day notice period provided for in the first sentence of this Section 4.4, the
term of employment shall end and the Executive shall cease to be an employee of
the Company and the Executive shall have no further obligations or liabilities
to the Company whatsoever, except that Sections 3.8, 4.6 and 4.8 and Sections 6
through 12 and Annex A shall survive such termination.
4.5 Office Facilities. In the event of a termination
of the Executive's employment pursuant to Section 4.2 , 4.3 or 4.4, then for the
period beginning on the effective date of such termination 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.
<PAGE> 10
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4.6 Release. In partial consideration for the
Company's obligation to make the payments described in Section 4.2, the Company
shall be entitled to require the Executive to execute and deliver to the Company
a release in substantially the form attached hereto as Annex B. If the Company
so elects, 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. 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, 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 senior
executives of the Company with length of service and compensation level of the
Executive.
4.7 Retirement. Notwithstanding the provisions of
Sections 4.2, 4.4 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,
4.4 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.
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4.8 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 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 the Term Date up to an amount equal to (x) the
discounted lump sum payment and credit to the Trust Account or the Deferred Plan
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 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 or the Deferred Plan 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 4.8 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 at the time
provided therein or the timely and full performance of any of the Company's
other obligations under this Agreement.
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4.9 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, 4.3
or 4.4 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, 4.3 or 4.4, 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 make the deferred compensation
credits when otherwise due, as provided in Section 3, 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 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 period from the Disability Date through the Term Date (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 by the Company pursuant to Section 3.3 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
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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
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 Section 4.2
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
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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.7 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
examinations that may be required by the insurer for any additional insurance,
the Company shall obtain $5,000,000 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
<PAGE> 15
15
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.
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)
<PAGE> 16
16
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.
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, 4.3, 4.4, 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 or 4.3, then (i) all stock
options granted to
<PAGE> 17
17
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 or 4.3, (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, 4.4, 5 or 6, 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 Stock Options. During the term of employment, the
Executive shall be eligible to receive grants of stock options in the discretion
of the Compensation Committee of the Company's Board of Directors. If the term
of employment is terminated pursuant to Section 4.3, then all stock options
granted to the Executive after the Effective Date shall become immediately
exercisable in full on the date of such termination and shall remain exercisable
(but not beyond the expiration of the option term) for five years after the date
of such termination.
9. Protection of Confidential Information; Non-Compete. The
Executive acknowledges that his employment by the Company (which, for purposes
of this Section 9 shall mean Time Warner Inc. and its affiliates) will,
throughout the term of employment, bring him into close contact with many
confidential affairs of the Company, including information about costs, profits,
markets, sales, products, key personnel, pricing policies, operational methods,
technical processes and other business affairs and methods and other information
not readily available to the public, and plans for future development. The
Executive further acknowledges that the services to be performed under this
Agreement are of a special, unique, unusual, extraordinary and intellectual
character. The Executive further acknowledges that the business of the Company
is international in scope, that its products are marketed throughout the world,
that the Company competes in nearly all of its business activities with other
Entities that are or could be located in nearly any part of the world and that
the nature of the Executive's services, position and expertise are such that he
is capable of competing with the Company from nearly any location in the world.
In recognition of the foregoing, the Executive covenants and agrees as set forth
below in this Section 9.
<PAGE> 18
18
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, 4.3 or 4.4, 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 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 , 4.3 or 4.4, 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
<PAGE> 19
19
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 the earlier of (a) twelve months after the effective date of any notice of
termination of the Executive's employment with the Company pursuant to Section
4.1 or 4.2 and (b) the Term Date, 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, 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 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.
Notwithstanding the foregoing, if the term of employment is terminated pursuant
to Section 4.3, then the provisions of the preceding sentence shall not apply to
the Executive after the effective date of such termination. 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 three times the Executive's then
current Base Salary, or if the
<PAGE> 20
20
Executive is not employed by the Company at the time of such breach, an amount
equal to three 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, 4.3 or 4.4. The Company and the Executive agree that it is impossible to
determine with any reasonable accuracy the amount of prospective damages to the
Company upon a breach of Section 9.2 by the Executive and further agree that the
damages set forth in this Section 9.4 are reasonable, and not a penalty, based
upon the facts and circumstances of the parties and with due regard to future
expectations.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (all of the
foregoing being collectively referred to herein as "Work Product"), and that
various business opportunities shall be presented to him by reason of his
employment by the Company. The Executive acknowledges that 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. 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
<PAGE> 21
21
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.
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> 22
22
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 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
<PAGE> 23
23
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.
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
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24
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 4.2.2
Applicable Tax Law - Section A.5 of Annex A
Base Salary - Section 3.1
cause - Section 4.1
Code - Section 3.2
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 4.7
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> 25
25
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
<PAGE> 26
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
<PAGE> 27
A-2
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.
<PAGE> 28
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, A.6 or A.7. 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, A.6 or A.7 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
<PAGE> 29
A-4
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 One-Time Transfer to Deferred Plan. So long as the
Executive is an employee of the Company, the Executive shall have the right to
elect at any time, but only once during the Executive's lifetime, by written
notice to the Company to transfer to the Deferred Plan all or a portion of the
Net Transferable Balance (determined as provided in the next sentence) of the
Trust Account. If the Executive shall make such an election, the Net
Transferable Balance shall be determined as of the end of the calendar quarter
following the date of such election (unless such election is made during the ten
calendar days following the end of a calendar quarter, in which case such
determination shall be made as of the end of such preceding calendar quarter) 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 such value the
amount of all outstanding indebtedness and any other amounts payable by the
Trust Account. Transfers to the Deferred Plan shall be made in cash as promptly
as reasonably practicable after the end of such calendar quarter and the
Investment Advisor (or the Company or the Trustee if the Investment Advisor
shall fail to act in a timely manner) shall cause securities held in the Trust
Account to be sold to provide cash equal to the portion of the Net Transferable
Balance of the Trust Account selected to be transferred by the Executive. If the
Executive elects to transfer
<PAGE> 30
A-5
more than 75% of the Net Transferable Balance of the Trust Account to the
Deferred Plan, the Company or the Trustee shall be permitted to take such action
as they may deem reasonably appropriate, including but not limited to, retaining
a portion of such Net Transferable Balance in the Trust Account, to ensure that
the Trust Account will have sufficient assets to pay the Company the amount of
taxes payable on such sales of securities at the end of the year in which such
sales are made.
A.7 Payments. Payments of deferred compensation shall be made
as provided in this Section A.7. 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, plus
any amounts that have been transferred to the Deferred Plan pursuant to Section
A.6 hereof and not theretofore distributed or deemed distributed therefrom,
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
<PAGE> 31
A-6
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 end of the Disability
Period in accordance with the provisions of the first paragraph of this Section
A.7.
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.
<PAGE> 32
A-7
Notwithstanding the foregoing provisions of this Section A.7,
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.
If a transfer to the Deferred Plan has been made pursuant to
Section A.6 hereof, payments made to the Executive from the Deferred Plan (a)
shall be deemed made first from the amounts transferred to the Deferred Plan
pursuant to Section A.6 and (b) shall be deemed made first out of Account
Retained Income.
Within 90 days after the end of each taxable year of the
Company in which payments are made, directly or indirectly, to the Executive
from the Trust Account or from the Deferred Plan with respect to amounts
transferred to the Deferred Plan from the Trust Account pursuant to Section A.6
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.7, the Executive shall not be entitled to receive pursuant to this
Annex A (including any amounts that have been transferred to the Deferred Plan
pursuant to Section A.6 hereof) 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, (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.7 shall
be determined in accordance with Section A.5 above.
<PAGE> 1
EXHIBIT 10.16
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18, 1998
effective as of January 1, 1998 (the "Effective Date"), as amended December 2,
1998, 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 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
<PAGE> 2
2
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 provided in this Agreement, including Annex A
hereto. Unless the Executive shall make the election described in the last
sentence of this Section 3.3, 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
<PAGE> 3
3
the time of such payment an amount equal to 50% of the Base Salary portion of
such lump sum payment; provided, however, that the Executive may elect by
written notice to the Company no later than the date the Executive makes the
election provided for in the first paragraph of Section 4.2 to have such amount
credited instead to the Deferred Compensation Plan established by the Company on
November 18, 1998, as the same may be amended from time to time (as so amended,
the "Deferred Plan"). 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. 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 (except that for calendar year 1999, such election shall
be made no later than January 31, 1999) to have (a) all of the payments to be
made to the Rabbi Trust pursuant to the second sentence of this Section 3.3 to
be credited instead to the Deferred Plan or (b) to have 50% of the payments to
be made by the Company pursuant to the second sentence of this Section 3.3 to be
credited instead to the Deferred Plan and the remaining 50% to be paid to the
Rabbi Trust.
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 (except that for
calendar year 1999, such election shall be made no later than January 31, 1999),
to defer payment of and to have the Company credit all or any portion of the
Executive's bonus for such year to either the Trust Account or the Deferred
Plan, or a combination of both, subject in the case of a deferral to the
Deferred Plan to the terms and conditions of the Deferred Plan. 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
<PAGE> 4
4
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 (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
<PAGE> 5
5
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 as
provided in Sections 3.1 and 3.3, 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
<PAGE> 6
6
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 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 or the Deferred Plan in accordance with any
previous election made by the Executive 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
<PAGE> 7
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 payment
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 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
<PAGE> 8
8
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 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 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
<PAGE> 9
9
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 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
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 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
<PAGE> 10
10
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 make the deferred compensation credits, when
otherwise due, as provided in Section 3, 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 by the Company
pursuant to Section 3.3 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 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
<PAGE> 11
11
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 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
<PAGE> 12
12
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 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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13
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,
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
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14
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 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
<PAGE> 15
15
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, 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.
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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, and not a penalty, based
upon the facts and circumstances of the parties and with due regard to future
expectations.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (all of the
foregoing being collectively referred to herein as "Work Product"), and that
various business opportunities shall be presented to him by reason of his
employment by the Company. The Executive acknowledges that 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
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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: 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.
<PAGE> 18
18
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 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
<PAGE> 19
19
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.
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
<PAGE> 20
20
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
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
<PAGE> 21
21
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 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
<PAGE> 22
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
<PAGE> 23
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 respects
work cooperatively with the Trustee to fulfill the
<PAGE> 24
A-3
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, A.6 or A.7. 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, A.6 or A.7 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
<PAGE> 25
A-4
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 One-Time Transfer to Deferred Plan. So long as the Executive is
an employee of the Company, the Executive shall have the right to elect at any
time, but only once during the Executive's lifetime, by written notice to the
Company to transfer to the Deferred Plan all or a portion of the Net
Transferable Balance (determined as provided in the next sentence) of the Trust
Account. If the Executive shall make such an election, the Net Transferable
Balance shall be determined as of the end of the calendar quarter following the
date of such election (unless such election is made during the ten calendar days
following the end of a calendar quarter, in which case such determination shall
be made as of the end of such preceding calendar quarter) 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 such value the amount of all outstanding
indebtedness and any other amounts payable by the Trust Account. Transfers to
the Deferred Plan shall be made in cash as promptly as reasonably practicable
after the end of such calendar quarter and the Investment Advisor (or the
Company or the Trustee if the Investment Advisor shall fail to act in a timely
manner) shall cause securities held in the Trust Account to be sold to provide
cash equal to the portion of the Net Transferable Balance of the Trust Account
selected to be transferred by the Executive. If the Executive elects to transfer
more than 75% of the Net Transferable Balance of the Trust Account to the
Deferred Plan, the Company or the Trustee shall be permitted to take such action
as they may deem reasonably appropriate, including but not limited to, retaining
a portion of such Net Transferable Balance in the Trust Account, to ensure that
the Trust Account will have sufficient assets to pay the Company the amount of
taxes payable on such sales of securities at the end of the year in which such
sales are made.
A.7 Payments. Payments of deferred compensation shall be made as
provided in this Section A.7. 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
<PAGE> 26
A-5
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, plus
any amounts that have been transferred to the Deferred Plan pursuant to Section
A.6 hereof and not theretofore distributed or deemed distributed therefrom,
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.7 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
<PAGE> 27
A-6
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.7.
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.7, 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.
If a transfer to the Deferred Plan has been made pursuant to Section
A.6 hereof, payments made to the Executive from the Deferred Plan (a) shall be
deemed made first from the amounts transferred to the Deferred Plan pursuant to
Section A.6 and (b) shall be deemed made first out of Account Retained Income.
Within 90 days after the end of each taxable year of the Company in
which payments are made, directly or indirectly, to the Executive from the Trust
Account or from the Deferred Plan with respect to amounts transferred to the
Deferred Plan from the Trust Account pursuant to Section A.6 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
<PAGE> 28
A-7
any provision of this Section A.7, the Executive shall not be entitled to
receive pursuant to this Annex A (including any amounts that have been
transferred to the Deferred Plan pursuant to Section A.6 hereof) 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, (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.7 shall be determined in accordance
with Section A.5 above.
<PAGE> 1
EXHIBIT 10.17
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 25,
1999, effective as of January 1, 1999 (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 Amended and Restated Employment Agreement made as of March 18, 1998, as
amended by Amendment dated December 2, 1998 (as so amended, 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, 2004 (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
<PAGE> 2
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 $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. 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.
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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. Unless Executive shall make the election described in the last sentence
of this Section 3.3, 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 Executive's then current Base Salary. If a lump sum payment is made to
Executive pursuant to Section 4.2.2 or 4.3.1 of this Agreement, 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; provided, however, that the Executive may elect by written notice to
the Company at least 15 days prior to the date of any such lump sum payment to
have such amount credited instead to the Deferred Compensation Plan established
by the Company on November 18, 1998, as the same may be amended from time to
time (as so amended, the "Deferred Plan"). 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
until the full amount which Executive is entitled to receive therefrom has been
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. 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 (except that for calendar year 1999, such election shall be made no
later than January 31, 1999) to have (a) all of the payments to be made to the
Rabbi Trust pursuant to the second sentence of this Section 3.3 to be credited
instead to the Deferred Plan or (b) to have 50% of the payments to be made by
the Company pursuant to the second sentence of this Section 3.3 to be credited
instead to the Deferred Plan and the remaining 50% to be paid to the Rabbi
Trust.
3.4 Deferred Bonus. In addition to any other deferred
bonus plan in which 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 (except
that for calendar year 1999, such election shall be made no
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later than January 31, 1999), to defer payment of and to have the Company credit
all or any portion of the Executive's bonus for such year to either the Trust
Account or the Deferred Plan, or a combination of both, subject in the case of a
deferral to the Deferred Plan to the terms and conditions of the Deferred Plan.
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 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
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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 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 as provided in Sections 3.1 and 3.3 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
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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; 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.
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In the event of a termination pursuant to this
Section 4.2, the Executive shall remain an employee of the Company as provided
in Section 4.2.2. In such case, the following provisions shall apply:
4.2.1 After the effective date of such termination,
the Executive shall have no further obligations or liabilities to the Company
whatsoever, other than pursuant to Sections 4.5 and 4.7 and Sections 6 through
12 which shall survive such termination, and the Executive shall be entitled to
receive any earned and unpaid Base Salary and be credited with deferred
compensation through the effective date of termination and a pro rata portion of
the Executive's annual bonus for the year in which such termination occurs
through the date of 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 or the Deferred Plan in accordance with any previous election made by
the Executive to defer all or any portion of his bonus for such year pursuant to
Section 3.4.
4.2.2 After the effective date of termination
pursuant to this Section 4.2, 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 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) credits of deferred compensation as
provided in Section 3.3. Except as provided in the second succeeding 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, 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
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Executive shall be entitled to receive, as severance, 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 calendar year in which such commencement or effective date occurred),
discounted as provided in the immediately following sentence, equal to the
balance of the Base Salary, deferred compensation (which shall be credited 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 4.2.2 had the Executive remained on
the Company's payroll until the end of the period described in the first
sentence of this Section 4.2.2. The lump sum payment required to be made to
Executive pursuant to this Section 4.2.2 shall be discounted to present value as
of the date of payment from the times at which such amounts would otherwise have
become payable absent 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 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. Section 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). Notwithstanding the foregoing, 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 4.2.2; and if the Executive accepts full-time
employment with any affiliate of the Company, then the payments provided for in
this Section 4.2.2 shall immediately cease and the Executive shall not be
entitled to any 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
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terminate the term of employment on or after the Term Date for any reason (other
than for 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 (i) at the end of the 60-day notice
period the Executive shall have no further obligations or liabilities to the
Company whatsoever, other than pursuant to Sections 4.5 and 4.7 and Sections 6
through 12 of this Agreement, which shall survive such termination and (ii) in
lieu of the provisions of Section 4.2, the Executive shall remain an employee of
the Company for a period of twelve months pursuant to Section 4.3.1 below and
shall receive the payments provided in Section 4.3.1.
4.3.1. The Executive shall remain an
employee of the Company until the date which is twelve months after the end of
the 60-day period provided in the first sentence of Section 4.3 and during such
twelve-month 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) 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 Executive shall cease to
be an employee of the Company. 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 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 third 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 as provided in the
third sentence
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of Section 3.3) and regular annual bonuses the Executive would have been
entitled to receive pursuant to this Section 4.3.1 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 4.3.1; and if the Executive accepts full-time
employment with any affiliate of the Company, then the payments provided for in
this Section 4.3.1 shall cease and the Executive shall not be entitled to any
such lump sum payment.
4.4 Office Facilities. In the event the Executive's
employment is terminated by the Company pursuant to Section 4.2 or 4.3, then for
the period beginning on the effective date of such termination 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 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.
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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 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 the term of employment is terminated pursuant to Section
4.2 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 the later of (x) the Term Date or (y) one year
after the date of termination pursuant to Section 4.2, 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
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(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 or the
Deferred Plan 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 or 4.3.1, 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 make the deferred compensation credits when
otherwise due as provided in Section 3, 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
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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 (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 by the Company pursuant to
Section 3.3 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 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 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
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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.7 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
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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 policy is owned by the trustees of a trust for the
benefit of the Executive's spouse and/or descendants, the trustees of the trust
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,
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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. In the event of a termination of the
term of employment pursuant to Section 4.2, the Company shall, at its sole
election, either issue to the Executive the stock options the Executive would
have received from the Company for the remainder of the term of employment had
such termination not occurred or pay to the Executive in cash an amount equal to
the value of such stock options. 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
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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, 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 later 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
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:
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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, 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 Competitive Entity (as
defined in the next sentence) or acquire any interest of any type in any
Competitive Entity; 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 Competitive 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
Competitive Entity and such securities, if converted, do not constitute more
than one percent (1%) of the outstanding voting power of that Competitive
Entity, (b) acquiring, solely as an investment, any securities of an Entity
(other than a Competitive Entity that has outstanding securities covered by the
preceding clause (a))
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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 a Competitive
Entity, or (c) serving as a director of any Entity that is not a Competitive
Entity. For purposes of the foregoing, a Competitive Entity shall mean a person
or Entity that 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; provided, however, that after the Executive is no longer
on the payroll of the Company, the provisions of this Section 9.2 shall apply
only to a Competitive Entity that had, or the parent Entity or predecessor
Entity of such Competitive Entity 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
Competitive Entity.
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 three 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 three 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
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reasonable, and not a penalty, based upon the facts and circumstances of the
parties and with due regard to future expectations.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (all of the
foregoing being collectively referred to herein as "Work Product"), and that
various business opportunities shall be presented to him by reason of his
employment by the Company. The Executive acknowledges that 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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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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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
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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
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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 4.2.2
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 9.2
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
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.
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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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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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
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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
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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, A.6 or A.7. 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, A.6 or A.7 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
3
<PAGE> 29
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 One-Time Transfer to Deferred Plan. So long as the
Executive is an employee of the Company, the Executive shall have the right to
elect by written notice to the Company at any time, but only once during the
Executive's lifetime, to transfer to the Deferred Plan all or a portion of the
Net Transferable Balance (determined as provided in the next sentence) of the
Trust Account. If the Executive shall make such an election, the Net
Transferable Balance shall be determined as of the end of the calendar quarter
following the date of such election (unless such election is made during the
first ten calendar days following the end of a calendar quarter, in which case
such determination shall be made as of the end of such preceding calendar
quarter) 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 such value the
amount of all outstanding indebtedness and any other amounts payable by the
Trust Account. Transfers to the Deferred Plan shall be made in cash as promptly
as reasonably practicable after the end of such calendar quarter and the
Investment Advisor (or the Company or the Trustee if the Investment Advisor
shall fail to act in a timely manner) shall cause securities held in the Trust
Account to be sold to provide cash equal to the portion of the Net Transferable
Balance of the Trust Account selected to be transferred by the Executive. If the
Executive elects to transfer more than 75% of the Net Transferable Balance of
the Trust Account to the Deferred Plan, the Company or the Trustee shall be
permitted to take such action as they may deem reasonably appropriate, including
but not limited to, retaining a portion of such Net Transferable Balance in the
Trust Account, to ensure that the Trust Account will have sufficient assets to
pay the Company the amount of taxes payable on such sales of securities at the
end of the year in which such sales are made.
4
<PAGE> 30
A.7 Payments. Payments of deferred compensation shall be made
as provided in this Section A.7. 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.7 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
5
<PAGE> 31
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.7.
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.7,
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.
If a transfer to the Deferred Plan has been made pursuant to
Section A.6 hereof, payments made to the Executive from the Deferred Plan (a)
shall be deemed made first from the amounts transferred to the Deferred Plan
pursuant to Section A.6 and (b) shall be deemed made first out of Account
Retained Income.
6
<PAGE> 32
Within 90 days after the end of each taxable year of the
Company in which payments are made, directly or indirectly, to the Executive
from the Trust Account or from the Deferred Plan with respect to amounts
transferred to the Deferred Plan from the Trust Account pursuant to Section A.6
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.7, the Executive shall not be entitled to receive pursuant to this
Annex A (including any amounts that have been transferred to the Deferred Plan
pursuant to Section A.6 hereof) 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.7 shall be determined in accordance with Section
A.5 above.
7
<PAGE> 1
Exhibit 10.18
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18, 1998,
effective as of January 1, 1998 (the "Effective Date"), as amended on December
2, 1998, 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 outside business activities which require the devotion of
substantial amounts of the Executive's time and (iv) the place for the
performance of the
<PAGE> 2
2
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).
<PAGE> 3
3
3. Compensation.
3.1 Base Salary. The Company shall pay or cause to be paid to the
Executive a base salary of not less than $300,000 per annum during the term of
employment (the "Base Salary"). The Company may increase, but not decrease, the
Base Salary at any time and from time to time during the term of employment and
upon each such increase the term "Base Salary" shall mean such increased amount.
Base Salary shall be payable in monthly or more frequent installments in
accordance with the Company's 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, including Annex A
hereto. Unless the Executive shall make the election described in the last
sentence of this Section 3.3, 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 the Base Salary portion of such lump sum
payment; provided, however, that the Executive may elect by written notice to
the Company no later than the date the Executive makes the election provided for
in the first
<PAGE> 4
4
paragraph of Section 4.2 or 4.3, as the case may be, to have such amount
credited instead to the Deferred Compensation Plan established by the Company on
November 18, 1998, as the same may be amended from time to time (as so amended,
the "Deferred Plan"). 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. 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. 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
(except that for calendar year 1999, such election shall be made no later than
January 31, 1999) to have (a) all of the payments to be made to the Rabbi Trust
pursuant to the second sentence of this Section 3.3 to be credited instead to
the Deferred Plan or (b) to have 50% of the payments to be made by the Company
pursuant to the second sentence of this Section 3.3 to be credited instead to
the Deferred Plan and the remaining 50% to be paid to the Rabbi Trust.
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 (except
that for calendar year 1999, such election shall be made no later than January
31, 1999), to defer payment of and to have the Company credit all or any portion
of the Executive's bonus for such year to either the Trust Account or the
Deferred Plan, or a combination of both, subject in the case of a deferral to
the Deferred Plan to the terms and conditions of the Deferred Plan. 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
<PAGE> 5
5
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 (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
<PAGE> 6
6
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 as provided in Sections 3.1 and 3.3
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
<PAGE> 7
7
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.
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 or the Deferred Plan in accordance with any
previous election made by the Executive to defer all or any portion of the
Executive's bonus for such year pursuant to Section 3.4.
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8
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 Section 4.2.2
upon such termination in respect of Sections 3.1 and 3.2 and the payment
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.
Section 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
<PAGE> 9
9
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 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. 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
<PAGE> 10
10
(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 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
<PAGE> 11
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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 pursuant to Section 3.3 as in
effect immediately prior to such notice of termination (which shall be credited
to the Trust Account or the Deferred Plan 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 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 or the Deferred Plan 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
<PAGE> 12
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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 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
<PAGE> 13
13
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 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
<PAGE> 14
14
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 make the deferred compensation credits, when otherwise due, as provided in
Section 3, 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 by the Company pursuant to Section 3.3 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 (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 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 payments to be made
to the Executive during the Disability Period pursuant to this Section 5 an
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15
amount equal to all disability payments received by the Executive (but only with
respect to that portion of the Disability Period occurring during the term of
employment) from Workmen's Compensation, Social Security and disability
insurance policies maintained by the Company; provided, however, that for so
long as, and to the extent that, proceeds paid to the Executive from such
disability insurance policies are not includible in his income for federal
income tax purposes, the Company's deduction with respect to such payments shall
be equal to the product of (i) such payments and (ii) a fraction, the numerator
of which is one and the denominator of which is one less the maximum marginal
rate of federal income taxes applicable to individuals at the time of receipt of
such payments. All payments made under this Section 5 after the Disability Date
are intended to be disability payments, regardless of the manner in which they
are computed. Except as otherwise provided in this Section 5, the term of
employment shall continue during the Disability Period and the Executive shall
be entitled to all of the rights and benefits provided for in this Agreement,
except that Sections 4.2 and 4.3 shall not apply during the Disability Period
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 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
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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 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
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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.
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 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
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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, 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
<PAGE> 19
19
entity) that in turn provides Lobbying Services to a Prohibited Entity so long
as the Executive is not directly or indirectly involved in providing such
Lobbying Services to such Prohibited Entity. If the Executive's employment is
terminated pursuant to Section 4.1, 4.2 or 4.3 of this Agreement or by the
Company in breach of this Agreement or if the Executive quits in breach of this
Agreement, then (i) so long as the Executive remains on the payroll of the
Company, the last paragraph of Section 2 shall apply and (ii) if the Executive
leaves the payroll of the Company within 12 months 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 to the Executive immediately prior to
his termination of employment with the Company, plus (y) one-twelfth of the
average of the regular annual bonuses (excluding the amount of any special or
spot bonuses) received by the Executive from the Company for the two calendar
years immediately preceding the year of such termination, multiplied by (ii) the
number of months remaining in the non-compete period applicable to the Executive
under Section 9.2 at the time of such breach. The Company shall be entitled to
offset any amounts owed by the Executive to the Company under this Section 9.4
against any amounts owed by the Company to the Executive under any provision of
this Agreement or otherwise, including without limitation, amounts payable to
the Executive under Sections 4.2 or 4.3. The Company and the Executive agree
that it is impossible to determine with any reasonable accuracy the amount of
prospective damages to the Company upon a breach of Section 9.2 by the Executive
and further agree that the damages set forth in this Section 9.4 are reasonable,
and not a penalty, based upon the facts and circumstances of the parties and
with due regard to future expectations.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether
<PAGE> 20
20
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):
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.
<PAGE> 21
21
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
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
<PAGE> 22
22
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.
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
<PAGE> 23
23
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
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
<PAGE> 24
24
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> 25
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
<PAGE> 26
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> 27
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, A.6 or A.7. 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, A.6 or A.7 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> 28
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 One-Time Transfer to Deferred Plan. So long as the Executive is
an employee of the Company, the Executive shall have the right to elect at any
time, but only once during the Executive's lifetime, by written notice to the
Company to transfer to the Deferred Plan all or a portion of the Net
Transferable Balance (determined as provided in the next sentence) of the Trust
Account. If the Executive shall make such an election, the Net Transferable
Balance shall be determined as of the end of the calendar quarter following the
date of such election (unless such election is made during the ten calendar days
following the end of a calendar quarter, in which case such determination shall
be made as of the end of such preceding calendar quarter) 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 such value the amount of all outstanding
indebtedness and any other amounts payable by the Trust Account. Transfers to
the Deferred Plan shall be made in cash as promptly as reasonably practicable
after the end of such calendar quarter and the Investment Advisor (or the
Company or the Trustee if the Investment Advisor shall fail to act in a timely
manner) shall cause securities held in the Trust Account to be sold to provide
cash equal to the portion of the Net Transferable Balance of the Trust Account
selected to be transferred by the Executive. If the Executive elects to transfer
more than 75% of the Net Transferable Balance of the Trust Account to the
Deferred Plan, the Company or the Trustee shall be permitted to take such action
as they may deem reasonably appropriate, including but not limited to, retaining
a portion of such Net Transferable Balance in the Trust Account, to ensure that
the Trust Account will have sufficient assets to pay the Company the amount of
taxes payable on such sales of securities at the end of the year in which such
sales are made.
A.7 Payments. Payments of deferred compensation shall be made as
provided in this Section A.7. 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
<PAGE> 29
A-5
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,
plus any amounts that have been transferred to the Deferred Plan pursuant to
Section A.6 hereof and not theretofore distributed or deemed distributed
therefrom, 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.7 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.
<PAGE> 30
A-6
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.7.
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.7, 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.
If a transfer to the Deferred Plan has been made pursuant to Section
A.6 hereof, payments made to the Executive from the Deferred Plan (a) shall be
deemed made first from the amounts transferred to the Deferred Plan pursuant to
Section A.6 and (b) shall be deemed made first out of Account Retained Income.
Within 90 days after the end of each taxable year of the Company in
which payments are made, directly or indirectly, to the Executive from the Trust
Account or from the Deferred Plan with respect to amounts transferred to the
Deferred Plan from the Trust Account pursuant to Section A.6 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
<PAGE> 31
A-7
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 (including any amounts that have been transferred to the Deferred
Plan pursuant to Section A.6 hereof) 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, (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.7 shall
be determined in accordance with Section A.5 above.
<PAGE> 1
Exhibit 10.19
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of March 18, 1998,
effective as of January 1, 1998 (the "Effective Date"), as amended December 2,
1998, 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 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
<PAGE> 2
2
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 which shall be determined and paid out on a deferred basis
("deferred compensation") as provided in this Agreement, including Annex A
hereto. Unless the Executive shall make the election described in the last
sentence of this Section 3.3, during the term of employment, the Company shall
pay to the trustee (the "Trustee") of a Company grantor trust (the "Rabbi
<PAGE> 3
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; provided,
however, that the Executive may elect by written notice to the Company no later
than the date the Executive makes the election provided for in the first
paragraph of Section 4.2 to have such amount credited instead to the Deferred
Compensation Plan established by the Company on November 18, 1998, as the same
may be amended from time to time (as so amended, the "Deferred Plan"). 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. 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
(except that for calendar year 1999, such election shall be made no later than
January 31, 1999) to have (a) all of the payments to be made to the Rabbi Trust
pursuant to the second sentence of this Section 3.3 to be credited instead to
the Deferred Plan or (b) to have 50% of the payments to be made by the Company
pursuant to the second sentence of this Section 3.3 to be credited instead to
the Deferred Plan and the remaining 50% to be paid to the Rabbi Trust.
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 (except
that for calendar year 1999, such election shall be made no later than January
31, 1999), to defer payment of and to have the Company credit all or any portion
of the Executive's bonus for such year to either the Trust Account or the
Deferred Plan, or a combination of both, subject in the case of a deferral to
the Deferred Plan to the terms and conditions of the Deferred Plan. 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.
<PAGE> 4
4
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 (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.
<PAGE> 5
5
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
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 as
provided in Sections 3.1 and 3.3 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
<PAGE> 6
6
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 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 or
the
<PAGE> 7
7
Deferred Plan in accordance with any previous election made by the Executive 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
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 payment 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 semiannually, the use of which rate is hereby elected by
the parties hereto pursuant to Treas. Reg. Section 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
<PAGE> 8
8
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 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 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
<PAGE> 9
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 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 them are any damages hereunder by reason
of the events of termination described above which arc "contingent on a change"
(within the meaning of Section 2800(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 Into, 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
<PAGE> 10
10
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 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 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 make the deferred compensation credits, when
otherwise due, as provided in Section 3, 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 by the Company
pursuant to Section 3.3 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
<PAGE> 11
11
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 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.
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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 (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
<PAGE> 13
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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 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
<PAGE> 14
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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 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
<PAGE> 15
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 processes and other
business affairs and methods and other information not readily available to the
public, and plans for future development. The Executive further acknowledges
that the services to be performed under this Agreement are of a special, unique,
unusual, extraordinary and intellectual character. The Executive further
acknowledges that the business of the Company is international in scope, that
its products are marketed throughout the world, that the Company competes in
nearly all of its business activities with other Entities that are or could be
located in nearly any part of the world and that the nature of the Executive's
services, position and expertise are such that he is capable of competing with
the Company from nearly any location in the world. In recognition of the
foregoing, the Executive covenants and agrees:
9.1.1. The Executive shall keep secret all 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 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.
<PAGE> 16
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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 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
<PAGE> 17
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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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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
<PAGE> 19
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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.
<PAGE> 20
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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
Advisory Period - Section 13
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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 employment and
the Advisory Period shall terminate, the Executive shall leave the payroll of
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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> 23
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
<PAGE> 24
A-2
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 respects
work cooperatively with the Trustee to fulfill the
<PAGE> 25
A-3
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, A.6 or A.7. 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, A.6 or A.7 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> 26
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 One-Time Transfer to Deferred Plan. So long as the Executive is
an employee of the Company, the Executive shall have the right to elect at any
time, but only once during the Executive's lifetime, by written notice to the
Company to transfer to the Deferred Plan all or a portion of the Net
Transferable Balance (determined as provided in the next sentence) of the Trust
Account. If the Executive shall make such an election, the Net Transferable
Balance shall be determined as of the end of the calendar quarter following the
date of such election (unless such election is made during the ten calendar days
following the end of a calendar quarter, in which case such determination shall
be made as of the end of such preceding calendar quarter) 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 such value the amount of all outstanding
indebtedness and any other amounts payable by the Trust Account. Transfers to
the Deferred Plan shall be made in cash as promptly as reasonably practicable
after the end of such calendar quarter and the Investment Advisor (or the
Company or the Trustee if the Investment Advisor shall fail to act in a timely
manner) shall cause securities held in the Trust Account to be sold to provide
cash equal to the portion of the Net Transferable Balance of the Trust Account
selected to be transferred by the Executive. If the Executive elects to transfer
more than 75% of the Net Transferable Balance of the Trust Account to the
Deferred Plan, the Company or the Trustee shall be permitted to take such action
as they may deem reasonably appropriate, including but not limited to, retaining
a portion of such Net Transferable Balance in the Trust Account, to ensure that
the Trust Account will have sufficient assets to pay the Company the amount of
taxes payable on such sales of securities at the end of the year in which such
sales are made.
A.7 Payments. Payments of deferred compensation shall be made as
provided in this Section A.7. 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
<PAGE> 27
A-5
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,
plus any amounts that have been transferred to the Deferred Plan pursuant to
Section A.6 hereof and not theretofore distributed or deemed distributed
therefrom, 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.7 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.
<PAGE> 28
A-6
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.7.
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.7, 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.
If a transfer to the Deferred Plan has been made pursuant to Section
A.6 hereof, payments made to the Executive from the Deferred Plan (a) shall be
deemed made first from the amounts transferred to the Deferred Plan pursuant to
Section A.6 and (b) shall be deemed made first out of Account Retained Income.
Within 90 days after the end of each taxable year of the Company in
which payments are made, directly or indirectly, to the Executive from the Trust
Account or from the Deferred Plan with respect to amounts transferred to the
Deferred Plan from the Trust Account pursuant to Section A.6 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
<PAGE> 29
A-7
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.7, the Executive shall not be entitled to receive pursuant to
this Annex A (including any amounts that have been transferred to the Deferred
Plan pursuant to Section A.6 hereof) 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, (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.7 shall
be determined in accordance with Section A.5 above.
<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT made as of February 4, 1999, effective as of
January 11, 1999 (the "Effective Date"), between TIME WARNER INC., a Delaware
corporation (the "Company"), and Andrew J. Kaslow (the "Executive").
The Company wishes to secure the services of the Executive on a
full-time basis for the period to and including December 31, 2002 (the "Term
Date") on and subject to the terms and conditions set forth in this Agreement,
and the Executive is willing to provide such services on and subject to the
terms and conditions set forth in this Agreement. The parties therefore agree as
follows:
1. Term of Employment. The Executive's "term of employment", as this
phrase is used throughout this Agreement, shall be for the period beginning on
the Effective Date and ending on the Term Date, subject, 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 , Human Resources 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 such additional authority, functions, duties, powers and
responsibilities consistent with such position as the Board of Directors, the
Chief Executive Officer or the President of the Company may from time to time
delegate to the Executive. 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 subsidiaries of the
Company, 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 substantially 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 Executive Officer,
Vice Chairman or President of the Company, (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 in the greater New York City area, subject to
such reasonable travel as may be
<PAGE> 2
2
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 $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
<PAGE> 3
3
provided in this Agreement and in Annex A hereto. Unless the Executive shall
make the election described in the last sentence of this Section 3.3, 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: (i) during 1999, 25% of one-twelfth of
the Executive's then current Base Salary, (ii) during 2000, 35% of one-twelfth
of the Executive's then current Base Salary and (iii) during 2001 and 2002, 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 4.3.2, the Company shall pay to the
Trustee for credit to the Trust Account at the time of such payment the portion
of such payment attributable to deferred compensation provided for in this
Section 3.3; provided, however, that the Executive may elect by written notice
to the Company no later than the date the Executive makes the election provided
for in the third paragraph of Section 4.2 or the first paragraph of Section 4.3,
as the case may be, to have such amount credited instead to the Deferred
Compensation Plan established by the Company on November 18, 1998, as the same
may be amended from time to time (as so amended, the "Deferred Plan"). 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 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. 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 (except that for calendar year
1999, such election shall be made no later than January 31, 1999) to have (a)
all of the payments to be made to the Rabbi Trust pursuant to the second
sentence of this Section 3.3 to be credited instead to the Deferred Plan or (b)
to have 50% of the payments to be made by the Company pursuant to the second
sentence of this Section 3.3 to be credited instead to the Deferred Plan and the
remaining 50% to be paid to the Rabbi Trust.
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 (except
that for calendar year 1999, such election shall be made no later than January
31, 1999), to defer payment of and to have the Company credit all or any
<PAGE> 4
4
portion of the Executive's bonus for such year to either the Trust Account or
the Deferred Plan, or a combination of both, subject in the case of a deferral
to the Deferred Plan to the terms and conditions of the Deferred Plan. 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 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.
3.6 No Anticipatory Assignments. Except as specifically
contemplated in Section 12.8 or under the life insurance policies and benefit
plans referred to in Sections 7 and 8, respectively, neither the Executive, his
legal representative nor any beneficiary designated by him shall have any right,
without the prior written consent of the Company, to assign, transfer, pledge,
hypothecate, anticipate or commute to any person or Entity any payment due in
the future pursuant to any provision of this Agreement, and any attempt to do so
shall be void and shall not be recognized by the Company.
3.7 Indemnification. The Executive shall be entitled
throughout the term of employment in his capacity as an officer or director of
the Company or any of its subsidiaries or 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. As of the
date of this Agreement, the Company maintains a Directors' and Officers'
Liability and Reimbursement Insurance Policy with coverage of $50 million
relating to directors and officers of the Company and its subsidiaries.
<PAGE> 5
5
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 reasonable
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 as provided in Sections 3.1 and 3.3
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 3.5, 3.7, 8.2, 8.3 and 9 through 12 and Annex A shall survive any
termination pursuant to this Section 4.1.
<PAGE> 6
6
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 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 in writing 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 remain an employee of the Company as provided in Section
4.2.2. In such case, the following provisions shall apply:
4.2.1 After the effective date of such termination, the
Executive shall have no further obligations or liabilities to the Company
whatsoever, except that Sections 3.7, 4.5 and 4.6 and Sections 6 through 12 and
Annex A shall survive such termination, and 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 Annual Bonus (as defined
below), all or a portion of which pro rata bonus will be credited to the Trust
Account or the Deferred
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Plan in accordance with any previous election made by the Executive to defer all
or any portion of the Executive's bonus for such year pursuant to Section 3.4.
The Executive's Average Annual Bonus shall mean 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 if such calculation occurs prior to the
determination of the Executive's annual bonus for 1999, then the Average Annual
Bonus shall be the Executive's target bonus and if such calculation occurs after
the determination of the Executive's annual bonus for 1999 but prior to the
determination of the Executive's annual bonus for 2000, then the Average Annual
Bonus shall be equal to the average of the Executive's target bonus and such
1999 annual bonus.
4.2.2 After the effective date of termination pursuant
to this Section 4.2, 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
eighteen months 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 Annual Bonus 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 immediately following
sentence, equal the balance of the Base Salary, deferred compensation (which
shall be credited as provided in the third sentence of Section 3.3) and annual
bonuses (assuming no deferral pursuant to Section 3.4) the Executive would have
been entitled to receive pursuant to this Section 4.2.2 had the Executive
remained on the Company's payroll until the end of the period described in the
first sentence of this Section 4.2.2. The lump sum payment required to be made
to the Executive
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pursuant to this Section 4.2.2 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 the Executive shall cease to be an employee of the Company, 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).
Notwithstanding the foregoing, 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 4.2.2; and if the Executive accepts full-time
employment with any affiliate of the Company, then the payments provided for in
this Section 4.2.2 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
renewal 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 then applicable 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 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 remain an employee of the Company
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for a period of twelve months pursuant to Section 4.3.2 and receive the payments
provided in Section 4.3.2. In such case, the following provisions shall apply:
4.3.1 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 3.7,
4.5 and 4.6 and Sections 6 through 12 and Annex A shall survive such
termination.
4.3.2 After the effective date of termination pursuant
to this Section 4.3, 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 Annual Bonus and (iii) credits of 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 in the third 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 one-half of the sum of the
amounts described in clauses (i), (ii) and (iii) of this Section 4.3.2. 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 third 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
or the Deferred Plan as provided in the third sentence of Section 3.3) and
annual bonuses the Executive would have been entitled to receive pursuant to
this Section 4.3.2 had the Executive remained on the Company's payroll until the
end of such twelve-month period.
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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 4.3.2; 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 4.3.2 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,
voice mail, 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.
In the event the Executive's employment is terminated by the Company pursuant to
Section 4.2 or 4.3, the Company shall, in its sole discretion, consider whether
to provide the Executive with outplacement services.
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 Company shall be entitled to require the Executive to execute
and deliver to the Company a release in substantially the form attached hereto
as Annex B. If the Company so elects, it shall deliver such release to the
Executive within 10 days after 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.
<PAGE> 11
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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 and, except
as otherwise provided in this Section 4.6, any compensation earned from such
other employment may be retained by the Executive; 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 the Term Date or during the
eighteen month 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 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 or the Deferred Plan 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 or 4.3.2, 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.
<PAGE> 12
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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 make the deferred compensation credits, when
otherwise due, as provided in Section 3, 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) eighteen months
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 by the
Company pursuant to Section 3.3 as further disability benefits) and (b) the
Average Annual Bonus (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 (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 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 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
<PAGE> 13
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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 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 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, 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 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 Annual Bonus, 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.7 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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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 $2,000,000. 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. The GUL insurance program made
available by the Company provides that the Executive may assume any insurance in
effect at the time the Executive ceases to be an employee of the Company so long
as the Executive continues to pay the premiums therefor.
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 Company shall recommend that the
Compensation Committee of the Company's Board of Directors grant the Executive
options (the "Contract Options") to purchase shares of the Company's Common
Stock as follows: (a) not less than 50,000 options to be granted prior to March
31, 1999; and (b) not less than an additional 50,000 options to be granted prior
to March 31, 2000. All Contract Options granted to the Executive shall be
granted pursuant to the Company's 1997 Stock Option Plan
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or another option plan substantially similar thereto and shall be subject to the
terms and conditions of the option plan or plans under which the options are
granted. After calendar year 2000, the Executive shall be considered annually in
light of stock option grants made to other senior executives of the Company for
eligibility to receive grants of stock options in addition to the Contract
Options in the discretion of the Company.
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 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) through the Term Date 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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8.4 Payments in Lieu of Other Benefits. In the event the term
of employment and the Executive's employment with the Company is terminated
pursuant to Sections 4.1, 4.2, 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 processes and other
business affairs and methods and other information not readily available to the
public, and plans for future development. The Executive further acknowledges
that the services to be performed under this Agreement are of a special, unique,
unusual, extraordinary and intellectual character. The Executive further
acknowledges that the business of the Company is international in scope, that
its products are marketed throughout the world, that the Company competes in
nearly all of its business activities with other Entities that are or could be
located in nearly any part of the world and that the nature of the Executive's
services, position and expertise are such that he is capable of competing with
the Company from nearly any location in the world. In recognition of the
foregoing, the Executive covenants and agrees:
9.1.1 The Executive shall keep secret all 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
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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. So long as the Executive remains on the
payroll of the Company or any Subsidiary, 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").
If (x) the Executive's employment with the Company is
terminated pursuant to Section 4.1, 4.2 or 4.3 of this Agreement or the
Executive quits in breach of this Agreement and (y) if the Executive leaves the
payroll of the Company within 12 months after
<PAGE> 18
18
the effective date of any notice of termination delivered under any such
Section, then for the remainder of such 12-month period the Executive shall not
(a) become an officer, director, partner or employee of or consultant to or act
in any managerial capacity or own an equity interest in excess of one percent in
The Walt Disney Company, The News Corporation, The Seagram Company, Ltd.,
Tele-Communications Inc. or Viacom Inc. or any of their respective subsidiaries
or affiliates (each of the foregoing companies is herein referred to as a
"Prohibited Entity" but only if at the time such company is a Competitive
Entity) or (b) provide consulting, lobbying or public relations services or
activities (collectively "Lobbying Services") to or for any Prohibited Entity
whether directly or indirectly through a separate firm or entity, provided that
this clause (b) shall not prevent the Executive from becoming an officer,
employee or partner of a firm or entity (or providing Lobbying Services to a
firm or entity) that in turn provides Lobbying Services to a Prohibited Entity
so long as the Executive is not directly or indirectly involved in providing
such Lobbying Services to such Prohibited Entity.
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 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 1.6 times the average of the annual Base Salaries
paid to the Executive by the Company; provided, however, that if the Executive
shall commit a material breach of Section 9.2 in connection with or following a
termination pursuant to Section 4.1, then the Executive shall pay to the
Company, as liquidated damages, an amount equal to 35% of the average of the
annual Base Salaries paid to the Executive by the Company multiplied by the
number of whole and partial years the Executive shall have been employed 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
<PAGE> 19
19
damages set forth in this Section 9.4 are reasonable, and not a penalty, based
upon the facts and circumstances of the parties and with due regard to future
expectations.
10. Ownership of Work Product. The Executive acknowledges that
during the term of employment, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (all of the
foregoing being collectively referred to herein as "Work Product"), and that
various business opportunities shall be presented to him by reason of his
employment by the Company. The Executive acknowledges that 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):
<PAGE> 20
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.
With a copy to:
Levine Thall Plotkin & Menin LLP
1740 Broadway, 22nd Floor
New York, NY 10019
Attn: Geoffrey D. Menin
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.
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> 21
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
<PAGE> 22
22
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.
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
<PAGE> 23
23
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 4.2.2
Applicable Tax Law - Section A.5 of Annex A
Average Annual Bonus - Section 4.2.1
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
<PAGE> 24
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/ Andrew J. Kaslow
--------------------------------
Andrew J. Kaslow
<PAGE> 25
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 such security on the date of reference (or the
<PAGE> 26
A-2
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 other costs of the Company. Subject to the terms of
the Trust Agreement, the securities
<PAGE> 27
A-3
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, A.6. or A.7. 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, A.6 or A.7results 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 One-Time Transfer to Deferred Plan. So long as the Executive is
an employee of the Company, the Executive shall have the right to elect at any
time, but only
<PAGE> 28
A-4
once during the Executive's lifetime, by written notice to the Company to
transfer to the Deferred Plan all or a portion of the Net Transferable Balance
(determined as provided in the next sentence) of the Trust Account. If the
Executive shall make such an election, the Net Transferable Balance shall be
determined as of the end of the calendar quarter following the date of such
election (unless such election is made during the ten calendar days following
the end of a calendar quarter, in which case such determination shall be made as
of the end of such preceding calendar quarter) 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 such value the amount of all outstanding
indebtedness and any other amounts payable by the Trust Account. Transfers to
the Deferred Plan shall be made in cash as promptly as reasonably practicable
after the end of such calendar quarter and the Investment Advisor (or the
Company or the Trustee if the Investment Advisor shall fail to act in a timely
manner) shall cause securities held in the Trust Account to be sold to provide
cash equal to the portion of the Net Transferable Balance of the Trust Account
selected to be transferred by the Executive. If the Executive elects to transfer
more than 75% of the Net Transferable Balance of the Trust Account to the
Deferred Plan, the Company or the Trustee shall be permitted to take such action
as they may deem reasonably appropriate, including but not limited to, retaining
a portion of such Net Transferable Balance in the Trust Account, to ensure that
the Trust Account will have sufficient assets to pay the Company the amount of
taxes payable on such sales of securities at the end of the year in which such
sales are made.
A.7 Payments. Payments of deferred compensation shall be made as
provided in this Section A.7. 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
<PAGE> 29
A-5
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 plus any amounts that have been transferred to
the Deferred Plan pursuant to Section A.6 hereof and not theretofore distributed
or deemed distributed therefrom exceeds the aggregate amount of credits to the
Trust Account pursuant to Section 3 of the Agreement as of each Valuation Date
and not theretofore distributed or deemed distributed pursuant to this Section
A.7 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 end of the Disability Period in accordance with the
provisions of the first paragraph of this Section A.7.
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.
<PAGE> 30
A-6
Notwithstanding the foregoing provisions of this Section A.7, 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.
If a transfer to the Deferred Plan has been made pursuant to Section
A.6 hereof, payments made to the Executive from the Deferred Plan (a) shall be
deemed made first from the amounts transferred to the Deferred Plan pursuant to
Section A.6 and (b) shall be deemed made first out of Account Retained Income.
Within 90 days after the end of each taxable year of the Company in
which payments are made, directly or indirectly, to the Executive from the Trust
Account or from the Deferred Plan with respect to amounts transferred to the
Deferred Plan from the Trust Account pursuant to Section A.6 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 (including any amounts that have been transferred to the Deferred Plan
pursuant to Section A.6 hereof) 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> 1
Exhibit 10.38
TRANSACTION AGREEMENT NO. 2
TRANSACTION AGREEMENT NO. 2, dated as of June 23, 1998 (this
"Agreement"), among ADVANCE PUBLICATIONS, INC., a New York corporation
("Advance"), NEWHOUSE BROADCASTING CORPORATION, a New York corporation
("Newhouse"), ADVANCE/NEWHOUSE PARTNERSHIP, a New York general partnership
("Advance/Newhouse"), TIME WARNER ENTERTAINMENT COMPANY, L.P., a Delaware
limited partnership ("TWE"), PARAGON COMMUNICATIONS, a Colorado general
partnership ("Paragon"), and TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE
PARTNERSHIP, a New York general partnership (the "Partnership").
WHEREAS, Advance/Newhouse and TWE entered into a Partnership
Agreement, dated as of September 9, 1994, as amended by the First Amendment (as
defined below), pursuant to which they formed the Partnership (the "Partnership
Agreement");
WHEREAS, Advance, Newhouse, Advance/Newhouse, TWE and the
Partnership entered into a Contribution Agreement, dated as of September 9,
1994, as amended (the "Contribution Agreement"), pursuant to which each of
Advance/Newhouse and TWE contributed certain specified assets to the
Partnership;
WHEREAS, in connection with the Amended and Restated Transaction
Agreement, dated as of October 27, 1997, among Advance, Newhouse,
Advance/Newhouse, TWE, TW Holding Co. and the Partnership, TWE, Advance/Newhouse
and Paragon have entered into the First Amendment to the Partnership Agreement,
dated as of February 12, 1998 (the "First Amendment"), pursuant to which, among
other things, Paragon became a partner of the Partnership;
WHEREAS, the Partnership, TWE-A/N Texas Cable Partners General
Partner LLC, TCI Texas Cable Holdings LLC, TCI Texas Cable Inc. and Texas Cable
Partners, L.P. a Delaware limited partnership (the "TCI Joint Venture"), have
entered into a Contribution Agreement dated as of the date hereof (the "TCI
Contribution Agreement"), pursuant to which, among other things, the Partnership
has agreed to contribute to the TCI Joint Venture certain assets, including the
cable television systems (the "Designated Texas Systems") described on Schedule
1 hereto.
WHEREAS, in contemplation thereof, the parties desire to cause the
Designated Texas Systems to be contributed to the Partnership as set forth
herein;
<PAGE> 2
2
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:
1. Contribution of Designated Texas Systems.
(a) Subject to the conditions set forth in Section 3, at the
Closing (as defined below), (i) Paragon shall contribute, assign, convey,
transfer and deliver to the Partnership its right, title and interest in and to
the Designated Texas Systems and (ii) the Partnership shall assume, and agree to
pay and discharge, as and when they become due, or otherwise take subject to,
the indebtedness and other liabilities associated with the Designated Texas
Systems that are described on Schedule 2 hereto (the "Assumed Texas
Liabilities").
(b) At the Closing, (i) Paragon shall deliver instruments
executed by it and in form and substance reasonably satisfactory to the
Partnership contributing, assigning, conveying, transferring and delivering to
the Partnership its right, title and interest in and to the Designated Texas
Systems and (ii) the Partnership shall deliver instruments executed by it and in
form and substance reasonably satisfactory to Paragon by which it shall assume
and agree to pay and discharge the Assumed Texas Liabilities.
(c) In exchange for the contributions contemplated by Section
1(a), Paragon shall receive (i) Common Partnership Units (as defined in the
Partnership Agreement) having a value equal to 50% of the Net Texas Contribution
and (ii) Series B Preferred Partnership Units (as defined in the Partnership
Agreement, as amended by the Second Amendment (as defined below)) having a value
equal to 50% of the Net Texas Contribution. For purposes of the foregoing, "Net
Texas Contribution" means $60,168,000.
<PAGE> 3
3
2. Beneficial Assets and Subsidiary Beneficial Assets. If any
consent or approval is required in connection with the contribution to the
Partnership pursuant to this Agreement of any cable television system (or the
franchise pursuant to which such cable television system is operated) and such
consent or approval is not obtained prior to the Closing, then in lieu of
contributing (and pending the actual contribution of) such cable television
systems to the Partnership, Paragon will hold such cable television systems (or
cause such cable television systems to be held) for the use and benefit of the
Partnership. Such cable television systems shall be treated as Beneficial Assets
(as defined in the Contribution Agreement) or Subsidiary Beneficial Assets (as
defined in the Contribution Agreement) in either case in accordance with Section
5.8 of the Partnership Agreement and Section 6.7 of the Contribution Agreement.
In accordance with Section 6.7 of the Contribution Agreement, following the
Effective Date, Paragon shall continue to use their reasonable best efforts to
obtain any consent or approval necessary to effectuate the contribution to the
Partnership of any Beneficial Asset or Subsidiary Beneficial Asset not
contributed to the Partnership on the Effective Date, and shall take all
reasonable actions to effectuate the contribution of such Beneficial Asset or
Subsidiary Beneficial Asset after such consent or approval is obtained;
provided, however, that no cable television franchise comprising a Beneficial
Asset or Subsidiary Beneficial Asset shall be required to be contributed to the
Partnership until consents or approvals shall have been obtained with respect to
the contribution of all cable television franchises in the same cable television
system as such franchise.
3. Closing Conditions. The obligations of Paragon and the
Partnership to effect the transactions contemplated by this Agreement, shall be
subject to the satisfaction at or prior to the Closing of the following
conditions, the imposition of which are solely for the benefit of such parties
and any one or more of which may be waived by such parties in their discretion:
(a) each of TWE, Advance/Newhouse and Paragon shall have
executed and delivered an amendment to the Partnership Agreement substantially
in the form of Exhibit A (the "Second Amendment");
(b) with respect to the assumption by the Partnership of the
Assumed Texas Liabilities, each of the conditions to Assumption, as defined in
the Credit Agreement dated as of November 10, 1997 (the "Credit Agreement")
among TWX, Time Warner Companies, Inc., TWE, Turner Broadcasting System, Inc.,
the Partnership, TWI Cable Inc., the Lenders Party thereto and The Chase
Manhattan Bank, as Administrative Agent, shall have been satisfied (or waived by
the parties entitled to waive same);
<PAGE> 4
4
(c) all of the conditions to the Partnership's obligations to
consummate the transactions contemplated by the TCI Contribution Agreement shall
have been satisfied or waived in accordance with the TCI Contribution Agreement;
(d) the waiting periods (and any extensions thereof), if any,
applicable to the transactions contemplated by this Agreement under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") shall have
been terminated or shall have expired (it being understood that as soon as
practicable after the execution of this Agreement, the parties will complete and
file, or cause to be completed and filed, any notification and report required
to be filed under the HSR Act and each such filing shall request early
termination of the waiting period imposed by the HSR Act); and
(e) no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the transactions
contemplated hereby shall be in effect.
4. Advance/Newhouse Contribution. Subject to the consummation of the
transfer or beneficial assignment of the Designated Texas Systems to the
Partnership, on or prior to the fourth anniversary of the Effective Date (but in
no event prior to the date that is six months following the Effective Date),
Advance/Newhouse shall contribute to the Partnership cash in an amount equal to
the Advance/Newhouse Contribution Amount, plus interest thereon at the Interest
Rate compounded (to the extent not paid) on a quarterly basis, from the
Effective Date until the date such contribution is made in full. For the
purposes of the foregoing, (i) "Advance/Newhouse Contribution Amount" means an
amount equal to 50% of the value of the Common Partnership Units received by
Paragon in exchange for its contribution of the Designated Texas Systems and
(ii) "Interest Rate" shall mean the average interest rate applicable from time
to time to borrowings by the Partnership under the senior revolving credit
facility of the Partnership. At the Closing, Advance/Newhouse shall execute and
deliver to the Partnership a promissory note (the "Advance/Newhouse Note")
substantially in the form of Exhibit B hereto having a principal amount equal to
the Advance/Newhouse Contribution Amount, as security for its obligation to
contribute to the Partnership the Advance/Newhouse Contribution Amount.
Advance/Newhouse shall take any and all actions and execute and deliver all
documents or agreements reasonably requested by the Partnership to enable the
Partnership to perfect its security interest in the Advance/Newhouse Note.
Advance/Newhouse and the Partnership acknowledge and agree that the
Advance/Newhouse Note shall not be deemed an asset of the Partnership unless and
until the Partnership seeks to realize upon its security interest therein. In
exchange for its agreement to contribute the Advance/Newhouse Contribution
Amount,
<PAGE> 5
5
Advance/Newhouse shall receive Common Partnership Units having a value equal to
the Advance/Newhouse Contribution Amount.
5. Time and Place of Closing. Subject to the satisfaction (or
waiver) of each of the conditions set forth in Section 3, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the
Americas, New York, New York 10019 (or such other place as the parties may
mutually agree), concurrent with the closing of the transactions contemplated by
the TCI Contribution Agreement, or such other date as the parties may mutually
agree in writing. The date on which the Closing occurs is referred to herein as
the "Effective Date".
6. Indemnification by Paragon. Paragon hereby agrees to indemnify
and hold harmless the Partnership from and against any Losses (as defined in the
TCI Contribution Agreement) for which the Partnership is required to indemnify a
party pursuant to Article XI of the TCI Contribution Agreement, to the extent
arising out of, or related to, the ownership or operations of the Designated
Texas Systems prior to Closing.
7. Miscellaneous.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York (other than its rules of
conflicts of law to the extent the application of the law of another
jurisdiction would be required thereby).
(b) The parties hereto shall cooperate with each other and
their respective counsel and accountants in connection with any steps required
to be taken as part of their respective obligations under this Agreement and
will each use reasonable best efforts to perform or fulfill all conditions and
obligations to be performed or fulfilled by them under this Agreement so that
the transactions contemplated hereby shall be consummated.
(c) This Agreement may be terminated by either TWE or
Advance/Newhouse (by delivery of written notice to the other) if the TCI
Contribution Agreement is terminated in accordance with its terms prior to the
consummation of the transactions contemplated thereby.
(d) Section headings contained in this Agreement are inserted
only as a matter of convenience and reference and in no way define, limit,
extend or describe the scope of this Agreement or the intent of any provisions
hereof.
<PAGE> 6
(e) This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
ADVANCE PUBLICATIONS, INC.
By: /s/ Donald E. Newhouse
-----------------------------
Name: Donald E. Newhouse
Title: President
NEWHOUSE BROADCASTING
CORPORATION
By: /s/ Robert J. Miron
-----------------------------
Name: Robert J. Miron
Title: Vice President
ADVANCE/NEWHOUSE PARTNERSHIP
By: ADVANCE COMMUNICATION
CORP., General Partner
By: /s/ Robert J. Miron
-----------------------------
Name: Robert J. Miron
Title: President
By: NEWHOUSE BROADCASTING
CORPORATION, General Partner
By: /s/ Robert J. Miron
-----------------------------
Name: Robert J. Miron
Title: Vice President
TIME WARNER ENTERTAINMENT
COMPANY, L.P.
<PAGE> 7
By: /s/ Robert D. Marcus
----------------------------------
Name: Robert D. Marcus
Title: Vice President
PARAGON COMMUNICATIONS
By: KBL COMMUNICATIONS, INC.
General Partner
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., General Partner
By: /s/ Robert D. Marcus
------------------------------
Name: Robert D. Marcus
Title: Vice President
By: ADVANCE/NEWHOUSE
PARTNERSHIP, General Partner
By: ADVANCE COMMUNICATION
CORP., General Partner
By: /s/ Robert J. Miron
--------------------------
Name: Robert J. Miron
Title: President
By: NEWHOUSE BROADCASTING
CORPORATION, General Partner
By: /s/ Robert J. Miron
--------------------------
Name: Robert J. Miron
Title: Vice President
<PAGE> 8
Accepted and agreed to as
of the date set forth above:
MEDIAONE GROUP, INC. (as successor
in interest to U S WEST, INC. and U S WEST
MULTIMEDIA COMMUNICATIONS, INC.
under TWE's limited partnership
agreement)
By: /s/ Douglas D. Holmes
-----------------------------------
Name: Douglas D. Holmes
Title: Executive Vice President
<PAGE> 1
Exhibit 10.39
TRANSACTION AGREEMENT NO. 3
TRANSACTION AGREEMENT NO. 3, dated as of September 15, 1998 (this
"Agreement"), among ADVANCE PUBLICATIONS, INC., a New York corporation
("Advance"), NEWHOUSE BROADCASTING CORPORATION, a New York corporation
("Newhouse"), ADVANCE/NEWHOUSE PARTNERSHIP, a New York general partnership
("Advance/Newhouse"), TIME WARNER ENTERTAINMENT COMPANY, L.P., a Delaware
limited partnership ("TWE"), PARAGON COMMUNICATIONS, a Colorado general
partnership ("Paragon"), and TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE
PARTNERSHIP, a New York general partnership (the "Partnership").
WHEREAS, Advance/Newhouse and TWE entered into a Partnership
Agreement, dated as of September 9, 1994, as amended, pursuant to which they
formed the Partnership (the "Partnership Agreement");
WHEREAS, Advance, Newhouse, Advance/Newhouse, TWE and the
Partnership entered into a Contribution Agreement, dated as of September 9,
1994, as amended (the "Contribution Agreement"), pursuant to which each of
Advance/Newhouse and TWE contributed certain specified assets to the
Partnership;
WHEREAS, in connection with the Amended and Restated Transaction
Agreement, dated as of October 27, 1997, among Advance, Newhouse,
Advance/Newhouse, TWE, TW Holding Co. and the Partnership, TWE, Advance/Newhouse
and Paragon entered into the First Amendment to the Partnership Agreement, dated
as of February 12, 1998 (the "First Amendment"), pursuant to which, among other
things, Paragon became a partner of the Partnership;
WHEREAS, the Partnership, TWE-A/N Texas Cable Partners General
Partner LLC, TCI Texas Cable Holdings LLC, TCI Texas Cable Inc. and Texas Cable
Partners, L.P., a Delaware limited partnership (the "TCI Joint Venture"), have
entered into a Contribution Agreement, dated as of June 23, 1998 (the "TCI
Contribution Agreement"), pursuant to which, among other things, the Partnership
has agreed to contribute to the TCI Joint Venture certain assets;
WHEREAS, in connection with the TCI Contribution Agreement the
parties hereto entered into Transaction Agreement No. 2, dated as of June 23,
1998 (the "Second Transaction Agreement"), pursuant to which, among other
things, the parties have agreed to further amend the Partnership Agreement on
the terms set forth in the Second Amendment to the Partnership Agreement
attached thereto (the "Second Amendment");
WHEREAS, the parties hereto desire to cause the cable television
systems described on Schedule 1 hereto (the "Winston Salem Systems"), which are
<PAGE> 2
2
currently owned by Summit Cable Services of Thom-A-Lex, Inc. and Summit Cable
Services of Forsyth County, Inc. (collectively,"Summit"), to be contributed to
the Partnership on the terms set forth herein;
WHEREAS, prior to the Closing (as defined below) such Winston Salem
Systems will be transferred by Summit to Paragon and, pursuant to this
Agreement, Paragon will transfer such Winston Salem Systems to the Partnership;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:
1. Contribution of Winston Salem Systems.
(a) Subject to the conditions set forth in Section 3, at the
Closing (as defined below), (i) Paragon shall contribute, assign, convey,
transfer and deliver to the Partnership its right, title and interest in and to
the Winston Salem Systems and (ii) the Partnership shall assume, and agree to
pay and discharge, as and when they become due, or otherwise take subject to,
the indebtedness and other liabilities associated with the Winston Salem Systems
that are described on Schedule 2 hereto (the "Assumed Winston Salem
Liabilities").
(b) At the Closing, (i) Paragon shall deliver instruments
executed by it and in form and substance reasonably satisfactory to the
Partnership contributing, assigning, conveying, transferring and delivering to
the Partnership its right, title and interest in and to the Winston Salem
Systems and (ii) the Partnership shall deliver instruments executed by it and in
form and substance reasonably satisfactory to Paragon by which it shall assume
and agree to pay and discharge the Assumed Winston Salem Liabilities.
(c) In exchange for the contributions contemplated by Section
1(a), Paragon shall receive (i) Common Partnership Units (as defined in the
Partnership Agreement) having a value equal to 50% of the Net Winston Salem
Contribution and (ii) Series B Preferred Partnership Units (as defined in the
Third Amendment described below) having a value equal to 50% of the Net Winston
Salem Contribution. For purposes of the foregoing, "Net Winston Salem
Contribution" means the excess of (i) the Winston Salem System Value determined
in accordance with Section 7 over (ii) the Assumed Winston Salem Indebtedness
(as defined on Schedule 2 hereof).
<PAGE> 3
3
2. Beneficial Assets and Subsidiary Beneficial Assets. If any
consent or approval is required in connection with the contribution to the
Partnership pursuant to this Agreement of any cable television system (or the
franchise pursuant to which such cable television system is operated) and such
consent or approval is not obtained prior to the Closing, then in lieu of
contributing (and pending the actual contribution of) such cable television
systems to the Partnership, Paragon will hold such cable television systems (or
cause such cable television systems to be held) for the use and benefit of the
Partnership. Such cable television systems shall be treated as Beneficial Assets
(as defined in the Contribution Agreement) or Subsidiary Beneficial Assets (as
defined in the Contribution Agreement) in either case in accordance with Section
5.8 of the Partnership Agreement and Section 6.7 of the Contribution Agreement.
In accordance with Section 6.7 of the Contribution Agreement, following the
Effective Date, Paragon shall continue to use its reasonable best efforts to
obtain any consent or approval necessary to effectuate the contribution to the
Partnership of any Beneficial Asset or Subsidiary Beneficial Asset not
contributed to the Partnership on the Effective Date, and shall take all
reasonable actions to effectuate the contribution of such Beneficial Asset or
Subsidiary Beneficial Asset after such consent or approval is obtained;
provided, however, that no cable television franchise comprising a Beneficial
Asset or Subsidiary Beneficial Asset shall be required to be contributed to the
Partnership until consents or approvals shall have been obtained with respect to
the contribution of all cable television franchises in the same cable television
system as such franchise.
3. Closing Conditions. The obligations of Paragon and the
Partnership to effect the transactions contemplated by this Agreement, shall be
subject to the satisfaction at or prior to the Closing of the following
conditions, the imposition of which are solely for the benefit of such parties
and any one or more of which may be waived by such parties in their discretion:
(a) each of TWE, Advance/Newhouse and Paragon shall have
executed and delivered an amendment to the Partnership Agreement substantially
in the form of Exhibit A (the "Third Amendment");
(b) with respect to the assumption by the Partnership of the
Assumed Winston Salem Liabilities, each of the conditions to Assumption, as
defined in the Credit Agreement dated as of November 10, 1997 (the "Credit
Agreement") among Time Warner Inc. ("TWX"), Time Warner Companies, Inc., TWE,
Turner Broadcasting System, Inc., the Partnership, TWI Cable Inc., the Lenders
Party thereto and The Chase Manhattan Bank, as Administrative Agent, shall have
been satisfied (or waived by the parties entitled to waive same);
(c) the consents and approvals required in connection with the
contribution of the franchises pursuant to which the Winston Salem Systems are
<PAGE> 4
4
operated shall have been obtained or not required with respect to franchises
having at least 85% of the total number of subscribers in the Winston Salem
Systems, as set forth on Schedule 1 hereto;
<PAGE> 5
5
(d) the board of directors of TWX and the Management Committee
of TWE shall have approved the transactions contemplated by this Agreement;
(e) the waiting periods (and any extensions thereof), if any,
applicable to the transactions contemplated by this Agreement under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") shall have
been terminated or shall have expired (it being understood that as soon as
practicable after the execution of this Agreement, the parties will complete and
file, or cause to be completed and filed, any notification and report required
to be filed under the HSR Act and each such filing shall request early
termination of the waiting period imposed by the HSR Act); and
(f) no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the transactions
contemplated hereby shall be in effect.
4. Advance/Newhouse Contribution. Subject to the consummation of the
transfer or beneficial assignment of the Winston Salem Systems to the
Partnership, on or prior to July 1, 2000 (the "Maturity Date") (but in no event
prior to the date that is six months following the Effective Date),
Advance/Newhouse shall contribute to the Partnership cash in an amount equal to
the Advance/Newhouse Contribution Amount, plus interest thereon at the Interest
Rate compounded (to the extent not paid) on a quarterly basis, from July 1, 1998
until the date such contribution is made in full. For the purposes of the
foregoing, (i) "Advance/Newhouse Contribution Amount" means an amount equal to
50% of the value of the Common Partnership Units received by Paragon in exchange
for its contribution of the Winston Salem Systems and (ii) "Interest Rate" shall
mean a rate per annum equal to the average interest rate applicable from time to
time to borrowings by the Partnership under the senior revolving credit facility
of the Partnership plus 6.48%. In the event Advance/Newhouse contributes all or
a portion of the Advance/Newhouse Contribution Amount prior to the Maturity
Date, it shall pay to the Partnership a prepayment penalty equal to the amount
of such contribution multiplied by the product of (x) .01775% and (y) the number
of days from the date of such prepayment to and including the Maturity Date. At
the Closing, Advance/Newhouse shall execute and deliver to the Partnership a
promissory note (the "Advance/Newhouse Note") substantially in the form of
Exhibit B hereto having a principal amount equal to the Advance/Newhouse
Contribution Amount, as security for its obligation to contribute to the
Partnership the Advance/Newhouse Contribution Amount, plus interest as provided
in this Section 4. Advance/Newhouse shall take any and all actions and execute
and deliver all documents or agreements reasonably requested by the Partnership
to enable the Partnership to perfect its security interest in the
Advance/Newhouse Note. Advance/Newhouse and
<PAGE> 6
6
the Partnership acknowledge and agree that the Advance/Newhouse Note shall not
be deemed an asset of the Partnership unless and until the Partnership seeks to
realize upon its security interest therein. In exchange for its agreement to
contribute the Advance/Newhouse Contribution Amount, Advance/Newhouse shall
receive Common Partnership Units having a value equal to 50% of the value of the
Common Partnership Units received by Paragon in exchange for its contribution of
the Winston Salem Systems.
5. Time and Place of Closing. Subject to the satisfaction (or
waiver) of each of the conditions set forth in Section 3, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the
Americas, New York, New York 10019-6064 (or such other place as the parties may
mutually agree), at 10:00 a.m. (New York City time) on the last day of the month
following the date that is the fifth business day following satisfaction or
waiver of the conditions set forth in Section 3, or such earlier date as TWE may
determine (upon 2 business days' notice to Advance/Newhouse), or such later date
as the parties may mutually agree in writing. The date on which the Closing
occurs is referred to herein as the "Effective Date."
6. Representations and Warranties; Indemnification. Subject to the
Closing having occurred, each of TWX and Paragon (i) shall use commercially
reasonable efforts, at the Partnership's expense, to enforce its rights with
respect to the representations and warranties set forth in the Agreement and
Plan of Merger, dated as of September 12, 1994 (the "Acquisition Agreement"), by
and among Time Warner Inc., Summit Communications Group, Inc. and certain of the
stockholders of Summit Communications Group, Inc., to the extent such
representations and warranties relate to the Winston Salem Systems, including by
way of seeking indemnification in accordance with the terms of the Acquisition
Agreement, and (ii) shall grant to the Partnership the benefits, if any,
obtained as a result of the enforcement of such rights.
7. Valuation of Winston Salem Systems Subscribers.
(a) Winston Salem Systems. The gross value of the Winston
Salem Systems (the "Winston Salem System Value") shall equal $244,171,561, as
adjusted pursuant to Section 8.
(b) Procedure; Dispute Resolution. Within 60 days following
the Effective Date, Paragon shall deliver to the Partnership, Advance/Newhouse
and TWE a certificate (the "Valuation Certificate"), signed by an appropriate
officer of Paragon after due inquiry by such officer, but without any personal
liability to such officer, setting forth the Winston Salem System Value, the Net
Winston Salem Contribution and the calculation thereof in accordance with
Section 1(c), Section 8 and this Section 7. At the request of Advance/Newhouse
or TWE, Paragon shall provide
<PAGE> 7
7
the requesting party with prompt and complete access to all working papers and
relevant supporting documentation as well as appropriate TWX, Paragon or TWE
personnel, in each case reasonably necessary in connection with such party's
review of the information set forth in the Valuation Certificate. If either
Advance/Newhouse or TWE shall conclude that the Valuation Certificate is not
accurate, then Advance/Newhouse or TWE, as appropriate (the "Disputing Party"),
within 90 days of receipt of such Valuation Certificate, shall furnish Paragon
with a written statement of any discrepancy or discrepancies believed to exist
(the "Discrepancy Certificate"). The Disputing Party and Paragon shall attempt
jointly to resolve any discrepancy set forth in the Discrepancy Certificate
within 30 days after receipt thereof, which resolution, if achieved, shall be
binding upon all parties to this Agreement and not subject to dispute or review.
If the Disputing Party and Paragon cannot resolve the discrepancy to their
mutual satisfaction within such 30-day period, the Disputing Party and Paragon
shall, within 10 days following the expiration of such 30-day period, jointly
designate a nationally known independent certified public accounting firm to
review the Valuation Certificate, together with the Discrepancy Certificate, and
any other relevant documents. If the Disputing Party and Paragon do not agree
upon a nationally known independent certified public accounting firm in
accordance with the preceding sentence within such 10-day period, then such
review shall be performed by a nationally known independent certified public
accounting firm selected by two other nationally known certified public
accounting firms, one selected by the Disputing Party and one selected by
Paragon; provided that if one party fails to notify the other party of its
selection within five days following receipt from the other party of its
selection, the accounting firm so selected shall perform such review. The cost
of retaining such independent public accounting firm shall be borne one-half by
the Disputing Party and one-half by Paragon Such firm shall report its
conclusions and such report shall be conclusive and binding on all parties to
this Agreement and not subject to dispute or review. The Winston Salem System
Value, the Net Winston Salem Contribution, the Advance/Newhouse Contribution
Amount and the Assumed Winston Salem Liabilities, shall be adjusted, if
necessary, to reflect any such resolution.
8. Closing Adjustments. At the Closing, Paragon shall deliver to the
Partnership a certificate setting forth the estimated Paragon Adjustment Amount
(as defined below), which shall be determined in good faith by Paragon. If the
estimated Paragon Adjustment Amount is greater than zero, then the Winston Salem
System Value shall be reduced by an amount equal to such estimated Paragon
Adjustment Amount. If the estimated Paragon Adjustment Amount is less than zero,
then the Winston Salem System Value shall be increased by an amount equal to the
absolute value of such Paragon Adjustment Amount. The Valuation Certificate
delivered by Paragon pursuant to Section 7(b) shall set forth the final Paragon
Adjustment Amount and, to the extent necessary, the Winston Salem System Value,
the Net Winston Salem Contribution, the Advance/Newhouse Contribution Amount and
the Assumed Winston
<PAGE> 8
8
Salem Liabilities shall be adjusted to reflect the difference between the final
Paragon Adjustment Amount and the estimated Paragon Adjustment Amount.
The foregoing adjustments are intended to place the Partnership and
its Partners in substantially the same after-tax economic position with respect
to the Winston Salem Systems that it would have been in had the Effective Date
occurred on July 1, 1998. For purposes of the foregoing, "Paragon Adjustment
Amount" means (A) the Cash Flow (as defined below) generated by the Winston
Salem Systems during the period from July 1, 1998 to the Effective Date, less
(B) interest on the Assumed Winston Salem Indebtedness accruing from July 1,
1998 to the Effective Date (calculated at an interest rate equal to the interest
rate that would have been applicable to such Assumed Winston Salem Indebtedness
had such amounts been indebtedness of the Partnership under the senior bank
credit facility of the Partnership in effect during such period), less (C) the
Series B Priority Return (as defined in the Third Amendment) that would have
accrued from July 1, 1998 to the Effective Date on the Series B Preferred
Partnership Units issued in accordance with Section 1(c) hereof on the Effective
Date had such Series B Preferred Partnership Units been outstanding throughout
such period, less (D) an amount equal to the income taxes that would be payable
on the net income relating to the Cash Flow described in clause (A), calculated
at the Special Effective Tax Rate (as defined in the Third Amendment) assuming
for such purposes that such net income were reduced by the amount of interest
described in clause (B) and the amount of the Series B Priority Return described
in clause (C) and (ii) "Cash Flow" means, with respect to any period, (A) total
revenues less total operating, selling, general and administrative expenses,
determined in accordance with generally accepted accounting principles
(excluding expenses that do not result in the accrual of current liabilities),
generated at the cable system level, including an allocation of the management
fees payable to TWE (calculated in a manner consistent with the manner in which
such management fees would have been calculated under Section 3.1(h) of the
Partnership Agreement had such systems been owned by the Partnership during such
period) minus (B) capital expenditures, plus the negative working capital, if
any, existing at the end of such period or minus the positive working capital,
if any, existing at the end of such period. The adjustments made pursuant to
this Section 8 are already reflected in the capital account balances of the
partners of the Partnership and, accordingly, no additional adjustments to the
partners' capital account balances shall be made in respect of such adjustments.
9. Amendments to Partnership Agreement. If the Closing occurs prior
to the closing of the transactions contemplated by the Second Transaction
Agreement, the parties agree that, notwithstanding anything to the contrary
contained in the Second Transaction Agreement, the Second Amendment contemplated
thereby shall not be executed and shall not be a condition of closing under the
Second Transaction Agreement. In such event, the parties shall rename the Third
Amendment as the "Second Amendment" and shall make such other ministerial
modifications as are
<PAGE> 9
9
necessary or advisable to reflect the intent of this Agreement and the Second
Transaction Agreement.
10. Miscellaneous.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York (other than its rules of
conflicts of law to the extent the application of the law of another
jurisdiction would be required thereby).
(b) The parties hereto shall cooperate with each other and
their respective counsel and accountants in connection with any steps required
to be taken as part of their respective obligations under this Agreement and
will each use reasonable best efforts to perform or fulfill all conditions and
obligations to be performed or fulfilled by them under this Agreement so that
the transactions contemplated hereby shall be consummated.
(c) Section headings contained in this Agreement are inserted
only as a matter of convenience and reference and in no way define, limit,
extend or describe the scope of this Agreement or the intent of any provisions
hereof.
(d) This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
ADVANCE PUBLICATIONS, INC.
By: /s/ S.I. Newhouse Jr.
--------------------------------------
Name: S.I. Newhouse, Jr.
Title: Chairman/Vice President
NEWHOUSE BROADCASTING
CORPORATION
By: /s/ Robert J. Miron
--------------------------------------
Name: Robert J. Miron
Title: Vice President
<PAGE> 10
10
ADVANCE/NEWHOUSE PARTNERSHIP
By: ADVANCE COMMUNICATION
CORP., General Partner
By: /s/ Robert J. Miron
----------------------------------
Name: Robert J. Miron
Title: President
By: NEWHOUSE BROADCASTING
CORPORATION, General Partner
By: /s/ Robert J. Miron
----------------------------------
Name: Robert J. Miron
Title: Vice President
TIME WARNER ENTERTAINMENT
COMPANY, L.P.
By: /s/ Robert D. Marcus
--------------------------------------
Name:Robert D. Marcus
Title: Vice President
PARAGON COMMUNICATIONS
By: KBL COMMUNICATIONS, INC.,
Managing General Partner
By: /s/ Spencer B.Hays
----------------------------------
Name: Spencer B. Hays
Title: Vice President
<PAGE> 11
11
TIME WARNER ENTERTAINMENT -
ADVANCE/NEWHOUSE PARTNERSHIP
By: TIME WARNER ENTERTAINMENT
COMPANY, L.P., General Partner
By: /s/ Robert D. Marcus
----------------------------------
Name: Robert D. Marcus
Title: Vice President
By: ADVANCE/NEWHOUSE
PARTNERSHIP, General Partner
By: ADVANCE COMMUNICATION CORP.,
General Partner
By: /s/ Robert J. Miron
------------------------------
Name: Robert J. Miron
Title: President
By: NEWHOUSE BROADCASTING
CORPORATION, General Partner
By: /s/ Robert J. Miron
------------------------------
Name: Robert J. Miron
Title: Vice President
<PAGE> 12
12
For purposes of Section 6 only:
TIME WARNER INC.
By: /s/ Robert D. Marcus
--------------------------------------
Name: Robert D. Marcus
Title: Vice President
Accepted and agreed to as
of the date set forth above:
MEDIAONE GROUP, INC. (as successor in interest to
U S WEST, INC. and U S WEST
MULTIMEDIA COMMUNICATIONS, INC.
under TWE's limited partnership agreement)
By: /s/ Pearre Williams
-------------------------------
Name: Pearre Williams
Title: Executive Vice President
<PAGE> 1
Exhbit 10.40
FIRST AMENDMENT TO THE
PARTNERSHIP AGREEMENT OF
TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP
FIRST AMENDMENT TO THE PARTNERSHIP AGREEMENT OF TIME WARNER
ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP, dated as of February 12, 1998 (this
"Amendment") among Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), Advance/Newhouse Partnership, a New York general
partnership ("Advance/Newhouse"), and Paragon Communications, a Colorado general
partnership ("Paragon").
WHEREAS, Time Warner Entertainment-Advance/Newhouse Partnership, a New
York general partnership (the "Partnership"), was formed between TWE and
Advance/Newhouse pursuant to a Partnership Agreement dated as of September 9,
1994, as amended (the "Partnership Agreement");
WHEREAS, pursuant to an Agreement, dated as of October 27, 1997 among
Advance Publications, Inc., Newhouse Broadcasting Corporation, Advance/Newhouse,
TWE, TW Holding Co. and the Partnership (the "Transaction Agreement"), each of
TWE and TW Holding Co. has agreed to contribute to the Partnership certain
assets and Advance/Newhouse has agreed to contribute to the Partnership
additional cash;
WHEREAS, in accordance with Section 11(d) of the Transaction Agreement,
pursuant to a notice dated February 11, 1998 from TWE to Advance/Newhouse, TWE
has elected to substitute Paragon for TW Holding Co. and, thus, Paragon has
become obligated to make such contributions or beneficial assignments to the
Partnership;
WHEREAS, pursuant to Section 15.4 of the Partnership Agreement, the
Partnership Agreement may be amended by an instrument in writing signed by TWE
and Advance/Newhouse; and
WHEREAS, the parties hereto desire to enter into this Amendment to reflect
the admission of Paragon to the Partnership as a Partner and certain other
amendments in connection with the transactions contemplated by the Transaction
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
<PAGE> 2
I.
AMENDMENTS TO SECTION 1
(1) The following definitions shall be added to the Partnership
Agreement:
"Adjusted Tax Amount" means, for any year, with respect to any
Partner, the product of (i) such Partner's Percentage Interest, and (ii)
the amount determined by dividing (a) the product of (I) the Special Tax
Amount of Advance/Newhouse for such year, and (II) the Rate Differential,
by (b) the Advance/Newhouse Percentage Interest.
"Advance/Newhouse Contribution Amount" has the meaning ascribed
thereto in Section 6 of the Transaction Agreement.
"Advance/Newhouse Loss Amount" means, with respect to a Fiscal Year,
an estimate of the maximum amount of Taxable Loss of the Partnership for
such Fiscal Year that is utilizable to offset other income, whether from
the Partnership or any other source, of Advance/Newhouse or the Persons
that are the taxpayers with respect to income of Advance/Newhouse (after
taking into account the Special Income of Advance/Newhouse for such Fiscal
Year).
"Applicable Contribution Period" means, with respect to any asset
contributed to the Partnership, (a) if for Federal income tax purposes
such asset was deemed contributed to the Partnership on or before June 8,
1997, five years, (b) if for Federal income tax purposes such asset was
deemed contributed to the Partnership after June 8, 1997, seven years, and
(c) in the event that the time period specified in Section 704(c)(1)(B) of
the Code (or any successor provision) is amended, then for any asset
deemed for Federal income tax purposes to be contributed on or after the
effective date of such amendment, the time period specified in such
amendment.
"Common Tax Amount" means, for any year, with respect to any
Partner, the amount obtained by multiplying (a) the Effective Tax Rate for
such year by (b) the excess, if any, of (i) the sum of the Net Profit or
Gross Profit allocated to such Partner for such year (other than pursuant
to Sections 5.3(b)(i), 5.3(b)(ii), 5.3(b)(iii), 5.3(d)(i) and 5.3(d)(ii)),
over (ii) the Net Loss or Gross Loss allocated to such Partner for each
prior year (other than pursuant to Section 5.3(d)(ii) and 5.3(c)(ii)) but
only to the extent that the amounts set forth in this clause (ii) were not
used in reducing the Common Tax Amount for such prior year or any
intervening year.
<PAGE> 3
"Debt Shift Tax Amount" means, with respect to a restructuring
pursuant to Section 8.2, the sum of :
(i) the product of (a) the Special Effective Tax Rate for the
year in which such restructuring occurs, and (b) the excess, if any, of
(I) the amount of the Partnership's liabilities at the time of such
restructuring assumed by Advance/Newhouse pursuant to Section 8.2(b)(iv),
over (II) the sum of (x) the tax basis of Paragon in its Partnership
Interest immediately prior to such restructuring (taking into account
adjustments required by Section 704(c)(1)(B) of the Code, if any), and (y)
the amount of the Partnership's liabilities at the time of such
restructuring guaranteed by Paragon pursuant to Section 8.2(b)(iv), and
(ii) the present value, using the Discount Rate, of an amount
for each of the Remaining Years equal to the product of (a) the Special
Effective Tax Rate for the year in which such restructuring occurs, and
(b) the product of (I) (y) the amount determined under clause (i)(b) above
divided by (z) the number of Remaining Years, and (II) the Tax Adjustment
Percentage for such year of restructuring.
"Determined Percentage" means either (a) 39% if TWE delivers a
Restructuring Notice at any time or Advance/Newhouse delivers a
Restructuring Notice after July 1, 2000, unless the Winston-Salem, North
Carolina cable system owned, as of the date of the Transaction Agreement,
by Summit Communications Group Inc. is included among the assets to be
allocated to one of the Asset Pools, such system having been transferred
to the Partnership at a mutually agreeable price or such transfer at such
price being probable during the time frame set forth in Section 8, or (b)
35% (in all other instances).
"Discount Rate" means the product of (a) the sum of (i) the rate on
outstanding obligations of the United States with remaining periods to
maturity equal to the weighted average of the remaining useful lives at
the time of determination of the assets contributed to the Partnership and
(ii) one and one-half percentage points, and (b) the excess of one (1)
over the effective combined rate of Federal, state and local income and
franchise tax applicable to corporations at the time of determination,
assuming the combined state and local income and franchise tax is 2.5%
(after benefit of Federal taxes).
"Effective Date" has the meaning ascribed thereto in Section 6 of
the Transaction Agreement.
- 3 -
<PAGE> 4
"Excess Debt Shift Tax Amount" means, with respect to a
restructuring pursuant to Section 8.2 and with respect to the assets
contributed by Paragon and specified in calculating the Restructuring
Deferred Tax Amount, the excess, if any, of (a) the Debt Shift Tax Amount
over (b) the product of (y) the Special Effective Tax Rate for the year in
which such restructuring occurs, and (z) the sum of (1) the Special Income
attributable to such assets for each Fiscal Year (or portion thereof)
subsequent to such restructuring (assuming that such restructuring did not
occur), and (2) the Maximum Income Amount for each such subsequent Fiscal
Year (or portion thereof) based on the Special Income determined in clause
(1).
"Final Determination" means (i) a decision, judgment, decree or
other order by a court of original jurisdiction which has become final
(i.e., the time for filing an appeal shall have expired)), (ii) a closing
agreement made under Section 7121 of the Code or any other settlement
agreement entered into in connection with an administrative or judicial
proceeding, provided, however, that any refund claim shall be deemed
approved without regard to any required approval by the Joint Committee on
Taxation, (iii) the expiration of the time for instituting a claim for
refund, or if a claim was filed, the expiration of the time for
instituting suit with respect thereto or (iv) in any case where judicial
review shall be unavailable, a decision, judgment, decree or other order
of an administrative official or agency which has become final.
"Gross Loss" means, with respect to any year, the items of deduction
or loss of the Partnership computed on the same basis that Net Profit and
Net Loss are computed for purposes of this Agreement.
"Gross Profit" means, with respect to any year, the items of income
and gain of the Partnership computed on the same basis that Net Profit and
Net Loss are computed for purposes of this Agreement.
"Maximum Income Amount" means, for any year, with respect to any
Partner, an amount equal to the product of (i) the Tax Adjustment
Percentage for such year, and (ii) the Special Income of such Partner for
such year.
"Negative Put Deferred Tax Amount" means, with respect to a sale of
Advance/Newhouse Common Partnership Units pursuant to Section 9, the
product of (x) the Advance/Newhouse Percentage Interest at the time of
such
- 4 -
<PAGE> 5
sale and (y) the sum of the amounts determined as follows with respect to
each of TWE and Paragon with respect to the assets of the Partnership at
the time of the Advance/Newhouse Common Put Closing that were contributed
by TWE and Paragon, respectively:
(a) the product of (i) the Special Effective Tax Rate
for the year in which such sale occurs, and (ii) the sum of (A) the
Special Income attributable to such assets for the Fiscal Year (or
portion thereof) in which such sale occurs, (B) the excess of (y)
the Maximum Income Amount of such Fiscal Year (or portion thereof)
(based on the Special Income determined in clause (A)) and for all
prior years, over (z) the Net Profit allocated to such Partner
pursuant to Section 5.3(b)(iii) for such Fiscal Year (or portion
thereof) and all prior Fiscal Years, and (C) to the extent any Net
Loss or Gross Loss allocated to such Partner for any prior year was
used to reduce such Partner's Special Tax Amount for any prior year
(pursuant to clause (b)(ii)(y) of the definition of Special Tax
Amount) and was not subsequently used to increase such Partner's
Special Tax Amount (pursuant to clause (b)(i)(z) of such
definition), an amount (expressed as a positive number) equal to the
sum of such Net Loss and Gross Loss, and
(b) the present value, using the Discount Rate, of an
amount for each Fiscal Year (or portion thereof) subsequent to such
sale equal to the product of (I) the Special Effective Tax Rate of
such Partner for the year in which such sale occurs, and (II) the
sum of (A) the Special Income attributable to such assets for each
such subsequent Fiscal Year (or portion thereof), and (B) the
Maximum Income Amount for each such subsequent Fiscal Year (or
portion thereof) based on the Special Income determined in clause
(A)).
"Net Tax Amount" means, for any year, with respect to any Partner,
the sum of (i) the Common Tax Amount of such Partner for such year, (ii)
the Special Tax Amount of such Partner for such year, and (iii) the
Adjusted Tax Amount of such Partner for such year.
"Paragon" means Paragon Communication, a Colorado general
partnership (or any successor).
- 5 -
<PAGE> 6
"Paragon 704(c)(1)(B) Tax Amount" means, on a restructuring and with
respect to assets described in Section 8.2(b)(vii)(A)(I), the sum of:
(i) the product of (a) the Special Effective Tax Rate for the
year in which such restructuring occurs, and (b) the gain recognized as a
result of such restructuring by Paragon with respect to such assets
pursuant to Section 704(c)(1)(B) of the Code (taking into account Section
704(c)(2) and assuming, for purposes of calculating such gain, that the
fair market value of such assets is equal to their Gross Asset Value at
the time of such restructuring), and
(ii) the present value, using the Discount Rate, of an amount
for each of the Remaining Years equal to the product of (a) the Special
Effective Tax Rate for the year in which such restructuring occurs, and
(b) the product of (I) (y) the amount determined under clause (i)(b) above
divided by (z) the number of Remaining Years, and (II) the Tax Adjustment
Percentage for such year of restructuring.
"Paragon Percentage Interest" means a fraction (expressed as a
percentage) the numerator of which is the number of Common Partnership
Units owned by Paragon and the denominator of which is the total number of
Common Partnership Units owned by all Partners.
"Paragon Preferred Capital Contribution" means, with respect to
Paragon, a Capital Contribution by Paragon pursuant to this Agreement
(other than cash deemed contributed in exchange for Preferred Partnership
Units pursuant to Section 4.1(e)) of assets having a fair market value of
$1,000 for each Paragon Preferred Partnership Unit issued to Paragon
pursuant to Section 4.2(b).
"Paragon Preferred Partnership Unit" means Paragon's right to
distributions in an amount equal to the Priority Return allocable to the
Paragon Preferred Capital Contribution of $1,000 and the right to a return
of such Paragon Preferred Capital Contribution in redemption thereof, all
of which shall be payable in accordance with Section 5, together with all
allocations of income attributable thereto, as specified in Section 5.
"Paragon Redemption Event" means the delivery of a written notice by
Paragon to the Partnership indicating that it wishes the Partnership to
redeem its Preferred Partnership Units.
- 6 -
<PAGE> 7
"Percentage Interests" means the Advance/Newhouse Percentage
Interest, the TWE Percentage Interest and the Paragon Percentage Interest.
"Positive Put Deferred Tax Amount" means, with respect to a sale of
Advance/Newhouse Common Partnership Units pursuant to Section 9, the
product of (x) one (1) minus the Advance/Newhouse Percentage Interest at
the time of such sale and (y) the sum of the amounts determined as follows
with respect to the assets of the Partnership at the time of the
Advance/Newhouse Common Put Closing that were contributed by
Advance/Newhouse:
(a) the product of (i) the Special Effective Tax Rate
for the year in which such sale occurs, and (ii) the sum of (A) the
Special Income attributable to such assets for the Fiscal Year (or
portion thereof) in which such sale occurs, (B) the excess of (y)
the Maximum Income Amount of such Fiscal Year (or portion thereof)
(based on the Special Income determined in clause (A)) and for all
prior years, over (z) the Net Profit allocated to such Partner
pursuant to Section 5.3(b)(iii) for such Fiscal Year (or portion
thereof) and all prior Fiscal Years, and (C) to the extent any Net
Loss or Gross Loss allocated to such Partner for any prior year was
used to reduce such Partner's Special Tax Amount for any prior year
(pursuant to clause (b)(ii)(y) of the definition of Special Tax
Amount) and was not subsequently used to increase such Partner's
Special Tax Amount (pursuant to clause (b)(i)(z) of such
definition), an amount (expressed as a positive number) equal to the
sum of such Net Loss and Gross Loss, and
(b) the present value, using the Discount Rate, of an
amount for each Fiscal Year (or portion thereof) subsequent to such
sale equal to the product of (I) the Special Effective Tax Rate of
such Partner for the year in which such sale occurs, and (II) the
sum of (A) the Special Income attributable to such assets for each
such subsequent Fiscal Year (or portion thereof), and (B) the
Maximum Income Amount for each such subsequent Fiscal Year (or
portion thereof) based on the Special Income determined in clause
(A)).
"Priority Return" means, with respect to each outstanding Paragon
Preferred Partnership Unit, a sum equal to 10 1/4 percent for the actual
number of days in the period for which the Priority Return is being
calculated, cumula-
- 7 -
<PAGE> 8
tive and compounded annually, on the amount of $1,000 plus any accrued and
unpaid Priority Return with respect to such Paragon Preferred Partnership
Unit, commencing on the Effective Date.
"Rate Differential" means, for any year, (i) the excess, if any, of
(a) the Effective Tax Rate for such year, over (b) the Special Effective
Tax Rate for such year, divided by (ii) the Special Effective Tax Rate for
such year.
"Remaining Years" means the number of years following a
restructuring pursuant to Section 8 equal to the remaining useful lives as
of the time of such restructuring of the assets contributed to the
Partnership.
"Restructuring Deferred Tax Amount" means, on a restructuring
pursuant to Section 8.2 and with respect to the assets specified in such
Section, and (i) with respect to Paragon:
(1) if there is an Excess Debt Shift Tax Amount, the excess
of:
(a) the product of (I) the Special Effective Tax Rate
for the year in which such restructuring occurs, and (II) the sum of
(A) the Special Income, attributable to such assets that were
contributed by Paragon for the Fiscal Year (or portion thereof) in
which such restructuring occurs (assuming that such restructuring
did not occur), (B) the excess of (y) the Maximum Income Amount for
such Fiscal Year (or portion thereof) (based on the Special Income
determined in clause (A)) and the Maximum Income Amount of Paragon
for all prior years with respect to all assets contributed by
Paragon, over (z) the Net Profit allocated to Paragon pursuant to
Section 5.3(b)(iii) for such Fiscal Year (or portion thereof) and
all prior Fiscal Years, and (C) to the extent any Net Loss or Gross
Loss allocated to Paragon for any prior year was used to reduce such
Partner's Special Tax Amount for any prior year (pursuant to clause
(b)(ii)(y) of the definition of Special Tax Amount) and was not
subsequently used to increase such Partner's Special Tax Amount
(pursuant to clause (b)(i)(z) of such definition), an amount
(expressed as a positive number) equal to the sum of such Net Loss
and Gross Loss, over
(b) such Excess Debt Shift Tax Amount; or
- 8 -
<PAGE> 9
(2) if there is not an Excess Debt Shift Tax Amount, the sum
of:
(a) the product of (I) the Special Effective Tax Rate
for the year in which such restructuring occurs, and (II) the sum of
(A) the Special Income, attributable to such assets that were
contributed by Paragon, for the Fiscal Year (or portion thereof) in
which such restructuring occurs (assuming that such restructuring
did not occur), (B) the excess of (y) the Maximum Income Amount for
such Fiscal Year (or portion thereof) (based on the Special Income
determined in clause (A)) and the Maximum Income Amount of Paragon
for all prior years with respect to all assets contributed by
Paragon, over (z) the Net Profit allocated to Paragon pursuant to
Section 5.3(b)(iii) for such Fiscal Year (or portion thereof) and
all prior Fiscal Years, and (C) to the extent any Net Loss or Gross
Loss allocated to Paragon for any prior year was used to reduce such
Partner's Special Tax Amount for any prior year (pursuant to clause
(b)(ii)(y) of the definition of Special Tax Amount) and was not
subsequently used to increase such Partner's Special Tax Amount
(pursuant to clause (b)(i)(z) of such definition), an amount
(expressed as a positive number) equal to the sum of such Net Loss
and Gross Loss, and
(b) the present value, using the Discount Rate, of an
amount for each Fiscal Year (or portion thereof) subsequent to such
restructuring equal to the excess of (y) the product of (I) the
Special Effective Tax Rate for the year in which such restructuring
occurs, and (II) the sum of (A) the Special Income, attributable to
such assets that were contributed by Paragon, for each such
subsequent Fiscal Year (or portion thereof) (assuming that such
restructuring did not occur), and (B) the Maximum Income Amount for
each such subsequent Fiscal Year (or portion thereof) based on the
Special Income determined in clause (A)), over (z) for each such
subsequent Fiscal Year (or portion thereof), a proportionate share
(based on the ratio of the Special Income for such Fiscal Year (or
portion thereof) to total Special Income for all such subsequent
Fiscal Years (or portion thereof) of the Debt Shift Tax Amount; and
(ii) with respect to each of TWE and Advance/Newhouse, the sum of:
- 9 -
<PAGE> 10
(a) the product of (I) the Special Effective Tax Rate
for the year in which such restructuring occurs, and (II) the sum of
(A) the Special Income, attributable to such assets that were
contributed by such Partner, for the Fiscal Year (or portion
thereof) in which such restructuring occurs (assuming that such
restructuring did not occur), (B) the excess of (y) the Maximum
Income Amount for such Fiscal Year (or portion thereof) (based on
the Special Income determined in clause (A)) and the Maximum Income
Amount of such Partner for all prior years with respect to all
assets contributed by such Partner, over (z) the Net Profit
allocated to such Partner pursuant to Section 5.3(b)(iii) for such
Fiscal Year (or portion thereof) and all prior Fiscal Years, and (C)
to the extent any Net Loss or Gross Loss allocated to such Partner
for any prior year was used to reduce such Partner's Special Tax
Amount for any prior year (pursuant to clause (b)(ii)(y) of the
definition of Special Tax Amount) and was not subsequently used to
increase such Partner's Special Tax Amount (pursuant to clause
(b)(i)(z) of such definition), an amount (expressed as a positive
number) equal to the sum of such Net Loss and Gross Loss, and
(b) the present value, using the Discount Rate, of an
amount for each Fiscal Year (or portion thereof) subsequent to such
restructuring equal to the product of (I) the Special Effective Tax
Rate of such Partner for the year in which such restructuring
occurs, and (II) the sum of (A) the Special Income, attributable to
such assets that were contributed by such Partner, for each such
subsequent Fiscal Year (or portion thereof) (assuming that such
restructuring did not occur), and (B) the Maximum Income Amount for
each such subsequent Fiscal Year (or portion thereof) based on the
Special Income determined in clause (A)).
"Special Effective Tax Rate" means, at any time, and from time to
time, the effective combined rate of Federal, state and local income and
franchise tax that the Partnership would be required to pay, if it were a
corporation, on its taxable income for such year, for Federal income tax
purposes.
"Special Income" means, for any year, with respect to any Partner,
the sum of:
- 10 -
<PAGE> 11
(i) the excess, if any, of (a) such Partner's distributive share of
Depreciation and loss determined as provided in clause (iv) of the
definition of Net Profit and Net Loss for such year, over (b) such
Partner's distributive share of depreciation, amortization, and other cost
recovery deductions and loss for such year for Federal income tax
purposes, to the extent such excess results from a difference between the
basis for Federal income tax purposes of any assets contributed to the
Partnership by any Partner and the Gross Asset Value of such assets;
(ii) the excess, if any, of (a) such Partner's distributive share of
gain for Federal income tax purposes for such year, over (b) such
Partner's distributive share of gain determined as provided in clause (iv)
of the definition of Net Profit and Net Loss for such year, to the extent
such excess results from a difference between the basis for Federal income
tax purposes of any assets contributed to the Partnership by any Partner
and the Gross Asset Value of such assets;
(iii) any remedial items allocated to such Partner pursuant to
Treasury Regulations Section 1.704-3(d) for such year; and
(iv) any income or loss for Federal income tax purposes recognized
by such Partner with respect to any of such Partner's Subsidiary
Beneficial Assets (or recognized by an Affiliate of such Partner which
holds any of such Partner's Subsidiary Beneficial Assets).
"Special Tax Amount" means, for any year, with respect to any
Partner, the amount obtained by multiplying (a) the Special Effective Tax
Rate for such year, by (b) the excess, if any, of (i) the sum of (x) the
sum of the Net Profit and Gross Profit allocated to such Partner pursuant
to Sections 5.3(b)(iii) and 5.3(d)(ii) for such year, (y) the Special
Income, if any, allocated to such Partner for such year, and (z) to the
extent that the Common Tax Amount of such Partner for such year is reduced
by any Net Loss or Gross Loss allocated to such Partner for any prior year
which was used to reduce such Partner's Special Tax Amount for any prior
year, an amount (expressed as a positive number) equal to the sum of such
Net Loss and Gross Loss, over (ii) the sum of (x) the Gross Loss allocated
to such Partner pursuant to Section 5.3(d)(ii) for the current year, and
(y) the Net Loss or Gross Loss allocated to such Partner for the current
or prior year (other than pursuant to Section 5.3(c)(ii) and 5.3(d)(ii))
but only to the extent that the amounts set
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forth in this clause (y) were not used in reducing the Common Tax Amount
for the current year or the Special Tax Amount for any prior year.
"Spin-Off Restructuring Notice" means a Restructuring Notice
delivered by Advance/Newhouse no later than ninety (90) days following a
change in the Chief Executive Officer of the Time Warner Cable Division,
or the installment as the Chief Executive Officer of TWE or its corporate
successor of someone other than a member at such time of the senior
management of TWX or the Chief Executive Officer of the Time Warner Cable
Division, as contemplated by a "spin off" or other distribution of TWE or
its corporate successor to the shareholders of TWX; provided as to such a
change in management (following such a spin-off or other distribution)
prior to April 1, 2000, the ninety (90) days period shall be deemed to
begin on April 1, 2000.
"Tax Adjustment Percentage" means, with respect to any year, the
amount obtained by dividing (A) the Special Effective Tax Rate for such
year by (B) the excess of one (1) over such Special Effective Tax Rate.
"Taxable Income" or "Taxable Loss" means net income or loss of the
Partnership as determined for Federal income tax purposes.
"Transaction Agreement" means the Agreement, dated as of October 27,
1997, among Advance, Newhouse, Advance/Newhouse, TWE, TW Holding Co. and
the Partnership.
"TWE 704(c)(1)(B) Tax Amount" means, on a restructuring and with
respect to assets described in Section 8.2(b)(vii)(A)(II), the sum of:
(i) the product of (a) the Special Effective Tax Rate for the
year in which such restructuring occurs, and (b) the gain recognized as a
result of such restructuring by TWE with respect to such assets pursuant
to Section 704(c)(1)(B) of the Code (taking into account Section 704(c)(2)
and assuming, for purposes of calculating such gain, that the fair market
value of such assets is equal to their Gross Asset Value at the time of
such restructuring), and
(ii) the present value, using the Discount Rate, of an amount
for each of the Remaining Years equal to the product of (a) the Special
Effective Tax Rate for the year in which such restructuring occurs, and
(b) the product of
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<PAGE> 13
(I) (y) the amount determined under clause (i)(b) above divided by (z) the
number of Remaining Years, and (II) the Tax Adjustment Percentage for such
year of restructuring.
(2) The following defined terms shall be deleted in their entirety and the
following substituted therefor:
"Advance/Newhouse Percentage Interest" means a fraction (expressed
as a percentage) the numerator of which is the number of Common
Partnership Units owned by Advance/Newhouse and the denominator of which
is the total number of Common Partnership Units owned by all Partners.
"Capital Account" means an account to be maintained for each Partner
which, subject to any contrary requirements of the Code, shall equal the
aggregate value of such Partner's Partnership Interest on the Effective
Date,
(A) increased by (i) the amount of cash contributed by such Partner
to the Partnership after the Effective Date (not including interest paid
by such Partner pursuant to Section 4.1(b)(ii), Section 5.1(a)(iii)(z) or
Section 5.1(b)(iii)(z) and not including cash deemed contributed by any
Partner pursuant to Section 4.1(e)); (ii) the fair market value without
regard to Code Section 7701(g) of property contributed by such Partner to
the Partnership after the Effective Date (net of liabilities secured by
such contributed property that the Partnership is considered to assume or
take subject to under Code Section 752) (treating any Subsidiary
Beneficial Assets and other Beneficial Assets as if they had been
contributed on the Initial Closing Date or the Effective Date, as
applicable, and disregarding any subsequent actual contribution of such
Subsidiary Beneficial Assets and other Beneficial Assets and any cash flow
related thereto); (iii) allocations to it after the Effective Date of
Preferred Profit, Gross Profit and Net Profit pursuant to Section 5; (iv)
the amount of any liabilities of the Partnership that are assumed by such
Partner pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(c); and
(v) other additions made in accordance with the Code and the provisions of
Treasury Regulations Section 1.704-1(b)(2)(iv); and
(B) decreased by (i) the amount of cash distributed to such Partner
by the Partnership after the Effective Date; (ii) allocations to the
Partner after the Effective Date of Preferred Loss, Gross Loss and Net
Loss pursuant to Section 5; (iii) the fair market value without regard to
Code
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<PAGE> 14
Section 7701(g) of property distributed to such Partner by the Partnership
after the Effective Date (net of liabilities secured by such distributed
property or that such Partner is considered to assume or take subject to
under Code Section 752) (taking into account any deemed distributions of
Subsidiary Beneficial Assets and other Beneficial Assets); (iv) the amount
of such Partner's individual liabilities that are assumed by the
Partnership after the Effective Date pursuant to Treasury Regulations
Section 1.704-1(b)(2)(iv)(c); and (v) other deductions made in accordance
with the Code and the provisions of Treasury Regulations Section
1.704-1(b)(2)(iv).
Notwithstanding the foregoing, for purposes of determining Capital
Accounts, (x) all of the adjustments, contributions or distributions
required pursuant to the Contribution Agreement to be made subsequent to
the Initial Closing Date and the contribution of TWE pursuant to Section
4.1(c)(ii) hereof shall be treated as if they had been made on the Initial
Closing Date, (y) the Paragon Adjustment Amount and the TWE Adjustment
Amount (as such terms are defined in Section 11 of the Transaction
Agreement) shall be treated as if they had been made on the Effective
Date, and (z) such adjustments, contributions, distributions, and
Adjustment Amounts shall not give rise to any adjustments to Capital
Account balances or redetermination of amounts contributed by or
distributed to any Partner.
"Capital Contribution" means either a Common Capital Contribution, a
Preferred Capital Contribution or a Paragon Preferred Capital
Contribution.
"Common Capital Contribution" means, (i) with respect to TWE and
Advance/Newhouse, the amount of cash contributed by such Partner to the
Partnership pursuant to this Agreement (other than cash deemed contributed
in exchange for Preferred Partnership Units pursuant to Section 4.1(e))
plus the fair market value without regard to Code Section 7701(g) of
property contributed by such Partner to the Partnership pursuant to this
Agreement (net of liabilities that are secured by such contributed
property or that either Partner is considered to assume under Code Section
752); and (ii) with respect to Paragon, the excess of (A) the amount of
cash contributed by such Partner to the Partnership pursuant to this
Agreement (other than cash deemed contributed in exchange for Preferred
Partnership Units pursuant to Section 4.1(e)) plus the fair market value
without regard to Code Section 7701(g) of property contributed by such
Partner to the Partnership pursuant to
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<PAGE> 15
this Agreement (net of liabilities that are secured by such contributed
property or that either Partner is considered to assume under Code Section
752), over (B) the Paragon Preferred Capital Contribution; and (iii) with
respect to all Partners treating any Subsidiary Beneficial Assets and
other Beneficial Assets as if they had been contributed on the Initial
Closing Date or the Effective Date, as applicable, and disregarding any
subsequent actual contribution of such Subsidiary Beneficial Assets or
other Beneficial Assets and any cash flow related thereto).
"Depreciation" means, for each fiscal period, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable
with respect to an asset for such fiscal period, except that if the Gross
Asset Value of an asset differs from its adjusted basis for federal income
tax purposes Depreciation shall be determined as set forth in Treasury
Regulations Section 1.704-3(d).
"Partners" means Advance/Newhouse, TWE, and Paragon, and their
respective successors-in-interest as Partners under this Agreement, and
"Partner" means any of such Partners.
"Partnership Unit" means either a "Common Partnership Unit," a
"Preferred Partnership Unit," or a "Paragon Preferred Partnership Unit,"
as defined in this Agreement.
"TWE Percentage Interest" means a fraction (expressed as a
percentage) the numerator of which is the number of Common Partnership
Units owned by TWE and the denominator of which is the total number of
Common Partnership Units owned by all Partners.
II.
ADMISSION OF PARAGON
Upon the execution of this Amendment by the parties hereto, Paragon shall
become a Partner of the Partnership and shall become a party to, and be bound by
the applicable terms and provisions of, the Partnership Agreement, as amended
hereby, as if it were an original party thereto, and each of Advance/Newhouse
and TWE shall be deemed to have consented (in accordance with Section 3.2(d) of
the Partnership Agreement) to the admission of Paragon as a Partner upon the
terms and conditions set forth herein.
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III.
AMENDMENT TO SECTION 3
Section 3.1(c) shall be deleted in its entirety and the following
substituted therefor:
(c) Executive Committee. The Managing Partner also shall act upon
the advice of a committee (the "Executive Committee") which shall be
composed of from three to five individuals. The Executive Committee shall
oversee the management and operations of the Partnership, shall make
significant business decisions of the Partnership (including without
limitation those set forth in Section 3.2 hereof) and shall participate
regularly in the overall supervision, direction and control of the
Partnership and its employees. Up to two of the members of the Executive
Committee shall be designated from time to time by TWE, up to two of the
members of the Executive Committee shall be designated from time to time
by Advance/Newhouse, and one of the members of the Executive Committee
shall be designated from time to time by Paragon Any member of the
Executive Committee may be removed and replaced at any time, and from time
to time, by the Partner that originally designated such member. The
Executive Committee shall hold regular meetings quarterly or at more
frequent intervals as determined by the Executive Committee. At each
meeting of the Executive Committee, the Managing Partner shall report on
its ongoing efforts to acquire on behalf of the Partnership, by swap or
otherwise, cable television systems located within the Preferred Cluster
Areas. Any Partner, or at least two members of the Executive Committee,
may call a special meeting of the Executive Committee upon no less than 48
hours' notice to each member. The designees of each of the Partners on the
Executive Committee shall in the aggregate have voting power proportional
to their respective Percentage Interests. Except as otherwise provided
herein (including without limitation Section 3.2 hereof) or by applicable
law, the affirmative vote (or written consent) of a majority of the voting
power of all members of the Executive Committee (whether or not present)
shall constitute action by the Executive Committee. Regular or special
meetings of the Executive Committee may be held in person or
telephonically. Each member of the Executive Committee entitled to vote at
any meeting of the Executive Committee may authorize another person to act
for him by proxy (provided that such proxy must be signed by such member
or his attorney-in-fact and shall be revocable by such member at any time
prior to such meeting).
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<PAGE> 17
IV.
AMENDMENTS TO SECTIONS 4 AND 5
Sections 4 and 5 of the Partnership Agreement shall be deleted in their
entirety and new Sections 4 and 5 in the form attached hereto as Exhibit A shall
be substituted therefor.
V.
AMENDMENT TO SECTION 6
Section 6.1(a)(iii)(A) shall be deleted in its entirety and the following
substituted therefor:
(A) a transfer of all of a Partner's Partnership Interest (1) to a
Newhouse Family Member, or to an Affiliate of Advance/Newhouse so long as
at least 80% of the equity of such Affiliate is owned directly or
indirectly by one or more Newhouse Family Members, in the case of
Advance/Newhouse, (2) to a Wholly-Owned Affiliate of TWE, in the case of
TWE, or (3) to TWE, TWX or a Wholly-Owned Affiliate of TWE or TWX, in the
case of Paragon
VI.
AMENDMENT TO SECTION 8
Section 8.2 shall be deleted in its entirety and the following substituted
therefor:
1.2 Restructuring of Partnership.
(1) Upon delivery of a Restructuring Notice in accordance with
Section 8.1 above, Advance/Newhouse and TWE shall negotiate in good faith the
restructuring of the Partnership in a manner intended to minimize federal, state
and local taxes. Within 60 days after delivery of a Restructuring Notice, upon
the request of any Partner, the Managing Partner shall provide all Partners with
a report listing all assets of the Partnership, including all projects in
development and/or for which the Partnership has been charged.
(2) If, after a period of three months from the date of delivery of
the Restructuring Notice, Advance/Newhouse and TWE have failed to agree on the
terms of the restructuring of the
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<PAGE> 18
Partnership, the Partnership shall be restructured by the withdrawal of
Advance/Newhouse from the Partnership as follows:
(1) Within 15 days following the expiration of such
three-month period, (A) if at such time Advance/Newhouse holds Preferred
Partnership Units the Partnership shall distribute the Preferred Investment Pool
attributable to such Preferred Partnership Units in redemption of all Preferred
Partnership Units then held by Advance/Newhouse, (B) the Partnership shall
calculate the "Restructuring Indebtedness Amount" (as defined in Section
8.2(b)(v) and the "Excess Tax Amount" (as defined in Section 8.2(b)(vi)) of
Advance/Newhouse, if any, (C) subject to obtaining any required governmental or
other third-party consents or approvals, the Partnership shall distribute 33_%
of the Pro Rata Assets (as defined below) to Advance/Newhouse, and (D) TWE shall
(1) divide the remaining assets (and related liabilities) of the Partnership
into three pools (the "Asset Pools") which shall meet the Asset Pool Criteria
(as defined below) but which shall in any event be of equal value (in TWE's
judgment), and (2) deliver a written notice to Advance/Newhouse setting forth
the cable television systems and other assets contained in each such Asset Pool
(the "Asset Pool Notice"). To the extent physically possible without impairing
their inherent operability, assets of the Partnership which relate to more than
one cable television system or to the Partnership as a whole shall be allocated
either equally to every pool or on a 2/3:1/3 basis to the Partnership and
Advance/Newhouse, respectively. Prior to making any distribution under this
Section 8.2(b) or delivering the Asset Pool Notice, the Partnership or TWE, as
applicable, shall contribute the assets comprising all developmental projects in
which the Partnership has an interest and/or for which the Partnership has been
charged (subject to the associated liabilities) to a separate legal entity or
otherwise reconstitute such assets (subject to the associated liabilities) in a
form (on terms agreed upon by Advance/Newhouse, TWE, and Paragon) that allows an
allocation of such assets (subject to the associated liabilities) to
Advance/Newhouse and the Partnership as described in the previous sentence. For
the purposes of the foregoing, "Pro Rata Assets" shall mean those assets of the
Partnership, including without limitation those Beneficial Assets and Subsidiary
Beneficial Assets, that are readily divisible into three identical pools without
any material diminution in the aggregate value of such assets resulting from
such division (such as stock, partnership interests and similar investments).
For purposes of the foregoing, "Asset Pool Criteria" shall mean (I) no Preferred
Cluster Area may be allocated to more than one Asset Pool, except in accordance
with the following: (A) if the number of Subscribers in the Preferred Cluster
Area having the largest
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<PAGE> 19
number of Subscribers exceeds the product of the Determined Percentage and the
number of all Subscribers in all Preferred Cluster Areas, then such excess may
be allocated to more than one Asset Pool; and (B) if the Preferred Cluster Area
having the largest number of Subscribers has been allocated to more than one
Asset Pool, and if the number of Subscribers in the Preferred Cluster Area
having the second largest number of Subscribers exceeds 33_% of all Subscribers
of all the Partnership Systems, then such excess may be allocated to more than
one Asset Pool, and (II) (A) Subscribers in the same ADI in a Preferred Cluster
Area may not be allocated to more than one pool, except to the extent that any
one ADI in a Preferred Cluster Area is permitted to be split under clause (I)
above, and (B) to the extent any ADI's are split they shall be split only along
the lines of operable units.
(2) Within 30 days following the delivery by TWE of the Asset
Pool Notice, Advance/Newhouse shall select and retain ownership of one of the
Asset Pools and the Partnership shall retain ownership of the remaining Asset
Pools; provided that if Advance/Newhouse fails to make such selection within
such 30-day period, then the Partnership shall be entitled to select and retain
ownership of two of the Asset Pools and Advance/Newhouse shall retain ownership
of the remaining Asset Pool. The Asset Pools allocated to Advance/Newhouse and
the Partnership in accordance with this paragraph (ii) are referred to herein as
the "Advance/Newhouse Asset Pool" and the "TWE Asset Pools," respectively.
(3) As promptly as practical following the determination of
the Advance/Newhouse Asset Pool and the TWE Asset Pools in accordance with
paragraph (ii), subject to obtaining any required governmental or other
third-party consents or approvals, the Partnership shall distribute the cable
television systems and other assets comprising the Advance/Newhouse Asset Pool
to Advance/Newhouse in complete liquidation of its Common Partnership Units;
provided that with respect to any assets in the Advance/Newhouse Pool that for
Federal income tax purposes were deemed contributed to the Partnership within
the immediately preceding Applicable Contribution Period by TWE or Paragon and
with respect to any assets in the TWE Asset Pools that for Federal income tax
purposes were deemed contributed to the Partnership within the immediately
preceding Applicable Contribution Period by Advance/Newhouse, the Partners shall
cooperate to cause such liquidation of the Advance/Newhouse Common Partnership
Units to be effectuated in a manner, and agree to defer the distribution of
assets to such time, as will minimize the taxes payable in connection with such
liquidation.
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<PAGE> 20
(4) As the cable television systems and other assets
comprising the Advance/Newhouse Asset Pool are distributed or deemed distributed
for Federal income tax purposes, (A) if there is an Excess Tax Amount with
respect to Advance/Newhouse, the Partnership shall be allocated liabilities
otherwise allocable to the Advance/Newhouse Pool (the "Excess Tax Amount
Indebtedness") equal to the product of (y) one (1) minus the Advance/Newhouse
Percentage Interest, and (z) such Excess Tax Amount of Advance/Newhouse, (B)
Advance/Newhouse shall execute an assumption agreement pursuant to which it will
assume (or to the extent necessary, in the case of clause (II) below, will
refinance or repay) (I) all liabilities relating to, arising out of or otherwise
attributable to the Advance/Newhouse Asset Pool (as reduced by the Excess Tax
Amount Indebtedness, if any), and (II) liabilities otherwise allocable to the
TWE Asset Pools (the "Restructuring Indebtedness") in an amount equal to the
Restructuring Indebtedness Amount and will further agree to indemnify the
Partnership for any losses the Partnership might suffer with respect to any of
such liabilities, and (C) the Partnership shall agree to indemnify
Advance/Newhouse for any losses Advance/Newhouse might suffer with respect to
any liabilities relating to, arising out of or otherwise attributable to the TWE
Asset Pools or the Excess Tax Amount Indebtedness. The assumption agreement to
be executed by Advance/Newhouse shall contain the terms contained in the
Assumption Agreement executed by the Partnership in accordance with Section
3.4(a) of the Contribution Agreement and the indemnity of Advance/Newhouse and
the Partnership shall be in the form of Sections 8.2 and 8.3 of the Contribution
Agreement. As Advance/Newhouse assumes liabilities relating to, arising out of
or otherwise attributable to the Advance/Newhouse Asset Pool, Paragon shall
guarantee remaining liabilities of the Partnership and take other steps
reasonably necessary so as to reduce, to the greatest extent possible, the Debt
Shift Tax Amount arising from the restructuring; provided however, that Paragon
shall not be required to guarantee remaining liabilities of the Partnership to
the extent such guarantee would cause TWE to recognize income pursuant to Code
Sections 731 and 752. To the extent possible, liabilities assumed by
Advance/Newhouse shall be qualified liabilities (as defined in Treasury
Regulation Section 1.707-6(b)(2)) of the Partnership.
(5) The "Restructuring Indebtedness Amount" shall equal the
product of (A) the Advance/Newhouse Percentage Interest, and (B) the sum of (i)
the Priority Return accrued and unpaid as of the date of distribution, (ii) the
redemption price for all outstanding Paragon Preferred Partnership Units, and
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<PAGE> 21
(iii) the sum of the Excess Tax Amount for the Partners other than
Advance/Newhouse and other than the Satisfied Partner.
(6) The "Excess Tax Amount" means, for each of two Partners,
the Tax Amount that would be remaining for such Partners if the Partnership were
to distribute the aggregate Tax Amounts of all Partners to the Partners in
accordance with their Percentage Interests until one Partner (the "Satisfied
Partner") shall have received its entire Tax Amount.
(7) The "Tax Amount" means, for any Partner, the sum of the
following amounts determined for such Partner, as applicable:
(1) If the restructuring has occurred as a result of the
delivery by Advance/Newhouse of a Restructuring Notice that is not a Spin-Off
Restructuring Notice:
(1) with respect to Paragon, the Paragon
704(c)(1)(B) Tax Amount with respect to assets deemed for Federal income tax
purposes contributed to the Partnership within the immediately preceding
Applicable Contribution Period by Paragon that are allocated to the
Advance/Newhouse Asset Pool,
(2) with respect to TWE, if the distribution of
the Advance/Newhouse Asset Pool occurs after April 1, 2000, the TWE 704(c)(1)(B)
Tax Amount with respect to assets deemed for Federal income tax purposes
contributed to the Partnership by TWE pursuant to the Transaction Agreement
within the immediately preceding Applicable Contribution Period that are
allocated to the Advance/Newhouse Asset Pool,
(3) with respect to each Partner, the
Restructuring Deferred Tax Amount with respect to assets contributed by such
Partner (other than, in the case of TWE and Paragon, the assets referred to in
clauses (I) and (II)), and
(4) with respect to Paragon, the Debt Shift Tax
Amount.
(2) If the restructuring has occurred as a result of the
delivery by TWE of the Restructuring Notice or the delivery by Advance/Newhouse
of a Restructuring Notice that is a Spin-Off Restructuring Notice:
(1) with respect to Paragon, the Paragon
704(c)(1)(B) Tax Amount with respect to assets deemed for Federal income tax
purposes contributed to the Partnership within
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<PAGE> 22
the immediately preceding Applicable Contribution Period by Paragon that are
allocated to the Advance/Newhouse Asset Pool,
(2) with respect to each Partner, the
Restructuring Deferred Tax Amount with respect to assets contributed by such
Partner (other than, in the case of Paragon, the assets referred to in clause
(I) above), and
(3) with respect to Paragon, the Debt Shift Tax
Amount.
(3) During the period from the date of delivery of a Restructuring
Notice in accordance with Section 8.1 to the date of determination of the
Advance/Newhouse Asset Pool and TWE Asset Pools in accordance with Section
8.2(b)(ii), the Partnership shall conduct its business in the ordinary course,
consistent with past practice, and shall not engage in any extraordinary
transactions that were not contemplated by a previously approved Long Term
Strategic Plan or approved by the Executive Committee with the consent of
Advance/Newhouse's representatives. Following the determination of the
Advance/Newhouse Asset Pool and the TWE Asset Pools in accordance with Section
8.2(b)(ii), to the extent permitted by law, (i) the assets comprising such Asset
Pools shall for all purposes be deemed to be owned by Advance/Newhouse and the
Partnership, respectively, (ii) the Restructuring Indebtedness shall for all
purposes be deemed to be an obligation of Advance/Newhouse and Advance Newhouse
shall have no obligation with respect to the Excess Tax Amount Indebtedness
which shall for all purposes be deemed to be an obligation of TWE and Paragon as
Partners of the Partnership following the restructuring of the Partnership
hereunder, and (iii) until the Advance/Newhouse Asset Pool is actually
distributed to Advance/Newhouse, (1) Advance/Newhouse's Partnership Interest
shall entitle it only to (A) a distributive share of the income, gain, losses
and deductions related to the Advance/Newhouse Asset Pool, (B) a distributive
share of the assets comprising the Advance/Newhouse Asset Pool (subject to the
related liabilities and the Restructuring Indebtedness) and (C) management
rights relating to the business and affairs of the Advance/Newhouse Asset Pool,
and (2) TWE's and Paragon's Partnership Interest shall entitle them only to (A)
a distributive share of the income, gain, losses and deductions related to the
TWE Asset Pools, (B) a distributive share of the assets comprising the TWE Asset
Pools (subject to the related liabilities and the Excess Tax Amount
Indebtedness) and (C) management rights relating to the business and affairs of
the TWE Asset Pools.
VII.
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AMENDMENT TO SECTION 9
(1) The last sentence of Section 9(d) shall be deleted in its entirety and
the following substituted therefor:
"Partnership Value" shall mean the fair market value, as of the date of
valuation, of the business of the Partnership (including the Beneficial
Assets and the Subsidiary Beneficial Assets) as a going concern taking
into account whether Advance/Newhouse has elected to receive Tax Deferred
Consideration or Taxable Consideration in satisfaction of the
Advance/Newhouse Common Put Price, reduced by the sum of the Priority
Return accrued and unpaid as of the anticipated Advance/Newhouse Common
Put Closing (as defined below) and the redemption price for all Paragon
Preferred Partnership Units outstanding as of the anticipated
Advance/Newhouse Common Put Closing, and assuming that the Preferred
Investment Pool shall have been distributed by the Partnership to the
holder of any outstanding Preferred Partnership Units immediately prior to
such valuation.
(2) The penultimate sentence of Section 9(g)(ii) shall be deleted in its
entirety and the following substituted therefor:
At the Advance/Newhouse Common Put Closing, TWE shall pay to
Advance/Newhouse the Advance/Newhouse Common Put Price, reduced by the
Negative Put Deferred Tax Amount and increased by the Positive Put
Deferred Tax Amount, and Advance/Newhouse shall, pursuant to such
instruments as may be reasonably requested by TWE, deliver to TWE all of
its Common Partnership Units in appropriate form for transfer, free and
clear of any lien or other encumbrance.
VIII.
AMENDMENT TO SECTION 11
(1) Section 11.5 shall be amended by adding the following language to the
end thereof:
For purposes of the foregoing, "senior management" shall mean the
following officers of the TWE Cable Division (or persons having comparable
responsibilities): the Chairman and Chief Executive Officer (currently,
Joseph J. Collins), the President and Chief Operating Officer (currently,
James H. Doolittle), the President and Chief Executive Officer of Time
Warner Cable Ventures (currently, Glenn A. Britt), the President and Chief
Executive Officer of Time Warner Cable
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<PAGE> 24
Programming (currently, E. Thayer Bigelow Jr.), the Chief Financial
Officer (currently, Tommy J. Harris), the Executive Vice Presidents
responsible for cable television systems owned by the Partnership
(currently, James P. Cottingham, Theodore J. Cutler and Thomas M.
Rutledge), the Senior Vice Presidents whose responsibilities significantly
relate to the operations of the Partnership (currently, David E. O'Hayre,
James Chiddix, Kevin Leddy, Lynn Yaeger, Carl Rossetti and Fred Dressler)
and the Presidents of the operating divisions of the Time Warner Cable
Division (currently, Steve McPhie, President of Time Warner
Communications, President of Time Warner Satellite Services (position now
vacant) and Jeff Schwall, President of Time Warner Cable Ventures
International). Further, the term "reports" shall include any
correspondence to or from such senior management individuals which relate
to the operations of the Partnership, except it shall not include
preliminary drafts or material prepared in connection with or in
preparation for adversarial proceedings between TWE and Advance/Newhouse.
(2) Section 11 shall be amended by adding the following as Section 11.8:
11.8 Tax Allocations. No later than 45 days prior to the filing of
the Partnership's federal information return and Schedules K-1 thereto,
the Managing Partner shall deliver a draft of such return to the
Advance/Newhouse Accountants, together with such workpapers as are
necessary for the Advance/Newhouse Accountants to review the proposed
determinations of Special Income, Maximum Income Amount, and Net Tax
Amount of each of the Partners, together with the allocations required by
Sections 5.3(b)(iii) and 5.3(d)(ii). The Advance/Newhouse Accountants
shall promptly review such proposed determinations and allocations and
shall deliver, within 30 days after receipt of the draft return and
necessary workpapers, a report ("Adjustment Report") setting forth in
reasonable detail the determinations and allocations with which such
Accountants disagree. Thereafter, the Managing Partner and the
Advance/Newhouse Accountants shall endeavor in good faith to agree to such
determinations and allocations prior to the filing of the Partnership's
information returns. If any dispute cannot be resolved by the Managing
Partner and the Advance/Newhouse Accountants within 10 days after the
delivery of the Adjustment Report, the disputed matters shall be referred
to a mutually satisfactory independent public accounting firm of national
stature which has not been employed by any Partner for the two year
preceding the date of such
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referral, such firm to be selected by the TWE Accountants and the
Advance/Newhouse Accountants. In settling any disputed matter (other than
a disputed matter arising in connection with a restructuring pursuant to
Section 8.2 or a put of the Advance/Newhouse interest pursuant to Section
9), such independent public accounting firm shall apply the understanding
of the Partners that on an annual basis the after-tax positions of the
Partners with respect to the contributed assets are to be in proportion to
their respective Percentage Interests (assuming all Partners are taxable
at the Special Effective Tax Rate). The fees of such firm shall be paid by
the Partners in accordance with their Percentage Interests.
IX.
TECHNICAL AMENDMENTS
(1) Clause (ii) of the definition of "Affiliate" shall be deleted in its
entirety and the following substituted therefor:
(ii) no Partner nor any Affiliate of any Partner shall be deemed to
be an Affiliate of the other Partners or of any Affiliate of the other
Partners solely by virtue of the Partners' Partnership Interests; and
(2) The definition of the terms "Gross Asset Value," "Partnership
Interest," and "Preferred Capital Contribution" and Sections 2.1, 3.2, 12.1(d),
12.3(b), 13.4, 15.7 and 15.13 shall be amended by deleting the words "either
Partner" from each place in which such words appear therein and inserting in
lieu thereof the words "any Partner".
(3) Section 2.1 shall be amended by deleting the word "between" from the
second sentence thereof and inserting in lieu thereof the word "among".
(4) Sections 2.2(a), 2.4(a)(i) and 2.10(c) shall be amended by inserting
the words "Paragon," immediately prior to the words "Advance/Newhouse and TWE"
in each place in which such words appear therein.
(5) Sections 3.1(g) and 11.6 shall be amended by deleting the words "both
Partners" from each place in which such words appear therein and inserting in
lieu thereof the words "all Partners".
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<PAGE> 26
(6) Sections 2.9, 3.1(h)(iv) and 6.1(a) shall be amended by deleting the
words "neither Partner" from each place in which such words appear therein and
inserting in lieu thereof the words "no Partner".
(7) Sections 3.1, 11.5, 12.3(a), 14, 15.5 and 15.13 shall be amended by
deleting the words "other Partner" from each place in which such words appear
therein and inserting in lieu thereof the words "other Partners".
(8) Section 15.7 shall be amended by deleting the words "the other
Partner" from each place in which such words appear therein and inserting in
lieu thereof the words "any other Partner".
X.
GENERAL PROVISIONS
(1) Governing Law; Venue; Disputes. This Agreement shall be governed by
the internal laws of the State of New York. Any action, suit or proceeding shall
be prosecuted as to any party hereto in the County of New York, State of New
York.
(2) Captions. Section headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
(3) Other Provisions. Except as amended hereby, the Partnership Agreement
shall in all respects continue in full force and effect and the parties ratify
and confirm that they continue to be bound by the terms and conditions thereof.
(4) Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
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<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
ADVANCE/NEWHOUSE PARTNERSHIP
By: Advance Communication Corp.,
General Partner
By: /s/ Robert J. Miron
-----------------------------------
Name: Robert J. Miron
Title: President
By: Newhouse Broadcasting Corporation,
General Partner
By: /s/ Robert J. Miron
-----------------------------------
Name: Robert J. Miron
Title: Vice President
TIME WARNER ENTERTAINMENT COMPANY, L.P.
By: /s/ Spencer B. Hays
-----------------------------------
Name: Spencer B. Hays
Title: Vice President
PARAGON COMMUNICATIONS
By: KBL Communications Inc.,
General Partner
By: /s/ Spencer B. Hays
-----------------------------------
Name: Spencer B. Hays
Title: Vice President
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<PAGE> 28
EXHIBIT A
SECTION 9 PARTNERSHIP CAPITAL
9.2 Capital Contributions.
(1) Initial Contributions. Upon the execution of the Partnership
Agreement, Advance/Newhouse contributed to the Partnership cash in the amount of
$30.00 and TWE contributed to the Partnership cash in the amount of $60.00.
(2) Additional Contributions by Advance/Newhouse.
(1) On the Initial Closing Date and from time to time
thereafter as provided in the Contribution Agreement, and in accordance with the
terms and conditions of the Contribution Agreement, Advance/Newhouse contributed
or caused to be contributed to the Partnership those assets (including the
Beneficial Assets and the Subsidiary Beneficial Assets) specified to be so
contributed in the Contribution Agreement. The Partners agree that as of the
Initial Closing Date the fair market value of the assets contributed by
Advance/Newhouse pursuant to this Section 4.1(b) shall be determined in
accordance with Section 2.4 of the Contribution Agreement, or as otherwise
agreed to by the parties, and included in the Partnership's records.
(2) At any time after the date that is six months following
the Effective Date and on or before the earlier of the fourth anniversary of the
Effective Date, a restructuring of the Partnership pursuant to Section 8.2, or
the purchase and sale of Common Partnership Units pursuant to Section 9(g)(ii),
Advance/Newhouse shall contribute to the Partnership cash in the amount of the
Advance/Newhouse Contribution Amount. In addition, Advance/Newhouse shall pay
interest on the Advance/Newhouse Contribution Amount at the Interest Rate (as
defined in Section 5 of the Transaction Agreement) compounded (to the extent not
paid) on a quarterly basis, from July 1, 1996 until the date on which the
Advance/Newhouse Contribution Amount is paid. Concurrently with the execution of
the Amendment, Advance/Newhouse shall execute the Advance/Newhouse Note (as
defined in Section 5 of the Transaction Agreement) which shall not be an asset
of the Partnership but shall secure Advance/Newhouse's obligation to contribute
the Advance/Newhouse Contribution Amount to the Partnership, plus interest, as
provided in this Section 4.1(b)(ii).
(3) Additional Contributions by TWE.
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<PAGE> 29
(1) On the Initial Closing Date and from time to time
thereafter as provided in the Contribution Agreement, and in accordance with the
terms and conditions of the Contribution Agreement, TWE contributed to the
Partnership those assets (including the Beneficial Assets and the Subsidiary
Beneficial Assets) specified to be so contributed in the Contribution Agreement.
The Partners agree that as of the Initial Closing Date the fair market value of
the assets contributed by TWE pursuant to this Section 4.1(c) shall be
determined in accordance with Section 2.4 of the Contribution Agreement, or as
otherwise agreed to by the parties, and included in the Partnership's records.
(2) Concurrently with the execution of the Amendment and from
time to time thereafter as provided in the Transaction Agreement and in
accordance with the terms and conditions of the Transaction Agreement, TWE shall
contribute to the Partnership those assets specified in Section 2(a) of the
Transaction Agreement, subject to the liabilities set forth in the Transaction
Agreement. Such contribution by TWE shall be in satisfaction of certain of its
obligations under the Contribution Agreement, as provided in Section 2(d) of the
Transaction Agreement.
(4) Contribution by Paragon. Concurrently with the execution of the
Amendment and from time to time thereafter as provided in the Transaction
Agreement and in accordance with the terms and conditions of the Transaction
Agreement, Paragon shall contribute to the Partnership those assets specified on
Schedule 1 of the Transaction Agreement and in Section 2(b) of the Transaction
Agreement, subject to the liabilities set forth in the Transaction Agreement.
For purposes of establishing Capital Accounts, the Partners agree that as of the
date of the Amendment, the fair market value of the assets contributed by
Paragon pursuant to this Section 4.1(d) shall be determined in accordance with
the Transaction Agreement.
(5) Preferred Capital Contributions.
(1) Prior to the date of this Amendment, no Preferred
Partnership Units were issued to Advance/Newhouse in exchange for Preferred
Capital Contributions pursuant to Section 4.2(c).
(2) At any time that TWE, Advance/Newhouse or Paragon elects
not to receive a proposed distribution from the Partnership pursuant to Section
5.1(c), the amount of such proposed distribution shall be treated as a
contribution to the Partnership, in increments of $1,000, in exchange for
Preferred
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<PAGE> 30
Partnership Units as provided in Section 4.2(c); provided, however, that,
notwithstanding the foregoing, if at such time TWE, Advance/Newhouse and Paragon
are all treated as having made a concurrent contribution to the Partnership in
accordance with this Section 4.1(e)(ii), then the amount of the proposed
distribution to TWE, Advance/Newhouse and Paragon shall be treated as Common
Capital Contributions and no Preferred Partnership Units shall be issued
therefor.
(3) Any Distributable Cash retained by the Partnership and
treated as a Preferred Capital Contribution in accordance with Section 4.1(e)(i)
or 4.1(e)(ii) shall be invested by the Partnership in debt securities in the
manner directed by the holder of the applicable Preferred Partnership Units and
any amounts received on such debt securities (as interest or otherwise), to the
extent not distributed pursuant to Sections 5.1(a)(i), 5.1(b)(i) or 5.2, shall
be reinvested in debt securities in the manner directed by the holder of the
applicable Preferred Partnership Units. All such debt securities, together with
any uninvested amounts received thereon, shall be referred to herein as the
"Preferred Investment Pool" with respect to the Preferred Partnership Units held
by such Partner.
(6) Other Additional Capital Contributions. Except as agreed to by
the Partners in accordance with Section 3.2 hereof, there shall be no further
assessments for additional Common Capital Contributions or Paragon Preferred
Capital Contributions by the Partners to the Partnership.
9.3 Partnership Units.
(1) Advance/Newhouse and TWE.
(1) On the date of the Partnership Agreement, the Partnership
issued:
(1) to Advance/Newhouse, 300 Common Partnership Units in
exchange for Advance/Newhouse's agreement to make the Common Capital
Contributions described in Section 4.1(a) and Section 4.1(b)(i); and
(2) to TWE, 600 Common Partnership Units in exchange for
TWE's agreement to make the Common Capital Contributions described in Section
4.1(a) and Section 4.1(c).
(2) As soon as practicable following the determination of the
Advance/Newhouse Contribution Amount pursuant to Section 5 of the Transaction
Agreement, the Partnership shall issue to Advance/Newhouse the number of Common
Partnership Units equal to fifty percent (50%) of the number of Common
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<PAGE> 31
Partnership Units issued to Paragon pursuant to Section 4.2(b) hereof. Such
Common Partnership Units shall be issued to Advance/Newhouse in exchange for
Advance/Newhouse's agreement to make the Capital Contribution described in
Section 4.1(b)(ii).
(2) Paragon As soon as practicable following the determination of
the Net CVI Contribution and the Net Paragon Contribution (as such terms are
defined in Sections 1(c) and 2(d) of the Transaction Agreement), the Partnership
shall issue to Paragon the number of Paragon Preferred Partnership Units and the
number of Common Partnership Units provided in Sections 1(c) and 2(d) of the
Transaction Agreement. Such Paragon Preferred Partnership Units and Common
Partnership Units shall be issued to Paragon in exchange for Paragon's agreement
to make the Capital Contribution described in Section 4.1(d).
(3) Preferred Partnership Units. At any time that a Partner is
treated as having made a contribution to the Partnership pursuant to Section
4.1(e) (unless all Partners are treated as having made such a contribution as
provided in the proviso to Section 4.1(e)(ii)), the Partnership shall issue to
such Partner, on the date on which such contribution is deemed made, one
Preferred Partnership Unit for each $1,000 deemed contributed by such Partner on
such date.
9.4 Indebtedness.
(1) In accordance with the Transaction Agreement, the Partnership
shall assume or otherwise take subject to, the Assumed CVI Liabilities and the
Assumed Paragon Liabilities (as such terms are defined in Sections 1(a) and 2(b)
of the Transaction Agreement).
(2) Subject to Sections 3.2(e) and 3.2(f), from time to time upon
the written request of either Partner, the Partnership shall incur Indebtedness
which, in the good faith judgment of the Managing Partner is available on
commercially reasonable terms, provided such Indebtedness expressly is
non-recourse to either Partner.
(3) Subject to the limitation in Section 5.1(a)(iv), in the event
the Partnership incurs Indebtedness pursuant to this Section 4.3, the proceeds
of such Indebtedness shall be distributed to the Partners in accordance with
Section 5.1 below.
(4) As promptly as practicable after the Managing Partner determines
to cause the Partnership to incur, create or assume any Indebtedness, but not
less than 10 days before the
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<PAGE> 32
incurrence, creation or assumption by the Partnership of such Indebtedness, the
Managing Partner shall give Advance/Newhouse notice and a reasonably detailed
description thereof, including a description of any restrictions on
distributions of the type referred to in the next sentence contained in the
agreement governing such Indebtedness (the "Indebtedness Notice"). The Managing
Partner shall use reasonable best efforts in negotiating such agreement to
exclude from the credit (or other) agreement(s) entered into by the Partnership
in connection with such Indebtedness any restrictions on distributions by the
Partnership with respect to any Preferred Partnership Units (it being understood
that, subject to Section 3.2(g), the Partnership shall not be required to
exclude any restrictions on distributions with respect to any Preferred
Partnership Units from any such agreement if as a result of such exclusion the
Indebtedness governed by such agreement would bear a higher rate of interest or
such agreement would contain more restrictive covenants than if such agreement
did not exclude such restrictions, assuming for such purpose that the
Partnership did not own the assets held in the Preferred Investment Pool).
SECTION 10 CASH DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES
10.2 Distributions.
(1) Distributions Prior to Sixth Anniversary. Except as provided in
Sections 5.1(d), 5.1(e), 5.2 and 8.2, prior to the sixth anniversary of the
Effective Date, all distributions by the Partnership shall be made as follows:
(1) The Partnership shall, at least quarterly, distribute (to
the extent not prohibited by any applicable contractual restrictions) to the
holders of the Preferred Partnership Units all cash received with respect to the
Preferred Investment Pool associated with such Preferred Partnership Units,
until each holder of Preferred Partnership Units shall have received aggregate
distributions pursuant to this Section 5.1(a)(i) in an amount equal to the
product of the Effective Tax Rate times the Net Cumulative Taxable Preferred
Income allocated to such holder of Preferred Partnership Units during the period
commencing on the Initial Closing Date and ending on the last day of the fiscal
quarter immediately preceding the date of distribution.
(2) With respect to any Fiscal Year in which Paragon is
expected (based on the Managing Partner's good faith estimate) to be allocated
Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least
quarterly, distribute
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<PAGE> 33
(to the extent not prohibited by any applicable contractual restrictions) to
Paragon all Distributable Cash, until Paragon shall have received distributions
with respect to its Paragon Preferred Partnership Units in an amount equal to
the excess of (A) the sum of (I) such estimated Net Profit and (II) the Net
Profit allocated pursuant to Section 5.3(b)(ii) for all prior Fiscal Years, over
(B) the distributions to Paragon pursuant to this Section 5.1(a)(ii) for all
prior Fiscal Years.
(3) After the Partnership has made distributions with respect
to the Preferred Partnership Units and the Paragon Preferred Partnership Units
in accordance with clauses (i) and (ii), the Partnership shall, at least
quarterly, distribute (to the extent not prohibited by any applicable
contractual restrictions) to the Partners Distributable Cash, in proportion to
the respective amounts required to be distributed to each such Partner pursuant
to this Section 5.1(a)(iii), in an amount equal to 25 percent of such Partner's
Net Tax Amount for the taxable year that includes such calendar quarter (as
estimated in good faith by the Managing Partner). The Managing Partner's
estimate of such Partner's Net Tax Amount for such year shall be revised prior
to each distribution for such year and upon the filing of the Partnership's
Federal income tax return for such year, and following such revision, (y) the
Partnership shall distribute to such Partner the excess (if any) of the amount
that should have been distributed to such Partner pursuant to this Section
5.1(a)(iii) based on such revised estimate, over the amount actually distributed
to such Partner pursuant to this Section 5.1(a)(iii), plus interest thereon at
the rate paid by the Partnership on its senior Indebtedness, or (z) such Partner
shall contribute to the Partnership the excess (if any) of the amount actually
distributed to such Partner pursuant to this Section 5.1(a)(iii) over the amount
that should have been distributed to such Partner pursuant to this Section
5.1(a)(iii) based on such revised estimate, plus interest thereon at the rate
paid by the Partnership on its senior Indebtedness. To the extent there is
insufficient available cash to make distributions pursuant to this Section
5.1(a)(iii) at the time required, the Partnership shall pay interest on such
shortfall at the rate paid by the Partnership on its senior Indebtedness, and
such interest shall be paid out of the Partnership's first available
Distributable Cash.
(4) After the Partnership has made the distributions required
by clauses (i), (ii) and (iii), any remaining Distributable Cash shall, at least
quarterly, be distributed to the Partners in accordance with their Percentage
Interests, unless they make the election provided in Section 5.1(c); provided,
however, that during the period ending on the
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<PAGE> 34
third anniversary of the Effective Date, distributions to any Partner pursuant
to this Section 5.1(a)(iv) shall not, without the consent of TWE, exceed an
amount which, when added to the distributions to such Partner pursuant to
Section 5.1(a)(iii), exceed the sum of (x) such Partner's permitted "operating
cash flow distribution," as determined pursuant to Treasury Regulation Section
1.707-4(b), and (y) the amount of Partnership indebtedness incurred by the
Partnership during the taxable year that includes such calendar quarter and the
proceeds of which are distributed to the Partners, to the extent such
indebtedness is included in such Partner's basis in its interest in the
Partnership pursuant to Code Section 752 and Treasury Regulation Section
1.707-5(a)(2).
(2) Distributions After Sixth Anniversary. Except as provided in
Sections 5.1(d), 5.1(e), 5.2 and 8.2, on and after the sixth anniversary of the
Effective Date, all distributions by the Partnership shall be made as follows:
(1) The Partnership shall, at least quarterly, distribute (to
the extent not prohibited by any applicable contractual restrictions) to the
holders of the Preferred Partnership Units all cash received with respect to the
Preferred Investment Pool associated with such Preferred Partnership Units,
until each holder of Preferred Partnership Units shall have received aggregate
distributions pursuant to Section 5.1(a)(i) and this Section 5.1(b)(i) in an
amount equal to the product of the Effective Tax Rate times the Net Cumulative
Taxable Preferred Income allocated to such holder of Preferred Partnership Units
during the period commencing on the Initial Closing Date and ending on the last
day of the fiscal quarter immediately preceding the date of distribution.
(2) With respect to any Fiscal Year in which Paragon is
expected (based on the Managing Partner's good faith estimate) to be allocated
Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least
quarterly, distribute (to the extent not prohibited by any applicable
contractual restrictions) to Paragon all Distributable Cash, until Paragon shall
have received distributions with respect to its Paragon Preferred Partnership
Units in an amount equal to the excess of (A) the sum of (I) such estimated Net
Profit and (II) the Net Profit allocated pursuant to Section 5.3(b)(ii) for all
prior Fiscal Years, over (B) the distributions to Paragon pursuant to Section
5.1(a)(ii) and this Section 5.1(b)(ii) for all prior Fiscal Years.
(3) After the Partnership has made distributions with respect
to the Preferred Partnership Units and the Paragon
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<PAGE> 35
Preferred Partnership Units in accordance with clauses (i) and (ii), the
Partnership shall, at least quarterly, distribute (to the extent not prohibited
by any applicable contractual restrictions) to the Partners Distributable Cash,
in proportion to the respective amounts required to be distributed to each such
Partner pursuant to this Section 5.1(b)(iii), in an amount equal to 25 percent
of such Partner's Net Tax Amount for the taxable year that includes such
calendar quarter (as estimated in good faith by the Managing Partner). The
Managing Partner's estimate of such Partner's Net Tax Amount for such year shall
be revised prior to each distribution for such year and upon the filing of the
Partnership's Federal income tax return for such year, and following such
revision, (y) the Partnership shall distribute to such Partner the excess (if
any) of the amount that should have been distributed to such Partner pursuant to
this Section 5.1(b)(iii) based on such revised estimate, over the amount
actually distributed to such Partner pursuant to this Section 5.1(b)(iii), plus
interest thereon at the rate paid by the Partnership on its senior Indebtedness,
or (z) such Partner shall contribute to the Partnership the excess (if any) of
the amount actually distributed to such Partner pursuant to this Section
5.1(b)(iii) over the amount that should have been distributed to such Partner
pursuant to this Section 5.1(b)(iii) based on such revised estimate, plus
interest thereon at the rate paid by the Partnership on its senior Indebtedness.
To the extent there is insufficient available cash to make distributions
pursuant to this Section 5.1(b)(iii) at the time required, the Partnership shall
pay interest on such shortfall at the rate paid by the Partnership on its senior
Indebtedness, and such interest shall be paid out of the Partnership's first
available Distributable Cash.
(4) After the Partnership has made the distributions required
by clauses (i), (ii) and (iii), the Partnership shall distribute (to the extent
not prohibited by any applicable contractual restrictions) any remaining
Distributable Cash to Paragon in redemption of outstanding Paragon Preferred
Partnership Units, at a redemption price of $1,000 per Paragon Preferred
Partnership Unit, so that the Partnership shall have redeemed such Paragon
Preferred Partnership Units in accordance with the following:
(1) Prior to the seventh anniversary of the Effective
Date, the Partnership shall have redeemed one-third of the number of Paragon
Preferred Partnership Units originally issued pursuant to Section 4.2(b);
(2) Prior to the eighth anniversary of the Effective
Date, the Partnership shall have redeemed, in the
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<PAGE> 36
aggregate, two-thirds of the number of Paragon Preferred Partnership Units
originally issued pursuant to Section 4.2(b); and
(3) On and after the eighth anniversary of the Effective
Date, the Partnership shall have redeemed all outstanding Paragon Preferred
Partnership Units.
(5) After the Partnership shall have made all distributions
required by clauses (i), (ii), (iii) and (iv), any remaining Distributable Cash
shall, at least quarterly, be distributed to the Partners in accordance with
their Percentage Interests, unless they make the election provided in Section
5.1(c).
(3) Election Not to Receive Distribution. Notwithstanding Section
5.1(a)(iv) or Section 5.1(b)(v), at any time that the Partnership proposes to
make distributions to Advance/Newhouse, TWE or Paragon pursuant to Section
5.1(a)(iv) or Section 5.1(b)(v), any of such Partners may elect not to receive
the distribution proposed to be distributed to it, and the amount of such
proposed distribution shall be treated as a contribution to the Partnership by
such Partner pursuant to Section 4.1(d), and shall no longer be considered to be
part of Distributable Cash for purposes of Section 5.1.
(4) Net Proceeds of Sale. Following the sale, exchange, or other
disposition of all or substantially all of the assets of the Partnership, or
upon the liquidation of the Partnership within the meaning of Treasury
Regulations Section 1.704-1(b)(2)(ii)(g), and after payment of, or adequate
provision for, the debts and obligations of the Partnership, the remaining
assets of the Partnership shall be distributed (or deemed distributed in the
event of a termination under Code Section 708(b)(1)(B)) to the Partners (after
giving effect to all contributions, distributions, allocations, and other
Capital Account adjustments for all taxable years, including the year during
which such liquidation occurs) as follows:
(1) First, the applicable Preferred Investment Pool shall be
distributed to the holder of Preferred Partnership Units in redemption of all
such Preferred Partnership Units;
(2) Second, the Priority Return accrued and unpaid as of the
date of liquidation shall be distributed to
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Paragon;
(3) Third, all outstanding Paragon Preferred Partnership Units
shall be redeemed at a redemption price of $1,000 per Paragon Preferred
Partnership Unit; and
(4) Finally, the remaining assets of the Partnership shall be
distributed to the Partners so as to effectuate the agreement among the Partners
that the distributions remaining after paying taxes on the Partners' Special
Income and Gross Profit and Gross Loss allocated under Section 5.3(d)(ii) with
respect to the year of such distribution are in proportion to their respective
Percentage Interests, assuming all Partners are taxed at the Special Effective
Tax Rate and taking into account any additional tax paid by Advance/Newhouse due
to the inability of it (or the Persons that are the taxpayers with respect to
income of it) to use all Taxable Loss allocable to it.
(5) Withholding. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment or
distribution to a Partner shall be treated as amounts distributed to such
Partner pursuant to Section 5.1 for all purposes of this Agreement.
10.3 Redemption of Preferred Partnership Units. Upon an Advance/Newhouse
Redemption Event, TWE Redemption Event, or Paragon Redemption Event,
Advance/Newhouse, TWE or Paragon, respectively, shall have the option to require
the Partnership to redeem all or some of the Preferred Partnership Units held by
such Partner. Such redemption option shall be exercisable by delivery of a
written notice (the "Redemption Notice") to the Partnership indicating that an
Advance/Newhouse Redemption Event, TWE Redemption Event or Paragon Redemption
Event, as applicable, has occurred, and setting forth the number of Preferred
Partnership Units to be redeemed by the Partnership (the "Redeemed Preferred
Partnership Units"). As soon as reasonably practicable, but no later than five
business days following the delivery of the Redemption Notice, the Partnership
shall distribute to Advance/Newhouse, TWE, or Paragon, as applicable, the
applicable Preferred Investment Pool (or pro rata portion thereof based on the
ratio of the number of Redeemed Preferred Partnership Units to the total number
of Preferred Partnership Units held by Advance/Newhouse, TWE or Paragon, as
applicable).
10.4 Allocations of Preferred Profit; Preferred Loss; Net Profit and Net
Loss.
(1) Priority Allocations. All Preferred Profit and Preferred Loss
with respect to a Preferred Investment Pool for any Fiscal Year (or portion
thereof) shall be allocated to the
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<PAGE> 38
holder of Preferred Partnership Units to which such Preferred Investment Pool
relates.
(2) Allocations of Net Profit. Except as otherwise provided in
Sections 5.3(d) and 5.3(e), after giving effect to the allocations provided in
Sections 5.3(a), 5.5 and 5.8, the Net Profit for each Fiscal Year (or portion
thereof) shall be allocated to the Partners as follows:
(1) First, Net Profit shall be allocated to Paragon until
Paragon shall have been allocated Net Profit in an amount equal to the excess,
if any, of (A) the aggregate Net Loss allocated to Paragon pursuant to Section
5.3(c)(ii) for all prior Fiscal Years, over (B) the aggregate Net Profit
allocated to Paragon pursuant to this Section 5.3(b)(i) for all prior Fiscal
Years;
(2) Second, Net Profit shall be allocated to Paragon until
Paragon shall have been allocated Net Profit in an amount equal to the excess,
if any, of (A) the cumulative Priority Return accrued through the end of such
Fiscal Year (or portion thereof) over (B) the aggregate Net Profit allocated to
Paragon pursuant to this Section 5.3(b)(ii) for all prior Fiscal Years;
(3) Third, Net Profit shall be allocated to the Partners, in
proportion to and to the extent of the amount required to be allocated pursuant
to this Section 5.3(b)(iii), until each such Partner has been allocated Net
Profit pursuant to this Section 5.3(b)(iii) in an amount equal to the excess of
(y) such Partner's aggregate Maximum Income Amount for such Fiscal Year and all
prior Fiscal Years, over (z) the aggregate Net Profit allocated to such Partner
pursuant to this Section 5.3(b)(iii) for all prior Fiscal Years; and
(4) Thereafter, Net Profit shall be allocated to the Partners
in accordance with their Percentage Interests.
(3) Allocations of Net Loss. Except as otherwise provided in
Sections 5.3(d) and 5.3(e), after giving effect to the allocations provided in
Sections 5.3(a), 5.5 and 5.8, Net Loss for each Fiscal Year (or portion thereof)
shall be allocated as follows:
(1) First, Net Loss for such Fiscal Year (or portion thereof)
shall be allocated to the Partners in accordance with their Percentage Interests
until Advance/Newhouse's and TWE's Capital Accounts are reduced to the excess,
if any, of the aggregate Net Profit allocated to such Partners pursuant to
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<PAGE> 39
Section 5.3(b)(iii) for all prior Fiscal Years, over the aggregate Special Tax
Amounts distributed to such Partners pursuant to Sections 5.1(a)(iii) and
5.1(b)(iii) for all prior Fiscal Years;
(2) Second, Net Loss for such Fiscal Year (or portion thereof)
shall be allocated to Paragon until Paragon's Capital Account has been reduced
to the excess, if any, of the aggregate Net Profit allocated to Paragon pursuant
to Section 5.3(b)(iii) for all prior Fiscal Years, over the aggregate Special
Tax Amounts distributed to Paragon pursuant to Sections 5.1(a)(iii) and
5.1(b)(iii) for all prior Fiscal Years; and
(3) Thereafter, Net Loss for such Fiscal Year (or portion
thereof) shall be allocated to the Partners in accordance with their Percentage
Interests.
(4) Allocation of Gain or Loss Upon Sale. Notwithstanding Section
5.3(b) and Section 5.3(c), and after giving effect to the allocations provided
in Section 5.3(a), in the event of a sale, exchange, or other disposition of all
or substantially all of the assets of the Partnership, or upon the liquidation
of the Partnership within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g), beginning in the year in which the contract or agreement
for such sale is entered into or, if such contract or agreement is entered into
on or prior to the date on which the Partnership's Federal income tax return
with respect to the prior year is required to be filed (not including any
extensions), beginning in such prior year:
(1) First, Gross Profit shall be allocated to Paragon until
Paragon shall have been allocated Gross Profit in an amount equal to the excess,
if any, of (A) the sum of (I) the aggregate Net Loss allocated to Paragon
pursuant to Section 5.3(c)(ii) for all prior Fiscal Years, and (II) the
cumulative Priority Return accrued through the end of such Fiscal Year (or
portion thereof), over (B) the aggregate Net Profit allocated to Paragon
pursuant to Sections 5.3(b)(i) and Section 5.3(b)(ii) for all prior Fiscal
Years;
(2) Finally, Gross Profit and Gross Loss shall be allocated to
the Partners so as to cause the credit balance in each Partner's Capital Account
to equal, as nearly as possible, the amount each Partner would receive in a
distribution on dissolution, if the distribution were made in accordance with
Section 5.1(d).
In the event that such sale or liquidation does not take place within the year
following the year of the signing of the contract
- 12 -
<PAGE> 40
or agreement, or upon the termination of such contract or agreement, if earlier,
allocations of Gross Profit or Gross Loss shall be made to reverse, as rapidly
as possible, the effect of any such allocations made pursuant to this Section
5.3(d).
10.5 Section 754 Adjustment. To the extent any adjustment to the adjusted
tax basis of any asset of the Partnership pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such gain or loss shall be specially allocated to the
Partners in a manner consistent with the manner in which their Capital Accounts
are required to be adjusted pursuant to such Section of the Treasury
Regulations. Any Partner may cause the Partnership to make any election
permitted under Code Section 754.
10.6 Other Allocation Rules.
(1) In the event that the Partnership is entitled to an income tax
deduction for the excess of the Closing Price of a unit of TWX Securities on the
Initial Closing Date over the exercise price paid by the Eligible Option Holder
for such unit of TWX Securities, such deduction and an equal amount of Gross
Loss shall be specifically allocated to TWE or Paragon, as appropriate, and TWE
or Paragon, as appropriate, shall be deemed to have made a capital contribution
to the Partnership in the same amount.
(2) In the event that, pursuant to any Final Determination of the
Partnership's Taxable Income or Taxable Loss or the Partner's distributive
shares thereof, (i) the Partnership's Taxable Income or Taxable Loss is adjusted
or (ii) the Partners' distributive shares of the Partnership's Taxable Income or
Taxable Loss are adjusted, Gross Profit or Gross Loss shall be allocated to the
Partners to reflect the adjustments to the Partnership's Taxable Income or
Taxable Loss or the Partners' distributive shares thereof so as to place the
Partners as rapidly as possible, in conjunction with any distribution or
contribution pursuant to Section 5.1(a)(iii) and Section 5.1(b)(iii), in the
same relative positions they would have been in had the Taxable Income or
Taxable Loss or distributive shares thereof as adjusted been taken into account
originally (including any interest with respect to any deficiency or any
refund).
(3) In the event that interest is paid by the Partnership to a
Partner pursuant to Section 5.1(a)(iii) or
- 13 -
<PAGE> 41
Section 5.1(b)(iii), a special allocation of Gross Profit shall be made to such
Partner in an amount equal to the amount of such interest.
(4) If any fees or other payments deducted for federal income tax
purposes by the Partnership are recharacterized by a final determination of the
Internal Revenue Service as nondeductible distributions to any Partner, then,
notwithstanding all other allocation provisions, Gross Profit shall be allocated
to such Partner (for each Fiscal Year in which such recharacterization occurs)
in an amount equal to the fees or payments recharacterized.
(5) All items of Partnership income, gain, loss, deduction, and any
other allocations not otherwise provided for shall be allocated among the
Partners in the same proportion as they share the Preferred Profits, Preferred
Losses, Net Profits or Net Losses to which such items relate for the Fiscal
Year. Any credits against income tax shall be allocated among the Partners in
accordance with their Percentage Interests.
(6) For any year with respect to which the Partnership is required
to pay New York City Unincorporated Business Tax, such tax shall be allocated
among the Partners in a manner so that the benefit of any deduction, credit,
exemption or exclusion that is available to the Partnership as a result of the
activities, income or status of or payments by a particular Partner (a "Credit
Partner") shall be allocated entirely to such Credit Partner. The foregoing
shall be accomplished by charging the amount of such tax to the Capital Account
of any Partner that is not a Credit Partner and by distributing to any Credit
Partner an amount that bears the same proportion to such tax as such Credit
Partner's Percentage Interest bears to the Percentage Interests of the Partners
that are not Credit Partners.
(7) Notwithstanding Section 5.3(b), in the event that the Net Profit
allocated to the Partners pursuant to Section 5.3(b)(iii) results in an
allocation of Taxable Loss to Advance/Newhouse, then Net Profit shall be
reallocated among the Partners so as to effectuate the agreement of the Partners
that on an annual basis the distributions pursuant to Sections 5.1(a)(iii),
5.1(a)(iv), 5.1(b)(iii) and 5.1(b)(v) remaining after paying taxes on Special
Income and Net Profit allocated pursuant to Sections 5.3(b)(iii) and 5.3(b)(iv)
shall be in proportion to their respective Percentage Interests, assuming all
Partners are taxed at the Special Effective Tax Rate and taking into account any
additional tax paid by Advance/Newhouse due to the inability of it (or the
Persons that are the taxpayers with respect to income of it) to use all Taxable
Loss allocable to it.
- 14 -
<PAGE> 42
10.7 Tax Allocations.
(1) Income, gain, loss, and deduction with respect to any property
contributed to the capital of the Partnership, including property purchased with
cash contributed to the capital of the Partnership by a Partner shall, solely
for tax purposes, be allocated among the Partners so as to take account of any
variation between the adjusted basis of such property to the Partnership for
Federal income tax purposes and its initial Gross Asset Value in accordance with
the remedial allocation method set forth in Treasury Regulations Section
1.704-3(d).
(2) If the Gross Asset Value of any asset of the Partnership is
adjusted pursuant to paragraph (ii) of the definition of Gross Asset Value,
subsequent allocations of income, gain, loss, and deduction with respect to such
asset shall take account of any variation between the adjusted basis of such
asset for Federal income tax purposes and its Gross Asset Value in accordance
with Section 704(c) and the Treasury Regulations promulgated thereunder,
including Treasury Regulations Sections 1.704-1(b)(4)(i) and 1.704-3(d).
(3) Subject to Section 11.8, any election or other decision relating
to any allocations pursuant to this Section 5.6 shall be made by the
Partnership, upon the approval of such election or other decision by the
Managing Partner, in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section 5.6 are solely
for purposes of Federal, state, and local taxes and shall not affect, or in any
way be taken into account in computing, any Partner's Capital Account or share
of Net Profit, Net Loss, other items, or distributions pursuant to any provision
of this Agreement.
(4) For purposes of Sections 5.1(d) and 5.5, within 45 days after
the end of each Fiscal Year, Advance/Newhouse shall provide the Managing Partner
with the Advance/Newhouse Loss Amount for such Fiscal Year.
10.8 Allocation in Event of Transfer. If any Partnership Units are
transferred in accordance with Section 6.1, the Preferred Profit, Preferred
Loss, Net Profit and Net Loss of the Partnership shall be allocated between the
periods before and after the transfer by the closing of the books method. As of
the date of such transfer, the transferee shall succeed to the Capital Account,
Common Capital Contribution and Preferred Capital Contribution of the transferor
Partner, to the extent that the transferor's Capital Account, Common Capital
- 15 -
<PAGE> 43
Contribution and Preferred Capital Contribution relate to the transferred
interest. This Section shall apply for purposes of computing a Partner's Capital
Account and for federal income tax purposes.
10.9 Beneficial Assets and Subsidiary Beneficial Assets. The Partnership
shall (and the Partners shall not, except as Partners of the Partnership)
report, for Federal income tax purposes, the income, gain, deduction and loss
with respect to the Beneficial Assets that are not Subsidiary Beneficial Assets,
and the Partners shall (and the Partnership shall not) report, for Federal
income tax purposes, the income, gain, deduction and loss with respect to the
Subsidiary Beneficial Assets. In the event that, pursuant to any Final
Determination (as defined below), the Partnership either (x) is treated as the
beneficial owner of any of the Subsidiary Beneficial Assets prior to the actual
contribution of such Subsidiary Beneficial Assets to the Partnership or (y) is
treated as not the beneficial owner of any of the Beneficial Assets that are not
Subsidiary Beneficial Assets prior to the actual contribution of such Beneficial
Assets to the Partnership, to the extent necessary, appropriate adjustments
shall be made to the distributions provided for in Section 5.1 so as to place
the Partners and the Partnership in the same positions they would have been in
had the Partnership's beneficial ownership of the Subsidiary Beneficial Assets
or lack of beneficial ownership of such other Beneficial Assets been taken into
account originally.
10.10 Set-off. If by the earlier of the fourth anniversary of the
Effective Date, a restructuring of the Partnership pursuant to Section 8.2, or
the purchase and sale of Common Partnership Units pursuant to Section 9(g)(ii),
Advance/Newhouse shall not have contributed to the Partnership cash in an amount
equal to the Advance/Newhouse Contribution Amount plus interest thereon in
accordance with Section 4.1(b)(ii), then, in addition to any other rights and
remedies which the Partnership may have, the Partnership is hereby authorized at
any time and from time to time, to the fullest extent permitted by law and
without prior notice to Advance/Newhouse (or any successor to or transferee of
its Partnership Interests), to recoup, set-off and apply any and all amounts at
any time owing or otherwise payable by the Partnership to Advance/Newhouse (or
any successor to or transferee of its Partnership Interests), including, without
limitation, any distributions payable in accordance with
- 16 -
<PAGE> 44
Section 5 and any distributions to, or Partnership liabilities assumed by,
Advance/Newhouse in accordance with Section 8.2, and any amounts payable to
Advance/Newhouse pursuant to Section 9, to satisfy Advance/Newhouse's
obligations to make such contribution. To the extent that any amounts
distributable in accordance with Section 5 or Section 8.2 are applied in
accordance with the preceding sentence rather than distributed to
Advance/Newhouse (or any successor to or transferee of its Partnership
Interests), then such amounts shall be deemed distributed by the Partnership to
Advance/Newhouse (or such successor or transferee) and recontributed by
Advance/Newhouse (or such successor or transferee) to the Partnership and the
Capital Account of Advance/Newhouse (or such successor or transferee) shall be
adjusted to reflect such deemed distribution and recontribution.
- 17 -
<PAGE> 1
Exhibit 10.41
SECOND AMENDMENT TO THE
PARTNERSHIP AGREEMENT OF
TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP
SECOND AMENDMENT TO THE PARTNERSHIP AGREEMENT OF TIME WARNER
ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP, dated as of December 31, 1998 (this
"Amendment") among Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), Advance/Newhouse Partnership, a New York general
partnership ("Advance/Newhouse"), and Paragon Communications, a Colorado general
partnership ("Paragon").
WHEREAS, Time Warner Entertainment-Advance/Newhouse Partnership, a
New York general partnership (the "Partnership"), was formed between TWE and
Advance/Newhouse pursuant to a Partnership Agreement dated as of September 9,
1994 (the "Original Agreement"), as amended by the First Amendment to the
Partnership Agreement of the Partnership dated as of February 12, 1998 (the
"First Amendment" and together with the Original Agreement, the "Partnership
Agreement"), pursuant to which, among other things, Paragon became a partner of
the Partnership;
WHEREAS, pursuant to a Transaction Agreement No. 2, dated as of June
23, 1998 among Advance Publications, Inc., Newhouse Broadcasting Corporation,
Advance/Newhouse, TWE, Paragon and the Partnership (the "Second Transaction
Agreement"), Paragon has agreed to contribute to the Partnership certain assets
and Advance/Newhouse has agreed to contribute to the Partnership additional
cash;
WHEREAS, pursuant to Section 15.4 of the Partnership Agreement, the
Partnership Agreement may be amended by an instrument in writing signed by TWE,
Advance/Newhouse and Paragon; and
WHEREAS, the parties hereto desire to enter into this Amendment in
connection with the transactions contemplated by the Second Transaction
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:
I.
AMENDMENTS TO SECTION 1
(1) The following definitions shall be deleted in their entirety:
"Advance/Newhouse Contribution Amount"; "Effective Date"; "Paragon
Preferred Capital Contribution"; "Paragon Preferred Partnership
Unit"; "Priority Return"; and "Transaction Agreement."
<PAGE> 2
2
(2) The following definitions shall be added to the Partnership
Agreement:
"First Advance/Newhouse Contribution Amount" has the meaning
ascribed to "Advance/Newhouse Contribution Amount" in Section 5 of
the First Transaction Agreement.
"First Effective Date" has the meaning ascribed thereto in
Section 6 of the First Transaction Agreement.
"First Transaction Agreement" means the Amended and Restated
Transaction Agreement, dated as of October 27, 1997, among Advance,
Newhouse, Advance/Newhouse, TWE, TW Holding Co. and the Partnership.
"Priority Return" shall mean the sum of the Series A Priority
Return and the Series B Priority Return.
"Second Advance/Newhouse Contribution Amount" has the meaning
ascribed to "Advance/Newhouse Contribution Amount" in Section 4 of
the Second Transaction Agreement.
"Second Effective Date" has the meaning ascribed thereto in
Section 5 of the Second Transaction Agreement.
"Second Transaction Agreement" means the Transaction Agreement
No. 2, dated as of June 23, 1998, among Advance, Newhouse,
Advance/Newhouse, TWE, Paragon and the Partnership.
"Series A Preferred Capital Contribution" means, with respect
to Paragon, a Capital Contribution by Paragon pursuant to this
Agreement (other than cash deemed contributed in exchange for
Preferred Partnership Units pursuant to Section 4.1(e)) of assets
having a fair market value of $1,000 for each Series A Preferred
Partnership Unit issued to Paragon pursuant to Section 4.2(b)(i).
"Series A Preferred Partnership Unit" means Paragon's right to
distributions in an amount equal to the Series A Priority Return
allocable to the Series A Preferred Capital Contribution of $1,000
and the right to a return of such Series A Preferred Capital
Contribution in redemption thereof, all of which shall be payable in
accordance with Section 5, together with all allocations of income
attributable thereto, as specified in Section 5.
<PAGE> 3
3
"Series A Priority Return" means, with respect to each
outstanding Series A Preferred Partnership Unit, a sum equal to 10
1/4 percent for the actual number of days in the period for which
the Series A Priority Return is being calculated, cumulative and
compounded annually, on the amount of $1,000 plus any accrued and
unpaid Series A Priority Return with respect to such Series A
Preferred Partnership Unit, commencing on the First Effective Date.
"Series B Preferred Capital Contribution" means with respect
to Paragon, a Capital Contribution by Paragon pursuant to this
Agreement (other than cash deemed contributed in exchange for
Preferred Partnership Units pursuant to Section 4.1(e)) of assets
having a fair market value of $1,000 for each Series B Preferred
Partnership Unit issued to Paragon pursuant to Section 4.2(b)(ii).
"Series B Preferred Partnership Unit" means, with respect to
Paragon, such Partner's right to distributions in an amount equal to
the Series B Priority Return allocable to such Partner's Series B
Preferred Capital Contribution of $1,000 and the right to a return
of such Series B Preferred Capital Contribution in redemption
thereof, all of which shall be payable in accordance with Section 5,
together with all allocations of income attributable thereto, as
specified in Section 5.
"Series B Priority Return" means, with respect to each
outstanding Series B Preferred Partnership Unit, a sum equal to 2%
plus the Partnership's cost of borrowing under its senior credit
facility for the actual number of days in the period for which the
Series B Priority Return is being calculated, cumulative and
compounded annually, on the amount of $1,000 plus any accrued and
unpaid Series B Priority Return with respect to such Series B
Preferred Partnership Unit, commencing on the Second Effective Date.
(3) The following defined terms shall be deleted in their entirety
and the following substituted therefor:
"Capital Account" means an account to be maintained for each
Partner which, subject to any contrary requirements of the Code,
shall equal the aggregate value of such Partner's Partnership
Interest on the Second Effective Date,
(A) increased by (i) the amount of cash contributed by
such Partner to the Partnership after the Second Effective
Date (not including interest paid by such Partner pursuant to
Section 4.1(b)(ii), Section 5.1(a)(iii)(z) or Section
5.1(b)(iii)(z) and not including cash deemed contributed by
any Partner pursuant to Section 4.1(e)); (ii) the fair market
value without
<PAGE> 4
4
regard to Code Section 7701(g) of property contributed by such
Partner to the Partnership after the Second Effective Date
(net of liabilities secured by such contributed property that
the Partnership is considered to assume or take subject to
under Code Section 752) (treating any Subsidiary Beneficial
Assets and other Beneficial Assets as if they had been
contributed on the Initial Closing Date or the First Effective
Date or the Second Effective Date, as applicable, and
disregarding any subsequent actual contribution of such
Subsidiary Beneficial Assets and other Beneficial Assets and
any cash flow related thereto); (iii) allocations to it after
the Second Effective Date of Preferred Profit, Gross Profit
and Net Profit pursuant to Section 5; (iv) the amount of any
liabilities of the Partnership that are assumed by such
Partner pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(c); and (v) other additions made in
accordance with the Code and the provisions of Treasury
Regulations Section 1.704-1(b)(2)(iv); and
(B) decreased by (i) the amount of cash distributed to
such Partner by the Partnership after the Second Effective
Date; (ii) allocations to the Partner after the Second
Effective Date of Preferred Loss, Gross Loss and Net Loss
pursuant to Section 5; (iii) the fair market value without
regard to Code Section 7701(g) of property distributed to such
Partner by the Partnership after the Second Effective Date
(net of liabilities secured by such distributed property or
that such Partner is considered to assume or take subject to
under Code Section 752) (taking into account any deemed
distributions of Subsidiary Beneficial Assets and other
Beneficial Assets); (iv) the amount of such Partner's
individual liabilities that are assumed by the Partnership
after the Second Effective Date pursuant to Treasury
Regulations Section 1.704-1(b)(2)(iv)(c); and (v) other
deductions made in accordance with the Code and the provisions
of Treasury Regulations Section 1.704-1(b)(2)(iv).
Notwithstanding the foregoing, for purposes of determining Capital
Accounts, (w) all of the adjustments, contributions or distributions
required pursuant to the Contribution Agreement to be made
subsequent to the Initial Closing Date and the contribution of TWE
pursuant to Section 4.1(c)(ii) hereof shall be treated as if they
had been made on the Initial Closing Date, (x) the Paragon
Adjustment Amount and the TWE Adjustment Amount (as such terms are
defined in Section 11 of the First Transaction Agreement) shall be
treated as if they had been made on the First Effective Date, (y)
all of the adjustments, contributions or distributions required
pursuant to the Second Transaction Agreement or the TCI Contribution
Agreement shall be treated as if they had been
<PAGE> 5
5
made on the Second Effective Date, and (z) such adjustments,
contributions, distributions, and Adjustment Amounts shall not give
rise to any adjustments to Capital Account balances or
redetermination of amounts contributed by or distributed to any
Partner.
"Capital Contribution" means either a Common Capital
Contribution, a Preferred Capital Contribution, a Series A Preferred
Capital Contribution or a Series B Preferred Capital Contribution.
"Common Capital Contribution" means, (i) with respect to TWE
and Advance/Newhouse, the amount of cash contributed by such Partner
to the Partnership pursuant to this Agreement (other than cash
deemed contributed in exchange for Preferred Partnership Units
pursuant to Section 4.1(e)) plus the fair market value without
regard to Code Section 7701(g) of property contributed by such
Partner to the Partnership pursuant to this Agreement (net of
liabilities that are secured by such contributed property or that
either Partner is considered to assume under Code Section 752); and
(ii) with respect to Paragon, the excess of (A) the amount of cash
contributed by such Partner to the Partnership pursuant to this
Agreement (other than cash deemed contributed in exchange for
Preferred Partnership Units pursuant to Section 4.1(e)) plus the
fair market value without regard to Code Section 7701(g) of property
contributed by such Partner to the Partnership pursuant to this
Agreement (net of liabilities that are secured by such contributed
property or that either Partner is considered to assume under Code
Section 752), over (B) the sum of the Series A Preferred Capital
Contribution and the Series B Preferred Capital Contribution; and
(iii) with respect to all Partners treating any Subsidiary
Beneficial Assets and other Beneficial Assets as if they had been
contributed on the Initial Closing Date, the First Effective Date or
the Second Effective Date, as applicable, and disregarding any
subsequent actual contribution of such Subsidiary Beneficial Assets
or other Beneficial Assets and any cash flow related thereto).
"Determined Percentage" means either (a) 39% if TWE delivers a
Restructuring Notice at any time or Advance/Newhouse delivers a
Restructuring Notice after July 1, 2000, unless the Winston-Salem,
North Carolina cable system owned, as of the date of the First
Transaction Agreement, by Summit Communications Group Inc. is
included among the assets to be allocated to one of the Asset Pools,
such system having been transferred to the Partnership at a mutually
agreeable price or such transfer at such price being probable during
the time frame set forth in Section 8, or (b) 35% (in all other
instances).
<PAGE> 6
6
"Partnership Unit" means either a "Common Partnership Unit," a
"Preferred Partnership Unit," a "Series A Preferred Partnership Unit
or a "Series B Preferred Partnership Unit," as defined in this
Agreement.
II.
OTHER AMENDMENTS
(1) Section 4 of the Partnership Agreement shall be deleted in its
entirety and new Section 4 in the form attached hereto as Exhibit A shall be
substituted therefor.
(2) Section 5 of the Partnership Agreement shall be deleted in its
entirety and new Section 5 in the form attached hereto as Exhibit B shall be
substituted therefor.
(3) Section 8.2 of the Partnership Agreement shall be deleted in its
entirety and new Section 8.2 in the form attached hereto as Exhibit C shall be
substituted therefor.
(4) The last sentence of Section 9(d) of the Partnership Agreement
shall be amended by deleting the words "Paragon Preferred Partnership Units" and
substituting therefor the words "Series A Preferred Partnership Units and Series
B Preferred Partnership Units."
(5) Section 12.3(b) of the Partnership Agreement shall be amended by
deleting "Section 5.1(c)" and substituting therefor the words "Section 5.1(d)."
III.
GENERAL PROVISIONS
(1) Governing Law; Venue; Disputes. This Agreement shall be governed
by the internal laws of the State of New York. Any action, suit or proceeding
shall be prosecuted as to any party hereto in the County of New York, State of
New York.
(2) Captions. Section headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
(3) Other Provisions. Except as amended hereby, the Partnership
Agreement shall in all respects continue in full force and effect and the
parties ratify and confirm that they continue to be bound by the terms and
conditions thereof.
<PAGE> 7
7
(4) Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
<PAGE> 8
8
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first above written.
ADVANCE/NEWHOUSE PARTNERSHIP
By: Advance Communication Corp.,
General Partner
By: /s/ Robert J. Miron
-------------------------------
Name: Robert J. Miron
Title: President
By: Newhouse Broadcasting
Corporation, General Partner
By: /s/ Robert J. Miron
-------------------------------
Name: Robert J. Miron
Title: Vice President
TIME WARNER ENTERTAINMENT COMPANY, L.P.
By: /s/ Spencer B. Hays
-----------------------------------
Name: Spencer B. Hays
Title: Vice President
PARAGON COMMUNICATIONS
By: KBL Communications, Inc., as
General Manager
By: /s/ Spencer B. Hays
-------------------------------
Name: Spencer B. Hays
Title: Senior Vice President
<PAGE> 9
EXHIBIT A
(to Second Amendment)
SECTION 4 PARTNERSHIP CAPITAL
Capital Contributions.
(a) Initial Contributions. Upon the execution of the Partnership
Agreement, Advance/Newhouse contributed to the Partnership cash in the amount of
$30.00 and TWE contributed to the Partnership cash in the amount of $60.00.
(b) Additional Contributions by Advance/Newhouse.
(i) On the Initial Closing Date and from time to time
thereafter as provided in the Contribution Agreement, and in accordance with the
terms and conditions of the Contribution Agreement, Advance/Newhouse contributed
or caused to be contributed to the Partnership those assets (including the
Beneficial Assets and the Subsidiary Beneficial Assets) specified to be so
contributed in the Contribution Agreement. The Partners agree that as of the
Initial Closing Date the fair market value of the assets contributed by
Advance/Newhouse pursuant to this Section 4.1(b) shall be determined in
accordance with Section 2.4 of the Contribution Agreement, or as otherwise
agreed to by the parties, and included in the Partnership's records.
(ii) At any time after the date that is six months following
the First Effective Date and on or before the earlier of the fourth anniversary
of the First Effective Date, a restructuring of the Partnership pursuant to
Section 8.2, or the purchase and sale of Common Partnership Units pursuant to
Section 9(g)(ii), Advance/Newhouse shall contribute to the Partnership cash in
the amount of the First Advance/Newhouse Contribution Amount. In addition,
Advance/Newhouse shall pay interest on the First Advance/Newhouse Contribution
Amount at the Interest Rate (as defined in Section 5 of the First Transaction
Agreement) compounded (to the extent not paid) on a quarterly basis, from July
1, 1996 until the date on which the First Advance/Newhouse Contribution Amount
is paid. On the First Effective Date, Advance/Newhouse executed the
Advance/Newhouse Note (as defined in Section 5 of the First Transaction
Agreement) which is not an asset of the Partnership but secures
Advance/Newhouse's obligation to contribute the First Advance/Newhouse
Contribution Amount to the Partnership, plus interest, as provided in this
Section 4.1(b)(ii).
(iii) At any time after the date that is six months following
the Second Effective Date and on or before the earlier of the fourth anniversary
of the Second Effective Date, a restructuring of the Partnership pursuant to
Section 8.2, or the purchase and sale of Common Partnership Units pursuant to
Section 9(g)(ii), Advance/Newhouse shall contribute to the Partnership cash in
the amount of the Second Advance/Newhouse Contribution Amount. In addition,
Advance/Newhouse shall pay interest on the Second Advance/Newhouse Contribution
Amount at the
<PAGE> 10
2
Interest Rate (as defined in Section 4 of the Second Transaction Agreement)
compounded (to the extent not paid) on a quarterly basis, from the Second
Effective Date until the date on which the Second Advance/Newhouse Contribution
Amount is paid. On the Second Effective Date, Advance/Newhouse shall execute the
Advance/Newhouse Note (as defined in Section 4 of the Second Transaction
Agreement) which shall not be an asset of the Partnership but shall secure
Advance/Newhouse's obligation to contribute the Second Advance/Newhouse
Contribution Amount to the Partnership, plus interest, as provided in this
Section 4.1(b)(iii).
(c) Additional Contributions by TWE.
(i) On the Initial Closing Date and from time to time
thereafter as provided in the Contribution Agreement, and in accordance with the
terms and conditions of the Contribution Agreement, TWE contributed to the
Partnership those assets (including the Beneficial Assets and the Subsidiary
Beneficial Assets) specified to be so contributed in the Contribution Agreement.
The Partners agree that as of the Initial Closing Date the fair market value of
the assets contributed by TWE pursuant to this Section 4.1(c) shall be
determined in accordance with Section 2.4 of the Contribution Agreement, or as
otherwise agreed to by the parties, and included in the Partnership's records.
(ii) On the First Effective Date and from time to time
thereafter as provided in the First Transaction Agreement and in accordance with
the terms and conditions of the First Transaction Agreement, TWE contributed to
the Partnership those assets specified in Section 2(a) of the Transaction
Agreement, subject to the liabilities set forth in the First Transaction
Agreement. Such contribution by TWE was in satisfaction of certain of its
obligations, including under the Contribution Agreement, as provided in Section
2(d) of the Transaction Agreement.
(d) Contributions by Paragon.
(i) On the First Effective Date and from time to time
thereafter as provided in the First Transaction Agreement and in accordance with
the terms and conditions of the First Transaction Agreement, Paragon contributed
to the Partnership those assets specified on Schedule 1 of the First Transaction
Agreement and in Section 2(b) of the First Transaction Agreement, subject to the
liabilities set forth in the First Transaction Agreement. For purposes of
establishing Capital Accounts, the Partners agree that as of the First Effective
Date, the fair market value of the assets contributed by Paragon pursuant to
this Section 4.1(d)(i) shall be determined in accordance with the First
Transaction Agreement.
<PAGE> 11
3
(ii) On the Second Effective Date and from time to time
thereafter as provided in the Second Transaction Agreement and in accordance
with the terms and conditions of the Second Transaction Agreement, Paragon shall
contribute to the Partnership those assets specified on Schedule 1 of the Second
Transaction Agreement, subject to the liabilities set forth in the Second
Transaction Agreement. For purposes of establishing Capital Accounts, the
Partners agree that as of the Second Effective Date, the fair market value of
the assets contributed by Paragon pursuant to this Section 4.1(d)(ii) shall be
determined in accordance with the Second Transaction Agreement.
(e) Preferred Capital Contributions.
(i) Prior to the Second Effective Date, no Preferred
Partnership Units were issued to Advance/Newhouse in exchange for Preferred
Capital Contributions pursuant to Section 4.2(c).
(ii) At any time that TWE, Advance/Newhouse or Paragon elects
not to receive a proposed distribution from the Partnership pursuant to Section
5.1(c), the amount of such proposed distribution shall be treated as a
contribution to the Partnership, in increments of $1,000, in exchange for
Preferred Partnership Units as provided in Section 4.2(c); provided, however,
that, notwithstanding the foregoing, if at such time TWE, Advance/Newhouse and
Paragon are all treated as having made a concurrent contribution to the
Partnership in accordance with this Section 4.1(e)(ii), then the amount of the
proposed distribution to TWE, Advance/Newhouse and Paragon shall be treated as
Common Capital Contributions and no Preferred Partnership Units shall be issued
therefor.
(iii) Any Distributable Cash retained by the Partnership and
treated as a Preferred Capital Contribution in accordance with Section 4.1(e)(i)
or 4.1(e)(ii) shall be invested by the Partnership in debt securities in the
manner directed by the holder of the applicable Preferred Partnership Units and
any amounts received on such debt securities (as interest or otherwise), to the
extent not distributed pursuant to Sections 5.1(a)(i), 5.1(b)(i) or 5.2, shall
be reinvested in debt securities in the manner directed by the holder of the
applicable Preferred Partnership Units. All such debt securities, together with
any uninvested amounts received thereon, shall be referred to herein as the
"Preferred Investment Pool" with respect to the Preferred Partnership Units held
by such Partner.
(f) Other Additional Capital Contributions. Except as agreed to by
the Partners in accordance with Section 3.2 hereof, there shall be no further
assessments for additional Common Capital Contributions, Series A Preferred
Capital Contributions or Series B Preferred Capital Contributions by the
Partners to the Partnership.
<PAGE> 12
4
4.2 Partnership Units.
(a) Advance/Newhouse and TWE.
(i) On September 9, 1994, the Partnership issued:
(1) to Advance/Newhouse, 300 Common Partnership Units in
exchange for Advance/Newhouse's agreement to make the Common Capital
Contributions described in Section 4.1(a) and Section 4.1(b)(i); and
(2) to TWE, 600 Common Partnership Units in exchange for
TWE's agreement to make the Common Capital Contributions described in Section
4.1(a) and Section 4.1(c).
(ii) Following the determination of the First Advance/Newhouse
Contribution Amount pursuant to Section 5 of the First Transaction Agreement,
the Partnership shall issue to Advance/Newhouse the number of Common Partnership
Units equal to fifty percent (50%) of the number of Common Partnership Units
issued to Paragon pursuant to Section 4.2(b)(i) hereof. Such Common Partnership
Units shall be issued to Advance/Newhouse in exchange for Advance/Newhouse's
agreement to make the Capital Contribution described in Section 4.1(b)(ii).
(iii) On the Second Effective Date, the Partnership shall issue to
Advance/Newhouse the number of Common Partnership Units equal to fifty percent
(50%) of the number of Common Partnership Units issued to Paragon pursuant to
Section 4.2(b)(ii) hereof. Such Common Partnership Units shall be issued to
Advance/Newhouse in exchange for Advance/Newhouse's agreement to make the
Capital Contribution described in Section 4.1(b)(iii).
(b) Paragon.
(i) As soon as practicable following the determination of the
Net CVI Contribution and the Net Paragon Contribution (as such terms are defined
in Sections 1(c) and 2(d) of the First Transaction Agreement), the Partnership
shall issue to Paragon the number of Series A Preferred Partnership Units and
the number of Common Partnership Units provided in Sections 1(c) and 2(d) of the
First Transaction Agreement. Such Series A Preferred Partnership Units and
Common Partnership Units shall be issued to Paragon in exchange for Paragon's
agreement to make the Capital Contribution described in Section 4.1(d)(i).
<PAGE> 13
5
(ii) On the Second Effective Date, the Partnership shall issue
to Paragon the number of Series B Preferred Partnership Units and the number of
Common Partnership Units provided in Section 1(c) of the Second Transaction
Agreement. Such Series B Preferred Partnership Units and Common Partnership
Units shall be issued to Paragon in exchange for Paragon's agreement to make the
Capital Contribution described in Section 4.1(d)(ii).
(c) Preferred Partnership Units. At any time that a Partner is
treated as having made a contribution to the Partnership pursuant to Section
4.1(e) (unless all Partners are treated as having made such a contribution as
provided in the proviso to Section 4.1(e)(ii)), the Partnership shall issue to
such Partner, on the date on which such contribution is deemed made, one
Preferred Partnership Unit for each $1,000 deemed contributed by such Partner on
such date.
4.3 Indebtedness.
(a) (i) In accordance with the First Transaction Agreement, the
Partnership has assumed and otherwise taken subject to, the Assumed CVI
Liabilities and the Assumed Paragon Liabilities (as such terms are defined in
Sections 1(a) and 2(b) of the First Transaction Agreement).
(ii) In accordance with the Second Transaction Agreement, the
Partnership shall assume or otherwise take subject to, the Assumed Texas
Liabilities (as such terms are defined in Section 1(a) of the Second Transaction
Agreement).
(b) Subject to Sections 3.2(e) and 3.2(f), from time to time upon
the written request of either Partner, the Partnership shall incur Indebtedness
which, in the good faith judgment of the Managing Partner is available on
commercially reasonable terms, provided such Indebtedness expressly is
non-recourse to either Partner.
(c) Subject to the limitation in Section 5.1(a)(iv), in the event
the Partnership incurs Indebtedness pursuant to this Section 4.3, the proceeds
of such Indebtedness shall be distributed to the Partners in accordance with
Section 5.1 below.
(d) As promptly as practicable after the Managing Partner determines
to cause the Partnership to incur, create or assume any Indebtedness, but not
less than 10 days before the incurrence, creation or assumption by the
Partnership of such Indebtedness, the Managing Partner shall give
Advance/Newhouse notice and a reasonably detailed description thereof, including
a description of any restrictions on distributions of the type referred to in
the next sentence contained in the agreement governing such Indebtedness (the
"Indebtedness Notice"). The Managing Partner shall use reasonable best efforts
in negotiating such agreement to exclude from the credit (or
<PAGE> 14
6
other) agreement(s) entered into by the Partnership in connection with such
Indebtedness any restrictions on distributions by the Partnership with respect
to any Preferred Partnership Units (it being understood that, subject to Section
3.2(g), the Partnership shall not be required to exclude any restrictions on
distributions with respect to any Preferred Partnership Units from any such
agreement if as a result of such exclusion the Indebtedness governed by such
agreement would bear a higher rate of interest or such agreement would contain
more restrictive covenants than if such agreement did not exclude such
restrictions, assuming for such purpose that the Partnership did not own the
assets held in the Preferred Investment Pool).
<PAGE> 15
EXHIBIT B
(to Second Amendment)
SECTION 5 CASH DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES
5.1 Distributions.
(a) Distributions Prior to Sixth Anniversary. Except as provided in
Sections 5.1(d), 5.1(e), 5.2 and 8.2, prior to the sixth anniversary of the
First Effective Date, all distributions by the Partnership shall be made as
follows:
(i) The Partnership shall, at least quarterly, distribute (to
the extent not prohibited by any applicable contractual restrictions) to the
holders of the Preferred Partnership Units all cash received with respect to the
Preferred Investment Pool associated with such Preferred Partnership Units,
until each holder of Preferred Partnership Units shall have received aggregate
distributions pursuant to this Section 5.1(a)(i) in an amount equal to the
product of the Effective Tax Rate times the Net Cumulative Taxable Preferred
Income allocated to such holder of Preferred Partnership Units during the period
commencing on the Initial Closing Date and ending on the last day of the fiscal
quarter immediately preceding the date of distribution.
(ii) With respect to any Fiscal Year in which Paragon is
expected (based on the Managing Partner's good faith estimate) to be allocated
Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least
quarterly, distribute (to the extent not prohibited by any applicable
contractual restrictions) to Paragon all Distributable Cash, until Paragon shall
have received distributions, with respect to the Series A Preferred Partnership
Units and the Series B Preferred Partnership Units held by it in an amount equal
to the excess of (A) the sum of (I) such estimated Net Profit expected to be
allocated pursuant to Section 5.3(b)(ii) and (II) the Net Profit allocated
pursuant to Section 5.3(b)(ii) for all prior Fiscal Years, over (B) the
distributions to Paragon pursuant to this Section 5.1(a)(ii) for all prior
Fiscal Years, which distributions shall be allocated among the Series A
Preferred Partnership Units and the Series B Preferred Partnership Units held by
Paragon, pari passu, in proportion to such excess amount calculated for each of
them.
(iii) After the Partnership has made distributions with
respect to the Preferred Partnership Units, the Series A Preferred Partnership
Units and Series B Preferred Partnership Units in accordance with clauses (i)
and (ii), the Partnership shall, at least quarterly, distribute (to the extent
not prohibited by any applicable contractual restrictions) to the Partners
Distributable Cash, in proportion to the respective amounts required to be
distributed to each such Partner pursuant to this Section 5.1(a)(iii), in an
amount equal to 25 percent of such Partner's Net Tax Amount for the taxable year
that includes such calendar quarter (as estimated in good faith by the Managing
Partner). The Managing Partner's estimate of such Partner's Net Tax Amount for
such year shall be revised prior to each distribution for such year and upon the
filing of the Partnership's Federal income tax return for such year, and
following such revision, (y) the Partnership
<PAGE> 16
2
shall distribute to such Partner the excess (if any) of the amount that should
have been distributed to such Partner pursuant to this Section 5.1(a)(iii) based
on such revised estimate, over the amount actually distributed to such Partner
pursuant to this Section 5.1(a)(iii), plus interest thereon at the rate paid by
the Partnership on its senior Indebtedness, or (z) such Partner shall contribute
to the Partnership the excess (if any) of the amount actually distributed to
such Partner pursuant to this Section 5.1(a)(iii) over the amount that should
have been distributed to such Partner pursuant to this Section 5.1(a)(iii) based
on such revised estimate, plus interest thereon at the rate paid by the
Partnership on its senior Indebtedness. To the extent there is insufficient
available cash to make distributions pursuant to this Section 5.1(a)(iii) at the
time required, the Partnership shall pay interest on such shortfall at the rate
paid by the Partnership on its senior Indebtedness, and such interest shall be
paid out of the Partnership's first available Distributable Cash.
(iv) After the Partnership has made the distributions required
by clauses (i), (ii) and (iii), any remaining Distributable Cash shall, at least
quarterly, be distributed to the Partners in accordance with their Percentage
Interests, unless they make the election provided in Section 5.1(c); provided,
however, that during the period ending on the third anniversary of the Second
Effective Date, distributions to any Partner pursuant to this Section 5.1(a)(iv)
shall not, without the consent of TWE, exceed an amount which, when added to the
distributions to such Partner pursuant to Section 5.1(a)(iii), exceed the sum of
(x) such Partner's permitted "operating cash flow distribution," as determined
pursuant to Treasury Regulation Section 1.707-4(b), and (y) the amount of
Partnership indebtedness incurred by the Partnership during the taxable year
that includes such calendar quarter and the proceeds of which are distributed to
the Partners, to the extent such indebtedness is included in such Partner's
basis in its interest in the Partnership pursuant to Code Section 752 and
Treasury Regulation Section 1.707-5(a)(2).
(b) Distributions After Sixth Anniversary. Except as provided in
Sections 5.1(d), 5.1(e), 5.2 and 8.2, on and after the sixth anniversary of the
First Effective Date, all distributions by the Partnership shall be made as
follows:
(i) The Partnership shall, at least quarterly, distribute (to
the extent not prohibited by any applicable contractual restrictions) to the
holders of the Preferred Partnership Units all cash received with respect to the
Preferred Investment Pool associated with such Preferred Partnership Units,
until each holder of Preferred Partnership Units shall have received aggregate
distributions pursuant to Section 5.1(a)(i) and this Section 5.1(b)(i) in an
amount equal to the product of the Effective Tax Rate times the Net Cumulative
Taxable Preferred Income allocated to such holder of Preferred Partnership Units
during the period commencing on the Initial Closing Date and ending on the last
day of the fiscal quarter immediately preceding the date of distribution.
<PAGE> 17
3
(ii) With respect to any Fiscal Year in which Paragon is
expected (based on the Managing Partner's good faith estimate) to be allocated
Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least
quarterly, distribute (to the extent not prohibited by any applicable
contractual restrictions) to Paragon all Distributable Cash, until Paragon shall
have received distributions, with respect to the Series A Preferred Partnership
Units and the Series B Preferred Partnership Units held by it in an amount equal
to the excess of (A) the sum of (I) such estimated Net Profit expected to be
allocated pursuant to Section 5.3(b)(ii) and (II) the Net Profit allocated
pursuant to Section 5.3(b)(ii) for all prior Fiscal Years, over (B) the
distributions to Paragon pursuant to this Section 5.1(b)(ii) for all prior
Fiscal Years, which distributions shall be allocated among the Series A
Preferred Partnership Units and the Series B Preferred Partnership Units held by
Paragon, pari passu, in proportion to such excess amount calculated for each of
them.
(iii) After the Partnership has made distributions with
respect to the Preferred Partnership Units, the Series A Preferred Partnership
Units and the Series B Preferred Partnership Units in accordance with clauses
(i) and (ii), the Partnership shall, at least quarterly, distribute (to the
extent not prohibited by any applicable contractual restrictions) to the
Partners Distributable Cash, in proportion to the respective amounts required to
be distributed to each such Partner pursuant to this Section 5.1(b)(iii), in an
amount equal to 25 percent of such Partner's Net Tax Amount for the taxable year
that includes such calendar quarter (as estimated in good faith by the Managing
Partner). The Managing Partner's estimate of such Partner's Net Tax Amount for
such year shall be revised prior to each distribution for such year and upon the
filing of the Partnership's Federal income tax return for such year, and
following such revision, (y) the Partnership shall distribute to such Partner
the excess (if any) of the amount that should have been distributed to such
Partner pursuant to this Section 5.1(b)(iii) based on such revised estimate,
over the amount actually distributed to such Partner pursuant to this Section
5.1(b)(iii), plus interest thereon at the rate paid by the Partnership on its
senior Indebtedness, or (z) such Partner shall contribute to the Partnership the
excess (if any) of the amount actually distributed to such Partner pursuant to
this Section 5.1(b)(iii) over the amount that should have been distributed to
such Partner pursuant to this Section 5.1(b)(iii) based on such revised
estimate, plus interest thereon at the rate paid by the Partnership on its
senior Indebtedness. To the extent there is insufficient available cash to make
distributions pursuant to this Section 5.1(b)(iii) at the time required, the
Partnership shall pay interest on such shortfall at the rate paid by the
Partnership on its senior Indebtedness, and such interest shall be paid out of
the Partnership's first available Distributable Cash.
(iv) After the Partnership has made the distributions required
by clauses (i), (ii) and (iii), the Partnership shall distribute (to the extent
not prohibited by any applicable contractual restrictions) any remaining
Distributable Cash to Paragon in redemption of outstanding Series A Preferred
Partnership Units and Series B Preferred
<PAGE> 18
4
Partnership Units, at a redemption price of $1,000 per Series A Preferred
Partnership Unit or Series B Preferred Partnership Unit, as the case may be, so
that the Partnership shall have redeemed such Series A Preferred Partnership
Units and Series B Preferred Partnership Units in accordance with the following:
(1) Prior to the seventh anniversary of the First
Effective Date, the Partnership shall have redeemed one-third of the number of
Series A Preferred Partnership Units and Series B Preferred Partnership Units
originally issued pursuant to Section 4.2(b);
(2) Prior to the eighth anniversary of the First
Effective Date, the Partnership shall have redeemed, in the aggregate,
two-thirds of the number of Series A Preferred Partnership Units and Series B
Preferred Partnership Units originally issued pursuant to Section 4.2(b); and
(3) On and after the eighth anniversary of the First
Effective Date, the Partnership shall have redeemed all outstanding Series A
Preferred Partnership Units and Series B Preferred Partnership Units.
Each distribution pursuant to this Section 5.1(b)(iv) shall be made with respect
to the Series A Preferred Partnership Units and the Series B Preferred
Partnership Units held by Paragon, pari passu, in proportion to the number of
each outstanding.
(v) After the Partnership shall have made all distributions
required by clauses (i), (ii), (iii) and (iv), any remaining Distributable Cash
shall, at least quarterly, be distributed to the Partners in accordance with
their Percentage Interests, unless they make the election provided in Section
5.1(c).
(c) Election Not to Receive Distribution. Notwithstanding Section
5.1(a)(iv) or Section 5.1(b)(v), at any time that the Partnership proposes to
make distributions to Advance/Newhouse, TWE or Paragon pursuant to Section
5.1(a)(iv) or Section 5.1(b)(v), any of such Partners may elect not to receive
the distribution proposed to be distributed to it, and the amount of such
proposed distribution shall be treated as a contribution to the Partnership by
such Partner pursuant to Section 4.1(d), and shall no longer be considered to be
part of Distributable Cash for purposes of Section 5.1.
(d) Net Proceeds of Sale. Following the sale, exchange, or other
disposition of all or substantially all of the assets of the Partnership, or
upon the liquidation of the Partnership within the meaning of Treasury
Regulations Section 1.704-1(b)(2)(ii)(g), and after payment of, or adequate
provision for, the debts and obligations of the Partnership, the remaining
assets of the Partnership shall be distributed (or deemed distributed in the
event of a termination under Code Section 708(b)(1)(B)) to the Partners (after
giving effect to all contributions, distributions, allocations, and other
Capital
<PAGE> 19
5
Account adjustments for all taxable years, including the year during which such
liquidation occurs) as follows:
(i) First, the applicable Preferred Investment Pool shall be
distributed to the holder of Preferred Partnership Units in redemption of all
such Preferred Partnership Units;
(ii) Second, the Priority Return accrued and unpaid as of the
date of liquidation shall be distributed to Paragon;
(iii) Third, all outstanding Series A Preferred Partnership
Units and Series B Preferred Partnership Units shall be redeemed at a redemption
price of $1,000 per Series A Preferred Partnership Unit or Series B Partnership
Unit, as the case may be; and
(iv) Finally, the remaining assets of the Partnership shall be
distributed to the Partners so as to effectuate the agreement among the Partners
that the distributions remaining after paying taxes on the Partners' Special
Income and Gross Profit and Gross Loss allocated under Section 5.3(d)(ii) with
respect to the year of such distribution are in proportion to their respective
Percentage Interests, assuming all Partners are taxed at the Special Effective
Tax Rate and taking into account any additional tax paid by Advance/Newhouse due
to the inability of it (or the Persons that are the taxpayers with respect to
income of it) to use all Taxable Loss allocable to it.
(e) Withholding. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment or
distribution to a Partner shall be treated as amounts distributed to such
Partner pursuant to Section 5.1 for all purposes of this Agreement.
5.2 Redemption of Preferred Partnership Units. Upon an Advance/Newhouse
Redemption Event, TWE Redemption Event, or Paragon Redemption Event,
Advance/Newhouse, TWE or Paragon, respectively, shall have the option to require
the Partnership to redeem all or some of the Preferred Partnership Units held by
such Partner. Such redemption option shall be exercisable by delivery of a
written notice (the "Redemption Notice") to the Partnership indicating that an
Advance/Newhouse Redemption Event, TWE Redemption Event or Paragon Redemption
Event, as applicable, has occurred, and setting forth the number of Preferred
Partnership Units to be redeemed by the Partnership (the "Redeemed Preferred
Partnership Units"). As soon as reasonably practicable, but no later than five
business days following the delivery of the Redemption Notice, the Partnership
shall distribute to Advance/Newhouse, TWE, or Paragon, as applicable, the
applicable Preferred Investment Pool (or pro rata portion thereof based on the
ratio of the number of Redeemed Preferred Partnership Units to the
<PAGE> 20
6
total number of Preferred Partnership Units held by Advance/Newhouse, TWE or
Paragon, as applicable).
5.3 Allocations of Preferred Profit; Preferred Loss; Net Profit and Net
Loss.
(a) Priority Allocations. All Preferred Profit and Preferred Loss
with respect to a Preferred Investment Pool for any Fiscal Year (or portion
thereof) shall be allocated to the holder of Preferred Partnership Units to
which such Preferred Investment Pool relates.
(b) Allocations of Net Profit. Except as otherwise provided in
Sections 5.3(d) and 5.3(e), after giving effect to the allocations provided in
Sections 5.3(a), 5.5 and 5.8, the Net Profit for each Fiscal Year (or portion
thereof) shall be allocated to the Partners as follows:
(i) First, Net Profit shall be allocated to Paragon until
Paragon shall have been allocated, with respect to the Series A Preferred
Partnership Units and the Series B Preferred Partnership Units, Net Profit in an
amount equal to the excess, if any, of (A) the aggregate Net Loss allocated to
Paragon pursuant to Section 5.3(c)(ii) for all prior Fiscal Years over (B) the
aggregate Net Profit allocated to them pursuant to this Section 5.3(b)(i) for
all prior Fiscal Years, which allocation shall be divided among the Series A
Preferred Partnership Units and the Series B Preferred Partnership Units held by
Paragon, pari passu, in proportion to such excess amount calculated for each of
them;
(ii) Second, Net Profit shall be allocated to Paragon until
Paragon shall have been allocated, with respect to the Series A Preferred
Partnership Units and the Series B Preferred Partnership Units, Net Profit in an
amount equal to the excess, if any, of (A) the cumulative Series A Priority
Return and the cumulative Series B Priority Return, in each case accrued through
the end of such Fiscal Year (or portion thereof) over (B) the aggregate Net
Profit allocated to such Partners pursuant to this Section 5.3(b)(ii) for all
prior Fiscal Years, which amount of Net Profit shall be allocated among the
Series A Preferred Partnership Units and the Series B Preferred Partnership
Units held by Paragon, pari passu, in proportion to such excess amount
calculated for each of them;
(iii) Third, Net Profit shall be allocated to the Partners, in
proportion to and to the extent of the amount required to be allocated pursuant
to this Section 5.3(b)(iii), until each such Partner has been allocated Net
Profit pursuant to this Section 5.3(b)(iii) in an amount equal to the excess of
(y) such Partner's aggregate Maximum Income Amount for such Fiscal Year and all
prior Fiscal Years, over (z) the aggregate Net Profit allocated to such Partner
pursuant to this Section 5.3(b)(iii) for all prior Fiscal Years; and
<PAGE> 21
7
(iv) Thereafter, Net Profit shall be allocated to the Partners
in accordance with their Percentage Interests.
(c) Allocations of Net Loss. Except as otherwise provided in
Sections 5.3(d) and 5.3(e), after giving effect to the allocations provided in
Sections 5.3(a), 5.5 and 5.8, Net Loss for each Fiscal Year (or portion thereof)
shall be allocated as follows:
(i) First, Net Loss for such Fiscal Year (or portion thereof)
shall be allocated to the Partners in accordance with their Percentage Interests
until TWE's and Advance/Newhouse's Capital Accounts are reduced to the excess,
if any, of the aggregate Net Profit allocated to such Partners pursuant to
Section 5.3(b)(iii) for all prior Fiscal Years, over the aggregate Special Tax
Amounts distributed to such Partners pursuant to Sections 5.1(a)(iii) and
5.1(b)(iii) for all prior Fiscal Years;
(ii) Second, Net Loss for such Fiscal Year (or portion
thereof) shall be allocated to Paragon with respect to the Series A Preferred
Partnership Units and the Series B Preferred Partnership Units, until Paragon's
Capital Account has been reduced to the excess, if any, of the aggregate Net
Profit allocated to Paragon pursuant to Section 5.3(b)(iii) for all prior Fiscal
Years, over the aggregate Special Tax Amounts distributed to pursuant to
Sections 5.1(a)(iii) and 5.1(b)(iii) for all prior Fiscal Years, which
allocation shall be divided among the Series A Preferred Partnership Units and
the Series B Preferred Partnership Units held by Paragon, pari passu, in
proportion the amount calculated with respect to each of them; and
(iii) Thereafter, Net Loss for such Fiscal Year (or portion
thereof) shall be allocated to the Partners in accordance with their Percentage
Interests.
(d) Allocation of Gain or Loss Upon Sale. Notwithstanding Section
5.3(b) and Section 5.3(c), and after giving effect to the allocations provided
in Section 5.3(a), in the event of a sale, exchange, or other disposition of all
or substantially all of the assets of the Partnership, or upon the liquidation
of the Partnership within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g), beginning in the year in which the contract or agreement
for such sale is entered into or, if such contract or agreement is entered into
on or prior to the date on which the Partnership's Federal income tax return
with respect to the prior year is required to be filed (not including any
extensions), beginning in such prior year:
(i) First, Gross Profit shall be allocated to Paragon until
Paragon shall have been allocated Gross Profit in an amount equal to the excess,
if any, of (A) the sum of (I) the aggregate Net Loss allocated to Paragon
pursuant to Section 5.3(c)(ii) for all prior Fiscal Years, and (II) the
cumulative Priority Return accrued through the end of such Fiscal Year (or
portion thereof), over (B) the aggregate Net Profit allocated to Paragon
pursuant to Sections 5.3(b)(i) and Section 5.3(b)(ii) for all
<PAGE> 22
8
prior Fiscal Years, which allocation shall be divided among the Series A
Preferred Partnership Units and the Series B Preferred Partnership Units held by
Paragon, pari passu, in proportion to such excess amount calculated for each of
them;
(ii) Finally, Gross Profit and Gross Loss shall be allocated
to the Partners so as to cause the credit balance in each Partner's Capital
Account to equal, as nearly as possible, the amount each Partner would receive
in a distribution on dissolution, if the distribution were made in accordance
with Section 5.1(d).
In the event that such sale or liquidation does not take place within the year
following the year of the signing of the contract or agreement, or upon the
termination of such contract or agreement, if earlier, allocations of Gross
Profit or Gross Loss shall be made to reverse, as rapidly as possible, the
effect of any such allocations made pursuant to this Section 5.3(d).
5.4 Section 754 Adjustment. To the extent any adjustment to the adjusted
tax basis of any asset of the Partnership pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such gain or loss shall be specially allocated to the
Partners in a manner consistent with the manner in which their Capital Accounts
are required to be adjusted pursuant to such Section of the Treasury
Regulations. Any Partner may cause the Partnership to make any election
permitted under Code Section 754.
5.5 Other Allocation Rules.
(a) In the event that the Partnership is entitled to an income tax
deduction for the excess of the Closing Price of a unit of TWX Securities on the
Initial Closing Date over the exercise price paid by the Eligible Option Holder
for such unit of TWX Securities, such deduction and an equal amount of Gross
Loss shall be specifically allocated to TWE or Paragon, as appropriate, and TWE
or Paragon, as appropriate, shall be deemed to have made a capital contribution
to the Partnership in the same amount.
(b) In the event that, pursuant to any Final Determination of the
Partnership's Taxable Income or Taxable Loss or the Partner's distributive
shares thereof, (i) the Partnership's Taxable Income or Taxable Loss is adjusted
or (ii) the Partners' distributive shares of the Partnership's Taxable Income or
Taxable Loss are adjusted, Gross Profit or Gross Loss shall be allocated to the
Partners to reflect the adjustments to the Partnership's Taxable Income or
Taxable Loss or the Partners' distributive shares thereof so as to place the
Partners as rapidly as possible, in conjunction with any distribution or
contribution pursuant to Section 5.1(a)(iii) and
<PAGE> 23
9
Section 5.1(b)(iii), in the same relative positions they would have been in had
the Taxable Income or Taxable Loss or distributive shares thereof as adjusted
been taken into account originally (including any interest with respect to any
deficiency or any refund).
(c) In the event that interest is paid by the Partnership to a
Partner pursuant to Section 5.1(a)(iii) or Section 5.1(b)(iii), a special
allocation of Gross Profit shall be made to such Partner in an amount equal to
the amount of such interest.
(d) If any fees or other payments deducted for federal income tax
purposes by the Partnership are recharacterized by a final determination of the
Internal Revenue Service as nondeductible distributions to any Partner, then,
notwithstanding all other allocation provisions, Gross Profit shall be allocated
to such Partner (for each Fiscal Year in which such recharacterization occurs)
in an amount equal to the fees or payments recharacterized.
(e) All items of Partnership income, gain, loss, deduction, and any
other allocations not otherwise provided for shall be allocated among the
Partners in the same proportion as they share the Preferred Profits, Preferred
Losses, Net Profits or Net Losses to which such items relate for the Fiscal
Year. Any credits against income tax shall be allocated among the Partners in
accordance with their Percentage Interests.
(f) For any year with respect to which the Partnership is required
to pay New York City Unincorporated Business Tax, such tax shall be allocated
among the Partners in a manner so that the benefit of any deduction, credit,
exemption or exclusion that is available to the Partnership as a result of the
activities, income or status of or payments by a particular Partner (a "Credit
Partner") shall be allocated entirely to such Credit Partner. The foregoing
shall be accomplished by charging the amount of such tax to the Capital Account
of any Partner that is not a Credit Partner and by distributing to any Credit
Partner an amount that bears the same proportion to such tax as such Credit
Partner's Percentage Interest bears to the Percentage Interests of the Partners
that are not Credit Partners.
(g) Notwithstanding Section 5.3(b), in the event that the Net Profit
allocated to the Partners pursuant to Section 5.3(b)(iii) results in an
allocation of Taxable Loss to Advance/Newhouse, then Net Profit shall be
reallocated among the Partners so as to effectuate the agreement of the Partners
that on an annual basis the distributions pursuant to Sections 5.1(a)(iii),
5.1(a)(iv), 5.1(b)(iii) and 5.1(b)(v) remaining after paying taxes on Special
Income and Net Profit allocated pursuant to Sections 5.3(b)(iii) and 5.3(b)(iv)
shall be in proportion to their respective Percentage Interests, assuming all
Partners are taxed at the Special Effective Tax Rate and taking into account any
additional tax paid by Advance/Newhouse due to the inability of it (or the
Persons that are the taxpayers with respect to income of it) to use all Taxable
Loss allocable to it.
<PAGE> 24
10
5.6 Tax Allocations.
(a) Income, gain, loss, and deduction with respect to any property
contributed to the capital of the Partnership, including property purchased with
cash contributed to the capital of the Partnership by a Partner shall, solely
for tax purposes, be allocated among the Partners so as to take account of any
variation between the adjusted basis of such property to the Partnership for
Federal income tax purposes and its initial Gross Asset Value in accordance with
the remedial allocation method set forth in Treasury Regulations Section
1.704-3(d).
(b) If the Gross Asset Value of any asset of the Partnership is
adjusted pursuant to paragraph (ii) of the definition of Gross Asset Value,
subsequent allocations of income, gain, loss, and deduction with respect to such
asset shall take account of any variation between the adjusted basis of such
asset for Federal income tax purposes and its Gross Asset Value in accordance
with Section 704(c) and the Treasury Regulations promulgated thereunder,
including Treasury Regulations Sections 1.704-1(b)(4)(i) and 1.704-3(d).
(c) Subject to Section 11.8, any election or other decision relating
to any allocations pursuant to this Section 5.6 shall be made by the
Partnership, upon the approval of such election or other decision by the
Managing Partner, in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section 5.6 are solely
for purposes of Federal, state, and local taxes and shall not affect, or in any
way be taken into account in computing, any Partner's Capital Account or share
of Net Profit, Net Loss, other items, or distributions pursuant to any provision
of this Agreement.
(d) For purposes of Sections 5.1(d) and 5.5, within 45 days after
the end of each Fiscal Year, Advance/Newhouse shall provide the Managing Partner
with the Advance/Newhouse Loss Amount for such Fiscal Year.
5.7 Allocation in Event of Transfer. If any Partnership Units are
transferred in accordance with Section 6.1, the Preferred Profit, Preferred
Loss, Net Profit and Net Loss of the Partnership shall be allocated between the
periods before and after the transfer by the closing of the books method. As of
the date of such transfer, the transferee shall succeed to the Capital Account,
Common Capital Contribution, Preferred Capital Contribution, Series A Preferred
Capital Contribution and Series B Preferred Capital Contribution of the
transferor Partner, to the extent that the transferor's Capital Account, Common
Capital Contribution, Preferred Capital Contribution, Series A Preferred Capital
Contribution and Series B Preferred Capital Contribution relate to the
transferred interest. This Section shall apply for purposes of computing a
Partner's Capital Account and for federal income tax purposes.
<PAGE> 25
11
5.8 Beneficial Assets and Subsidiary Beneficial Assets. The Partnership
shall (and the Partners shall not, except as Partners of the Partnership)
report, for Federal income tax purposes, the income, gain, deduction and loss
with respect to the Beneficial Assets that are not Subsidiary Beneficial Assets,
and the Partners shall (and the Partnership shall not) report, for Federal
income tax purposes, the income, gain, deduction and loss with respect to the
Subsidiary Beneficial Assets. In the event that, pursuant to any Final
Determination (as defined below), the Partnership either (x) is treated as the
beneficial owner of any of the Subsidiary Beneficial Assets prior to the actual
contribution of such Subsidiary Beneficial Assets to the Partnership or (y) is
treated as not the beneficial owner of any of the Beneficial Assets that are not
Subsidiary Beneficial Assets prior to the actual contribution of such Beneficial
Assets to the Partnership, to the extent necessary, appropriate adjustments
shall be made to the distributions provided for in Section 5.1 so as to place
the Partners and the Partnership in the same positions they would have been in
had the Partnership's beneficial ownership of the Subsidiary Beneficial Assets
or lack of beneficial ownership of such other Beneficial Assets been taken into
account originally.
5.9 Set-off. If (a) by the earlier of the fourth anniversary of the First
Effective Date, a restructuring of the Partnership pursuant to Section 8.2, or
the purchase and sale of Common Partnership Units pursuant to Section 9(g)(ii),
Advance/Newhouse shall not have contributed to the Partnership cash in an amount
equal to the First Advance/Newhouse Contribution Amount plus interest thereon in
accordance with Section 4.1(b)(ii) or (b) by the earlier of the fourth
anniversary of the Second Effective Date, a restructuring of the Partnership
pursuant to Section 8.2, or the purchase and sale of Common Partnership Units
pursuant to Section 9(g)(ii), Advance/Newhouse shall not have contributed to the
Partnership cash in an amount equal to the Second Advance/Newhouse Contribution
Amount, then, in addition to any other rights and remedies which the Partnership
may have, the Partnership is hereby authorized at any time and from time to
time, to the fullest extent permitted by law and without prior notice to
Advance/Newhouse (or any successor to or transferee of its Partnership
Interests), to recoup, set-off and apply any and all amounts at any time owing
or otherwise payable by the Partnership to Advance/Newhouse (or any successor to
or transferee of its Partnership Interests), including, without limitation, any
distributions payable in accordance with Section 5 and any distributions to, or
Partnership liabilities assumed by, Advance/Newhouse in accordance with Section
8.2, and any amounts payable to Advance/Newhouse pursuant to Section 9, to
satisfy Advance/Newhouse's obligations to make such contribution. To the extent
that any amounts distributable in accordance with Section 5 or Section 8.2 are
applied in accordance with the preceding sentence rather than distributed to
Advance/Newhouse (or any successor to or transferee of its Partnership
Interests), then such amounts shall be deemed distributed by the Partnership to
Advance/Newhouse (or such successor or transferee) and recontributed by
Advance/Newhouse (or such successor or transferee) to the Partnership and the
Capital
<PAGE> 26
12
Account of Advance/Newhouse (or such successor or transferee) shall be adjusted
to reflect such deemed distribution and recontribution.
<PAGE> 27
EXHIBIT C
(to Second Amendment)
8.2 Restructuring of Partnership.
(a) Upon delivery of a Restructuring Notice in accordance with
Section 8.1 above, Advance/Newhouse and TWE shall negotiate in good faith
the restructuring of the Partnership in a manner intended to minimize
federal, state and local taxes. Within 60 days after delivery of a
Restructuring Notice, upon the request of any Partner, the Managing
Partner shall provide all Partners with a report listing all assets of the
Partnership, including all projects in development and/or for which the
Partnership has been charged.
(b) If, after a period of three months from the date of
delivery of the Restructuring Notice, Advance/Newhouse and TWE have failed
to agree on the terms of the restructuring of the Partnership, the
Partnership shall be restructured by the withdrawal of Advance/Newhouse
from the Partnership as follows:
(i) Within 15 days following the expiration of such
three-month period, (A) if at such time Advance/Newhouse holds Preferred
Partnership Units the Partnership shall distribute the Preferred
Investment Pool attributable to such Preferred Partnership Units in
redemption of all Preferred Partnership Units then held by
Advance/Newhouse, (B) the Partnership shall calculate the "Restructuring
Indebtedness Amount" (as defined in Section 8.2(b)(v) and the "Excess Tax
Amount" (as defined in Section 8.2(b)(vi)) of Advance/Newhouse, if any,
(C) subject to obtaining any required governmental or other third-party
consents or approvals, the Partnership shall distribute 33-1/3% of the Pro
Rata Assets (as defined below) to Advance/Newhouse, and (D) TWE shall (1)
divide the remaining assets (and related liabilities) of the Partnership
into three pools (the "Asset Pools") which shall meet the Asset Pool
Criteria (as defined below) but which shall in any event be of equal value
(in TWE's judgment), and (2) deliver a written notice to Advance/Newhouse
setting forth the cable television systems and other assets contained in
each such Asset Pool (the "Asset Pool Notice"). To the extent physically
possible without impairing their inherent operability, assets of the
Partnership which relate to more than one cable television system or to
the Partnership as a whole shall be allocated either equally to every pool
or on a 2/3:1/3 basis to the Partnership and Advance/Newhouse,
respectively. Prior to making any distribution under this Section 8.2(b)
or delivering the Asset Pool Notice, the Partnership or TWE, as
applicable, shall contribute the assets comprising all developmental
projects in which the Partnership has an interest and/or for which the
Partnership has been charged (subject to the associated liabilities) to a
separate legal entity or otherwise reconstitute such assets (subject to
the associated liabilities) in a form (on terms agreed upon by
Advance/Newhouse, TWE, and Paragon) that allows an allocation of such
assets (subject to the associated liabilities) to Advance/Newhouse and the
<PAGE> 28
2
Partnership as described in the previous sentence. For the purposes of the
foregoing, "Pro Rata Assets" shall mean those assets of the Partnership,
including without limitation those Beneficial Assets and Subsidiary
Beneficial Assets, that are readily divisible into three identical pools
without any material diminution in the aggregate value of such assets
resulting from such division (such as stock, partnership interests and
similar investments). For purposes of the foregoing, "Asset Pool Criteria"
shall mean (I) no Preferred Cluster Area may be allocated to more than one
Asset Pool, except in accordance with the following: (A) if the number of
Subscribers in the Preferred Cluster Area having the largest number of
Subscribers exceeds the product of the Determined Percentage and the
number of all Subscribers in all Preferred Cluster Areas, then such excess
may be allocated to more than one Asset Pool; and (B) if the Preferred
Cluster Area having the largest number of Subscribers has been allocated
to more than one Asset Pool, and if the number of Subscribers in the
Preferred Cluster Area having the second largest number of Subscribers
exceeds 33-1/3% of all Subscribers of all the Partnership Systems, then
such excess may be allocated to more than one Asset Pool, and (II) (A)
Subscribers in the same ADI in a Preferred Cluster Area may not be
allocated to more than one pool, except to the extent that any one ADI in
a Preferred Cluster Area is permitted to be split under clause (I) above,
and (B) to the extent any ADI's are split they shall be split only along
the lines of operable units.
(ii) Within 30 days following the delivery by TWE of the
Asset Pool Notice, Advance/Newhouse shall select and retain ownership of
one of the Asset Pools and the Partnership shall retain ownership of the
remaining Asset Pools; provided that if Advance/Newhouse fails to make
such selection within such 30-day period, then the Partnership shall be
entitled to select and retain ownership of two of the Asset Pools and
Advance/Newhouse shall retain ownership of the remaining Asset Pool. The
Asset Pools allocated to Advance/Newhouse and the Partnership in
accordance with this paragraph (ii) are referred to herein as the
"Advance/Newhouse Asset Pool" and the "TWE Asset Pools," respectively.
(iii) As promptly as practical following the
determination of the Advance/Newhouse Asset Pool and the TWE Asset Pools
in accordance with paragraph (ii), subject to obtaining any required
governmental or other third-party consents or approvals, the Partnership
shall distribute the cable television systems and other assets comprising
the Advance/Newhouse Asset Pool to Advance/Newhouse in complete
liquidation of its Common Partnership Units; provided that with respect to
any assets in the Advance/Newhouse Pool that for Federal income tax
purposes were deemed contributed to the Partnership within the immediately
preceding Applicable Contribution Period by TWE or Paragon and with
respect to any assets in the TWE Asset Pools that for Federal income tax
<PAGE> 29
3
purposes were deemed contributed to the Partnership within the immediately
preceding Applicable Contribution Period by Advance/Newhouse, the Partners
shall cooperate to cause such liquidation of the Advance/Newhouse Common
Partnership Units to be effectuated in a manner, and agree to defer the
distribution of assets to such time, as will minimize the taxes payable in
connection with such liquidation.
(iv) As the cable television systems and other assets
comprising the Advance/Newhouse Asset Pool are distributed or deemed
distributed for Federal income tax purposes, (A) if there is an Excess Tax
Amount with respect to Advance/Newhouse, the Partnership shall be
allocated liabilities otherwise allocable to the Advance/Newhouse Pool
(the "Excess Tax Amount Indebtedness") equal to the product of (y) one (1)
minus the Advance/Newhouse Percentage Interest, and (z) such Excess Tax
Amount of Advance/Newhouse, (B) Advance/Newhouse shall execute an
assumption agreement pursuant to which it will assume (or to the extent
necessary, in the case of clause (II) below, will refinance or repay) (I)
all liabilities relating to, arising out of or otherwise attributable to
the Advance/Newhouse Asset Pool (as reduced by the Excess Tax Amount
Indebtedness, if any), and (II) liabilities otherwise allocable to the TWE
Asset Pools (the "Restructuring Indebtedness") in an amount equal to the
Restructuring Indebtedness Amount and will further agree to indemnify the
Partnership for any losses the Partnership might suffer with respect to
any of such liabilities, and (C) the Partnership shall agree to indemnify
Advance/Newhouse for any losses Advance/Newhouse might suffer with respect
to any liabilities relating to, arising out of or otherwise attributable
to the TWE Asset Pools or the Excess Tax Amount Indebtedness. The
assumption agreement to be executed by Advance/Newhouse shall contain the
terms contained in the Assumption Agreement executed by the Partnership in
accordance with Section 3.4(a) of the Contribution Agreement and the
indemnity of Advance/Newhouse and the Partnership shall be in the form of
Sections 8.2 and 8.3 of the Contribution Agreement. As Advance/Newhouse
assumes liabilities relating to, arising out of or otherwise attributable
to the Advance/Newhouse Asset Pool, Paragon shall guarantee remaining
liabilities of the Partnership and take other steps reasonably necessary
so as to reduce, to the greatest extent possible, the Debt Shift Tax
Amount arising from the restructuring; provided however, that Paragon
shall not be required to guarantee remaining liabilities of the
Partnership to the extent such guarantee would cause TWE to recognize
income pursuant to Code Sections 731 and 752. To the extent possible,
liabilities assumed by Advance/Newhouse shall be qualified liabilities (as
defined in Treasury Regulation Section 1.707-6(b)(2)) of the Partnership.
(v) The "Restructuring Indebtedness Amount" shall equal
the product of (A) the Advance/Newhouse Percentage Interest, and (B) the
<PAGE> 30
4
sum of (i) the Priority Return accrued and unpaid as of the date of
distribution with respect to the Series A Preferred Partnership Units and
the Series B Preferred Partnership Units held by Paragon, (ii) the
redemption price for all outstanding Series A Preferred Partnership Units
and Series B Preferred Partnership Units held by Paragon, and (iii) the
sum of the Excess Tax Amount for the Partners other than Advance/Newhouse
and other than the Satisfied Partner.
(vi) The "Excess Tax Amount" means, for each of two
Partners, the Tax Amount that would be remaining for such Partners if the
Partnership were to distribute the aggregate Tax Amounts of all Partners
to the Partners in accordance with their Percentage Interests until one
Partner (the "Satisfied Partner") shall have received its entire Tax
Amount.
(vii) The "Tax Amount" means, for any Partner, the sum
of the following amounts determined for such Partner, as applicable:
(1) If the restructuring has occurred as a result
of the delivery by Advance/Newhouse of a Restructuring Notice that is not
a Spin-Off Restructuring Notice:
(I) with respect to Paragon, the Paragon
704(c)(1)(B) Tax Amount with respect to assets deemed for Federal income
tax purposes contributed to the Partnership within the immediately
preceding Applicable Contribution Period by Paragon that are allocated to
the Advance/Newhouse Asset Pool,
(II) with respect to TWE, if the
distribution of the Advance/Newhouse Asset Pool occurs after April 1,
2000, the TWE 704(c)(1)(B) Tax Amount with respect to assets deemed for
Federal income tax purposes contributed to the Partnership by TWE pursuant
to the First Transaction Agreement within the immediately preceding
Applicable Contribution Period that are allocated to the Advance/Newhouse
Asset Pool,
(III) with respect to each Partner, the
Restructuring Deferred Tax Amount with respect to assets contributed by
such Partner (other than, in the case of TWE and Paragon, the assets
referred to in clauses (I) and (II)), and
(IV) with respect to Paragon, the Debt Shift
Tax Amount.
<PAGE> 31
5
(2) If the restructuring has occurred as a result
of the delivery by TWE of the Restructuring Notice or the delivery by
Advance/Newhouse of a Restructuring Notice that is a Spin-Off
Restructuring Notice:
(I) with respect to Paragon, the Paragon
704(c)(1)(B) Tax Amount with respect to assets deemed for Federal income
tax purposes contributed to the Partnership within the immediately
preceding Applicable Contribution Period by Paragon that are allocated to
the Advance/Newhouse Asset Pool,
(II) with respect to each Partner, the
Restructuring Deferred Tax Amount with respect to assets contributed by
such Partner (other than, in the case of Paragon, the assets referred to
in clause (I) above), and
(III) with respect to Paragon, the Debt
Shift Tax Amount.
(c) During the period from the date of delivery of a
Restructuring Notice in accordance with Section 8.1 to the date of
determination of the Advance/Newhouse Asset Pool and TWE Asset Pools in
accordance with Section 8.2(b)(ii), the Partnership shall conduct its
business in the ordinary course, consistent with past practice, and shall
not engage in any extraordinary transactions that were not contemplated by
a previously approved Long Term Strategic Plan or approved by the
Executive Committee with the consent of Advance/Newhouse's
representatives. Following the determination of the Advance/Newhouse Asset
Pool and the TWE Asset Pools in accordance with Section 8.2(b)(ii), to the
extent permitted by law, (i) the assets comprising such Asset Pools shall
for all purposes be deemed to be owned by Advance/Newhouse and the
Partnership, respectively, (ii) the Restructuring Indebtedness shall for
all purposes be deemed to be an obligation of Advance/Newhouse and
Advance/Newhouse shall have no obligation with respect to the Excess Tax
Amount Indebtedness which shall for all purposes be deemed to be an
obligation of TWE and Paragon as Partners of the Partnership following the
restructuring of the Partnership hereunder, and (iii) until the
Advance/Newhouse Asset Pool is actually distributed to Advance/Newhouse,
(1) Advance/Newhouse's Partnership Interest shall entitle it only to (A) a
distributive share of the income, gain, losses and deductions related to
the Advance/Newhouse Asset Pool, (B) a distributive share of the assets
comprising the Advance/Newhouse Asset Pool (subject to the related
liabilities and the Restructuring Indebtedness) and (C) management rights
relating to the business and affairs of the Advance/Newhouse Asset Pool,
and (2) TWE's and Paragon's Partnership Interest shall entitle them only
to (A) a
<PAGE> 32
6
distributive share of the income, gain, losses and deductions related to
the TWE Asset Pools, (B) a distributive share of the assets comprising the
TWE Asset Pools (subject to the related liabilities and the Excess Tax
Amount Indebtedness) and (C) management rights relating to the business
and affairs of the TWE Asset Pools.
<PAGE> 1
Exhibit 10.42
THIRD AMENDMENT TO THE
PARTNERSHIP AGREEMENT OF
TIME WARNER ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP
THIRD AMENDMENT TO THE PARTNERSHIP AGREEMENT OF TIME WARNER
ENTERTAINMENT-ADVANCE/NEWHOUSE PARTNERSHIP, dated as of March 1, 1999 (this
"Amendment") among Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), Advance/Newhouse Partnership, a New York general
partnership ("Advance/Newhouse"), and Paragon Communications, a Colorado general
partnership ("Paragon").
WHEREAS, Time Warner Entertainment-Advance/Newhouse Partnership, a
New York general partnership (the "Partnership"), was formed between TWE and
Advance/Newhouse pursuant to a Partnership Agreement dated as of September 9,
1994 (the "Original Agreement"), as amended by the First Amendment to the
Partnership Agreement of the Partnership dated as of February 12, 1998 (the
"First Amendment" and the Second Amendment to the Partnership Agreement dated as
of December 31, 1998 (the "Second Amendment" and together with the Original
Agreement and the First Amendment, the "Partnership Agreement");
WHEREAS, pursuant to a Transaction Agreement No. 2, dated as of June
23, 1998 (the "Second Transaction Agreement") and a Transaction Agreement No. 3
dated September 15, 1998 (the "Third Transaction Agreement"), each among Advance
Publications, Inc., Newhouse Broadcasting Corporation, Advance/Newhouse, TWE,
Paragon and the Partnership, Paragon has agreed to contribute to the Partnership
certain assets and Advance/Newhouse has agreed to contribute to the Partnership
additional cash;
WHEREAS, pursuant to Section 15.4 of the Partnership Agreement, the
Partnership Agreement may be amended by an instrument in writing signed by TWE,
Advance/Newhouse and Paragon; and
WHEREAS, the parties hereto desire to enter into this Amendment in
connection with the transactions contemplated by the Third Transaction
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:
I.
AMENDMENTS TO SECTION 1
(1) The following definitions shall be deleted in their entirety:
"Advance/Newhouse Contribution Amount"; "Effective Date"; "Paragon Preferred
<PAGE> 2
Capital Contribution"; "Paragon Preferred Partnership Unit"; "Priority Return";
and "Transaction Agreement."
(2) The following definitions shall be added to the Partnership
Agreement:
"First Advance/Newhouse Contribution Amount" has the meaning
ascribed to "Advance/Newhouse Contribution Amount" in Section 5 of
the First Transaction Agreement.
"First Effective Date" has the meaning ascribed to "Effective
Date" in Section 6 of the First Transaction Agreement.
"First Transaction Agreement" means the Amended and Restated
Transaction Agreement, dated as of October 27, 1997, among Advance,
Newhouse, Advance/Newhouse, TWE, TW Holding Co. and the Partnership.
"Priority Return" shall mean the sum of the Series A Priority
Return and the Series B Priority Return.
"Series A Preferred Capital Contribution" means, with respect
to Paragon, a Capital Contribution by Paragon pursuant to this
Agreement (other than cash deemed contributed in exchange for
Preferred Partnership Units pursuant to Section 4.1(e)) of assets
having a fair market value of $1,000 for each Series A Preferred
Partnership Unit issued to Paragon pursuant to Section 4.2(b)(i).
"Series A Preferred Partnership Unit" means Paragon's right to
distributions in an amount equal to the Series A Priority Return
allocable to the Series A Preferred Capital Contribution of $1,000
and the right to a return of such Series A Preferred Capital
Contribution in redemption thereof, all of which shall be payable in
accordance with Section 5, together with all allocations of income
attributable thereto, as specified in Section 5.
"Series A Priority Return" means, with respect to each
outstanding Series A Preferred Partnership Unit, a sum equal to 10
1/4 percent for the actual number of days in the period for which
the Series A Priority Return is being calculated, cumulative and
compounded annually, on the amount of $1,000 plus any accrued and
unpaid Series A Priority Return with respect to such Series A
Preferred Partnership Unit, commencing on the First Effective Date.
"Series B Preferred Capital Contribution" means with respect
to Paragon, a Capital Contribution by Paragon pursuant to this
Agreement (other than cash deemed contributed in exchange for
Preferred Partnership Units pursuant to Section 4.1(e)) of assets
having a fair market value of $1,000 for each Series B Preferred
Partnership Unit issued to Paragon pursuant to Section 4.2(b)(ii).
<PAGE> 3
"Series B Preferred Partnership Unit" means, with respect to
Paragon, such Partner's right to distributions in an amount equal to
the Series B Priority Return allocable to such Partner's Series B
Preferred Capital Contribution of $1,000 and the right to a return
of such Series B Preferred Capital Contribution in redemption
thereof, all of which shall be payable in accordance with Section 5,
together with all allocations of income attributable thereto, as
specified in Section 5.
"Series B Priority Return" means, with respect to each
outstanding Series B Preferred Partnership Unit, a sum equal to 2%
plus the Partnership's cost of borrowing under its senior credit
facility for the actual number of days in the period for which the
Series B Priority Return is being calculated, cumulative and
compounded annually, on the amount of $1,000 plus any accrued and
unpaid Series B Priority Return with respect to such Series B
Preferred Partnership Unit, commencing on the (i) Texas Effective
Date, in the case of Series B Preferred Partnership Units issued
pursuant to Section 4.2(b)(ii) or (ii) the Winston Salem Effective
Date, in the case of Series B Preferred Partnership Units issued
pursuant to Section 4.2(b)(iii).
"TCI Contribution Agreement" has the meaning ascribed thereto
in the Texas Transaction Agreement.
"Texas Advance/Newhouse Contribution Amount" has the meaning
ascribed to "Advance/Newhouse Contribution Amount" in Section 4 of
the Texas Transaction Agreement.
"Texas Effective Date" has the meaning ascribed to "Effective
Date" in Section 5 of the Texas Transaction Agreement.
"Texas Transaction Agreement" means the Transaction Agreement
No. 2, dated as of June 23, 1998, among Advance, Newhouse,
Advance/Newhouse, TWE, Paragon and the Partnership.
"Winston Salem Advance/Newhouse Contribution Amount" has the
meaning ascribed to "Advance/Newhouse Contribution Amount" in
Section 4 of the Winston Salem Transaction Agreement.
"Winston Salem Effective Date" has the meaning ascribed to
"Effective Date" in Section 5 of the Winston Salem Transaction
Agreement.
"Winston Salem Transaction Agreement" means the Transaction
Agreement No. 3, dated as of September 15, 1998 among Advance,
Newhouse, Advance/Newhouse, TWE, Paragon and the Partnership.
(3) The following defined terms shall be deleted in their entirety
and the following substituted therefor:
"Capital Account" means an account to be maintained for each
Partner which, subject to any contrary requirements of the Code,
shall
<PAGE> 4
equal the aggregate value of such Partner's Partnership Interest on
the Winston Salem Effective Date,
(A) increased by (i) the amount of cash contributed by
such Partner to the Partnership after the Winston Salem
Effective Date (not including interest paid by such Partner
pursuant to Section 4.1(b)(ii), Section 4.1(b)(iii), Section
4.1(b)(iv), Section 5.1(a)(iii)(z) or Section 5.1(b)(iii)(z)
and not including cash deemed contributed by any Partner
pursuant to Section 4.1(e)); (ii) the fair market value
without regard to Code Section 7701(g) of property contributed
by such Partner to the Partnership after the Winston Salem
Effective Date (net of liabilities secured by such contributed
property that the Partnership is considered to assume or take
subject to under Code Section 752) (treating any Subsidiary
Beneficial Assets and other Beneficial Assets as if they had
been contributed on the Initial Closing Date, the First
Effective Date, the Texas Effective Date or the Winston Salem
Effective Date, as applicable, and disregarding any subsequent
actual contribution of such Subsidiary Beneficial Assets and
other Beneficial Assets and any cash flow related thereto);
(iii) allocations to it after the Winston Salem Effective Date
of Preferred Profit, Gross Profit and Net Profit pursuant to
Section 5; (iv) the amount of any liabilities of the
Partnership that are assumed by such Partner pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(c); and (v)
other additions made in accordance with the Code and the
provisions of Treasury Regulations Section 1.704-1(b)(2)(iv);
and
(B) decreased by (i) the amount of cash distributed to
such Partner by the Partnership after the Winston Salem
Effective Date; (ii) allocations to the Partner after the
Winston Salem Effective Date of Preferred Loss, Gross Loss and
Net Loss pursuant to Section 5; (iii) the fair market value
without regard to Code Section 7701(g) of property distributed
to such Partner by the Partnership after the Winston Salem
Effective Date (net of liabilities secured by such distributed
property or that such Partner is considered to assume or take
subject to under Code Section 752) (taking into account any
deemed distributions of Subsidiary Beneficial Assets and other
Beneficial Assets); (iv) the amount of such Partner's
individual liabilities that are assumed by the Partnership
after the Winston Salem Effective Date pursuant to Treasury
Regulations Section 1.704-1(b)(2)(iv)(c); and (v) other
deductions made in accordance with the Code and the provisions
of Treasury Regulations Section 1.704-1(b)(2)(iv).
Notwithstanding the foregoing, for purposes of determining Capital
Accounts, (v) all of the adjustments, contributions or distributions
required pursuant to the Contribution Agreement to be made
subsequent to the Initial Closing Date and the contribution of TWE
pursuant to Section 4.1(c)(ii) hereof shall be treated as if they
had been made on the Initial Closing Date, (w) the Paragon
Adjustment Amount and the TWE
<PAGE> 5
Adjustment Amount (as such terms are defined in Section 11 of the
First Transaction Agreement) shall be treated as if they had been
made on the First Effective Date, (x) all of the adjustments,
contributions or distributions required pursuant to the Texas
Transaction Agreement or the TCI Contribution Agreement shall be
treated as if they had been made on the Texas Effective Date, (y)
all of the adjustments, contributions or distributions required
pursuant to the Winston Salem Transaction Agreement shall be treated
as if they had been made on the Winston Salem Effective Date, and
(z) such adjustments, contributions, distributions, and Adjustment
Amounts shall not give rise to any adjustments to Capital Account
balances or redetermination of amounts contributed by or distributed
to any Partner.
"Capital Contribution" means either a Common Capital
Contribution, a Preferred Capital Contribution, a Series A Preferred
Capital Contribution or a Series B Preferred Capital Contribution.
"Common Capital Contribution" means, (i) with respect to TWE
and Advance/Newhouse, the amount of cash contributed by such Partner
to the Partnership pursuant to this Agreement (other than cash
deemed contributed in exchange for Preferred Partnership Units
pursuant to Section 4.1(e)) plus the fair market value without
regard to Code Section 7701(g) of property contributed by such
Partner to the Partnership pursuant to this Agreement (net of
liabilities that are secured by such contributed property or that
either Partner is considered to assume under Code Section 752); and
(ii) with respect to Paragon, the excess of (A) the amount of cash
contributed by such Partner to the Partnership pursuant to this
Agreement (other than cash deemed contributed in exchange for
Preferred Partnership Units pursuant to Section 4.1(e)) plus the
fair market value without regard to Code Section 7701(g) of property
contributed by such Partner to the Partnership pursuant to this
Agreement (net of liabilities that are secured by such contributed
property or that either Partner is considered to assume under Code
Section 752), over (B) the sum of the Series A Preferred Capital
Contribution and the Series B Preferred Capital Contribution; and
(iii) with respect to all Partners treating any Subsidiary
Beneficial Assets and other Beneficial Assets as if they had been
contributed on the Initial Closing Date, the First Effective Date,
the Texas Effective Date or the Winston Salem Effective Date, as
applicable, and disregarding any subsequent actual contribution of
such Subsidiary Beneficial Assets or other Beneficial Assets and any
cash flow related thereto).
"Determined Percentage" means 35%.
"Partnership Unit" means either a "Common Partnership Unit," a
"Preferred Partnership Unit," a "Series A Preferred Partnership Unit
or a "Series B Preferred Partnership Unit," as defined in this
Agreement.
<PAGE> 6
II.
OTHER AMENDMENTS
(1) Section 4 of the Partnership Agreement shall be deleted in its
entirety and new Section 4 in the form attached hereto as Exhibit A shall be
substituted therefor.
(2) Section 5 of the Partnership Agreement shall be deleted in its
entirety and new Section 5 in the form attached hereto as Exhibit B shall be
substituted therefor.
(3) Section 8.2 of the Partnership Agreement shall be deleted in its
entirety and new Section 8.2 in the form attached hereto as Exhibit C shall be
substituted therefor.
(4) The last sentence of Section 9(d) of the Partnership Agreement
shall be amended by deleting the words "Paragon Preferred Partnership Units" and
substituting therefor the words "Series A Preferred Partnership Units and Series
B Preferred Partnership Units."
(5) Section 12.3(b) of the Partnership Agreement shall be amended by
deleting "Section 5.1(c)" and substituting therefor the words "Section 5.1(d)."
III.
GENERAL PROVISIONS
(1) Governing Law; Venue; Disputes. This Amendment shall be governed
by the internal laws of the State of New York. Any action, suit or proceeding
shall be prosecuted as to any party hereto in the County of New York, State of
New York.
(2) Captions. Section headings contained in this Amendment are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Amendment.
(3) Other Provisions. Except as amended hereby, the Partnership
Agreement shall in all respects continue in full force and effect and the
parties ratify and confirm that they continue to be bound by the terms and
conditions thereof.
(4) Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first above written.
ADVANCE/NEWHOUSE PARTNERSHIP
By: Advance Communication Corp.,
General Partner
By: /s/ Robert J. Miron
-------------------------------
Name: Robert J. Miron
Title: President
By: Newhouse Broadcasting
Corporation, General Partner
By: /s/ Robert J. Miron
-------------------------------
Name: Robert J. Miron
Title: Vice President
TIME WARNER ENTERTAINMENT COMPANY, L.P.
By: /s/ Spencer B. Hays
-----------------------------------
Name: Spencer B. Hays
Title: Vice President
PARAGON COMMUNICATIONS
By: KBL Communications, Inc.,
Managing General Partner
By: /s/ Spencer B. Hays
-------------------------------
Name: Spencer B. Hays
Title: Senior Vice President
<PAGE> 8
EXHIBIT A
(to Third Amendment)
SECTION 4 PARTNERSHIP CAPITAL
4.1 Capital Contributions.
(a) Initial Contributions. Upon the execution of the Partnership
Agreement, Advance/Newhouse contributed to the Partnership cash in the amount of
$30.00 and TWE contributed to the Partnership cash in the amount of $60.00.
(b) Additional Contributions by Advance/Newhouse.
(i) On the Initial Closing Date and from time to time
thereafter as provided in the Contribution Agreement, and in accordance with the
terms and conditions of the Contribution Agreement, Advance/Newhouse contributed
or caused to be contributed to the Partnership those assets (including the
Beneficial Assets and the Subsidiary Beneficial Assets) specified to be so
contributed in the Contribution Agreement. The Partners agree that as of the
Initial Closing Date the fair market value of the assets contributed by
Advance/Newhouse pursuant to this Section 4.1(b) shall be determined in
accordance with Section 2.4 of the Contribution Agreement, or as otherwise
agreed to by the parties, and included in the Partnership's records.
(ii) At any time after the date that is six months following
the First Effective Date and on or before the earlier of the fourth anniversary
of the First Effective Date, a restructuring of the Partnership pursuant to
Section 8.2, or the purchase and sale of Common Partnership Units pursuant to
Section 9(g)(ii), Advance/Newhouse shall contribute to the Partnership cash in
the amount of the First Advance/Newhouse Contribution Amount. In addition,
Advance/Newhouse shall pay interest on the First Advance/Newhouse Contribution
Amount at the Interest Rate (as defined in Section 5 of the First Transaction
Agreement) compounded (to the extent not paid) on a quarterly basis, from July
1, 1996 until the date on which the First Advance/Newhouse Contribution Amount
is paid. On the First Effective Date, Advance/Newhouse executed the
Advance/Newhouse Note (as defined in Section 5 of the First Transaction
Agreement) which is not an asset of the Partnership but secures
Advance/Newhouse's obligation to contribute the First Advance/Newhouse
Contribution Amount to the Partnership, plus interest, as provided in this
Section 4.1(b)(ii).
(iii) At any time after the date that is six months following
the Texas Effective Date and on or before the earlier of the fourth anniversary
of the Texas Effective Date, a restructuring of the Partnership pursuant to
Section 8.2, or the purchase and sale of Common Partnership Units pursuant to
Section 9(g)(ii), Advance/Newhouse shall contribute to the Partnership cash in
the amount of the Texas Advance/Newhouse Contribution Amount. In addition,
Advance/Newhouse shall pay interest on the Texas Advance/Newhouse Contribution
Amount at the Interest Rate (as defined in Section 4 of the Texas Transaction
Agreement) compounded (to the extent not paid) on a quarterly basis, from the
Texas Effective Date until the date on which the Texas Advance/Newhouse
Contribution Amount is paid. On the Texas Effective
<PAGE> 9
Date, Advance/Newhouse shall execute the Advance/Newhouse Note (as defined in
Section 4 of the Texas Transaction Agreement) which shall not be an asset of the
Partnership but shall secure Advance/Newhouse's obligation to contribute the
Texas Advance/Newhouse Contribution Amount to the Partnership, plus interest, as
provided in this Section 4.1(b)(iii).
(iv) At any time after the date that is six months following
the Winston Salem Effective Date and on or before the earlier of July 1, 2000, a
restructuring of the Partnership pursuant to Section 8.2, or the purchase and
sale of Common Partnership Units pursuant to Section 9(g)(ii), Advance/Newhouse
shall contribute to the Partnership cash in the amount of the Winston Salem
Advance/Newhouse Contribution Amount. In addition, Advance/Newhouse shall pay
interest on the Winston Salem Advance/Newhouse Contribution Amount at the
Interest Rate (as defined in Section 4 of the Winston Salem Transaction
Agreement) compounded (to the extent not paid) on a quarterly basis, from July
1, 1998 until the date on which the Winston Salem Advance/Newhouse Contribution
Amount is paid in full, subject to a prepayment penalty if paid prior to July 1,
2000 as described in Section 4 of the Winston Salem Transaction Agreement. On
the Winston Salem Effective Date, Advance/Newhouse shall execute the
Advance/Newhouse Note (as defined in Section 4 of the Winston Salem Transaction
Agreement) which shall not be an asset of the Partnership but shall secure
Advance/Newhouse's obligation to contribute the Winston Salem Advance/Newhouse
Contribution Amount to the Partnership, plus interest, as provided in this
Section 4.1(b)(iv).
(c) Additional Contributions by TWE.
(i) On the Initial Closing Date and from time to time
thereafter as provided in the Contribution Agreement, and in accordance with the
terms and conditions of the Contribution Agreement, TWE contributed to the
Partnership those assets (including the Beneficial Assets and the Subsidiary
Beneficial Assets) specified to be so contributed in the Contribution Agreement.
The Partners agree that as of the Initial Closing Date the fair market value of
the assets contributed by TWE pursuant to this Section 4.1(c) shall be
determined in accordance with Section 2.4 of the Contribution Agreement, or as
otherwise agreed to by the parties, and included in the Partnership's records.
(ii) On the First Effective Date and from time to time
thereafter as provided in the First Transaction Agreement and in accordance with
the terms and conditions of the First Transaction Agreement, TWE contributed to
the Partnership those assets specified in Section 2(a) of the Transaction
Agreement, subject to the liabilities set forth in the First Transaction
Agreement. Such contribution by TWE was in satisfaction of certain of its
obligations, including under the Contribution Agreement, as provided in Section
2(d) of the Transaction Agreement.
(d) Contributions by Paragon.
(i) On the First Effective Date and from time to time
thereafter as provided in the First Transaction Agreement and in accordance with
the terms and conditions of the First Transaction Agreement, Paragon contributed
to the Partnership those assets specified on Schedule 1 of the First Transaction
Agreement and in Section 2(b) of the First Transaction Agreement, subject to the
liabilities set forth in the First Transaction Agreement. For purposes of
establishing Capital Accounts, the Partners
<PAGE> 10
agree that as of the First Effective Date, the fair market value of the assets
contributed by Paragon pursuant to this Section 4.1(d)(i) shall be determined in
accordance with the First Transaction Agreement.
(ii) On the Texas Effective Date and from time to time
thereafter as provided in the Texas Transaction Agreement and in accordance with
the terms and conditions of the Texas Transaction Agreement, Paragon contributed
to the Partnership those assets specified on Schedule 1 of the Texas Transaction
Agreement, subject to the liabilities set forth in the Texas Transaction
Agreement. For purposes of establishing Capital Accounts, the Partners agree
that as of the Texas Effective Date, the fair market value of the assets
contributed by Paragon pursuant to this Section 4.1(d)(ii) shall be determined
in accordance with the Texas Transaction Agreement.
(iii) On the Winston Salem Effective Date and from time to
time thereafter as provided in the Winston Salem Transaction Agreement and in
accordance with the terms and conditions of the Winston Salem Transaction
Agreement, Paragon shall contribute to the Partnership those assets specified on
Schedule 1 of the Winston Salem Transaction Agreement, subject to the
liabilities set forth in the Winston Salem Transaction Agreement. For purposes
of establishing Capital Accounts, the Partners agree that as of the Winston
Salem Effective Date, the fair market value of the assets contributed by Paragon
pursuant to this Section 4.1(d)(iii) shall be determined in accordance with the
Winston Salem Transaction Agreement.
(e) Preferred Capital Contributions.
(i) Prior to the Winston Salem Effective Date, no Preferred
Partnership Units were issued to Advance/Newhouse in exchange for Preferred
Capital Contributions pursuant to Section 4.2(c).
(ii) At any time that TWE, Advance/Newhouse or Paragon elects
not to receive a proposed distribution from the Partnership pursuant to Section
5.1(c), the amount of such proposed distribution shall be treated as a
contribution to the Partnership, in increments of $1,000, in exchange for
Preferred Partnership Units as provided in Section 4.2(c); provided, however,
that, notwithstanding the foregoing, if at such time TWE, Advance/Newhouse and
Paragon are all treated as having made a concurrent contribution to the
Partnership in accordance with this Section 4.1(e)(ii), then the amount of the
proposed distribution to TWE, Advance/Newhouse and Paragon shall be treated as
Common Capital Contributions and no Preferred Partnership Units shall be issued
therefor.
(iii) Any Distributable Cash retained by the Partnership and
treated as a Preferred Capital Contribution in accordance with Section 4.1(e)(i)
or 4.1(e)(ii) shall be invested by the Partnership in debt securities in the
manner directed by the holder of the applicable Preferred Partnership Units and
any amounts received on such debt securities (as interest or otherwise), to the
extent not distributed pursuant to Sections 5.1(a)(i), 5.1(b)(i) or 5.2, shall
be reinvested in debt securities in the manner directed by the holder of the
applicable Preferred Partnership Units. All such debt securities, together with
any uninvested amounts received thereon, shall be referred to herein as the
"Preferred Investment Pool" with respect to the Preferred Partnership Units held
by such Partner.
<PAGE> 11
(f) Other Additional Capital Contributions. Except as agreed to by
the Partners in accordance with Section 3.2 hereof, there shall be no further
assessments for additional Common Capital Contributions, Series A Preferred
Capital Contributions or Series B Preferred Capital Contributions by the
Partners to the Partnership.
4.2 Partnership Units.
(a) Advance/Newhouse and TWE.
(i) On September 9, 1994, the Partnership issued:
(A) to Advance/Newhouse, 300 Common Partnership Units in
exchange for Advance/Newhouse's agreement to make the Common Capital
Contributions described in Section 4.1(a) and Section 4.1(b)(i); and
(B) to TWE, 600 Common Partnership Units in exchange for
TWE's agreement to make the Common Capital Contributions described in Section
4.1(a) and Section 4.1(c).
(ii) Following the determination of the First Advance/Newhouse
Contribution Amount pursuant to Section 5 of the First Transaction Agreement,
the Partnership shall issue to Advance/Newhouse the number of Common Partnership
Units equal to fifty percent (50%) of the number of Common Partnership Units
issued to Paragon pursuant to Section 4.2(b)(i) hereof. Such Common Partnership
Units shall be issued to Advance/Newhouse in exchange for Advance/Newhouse's
agreement to make the Capital Contribution described in Section 4.1(b)(ii).
(iii) On the Texas Effective Date, the Partnership issued to
Advance/Newhouse the number of Common Partnership Units equal to fifty percent
(50%) of the number of Common Partnership Units issued to Paragon pursuant to
Section 4.2(b)(ii) hereof. Such Common Partnership Units were issued to
Advance/Newhouse in exchange for Advance/Newhouse's agreement to make the
Capital Contribution described in Section 4.1(b)(iii).
(iv) On the Winston Salem Effective Date, the Partnership
shall issue to Advance/Newhouse the number of Common Partnership Units equal to
fifty percent (50%) of the number of Common Partnership Units issued to Paragon
pursuant to Section 4.2(b)(iii) hereof. Such Common Partnership Units shall be
issued to Advance/Newhouse in exchange for Advance/Newhouse's agreement to make
the Capital Contribution described in Section 4.1(b)(iv).
(b) Paragon.
(i) As soon as practicable following the determination of the
Net CVI Contribution and the Net Paragon Contribution (as such terms are defined
in Sections 1(c) and 2(d) of the First Transaction Agreement), the Partnership
shall issue to Paragon the number of Series A Preferred Partnership Units and
the number of Common Partnership Units provided in Sections 1(c) and 2(d) of the
First Transaction Agreement. Such Series A Preferred Partnership Units and
Common Partnership Units shall be issued to Paragon in exchange for Paragon's
agreement to make the Capital Contribution described in Section 4.1(d)(i).
<PAGE> 12
(ii) On the Texas Effective Date, the Partnership shall issue
to Paragon the number of Series B Preferred Partnership Units and the number of
Common Partnership Units provided in Section 1(c) of the Texas Transaction
Agreement. Such Series B Preferred Partnership Units and Common Partnership
Units shall be issued to Paragon in exchange for Paragon's agreement to make the
Capital Contribution described in Section 4.1(d)(ii).
(iii) As soon as practicable following the determination of
the Net Winston Salem Contribution (as defined in Section 1(c) of the Winston
Salem Transaction Agreement), the Partnership shall issue to Paragon the number
of Series B Preferred Partnership Units and the number of Common Partnership
Units provided in Section 1(c) of the Winston Salem Transaction Agreement. Such
Series B Preferred Partnership Units and Common Partnership Units shall be
issued to Paragon in exchange for Paragon's agreement to make the Capital
Contribution described in Section 4.1(d)(iii).
(c) Preferred Partnership Units. At any time that a Partner is
treated as having made a contribution to the Partnership pursuant to Section
4.1(e) (unless all Partners are treated as having made such a contribution as
provided in the proviso to Section 4.1(e)(ii)), the Partnership shall issue to
such Partner, on the date on which such contribution is deemed made, one
Preferred Partnership Unit for each $1,000 deemed contributed by such Partner on
such date.
4.3 Indebtedness.
(a) (i) In accordance with the First Transaction Agreement, the
Partnership has assumed and otherwise taken subject to, the Assumed CVI
Liabilities and the Assumed Paragon Liabilities (as such terms are defined in
Sections 1(a) and 2(b) of the First Transaction Agreement).
(ii) In accordance with the Texas Transaction Agreement, the
Partnership assumed or otherwise took subject to, the Assumed Texas Liabilities
(as such terms are defined in Section 1(a) of the Texas Transaction Agreement).
(iii) In accordance with the Winston Salem Transaction
Agreement, the Partnership shall assume or otherwise take subject to, the
Assumed Winston Salem Liabilities (as such terms are defined in Section 1(a) of
the Winston Salem Transaction Agreement).
(b) Subject to Sections 3.2(e) and 3.2(f), from time to time upon
the written request of any Partner, the Partnership shall incur Indebtedness
which, in the good faith judgment of the Managing Partner is available on
commercially reasonable terms, provided such Indebtedness expressly is
non-recourse to any Partner.
(c) Subject to the limitation in Section 5.1(a)(iv), in the event
the Partnership incurs Indebtedness pursuant to this Section 4.3, the proceeds
of such Indebtedness shall be distributed to the Partners in accordance with
Section 5.1 below.
(d) As promptly as practicable after the Managing Partner determines
to cause the Partnership to incur, create or assume any Indebtedness, but not
less than 10 days before the incurrence, creation or assumption by the
Partnership of such
<PAGE> 13
Indebtedness, the Managing Partner shall give Advance/Newhouse notice and a
reasonably detailed description thereof, including a description of any
restrictions on distributions of the type referred to in the next sentence
contained in the agreement governing such Indebtedness (the "Indebtedness
Notice"). The Managing Partner shall use reasonable best efforts in negotiating
such agreement to exclude from the credit (or other) agreement(s) entered into
by the Partnership in connection with such Indebtedness any restrictions on
distributions by the Partnership with respect to any Preferred Partnership Units
(it being understood that, subject to Section 3.2(g), the Partnership shall not
be required to exclude any restrictions on distributions with respect to any
Preferred Partnership Units from any such agreement if as a result of such
exclusion the Indebtedness governed by such agreement would bear a higher rate
of interest or such agreement would contain more restrictive covenants than if
such agreement did not exclude such restrictions, assuming for such purpose that
the Partnership did not own the assets held in the Preferred Investment Pool).
<PAGE> 14
EXHIBIT B
(to Third Amendment)
SECTION 5 CASH DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES
5.1 Distributions.
(a) Distributions Prior to Sixth Anniversary. Except as provided in
Sections 5.1(d), 5.1(e), 5.2 and 8.2, prior to the sixth anniversary of the
First Effective Date, all distributions by the Partnership shall be made as
follows:
(i) The Partnership shall, at least quarterly, distribute (to
the extent not prohibited by any applicable contractual restrictions) to the
holders of the Preferred Partnership Units all cash received with respect to the
Preferred Investment Pool associated with such Preferred Partnership Units,
until each holder of Preferred Partnership Units shall have received aggregate
distributions pursuant to this Section 5.1(a)(i) in an amount equal to the
product of the Effective Tax Rate times the Net Cumulative Taxable Preferred
Income allocated to such holder of Preferred Partnership Units during the period
commencing on the Initial Closing Date and ending on the last day of the fiscal
quarter immediately preceding the date of distribution.
(ii) With respect to any Fiscal Year in which Paragon is
expected (based on the Managing Partner's good faith estimate) to be allocated
Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least
quarterly, distribute (to the extent not prohibited by any applicable
contractual restrictions) to Paragon all Distributable Cash, until Paragon shall
have received distributions, with respect to the Series A Preferred Partnership
Units and the Series B Preferred Partnership Units held by it in an amount equal
to the excess of (A) the sum of (I) such estimated Net Profit expected to be
allocated pursuant to Section 5.3(b)(ii) and (II) the Net Profit allocated
pursuant to Section 5.3(b)(ii) for all prior Fiscal Years, over (B) the
distributions to Paragon pursuant to this Section 5.1(a)(ii) for all prior
Fiscal Years, which distributions shall be allocated among the Series A
Preferred Partnership Units and the Series B Preferred Partnership Units held by
Paragon, pari passu, in proportion to such excess amount calculated for each of
them.
(iii) After the Partnership has made distributions with
respect to the Preferred Partnership Units, the Series A Preferred Partnership
Units and Series B Preferred Partnership Units in accordance with clauses (i)
and (ii), the Partnership shall, at least quarterly, distribute (to the extent
not prohibited by any applicable contractual restrictions) to the Partners
Distributable Cash, in proportion to the respective amounts required to be
distributed to each such Partner pursuant to this Section 5.1(a)(iii), in an
amount equal to 25 percent of such Partner's Net Tax Amount for the taxable year
that includes such calendar quarter (as estimated in good faith by the Managing
Partner). The Managing Partner's estimate of such Partner's Net Tax Amount for
such year shall be revised prior to each distribution for such year and upon the
filing of the Partnership's Federal income tax return for such year, and
following such revision, (y) the Partnership shall distribute to such Partner
the excess (if any) of the amount that should have been distributed to such
Partner pursuant to this Section 5.1(a)(iii) based on such revised
<PAGE> 15
2
estimate, over the amount actually distributed to such Partner pursuant to this
Section 5.1(a)(iii), plus interest thereon at the rate paid by the Partnership
on its senior Indebtedness, or (z) such Partner shall contribute to the
Partnership the excess (if any) of the amount actually distributed to such
Partner pursuant to this Section 5.1(a)(iii) over the amount that should have
been distributed to such Partner pursuant to this Section 5.1(a)(iii) based on
such revised estimate, plus interest thereon at the rate paid by the Partnership
on its senior Indebtedness. To the extent there is insufficient available cash
to make distributions pursuant to this Section 5.1(a)(iii) at the time required,
the Partnership shall pay interest on such shortfall at the rate paid by the
Partnership on its senior Indebtedness, and such interest shall be paid out of
the Partnership's first available Distributable Cash.
(iv) After the Partnership has made the distributions required
by clauses (i), (ii) and (iii), any remaining Distributable Cash shall, at least
quarterly, be distributed to the Partners in accordance with their Percentage
Interests, unless they make the election provided in Section 5.1(c); provided,
however, that during the period ending on the third anniversary of the Texas
Effective Date, distributions to any Partner pursuant to this Section 5.1(a)(iv)
shall not, without the consent of TWE, exceed an amount which, when added to the
distributions to such Partner pursuant to Section 5.1(a)(iii), exceed the sum of
(x) such Partner's permitted "operating cash flow distribution," as determined
pursuant to Treasury Regulation Section 1.707-4(b), and (y) the amount of
Partnership indebtedness incurred by the Partnership during the taxable year
that includes such calendar quarter and the proceeds of which are distributed to
the Partners, to the extent such indebtedness is included in such Partner's
basis in its interest in the Partnership pursuant to Code Section 752 and
Treasury Regulation Section 1.707-5(a)(2).
(b) Distributions After Sixth Anniversary. Except as provided in
Sections 5.1(d), 5.1(e), 5.2 and 8.2, on and after the sixth anniversary of the
First Effective Date, all distributions by the Partnership shall be made as
follows:
(i) The Partnership shall, at least quarterly, distribute (to
the extent not prohibited by any applicable contractual restrictions) to the
holders of the Preferred Partnership Units all cash received with respect to the
Preferred Investment Pool associated with such Preferred Partnership Units,
until each holder of Preferred Partnership Units shall have received aggregate
distributions pursuant to Section 5.1(a)(i) and this Section 5.1(b)(i) in an
amount equal to the product of the Effective Tax Rate times the Net Cumulative
Taxable Preferred Income allocated to such holder of Preferred Partnership Units
during the period commencing on the Initial Closing Date and ending on the last
day of the fiscal quarter immediately preceding the date of distribution.
(ii) With respect to any Fiscal Year in which Paragon is
expected (based on the Managing Partner's good faith estimate) to be allocated
Net Profit pursuant to Section 5.3(b)(ii), the Partnership shall, at least
quarterly, distribute (to the extent not prohibited by any applicable
contractual restrictions) to Paragon all Distributable Cash, until Paragon shall
have received distributions, with respect to the Series A Preferred Partnership
Units and the Series B Preferred Partnership Units held by it in an amount equal
to the excess of (A) the sum of (I) such estimated Net Profit expected to be
allocated pursuant to Section 5.3(b)(ii) and (II) the Net Profit allocated
pursuant to Section 5.3(b)(ii) for all prior Fiscal Years, over (B) the
distributions to
<PAGE> 16
3
Paragon pursuant to this Section 5.1(b)(ii) for all prior Fiscal Years, which
distributions shall be allocated among the Series A Preferred Partnership Units
and the Series B Preferred Partnership Units held by Paragon, pari passu, in
proportion to such excess amount calculated for each of them.
(iii) After the Partnership has made distributions with
respect to the Preferred Partnership Units, the Series A Preferred Partnership
Units and the Series B Preferred Partnership Units in accordance with clauses
(i) and (ii), the Partnership shall, at least quarterly, distribute (to the
extent not prohibited by any applicable contractual restrictions) to the
Partners Distributable Cash, in proportion to the respective amounts required to
be distributed to each such Partner pursuant to this Section 5.1(b)(iii), in an
amount equal to 25 percent of such Partner's Net Tax Amount for the taxable year
that includes such calendar quarter (as estimated in good faith by the Managing
Partner). The Managing Partner's estimate of such Partner's Net Tax Amount for
such year shall be revised prior to each distribution for such year and upon the
filing of the Partnership's Federal income tax return for such year, and
following such revision, (y) the Partnership shall distribute to such Partner
the excess (if any) of the amount that should have been distributed to such
Partner pursuant to this Section 5.1(b)(iii) based on such revised estimate,
over the amount actually distributed to such Partner pursuant to this Section
5.1(b)(iii), plus interest thereon at the rate paid by the Partnership on its
senior Indebtedness, or (z) such Partner shall contribute to the Partnership the
excess (if any) of the amount actually distributed to such Partner pursuant to
this Section 5.1(b)(iii) over the amount that should have been distributed to
such Partner pursuant to this Section 5.1(b)(iii) based on such revised
estimate, plus interest thereon at the rate paid by the Partnership on its
senior Indebtedness. To the extent there is insufficient available cash to make
distributions pursuant to this Section 5.1(b)(iii) at the time required, the
Partnership shall pay interest on such shortfall at the rate paid by the
Partnership on its senior Indebtedness, and such interest shall be paid out of
the Partnership's first available Distributable Cash.
(iv) After the Partnership has made the distributions required
by clauses (i), (ii) and (iii), the Partnership shall distribute (to the extent
not prohibited by any applicable contractual restrictions) any remaining
Distributable Cash to Paragon in redemption of outstanding Series A Preferred
Partnership Units and Series B Preferred Partnership Units, at a redemption
price of $1,000 per Series A Preferred Partnership Unit or Series B Preferred
Partnership Unit, as the case may be, so that the Partnership shall have
redeemed such Series A Preferred Partnership Units and Series B Preferred
Partnership Units in accordance with the following:
(A) Prior to the seventh anniversary of the First
Effective Date, the Partnership shall have redeemed one-third of the number of
Series A Preferred Partnership Units and Series B Preferred Partnership Units
originally issued pursuant to Section 4.2(b);
(B) Prior to the eighth anniversary of the First
Effective Date, the Partnership shall have redeemed, in the aggregate,
two-thirds of the number of Series A Preferred Partnership Units and Series B
Preferred Partnership Units originally issued pursuant to Section 4.2(b); and
<PAGE> 17
4
(C) On and after the eighth anniversary of the First
Effective Date, the Partnership shall have redeemed all outstanding Series A
Preferred Partnership Units and Series B Preferred Partnership Units.
Each distribution pursuant to this Section 5.1(b)(iv) shall be made with respect
to the Series A Preferred Partnership Units and the Series B Preferred
Partnership Units held by Paragon, pari passu, in proportion to the number of
each outstanding.
(v) After the Partnership shall have made all distributions
required by clauses (i), (ii), (iii) and (iv), any remaining Distributable Cash
shall, at least quarterly, be distributed to the Partners in accordance with
their Percentage Interests, unless they make the election provided in Section
5.1(c).
(c) Election Not to Receive Distribution. Notwithstanding Section
5.1(a)(iv) or Section 5.1(b)(v), at any time that the Partnership proposes to
make distributions to Advance/Newhouse, TWE or Paragon pursuant to Section
5.1(a)(iv) or Section 5.1(b)(v), any of such Partners may elect not to receive
the distribution proposed to be distributed to it, and the amount of such
proposed distribution shall be treated as a contribution to the Partnership by
such Partner pursuant to Section 4.1(d), and shall no longer be considered to be
part of Distributable Cash for purposes of Section 5.1.
(d) Net Proceeds of Sale. Following the sale, exchange, or other
disposition of all or substantially all of the assets of the Partnership, or
upon the liquidation of the Partnership within the meaning of Treasury
Regulations Section 1.704-1(b)(2)(ii)(g), and after payment of, or adequate
provision for, the debts and obligations of the Partnership, the remaining
assets of the Partnership shall be distributed (or deemed distributed in the
event of a termination under Code Section 708(b)(1)(B)) to the Partners (after
giving effect to all contributions, distributions, allocations, and other
Capital Account adjustments for all taxable years, including the year during
which such liquidation occurs) as follows:
(i) First, the applicable Preferred Investment Pool shall be
distributed to the holder of Preferred Partnership Units in redemption of all
such Preferred Partnership Units;
(ii) Second, the Priority Return accrued and unpaid as of the
date of liquidation shall be distributed to Paragon;
(iii) Third, all outstanding Series A Preferred Partnership
Units and Series B Preferred Partnership Units shall be redeemed at a redemption
price of $1,000 per Series A Preferred Partnership Unit or Series B Partnership
Unit, as the case may be; and
(iv) Finally, the remaining assets of the Partnership shall be
distributed to the Partners so as to effectuate the agreement among the Partners
that the distributions remaining after paying taxes on the Partners' Special
Income and Gross Profit and Gross Loss allocated under Section 5.3(d)(ii) with
respect to the year of such distribution are in proportion to their respective
Percentage Interests, assuming all Partners are taxed at the Special Effective
Tax Rate and taking into account any
<PAGE> 18
5
additional tax paid by Advance/Newhouse due to the inability of it (or the
Persons that are the taxpayers with respect to income of it) to use all Taxable
Loss allocable to it.
(e) Withholding. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment or
distribution to a Partner shall be treated as amounts distributed to such
Partner pursuant to Section 5.1 for all purposes of this Agreement.
5.2 Redemption of Preferred Partnership Units. Upon an Advance/Newhouse
Redemption Event, TWE Redemption Event, or Paragon Redemption Event,
Advance/Newhouse, TWE or Paragon, respectively, shall have the option to require
the Partnership to redeem all or some of the Preferred Partnership Units held by
such Partner. Such redemption option shall be exercisable by delivery of a
written notice (the "Redemption Notice") to the Partnership indicating that an
Advance/Newhouse Redemption Event, TWE Redemption Event or Paragon Redemption
Event, as applicable, has occurred, and setting forth the number of Preferred
Partnership Units to be redeemed by the Partnership (the "Redeemed Preferred
Partnership Units"). As soon as reasonably practicable, but no later than five
business days following the delivery of the Redemption Notice, the Partnership
shall distribute to Advance/Newhouse, TWE, or Paragon, as applicable, the
applicable Preferred Investment Pool (or pro rata portion thereof based on the
ratio of the number of Redeemed Preferred Partnership Units to the total number
of Preferred Partnership Units held by Advance/Newhouse, TWE or Paragon, as
applicable).
5.3 Allocations of Preferred Profit; Preferred Loss; Net Profit and Net
Loss.
(a) Priority Allocations. All Preferred Profit and Preferred Loss
with respect to a Preferred Investment Pool for any Fiscal Year (or portion
thereof) shall be allocated to the holder of Preferred Partnership Units to
which such Preferred Investment Pool relates.
(b) Allocations of Net Profit. Except as otherwise provided in
Sections 5.3(d) and 5.3(e), after giving effect to the allocations provided in
Sections 5.3(a), 5.5 and 5.8, the Net Profit for each Fiscal Year (or portion
thereof) shall be allocated to the Partners as follows:
(i) First, Net Profit shall be allocated to Paragon until
Paragon shall have been allocated, with respect to the Series A Preferred
Partnership Units and the Series B Preferred Partnership Units, Net Profit in an
amount equal to the excess, if any, of (A) the aggregate Net Loss allocated to
Paragon pursuant to Section 5.3(c)(ii) for all prior Fiscal Years over (B) the
aggregate Net Profit allocated to them pursuant to this Section 5.3(b)(i) for
all prior Fiscal Years, which allocation shall be divided among the Series A
Preferred Partnership Units and the Series B Preferred Partnership Units held by
Paragon, pari passu, in proportion to such excess amount calculated for each of
them;
(ii) Second, Net Profit shall be allocated to Paragon until
Paragon shall have been allocated, with respect to the Series A Preferred
Partnership Units and the Series B Preferred Partnership Units, Net Profit in an
amount equal to the excess, if any, of (A) the cumulative Series A Priority
Return and the cumulative Series B Priority Return, in each case accrued through
the end of such Fiscal Year (or portion
<PAGE> 19
6
thereof) over (B) the aggregate Net Profit allocated to such Partners pursuant
to this Section 5.3(b)(ii) for all prior Fiscal Years, which amount of Net
Profit shall be allocated among the Series A Preferred Partnership Units and the
Series B Preferred Partnership Units held by Paragon, pari passu, in proportion
to such excess amount calculated for each of them;
(iii) Third, Net Profit shall be allocated to the Partners, in
proportion to and to the extent of the amount required to be allocated pursuant
to this Section 5.3(b)(iii), until each such Partner has been allocated Net
Profit pursuant to this Section 5.3(b)(iii) in an amount equal to the excess of
(y) such Partner's aggregate Maximum Income Amount for such Fiscal Year and all
prior Fiscal Years, over (z) the aggregate Net Profit allocated to such Partner
pursuant to this Section 5.3(b)(iii) for all prior Fiscal Years; and
(iv) Thereafter, Net Profit shall be allocated to the Partners
in accordance with their Percentage Interests.
(c) Allocations of Net Loss. Except as otherwise provided in
Sections 5.3(d) and 5.3(e), after giving effect to the allocations provided in
Sections 5.3(a), 5.5 and 5.8, Net Loss for each Fiscal Year (or portion thereof)
shall be allocated as follows:
(i) First, Net Loss for such Fiscal Year (or portion thereof)
shall be allocated to the Partners in accordance with their Percentage Interests
until TWE's and Advance/Newhouse's Capital Accounts are reduced to the excess,
if any, of the aggregate Net Profit allocated to such Partners pursuant to
Section 5.3(b)(iii) for all prior Fiscal Years, over the aggregate Special Tax
Amounts distributed to such Partners pursuant to Sections 5.1(a)(iii) and
5.1(b)(iii) for all prior Fiscal Years;
(ii) Second, Net Loss for such Fiscal Year (or portion
thereof) shall be allocated to Paragon with respect to the Series A Preferred
Partnership Units and the Series B Preferred Partnership Units, until Paragon's
Capital Account has been reduced to the excess, if any, of the aggregate Net
Profit allocated to Paragon pursuant to Section 5.3(b)(iii) for all prior Fiscal
Years, over the aggregate Special Tax Amounts distributed to pursuant to
Sections 5.1(a)(iii) and 5.1(b)(iii) for all prior Fiscal Years, which
allocation shall be divided among the Series A Preferred Partnership Units and
the Series B Preferred Partnership Units held by Paragon, pari passu, in
proportion the amount calculated with respect to each of them; and
(iii) Thereafter, Net Loss for such Fiscal Year (or portion
thereof) shall be allocated to the Partners in accordance with their Percentage
Interests.
(d) Allocation of Gain or Loss Upon Sale. Notwithstanding Section
5.3(b) and Section 5.3(c), and after giving effect to the allocations provided
in Section 5.3(a), in the event of a sale, exchange, or other disposition of all
or substantially all of the assets of the Partnership, or upon the liquidation
of the Partnership within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g), beginning in the year in which the contract or agreement
for such sale is entered into or, if such contract or agreement is entered into
on or prior to the date on which the Partnership's Federal income tax return
with respect to the prior year is required to be filed (not including any
extensions), beginning in such prior year:
<PAGE> 20
7
(i) First, Gross Profit shall be allocated to Paragon until
Paragon shall have been allocated Gross Profit in an amount equal to the excess,
if any, of (A) the sum of (I) the aggregate Net Loss allocated to Paragon
pursuant to Section 5.3(c)(ii) for all prior Fiscal Years, and (II) the
cumulative Priority Return accrued through the end of such Fiscal Year (or
portion thereof), over (B) the aggregate Net Profit allocated to Paragon
pursuant to Sections 5.3(b)(i) and Section 5.3(b)(ii) for all prior Fiscal
Years, which allocation shall be divided among the Series A Preferred
Partnership Units and the Series B Preferred Partnership Units held by Paragon,
pari passu, in proportion to such excess amount calculated for each of them;
(ii) Finally, Gross Profit and Gross Loss shall be allocated
to the Partners so as to cause the credit balance in each Partner's Capital
Account to equal, as nearly as possible, the amount each Partner would receive
in a distribution on dissolution, if the distribution were made in accordance
with Section 5.1(d).
In the event that such sale or liquidation does not take place within the year
following the year of the signing of the contract or agreement, or upon the
termination of such contract or agreement, if earlier, allocations of Gross
Profit or Gross Loss shall be made to reverse, as rapidly as possible, the
effect of any such allocations made pursuant to this Section 5.3(d).
5.4 Section 754 Adjustment. To the extent any adjustment to the adjusted
tax basis of any asset of the Partnership pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such gain or loss shall be specially allocated to the
Partners in a manner consistent with the manner in which their Capital Accounts
are required to be adjusted pursuant to such Section of the Treasury
Regulations. Any Partner may cause the Partnership to make any election
permitted under Code Section 754.
5.5 Other Allocation Rules.
(a) In the event that the Partnership is entitled to an income tax
deduction for the excess of the Closing Price of a unit of TWX Securities on the
Initial Closing Date over the exercise price paid by the Eligible Option Holder
for such unit of TWX Securities, such deduction and an equal amount of Gross
Loss shall be specifically allocated to TWE or Paragon, as appropriate, and TWE
or Paragon, as appropriate, shall be deemed to have made a capital contribution
to the Partnership in the same amount.
(b) In the event that, pursuant to any Final Determination of the
Partnership's Taxable Income or Taxable Loss or the Partner's distributive
shares thereof, (i) the Partnership's Taxable Income or Taxable Loss is adjusted
or (ii) the Partners' distributive shares of the Partnership's Taxable Income or
Taxable Loss are adjusted, Gross Profit or Gross Loss shall be allocated to the
Partners to reflect the adjustments to the Partnership's Taxable Income or
Taxable Loss or the Partners' distributive shares thereof so as to place the
Partners as rapidly as possible, in conjunction with any distribution or
contribution pursuant to Section 5.1(a)(iii) and Section 5.1(b)(iii), in the
same relative positions they would have been in had the Taxable
<PAGE> 21
8
Income or Taxable Loss or distributive shares thereof as adjusted been taken
into account originally (including any interest with respect to any deficiency
or any refund).
(c) In the event that interest is paid by the Partnership to a
Partner pursuant to Section 5.1(a)(iii) or Section 5.1(b)(iii), a special
allocation of Gross Profit shall be made to such Partner in an amount equal to
the amount of such interest.
(d) If any fees or other payments deducted for federal income tax
purposes by the Partnership are recharacterized by a final determination of the
Internal Revenue Service as nondeductible distributions to any Partner, then,
notwithstanding all other allocation provisions, Gross Profit shall be allocated
to such Partner (for each Fiscal Year in which such recharacterization occurs)
in an amount equal to the fees or payments recharacterized.
(e) All items of Partnership income, gain, loss, deduction, and any
other allocations not otherwise provided for shall be allocated among the
Partners in the same proportion as they share the Preferred Profits, Preferred
Losses, Net Profits or Net Losses to which such items relate for the Fiscal
Year. Any credits against income tax shall be allocated among the Partners in
accordance with their Percentage Interests.
(f) For any year with respect to which the Partnership is required
to pay New York City Unincorporated Business Tax, such tax shall be allocated
among the Partners in a manner so that the benefit of any deduction, credit,
exemption or exclusion that is available to the Partnership as a result of the
activities, income or status of or payments by a particular Partner (a "Credit
Partner") shall be allocated entirely to such Credit Partner. The foregoing
shall be accomplished by charging the amount of such tax to the Capital Account
of any Partner that is not a Credit Partner and by distributing to any Credit
Partner an amount that bears the same proportion to such tax as such Credit
Partner's Percentage Interest bears to the Percentage Interests of the Partners
that are not Credit Partners.
(g) Notwithstanding Section 5.3(b), in the event that the Net Profit
allocated to the Partners pursuant to Section 5.3(b)(iii) results in an
allocation of Taxable Loss to Advance/Newhouse, then Net Profit shall be
reallocated among the Partners so as to effectuate the agreement of the Partners
that on an annual basis the distributions pursuant to Sections 5.1(a)(iii),
5.1(a)(iv), 5.1(b)(iii) and 5.1(b)(v) remaining after paying taxes on Special
Income and Net Profit allocated pursuant to Sections 5.3(b)(iii) and 5.3(b)(iv)
shall be in proportion to their respective Percentage Interests, assuming all
Partners are taxed at the Special Effective Tax Rate and taking into account any
additional tax paid by Advance/Newhouse due to the inability of it (or the
Persons that are the taxpayers with respect to income of it) to use all Taxable
Loss allocable to it.
5.6 Tax Allocations.
(a) Income, gain, loss, and deduction with respect to any property
contributed to the capital of the Partnership, including property purchased with
cash contributed to the capital of the Partnership by a Partner shall, solely
for tax purposes, be allocated among the Partners so as to take account of any
variation between the adjusted basis of such property to the Partnership for
Federal income tax purposes and its initial
<PAGE> 22
9
Gross Asset Value in accordance with the remedial allocation method set forth in
Treasury Regulations Section 1.704-3(d).
(b) If the Gross Asset Value of any asset of the Partnership is
adjusted pursuant to paragraph (ii) of the definition of Gross Asset Value,
subsequent allocations of income, gain, loss, and deduction with respect to such
asset shall take account of any variation between the adjusted basis of such
asset for Federal income tax purposes and its Gross Asset Value in accordance
with Section 704(c) and the Treasury Regulations promulgated thereunder,
including Treasury Regulations Sections 1.704-1(b)(4)(i) and 1.704-3(d).
(c) Subject to Section 11.8, any election or other decision relating
to any allocations pursuant to this Section 5.6 shall be made by the
Partnership, upon the approval of such election or other decision by the
Managing Partner, in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section 5.6 are solely
for purposes of Federal, state, and local taxes and shall not affect, or in any
way be taken into account in computing, any Partner's Capital Account or share
of Net Profit, Net Loss, other items, or distributions pursuant to any provision
of this Agreement.
(d) For purposes of Sections 5.1(d) and 5.5, within 45 days after
the end of each Fiscal Year, Advance/Newhouse shall provide the Managing Partner
with the Advance/Newhouse Loss Amount for such Fiscal Year.
5.7 Allocation in Event of Transfer. If any Partnership Units are
transferred in accordance with Section 6.1, the Preferred Profit, Preferred
Loss, Net Profit and Net Loss of the Partnership shall be allocated between the
periods before and after the transfer by the closing of the books method. As of
the date of such transfer, the transferee shall succeed to the Capital Account,
Common Capital Contribution, Preferred Capital Contribution, Series A Preferred
Capital Contribution and Series B Preferred Capital Contribution of the
transferor Partner, to the extent that the transferor's Capital Account, Common
Capital Contribution, Preferred Capital Contribution, Series A Preferred Capital
Contribution and Series B Preferred Capital Contribution relate to the
transferred interest. This Section shall apply for purposes of computing a
Partner's Capital Account and for federal income tax purposes.
5.8 Beneficial Assets and Subsidiary Beneficial Assets. The Partnership
shall (and the Partners shall not, except as Partners of the Partnership)
report, for Federal income tax purposes, the income, gain, deduction and loss
with respect to the Beneficial Assets that are not Subsidiary Beneficial Assets,
and the Partners shall (and the Partnership shall not) report, for Federal
income tax purposes, the income, gain, deduction and loss with respect to the
Subsidiary Beneficial Assets. In the event that, pursuant to any Final
Determination (as defined below), the Partnership either (x) is treated as the
beneficial owner of any of the Subsidiary Beneficial Assets prior to the actual
contribution of such Subsidiary Beneficial Assets to the Partnership or (y) is
treated as not the beneficial owner of any of the Beneficial Assets that are not
Subsidiary Beneficial Assets prior to the actual contribution of such Beneficial
Assets to the Partnership, to the extent necessary, appropriate adjustments
shall be made to the distributions provided for in Section 5.1 so as to place
the Partners and the Partnership in the same positions they would have been in
had the Partnership's beneficial ownership of
<PAGE> 23
10
the Subsidiary Beneficial Assets or lack of beneficial ownership of such other
Beneficial Assets been taken into account originally.
5.9 Set-off. If (a) by the earlier of the fourth anniversary of the First
Effective Date, a restructuring of the Partnership pursuant to Section 8.2, or
the purchase and sale of Common Partnership Units pursuant to Section 9(g)(ii),
Advance/Newhouse shall not have contributed to the Partnership cash in an amount
equal to the First Advance/Newhouse Contribution Amount plus interest thereon in
accordance with Section 4.1(b)(ii), (b) by the earlier of the fourth anniversary
of the Texas Effective Date, a restructuring of the Partnership pursuant to
Section 8.2, or the purchase and sale of Common Partnership Units pursuant to
Section 9(g)(ii), Advance/Newhouse shall not have contributed to the Partnership
cash in an amount equal to the Texas Advance/Newhouse Contribution Amount, or
(c) by the earlier of July 1, 2000, a restructuring of the Partnership pursuant
to Section 8.2 or the purchase and sale of Common Partnership Units pursuant to
Section 9(g)(ii), Advance/Newhouse shall not have contributed to the Partnership
cash in the amount equal to the Winston Salem Advance/Newhouse Contribution
Amount, then, in addition to any other rights and remedies which the Partnership
may have, the Partnership is hereby authorized at any time and from time to
time, to the fullest extent permitted by law and without prior notice to
Advance/Newhouse (or any successor to or transferee of its Partnership
Interests), to recoup, set-off and apply any and all amounts at any time owing
or otherwise payable by the Partnership to Advance/Newhouse (or any successor to
or transferee of its Partnership Interests), including, without limitation, any
distributions payable in accordance with Section 5 and any distributions to, or
Partnership liabilities assumed by, Advance/Newhouse in accordance with Section
8.2, and any amounts payable to Advance/Newhouse pursuant to Section 9, to
satisfy Advance/Newhouse's obligations to make such contribution. To the extent
that any amounts distributable in accordance with Section 5 or Section 8.2 are
applied in accordance with the preceding sentence rather than distributed to
Advance/Newhouse (or any successor to or transferee of its Partnership
Interests), then such amounts shall be deemed distributed by the Partnership to
Advance/Newhouse (or such successor or transferee) and recontributed by
Advance/Newhouse (or such successor or transferee) to the Partnership and the
Capital Account of Advance/Newhouse (or such successor or transferee) shall be
adjusted to reflect such deemed distribution and recontribution.
<PAGE> 24
1
EXHIBIT C
(to Third Amendment)
8.2 Restructuring of Partnership.
(a) Upon delivery of a Restructuring Notice in accordance with
Section 8.1 above, Advance/Newhouse and TWE shall negotiate in good faith the
restructuring of the Partnership in a manner intended to minimize federal, state
and local taxes. Within 60 days after delivery of a Restructuring Notice, upon
the request of any Partner, the Managing Partner shall provide all Partners with
a report listing all assets of the Partnership, including all projects in
development and/or for which the Partnership has been charged.
(b) If, after a period of three months from the date of delivery of
the Restructuring Notice, Advance/Newhouse and TWE have failed to agree on the
terms of the restructuring of the Partnership, the Partnership shall be
restructured by the withdrawal of Advance/Newhouse from the Partnership as
follows:
(i) Within 15 days following the expiration of such
three-month period, (A) if at such time Advance/Newhouse holds Preferred
Partnership Units the Partnership shall distribute the Preferred Investment Pool
attributable to such Preferred Partnership Units in redemption of all Preferred
Partnership Units then held by Advance/Newhouse, (B) the Partnership shall
calculate the "Restructuring Indebtedness Amount" (as defined in Section
8.2(b)(v) and the "Excess Tax Amount" (as defined in Section 8.2(b)(vi)) of
Advance/Newhouse, if any, (C) subject to obtaining any required governmental or
other third-party consents or approvals, the Partnership shall distribute
33-1/3% of the Pro Rata Assets (as defined below) to Advance/Newhouse, and (D)
TWE shall (1) divide the remaining assets (and related liabilities) of the
Partnership into three pools (the "Asset Pools") which shall meet the Asset Pool
Criteria (as defined below) but which shall in any event be of equal value (in
TWE's judgment), and (2) deliver a written notice to Advance/Newhouse setting
forth the cable television systems and other assets contained in each such Asset
Pool (the "Asset Pool Notice"). To the extent physically possible without
impairing their inherent operability, assets of the Partnership which relate to
more than one cable television system or to the Partnership as a whole shall be
allocated either equally to every pool or on a 2/3:1/3 basis to the Partnership
and Advance/Newhouse, respectively. Prior to making any distribution under this
Section 8.2(b) or delivering the Asset Pool Notice, the Partnership or TWE, as
applicable, shall contribute the assets comprising all developmental projects in
which the Partnership has an interest and/or for which the Partnership has been
charged (subject to the associated liabilities) to a separate legal entity or
otherwise reconstitute such assets (subject to the associated liabilities) in a
form (on terms agreed upon by Advance/Newhouse, TWE, and Paragon) that allows an
allocation of such assets (subject to the associated liabilities) to
Advance/Newhouse and the
<PAGE> 25
2
Partnership as described in the previous sentence. For the purposes of the
foregoing, "Pro Rata Assets" shall mean those assets of the Partnership,
including without limitation those Beneficial Assets and Subsidiary Beneficial
Assets, that are readily divisible into three identical pools without any
material diminution in the aggregate value of such assets resulting from such
division (such as stock, partnership interests and similar investments). For
purposes of the foregoing, "Asset Pool Criteria" shall mean (I) no Preferred
Cluster Area may be allocated to more than one Asset Pool, except in accordance
with the following: (A) if the number of Subscribers in the Preferred Cluster
Area having the largest number of Subscribers exceeds the product of the
Determined Percentage and the number of all Subscribers in all Preferred Cluster
Areas, then such excess may be allocated to more than one Asset Pool; and (B) if
the Preferred Cluster Area having the largest number of Subscribers has been
allocated to more than one Asset Pool, and if the number of Subscribers in the
Preferred Cluster Area having the second largest number of Subscribers exceeds
33-1/3% of all Subscribers of all the Partnership Systems, then such excess may
be allocated to more than one Asset Pool, and (II) (A) Subscribers in the same
ADI in a Preferred Cluster Area may not be allocated to more than one pool,
except to the extent that any one ADI in a Preferred Cluster Area is permitted
to be split under clause (I) above, and (B) to the extent any ADI's are split
they shall be split only along the lines of operable units.
(ii) Within 30 days following the delivery by TWE of the Asset
Pool Notice, Advance/Newhouse shall select and retain ownership of one of the
Asset Pools and the Partnership shall retain ownership of the remaining Asset
Pools; provided that if Advance/Newhouse fails to make such selection within
such 30-day period, then the Partnership shall be entitled to select and retain
ownership of two of the Asset Pools and Advance/Newhouse shall retain ownership
of the remaining Asset Pool. The Asset Pools allocated to Advance/Newhouse and
the Partnership in accordance with this paragraph (ii) are referred to herein as
the "Advance/Newhouse Asset Pool" and the "TWE Asset Pools," respectively.
(iii) As promptly as practical following the determination of
the Advance/Newhouse Asset Pool and the TWE Asset Pools in accordance with
paragraph (ii), subject to obtaining any required governmental or other
third-party consents or approvals, the Partnership shall distribute the cable
television systems and other assets comprising the Advance/Newhouse Asset Pool
to Advance/Newhouse in complete liquidation of its Common Partnership Units;
provided that with respect to any assets in the Advance/Newhouse Pool that for
Federal income tax purposes were deemed contributed to the Partnership within
the immediately preceding Applicable Contribution Period by TWE or Paragon and
with respect to any assets in the TWE Asset Pools that for Federal income tax
purposes were deemed contributed to the Partnership within the immediately
preceding Applicable Contribution Period by Advance/Newhouse, the Partners shall
cooperate to cause such liquidation of the Advance/Newhouse Common Partnership
Units to be effectuated in a manner, and agree to defer the distribution of
assets to such time, as will minimize the taxes payable in connection with such
liquidation.
<PAGE> 26
3
(iv) As the cable television systems and other assets
comprising the Advance/Newhouse Asset Pool are distributed or deemed distributed
for Federal income tax purposes, (A) if there is an Excess Tax Amount with
respect to Advance/Newhouse, the Partnership shall be allocated liabilities
otherwise allocable to the Advance/Newhouse Pool (the "Excess Tax Amount
Indebtedness") equal to the product of (y) one (1) minus the Advance/Newhouse
Percentage Interest, and (z) such Excess Tax Amount of Advance/Newhouse, (B)
Advance/Newhouse shall execute an assumption agreement pursuant to which it will
assume (or to the extent necessary, in the case of clause (II) below, will
refinance or repay) (I) all liabilities relating to, arising out of or otherwise
attributable to the Advance/Newhouse Asset Pool (as reduced by the Excess Tax
Amount Indebtedness, if any), and (II) liabilities otherwise allocable to the
TWE Asset Pools (the "Restructuring Indebtedness") in an amount equal to the
Restructuring Indebtedness Amount and will further agree to indemnify the
Partnership for any losses the Partnership might suffer with respect to any of
such liabilities, and (C) the Partnership shall agree to indemnify
Advance/Newhouse for any losses Advance/Newhouse might suffer with respect to
any liabilities relating to, arising out of or otherwise attributable to the TWE
Asset Pools or the Excess Tax Amount Indebtedness. The assumption agreement to
be executed by Advance/Newhouse shall contain the terms contained in the
Assumption Agreement executed by the Partnership in accordance with Section
3.4(a) of the Contribution Agreement and the indemnity of Advance/Newhouse and
the Partnership shall be in the form of Sections 8.2 and 8.3 of the Contribution
Agreement. As Advance/Newhouse assumes liabilities relating to, arising out of
or otherwise attributable to the Advance/Newhouse Asset Pool, Paragon shall
guarantee remaining liabilities of the Partnership and take other steps
reasonably necessary so as to reduce, to the greatest extent possible, the Debt
Shift Tax Amount arising from the restructuring; provided however, that Paragon
shall not be required to guarantee remaining liabilities of the Partnership to
the extent such guarantee would cause TWE to recognize income pursuant to Code
Sections 731 and 752. To the extent possible, liabilities assumed by
Advance/Newhouse shall be qualified liabilities (as defined in Treasury
Regulation Section 1.707-6(b)(2)) of the Partnership.
(v) The "Restructuring Indebtedness Amount" shall equal the
product of (A) the Advance/Newhouse Percentage Interest, and (B) the sum of (i)
the Priority Return accrued and unpaid as of the date of distribution with
respect to the Series A Preferred Partnership Units and the Series B Preferred
Partnership Units held by Paragon, (ii) the redemption price for all outstanding
Series A Preferred Partnership Units and Series B Preferred Partnership Units
held by Paragon, and (iii) the sum of the Excess Tax Amount for the Partners
other than Advance/Newhouse and other than the Satisfied Partner.
(vi) The "Excess Tax Amount" means, for each of two Partners,
the Tax Amount that would be remaining for such Partners if the Partnership were
to distribute the aggregate Tax Amounts of all Partners to the Partners in
accordance with their Percentage Interests until one Partner (the "Satisfied
Partner") shall have received its entire Tax Amount.
<PAGE> 27
4
(vii) The "Tax Amount" means, for any Partner, the sum of the
following amounts determined for such Partner, as applicable:
(A) If the restructuring has occurred as a result of the
delivery by Advance/Newhouse of a Restructuring Notice that is not a Spin-Off
Restructuring Notice:
(I) with respect to Paragon, the Paragon
704(c)(1)(B) Tax Amount with respect to assets deemed for Federal income tax
purposes contributed to the Partnership within the immediately preceding
Applicable Contribution Period by Paragon that are allocated to the
Advance/Newhouse Asset Pool,
(II) with respect to TWE, if the distribution of
the Advance/Newhouse Asset Pool occurs after April 1, 2000, the TWE 704(c)(1)(B)
Tax Amount with respect to assets deemed for Federal income tax purposes
contributed to the Partnership by TWE pursuant to the First Transaction
Agreement within the immediately preceding Applicable Contribution Period that
are allocated to the Advance/Newhouse Asset Pool,
(III) with respect to each Partner, the
Restructuring Deferred Tax Amount with respect to assets contributed by such
Partner (other than, in the case of TWE and Paragon, the assets referred to in
clauses (I) and (II)), and
(IV) with respect to Paragon, the Debt Shift Tax
Amount.
(B) If the restructuring has occurred as a result of the
delivery by TWE of the Restructuring Notice or the delivery by Advance/Newhouse
of a Restructuring Notice that is a Spin-Off Restructuring Notice:
(I) with respect to Paragon, the Paragon
704(c)(1)(B) Tax Amount with respect to assets deemed for Federal income tax
purposes contributed to the Partnership within the immediately preceding
Applicable Contribution Period by Paragon that are allocated to the
Advance/Newhouse Asset Pool,
(II) with respect to each Partner, the
Restructuring Deferred Tax Amount with respect to assets contributed by such
Partner (other than, in the case of Paragon, the assets referred to in clause
(I) above), and
(III) with respect to Paragon, the Debt Shift Tax
Amount.
(c) During the period from the date of delivery of a Restructuring
Notice in accordance with Section 8.1 to the date of determination of the
Advance/Newhouse Asset Pool and TWE Asset Pools in accordance with
<PAGE> 28
5
Section 8.2(b)(ii), the Partnership shall conduct its business in the ordinary
course, consistent with past practice, and shall not engage in any extraordinary
transactions that were not contemplated by a previously approved Long Term
Strategic Plan or approved by the Executive Committee with the consent of
Advance/Newhouse's representatives. Following the determination of the
Advance/Newhouse Asset Pool and the TWE Asset Pools in accordance with Section
8.2(b)(ii), to the extent permitted by law, (i) the assets comprising such Asset
Pools shall for all purposes be deemed to be owned by Advance/Newhouse and the
Partnership, respectively, (ii) the Restructuring Indebtedness shall for all
purposes be deemed to be an obligation of Advance/Newhouse and Advance/Newhouse
shall have no obligation with respect to the Excess Tax Amount Indebtedness
which shall for all purposes be deemed to be an obligation of TWE and Paragon as
Partners of the Partnership following the restructuring of the Partnership
hereunder, and (iii) until the Advance/Newhouse Asset Pool is actually
distributed to Advance/Newhouse, (1) Advance/Newhouse's Partnership Interest
shall entitle it only to (A) a distributive share of the income, gain, losses
and deductions related to the Advance/Newhouse Asset Pool, (B) a distributive
share of the assets comprising the Advance/Newhouse Asset Pool (subject to the
related liabilities and the Restructuring Indebtedness) and (C) management
rights relating to the business and affairs of the Advance/Newhouse Asset Pool,
and (2) TWE's and Paragon's Partnership Interest shall entitle them only to (A)
a distributive share of the income, gain, losses and deductions related to the
TWE Asset Pools, (B) a distributive share of the assets comprising the TWE Asset
Pools (subject to the related liabilities and the Excess Tax Amount
Indebtedness) and (C) management rights relating to the business and affairs of
the TWE Asset Pools.
<PAGE> 1
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, 1998, 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 Hockey Club, Inc. ............................. 100 Georgia
Atlanta National League Baseball Club, Inc. ........... 100 Georgia
Hawks Basketball, Inc. ................................ 100 Georgia
Atlanta Hawks, L.P. ................................. 100 Georgia
CNN Investment Company, Inc. .......................... 100 Delaware
Cable News Network LP, LLLP.......................... 100 (1) Delaware
CNN Productions, 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 (2) 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
TEN Investment Company, Inc. ..................... 100 Delaware
Turner Network Television LP, LLLP.............. 100 (3) Delaware
The Cartoon Network LP, LLLP.................... 100 (3) Delaware
Turner Classic Movies LP, LLLP.................. 100 (3) Delaware
TNT Productions, Inc. .......................... 100 Georgia
Superstation, Inc. ............................... 100 Georgia
Turner Original Productions, Inc. .............. 100 Georgia
Turner Home Entertainment, Inc. ..................... 100 Georgia
Turner Learning, Inc. ............................ 100 Georgia
Turner Publishing, Inc. .......................... 100 Georgia
Turner Pictures Group, Inc. ......................... 100 Georgia
Turner Entertainment Co. ......................... 100 Georgia
</TABLE>
i
<PAGE> 2
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
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.
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 (4) 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.(5)........................................... 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 Service, Inc. ......................... 100 Delaware
Time Publishing Ventures, Inc. ...................... 100 Delaware
Southern Progress Corporation(6) ................. 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 Warner Telecom LLC(7)............................. (8) Delaware
TW Service Holding I, L.P. (partnership)............... (9) Delaware
TW Service Holding II, L.P. (partnership).............. (9) Delaware
TW Programming Co. (partnership)..................... (10) New York
TW Cable Service Co. (partnership)................... (11) New York
Time Warner Connect (partnership).................... (11) New York
WCI Record Club Inc. .................................. 100 (12) Delaware
</TABLE>
ii
<PAGE> 3
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
The Columbia House Company (partnership)............. 50 New York
Warner Communications Inc................................. 100 Delaware
Elektra Entertainment Group Inc. ...................... 100 Delaware
DC Comics (partnership)................................ 50 (13) 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.(14)........................... 100 Delaware
Super Hype Publishing, Inc. ......................... 100 New York
Cotillion Music, Inc. ............................... 100 Delaware
Walden Music, Inc. .................................. 100 New York
Summy-Birchard, Inc. ................................ 100 Wyoming
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
WBR/Sire Ventures Inc. .............................. 100 Delaware
SR/MDM Venture Inc. .............................. 100 Delaware
Maverick Recording Company (partnership)........ 50 California
Atlantic Recording Corporation....................... 100 Delaware
Atlantic Rhino Ventures Inc. ..................... 100 Delaware
Warner-Elektra-Atlantic Corporation.................. 100 New York
WEA International Inc.(15)............................. 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 (16) Delaware
TWI Cable Inc.(17)........................................ 100 Delaware
TW/Kblcom Inc.(18)..................................... 100 Delaware
</TABLE>
iii
<PAGE> 4
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
KBL Communications, Inc. ............................ 100 Delaware
Paragon Communications (partnership).............. 100 (19) 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
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...... 64.8 New York
CV of Viera Joint Venture (partnership)................... 50 Florida
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 (20) New Zealand
Public Cable Company (partnership).......................... 77 Maine
Queens Inner Unity Cable System............................. 66.01 New York
Comedy Partners, L.P. (partnership)......................... 50 New York
CTV Holdings L.L.C. ........................................ 100 Delaware
CTV Holdings II L.L.C. ..................................... 100 Delaware
Courtroom Television Network LLC.......................... 50 (21) New York
DC Comics (partnership)..................................... 50 (13) New York
Quincy Jones Entertainment Company L.P. (partnership)....... 50 Delaware
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 (22) 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 (23) 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.
</TABLE>
iv
<PAGE> 5
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
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
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 (24) Germany
Time Warner Entertainment Germany GmbH.................... 100 Germany
Time Warner Entertainment Germany GmbH and Co.
Medienvertrieb OHG................................... 100 (25) 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
</TABLE>
v
<PAGE> 6
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
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
Hungary Holding Co. ........................................ 100 (24) Delaware
HBO Ceska Republika, S.R.O. ................................ 100 Czech Republic
</TABLE>
- ---------------
(1) TBS is the General Partner and CNN Investment Company, Inc. is the Limited
Partner.
(2) TBS owns 69.31% and Castle Rock Entertainment, Inc. owns 30.69%.
(3) Turner Entertainment Networks, Inc. is the General Partner and TEN
Investment Company, Inc. is the Limited Partner.
(4) Turner Omni Venture, Inc. owns 75% and ICC Ventures, Inc. owns 25%.
(5) The names of five subsidiaries of Time Inc. carrying on the magazine
publishing business are omitted.
(6) The names of nine subsidiaries of Southern Progress Corporation carrying on
the magazine or book publishing business are omitted.
(7) The names of 13 subsidiaries of Time Warner Telecom carrying on the same
alternate access operations are omitted.
(8) Advance/Newhouse Partnership owns 19.16667%, Media One Group, Inc. owns
18.86341% and various subsidiaries of Time Warner Companies, Inc. own the
rest.
vi
<PAGE> 7
(9) The General Partners of TWE own 87.5% and TW/TAE, Inc. and Time Warner
Companies, Inc. each own 6.25% as limited partners.
(10) TWE owns 99% and TW Service Holding II, L.P. owns 1%.
(11) TW Service Holding I, L.P. owns 99% and TW Service Holding II, L.P. owns
1%.
(12) Time Warner Companies, Inc. owns 80% and Warner Communications Inc. owns
20%.
(13) Warner Communications Inc. owns 50% and TWE owns 50%.
(14) The names of 16 subsidiaries of New Chappell Inc. carrying on substantially
the same music publishing operations in foreign countries are omitted.
(15) 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.
(16) Time Warner Companies, Inc. owns 92.20%, and Warner Communications Inc.
owns 7.8%.
(17) The names of 42 subsidiaries of TWI Cable Inc. carrying on the cable
television business are omitted.
(18) The names of 21 subsidiaries of TW/Kblcom Inc. carrying on the cable
television business are omitted.
(19) KBL Communications Inc. owns 53.69% of Paragon Communications, ATC owns
.74% and the remaining 45.57% is owned by TWI Cable Inc. through its
subsidiaries.
(20) TWE owns 99% and Time Warner Companies, Inc. owns 1%.
(21) CTV Holdings L.L.C. owns 33 1/3% & CTV Holdings II L.L.C. owns 16 2/3%.
(22) TWE owns 99% and TWE Asia Inc. owns 1%.
(23) TWE owns 50% and TBS owns 50%.
(24) TWE owns 99% and HBO Direct, Inc. owns 1%.
(25) Time Warner Entertainment Germany GmbH owns 85% and Time Warner Germany
Holding GmbH owns 15%.
vii
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our reports dated February
3, 1999, with respect to the (a) consolidated financial statements, schedule and
supplementary information of Time Warner Inc. and (b) consolidated financial
statements and schedule of Time Warner Entertainment Company, L.P. included in
this Annual Report on Form 10-K for the year ended December 31, 1998, in each of
the following:
1. Registration Statement No. 333-11471 on Form S-4 of 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 and related prospectuses 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 and related prospectus 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 and related prospectus 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 and related prospectus 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 and related prospectuses of
Time Warner Inc.;
7. Post-Effective Amendment No. 1 to Registration Statement No.
333-14053 on Form S-8 and related prospectus 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 and related
prospectus of Time Warner Inc.;
10. Registration Statement No. 333-39647 on Form S-3 of Time Warner Inc.;
11. Registration Statement No. 333-49139 on Form S-8 and related
prospectus of Time Warner Inc.;
12. Registration Statement No. 333-61207 on Form S-3 of Time Warner Inc.
(and Turner Broadcasting System, Inc. and Time Warner Companies,
Inc.) (prospectus also relates to and constitutes a post-effective
amendment to Registration Statement No. 333-44255);
13. Registration Statement No. 333-69161 on Form S-8 and related
prospectus of Time Warner Inc.;
14. Registration Statement No. 33-61497 on Form S-8 and related
prospectus of Time Warner Companies, Inc.; and
15. Registration Statement No. 333-37827 on Form S-3 of Time Warner Inc.
(and Registration Statement No. 333-37827-01 of Time Warner
Companies, Inc.) (prospectus also relates to and constitutes a
post-effective amendment to Registration Statement No. 333-32813).
ERNST & YOUNG LLP
New York, New York
March 25, 1999
ix
<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, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 442
<SECURITIES> 0
<RECEIVABLES> 3,892
<ALLOWANCES> 1,007
<INVENTORY> 2,846
<CURRENT-ASSETS> 5,449
<PP&E> 3,398
<DEPRECIATION> 1,407
<TOTAL-ASSETS> 31,640
<CURRENT-LIABILITIES> 4,618
<BONDS> 10,925
0
2
<COMMON> 12
<OTHER-SE> 8,838
<TOTAL-LIABILITY-AND-EQUITY> 31,640
<SALES> 14,582
<TOTAL-REVENUES> 14,582
<CGS> 8,210
<TOTAL-COSTS> 8,210
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 891
<INCOME-PRETAX> 586
<INCOME-TAX> 418
<INCOME-CONTINUING> 168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
