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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, 1999.
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. [x]
As of the close of business on March 14, 2000, there were 1,194,082,138
shares of registrant's Common Stock and 114,123,884 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 14, 2000) was approximately $94.16 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
2000 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 that
are junior to the pro rata priority capital interests. (See Note 4 to the
Company's consolidated statements.)
(3) Direct or indirect common equity interests. In addition, TWI Cable
indirectly owns preferred partnership interests.
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PART I
ITEM 1. BUSINESS
Time Warner Inc. (the 'Company' or 'Time Warner') is the world's leading
media and entertainment company. The Company classifies its business interests
into six 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;
Music, consisting principally of interests in recorded music and music
publishing;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production, and television broadcasting;
Cable, consisting principally of interests in cable television systems; and
Digital Media, consisting principally of interests in Internet-related and
digital media businesses.
The Company is a holding company that derives its operating income and cash
flow from its investments in its subsidiaries. For convenience, the terms the
'Registrant,' 'Company' and 'Time Warner' are used in this report to refer to
both the parent company and collectively to the parent company and the
subsidiaries through which its various businesses are conducted, unless the
context otherwise requires.
TWE
Time Warner Entertainment Company, L.P. ('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 junior
priority 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'). In accordance with the partnership's
governing documents, as a result of MediaOne's August 1999 notice of intent to
terminate its covenant not to compete with TWE, MediaOne's right to participate
in the management of TWE's businesses terminated immediately and irrevocably.
MediaOne retains only certain protective governance rights pertaining to certain
limited, significant matters affecting TWE as a whole. As a result of this
significant reduction in MediaOne's rights, the Company consolidated TWE and
certain related companies for financial reporting purposes during 1999. The
termination of the covenant not to compete is necessary for MediaOne to complete
its proposed merger with AT&T Corp. ('AT&T'). See also 'Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Investment in
TWE' at page F-3.
RECENT EVENTS
On January 10, 2000, the Company and America Online, Inc. ('America Online')
announced a strategic merger of equals (the 'AOL Merger') to create the world's
leading media and communications company. America Online is a world leader in
interactive services, web brands, Internet technologies and electronic commerce
services. The AOL Merger will be structured as an all-stock transaction pursuant
to which the Company's common stockholders will receive 1.5 shares of a new
holding company, to be named AOL Time Warner Inc., for each share of the
Company's common stock they own. Following completion of the AOL Merger, America
Online and the Company will each become a wholly owned subsidiary of AOL Time
Warner Inc. America Online's stockholders will receive one share of AOL Time
Warner Inc. common stock for each share of America Online common stock they own.
Initially, half of the 16 directors of AOL Time Warner will be selected by
America Online and half will be selected by Time Warner. Stephen Case, the
Chairman and Chief Executive Officer of America Online, will become Chairman of
the Board of AOL Time Warner and Gerald Levin, the Chairman and Chief Executive
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Officer of Time Warner, will become Chief Executive Officer. AOL Time Warner
will be headquartered in New York City with additional executive offices in
Dulles, Virginia. Among other things, the AOL Merger is subject to regulatory
approvals and the approvals of the Company's and of America Online's
stockholders. Additional information on the AOL Merger is provided in
'Management's Discussion and Analysis of Results of Operations and Financial
Condition -- America Online-Time Warner Merger' at pages F-2 and F-3 and in
Note 20, 'Subsequent Events -- America Online-Time Warner Merger,' to the
Company's consolidated financial statements, at pages F-64 and F-65 herein.
On January 24, 2000, the Company and Britain's EMI Group plc announced
that they had agreed to combine their global music operations into two
equally-owned ventures to be collectively known as Warner EMI Music. Under the
agreement, Time Warner will nominate six of the new company's 11-member Board of
Directors. Warner EMI Music will be headquartered in New York, with its non-U.S.
operations based in London. Completion of the transaction is subject to
regulatory approvals and approval by EMI shareholders. Additional information on
the formation of the joint venture is provided in 'Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Warner-EMI Music
Merger' at page F-3 herein and in Note 20, 'Subsequent Events -- Warner-EMI
Music Merger' to the Company's consolidated financial statements at page F-65
herein.
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-19 and F-20 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.
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. The basic
cable networks (collectively, the 'Turner Networks') owned by Turner
Broadcasting System, Inc. ('TBS'), a wholly owned subsidiary, constitute the
principal component of the Company's basic cable networks. TBS also operates
several large advertiser-supported online sites, including the CNN family of
Internet destinations. 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, financial and
all-sports news programming and include three of the top five rated basic cable
networks in 1999. 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
original programming, such as feature motion pictures, mini-series and
television series produced specifically by or for HBO. In addition, HBO offers
sporting and special entertainment events, such as concerts and comedy shows.
The Turner Networks and the Home Box Office Services (collectively, the
'Networks') distribute their programming via cable and other distribution
technologies, including satellite distribution. The Networks generally enter
into separate multi-year agreements, known as affiliation agreements, with
distributors that have
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agreed to carry such Networks. With the proliferation of new cable networks and
services, competition for cable carriage on the limited available analog channel
capacity has intensified.
The programming produced for the Company's Networks is generally transmitted
via satellites to receivers located at local operations centers for each
affiliated cable company, or to home satellite dish receivers. Individual dish
owners wishing to receive programming from one of the satellite distribution
companies must purchase a consumer decoder 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
AT&T, 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.
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 number 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 generally
command a high CPM for their advertising time.
TURNER NETWORKS
DOMESTIC NETWORKS
TBS's entertainment networks include two general entertainment networks, TBS
Superstation, with approximately 78.5 million subscribers in the U.S. as of
December 31, 1999, and TNT, with approximately 77.1 million subscribers in the
U.S.; as well as Cartoon Network, with approximately 60.9 million subscribers in
the U.S.; 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 which had approximately 37.7 million subscribers in the U.S.
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 October 1999, TBS launched Turner
South, a new regional entertainment network featuring movies and sitcoms from
the Turner library and original programming targeted to viewers in the
Southeast, as well as regional news and sports, and on April 1, 2000, TBS will
launch Boomerang, a digital network featuring classic cartoons.
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 made to Major League Baseball's
central fund for distribution to all Major League Baseball clubs. Through a
joint venture with NBC,
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TBS has also acquired rights to televise certain NASCAR Winston Cup and Busch
Series races on TBS and TNT from 2001-2006. Rights fees will be paid by the
TBS/NBC joint venture to NASCAR and then redistributed to owners of the tracks
hosting races and to the race teams.
CNN is a 24-hour per day cable television news service which has more than
77 million subscribers in the U.S. Together with CNN International ('CNNI'), CNN
reached more than 200 million locations in 212 countries and territories as of
December 31, 1999. In addition to Headline News, which provides updated half-
hour newscasts throughout each day, CNN has expanded its brand franchise to
include CNNfn, featuring business and consumer news; and CNN/Sports Illustrated,
a venture with Sports Illustrated, a Time Warner publication, featuring sports
news and features. The Company has also expanded into a number of special market
networks.
CNN operates 35 news bureaus, of which ten are located in the United States
and 25 are located around the world. In addition, a network of satellite
newsgathering trucks, portable satellite uplinks and a network of domestic and
international broadcast television affiliates on six continents permit CNN to
report live from virtually anywhere in the world. These affiliate arrangements,
from which CNN obtains substantial news coverage, are generally pursuant to
contracts having terms of one or more years.
INTERNATIONAL NETWORKS
CNNI 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. CNN en Espanol, a Spanish language all-news network in
Latin America, as of December 31, 1999 had 8.5 million subscribers. TBS also
distributes region specific versions of TNT and Cartoon Network on either a
single channel basis or a combined channel basis, and Turner Classic Movies in
approximately 120 countries around the world. Each such network features all or
a portion of its schedule in more than one language through dubbing or
subtitling.
CNN+, a Spanish language 24-hour news network, was launched for distribution
in Spain and Andorra in early 1999 in a 50/50 joint venture between TBS and
Sogecable, S.A., an affiliate of Canal+. As of December 31, 1999, CNN+ reached
820,000 households. In October 1999, TBS launched CNN Turk, a Turkish language
24-hour news network, through a joint venture with the Dogan Media Group.
Cartoon Network Japan is a Japanese language, all animation (including a
significant amount of locally sourced, Japanese product) 24-hour network which,
as of December 31, 1999, reached more than 1.6 million households. Cartoon
Network Japan is a joint venture owned 40% by TBS, 40% by ITOCHU Corporation and
20% by Time Warner Entertainment Japan Inc. ('TWE Japan'), which is 37.25% owned
by Time Warner.
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 HBO 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. Cartoon Network.com is a popular advertiser-supported site for
children ages two to eleven. CNN News Group operates multiple sites, primarily
through CNN Interactive. These sites are among the most-visited online
destinations for news and information, with more than 6 billion pages viewed in
1999. 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; myCNN.com, a personalized news site operated by Oracle technology;
and additional online services in Spanish, Portuguese, Swedish, Danish,
Norwegian and Italian. The CNN News Group also produces two other major news
sites: CNNfn.com, a unit of CNN Financial News, and CNN/SI.com, a sports site
developed jointly with Sports Illustrated.
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In addition to producing content for the Internet, CNN Interactive produces
and distributes CNN digital content for other platforms and technologies,
including pagers, push technology, European teletext and certain mobile
telephone technologies.
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 35.7 million subscriptions as of
December 31, 1999.
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, the films' box office
performances.
Both HBO and Cinemax are made available in a multichannel format, allowing
subscribers to receive through participating distribution affiliates up to six
separately programmed channels of HBO (such as HBO-Family, providing G and
PG-rated programming only, or HBO-Zone, offering a younger, hipper programming
mix) and four separately programmed channels of Cinemax programming (such as
ThrillerMax or ActionMax).
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 it has acquired 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 award-winning pay television
original movies and mini-series, sporting events such as boxing matches, sports
documentaries and sports news programs, including 'Real Sports with Bryant
Gumbel,' as well as dramatic and comedy specials and series, such as 'The
Sopranos,' and concert events, family programming and documentaries.
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 1999, Home Box Office's own production company, HBO Independent
Productions, produced 'Everybody Loves Raymond,' now in its fourth season on
CBS. Divisions of Home Box Office also produce comedy programming for HBO,
such as "The Chris Rock Show," and for other networks.
INTERNATIONAL
HBO Ole, a 29.4%-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 a 23% interest,
distributes Portuguese-language pay television movie services in Brazil. TWE
also has a
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40% interest in HBO Asia, a movie-based pay television service which, together
with Cinemax, is distributed to various countries in Southeast Asia.
In addition to the Latin American and Asian ventures, Home Box Office has
interests in pay television services in Hungary, the Czech Republic, the Slovak
Republic, Poland and Romania.
OTHER BASIC CABLE NETWORK INTERESTS
The Company, through the Home Box Office division of 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 62 million homes at year-end 1999.
The Company, through TWE, also holds a 50% interest in Court TV, which was
available in approximately 37.5 million homes at year-end 1999. Court TV is an
advertiser-supported basic cable television service whose newly expanded
programming includes coverage of live and taped legal proceedings during the day
and a mix featuring popular crime television series in syndication and real
crime stories in the evening.
COMPETITION
Each of the Networks competes with other television programming services for
distribution on the limited number of analog 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.
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 of Major
League Baseball, the Atlanta Hawks of the National Basketball Association, and
the Atlanta Thrashers of the National Hockey League. Each sports team is subject
to the team 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.
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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
In Style. These magazines generally appeal to the broad consumer market.
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 centralized.
Fulfillment activities for Time Inc.'s magazines are generally administered from
a centralized facility in Tampa, Florida. Some properties employ independent
fulfillment services and make their own arrangements for production and
distribution.
Time Inc. continues to expand its core magazine businesses through the
development of product extensions. These are generally managed by the individual
magazines and involve new magazines, specialized editions aimed at particular
readership groups, and publication of editorial content through different media,
such as the Internet, books and television. Time Inc. expects to launch five new
magazines in 2000, including Real Simple, a lifestyle magazine about simplifying
your life slated to be launched at the end of March, and eCompany Now, a
business magazine for the Internet economy developed by Fortune to be launched
in early May.
Time Inc.'s various magazines also generate revenue from their online sites
through advertising, fee-based downloads of or access to premium content,
selected e-commerce offerings, and the licensing of digital content.
DESCRIPTION OF MAGAZINES
Time Inc.'s magazines and their areas of editorial focus are summarized
below:
Time summarizes the news and interprets the week's events, both national and
international, across a spectrum of topics, which includes: politics, business,
entertainment, sports, societal trends and health. Time for Kids is a classroom
publication with editions created for students in grades 2 through 6. Time
Digital, formerly a supplement of Time, is being launched as a regular frequency
magazine in 2000. Time also has five weekly English-language editions that
circulate outside the United States: Time Asia, Time Atlantic, Time Canada, Time
Latin America and Time South Pacific.
Sports Illustrated is a weekly newsmagazine that covers a variety of
competitive sports. 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. Sports Illustrated for Women covering women's sports, and
Sports Illustrated for Kids, which is intended primarily for pre-teenagers, are
also extensions of the Sports Illustrated franchise.
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 prominence due to personal challenges or acts of heroism.
People's most recent offspring are: People en Espanol, a Spanish-language
edition aimed primarily at Hispanic readers in the United States, and Teen
People, aimed at teenage readers. Who Weekly is an Australian version of People.
Time Inc. has other magazines also directed at readers' interests in
celebrities and entertainers. In Style is a monthly magazine that focuses on
celebrity lifestyles and includes reports and advice on beauty and fashion.
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Entertainment Weekly is a weekly magazine that includes reviews and reports on
television, movies, video, music, books and multimedia.
Fortune is a bi-weekly magazine that reports on worldwide economic and
business developments and 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,
that reports primarily on personal finance and provides information on topics
such as investing, planning for retirement and financing children's college
education. Time Inc. also publishes, under an agreement with American Express
Publishing Corporation, FSB (Fortune Small Business), formerly titled Your
Company, a bi-monthly magazine focusing on success stories, growth advice and
operational issues for small businesses. In 1998, Time Inc. acquired Mutual
Funds, a monthly magazine featuring extensive reports on mutual funds and
stories about personal financial planning.
Life is a monthly magazine that features photographic essays of important
news events, prominent personalities and meaningful vignettes of the lives of
ordinary people. Time Inc. has announced that Life will cease regular
publication following its May 2000 issue. Life also publishes hardcover
books that include contemporary and historical photographs of note from its
extensive collection.
Southern Progress Corporation ('Southern Progress') publishes several
regional magazines including Southern Living, a monthly regional home, garden,
food and travel magazine focused on the South; and Sunset, The Magazine of
Western Living. Southern Progress also publishes the following: Cooking Light,
which is published ten times a year and promotes health and fitness through
active lifestyles and good nutrition; 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 Health, a women's consumer
magazine about health and fitness published nine times in 1999.
Time Publishing Ventures, Inc. ('TPV') manages Time Inc.'s specialty
publishing titles. Parents and families are addressed by the Parenting Group
Inc., which publishes Parenting, Baby Talk and Family Life (acquired in 1999).
TPV publishes This Old House magazine ten times a year pursuant to a licensing
arrangement with public television station WGBH in Boston and 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, In Style 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, Food & Wine and Departures.
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.
ADVERTISING
Advertising carried in Time Inc. magazines is predominantly consumer
advertising, including domestic automobile manufacturers, media and movies,
computers, financial, food, and toiletries and cosmetics. In 1999, Time Inc.
magazines accounted for a leading 22.6% of the total advertising revenue in
consumer magazines, as measured by the Publishers Information Bureau (PIB).
People, Time and Sports Illustrated were ranked 1, 2 and 3, respectively by PIB,
and Time Inc. had eight of the 30 leading magazines in terms of advertising
dollars.
CIRCULATION
Circulation drives the advertising rate base, which is the guaranteed
minimum paid circulation level on which advertising rates are based. Single
copies of magazines are sold through retail news dealers and other outlets which
are supplied by wholesalers or directly through a Time Inc. subsidiary. Time
Inc.'s magazines are, however, sold primarily by subscription and delivered to
subscribers through the mail. Subscriptions are sold by
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direct mail and online solicitation, subscription sales agencies, television
and telephone solicitation and insert cards in Time Inc. magazines and other
publications. A wholly owned subsidiary of Time Inc. is a 50% partner in
American Family Enterprises ('AFE'), whose principal business is selling
magazine subscriptions through the use of sweepstakes and other promotions.
The sale of subscriptions through AFE has declined, partly as a result of
certain litigation involving AFE.
Time Distribution Services Inc. ('TDS') is responsible for the national
distribution and marketing of single copies of Time Inc. magazines and other
publications. TDS distributes periodicals either directly to retailers or
through a magazine wholesaler network which services retail outlets such as
newsstands, supermarkets, convenience and drug stores. Warner Publisher Services
Inc. ('WPS') is a major distributor of magazines and paperback books sold
through wholesalers in the United States and Canada.
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
1999, Time Inc. purchased paper principally from six independent manufacturers.
Printing and binding for Time Inc. magazines are performed 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.
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, to a lesser extent, outside fulfillment companies.
BOOK-OF-THE-MONTH CLUB
Effective as of February 2000, Book-of-the-Month Club, Inc. ('BOMC') formed
a joint venture with Bertelsmann Inc.'s Doubleday book clubs business to operate
the U.S. book clubs of BOMC and Doubleday jointly. BOMC contributed to the joint
venture ten of its book clubs and two continuity businesses with a combined U.S.
membership of more than 4.2 million.
Two of BOMC's 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 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.
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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 1999, Time Warner Trade Publishing placed 36 books
on The New York Times best-seller lists. Warner Books primarily publishes
hardcover, mass market and trade paperback books. 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.
Time Warner Trade Publishing handles book distribution for Little, Brown and
Warner Books, as well as other publishers, through its state-of-the-art
distribution center in Indiana. The marketing of trade books is primarily to
retail stores, online outlets 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.
Time Warner Audiobooks develops and markets audio versions of books and
other materials published by both Warner Books and Little, Brown.
OXMOOR HOUSE
Oxmoor House, Inc., a subsidiary of Southern Progress, markets how-to books
on a wide variety of topics including food and crafts. 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, managed by Oxmoor House,
markets books on topics such as building and decorating, cooking, gardening and
landscaping, and travel. Sunset Books' unique marketing formula includes an
extensive distribution network of home repair and garden centers.
POSTAL RATES
Postal costs represent a significant operating expense for the Company's
publishing activities.
Publishing operations strive to minimize postal expense through the use of
certain cost-saving measures, including the utilization of contract carriers to
transport books and magazines to central postal centers. It has been the
Company's practice in selling books and other products by mail to include a
charge for postage and handling, which is adjusted from time to time to
partially offset any increased postage or handling costs.
COMPETITION
Time Inc.'s magazine operations compete for 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 circulation efforts, as well as those of most other magazine
publishers, have been adversely affected by developments in two principal
distribution channels. The effectiveness of sweepstakes-based subscription
efforts has declined significantly and recent consolidation among independent
magazine wholesalers has resulted in decreased efficiencies for Time Inc. in
retail magazine distribution.
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.
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MUSIC
The Company's worldwide recorded music and music publishing businesses are
conducted under the umbrella name, Warner Music Group ('WMG'). In January 2000,
the Company announced that it had entered into an agreement to combine its
global music operations with that of Britain's EMI Group plc (the 'Warner-EMI
Merger') to form two equally-owned ventures to be collectively known as Warner
EMI Music. (See below.)
RECORDED MUSIC
In the United States, the Company's recorded music business is principally
conducted through WMG's Warner Bros. Records Inc., Atlantic Recording
Corporation, Elektra Entertainment Group Inc. and London-Sire Records Inc. and
their affiliated labels, as well as through the WEA Inc. companies. WMG's
recorded music activities are also conducted in 67 countries outside the United
States through various subsidiaries, affiliates and non-affiliated licensees.
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'), an
independent distribution company specializing in alternative rock music with a
focus on new artists.
DOMESTIC
WMG's record labels in the United States -- Warner Bros., Atlantic, Elektra
and London-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, rap, reggae, folk, blues, gospel
and Christian music. Among the artists and albums that resulted in significant
U.S. sales for WMG during 1999 were: Kid Rock, Cher, Red Hot Chili Peppers,
Sugar Ray, Everlast, GooGoo Dolls, Faith Hill, Metallica, Brandy, Austin Powers:
The Spy Who Shagged Me soundtrack, Jewel and Busta Rhymes.
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. WEA Manufacturing is
also the largest manufacturer of DVDs in the world. 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 audio
cassettes are also increasingly being sold directly to consumers through
Internet retailers such as CDnow and amazon.com. Artists generally receive
royalties based upon the sales of their recordings and music videos, and many
receive non-refundable advance payments which are recoupable from such
royalties.
At the same time a record 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 and often made available for
viewing on Internet music sites. Label personnel may also help organize a
concert tour that will further promote a new album. On January 19, 2000, WMG
entered into a consent order with the staff of the Federal Trade Commission (the
'Consent Order') with respect to the FTC's investigation of the Company's
practices related to minimum advertised price. Among other things, WMG has
agreed that for seven years it will not make the receipt of any funds for
cooperative advertising of its recorded music product contingent upon the price
or price level at which such product is advertised or promoted. The Consent
Order remains subject to approval by the FTC Commissioners, which has not yet
been obtained.
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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
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. WMG labels also enter into agreements with
unaffiliated third-party record labels such as Curb Records to manufacture and
distribute for a fee recordings that are marketed under the owner's proprietary
label.
WMG has actively pursued new media opportunities. A leader in establishing
the DVD Audio format, WMG was a major force in the Madison Project, which tested
the sale to consumers of digitally downloaded music, and has made investments in
companies that stream recordings or music videos digitally. WMG's record labels'
online sites collectively experience the second-largest traffic volume among all
the major music companies.
Through a 50/50 joint venture, WMG and Sony Music Entertainment Inc.
('Sony') have operated The Columbia House Company, a direct marketer of CDs,
audio and videocassettes in North America. In July 1999, Time Warner announced
an agreement with Sony to merge Columbia House with CDnow, Inc., a music and
video e-commerce company. Since that time, the parties had been pursuing the
receipt of regulatory approvals, but such approvals had not been received by the
March 13, 2000 termination date set forth in the merger agreement and at that
time the parties agreed to terminate the agreement. As a result, the merger will
not occur. On terminating the merger agreement Time Warner and Sony also each
elected to make an investment of $10.5 million in CDnow's common stock, in
addition to the $15 million of convertible loans each committed to make on
entering into the merger agreement.
INTERNATIONAL
The Warner Music International ('WMI') division of WMG operates through
various subsidiaries and affiliates and their non-affiliated licensees in 67
countries around the world. 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. Significant album sales for WMI in
1999 were generated by the following artists: Cher, Red Hot Chili Peppers, Eric
Clapton, The Coors, Madonna, Luis Miguel, Mana and Phil Collins.
In most cases, WMI also markets and distributes the records 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 records. 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 recently acquired London Records, a leading British independent
recording company. Its artists include Faith No More, Fine Young Cannibals and
Salt `n' Pepa.
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
Eric Clapton, 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 Hallmark
Entertainment.
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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.
WARNER-EMI MERGER
On January 24, 2000, Time Warner and Britain's EMI Group plc announced that
they had agreed to combine their global music operations into two equally-owned
ventures to be collectively known as Warner EMI Music. EMI's labels include
Angel/Blue Note Records, Capitol Records, Priority Records and Virgin Records.
EMI's roster of artists includes Garth Brooks, Janet Jackson, The Rolling Stones
and Spice Girls and its vast back catalogue includes the recordings of The
Beatles, Frank Sinatra and Nat King Cole. EMI's music publishing assets include
songs written by Diane Warren, Enya, Sting, Third Eye Blind, The Prodigy and
Robbie Williams. The Warner EMI Music Board of Directors will consist of 11
members, six designated by Time Warner and five designated by EMI. Roger Ames,
Chairman and Chief Executive Officer of WMG, will be the Chief Executive
Officer, and Ken Berry, CEO of EMI Recorded Music, will be the Chief Operating
Officer. Richard Parsons, President of Time Warner, and Eric Nicoli, Chairman of
EMI Group plc, will serve as Co-Chairmen. The new company will be headquartered
in New York with most of its non-U.S. operations based in London. Completion of
the transaction is subject to certain regulatory approvals and approval by EMI
shareholders. There can be no assurance that such approvals will be obtained.
Additional information on the formation of the joint ventures is provided in
'Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Warner-EMI Music Merger' at page F-3 herein and in Note 20,
'Subsequent Events -- Warner-EMI Music Merger,' to the Company's consolidated
financial statements, at page F-65 herein.
COMPETITION
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. The competition among
record companies for such talent is intense, as is the competition among
companies to sell the recordings created by these artists. 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 a
consumer's ability to download quality sound reproductions from the Internet
without authorization from the Company. In response, the recorded music industry
has 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. In addition, the vast majority of WMG's music publishing revenues
are subject to rate regulation either by government entities or by collecting
societies throughout the world.
FILMED ENTERTAINMENT
The Company's Filmed Entertainment businesses produce and distribute
theatrical motion pictures, television shows, animation and other programming,
distribute home video product, operate The WB Television Network, license rights
to the Company's characters, operate retail stores featuring consumer products
based on the Company's characters and brands and operate motion picture
theaters. All of the foregoing businesses are principally conducted by Warner
Bros., which is a division of TWE. The filmed entertainment business also
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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, which businesses
are wholly owned by the Company.
WARNER BROS. FEATURE FILMS
Warner Bros. Pictures produces feature films both wholly on its own and
under co-financing arrangements with others. Warner Bros. Pictures also acquires
for distribution completed films produced and financed by others. Acquired
distribution rights may be limited to specified territories, media and/or
periods of time. The terms of Warner Bros. Pictures' 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.
Warner Bros. Pictures' strategy includes building movie franchises, which
will continue with the planned expansion of The Matrix into a series of films
and the introduction in 2001 of the first of a series of Harry Potter motion
pictures. Warner Bros. Pictures has also announced a strategic effort to release
films with a diversified mix of genres, talent and budgets. In response to the
rising cost of producing theatrical films, Warner Bros. Pictures has entered
into a number of joint venture agreements with other companies to co-finance
films, decreasing its financial risk while in most cases retaining substantially
all worldwide distribution rights. During 1999, Warner Bros. Pictures released a
total of 25 motion pictures for theatrical exhibition, of which six were wholly
financed by Warner Bros. Pictures and 19 were produced by or with others. 1999
releases from Warner Bros. Pictures (both wholly financed and co-produced)
included Analyze This, Any Given Sunday, Pokemon -- The First Movie, The Green
Mile, The Matrix, Three Kings and Wild Wild West. A total of 24 motion pictures
are currently slated to be released during 2000, of which four are wholly
financed by Warner Bros. Pictures and 20 are produced by or with others.
Warner Bros. Pictures' joint venture arrangements include: (i) Bel-Air
Entertainment, a joint venture with Canal+ to co-finance on primarily a 50/50
basis the production, overhead and development costs of 10 to 20 motion pictures
through 2003; (ii) a joint venture with Village Roadshow Pictures to co-finance
under a 50/50 cost sharing arrangement the production of up to 40 motion
pictures through 2005; (iii) an exclusive arrangement with Alcon Entertainment
('Alcon') under which Warner Bros. Pictures will have substantially all
worldwide distribution rights in a minimum of 10 motion pictures produced and
financed by Alcon; and (iv) an arrangement with a wholly owned subsidiary of
Universal Pictures ('Universal') to co-finance on a 50/50 basis through 2000
certain motion pictures produced or acquired by Castle Rock, a subsidiary of
Time Warner, under which Warner Bros. and Universal each acquire distribution
rights in the U.S. and Canada to half of the Castle Rock pictures produced under
this arrangement and international distribution rights to the other half on an
alternating basis.
Warner Bros. Pictures has distribution servicing agreements with Morgan
Creek Productions Inc. ('Morgan Creek') through June 2003 pursuant to which,
among other things, Warner Bros. provides domestic distribution services for all
Morgan Creek pictures and certain foreign distribution services for selected
pictures. Warner Bros. Pictures will also distribute eight motion pictures
produced by Franchise Entertainment LLC through its domestic servicing
arrangements with Morgan Creek.
NEW LINE, CASTLE ROCK AND OTHER FILMED ENTERTAINMENT
Theatrical films are also produced and distributed by New Line and Castle
Rock, which are wholly owned subsidiaries of TBS. New Line is a leading
independent producer and distributor of theatrical motion pictures with two film
divisions, New Line Cinema and Fine Line Features. New Line's 1999 releases
included the hit Austin Powers: The Spy Who Shagged Me. A total of 24 motion
pictures are currently slated for theatrical release by New Line during 2000.
Certain of Castle Rock's films are currently being co-financed and distributed
under an arrangement with Warner Bros. and Universal (see, 'Warner Bros. Feature
Films' above).
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Castle Rock Television produced the critically acclaimed and highly rated
Emmy Award-winning series Seinfeld, which is distributed by a third party for a
fee. Distributed throughout the world, Seinfeld began its first domestic
syndication cycle in September 1995, and 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 also includes the Hanna-Barbera, MGM and RKO
libraries, with distribution and licensing handled by Warner Bros.
HOME VIDEO
Warner Home Video ('WHV') distributes for home video use pre-recorded
videocassettes and DVDs containing the filmed entertainment product of the
Company's Warner Bros. Pictures, WarnerVision Entertainment, Castle Rock, New
Line Cinema and Home Box Office divisions. WHV also distributes other companies'
product for which it has acquired the rights, including the distribution of DVDs
on behalf of Disney in Europe, the Middle East, Africa and Australia. Under
distribution agreements, WHV licenses video product and shares in revenues
generated by its customers.
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 manufactured under contract with independent
duplicators. DVD product is replicated by Warner Music Group companies and third
parties.
In North America, WHV released five titles on videocassette for home rental
in 1999 with sales and licensed units exceeding one million units each: The
Matrix, Analyze This, Deep Blue Sea, Message in a Bottle and Rush Hour.
Additionally, WHV released 10 titles on videocassette in the North American
sell-through market that generated sales of more than one million units each.
Internationally, the following titles, among others, generated substantial home
video revenues in 1999: The Matrix, You've Got Mail, Lethal Weapon 4 and A
Perfect Murder.
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 -- further increased their presence in the North American and
international markets during 1999. Since the inception of the format, WHV has
released over 500 titles on DVD in North America, of which 25 have generated
sales of more than 250,000 units each, headed by The Matrix, with sales in
excess of two million units. WHV is currently benefitting by releasing in DVD
format both first-run feature motion pictures and titles from WHV's extensive
catalogue.
TELEVISION
Warner Bros. is one of the world's leading suppliers of television
programming. 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 U.S. 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 approximately 5,700
feature films, 32,000 television titles, 12,000 animated titles and 1,500
classic animated shorts.
Warner Bros.' television programming is primarily produced by Warner Bros.
Television ('WBTV'), which produces primetime dramatic and comedy programming
for the major networks, and Telepictures Productions ('Telepictures'), which
specializes in reality-based and talk/variety series. Returning network
primetime series from WBTV include, among others, ER, Friends, The Drew Carey
Show, Whose Line Is It Anyway? and For Your Love, along with WBTV's newest
series, The West Wing. Telepictures is responsible for the development and
production of original programming primarily for syndicated television. In this
capacity, Telepictures has successfully launched, among others, The Rosie
O'Donnell Show.
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Warner Bros. Animation ('WBA') is responsible for the creation, development
and production of contemporary television and feature film 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 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!).
WBA continues to be a leading producer of original children's animation
programming, including the series Batman Beyond and various direct-to-video
projects, and also continues to distribute the popular Pokemon animated series
in the U.S.
The expansion of off-network, pay-per-view, pay and basic cable and
satellite broadcasting has increased distribution opportunities for the Warner
Bros. and TBS libraries. A typical sale of a new series produced by or for WBTV
to a major domestic network grants that network an option to carry such series
for four years, after which time WBTV 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.
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
is also active in the development and production of both English and local
language television programming with international partners.
BACKLOG
Backlog represents the 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. Backlog for all of Time
Warner's filmed entertainment companies amounted to $3.595 billion at
December 31, 1999, compared to $2.934 billion at December 31, 1998 (including
amounts relating to the intercompany licensing of film product to Time Warner's
cable television networks of $1.176 billion and $995 million as of December 31,
1999 and December 31, 1998, respectively). The backlog excludes advertising
barter contracts.
THE WB TELEVISION NETWORK
The WB Television Network ('The WB') completed its fifth year of broadcast
operations in January 2000. During the l999/2000 broadcast season, The WB
expanded its primetime program line-up to six nights and is now airing 13 hours
of series programming from Sunday to Friday 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, Felicity, Roswell, Popular and Angel.
The WB's children's network, Kids' WB!, airs 19 hours of programming per
week with programming on weekday mornings, weekday afternoons and Saturday
mornings led by Pokemon, the No. 1-rated Saturday morning children's animation
series.
As had been anticipated, during the fourth quarter of 1999 the WGN
Superstation discontinued its carriage of The WB programming and, as a result,
the total TV household coverage of The WB was reduced from approximately 90% to
83%. Seventy primary broadcast affiliates together with eight cable-only
affiliates provide
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coverage for The WB in the top 99 markets. Additional coverage of approximately
5.4 million homes is provided by The WB 100+ Station Group, a partnership with
broadcast affiliates and cable operators in markets 100-212 that provides The WB
and syndicated programming to those markets.
Tribune Broadcasting owns a 22.25% interest in The WB. Key employees of The
WB hold an 11% interest in the network.
CONSUMER PRODUCTS AND 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, Turner classic films and the literary
phenomenon Harry Potter.
Warner Bros. Studio Stores operates 146 stores in the United States.
Fifty-four other stores are owned and operated by franchisees in 14 countries or
territories throughout the world. Warner Bros. Studio Stores has recently
commenced a plan to improve the performance of its stores, which includes the
closing of underperforming stores, the modification of other stores into
smaller, more efficient operations and the exploitation of potential e-commerce
opportunities. See also 'Management's Discussion and Analysis of Results of
Operations and Financial Condition,' at pages F-9 and F-10 and Note 3, 'Filmed
Entertainment Transactions -- 1999 Warner Bros. Retail Stores Write-Down,' to
the Company's consolidated financial statements at page F-36 herein for
additional information.
THEATERS
Through joint ventures, Warner Bros. International Theatres at December 31,
1999 operated 107 multi-screen cinema complexes with 975 screens in 7 foreign
countries, including 30 theaters in Australia, 27 in the United Kingdom, 28 in
Japan, 10 in Portugal, 6 in Italy, 5 in Spain and 1 in Taiwan. In January 2000,
a partnership of a Warner Bros. affiliate and Viacom repurchased out of
bankruptcy a chain of theaters located in Colorado and California. The
partnership is in the process of disposing of a substantial number of the
acquired sites and may retain and operate a select few located primarily in
southern California.
OTHER ENTERTAINMENT ASSETS
THEME PARKS
During 1999, Warner Bros. sold its interests in movie-related theme parks in
Germany and Spain to Premier Parks while retaining its interest in three parks
in Australia. Warner Bros. will continue to license its animated cartoon and
comic book characters to Premier's Six Flags theme parks in the United States
and Canada and has granted new licenses to Premier Parks for parks in Europe and
Central and South America.
DC COMICS AND MAD MAGAZINE
TWE and a wholly owned subsidiary of 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, writers,
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.
CABLE
The Company's Cable business consists principally of interests in cable
television systems that are generally managed by Time Warner Cable, a division
of TWE. Of the approximately 12.6 million subscribers served by the Company at
December 31, 1999, approximately 1.8 million are in systems owned by TWI Cable
Inc. ('TWI Cable'), a wholly owned subsidiary of Time Warner, and approximately
10.8 million are in systems owned or managed by TWE. TWE's cable systems include
approximately 6.7 million subscribers in a joint venture between TWE and
Advance/Newhouse known as TWE-A/N. TWE-A/N is owned 33.3% by Advance/Newhouse,
64.8% by TWE and 1.9% by TWI Cable. 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.
SYSTEMS OPERATIONS
Time Warner Cable is one of the largest operators of cable television
systems in the United States with approximately 90% of its customers served by
clustered cable systems (as described below) with 100,000 subscribers or more.
Over the past several years, Time Warner Cable has pursued a strategy of
upgrading its existing cable systems generally to 750 MHz capability, based on a
hybrid fiber optic/coaxial cable architecture. Upgraded systems can deliver
increased channel capacity and provide two-way transmission capability, with
improved network management systems. Upgrading also permits Time Warner Cable to
roll out new and advanced services, including digital and high-definition
television ('HDTV') programming, high-speed Internet service, video-on-demand,
telephony and other services. See '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. Of those
cable systems which are covered by the Social Contract, approximately 85% had
completed upgrades by December 31, 1999 and average analog channel capacity had
increased from approximately 50 channels to approximately 75 channels. 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 1999 approximately $3.75
billion had been spent.
Apart from upgrades, Time Warner has made over $350 million of additional
capital available to Time Warner Cable in 2000 to accelerate the rollout of its
digital and Internet services, in order to take advantage of the positive
customer response rates and to better position itself against competitive
services such as DTH satellite services.
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As of December 31, 1999, Time Warner Cable had 34 distinct geographic system
groupings serving more than 100,000 subscribers. This 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.
In 1999, Time Warner Cable (i) closed a series of asset exchanges with
certain subsidiaries of AT&T (successor to TCI) under which AT&T received
systems serving approximately 575,000 subscribers in areas not strategic to Time
Warner Cable and Time Warner Cable received systems of comparable aggregate size
adjacent to or near major clusters in Florida, Hawaii, Maine, New York, Ohio,
Texas and Wisconsin and (ii) exchanged cable television systems serving
approximately 314,000 subscribers in Boston and Atlanta for other systems of
comparable aggregate size owned by MediaOne in Ohio, Maine and Palm Springs, CA.
Time Warner Cable also in 1999 obtained sole control of partnerships previously
held with Fanch Communications, retaining cable television systems serving
approximately 158,000 subscribers and approximately $280 million of cash, and
releasing interests in other systems owned by such partnerships. Time Warner
Cable has agreed to exchange its Indianapolis system (approximately 120,000
subscribers) for Comcast's Tallahassee and Lake County, Florida systems
(approximately 130,000 subscribers) in an asset exchange expected to close in
the first half of 2000.
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. As Time
Warner Cable rolls out digital services in its systems, the number of channels
of video programming a customer may elect to receive are further increased such
that over 150 video channels are available.
Video programming available to customers includes local and distant
broadcast television stations, 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 affiliation agreements between the programmers and 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, which fees in some cases include equipment
charges. A one-time installation fee is generally charged for connecting
subscribers to the cable television system. Although regulation of certain cable
programming rates ended on March 31, 1999, rates for 'basic' programming and for
equipment and installation 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
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separate charge. 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. The
clustering of Time Warner Cable's systems expands the share of viewers that Time
Warner Cable reaches within a local DMA (Designated Market Area), which helps
local ad sales personnel to compete more effectively with broadcast and other
media. 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. Twenty-two of Time Warner Cable's 39 field divisions participate in
a cable advertising interconnect.
LOCAL NEWS CHANNELS
Time Warner Cable operates, alone or in partnerships, 24-hour local news
channels in New York City (NY1 News), Tampa Bay (Bay News 9), Orlando (Central
Florida News 13), Rochester, NY (R/News) and Austin (News 8 Austin).
Preparations to launch news channels are underway in two other large systems.
NEW CABLE SERVICES
DIGITAL CABLE SERVICES
During 1999, Time Warner Cable began an aggressive roll-out of digital cable
service in many of its cable systems. As of December 31, 1999, Time Warner Cable
had approximately 430,000 digital service subscribers. Currently 30 of Time
Warner Cable's field divisions are offering digital cable, while the remaining
major divisions are expected to commence offering digital service in 2000. The
digital format of the signals allows them to be compressed so that they occupy
less bandwidth, which substantially increases the number of channels that can be
provided over a system. The digital set-top boxes delivered to subscribing
customers will offer a digital programming tier with up to 100 networks, CD
quality music services, more pay-per-view options, more channels of multiplexed
premium services, a digital interactive program guide, and other features such
as parental lockout options.
ROAD RUNNER
In 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 then-existing
high-speed online service business (the 'Road Runner Joint Venture'). The Road
Runner cable service provides high-speed Internet access and also offers content
optimized 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 connect their personal
computers to the cable operators' two-way hybrid fiber optic/coaxial cable
system which, together with Road Runner's backbone network, enables customers to
access the Internet and Road Runner's content at speeds much greater than
traditional telephone modems.
As of December 31, 1999, the Road Runner Joint Venture had affiliations in
37 localities and was available to approximately 13 million homes passed by
cable, and the service had approximately 550,000 subscribers (of which
approximately 330,000 are in Time Warner Cable systems). The Road Runner service
has been launched by Time Warner Cable in 23 of its 39 field divisions including
New York City. Roll-outs will continue during 2000. After conversion of all
outstanding preferred interests, the Road Runner Joint Venture is owned 8.6% by
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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 pages F-34
and F-35 herein.
The Road Runner affiliates, including Time Warner Cable, have given the Road
Runner service certain rights of exclusivity with regard to high-speed Internet
services to residential subscribers' personal computers. However, as part of the
Company's ongoing discussions in connection with the proposed AOL Merger, the
Company has pledged to enter into agreements to provide multiple Internet
service providers (ISPs) on its cable systems, subject to existing contractual
limitations and partnership obligations; and the Company will endeavor to reach
accommodations with third parties to permit the implementation of multiple ISP
services as quickly as possible.
HDTV
Pursuant to FCC order, television broadcast stations have been granted
additional over-the-air spectrum to provide, under a prescribed roll-out
schedule, high definition and digital television signals to the public. Time
Warner Cable's upgraded hybrid fiber optic/coaxial cable architecture should
provide a technologically superior means of distributing HDTV signals. To date,
Time Warner Cable has 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 and Fox networks; and Time Warner Cable is seeking similar
arrangements with other broadcasters. Time Warner Cable is also carrying the
HDTV version of HBO in certain areas.
VIDEO-ON-DEMAND
By adding digital servers and software to its digital television service
platform, Time Warner Cable will be able to offer network-based 'true'
video-on-demand services, including 'virtual' VCR features such as pause, rewind
and fast forward. Time Warner Cable began testing of video-on-demand equipment
in 1999 in its Austin, Tampa Bay and Hawaii systems, and launched
video-on-demand service on a limited basis to customers in certain areas of
Hawaii in December 1999. Additional testing and launches in two or three
additional locations are expected in 2000.
TELEPHONY
Time Warner Telecom Inc. ('Time Warner Telecom') is a facilities-based
integrated communications provider that offers a wide range of business
telephony services in selected metropolitan areas across the United States. Time
Warner Telecom was formed in 1998 through a restructuring of the business
telephony operations of Time Warner Cable. Following Time Warner Telecom's
initial public offering of equity securities in May 1999, the Company's
aggregate interest in Time Warner Telecom as of December 31, 1999 was diluted to
approximately 48% of the equity.
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. Its networks
have been constructed to date primarily through licensing the use of fiber
capacity from Time Warner Cable.
Time Warner Cable is continuing to evaluate the most efficient and effective
way to offer residential telephony services to consumers, and is presently
exploring a strategy focused on Internet protocol, rather than circuit-switched,
telephony.
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INTERNATIONAL
During 1999, TWE and TWE-A/N sold their interests in two cable systems in
France and, in addition, sold their interests in two cable and Internet access
services in Japan. As a result, Time Warner Cable no longer holds any interests
in cable systems outside the United States.
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. DTH services offer pre-packaged programming services that can be
received by relatively small and inexpensive receiving dishes. As of December
1999, satellite-delivered DTH services were reported to be serving over 11
million subscribers. (In addition to DTH, most cable programming is available to
owners of larger, more expensive C-Band satellite dishes.) Congress has recently
enacted legislation allowing carriage of local broadcast signals by DTH
providers under a copyright compulsory license similar to that granted to cable
television operators. DirectTV and Echostar have commenced offering local
broadcast signals in major metropolitan areas, with additional rollouts
scheduled. The ability of DTH providers to deliver local broadcast signals
reduces one advantage that cable operators previously had over DTH providers.
MMDS/Wireless Cable. Wireless cable operators, including digital wireless
operators, use microwave technology to distribute video programming. Wireless
cable operators reportedly served over 800,000 subscribers nationwide as of June
1999.
SMATV. Additional competition comes from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments with local broadcast signals and many of the same
satellite-delivered program services offered by franchised cable television
systems. The operators of these private systems, known as SMATV systems, often
enter into exclusive agreements which preclude cable television operators from
serving residents of such private complexes, where state law permits.
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 and two municipally-owned systems are presently in
operation in Time Warner Cable franchise areas.
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, including through DTH,
MMDS and SMATV, as traditional franchised cable system operators, or as
operators of 'open video systems' subject to certain local authorizations and
local fees.
Additional Competition. In addition to multichannel video providers, cable
television systems compete with all other sources of news, information and
entertainment including over-the-air television broadcast reception, live
events, movie theaters, home video products, 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.
'On-Line' Competition. Time Warner Cable's systems face competition from a
variety of companies that service customers with various other forms of
'on-line' services, including DSL high-speed Internet access services and
dial-up services over ordinary telephone lines. Monthly prices of these ISPs are
often comparable to cable offerings. Other developing new technologies, such as
Internet access via satellite or wireless connections, compete with cable and
cable on-line services as well.
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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
Under the 1992 Cable Act, the FCC has issued regulations which generally
prohibit vertically integrated programmers, which 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 Telecommunications Competition and Deregulation Act of 1996 (the '1996
Telecommunications Act') contains certain provisions relating to violent and
sexually explicit programming. In addition to requiring manufacturers to build
television sets with the capability of blocking certain coded programming (the
so-called 'V-chip'), pursuant to the 1996 Telecommunications Act the cable and
broadcasting industries developed voluntary ratings for video programming
containing violent, sexually explicit or other indecent content and agreed to
voluntarily transmit signals containing such ratings.
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 systems rates for basic
service, equipment and installation; (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.
Rate Regulation. Under federal laws, nearly all cable television systems are
subject to local rate regulation for basic service pursuant to a formula
established by the FCC and enforced by local franchising authorities. 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. However, pursuant to
the 1996 Telecommunications Act, regulation of CPST rates terminated on
March 31, 1999. Regulation of basic service 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's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic 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
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rates can also be made in the event a cable operator adds or deletes channels or
significantly upgrades its system.
Local franchising authorities are empowered to order a reduction of existing
rates that exceed the maximum permitted level for basic service and associated
equipment, and refunds can be required.
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 or non-monetary
compensation 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 retransmission consent agreements of at least three year
terms with the majority of broadcasters, but certain broadcasters have only
granted short-term arrangements to permit continued negotiations. If the parties
cannot agree on retransmission consent terms, Time Warner Cable may be forced to
delete the subject programming from one or more of its systems for an indefinite
period. The next three-year election between mandatory carriage and
retransmission consent for local commercial television stations will occur on
October 1, 2002.
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.
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, Milwaukee, Kansas City
and a number of cities in Texas.
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. 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. 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.
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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 all cable, DTH and
other multi-channel video provider subscribers nationwide. 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.
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 a maximum of
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.
Renewal and Transfer 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.
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. Although Time Warner Cable has been successful in
the past in negotiating new franchise agreements, there can be no assurance as
to the approval of franchises in the future.
A substantial number of Time Warner Cable's cable television franchises may
require local governmental approval in connection with the merger of America
Online and the Company, and a few states may impose similar requirements.
Applications have been submitted to appropriate state and local authorities
where such consent may be required. Other state and local authorities have been
provided notification of the pending merger.
I-25
<PAGE>
DIGITAL MEDIA
During 1999, Time Warner created Time Warner Digital Media ('TW Digital
Media') to develop and implement a company-wide digital media strategy, to fund
and oversee digital media initiatives across Time Warner's divisions and to
identify and pursue digital media-related investment opportunities. TW Digital
Media also serves as a resource for other transactions in the new media and
digital area, including the Company's pending merger with America Online. As
part of the restructuring of Time Warner's digital initiatives, the Company also
closed the Pathfinder portal previously developed by Time Inc.
TW Digital Media currently funds and participates in the oversight of the
development of the Company's significant Internet sites, including CNN.com,
CNNfn.com, CNN/SI.com, and Entertaindom.com. Entertaindom, launched in November
1999, is an advertiser-supported entertainment destination site featuring
entertainment-related information and services, a mix of content from both Time
Warner brands and third party content providers, including animated shorts,
music and multiplayer games, e-commerce and community sites, such as
ACMEcity.com, an entertainment-focused personal home page community. TW Digital
Media also funds and participates in the development of new digital media
business initiatives, including both online extensions of existing brands, such
as CartoonNetwork.com, InStyle.com, and TimeLife.com, as well as new brands,
such as Volume.com, a website targeting an African American audience.
In December 1999, TW Digital Media launched a digital media investment fund
to invest up to $500 million in cash and non-cash (e.g., advertising and
promotion) currencies in non-controlling equity investments in companies engaged
in e-commerce, vertical and interactive content, technology, infrastructure and
other digital media-related activities. As of March 1, 2000, investments made by
the Company in digital media include OpenTV, ReplayTV, Intervu, Snowball,
Fortune City, WebMD, Bolt, Inc., ARTISTDirect, DealTime and NetSales.
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 AT&T) and certain of
its subsidiaries (collectively, 'LMC') that was entered into in connection with
the merger of Turner Broadcasting System Inc. in 1996 (the 'TBS Transaction')
and the consent decree entered into by the Company with the FTC at that time
(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. In May 1999,
the terms of the Series LMCN-V Common Stock were amended which effectively
resulted in a two-for-one stock split. Each share of Series LMCN-V Common Stock
receives the same dividends and otherwise has the same rights as a share of Time
Warner Common Stock except that (a) holders of Series LMCN-V Common Stock are
entitled to 1/100th of a vote per share on the election of directors and do not
have any other voting rights, except as required by law or with respect to
limited matters, including amendments to the terms of the Series LMCN-V Common
Stock adverse to such holders, and (b) unlike shares of Time Warner Common
Stock, shares of Series LMCN-V Common Stock are not subject to redemption by the
Company if necessary to prevent the loss by the Company of any governmental
license or franchise. The Series LMCN-V Common Stock is not transferable, except
in limited circumstances, and is not listed on any securities exchange.
I-26
<PAGE>
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 one share 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.
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. 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. 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 limited, significant matters affecting TWE as a whole, 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.
CABLE MANAGEMENT COMMITTEE. Prior to August 1999, the businesses and
operations of the cable television systems ('Cable Systems') of TWE and the
TWE-A/N Partnership were governed by a Cable Management Committee (the
'Management Committee') comprised of six voting members, three designated by
MediaOne and three designated by TWE. In August 1999, TWE received a notice from
MediaOne concerning the termination of its covenant not to compete with TWE. As
a result of the termination notice and the operation of the TWE partnership
agreement, MediaOne's rights to participate in the management of TWE's
businesses,
I-27
<PAGE>
including its rights to membership on the Management Committee, terminated
immediately and irrevocably. MediaOne retains its representation on
the TWE Board of Representatives as described above.
DAY-TO-DAY OPERATIONS. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's 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 principal
lines of business of TWE -- cable, cable programming and filmed entertainment
-- 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. MediaOne will not be bound by the covenant not to compete
after August 2000.
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
Within 60 days after June 30, 1999 and within 60 days after the last day of
each 18 month period after June 30, 1999, 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
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.
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
I-28
<PAGE>
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 MediaOne, TWE will be required to elect either to
liquidate TWE within a two-year period or to purchase the interest of MediaOne
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.
The consummation of the proposed AOL Merger will not constitute a "change
in control" of Time Warner under the foregoing provisions.
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 MediaOne 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.
I-29
<PAGE>
No other dispositions are permitted, except that the Company may sell its
entire partnership interest subject to the Class A Partners' rights of first
refusal and 'tag-along' rights pursuant to which the Company must provide for
the concurrent sale of the partnership interests of the Class A Partners so
requesting.
CURRENCY RATES AND REGULATIONS
The Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict the
extent to which such controls and fluctuations in currency exchange rates may
affect its operations in the future or its ability to remit dollars from abroad.
See Note 1, 'Organization and Summary of Significant Accounting
Policies -- Foreign Currency Translation' and Note 15, 'Derivative Financial
Instruments -- Foreign Currency Risk Management' to the consolidated financial
statements set forth at pages F-26 and F-27 and F-56 through F-57, respectively,
herein. For the revenues of international operations, see Note 16, 'Segment
Information' to the consolidated financial statements set forth on page F-61
herein.
EMPLOYEES
At December 31, 1999, the Company employed a total of approximately 69,700
persons, including approximately 30,000 persons employed by TWE.
I-30
<PAGE>
ITEM 2. PROPERTIES
CORPORATE, TBS, PUBLISHING AND MUSIC
The following table sets forth certain information as of December 31, 1999
with respect to the Company's principal properties (over 250,000 square feet in
area) that are used primarily by TBS and the Company's publishing and music
divisions or occupied for corporate offices, all of which the Company considers
adequate for its present needs, and all of which were substantially used by the
Company or were leased to outside tenants:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FEET TYPE OF OWNERSHIP
LOCATION PRINCIPAL USE FLOOR SPACE EXPIRATION DATE OF LEASE
-------- ------------- ----------- ------------------------
<S> <C> <C> <C>
New York, New York Executive and administrative 560,000 Leased by the Company. Lease
75 Rockefeller Plaza offices (Corporate and Music) expires in 2014. Approximately
Rockefeller Center 94,400 sq. ft. are sublet to
outside tenants.
New York, New York Business and editorial offices 1,522,400 Leased by the Company. Most leases
Time & Life Bldg. (Publishing and Corporate) expire in 2017. Approximately
Rockefeller Center 39,800 sq. ft. are sublet to
outside tenants.
New York, New York Offices (Music) 273,800 Leased by the Company. Leases
1290 Ave. of the expire 2000-2012. Approximately
Americas 66,100 sq. ft. are sublet to
outside tenants.
Atlanta, Georgia Executive and administrative 1,570,000 Owned by the Company.
One CNN Center offices, studio (TBS) Approximately 146,000 sq. ft.
retail, hotel and theatres are sublet to outside tenants.
Atlanta, Georgia Offices and studios (TBS) 436,000 Owned and occupied by the Company.
1050 Techwood Dr.
Lebanon, Indiana Warehouse space (Publishing) 500,450 Leased by the Company. Lease
121 N. Enterprise Blvd. expires in 2006.
Mechanicsburg, Office and warehouse space 358,000 Owned and occupied by the Company.
Pennsylvania (Publishing)
1225 S. Market St.
Indianapolis, Indiana Warehouse space (Publishing) 253,000 Leased by the Company. Lease
4200 N. Industrial expires in 2009.
Street
Olyphant, Manufacturing, warehouses, 1,012,000 Owned and occupied by the Company.
Pennsylvania distribution and office space
1400 and 1444 East (Music)
Lackawanna Avenue
Alsdorf, Germany Manufacturing, distribution and 269,000 Owned and occupied by the Company.
Max-Planck Strasse 1-9 office space (Music)
Terre Haute, Indiana Manufacturing and office space 269,000 Leased by the Company. Lease
4025 3rd Parkway (Music) expires in 2001.
</TABLE>
I-31
<PAGE>
CABLE NETWORKS -- HBO, FILMED ENTERTAINMENT AND CABLE
The following table sets forth certain information as of December 31, 1999
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 350,000 sq. ft. Leased by TWE.
1100 and 1114 (HBO) and 244,000 sq. Leases expire in 2018.
Avenue of the ft.
Americas
Burbank, California Sound stages, administrative, 3,303,000 Owned by TWE.
The Warner Bros. technical sq. ft. of
Studio and dressing room improved
structures, screening space on 158
theaters, machinery and acres(a)
equipment facilities, back
lot and parking lot and
other Burbank properties
(Filmed Entertainment)
Baltimore, Maryland Warehouse (Filmed 387,200 sq. ft. Owned by TWE.
White Marsh 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
Following the announcement of the proposed merger of the Company and America
Online, nine lawsuits were filed by certain of the Company's shareholders
against the Company, its Board of Directors and America Online in the Court of
Chancery of the State of Delaware between January 10 and January 13, 2000,
which allege breach of fiduciary duty and seek to enjoin the merger and
unspecified compensatory damages. The plaintiffs in these nine suits (Cohen v.
Levin et al., Zucker v. Levin et al., Masseo Investments Ltd v. Levin et al.,
Lacoff v. Levin et al., Bamdas v. Levin et al., Harad v. Levin et al.,
Feinberg v. Time Warner Inc. et al., Rosengarten v. Levin et al., Bernard v.
Time Warner Inc. et al.) have agreed to consolidate their complaints and no
action is required by defendants until such consolidation is ordered by the
Court.
On June 24, 1997, plaintiffs in Six Flags Over Georgia LLC et al. v. Time
Warner Entertainment Company, L.P. et al., filed an amended complaint in the
Superior Court of Gwinnett County, Georgia, claiming that, inter alia,
defendants violated their fiduciary duties in operating the Six Flags Over
Georgia amusement park. On December 18, 1998, following a trial, a jury returned
a verdict in favor of plaintiffs. The total awarded to plaintiffs was
approximately $454 million in compensatory and punitive damages. Interest on the
judgment is accruing at the Georgia statutory rate of 12%. The case is now on
appeal to the Georgia Court of Appeals. Defendants have argued on appeal that,
because of legal errors in the trial court, they are entitled to judgment in
their favor, a new trial, or a reduced damage award. TWE and its 51% partner in
the amusement park have retained financial responsibility for this litigation
following their sale of the Six Flags companies to Premier Parks, Inc.
On April 11, 1997, the Federal Trade Commission (FTC) notified
Warner-Elektra-Atlantic Corporation ('WEA Corp.') that it had commenced a
preliminary investigation into whether WEA Corp. and others may
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<PAGE>
have violated, or may be violating, laws against unfair competition by the
adoption, implementation, or maintenance of minimum advertising pricing
programs. In light of the Consent Order that WMG has entered into with the
FTC staff (see Item 1. Business -- Music, on page I-11), the Company expects
that the FTC will discontinue its investigation of WEA Corp. without further
action.
On July 25, 1996, the Office of the Attorney General of the State of Florida
served WEA Corp. with a Civil Investigative Demand ('CID') 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 compact discs
(CDs) or conduct consisting of unfair methods of competition or unfair trade
practices in the sale and marketing of CDs. WEA Corp. has produced documents in
compliance with this CID. By letter dated January 9, 1998, WEA Corp. was
notified by the Office of the Attorney General of the State of Florida that
certain documents that WEA Corp. had produced to its office were shared under a
confidentiality provision of Florida law 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. The investigation remains open.
On May 30, 1995, Digital Distribution Inc. d/b/a Compact Disc Warehouse v.
CEMA Distribution et al. was filed in U.S. District Court for the Central
District of California. The plaintiff, purportedly representing a class of
direct purchasers of CDs, claimed several companies that distribute CDs to
wholesalers and retailers, including WEA Corp., had violated federal antitrust
laws by engaging in a conspiracy to fix prices of CDs, and sought injunctive
relief and treble damages. The District Court granted the defendants' motion to
dismiss on January 9, 1996, but the U.S. Court of Appeals for the Ninth Circuit
subsequently reversed that decision. On April 22, 1998, the Judicial Panel on
Multidistrict Litigation consolidated the case with four other pending cases,
for pretrial purposes, in the Central District of California. These other cases
include: Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI
Music Distribution et al. (C.D. Cal. 1997); Obie, inc. d/b/a Chestnut Hill
Compact Disc v. EMI Music Distribution et al. (S.D.N.Y. 1997); Third Street
Jazz and Rock Holding Corporation v. EMI Music Distribution et al (C.D. Cal.
1997); and Nathan Muchnick, Inc. v. Sony Music Entertainment, Inc. et al.
(S.D.N.Y.1998). The District Court has scheduled trial to begin later this year.
Although management believes the case is without any merit, an adverse jury
verdict could result in a material loss to Time Warner. Due to the lack of
specificity to plaintiff's claims, a range of loss is not determinable at this
time.
In Ottinger & Silvey et al. v. EMI Music Distribution, Inc. et al.,
plaintiffs commenced suit on February 17, 1998 in the Circuit Court of Cocke
County, Tennessee. Plaintiffs purport to bring the suit on behalf of all persons
who indirectly purchased CDs from January 29, 1993 to the present from six
companies (including WEA Corp.) 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. Plaintiffs claim that defendants are engaged in a conspiracy to fix
CD prices, in violation of the antitrust, unfair trade practices, and consumer
protection statutes of each of these jurisdictions. On May 11, 1998, defendants
filed a motion to dismiss the complaint for failure to state a cause of action.
Plaintiffs have not yet responded to the motion.
In July 1999, the former President of Indonesia, H.M. Suharto, filed a
lawsuit in the Central Jakarta District Court in Indonesia against Time Inc.
Asia and certain individuals, alleging that the May 24, 1999 issue of the Asian
edition of Time Magazine defamed him in violation of Indonesian law. The
complaint seeks a public retraction and apology, as well as $27 billion in
compensatory damages for alleged harm to Suharto's reputation. In
November 1999, the Indonesian court denied Time's motion to dismiss the suit on
jurisdictional grounds. The parties are in the process of presenting written
evidence to the Indonesian Court; oral testimony is expected to begin later this
year.
In Bartholdi Cable Company, Inc. v. Time Warner Inc. et al., plaintiff
(formerly known as Liberty Cable Company, Inc.) filed suit in U.S. District
Court for the Eastern District of New York on March 29, 1996 against the
Company, asserting various federal antitrust, Lanham Act, and state law claims.
On June 18, 1997, defendants asserted certain counterclaims against Bartholdi
and certain individuals. The Court has declined motions to dismiss plaintiffs'
claims and defendants' counterclaims. The Court has also denied defendants'
motion for summary judgment. Discovery is underway.
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<PAGE>
In Parker et. al. v. Time Warner Entertainment et al., two individuals filed
suit in June 1998 against TWE and Time Warner Cable in the Eastern District of
New York on behalf of a purported nationwide class, asserting violations of the
federal Cable Act's privacy provisions, 47 U.S.C. 'SS' 551, related to
defendants' alleged disclosure of personally identifiable information about
plaintiffs, as well as related state law claims. The lawsuit seeks damages under
the Cable Act, restitution of profits, punitive damages, interest, costs, and
attorney's fees. In December 1998, defendants filed a motion to dismiss the
plaintiffs' amended complaint, which the Court initially granted, but denied on
reconsideration. On December 8, 1999, defendants filed a motion to deny class
certification, which is presently pending.
On February 4, 1999, the United States Department of Justice served a 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 movie studios, including New Line and Warner Bros.,
and movie theaters. The Company believes the investigation was prompted by
one theater owner's complaints regarding studio distribution practices. The
Company has not been given any indication that any relief will be sought by the
Department of Justice and, to date, has only been asked to produce documents
and information.
Litigation relating to the 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G (3), the information regarding the
Company's executive officers required by Item 401(b) of Regulation S-K is hereby
included in Part I of this report.
The following table sets forth the name of each executive officer of the
Company, the office held by such officer and the age, as of March 10, 2000, of
such officer.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Gerald M. Levin...................... 60 Chairman of the Board and Chief Executive
Officer
R.E. Turner.......................... 61 Vice Chairman of the Board
Richard D. Parsons................... 51 President
Richard J. Bressler.................. 42 Executive Vice President
Christopher P. Bogart................ 34 Executive Vice President, General Counsel &
Secretary
Joseph A. Ripp....................... 48 Executive Vice President and Chief Financial
Officer
Edward I. Adler...................... 46 Senior Vice President, Corporate Communications
Timothy A. Boggs..................... 49 Senior Vice President, Global Public Policy
Andrew J. Kaslow..................... 50 Senior Vice President, Human Resources
John A. LaBarca...................... 57 Senior Vice President, Financial Operations
Joan N. Sumner....................... 40 Senior Vice President
</TABLE>
Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1995:
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
(table continued on next page)
I-34
<PAGE>
(table continued from previous page)
<TABLE>
<S> <C>
Mr. Bressler......................... Executive Vice President of the Company and Chairman
and Chief Executive Officer of Time Warner Digital
Media since July 1999. Prior to that, he served as
Executive Vice President and Chief Financial
Officer from January 1998; and Senior Vice
President and Chief Financial Officer from March
1995.
Mr. Bogart........................... Executive Vice President, General Counsel and
Secretary since January 2000. Prior to that, he
served as Vice President and Deputy General
Counsel from March 1998 and as one of the
Company's principal outside litigation counsel at
Cravath, Swaine & Moore prior to that.
Mr. Ripp............................. Executive Vice President and Chief Financial Officer
since July 1999. Prior to that, he served as
Executive Vice President, Chief Financial Officer
and Treasurer of Time Inc., a wholly owned
subsidiary of the Company, from April 1994.
Mr. Adler............................ Senior Vice President, Corporate Communications
since January 2000. Prior to that, he served as Vice
President, Corporate Communications from September
1997; and Director of Media Relations from 1993.
Mr. Boggs............................ Senior Vice President, Global Public Policy since
November 1999. Prior to that, he served as Senior
Vice President from November 1992.
Mr. Kaslow........................... Senior Vice President, Human Resources 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.
Mr. LaBarca.......................... Senior Vice President, Financial Operations since
February 2000. Prior to that, he served as Senior
Vice President and Controller from May 1997; and
Vice President and Controller from January 1995.
Ms. Sumner........................... Senior Vice President since July 1999. Prior to
that, she served as a Vice President from November
1992.
</TABLE>
I-35
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market for the Company's Common Stock is the New York Stock
Exchange. For quarterly price information with respect to the Company's Common
Stock for the two years ended December 31, 1999, see 'Quarterly Financial
Information' at page F-71 herein, which information is incorporated herein by
reference. The number of holders of record of the Company's Common Stock as of
February 29, 2000 was approximately 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, 1999, see
'Quarterly Financial Information' at page F-71 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 29, 2000 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, 1999 is set forth at pages F-68 through F-70 herein and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information set forth under the caption 'Management's Discussion and
Analysis' at pages F-2 through F-20 herein is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information set forth under the caption 'Interest Rate and Foreign
Currency Risk Management' at page F-17 and F-18 herein is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the Company
and the report of independent auditors thereon set forth at pages F-21 through
F-66, F-72 through F-79 and F-67 herein are incorporated herein by reference.
Quarterly Financial Information set forth at page F-71 herein is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
II-1
<PAGE>
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 2000 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>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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 10.31 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 January 10, 2000 in
which it reported in Item 5 that the Company and America Online, Inc. ('America
Online') entered into an Agreement and Plan of Merger and related agreements
with respect to the proposed merger of the Company and America Online (the 'AOL
Merger').
(ii) The Company filed a Current Report on Form 8-K dated January 10, 2000
setting forth in Item 7 certain pro forma consolidated condensed financial
statements of the new holding company which will be formed in connection with
the AOL Merger, giving effect to the AOL Merger.
(iii) The Company filed a Current Report on Form 8-K dated January 23, 2000
in which it reported in Item 5 that the Company and EMI Group plc ('EMI')
entered into a Combination Agreement pursuant to which the Company and EMI will
combine their respective music and music publishing businesses.
(iv) The Company filed a Current Report on Form 8-K dated February 2, 2000
setting forth in Item 5 the Company's results of operations for the quarter and
year ended December 31, 1999.
(v) The Company filed a Current Report on Form 8-K dated March 13, 2000 in
which it reported in Item 5 that the Company and Sony Music Entertainment Inc.
terminated their proposed merger with CDnow, Inc.
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TIME WARNER INC.
By /s/ Christopher P. Bogart
...................................
CHRISTOPHER P. BOGART
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Date: March 28, 2000
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 28, 2000
......................................... Chief Executive Officer (principal
(GERALD M. LEVIN) executive officer)
/s/ Joseph A. Ripp Executive Vice President and Chief March 28, 2000
......................................... Financial Officer (principal
(JOSEPH A. RIPP) financial officer)
/s/ James W. Barge Vice President and Controller March 28, 2000
......................................... (principal accounting officer)
(JAMES W. BARGE)
/s/ Merv Adelson Director March 28, 2000
.........................................
(MERV ADELSON)
/s/ J. Carter Bacot Director March 28, 2000
.........................................
(J. CARTER BACOT)
/s/ Stephen F. Bollenbach Director March 28, 2000
.........................................
(STEPHEN F. BOLLENBACH)
/s/ John C. Danforth Director March 28, 2000
.........................................
(JOHN C. DANFORTH)
/s/ Beverly Sills Greenough Director March 28, 2000
.........................................
(BEVERLY SILLS GREENOUGH)
/s/ Gerald Greenwald Director March 28, 2000
.........................................
(GERALD GREENWALD)
/s/ Carla A. Hills Director March 28, 2000
.........................................
(CARLA A. HILLS)
/s/ Reuben Mark Director March 28, 2000
.........................................
(REUBEN MARK)
</TABLE>
IV-2
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Michael A. Miles Director March 28, 2000
.........................................
(MICHAEL A. MILES)
/s/ Richard D. Parsons Director March 28, 2000
.........................................
(RICHARD D. PARSONS)
/s/ R. E. Turner Director March 28, 2000
.........................................
(R. E. TURNER)
/s/ Francis T. Vincent, Jr. Director March 28, 2000
.........................................
(FRANCIS T. VINCENT, JR.)
</TABLE>
IV-3
<PAGE>
TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------------
TIME
WARNER TWE
------ ---
<S> <C> <C>
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ F-2 F-81
Consolidated Financial Statements:
Balance Sheet........................................... F-21 F-93
Statement of Operations................................. F-22 F-94
Statement of Cash Flows................................. F-23 F-95
Statement of Shareholders' Equity and Partnership
Capital............................................... F-24 F-96
Notes to Consolidated Financial Statements.............. F-25 F-97
Report of Management........................................ F-66
Report of Independent Auditors.............................. F-67 F-123
Selected Financial Information.............................. F-68 F-124
Quarterly Financial Information............................. F-71 F-125
Supplementary Information................................... F-72
Financial Statement Schedule II -- Valuation and Qualifying
Accounts.................................................. F-80 F-126
</TABLE>
F-1
<PAGE>
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') 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 six
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; Music, consisting
principally of interests in recorded music and music publishing; Filmed
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable, consisting principally
of interests in cable television systems; and Digital Media, consisting
principally of interests in Internet-related and digital media businesses.
STRATEGIC OVERVIEW
Time Warner had a strong financial performance in 1999, as measured by the
operating performance of its businesses and the improved strength of its
financial condition, as more fully described herein. This performance was driven
primarily by solid business fundamentals at most of its businesses and a
disciplined financial focus on cost management and controlled capital spending.
This financial performance enabled Time Warner to use its increasing free cash
flow and financial capacity to repurchase close to $2 billion of common stock in
1999, while continuing to invest in the growth of its businesses.
Moreover, in early 2000, consistent with its ongoing strategy to focus on
growth opportunities across its businesses, Time Warner announced two
transactions of high strategic importance. These transactions consist of:
- A proposed merger with America Online, Inc. ('America Online'), the world's
leader in interactive services, web brands, Internet technologies and
electronic commerce services; and
- A proposed merger of the global operations of Time Warner's Music division
and EMI Group plc ('EMI'), a leading recorded music company and music
publisher.
Each of these transactions is discussed separately below.
America Online-Time Warner Merger
In January 2000, Time Warner and America Online announced that they had
entered into an agreement to merge (the 'Merger') by forming a new holding
company named AOL Time Warner Inc. ('AOL Time Warner'). The Merger will create a
leading, fully integrated media and communications company that will combine
Time Warner's collection of media, entertainment and news brands and its
technologically advanced cable infrastructure with America Online's extensive
Internet franchises and technology. Management believes that the combined
company will be well positioned to expand the use of the Internet in consumers'
everyday lives and, accordingly, provide Time Warner's content businesses with
increased access to consumers through a new and growing distribution medium.
Management further believes that the Merger will result in significant new
business and other value-creation opportunities, including additional
opportunities for e-commerce, growth in subscribers for each company's products
and services, and cost and operating efficiencies from cross-promotional and
other opportunities.
As part of the Merger, each issued and outstanding share of each class of
common stock of Time Warner will be converted into 1.5 shares of an identical
series of common stock of AOL Time Warner. In addition, each issued and
outstanding share of each class of preferred stock of Time Warner will be
converted into one share of preferred stock of AOL Time Warner, which will have
substantially identical terms except that such shares will be convertible into
approximately 6.25 shares of AOL Time Warner common stock. Lastly, each issued
and outstanding share of common stock of America Online will be converted into
one share of common stock of AOL Time Warner.
F-2
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.
The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
Warner-EMI Music Merger
In January 2000, Time Warner and EMI announced they had entered into an
agreement to combine their global music operations into two jointly owned
ventures, to be referred to collectively as Warner EMI Music. Time Warner will
control the joint ventures through majority board representation, among other
factors, and is expected to account for the transaction under the purchase
method of accounting.
The joint ventures will combine the domestic strength of Time Warner's Music
division with the international strength of EMI's music operations. Management
believes that this complementary strategic fit will better position the combined
company to capitalize on incremental growth opportunities relating to online
sales of music product, the digital distribution of music and the continuing
globalization of the music industry. In addition, management believes that the
combination will result in significant cost savings and operating efficiencies,
including economies of scale in manufacturing and distribution, consolidation of
duplicative functions and shared investment costs in new media and technology.
Management expects these synergies to approximate $400 million annually by the
end of the third year following the closing of the transaction. In order to
realize these synergies, management expects that the joint ventures will incur
up to $700 million of one-time costs.
As part of the transaction, each company will contribute its music
operations to the joint ventures, subject to a comparable amount of debt. As of
December 31, 1999, EMI had approximately $1.5 billion of net debt. EMI
shareholders also will receive an aggregate, special cash dividend of
approximately $1.3 billion. This dividend is expected to be financed through a
combination of proceeds from debt incurred or assumed by the joint ventures and
consideration to be paid by Time Warner directly to EMI for a new class of EMI
equity securities. The new class of EMI equity securities to be held by
Time Warner will convert automatically into an 8% common equity interest in EMI,
on a fully diluted basis, if EMI's share price reaches `L'9 for a short period
of time within the first three-and-a-half years after closing.
The transaction is expected to close by the end of 2000, subject to
customary closing conditions, including regulatory approvals and the approval of
EMI's shareholders. There can be no assurance that such approvals will be
obtained.
OTHER INVESTMENTS AND TRANSACTIONS
Investment in TWE
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 and digital media, 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 junior priority 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').
F-3
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Since 1993, Time Warner historically had not consolidated TWE and certain
related companies (the 'Entertainment Group') for financial reporting purposes
because MediaOne had rights that allowed it to participate in the management of
TWE's businesses. However, in August 1999, TWE received a notice from MediaOne
concerning the termination of its covenant not to compete with TWE. The
termination of that covenant is necessary for MediaOne to complete its proposed
merger with AT&T Corp. ('AT&T'). As a result of the termination notice and the
operation of the TWE partnership agreement, MediaOne's rights to participate in
the management of TWE's businesses terminated immediately and irrevocably.
MediaOne retains only certain protective governance rights pertaining to certain
limited matters affecting TWE as a whole. Because of this significant reduction
in MediaOne's rights, Time Warner has consolidated the Entertainment Group,
which substantially consists of TWE, in its 1999 financial statements,
retroactive to the beginning of 1999.
Book-of-the-Month Club-Doubleday Merger
In the first quarter of 2000, Time Warner formed a jointly owned book club
venture with Bertelsmann AG ('Bertelsmann'). The venture combined the domestic
operations of Time Warner's Book-of-the-Month Club with the domestic book club
operations of Doubleday Direct, Inc. ('Doubleday'), a leading consumer book club
group owned by Bertelsmann. The venture does not include Time Warner's book club
operations in the United Kingdom and Canada, which were sold directly to
Bertelsmann. In connection with this transaction, Time Warner will deconsolidate
its domestic book club operations in 2000 and account for its interest in the
joint venture under the equity method of accounting.
The transaction combines two of the largest direct-marketing book club
operators in the United States. Management believes that the combination will
result in considerable cost savings and operating efficiencies, including
cross-promotional opportunities, consolidation of duplicative functions and cost
advantages through economies of scale. Moreover, management believes that the
use of the joint venture's eight million-plus existing club members will foster
the development of new incremental growth opportunities relating to online sales
of books.
Columbia House-CDNOW Merger
In July 1999, Time Warner announced an agreement with Sony Corporation of
America ('Sony') to merge their jointly owned music and video club operations of
Columbia House Company Partnerships ('Columbia House') with CDnow, Inc.
('CDNOW'), a music and video e-commerce company. Since that time, the parties
had been pursuing the receipt of regulatory approvals. While awaiting these
approvals, the March 13th termination date in the merger agreement was reached,
and the parties recently terminated the agreement. Accordingly, the merger will
not occur.
In lieu of the merger, Time Warner and Sony each committed $25.5 million of
funding to CDNOW to help support the future growth of its business. Each
company's funding will be in the form of a $10.5 million equity investment and a
$15 million long-term convertible debt interest.
Time Warner will continue to evaluate strategic alternatives for Columbia
House's operations. Those alternatives are focused primarily on ways to improve
Columbia House's declining operating performance, including online initiatives,
joint ventures and other strategic actions. In connection with some of these
alternatives, Time Warner may be required to record a significant, noncash
charge to reduce the carrying value of its interest in Columbia House.
Digital Media Investment Fund
In late 1999, Time Warner announced the formation of a $500 million venture
capital fund (the 'Digital Media Fund') to identify and invest in new
Internet-related and digital media businesses. The Digital Media
F-4
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Fund is comprised of $250 million of cash and $250 million of advertising and
promotion across Time Warner's various content offerings. Digital Media Fund
investments are expected to focus on non-controlling equity stakes in companies
engaged in e-commerce, vertical and interactive content, technology,
infrastructure and other digital media-related activities.
USE OF EBITA
Time Warner evaluates operating performance based on several factors,
including its primary financial measure of 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. These business combinations include 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, which created over $25 billion of
intangible assets that generally are being amortized over a twenty to forty year
period. The exclusion of noncash amortization charges is also consistent with
management's belief that Time Warner's intangible assets, such as cable
television and sports franchises, music catalogues and copyrights, film and
television libraries and the goodwill associated with its brands, 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 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.
COST SAVINGS
Since 1997, Time Warner has been engaged in a company-wide cost management
program. The program's purpose is to control costs by identifying more efficient
ways of conducting its businesses. During 1999, Time Warner realized
approximately $300 million of incremental cost savings, thereby increasing the
aggregate cost reductions under this program to approximately $900 million
annually.
As part of these cost savings initiatives, Time Warner implemented some
changes to its pension plans in 1999. As a result of these changes, and when
taken together with other changes in actuarial assumptions that include a 100
basis point increase in pension discount rates, Time Warner expects to reduce
its pension expense by approximately $60 million in 2000.
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Consolidation of the Entertainment Group
As previously described, Time Warner's 1999 operating results and financial
condition reflect the consolidation of the Entertainment Group, which
substantially consists of TWE, retroactive to the beginning of 1999. Time
Warner's 1998 and 1997 historical operating results and financial condition have
not been changed, but are no longer comparable to 1999 because the Entertainment
Group was reflected on an unconsolidated basis using the equity method of
accounting. Accordingly, in order to enhance comparability and make an analysis
of 1999 more meaningful, the following discussion of results of operations and
changes in financial condition and liquidity is based upon pro forma financial
information for 1998 as if the consolidation of the Entertainment Group had
occurred at the beginning of that period.
F-5
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Other Significant Transactions and Nonrecurring Items
As more fully described herein, the comparability of Time Warner's operating
results has been affected by certain other significant transactions and
nonrecurring items in each period.
For 1999, the significant, nonrecurring items included (i) net pretax gains
of approximately $2.247 billion relating to the sale or exchange of cable
television systems and investments, (ii) an approximate $115 million pretax gain
recognized in connection with the initial public offering of a 20% interest in
Time Warner Telecom Inc. (the 'Time Warner Telecom IPO'), an integrated
communications provider that provides telephony services to businesses,
(iii) an approximate $215 million net pretax gain recognized in connection with
the early termination and settlement of a long-term home video distribution
agreement, (iv) an approximate $97 million pretax gain recognized in connection
with the sale of an interest in CanalSatellite, a satellite television platform
servicing France and Monaco, (v) a one-time, noncash pretax charge of
approximately $106 million relating to Warner Bros.'s retail stores and (vi) an
extraordinary loss of $12 million relating to the retirement of debt.
For 1998, the significant, nonrecurring items included (i) net pretax gains
of approximately $108 million recognized by Time Warner and TWE relating to the
sale or exchange of various cable television systems and investments, (ii) a
pretax charge of approximately $210 million principally to reduce TWE's carrying
value of its investment in Primestar, Inc. ('Primestar') and (iii) 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').
For 1997, the significant, nonrecurring items included (i) net pretax gains
of approximately $212 million recognized by Time Warner and TWE relating to the
sale or exchange of various cable television systems, (ii) a pretax gain of
approximately $250 million relating to TWE's sale of its interest in E!
Entertainment Television, Inc. ('E! Entertainment'), (iii) a pretax gain of $200
million relating to Time Warner's disposal of its interest in Hasbro, Inc.
('Hasbro') and (iv) an extraordinary loss of $55 million on the retirement of
debt.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period 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.
In addition to the above significant and nonrecurring items, the
comparability of Time Warner's Cable division results has been affected further
by certain 1998 cable-related transactions, as described more fully in Note 2 to
the accompanying consolidated financial statements. While these transactions had
a significant effect on the comparability of the Cable division's EBITA and
operating income, principally due to the deconsolidation of the related
operations, they did not have a significant effect on the comparability of Time
Warner's net income and per share results.
1998 Stock Split
Per common share and average common share amounts give effect to a
two-for-one common stock split that occurred on December 15, 1998.
F-6
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
RESULTS OF OPERATIONS
1999 VS. 1998
As a result of the consolidation of the Entertainment Group in 1999, and in
accordance with Financial Accounting Standards Board Statement No. 131,
'Disclosures About Segments of an Enterprise and Related Information' ('FAS
131'), Time Warner restated its 1998 historical segment presentation to reflect
the combination of Time Warner's and the Entertainment Group's business
segments. EBITA and operating income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
EBITA OPERATING INCOME
--------------- -----------------
1999 1998 1999 1998
------ ------ ------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
Cable Networks.............................................. $1,397 $1,160 $1,192 $ 960
Publishing.................................................. 679 607 627 569
Music....................................................... 452 493 179 213
Filmed Entertainment(a)..................................... 997 695 796 479
Broadcasting -- The WB Network.............................. (92) (93) (96) (96)
Cable(b).................................................... 3,927 1,694 3,364 1,101
Digital Media............................................... (17) -- (17) --
Intersegment elimination.................................... (10) (94) (10) (94)
------ ------ ------ ------
Total....................................................... $7,333 $4,462 $6,035 $3,132
------ ------ ------ ------
------ ------ ------ ------
Entertainment Group EBITA and operating income reported on
an unconsolidated basis(c)................................ -- (2,166) -- (1,636)
------ ------ ------ ------
Total reported consolidated EBITA and operating income...... $7,333 $2,296 $6,035 $1,496
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ---------
(a) 1999 results include a net pretax gain of approximately $215 million
recognized in connection with the early termination and settlement of a
long-term, home video distribution agreement and a pretax gain of $97
million relating to the sale of an interest in CanalSatellite, offset in
part by a one-time, noncash pretax charge of $106 million relating to Warner
Bros.'s retail stores.
(b) The comparability of the Cable division's operating results has been
affected by certain 1998 cable-related transactions in addition to net
pretax gains related to the sale or exchange of certain cable television
systems and investments of approximately $2.247 billion in 1999 and $108
million in 1998.
(c) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
CONSOLIDATED RESULTS
Time Warner had revenues of $27.333 billion, income of $1.960 billion before
an extraordinary loss on the retirement of debt and net income of $1.948 billion
in 1999, compared to revenues of $26.244 billion on a pro forma basis ($14.582
billion on a historical basis) and net income of $168 million in 1998. After
preferred dividend requirements, Time Warner had basic income per common share
before the extraordinary item of $1.51 in 1999, and $1.50 after, compared to a
net loss of $.31 per common share in 1998. On a diluted basis, income per common
share before the extraordinary item was $1.43 in 1999, and $1.42 after,
compared to a net loss of $.31 per common share in 1998.
As previously described, in addition to the consolidation of the
Entertainment Group retroactive to the beginning of 1999, the comparability of
Time Warner's operating results for 1999 and 1998 has been further affected by
certain significant, nonrecurring items recognized in each period. These
nonrecurring items consisted of approximately $2.568 billion of net pretax gains
in 1999, compared to $102 million of net pretax losses in 1998. In addition, net
income in 1999 included an extraordinary loss on the retirement of debt of
$12 million.
F-7
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Preferred dividend requirements in 1998 also 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. The aggregate net effect of these
items was an increase in basic net income per common share of $1.11 in 1999,
compared to a decrease of $.25 per common share in 1998. On a diluted basis, the
aggregate net effect of these items was an increase in basic net income per
common share of $1.03 in 1999, compared to a decrease of $.25 per common share
in 1998.
Time Warner's net income increased to $1.948 billion in 1999, compared to
$168 million in 1998. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $312 million to
$548 million in 1999 from $236 million in 1998. As discussed more fully below,
this improvement principally resulted from an overall increase in Time Warner's
business segment operating income, offset in part by higher losses from certain
investments accounted for under the equity method of accounting, higher interest
expense principally in connection with borrowings used to redeem Time Warner's
Series M Preferred Stock in December 1998 and higher income taxes due to the
increase in Time Warner's income. Similarly, normalized basic and diluted net
income per common share, excluding the effect of significant nonrecurring items,
increased to $.39, compared to a normalized net loss of $.06 per common
share in 1998. In addition to the factors discussed above, the improvement in
1999 normalized per share results reflects a $254 million reduction in preferred
dividend requirements principally relating to the redemption of Series M
Preferred Stock in late 1998.
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.
BUSINESS SEGMENT RESULTS
Cable Networks. Revenues increased to $6.111 billion in 1999, compared to
$5.377 billion in 1998. EBITA increased to $1.397 billion in 1999 from $1.160
billion in 1998. Operating income increased to $1.192 billion in 1999 from $960
million in 1998. Revenues grew due to increases at the Turner cable networks
group and HBO. For the Turner cable networks group, revenues benefited from
increases in advertising and subscription revenues, offset in part by the
absence of revenues from the Goodwill Games sponsored in the summer of 1998. The
increase in advertising revenues was principally due to a strong overall
advertising market for most of the group's networks, including CNN, TBS
Superstation, TNT and Cartoon Network. The increase in subscription revenues was
principally due to an increase in subscriptions and higher rates, primarily led
by revenue increases at CNN, TBS Superstation, TNT and Turner Classic Movies.
For HBO, revenues benefited primarily from an increase in subscriptions to 35.7
million from 34.6 million at the end of 1998.
Likewise, EBITA and operating income were higher due to increases at the
Turner cable networks group and HBO. For the Turner cable networks group, the
increase in EBITA and operating income was principally due to the revenue gains,
offset in part by higher programming costs and start-up costs for two new
entertainment networks. For HBO, the increase in EBITA and operating income was
principally due to the revenue gains, increased cost savings, and higher income
from Comedy Central, a 50%-owned equity investee.
Publishing. Revenues increased to $4.663 billion in 1999, compared to
$4.496 billion in 1998. EBITA increased to $679 million in 1999 from $607
million in 1998. Operating income increased to $627 million in 1999 from $569
million in 1998. Revenues in 1999 were affected negatively by the
deconsolidation of a direct-marketing operation, which is now being accounted
for under the equity method of accounting. Notwithstanding this change, revenues
increased primarily from significant, across-the-board growth in magazine
advertising revenues, primarily led by In Style, People, Fortune and Time.
Magazine circulation revenues also increased
F-8
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
principally as a result of higher subscription and newsstand revenues, led by
Time and Teen People, offset in part by higher commissions paid on subscriptions
sold by third-party agencies. EBITA and operating income increased principally
as a result of the revenue gains and increased cost savings. These increases
were offset in part by start-up costs for new magazine launches and lower
results from direct-marketing activities, including Book-of-the-Month Club and
American Family Enterprises, a 50%-owned equity investee. In addition, EBITA and
operating income for each period included some small one-time gains on the sale
of assets that, in the aggregate, were comparable in amount and, therefore, did
not have any significant effect on operating trends.
Music. Revenues decreased to $3.834 billion in 1999, compared to $4.025
billion in 1998. EBITA decreased to $452 million in 1999 from $493 million in
1998. Operating income decreased to $179 million in 1999 from $213 million in
1998. Revenues decreased primarily due to lower domestic and international
recorded music sales, as well as declines in music publishing operations. The
worldwide revenue decline principally related to less popular releases in
comparison to the prior year, as well as industry-wide softness in various
international markets, such as Brazil and Japan. EBITA and operating income
decreased principally as a result of the decline in worldwide revenues and lower
results from Columbia House, a 50%-owned equity investee, offset in part by
increased cost savings, lower artist royalty costs and higher income from DVD
manufacturing operations. Management expects that the revenue decline relating
to lower worldwide sales levels will continue into the first quarter of 2000,
which could continue to affect operating results negatively.
Filmed Entertainment. Revenues increased to $8.075 billion in 1999,
compared to $7.978 billion in 1998. EBITA increased to $997 million in 1999 from
$695 million in 1998. Operating income increased to $796 million in 1999 from
$479 million in 1998. Revenues grew due to increases at Warner Bros., offset in
part by revenue declines at the Turner filmed entertainment businesses, which
include New Line Cinema, Castle Rock Entertainment and certain film and
television libraries managed by Warner Bros. For Warner Bros., revenues
benefited from increases in worldwide theatrical, home video and television
distribution operations, offset in part by lower revenues from consumer products
operations. The increase in worldwide home video revenues primarily resulted
from increased sales of DVDs. For the Turner filmed entertainment businesses,
revenues decreased principally as a result of the absence in 1999 of significant
syndication revenues from the sale of second-cycle broadcasting rights for
Seinfeld in 1998, and fewer theatrical releases in 1999.
EBITA and operating income were higher due to increases at Warner Bros. and
the Turner filmed entertainment businesses. For Warner Bros., the operating
results in 1999 were affected by various significant, nonrecurring items,
including an approximate $215 million net pretax gain recognized in connection
with the early termination and settlement of a long-term, home video
distribution agreement, a pretax gain of $97 million recognized in connection
with the sale of an interest in CanalSatellite and a one-time, noncash pretax
charge of $106 million relating to Warner Bros.'s retail stores. Excluding the
effect of these significant nonrecurring items, Warner Bros.'s EBITA and
operating income increased principally as a result of improved results from
worldwide theatrical, home video and domestic television syndication operations.
These improvements were offset in part by lower results from consumer products
operations and lower net gains on the sale of other assets. For the Turner
filmed entertainment businesses, EBITA and operating income increased
principally due to the absence of film write-offs relating to disappointing
results for theatrical releases of Castle Rock Entertainment in 1998, offset in
part by lower results from television distribution operations relating to the
absence in 1999 of significant syndication sales of broadcasting rights for
Seinfeld in 1998.
The decline in Warner Bros.'s consumer products operations relates, in part,
to its retail stores. In the fourth quarter of 1999, Warner Bros. adopted a plan
designed to improve the performance of its retail stores. The plan is expected
to be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores and exploiting potential e-commerce opportunities. As a result
of this plan, Warner Bros. recorded a noncash, pretax charge of $106 million to
reduce the carrying value of certain fixed assets and leasehold improvements
used in its retail stores. The charge
F-9
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
represented the excess of the carrying value of those assets over the discounted
future operating cash flows, adjusted to reflect a shorter recovery period due
to planned store closures.
Broadcasting-The WB Network. Revenues increased to $384 million in 1999,
compared to $260 million in 1998. EBITA improved to a loss of $92 million in
1999 from a loss of $93 million in 1998. Operating losses of $96 million were
the same in both 1999 and in 1998. Revenues increased principally as a result of
one additional night of weekly prime-time programming in comparison to the prior
year and advertising rate increases, offset in part by lower prime-time
television ratings. Prime-time television ratings were, and are expected to
continue to be, negatively affected by lower household delivery associated with
the WGN Superstation discontinuing its carriage of The WB Network's programming
beginning in the fall of 1999. The marginal EBITA loss improvement and flat
operating losses principally resulted from the fact that significant revenue
increases were offset by the combination of higher programming costs associated
with the expanded programming schedule and higher start-up costs associated with
The WB Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable. Revenues increased to $5.374 billion in 1999, compared to $5.342
billion in 1998. EBITA increased to $3.927 billion in 1999 from $1.694 billion
in 1998. Operating income increased to $3.364 billion in 1999 from $1.101
billion in 1998. These operating results were affected by certain cable-related
transactions that occurred in 1998 (the '1998 Cable Transactions') and by net
pretax gains of $2.247 billion recognized in 1999 and $108 million in 1998
related to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation of certain operations and are described more fully in Note 2 to
the accompanying consolidated financial statements. Excluding the effect of the
1998 Cable Transactions, revenues increased due to growth in basic cable
subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and the one-time gains, EBITA and operating income
increased principally as a result of the revenue increases, offset in part by
higher programming costs.
As of December 31, 1999 and 1998, there were 12.6 million subscribers under
the management of Time Warner's Cable division.
Digital Media. Digital Media operating results reflect start-up costs
associated with Time Warner's digital media businesses, including the November
1999 launch of Entertaindom, Time Warner's entertainment Web destination.
Digital Media had $17 million of operating losses on $1 million of revenues
during 1999. Due to the start-up nature of these businesses, losses are expected
to continue.
Interest and Other, Net. Interest and other, net, decreased to $1.897
billion of expense in 1999, compared to $2.050 billion of expense on a pro forma
basis in 1998. Interest expense increased to $1.519 billion in 1999, compared to
$1.451 billion on a pro forma basis in 1998. Interest expense increased
principally because of higher interest costs incurred in connection with the
$2.1 billion of borrowings used to redeem the Company's Series M Preferred Stock
in December 1998, offset in part by interest savings associated with the
Company's 1998 debt reduction efforts. Other expense, net, decreased to $378
million in 1999, compared to $599 million on a pro forma basis in 1998. The
decrease principally related to the recognition of an approximate $115 million
pretax gain in 1999 in connection with the Time Warner Telecom IPO and the
absence of an approximate $210 million pretax charge recorded in 1998 to reduce
the carrying value of an interest in Primestar, offset in part by higher losses
in 1999 from certain investments accounted for under the equity method of
accounting.
Minority Interest. Minority interest expense increased to $475 million in
1999, compared to $338 million on a pro forma basis in 1998. Minority interest
expense increased primarily due to the allocation of a portion of the higher net
pretax gains in 1999 relating to the sale or exchange of various cable
television systems and investments owned by the TWE-Advance/Newhouse Partnership
('TWE-A/N') to the minority owners of that partnership. Excluding the
significant effect of the gains recognized in each period, minority interest
expense
F-10
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
decreased slightly in 1999 principally due to a higher allocation of losses to a
minority partner in The WB Network.
1998 VS. 1997
As a result of the consolidation of the Entertainment Group in 1999, and in
accordance with FAS 131, Time Warner restated its historical segment
presentation to reflect the combination of Time Warner's and the Entertainment
Group's business segments. EBITA and operating income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
EBITA OPERATING INCOME
--------------- -----------------
1998 1997 1998 1997
------ ------ ------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
Cable Networks.............................................. $1,160 $ 964 $ 960 $ 765
Publishing.................................................. 607 529 569 481
Music....................................................... 493 467 213 166
Filmed Entertainment........................................ 695 604 479 389
Broadcasting-The WB Network................................. (93) (88) (96) (88)
Cable(a).................................................... 1,694 1,611 1,101 1,011
Intersegment elimination.................................... (94) (54) (94) (54)
------ ------ ------ ------
Total....................................................... $4,462 $4,033 $3,132 $2,670
------ ------ ------ ------
------ ------ ------ ------
Entertainment Group EBITA and operating income reported on
an unconsolidated basis(b)................................ (2,166) (1,850) (1,636) (1,399)
------ ------ ------ ------
Total reported consolidated EBITA and operating income...... $2,296 $2,183 $1,496 $1,271
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ---------
(a) The comparability of the Cable division's operating results has been
affected by certain 1998 cable-related transactions in addition to net
pretax gains of approximately $108 million in 1998 and $212 million in 1997
related to the sale or exchange of certain cable television systems.
(b) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
CONSOLIDATED RESULTS
Time Warner had revenues of $14.582 billion and net income of $168 million
in 1998, compared to revenues of $13.294 billion, income of $301 million before
an extraordinary loss on the retirement of debt and net income of $246 million
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. After preferred
dividend requirements, Time Warner had basic and diluted loss per common share
of $.31 in 1998, compared to a loss of $.01 per common share before the
extraordinary item in 1997, and $.06 per common share after.
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. These
nonrecurring items amounted to $102 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 in 1998, compared to an increase in income per common share of $.27 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-11
<PAGE>
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 certain cable system transfers in 1998 (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. The TWE-A/N Transfers are described more fully in Note 2 to the
accompanying financial statements. Similarly, normalized net loss per common
share, excluding the effect of significant nonrecurring items, 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.
BUSINESS SEGMENT RESULTS
Cable Networks. Revenues increased to $5.377 billion in 1998, compared to
$4.823 billion in 1997. EBITA increased to $1.160 billion in 1998 from $964
million in 1997. Operating income increased to $960 million in 1998 from $765
million in 1997. Revenues grew due to increases at the Turner cable networks
group and HBO. For the Turner cable networks group, 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 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. For HBO, revenues
benefited primarily from an increase in subscriptions to 34.6 million from 33.6
million at the end of 1997.
Likewise, EBITA and operating income were higher due to increases at the
Turner cable networks group and HBO. For the Turner cable networks group, the
increase in EBITA and operating income was principally due to 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. For HBO, 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.
Publishing. Revenues increased to $4.496 billion in 1998, compared to
$4.290 billion in 1997. EBITA increased to $607 million in 1998 from $529
million in 1997. Operating income increased to $569 million in 1998 from $481
million in 1997. Revenues benefited primarily from significant increases in
magazine
F-12
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 in 1998, compared to $3.691
billion in 1997. EBITA increased to $493 million in 1998 from $467 million in
1997. Operating income increased to $213 million in 1998 from $166 million in
1997. 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. 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.
Filmed Entertainment. Revenues increased to $7.978 billion in 1998,
compared to $7.003 billion in 1997. EBITA increased to $695 million in 1998 from
$604 million in 1997. Operating income increased to $479 million in 1998 from
$389 million in 1997. Revenues grew due to increases at Warner Bros. and the
Turner filmed entertainment business. For Warner Bros., 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. For the Turner filmed entertainment businesses,
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.
Likewise, EBITA and operating income increased due to increases at Warner
Bros., offset in part by decreases at the Turner filmed entertainment
businesses, 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. For Warner Bros., 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 in 1998,
compared to $136 million in 1997. EBITA decreased to a loss of $93 million in
1998 from a loss of $88 million in 1997. Operating losses increased to $96
million in 1998 from $88 million in 1997. 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. Revenues increased to $5.342 billion in 1998, compared to $5.240
billion in 1997. EBITA increased to $1.694 billion in 1998 from $1.611 billion
in 1997. Operating income increased to $1.101 billion in 1998 from $1.011
billion in 1997. These operating results were affected by the 1998 Cable
Transactions and by net pretax gains of $108 million recognized in 1998 and $212
million in 1997 related to the sale or exchange of various cable television
systems and investments. 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 and the
one-time gains, EBITA and operating income increased principally as a result of
the revenue gains, offset in part by higher depreciation related to capital
spending.
F-13
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Interest and Other, Net. The following is a discussion of interest and
other, net, included in the consolidated results of Time Warner and the
unconsolidated results of the Entertainment Group.
Interest and other, net, at Time Warner increased to $1.128 billion of
expense in 1998, compared to $973 million of expense in 1997. Interest expense
decreased to $891 million in 1998, compared to $1.049 billion in 1997,
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
$237 million in 1998 compared to other income, net of $76 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.
Interest and other, net, at the Entertainment Group increased to $945
million of expense in 1998, compared to $338 million of expense in 1997.
Interest expense increased to $566 million in 1998, 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 $379 million in 1998, compared to
other income, net, of $156 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.
Minority Interest. Minority interest, recognized by the Entertainment Group
on an unconsolidated basis, decreased to $284 million in 1998, compared to $324
million in 1997. Minority interest expense decreased primarily due to the
allocation of a portion of the higher net pretax gains in 1997 relating to the
sale or exchange of various cable television systems owned by TWE-A/N to the
minority owners of that partnership. Excluding the effect of the gains
recognized in each period, minority interest expense for 1998 and 1997 was
comparable in amount and did not have any significant effect on operating
trends.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1999
1999 FINANCIAL CONDITION
At December 31, 1999, Time Warner had $18.1 billion of debt, $1.3 billion of
available cash and equivalents (net debt of $16.8 billion), $1.2 billion of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of a subsidiary and $9.7 billion of
shareholders' equity, compared to $17.5 billion of debt, $529 million of
available cash and equivalents (net debt of $17.0 billion), $895 million of
borrowings against future stock option proceeds, $792 million of mandatorily
redeemable preferred securities of subsidiaries, and $8.9 billion of
shareholders' equity on a pro forma basis at December 31, 1998.
DEBT REFINANCINGS
In 1999, Time Warner Companies, Inc., a wholly owned subsidiary of Time
Warner, redeemed all of its $600 million principal amount of Floating Rate Reset
Notes due July 29, 2009. The aggregate redemption cost of approximately $620
million was funded with borrowings under Time Warner's bank credit agreement. In
connection with this redemption, an extraordinary loss of $12 million was
recognized in the third quarter of 1999.
F-14
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
REDEMPTION OF REIT PREFERRED STOCK
In March 1999, a subsidiary of TWE (the 'REIT') redeemed all of its shares
of preferred stock ('REIT Preferred Stock') at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement.
PREFERRED STOCK CONVERSIONS
During 1999 and January 2000, Time Warner issued approximately 71.4 million
shares of common stock in connection with the conversion of approximately 17.2
million shares of convertible preferred stock. Because holders of preferred
stock are entitled to cash dividends at a preferential rate prior to conversion,
Time Warner's 1999 cash dividend requirements will be reduced in 2000 by
approximately $26 million. After giving effect to those conversions, there were
approximately 5.4 million shares of preferred stock outstanding that are
convertible into approximately 22.7 million shares of Time Warner common stock.
COMMON STOCK REPURCHASE PROGRAM
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 was expected to be
completed over a three-year period. However, in connection with Time Warner's
agreement to merge with America Online, Time Warner currently has suspended its
stock repurchase program.
During 1999, Time Warner acquired 28.4 million shares of its common stock at
an aggregate cost of $1.896 billion. These repurchases increased the cumulative
shares purchased under this and its previous common stock repurchase program
begun in 1996 to approximately 123.5 million shares at an aggregate cost of
$4.936 billion, or approximately $40 per share.
CASH FLOWS
During 1999, Time Warner's cash provided by operations amounted to $3.953
billion and reflected $7.333 billion of business segment EBITA, $1.231 billion
of noncash depreciation expense, $213 million of proceeds from Time Warner's
asset securitization program, less $2.247 billion of net pretax gains on the
sale or exchange of cable television systems and investments, $1.406 billion of
interest payments, $377 million of income taxes, $163 million of corporate
expenses and $631 million related to an increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations on a pro forma basis in 1998 of $3.408 billion reflected $4.462
billion of business segment EBITA, $1.305 billion of noncash depreciation
expense, $183 million of proceeds from Time Warner's asset securitization
program, less $108 million of net pretax gains on the sale or exchange of cable
television systems, $1.343 billion of interest payments, $300 million of income
taxes, $158 million of corporate expenses and $633 million related to an
increase in working capital requirements, other balance sheet accounts and
noncash items.
Cash used by investing activities was $1.930 billion in 1999, compared to
$908 million on a pro forma basis in 1998, principally as a result of higher
capital expenditures, an increase in cash used for investment and acquisitions
and a decrease in investment proceeds. Investment proceeds decreased largely
relating to the 1998 sale of TWE's remaining interest in Six Flags Entertainment
Corporation and the receipt of approximately $650 million of proceeds in 1998
upon the formation of a cable joint venture in Texas, offset in part by the
receipt of approximately $280 million of net proceeds in 1999 in connection with
an exchange of cable television systems. Capital expenditures increased to
$2.231 billion in 1999, compared to $2.115 billion on a pro forma basis in 1998.
Cash used by financing activities was $1.181 billion in 1999, compared to
$2.938 billion on a pro forma basis in 1998. The use of cash in 1999 principally
resulted from the repurchase of approximately 28.4 million
F-15
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
shares of Time Warner common stock at an aggregate cost of $1.896 billion, the
redemption of REIT Preferred Stock at an aggregate cost of $217 million and the
payment of $289 million of dividends, offset in part by a $583 million increase
in net borrowings, $421 million of proceeds received from the exercise of
employee stock options and $348 million of borrowings against future stock
option proceeds. During 1998, Time Warner issued approximately $2.1 billion of
debt and used the proceeds therefrom to redeem its Series M Preferred Stock.
Dividends paid in 1999 were $235 million lower than in 1998, reflecting the
effect of Time Warner's redemption of its Series M Preferred Stock in December
1998.
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.
CABLE CAPITAL SPENDING
Time Warner Cable has been engaged in a plan to upgrade the technological
capability and reliability of its cable television systems and develop new
services, which it believes will position the business for sustained, long-term
growth. Capital spending by Time Warner Cable amounted to $1.600 billion in
1999, compared to $1.676 billion in 1998. Cable capital spending for 2000 is
budgeted to be approximately $2 billion, reflecting higher spending on variable
capital to facilitate a more aggressive roll-out of Time Warner Cable's popular
digital cable and Road Runner-branded high-speed online service. Capital
spending by Time Warner Cable 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 TWE, TWE-A/N
and Time Warner. As of December 31, 1999, Time Warner Cable had approximately
$250 million 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 completed.
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 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 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.
F-16
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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
the current exploitation of DVDs, 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 sheet of Time Warner.
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 for all of
Time Warner's filmed entertainment companies amounted to $3.595 billion at
December 31, 1999, compared to $2.934 billion on a pro forma basis at December
31, 1998 (including amounts relating to the licensing of film product to Time
Warner's cable television networks of $1.176 billion at December 31, 1999 and
$995 million at December 31, 1998).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements 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. As of December 31, 1999, including cash received
under the securitization facility and other advanced payments, approximately
$700 million of cash licensing fees had been collected against the backlog. The
backlog excludes advertising barter contracts, which are also expected to
result in the future realization of revenues and cash through the sale of
advertising spots received under such contracts.
INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT
Interest Rate Swap Contracts
Time Warner uses interest rate swap contracts to adjust the proportion of
total debt that is subject to variable and fixed interest rates. At December 31,
1999, Time Warner had interest rate swap contracts to pay floating-rates of
interest (average six-month LIBOR rate of 5.8%) and receive fixed-rates of
interest (average rate of 5.5%) on $400 million notional amount of indebtedness,
which resulted in approximately 34% of Time Warner's underlying debt being
subject to variable interest rates. At December 31, 1998, Time Warner had
interest rate swap contracts on $1.6 billion notional amount of indebtedness.
F-17
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Based on Time Warner's variable-rate obligations and related interest rate
swap contracts outstanding at December 31, 1999, 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 $19 million, including $1 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 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. At December 31, 1999, Time Warner had effectively hedged
approximately half of the 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. At December 31, 1999, Time Warner had contracts
for the sale of $843 million and the purchase of $468 million of foreign
currencies at fixed rates, compared to contracts for the sale of $755 million
and the purchase of $259 million of foreign currencies at December 31, 1998.
Based on the foreign exchange contracts outstanding at December 31, 1999,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1999 would result
in approximately $42 million of unrealized losses and $23 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 $42 million of unrealized gains and $23 million of unrealized losses,
respectively. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses largely 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.
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
F-18
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 have not been, and 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, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its business.
The Company took various precautions related to the fact that many older
computer programs, computer hardware and chip-based devices might have failed to
recognize dates beginning on January 1, 2000 as being valid dates, and as a
result might have failed to operate or might have operated improperly as such
dates were introduced.
During 1999, the Company completed its efforts to minimize the risk of
disruption related to Year 2000 issues. This program was described in the
Company reports filed with the Securities and Exchange Commission (the 'SEC').
To date, the Company has experienced few problems related to Year 2000
compliance, and the problems that have been identified have been addressed. The
Company is not aware of any remaining significant problems related to Year 2000
issues but is continuing to monitor the status of suppliers, vendors and other
entities with which it does business.
Through the end of 1999, the Company, as a whole, incurred approximately
$150 million related to its Year 2000 remediation program, which started in
1996. These expenditures were funded from the Company's operating cash flow.
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. Future expenditures are not
expected to be significant.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
The SEC 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 uncertainty and 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, future events 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 of changes in
such factors. Some of the other factors that also could cause actual results to
differ from those
F-19
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
contained in the forward-looking statements include those
identified in Time Warner's other filings with the SEC and:
- For Time Warner's cable business, more aggressive than expected competition
from new technologies and other types of video programming distributors,
including DBS and DSL; increases in government regulation of basic cable or
equipment rates or other terms of service (such as 'digital must-carry' or
common carrier requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as digital cable and high-speed on-line 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 and capitalize on its
intellectual property rights in digital environments; its ability to
complete its proposed transaction with EMI and integrate the businesses
successfully; and the overall strength of global music sales.
- For Time Warner's print media and publishing businesses, increases in
paper, postal 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.
- For Time Warner's digital media businesses, their ability to locate and
invest in profitable businesses, to develop products and services that are
attractive, accessible and commercially viable in terms of content,
technology and cost; their ability to manage costs and generate revenues;
aggressive competition from existing and developing technologies and
products; the resolution of issues concerning commercial activities via the
Internet, including security, reliability, cost, ease of use and access;
and the possibility of increased government regulation of new media
services.
- The risks related to the Company's merger with America Online, including
the failure of the Time Warner or America Online shareholders to approve
the Merger; the risk that the Time Warner and America Online businesses
will not be integrated successfully; the costs related to the Merger; the
inability to obtain, or meet conditions imposed for, governmental approvals
for the Merger; and other factors generally affecting the businesses of the
combined company.
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-20
<PAGE>
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1998
HISTORICAL(a) PRO FORMA(a) HISTORICAL(a)
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................ $ 1,284 $ 529 $ 442
Receivables, less allowances of $1.682, $1.513 and
$1.007 billion............................................. 4,931 4,640 2,885
Inventories................................................. 2,182 2,258 946
Prepaid expenses............................................ 1,464 1,342 1,176
------- ------- -------
Total current assets........................................ 9,861 8,769 5,449
Noncurrent inventories...................................... 4,201 4,219 1,900
Investments in and amounts due to and from Entertainment
Group...................................................... -- -- 4,980
Other investments........................................... 2,096 1,665 794
Property, plant and equipment............................... 8,728 8,037 1,991
Music catalogues, contracts and copyrights.................. 782 876 876
Cable television and sports franchises...................... 8,472 6,943 2,868
Goodwill.................................................... 15,458 15,830 11,919
Other assets................................................ 1,641 1,612 863
------- ------- -------
Total assets................................................ $51,239 $47,951 $31,640
------- ------- -------
------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 1,923 $ 1,966 $ 996
Participations, royalties and programming costs payable..... 2,967 2,714 1,199
Debt due within one year.................................... 22 25 19
Other current liabilities................................... 4,758 4,365 2,404
------- ------- -------
Total current liabilities................................... 9,670 9,070 4,618
Long-term debt.............................................. 18,083 17,503 10,925
Borrowings against future stock option proceeds............. 1,243 895 895
Deferred income taxes....................................... 4,234 3,491 3,491
Unearned portion of paid subscriptions...................... 762 741 741
Other liabilities........................................... 3,773 3,580 1,543
Minority interests.......................................... 3,186 3,027 --
Mandatorily redeemable preferred securities of subsidiaries
holding solely notes and debentures of subsidiaries of the
Company.................................................... 575 792 575
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value, 8.4, 22.6 and 22.6 million
shares outstanding, $.840, $2.260 and $2.260 billion
liquidation preference..................................... 1 2 2
Series LMCN-V common stock, $.01 par value, 114.1 million
shares outstanding......................................... 1 1 1
Common stock, $.01 par value, 1.173, 1.118 and 1.118 billion
shares outstanding......................................... 12 11 11
Paid-in capital............................................. 12,998 13,134 13,134
Accumulated deficit......................................... (3,299) (4,296) (4,296)
------- ------- -------
Total shareholders' equity.................................. 9,713 8,852 8,852
------- ------- -------
Total liabilities and shareholders' equity.................. $51,239 $47,951 $31,640
------- ------- -------
------- ------- -------
</TABLE>
- ---------
(a) The 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's historical financial statements for
1998 have not been changed; however, in order to enhance comparability,
pro forma financial statements for 1998 reflecting the consolidation of
the Entertainment Group are presented supplementally (Note 1).
See accompanying notes.
F-21
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1998 1997
HISTORICAL(a) PRO FORMA(a) HISTORICAL(a) HISTORICAL(a)
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues(b)................................................. $ 27,333 $ 26,244 $14,582 $13,294
-------- -------- ------- -------
Cost of revenues(b)(c)...................................... (14,940) (14,820) (7,502) (6,723)
Selling, general and administrative(b)(c)................... (7,513) (7,070) (4,802) (4,400)
Amortization of goodwill and other intangible assets........ (1,298) (1,330) (800) (912)
Gain on sale or exchange of cable systems and
investments(b)............................................. 2,247 108 18 12
Gain on early termination of video distribution agreement... 215 -- -- --
Gain on sale of interest in CanalSatellite.................. 97 -- -- --
Write-down of retail store assets........................... (106) -- -- --
-------- -------- ------- -------
Business segment operating income........................... 6,035 3,132 1,496 1,271
Equity in pretax income of Entertainment Group(b)........... -- -- 356 686
Interest and other, net(b)(d)............................... (1,897) (2,050) (1,128) (973)
Corporate expenses(b)....................................... (163) (158) (86) (81)
Minority interest........................................... (475) (338) (52) (71)
-------- -------- ------- -------
Income before income taxes.................................. 3,500 586 586 832
Income taxes................................................ (1,540) (418) (418) (531)
-------- -------- ------- -------
Income before extraordinary item............................ 1,960 168 168 301
Extraordinary loss on retirement of debt, net of $9 and $37
million income tax benefit in 1999 and 1997,
respectively............................................... (12) -- -- (55)
-------- -------- ------- -------
Net income.................................................. 1,948 168 168 246
Preferred dividend requirements(e).......................... (52) (540) (540) (319)
-------- -------- ------- -------
Net income (loss) applicable to common shares............... $ 1,896 $ (372) $ (372) $ (73)
-------- -------- ------- -------
-------- -------- ------- -------
Income (loss) per common share before extraordinary item:
Basic.................................................... $ 1.51 $ (.31) $ (.31) $ (.01)
-------- -------- ------- -------
-------- -------- ------- -------
Diluted.................................................. $ 1.43 $ (.31) $ (.31) $ (.01)
-------- -------- ------- -------
-------- -------- ------- -------
Net income (loss) per common share:
Basic.................................................... $ 1.50 $ (.31) $ (.31) $ (.06)
-------- -------- ------- -------
-------- -------- ------- -------
Diluted.................................................. $ 1.42 $ (.31) $ (.31) $ (.06)
-------- -------- ------- -------
-------- -------- ------- -------
Average common shares:
Basic.................................................... 1,267.0 1,194.7 1,194.7 1,135.4
-------- -------- ------- -------
-------- -------- ------- -------
Diluted.................................................. 1,398.3 1,194.7 1,194.7 1,135.4
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
- ---------
(a) The 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's historical financial statements for
prior periods have not been changed; however, in order to enhance
comparability, pro forma financial statements for 1998 reflecting the
consolidation of the Entertainment Group are presented supplementally
(Note 1).
(b) Includes the following income (expenses) resulting from transactions with
related companies and, on a historical basis for 1998 and 1997, the
Entertainment Group:
<TABLE>
<S> <C> <C> <C> <C>
Revenues............................................ $ 506 $ 511 $ 487 $ 384
Cost of revenues.................................... (207) (154) (318) (245)
Selling, general and administrative................. (29) (23) (40) (53)
Gain (loss) on sale or exchange of cable systems and
investments....................................... 427 (4) (4) --
Equity in pretax income of Entertainment Group...... -- -- 105 5
Interest and other, net............................. 12 1 (9) (36)
Corporate expenses.................................. -- -- 72 72
(c) Includes depreciation expense of:..................... $ 1,231 $ 1,305 $ 378 $ 382
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
(d) Includes an approximate $115 million pretax gain recognized in the second
quarter of 1999 in connection with the initial public offering of a 20%
interest in Time Warner Telecom Inc.
(e) Preferred dividend requirements for 1998 include a one-time effect of $234
million 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'). See Note 11.
See accompanying notes.
F-22
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1998 1997
HISTORICAL(a) PRO FORMA(a) HISTORICAL(a) HISTORICAL(a)
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net income................................. $ 1,948 $ 168 $ 168 $ 246
Adjustments for noncash and nonoperating
items:
Extraordinary loss on retirement of
debt................................... 12 -- -- 55
Depreciation and amortization........... 2,529 2,635 1,178 1,294
Amortization of film costs.............. 2,294 2,478 542 379
Noncash interest expense................ 4 30 30 98
Gain on sale or exchange of cable
systems and investments................ (2,247) (108) (18) (12)
Excess (deficiency) of distributions
over equity in pretax income of
Entertainment Group.................... -- -- 342 (207)
Equity in losses of other investee
companies after distributions.......... 344 267 147 36
Changes in operating assets and
liabilities:
Receivables............................. (349) (940) (597) (167)
Inventories............................. (2,321) (2,962) (854) (463)
Accounts payable and other
liabilities............................ 1,690 1,500 810 501
Other balance sheet changes............. 49 340 97 (352)
------- ------- ------- -------
Cash provided by operations................ 3,953 3,408 1,845 1,408
------- ------- ------- -------
INVESTING ACTIVITIES
Consolidation of the Entertainment Group's
cash and equivalents...................... 87 -- -- --
Investments and acquisitions............... (870) (548) (159) (113)
Capital expenditures....................... (2,231) (2,115) (512) (574)
Investment proceeds........................ 1,084 1,755 569 187
Proceeds received from distribution of TWE
Senior Capital............................ -- -- 455 455
------- ------- ------- -------
Cash provided (used) by investing
activities................................ (1,930) (908) 353 (45)
------- ------- ------- -------
FINANCING ACTIVITIES
Borrowings................................. 4,332 5,257 3,743 5,413
Debt repayments............................ (3,749) (4,215) (2,317) (6,394)
Borrowings against future stock option
proceeds.................................. 348 1,015 1,015 230
Repayments of borrowings against future
stock option proceeds..................... -- (653) (653) (185)
Redemption of mandatorily redeemable
preferred securities of subsidiary........ (217) -- -- --
Repurchases of Time Warner common stock.... (1,896) (2,240) (2,240) (344)
Redemption of Series M Preferred Stock..... -- (2,093) (2,093) --
Dividends paid............................. (289) (524) (524) (338)
Proceeds received from stock option and
dividend reinvestment plans............... 421 740 740 454
Other...................................... (131) (225) (72) (68)
------- ------- ------- -------
Cash used by financing activities.......... (1,181) (2,938) (2,401) (1,232)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................... 842 (438) (203) 131
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD.................................... 442 967 645 514
------- ------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD...... $ 1,284 $ 529 $ 442 $ 645
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- ---------
(a) The 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's historical financial statements for
prior periods have not been changed; however, in order to enhance
comparability, pro forma financial statements for 1998 reflecting the
consolidation of the Entertainment Group are presented supplementally
(Note 1).
See accompanying notes.
F-23
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(MILLIONS)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
----- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996................................ $ 4 $11 $12,245 $(2,758) $9,502
Net income.................................................. 246 246
Foreign currency translation adjustments.................... (76) (76)
Unrealized losses on securities, net of $89 million tax
benefit(a)............................................... (128) (128)
------- ------
Comprehensive income..................................... 42 42
Common stock dividends...................................... (204) (204)
Preferred stock dividends................................... (319) (319)
Issuance of common stock in connection with the TBS
acquisition.............................................. 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
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..................................... 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
Net income.................................................. 1,948 1,948
Foreign currency translation adjustments.................... (63) (63)
Unrealized gains on securities, net of $147 million tax
provision................................................ 221 221
Realized and unrealized gains on derivative financial
instruments, net of $6 million tax provision............. 9 9
------- ------
Comprehensive income..................................... 2,115 2,115
Common stock dividends...................................... (228) (228)
Preferred stock dividends................................... (52) (52)
Issuance of common stock in connection with the conversion
of convertible preferred stock........................... (1) 1 23 (23) --
Repurchases of Time Warner common stock..................... (1,896) (1,896)
Shares issued pursuant to stock option, dividend
reinvestment and benefit plans........................... 1,737 (815) 922
--- --- ------- ------- ------
BALANCE AT DECEMBER 31, 1999................................ $ 1 $13 $12,998 $(3,299) $9,713
--- --- ------- ------- ------
--- --- ------- ------- ------
</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.
See accompanying notes.
F-24
<PAGE>
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') 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 six
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; Music, consisting
principally of interests in recorded music and music publishing; Filmed
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; Cable, consisting principally
of interests in cable television systems; and Digital Media, consisting
principally of interests in Internet-related and digital media businesses.
Each of the business interests within Cable Networks, Publishing, Music,
Filmed Entertainment, Cable and Digital Media 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 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) the unique and
extensive film, television and animation libraries owned or managed by Warner
Bros. and New Line Cinema, 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, (6) Time Warner Cable, currently the largest operator of
cable television systems in the U.S. and (7) Internet websites, such as CNN.com
and Entertaindom.com.
Financial information for Time Warner's various business segments is
presented herein as an indication of financial performance (Note 16). Except for
start-up losses incurred in connection with The WB Network and Digital Media,
Time Warner's principal business segments generate significant operating income
and cash flow from operations. The cash flow from operations generated by such
business segments 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 segments
amounted to $1.298 billion in 1999, $800 million in 1998 ($1.330 billion on a
pro forma basis) and $912 million in 1997.
BASIS OF PRESENTATION
Consolidation of TWE
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 and digital media 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 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').
Since 1993, Time Warner historically had not consolidated TWE and certain
related companies (the 'Entertainment Group') for financial reporting purposes
because MediaOne had rights that allowed it to
F-25
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
participate in the management of TWE's businesses. However, in August 1999, TWE
received a notice from MediaOne concerning the termination of its covenant not
to compete with TWE. The termination of that covenant is necessary for MediaOne
to complete its proposed merger with AT&T Corp. ('AT&T'). As a result of the
termination notice and the operation of the TWE partnership agreement,
MediaOne's rights to participate in the management of TWE's businesses
terminated immediately and irrevocably. MediaOne retains only certain protective
governance rights pertaining to certain limited matters affecting TWE as a
whole.
Because of this significant reduction in MediaOne's rights, Time Warner's
1999 financial statements reflect the consolidation of the Entertainment Group,
which substantially consists of TWE, retroactive to the beginning of 1999. Time
Warner's historical financial statements for prior periods have not been
changed, but are no longer comparable to 1999 because the Entertainment Group
was reflected on an unconsolidated basis using the equity method of accounting.
Accordingly, in order to enhance comparability, pro forma financial statements
for 1998 reflecting the consolidation of the Entertainment Group are presented
supplementally.
1998 Stock Split
Common stock, paid-in-capital, stock options, per common share and average
common share amounts give effect to a two-for-one common stock split that
occurred on December 15, 1998.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1999 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.
Investments in 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 greater than one year. If there
are resale restrictions greater than one year, or if the investment is not
publicly traded, then the investment is accounted for at cost. Unrealized gains
and losses on investments accounted for at market value are reported net-of-tax
as a component of accumulated other comprehensive income (loss) 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
F-26
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 as a component of
accumulated other comprehensive income (loss) 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 and cash flows from investments and the sale of future and existing
music and publishing-related products, as well as from the distribution of
theatrical and television product, in order to evaluate the ultimate
recoverability of accounts receivable, film inventory, artist and author
advances and investments, recorded as assets in the consolidated balance sheet.
Accounts receivable and sales of product 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 receivable, individual films and
television product, individual artist and author advances, and investments 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, DVDs 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.
Digital Media
Digital media revenues primarily are derived from advertising and e-commerce
activities. Advertising revenues are recognized in the period that the
advertisements are exhibited. Revenues from e-commerce activities are recognized
when the products are sold.
F-27
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 completed
principally 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.'
Inventories of theatrical and television product are stated at the lower of
unamortized 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, including changes
in revenue recognition and accounting for advertising, development and overhead
costs.
AcSEC currently is in the process of finalizing these proposed rules. Based
on AcSEC's conclusions reached as of the end of 1999, the SOP would require that
advertising costs for theatrical and television product
F-28
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be expensed as incurred. This compares to Time Warner's existing policy of
capitalizing and then expensing advertising costs for theatrical product over
the related revenue streams. In addition, the SOP would require development
costs for abandoned projects and certain indirect overhead costs to be charged
directly to expense, instead of those costs being capitalized to film costs,
which currently is required under the existing accounting model. The SOP would
also require all film costs to be classified in the balance sheet as a
noncurrent asset. The proposed SOP's provisions in other areas, such as revenue
recognition, generally are consistent with Time Warner's existing accounting
policies.
At the time that Time Warner adopts the final provisions of the SOP, it
expects to record a one-time, noncash, after-tax charge of approximately $400 to
$425 million primarily to reduce the carrying value of its film inventory. This
charge will be reflected as a cumulative effect of a change in accounting
principle.
The provisions of the SOP are still being deliberated by AcSEC and could
change prior to the issuance of a final standard, which is expected to occur by
the end of the second quarter of 2000. The SOP is expected to be effective for
calendar-year companies on January 1, 2001, with early application encouraged.
Time Warner expects to adopt the provisions of the SOP upon issuance.
Revenue Classification Changes
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, 'Revenue Recognition in Financial Statements'
('SAB 101'), which will be effective for Time Warner in the second quarter of
2000. SAB 101 clarifies certain existing accounting principles for the
recognition and classification of revenues in financial statements. While Time
Warner's existing revenue recognition policies are consistent with the
provisions of SAB 101, the new rules are expected to result in some changes as
to how the filmed entertainment industry classifies its revenues, particularly
relating to distribution arrangements for third-party and co-financed joint
venture product. As a result, Time Warner is in the process of evaluating the
overall impact of SAB 101 on its consolidated financial statements. It is
expected that both annual revenues and costs in Time Warner's filmed
entertainment businesses will be reduced by an equal amount of approximately
$1.5 to $2 billion as a result of these classification changes. However, other
aspects of SAB 101 are not expected to have a significant effect on
Time Warner's consolidated financial statements.
ADVERTISING
Through 1999, 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
have been capitalized and amortized over the related revenue streams in each
market that such costs are intended to benefit, which generally does not exceed
three months. Other advertising costs are expensed upon the first exhibition of
the advertisement, except for certain direct-response advertising, for which the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response advertising principally consists of product promotional
mailings, broadcast advertising, catalogs and other promotional costs incurred
in the Company's direct-marketing businesses. Deferred advertising costs
generally are 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 $250 million at the end of 1999 and $282
million at the end of 1998 ($282 million on a pro forma basis), respectively.
Advertising expense, excluding theatrical and television product, amounted to
$1.511 billion in 1999, $1.154 billion in 1998 ($1.438 billion on a pro forma
basis) and $1.080 billion in 1997.
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.
F-29
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 that qualify for hedge
accounting, 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 in 1998 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, 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,
-----------------------------------
1999 1998 1998
HISTORICAL PRO FORMA HISTORICAL
---------- --------- ----------
(MILLIONS)
<S> <C> <C> <C>
Land and buildings..................................... $ 1,606 $ 1,764 $ 963
Cable television equipment............................. 8,671 7,648 1,035
Furniture, fixtures and other equipment................ 4,048 3,714 1,400
------- ------- -------
14,325 13,126 3,398
Less accumulated depreciation...................... (5,597) (5,089) (1,407)
------- ------- -------
Total.................................................. $ 8,728 $ 8,037 $ 1,991
------- ------- -------
------- ------- -------
</TABLE>
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,
generally are either expensed as incurred, or capitalized as tangible assets as
in the case of cash advances and inventoriable product costs. However,
accounting recognition is not given to any increasing asset value that may be
associated with the collection of the underlying copyrighted material.
Additionally, costs incurred to create or extend brands, such as magazine
titles and new television networks, generally result in losses over an extended
development period and are recognized as a reduction of income as incurred,
while any corresponding brand value created is not recognized
F-30
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1.298
billion in 1999, $800 million in 1998 ($1.330 billion on a pro forma basis) and
$912 million in 1997. Accumulated amortization of intangible assets at December
31, 1999 and 1998 amounted to $8.3 billion and $3.9 billion ($7.4 billion on a
pro forma basis), 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
is accounted for as a reduction of goodwill.
The principal operations of the Entertainment Group are conducted by
partnerships. Time Warner's income tax expense for all periods 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.
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.
INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is computed by dividing the net income
(loss) applicable to common shares after preferred dividend requirements by the
weighted average of common shares outstanding during the period. Weighted-
average common shares include shares of Time Warner's common stock and
Series LMCN-V common stock. Diluted income (loss) per common share adjusts basic
income (loss) per common
F-31
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
COMPREHENSIVE INCOME
In accordance with FASB Statement No. 130, 'Reporting Comprehensive Income,'
Time Warner reports 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 following summary sets forth the components of other comprehensive
income (loss) accumulated in shareholders' equity:
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN DERIVATIVE OTHER
CURRENCY UNREALIZED FINANCIAL COMPREHENSIVE
TRANSLATION GAINS ON INSTRUMENT INCOME
LOSSES SECURITIES GAINS (LOSSES) (LOSS)
----------- ---------- -------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
Balance at December 31, 1998....... $ (83) $ 5 $(38) $(116)
1999 activity...................... (63) 221 9 167
----- ---- ---- -----
Balance at December 31, 1999....... $(146) $226 $(29) $ 51
----- ---- ---- -----
----- ---- ---- -----
</TABLE>
2. CABLE TRANSACTIONS
Time Warner, TWE and the TWE-Advance/Newhouse Partnership ('TWE-A/N')
completed a series of significant transactions in 1999 and 1998. These
transactions, which related to the cable television business and related
ancillary businesses, enhanced Time Warner Cable's geographic clustering of
cable television properties or reduced existing debt and/or Time Warner Cable's
share of future funding requirements for such businesses. These transactions are
discussed more fully below.
GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS
During the past three years, largely in an effort to enhance their
geographic clustering of cable television properties, Time Warner and TWE sold
or exchanged various cable television systems and investments. The 1999
transactions included a number of transactions generally involving large
exchanges of cable television systems. In these transactions, Time Warner Cable
exchanged cable television systems serving approximately (i) 575,000 subscribers
for other cable television systems of comparable size owned by TCI
Communications, Inc. ('TCI'), a subsidiary of AT&T (the 'TCI Cable Trades') and
(ii) 314,000 subscribers for other cable television systems of comparable size
owned by MediaOne. In addition, in 1999, Time Warner Cable obtained sole control
of certain partnerships previously held with Fanch Communications, retaining
cable television systems serving approximately 158,000 subscribers and
approximately $280 million of net cash proceeds, in exchange for its interests
in other cable television systems formerly owned by such partnerships. The
systems acquired by Time Warner Cable were accounted for under the purchase
method of accounting for business combinations. As such, the net assets received
were recorded at fair value based on the negotiated terms of the transactions.
In connection with these and other transactions, the operating results of
Time Warner include net pretax gains of $2.247 billion in 1999, $108 million in
1998 and $212 million in 1997.
Because a substantial portion of these pretax gains was recognized by TWE,
and TWE was reported on an unconsolidated basis for all periods prior to 1999,
these gains were either classified in Time Warner's operating
F-32
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income or Time Warner's equity in the pretax income of the Entertainment Group
in the accompanying consolidated statement of operations. In particular, Time
Warner's operating income includes pretax gains of $2.247 billion in 1999,
$18 million in 1998 ($108 million on a pro forma basis) and $12 million in 1997.
In 1998 and 1997, Time Warner's equity in the pretax income of the Entertainment
Group included pretax gains of $90 million and $200 million, respectively.
TIME WARNER TELECOM
Time Warner Telecom Inc. ('Time Warner Telecom'), an integrated
communications provider that provides a wide range of telephony and data
services to businesses, was formed in July 1998 when Time Warner, TWE and
TWE-A/N completed a reorganization of their business telephony operations (the
'Time Warner Telecom Reorganization'). As part of that reorganization,
(i) the business telephony operations conducted by Time Warner, TWE and TWE-A/N
were each contributed to Time Warner Telecom and (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. No gain or loss was recognized on the transaction.
Time Warner's initial interest in Time Warner Telecom was recorded based on the
historical cost basis of the contributed net assets.
In May 1999, Time Warner Telecom completed an initial public offering of 20%
of its common stock (the 'Time Warner Telecom IPO'). Time Warner Telecom issued
approximately 21 million shares of common stock at a price of $14 per share
and raised net proceeds of approximately $270 million. Approximately
$180 million of these proceeds were used to pay obligations owed to Time Warner
and TWE. In turn, Time Warner and TWE used those proceeds principally to
reduce bank debt. In connection with the Time Warner Telecom IPO and certain
related transactions, Time Warner's ownership interest in Time Warner
Telecom was diluted from 62% to 48%. As a result, Time Warner recognized a
gain of approximately $115 million before providing for deferred taxes. This
gain has been included in interest and other, net, in Time Warner's 1999
consolidated statement of operations.
As of December 31, 1999, Time Warner Telecom is owned 48% by Time Warner,
15% by MediaOne, 15% by Advance/Newhouse and 22% by other third parties. Time
Warner's interest in Time Warner Telecom is being accounted for under the equity
method of accounting.
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. 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 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 that quarter. The decline in Primestar's value was confirmed by the sale
of its operations and assets to DirecTV, a competitor of Primestar owned by
Hughes Electronics Corp., which occurred during the first half of 1999.
F-33
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the sale to DirecTV, Primestar began to wind down its
operations during 1999. Time Warner recognized its share of Primestar's 1999
losses under the equity method of accounting. Such losses are included in
interest and other, net in Time Warner's 1999 consolidated statement of
operations. As of December 31, 1999, Primestar has substantially completed the
wind down of its operations. As such, future wind-down losses are not expected
to be material to Time Warner's operating results.
On a historical basis, the 1998 charge has been included in Time Warner's
equity in the pretax income of the Entertainment Group and, on a pro forma basis
for 1998, in Time Warner's interest and other, net in the accompanying
consolidated statement of operations.
TCI CABLE TRANSACTIONS
During 1999 and 1998, Time Warner, TWE, TWE-A/N and TCI completed a number
of significant 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, (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 TCI Cable Trades in 1999,
as previously discussed above. The Kansas City joint venture is being accounted
for under the equity method of accounting.
The Texas Cable Joint Venture is a 50-50 cable television joint venture
between TWE-A/N and TCI. TWE-A/N contributed cable television systems serving
approximately 545,000 subscribers, subject to approximately $650 million of
debt. TCI contributed cable television systems serving approximately 565,000
subscribers, subject to approximately $650 million of debt. TWE-A/N did not
recognize a gain or loss on the transaction and the initial investment in the
Texas Cable Joint Venture was recorded based on the historical cost basis of
the contributed net assets. The Texas Cable Joint Venture is being accounted
for under the equity method of accounting.
As a result of the formation of the Texas Cable Joint Venture, 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.
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 (the 'Preferred Equity
Interests'). 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. No gain or loss was recognized on
the transaction. As such, each of Time Warner's, TWE's and TWE-A/N's initial
interest in the Road Runner Joint Venture was recorded based on the historical
cost basis of the contributed net assets. In addition, 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 because of certain approval rights
held by MediaOne.
If the Road Runner Joint Venture does not successfully complete a public
offering of its common stock by December 31, 2001, Microsoft and Compaq may put
their Preferred Equity Interests back to the venture at an
F-34
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
independently determined fair value, plus any accrued and unpaid dividends at
a rate of 6% per annum. Microsoft and Compaq also have the right to put their
Preferred Equity Interests back to the venture upon the occurrence of certain
early termination events, as set forth in the partnership agreement. If these
termination rights are triggered and exercised, the put price paid to Microsoft
and Compaq will equal the amount of their original investment plus a cumulative
annual preferred return of 15%.
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.
TWE-A/N TRANSFERS
As of December 31, 1999, TWE-A/N owned cable television systems (or
interests therein) serving approximately 6.7 million subscribers, of which
5.5 million subscribers were served by consolidated, wholly owned cable
television systems and 1.2 million subscribers were served by unconsolidated,
partially owned cable television systems. TWE-A/N had approximately
$1.4 billion of debt at December 31, 1999.
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. On a historical basis for
1999 and on a pro forma basis for 1998, the financial position and operating
results of TWE-A/N have been consolidated by Time Warner and the partnership
interest owned by Advance/Newhouse is reflected in Time Warner's consolidated
financial statements as minority interest. On a historical basis for all periods
prior to 1999, the financial position and operating results of TWE-A/N have been
consolidated by TWE and reflected by Time Warner under the equity method of
accounting. 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
transactions relating to Paragon Communications ("Paragon" and 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. Prior to this transaction, the economic ownership
of Paragon was held 50% by subsidiaries of Time Warner, 25% beneficially by TWE
and 25% beneficially by TWE-A/N. The debt assumed by TWE-A/N has been guaranteed
by TWI Cable and certain of its subsidiaries, including Paragon. The TWE-A/N
Transfers were accounted for effective as of January 1, 1998. Time Warner and
TWE-A/N accounted for this transaction at fair value. However, because the fair
value of the consideration received approximated Time Warner's carrying value
of the net assets transferred, Time Warner did not recognize a gain or loss
on the transaction.
Paragon was a partnership formerly owning cable television systems serving
approximately 1 million subscribers. 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.
F-35
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, effective as of January 1, 1998, Time Warner has consolidated
Paragon, which it formerly accounted for under the equity method of accounting.
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.
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).
3. FILMED ENTERTAINMENT TRANSACTIONS
1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ('MGM') terminated
a long-term distribution agreement under which Warner Bros. had exclusive
worldwide distribution rights for MGM/United Artists home video product. In
connection with the early termination and settlement of this distribution
agreement, Warner Bros. recognized a net pretax gain of approximately
$215 million, which has been included in operating income in the accompanying
consolidated statement of operations.
1999 GAIN ON SALE OF INTEREST IN CANALSATELLITE
In December 1999, Warner Bros. sold its 10% interest in CanalSatellite, a
satellite television distribution service in France and Monaco, to Canal+, a
large French media and entertainment company. In connection with the sale,
Warner Bros. recognized a pretax gain of $97 million, which has been included in
operating income in the accompanying consolidated statement of operations.
1999 WARNER BROS. RETAIL STORES WRITE-DOWN
In the fourth quarter of 1999, Warner Bros. recorded a one-time, noncash
pretax charge of $106 million to reduce the carrying value of certain fixed
assets and leasehold improvements used in its retail stores. This charge
resulted from a plan adopted in December 1999 that is designed to improve the
performance of Warner Bros.'s retail store operations. The plan is expected to
be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores, and exploiting potential e-commerce opportunities.
The charge represents the excess of the carrying value of the assets used in
Warner Bros.'s retail stores over the discounted future operating cash flows,
adjusted to reflect a shorter recovery period due to planned store closures. The
charge has been included in operating income in the accompanying consolidated
statement of operations.
1998 SALE OF 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. As of
F-36
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1999, approximately $330 million of the original $400 million gain
on the sale of TWE's interest had been deferred principally as a result of
uncertainties surrounding its realization. Those uncertainties relate to ongoing
litigation as described in Note 17 and TWE's continuing guarantees of Premier's
long-term obligations to make minimum payments to the limited partners of the
Six Flags Over Texas and Six Flags Over Georgia theme parks. If current trends
continue, Time Warner expects the deferred gain to be recognized over the next
several years, subject to the resolution of the Six Flags litigation.
That is, the deferred gain will not fall below the estimated exposure relating
to the Six Flags litigation. In addition, upon closing of the America Online-
Time Warner merger, any portion of the deferred gain not attributable to the
Six Flags litigation is likely to be eliminated in purchase accounting.
4. INVESTMENT IN ENTERTAINMENT GROUP
PARTNERSHIP STRUCTURE
Time Warner's investment in the Entertainment Group consists substantially
of its investment in TWE, as well as certain related companies. TWE is a
Delaware limited partnership that was capitalized in 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. 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 Series B Capital. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by MediaOne. Certain Time Warner subsidiaries are the
general partners of TWE ('Time Warner General Partners').
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to TWE ('Undistributed Contributed Capital'), plus, with
respect to the priority capital interests only, any undistributed priority
capital return. The priority capital return consists of net partnership income
allocated to date in accordance with the provisions of the TWE partnership
agreement and the right to be allocated additional partnership income which,
together, provides for the various priority capital rates of return as specified
in the following table. 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 100% by the Time Warner General
Partners. Furthermore, the ultimate realization of Cumulative Priority Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
F-37
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the priority of Undistributed Contributed Capital, Time
Warner's ownership of Undistributed Contributed Capital and Cumulative Priority
Capital at December 31, 1999 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>
Series A Capital........................ $5.6 $14.5 13.00% 74.49%
Series B Capital........................ 2.9(d) 7.7 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 generally is 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 its 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 also is 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 Series A Capital and Series B Capital, in order of priority, at
rates of 13.00% and 13.25% per annum, respectively, 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, and then to reduce any special tax allocations. To the
extent partnership income is insufficient to satisfy all special allocations in
a particular accounting period, the right to receive additional partnership
income necessary to provide for the various priority capital rates of return
is carried forward until satisfied out of future partnership income, including
any partnership income that may result from any liquidation, sale or dissolution
of TWE. TWE reported net income of $2.759 billion, $326 million and $614 million
in 1999, 1998 and 1997, 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. The determination of the amount of additional interests that MediaOne
is eligible to acquire is based on the compounded annual growth rate of TWE's
adjusted cable EBITDA, as defined in the option agreement, over the life of the
option. The option is exercisable at any time through May 2005. The option
exercise price is dependent upon the year of exercise and
F-38
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ranges from an exercise price of approximately $1.3 billion in 2000 to
$1.8 billion in 2005. 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
As previously described in Note 1, Time Warner's historical financial
statements for 1999 and pro forma financial statements for 1998 reflect the
consolidation of the Entertainment Group, effective as of the beginning of each
year. However, in order to facilitate an analysis of Time Warner's results of
operations and financial condition for all historical periods in which the
Entertainment Group was not consolidated, set forth below is summarized
financial information of the Entertainment Group. The summarized financial
information 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, the Time Warner
Telecom Reorganization effective as of July 1, 1998 and the formation of the
Texas Cable Joint Venture effective as of December 31, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues................................................. $13,164 $12,256 $11,328
Depreciation and amortization............................ (1,364) (1,436) (1,386)
Business segment operating income(a)..................... 4,227 1,724 1,461
Interest and other, net(b)............................... (818) (945) (338)
Minority interest........................................ (427) (284) (324)
Income before income taxes............................... 2,909 423 727
Income before extraordinary item......................... 2,759 331 642
Net income............................................... 2,759 331 619
</TABLE>
- ---------
(a) Includes a net pretax gain of approximately $215 million in 1999 in
connection with the early termination and settlement of a long-term, home
video distribution agreement, a pretax gain of approximately $97 million in
1999 relating to the sale of an interest in CanalSatellite, a one-time,
noncash pretax charge of approximately $106 million in 1999 relating to
certain Warner Bros.'s retail stores and net pretax gains of approximately
$2.119 billion in 1999, $90 million in 1998 and $200 million in 1997 related
to the sale or exchange of certain cable television systems and investments.
(b) 1998 includes a pretax charge of approximately $210 million principally to
reduce the carrying value of an interest in Primestar. 1997 includes a
pretax gain of approximately $250 million related to the sale of an interest
in E! Entertainment Television, Inc.
F-39
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
CASH FLOW INFORMATION
Cash provided by operations................................. $2,713 $2,288 $1,799
Capital expenditures........................................ (1,475) (1,603) (1,565)
Investments and acquisitions................................ (478) (388) (172)
Investment proceeds......................................... 948 1,246 520
Collection of loan to Time Warner........................... 400 -- --
Borrowings.................................................. 2,658 1,514 3,400
Debt repayments............................................. (2,764) (1,898) (3,085)
Issuance of preferred stock of subsidiary................... -- -- 243
Redemption of preferred stock of subsidiary................. (217) -- --
Capital distributions....................................... (1,200) (1,153) (934)
Other financing activities, net............................. (155) (241) (100)
Increase (decrease) in cash and equivalents................. 430 (235) 106
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
(MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................ $ 517 $ 87
Total current assets........................................ 5,311 4,187
Total assets................................................ 24,843 22,241
Total current liabilities................................... 5,723 4,940
Long-term debt.............................................. 6,655 6,578
Minority interests.......................................... 1,815 1,522
Preferred stock of subsidiary............................... -- 217
Time Warner General Partners' Senior Capital................ -- 603
Partners' capital........................................... 7,149 5,210
</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.
Through July 1999, the Time Warner General Partners held senior priority
capital interests ('Senior Capital') in TWE. At that time, the Time Warner
General Partners received a $627 million distribution from TWE in full
redemption of the remaining portion of their Senior Capital interests plus
related priority capital return. This distribution increased the cumulative cash
distributions received from TWE relating to the Time Warner General Partners'
Senior Capital interests to $2.1 billion. A portion of the proceeds received
from the July 1999 distribution was used to repay all $400 million of
outstanding borrowings under Time Warner's credit agreement with TWE.
At December 31, 1999 and 1998, the Time Warner General Partners had recorded
$1.292 billion and $1.130 billion, respectively, of stock option related
distributions due from TWE, based on closing prices of Time Warner common stock
of $72.31 and $62.06, 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 1999, the Time Warner General
Partners received distributions from TWE in the amount of $1.2 billion,
consisting of $627 million of Senior Capital distributions (representing the
return of $454 million of contributed capital and the distribution of
$173 million of priority capital return), $347 million of tax-related
distributions and $226 million of stock option related distributions. During
1998, the Time Warner General Partners received
F-40
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. 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 in
1998, 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).
5. OTHER INVESTMENTS
Time Warner's other investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998 1998
HISTORICAL PRO FORMA HISTORICAL
---------- --------- ----------
(MILLIONS)
<S> <C> <C> <C>
Equity-method investments.............................. $1,012 $1,042 $483
Cost-method investments................................ 73 177 12
Fair-value investments(a).............................. 1,011 446 299
------ ------ ----
Total.................................................. $2,096 $1,665 $794
------ ------ ----
------ ------ ----
</TABLE>
- ---------
(a) Principally includes investments in Internet-related and digital media
businesses and investments relating to Time Warner's deferred compensation
plans.
The following discussion presents information on Time Warner's equity
investees and separately highlights some of the more significant and strategic
investments held by Time Warner.
EQUITY-METHOD INVESTMENTS
At December 31, 1999, companies accounted for using the equity method
include: Time Warner Telecom (48% owned), the Road Runner Joint Venture (55%
owned on a fully diluted basis), certain cable television system joint ventures
(generally 50% owned), Courtroom Television Network (50% owned), the Columbia
House Company partnerships (50% owned), other music joint ventures (generally
50% owned), American Family Enterprises (50% owned), Comedy Partners, L.P. (50%
owned) and Primestar (24% owned). A summary of combined financial information as
reported by the equity investees of Time Warner is set forth below:
F-41
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1998 1997
HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Revenues..................................... $3,064 $3,604 $1,275 $1,336
Depreciation and amortization................ (418) (749) (43) (13)
Operating income (loss)...................... 64 (266) (1) 80
Net loss..................................... (346) (461) (109) (36)
Current assets............................... 1,570 1,848 1,183 792
Total assets................................. 5,214 7,293 2,065 1,132
Current liabilities.......................... 1,294 1,215 587 418
Long-term debt............................... 3,367 4,724 1,807 1,303
Total liabilities............................ 4,807 6,163 2,464 1,791
Total shareholders' (deficit) or partners'
capital.................................... 407 1,130 (399) (659)
</TABLE>
TIME WARNER TELECOM
As discussed more fully under Note 2, Time Warner has a 48% interest in Time
Warner Telecom. Time Warner Telecom is an integrated communications provider
that provides a wide range of telephony and data services to businesses in a
number of metropolitan areas across the United States. As of December 31, 1999,
based on Time Warner's ownership of 50.4 million shares of Class B common stock
and the $49.9375 market price of Time Warner Telecom's publicly traded Class A
common stock, the market value of Time Warner's interest in Time Warner Telecom
was $2.5 billion.
ROAD RUNNER JOINT VENTURE
As discussed more fully under Note 2, Time Warner, TWE and TWE-A/N have a
collective 55% interest in the Road Runner Joint Venture on a fully diluted
basis. The Road Runner Joint Venture operates a high-speed online service that
connects customers to the Internet at speeds significantly faster than telephone
dial-up services. As of December 31, 1999, the Road Runner Joint Venture had
approximately 550,000 subscribers in 37 markets that pass more than 13 million
homes.
CABLE TELEVISION SYSTEM JOINT VENTURES
Time Warner Cable has an approximate 50% weighted-average interest in a
number of unconsolidated cable television systems that served an aggregate 1.7
million subscribers as of December 31, 1999. For 1999, these cable television
systems reported combined operating income of $231 million and combined
depreciation and amortization of $267 million. In addition, at the end of 1999,
these cable television systems had debt of approximately $1.9 billion.
OTHER INVESTMENTS
Time Warner has a number of other fair value method investments, including
interests in Internet-related and digital media businesses. These interests
generally consist of common equity and common equity equivalents. As of
December 31, 1999, Internet-related and digital media investments included
2,252,252 of common share equivalents in OpenTV Corp., a designer and marketer
of digital interactive television software and components; 349,612 of common
share equivalents in Intervu Inc., a service provider for Internet audio and
video delivery solutions; 2,486,742 of common share equivalents in
Healtheon/WebMD Corp., an end-to-end Internet healthcare company connecting
physicians and consumers to the entire healthcare industry; 5,170,509 of common
share equivalents in Fortune City, an international online community; and
2,627,080 of common share
F-42
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents in Hoover's Inc., an Internet provider of news, financial and other
information on various companies and industries.
Time Warner's ownership and voting interests in these companies are
generally less than 20%, which is not large enough to exert significant
influence. As such, these publicly traded investments are accounted for at
market value. As of December 31, 1999, the aggregate market value of these
publicly traded investments approximated $450 million, resulting in unrealized
pretax gains of approximately $350 million included as a component of other
comprehensive income in shareholders' equity.
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1998
-------------------- -------------------- --------------------
HISTORICAL PRO FORMA HISTORICAL
-------------------- -------------------- --------------------
CURRENT NONCURRENT CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Film costs:
Released, less
amortization.............. $ 777 $ 966 $ 665 $1,052 $ 51 $ 308
Completed and not
released.................. 73 17 199 76 20 --
In process and other........ 8 864 25 811 2 240
Library, less
amortization.............. -- 1,554 -- 1,668 -- 1,007
Programming costs, less
amortization................ 820 800 883 612 457 345
Magazines, books, recorded
music and other
merchandise................. 504 -- 486 -- 416 --
------ ------ ------ ------ ---- ------
Total......................... $2,182 $4,201 $2,258 $4,219 $946 $1,900
------ ------ ------ ------ ---- ------
------ ------ ------ ------ ---- ------
</TABLE>
Excluding the Library, the unamortized cost of completed films at
December 31, 1999 amounted to $1.8 billion, over 90% of which is expected to be
amortized within three years after release.
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
WEIGHTED AVERAGE ------------------------------------
INTEREST RATE AT 1999 1998 1998
DECEMBER 31, 1999 MATURITIES HISTORICAL PRO FORMA HISTORICAL
------------------ ------------- ---------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Bank credit agreement
borrowings................ 6.85% 2002 $ 4,846 $ 3,945 $ 1,234
Commercial paper............ 6.46% 2000 360 62 --
Fixed-rate senior notes and
debentures................ 8.03% 2000-2036 12,277 12,296 8,491
Variable-rate senior
notes..................... 5.93% 2031 600 1,200 1,200
------- ------- -------
Total....................... $18,083 $17,503 $10,925
------- ------- -------
------- ------- -------
</TABLE>
BANK CREDIT AGREEMENT
Time Warner has a revolving credit facility (the 'Bank Credit Agreement')
that permits borrowings in an aggregate amount of up to $7.5 billion, with no
scheduled reduction in credit availability prior to maturity in
F-43
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
November 2002. The borrowers under the Bank Credit Agreement are Time Warner and
a number of its consolidated subsidiaries, consisting of Time Warner Companies,
Inc. ('TW Companies'), Turner Broadcasting System, Inc. ('TBS'), TWI Cable, TWE
and TWE-A/N. Borrowings under the Bank 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
of 35 basis points) and each borrower is required to pay a commitment fee of
.125% per annum on the unused portion of its commitment, 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 Bank Credit Agreement
contains certain covenants generally for each borrower relating to, among other
things, additional indebtedness; liens on assets; cash flow coverage and
leverage ratios; and dividends, distributions and other restricted cash payments
or transfers of assets from the borrowers to their respective shareholders,
partners or affiliates.
VARIABLE-RATE SENIOR NOTES
In 1999, TW Companies redeemed all of its $600 million principal amount of
Floating Rate Reset Notes due July 29, 2009. The aggregate redemption cost of
approximately $620 million was funded with borrowings under the Bank Credit
Agreement.
The only variable-rate senior notes outstanding at the end of 1999 were $600
million principal amount of Floating Rate Reset Notes due December 30, 2031 that
are redeemable at the election of the holders on December 30, 2001 (the
'Five-Year Floating Rate Notes'). 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.
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.
INTEREST EXPENSE AND MATURITIES
Time Warner periodically refinances its debt in an effort to lower its
overall cost of borrowings and to stagger debt maturities. In connection with
such refinancings, Time Warner recognized an extraordinary loss on the
retirement of debt of $12 million in 1999 and $55 million in 1997.
At December 31, 1999, Time Warner had interest rate swap contracts to pay
floating-rates of interest and receive fixed-rates of interest on $400 million
notional amount of indebtedness, which resulted in approximately 34% of Time
Warner's underlying debt being subject to variable interest rates (Note 15).
Interest expense amounted to $1.519 billion in 1999, $891 million in 1998
($1.451 billion on a pro forma basis) and $1.049 billion in 1997. The weighted
average interest rate on Time Warner's total debt, including TWE's debt and the
effect of interest rate swap contracts, was 7.6% and 7.3% at December 31, 1999
and 1998, respectively.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1999 consist of $500 million due in 2000, $5.8 billion due in 2002,
$48 million due in 2003 and $523 million due in 2004. Such
F-44
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repayments exclude the aggregate redemption price of $600 million in 2001
relating to the Five-Year Floating Rate Notes, the year in which the holders
thereof may first exercise their redemption options. Time Warner has the intent
and ability under the Bank Credit Agreement to continue to refinance its
borrowings on a long-term basis.
FAIR VALUE OF DEBT
Based on the level of interest rates prevailing at December 31, 1999, the
fair value of Time Warner's fixed rate debt approximated its carrying value.
Based on the level of interest rates prevailing at December 31, 1998, the fair
value of Time Warner's fixed-rate debt exceeded its carrying value by $1.098
billion ($1.862 billion on a pro forma basis). 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 connection with Time Warner's common stock repurchase program (Note 12),
Time Warner has a $1.3 billion revolving credit facility that provides for
borrowings against future stock option proceeds (the 'Stock Option Proceeds
Credit Facility'). Borrowings under the Stock Option Proceeds Credit Facility
are principally used to fund stock repurchases. At December 31, 1999 and 1998,
Time Warner had outstanding borrowings against future stock option proceeds of
$1.243 billion and $895 million, respectively.
As of December 31, 1999, the Stock Option Proceeds Credit Facility provided
for borrowings of up to $1.3 billion, of which up to $125 million was 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 $1.3 billion
through March 2000, and thereafter in full on a cumulative basis, must be used
to permanently reduce the borrowing availability under the facility. At
December 31, 1999, based on a closing market price of Time Warner common stock
of $72.31, 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 $1.8 billion, representing a 1.4 to 1 coverage ratio
over the related $1.3 billion borrowing availability. To the extent that such
stock option proceeds are not sufficient to satisfy Time Warner's obligations
under the Stock Option Proceeds Credit Facility, Time Warner is generally
required to repay such borrowings using proceeds from the sale of shares of its
common stock held in escrow under the Stock Option Proceeds Credit Facility or,
at Time Warner's election, using available cash on hand. Time Warner had placed
76 million shares in escrow at December 31, 1999, 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.
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 for purposes of
evaluating the Company's leverage and coverage ratios.
F-45
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Domestic and foreign pretax income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------ ---------- ------
(MILLIONS)
<S> <C> <C> <C>
Domestic................................................. $3,184 $486 $728
Foreign.................................................. 316 100 104
------ ---- ----
Total.................................................... $3,500 $586 $832
------ ---- ----
------ ---- ----
</TABLE>
Current and deferred income taxes (tax benefits) provided are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------ ---------- ------
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current(a)........................................... $ 470 $ 436 $191
Deferred............................................. 556 (259) 49
Foreign:
Current(b)........................................... 240 260 205
Deferred............................................. 9 (49) (3)
State and Local:
Current(a)........................................... 179 166 88
Deferred............................................. 86 (136) 1
------ ----- ----
Total.................................................... $1,540 $ 418 $531
------ ----- ----
------ ----- ----
</TABLE>
- ---------
(a) Includes utilization of tax carryforwards of $198 million in 1999, $126
million in 1998 and $109 million in 1997. Excludes federal and state and
local tax benefits of $486 million in 1999, $478 million in 1998 and $165
million in 1997 resulting from the exercise of stock options and vesting of
restricted stock awards, which were credited directly to paid-in-capital.
Excludes current tax benefits of $9 million in 1999 and $37 million in 1997
resulting from the retirement of debt, which reduced the extraordinary
losses in such years.
(b) Includes foreign withholding taxes of $120 million in 1999, $113 million in
1998 and $114 million in 1997.
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Taxes on income at U.S. federal statutory rate........... $1,225 $205 $291
State and local taxes, net of federal tax benefits....... 172 20 58
Nondeductible goodwill amortization...................... 173 170 170
Other nondeductible expenses............................. 9 13 11
Foreign income taxed at different rates, net of U.S.
foreign tax credits.................................. (37) -- 9
Other.................................................... (2) 10 (8)
------ ---- ----
Total.................................................... $1,540 $418 $531
------ ---- ----
------ ---- ----
</TABLE>
F-46
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of Time Warner's net deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
(MILLIONS)
<S> <C> <C>
Assets acquired in business combinations.................... $2,635 $3,158
Depreciation and amortization............................... 2,240 1,112
Unrealized appreciation of certain marketable securities.... 155 4
Other....................................................... 422 452
------ ------
Deferred tax liabilities.................................... 5,452 4,726
------ ------
Tax carryforwards........................................... 231 304
Accrued liabilities......................................... 572 513
Receivable allowances and return reserves................... 223 217
Other....................................................... 192 201
------ ------
Deferred tax assets......................................... 1,218 1,235
------ ------
Net deferred tax liabilities................................ $4,234 $3,491
------ ------
------ ------
</TABLE>
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $1.1 billion at December 31, 1999. 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, 1999 consisted of $93 million
of net operating losses, $123 million of investment tax credits and $76 million
of alternative minimum tax credits. The utilization of certain carryforwards is
subject to limitations under U.S. federal income tax laws. Except for the
alternative minimum tax credits which do not expire, the other U.S. federal tax
carryforwards expire in varying amounts as follows for income tax reporting
purposes:
<TABLE>
<CAPTION>
CARRYFORWARDS
----------------------
NET INVESTMENT
OPERATING TAX
LOSSES CREDITS
--------- ----------
(MILLIONS)
<S> <C> <C>
2000........................................................ $ 1 $ 25
2001........................................................ 1 36
2002........................................................ -- 32
2003........................................................ -- 13
Thereafter up to 2012....................................... 91 17
--- ----
$93 $123
--- ----
--- ----
</TABLE>
10. MANDATORILY REDEEMABLE PREFERRED SECURITIES
REDEMPTION OF REIT PREFERRED STOCK
In 1997, a newly formed, substantially owned subsidiary of TWE (the 'REIT')
issued 250,000 shares of preferred stock ('REIT Preferred Stock'). The REIT was
intended to qualify as a real estate investment trust under the Internal Revenue
Code of 1986, as amended.
In March 1999, the REIT redeemed all of its shares of REIT Preferred Stock
at an aggregate cost of $217 million, which approximated net book value. The
redemption was funded with borrowings under TWE's bank credit agreement.
F-47
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REDEMPTION OF HASBRO-RELATED PREFERRED TRUST SECURITIES
In 1995, Time Warner, through TW Companies, 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.
PREFERRED TRUST SECURITIES
In 1995, Time Warner, through TW Companies, 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 TW Companies 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. If TW Companies elects to redeem these securities, the redemption
amount would be in each case at an amount per Preferred Trust Security equal to
$25 per security, 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. 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
relating to the redemption premium paid in connection therewith.
Because the weighted-average interest rate of the debt is approximately 400
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 has realized over $100 million of annual cash savings as a result of this
redemption.
12. SHAREHOLDERS' EQUITY
At December 31, 1999, shareholders' equity of Time Warner included 8.4
million shares of convertible preferred stock, 114.1 million shares of Series
LMCN-V common stock and 1.173 billion shares of common stock (net of 22.1
million shares of common stock in treasury). Time Warner currently is authorized
to issue up to 250 million shares of preferred stock, up to 5 billion shares of
common stock and up to 600 million shares of additional classes of common stock,
including Series LMCN-V common stock. Shares of Series LMCN-V common stock
have substantially identical rights as shares of Time Warner's common stock,
except shares of Series LMCN-V common stock have limited voting rights and are
non-redeemable.
F-48
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONVERTIBLE PREFERRED STOCK
Over the past two years, Time Warner issued approximately 112.6 million
shares of common stock in connection with the conversion of 27 million shares of
convertible preferred stock. After those conversions, and the conversion in
January 2000 of substantially all outstanding shares of Series F preferred
stock into 12.3 million shares of common stock, Time Warner has approximately
5.4 million shares of convertible preferred stock outstanding. Such shares are
convertible into approximately 22.7 million shares of Time Warner common stock.
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) and (3) 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.
Holders of Series E preferred stock and Series J preferred stock will
receive a $3.75 annual dividend per share through January 4, 2001 and May 2,
2000, respectively. Thereafter, holders of Series E preferred stock and Series J
preferred stock 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 (the 'Common Equivalent Dividend
Rate'). Holders of Series F preferred stock and Series I preferred stock will
continue to receive dividends based on the Common Equivalent Dividend Rate.
Time Warner has the right at any time to redeem for cash or exchange for
Time Warner common stock, shares of Series I preferred stock at their
liquidation value or stated conversion price. Time Warner also has the right at
any time to exchange for Time Warner common stock, shares of Series F preferred
stock and to redeem such shares for cash at any time on or after January 4,
2001. These rights also are exercisable at any time on or after May 2, 2000 for
shares of Series J preferred stock and January 4, 2001 for shares of Series E
preferred stock.
COMMON STOCK REPURCHASE PROGRAM
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 was expected to be
completed over a three-year period. However, in connection with Time Warner's
agreement to merge with America Online, Time Warner currently has suspended its
stock repurchase program.
During 1999, Time Warner acquired 28.4 million shares of its common stock at
an aggregate cost of $1.896 billion. These repurchases increased the cumulative
shares purchased under this and its previous common stock repurchase program
begun in 1996 to approximately 123.5 million shares at an aggregate cost of
$4.936 billion, or approximately $40 per share.
1998 STOCK SPLIT
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 in 1998. In May 1999, Time
Warner amended the terms of its Series LMCN-V common stock, which effectively
resulted in a two-for-one stock split and the issuance of approximately 57
million shares of Series LMCN-V common stock (the 'LMCN-V Stock Split'). As a
result, each share of Series LMCN-V common stock now is equivalent effectively
to one share of common stock instead of two. Because the equivalent number of
shares of common
F-49
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock did not change, the LMCN-V Stock Split did not have any
effect on Time Warner's consolidated financial statements.
DILUTIVE SECURITIES AND HOLDERS OF RECORD
At December 31, 1999, Time Warner had convertible securities and outstanding
stock options that were convertible or exercisable into approximately 158.6
million shares of common stock (as adjusted for the January 2000 conversion of
Series F preferred stock). Similarly, those securities were convertible or
exercisable into approximately 242.2 million shares of common stock at
December 31, 1998 and 363.6 million shares at December 31, 1997. In addition,
Time Warner has placed a number of shares of common stock in escrow under its
Stock Option Proceeds Credit Facility (see Note 8).
At February 29, 2000, 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.
SHAREHOLDER RIGHTS PLAN
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.
In connection with Time Warner's agreement to merge with America Online,
Inc. ('America Online') entered into in January 2000, Time Warner amended the
rights plan to provide that the consummation of the merger and the other
transactions contemplated by the merger agreement with America Online would not
trigger the exercise of rights under the rights plan. See Note 20 for a summary
of the terms of the America Online-Time Warner merger.
F-50
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME (LOSS) PER COMMON SHARE BEFORE EXTRAORDINARY ITEM
Set forth below is a reconciliation of basic and diluted income (loss) per
common share before extraordinary item for each period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1998 1997
HISTORICAL PRO FORMA(a) HISTORICAL(a) HISTORICAL(a)
---------- ------------ ------------- -------------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income (loss) applicable to common
shares before extraordinary
item -- basic......................... $1,908 $ (372) $ (372) $ (18)
Interest savings, net of tax(b)......... 43 -- -- --
Preferred dividends..................... 52 -- -- --
------ ------ ------ ------
Income (loss) applicable to common
shares before extraordinary
item -- diluted....................... $2,003 $ (372) $ (372) $ (18)
------ ------ ------ ------
------ ------ ------ ------
Average number of common shares
outstanding -- basic.................. 1,267.0 1,194.7 1,194.7 1,135.4
Dilutive effect of stock options........ 72.6 -- -- --
Dilutive effect of convertible preferred
shares................................ 58.7 -- -- --
------ ------ ------ ------
Average number of common shares
outstanding -- diluted................ 1,398.3 1,194.7 1,194.7 1,135.4
------- ------- ------- -------
------- ------- ------- -------
Income (loss) per common share before
extraordinary item:
Basic................................. $ 1.51 $ (.31) $ (.31) $ (.01)
------ ------ ------ ------
------ ------ ------ ------
Diluted............................... $ 1.43 $ (.31) $ (.31) $ (.01)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ---------
(a) 1998 and 1997 basic and diluted loss per common share before extraordinary
item are the same because the effect of Time Warner's stock options and
convertible preferred stock was antidilutive.
(b) Reflects the required use of a portion of the proceeds from the future
exercise of employee stock options to repay all outstanding borrowings under
Time Warner's stock option proceeds credit facility.
13. STOCK-BASED COMPENSATION PLANS
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 generally is not 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 method set forth in
FASB Statement No. 123, 'Accounting for Stock-Based Compensation' ('FAS 123'),
Time Warner's net income and basic and diluted net income (loss) per common
share would have been changed to the pro forma amounts indicated below:
F-51
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported............................................. $1,948 $ 168 $ 246
------ ----- -----
------ ----- -----
Pro forma............................................... $1,852 $ 106 $ 200
------ ----- -----
------ ----- -----
Net income (loss) per basic common share:
As reported............................................. $ 1.50 $(.31) $(.06)
------ ----- -----
------ ----- -----
Pro forma............................................... $ 1.42 $(.36) $(.10)
------ ----- -----
------ ----- -----
Net income (loss) per diluted common share:
As reported............................................. $ 1.42 $(.31) $(.06)
------ ----- -----
------ ----- -----
Pro forma............................................... $ 1.36 $(.36) $(.10)
------ ----- -----
------ ----- -----
</TABLE>
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 1999, 1998 and
1997: dividend yields of 0.3%, 0.5% and 1%, respectively; expected volatility of
23.4%, 21.6% and 21.9%, respectively; risk-free interest rates of 5.3%, 5.5% and
6.4%, respectively; and expected lives of 5 years in all periods. The weighted
average fair value of an option granted during the year was $21.18 ($12.50, net
of taxes), $11.13 ($6.57, net of taxes) and $6.58 ($3.88, net of taxes) for the
years ended December 31, 1999, 1998 and 1997, 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
$95.10 and $19.49 ($11.50, net of taxes), respectively, in 1999; $49.54 and
$9.45 ($5.58, net of taxes), respectively, in 1998; and $32.45 and $6.29 ($3.71,
net of taxes), respectively, in 1997.
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, 1997.................................. 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
Granted..................................................... 12,954 68.50
Exercised................................................... (24,257) 16.49
Cancelled................................................... (893) 46.17
-------
Balance at December 31, 1999................................ 135,868 $25.23
-------
-------
</TABLE>
F-52
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable.............................................. 106,728 112,471 145,616
Available for future grants.............................. 21,635 11,207 12,771
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<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 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- ------------------------------------- ----------- ----------- ----- ----------- ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $10............................ 6,104 0.6 years $ 9.08 6,104 $ 9.08
$10.00 to $15.00..................... 18,760 2.6 years $12.11 18,760 $12.11
$15.01 to $20.00..................... 46,331 3.9 years $18.28 44,974 $18.27
$20.01 to $30.00..................... 33,265 5.4 years $22.06 29,547 $21.94
$30.01 to $45.00..................... 15,874 7.9 years $35.08 6,403 $34.68
$45.01 to $65.00..................... 5,070 8.5 years $54.35 928 $48.67
$65.01 to $103.74.................... 10,464 9.0 years $69.96 12 $69.16
------- -------
Total................................ 135,868 5.0 years $25.23 106,728 $18.93
------- -------
------- -------
</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 44.8 million options held by employees of TWE at December 31, 1999,
34.7 million of which were exercisable.
RESTRICTED STOCK PLANS
Time Warner also has various restricted stock plans for employees and
non-employee directors of the Board. Under these plans, shares of common stock
are granted which do not vest until the end of a restriction period, generally
between three to five years. In accordance with APB 25 and related
interpretations, Time Warner recognizes compensation cost for restricted stock
awards ratably over the vesting period based on the fair market value of the
shares on the date of grant.
At December 31, 1999, Time Warner had approximately 190,000 shares of
restricted stock outstanding. During 1999, Time Warner issued 99,400 shares of
restricted stock at a weighted-average fair value of $64.24. Grants of
restricted stock in prior years were not significant. In addition, compensation
cost recognized in connection with restricted stock grants was not material in
any period.
EFFECT OF AMERICA ONLINE-TIME WARNER MERGER ON STOCK-BASED COMPENSATION PLANS
In connection with Time Warner's agreement to merge with America Online
entered into in January 2000, all Time Warner stock options and restricted
stock outstanding at that time became fully vested, pursuant to the terms of
Time Warner's stock option and restricted stock plans.
See Note 20 for a summary of the terms of the America Online-Time Warner merger.
14. BENEFIT PLANS
Time Warner and its subsidiaries have defined benefit pension plans covering
most domestic employees. Pension benefits are based on formulas that reflect the
employees' years of service and compensation levels
F-53
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
during their employment period. Time Warner's common stock represents
approximately 13% and 12% of plan assets at December 31, 1999 and 1998,
respectively. A summary of activity for Time Warner's defined benefit
pension plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1998 1997
HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
COMPONENTS OF PENSION EXPENSE
Service cost.................................. $ 107 $ 95 $ 53 $ 45
Interest cost................................. 118 110 74 68
Expected return on plan assets................ (132) (108) (73) (62)
Net amortization and deferral................. (3) 2 2 1
----- ----- ---- ----
Total......................................... $ 90 $ 99 $ 56 $ 52
----- ----- ---- ----
----- ----- ---- ----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998 1998
HISTORICAL PRO FORMA HISTORICAL
---------- --------- ----------
(MILLIONS)
<S> <C> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year...... $1,749 $1,451 $ 990
Service cost........................................... 107 95 53
Interest cost.......................................... 118 110 74
Actuarial (gain) loss(a)............................... (427) 159 98
Benefits paid.......................................... (70) (66) (52)
------ ------ ------
Projected benefit obligation at end of year............ 1,477 1,749 1,163
------ ------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year......... 1,480 1,203 839
Actual return on plan assets........................... 266 303 191
Employer contribution.................................. 21 34 16
Benefits paid.......................................... (64) (60) (46)
------ ------ ------
Fair value of plan assets at end of year............... 1,703 1,480 1,000
------ ------ ------
Overfunded (unfunded) projected benefit obligation..... 226 (269) (163)
Additional minimum liability(b)........................ (40) (37) (33)
Unrecognized actuarial gain(a)......................... (589) (26) (16)
Unrecognized prior service cost........................ 26 21 16
------ ------ ------
Accrued pension expense................................ $ (377) $ (311) $ (196)
------ ------ ------
------ ------ ------
</TABLE>
- ---------
(a) Reflects certain changes in actuarial assumptions made during 1999,
including a shortening of the expected service period and an increase in the
discount rate.
(b) The additional minimum liability is offset fully by a corresponding
intangible asset recognized in the consolidated balance sheet.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate........................................... 7.75% 6.75% 7.25%
Expected return on plan assets.......................... 9% 9% 9%
Rate of compensation increase........................... 6% 6% 6%
</TABLE>
F-54
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included above are projected benefit obligations and accumulated benefit
obligations for unfunded defined benefit pension plans of $174 million and $145
million as of December 31, 1999, respectively; and $118 million and $97 million
as of December 31, 1998, respectively ($157 million and $124 million on a pro
forma basis).
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 $100 million in
1999, $84 million in 1998 ($119 million on a pro forma basis) and $83 million in
1997. Contributions to the savings plans are based upon a percentage of the
employees' elected contributions. Contributions to the profit sharing plans
generally are 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 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
F-55
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999, Time Warner had interest rate swap contracts to pay
variable-rates of interest (average six-month LIBOR rate of 5.8%) and receive
fixed-rates of interest (average rate of 5.5%) on $400 million notional amount
of indebtedness. This resulted in approximately 34% of Time Warner's underlying
debt being subject to variable interest rates. The $400 million notional amount
of outstanding contracts will mature during 2000. At December 31, 1998, Time
Warner had interest rate swap contracts on $1.6 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 infrequently 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. Since that time, Time Warner
has not entered into any interest rate lock agreements to hedge the cost of
future issuances of fixed-rate debt. At December 31, 1999, Time Warner had
deferred approximately $30 million of net losses on interest rate lock
agreements, of which less than $1 million is expected to be recognized in income
over the next twelve months.
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
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. At
December 31, 1999, Time Warner had effectively hedged approximately half of the
estimated foreign currency exposures that principally relate to anticipated cash
flows to be remitted to the U.S. over the ensuing
F-56
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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 generally are included as a
component of interest and other, net, in Time Warner's consolidated statement of
operations.
At December 31, 1999, Time Warner had contracts for the sale of $843 million
and the purchase of $468 million of foreign currencies at fixed rates. Contracts
in a net sale position primarily consisted of Japanese yen (62% of net contract
value), European currency (46%), Canadian dollars (15%) and English pounds (2%),
offset in part by contracts in a net purchase position, primarily consisting of
New Zealand dollars (34%).
Time Warner had contracts for the sale of $755 million and the purchase of
$259 million of foreign currencies at December 31, 1998. Time Warner had
deferred approximately $1 million of net gains on foreign exchange contracts at
December 31, 1999, which is substantially expected to be recognized in income
over the next twelve months. Time Warner recognized $8 million in losses in
1999, $8 million in losses in 1998 ($10 million on a pro forma basis) and $27
million in gains in 1997, on foreign exchange contracts. These amounts were or
are expected to be largely 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 business interests into six 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; Music, consisting principally
of interests in recorded music and music publishing; Filmed Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; Cable, consisting principally of
interests in cable television systems; and Digital Media, consisting principally
of interests in Internet-related and digital media businesses. Time Warner's
Digital Media segment commenced operations in 1999.
Information as to the operations of Time Warner in different business
segments is set forth below based on the nature of the products and services
offered. Time Warner evaluates performance based on several factors, of which
the primary financial measure is business segment operating income before
noncash amortization of intangible assets ('EBITA'). As a result of the
consolidation of the Entertainment Group in 1999, Time Warner's and the
Entertainment Group's business segments have been combined. Accordingly,
segment information for 1998 and 1997 has been restated in order to conform to
the new presentation. 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 Cable segment reflect (i) the TWE-A/N
Transfers effective as of January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the formation of the Road
Runner Joint Venture, effective as of June 30, 1998, (iv) the Time Warner
Telecom Reorganization,
F-57
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effective as of July 1, 1998 and (v) the formation of
the Texas Cable Joint Venture, effective as of December 31, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
Cable Networks........................................... $ 6,111 $ 5,377 $ 4,823
Publishing............................................... 4,663 4,496 4,290
Music.................................................... 3,834 4,025 3,691
Filmed Entertainment..................................... 8,075 7,978 7,003
Broadcasting-The WB Network.............................. 384 260 136
Cable.................................................... 5,374 5,342 5,240
Digital Media............................................ 1 -- --
Intersegment elimination................................. (1,109) (1,234) (812)
------- ------- -------
Total business segment revenues.......................... $27,333 $26,244 $24,371
Entertainment Group revenues reported on an
unconsolidated basis(a)................................ -- (11,662) (11,077)
------- ------- -------
Total consolidated revenues.............................. $27,333 $14,582 $13,294
------- ------- -------
------- ------- -------
</TABLE>
- ---------
(a) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
EBITA(a)
Cable Networks.............................................. $1,397 $1,160 $ 964
Publishing.................................................. 679 607 529
Music....................................................... 452 493 467
Filmed Entertainment(b)..................................... 997 695 604
Broadcasting-The WB Network................................. (92) (93) (88)
Cable(c).................................................... 3,927 1,694 1,611
Digital Media............................................... (17) -- --
Intersegment elimination.................................... (10) (94) (54)
------ ------ ------
Total business segment EBITA................................ $7,333 $4,462 $4,033
Entertainment Group EBITA reported on an unconsolidated
basis(d).................................................. -- (2,166) (1,850)
------ ------ ------
Total consolidated EBITA.................................... $7,333 $2,296 $2,183
------ ------ ------
------ ------ ------
</TABLE>
- ---------
(a) 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
$6.035 billion in 1999, $1.496 billion in 1998 and $1.271 billion in 1997.
(b) 1999 results include a net pretax gain of $215 million recognized in
connection with the early termination and settlement of a long-term, home
video distribution agreement and a pretax gain of $97 million relating to
the sale of an interest in CanalSatellite, offset in part by a one-time,
noncash pretax charge of $106 million relating to Warner Bros.'s retail
stores.
(c) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of approximately $2.247 billion in 1999,
$108 million in 1998 and $212 million in 1997.
(d) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
F-58
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Cable Networks.............................................. $ 132 $ 116 $ 109
Publishing.................................................. 81 80 79
Music....................................................... 74 72 83
Filmed Entertainment........................................ 156 172 204
Broadcasting-The WB Network................................. 1 1 1
Cable....................................................... 786 864 862
Digital Media............................................... 1 -- --
------ ------ ------
Total business segment depreciation......................... $1,231 $1,305 $1,338
Entertainment Group depreciation reported on an
unconsolidated basis(a)................................... -- (927) (956)
------ ------ ------
Total consolidated depreciation............................. $1,231 $ 378 $ 382
------ ------ ------
------ ------ ------
</TABLE>
- ---------
(a) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(a)
Cable Networks.............................................. $ 205 $ 200 $ 199
Publishing.................................................. 52 38 48
Music....................................................... 273 280 301
Filmed Entertainment........................................ 201 216 215
Broadcasting-The WB Network................................. 4 3 --
Cable....................................................... 563 593 600
Digital Media............................................... -- -- --
------ ------ ------
Total business segment amortization......................... $1,298 $1,330 $1,363
Entertainment Group amortization reported on an
unconsolidated basis(b)................................... -- (530) (451)
------ ------ ------
Total consolidated amortization............................. $1,298 $ 800 $ 912
------ ------ ------
------ ------ ------
</TABLE>
- ---------
(a) 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.
(b) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
F-59
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information as to the assets and capital expenditures is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Cable Networks........................................... $ 9,940 $ 9,499 $ 9,441
Publishing............................................... 2,870 2,726 2,490
Music.................................................... 7,483 7,354 6,797
Filmed Entertainment..................................... 10,393 10,841 10,658
Broadcasting-The WB Network.............................. 284 244 113
Cable.................................................... 18,380 16,094 17,766
Digital Media............................................ 28 -- --
Corporate(a)............................................. 1,861 1,193 1,334
------- ------- -------
Total business segment assets............................ $51,239 $47,951 $48,599
Entertainment Group assets reported on an unconsolidated
basis(b)............................................... -- (16,311) (14,436)
------- ------- -------
Total consolidated assets................................ $51,239 $31,640 $34,163
------- ------- -------
------- ------- -------
</TABLE>
- ---------
(a) Consists principally of cash, cash equivalents and other investments.
(b) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------- -------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Cable Networks............................................. $ 229 $ 143 $ 132
Publishing................................................. 106 58 77
Music...................................................... 134 92 87
Filmed Entertainment....................................... 136 125 147
Broadcasting-The WB Network................................ 2 1 1
Cable...................................................... 1,600 1,676 1,683
Digital Media.............................................. 2 -- --
Corporate.................................................. 22 20 12
------ ------- -------
Total business segment capital expenditures................ $2,231 $ 2,115 $ 2,139
Entertainment Group capital expenditures reported on an
unconsolidated basis(a).................................. -- (1,603) (1,565)
------ ------- -------
Total consolidated capital expenditures.................... $2,231 $ 512 $ 574
------ ------- -------
------ ------- -------
</TABLE>
- ---------
(a) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
F-60
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information as to operations in different geographical areas is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
REVENUES(a)
United States........................................... $21,654 $ 20,803 $ 19,004
United Kingdom.......................................... 1,000 1,001 937
Germany................................................. 724 695 704
Japan................................................... 629 567 589
Canada.................................................. 420 429 399
France.................................................. 418 390 347
Other international..................................... 2,488 2,359 2,391
------- -------- --------
Total revenues by geographic area....................... $27,333 $ 26,244 $ 24,371
Entertainment Group revenues reported on an
unconsolidated basis(b)............................... -- (11,662) (11,077)
------- -------- --------
Total................................................... $27,333 $ 14,582 $ 13,294
------- -------- --------
------- -------- --------
</TABLE>
- ---------
(a) Revenues are attributed to countries based on location of customer.
(b) Represents amounts previously reported for the Entertainment Group, adjusted
by intercompany eliminations and other consolidating adjustments necessary
for Time Warner to reflect the Entertainment Group on a consolidated basis.
Because a substantial portion of 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 $521 million in 1999, $286
million in 1998 ($504 million on a pro forma basis) and $237 million in 1997.
The minimum rental commitments under noncancellable long-term operating leases
are: 2000-$450 million; 2001-$442 million; 2002-$416 million; 2003-$385 million;
2004-$362 million; and after 2004-$2.809 billion.
Time Warner's minimum commitments and guarantees under certain programming,
licensing, artists, athletes, franchise and other agreements aggregated
approximately $14.5 billion at December 31, 1999, which are payable principally
over a ten-year period.
Time Warner is subject to a class action lawsuit alleging collusive pricing
practices by the major record companies in their capacity as distributors of
compact discs to CD wholesalers and retailers. The trial presently is scheduled
for the fall of 2000. Although management believes the case is without merit,
an adverse jury verdict could result in a material loss to Time Warner. Due to
the lack of specificity to plaintiffs' claims, a range of loss is not
determinable at this time.
TWE also is subject to certain litigation relating to Six Flags. In December
1998, a jury returned an adverse verdict in the Six Flags matter in the amount
of $454 million. TWE and its former 51% partner in Six Flags are financially
responsible for this judgment. Management believes that there were numerous
legal errors in the case and has appealed the verdict. In management's opinion
and considering the gain deferred on the sale of Six Flags described in Note 3
to cover this potential exposure, the resolution of this matter is not expected
to have a material effect on Time Warner's financial statements.
F-61
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time Warner is subject to numerous other legal proceedings. 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.
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. For all periods prior to the consolidation of the Entertainment
Group in 1999, these transactions were included in Time Warner's operating
results and reported as related party transactions. However, on a historical
basis for 1999 and on a pro forma basis for 1998, these transactions have been
eliminated in Time Warner's consolidated financial statements. Nevertheless, in
order to facilitate an understanding of the effects of these transactions on
Time Warner's historical financial statements for 1998 and 1997, a summary of
significant transactions between Time Warner and TWE is provided below.
TWE's employees 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.
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'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 businesses have 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 businesses have sold or exchanged various
cable television systems to MediaOne in an effort to strengthen their geographic
clustering of cable television properties. See Note 2 for further information.
Time Warner had a credit agreement with TWE that allowed it to borrow up to
$400 million from TWE. Time Warner paid interest to TWE on outstanding
borrowings at a rate equal to LIBOR plus 1% per annum. In 1999, Time Warner
repaid all outstanding borrowings under this credit agreement.
Time Warner provides TWE with certain corporate support services, including
accounting, tax, legal and administration, for which it received a fee in the
amount of $73 million in 1999 and $72 million in both 1998 and 1997.
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.
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
F-62
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999, 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 receivable 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 $228 million in 1999, $17 million in 1998 and $108 million in 1997.
Time Warner, through TWE, also has an asset securitization facility, 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, Time Warner 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. In 1999, approximately
$15 million of proceeds were repaid under this securitization program. This
compares to net proceeds received of approximately $166 million in 1998 on
a pro forma basis.
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1998 1997
HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Cash payments made for interest............... $1,406 $1,343 $812 $929
Cash payments made for income taxes........... 424 356 261 305
Tax-related distributions received from TWE... -- -- 314 324
Income tax refunds received................... 47 56 52 52
</TABLE>
Noncash investing activities in 1999 included the exchange of certain cable
television systems (Note 2). Noncash investing activities in 1998 included the
exchange of certain cable television systems, the Time Warner Telecom
Reorganization, the formation of the Road Runner Joint Venture and the TWE-A/N
Transfers (Note 2). Noncash financing activities in 1999 included the conversion
of 14.2 million shares of convertible preferred stock into approximately 59.1
million shares of common stock. Noncash financing activities in 1998 included
the conversion of $1.15 billion of Zero-Coupon Convertible Notes into 37.4
million shares of common stock
F-63
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
INTEREST AND OTHER, NET
Interest and other, net, consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1998 1997
HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Interest expense....................................... $(1,519) $(1,451) $ (891) $(1,049)
Gain on Time Warner Telecom IPO........................ 115 - - -
Gain on sale of investment in Hasbro................... - - - 200
Write-down of investment in Primestar.................. - (210) - -
Other investment-related activity, principally net
losses of corporate-related equity investees.......... (250) (208) (91) (76)
Corporate finance-related activity, principally losses
on asset securitization programs..................... (145) (101) (76) (16)
Miscellaneous.......................................... (98) (80) (70) (32)
------- ------- ------- -------
Total interest and other, net.......................... $(1,897) $(2,050) $(1,128) $(973)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998 1998
HISTORICAL PRO FORMA HISTORICAL
---------- --------- ----------
(MILLIONS)
<S> <C> <C> <C>
Accrued expenses....................................... $3,030 $2,924 $1,542
Accrued compensation................................... 1,026 835 538
Accrued income taxes................................... 105 125 93
Deferred revenues...................................... 597 481 231
------ ------ ------
Total.................................................. $4,758 $4,365 $2,404
------ ------ ------
------ ------ ------
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
America Online-Time Warner Merger
In January 2000, Time Warner and America Online announced that they had
entered into an agreement to merge (the 'Merger') by forming a new holding
company named AOL Time Warner Inc. ('AOL Time Warner'). As part of the Merger,
each issued and outstanding share of each class of common stock of Time Warner
will be converted into 1.5 shares of an identical series of common stock of AOL
Time Warner. In addition, each issued and outstanding share of each class of
preferred stock of Time Warner will be converted into one share of preferred
stock of AOL Time Warner, which will have substantially identical terms except
that such shares will be convertible into approximately 6.25 shares of AOL Time
Warner common stock. Lastly, each issued and outstanding share of common stock
of America Online will be converted into one share of common stock of AOL Time
Warner.
As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by
F-64
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.
The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
Warner-EMI Music Merger
In January 2000, Time Warner and EMI Group plc ('EMI') announced they had
entered into an agreement to combine their global music operations into two
jointly owned ventures, to be referred to collectively as Warner EMI Music. Time
Warner will control the joint ventures through majority board representation,
among other factors, and will account for the transaction under the purchase
method of accounting.
As part of the transaction, each company will contribute its music
operations to the joint ventures, subject to a comparable amount of debt. As of
December 31, 1999, EMI had approximately $1.5 billion of net debt. EMI
shareholders also will receive an aggregate special cash dividend of
approximately $1.3 billion. This dividend is expected to be financed through a
combination of proceeds from debt incurred or assumed by the joint ventures and
consideration to be paid by Time Warner directly to EMI for a new class of EMI
equity securities. The new class of EMI equity securities to be held by Time
Warner will convert automatically into an 8% common equity interest in EMI,
on a fully diluted basis, if EMI's share price reaches `L'9 for a short period
of time within the first three-and-a-half years after closing.
The transaction is expected to close by the end of 2000, subject to
customary closing conditions, including regulatory approvals and the approval of
EMI's shareholders. There can be no assurance that such approvals will be
obtained.
F-65
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles, and
necessarily include some amounts that are based on management's best estimates
and judgments.
Time Warner maintains a system of internal accounting controls designed to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization and recorded properly. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal control should not exceed the benefits derived and that the evaluation
of those factors requires estimates and judgments by management. Further,
because of inherent limitations in any system of internal accounting control,
errors or irregularities may occur and not be detected. Nevertheless, management
believes that a high level of internal control is maintained by Time Warner
through the selection and training of qualified personnel, the establishment and
communication of accounting and business policies, and its internal audit
program.
The Audit Committee of the Board of Directors, composed solely of directors
who are not employees of Time Warner, meets periodically with management and
with Time Warner's internal auditors and independent auditors to review matters
relating to the quality of financial reporting and internal accounting control,
and the nature, extent and results of their audits. Time Warner's internal
auditors and independent auditors have free access to the Audit Committee.
<TABLE>
<S> <C>
Joseph A. Ripp James W. Barge
Executive Vice President and Vice President and
Chief Financial Officer Controller
</TABLE>
F-66
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TIME WARNER INC.
We have audited the accompanying consolidated balance sheet of Time Warner
Inc. ('Time Warner') as of December 31, 1999 and 1998, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 2, 2000
F-67
<PAGE>
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1999 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. Certain
reclassifications have been made to conform to the 1999 presentation.
The selected historical financial information for 1999 reflects the
consolidation of the Entertainment Group, which substantially consists of TWE,
retroactive to the beginning of 1999. The selected historical financial
information for all prior periods has not been changed. However, in order to
enhance comparability, pro forma financial statements for 1998 reflecting the
consolidation of the Entertainment Group are presented supplementally.
The selected historical financial information for 1998 reflects (i) the
TWE-A/N Transfers and (ii) the redemption of Time Warner's 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 (i) the use
of approximately $1.55 billion of net proceeds from the issuance of Series M
Preferred Stock to reduce outstanding indebtedness and (ii) the acquisitions of
TBS and Cablevision Industries Corporation and related companies, resulting in
(a) the issuance of an aggregate 6.3 million shares of Time Warner preferred
stock having a total liquidation preference of $633 million and 365.4 million
shares of Time Warner common stock and (b) the assumption or incurrence of
approximately $4.8 billion of indebtedness.
The selected historical financial information for 1995 reflects (i) the
acquisitions of KBLCOM Incorporated and Summit Communications Group, Inc. and
(ii) the exchange by Toshiba Corporation and ITOCHU Corporation of their direct
and indirect interests in TWE, resulting in (a) the issuance of an aggregate
29.3 million shares of Time Warner preferred stock having a total liquidation
preference of $2.926 billion and 5.2 million shares of Time Warner common stock
and (b) the assumption or incurrence of approximately $1.3 billion of
indebtedness.
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.
F-68
<PAGE>
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995
HISTORICAL PRO FORMA HISTORICAL HISTORICAL HISTORICAL HISTORICAL
SELECTED OPERATING STATEMENT INFORMATION ---------- --------- ---------- ---------- ---------- ----------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $27,333 $26,244 $14,582 $13,294 $10,064 $8,067
Depreciation and amortization........... (2,529) (2,635) (1,178) (1,294) (988) (559)
Business segment operating
income(a)(b)(c)....................... 6,035 3,132 1,496 1,271 966 697
Equity in pretax income of Entertainment
Group(d).............................. -- -- 356 686 290 256
Interest and other, net(e)(f)........... (1,897) (2,050) (1,128) (973) (1,102) (866)
Income (loss) before extraordinary
item.................................. 1,960 168 168 301 (156) (124)
Net income (loss)(g).................... 1,948 168 168 246 (191) (166)
Net income (loss) applicable to common
shares (after preferred
dividends)(g)(h)...................... 1,896 (372) (372) (73) (448) (218)
Per share of common stock:(h)
Basic net income (loss)............... $ 1.50 $ (.31) $ (.31) $ (.06) $ (.52) $ (.28)
Diluted net income (loss)............. $ 1.42 $ (.31) $ (.31) $ (.06) $ (.52) $ (.28)
Dividends............................. $ .18 $ .18 $ .18 $ .18 $ .18 $ .18
Average common shares:
Basic................................. 1,267.0 1,194.7 1,194.7 1,135.4 862.4 767.6
Diluted............................... 1,398.3 1,194.7 1,194.7 1,135.4 862.4 767.6
</TABLE>
- ---------
(a) 1999 Business segment operating income includes a net pretax gain of
approximately $215 million relating to early termination and settlement of
a long-term, home video distribution agreement, a pretax gain of $97
million relating to the sale of an interest in CanalSatellite and a
one-time and noncash pretax charge of $106 million relating to Warner
Bros.'s retail stores.
(b) Business segment operating income includes net pretax gains related to the
sale or exchange of certain cable television systems and investments of
approximately $2.247 billion in 1999, $18 million in 1998 ($108 million on
a pro forma basis) and $12 million in 1997.
(c) Business segment operating income in 1995 includes $85 million in losses
relating to certain businesses and joint ventures owned by the Music
division which were restructured or closed.
(d) Time Warner's equity in the pretax income of the Entertainment Group
includes approximately $120 million of net losses in 1998 and $450 million
of gains in 1997 relating to the sale or exchange of various cable
television systems and other investment-related activity.
(e) Interest and other, net includes an approximate $115 million pretax gain in
1999 recognized in connection with the initial public offering of a 20%
interest in Time Warner Telecom, Inc. and a net pretax charge of $210
million on a pro forma basis in 1998 relating to the write-down of TWE's
carrying value of Primestar.
(f) 1997 Interest and other, net 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.
(g) Net income (loss) includes an extraordinary loss on the retirement of debt
of $12 million in 1999, $55 million in 1997, $35 million in 1996 and $42
million in 1995.
(h) 1998 preferred dividend requirements include a one-time effect of $234
million relating to the premium paid in connection with the redemption of
Time Warner's Series M Preferred Stock.
F-69
<PAGE>
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995
HISTORICAL PRO FORMA HISTORICAL HISTORICAL HISTORICAL HISTORICAL
SELECTED BALANCE SHEET INFORMATION ---------- --------- ---------- ---------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents................ $ 1,284 $ 529 $ 442 $ 645 $ 514 $ 1,185
Total assets........................ 51,239 47,951 31,640 34,163 35,064 22,132
Debt due within one year............ 22 25 19 8 11 34
Long-term debt...................... 18,083 17,503 10,925 11,833 12,713 9,907
Borrowings against future stock
option proceeds................... 1,243 895 895 533 488 --
Company-obligated mandatorily
redeemable preferred securities of
subsidiaries...................... 575 792 575 575 949 949
Series M exchangeable preferred
stock............................. -- -- -- 1,857 1,672 --
Shareholders' equity:
Preferred stock liquidation
preference...................... 840 2,260 2,260 3,539 3,559 2,994
Equity applicable to common
stock........................... 8,873 6,592 6,592 5,817 5,943 673
Total shareholders' equity........ 9,713 8,852 8,852 9,356 9,502 3,667
Total capitalization................ 29,636 28,067 21,266 24,162 25,335 14,557
</TABLE>
F-70
<PAGE>
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY IN DILUTED
PRETAX NET INCOME BASIC NET NET
OPERATING INCOME (LOSS) INCOME INCOME DIVIDENDS
INCOME OF (LOSS) OF NET APPLICABLE TO (LOSS) PER (LOSS) PER PER
BUSINESS ENTERTAINMENT INCOME COMMON COMMON COMMON COMMON
QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(e) SHARE(e)(f)(g) SHARE(e)(f)(g) SHARE(f)(g)
- ----------- -------- --------- ------------- ------ ------------- -------------- -------------- -------------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(a)
1st(b) $ 6,091 $ 943 $ -- $ 138 $ 120 $ .10 $ .10 $.045
2nd(b) 6,531 1,701 -- 593 575 .46 .43 .045
3rd(b) 6,723 1,287 -- 369 360 .28 .27 .045
4th(b) 7,988 2,104 -- 848 841 .65 .62 .045
Year(b) 27,333 6,035 -- 1,948 1,896 1.50 1.42 .18
1998(a)
1st $ 3,137 $ 170 $107 $ (62) $(144) $(.12) $(.12) $.045
2nd(c)(d) 3,672 384 166 101 23 .02 .02 .045
3rd 3,578 315 164 39 (37) (.03) (.03) .045
4th(c)(d) 4,195 627 (81) 90 (214) (.17) (.17) .045
Year(c)(d) 14,582 1,496 356 168 (372) (.31) (.31) .18
<CAPTION>
BASIC DILUTED COMMON
AVERAGE AVERAGE STOCK(g)
COMMON COMMON ---------------
QUARTER SHARES(g) SHARES(g) HIGH LOW
- ----------- ---------- ---------- ------ ------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999(a)
1st(b) 1,243.1 1,243.1 $72.44 $58.88
2nd(b) 1,249.3 1,403.7 78.25 62.00
3rd(b) 1,288.9 1,397.8 77.31 58.50
4th(b) 1,286.5 1,391.8 72.31 59.63
Year(b) 1,267.0 1,398.3 78.25 58.50
1998(a)
1st 1,156.6 1,156.6 $37.75 $29.06
2nd(c)(d) 1,192.6 1,192.6 44.44 36.06
3rd 1,202.6 1,202.6 50.00 39.00
4th(c)(d) 1,227.2 1,227.2 63.13 37.56
Year(c)(d) 1,194.7 1,194.7 63.13 29.06
</TABLE>
- ---------
(a) The 1999 quarterly financial information reflects the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's 1998 historical quarterly financial
information has not been changed.
(b) Time Warner's income per common share in 1999 has been affected by certain
significant nonrecurring items. These items consisted of (i) a net pretax
gain of approximately $215 million in the first quarter relating to the
early termination and settlement of a long-term, home video distribution
agreement, (ii) a net pretax gain of approximately $97 million in the
fourth quarter in connection with the sale of an interest in
CanalSatellite, (iii) a noncash pretax charge of approximately $106 million
in the fourth quarter relating to Warner Bros.'s retail stores, (iv) an
approximate $115 million pretax gain in the second quarter in connection
with the initial public offering of a 20% interest in Time Warner Telecom
Inc., (v) gains relating to the sale and exchange of various cable
television systems and investments of $771 million in the second quarter,
$477 million in the third quarter and $999 million in the fourth quarter,
thereby aggregating to $2.247 billion for the year and (vi) an
extraordinary loss of $12 million in the third quarter relating to the
retirement of debt. The aggregate net effect of these items in 1999 was to
increase income per common share by $.10 in the first quarter, $.34 in the
second quarter, $.20 in the third quarter and $.45 in the fourth quarter,
thereby aggregating to $1.11 per common share for the year.
(c) 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 to $(.25) per common share for the year.
(d) 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 and
investments, 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.
(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 give effect to the two-for-one common stock
split that occurred on December 15, 1998.
F-71
<PAGE>
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, and jointly and severally,
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, 1999
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR WARNER
WARNER COMPANIES TBS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --------- --- ------------ ------------ ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ -- $ -- $868 $26,516 $ (51) $27,333
------ ------ ---- ------- ------- -------
Cost of revenues(a)............... -- -- (362) (14,629) 51 (14,940)
Selling, general and
administrative(a)............... -- -- (228) (7,285) -- (7,513)
Amortization of goodwill and other
intangible assets............... -- -- -- (1,298) -- (1,298)
Gain on sale or exchange of cable
systems and investments......... -- -- -- 2,247 -- 2,247
Gain on early termination of video
distribution agreement.......... -- -- -- 215 -- 215
Gain on sale of interest in
CanalSatellite.................. -- -- -- 97 -- 97
Write-down of retail store
assets.......................... -- -- -- (106) -- (106)
------ ------ ---- ------- ------- -------
Business segment operating
income.......................... -- -- 278 5,757 -- 6,035
Equity in pretax income of
consolidated subsidiaries....... 3,857 4,050 460 -- (8,367) --
Interest and other, net........... (266) (621) (148) (772) (90) (1,897)
Corporate expenses................ (91) (57) (16) (138) 139 (163)
Minority interest................. -- (52) -- (423) -- (475)
------ ------ ---- ------- ------- -------
Income before income taxes........ 3,500 3,320 574 4,424 (8,318) 3,500
Income taxes...................... (1,540) (1,445) (297) (1,909) 3,651 (1,540)
------ ------ ---- ------- ------- -------
Income before extraordinary
item............................ 1,960 1,875 277 2,515 (4,667) 1,960
Extraordinary loss on retirement
of debt, net of tax............. (12) (12) -- -- 12 (12)
------ ------ ---- ------- ------- -------
Net income........................ $1,948 $1,863 $277 $ 2,515 $(4,655) $ 1,948
------ ------ ---- ------- ------- -------
------ ------ ---- ------- ------- -------
- ---------
(a) Includes depreciation expense
of:............................. $ -- $ -- $ 9 $ 1,222 $ -- $ 1,231
------ ------ ---- ------- ------- -------
------ ------ ---- ------- ------- -------
</TABLE>
F-72
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
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(a)............... -- -- (303) (7,223) 24 (7,502)
Selling, general and
administrative(a)............... -- -- (211) (4,591) -- (4,802)
Amortization of goodwill and other
intangible assets............... -- -- -- (800) -- (800)
Gain on sale or exchange of cable
systems and investments......... -- -- -- 18 -- 18
---- ------ ---- ------- ------- -------
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) (704) (159) (103) (64) (1,128)
Corporate expenses................ (86) (55) (16) (64) 135 (86)
Minority interest................. -- (52) -- -- -- (52)
---- ------ ---- ------- ------- -------
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
---- ------ ---- ------- ------- -------
---- ------ ---- ------- ------- -------
- ---------
(a) Includes depreciation expense
of:............................. $ -- $ -- $ 9 $ 369 $ -- $ 378
---- ------ ---- ------- ------- -------
---- ------ ---- ------- ------- -------
</TABLE>
F-73
<PAGE>
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(a)............... -- -- (250) (6,473) -- (6,723)
Selling, general and
administrative(a)............... -- -- (171) (4,229) -- (4,400)
Amortization of goodwill and other
intangible assets............... -- -- -- (912) -- (912)
Gain on sale or exchange of cable
systems and investments......... -- -- -- 12 -- 12
---- ------ ---- ------- ------- -------
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) (923) (203) 211 (49) (973)
Corporate expenses................ (81) (54) (12) (60) 126 (81)
Minority interest................. -- (71) -- -- -- (71)
---- ------ ---- ------- ------- -------
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
---- ------ ---- ------- ------- -------
---- ------ ---- ------- ------- -------
- ---------
(a) Includes depreciation expense
of:............................. $ -- $ -- $ 21 $ 361 $ -- $ 382
---- ------ ---- ------- ------- -------
---- ------ ---- ------- ------- -------
</TABLE>
F-74
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.............................. $ -- $ 366 $ 77 $ 841 $ -- $ 1,284
Receivables, net.................................. 18 27 89 4,797 -- 4,931
Inventories....................................... -- -- 125 2,057 -- 2,182
Prepaid expenses.................................. 12 -- 4 1,448 -- 1,464
------- ------- ------ ------- -------- -------
Total current assets.............................. 30 393 295 9,143 -- 9,861
Noncurrent inventories............................ -- -- 203 3,998 -- 4,201
Investments in and amounts due to and from
consolidated subsidiaries........................ 17,212 16,711 9,354 -- (43,277) --
Other investments................................. 236 7 24 2,562 (733) 2,096
Property, plant and equipment..................... 42 -- 47 8,639 -- 8,728
Music catalogues, contracts and copyrights........ -- -- -- 782 -- 782
Cable television and sports franchises............ -- -- -- 8,472 -- 8,472
Goodwill.......................................... -- -- -- 15,458 -- 15,458
Other assets...................................... 91 103 65 1,382 -- 1,641
------- ------- ------ ------- -------- -------
Total assets...................................... $17,611 $17,214 $9,988 $50,436 $(44,010) $51,239
------- ------- ------ ------- -------- -------
------- ------- ------ ------- -------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 13 $ -- $ 25 $ 1,885 $ -- $ 1,923
Participations, royalties and programming costs
payable.......................................... -- -- 35 2,932 -- 2,967
Debt due within one year.......................... -- -- -- 22 -- 22
Other current liabilities......................... 342 190 150 4,114 (38) 4,758
------- ------- ------ ------- -------- -------
Total current liabilities......................... 355 190 210 8,953 (38) 9,670
Long-term debt.................................... 1,585 6,745 746 9,007 -- 18,083
Debt due to affiliates............................ -- -- 1,647 158 (1,805) --
Borrowings against future stock option proceeds... 1,243 -- -- -- -- 1,243
Deferred income taxes............................. 4,234 3,978 337 4,314 (8,629) 4,234
Unearned portion of paid subscriptions............ -- -- -- 762 -- 762
Other liabilities................................. 481 -- 130 3,162 -- 3,773
Minority interests................................ -- -- -- 3,186 -- 3,186
TW Companies-obligated mandatorily redeemable
preferred securities of a subsidiary holding
solely subordinated debentures of TW Companies... -- -- -- 575 -- 575
SHAREHOLDERS' EQUITY
Due from Time Warner and subsidiaries............. -- (1,997) (903) (3,791) 6,691 --
Other shareholders' equity........................ 9,713 8,298 7,821 24,110 (40,229) 9,713
------- ------- ------ ------- -------- -------
Total shareholders' equity........................ 9,713 6,301 6,918 20,319 (33,538) 9,713
------- ------- ------ ------- -------- -------
Total liabilities and shareholders' equity........ $17,611 $17,214 $9,988 $50,436 $(44,010) $51,239
------- ------- ------ ------- -------- -------
------- ------- ------ ------- -------- -------
</TABLE>
F-75
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS 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..................... 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 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-76
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
NON- TIME
TIME TW GUARANTOR ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS CONSOLIDATED
------ --------- --- ------------ ----- ------------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income.................................... $1,948 $ 1,863 $ 277 $ 2,515 $(4,655) $ 1,948
Adjustments for noncash and nonoperating
items:
Extraordinary loss on retirement of debt..... 12 12 -- -- (12) 12
Depreciation and amortization................ -- -- 9 2,520 -- 2,529
Amortization of film costs................... -- -- -- 2,294 -- 2,294
Noncash interest expense..................... -- 4 -- -- -- 4
Gain on sale or exchange of cable systems and
investments................................ -- -- -- (2,247) -- (2,247)
Excess (deficiency) of distributions over
equity in pretax income of consolidated
subsidiaries............................... (1,675) (1,279) 119 -- 2,835 --
Equity in losses of other investee companies
after distributions........................ -- 4 -- 257 83 344
Changes in operating assets and liabilities... (195) (145) 85 (125) (551) (931)
------- ------- ------ ------- -------- -------
Cash provided by operations................... 90 459 490 5,214 (2,300) 3,953
------- ------- ------ ------- -------- -------
INVESTING ACTIVITIES
Consolidation of the Entertainment Group's
cash and equivalents......................... -- -- -- 87 -- 87
Investments and acquisitions.................. -- -- -- (870) -- (870)
Advances to parents and consolidated
subsidiaries................................. -- -- -- (1,558) 1,558 --
Repayment of advances from consolidated
subsidiaries................................. -- 140 -- 232 (372) --
Capital expenditures.......................... -- -- (14) (2,217) -- (2,231)
Investment proceeds........................... -- -- -- 1,084 -- 1,084
------- ------- ------ ------- -------- -------
Cash provided (used) by investing
activities................................... -- 140 (14) (3,242) 1,186 (1,930)
------- ------- ------ ------- -------- -------
FINANCING ACTIVITIES
Borrowings.................................... -- 173 -- 4,159 -- 4,332
Debt repayments............................... -- (767) -- (2,982) -- (3,749)
Change in due to/from parent.................. 1,326 316 (424) (2,332) 1,114 --
Borrowings against future stock option
proceeds..................................... 348 -- -- -- -- 348
Redemption of mandatorily redeemable preferred
securities of subsidiary..................... -- -- -- (217) -- (217)
Repurchases of Time Warner common stock....... (1,896) -- -- -- -- (1,896)
Dividends paid................................ (289) -- -- -- -- (289)
Proceeds received from stock option and
dividend reinvestment plans.................. 421 -- -- -- -- 421
Other......................................... -- (21) -- (110) -- (131)
------- ------- ------ ------- -------- -------
Cash used by financing activities............. (90) (299) (424) (1,482) 1,114 (1,181)
------- ------- ------ ------- -------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS... -- 300 52 490 -- 842
------- ------- ------ ------- -------- -------
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD... -- 66 25 351 -- 442
------- ------- ------ ------- -------- -------
CASH AND EQUIVALENTS AT END OF PERIOD......... $ -- $ 366 $ 77 $ 841 $ -- $ 1,284
------- ------- ------ ------- -------- -------
------- ------- ------ ------- -------- -------
</TABLE>
F-77
<PAGE>
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 ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS 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
Amortization of film costs......................... -- -- -- 542 -- 542
Noncash interest expense........................... -- 30 -- -- -- 30
Gain on sale or exchange of cable systems and
investments...................................... -- -- -- (18) -- (18)
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) (1,062) (2,137) (544)
------- ------- ----- ------- ------- -------
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 --
Repayment 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............................................... (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-78
<PAGE>
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 ELIMINA- WARNER
WARNER COMPANIES TBS SUBSIDIARIES TIONS 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
Amortization of film costs......................... -- -- -- 379 -- 379
Noncash interest expense........................... -- 95 3 -- -- 98
Gain on sale or exchange of cable systems and
investments...................................... -- -- -- (12) -- (12)
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 (1,035) 3 (481)
------- ------- ----- ------- ------- -------
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 --
Repayment 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............................................... -- (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-79
<PAGE>
TIME WARNER INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CONSOLIDATION ADDITIONS
BALANCE AT OF THE CHARGED TO BALANCE
BEGINNING ENTERTAINMENT COSTS AND AT END
DESCRIPTION OF PERIOD(a) GROUP(a) EXPENSES DEDUCTIONS OF PERIOD
----------- ------------ ------------------ -------- ---------- ---------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
1999:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............... $ 316 $271 $ 279 $ (288)(b) $ 578
Reserves for sales returns and allowances..... 691 235 1,843 (1,665)(c)(d) 1,104
------ ---- ------- ------- ------
Total........................................... $1,007 $506 $ 2,122 $(1,953) $1,682
------ ---- ------- ------- ------
------ ---- ------- ------- ------
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns....... $ (220) $ -- $(1,236) $ 1,262(d) $ (194)
------ ---- ------- ------- ------
------ ---- ------- ------- ------
1998:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............... $ 311 $ -- $ 323 $ (318)(b) $ 316
Reserves for sales returns and allowances..... 680 -- 2,490 (2,479)(c)(d) 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(d) $ (220)
------ ---- ------- ------- ------
------ ---- ------- ------- ------
1997:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............... $ 236 $ -- $ 379 $ (304)(b) $ 311
Reserves for sales returns and allowances..... 740 -- 2,599 (2,659)(c)(d) 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(d) $ (171)
------ ---- ------- ------- ------
------ ---- ------- ------- ------
</TABLE>
- ---------
(a) In 1999, Time Warner consolidated the Entertainment Group, which
substantially consists of TWE, retroactive to the beginning of 1999. Time
Warner's historical financial information for prior periods have not been
changed.
(b) Represents uncollectible receivables charged against reserve.
(c) Represents returns or allowances applied against reserve.
(d) 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-80
<PAGE>
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 four fundamental areas: Cable Networks, consisting
principally of interests in cable television programming; Filmed Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; Cable, consisting principally of
interests in cable television systems; and Digital Media, consisting principally
of interests in Internet-related and digital media businesses. TWE also manages
the cable properties owned by Time Warner Inc. ('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, including its
primary financial measure of 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.
These business combinations include 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, which
created over $10 billion of intangible assets that generally are being amortized
over a twenty to forty year period. 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.
AT&T-MEDIAONE MERGER
At the time of this filing, MediaOne Group, Inc. ('MediaOne'), a limited
partner in TWE, had agreed to be acquired by AT&T Corp. ('AT&T'). In August
1999, TWE received a notice from MediaOne concerning the termination of its
covenant not to compete with TWE. The termination of that covenant is necessary
for MediaOne to complete its proposed merger with AT&T. As a result of the
termination notice and the operation of the TWE partnership agreement,
MediaOne's rights to participate in the management of TWE's businesses
terminated immediately and irrevocably. MediaOne retains only certain protective
governance rights pertaining to certain limited matters affecting TWE as a
whole.
AMERICA ONLINE-TIME WARNER MERGER
In January 2000, Time Warner and America Online, Inc. ('America Online')
announced that they had entered into an agreement to merge (the 'Merger') by
forming a new holding company named AOL Time Warner Inc. ('AOL Time Warner').
The Merger will create a leading, fully integrated media and communications
company that will combine Time Warner's and TWE's collection of media,
entertainment and news brands and its technologically advanced cable
infrastructure with America Online's extensive Internet franchises and
technology. Management believes that the combined company will be well
positioned to expand the use of the Internet in consumers' everyday lives and,
accordingly, provide Time Warner's and TWE's content businesses with increased
access to consumers through a new and growing distribution medium. Management
further believes that the Merger will result in significant new business and
other value-creation opportunities,
F-81
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
including additional opportunities for e-commerce, growth in subscribers for
each company's products and services, and cost and operating efficiencies from
cross-promotional and other opportunities.
As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.
The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
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 1999, the significant, nonrecurring items included (i) net pretax gains
in the amount of $2.119 billion relating to the sale or exchange of various
cable television systems and investments, (ii) an approximate $215 million net
pretax gain recognized in connection with the early termination and settlement
of a long-term, home video distribution agreement, (iii) an approximate $97
million pretax gain recognized in connection with the sale of an interest in
CanalSatellite, a satellite television platform servicing France and Monaco and
(iv) a one-time, noncash pretax charge of approximately $106 million relating to
Warner Bros.'s retail stores.
For 1998, the significant, nonrecurring items included (i) net pretax gains
of approximately $90 million relating to the sale or exchange of various cable
television systems and investments and (ii) a pretax charge of approximately
$210 million principally to reduce TWE's carrying value of its investment in
Primestar, Inc. ('Primestar').
For 1997, the significant, nonrecurring items included (i) net pretax gains
of approximately $200 million relating to the sale or exchange of various cable
television systems, (ii) a pretax gain of approximately $250 million relating to
the sale of its interest in E! Entertainment Television, Inc.
('E! Entertainment') and (iii) an extraordinary loss of $23 million on the
retirement of debt.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring gains. 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.
In addition to the above significant and nonrecurring items, the
comparability of TWE's Cable division results has been affected further by
certain 1998 cable-related transactions, as described more fully in Note 2 to
the accompanying consolidated financial statements. While these transactions had
a significant effect on the comparability of the Cable division's EBITA and
operating income, principally due to the deconsolidation of the related
operations, they did not have a significant effect on the comparability of TWE's
net income.
COST SAVINGS
Since 1997, together with Time Warner, TWE has been engaged in a
company-wide cost management program. The program's purpose is to control costs
by identifying more efficient ways of conducting its
F-82
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
businesses. As part of these cost savings initiatives, TWE implemented some
changes to its pension plans in 1999. As a result of these changes, and when
taken together with other changes in actuarial assumptions that include a 100
basis point increase in pension discount rates, TWE expects to reduce its
pension expense by approximately $25 million in 2000.
RESULTS OF OPERATIONS
1999 VS. 1998
EBITA and operating income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
EBITA OPERATING INCOME
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros(a).................... $ 787 $ 498 $ 665 $ 369
Broadcasting-The WB Network............................ (92) (93) (96) (96)
Cable Networks-HBO..................................... 527 454 527 454
Cable(b)............................................... 3,517 1,369 3,139 992
Digital Media.......................................... (8) -- (8) --
------ ------ ------ ------
Total.................................................. $4,731 $2,228 $4,227 $1,719
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ---------
(a) 1999 results include a net pretax gain of $215 million recognized in
connection with the early termination and settlement of a long-term, home
video distribution agreement, a $97 million pretax gain relating to the sale
of an interest in CanalSatellite, offset in part by a one-time, noncash
pretax charge of $106 million relating to Warner Bros.'s retail stores.
(b) The comparability of the Cable division's operating results has been
affected by certain 1998 cable-related transactions in addition to net
pretax gains relating to the sale or exchange of certain cable television
systems and investments of $2.119 billion in 1999 and $90 million in 1998.
CONSOLIDATED RESULTS
TWE had revenues of $13.164 billion and net income of $2.759 billion for the
year ended December 31, 1999, compared to revenues of $12.246 billion and net
income of $326 million for the year ended December 31, 1998.
As previously described, the comparability of TWE's operating results for
1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$2.325 billion of net pretax gains in 1999, compared to $120 million of net
pretax losses in 1998.
TWE's net income increased to $2.759 billion in 1999, compared to $326
million in 1998. However, excluding the significant effect of the nonrecurring
items referred to earlier, net income increased by $149 million to $609 million
in 1999 from $460 million in 1998. As more fully discussed below, this
improvement principally resulted from an overall increase in TWE's business
segment operating income, offset in part by higher equity 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 $150 million and $92 million for the
years ended December 31, 1999 and 1998, respectively, have been provided for the
operations of TWE's domestic and foreign subsidiary corporations.
BUSINESS SEGMENT RESULTS
Filmed Entertainment-Warner Bros. Revenues increased to $6.628 billion in
1999, compared to $6.051 billion in 1998. EBITA increased to $787 million in
1999 from $498 million in 1998. Operating income
F-83
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
increased to $665 million in 1999 from $369 million in 1998. Revenues benefited
from increases in worldwide theatrical, home video and television distribution
operations, offset in part by lower revenues from consumer products operations.
The increase in worldwide home video revenues primarily resulted from increased
sales of DVDs. The operating results in 1999 were affected by various
significant, nonrecurring items, including an approximate $215 million net
pretax gain recognized in connection with the early termination and settlement
of a long-term, home video distribution agreement, a pretax gain of $97 million
recognized in connection with the sale of an interest in CanalSatellite and a
one-time, noncash pretax charge of $106 million relating to Warner Bros.'s
retail stores. Excluding the effect of these significant nonrecurring items,
EBITA and operating income increased principally as a result of improved results
from worldwide theatrical, home video and domestic television syndication
operations. These improvements were offset in part by lower results from
consumer products operations and lower net gains on the sale of other assets.
The decline in Warner Bros.'s consumer products operations relates, in part,
to its retail stores. In the fourth quarter of 1999, Warner Bros. adopted a plan
designed to improve the performance of its retail stores. The plan is expected
to be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores, and exploiting potential e-commerce opportunities. As a result
of this plan, Warner Bros. recorded a one-time, noncash pretax charge of $106
million to reduce the carrying value of certain fixed assets and leasehold
improvements used in its retail stores. The charge represented the excess of the
carrying value of those assets over the discounted future operating cash flows,
adjusted to reflect a shorter recovery period due to planned store closures.
Broadcasting-The WB Network. Revenues increased to $384 million in 1999,
compared to $260 million in 1998. EBITA improved to a loss of $92 million in
1999 from a loss of $93 million in 1998. Operating losses of $96 million were
the same in both 1999 and in 1998. Revenues increased principally as a result of
one additional night of weekly prime-time programming in comparison to the prior
year and advertising rate increases, offset in part by lower prime-time
television ratings. Prime-time television ratings were, and are expected to
continue to be, negatively affected by lower household delivery associated with
the WGN Superstation discontinuing its carriage of The WB Network's programming
beginning in the fall of 1999. The marginal EBITA loss improvement and flat
operating losses principally resulted from the fact that significant revenue
increases were offset by the combination of higher programming costs associated
with the expanded programming schedule and higher start-up costs associated with
The WB Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable Networks-HBO. Revenues increased to $2.169 billion in 1999, compared
to $2.052 billion in 1998. EBITA and operating income increased to $527 million
in 1999 from $454 million in 1998. Revenues benefited primarily from an increase
in subscriptions to 35.7 million from 34.6 million at the end of 1998. EBITA and
operating income increased principally due to the revenue gains, increased cost
savings, and higher income from Comedy Central, a 50%-owned equity investee.
Cable. Revenues increased to $4.496 billion in 1999, compared to $4.378
billion in 1998. EBITA increased to $3.517 billion in 1999 from $1.369 billion
in 1998. Operating income increased to $3.139 billion in 1999 from $992 million
in 1998. These operating results were affected by certain cable-related
transactions that occurred in 1998 (the '1998 Cable Transactions') and by net
pretax gains of $2.119 billion recognized in 1999 and $90 million in 1998
related to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation or transfer of certain operations and are described more fully
in Note 2 to the accompanying consolidated financial statements. Excluding the
effect of the 1998 Cable Transactions, revenues increased due to growth in basic
cable subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and
F-84
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
the one-time gains, EBITA and operating income increased principally as a result
of the revenue increases, offset in part by higher programming costs.
As of December 31, 1999 and 1998, there were 12.6 million subscribers under
the management of TWE's Cable division.
Digital Media. Digital Media operating results reflect start-up costs
associated with TWE's digital media businesses, including the November 1999
launch of Entertaindom, TWE's entertainment Web destination. Digital Media had
$8 million of operating losses on $1 million of revenues during 1999. Due to the
start-up nature of these businesses, losses are expected to continue.
Interest and Other, Net. Interest and other, net, decreased to $818 million
of expense in 1999, compared to $945 million of expense in 1998. Interest
expense decreased to $561 million in 1999, compared to $566 million in 1998,
principally due to interest savings associated with the Company's 1998 debt
reduction efforts. There was other expense, net of $257 million in 1999,
compared to $379 million in 1998. This decrease principally related to the
absence of an approximate $210 million charge recorded in 1998 to reduce the
carrying value of an interest in Primestar, offset in part by higher losses in
1999 from certain investments accounted for under the equity method of
accounting.
Minority Interest. Minority interest expense increased to $427 million in
1999, compared to $284 million in 1998. Minority interest expense increased
primarily due to the allocation of a portion of the higher net pretax gains in
1999 relating to the sale or exchange of various cable television systems and
investments owned by the TWE-Advance/Newhouse Partnership ('TWE-A/N') to the
minority owners of that partnership. Excluding the significant effect of the
gains recognized in each period, minority interest expense decreased slightly in
1999 principally due to a higher allocation of losses to a minority partner in
The WB Network.
1998 VS. 1997
EBITA and operating income 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(a)................................................... 1,369 1,184 992 877
------ ------ ------ ------
Total...................................................... $2,228 $1,874 $1,719 $1,444
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ---------
(a) The comparability of the Cable division's operating results has been
affected by certain 1998 cable-related transactions in addition to net
pretax gains relating to the sale or exchange of certain cable television
systems and investments of approximately $90 million and $200 million
recognized in 1998 and 1997, respectively.
CONSOLIDATED RESULTS
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. These nonrecurring items consisted of
F-85
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
approximately $120 million of net losses in 1998, compared to approximately $450
million of net 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 certain cable system
transfers in 1998 (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
TWE-A/N Transfers are described more fully in Note 2 to the accompanying
financial statements.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $92 million and $85 million for the
years ended December 31, 1998 and 1997, respectively, have been provided for the
operations of TWE's domestic and foreign subsidiary corporations.
BUSINESS SEGMENT RESULTS
Filmed Entertainment-Warner Bros. Revenues increased to $6.051 billion in
1998, compared to $5.462 billion in 1997. EBITA increased to $498 million in
1998 from $387 million in 1997. Operating income increased to $369 million in
1998 from $264 million in 1997. 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 were $260 million in 1998, compared
to $136 million in 1997. EBITA decreased to a loss of $93 million in 1998 from a
loss of $88 million in 1997. Operating losses increased to $96 million in 1998
from $88 million in 1997. 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 in 1998, compared
to $1.923 billion in 1997. EBITA and operating income increased to $454 million
in 1998 from $391 million in 1997. 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 in 1998, compared to $4.243
billion in 1997. EBITA increased to $1.369 billion in 1998 from $1.184 billion
in 1997. Operating income increased to $992 million in 1998 from $877 million in
1997. These operating results were affected by the 1998 Cable Transactions and
by net pretax gains of $90 million recognized in 1998 and $200 million in 1997
related to the sale or exchange of various cable television systems and
investments. 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
F-86
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
an increase in advertising revenues. Similarly, excluding the effect of the 1998
Cable Transactions and the one-time gains, EBITA and operating income increased
principally as a result of the revenue gains, offset in part by higher
depreciation related to capital spending.
Interest and Other, Net. Interest and other, net, increased to $945 million
of expense in 1998, compared to $326 million of expense in 1997. Interest
expense increased to $566 million in 1998, 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 $379 million in 1998, compared to
other income of $164 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.
Minority Interest. Minority interest expense decreased to $284 million in
1998, compared to $324 million in 1997. Minority interest expense decreased
primarily due to the allocation of a portion of higher net pretax gains in 1997
relating to the sale or exchange of various cable television systems owned by
TWE-A/N to the minority owners of that partnership. Excluding the effect of the
gains recognized in each period, minority interest expense for 1998 and 1997 was
comparable in amount and did not have any significant effect on operating
trends.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1999
1999 FINANCIAL CONDITION
At December 31, 1999, TWE had $6.7 billion of debt, $517 million of cash and
equivalents (net debt of $6.2 billion) and $7.1 billion of partners' capital.
This compares to $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 at December 31, 1998.
SENIOR CAPITAL DISTRIBUTIONS
In July 1999, TWE paid a $627 million distribution to the Time Warner
General Partners to redeem the remaining portion of their senior priority
capital interests, including a priority capital return of $173 million. Time
Warner used a portion of the proceeds received from this distribution to repay
all $400 million of outstanding borrowings under its credit agreement with TWE.
REDEMPTION OF REIT PREFERRED STOCK
In March 1999, a subsidiary of TWE (the 'REIT') redeemed all of its shares
of preferred stock ('REIT Preferred Stock') at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement.
CASH FLOWS
During 1999, TWE's cash provided by operations amounted to $2.713 billion
and reflected $4.731 billion of business segment EBITA, $860 million of noncash
depreciation expense, less $2.119 billion of net pretax gains on the sale or
exchange of cable television systems and investments, $498 million of interest
payments, $132 million of income taxes, $73 million of corporate expenses, $15
million of proceeds repaid under TWE's
F-87
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
asset securitization program and $41 million related to an increase in working
capital requirements, other balance sheet accounts and noncash items. Cash
provided by operations of $2.288 billion in 1998 reflected $2.228 billion of
business segment EBITA, $927 million of noncash depreciation expense and $166
million of proceeds from TWE's asset securitization program, less $90 million of
net pretax gains on the sale or exchange of cable television systems and
investments, $537 million of interest payments, $91 million of income taxes, $72
million of corporate expenses and $243 million related to an increase in working
capital requirements, other balance sheet accounts and noncash items.
Cash used by investing activities was $605 million in 1999, compared to $745
million in 1998. The decrease principally resulted from the collection of TWE's
$400 million loan to Time Warner and lower capital expenditures, offset in part
by a $298 million decrease in investment proceeds. Investment proceeds decreased
largely relating to the 1998 sale of TWE's remaining interest in Six Flags
Entertainment Corporation and the receipt of approximately $650 million of
proceeds in 1998 upon the formation of a cable joint venture in Texas, offset in
part by the receipt of approximately $280 million of net proceeds in 1999 in
connection with an exchange of cable television systems. Capital expenditures
decreased to $1.475 billion in 1999, compared to $1.603 billion in 1998.
Cash used by financing activities was $1.678 billion in 1999, compared to
$1.778 million in 1998. The use of cash in 1999 principally resulted from the
redemption of REIT Preferred Stock at an aggregate cost of $217 million, the
payment of $1.2 billion of capital distributions to Time Warner and $106 million
of debt reduction. 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 1998 debt reduction efforts.
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 $1.319
billion in 1999, compared to $1.451 billion in 1998. Capital spending by TWE's
Cable division for 2000 is budgeted to be approximately $1.674 billion,
reflecting higher spending on variable capital to facilitate a more aggressive
roll-out of Time Warner Cable's popular digital cable and Road Runner-branded
high-speed online service. Capital spending 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
TWE, TWE-A/N and Time Warner. As of December 31, 1999, Time Warner Cable had
approximately $250 million remaining under this commitment, of which
approximately $50 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
completed.
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.
F-88
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
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 DVDs, 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.'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, basic cable, network and syndicated television
exhibition, amounted to $3.033 billion at December 31, 1999 (including amounts
relating to TWE's cable television networks of $365 million and $599 million to
Time Warner's cable television networks).
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. As of December 31, 1999, including cash received
under the securitization facility and other advanced payments, approximately
$700 million of cash licensing fees had been collected against the backlog. 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, 1999, 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
F-89
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
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, 1999, Time Warner had contracts for the sale of
$843 million and the purchase of $468 million of foreign currencies at fixed
rates. Of Time Warner's $375 million net sale contract position, $393 million of
the foreign exchange sale contracts and $108 million of the foreign exchange
purchase contracts related to TWE's foreign currency exposure, compared to
contracts for the sale of $298 million and the purchase of $101 million of
foreign currencies at fixed rates at December 31, 1998.
Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1999, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1999 would result in approximately $14 million of net 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, 1999 would result in $14 million of net unrealized
gains on contracts. Consistent with the nature of the economic hedge provided by
such foreign exchange contracts, such unrealized gains or losses largely 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.
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, 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. TWE
took various precautions related to the fact that many older computer programs,
computer hardware and chip-based devices might have failed to recognize dates
beginning on January 1, 2000 as being valid dates, and as a result might have
failed to operate or might have operated improperly as such dates were
introduced.
F-90
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
During 1999, TWE completed its efforts to minimize the risk of disruption
related to Year 2000 issues. This program was described in TWE's reports filed
with the Securities and Exchange Commission (the 'SEC'). To date, TWE has
experienced few problems related to Year 2000 compliance, and the problems that
have been identified have been addressed. TWE is not aware of any remaining
significant problems related to Year 2000 issues but is continuing to monitor
the status of suppliers, vendors and other entities with which it
does business.
Through the end of 1999, TWE, as a whole, incurred approximately $60 million
related to its Year 2000 remediation program, which started in 1996. These
expenditures were funded from the Company's operating cash flow. TWE anticipates
that its remediation program, and related expenditures, may continue into 2001
as temporary solutions to Year 2000 problems are replaced with upgraded
equipment. Future expenditures are not expected to be significant.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
The SEC 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, future events 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, 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 with the SEC and:
- For TWE's cable business, more aggressive than expected competition from
new technologies and other types of video programming distributors,
including DBS and DSL; increases in government regulation of basic cable or
equipment rates or other terms of service (such as 'digital must-carry' or
common carrier requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as digital cable and high-speed on-line 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.
F-91
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
- 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, 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 TWE's digital media businesses, their ability to locate and invest in
profitable businesses, to develop products and services that are
attractive, accessible and commercially viable in terms of content,
technology and cost; their ability to manage costs and generate revenues;
aggressive competition from existing and developing technologies and
products; the resolution of issues concerning commercial activities via the
Internet; including security, reliability, cost, ease of use and access;
and the possibility of increased government regulation of new media
services.
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-92
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................ $ 517 $ 87
Receivables, including $1.354 billion and $765 million due
from Time Warner, less allowances of $668 and $506
million.................................................... 3,328 2,618
Inventories................................................. 1,220 1,312
Prepaid expenses............................................ 246 166
------- -------
Total current assets........................................ 5,311 4,183
Noncurrent inventories...................................... 2,274 2,327
Loan receivable from Time Warner............................ -- 400
Investments................................................. 774 886
Property, plant and equipment............................... 6,488 6,041
Cable television franchises................................. 5,464 3,773
Goodwill.................................................... 3,731 3,854
Other assets................................................ 801 766
------- -------
Total assets................................................ $24,843 $22,230
------- -------
------- -------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................ $ 1,791 $ 1,473
Participations and programming costs payable................ 1,717 1,515
Debt due within one year.................................... 6 6
Other current liabilities, including $893 and $370 million
due to Time Warner......................................... 2,209 1,942
------- -------
Total current liabilities................................... 5,723 4,936
Long-term debt.............................................. 6,655 6,578
Other long-term liabilities, including $1.292 and $1.130
billion due to Time Warner................................. 3,501 3,267
Minority interests.......................................... 1,815 1,522
Preferred stock of subsidiary holding solely a mortgage note
of its parent.............................................. -- 217
Time Warner General Partners' Senior Capital................ -- 603
PARTNERS' CAPITAL
Contributed capital......................................... 7,338 7,341
Partnership deficit......................................... (189) (2,234)
------- -------
Total partners' capital..................................... 7,149 5,107
------- -------
Total liabilities and partners' capital..................... $24,843 $22,230
------- -------
------- -------
</TABLE>
See accompanying notes.
F-93
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues(a)................................................. $13,164 $12,246 $11,318
------- ------- -------
Cost of revenues(a)(b)...................................... (8,377) (7,842) (7,234)
Selling, general and administrative(a)(b)................... (2,381) (2,266) (2,410)
Amortization of goodwill and other intangible assets........ (504) (509) (430)
Gain on sale or exchange of cable systems and
investments(a)............................................. 2,119 90 200
Gain on early termination of video distribution agreement... 215 -- --
Gain on sale of interest in CanalSatellite.................. 97 -- --
Write-down of retail store assets........................... (106) -- --
------- ------- -------
Business segment operating income........................... 4,227 1,719 1,444
Interest and other, net(a).................................. (818) (945) (326)
Corporate services(a)....................................... (73) (72) (72)
Minority interest........................................... (427) (284) (324)
------- ------- -------
Income before income taxes.................................. 2,909 418 722
Income taxes................................................ (150) (92) (85)
------- ------- -------
Income before extraordinary item............................ 2,759 326 637
Extraordinary loss on retirement of debt.................... -- -- (23)
------- ------- -------
Net income.................................................. $ 2,759 $ 326 $ 614
------- ------- -------
------- ------- -------
</TABLE>
- ---------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies:
<TABLE>
<S> <C> <C> <C>
Revenues................................................. $ 564 $ 695 $ 431
Cost of revenues......................................... (266) (220) (167)
Selling, general and administrative...................... (55) (26) 18
Gain on sale or exchange of cable systems and
investments............................................. 308 -- --
Interest and other, net.................................. 20 6 30
Corporate expenses....................................... (73) (72) (72)
(b) Includes depreciation expense of:....................... $ 860 $ 927 $ 940
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes.
F-94
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
OPERATIONS
Net income.................................................. $ 2,759 $ 326 $ 614
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt................. -- -- 23
Depreciation and amortization............................ 1,364 1,436 1,370
Amortization of film costs............................... 1,897 1,936 1,833
Gain on sale or exchange of cable systems and
investments............................................. (2,119) (90) (200)
Equity in losses of investee companies after
distributions........................................... 157 149 57
Changes in operating assets and liabilities:
Receivables.............................................. (707) (825) (273)
Inventories.............................................. (1,805) (2,174) (1,947)
Accounts payable and other liabilities................... 798 1,178 393
Other balance sheet changes.............................. 369 352 (36)
------- ------- -------
Cash provided by operations................................. 2,713 2,288 1,834
------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions................................ (478) (388) (172)
Capital expenditures........................................ (1,475) (1,603) (1,565)
Investment proceeds......................................... 948 1,246 485
Collection of loan to Time Warner........................... 400 -- --
------- ------- -------
Cash used by investing activities........................... (605) (745) (1,252)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.................................................. 2,658 1,514 3,400
Debt repayments............................................. (2,764) (1,898) (3,085)
Issuance of preferred stock of subsidiary................... -- -- 243
Redemption of preferred stock of subsidiary................. (217) -- --
Capital distributions....................................... (1,200) (1,153) (934)
Other....................................................... (155) (241) (100)
------- ------- -------
Cash used by financing activities........................... (1,678) (1,778) (476)
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................. 430 (235) 106
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 87 322 216
------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 517 $ 87 $ 322
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes.
F-95
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(MILLIONS)
<TABLE>
<CAPTION>
TIME WARNER PARTNERS' CAPITAL
GENERAL -------------------------------------
PARTNERS' PARTNERSHIP TOTAL
SENIOR CONTRIBUTED EARNINGS PARTNERS'
CAPITAL CAPITAL (DEFICIT) CAPITAL
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996................................ $1,543 $7,537 $ (963) $ 6,574
Net income.................................................. 614 614
Foreign currency translation adjustments.................... (29) (29)
Unrealized gains on securities.............................. 7 7
------- -------
Comprehensive income..................................... 592 592
Stock option, tax-related and Senior Capital
distributions.............................................. (535) (723) (723)
Allocation of income to Time Warner General Partners' Senior
Capital.................................................... 110 (110) (110)
------ ------ ------- -------
BALANCE AT DECEMBER 31, 1997................................ 1,118 7,537 (1,204) 6,333
Net income.................................................. 326 326
Foreign currency translation adjustments.................... (1) (1)
Unrealized gains on securities.............................. 2 2
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 to Time Warner General Partners' Senior
Capital.................................................... 64 (64) (64)
Other....................................................... (5) (5)
------ ------ ------- -------
BALANCE AT DECEMBER 31, 1998................................ 603 7,341 (2,234) 5,107
Net income.................................................. 2,759 2,759
Foreign currency translation adjustments.................... 1 1
Unrealized gains on securities.............................. 39 39
Realized and unrealized gains on derivative financial
instruments................................................ 5 5
------- -------
Comprehensive income..................................... 2,804 2,804
Stock option, tax-related and Senior Capital
distributions.............................................. (627) (735) (735)
Allocation of income to Time Warner General Partners' Senior
Capital.................................................... 24 (24) (24)
Other....................................................... (3) (3)
------ ------ ------- -------
BALANCE AT DECEMBER 31, 1999................................ $ -- $7,338 $ (189) $ 7,149
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
See accompanying notes.
F-96
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Entertainment Company, L.P., a Delaware limited partnership
('TWE'), classifies its business interests into four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses.
Each of the business interests within Cable Networks, Filmed Entertainment,
Cable and Digital Media 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.'s collection of
children's cartoons and television programming, (4) Time Warner Cable, currently
the largest operator of cable television systems in the U.S. and (5) Internet
websites, such as Entertaindom.com.
Financial information for TWE's various business segments is presented
herein as an indication of financial performance (Note 13). Except for start-up
losses incurred in connection with The WB Network and Digital Media, TWE's
principal business segments generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
segments is considerably greater than their operating income due to significant
amounts of noncash amortization of intangible assets recognized principally in
Time Warner 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
business segments amounted to $504 million in 1999, $509 million in 1998 and
$430 million in 1997.
Certain of Time Warner's 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 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'). Certain of Time Warner's subsidiaries are the general partners
of TWE ('Time Warner General Partners').
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 15).
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.
F-97
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 greater than one year. If there are resale
restrictions greater than one year, or if the investment is not publicly
traded, then the investment is accounted for at cost. Unrealized gains and
losses on investments accounted for at market value are reported as a component
of accumulated other comprehensive income (loss) 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.
The effect of any changes in TWE's ownership interests resulting from the
issuance of 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 as a component of accumulated
other comprehensive income (loss) 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 and cash flows from investments and the distribution of theatrical and
television product in order to evaluate the ultimate recoverability of accounts
receivable, film inventory and investments recorded as assets in the
consolidated balance sheet. Accounts receivable and 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
receivable, individual films and television product, and investments 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.
Digital Media
Digital media revenues primarily are derived from advertising and e-commerce
activities. Advertising revenues are recognized in the period that the
advertisements are exhibited. Revenues from e-commerce activities are recognized
when the products are sold.
F-98
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 completed
principally 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 $3.033
billion at December 31, 1999 (including amounts relating to the licensing of
film product to TWE's cable television networks of $365 million and $599 million
to Time Warner's cable television networks).
Inventories of theatrical and television product are stated at the lower of
unamortized 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, including changes
in revenue recognition and accounting for advertising, development and overhead
costs.
AcSEC currently is in the process of finalizing these proposed rules. Based
on AcSEC's conclusions reached as of the end of 1999, the SOP would require that
advertising costs for theatrical and television product
F-99
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
be expensed as incurred. This compares to TWE's existing policy of capitalizing
and then expensing advertising costs for theatrical product over the related
revenue streams. In addition, the SOP would require development costs for
abandoned projects and certain indirect overhead costs to be charged directly to
expense, instead of those costs being capitalized to film costs, which currently
is required under the existing accounting model. The SOP would also require all
film costs to be classified in the balance sheet as a noncurrent asset. The
proposed SOP's provisions in other areas, such as revenue recognition, generally
are consistent with TWE's existing accounting policies.
At the time that TWE adopts the final provisions of the SOP, it expects to
record a one-time, noncash pretax charge of approximately $525 to $550 million
primarily to reduce the carrying value of its film inventory. This charge will
be reflected as a cumulative effect of a change in accounting principle.
The provisions of the SOP are still being deliberated by AcSEC and could
change prior to the issuance of a final standard, which is expected to occur by
the end of the second quarter of 2000. The SOP is expected to be effective for
calendar-year companies on January 1, 2001, with early application encouraged.
TWE expects to adopt the provisions of the SOP upon issuance.
Revenue Classification Changes
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, 'Revenue Recognition in Financial Statements'
('SAB 101'), which will be effective for TWE in the second quarter of 2000.
SAB 101 clarifies certain existing accounting principles for the recognition and
classification of revenues in financial statements. While TWE's existing revenue
recognition policies are consistent with the provisions of SAB 101, the new
rules are expected to result in some changes as to how the filmed entertainment
industry classifies its revenues, particularly relating to distribution
arrangements for third-party and co-financed joint venture product. As a result,
TWE is in the process of evaluating the overall impact of SAB 101 on its
consolidated financial statements. It is expected that both annual revenues and
costs in TWE's filmed entertainment business will be reduced by an equal amount
of approximately $1.5 to $2 billion as a result of these classification changes.
However, other aspects of SAB 101 are not expected to have a significant effect
on TWE's consolidated financial statements.
ADVERTISING
Through 1999, 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
have been capitalized and amortized over the related revenue streams in each
market that such costs are intended to benefit, which generally does not exceed
three months. Other advertising costs are expensed upon the first exhibition of
the advertisement. Advertising expense, excluding theatrical and television
product, amounted to $288 million in 1999, $284 million in 1998 and $288 million
in 1997.
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 that qualify for hedge accounting,
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
F-100
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
instruments are either recognized periodically in income or partners' capital
(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 6) 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 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,
-----------------
1999 1998
------- -------
(MILLIONS)
<S> <C> <C>
Land and buildings.......................................... $ 545 $ 797
Cable television equipment.................................. 7,613 6,612
Furniture, fixtures and other equipment..................... 2,407 2,313
------- -------
10,565 9,722
Less accumulated depreciation........................... (4,077) (3,681)
------- -------
Total....................................................... $ 6,488 $ 6,041
------- -------
------- -------
</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, generally are
either expensed as incurred, or capitalized as tangible assets, as in the case
of cash advances and inventoriable product costs. However, accounting
recognition is not given to any increasing asset value that may be associated
with the collection of the underlying copyrighted material. Additionally, costs
incurred to create or extend brands, such as the start-up of The WB Network,
generally result in losses over an extended development period and are
recognized as a reduction of income as incurred, while any corresponding brand
value created is not recognized as an intangible asset in the consolidated
balance sheet. On the other hand, intangible assets acquired in business
combinations accounted for by the purchase method of accounting are capitalized
and amortized over their expected useful life as a noncash 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 $504
million in 1999, $509
F-101
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million in 1998 and $430 million in 1997. Accumulated amortization of intangible
assets at December 31, 1999 and 1998 amounted to $3.942 billion and $3.505
billion, respectively.
TWE periodically reviews the carrying value of acquired intangible assets
for each acquired entity to determine whether an impairment may exist. TWE
considers relevant cash flow and profitability information, including estimated
future operating results, trends and other available information, in assessing
whether the carrying value of intangible assets can be recovered. If it is
determined that the carrying value of intangible assets will not be recovered
from the undiscounted future cash flows of the acquired business, the carrying
value of such intangible assets would be considered impaired and reduced by a
charge to operations in the amount of the impairment. An impairment charge is
measured as any deficiency in the amount of estimated undiscounted future cash
flows of the acquired business available to recover the carrying value related
to the intangible assets.
INCOME TAXES
As a Delaware limited partnership, TWE is not subject to U.S. federal and
state income taxation. However, certain of TWE's operations are conducted by
subsidiary corporations that are subject to domestic or foreign taxation. Income
taxes are provided on the income of such corporations using the liability method
prescribed by FASB Statement No. 109, 'Accounting for Income Taxes.'
STOCK OPTIONS
Time Warner has various stock option plans under which it may grant options
to purchase Time Warner common stock to employees of Time Warner and TWE. 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 of TWE 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, nor charged to TWE.
COMPREHENSIVE INCOME
In accordance with FASB Statement No. 130, 'Reporting Comprehensive Income,'
TWE reports 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 following summary sets forth the components of other comprehensive
income (loss) accumulated in partners' capital:
<TABLE>
<CAPTION>
FOREIGN DERIVATIVE ACCUMULATED
CURRENCY UNREALIZED FINANCIAL OTHER
TRANSLATION GAINS ON INSTRUMENT COMPREHENSIVE
GAINS (LOSSES) SECURITIES GAINS (LOSSES) INCOME (LOSS)
-------------- ---------- -------------- -------------
(MILLIONS)
<S> <C> <C> <C> <C>
Balance at December 31, 1998........ $(43) $ 9 $(6) $(40)
1999 activity....................... 1 39 5 45
---- --- --- ----
Balance at December 31, 1999........ $(42) $48 $(1) $ 5
---- --- --- ----
---- --- --- ----
</TABLE>
F-102
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1999 presentation.
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 1999 and 1998. These transactions, which related to the cable television
business and related ancillary businesses, enhanced Time Warner Cable's
geographic clustering of cable television properties or reduced existing debt
and/or Time Warner Cable's share of future funding requirements for such
businesses. These transactions are discussed more fully below.
GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS
During the past three years, largely in an effort to enhance its geographic
clustering of cable television properties, TWE sold or exchanged various cable
television systems and investments. The 1999 transactions included a number of
transactions generally involving large exchanges of cable television systems. In
these transactions, Time Warner Cable exchanged cable television systems serving
approximately (i) 575,000 subscribers for other cable television systems of
comparable size owned by TCI Communications, Inc. ('TCI'), a subsidiary of AT&T
Corp. (the 'TCI Cable Trades') and (ii) 314,000 subscribers for other cable
television systems of comparable size owned by MediaOne. In addition, in 1999,
Time Warner Cable obtained sole control of certain partnerships previously held
with Fanch Communications, retaining cable television systems serving
approximately 158,000 subscribers and approximately $280 million of net cash
proceeds, in exchange for its interests in other cable television systems
formerly owned by such partnerships. The systems acquired by Time Warner Cable
were accounted for under the purchase method of accounting for business
combinations. As such, the net assets received were recorded at fair value
based on the negotiated terms of the transactions. In connection with these and
other transactions, the operating results of TWE include net pretax gains of
$2.119 billion in 1999, $90 million in 1998 and $200 million in 1997.
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 an integrated
communications provider in selected metropolitan areas across the United States
where it offers a wide range of telephony and data services to business
customers. As a result of the Time Warner Telecom Reorganization, TWE and
TWE-A/N do not have continuing equity interests in the 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.
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.
F-103
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
('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. 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 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 that quarter. The decline in Primestar's value was confirmed by the sale
of its operations and assets to DirecTV, a competitor of Primestar owned by
Hughes Electronics Corp., which occurred during the first half of 1999.
As a result of the sale to DirecTV, Primestar began to wind down its
operations during 1999. TWE recognized its share of Primestar's 1999 losses
under the equity method of accounting. As of December 31, 1999, Primestar has
substantially completed the wind down of its operations. As such, future
wind-down losses are not expected to be material to TWE's operating results.
The foregoing losses are included in interest and other, net in TWE's 1999
consolidated statement of operations.
TCI CABLE TRANSACTIONS
During 1999 and 1998, Time Warner, TWE, TWE-A/N and TCI completed a number
of significant 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, (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 TCI Cable Trades in 1999,
as previously discussed above. The Kansas City joint venture is being accounted
for under the equity method of accounting.
The Texas Cable Joint Venture is a 50-50 cable television joint venture
between TWE-A/N and TCI. TWE-A/N contributed cable television systems serving
approximately 545,000 subscribers, subject to approximately $650 million of
debt. TCI contributed cable television systems serving approximately 565,000
subscribers, subject to approximately $650 million of debt. TWE-A/N did not
recognize a gain or loss on the transaction and the initial investment in the
Texas Cable Joint Venture was recorded based on the historical cost basis of
the contributed net assets. The Texas Cable Joint Venture is being accounted
for under the equity method of accounting.
As a result of the formation of the Texas Cable Joint Venture, 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 the management of Time Warner Cable was increased by approximately 660,000
subscribers.
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
F-104
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (the 'Preferred Equity
Interests'). 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. No gain or loss was recognized on
the transaction. As such, each of TWE's and TWE-A/N's initial interest in the
Road Runner Joint Venture was recorded based on the historical cost basis of
the contributed net assets. In addition, each of TWE's and TWE-A/N's interest
in the Road Runner Joint Venture is being accounted for under the equity method
of accounting.
If the Road Runner Joint Venture does not successfully complete a public
offering of its common stock by December 31, 2001, Microsoft and Compaq may put
their Preferred Equity Interests back to the venture at an independently
determined fair value, plus any accrued and unpaid dividends at a rate of 6% per
annum. Microsoft and Compaq also have the right to put their Preferred Equity
Interests back to the venture upon the occurrence of certain early termination
events, as set forth in the partnership agreement. If these termination rights
are triggered and exercised, the put price paid to Microsoft and Compaq will
equal the amount of their original investment plus a cumulative annual preferred
return of 15%.
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.
TWE-A/N TRANSFERS
As of December 31, 1999, TWE-A/N owned cable television systems (or
interests therein) serving approximately 6.7 million subscribers, of which
5.5 million subscribers were served by consolidated, wholly owned cable
television systems and 1.2 million subscribers were served by unconsolidated,
partially owned cable television systems. TWE-A/N had approximately
$1.4 billion of debt at December 31, 1999.
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
transactions relating to Paragon Communications ('Paragon' and 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. Prior to this transaction, the economic ownership
of Paragon was held 50% by subsidiaries of Time Warner, 25% beneficially by
TWE and 25% beneficially by TWE-A/N. The debt assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries,
F-105
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
including Paragon. TWE-A/N accounted for this transaction at fair value under
the purchase method of accounting for business combinations.
Paragon was a partnership formerly owning cable television systems serving
approximately 1 million subscribers. As part of the TWE-A/N Transfers, TWE and
TWE-A/N exchanged substantially all of their aggregate 50% 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, 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.
3. FILMED ENTERTAINMENT TRANSACTIONS
1999 GAIN ON TERMINATION OF VIDEO DISTRIBUTION AGREEMENT
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ('MGM') terminated
a long-term distribution agreement under which Warner Bros. had exclusive
worldwide distribution rights for MGM/United Artists home video product. In
connection with the early termination and settlement of this distribution
agreement, Warner Bros. recognized a net pretax gain of approximately
$215 million, which has been included in operating income in the accompanying
consolidated statement of operations.
1999 GAIN ON SALE OF INTEREST IN CANALSATELLITE
In December 1999, Warner Bros. sold its 10% interest in CanalSatellite, a
satellite television distribution service in France and Monaco, to Canal+, a
large French media and entertainment company. In connection with the sale,
Warner Bros. recognized a pretax gain of $97 million, which has been included in
operating income in the accompanying consolidated statement of operations.
1999 WARNER BROS. RETAIL STORES WRITE-DOWN
In the fourth quarter of 1999, Warner Bros. recorded a one-time, noncash
pretax charge of $106 million to reduce the carrying value of certain fixed
assets and leasehold improvements used in its retail stores. This charge
resulted from a plan adopted in December 1999 that is designed to improve the
performance of Warner Bros.'s retail store operations. The plan is expected to
be executed largely over a three-year period and involves closing certain
underperforming stores, transforming other stores into smaller and more
efficient stores, and exploiting potential e-commerce opportunities.
The charge represents the excess of the carrying value of the assets used in
Warner Bros.'s retail stores over the discounted future operating cash flows,
adjusted to reflect a shorter recovery period due to planned store closures. The
charge has been included in operating income in the accompanying consolidated
statement of operations.
1998 SALE OF 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
F-106
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. As of December 31, 1999,
approximately $330 million of the original $400 million gain on the sale of
TWE's interest had been deferred, principally as a result of uncertainties
surrounding its realization. Those uncertainties relate to ongoing litigation
as described in Note 14 and TWE's continuing guarantees of Premier's long-term
obligations to make minimum payments to the limited partners of the Six Flags
Over Texas and Six Flags Over Georgia theme parks. If current trends continue,
TWE expects the deferred gain to be recognized over the next several years,
subject to the resolution of the Six Flags litigation. That is, the deferred
gain will not fall below the estimated exposure relating to the Six Flags
litigation. In addition, upon closing of the America Online-Time Warner merger,
any portion of the deferred gain not attributable to the Six Flags litigation
is likely to be eliminated in purchase accounting.
4. OTHER INVESTMENTS
TWE's other investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1999 1998
---- ----
(MILLIONS)
<S> <C> <C>
Equity method investments................................... $542 $574
Cost and fair-value method investments...................... 232 312
---- ----
Total....................................................... $774 $886
---- ----
---- ----
</TABLE>
At December 31, 1999, 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 (46% owned on a
fully diluted basis), Six Flags (49% owned in 1997), certain international cable
and programming joint ventures (20% to 50% owned), Courtroom Television Network
(50% owned) and Primestar (24% 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,
------------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Revenues.................................................. $1,704 $2,329 $2,207
Depreciation and amortization............................. (333) (706) (235)
Operating income (loss)................................... 140 (265) 118
Net loss.................................................. (130) (352) (82)
Current assets............................................ 385 665 412
Total assets.............................................. 2,919 5,228 3,046
Current liabilities....................................... 303 628 993
Long-term debt............................................ 1,881 2,917 1,625
Total liabilities......................................... 2,224 3,699 2,734
Total shareholders' equity or partners' capital........... 695 1,529 312
</TABLE>
In the first quarter of 1997, TWE sold its 58% interest in E! Entertainment
Television, Inc. A pretax gain of approximately $250 million relating to this
sale has been included in interest and other, net in the accompanying
consolidated statement of operations.
F-107
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization................ $ 652 $ 774 $ 614 $ 744
Completed and not released................. 60 17 179 76
In process and other....................... 8 532 23 572
Library, less amortization................. -- 508 -- 560
Programming costs, less amortization........... 411 443 426 375
Merchandise.................................... 89 -- 70 --
------ ------ ------ ------
Total.......................................... $1,220 $2,274 $1,312 $2,327
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Excluding the Library, the unamortized cost of completed films at
December 31, 1999 amounted to $1.502 billion, over 90% of which is expected to
be amortized within three years after release.
6. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT ---------------
DECEMBER 31, 1999 MATURITIES 1999 1998
----------------- ---------- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Bank credit agreement borrowings......... 6.85% 2002 $2,496 $2,711
Commercial paper......................... 6.46% 2000 360 62
Fixed-rate senior notes and debentures... 8.56% 2002-2033 3,799 3,805
------ ------
Total.................................... $6,655 $6,578
------ ------
------ ------
</TABLE>
BANK CREDIT AGREEMENT
TWE and TWE-A/N, together with Time Warner and certain of its consolidated
subsidiaries, have a revolving credit facility (the 'Bank Credit Agreement').
The Bank 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 Bank Credit Agreement are
Time Warner and a number of its consolidated subsidiaries, consisting of Time
Warner Companies, Inc. ('TW Companies'), Turner Broadcasting System, Inc.
('TBS'), TWI Cable, TWE and TWE-A/N. Borrowings under the Bank 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 of 35 basis points) and each borrower is required to pay a
commitment fee of .125% per annum on the unused portion of its commitment, 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 Bank
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-108
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEBT GUARANTEES
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.3 billion of TWE's debt and accrued interest at December 31,
1999, 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 $1.396 billion
of TWE-A/N's debt and accrued interest at December 31, 1999 has been guaranteed
by TWI Cable and certain of its subsidiaries.
INTEREST EXPENSE AND MATURITIES
TWE periodically refinances its debt in an effort to lower its overall cost
of borrowings and to stagger debt maturities. In connection with such
refinancings, TWE recognized an extraordinary loss on the retirement of debt of
$23 million in 1997.
Interest expense amounted to $561 million in 1999, $566 million in 1998 and
$490 million in 1997. The weighted average interest rate on TWE's total debt was
7.8% and 7.5% at December 31, 1999 and 1998, respectively.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1999 consist only of $3.5 billion due in 2002. This includes all
borrowings under the Bank Credit Agreement, as well as any commercial paper
borrowings supported thereby. TWE has the intent and ability under the Bank
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, 1999 and
1998, the fair value of TWE's fixed-rate debt exceeded its carrying value by
$160 million in 1999 and $764 million in 1998. 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.
7. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------- ----- -----
(MILLIONS)
<S> <C> <C> <C>
Domestic.................................................... $2,717 $438 $654
Foreign..................................................... 192 (20) 68
------ ---- ----
Total....................................................... $2,909 $418 $722
------ ---- ----
------ ---- ----
</TABLE>
F-109
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a partnership, TWE is not subject to U.S. federal, state or local income
taxation. However, certain of TWE's operations are conducted by subsidiary
corporations that are subject to domestic or foreign taxation. Income taxes
(benefits) of TWE and subsidiary corporations are as set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Federal:
Current................................................ $ 17 $ 6 $ 2
Deferred............................................... -- (7) (10)
Foreign:
Current(a)............................................. 109 106 69
Deferred............................................... 16 (15) 22
State and local:
Current................................................ 7 4 4
Deferred............................................... 1 (2) (2)
---- --- ---
Total income taxes......................................... $150 $92 $85
---- --- ---
---- --- ---
</TABLE>
- ---------
(a) Includes foreign withholding taxes of $75 million in 1999, $62 million in
1998 and $58 million in 1997.
The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $9.2 billion at December 31, 1999, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
8. PREFERRED STOCK OF SUBSIDIARY
In 1997, a newly formed, substantially owned subsidiary of TWE (the 'REIT')
issued 250,000 shares of preferred stock ('REIT Preferred Stock'). The REIT was
intended to qualify as a real estate investment trust under the Internal Revenue
Code of 1986, as amended.
In March 1999, the REIT redeemed all of its shares of REIT Preferred Stock
at an aggregate cost of $217 million, which approximated net book value. The
redemption was funded with borrowings under TWE's bank credit agreement.
9. PARTNERS' CAPITAL
PARTNERSHIP CAPITAL AND ALLOCATION OF INCOME
Each partner's interest in TWE generally consists of the undistributed
priority capital and residual equity amounts that were initially assigned to
that partner or its predecessor based on the estimated fair value of the net
assets each contributed to the partnership ('Undistributed Contributed
Capital'), plus, with respect to the priority capital interests only, any
undistributed priority capital return. The priority capital return consists of
net partnership income allocated to date in accordance with the provisions of
the TWE partnership agreement and the right to be allocated additional
partnership income which, together, provides for the various priority capital
rates of return as specified in the following table. The sum of Undistributed
Contributed Capital and the undistributed priority capital return is referred to
herein as 'Cumulative Priority Capital.' Cumulative Priority Capital is not
necessarily indicative of the fair value of the underlying priority capital
interests principally due to above-market rates of return on certain priority
capital interests as compared to securities of comparable credit risk and
maturity, such as the 13.25% rate of return on the Series B Capital interest
owned by the Time Warner General Partners. Furthermore, the ultimate realization
of Cumulative Priority Capital could be affected by the fair value of TWE, which
is subject to fluctuation.
F-110
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the priority of Undistributed Contributed Capital, ownership of
Undistributed Contributed Capital and Cumulative Priority Capital at
December 31, 1999 and priority capital rates of return thereon is as set forth
below:
<TABLE>
<CAPTION>
PRIORITY TIME LIMITED PARTNERS
UNDISTRIBUTED CUMULATIVE CAPITAL WARNER -----------------
CONTRIBUTED PRIORITY RATES OF GENERAL TIME
PRIORITY OF UNDISTRIBUTED CONTRIBUTED CAPITAL CAPITAL(a) CAPITAL RETURN(b) PARTNERS WARNER MEDIAONE
- --------------------------------------------- ------------- ---------- --------- -------- ------ --------
(BILLIONS) (OWNERSHIP%)
<S> <C> <C> <C> <C> <C> <C>
Series A Capital....................... $5.6 $14.5 13.00% 63.27% 11.22% 25.51%
Series B Capital....................... 2.9(d) 7.7 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 Series A Capital and Series B Capital, in order of priority, at
rates of return ranging from 13.00% 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 any special tax allocations. To the
extent partnership income is insufficient to satisfy all special allocations in
a particular accounting period, the right to receive additional partnership
income necessary to provide for the various priority capital rates of return is
carried forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation, sale or dissolution of
TWE.
The Series B Capital owned by subsidiaries of Time Warner may be increased
if certain operating performance targets are achieved over a ten-year period
ending on December 31, 2001, 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. The determination of the amount of additional interests that
MediaOne is eligible to acquire is based on the compounded annual growth rate
of TWE's adjusted cable EBITDA, as defined in the option agreement, over the
life of the option. The option is exercisable at any time through May 2005.
The option exercise price is dependent upon the year of exercise and ranges from
an exercise price of approximately $1.3 billion in 2000 to $1.8 billion in 2005.
Either MediaOne or TWE may elect that the exercise price be paid with
partnership interests rather than cash.
F-111
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL DISTRIBUTIONS
Distributions and loans to the partners are subject to partnership and
credit agreement limitations. Generally, TWE must be in compliance with the cash
flow coverage and leverage ratios, restricted payment limitations and other
credit agreement covenants in order to make such distributions or loans.
In July 1999, TWE borrowed $627 million under its bank credit agreement and
paid a distribution to the Time Warner General Partners to redeem the remaining
portion of their senior priority capital interests representing the return of
$454 million and a priority capital return of $173 million. Time Warner used a
portion of the proceeds received from this distribution to repay all $400
million of outstanding borrowings under its credit agreement with TWE. Senior
Capital distributions paid in prior periods consisted of $579 million in 1998
(representing the return of $455 million and a priority capital return of $124
million) and $535 million in 1997 (representing the return of $455 million and a
priority capital return of $80 million).
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,
1999 and 1998, TWE had recorded a liability for Stock Option Distributions of
$1.292 billion and $1.130
billion, respectively, based on the unexercised options and the market prices at
such dates of $72.31 and $62.06, respectively, per Time Warner common share.
This liability reflects the accrual of $388 million and $973 million of Stock
Option Distributions in 1999 and 1998, respectively, when the market price of
Time Warner common stock increased during such periods. TWE paid Stock Option
Distributions to Time Warner in the amount of $226 million in 1999, $260 million
in 1998 and $75 million in 1997.
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 $347 million
in 1999, $314 million in 1998 and $324 million in 1997.
In addition to Stock Option Distributions, Tax Distributions and Senior
Capital Distributions, quarterly cash distributions may be made to the partners
to the extent of excess cash, as defined in the TWE partnership agreement. Such
cash distributions will generally be made on a priority and pro rata basis with
respect to each partner's interest in the Series A Capital, Series B Capital and
Residual Capital. However, cash distributions to the Time Warner General
Partners with respect to their Series A Capital and Residual Capital interests
will be deferred until the limited partners receive aggregate distributions
(excluding Tax Distributions) of approximately $800 million. Similarly, cash
distributions with respect to the Time Warner General Partners' Series B Capital
interest will be deferred until the limited partners receive aggregate
distributions of $1.6 billion. If any such deferral occurs, a portion of the
corresponding partnership income allocations with respect to such deferred
amounts will be made at a rate higher than otherwise would have been the case.
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
F-112
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
10. 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 APB 25 and related interpretations, compensation cost
generally has not 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 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,
--------------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net income:
As reported........................................ $2,759 $326 $614
------ ---- ----
------ ---- ----
Pro forma.......................................... $2,710 $285 $584
------ ---- ----
------ ---- ----
</TABLE>
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
1999, 1998 and 1997: dividend yields of 0.3%, 0.5% and 1%, respectively;
expected volatility of 23.6%, 21.7% and 22.2%, respectively; risk-free interest
rates of 5.4%, 5.5% and 6.3%, respectively; and expected lives of 5 years in all
periods.
In December 1998, Time Warner completed a two-for-one common stock split.
Accordingly, the following stock option information gives effect to this stock
split.
The weighted average fair value of an option granted to TWE employees during
the year was $20.61 in 1999, $11.03 in 1998 and $6.09 in 1997.
F-113
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997.................................. 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
Granted..................................................... 3,809 66.17
Exercised................................................... (6,587) 17.54
Cancelled(a)................................................ (157) 37.11
-------
Balance at December 31, 1999................................ 44,806 $25.66
-------
-------
</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,
------------------------
1999 1998 1997
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Exercisable................................................. 34,688 33,370 43,022
</TABLE>
The following table summarizes information about stock options outstanding
with respect to employees of TWE at December 31, 1999:
<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 12/31/99 LIFE PRICE AT 12/31/99 PRICE
--------------- ------------ ----------- --------- ------------ ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C> <C> <C>
Under $10 351 0.1 years $ 8.37 351 $ 8.37
$10.00 to $ 15.00 3,967 2.2 years $12.65 3,967 $12.65
$15.01 to $ 20.00 12,821 5.3 years $18.52 11,488 $18.50
$20.01 to $ 30.00 18,150 4.8 years $21.68 16,963 $21.62
$30.01 to $ 45.00 4,523 8.0 years $34.69 1,522 $34.53
$45.01 to $ 65.00 2,382 8.6 years $55.04 396 $48.07
$65.01 to $103.74 2,612 9.1 years $68.07 1 $69.16
------ ------
Total 44,806 5.4 years $25.66 34,688 $20.30
------ ------
------ ------
</TABLE>
TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 9.
In January 2000, Time Warner and America Online, Inc. ('America Online')
announced that they had agreed to merge. In connection with this merger, all
outstanding Time Warner stock options held by TWE employees at that time became
fully vested and exercisable, pursuant to the terms of Time Warner's stock
option plans (Note 17).
F-114
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. BENEFIT PLANS
TWE 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 13%
and 12% of plan assets at December 31, 1999 and 1998, respectively. A summary of
activity for TWE's defined benefit pension plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
COMPONENTS OF PENSION EXPENSE
Service cost............................................. $ 51 $ 42 $ 33
Interest cost............................................ 41 36 31
Expected return on plan assets........................... (44) (35) (26)
Net amortization and deferral............................ (3) -- --
---- ---- ----
Total.................................................... $ 45 $ 43 $ 38
---- ---- ----
---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
----- -----
(MILLIONS)
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year........... $ 586 $ 461
Service cost................................................ 51 42
Interest cost............................................... 41 36
Actuarial (gain) loss(a).................................... (181) 61
Benefits paid............................................... (16) (14)
----- -----
Projected benefit obligation at end of year................. 481 586
----- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 480 364
Actual return on plan assets................................ 71 112
Employer contribution....................................... 17 18
Benefits paid............................................... (15) (14)
Asset transfers............................................. (30) --
----- -----
Fair value of plan assets at end of year.................... 523 480
----- -----
Overfunded (unfunded) projected benefit obligation.......... 42 (106)
Additional minimum liability(b)............................. (2) (4)
Unrecognized actuarial gain(a).............................. (181) (10)
Unrecognized prior service cost............................. 2 5
----- -----
Accrued pension expense..................................... $(139) $(115)
----- -----
----- -----
</TABLE>
- ---------
(a) Reflects certain changes in actuarial assumptions made during 1999,
including a shortening of the expected service period and an increase in the
discount rate.
(b) The additional minimum liability is offset fully by a corresponding
intangible asset recognized in the consolidated balance sheet.
F-115
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate............................................... 7.75% 6.75% 7.25%
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 $44 million and $33
million as of December 31, 1999, respectively; and $39 million and $27 million
as of December 31, 1998, respectively.
Certain domestic employees of TWE participate in multi-employer pension
plans as to which the expense amounted to $34 million in 1999, $35 million in
1998 and $29 million in 1997. Employees of TWE's operations in foreign countries
participate to varying degrees in local pension plans, which in the aggregate
are not significant.
Certain TWE employees also participate in Time Warner's savings and profit
sharing plans, as to which the expense amounted to $30 million in 1999, $35
million in 1998 and $30 million in 1997. Contributions to the savings plans are
based upon a percentage of the employees' elected contributions. Contributions
to the profit sharing plans generally are determined by management.
12. 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 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, 1999, 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.
F-116
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1999, Time Warner had contracts for the sale of $843 million
and the purchase of $468 million of foreign currencies at fixed rates. Of Time
Warner's $375 million net sale contract position, $393 million of the foreign
exchange sale contracts and $108 million of the foreign exchange purchase
contracts related to TWE's foreign currency exposure, primarily Japanese yen
(23% of net contract position related to TWE), European currency (70%), and
Canadian dollars (6%), compared to a net sale contract position of $197 million
of foreign currencies at December 31, 1998. TWE had deferred approximately $1
million of net losses on foreign exchange contracts at December 31, 1999, which
is substantially expected to be recognized in income over the next twelve
months. For the years ended December 31, 1999, 1998 and 1997, TWE recognized $15
million in gains, $2 million in losses and $14 million in gains, respectively,
on foreign exchange contracts, which were or are expected to be largely 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.
13. SEGMENT INFORMATION
TWE classifies its business interests into four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses. Time Warner's Digital Media segment commenced operations in 1999.
Information as to the operations of TWE in different business segments is
set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ('EBITA'). The accounting policies of the business segments
are the same as those described in the summary of significant accounting
policies (Note 1). Intersegment sales are accounted for at fair value as if the
sales were to third parties.
The operating results of TWE's cable segment reflect (i) the TWE-A/N
Transfers, effective as of January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the formation of the Road
Runner Joint Venture, effective as of June 30, 1998, (iv) the Time Warner
Telecom Reorganization, effective as of July 1, 1998 and (v) the formation of
the Texas Cable Joint Venture, effective as of December 31, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
REVENUES
Filmed Entertainment-Warner Bros. ....................... $ 6,628 $ 6,051 $ 5,462
Broadcasting-The WB Network.............................. 384 260 136
Cable Networks-HBO....................................... 2,169 2,052 1,923
Cable.................................................... 4,496 4,378 4,243
Digital Media............................................ 1 -- --
Intersegment elimination................................. (514) (495) (446)
------- ------- -------
Total.................................................... $13,164 $12,246 $11,318
------- ------- -------
------- ------- -------
</TABLE>
F-117
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
EBITA(a)
Filmed Entertainment-Warner Bros.(b)........................ $ 787 $ 498 $ 387
Broadcasting-The WB Network................................. (92) (93) (88)
Cable Networks-HBO.......................................... 527 454 391
Cable(c).................................................... 3,517 1,369 1,184
Digital Media............................................... (8) -- --
------ ------ ------
Total....................................................... $4,731 $2,228 $1,874
------ ------ ------
------ ------ ------
</TABLE>
- ---------
(a) 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 $4.227
billion in 1999, $1.719 billion in 1998 and $1.444 billion in 1997.
(b) 1999 results include a net pretax gain of $215 million recognized in
connection with the early termination and settlement of a long-term, home
video distribution agreement and a $97 million pretax gain relating to the
sale of an interest in CanalSatellite, offset in part by a one-time, noncash
charge of $106 million relating to Warner Bros.'s retail stores.
(c) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of $2.119 billion in 1999, $90 million in
1998 and $200 million in 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros. ....................... $150 $166 $181
Broadcasting-The WB Network.............................. 1 1 1
Cable Networks-HBO....................................... 29 23 22
Cable.................................................... 679 737 736
Digital Media............................................ 1 -- --
---- ---- ----
Total.................................................... $860 $927 $940
---- ---- ----
---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(a)
Filmed Entertainment-Warner Bros. ....................... $122 $129 $123
Broadcasting-The WB Network.............................. 4 3 --
Cable Networks-HBO....................................... -- -- --
Cable.................................................... 378 377 307
Digital Media............................................ -- -- --
---- ---- ----
Total.................................................... $504 $509 $430
---- ---- ----
---- ---- ----
</TABLE>
- ---------
(a) 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-118
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information as to the assets and capital expenditures is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Filmed Entertainment-Warner Bros. ....................... $ 8,894 $ 8,800 $ 8,098
Broadcasting-The WB Network.............................. 284 244 113
Cable Networks-HBO....................................... 1,284 1,159 1,080
Cable.................................................... 13,820 11,314 10,771
Digital Media............................................ 3 -- --
Corporate(a)............................................. 558 713 669
------- ------- -------
Total.................................................... $24,843 $22,230 $20,731
------- ------- -------
------- ------- -------
</TABLE>
- ---------
(a) Consists principally of cash, cash equivalents and other investments.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Filmed Entertainment-Warner Bros. ....................... $ 128 $ 122 $ 144
Broadcasting-The WB Network.............................. 2 1 1
Cable Networks-HBO....................................... 18 23 19
Cable.................................................... 1,319 1,451 1,401
Digital Media............................................ 2 -- --
Corporate................................................ 6 6 --
------ ------ ------
Total.................................................... $1,475 $1,603 $1,565
------ ------ ------
------ ------ ------
</TABLE>
Information as to operations in different geographical areas is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
REVENUES(a)
United States............................................ $10,758 $10,167 $ 9,086
United Kingdom........................................... 461 459 488
Germany.................................................. 275 263 284
Japan.................................................... 268 162 172
France................................................... 202 163 152
Canada................................................... 157 145 137
Other international...................................... 1,043 887 999
------- ------- -------
Total.................................................... $13,164 $12,246 $11,318
------- ------- -------
------- ------- -------
</TABLE>
- ---------
(a) 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.
F-119
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
TWE's total rent expense amounted to $233 million in 1999, $218 million in
1998 and $218 million in 1997. The minimum rental commitments under
noncancellable long-term operating leases are: 2000-$177 million; 2001-$176
million; 2002-$174 million; 2003-$158 million; 2004-$141 million; and after
2004-$1.076 billion.
TWE's minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements aggregated approximately $8 billion at
December 31, 1999, which are payable principally over a five-year period.
TWE is subject to certain litigation relating to Six Flags. In December
1998, a jury returned an adverse verdict in the Six Flags matter in the amount
of $454 million. TWE and its former 51% partner in Six Flags are financially
responsible for this judgment. Management believes that there were numerous
legal errors in the case and has appealed the verdict. In management's opinion
and considering the gain deferred on the sale of Six Flags described
in Note 3 to cover this potential exposure, the resolution of this matter is
not expected to have a material effect on TWE's financial statements.
TWE is subject to numerous other legal proceedings. 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
consolidated financial statements.
15. RELATED PARTY TRANSACTIONS
In the normal course of conducting their businesses, TWE and its
subsidiaries and affiliates have had various transactions with Time Warner and
its subsidiaries, 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, including accounting, tax, legal and
administration, for which TWE paid a fee in the amount of $73 million in 1999,
$72 million in 1998 and $72 million in 1997.
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 business,
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 sold or exchanged various cable television systems
to MediaOne in an effort to strengthen its geographic clustering of cable
television properties. See Note 2 for further information.
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
F-120
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 had a credit agreement with TWE allowing it to borrow up to $400
million from TWE through September 15, 2000. During 1999, Time Warner used a
portion of the proceeds received from the final distribution of the Senior
Capital interests in TWE to repay all $400 million of outstanding borrowings
under this agreement.
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.
16. 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. In 1999, approximately $15
million of proceeds were repaid under this securitization program. This compares
to net proceeds received of approximately $166 million in 1998.
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
Cash payments made for interest.......................... $498 $537 $493
Cash payments made for income taxes, net................. 132 91 95
Noncash capital contributions (distributions), net....... 388 973 399
</TABLE>
Noncash investing activities in 1999 included the exchange of certain cable
television systems. Noncash investing activities in 1998 included the exchange
of certain cable television systems, the Time Warner Telecom Reorganization, the
formation of the Road Runner Joint Venture and the TWE-A/N Transfers (Note 2).
F-121
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTEREST AND OTHER, NET
Interest and other, net, consists of:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1999 1998 1997
---- ---- ----
(MILLIONS)
------------------
<S> <C> <C> <C>
Interest expense............................................ $(561) $(566) $(490)
Write-down of investment in Primestar....................... -- (210) --
Gain on sale of investment in E! Entertainment
Television, Inc. ......................................... -- -- 250
Other investment-related activity, principally net losses on
corporate-related equity investees........................ (185) (119) (38)
Corporate finance-related activity, including losses on
asset securitization programs............................. (58) (25) 3
Miscellaneous............................................... (14) (25) (51)
---- ---- ----
Total interest and other, net............................... $(818) $(945) $(326)
---- ---- ----
---- ---- ----
</TABLE>
OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses............................................ $1,566 $1,395
Accrued compensation........................................ 381 298
Deferred revenues........................................... 262 249
------ ------
Total....................................................... $2,209 $1,942
------ ------
------ ------
</TABLE>
17. SUBSEQUENT EVENT
America Online-Time Warner Merger
In January 2000, Time Warner and America Online announced that they had
entered into an agreement to merge (the 'Merger') by forming a new holding
company named AOL Time Warner Inc. ('AOL Time Warner'). As a result of the
Merger, the former shareholders of America Online will have an approximate 55%
interest in AOL Time Warner and the former shareholders of Time Warner will have
an approximate 45% interest in the combined entity, expressed on a fully diluted
basis. The Merger is expected to be accounted for by AOL Time Warner as an
acquisition of Time Warner under the purchase method of accounting for business
combinations.
The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
F-122
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE PARTNERS OF
TIME WARNER ENTERTAINMENT COMPANY, L.P.
We have audited the accompanying consolidated balance sheet of Time Warner
Entertainment Company, L.P. ('TWE') as of December 31, 1999 and 1998, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 2, 2000
F-123
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1999 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.
Certain reclassifications have been made to conform to the 1999 presentation.
The selected historical financial information for 1998 reflects (i) the
TWE-A/N Transfers, effective as of January 1, 1998, (ii) the Primestar Roll-up
Transaction, effective as of April 1, 1998, (iii) the formation of the Road
Runner Joint Venture, effective as of June 30, 1998, (iv) the Time Warner
Telecom Reorganization, effective as of July 1, 1998 and (v) the formation of
the Texas Cable Joint Venture, effective as of December 31, 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,
-----------------------------------------------
1999 1998 1997 1996 1995
SELECTED OPERATING STATEMENT INFORMATION ------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $13,164 $12,246 $11,318 $10,852 $ 9,517
Depreciation and amortization.................. (1,364) (1,436) (1,370) (1,235) (1,039)
Business segment operating income(a)(b)........ 4,227 1,719 1,444 1,078 960
Interest and other, net(c)..................... (818) (945) (326) (522) (580)
Income before extraordinary item............... 2,759 326 637 210 97
Net income(d).................................. 2,759 326 614 210 73
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
SELECTED BALANCE SHEET INFORMATION ------- ------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash and equivalents........................... $ 517 $ 87 $ 322 $ 216 $ 209
Total assets................................... 24,843 22,230 20,731 19,973 18,905
Debt due within one year....................... 6 6 8 7 47
Long-term debt................................. 6,655 6,578 5,990 5,676 6,137
Preferred stock of subsidiary.................. -- 217 233 -- --
Time Warner General Partners' Senior Capital... -- 603 1,118 1,543 1,426
Partners' capital.............................. 7,149 5,107 6,333 6,574 6,478
</TABLE>
- ---------
(a) Includes net pretax gains of approximately $2.119 billion in 1999, $90
million in 1998 and $200 million in 1997 relating to the sale or exchange of
certain cable television systems and investments.
(b) 1999 includes a net pretax gain of approximately $215 million recognized in
connection with the early termination and settlement of a long-term, home
video distribution agreement, a pretax gain of $97 million relating to the
sale of an interest in CanalSatellite and a one-time, noncash pretax charge
of $106 million relating to Warner Bros.'s retail stores.
(c) Includes a pretax charge of approximately $210 million in 1998 to reduce the
carrying value of an interest in Primestar and a pretax gain of
approximately $250 million in 1997 related to the sale of an interest in E!
Entertainment.
(d) Net income includes an extraordinary loss on the retirement of debt of $23
million in 1997 and $24 million in 1995.
F-124
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING
INCOME OF NET
BUSINESS INCOME
QUARTER REVENUES SEGMENTS (LOSS)
- ------- -------- ---------- ------
(MILLIONS)
<S> <C> <C> <C>
1999
1st(a)...................................................... $ 2,934 $ 651 $ 312
2nd(a)...................................................... 3,060 1,212 767
3rd(a)...................................................... 3,474 863 561
4th(a)...................................................... 3,696 1,501 1,119
Year(a)..................................................... 13,164 4,227 2,759
1998
1st(b)...................................................... $ 2,910 $ 369 $ 108
2nd(b)...................................................... 2,850 455 155
3rd(b)...................................................... 3,220 468 172
4th(c)...................................................... 3,266 427 (109)
Year(b)(c).................................................. 12,246 1,719 326
</TABLE>
- ---------
(a) 1999 operating income has been affected by certain significant nonrecurring
items. These items consisted of (i) a net pretax gain of approximately $215
million in the first quarter relating to the early termination and
settlement of a long-term home video distribution agreement, (ii) a net
pretax gain of approximately $97 million in the fourth quarter relating to
the sale of an interest in CanalSatellite, (iii) a one-time, noncash pretax
charge of approximately $106 million in the fourth quarter relating to
Warner Bros.'s retail stores and (iv) net pretax gains relating to the sale
and exchange of various cable television systems and investments of $760
million in the second quarter, $358 million in the third quarter, $1.001
billion in the fourth quarter, thereby aggregating $2.119 billion for the
year.
(b) 1998 operating income includes net pretax gains relating to the sale and
exchange of various cable television systems and investments of $14 million
in the first quarter, $70 million in the second quarter, $6 million in the
third quarter, thereby aggregating $90 million for the year.
(c) 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.
F-125
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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>
1999:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts................................ $271 $114 $ (95)(a) $290
Reserves for sales returns and allowances...................... 235 456 (313)(b) 378
---- ---- ---- ----
Total............................................................. $506 $570 $(408) $668
==== ==== ===== ====
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
==== ==== ===== ====
</TABLE>
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
F-126
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
2. Agreement and Plan of Merger dated as of January 10, 2000, *
between the Registrant and America Online, Inc. ('AOL')
(which is incorporated herein by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K dated
January 10, 2000 (the 'January 2000 Form 8-K')).
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 Amendment of Restated Certificate of *
Incorporation of the Registrant as filed with the
Secretary of State of the State of Delaware on May 26,
1999 (which is incorporated herein by reference to Exhibit
3.(i)(b) of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (the 'June 1999
Form 10-Q')).
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 Amendment 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 LMC Common Stock of the Registrant as filed
with the Secretary of State of the State of Delaware on
May 26, 1999 (which is incorporated herein by reference
to Exhibit 3.(i)(f) of the Registrant's June 1999 Form 10-Q).
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 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)(h) 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)(i) Certificate of Amendment 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
LMCN-V Common Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on May 26, 1999
(which is incorporated herein by reference to Exhibit 3.(i)(i)
of the Registrant's June 1999 Form 10-Q).
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
3.(i)(j) 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)(k) 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 D Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware
on March 17, 2000.
3.(i)(l) Certificate of the Voting Powers, Designations, Preferences *
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series D Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the State
of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.8 to the Registrant's S-8
Registration Statement).
3.(i)(m) 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)(n) 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)(o) 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)(p) 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)(q) 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 19, 1999 (which is incorporated by reference to
Exhibit 3.(i)(m) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 (the '1998
Form 10-K')).
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 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).
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
3.(i)(s) 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 19, 1999 (which is incorporated herein by reference
to Exhibit 3.(i)(o) to the Registrant's 1998 Form 10-K).
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 Series H Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the State
of Delaware on October 10, 1996 (which is incorporated
herein by reference to Exhibit 4.12 to the Registrant's S-8
Registration Statement).
3.(i)(u) 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)(v) 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)(w) 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 19, 1999 (which is incorporated herein by reference to
Exhibit 3.(i)(s) to the Registrant's 1998 Form 10-K).
3.(i)(x) 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 (which are *
incorporated herein by reference to Exhibit 3.(ii) to the
Registrant's 1998 Form 10-K).
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 (which is
incorporated herein by reference to Exhibit 4.2 to the
Registrant's 1998 Form 10-K).
4.3 Amendment No. 2 to the Rights Agreement dated as of January *
21, 1999 between the Registrant and ChaseMellon (which is
incorporated herein by reference to Exhibit 4.3 to the
Registrant's 1998 Form 10-K).
4.4 Amendment No. 3 to the Rights Agreement dated as of January *
10, 2000 between the Registrant and ChaseMellon (which is
incorporated herein by reference to Exhibit 4 to the
Registrant's Amendment No. 1 on Form 8-A/A to the Registrant's
Registration Statement on Form 8-B as filed with the Commission
on January 31, 2000).
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
4.5 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 quarter ended June 30, 1998).
4.6 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')).
4.7 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')).
4.8 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).
4.9 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')).
4.10 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)).
4.11 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)).
4.12 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 4.8 to the
Registrant's 1997 Form 10-K).
4.13 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)).
4.14 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)).
4.15 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 (File No. 1-8637)).
4.16 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>
<TABLE>
<CAPTION>
SEQUENTIAL
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
4.17 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').
4.18 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).
4.19 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).
4.20 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 16, 2000.
10.2 1988 Stock Incentive Plan of Time Warner Inc., as amended
through March 16, 2000.
10.3 Time Warner 1989 Stock Incentive Plan, as amended through
March 16, 2000.
10.4 Time Warner 1993 Stock Option Plan, as amended through
March 16, 2000.
10.5 Time Warner 1994 Stock Option Plan, as amended through
March 16, 2000.
10.6 Time Warner Corporate Group Stock Incentive Plan, as amended
through March 16, 2000.
10.7 Time Warner 1997 Stock Option Plan, as amended through
March 16, 2000.
10.8 Time Warner 1988 Restricted Stock Plan for Non-Employee
Directors, as amended through March 16, 2000.
10.9 Time Warner 1996 Stock Option Plan for Non-Employee
Directors, as amended through March 16, 2000.
10.10 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)).
10.11 Time Warner Retirement Plan for Outside Directors, as *
amended through May 16, 1996 (which is incorporated herein
by reference to Exhibit 10.9 to the Registrant's 1996
Form 10-K).
10.12 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 (File No. 1-8637)).
10.13 Time Warner Inc. Deferred Compensation Plan (the '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)).
10.14 Amendment No. 1 to the Deferred Compensation Plan, effective on
June 18, 1999.
10.15 Amendment No. 2 to the Deferred Compensation Plan, effective on
September 13, 1999.
10.16 Amendment No. 3 to the Deferred Compensation Plan, effective on
October 25, 1999 except where otherwise indicated.
10.17 Amendment No. 4 to the Deferred Compensation Plan, effective on
October 25, 1999 except where otherwise indicated.
10.18 Amendment No. 5 to the Deferred Compensation Plan, effective on
November 15, 1999, except where otherwise indicated.
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
10.19 Amendment No. 6 to the Deferred Compensation Plan, effective on
March 15, 2000, except where otherwise indicated.
10.20 Amended and Restated Employment Agreement effective as of *
January 1, 1998, as amended December 2, 1998, between the
Registrant and Gerald M. Levin (which is incorporated herein
by reference to Exhibit 10.13 to the Registrant's 1998
Form 10-K).
10.21 Amended and Restated Employment Agreement effective as of *
January 1, 1998, as amended December 15, 1998, between the
Registrant and R.E. Turner ('Turner') (which is incorporated
herein by reference to Exhibit 10.14 to the Registrant's
1998 Form 10-K).
10.22 Amended and Restated Employment Agreement effective as of *
January 1, 1999, between the Registrant and Richard D.
Parsons (which is incorporated herein by reference to
Exhibit 10.15 to the Registrant's 1998 Form 10-K).
10.23 Amended and Restated Employment Agreement effective as of *
January 1, 1998, as amended December 2, 1998, between the
Registrant and Peter R. Haje (which is incorporated herein
by reference to Exhibit 10.16 to the Registrant's 1998
Form 10-K).
10.24 Amended and Restated Employment Agreement effective as of *
January 1, 1999, between the Registrant and Richard J.
Bressler (which is incorporated herein by reference to
Exhibit 10.17 to the Registrant's 1998 Form 10-K).
10.25 Amended and Restated Employment Agreement effective as of *
April 1, 1998, as amended December 2, 1998, between the
Registrant and Timothy A. Boggs (which is incorporated
herein by reference to Exhibit 10.18 to the Registrant's
1998 Form 10-K).
10.26 Amended and Restated Employment Agreement effective as of *
April 1, 1998, as amended December 2, 1998, between the
Registrant and John A. LaBarca (which is incorporated herein
by reference to Exhibit 10.19 to the Registrant's 1998
Form 10-K).
10.27 Employment Agreement effective as of January 11, 1999 *
between the Registrant and Andrew J. Kaslow (which is
incorporated herein by reference to Exhibit 10.20 to the
Registrant's 1998 Form 10-K).
10.28 Employment Agreement effective as of July 1, 1999, between
the Registrant and Joan N. Sumner.
10.29 Employment Agreement effective as of July 12, 1999, between
the Registrant and Joseph A. Ripp.
10.30 Employment Agreement effective as of January 1, 2000,
between the Registrant and Christopher P. Bogart.
10.31 Employment Agreement effective as of January 1, 2000,
between the Registrant and Edward A. Adler.
10.32 Voting Agreement dated as of January 10, 2000 between AOL *
and certain stockholders of the Registrant (which is
incorporated herein by reference to Exhibit 99.1 of the
Registrant's January 2000 Form 8-K).
10.33 Stock Option Agreement dated as of January 10, 2000 between *
AOL and the Registrant (which is incorporated herein by
reference to Exhibit 99.2 of the Registrant's January 2000
Form 8-K).
10.34 Stock Option Agreement dated as of January 10, 2000 between *
AOL and the Registrant (which is incorporated herein by
reference to Exhibit 99.3 of the Registrant's January 2000
Form 8-K).
10.35 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 (File No. 1-8637) ('TWCI's September 1996
Form 8-K')).
</TABLE>
vi
<PAGE>
<TABLE>
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EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
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10.36 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).
10.37 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).
10.38 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).
10.39 Investors Agreement (No. 2) dated as of October 10, 1996 *
among the Registrant, Turner Foundation, Inc. ('Turner
Foundation') and Robert E. Turner Charitable Remainder
Unitrust No. 2 ('Turner Trust') (which is incorporated
herein by reference to Exhibit 10.24 to the Registrant's
1996 Form 10-K).
10.40 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).
10.41 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).
10.42 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. 1-12878)).
10.43 Amendment Agreement, dated as of September 14, 1993, among *
ITOCHU, Toshiba, TWCI, US West and certain of their
respective subsidiaries, amending the TWE Partnership
Agreement, as amended (which is incorporated herein by
reference to Exhibit 3.2 to TWE's 1993 Form 10-K).
10.44 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 (File No.
1-8637) ('TWCI's August 1995 Form 8-K')).
10.45 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).
10.46 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. 1-12878)).
</TABLE>
vii
<PAGE>
<TABLE>
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EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
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10.47 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 (File No. 1-12878)
('TWE's September 1994 Form 8-K')).
10.48 Partnership Agreement, dated as of September 9, 1994, *
between TWE and Advance/Newhouse (which is incorporated
herein by reference to Exhibit 10(b) to TWE's September 1994
Form 8-K).
10.49 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
(File No. 1-12878)).
10.50 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).
10.51 Transaction Agreement No. 2 dated as of June 23, 1998 among *
Advance Publications, Newhouse, Advance/Newhouse, TWE,
Paragon Communications ('Paragon') and TWE-AN Partnership
(which is incorporated herein by reference to Exhibit 10.38
to the Registrant's 1998 Form 10-K).
10.52 Transaction Agreement No. 3 dated as of September 15, 1998 *
among Advance Publications, Newhouse, Advance/Newhouse, TWE,
Paragon and TWE-AN Partnership (which is incorporated herein
by reference to Exhibit 10.39 to the Registrant's 1998
Form 10-K).
10.53 First Amendment to the Partnership Agreement of TWE-AN *
Partnership dated as of February 12, 1998 among TWE,
Advance/Newhouse and TW Holding Co. (which is incorporated
herein by reference to Exhibit 10.40 to the Registrant's
1998 Form 10-K).
10.54 Second Amendment to the Partnership Agreement of TWE-AN *
Partnership dated as of December 31, 1998 among TWE,
Advance/Newhouse and Paragon (which is incorporated herein
by reference to Exhibit 10.41 to the Registrant's 1998
Form 10-K).
10.55 Third Amendment to the Partnership Agreement of TWE-AN *
Partnership dated as of March 1, 1999 among TWE,
Advance/Newhouse and Paragon (which is incorporated herein
by reference to Exhibit 10.42 of the Registrant's 1998
Form 10-K).
12.1 Ratio of Earnings to Fixed Charges of the Registrant.
12.2 Ratio of Earnings to Fixed Charges of TWE.
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, 1999 (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, 1999 (to be filed by
amendment).
99.3 Annual Report on Form 11-K of the TWC Savings Plan for the
year ended December 31, 1999 (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>
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 16, 2000, resolutions were duly adopted authorizing elimination of the
Series D 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 D Stock"), as set forth herein:
RESOLVED, that all shares of the Series D Stock outstanding
have been exchanged for the Corporation's Common Stock and no shares of
Series D 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
D 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 D Stock.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Thomas W. McEnerney, its Vice President, on this 16th day of March,
2000.
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>
As Amended Through
March 16, 2000
Time Warner
1986 Stock Option Plan
1. ADOPTION AND PURPOSE OF THE PLAN.
Time Incorporated, a Delaware corporation (hereinafter called the
Company), hereby adopts this stock option plan (hereinafter called the Plan),
providing for the granting of stock options to key employees of the Company and
its subsidiaries. The general purpose of the Plan is to promote the interests of
the Company and its stockholders by providing to key employees of the Company
and its subsidiaries additional incentives to continue and increase their
efforts with respect to, and to remain in the employ of, the Company or its
subsidiaries.
So that the maximum incentive may be provided to particular employees
participating in the Plan, the Plan provides for the granting of "incentive"
stock options (hereinafter called incentive stock options), within the meaning
of Section 422A(b) of the Internal Revenue Code of 1954, as amended (hereinafter
called the Code), and for the granting of "nonqualified" stock options.
2. STOCK SUBJECT TO THE PLAN.
There will be reserved for issuance upon the exercise of options and
stock appreciation rights to be granted from time to time under the Plan an
aggregate of 2,500,000 shares of the Company's Common Stock, par value $.01 per
share (hereinafter called Common Stock). Such shares may be, in whole or in
part, authorized and unissued shares of Common Stock or issued shares of Common
Stock which shall have been reacquired by the Company. If any option granted
under the Plan shall expire or terminate for any reason without having been
exercised (or without having been considered to have been exercised as provided
in paragraphs 8 and 9 hereof) in full, the unpurchased shares subject thereto
shall again be available for purposes of the Plan.
<PAGE>
3. ADMINISTRATION.
The Plan shall be administered by the Board of Directors of the Company
(hereinafter called the Board). Subject to the express provisions of the Plan,
the Board shall have plenary authority, in its discretion, to determine the
terms of all options granted under the Plan (which need not be identical),
including, without limitation, the purchase price of the shares covered by each
option, the individuals to whom, and the time or times at which, options shall
be granted, the number of shares to be subject to each option (provided that the
maximum aggregate number of shares which may be granted to an individual
employee under the Plan shall be 100,000), whether an option shall be an
incentive stock option or a nonqualified stock option, when an option can be
exercised and whether in whole or in installments (which terms may be altered,
subject to paragraph 14 hereof). In making such determinations, the Board may
take into account the nature of the services rendered by the respective
employees, their present and potential contributions to the Company's success
and such other factors as the Board in its discretion shall deem relevant.
Subject to the express provisions of the Plan, the Board shall have plenary
authority to interpret the Plan, to prescribe, amend and rescind the rules and
regulations relating to it and to make all other determinations deemed necessary
or advisable for the administration of the Plan. The determinations of the Board
on the matters referred to in this paragraph 3 shall be conclusive.
Notwithstanding anything to the contrary contained herein, the Board
may at any time, or from time to time, appoint a committee (hereinafter called
the Committee) of at least three members, who shall be members of the Personnel
and Compensation Committee of the Board (or such other members of the Board as
the Board may designate), and delegate to such Committee the authority of the
Board to administer the Plan. Upon such appointment and delegation, the
Committee shall have all the powers, privileges and duties of the Board in the
administration of the Plan, except the power to appoint members of the Committee
and to terminate, modify or amend the Plan. The Board may from time to time
appoint members of any such Committee in substitution for or in addition to
members previously appointed, may fill vacancies in the Committee and may
discharge the Committee. The Committee shall select one of its members as its
chairman and shall hold its meetings at such times and places as it shall deem
advisable. A majority of its
<PAGE>
members shall constitute a quorum and all determinations shall be made by a
majority of such quorum. Any determination reduced to writing and signed by a
majority of the members shall be fully as effective as if it had been made by a
majority vote at a meeting duly called and held.
4. ELIGIBILITY.
Options may be granted only to key salaried employees (which term shall
be deemed to include officers) of the Company and of its present and future
subsidiary corporations as defined in Section 425 of the Code, as the same shall
be amended from time to time (hereinafter called subsidiaries). A director of
the Company or of a subsidiary who is not also such an employee of the Company
or of one of its subsidiaries will not be eligible to receive any options under
the Plan. No option shall be granted to any person who, at the time the option
is granted, owns (or is considered as owning within the meaning of Section
425(d) of the Code) stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any subsidiary, unless at the
time the option is granted the option price is at least 110% of the fair market
value of the Common Stock subject to the option and the option by its terms is
not exercisable after the expiration of five years from the date it is granted.
Options may be granted to employees who hold or have held options under previous
plans. An employee who has been granted an option may be granted an additional
option or options.
Notwithstanding anything to the contrary contained herein, in the case
of incentive stock options granted on or prior to December 31, 1986, the maximum
aggregate fair market value (determined at the time each incentive stock option
is granted) of the shares of Common Stock for which any individual employee may
be granted incentive stock options under the Plan in any calendar year (and
under all other plans of the Company or any subsidiary which provide for the
granting of incentive stock options) shall not exceed $100,000 plus the amount
of any unused limit carryover to such year. If $100,000 exceeds the aggregate
fair market value (determined at the time each incentive stock option is
granted) of the Common Stock for which an employee was granted incentive stock
options in any calendar year under the Plan (and under all other plans of the
Company or any subsidiary which provide for the granting of incentive stock
options), one-half of such excess shall be an unused limit carryover to each of
the three succeeding calendar
3
<PAGE>
years, under the rules of Section 422A(c)(4) of the Code. In the case of
incentive stock options granted after December 31, 1986, the aggregate fair
market value (determined at the time the option is granted) of the shares of
Common Stock covered by incentive stock options which first become exercisable
in any calendar year under the Plan by any individual employee (and under all
other plans of the Company or any subsidiary which provide for the granting of
incentive stock options) shall not exceed $100,000. For purposes of this
paragraph, fair market value of Common Stock shall be the mean between the high
and low sales prices of a share of Common Stock as reported on the New York
Stock Exchange Composite Tape on the date of grant of an incentive stock option
under the Plan.
5. OPTION PRICES.
Except as otherwise specifically provided in paragraph 4 hereof, the
purchase price of the Common Stock under each option shall be determined by the
Board, but shall not be less than 100% of the fair market value of the Common
Stock at the time of the granting of such option. Such fair market value shall
be determined by the Board and shall not be less than the mean between the high
and low sales prices of a share of Common Stock as reported on the New York
Stock Exchange Composite Tape on the day on which the option is granted.
6. TERM OF OPTIONS.
The term of each option shall be for such period as the Board shall
determine, but not more than ten years from the date of grant in the case of
each incentive stock option and not more than ten and one-half years from the
date of grant in the case of each nonqualified stock option, or such shorter
period as is prescribed in paragraphs 4, 11 and 12 hereof.
7. EXERCISE OF OPTIONS.
Unless otherwise provided in the option agreement, an option granted
under the Plan shall be exercisable in whole, or in part, at any time during the
term of the option. Each incentive stock option granted under the Plan on or
prior to December 31, 1986 shall by its terms comply with the requirements of
Section 422A(b)(7) of the Code, as in effect
4
<PAGE>
prior to December 31, 1986.
The Board shall be authorized to establish the procedure for the
exercise of an option, provided that the Company shall not be required to
deliver certificates for shares with respect to which an option is exercised
until the purchase price of such shares shall have been paid in full. Payment
shall be made in cash or, unless otherwise provided in the option agreement, in
whole shares of Common Stock already owned by the holder of the option or,
unless otherwise provided in the option agreement, partly in cash and partly in
such Common Stock. An option shall be exercised by written notice to the
Company. Such notice shall state that the holder of the option elects to
exercise the option, the number of shares in respect of which it is being
exercised and the manner of payment for such shares, and shall either (i) be
accompanied by payment of the full purchase price of such shares, or (ii) fix a
date (not more than 10 business days from the date of exercise) for the payment
of the full purchase price of such shares. Cash payments shall be made by
certified or bank cashier's check, or by the wire transfer of immediately
available funds, in each case payable to the order of the Company. Common Stock
payments (valued at the mean between the high and low sales prices of a share of
Common Stock as reported on the New York Stock Exchange Composite Tape on the
date of exercise) shall be made by delivery of stock certificates in negotiable
form. If certificates representing Common Stock are used to pay all or part of
the purchase price of an option, separate certificates shall be delivered by the
Company representing the same number of shares as each certificate so used, and
an additional certificate shall be delivered representing any additional shares
to which the holder of the option is entitled as a result of the exercise of the
option. Except as provided in paragraphs 11 and 12 hereof, no option may be
exercised at any time unless the employee to whom the option was granted under
the Plan is then an employee of the Company or of a subsidiary or, if the option
agreement so provides, an Employee of an Affiliated Entity. For the purposes of
this Plan, "Employee of an Affiliated Entity" shall mean an employee of any
entity other than the Company or a subsidiary, whether or not incorporated,
which is controlled by or under common control with the Company (an "Affiliated
Entity"); provided, however, that no director, officer or holder of ten percent
or more of any class of equity securities of the Company who was subject,
directly or indirectly, to Section 16(b) of the Securities Exchange Act of 1934,
as amended, at any time on or after May
5
<PAGE>
14, 1991, shall be considered an Employee of an Affiliated Entity. The holder of
an option shall have none of the rights of a stockholder with respect to the
shares subject to the option until such shares shall be transferred to the
holder upon the exercise of his or her option.
Notwithstanding any contrary waiting period or installment period in
any option agreement or in the Plan, each outstanding option granted under the
Plan shall, except as otherwise provided in the option agreement, become
exercisable in full for the aggregate number of shares covered thereby, in the
event (i) the Board (or, if approval of the Board is not required as a matter of
law, the stockholders of the Company) shall approve (a) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted into
cash, securities or other property, other than a merger of the Company (x) as
contemplated in the Amended and Restated Agreement and Plan of Merger dated as
of September 22, 1995 among Time Warner Inc., TW Inc., Time Warner Acquisition
Corp., TW Acquisition Corp. and Turner Broadcasting System, Inc., as the same
may be amended from time to time, or (y) in which the holders of Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (b) any
sale, lease, exchange, or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company, or (c) the adoption of any plan or proposal for the liquidation or
dissolution of the Company, or (ii) any person (as such term is defined in
Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (hereinafter called the Exchange Act)), corporation or other entity (a)
shall purchase any Common Stock of the Company (or securities convertible into
the Company's Common Stock) for cash, securities or any other consideration
pursuant to a tender offer or exchange offer, without the prior consent of the
Board, or (b) any such person, corporation or other entity (other than the
Company or any benefit plan sponsored by the Company or any subsidiary) shall
become the "beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
20 percent or more of the combined voting power of the then outstanding
securities of the Company ordinarily (and apart from rights accruing under
special circumstances) having the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case of
rights to acquire the Company's
6
<PAGE>
securities), or (iii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the entire Board shall cease for
any reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period. Any transaction referred to
in the foregoing clause (i) is hereinafter called an Approved Transaction, any
purchase pursuant to a tender offer or exchange offer or otherwise as described
in the foregoing clause (ii) is hereinafter called a Control Purchase and the
cessation of individuals constituting a majority of the Board as described in
the foregoing clause (iii) is hereinafter called a Board Change. The option
agreement evidencing an option granted under the Plan may contain such
provisions limiting the acceleration of the exercise of options as the Board
deems appropriate to ensure that the penalty provisions of Section 4999 of the
Code, or any successor thereto in effect at the time of such acceleration, will
not apply to any stock or cash received by the holder from the Company.
8. GENERAL STOCK APPRECIATION RIGHTS.
The Board may (but shall not be obligated to) grant general stock
appreciation rights (hereinafter called SARs) pursuant to the provisions of this
paragraph to the holder of any option granted under the Plan (hereinafter in
this paragraph 8 called a related option) with respect to all or a portion of
the shares subject to the related option. An SAR may only be granted
concurrently with the grant of the related option. Subject to the terms and
provisions of this paragraph 8, each SAR shall be exercisable only at the same
time and to the same extent the related option is exercisable, and in no event
after the termination or exercise of the related option.
Notwithstanding the foregoing, no SAR may be exercised within a period
of six months after the date of grant of the SAR. SARs shall be exercisable only
when the fair market value (determined as of the date of exercise of the SARs)
of each share of Common Stock with respect to which the SARs are to be exercised
shall exceed the option price per share of Common Stock subject to the related
option. SARs granted under the Plan shall be exercisable in whole or in part by
notice to the Company. Such notice shall state that the holder of the SARs
elects to exercise the SARs and the number of shares in respect of which the
SARs are being exercised.
7
<PAGE>
Subject to the terms and provisions of this paragraph 8, upon the
exercise of SARs, the holder thereof shall be entitled to receive from the
Company consideration (in the form hereinafter provided) equal in value to the
excess of the fair market value (determined as of the date of exercise of the
SARs) of each share of Common Stock with respect to which such SARs have been
exercised over the option price per share of Common Stock subject to the related
option. Upon the exercise of an SAR, the holder may specify the form of
consideration to be received by such holder, which shall be in shares of Common
Stock (valued at fair market value on the date of exercise of the SAR), or in
cash, or partly in cash and partly in shares of Common Stock as the holder shall
request; provided, however, that the Board in its sole discretion may disapprove
the form of consideration requested and instead authorize the payment of such
consideration in shares of Common Stock (valued as aforesaid), or in cash, or
partly in cash and partly in shares of Common Stock. Notwithstanding the
foregoing, any election by the holder of an SAR to receive cash in full or
partial settlement of the SAR, as well as any exercise of an SAR for such cash,
shall be made only during the period beginning on the third business day
following the date of release for publication of quarterly or annual summary
statements of sales and earnings and ending on the twelfth business day
following such date (such period is hereinafter called the Exercise Period).
Notwithstanding the foregoing, the number of SARs which may be exercised for
cash, or partly for cash and partly for shares of Common Stock, during any
Exercise Period may not exceed twenty percent of the aggregate number of shares
of Common Stock originally subject to the related option (as such original
number, without giving effect to the exercise of any portion of the related
option, shall have been retroactively adjusted by application of the
adjustment(s), if any, determined in accordance with paragraph 13 hereof or the
corresponding provisions of any outstanding option agreement), but such SARs
shall be exercisable only to the extent the related option is exercisable. For
purposes of this paragraph 8, (a) fair market value of Common Stock shall be the
mean between the high and low sales prices thereof as reported on the New York
Stock Exchange Composite Tape on the date of exercise of an SAR, and (b) the
date of exercise of an SAR shall mean the date on which the Company shall have
received notice from the holder of the SAR of the exercise of such SAR.
Notwithstanding the foregoing, upon the exercise during the Exercise Period of
an SAR granted in tandem with a nonqualified
8
<PAGE>
stock option, the date of exercise of such SAR shall be deemed to be the date
during the Exercise Period on which the highest reported closing sales price of
a share of Common Stock as reported on the New York Stock Exchange Composite
Tape occurred and the fair market value of such shares shall be deemed to be
such highest reported closing sales price.
Upon the exercise of SARs, the related option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised, and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock available for the grant of options under the Plan. Upon the
exercise or termination of the related option, the SARs with respect to such
related option shall be considered to have been exercised or terminated to the
extent of the number of shares of Common Stock with respect to which the related
option was so exercised or terminated.
The provisions of paragraphs 3, 6, 10 through 16, and 18 through 20 of
the Plan (to the extent that such provisions are applicable to options granted
under the Plan) shall also be applicable to SARs unless the context otherwise
requires. The effective date of the grant of an SAR shall be the date on which
the Board approves the grant of such SAR. Each grantee of an SAR shall be
notified promptly of the grant of an SAR in such manner as the Board shall
prescribe.
Notwithstanding anything to the contrary contained in this paragraph 8,
SARs shall not be exercisable unless at the time of such exercise (i) the holder
of the SARs is directly or indirectly subject to Section 16 of the Exchange Act
or (ii) sales of Common Stock by the person exercising the SARs would be
reportable under Section 16 by the original holder of the related option.
9. LIMITED STOCK APPRECIATION RIGHTS.
The Board may (but shall not be obligated to) grant limited stock
appreciation rights (hereinafter called limited rights) pursuant to the
provisions of this paragraph to the holder of any option granted under the Plan
(hereinafter in this paragraph 9 called a related option) with respect to all or
a portion of the shares subject to the related option. A limited right may only
be granted concurrently with the grant of the related option. A limited right
may be exercised only
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during the period (a) beginning on the first day following either (i) the date
of approval by the stockholders of the Company of an Approved Transaction (as
defined in the last paragraph of paragraph 7 hereof), (ii) the date of a Control
Purchase (as defined in the last paragraph of paragraph 7 hereof), or (iii) the
date of a Board Change (as defined in the last paragraph of paragraph 7 hereof),
and (b) ending on the thirtieth day following such date. Each limited right
shall be exercisable only to the extent the related option is exercisable, and
in no event after the termination of the related option. Notwithstanding the
provisions of the two immediately preceding sentences, no limited right may be
exercised within a period of six months after the date of grant of the limited
right. Limited rights shall be exercisable only when the fair market value
(determined as of the date of exercise of the limited rights) of each share of
Common Stock with respect to which the limited rights are to be exercised shall
exceed the option price per share of Common Stock subject to the related option.
Upon the exercise of limited rights, the related option shall be
considered to have been exercised to the extent of the number of shares of
Common Stock with respect to which such limited rights are exercised, and shall
be considered to have been exercised to that extent for purposes of determining
the number of shares of Common Stock available for the grant of options under
the Plan. Upon the exercise or termination of the related option, the limited
rights with respect to such related option shall be considered to have been
exercised or terminated to the extent of the number of shares of Common Stock
with respect to which the related option was so exercised or terminated.
The provisions of paragraphs 3, 6, 10 through 16, and 18 through 20 of
the Plan (to the extent that such provisions are applicable to options granted
under the Plan) shall also be applicable to limited rights unless the context
otherwise requires. The effective date of the grant of a limited right shall be
the date on which the Board approves the grant of such limited right. Each
grantee of a limited right shall be notified promptly of the grant of the
limited right in such manner as the Board shall prescribe.
Limited rights granted under the Plan shall be exercisable in whole or
in part by notice to the Company. Such notice shall state that the holder of the
limited rights elects to exercise the limited rights and the number of shares in
respect
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of which the limited rights are being exercised. The effective date of exercise
of a limited right shall be deemed to be the date on which the Company shall
have received such notice. Upon the exercise of limited rights granted in tandem
with an incentive stock option, except as otherwise provided in the option
agreement, the holder thereof shall receive in cash an amount equal to the
excess of the fair market value (determined as of the date of exercise of such
limited rights) of each share of Common Stock with respect to which such limited
right shall have been exercised over the option price per share of Common Stock
subject to the related incentive stock option. For purposes of this paragraph 9,
the fair market value of a share of Common Stock shall be the mean between the
high and low sales price thereof as reported on the New York Stock Exchange
Composite Tape on the date of exercise of a limited right.
Upon the exercise of limited rights granted in tandem with a
nonqualified stock option, except as otherwise provided in the option agreement,
the holder thereof shall receive in cash an amount equal to the product computed
by multiplying (i) the excess of (a) the higher of (x) the Minimum Price Per
Share (as hereinafter defined), or (y) the highest reported closing sales price
of a share of Common Stock as reported on the New York Stock Exchange Composite
Tape at any time during the period beginning on the sixtieth day prior to the
date on which such limited rights are exercised and ending on the date on which
such limited rights are exercised, over (b) the option price per share of Common
Stock subject to the related nonqualified stock option, by (ii) the number of
shares of Common Stock with respect to which such limited rights are being
exercised.
For purposes of this paragraph 9, the term "Minimum Price Per Share"
shall mean the highest gross price (before brokerage commissions, soliciting
dealers' fees and similar charges) paid or to be paid for any share of Common
Stock (whether by way of exchange, conversion, distribution, liquidation or
otherwise) in, or in connection with, any Approved Transaction or Control
Purchase which occurs at any time during the period beginning on the sixtieth
day prior to the date on which such limited rights are exercised and ending on
the date on which such limited rights are exercised. For purposes of this
definition, if the consideration paid or to be paid in any such Approved
Transaction or Control Purchase shall consist, in whole or in part, of
consideration other than cash, the Board shall take such action, as in its
judgment it deems appropriate, to establish the cash value of such
consideration, but such
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valuation shall not be less than the value, if any, attributed to such
consideration by any other party to such Approved Transaction or Control
Purchase.
Notwithstanding anything to the contrary contained in this paragraph 9,
limited rights shall not be exercisable unless at the time of the occurrence of
an Approved Transaction, Control Purchase or Board Change, (i) the holder of the
limited rights is directly or indirectly subject to Section 16 of the Exchange
Act or (ii) sales of Common Stock by the person exercising the limited rights
would be reportable under Section 16 by the original holder of the related
option. The option agreement evidencing an option granted under the Plan may
contain such provisions limiting the exercise of limited rights as the Board
deems appropriate to ensure that the penalty provisions of Section 4999 of the
Code, or any successor thereto in effect at the time of such exercise, will not
apply to any stock or cash received from the Company by the holder of the
limited rights.
10. LIMITED TRANSFERABILITY OF OPTIONS.
Except as set forth in this paragraph 10 and paragraph 21, options and
SARs granted under the Plan shall not be transferable other than by will or the
laws of descent and distribution, and such options and SARs may be exercised
during the lifetime of the holder thereof only by such holder (or his or her
court appointed legal representative). The option agreement may provide that
options and SARs are transferable by gift to such persons or entities and upon
such terms and conditions specified in the option agreement.
11. TERMINATION OF EMPLOYMENT.
If a holder's employment shall be terminated by the Company or any of
it subsidiaries prior to the complete exercise of an option, then such option
shall thereafter be exercisable, solely to the extent provided in the applicable
option agreement; provided, however, that (a) no option granted under the Plan
may be exercised after the scheduled expiration date of such option; (b) if the
holder's employment terminates by reason of death or permanent and total
disability as defined in Section 22(e)(3) of the Code, as the same may be
amended from time to time, the option shall remain exercisable for a period of
at least one year following such termination (but not later than the scheduled
expiration of such option); and (c)
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<PAGE>
any termination by the employing company for cause will be treated in accordance
with the provisions of the next succeeding paragraph.
If a holder's employment with the Company or any of its subsidiaries
shall be terminated for cause by the Company or such subsidiary prior to the
exercise of any option, then unless the applicable option agreement provides
otherwise, all options held by such holder and any permitted transferee
pursuant to paragraph 10 shall terminate one month after the date of a
termination for cause, provided that if such termination for cause is for
fraud, misappropriation or embezzlement, all options shall terminate
immediately. For the purposes hereof, cause (a) shall have the meaning
provided for in any employment, consulting or advisory agreement to which
such holder and the Company or any of its subsidiaries is a party or
(b) in the absence thereof, shall mean insubordination, dishonesty,
incompetence, moral turpitude, other misconduct of any kind and the refusal
to perform his or her duties and responsibilities for any reason other
than illness or incapacity, except that if such termination occurs within
12 months after an Approved Transaction, Control Purchase or Board Change,
cause under this clause (b) shall mean only a felony conviction for fraud,
misappropriation or embezzlement.
Notwithstanding any other provision of the Plan, the Board may provide
in the applicable option agreement that the options and/or SARs granted under
the Plan shall become and/or remain exercisable at rates and times at variance
with the rules otherwise herein set forth; provided, however, that any such
option agreement provisions at variance with the exercisability rules otherwise
set forth herein shall be effective only if reflected in the terms of an
employment agreement approved or ratified by the Board.
The Board may determine whether any given leave of absence constitutes
a termination of employment. Options and SARs under the Plan shall not be
affected by any change of employment so long as the holder continues to be an
employee of the Company or one of its subsidiaries.
12. INTENTIONALLY OMITTED.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Notwithstanding any other provisions of the Plan, option agreements may
contain such provisions as the Board shall determine to be appropriate for the
adjustment of the number and class of shares subject to each outstanding option
and the
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<PAGE>
option prices in the event of changes in the outstanding Common Stock of the
Company by reason of any stock dividend, distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation or
liquidation and the like, and, in the event of any such change in the
outstanding Common Stock of the Company, the aggregate number and class of
shares available under the Plan and the maximum number of shares as to which
options may be granted to any individual shall be appropriately adjusted by the
Board, whose determination shall be conclusive.
14. TERMINATION AND AMENDMENT.
Unless the Plan shall theretofore have been terminated as hereinafter
provided, the Plan shall terminate on, and no option shall be granted after,
December 31, 1991. The Board may at any time prior to December 31, 1991
terminate the Plan, and the Board may at any time also modify or amend the Plan
in such respects as it shall deem advisable; provided, however, that the Board
may not, without approval of the holders of a majority of the voting securities
of the Company present, or represented, and entitled to vote at a meeting (i)
increase (except as provided in paragraph 13 hereof) the maximum number of
shares as to which options may be granted under the Plan, (ii) change the class
of employees eligible to receive options, (iii) change the manner of determining
the minimum option prices other than to change the manner of determining the
fair market value of the Common Stock, as set forth in paragraph 5 hereof, or
(iv) extend the period during which options may be granted or exercised. No
termination, modification or amendment of the Plan may, without the consent of
the holder of an option, adversely affect the rights of such holder under such
option.
15. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective upon approval by the vote of a majority
of the voting securities of the Company present, or represented, and entitled to
vote at the 1986 Annual Meeting of Stockholders to be held on April 17, 1986, or
any adjournment thereof. Prior to such approval, the Board may, in its
discretion, grant or authorize the granting of options under the Plan the
exercise of which shall be expressly subject to the condition that the Plan
shall have been so approved. Unless the Plan shall be so approved, the Plan and
all options
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<PAGE>
theretofore granted thereunder shall be and become null and void.
16. GOVERNMENT AND OTHER REGULATIONS.
The obligation of the Company to sell and deliver shares under the
options granted under the Plan shall be subject to (i) all applicable laws,
rules and regulations and such approvals by any governmental agencies as may be
required, including, without limitation, the effectiveness of a registration
statement under the Securities Act of 1933, and (ii) the condition that the
shares of Common Stock reserved for issuance upon the exercise of options
granted under the Plan shall have been duly listed on the New York Stock
Exchange.
17. TIME OF GRANTING OF OPTIONS.
The effective date of the granting of an option (hereinafter called the
Granting Date) shall be the date on which the Board approves the granting of
such option. Each grantee of an option shall be notified promptly of the grant
of the option and a written option agreement shall promptly be executed and
delivered by or on behalf of the Company and the grantee, provided that such
grant of an option shall expire if a written option agreement is not signed by
such grantee (or his or her agent or attorney) and delivered to the Company
within 60 days after the Granting Date.
18. WITHHOLDING.
The Company's obligation to deliver shares of Common Stock or to pay
cash upon the exercise of any nonqualified stock option or any stock
appreciation right granted under the Plan shall be subject to applicable
federal, state and local tax withholding requirements. Federal, state and local
withholding taxes paid upon the exercise of any nonqualified stock option may be
paid in shares of Common Stock upon such terms and conditions as the Board shall
determine; provided, however, that the Board in its sole discretion may
disapprove such payment and require that such taxes be paid in cash.
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<PAGE>
19. SEPARABILITY.
If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 under the Exchange Act (as the same shall be amended
from time to time) and/or Section 422A of the Code (as the same shall be amended
from time to time), then such terms or provisions shall be deemed inoperative to
the extent they so conflict with the requirements of said Rule 16b-3 and/or
Section 422A of the Code.
If this Plan does not contain any provision required to be included
herein under Section 422A of the Code (as the same shall be amended from time to
time), such provision shall be deemed to be incorporated herein with the same
force and effect as if such provision had been set out at length herein.
20. NON-EXCLUSIVITY OF THE PLAN.
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under the Plan, and such arrangements
may be either generally applicable or applicable only in specific cases.
21. BENEFICIARIES.
Each holder may designate any person(s) or legal entity(ies), including
his or her estate, as his or her beneficiary under the Plan. Such designation
shall be made in writing on a form filed with the Secretary of the Company or
his or her designee and may be revoked or changed by such holder at any time by
filing written notice of such revocation or change with the Secretary of the
Company or his or her designee. If no person shall be designated by a holder as
his or her beneficiary or if no person designated as a beneficiary survives such
holder, the holder's beneficiary shall be his or her estate.
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<PAGE>
22. DEFERRAL OF OPTION GAINS.
The option agreement evidencing an option granted under the Plan may
contain terms, conditions and procedures permitting the holder of an option to
elect to defer the receipt of shares of Common Stock upon the exercise of the
option for a specific period or until a specified event.
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As Amended Through
March 16, 2000
1988 Stock Incentive Plan
of Time Warner Inc.
1. PURPOSE OF THE PLAN.
Time Incorporated, a Delaware corporation, hereby adopts this stock
incentive plan, providing for the granting of stock options, stock appreciation
rights and restricted shares to key employees (including officers) of the
Company and its subsidiaries. The general purpose of the Plan is to promote the
interests of the Company and its stockholders by providing to key employees of
the Company and its subsidiaries additional incentives to continue and increase
their efforts with respect to, and to remain in the employ of, the Company or
its subsidiaries.
2. CERTAIN DEFINITIONS.
The following terms shall have the meanings set forth below when used
in this Plan:
(a) "Award" means grants of an Option, SAR and/or Restricted
Shares under this Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Cash Award" means the amount of cash, if any, to be paid
to an employee pursuant to paragraph 7D hereof.
(d) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
(e) "Committee" means the Committee of the Board appointed
pursuant to paragraph 4 hereof.
(f) "Common Stock" means the Common Stock, par value $.01 per
share, of the Company.
<PAGE>
(g) "Company" means Time Warner Inc., a Delaware corporation.
(h) "Composite Tape" means the New York Stock Exchange
Composite Tape.
(i) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor statute or statutes
thereto.
(j) "Exercise Period" shall have the meaning ascribed thereto
in paragraph 6E hereof.
(k) "Fair Market Value" of a share of Common Stock shall mean
the mean between the high and low sales prices of a share of Common
Stock on the Composite Tape on the date in question, except as
otherwise provided in paragraph 6E hereof.
(l) "Holder" means an employee of the Company or a Subsidiary
who has received an Award under this Plan.
(m) "ISO" means an incentive stock option within the meaning
of Section 422A(b), or any successor section, of the Code.
(n) "Limited Rights" shall have the meaning ascribed thereto
in paragraph 6F hereof.
(o) "Maturity Value" means, unless the Board shall determine
otherwise, the average (rounded to the nearest cent) of the means
between the high and low sales prices of a share of Common Stock on the
Composite Tape on the sixty consecutive trading days ending on the
Valuation Date with respect to each award of Restricted Shares, or if
the Valuation Date is not a trading day, the sixty consecutive trading
days prior thereto.
(p) "Nonqualified Stock Option" means a stock option that does
not qualify as an ISO.
(q) "Option" means any option granted under this Plan.
(r) "Plan" means this 1988 Incentive Stock Plan of the
Company.
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(s) "Restricted Shares" means shares of Common Stock or the
right to receive shares of Common Stock, as the case may be, awarded to
an employee of the Company or a Subsidiary, pursuant to paragraph 7
hereof.
(t) "Restricted Shares Agreement" means the agreement
specified in paragraph 12 hereof.
(u) "Restriction Period" means a period of time beginning on
the date of each award of Restricted Shares and ending on the Valuation
Date with respect to each such award.
(v) "Retained Distributions" means distributions with respect
to Restricted Shares that are retained by the Company pursuant to
paragraph 7C hereof.
(w) "SARs" shall mean stock appreciation rights as defined in
paragraph 6E hereof.
(x) "SEC" means the Securities and Exchange Commission.
(y) "Stock Option Agreement" means the agreement specified in
paragraph 12 hereof.
(z) "Subsidiary" means any present or future subsidiary of the
Company as such term is defined in Section 425, or any successor
section, of the Code.
(aa) "Total Disability" means a permanent and total disability
as defined in Section 22(e)(3), or any successor section, of the Code.
(bb) "Valuation Date" with respect to any Restricted Shares
awarded hereunder means the date designated in the Restricted Shares
Agreement with respect to each award of Restricted Shares pursuant to
paragraph 7A hereof.
(cc) "Dividend Equivalents" means an amount equal to the cash
dividend payable on each share of Common Stock on any dividend payment
date multiplied by the number of shares of Common Stock covered by an
award of Restricted Shares hereunder but only to the extent the shares
of Common Stock covered by such award are not issued until the end of
the Restriction Period.
3
<PAGE>
(dd) "Employee of an Affiliated Entity" means an employee of
any entity other than the Company or a Subsidiary, whether or not
incorporated, which is controlled by or under common control with the
Company (an "Affiliated Entity"); provided, however, that no director,
officer or holder of ten percent or more of any class or equity
securities of the Company who was subject, directly or indirectly, to
Section 16(b) of the Exchange Act at any time on or after May 14, 1991,
shall be considered an Employee of an Affiliated Entity.
3. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of paragraph 13 hereof and this paragraph 3,
the maximum aggregate number of shares of Common Stock which may be issued upon
exercise of Options and SARs and which may be granted as Restricted Shares or
issued at the end of the Restriction Period with respect to an award of
Restricted Shares hereunder shall be 1,500,000. Such shares may be, in whole or
in part, authorized and unissued shares of Common Stock or issued shares of
Common Stock which shall have been reacquired by the Company. If any Option
shall expire or terminate for any reason without having been exercised (or
without having been considered to have been exercised as provided in paragraphs
6E and 6F hereof) in full, the unexercised shares subject thereto shall again be
available for purposes of the Plan. In addition, any Restricted Shares which are
forfeited by the terms of the Plan or any Restricted Shares Agreement shall
again become available for purposes of the Plan.
4. ADMINISTRATION.
A. Powers. The Plan shall be administered by the Board. Subject to the
express provisions of the Plan, the Board shall have plenary authority, in its
discretion, to grant Options and award Restricted Shares under the Plan and to
determine the terms and conditions (which need not be identical), of all Options
and Restricted Shares granted or awarded under the Plan, including, without
limitation, (i) the purchase price, if any, of each Restricted Share, (ii) the
individuals to whom, and the time or times at which, Options and Restricted
Shares shall be granted or awarded, (iii) the number of shares to be
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<PAGE>
subject to each Option or award of Restricted Shares, (iv) whether an Option
shall be an ISO or a Nonqualified Stock Option, (v) when an Option can be
exercised and whether in whole or in installments, (vi) the time or times and
the conditions subject to which Restricted Shares shall become vested and any
Cash Awards shall become payable, and (vii) the form, terms and provisions of
any Stock Option Agreement and Restricted Shares Agreement evidencing a grant of
Options or awards of Restricted Shares hereunder (which terms may be amended,
subject to paragraph 15 hereof). In making such determinations, the Board may
take into account the nature of the services rendered by the respective
employees, their present and potential contributions to the success of the
Company and its subsidiaries, and such other factors as the Board in its
discretion shall deem relevant. Subject to the express provisions of the Plan,
the Board shall have plenary authority to interpret the Plan, to prescribe,
amend and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on the matters referred to in this paragraph 4
shall be conclusive.
B. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee of at least three members, who shall be members of the Compensation
Committee of the Board (or such other persons as the Board may designate), and
delegate to such Committee the authority of the Board to administer the Plan.
Upon such appointment and delegation, the Committee shall have all the powers,
privileges and duties of the Board in the administration of the Plan, except the
power to appoint members of the Committee and to terminate, modify or amend the
Plan. The Board may from time to time appoint members of any such Committee in
substitution for or in addition to members previously appointed, may fill
vacancies in the Committee and may discharge the Committee. The Committee shall
select one of its members as its chairman and shall hold its meetings at such
times and places as it shall deem advisable. A majority of its members shall
constitute a quorum and all determinations shall be made by a majority of such
quorum. Any determination reduced to writing and signed by a majority of the
members shall be fully as effective as if it had been made by a majority vote at
a meeting duly called and held.
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<PAGE>
5. ELIGIBILITY.
Options and Restricted Shares may be awarded only to key salaried
employees (including officers) of the Company and its Subsidiaries who are at
the time of the Award regularly employed by the Company or a Subsidiary on a
full-time basis. A director of the Company or of a Subsidiary who is not also an
employee of the Company or of one of its Subsidiaries will not be eligible to
receive any Awards under the Plan. No ISO shall be granted to any employee who,
at the time the ISO is granted, owns (or is considered as owning within the
meaning of Section 425(d), or any successor section, of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of any Subsidiary, unless at the time the ISO is granted
the option price is at least 110% of the Fair Market Value of the Common Stock
subject to the ISO and the ISO by its terms is not exercisable after the
expiration of five years from the date it is granted. Awards may be made to
employees who hold or have held Options and/or Restricted Shares under this Plan
or any other plans of the Company. An employee who has received Awards under
this Plan may be granted additional Options and Restricted Shares under this
Plan or any other plan.
6. OPTIONS.
A. Option Prices. Except as otherwise specifically provided in
paragraph 5 hereof, the purchase price of the Common Stock under each Option
shall be determined by the Board, but shall not be less than 100% of the Fair
Market Value of the Common Stock at the time of the granting of such Option.
B. Term of Options. The term of each Option shall be for such period as
the Board shall determine, but not more than ten years from the date of grant in
the case of each ISO, and, except as set forth in paragraph 9 hereof, shall
expire upon termination of employment with the Company or any Subsidiary.
C. Exercise of Options. Unless otherwise provided in the Stock Option
Agreement, an Option granted under the Plan shall be exercisable in whole, or in
part, at any time during the term of the Option. Payment shall be made in cash
or, unless otherwise provided in the Stock Option Agreement, in whole shares of
Common Stock already owned by the person exercising
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<PAGE>
the Option or, unless otherwise provided in the Stock Option Agreement, partly
in cash and partly in such Common Stock. An Option shall be exercised by written
notice to the Company. Such notice shall state that the person exercising the
Option elects to exercise the Option, the number of shares in respect of which
it is being exercised and the manner of payment for such shares, and shall
either (i) be accompanied by payment of the full purchase price of such shares
or (ii) fix a date (not more than 10 business days from the date of exercise)
for the payment of the full purchase price of such shares. Cash payments shall
be made by wire transfer, certified or bank check or personal check, in each
case payable to the order of the Company; provided, however, that the Company
shall not be required to deliver certificates for shares with respect to which
an Option is exercised until the Company has confirmed the receipt of good and
available funds in payment of the purchase price thereof. Common Stock payments
(valued at the Fair Market Value of a share of Common Stock on the date of
exercise) shall be made by delivery of stock certificates in negotiable form. If
certificates representing Common Stock are used to pay all or part of the
purchase price of an Option, separate certificates shall be delivered by the
Company representing the same number of shares as each certificate so used, and
an additional certificate shall be delivered representing any additional shares
to which the person exercising the Option is entitled as a result of the
exercise of the Option. Except as provided in paragraphs 9 and 25 and
subparagraph 6G hereof, no Option may be exercised at any time unless the Holder
thereof is then an employee of the Company or of a Subsidiary or, if the option
agreement so provides, is an Employee of an Affiliated Entity. No Holder or
other person exercising the Option shall have any of the rights of a stockholder
with respect to the shares subject to the Option until such shares shall be
transferred to the Holder or such other person upon the exercise of the Option.
D. ISOs. Notwithstanding anything to the contrary contained herein, but
subject to paragraph 8 hereof, in the case of ISOs, the aggregate Fair Market
Value (determined at the time the Option is granted) of the shares of Common
Stock covered by ISOs which first become exercisable in any calendar year under
the Plan by any individual employee (and under all other plans of the Company or
any Subsidiary which provide for the granting of ISOs) shall not exceed
$100,000.
E. SARs. The Board may (but shall not be obligated to) grant SARs
pursuant to the provisions of this subparagraph 6E
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<PAGE>
to the Holder of any Option granted under the Plan (hereinafter in this
subparagraph 6E called a related Option) with respect to all or a portion of the
shares subject to the related Option. An SAR may only be granted concurrently
with the grant of the related Option. Subject to the terms and provisions of
this subparagraph 6E, each SAR shall be exercisable only at the same time and to
the same extent the related Option is exercisable, and in no event after the
termination or exercise of the related Option. Notwithstanding the foregoing, no
SAR may be exercised within a period of six months after the date of grant of
the SAR. SARs granted under the Plan shall be exercisable in whole or in part by
notice to the Company. Such notice shall state that the person exercising the
SARs elects to exercise the SARs, the number of shares in respect of which the
SARs are being exercised and the form of payment requested.
Subject to the terms and provisions of this subparagraph 6E, upon the
exercise of SARs, the person exercising the SARs shall be entitled to receive
from the Company consideration (in the form hereinafter provided) equal in value
to the excess of the Fair Market Value as of the date of exercise of the SARs of
each share of Common Stock with respect to which such SARs have been exercised
over the option price per share of Common Stock subject to the related Option.
Upon the exercise of an SAR, the person exercising the SARs may specify the form
of consideration to be received, which shall be in shares of Common Stock
(valued at Fair Market Value on the date of exercise of the SAR), or in cash, or
partly in cash and partly in shares of Common Stock as the person exercising the
SARs shall request; provided, however, that the Board in its sole discretion may
disapprove the form of consideration requested and instead authorize the payment
of such consideration in shares of Common Stock (valued as aforesaid), or in
cash, or partly in cash and partly in shares of Common Stock. Any election by
the person exercising the SARs to receive cash in full or partial settlement of
the SAR, as well as any exercise of an SAR for such cash, shall be made only
during the period beginning on the third business day following the date of
release for publication of quarterly or annual summary statements of sales and
earnings and ending on the twelfth business day following such date (the
"Exercise Period"). Unless the Board determines otherwise, the number of SARs
which may be exercised for cash, or partly for cash and partly for shares of
Common Stock, during any Exercise Period may not exceed twenty percent of the
aggregate number of shares of Common Stock originally subject to the related
Option (as such original number, without giving effect to the exercise of any
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portion of the related Option, shall have been retroactively adjusted by
application of the adjustment(s), if any, determined in accordance with
paragraph 13 hereof or the corresponding provisions of any outstanding Stock
Option Agreement), but such SARs shall be exercisable only to the extent the
related Option is exercisable. For purposes of this subparagraph 6E, the date of
exercise of an SAR shall mean the date on which the Company shall have received
notice from the person exercising the SARs of the exercise of such SAR, except
that, upon exercise during the Exercise Period of an SAR granted in tandem with
a Nonqualified Stock Option, the date of exercise of such SAR shall be deemed to
be the date during the Exercise Period on which the highest reported closing
sales price of a share of Common Stock as reported on the Composite Tape
occurred and the Fair Market Value of such shares shall be deemed to be such
highest reported closing sales price.
Upon the exercise of SARs, the related Option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised, and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock available for the grant of Options under the Plan. Upon the
exercise or termination of the related Option, the SARs with respect to such
related Option shall be considered to have been exercised or terminated to the
extent of the number of shares of Common Stock with respect to which the related
Option was so exercised or terminated.
The provisions of paragraphs 4, 6B and 9 through 22 of the Plan (to the
extent that such provisions are applicable to Options) shall also be applicable
to SARs unless the context otherwise requires. The effective date of the grant
of an SAR shall be the date on which the Board approves the grant of such SAR.
Each grantee of an SAR shall be notified promptly of the grant of an SAR.
Notwithstanding anything to the contrary contained in this subparagraph
6E, SARs shall not be exercisable unless at the time of such exercise (i) the
Holder or other person exercising the SARs is directly or indirectly subject to
Section 16 of the Exchange Act or (ii) sales of Common Stock by the person
exercising the SARs would be reportable under Section 16 by the original Holder
of the related Option.
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F. Limited Rights. The Board may (but shall not be obligated to) grant
Limited Rights pursuant to the provisions of this subparagraph 6F to the Holder
of any Option (hereinafter in this subparagraph 6F called a related Option) with
respect to all or a portion of the shares subject to the related Option. A
Limited Right may only be granted concurrently with the grant of the related
Option. A Limited Right may be exercised only during the period (a) beginning on
the first day following either (i) the date of approval by the stockholders of
the Company of an Approved Transaction (as defined in the last paragraph of
paragraph 8 hereof), (ii) the date of a Control Purchase (as defined in the last
paragraph of paragraph 8 hereof), or (iii) the date of a Board Change (as
defined in the last paragraph of paragraph 8 hereof), and (b) ending on the
thirtieth day (or such other date specified in the Stock Option Agreement)
following such date. Each Limited Right shall be exercisable only to the extent
the related Option is exercisable, and in no event after the termination of the
related Option. Notwithstanding the provisions of the two immediately preceding
sentences, no Limited Right may be exercised within a period of six months after
the date of grant of the Limited Right.
Upon the exercise of Limited Rights, the related Option shall be
considered to have been exercised to the extent of the number of shares of
Common Stock with respect to which such Limited Rights are exercised, and shall
be considered to have been exercised to that extent for purposes of determining
the number of shares of Common Stock available for the grant of Options under
the Plan. Upon the exercise or termination of the related Option, the Limited
Rights with respect to such related Option shall be considered to have been
exercised or terminated to the extent of the number of shares of Common Stock
with respect to which the related Option was so exercised or terminated.
The provisions of paragraphs 4, 6B and 9 through 22 of the Plan (to the
extent that such provisions are applicable to Options) shall also be applicable
to Limited Rights unless the context otherwise requires. The effective date of
the grant of a Limited Right shall be the date on which the Board approves the
grant of such Limited Right. Each grantee of a Limited Right shall be notified
promptly of the grant of the Limited Right.
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Limited Rights granted under the Plan shall be exercisable in whole or
in part by notice to the Company. Such notice shall state that the person
exercising the Limited Rights elects to exercise the Limited Rights and the
number of shares in respect of which the Limited Rights are being exercised. The
effective date of exercise of a Limited Right shall be deemed to be the date on
which the Company shall have received such notice. Upon the exercise of Limited
Rights granted in tandem with an ISO, except as otherwise provided in the Stock
Option Agreement, the person exercising the Limited Rights shall receive in cash
an amount equal to the excess of the Fair Market Value on the date of exercise
of such Limited Rights of each share of Common Stock with respect to which such
Limited Right shall have been exercised over the option price per share of
Common Stock subject to the related ISO.
Upon the exercise of Limited Rights granted in tandem with a
Nonqualified Stock Option, except as otherwise provided in the Stock Option
Agreement, the person exercising the Limited Rights shall receive in cash an
amount equal to the product computed by multiplying (i) the excess of (a) the
higher of (x) the Minimum Price Per Share (as hereinafter defined), or (y) the
highest reported closing sales price of a share of Common Stock as reported on
the Composite Tape at any time during the period beginning on the sixtieth day
prior to the date on which such Limited Rights are exercised and ending on the
date on which such Limited Rights are exercised, over (b) the option price per
share of Common Stock subject to the related Nonqualified Stock Option, by (ii)
the number of shares of Common Stock with respect to which such Limited Rights
are being exercised.
For purposes of this subparagraph 6F, the term "Minimum Price Per
Share" shall mean the highest gross price (before brokerage commissions,
soliciting dealers' fees and similar charges) paid or to be paid for any share
of Common Stock (whether by way of exchange, conversion, distribution,
liquidation or otherwise) in, or in connection with, any Approved Transaction or
Control Purchase (as such terms are defined in paragraph 8 hereof) which occurs
at any time during the period beginning on the sixtieth day prior to the date on
which such Limited Rights are exercised and ending on the date on which such
Limited Rights are exercised. For purposes of this definition, if the
consideration paid or to be paid in any such Approved Transaction or Control
Purchase shall consist, in whole or in part, of consideration other than cash,
the Board
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shall take such action, as in its judgment it deems appropriate, to establish
the cash value of such consideration, but such valuation shall not be less than
the value, if any, attributed to such consideration by any other party to such
Approved Transaction or Control Purchase.
Notwithstanding anything to the contrary contained in this subparagraph
6F, Limited Rights shall not be exercisable unless at the time of the occurrence
of an Approved Transaction, Control Purchase or Board Change (as such terms are
defined in paragraph 8 hereof) (i) the Holder or other person exercising the
Limited Rights is directly or indirectly subject to Section 16(b) of the
Exchange Act or (ii) sales of Common Stock by the person exercising the Limited
Rights would be reportable under Section 16 by the original Holder of the
related Option. The Stock Option Agreement evidencing an Option may contain such
provisions limiting the exercise of Limited Rights as the Board deems
appropriate to ensure that the penalty provisions of Section 4999 of the Code,
or any successor thereto in effect at the time of such exercise, will not apply
to any stock or cash received from the Company by the Holder or other person
exercising the Limited Rights.
G. Limited Transferability of Options. Except as set forth in this
subparagraph G and paragraph 23, Options shall not be transferable other than by
will or the laws of descent and distribution, and Options may be exercised
during the lifetime of the Holder thereof only by such Holder (or his or her
court appointed legal representative). The Stock Option Agreement may provide
that Options are transferable by gift to such persons or entities and upon such
terms and conditions specified in the Holder's Stock Option Agreement.
7. RESTRICTED SHARES.
A. Valuation Date, Issuance and Price. The Board shall determine
whether certificates representing shares of Common Stock covered by awards of
Restricted Shares will be issued at the beginning or the end of the Restriction
Period, whether Dividend Equivalents will be paid during the Restriction Period
in the event shares of Common Stock are to be issued at the end of the
Restriction Period and shall designate a Valuation Date with respect to each
award of Restricted Shares and may prescribe restrictions, terms and conditions
applicable to the vesting of such Restricted Shares in addition to those
provided
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in this Plan. The Board shall determine the price, if any, to be paid by the
Holder for the Restricted Shares.
B. Issuance of Stock at Beginning of the Restriction Period. If
certificates representing shares of Common Stock are issued at the beginning of
the Restriction Period, the stock certificate or certificates representing such
shares shall be registered in the name of the Holder to whom such Restricted
Shares shall have been awarded. During the Restriction Period, certificates
representing the Restricted Shares and any securities constituting Retained
Distributions shall bear a restrictive legend to the effect that ownership of
the Restricted Shares (and such Retained Distributions), and the enjoyment of
all rights appurtenant thereto, are subject to the restrictions, terms and
conditions provided in the Plan and the applicable Restricted Shares Agreement.
Such certificates shall be deposited by such Holder with the Company, together
with stock powers or other instruments of assignment, each endorsed in blank,
which will permit transfer to the Company of all or any portion of the
Restricted Shares and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the applicable Restricted Shares Agreement.
C. Restrictions. If certificates representing shares of Common Stock
covered by an award of Restricted Shares are issued at the beginning of the
Restriction Period, the Restricted Shares shall constitute issued and
outstanding shares of Common Stock for all corporate purposes. The Holder will
have the right to vote such Restricted Shares, to receive and retain all regular
cash dividends, and such other distributions as the Board may in its sole
discretion designate, paid or distributed on such Restricted Shares and to
exercise all other rights, powers and privileges of a Holder of Common Stock
with respect to such Restricted Shares, with the exception that (i) the Holder
will not be entitled to delivery of the stock certificate or certificates
representing such Restricted Shares until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing such Restricted Shares during the
Restriction Period; (iii) other than regular cash dividends and such other
distributions as the Board may in its sole discretion designate, the Company
will retain custody of all distributions ("Retained Distributions") made or
declared with respect to such
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Restricted Shares (and such Retained Distributions will be subject to the same
restrictions, terms and conditions as are applicable to such Restricted Shares)
until such time, if ever, as the Restricted Shares with respect to which such
Retained Distributions shall have been made, paid or declared shall have become
vested, and such Retained Distributions shall not bear interest or be segregated
in separate accounts; (iv) the Holder may not sell, assign, transfer, pledge,
exchange, encumber or dispose of such Restricted Shares or any Retained
Distributions during the Restriction Period; and (v) a breach of any
restrictions, terms or conditions provided in the Plan or established by the
Board with respect to such Restricted Shares or Retained Distributions will
cause a forfeiture of such Restricted Shares and any Retained Distributions with
respect thereto.
D. Issuance of Stock at End of the Restriction Period. If certificates
representing shares of Common Stock covered by an award of Restricted Shares are
to be issued at the end of the Restriction Period, the Holder shall have none of
the rights of a stockholder with respect to the shares of Common Stock covered
by an award of Restricted Shares until such shares have been transferred to the
Holder at the end of the Restriction Period. If shares of Common Stock are to be
issued at the end of the Restriction Period, the Holder, unless otherwise
determined by the Board, shall be entitled to receive Dividend Equivalents
during the Restriction Period with respect to the shares of Common Stock covered
thereby.
E. Cash Awards. In connection with any award of Restricted Shares, the
Board may authorize the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested; provided, however, that the amount of the cash payment, if any, that a
Holder shall be entitled to receive shall not exceed 100% of the aggregate
Maturity Value of the Restricted Shares awarded to such Holder hereunder. Such
Cash Awards shall be payable in accordance with such additional restrictions,
terms and conditions as shall be prescribed by the Board and shall be in
addition to any other salary, incentive, bonus or other compensation payments
which Holders shall be otherwise entitled or eligible to receive from the
Company.
F. Completion of Restriction Period. On the Valuation Date with respect
to each award of Restricted Shares, and the satisfaction of any other applicable
restrictions, terms and conditions (i) all or part of such Restricted Shares
shall
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become vested, (ii) any Retained Distributions with respect to such Restricted
Shares shall become vested to the extent that the Restricted Shares related
thereto shall have become vested, and (iii) any Cash Award to be received by the
Holder with respect to such Restricted Shares shall become payable, all in
accordance with the terms of the applicable Restricted Shares Agreement. Any
such Restricted Shares and Retained Distributions that shall not have become
vested shall be forfeited to the Company and the Holder shall not thereafter
have any rights with respect to such Restricted Shares and Retained
Distributions that shall have been so forfeited.
8. ACCELERATION OF OPTIONS AND RESTRICTED SHARES.
Notwithstanding any contrary waiting period or installment period in
any Stock Option Agreement or any Restriction Period in any Restricted Share
Agreement or in the Plan, each outstanding Option granted under the Plan shall,
except as otherwise provided in the Stock Option Agreement, become exercisable
in full for the aggregate number of shares covered thereby, and each Restricted
Share, except as otherwise provided in the Restricted Shares Agreement, shall
vest unconditionally, in the event (i) the Board (or, if approval of the Board
is not required as a matter of law, the stockholders of the Company) shall
approve (a) any consolidation or merger of the Company (x) as contemplated in
the Amended and Restated Agreement and Plan of Merger dated as of September 22,
1995 among Time Warner Inc., TW Inc., Time Warner Acquisition Corp., TW
Acquisition Corp. and Turner Broadcasting System, Inc., as the same may be
amended from time to time, or (y) in which the Company is not the continuing or
surviving corporation or pursuant to which shares of Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the Holders of Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (b) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company, or (c) the adoption of any
plan or proposal for the liquidation or dissolution of the Company, or (ii) any
person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act), corporation or other entity (other than the Company or any
employee benefit plan sponsored by the Company or any Subsidiary) (a) shall
purchase any Common Stock of the Company (or securities convertible into the
Company's Common Stock) for
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<PAGE>
cash, securities or any other consideration pursuant to a tender offer or
exchange offer, without the prior consent of the Board, or (b) shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 20
percent or more of the combined voting power of the then outstanding securities
of the Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors (calculated
as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire
the Company's securities), or (iii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire Board
shall cease for any reason to constitute a majority thereof unless the election,
or the nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. Any
transaction referred to in the foregoing clause (i) is herein called an Approved
Transaction, any purchase pursuant to a tender offer or exchange offer or
otherwise as described in the foregoing clause (ii) is herein called a Control
Purchase and the cessation of individuals constituting a majority of the Board
as described in the foregoing clause (iii) is herein called a Board Change. The
Stock Option Agreement and Restricted Shares Agreement evidencing Options or
Restricted Shares granted under the Plan may contain such provisions limiting
the acceleration of the exercise of Options and the acceleration of the vesting
of Restricted Shares as provided in this paragraph 8 as the Board deems
appropriate to ensure that the penalty provisions of Section 4999 of the Code,
or any successor thereto in effect at the time of such acceleration, will not
apply to any stock or cash received from the Company by the Holder or such
Holder's permitted transferee pursuant to subparagraph 6G.
9. TERMINATION OF EMPLOYMENT.
A. General. If a Holder's employment shall be terminated by the Company
or any Subsidiary or the Holder shall cease to be an Employee of an Affiliated
Entity prior to the complete exercise of an Option (or deemed exercise thereof,
as provided in subparagraphs 6E and 6F), or prior to the complete vesting of any
Restricted Shares, then such Option shall thereafter be exercisable, and the
Restricted Shares shall vest, solely to the extent provided in the applicable
Stock Option Agreement or Restricted Shares Agreement; provided, however, that
(a) no
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<PAGE>
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates or the Holder ceases to be an Employee of
an Affiliated Entity by reason of death or Total Disability, the Option shall
remain exercisable for a period of at least one year following such termination
(but not later than the scheduled expiration of such Option) and the Restricted
Shares and any Retained Distributions shall vest in full; and (c) any
termination by the employing company for cause will be treated in accordance
with the provisions of subparagraph 9B.
B. Termination for Cause. If a Holder's employment with the Company or
any of its Subsidiaries shall be terminated for cause by the Company or such
Subsidiary or the Holder shall be terminated as an Employee of an Affiliated
Entity for cause prior to the exercise of any Option, or the complete vesting
of any Restricted Shares, then unless the applicable Stock Option Agreement or
Restricted Shares Agreement provides otherwise, all Options held by such Holder
and any permitted transferee pursuant to subparagraph 6G shall terminate one
month after the date of a termination for cause (provided that if such
termination for cause is for fraud, misappropriation or embezzlement, all
options shall terminate immediately) and all Restricted Shares and Retained
Distributions shall be forfeited. For the purposes hereof, cause (a) shall
have the meaning provided for in any employment, advisory or consulting
agreement to which such Holder and Time Warner are parties or (b) in the
absence thereof, shall mean insubordination, dishonesty, incompetence, moral
turpitude, other misconduct of any kind and the refusal to perform such Holder's
duties and responsibilities for any reason other than illness or incapacity,
except that if the termination occurs within 12 months after an Approved
Transaction, Control Purchase or Board Change, cause under this clause (b)
shall mean only a felony conviction for fraud, misappropriation or embezzlement.
C. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Stock Option Agreement or Restricted Shares
Agreement that the Award shall become and/or remain exercisable or shall vest at
rates and times at variance with the rules otherwise herein set forth; provided,
however, that any such Stock Option Agreement or Restricted Shares Agreement
provisions at variance with the exercisability and vesting rules otherwise set
forth herein shall be effective only if reflected in the terms of an employment
agreement approved or ratified by the Board.
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D. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment or the termination of the
Holder's status as an Employee of an Affiliated Entity. Awards made under the
Plan shall not be affected by any change of employment so long as the Holder
continues to be an employee of the Company or one of its Subsidiaries or an
Employee of an Affiliated Entity.
10. RIGHT OF THE EMPLOYER TO TERMINATE EMPLOYMENT.
Nothing contained in the Plan or in any Award shall confer on any
Holder any right to continue in the employ of the Company or any of its
Subsidiaries or to continue as an Employee of an Affiliated Entity or interfere
in any way with the right of the Company or a Subsidiary or an Affiliated Entity
to terminate the employment of the Holder at any time, with or without cause.
11. NONALIENATION OF BENEFITS.
Except as provided in subparagraph 6G, no right or benefit under the
Plan shall be subject to anticipation, alienation, sale, assignment,
hypothecation, pledge, exchange, transfer, encumbrance or charge, and any
attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange,
transfer, encumber or charge the same shall be void. No right or benefit
hereunder shall in any manner be liable for or subject to the debts, contracts,
liabilities or torts of the person entitled to such benefit.
12. WRITTEN AGREEMENT.
Each award of Restricted Shares and any right to a Cash Award hereunder
shall be evidenced by a Restricted Shares Agreement and each grant of an Option
shall be evidenced by a Stock Option Agreement, each in such form and containing
such terms and provisions not inconsistent with the provisions of the Plan as
the Board from time to time shall approve. The effective date of the granting of
an Option shall be the date on which the Board approves the granting of such
Option. Each grantee of an Option or Restricted Shares shall be notified
promptly of such grant and a written Stock Option Agreement and/or Restricted
Shares Agreement shall be promptly executed and delivered by the Company and the
grantee, provided that
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such grant of Options or Restricted Shares shall terminate if such written
Agreement is not signed by such grantee (or his or her attorney) and delivered
to the Company within 60 days after the date the Board approved such grant. Any
such written Agreement may contain such provisions as the Board deems
appropriate to ensure that the penalty provisions of Section 4999 of the Code,
or any successor thereto, will not apply to any stock or cash received from the
Company by the Holder or such Holder's permitted transferee pursuant to
subparagraph 6G.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
The Stock Option Agreements and Restricted Shares Agreements evidencing
Awards may contain such provisions as the Board shall determine to be
appropriate for the adjustment of the number and class of all Restricted Shares
and the terms applicable to any Cash Awards and the number and class of shares
subject to each outstanding Option and the option prices in the event of changes
in the outstanding Common Stock of the Company by reason of any stock dividend,
distribution, split-up, recapitalization, combination or exchange of shares,
merger, consolidation or liquidation and the like, and, in the event of any such
change in the outstanding Common Stock of the Company, the aggregate number and
class of shares available under the Plan shall be appropriately adjusted by the
Board, whose determination shall be conclusive.
14. RIGHT OF FIRST REFUSAL.
The Stock Option Agreements and Restricted Shares Agreements may
contain such provisions as the Board shall determine to the effect that if a
Holder, or other person exercising an Option, elects to sell all or any shares
of Common Stock that such Holder or other person acquired upon the exercise of
an Option or upon the vesting of Restricted Shares awarded under this Plan, then
such Holder or other person shall not sell such shares unless such Holder or
other person shall have first offered in writing to sell such shares to the
Company at Fair Market Value on a date specified in such offer (which date shall
be at least three business days and not more than ten business days following
the date of such offer). In any such event, certificates representing shares
issued upon exercise of Options and the vesting of Restricted Shares shall bear
a restrictive legend to the effect that transferability of
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such shares are subject to the restrictions contained in the Plan and the
applicable Stock Option Agreement or Restricted Shares Agreement and the Company
may cause the registrar of its Common Stock to place a stop transfer order with
respect to such shares.
15. TERMINATION AND AMENDMENT.
Unless the Plan shall theretofore have been terminated as hereinafter
provided, no Awards may be made under the Plan after December 31, 1997. The
Board may at any time prior to December 31, 1997 terminate the Plan, and the
Board may at any time also modify or amend the Plan in such respects as it shall
deem advisable; provided, however, that the Board may not, without approval of
the Holders of a majority of the voting securities of the Company present,
either in person or by proxy, and entitled to vote at a meeting (i) materially
increase (except as provided in paragraph 13 hereof) the maximum number of
shares which may be issued under the Plan, (ii) materially modify the
requirements as to eligibility for participation in the Plan, or (iii)
materially increase the benefits accruing to participants under the Plan. No
termination, modification or amendment of the Plan or any outstanding Restricted
Shares Agreement or Stock Option Agreement may, without the consent of the
employee (or a transferee of such employee if the Award, or any part thereof,
has been transferred pursuant to subparagraph 6G) to whom any Award shall
theretofore have been granted, adversely affect the rights of such employee (or
a transferee of such employee if the Award, or any part thereof, has been
transferred pursuant to subparagraph 6G) with respect to such Award.
16. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective upon approval by the vote of a majority
of the voting securities of the Company present, either in person or by proxy,
and entitled to vote at the 1988 Annual Meeting of Stockholders to be held on
April 21, 1988, or any adjournment thereof. Prior to such approval, the Board
may, in its discretion, grant or authorize the making of Awards under the Plan
provided that the exercise of Options and the vesting of Restricted Shares shall
be expressly subject to the condition that the Plan shall have been so approved.
Unless
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the Plan shall be so approved, the Plan and all Awards theretofore made
thereunder shall be and become null and void.
17. GOVERNMENT AND OTHER REGULATIONS.
The obligation of the Company with respect to Awards shall be subject
to (i) all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of a registration statement under the Securities Act of 1933, and
(ii) the rules and regulations of any securities exchange on which the Common
Stock may be listed.
18. WITHHOLDING.
The Company's obligation to deliver shares of Common Stock or to pay
cash upon the exercise of any Nonqualified Stock Option or any SAR granted under
the Plan and to deliver stock certificates or to pay cash upon the vesting of
Restricted Shares or Cash Awards shall be subject to applicable Federal, state
and local tax withholding requirements. Federal, state and local withholding tax
paid upon the exercise of any Nonqualified Stock Option and upon the vesting of
Restricted Shares may be paid in shares of Common Stock upon such terms and
conditions as the Board shall determine; provided, however, that the Board in
its sole discretion may disapprove such payment and require that such taxes be
paid in cash.
19. SEPARABILITY.
If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 under the Exchange Act (as the same shall be amended
from time to time) and/or Section 422A of the Code (as the same shall be amended
from time to time), then such terms or provisions shall be deemed inoperative to
the extent they so conflict with the requirements of said Rule 16b-3, and/or
with respect to ISO's, Section 422A of the Code.
With respect to ISOs, if this Plan does not contain any provision
required to be included herein under Section 422A of the Code (as the same shall
be amended from time to time), such
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provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out at length herein.
20. NON-EXCLUSIVITY OF THE PLAN.
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION.
By acceptance of an Award, each Holder shall be deemed to have agreed
that the award of Restricted Shares and any right to a Cash Award and the grant
of any Option and the exercise thereof or of any SAR or Limited Right are
special incentive compensation and that they will not be taken into account as
"salary" or "compensation" or "bonus" in determining the amount of any payment
under any pension, retirement or other qualified employee benefit plan of the
Company or any Subsidiary or any Affiliated Entity. In addition, each
beneficiary of a deceased Holder shall be deemed to have agreed that such Award
will not affect the amount of any life insurance coverage provided by the
Company on the life of the Holder which is payable to such beneficiary under any
life insurance plan covering employees of the Company or any Subsidiary or any
Affiliated Entity.
22. GOVERNING LAW.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
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23. BENEFICIARIES.
Each Holder may designate any person(s) or legal entity(ies), including
his or her estate, as his or her beneficiary under the Plan. Such designation
shall be made in writing on a form filed with the Secretary of the Company or
his or her designee and may be revoked or changed by such Holder at any time by
filing written notice of such revocation or change with the Secretary of the
Company or his or her designee. If no person shall be designated by a Holder as
his or her beneficiary or if no person designated as a beneficiary survives such
Holder, the Holder's beneficiary shall be his or her estate.
24. DEFERRAL OF OPTION GAINS.
A Stock Option Agreement may contain terms, conditions and procedures
permitting Holders to elect to defer the receipt of shares of Common Stock upon
the exercise of Options for a specific period or until a specified event.
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As Amended Through
March 16, 2000
TIME WARNER
1989 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner 1989 Stock Incentive Plan, as amended
(hereinafter the "Plan"), is to provide for the granting of stock options, stock
appreciation rights and restricted shares to certain employees, including
officers and directors who are also employees of the Company or its
Subsidiaries. The general purpose of the Plan is to promote the interests of the
Company and its stockholders by providing to certain employees of the Company or
its Subsidiaries additional incentives to continue and increase their efforts
with respect to, and to remain in the employ of, the Company or its
Subsidiaries.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement, stock
appreciation rights agreement and the restricted shares agreement
specified in Section 12, both individually and collectively, as the
context so requires.
(b) "Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of law,
the stockholders of the Company) shall approve (i) any consolidation or
merger of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of Common Stock would
be converted into cash, securities or other property, other than a
merger of the Company (x) as contemplated in the Amended and Restated
Agreement and Plan of Merger dated as of September 22, 1995 among Time
Warner Inc., TW Inc., Time Warner Acquisition Corp., TW Acquisition
Corp. and Turner Broadcasting System, Inc., as the same may be amended
from time to time, or (y) in which the holders of Common Stock
immediately prior to the merger have the same proportionate ownership
of common stock of the surviving corporation immediately after the
merger, or (ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company, or (iii) the adoption
of any plan or proposal for the liquidation or dissolution of the
Company.
(c) "Award" means grants of Options, SARs and/or Restricted
Shares under this Plan.
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(d) "Board" means the Board of Directors of the Company.
(e) "Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board ceased for any reason to constitute a majority thereof
unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of the period.
(f) "Cash Award" means the amount of cash, if any, to be paid
to an employee pursuant to Section 7.5.
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
Reference to any specific Code section shall include any successor
section.
(h) "Committee" means the Committee of the Board appointed
pursuant to Section 4.
(i) "Common Stock" means the common stock, par value $.01 per
share, of the Company.
(j) "Company" means Time Warner Inc., a Delaware corporation,
and any successor thereto.
(k) "Composite Tape" means the New York Stock Exchange
Composite Tape.
(l) "Control Purchase" means any transaction in which any
person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act), corporation or other entity (other than the Company
or any employee benefit plan sponsored by the Company or any
Subsidiary) (i) shall purchase any Common Stock (or securities
convertible into Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of the Board, or (ii) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 20%
or more of the combined voting power of the then outstanding securities
of the Company ordinarily (and apart from the rights accruing under
special circumstances) having the right to vote in the election of
directors (calculated as provided in Rule 13d-3(d) in the case of
rights to acquire the Company's securities).
(m) "Dividend Equivalents" means, with respect to Restricted
Shares to be issued at the end of the Restriction Period, to the extent
specified by the Board only, an
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amount equal to the regular cash dividends and all other distributions
(or the economic equivalent thereof) which are payable to stockholders
of record during the Restriction Period on a like number of shares of
Common Stock.
(n) "Effective Date" means the date the Plan becomes effective
pursuant to Section 16.
(o) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor statute or statutes
thereto. Reference to any specific Exchange Act section shall include
any successor section.
(p) "Exercise Period" has the meaning ascribed thereto in
Section 6.5.
(q) "Fair Market Value" of a share of Common Stock means the
average of the high and low sales prices of a share of Common Stock on
the Composite Tape on the date in question, except as otherwise
provided in Section 6.5.
(r) "General SARs" means stock appreciation rights subject to
the terms of Section 6.5(b).
(s) "Holder" means an employee of the Company or a Subsidiary
who has received an Award under this Plan.
(t) "ISO" means an incentive stock option within the meaning
of section 422A(b) of the Code.
(u) "Limited SARs" means stock appreciation rights subject to
the terms of Section 6.5(c).
(v) "Minimum Price Per Share" means the highest gross price
(before brokerage commissions, soliciting dealers' fees and similar
charges) paid or to be paid for any share of Common Stock (whether by
way of exchange, conversion, distribution, liquidation or otherwise)
in, or in connection with, any Approved Transaction or Control Purchase
which occurs at any time during the period beginning on the sixtieth
day prior to the date on which Limited SARs are exercised and ending on
the date on which Limited SARs are exercised. If the consideration paid
or to be paid in any such Approved Transaction or Control Purchase
shall consist, in whole or in part, of consideration other than cash,
the Board shall take such action, as in its judgment it deems
appropriate, to establish the cash value of such consideration, but
such valuation shall not be less than the value, if any, attributed to
such consideration by any other party to such Approved Transaction or
Control Purchase.
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(w) "Nonqualified Stock Option" means a stock option that is
designated as a nonqualified stock option.
(x) "Option" means any ISO or Nonqualified Stock Option.
(y) "Plan" has the meaning ascribed thereto in Section 1.
(z) "Restricted Shares" means shares of Common Stock or the
right to receive shares of Common Stock, as the case may be, awarded to
an employee of the Company or a Subsidiary pursuant to Section 7.
(aa) "Restriction Period" means a period of time beginning on
the date of each award of Restricted Shares and ending on the Valuation
Date with respect to such award.
(bb) "Retained Distributions" has the meaning ascribed thereto
in Section 7.3.
(cc) "SARs" means General SARs and Limited SARs.
(dd) "SEC" means the Securities and Exchange Commission.
(ee) "Subsidiary" means any present or future subsidiary of
the Company as such term is defined in section 425 of the Code and any
present or future trade or business, whether or not incorporated,
controlled by or under common control with the Company. An entity shall
be deemed a Subsidiary of the Company only for such periods as the
requisite ownership or control relationship is maintained.
(ff) "Total Disability" means a permanent and total disability
as defined in section 22(e)(3) of the Code.
(gg) "Valuation Date" with respect to any Restricted Shares
awarded hereunder means the date designated as such in the Agreement
with respect to such award of Restricted Shares pursuant to Section 7.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 13 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is 5,500,000. If and to the extent that an Option shall
expire, terminate or be canceled for any reason without having been exercised
(or without having been considered to have been exercised as provided in Section
6.5(a)), the shares of Common Stock subject to such expired, terminated or
canceled portion of the Option shall again become available for purposes of the
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Plan. In addition, any Restricted Shares which are forfeited under the terms of
the Plan or any Agreement shall again become available for purposes of the Plan.
3.2. Character of Shares. Shares of Common Stock deliverable under the
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in the Company's treasury, or
both.
3.3. Reservation of Shares. The Company shall at all times reserve a
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in the Company's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to
the express provisions of the Plan, the Board shall have plenary authority, in
its discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the purchase price, if any, of each Restricted Share,
(b) the individuals to whom, and the time or times at which, Awards shall be
granted or awarded, (c) the number of shares to be subject to each Award, (d)
whether an Option shall be an ISO or a Nonqualified Stock Option, (e) when an
Option or SAR can be exercised and whether in whole or in installments, (f) the
time or times and the conditions subject to which Restricted Shares shall become
vested and any Cash Awards shall become payable, and (g) the form, terms and
provisions of any Agreement (which terms may be amended, subject to Section 15).
4.2. Factors to Consider. In making determinations hereunder, the Board
may take into account the nature of the services rendered by the respective
employees, their present and potential contributions to the success of the
Company and its Subsidiaries and such other factors as the Board in its
discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on the matters referred to in this Section 4
shall be conclusive.
4.4. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee of at least three members, who shall be members of the Compensation
Committee of the Board (or such other persons as the Board may designate), and
delegate to such Committee the authority of the Board to administer the Plan.
Upon such appointment and delegation, the Committee shall
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<PAGE>
have all the powers, privileges and duties of the Board in the administration of
the Plan, except for the power to appoint members of the Committee and to
terminate, modify or amend the Plan. The Board may from time to time appoint
members of any such Committee in substitution for or in addition to members
previously appointed, may fill vacancies in the Committee and may discharge the
Committee. The Committee shall select one of its members as its chairman and
shall hold its meetings at such times and places as it shall deem advisable. A
majority of its members shall constitute a quorum and all determinations shall
be made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
5.1. General. Awards may be made only to (a) employees, including
officers and directors who are also employees, of the Company or any of its
Subsidiaries and (b) prospective employees of the Company or any of its
Subsidiaries. The exercise of Options and SARs and the vesting of Restricted
Shares granted to a prospective employee shall be conditioned upon such person
becoming an employee of the Company or any of its Subsidiaries. For purposes of
the Plan, the term "prospective employee" shall mean any person who holds an
outstanding offer of employment on specific terms from the Company or any of its
Subsidiaries. Awards may be made to employees who hold or have held Awards under
this Plan or any similar or other awards under any other plan of the Company or
its Subsidiaries.
5.2. Intentionally Omitted.
5.3. Special ISO Rule. No ISO shall be granted to an employee who, at
the time the ISO is granted, owns (or is considered as owning within the meaning
of section 425(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any Subsidiary,
unless at the time the ISO is granted the option price is at least 110% of the
Fair Market Value of the Common Stock subject to the ISO and the ISO by its
terms is not exercisable after the expiration of five years from the date it is
granted.
6. OPTIONS AND SARS
6.1. Option Prices. Subject to Section 5.3, the purchase price of the
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
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6.2. Term of Options. The term of each Option shall be for such period
as the Board shall determine, as set forth in the applicable Agreement, but not
more than 10 years from the date of grant in the case of an ISO (except as
provided in Section 5.3).
6.3. Exercise of Options. An Option granted under the Plan shall become
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option).
6.4. Manner of Exercise. Payment of the Option purchase price shall be
made in cash or in whole shares of Common Stock already owned by the person
exercising an Option or, partly in cash and partly in such Common Stock;
provided, however, that such payment may be made in whole or in part in shares
of Common Stock only if and to the extent permitted by the applicable Agreement.
An Option shall be exercised by written notice to the Company upon such terms
and conditions as provided in the Agreement. The Company shall effect the
transfer of the shares of Common Stock purchased under the Option as soon as
practicable, and within a reasonable time thereafter such transfer shall be
evidenced on the books of the Company. No Holder or other person exercising an
Option shall have any of the rights of a stockholder of the Company with respect
to shares of Common Stock subject to an Option granted under the Plan until due
exercise and full payment has been made. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date of such
due exercise and full payment.
6.5. SARS. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
A SAR may be granted either concurrently with the grant of the related
Option or at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Subject to the terms and
provisions of this Section 6.5, each SAR shall be exercisable to the extent the
related Option is then exercisable (and may be subject to such additional
limitations on exercisability as the Agreement may provide), and in no event
after the complete termination or full exercise of the related Option. SARs
shall be exercisable in whole or in part upon notice to the Company upon such
terms and conditions as provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised and shall be considered to have been
exercised to that extent for purposes
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of determining the number of shares of Common Stock in respect of which other
Awards may be granted. Upon the exercise or termination of the related Option,
the SARs with respect thereto shall be considered to have been exercised or
terminated to the extent of the number of shares of Common Stock with respect to
which the related Option was so exercised or terminated.
The provisions of Sections 4, 6 and 8 through 22 (to the extent that
such provisions are applicable to Options) shall also be applicable to SARs
unless the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at
the time the related Option is exercisable and subject to the terms and
provisions of this Section 6.5, upon the exercise of General SARs, the person
exercising the General SAR shall be entitled to receive from the Company
consideration (in the form hereinafter provided) equal in value to the excess of
the Fair Market Value on the date of exercise of the shares of Common Stock with
respect to which such General SARs have been exercised over the aggregate
related Option purchase price for such shares; provided, however, that the Board
may, in any Agreement granting General SARs provide that the appreciation
realizable upon exercise thereof shall be measured from a base higher than the
related Option purchase price.
Upon the exercise of a General SAR, the person exercising the General
SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
General SAR shall comply with all applicable laws and shall additionally comply
(to the extent necessary) with the requirements for exemptive relief under Rule
16b-3 promulgated under the Exchange Act. Unless otherwise specified in the
applicable Agreement, the number of General SARs which may be exercised for
cash, or partly for cash and partly for shares of Common Stock, during any
permitted period of exercise (the "Exercise Period"), may not exceed 20% of the
aggregate number of shares of Common Stock originally subject to the related
Option (as such original number, without giving effect to the exercise of any
portion of the related Option, shall have been retroactively adjusted in
accordance with Section 13 or any corresponding provisions of an applicable
Agreement).
For purposes of this Section 6.5, the date of exercise of a General SAR
shall mean the date on which the Company shall have received notice from the
person exercising the General SAR of the exercise of such General SAR, except
that, upon exercise of a General SAR granted in connection with a Nonqualified
Stock Option during an Exercise Period which consists of the ten business days
beginning on the third business day following the date of the release for
publication of quarterly or annual summary statements of sales and earnings and
ending on the twelfth business day following such date, the date of exercise of
such General SAR shall be
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deemed to be the date during the Exercise Period on which the highest reported
closing sales price of a share of Common Stock as reported on the Composite Tape
occurred and the Fair Market Value of such shares shall be deemed to be such
highest reported closing sales price.
Notwithstanding anything to the contrary contained in this Section 6.5,
a General SAR shall not be exercisable unless at the time of such exercise (i)
the Holder or other person exercising the General SAR is directly or indirectly
subject to Section 16 of the Exchange Act or (ii) sales of Common Stock by the
person exercising the General SAR would be reportable under Section 16 by the
original Holder of the related Option.
(c) Limited SARs. Limited SARs may be exercised only during
the period (a) beginning on the first day following either (i) the date of an
Approved Transaction, (ii) the date of a Control Purchase, or (iii) the date of
a Board Change, and (b) ending on the ninetieth day (or such other date
specified in the Agreement) following such date. The effective date of exercise
of a Limited SAR shall be deemed to be the date on which the Company shall have
received notice from the person exercising the Limited SAR of the exercise
thereof.
Upon the exercise of Limited SARs granted in connection with an ISO,
except as otherwise provided in the Agreement, the person exercising the Limited
SAR shall receive in cash an amount equal to the excess of the Fair Market Value
on the date of exercise of such Limited SARs of the shares of Common Stock with
respect to which such Limited SARs shall have been exercised over the aggregate
related Option purchase price for such shares.
Upon the exercise of Limited SARs granted in connection with a
Nonqualified Stock Option, except as otherwise provided in the Agreement, the
person exercising the Limited SAR shall receive in cash an amount equal to the
product computed by multiplying (a) the excess of (i) the higher of (A) the
Minimum Price Per Share, or (B) the highest reported closing sales price of a
share of Common Stock as reported on the Composite Tape at any time during the
period beginning on the sixtieth day prior to the date on which such Limited
SARs are exercised and ending on the date on which such Limited SARs are
exercised over (ii) the per share Option price of the related Nonqualified Stock
Option, by (b) the number of shares of Common Stock with respect to which such
Limited SARs are being exercised.
Notwithstanding anything to the contrary contained in this Section 6.5,
Limited SARs shall not be exercisable unless at the time of the occurrence of an
Approved Transaction, Control Purchase or Board Change, (i) the Holder or other
person exercising the Limited SAR is directly or indirectly subject to Section
16 of the Exchange Act or (ii) sales of Common Stock by the person exercising
the Limited SAR would be reportable under Section 16 by the original Holder of
the related Option.
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6.6. Limited Transferability of Options and SARs. Except as set forth
in this Section 6.6 and Section 23, Options and SARs shall not be transferable
other than by will or the laws of descent and distribution, and Options and SARs
may be exercised during the lifetime of the Holder thereof only by such Holder
(or his or her court appointed legal representative). The Agreement may provide
that Options and SARs are transferable by gift to such persons or entities and
upon such terms and conditions specified in the Agreement.
7. RESTRICTED SHARES
7.1. Valuation Date, Issuance and Price. The Board shall determine
whether shares of Common Stock covered by awards of Restricted Shares will be
issued at the beginning or the end of the Restriction Period, whether Dividend
Equivalents will be paid during the Restriction Period in the event shares of
the Common Stock are to be issued at the end of the Restriction Period and shall
designate a Valuation Date with respect to each award of Restricted Shares and
may prescribe other restrictions, terms and conditions applicable to the vesting
of such Restricted Shares in addition to those provided in the Plan. The Board
shall determine the price, if any, to be paid by the Holder for the Restricted
Shares; provided, however, that the issuance of Restricted Shares shall be made
for at least the minimum consideration necessary to permit such Restricted
Shares to be deemed fully paid and nonassessable. All determinations made by the
Board pursuant to this Section 7.1 shall be specified in the Agreement.
7.2. Issuance of Restricted Shares at Beginning of the Restriction
Period. If shares of Common Stock are issued at the beginning of the Restriction
Period, the stock certificate or certificates representing such Restricted
Shares shall be registered in the name of the Holder to whom such Restricted
Shares shall have been awarded. During the Restriction Period, certificates
representing the Restricted Shares and any securities constituting Retained
Distributions shall bear a restrictive legend to the effect that ownership of
the Restricted Shares (and such Retained Distributions), and the enjoyment of
all rights appurtenant thereto, are subject to the restrictions, terms and
conditions provided in the Plan and the applicable Agreement. Such certificates
shall remain in the custody of the Company and the Holder shall deposit with the
Company stock powers or other instruments of assignment, each endorsed in blank,
so as to permit retransfer to the Company of all or any portion of the
Restricted Shares and any securities constituting Retained Distributions that
shall be forfeited or otherwise not become vested in accordance with the Plan
and the applicable Agreement.
7.3. Restrictions. Restricted Shares issued at the beginning of the
Restriction Period shall constitute issued and outstanding shares of Common
Stock for all corporate purposes. The Holder will have the right to vote such
Restricted Shares, to receive and retain all regular cash dividends and such
other distributions, as the Board may in its sole discretion designate, paid or
distributed on such Restricted Shares and to exercise all other rights, powers
and privileges of a Holder of Common Stock with respect to such Restricted
Shares; except, that, (a) the Holder will not be entitled to delivery of the
stock certificate or certificates representing
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such Restricted Shares until the Restriction Period shall have expired and
unless all other vesting requirements with respect thereto shall have been
fulfilled or waived; (b) the Company will retain custody of the stock
certificate or certificates representing the Restricted Shares during the
Restriction Period as provided in Section 7.2; (c) other than regular cash
dividends and such other distributions as the Board may in its sole discretion
designate, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Shares (and such
Retained Distributions will be subject to the same restrictions, terms and
vesting and other conditions as are applicable to the Restricted Shares) until
such time, if ever, as the Restricted Shares with respect to which such Retained
Distributions shall have been made, paid or declared shall have become vested,
and such Retained Distributions shall not bear interest or be segregated in a
separate account; (d) the Holder may not sell, assign, transfer, pledge,
exchange, encumber or dispose of the Restricted Shares or any Retained
Distributions or his interest in any of them during the Restriction Period; and
(e) a breach of any restrictions, terms or conditions provided in the Plan or
established by the Board with respect to any Restricted Shares or Retained
Distributions will cause a forfeiture of such Restricted Shares and any Retained
Distributions with respect thereto.
7.4. Issuance of Stock at End of the Restriction Period. Restricted
Shares issued at the end of the Restriction Period shall not constitute issued
and outstanding shares of Common Stock and the Holder shall not have any of the
rights of a stockholder with respect to the shares of Common Stock covered by
such an award of Restricted Shares, in each case, until such shares shall have
been transferred to the Holder at the end of the Restriction Period. If and to
the extent that shares of Common Stock are to be issued at the end of the
Restriction Period, the Holder shall be entitled to receive Dividend Equivalents
with respect to the shares of Common Stock covered thereby either (a) during the
Restriction Period or (b) in accordance with the rules applicable to Retained
Distributions, as the Board may specify in the Agreement.
7.5. Cash Awards. In connection with any award of Restricted Shares, an
Agreement may provide for the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested. Such Cash Awards shall be payable in accordance with such additional
restrictions, terms and conditions as shall be prescribed by the Board in the
Agreement and shall be in addition to any other salary, incentive, bonus or
other compensation payments which such Holder shall be otherwise entitled or
eligible to receive from the Company.
7.6. Completion of Restriction Period. On the Valuation Date with
respect to each award of Restricted Shares, and the satisfaction of any other
applicable restrictions, terms and conditions (a) all or part of such Restricted
Shares shall become vested, (b) any Retained Distributions and any unpaid
Dividend Equivalents with respect to such Restricted Shares shall become vested
to the extent that the Restricted Shares related thereto shall have become
vested and (c) any Cash Award to be received by the Holder with respect to such
Restricted Shares shall become payable, all in accordance with the terms of the
applicable Agreement. Any such Restricted Shares, Retained Distributions and any
unpaid Dividend Equivalents that shall not
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become vested shall be forfeited to the Company and the Holder shall not
thereafter have any rights (including dividend and voting rights) with respect
to such Restricted Shares, Retained Distributions and any unpaid Dividend
Equivalents that shall have been so forfeited.
8. ACCELERATION OF OPTIONS, SARS AND RESTRICTED SHARES
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period or
Restriction Period in any Agreement or in the Plan or in the event of any
Approved Transaction, Board Change or Control Purchase, unless the applicable
Agreement provides otherwise: (a) in the case of an Option or SAR, each such
outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby; and (b) in the case of Restricted Shares, the Restriction Period
applicable to each such award of Restricted Shares shall be deemed to have
expired and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents shall become vested and any Cash Award payable
pursuant to the applicable Agreement shall be adjusted in such manner as
provided in the Agreement.
9. TERMINATION OF EMPLOYMENT
9.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the applicable Agreement; provided, however, that (a) no
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates by reason of death or Total Disability,
the Option shall remain exercisable for a period of at least one year following
such termination (but not later than the scheduled expiration of such Option);
and (c) any termination by the Company for cause will be treated in accordance
with the provisions of Section 9.2.
9.2. Termination by Company for Cause. If a Holder's employment with
the Company or any Subsidiary shall be terminated for cause by the Company or
such Subsidiary during the Restriction Period with respect to any Restricted
Shares or prior to the exercise of any Option, then (a) unless the applicable
Agreement provides otherwise, all Options held by such Holder and any permitted
transferees pursuant to Section 6.6 shall terminate one month after the date of
a termination for cause, provided that if such termination for cause is for
fraud, misappropriation or embezzlement, all options shall terminate
immediately and (b) such Holder's rights to all Restricted Shares, Retained
Distributions, any unpaid Dividend Equivalents and any Cash Awards shall be
forfeited immediately. For the purposes hereof, cause (a) shall have the
meaning provided for in any employment, advisory or consulting agreement
to which such Holder and the Company or any such Subsidiary are parties or
(b) in the absence thereof, shall mean insubordination, dishonesty,
incompetence, moral turpitude, other misconduct of any kind and the refusal
to perform such Holder's duties and responsibilities for any reason other
than illness or incapacity, except that if
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the termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, cause under this clause (b) shall mean only a felony
conviction for fraud, misappropriation or embezzlement
9.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
9.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of the Company or a Subsidiary.
10. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any
Holder any right to continue in the employ of the Company or any of its
Subsidiaries or interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of the Holder at any time, with or
without cause; subject, however, to the provisions of any employment agreement
between the Holder and the Company or any Subsidiary.
11. NONALIENATION OF BENEFITS
Except as provided in Section 6.6, no right or benefit under the Plan
shall be subject to anticipation, alienation, sale, assignment, hypothecation,
pledge, exchange, transfer, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer,
encumber or charge the same shall be void. No right or benefit hereunder shall
in any manner be liable for or subject to the debts, contracts, liabilities or
torts of the person entitled to such benefits.
12. WRITTEN AGREEMENT
Each award of Restricted Shares and any right to a Cash Award hereunder
shall be evidenced by a restricted shares agreement; each grant of an Option
shall be evidenced by a stock option agreement which shall designate the Options
granted thereunder as ISOs or Nonqualified Stock Options; and each SAR shall be
evidenced by a stock appreciation rights
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agreement, each in such form and containing such terms and provisions not
inconsistent with the provisions of the Plan as the Board from time to time
shall approve; provided, however, that such Awards may be evidenced by a single
agreement. The effective date of the granting of an Award shall be the date on
which the Board approves such grant. Each grantee of an Option, SAR or
Restricted Shares shall be notified promptly of such grant and a written
Agreement shall be promptly executed and delivered by the Company and the
grantee, provided that such grant of Options, SARs or Restricted Shares shall
terminate if such written Agreement is not signed by such grantee (or his
attorney) and delivered to the Company within 60 days after the date the Board
approved such grant or if the effectiveness of such grant is conditioned upon
the grantee becoming an employee of the Company or one of its subsidiaries, the
execution by the grantee of an employment agreement with the Company or one of
its subsidiaries or any other similar condition, within 60 days after the
occurrence of such condition, if later. Any such written Agreement may contain
(but shall not be required to contain) such provisions as the Board deems
appropriate to ensure that the penalty provisions of section 4999 of the Code
will not apply to any stock or cash received by the Holder or such Holder's
permitted transferee pursuant to Section 6.6 from the Company.
13. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes the character or amount of the
Common Stock while any portion of any Award theretofore granted under the Plan
is outstanding but unexercised or unvested, the Board shall make such
adjustments in the character and number of shares subject to such Award, in the
option price, in the relevant appreciation base and in the Cash Awards, as shall
be applicable, equitable and appropriate in order to make such Award,
immediately after any such change, as nearly as may be practicable, equivalent
to such Award, immediately prior to any such change. If any merger,
consolidation or similar transaction affects the Common Stock subject to any
unexercised or unvested Award theretofore granted under the Plan, the Board or
any surviving or acquiring corporation shall take such action as is equitable
and appropriate to substitute a new award for such Award or to assume such Award
in order to make such new or assumed Award, as nearly as may be practicable,
equivalent to the old Award. If any such change or transaction shall occur, the
number and kind of shares for which Awards may thereafter be granted under the
Plan shall be adjusted to give effect thereto.
14. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine
to the effect that if a Holder, or other person exercising an Option, elects to
sell all or any shares of Common Stock that such Holder or other person acquired
upon the exercise of an Option or upon the vesting of Restricted Shares awarded
under the Plan, then such Holder or other person shall not sell such shares
unless such Holder or other person shall have first offered in writing
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to sell such shares to the Company at Fair Market Value on a date specified in
such offer (which date shall be at least three business days and not more than
10 business days following the date of such offer). In any such event,
certificates representing shares issued upon exercise of Options and the vesting
of Restricted Shares shall bear a restrictive legend to the effect that
transferability of such shares are subject to the restrictions contained in the
Plan and the applicable Agreement and the Company may cause the registrar of its
Common Stock to place a stop transfer order with respect to such shares.
15. TERMINATION AND AMENDMENT
15.1. General. Unless the Plan shall theretofore have been terminated
as hereinafter provided, no Awards may be made under the Plan on or after the
tenth anniversary of the Effective Date. The Board may at any time prior to the
tenth anniversary of the Effective Date terminate the Plan, and the Board may at
any time modify or amend the Plan in such respects as it shall deem advisable;
provided, however, that any such modification or amendment shall comply with all
applicable laws, applicable stock exchange listing requirements, and applicable
requirements for exemption (to the extent necessary) under Rule 16b-3 under the
Exchange Act.
15.2. Modification. No termination, modification or amendment of the
Plan may, without the consent of the person to whom any Award shall theretofore
have been granted (or a transferee of such person if the Award, or any part
thereof, has been transferred pursuant to Section 6.6), adversely affect the
rights of such person with respect to such Award. No modification, extension,
renewal or other change in any Award granted under the Plan shall be made after
the grant of such Award, unless the same is consistent with the provisions of
the Plan. With the consent of the Holder (or a transferee of such Holder if the
award, or any part thereof, has been transferred pursuant to Section 6.6) and
subject to the terms and conditions of the Plan (including Section 15.1), the
Board may amend outstanding Agreements with any Holder (or any such transferee),
including, without limitation, any amendment which would (a) accelerate the time
or times at which the Award may be exercised and/or (b) extend the scheduled
expiration date of the Award. Without limiting the generality of the foregoing,
the Board may but solely with the Holder's consent, agree to cancel any Award
under the Plan held by such Holder and issue a new Award in substitution
therefor, provided that the Award so substituted shall satisfy all of the
requirements of the Plan as of the date such new Award is made.
16. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the vote of a majority
of the voting securities of the Company present, either in person or by proxy,
and entitled to vote at a duly called and held meeting of stockholders of the
Company. Prior to the Effective Date, the Board
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may, in its discretion, grant or authorize the making of Awards under the Plan
as if the Effective Date had occurred, provided that the exercise of Options and
SARs and the vesting of Restricted Shares so granted or made shall be expressly
subject to the occurrence of the Effective Date.
17. GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company with respect to Awards shall be subject
to all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, the Company shall use its reasonable efforts to comply with
any legal requirements (a) to maintain a registration statement in effect under
the Securities Act of 1933 with respect to all shares of Common Stock that may
be issued to Holders under the Plan, and (b) to file in a timely manner all
reports required to be filed by it under the Exchange Act.
18. WITHHOLDING
The Company's obligation to deliver shares of Common Stock or pay cash
in respect of any Award or Cash Award under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding taxes paid upon the exercise of any Option and upon the
vesting of Restricted Shares may be paid in shares of Common Stock upon such
terms and conditions as the Board shall determine; provided, however, that the
Board in its sole discretion may disapprove such payment and require that such
taxes be paid in cash.
19. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 under the Exchange Act and/or section 422A of the
Code, then such terms or provisions shall be deemed inoperative to the extent
they so conflict with the requirements of Rule 16b-3, and/or with respect to
ISOs, section 422A of the Code. With respect to ISOs, if this Plan does not
contain any provision required to be included herein under section 422A of the
Code, such provision shall be deemed to be incorporated herein with the same
force and effect as if such provision had been set out at length herein;
provided, further, that to the extent any Option which is intended to qualify as
an ISO cannot so qualify, such Option, to that extent, shall be deemed to be a
Nonqualified Stock Option for all purposes of the Plan.
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20. NON-EXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award or Cash Award, as applicable, each Holder
shall be deemed to have agreed that such Award or Cash Award, as applicable, is
special incentive compensation that will not be taken into account, in any
manner, as salary, compensation or bonus in determining the amount of any
payment under any pension, retirement or other employee benefit plan of the
Company or any Subsidiary. In addition, each beneficiary of a deceased Holder
shall be deemed to have agreed that such Award or Cash Award, as applicable,
will not affect the amount of any life insurance coverage, if any, provided by
the Company on the life of the Holder which is payable to such beneficiary under
any life insurance plan covering employees of the Company or any Subsidiary.
22. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
23. BENEFICIARIES
Each Holder may designate any person(s) or legal entity(ies), including
his or her estate, as his or her beneficiary under the Plan. Such designation
shall be made in writing on a form filed with the Secretary of the Company or
his or her designee and may be revoked or changed by such Holder at any time by
filing written notice of such revocation or change with the Secretary of the
Company or his or her designee. If no person shall be designated by a Holder as
his or her beneficiary or if no person designated as a beneficiary survives such
Holder, the Holder's beneficiary shall be his or her estate.
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24. DEFERRAL OF OPTION GAINS
The Agreement may contain terms, conditions and procedures permitting
Holders to elect to defer the receipt of shares of Common Stock upon the
exercise of Options for a specific period or until a specified event.
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As Amended Through
March 16, 2000
TIME WARNER INC.
1993 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner Inc. 1993 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 the same may be amended
from time to time, or (y) in which the
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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, 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
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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 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.
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(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 four million plus 1.5% (one and one-half percent) of
the number of shares of Common Stock outstanding on December 31, 1992. 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.
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4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to
the express provisions of the Plan, the Board shall have plenary authority, in
its discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the individuals to whom, and the time or times at which,
Awards shall be granted or awarded, (b) the number of shares to be subject to
each Award, (c) when an Option or SAR can be exercised and whether in whole or
in installments, and (d) the form, terms and provisions of any Agreement (which
terms may be amended, subject to Section 14).
4.2. Factors to Consider. In making determinations hereunder, the Board
may take into account the nature of the services rendered by the respective
employees, consultants or advisors, their dedication and past contributions to
Time Warner and its Subsidiaries, their present and potential contributions to
the success of Time Warner and its Subsidiaries and such other factors as the
Board in its discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on 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.
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5. ELIGIBILITY
Awards may be made only to (a) employees of Time Warner or any of its
Subsidiaries (including officers and directors of any of Time Warner's
Subsidiaries), other than officers or directors of Time Warner who are subject
to Section 16 of the Exchange Act, (b) prospective employees of Time Warner or
any of its Subsidiaries and (c) consultants or advisors to Time Warner or any of
its Subsidiaries. The exercise of Options and SARs granted to a prospective
employee shall be conditioned upon such person becoming an employee of Time
Warner or any of its Subsidiaries. For purposes of the Plan, the term
"prospective employee" shall mean any person who holds an outstanding offer of
employment on specific terms from Time Warner or any of its Subsidiaries. Awards
may be made to employees, consultants and advisors who hold or have held Awards
under this Plan or any similar or other awards under any other plan of Time
Warner or its Subsidiaries.
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
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applicable Agreement. An Option shall be exercised by written notice to Time
Warner upon such terms and conditions as provided in the Agreement. Time Warner
shall effect the transfer of the shares of Common Stock purchased under the
Option as soon as practicable, and within a reasonable time thereafter such
transfer shall be evidenced on the books of Time Warner. No Holder or other
person exercising an Option shall have any of the rights of a stockholder of
Time Warner with respect to shares of Common Stock subject to an Option granted
under the Plan until due exercise and full payment has been made. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to the date of such due exercise and full payment.
6.5. SARs. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
A SAR may be granted either concurrently with the grant of the related
Option or at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Subject to the terms and
provisions of this Section 6.5, each SAR shall be exercisable to the extent the
related Option is then exercisable (and may be subject to such additional
limitations on exercisability as the Agreement may provide), and in no event
after the complete termination or full exercise of the related Option. SARs
shall be exercisable in whole or in part upon notice to Time Warner upon such
terms and conditions as provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered to
have been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock in respect of which other Awards may be granted. Upon the exercise
or termination of the related Option, the SARs with respect thereto shall be
considered to have been exercised or terminated to the extent of the number of
shares of Common Stock with respect to which the related Option was so exercised
or terminated.
The provisions of Sections 4 and 6 through 21 (to the extent that such
provisions are applicable to Options) shall also be applicable to SARs unless
the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the time
the related Option is exercisable and subject to the terms and provisions of
this Section 6.5, upon the exercise of General SARs, the person exercising the
General SAR shall be entitled to receive
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consideration (in the form hereinafter provided) equal in value to the excess of
the Fair Market Value on the date of exercise of the shares of Common Stock with
respect to which such General SARs have been exercised over the aggregate
related Option purchase price for such shares; provided, however, that the Board
may, in any Agreement granting General SARs provide that the appreciation
realizable upon exercise thereof shall be measured from a base higher than the
related Option purchase price.
Upon the exercise of a General SAR, the person exercising the General
SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
General SAR shall comply with all applicable laws. Unless otherwise specified in
the applicable Agreement, the number of General SARs which may be exercised for
cash, or partly for cash and partly for shares of Common Stock, during any
calendar quarter, may not exceed 20% of the aggregate number of shares of Common
Stock originally subject to the related Option (as such original number, without
giving effect to the exercise of any portion of the related Option, shall have
been retroactively adjusted in accordance with Section 13 or any corresponding
provisions of an applicable Agreement).
For purposes of this Section 6.5, the date of exercise of a General SAR
shall mean the date on which Time Warner shall have received notice from the
person exercising the General SAR of the exercise of such General SAR.
(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board
Change, and (b) ending on the ninetieth day (or such other date specified in the
Agreement) following such date. The effective date of exercise of a Limited SAR
shall be deemed to be the date on which Time Warner shall have received notice
from the person exercising the Limited SAR of the exercise thereof.
Upon the exercise of Limited SARs granted in connection with an Option,
except as otherwise provided in the Agreement, 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
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related Nonqualified Stock Option, by (b) the number of shares of Common Stock
with respect to which such Limited SARs are being exercised.
6.6. Limited Transferability of Options and SARs. Except as set forth
in this Section 6.6 and Section 22, Options and SARs shall not be transferable
other than by will or the laws of descent and distribution, and Options and SARs
may be exercised during the lifetime of the Holder thereof only by such Holder
(or his or her court appointed legal representative). The Agreement may provide
that Options and SARs are transferable by gift to such persons or entities and
upon such terms and conditions specified in the Agreement.
7. ACCELERATION OF OPTIONS AND SARS
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period in
any Agreement or in the Plan or in the event of any Approved Transaction, Board
Change or Control Purchase, unless the applicable Agreement provides otherwise,
each outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby.
8. TERMINATION OF EMPLOYMENT
8.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the 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 for cause by Time Warner or such
Subsidiary prior to the exercise of any Option, then unless the applicable
Agreement provides otherwise, all Options held by such Holder and any permitted
transferee pursuant to Section 6.6 shall terminate one month after the date of
a termination for cause, provided that if such termination for cause is for
fraud, misappropriation or embezzlement, all options shall terminate
immediately. For the purposes hereof, cause (a) shall have the meaning provided
for in any employment, advisory or consulting agreement to which such Holder
and Time Warner or any Subsidiary are
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parties or (b) in the absence thereof, shall mean insubordination, dishonesty,
incompetence, moral turpitude, other misconduct of any kind and the refusal to
perform such Holder's duties and responsibilities for any reason other than
illness or incapacity, except that if the termination occurs within 12 months
after an Approved Transaction, Control Purchase or Board Change, cause under
this clause (b) shall mean only a felony conviction for fraud, misappropriation
or embezzlement.
8.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
8.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or one of its Subsidiaries.
9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any
Holder any right to continue in the employ of Time Warner or any of its
Subsidiaries or interfere in any way with the right of Time Warner or a
Subsidiary to terminate the employment of the Holder at any time, with or
without cause; subject, however, to the provisions of any employment agreement
between the Holder and Time Warner or any of its Subsidiaries.
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.
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11. WRITTEN AGREEMENT
Each grant of an Option shall be evidenced by a stock option agreement
and each SAR shall be evidenced by a stock appreciation rights agreement, each
in such form and containing such terms and provisions not inconsistent with the
provisions of the Plan as the Board from time to time shall approve; provided,
however, that such Awards may be evidenced by a single agreement. The effective
date of the granting of an Award shall be the date on which the Board approves
such grant. Each grantee of an Option or SAR shall be notified promptly of such
grant and a written Agreement shall be promptly executed and delivered by Time
Warner and the grantee, provided that such grant of Options or SARs shall
terminate if such written Agreement is not signed by such grantee (or his
attorney) and delivered to Time Warner within 60 days after the date the Board
approved such grant or if the effectiveness of such grant is conditioned upon
the grantee becoming an employee of Time Warner or one of its Subsidiaries, the
execution by the grantee of an employment agreement with Time Warner or one of
its Subsidiaries or any other similar condition, within 60 days after the
occurrence of such condition, if later. Any such written Agreement may contain
(but shall not be required to contain) such provisions as the Board deems
appropriate to ensure that the penalty provisions of section 4999 of the Code
will not apply to any stock or cash received by the Holder or such Holder's
permitted transferee pursuant to Section 6.6 from Time Warner or any of its
Subsidiaries.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes 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.
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13. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine
to the effect that if a Holder, or other person exercising an Option, elects to
sell all or any shares of Common Stock that such Holder or other person acquired
upon the exercise of an Option awarded under the Plan, then such Holder or other
person shall not sell such shares unless such Holder or other person shall have
first offered in writing to sell such shares to Time Warner at Fair Market Value
on a date specified in such offer (which date shall be at least three business
days and not more than 10 business days following the date of such offer). In
any such event, certificates representing shares issued upon exercise of Options
shall bear a restrictive legend to the effect that transferability of such
shares are subject to the restrictions contained in the Plan and the applicable
Agreement and Time Warner may cause the registrar of its Common Stock to place a
stop transfer order with respect to such shares.
14. TERMINATION AND AMENDMENT
14.1. General. Unless the Plan shall theretofore have been terminated
as hereinafter provided, no Awards may be made under the Plan on or after the
tenth anniversary of the Effective Date. The Board may at any time prior to the
tenth anniversary of the Effective Date terminate the Plan, and the Board may at
any time modify or amend the Plan in such respects as it shall deem advisable;
provided, however, that any such modification or amendment shall comply with all
applicable laws and stock exchange listing requirements.
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
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substituted shall satisfy all of the requirements of the Plan as of the date
such new Award is made.
15. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the Board of Directors
of Time Warner.
16. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject
to all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner 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.
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19. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
20. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award, each Holder shall be deemed to have agreed
that such Award is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment 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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23. DEFERRAL OF OPTION GAINS
The Agreement may contain terms, conditions and procedures permitting
Holders to elect to defer the receipt of shares of Common Stock upon the
exercise of Options for a specific period or until a specified event.
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As Amended Through
March 16, 2000
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 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,
<PAGE>
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, 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).
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(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 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.
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(u) "SEC" means the Securities and Exchange Commission.
(v) "Subsidiary" of a person means any present or future
subsidiary of such person as such term is defined in section 425 of the
Code and any present or future trade or business, whether or not
incorporated, controlled by or under common control with such person.
An entity shall be deemed a Subsidiary of a person only for such
periods as the requisite ownership or control relationship is
maintained.
(w) "Time Warner" means Time Warner Inc., a Delaware
corporation, and any successor thereto.
(x) "Total Disability" means a permanent and total disability
as defined in section 22(e)(3) of the Code.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 12 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is the sum of (a) 1.5% (one and one-half percent) of the
number of shares of Common Stock outstanding on December 31, 1993, (b) 1.25%
(one and one-quarter percent) of the number of shares of Common Stock
outstanding on December 31, 1994, (c) 1% (one percent) of the number of shares
of Common Stock outstanding on December 31, 1995, (d) 1.2% (one and two-tenths
percent) of the aggregate number of shares of Common Stock and Series LMCN-V
Common Stock, par value $.01 per share, outstanding on December 31, 1996, (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 and Series LMCN-V Common Stock, par value $.01
per share, outstanding on December 31, 1998, (g) 1.175% (one and one hundred
seventy five thousandths 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, 1999, and (h) 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.
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3.2. Character of Shares. Shares of Common Stock deliverable under the
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in Time Warner's treasury, or
both.
3.3. Reservation of Shares. Time Warner shall at all times reserve a
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in Time Warner's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to
the express provisions of the Plan, the Board shall have plenary authority, in
its discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the individuals to whom, and the time or times at which,
Awards shall be granted or awarded, (b) the number of shares to be subject to
each Award, (c) when an Option or SAR can be exercised and whether in whole or
in installments, and (d) the form, terms and provisions of any Agreement (which
terms may be amended, subject to Section 14).
4.2. Factors to Consider. In making determinations hereunder, the Board
may take into account the nature of the services rendered by the respective
employees, consultants or advisors, their dedication and past contributions to
Time Warner and its Subsidiaries, their present and potential contributions to
the success of Time Warner and its Subsidiaries and such other factors as the
Board in its discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on 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
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power to appoint members of the Committee and to terminate, modify or amend the
Plan. The Board may from time to time appoint members of any such Committee in
substitution for or in addition to members previously appointed, may fill
vacancies in such Committee and may discharge such Committee.
Any such Committee shall select one of its members as its chairman and
shall hold its meetings at such times and places as it shall deem advisable. A
majority of members shall constitute a quorum and all determinations shall be
made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
Awards may be made only to (a) employees of Time Warner or any of its
Subsidiaries (including officers and directors of any of Time Warner's
Subsidiaries), other than officers or directors of Time Warner who are subject
to Section 16 of the Exchange Act, (b) prospective employees of Time Warner or
any of its Subsidiaries and (c) consultants or advisors to Time Warner or any of
its Subsidiaries. The exercise of Options and SARs granted to a prospective
employee shall be conditioned upon such person becoming an employee of Time
Warner or any of its Subsidiaries. For purposes of the Plan, the term
"prospective employee" shall mean any person who holds an outstanding offer of
employment on specific terms from Time Warner or any of its Subsidiaries. Awards
may be made to employees, consultants and advisors who hold or have held Awards
under this Plan or any similar or other awards under any other plan of Time
Warner or its Subsidiaries.
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
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Agreement and this Plan and, unless the Agreement otherwise provides, may be
exercised to the extent exercisable, in whole or in part, at any time and from
time to time during such term; provided, however, that subsequent to the grant
of an Option, the Board, at any time before complete termination of such Option,
may accelerate the time or times at which such Option may be exercised in whole
or in part (without reducing the term of such Option). The Agreement may contain
conditions precedent to the exercisability of Options, including without
limitation, the achievement of minimum performance criteria.
6.4. Manner of Exercise. Payment of the Option purchase price shall be
made in cash or in whole shares of Common Stock already owned by the person
exercising an Option or, partly in cash and partly in such Common Stock;
provided, however, that such payment may be made in whole or in part in shares
of Common Stock only if and to the extent permitted by the applicable Agreement.
An Option shall be exercised by written notice to Time Warner upon such terms
and conditions as provided in the Agreement. Time Warner shall effect the
transfer of the shares of Common Stock purchased under the Option as soon as
practicable, and within a reasonable time thereafter such transfer shall be
evidenced on the books of Time Warner. No Holder or other person exercising an
Option shall have any of the rights of a stockholder of Time Warner with respect
to shares of Common Stock subject to an Option granted under the Plan until due
exercise and full payment has been made. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date of such
due exercise and full payment.
6.5. SARs. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
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
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of determining the number of shares of Common Stock in respect of which other
Awards may be granted. Upon the exercise or termination of the related Option,
the SARs with respect thereto shall be considered to have been exercised or
terminated to the extent of the number of shares of Common Stock with respect to
which the related Option was so exercised or terminated.
The provisions of Sections 4 and 6 through 21 (to the extent that such
provisions are applicable to Options) shall also be applicable to SARs unless
the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the time
the related Option is exercisable and subject to the terms and provisions of
this Section 6.5, upon the exercise of General SARs, the person exercising the
General SAR shall be entitled to receive consideration (in the form hereinafter
provided) equal in value to the excess of the Fair Market Value on the date of
exercise of the shares of Common Stock with respect to which such General SARs
have been exercised over the aggregate related Option purchase price for such
shares; provided, however, that the Board may, in any Agreement granting General
SARs provide that the appreciation realizable upon exercise thereof shall be
measured from a base higher than the related Option purchase price.
Upon the exercise of a General SAR, the person exercising the General
SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
General SAR shall 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.
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(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board
Change, and (b) ending on the ninetieth day (or such other date specified in the
Agreement) following such date. The effective date of exercise of a Limited SAR
shall be deemed to be the date on which Time Warner shall have received notice
from the person exercising the Limited SAR of the exercise thereof.
Upon the exercise of Limited SARs granted in connection with an Option,
except as otherwise provided in the Agreement and the immediately succeeding
sentence, the person exercising the Limited SAR shall receive in cash an amount
equal to the product computed by multiplying (a) the excess of (i) the higher of
(A) the Minimum Price Per Share, or (B) the highest reported closing sales price
of a share of Common Stock as reported on the Composite Tape at any time during
the period beginning on the sixtieth day prior to the date on which such Limited
SARs are exercised and ending on the date on which such Limited SARs are
exercised over (ii) the per share Option price of the related Nonqualified Stock
Option, by (b) the number of shares of Common Stock with respect to which such
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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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 for cause by Time Warner or such
Subsidiary prior to the exercise of any Option, then unless the applicable
Agreement provides otherwise, all Options held by such Holder and any permitted
transferee pursuant to Section 6.6. shall terminate one month after the date of
a termination for cause; provided that if such termination for cause is for
fraud, misappropriation or embezzlement, all options shall terminate
immediately. For the purposes hereof, cause (a) shall have the meaning
provided for in any employment, advisory or consulting agreement to which
such Holder and Time Warner or any Subsidiary are parties or (b) in the
absence thereof, shall mean insubordination, dishonesty, incompetence, moral
turpitude, other misconduct of any kind and the refusal to perform such
Holder's duties and responsibilities for any reason other than illness or
incapacity, except that if the termination occurs within 12 months after an
Approved Transaction, Control Purchase or Board Change, cause under this
clause (b) shall mean only a felony conviction for fraud, misappropriation
or embezzlement.
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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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 such Holder's
permitted transferee pursuant to Section 6.6 from Time Warner or any of its
Subsidiaries.
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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 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
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terminate the Plan, and the Board may at any time modify or amend the Plan in
such respects as it shall deem advisable; provided, however, that any such
modification or amendment shall comply with all applicable laws and stock
exchange listing requirements.
14.2. Modification. No termination, modification or amendment of the
Plan may, without the consent of the person to whom any Award shall theretofore
have been granted (or a transferee of such person if the Award, or any part
thereof, has been transferred pursuant to Section 6.6), adversely affect the
rights of such person with respect to such Award. No modification, extension,
renewal or other change in any Award granted under the Plan shall be made after
the grant of such Award, unless the same is consistent with the provisions of
the Plan. With the consent of the Holder (or a transferee of such Holder if the
Award, or any part thereof, has been transferred pursuant to Section 6.6) and
subject to the terms and conditions of the Plan (including Section 14.1), the
Board may amend outstanding Agreements with any Holder (or any such transferee),
including, without limitation, any amendment which would (a) accelerate the time
or times at which the Award may be exercised and/or (b) extend the scheduled
expiration date of the Award. Without limiting the generality of the foregoing,
the Board may but solely with the Holder's consent, agree to cancel any Award
under the Plan held by such Holder and issue a new Award in substitution
therefor, provided that the Award so substituted shall satisfy all of the
requirements of the Plan as of the date such new Award is made.
15. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the Board of Directors
of Time Warner.
16. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject
to all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner 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.
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17. WITHHOLDING
Time Warner's obligation to deliver shares of Common Stock or pay cash
in respect of any Award under the Plan shall be subject to applicable federal,
state and local tax withholding requirements. Federal, state and local
withholding taxes paid upon the exercise of any Option may be paid in shares of
Common Stock upon such terms and conditions as the Board shall determine;
provided, however, that the Board in its sole discretion may disapprove such
payment and require that such taxes be paid in cash.
18. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of applicable law, then such terms or provisions shall be deemed
inoperative to the extent necessary to avoid the conflict with applicable law
without invalidating the remaining provisions hereof.
19. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
20. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award, each Holder shall be deemed to have agreed
that such Award is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment 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.
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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.
23. DEFERRAL OF OPTIONS GIANS
The Agreement may contain terms, conditions and procedures permitting
Holders to elect to defer the receipt of shares of Common Stock upon the
exercise of Options for a specific period or until a specified event.
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As Amended Through
March 16, 2000
TIME WARNER
CORPORATE GROUP
STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner Corporate Group Stock Incentive Plan
(hereinafter the "Plan"), is to provide for the granting of stock options, stock
appreciation rights and restricted shares to certain employees of Time Warner
Inc., Warner Communications Inc., Time Warner Enterprises, Inc. and their
respective Subsidiaries in recognition of the valuable services provided, and
contemplated to be provided, by such employees. The general purpose of the Plan
is to promote the interests of Time Warner and its stockholders and to reward
dedicated employees of these companies by providing such employees additional
incentives to continue and increase their efforts with respect to, and to remain
in the employ of, Time Warner or its Subsidiaries. This plan is being adopted in
connection with the development of an overall long-term compensation program for
these companies and it is expected that certain Options granted hereunder will
become exercisable only if certain performance criteria are met.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement, stock
appreciation rights agreement and the restricted shares agreement
specified in Section 12, both individually and collectively, as the
context so requires.
(b) "Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of law,
the stockholders of Time Warner) shall approve (i) any consolidation or
merger of Time Warner in which Time Warner is not the continuing or
surviving corporation or pursuant to which shares of Common Stock would
be converted into cash, securities or
<PAGE>
other property, other than a merger of Time Warner (x) as contemplated
in the Amended and Restated Agreement and Plan of Merger dated as of
September 22, 1995 among Time Warner Inc., TW Inc., Time Warner
Acquisition Corp., TW Acquisition Corp. and Turner Broadcasting System,
Inc., as the same may be amended from time to time, or (y) in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (ii) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions)
of all, or substantially all, of the assets of Time Warner, or (iii)
the adoption of any plan or proposal for the liquidation or dissolution
of Time Warner.
(c) "Award" means grants of Options, SARs and/or Restricted
Shares under this Plan.
(d) "Board" means the Board of Directors of Time Warner.
(e) "Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board ceased for any reason to constitute a majority thereof
unless the election, or the nomination for election by Time Warner's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of the period.
(f) "Cash Award" means the amount of cash, if any, to be paid
to an employee pursuant to Section 7.5.
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
Reference to any specific Code section shall include any successor
section.
(h) "Committee" means the Committee comprised of members of
the Board appointed pursuant to Section 4.
(i) "Common Stock" means the common stock, par value $.01 per
share, of Time Warner.
(j) "Composite Tape" means the New York Stock Exchange
Composite Tape.
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(k) "Control Purchase" means any transaction in which any
person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act), corporation or other entity (other than Time Warner
or any employee benefit plan sponsored by Time Warner or any if its
Subsidiaries) (i) shall purchase any Common Stock (or securities
convertible into Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of the Board, or (ii) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Time Warner representing 20%
or more of the combined voting power of the then outstanding securities
of Time Warner ordinarily (and apart from the rights accruing under
special circumstances) having the right to vote in the election of
directors (calculated as provided in Rule 13d-3(d) in the case of
rights to acquire Time Warner's securities).
(l) "Dividend Equivalents" means, with respect to Restricted
Shares to be issued at the end of the Restriction Period, to the extent
specified by the Board only, an amount equal to the regular cash
dividends and all other distributions (or the economic equivalent
thereof) which are payable to stockholders of record during the
Restriction Period on a like number of shares of Common Stock.
(m) "Effective Date" means the date the Plan becomes effective
pursuant to Section 16.
(n) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor statute or statutes
thereto. Reference to any specific Exchange Act section shall include
any successor section.
(o) "Fair Market Value" of a share of Common Stock means the
average of the high and low sales prices of a share of Common Stock on
the Composite Tape on the date in question, except as otherwise
provided in Section 6.5.
(p) "General SARs" means stock appreciation rights subject to
the terms of Section 6.5(b).
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(q) "Holder" means an employee of Time Warner or any of its
Subsidiaries who has received an Award under this Plan.
(r) "ISO" means an incentive stock option within the meaning
of section 422A(b) of the Code.
(s) "Limited SARs" means stock appreciation rights subject to
the terms of Section 6.5(c).
(t) "Minimum Price Per Share" means the highest gross price
(before brokerage commissions, soliciting dealers' fees and similar
charges) paid or to be paid for any share of Common Stock (whether by
way of exchange, conversion, distribution, liquidation or otherwise)
in, or in connection with, any Approved Transaction or Control Purchase
which occurs at any time during the period beginning on the sixtieth
day prior to the date on which Limited SARs are exercised and ending on
the date on which Limited SARs are exercised. If the consideration paid
or to be paid in any such Approved Transaction or Control Purchase
shall consist, in whole or in part, of consideration other than cash,
the Board shall take such action, as in its judgment it deems
appropriate, to establish the cash value of such consideration, but
such valuation shall not be less than the value, if any, attributed to
such consideration by any other party to such Approved Transaction or
Control Purchase.
(u) "Nonqualified Stock Option" means a stock option that is
designated as a nonqualified stock option.
(v) "Option" means any ISO or Nonqualified Stock Option.
(w) "Plan" has the meaning ascribed thereto in Section 1.
(x) "Restricted Shares" means shares of Common Stock or the
right to receive shares of Common Stock, as the case may be, awarded
pursuant to Section 7.
(y) "Restriction Period" means a period of time beginning on
the date of each award of Restricted Shares and ending on the Valuation
Date with respect to such award.
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(z) "Retained Distributions" has the meaning ascribed thereto
in Section 7.3.
(aa) "SARs" means General SARs and Limited SARs.
(bb) "SEC" means the Securities and Exchange Commission.
(cc) "Subsidiary" of a person means any present or future
subsidiary of such person as such term is defined in section 425 of the
Code and any present or future trade or business, whether or not
incorporated, controlled by or under common control with such person.
An entity shall be deemed a Subsidiary of a person only for such
periods as the requisite ownership or control relationship is
maintained.
(dd) "Time Warner" means Time Warner Inc., a Delaware
corporation, and any successor thereto.
(ee) "Total Disability" means a permanent and total disability
as defined in section 22(e)(3) of the Code.
(ff) "Valuation Date" with respect to any Restricted Shares
awarded hereunder means the date designated as such in the Agreement
with respect to such award of Restricted Shares pursuant to Section 7.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 13 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is 325,000. If and to the extent that an Option shall
expire, terminate or be canceled for any reason without having been exercised
(or without having been considered to have been exercised as provided in Section
6.5(a)), the shares of Common Stock subject to such expired, terminated or
canceled portion of the Option shall again become available for purposes of the
Plan. In addition, any Restricted Shares which are forfeited under the terms of
the Plan or any Agreement shall again become available for purposes of the Plan.
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3.2. Character of Shares. Shares of Common Stock deliverable under the
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in Time Warner's treasury, or
both.
3.3. Reservation of Shares. Time Warner shall at all times reserve a
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in Time Warner's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to
the express provisions of the Plan, the Board shall have plenary authority, in
its discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the purchase price, if any, of each Restricted Share,
(b) the individuals to whom, and the time or times at which, Awards shall be
granted or awarded, (c) the number of shares to be subject to each Award, (d)
whether an Option shall be an ISO or a Nonqualified Stock Option, (e) when an
Option or SAR can be exercised and whether in whole or in installments, (f) the
time or times and the conditions subject to which Restricted Shares shall become
vested and any Cash Awards shall become payable, and (g) the form, terms and
provisions of any Agreement (which terms may be amended, subject to Section 15).
4.2. Factors to Consider. In making determinations hereunder, the Board
may take into account the nature of the services rendered by the respective
employees, their dedication and past contributions to Time Warner and its
Subsidiaries, their present and potential contributions to the success of Time
Warner and its Subsidiaries and such other factors as the Board in its
discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on the matters referred to in this Section 4
shall be conclusive.
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4.4. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board in the
administration of the Plan to the extent provided in such delegation, except for
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in such Committee and may discharge such Committee.
Any such Committee shall select one of its members as its chairman and
shall hold its meeting at such times and places as it shall deem advisable. A
majority of members shall constitute a quorum and all determinations shall be
made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
5.1. General. Awards may be made only to (a) employees of Time Warner
or any of its Subsidiaries (including officers and directors of any of Time
Warner's Subsidiaries), other than officers or directors of Time Warner who are
subject to Section 16 of the Exchange Act, and (b) prospective employees of Time
Warner or any of its Subsidiaries. The exercise of Options and SARs and the
vesting of Restricted Shares granted to a prospective employee shall be
conditioned upon such person becoming an employee of Time Warner or any of its
Subsidiaries. For purposes of the Plan, the term "prospective employee" shall
mean any person who holds an outstanding offer of employment on specific terms
from Time Warner or any of its Subsidiaries. Awards may be made to employees who
hold or have held Awards under this Plan or any similar or other awards under
any other plan of Time Warner or its Subsidiaries.
5.2. Special ISO Rule. No ISO shall be granted to an employee who, at
the time the ISO is granted, owns (or is considered as owning within the meaning
of section 425(d) of the Code) stock possessing more than 10% of the total
combined
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voting power of all classes of stock of Time Warner or any of its Subsidiaries,
unless at the time the ISO is granted the option price is at least 110% of the
Fair Market Value of the Common Stock subject to the ISO and the ISO by its
terms is not exercisable after the expiration of five years from the date it is
granted.
6. OPTIONS AND SARS
6.1. Option Prices. Subject to Section 5.2, the purchase price of the
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
6.2. Term of Options. The term of each Option shall be for such period
as the Board shall determine, as set forth in the applicable Agreement, but not
more than 10 years from the date of grant in the case of an ISO (except as
provided in Section 5.2).
6.3. Exercise of Options. An Option granted under the Plan shall become
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option). The Agreement may contain conditions precedent to the exercisability of
Options, including without limitation, the achievement of minimum performance
criteria.
6.4. Manner of Exercise. Payment of the Option purchase price shall be
made in cash or in whole shares of Common Stock already owned by the person
exercising an Option or, partly in cash and partly in such Common Stock;
provided, however, that such payment may be made in whole or in part in shares
of Common Stock only if and to the extent permitted by the 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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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, 6 and 8 through 22 (to the extent that
such provisions are applicable to Options) shall also be applicable to SARs
unless the context otherwise requires.
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(b) General SARs. General SARs shall be exercisable only at the time
the related Option is exercisable and subject to the terms and provisions of
this Section 6.5, upon the exercise of General SARs, the person exercising the
General SAR shall be entitled to receive consideration (in the form hereinafter
provided) equal in value to the excess of the Fair Market Value on the date of
exercise of the shares of Common Stock with respect to which such General SARs
have been exercised over the aggregate related Option purchase price for such
shares; provided, however, that the Board may, in any Agreement granting General
SARs provide that the appreciation realizable upon exercise thereof shall be
measured from a base higher than the related Option purchase price.
Upon the exercise of a General SAR, the person exercising the General
SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
General SAR shall comply with all applicable laws. Unless otherwise specified in
the applicable Agreement, the number of General SARs which may be exercised for
cash, or partly for cash and partly for shares of Common Stock, during any
calendar quarter, may not exceed 20% of the aggregate number of shares of Common
Stock originally subject to the related Option (as such original number, without
giving effect to the exercise of any portion of the related Option, shall have
been retroactively adjusted in accordance with Section 13 or any corresponding
provisions of an applicable Agreement).
For purposes of this Section 6.5, the date of exercise of a General SAR
shall mean the date on which Time Warner shall have received notice from the
person exercising the General SAR of the exercise of such General SAR.
(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board
Change, and (b) ending on the ninetieth day (or such other date specified in the
Agreement) following such date. The effective date of exercise of a Limited SAR
shall be deemed to be the date on which Time Warner shall have received notice
from the person exercising the Limited SAR of the exercise thereof.
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Upon the exercise of Limited SARs granted in connection with an ISO,
except as otherwise provided in the Agreement, the person exercising the Limited
SAR shall receive in cash an amount equal to the excess of the Fair Market Value
on the date of exercise of such Limited SARs of the shares of Common Stock with
respect to which such Limited SARs shall have been exercised over the aggregate
related Option purchase price for such shares.
Upon the exercise of Limited SARs granted in connection with a
Nonqualified Stock Option, except as otherwise provided in the Agreement, the
person exercising the Limited SAR shall receive in cash an amount equal to the
product computed by multiplying (a) the excess of (i) the higher of (A) the
Minimum Price Per Share, or (B) the highest reported closing sales price of a
share of Common Stock as reported on the Composite Tape at any time during the
period beginning on the sixtieth day prior to the date on which such Limited
SARs are exercised and ending on the date on which such Limited SARs are
exercised over (ii) the per share Option price of the related Nonqualified Stock
Option, by (b) the number of shares of Common Stock with respect to which such
Limited SARs are being exercised.
6.6. Limited Transferability of Options and SARs. Except as set forth
in this Section 6.6 and Section 23, Options and SARs shall not be transferable
other than by will or the laws of descent and distribution, and Options and SARs
may be exercised during the lifetime of the Holder thereof only by such Holder
(or his or her court appointed legal representative). The Agreement may provide
that Options and SARs are transferable by gift to such persons or entities and
upon such terms and conditions specified in the Agreement.
7. RESTRICTED SHARES
7.1. Valuation Date, Issuance and Price. The Board shall determine
whether shares of Common Stock covered by awards of Restricted Shares will be
issued at the beginning or the end of the Restriction Period, whether Dividend
Equivalents will be paid during the Restriction Period in the event shares of
the Common Stock are to be issued at the end of the Restriction Period and shall
designate a Valuation Date with respect to each award of Restricted Shares and
may prescribe other restrictions, terms and conditions applicable to the vesting
of
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such Restricted Shares in addition to those provided in the Plan. The Board
shall determine the price, if any, to be paid by the Holder for the Restricted
Shares; provided, however, that the issuance of Restricted Shares shall be made
for at least the minimum consideration necessary to permit such Restricted
Shares to be deemed fully paid and nonassessable. All determinations made by the
Board pursuant to this Section 7.1 shall be specified in the Agreement.
7.2. Issuance of Restricted Shares at Beginning of the Restriction
Period. If shares of Common Stock are issued at the beginning of the Restriction
Period, the stock certificate or certificates representing such Restricted
Shares shall be registered in the name of the Holder to whom such Restricted
Shares shall have been awarded. During the Restriction Period, certificates
representing the Restricted Shares and any securities constituting Retained
Distributions shall bear a restrictive legend to the effect that ownership of
the Restricted Shares (and such Retained Distributions), and the enjoyment of
all rights appurtenant thereto, are subject to the restrictions, terms and
conditions provided in the Plan and the applicable Agreement. Such certificates
shall remain in the custody of Time Warner and the Holder shall deposit with
Time Warner stock powers or other instruments of assignment, each endorsed in
blank, so as to permit retransfer to Time Warner of all or any portion of the
Restricted Shares and any securities constituting Retained Distributions that
shall be forfeited or otherwise not become vested in accordance with the Plan
and the applicable Agreement.
7.3. Restrictions. Restricted Shares issued at the beginning of the
Restriction Period shall constitute issued and outstanding shares of Common
Stock for all corporate purposes. The Holder will have the right to vote such
Restricted Shares, to receive and retain all regular cash dividends and such
other distributions, as the Board may in its sole discretion designate, paid or
distributed on such Restricted Shares and to exercise all other rights, powers
and privileges of a Holder of Common Stock with respect to such Restricted
Shares; except, that, (a) the Holder will not be entitled to delivery of the
stock certificate or certificates representing such Restricted Shares until the
Restriction Period shall have expired and unless all other vesting requirements
with respect thereto shall have been fulfilled or waived; (b) Time Warner will
retain custody of the stock certificate or certificates representing the
Restricted Shares during the Restriction Period as provided in Section 7.2; (c)
other than regular cash
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dividends and such other distributions as the Board may in its sole discretion
designate, Time Warner will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Shares (and such
Retained Distributions will be subject to the same restrictions, terms and
vesting and other conditions as are applicable to the Restricted Shares) until
such time, if ever, as the Restricted Shares with respect to which such Retained
Distributions shall have been made, paid or declared shall have become vested,
and such Retained Distributions shall not bear interest or be segregated in a
separate account; (d) the Holder may not sell, assign, transfer, pledge,
exchange, encumber or dispose of the Restricted Shares or any Retained
Distributions or his interest in any of them during the Restriction Period; and
(e) a breach of any restrictions, terms or conditions provided in the Plan or
established by the Board with respect to any Restricted Shares or Retained
Distributions will cause a forfeiture of such Restricted Shares and any Retained
Distributions with respect thereto.
7.4. Issuance of Stock at End of the Restriction Period. Restricted
Shares issued at the end of the Restriction Period shall not constitute issued
and outstanding shares of Common Stock and the Holder shall not have any of the
rights of a stockholder with respect to the shares of Common Stock covered by
such an award of Restricted Shares, in each case, until such shares shall have
been transferred to the Holder at the end of the Restriction Period. If and to
the extent that shares of Common Stock are to be issued at the end of the
Restriction Period, the Holder shall be entitled to receive Dividend Equivalents
with respect to the shares of Common Stock covered thereby either (a) during the
Restriction Period or (b) in accordance with the rules applicable to Retained
Distributions, as the Board may specify in the Agreement.
7.5. Cash Awards. In connection with any award of Restricted Shares, an
Agreement may provide for the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested. Such Cash Awards shall be payable in accordance with such additional
restrictions, terms and conditions as shall be prescribed by the Board in the
Agreement and shall be in addition to any other salary, incentive, bonus or
other compensation payments which such Holder shall be otherwise entitled or
eligible to receive from Time Warner or any of its Subsidiaries.
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7.6. Completion of Restriction Period. On the Valuation Date with
respect to each award of Restricted Shares, and the satisfaction of any other
applicable restrictions, terms and conditions (a) all or part of such Restricted
Shares shall become vested, (b) any Retained Distributions and any unpaid
Dividend Equivalents with respect to such Restricted Shares shall become vested
to the extent that the Restricted Shares related thereto shall have become
vested and (c) any Cash Award to be received by the Holder with respect to such
Restricted Shares shall become payable, all in accordance with the terms of the
applicable Agreement. Any such Restricted Shares, Retained Distributions and any
unpaid Dividend Equivalents that shall not become vested shall be forfeited to
Time Warner and the Holder shall not thereafter have any rights (including
dividend and voting rights) with respect to such Restricted Shares, Retained
Distributions and any unpaid Dividend Equivalents that shall have been so
forfeited.
8. ACCELERATION OF OPTIONS, SARS AND RESTRICTED SHARES
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period or
Restriction Period in any Agreement or in the Plan or in the event of any
Approved Transaction, Board Change or Control Purchase, unless the applicable
Agreement provides otherwise: (a) in the case of an Option or SAR, each such
outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby; and (b) in the case of Restricted Shares, the Restriction Period
applicable to each such award of Restricted Shares shall be deemed to have
expired and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents shall become vested and any Cash Award payable
pursuant to the applicable Agreement shall be adjusted in such manner as
provided in the Agreement.
9. TERMINATION OF EMPLOYMENT
9.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the applicable Agreement; provided, however, that (a) no
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates by reason of
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death or Total Disability, the Option shall remain exercisable for a period of
at least one year following such termination (but not later than the scheduled
expiration of such Option); and (c) any termination by the employing company for
cause will be treated in accordance with the provisions of Section 9.2.
9.2. Termination for Cause. If a Holder's employment with Time Warner
or any of its Subsidiaries shall be terminated for cause by Time Warner or such
Subsidiary during the Restriction Period with respect to any Restricted Shares
or prior to the exercise of any Option, then (a) unless the applicable Agreement
provides otherwise, all Options held by such Holder and any permitted transferee
pursuant to Section 6.6 terminate one month after the date of a termination
for cause (provided that if such termination for cause is for fraud,
misappropriation or embezzlement, all options shall terminate immediately)
and (b) such Holder's rights to all Restricted Shares, Retained Distributions,
any unpaid Dividend Equivalents and any Cash Awards shall be forfeited
immediately. For the purposes hereof, cause (a) shall have the meaning
provided for in any employment, advisory or consulting agreement to
which such Holder and Time Warner or any such Subsidiary are parties or
(b) in the absence thereof, shall mean insubordination, dishonesty,
incompetence, moral turpitude, other misconduct of any kind and the refusal
to perform such Holder's duties and responsibilities for any reason other
than illness or incapacity, except that if the termination occurs within
12 months after an Approved Transaction, Control Purchase or Board Change,
cause under this clause (b) shall mean only a felony conviction for fraud,
misappropriation or embezzlement.
9.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
9.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or any of its Subsidiaries.
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10. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any
Holder any right to continue in the employ of Time Warner or any of its
Subsidiaries or interfere in any way with the right of Time Warner or a
Subsidiary to terminate the employment of the Holder at any time, with or
without cause; subject, however, to the provisions of any employment agreement
between the Holder and Time Warner or any of its Subsidiaries.
11. NONALIENATION OF BENEFITS
Except as provided in Section 6.6, no right or benefit under the Plan
shall be subject to anticipation, alienation, sale, assignment, hypothecation,
pledge, exchange, transfer, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer,
encumber or charge the same shall be void. No right or benefit hereunder shall
in any manner be liable for or subject to the debts, contracts, liabilities or
torts of the person entitled to such benefits.
12. WRITTEN AGREEMENT
Each award of Restricted Shares and any right to a Cash Award hereunder
shall be evidenced by a restricted shares agreement; each grant of an Option
shall be evidenced by a stock option agreement which shall designate the Options
granted thereunder as ISOs or Nonqualified Stock Options; and each SAR shall be
evidenced by a stock appreciation rights agreement, each in such form and
containing such terms and provisions not inconsistent with the provisions of the
Plan as the Board from time to time shall approve; provided, however, that such
Awards may be evidenced by a single agreement. The effective date of the
granting of an Award shall be the date on which the Board approves such grant.
Each grantee of an Option, SAR or Restricted Shares shall be notified promptly
of such grant and a written Agreement shall be promptly executed and delivered
by Time Warner and the grantee, provided that such grant of Options, SARs or
Restricted Shares shall terminate if such written Agreement is not signed by
such grantee (or his attorney) and delivered to Time Warner within 60 days after
the date the Board approved such grant or if the effectiveness of such grant is
conditioned upon the grantee
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becoming an employee of Time Warner or one of its Subsidiaries, the execution by
the grantee of an employment agreement with Time Warner or one of its
subsidiaries or any other similar condition, within 60 days after the occurrence
of such condition, if later. Any such written Agreement may contain (but shall
not be required to contain) such provisions as the Board deems appropriate to
ensure that the penalty provisions of section 4999 of the Code will not apply to
any stock or cash received by the Holder or such Holder's permitted transferee
pursuant to Section 6.6 from Time Warner or any of its Subsidiaries.
13. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes the character or amount of the
Common Stock while any portion of any Award theretofore granted under the Plan
is outstanding but unexercised or unvested, the Board shall make such
adjustments in the character and number of shares subject to such Award, in the
option price, in the relevant appreciation base and in the Cash Awards, as shall
be applicable, equitable and appropriate in order to make such Award,
immediately after any such change, as nearly as may be practicable, equivalent
to such Award, immediately prior to any such change. If any merger,
consolidation or similar transaction affects the Common Stock subject to any
unexercised or unvested Award theretofore granted under the Plan, the Board or
any surviving or acquiring corporation shall take such action as is equitable
and appropriate to substitute a new award for such Award or to assume such Award
in order to make such new or assumed Award, as nearly as may be practicable,
equivalent to the old Award. If any such change or transaction shall occur, the
number and kind of shares for which Awards may thereafter be granted under the
Plan shall be adjusted to give effect thereto.
14. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine
to the effect that if a Holder, or other person exercising an Option, elects to
sell all or any shares of Common Stock that such Holder or other person acquired
upon the exercise of an Option or upon the vesting of Restricted Shares awarded
under the Plan, then such Holder or other person shall not sell such shares
unless such Holder or other person shall
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have first offered in writing to sell such shares to Time Warner at Fair Market
Value on a date specified in such offer (which date shall be at least three
business days and not more than 10 business days following the date of such
offer). In any such event, certificates representing shares issued upon exercise
of Options and the vesting of Restricted Shares shall bear a restrictive legend
to the effect that transferability of such shares are subject to the
restrictions contained in the Plan and the applicable Agreement and Time Warner
may cause the registrar of its Common Stock to place a stop transfer order with
respect to such shares.
15. TERMINATION AND AMENDMENT
15.1. General. Unless the Plan shall theretofore have been terminated
as hereinafter provided, no Awards may be made under the Plan on or after the
tenth anniversary of the Effective Date. The Board may at any time prior to the
tenth anniversary of the Effective Date terminate the Plan, and the Board may at
any time modify or amend the Plan in such respects as it shall deem advisable;
provided, however, that any such modification or amendment shall comply with all
applicable laws and stock exchange listing requirements.
15.2. Modification. No termination, modification or amendment of the
Plan may, without the consent of the person (or a transferee of such person if
the Award, or any part thereof, has been transferred pursuant to Section 6.6) to
whom any Award shall theretofore have been granted, adversely affect the rights
of such person with respect to such Award. No modification, extension, renewal
or other change in any Award granted under the Plan shall be made after the
grant of such Award, unless the same is consistent with the provisions of the
Plan. With the consent of the Holder (or a transferee of such Holder if the
Award, or any part thereof, has been transferred pursuant to Section 6.6) and
subject to the terms and conditions of the Plan (including Section 15.1), the
Board may amend outstanding Agreements with any Holder (or any such transferee),
including, without limitation, any amendment which would (a) accelerate the time
or times at which the Award may be exercised and/or (b) extend the scheduled
expiration date of the Award. Without limiting the generality of the foregoing,
the Board may but solely with the Holder's consent, agree to cancel any Award
under the Plan held by such Holder and issue a new Award in substitution
therefor, provided that the Award so
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substituted shall satisfy all of the requirements of the Plan as of the date
such new Award is made.
16. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the Board of Directors
of Time Warner.
17. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject
to all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner shall use its reasonable efforts to comply with
any legal requirements (a) to maintain a registration statement in effect under
the Securities Act of 1933 with respect to all shares of Common Stock that may
be issued to Holders under the Plan, and (b) to file in a timely manner all
reports required to be filed by it under the Exchange Act.
18. WITHHOLDING
Time Warner's obligation to deliver shares of Common Stock or pay cash
in respect of any Award or Cash Award under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding taxes paid upon the exercise of any Option and upon the
vesting of Restricted Shares may be paid in shares of Common Stock upon such
terms and conditions as the Board shall determine; provided, however, that the
Board in its sole discretion may disapprove such payment and require that such
taxes be paid in cash.
19. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of section 422A of the Code, then such
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terms or provisions shall be deemed inoperative to the extent they so conflict
with the requirements of section 422A of the Code. If this Plan does not contain
any provision required to be included herein under section 422A of the Code,
such provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out at length herein; provided,
however, that to the extent any Option which is intended to qualify as an ISO
cannot so qualify, such Option, to that extent, shall be deemed to be a
Nonqualified Stock Option for all purposes of the Plan.
20. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award or Cash Award, as applicable, each Holder
shall be deemed to have agreed that such Award or Cash Award, as applicable, is
special incentive compensation that will not be taken into account, in any
manner, as salary, compensation or bonus in determining the amount of any
payment under any pension, retirement or other employee benefit plan of Time
Warner or any of its Subsidiaries. In addition, each beneficiary of a deceased
Holder shall be deemed to have agreed that such Award or Cash Award, as
applicable, will not affect the amount of any life insurance coverage, if any,
provided by Time Warner or any of its Subsidiaries on the life of the Holder
which is payable to such beneficiary under any life insurance plan covering
employees of Time Warner or any of its Subsidiaries.
22. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
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23. BENEFICIARIES
Each Holder may designate any person(s) or legal entity(ies), including
his or her estate, as his or her beneficiary under the Plan. Such designation
shall be made in writing on a form filed with the Secretary of Time Warner or
his or her designee and may be revoked or changed by such Holder at any time by
filing written notice of such revocation or change with the Secretary of Time
Warner or his or her designee. If no person shall be designated by a Holder as
his or her beneficiary or if no person designated as a beneficiary survives such
Holder, the Holder's beneficiary shall be his or her estate.
24. DEFERRAL OF OPTION GAINS
The Agreement may contain terms, conditions and procedures permitting
Holders to elect to defer the receipt of shares of Common Stock upon the
exercise of Options for a specific period or until a specified event.
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As Amended Through
March 16, 2000
TIME WARNER
1997 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner 1997 Stock Option Plan (hereinafter the
"Plan") is to provide for the granting of stock options and stock appreciation
rights to certain employees (principally executive officers) of Time Warner Inc.
and its Subsidiaries in recognition of the valuable services provided, and
contemplated to be provided, by such employees. The Plan is intended to preserve
the tax deduction of Time Warner and its Subsidiaries for the ordinary income
recognized by executive officers of Time Warner upon exercise of Nonqualified
Stock Options granted under the Plan in light of the Omnibus Budget
Reconciliation Act of 1993. The general purpose of the Plan is to promote the
interests of Time Warner and its stockholders and to reward dedicated employees
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.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Act" means the Omnibus Budget Reconciliation Act of 1993,
as amended.
(b) "Agreement" means the stock option agreement and stock
appreciation rights agreement specified in Section 11, both
individually and collectively, as the context so requires.
(c) "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 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
<PAGE>
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.
(d) "Award" means grants of Options and/or SARs under this
Plan.
(e) "Board" means the Board of Directors of Time Warner.
(f) "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.
(g) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
Reference to any specific Code section shall include any successor
section.
(h) "Committee" means the Committee comprised of members of
the Board appointed pursuant to Section 4.
(i) "Common Stock" means the common stock, par value $.01 per
share, of Time Warner.
(j) "Composite Tape" means the New York Stock Exchange
Composite Tape.
(k) "Control Purchase" means any transaction in which any
person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act), corporation or other entity (other than Time Warner
or any employee benefit plan sponsored by Time Warner or any of its
Subsidiaries) (i) shall purchase any Common Stock (or securities
convertible into or exchangeable for Common Stock) for cash, securities
or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board, or (ii) shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Time Warner
representing 20% or more of the combined voting power of the then
outstanding securities of Time Warner ordinarily (and apart from the
rights accruing under special circumstances) having the right to vote
in the election of directors (calculated as provided in Rule 13d-3(d)
in the case of rights to acquire Time Warner's securities).
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(l) "Effective Date" means the date the Plan becomes effective
pursuant to Section 15.
(m) "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.
(n) "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.
(o) "General SARs" means stock appreciation rights subject to
the terms of Section 6.5(b).
(p) "Holder" means an employee of Time Warner or any of its
Subsidiaries who has received an Award under this Plan.
(q) "ISO" means an incentive stock option within the meaning
of section 422A(b) of the Code.
(r) "Limited SARs" means stock appreciation rights subject to
the terms of Section 6.5(c).
(s) "Minimum Price Per Share" means the highest gross price
(before brokerage commissions, soliciting dealers' fees and similar
charges) paid or to be paid for any share of Common Stock (whether by
way of exchange, conversion, distribution, liquidation or otherwise)
in, or in connection with, any Approved Transaction or Control Purchase
which occurs at any time during the period beginning on the sixtieth
day prior to the date on which Limited SARs are exercised and ending on
the date on which Limited SARs are exercised. If the consideration paid
or to be paid in any such Approved Transaction or Control Purchase
shall consist, in whole or in part, of consideration other than cash,
the Board shall take such action, as in its judgment it deems
appropriate, to establish the cash value of such consideration, but
such valuation shall not be less than the value, if any, attributed to
such consideration by any other party to such Approved Transaction or
Control Purchase.
(t) "Nonqualified Stock Option" means a stock option that is
designated as a nonqualified stock option.
(u) "Option" means any ISO or Nonqualified Stock Option
granted pursuant to this Plan.
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(v) "Plan" has the meaning ascribed thereto in Section 1.
(w) "SARs" means General SARs and Limited SARs.
(x) "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.
(y) "Time Warner" means Time Warner Inc., a Delaware
corporation, and any successor thereto.
(z) "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 under the Plan is 6,250,000 and the maximum number of
shares that may be granted to any one individual under the Plan is 2,500,000. If
and to the extent that an Option shall expire, terminate or be canceled for any
reason without having been exercised (or without having been considered to have
been exercised as provided in Section 6.5(a)), the shares of Common Stock
subject to such expired, terminated or canceled portion of the Option shall
again become available for purposes of the Plan.
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
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times at which, Awards shall be granted or awarded, (b) the number of shares to
be subject to each Award, (c) whether an Option shall be an ISO or a
Nonqualified Stock Option, (d) when an Option or SAR can be exercised and
whether in whole or in installments, and (e) 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, their dedication and past contributions to Time Warner and its
Subsidiaries, their present and potential contributions to the success of Time
Warner and its Subsidiaries and such other factors as the Board in its
discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on the matters referred to in this Section 4
shall be conclusive.
4.4. Delegation to Committee. Notwithstanding anything to the contrary
contained herein, the Board may at any time, or from time to time, appoint a
Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board in the
administration of the Plan to the extent provided in such delegation, except for
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in such Committee and may discharge such Committee.
Any such Committee shall 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
5.1. General. Awards may be made only to (a) employees, including
officers and directors who are also employees, of Time Warner or any of its
Subsidiaries and (b) prospective employees of Time Warner or any of its
Subsidiaries. The exercise of Options and SARs granted to a prospective employee
shall be conditioned upon such person becoming an employee of Time Warner or any
of its Subsidiaries. For purposes of the Plan, the term "prospective employee"
shall mean any person who holds an outstanding offer of employment on specific
terms from Time Warner or any of its Subsidiaries. Awards may be made to
employees who hold or have
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held Awards under this Plan or any similar or other awards under any other plan
of Time Warner or its Subsidiaries.
5.2. Special ISO Rule. No ISO shall be granted to an employee who, at
the time the ISO is granted, owns (or is considered as owning within the meaning
of section 425(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of Time Warner or any Subsidiary,
unless at the time the ISO is granted the option price is at least 110% of the
Fair Market Value of the Common Stock subject to the ISO and the ISO by its
terms is not exercisable after the expiration of five years from the date it is
granted.
6. OPTIONS AND SARS
6.1. Option Prices. Subject to Section 5.2, the purchase price of the
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
6.2. Term of Options. The term of each Option shall be for such period
as the Board shall determine, as set forth in the applicable Agreement, but not
more than 10 years from the date of grant (except as provided in Section 5.2).
6.3. Exercise of Options. An Option granted under the Plan shall become
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option). The Agreement may contain conditions precedent to the exercisability of
Options, including without limitation, the achievement of minimum performance
criteria.
6.4. Manner of Exercise. Payment of the Option purchase price shall be
made in cash or in whole shares of Common Stock already owned by the person
exercising an Option or, partly in cash and partly in such Common Stock;
provided, however, that such payment may be made in whole or in part in shares
of Common Stock only if and to the extent permitted by the applicable Agreement.
An Option shall be exercised by written notice to Time Warner upon such terms
and conditions as provided in the Agreement. Time Warner shall effect the
transfer of the shares of Common Stock purchased under the Option as soon as
practicable, and within a reasonable time thereafter such transfer shall be
evidenced on the books of Time Warner. No Holder or other person exercising an
Option shall have any of the rights of a stockholder of Time Warner with respect
to shares of Common Stock subject to an Option granted under the Plan until due
exercise and full payment has been made. No adjustment shall be made for cash
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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 22 (to the extent that such
provisions are applicable to Options) shall also be applicable to SARs unless
the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the time
the related Option is exercisable and, subject to the terms and provisions of
this Section 6.5, upon the exercise of General SARs, the person exercising the
General SAR shall be entitled to receive consideration (in the form hereinafter
provided) equal in value to the excess of the Fair Market Value on the date of
exercise of the shares of Common Stock with respect to which such General SARs
have been exercised over the aggregate related Option purchase price for such
shares; provided, however, that the Board may, in any Agreement granting General
SARs provide that the appreciation realizable upon exercise thereof shall be
measured from a base higher than the related Option purchase price.
Upon the exercise of a General SAR, the person exercising the General
SAR may specify the form of consideration to be received by such person
exercising the General SAR, which shall be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of such General SAR), or in cash, or
partly in cash and partly in shares of Common Stock. Any election by the person
exercising the General SAR to receive cash in full or partial settlement of such
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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 Time
Warner. 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 12 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 thereof.
(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board
Change, and (b) ending on the ninetieth day (or such other date specified in the
Agreement) following such date. The effective date of exercise of a Limited SAR
shall be deemed to be the date on which Time Warner shall have received notice
from the person exercising the Limited SAR of the exercise thereof.
Upon the exercise of Limited SARs granted in connection with an ISO,
except as otherwise provided in the Agreement and subject to the last paragraph
of this Section 6.5(c), the person exercising the Limited SAR shall receive in
cash an amount equal to the excess of the Fair Market Value on the date of
exercise of such Limited SARs of the shares of Common Stock with respect to
which such Limited SARs shall have been exercised over the aggregate related
Option exercise price for such shares.
Upon the exercise of Limited SARs granted in connection with a
Nonqualified Stock Option, except as otherwise provided in the Agreement and
subject to the last paragraph of this Section 6.5(c), the person exercising the
Limited SAR shall receive in cash an amount equal to the product computed by
multiplying (a) the excess of (i) the higher of (A) the Minimum Price Per Share,
or (B) the highest reported closing sales price of a share of Common Stock as
reported on the Composite Tape at any time during the period beginning on the
sixtieth day prior to the date on which such Limited SARs are exercised and
ending on the date on which such Limited SARs are exercised over (ii) the per
share Option price of the related Nonqualified Stock Option, by (b) the number
of shares of Common Stock with respect to which such Limited SARs are being
exercised.
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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 Time Warner.
6.6. Limited Transferability of Options and SARs. Except as set forth
in this Section 6.6 and Section 21, Options and SARs shall not be transferable
other than by will or the laws of descent and distribution, and Options and SARs
may be exercised during the lifetime of the Holder thereof only by such Holder
(or his or her court appointed legal representative). The Agreement may provide
that Options and SARs are transferable by gift to such persons or entities and
upon such terms and conditions specified in the Agreement.
7. ACCELERATION OF OPTIONS AND SARS
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period in
any Agreement or in the Plan, or in the event of any Approved Transaction, Board
Change or Control Purchase, unless the applicable Agreement provides otherwise,
each outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby.
8. TERMINATION OF EMPLOYMENT
8.1. General. If a Holder's employment shall terminate prior to the
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable in accordance
with the provisions of the applicable Agreement (including the provisions of any
other agreement referred to in the 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 for cause by Time Warner or such
Subsidiary prior to the exercise of any Option, then unless the applicable
Agreement provides otherwise, all Options held by such Holder and any permitted
transferee pursuant to Section 6.6 shall terminate one month after the date of
a termination for cause, provided that if such termination for cause is for
fraud, misappropriation or embezzlement, all options shall terminate
immediately. For the purposes hereof, cause (a) shall have the same meaning
provided for in any employment, advisory or consulting agreement to which such
Holder and Time Warner or any Subsidiary are parties or (b) in the absence
thereof, shall mean insubordination, dishonesty, incompetence, moral
turpitude, other misconduct of any kind and the refusal to perform such
Holder's duties and responsibilities for any reason other than illness or
incapacity, except that if
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the termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, cause under this clause (b) shall mean only a felony
conviction for fraud, misappropriation or embezzlement.
8.3. Special Rule. Notwithstanding any other provision of the Plan, the
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
8.4. Miscellaneous. The Board may determine whether any given leave of
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or one of its Subsidiaries.
9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any
Holder any right to continue in the employ of Time Warner or any of its
Subsidiaries or interfere in any way with the right of Time Warner or a
Subsidiary to terminate the employment of the Holder at any time, with or
without cause; subject, however, to the provisions of any employment agreement
between the Holder and Time Warner or any of its Subsidiaries.
10. NONALIENATION OF BENEFITS
Except as specifically provided in Section 6.6 and 21, 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,
which shall designate the Options granted thereunder as ISOs or Nonqualified
Stock Options, and each SAR shall be evidenced by a stock appreciation rights
agreement, each in such form and containing such terms and provisions not
inconsistent with the provisions of the Plan as the Board from time to time
shall approve; provided, however, that such Awards may be evidenced by a single
agreement. The effective date of the granting of an Award shall be the date on
which the Board approves such grant. Each grantee of an Option or SAR shall be
notified promptly of such grant and a written Agreement shall be promptly
executed and delivered by Time Warner and the
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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 from Time Warner or any of its Subsidiaries by the Holder
or a transferee of such Holder if the Award, or any part thereof, has been
transferred pursuant to Section 6.6 or 21.
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 is subject to the restrictions contained in the
Plan and the applicable Agreement and Time Warner may cause the registrar of its
Common Stock to place a stop transfer order with respect to such shares.
14. TERMINATION AND AMENDMENT
14.1. General. Unless the Plan shall theretofore have been terminated
as hereinafter provided, no Awards may be made under the Plan on or after the
fifth anniversary of the Effective Date. The Board may at any time prior to the
fifth anniversary of the Effective Date
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terminate the Plan, and the Board may at any time modify or amend the Plan in
such respects as it shall deem advisable; provided, however, that any such
modification or amendment shall comply with all applicable laws, applicable
stock exchange listing requirements and applicable requirements for the Plan to
qualify as "performance based" under the Act and section 162(m) of the Code.
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 or 21), 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 or 21) 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 affirmative vote
of a majority of the votes duly cast thereon, either in person or by proxy, by
the holders of voting securities of Time Warner entitled to vote thereon, voting
together as a single class, at a duly called and held meeting of stockholders of
Time Warner.
16. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject
to all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner 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.
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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 or applicable rules and regulations thereunder,
including the requirements of section 162(m) of the Code, Rule 16b-3 under the
Exchange Act and/or section 422A of the Code, then such terms or provisions
shall be deemed inoperative to the extent necessary to avoid the conflict with
applicable law, or applicable rules and regulations, without invalidating the
remaining provisions hereof. With respect to ISOs, if this Plan does not contain
any provision required to be included herein under section 422A of the Code,
such provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out at length herein; provided,
further, that to the extent any Option which is intended to qualify as an ISO
cannot so qualify, such Option, to that extent, shall be deemed to be a
Nonqualified Stock Option for all purposes of the Plan.
19. NON-EXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of Time Warner for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
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.
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21. BENEFICIARIES
Each Holder may designate any person(s) or legal entity(ies), including
his or her estate, as his or her beneficiary under the Plan. Such designation
shall be made in writing on a form filed with the Secretary of 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.
22. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
23. DEFERRAL OF OPTION GAINS
The Agreement may contain terms, conditions and procedures permitting
Holders to elect to defer the receipt of shares of Common Stock upon the
exercise of Options for a specific period or until a specified event.
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As Amended Through
March 16, 2000
TIME WARNER INC.
1988 Restricted Stock Plan For
Non-Employee Directors
1. PURPOSE. The purpose of the Plan is to supplement the compensation
paid to Outside Directors and to increase their proprietary interest in the
Company and their identification with the interests of the Company's
stockholders, by grants of annual awards of Common Stock.
2. CERTAIN DEFINITIONS.
(a) "Average Market Price" shall mean the average (rounded to
the nearest cent) of the means between the high and low sales prices of a share
of Common Stock as reported on the New York Stock Exchange Composite Tape for
the ten consecutive trading days ending on the date of the annual meeting of
stockholders of the Company for the year with respect to which an annual grant
of Restricted Shares is automatically made pursuant to paragraph 5 of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Commission" shall mean the Securities and Exchange
Commission.
(d) "Common Stock" shall mean the Common Stock, par value $1
per share, of the Company.
(e) "Company" shall mean Time Warner Inc., a Delaware
corporation.
(f) "Grant Date" shall have the meaning set forth in paragraph
5 of the Plan.
(g) "Outside Director" shall mean a member of the Board of
Directors of the Company who, as of the close of business on the date of the
annual meeting of stockholders of the Company, is not an employee of the Company
or any subsidiary of the Company. For the purposes hereof, a "subsidiary" of the
Company shall mean any corporation, partnership or other entity in which the
Company owns, directly or indirectly, an equity interest of 50% or more.
(h) "Plan" shall mean this 1988 Restricted Stock Plan for
Non-Employee Directors of the Company.
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(i) "Retained Distributions" shall mean distributions which
are retained by the Company pursuant to paragraph 6(b) of the Plan.
(j) "Restricted Shares" shall mean shares of Common Stock
automatically granted to an Outside Director pursuant to paragraph 5 of the
Plan.
(k) "Restriction Period" shall mean the period of time
specified in paragraph 6(a) hereof applicable to all Restricted Shares granted
under the Plan.
3. SHARES SUBJECT TO THE PLAN. Subject to the provisions of paragraph 9
hereof, the maximum aggregate number of Restricted Shares which may be issued
under the Plan in any calendar year, commencing with calendar year 1999, shall
be equal to .003% of the shares of Common Stock outstanding on December 31st of
the preceding calendar year. Any Restricted Shares available for grant in any
calendar year which are not granted in that calendar year shall not be available
for grant in any subsequent calendar year and any Restricted Shares awarded in
any calendar year that are forfeited by the terms of the Plan in any subsequent
calendar year shall not again be available for awards. No fractional shares of
Common Stock shall be granted or issued under the Plan.
The Restricted Shares may be, in whole or in part, authorized but
unissued shares of Common Stock or shares of Common Stock previously issued and
outstanding and reacquired by the Company.
4. ELIGIBILITY. Subject to the last sentence of paragraph 5 hereof, the
only persons eligible to participate in the Plan shall be Outside Directors.
5. ANNUAL GRANTS. Subject to the provisions of paragraph 3 hereof, each
Outside Director shall automatically be granted under the Plan, as of the
conclusion of each annual meeting of stockholders of the Company (the "Grant
Date"), that number of Restricted Shares equal to (a) for Grant Dates occurring
during calendar years 1990 through 1998, $30,000 divided by the Average Market
Price of the Common Stock on the Grant Date and (b) for Grant Dates occurring
during calendar year 1999 and thereafter, that number of Restricted Shares equal
to a dollar amount determined by the Board of Directors on or before the Grant
Date divided by the Average Market Price of the Common Stock on the Grant Date,
and except as hereinafter provided, the Company shall promptly thereafter issue
such shares, in each case without any further action required to be taken by the
Board or any committee thereof. The Company shall not be required to issue
fractions of Restricted Shares and in lieu thereof any fractional Restricted
Share shall be rounded to the next whole number. Notwithstanding the foregoing,
in the case of an Outside Director who, as of any Grant Date, has not
continuously served as a member of the Board for a period of at least six
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consecutive months (a "new Outside Director"), the Restricted Shares granted to
such new Outside Director on such Grant Date shall not be issued in such new
Outside Director's name until six months after such new Outside Director shall
have first become a new Outside Director. An individual who shall become an
Outside Director subsequent to the date of the annual meeting of stockholders of
the Company for any year shall first become eligible to participate in the Plan
commencing on the date of the next annual meeting of stockholders of the
Company.
6. RESTRICTION PERIOD; RESTRICTIONS APPLICABLE TO RESTRICTED SHARES;
CERTIFICATES REPRESENTING RESTRICTED SHARES.
(a) All Restricted Shares granted to an Outside Director
pursuant to the Plan shall be subject to the possibility of forfeiture and the
restrictions set forth in paragraph 6(b) below for a period (the "Restriction
Period") commencing on the date such Restricted Shares shall have been
automatically granted to such Outside Director pursuant to paragraph 5 of the
Plan and ending on the earliest of the following events:
(i) the date such Outside Director ceases to be a
director of the Company by reason of mandatory retirement pursuant to
any policy or plan of the Company applicable to Outside Directors;
(ii) the date such Outside Director, having been
nominated for reelection, is not reelected by the stockholders of the
Company to serve as a member of the Board;
(iii) the date of death of such Outside Director;
(iv) the date such Outside Director terminates
service on the Board on account of medical or health reasons which
render such Outside Director unable to continue to serve as a member of
the Board; or
(v) the occurrence of a Change in Control of the
Company (as defined in paragraph 6(c) below).
provided, however, that, in the discretion of the Board on a case by case basis,
the Restriction Period applicable to all Restricted Shares granted to an Outside
Director shall end and be deemed completed for all purposes of the Plan in the
event an Outside Director (a "withdrawing Outside Director") terminates his or
her service as a member of the Board (A) for reasons of personal or financial
hardship; (B) to serve in any governmental, diplomatic or
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any other public service position or capacity; (C) to avoid or protect against a
conflict of interest of any kind; (D) on the advice of legal counsel; or (E) for
any other extraordinary circumstance that the Board determines to be comparable
to the foregoing. The withdrawing Outside Director shall abstain from
participating in any determination made by the Board with respect to any matter
relating to the foregoing.
(b) Restricted Shares, when issued, will be represented by a
stock certificate or certificates registered in the name of the Outside Director
to whom such Restricted Shares shall have been granted. Each such certificate
shall bear a legend in substantially the following form:
"The shares represented by this certificate are subject to the
terms and conditions (including forfeiture and restrictions
against transfer) contained in the Time Warner Inc. 1988
Restricted Stock Plan for Non-Employee Directors. A copy of
such Plan is on file in the Office of the Secretary of Time
Warner Inc."
Such certificates shall be deposited by such Outside Director
with the Company, together with stock powers or other instruments of assignment,
each endorsed in blank, which will permit transfer to the Company of all or any
portion of the Restricted Shares and any securities constituting Retained
Distributions that shall be forfeited or that shall not become vested in
accordance with the Plan. Restricted Shares shall constitute issued and
outstanding shares of Common Stock for all corporate purposes. The Outside
Director will have the right to vote such Restricted Shares, to receive and
retain all regular cash dividends paid on such Restricted Shares and to exercise
all other rights, powers and privileges of a holder of Common stock with respect
to such Restricted Shares, with the exception that (i) the Outside Director will
not be entitled to delivery of the stock certificate or certificates
representing such Restricted Shares until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing the Restricted Shares during the
Restriction Period; (iii) other than regular cash dividends the Company will
retain custody of all distributions ("Retained Distributions") made or declared
with respect to the Restricted Shares (and such Retained Distributions will be
subject to the same restrictions, terms and conditions as are applicable to the
Restricted Shares) until such time, if ever, as the Restricted Shares with
respect to which such Retained Distributions shall have been made, paid or
declared shall have become vested, and such Retained Distributions shall not
bear interest or be segregated in separate accounts; (iv) an Outside Director
may not sell, assign, transfer, pledge, exchange, encumber or dispose of any
Restricted Shares or any Retained Distributions during the Restriction Period;
and (v) a breach of any restrictions, terms or conditions provided in the Plan
or established by the
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Board with respect to any Restricted Shares or Retained Distributions will cause
a forfeiture of such Restricted Shares and any Retained Distributions with
respect thereto.
(c) A "Change in Control" of the Company shall be deemed to
have occurred on the date upon which (i) the board (or, if approval of the Board
is not required as a matter of law, the stockholders of the Company) shall
approve (a) any consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of
Common Stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of Common Stock immediately
prior to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (b) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or (c)
the adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (ii) any person (as such term is defined in Section 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), corporation, or other entity shall purchase any Common Stock of the
Company (or securities convertible into the Common Stock) for cash, securities
or any other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board, or any such person, corporation or other entity
(other than the Company or any benefit plan sponsored by the Company or any
subsidiary) shall become the "beneficial owner" (as such term is defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 20 percent or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote in the election of
directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the
case of rights to acquire the Company's securities), or (iii) during any period
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board shall cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least two-thirds
of the directions then still in office who were directors at the beginning of
the period; provided, however, that, as to Restricted Shares granted after
January 9, 2000, the consummation of the mergers and the other transactions
contemplated in the Agreement and Plan of Merger dated as of January 10, 2000
between America Online, Inc. and Time Warner Inc., as the same may be amended
from time to time, shall not constitute a Change in Control under the foregoing
clauses (ii) or (iii).
7. COMPLETION OF RESTRICTION PERIOD; FORFEITURE. Upon the completion of
the Restriction Period with respect to an Outside Director's Restricted Shares,
and the satisfaction of any other applicable restrictions, terms and conditions,
all Restricted Shares issued to such Outside Director and any Retained
Distributions with respect to such Restricted Shares shall become vested. The
Company shall promptly thereafter issue and
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deliver to the Outside Director new stock certificates or instruments
representing the Restricted Shares and other distributions registered in the
name of the Outside Director or, if deceased, his or her legatee, personal
representative or distributee, which do not contain the legend set forth in
paragraph 6(b) hereof.
If an Outside Director ceases to be a member of the Board for any
reason other than as set forth in clauses (i) through (v) of paragraph 6(a)
hereof or as the Board may otherwise approve in accordance with paragraph 6(a),
then all Restricted Shares issued to such Outside Director and all Retained
Distributions with respect thereto shall be forfeited to the Company and the
Outside Director shall not thereafter have any rights (including dividend and
voting rights) with respect to such Restricted Shares and Retained
Distributions.
8. STATEMENT OF ACCOUNT. Each Outside Director shall receive an annual
statement, on or about June 1st, showing the number of Restricted Shares granted
to such Outside Director for that year and the aggregate number of Restricted
Shares that have been granted to such Outside Director under the Plan.
9. ADJUSTMENT IN EVENT OF CHANGES IN COMMON STOCK. In the event of a
recapitalization, stock split, stock dividend, combination or exchange of
shares, merger, consolidation or liquidation or the like, the aggregate number
and class of Restricted Shares available for grant under the Plan shall be
appropriately adjusted by the Board, whose determination shall be conclusive.
10. NO RIGHT TO NOMINATION. Nothing contained in the Plan shall confer
upon any Outside Director the right to be nominated for reelection to the Board.
11. NONALIENATION OF BENEFITS. No right or benefit under the Plan shall
be subject to anticipation, alienation, sale, assignment, hypothecation, pledge,
exchange, transfer, encumbrance or charge, and any attempt to anticipate,
alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or
charge the same shall be void. No right or benefit hereunder shall in any manner
be liable for or subject to the debts, contracts, liabilities or torts of the
person entitled to such benefit. If any Outside Director or beneficiary
hereunder should become bankrupt or attempt to anticipate, alienate, sell,
assign, hypothecate, pledge, exchange, transfer, encumber or charge any right or
benefit hereunder, then such right or benefit shall, in the discretion of the
Board, cease and terminate, and in such event, the Board in its discretion may
hold or apply the same or any part thereof for the benefit of the Outside
Director, his or her beneficiary, spouse, children or other dependents, or any
of them, in such manner and in such proportion as the Board may deem proper.
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12. APPOINTMENT OF ATTORNEY-IN-FACT. Upon the issuance of any
Restricted Shares hereunder and the delivery by an Outside Director of the stock
power referred to in paragraph 6(b) hereof, such Outside Director shall be
deemed to have appointed the Company, its successors and assigns, the
attorney-in-fact of the Outside Director, with full power of substitution, for
the purpose of carrying out the provisions of this Plan and taking any action
and executing any instruments which such attorney-in-fact may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact shall be irrevocable and coupled with an interest. The Company
as attorney-in-fact for the Outside Director may in the name and stead of the
Outside Director make and execute all conveyances, assignments and transfers of
the Restricted Shares and Retained Distributions deposited with the Company
pursuant to paragraph 6(b) of the Plan and the Outside Director hereby ratifies
and confirms all that the Company, as said attorney-in-fact, shall do by virtue
thereof.
Nevertheless, the Outside Director shall, if so requested by the
Company, execute and deliver to the Company all such instruments as may, in the
judgment of the Company, be advisable for the purpose.
13. SECTION 4999 RULES. Notwithstanding any provisions to the contrary
contained in the Plan, if the Payment (as hereinafter defined) due to the
Outside Director hereunder upon the occurrence of a Change in Control of the
Company would be subject to the excise tax imposed by Section 4999 (or any
successor thereto) of the Internal Revenue Code of 1986 (the "Code"), then any
such Payment hereunder payable to the Outside Director shall be reduced to the
largest amount that will result in no portion of the aggregate of the Payments
from the Company being subject to such excise tax. The term "Payment" shall mean
any transfer of property within the meaning of Section 280G (or any successor
thereto) of the Code.
The determination of any reduction in Payments under the Plan shall be
made by the Outside Director in good faith, and such determination shall be
conclusive and binding on the Company. The Outside Director shall have the right
to determine the extent to which the aggregate amount of any such reduction
shall be applied against any cash or any shares of stock of the Company or any
other securities or property to which the Outside Director would otherwise have
been entitled under the Plan, the extent to which the Payments hereunder and any
other payments due to the Outside Director from the Company shall be reduced,
and whether to waive the right to the acceleration of any portion of the Payment
due hereunder or otherwise due to the Outside Director from the Company, and any
such determination shall be conclusive and binding on the Company. To the extent
that Payments hereunder are not paid as a consequence of the limitation
contained in this paragraph 13, then the Restricted Shares and Retained
Distributions not so accelerated shall be deemed to
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<PAGE>
remain outstanding and shall be subject to the provisions of the Plan as if no
acceleration had occurred.
If (a) the Company shall make any Payments pursuant to the Plan to the
Outside Director, (b) an excise tax under Section 4999 (or any successor
thereto) of the Code is in fact paid by the Outside Director (or is claimed by
the Internal Revenue Service to be due) as a result of any such Payment, either
alone or together with any other Payments received or to be received by the
Outside Director from the Company, and (c) if nationally recognized counsel to
the Outside Director or the Company shall have given an opinion of counsel that
repayment of all or a portion of such Payments would result in such excise tax
being refunded to the Outside Director (or, if not paid, in such excise tax not
being imposed), then the Outside Director shall repay to the Company all or such
portion of such Payments so that such excise tax will be refunded (or will not
apply).
The Company shall pay all legal fees and expenses which the Outside
Director may incur in any contest of the Outside Director's interpretation of,
or determinations under, the provisions of this paragraph 13.
14. WITHHOLDING TAXES.
(a) At the time any Restricted Shares or Retained
Distributions become vested or payable, each Outside Director shall pay to the
Company the amount of any Federal, state or local taxes of any kind required by
law to be withheld with respect thereto.
(b) If an Outside Director properly elects (which, apart from
any other notice required by law, shall require that the Outside Director notify
the Company of such election at the time it is made) within 30 days after the
Company issues the certificate or certificates representing the Restricted
Shares to the Outside Director to include in gross income for Federal income tax
purposes an amount equal to the fair market value of such Restricted Shares at
the time of such issuance, he or she shall pay to the Company in the year of
award of such Restricted Shares the amount of any Federal, state or local taxes
required to be withheld with respect to such Restricted Shares.
(c) If an Outside Director shall fail to make the payments
required hereunder, the Company shall, to the extent permitted by law, have the
right to deduct from any payment of any kind otherwise due to such Outside
Director any Federal, state or local taxes of any kind required by law to be
withheld with respect to such Restricted Shares.
15. AMENDMENT AND TERMINATION OF PLAN. The Board may at any time
terminate the Plan or make such amendments to the Plan as it shall deem
advisable;
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provided, however, that no termination or amendment of the Plan shall adversely
affect the right of any Outside Director (without his or her consent) under any
grant previously made and any amendment shall comply with all applicable laws
and regulations and stock exchange listing requirements.
16. GOVERNMENT AND OTHER REGULATIONS. Notwithstanding any other
provisions of the Plan, the obligations of the Company with respect to
Restricted Shares shall be subject to all applicable laws, rules and
regulations, and such approvals by any governmental agencies as may be required
or deemed appropriate by the Company. The Company reserves the right to delay or
restrict, in whole or in part, the issuance or delivery of Common Stock pursuant
to any grants of Restricted Shares under the Plan until such time as:
(a) any legal requirements or regulations shall have been met
relating to the issuance of such Restricted Shares or to their registration,
qualification or exemption from registration or qualification under the
Securities Act of 1933 or any applicable state securities laws; and
(b) satisfactory assurances shall have been received that such
Restricted Shares when delivered will be duly listed on any applicable stock
exchange.
17. NONEXCLUSIVITY OF PLAN. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including without limitation, the awarding of stock otherwise than under the
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
18. GOVERNING LAW. The Plan shall be governed by, and construed in
accordance with, the laws of the State of New York.
19. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective on a
date which is the latter of (i) the date the Plan is approved by the
stockholders of the Company entitled to vote at the annual meeting of
stockholders of the Company to be held in 1988, or any adjournment thereof; and
(ii) the date on which the Company receives a favorable interpretative letter
from the Commission to the effect that (x) the grant of Restricted Shares under
the Plan is exempt from the operation of Section 16(b) of the Exchange Act and
(y) Outside Directors who receive Restricted Shares under the Plan will continue
to be "disinterested persons" within the meaning of Rule 16b-3 under the
Exchange Act with respect to administration of the Company's other stock related
plans in which only
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employees of the Company (including officers, whether or not they are directors)
and its subsidiaries may participate.
20. BENEFICIARIES. Each Outside Director may designate any person(s) or
legal entity(ies), including his or her estate, as his or her beneficiary under
the Plan. Such designation shall be made in writing on a form filed with the
Secretary of the Corporation or his or her designee and may be revoked or
changed by an Outside Director at any time by filing written notice of such
revocation or change with the Secretary of the Corporation or his or her
designee. If no person shall be designated by an Outside Director as his or her
beneficiary or if no person designated by such Outside Director as his or her
beneficiary survives such Outside Director, the Outside Director's beneficiary
shall be his or her estate.
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As Amended Through
March 16, 2000
TIME WARNER 1996 STOCK OPTION
PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE OF THE PLAN
The purpose of the Time Warner 1996 Stock Option Plan for Non-Employee
Directors (hereinafter the "Plan") is to provide for the granting of
nonqualified stock options and limited stock appreciation rights to Outside
Directors and to increase their proprietary interest in Time Warner and their
identification with the interests of Time Warner's stockholders through annual
grants of stock options.
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 and Limited SARs
agreement specified in Section 10.
(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 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
<PAGE>
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 Limited 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) "Common Stock" means, subject to Section 11 hereof, the
common stock, par value $1.00 per share, of Time Warner.
(h) "Composite Tape" means the New York Stock Exchange
Composite Tape.
(i) "Control Purchase" means any transaction in which any
person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act), corporation or other entity (other than Time Warner
or any employee benefit plan sponsored by Time Warner or any of its
Subsidiaries) (i) shall purchase any Common Stock (or securities
convertible into Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of the Board, or (ii) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Time Warner representing 20%
or more of the combined voting power of the then outstanding securities
of Time Warner ordinarily (and apart from the rights accruing
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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).
(j) "Effective Date" means the date the Plan becomes effective
pursuant to Section 13.
(k) "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.
(l) "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.
(m) "Holder" means an Outside Director who has received an
Award under this Plan.
(n) "Limited SARs" means limited stock appreciation rights
subject to the terms of Section 7.6.
(o) "Minimum Price Per Share" means the highest gross price
(before brokerage commissions, soliciting dealers' fees and similar
charges) paid or to be paid for any share of Common Stock (whether by
way of exchange, conversion, distribution, liquidation or otherwise)
in, or in connection with, any Approved Transaction or Control Purchase
which occurs at any time during the period beginning on the sixtieth
day prior to the date on which Limited SARs are exercised and ending on
the date on which Limited SARs are exercised. If the consideration paid
or to be paid in any such Approved Transaction or Control Purchase
shall consist, in whole or in part, of consideration other than cash,
the cash value of such consideration shall be the same as established
by the Board under the provisions of Time Warner's 1994 Stock Option
Plan or any successor thereto.
(p) "Option" means any nonqualified stock option granted
pursuant to this Plan.
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(q) "Outside Directors" shall mean a member of the Board who,
as of the close of business on the date of the grant of any Option
hereunder, is not an employee of Time Warner or any Subsidiary.
(r) "Plan" has the meaning ascribed thereto in Section 1.
(s) "Subsidiary" of a person means any present or future
subsidiary corporation (as such term is defined in section 424 of the
Code) of such person 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.
(t) "Time Warner" means Time Warner Inc., a Delaware
corporation, and any successor thereto.
(u) "Trading Day" means any day on which the New York Stock
Exchange is open for business.
(v) "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 11 and this
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is 250,000. If and to the extent that an Option shall
expire, terminate or be cancelled for any reason without having been exercised
(or without having been considered to have been exercised as provided in Section
7.6), the shares of Common Stock subject to such expired, terminated or
cancelled 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.
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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. 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.
4.2. 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. Upon such appointment and delegation, any such Committee
shall have all the powers, privileges and duties of the Board, and shall be
substituted for 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.
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5. ELIGIBILITY
The only persons eligible to participate in the Plan shall be Outside
Directors.
6. ANNUAL GRANTS
Each Outside Director shall automatically be granted 1,500 Options and
related Limited SARs under the Plan on the day that is 10 Trading Days after
each annual meeting of stockholders of Time Warner, commencing with the annual
meeting to be held in 1996, and, except as hereinafter provided, the Company
shall promptly thereafter execute and deliver to each Outside Director, an
Agreement evidencing the grant of such Options and Limited SARs, in each case
without any further action required to be taken by the Board or any committee
thereof. An individual who shall become an Outside Director subsequent to the
date of the annual meeting of stockholders of Time Warner for any year shall
first become eligible to participate in the Plan commencing on the date of the
next annual meeting of stockholders of Time Warner.
7. OPTIONS AND LIMITED SARS
7.1. Option Prices. The purchase price of the Common Stock under each
Option shall be equal to 100% of the Fair Market Value of the Common Stock on
the date of grant.
7.2. Terms of Options. The term of each Option shall be ten years from
the date of grant.
7.3. Exercisability of Options. Subject to adjustment as provided in
Section 11, each Option granted under the Plan shall be exercisable (a) on and
after the first anniversary of the date of grant, to the extent of 500 shares,
(b) on and after the second anniversary of the date of grant, to the extent of
1,000 shares and (c) on and after the third anniversary of the date of grant, to
the extent of 1,500 shares. Notwithstanding the foregoing, each Option granted
under the Plan shall become exercisable in full (a) on the date the Holder
ceases to be a director of Time Warner for any reason other than as described in
Section 7.5(d) and (b) in the event of any Approved Transaction, Board Change or
Control
-6-
<PAGE>
Purchase; provided, however, that, as to Options granted after January 9, 2000,
the consummation of the mergers and the other transactions contemplated in the
Agreement and Plan of Merger dated as of January 10, 2000 between America
Online, Inc. and Time Warner Inc., as the same may be amended from time to time,
shall not constitute a Board Change or Control Purchase.
7.4. 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 Holder or
partly in cash and partly in such Common Stock in accordance with the provisions
of the Agreement. An Option shall be exercised by written notice to Time Warner
upon such terms and conditions as provided in the Agreement. Time Warner shall
effect the transfer of the shares of Common Stock purchased under the Option as
soon as practicable, and within a reasonable time thereafter such transfer shall
be evidenced on the books of Time Warner. No Holder or other person exercising
an Option shall have any of the rights of a stockholder of Time Warner with
respect to shares of Common Stock subject to an Option granted under the Plan
until due exercise and full payment has been made. No adjustment shall be made
for cash dividends or other rights for which the record date is prior to the
date of such due exercise and full payment.
7.5. Termination of Options. The unexercised portion of each Option
shall automatically and without notice irrevocably terminate and become null and
void at the time of the earliest to occur of (a) ten years from the date of
grant of such Option, (b) five years from the date the Holder ceases to be a
director of Time Warner by reason of retirement, Total Disability or any reason
other than as described in the succeeding clauses (c) and (d), (c) one year from
the date the Holder dies or (d) the date the Holder is removed from the Board
for cause.
7.6. Limited SARs. Limited SARs shall be granted pursuant to the
provisions of this Section 7.6 with respect to each grant of Options under the
Plan (hereinafter called a "related Option"). Subject to the terms and
provisions of this Section 7.6, each Limited SAR shall be exercisable to the
extent the related Option is then exercisable and in no event after the complete
termination or full exercise of the related Option. Limited SARs shall be
exercisable in whole or in part
-7-
<PAGE>
upon notice to Time Warner upon such terms and conditions as provided in the
Agreement.
Upon the exercise of Limited 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 Limited 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 Limited
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 7 through 19 (to the extent that such
provisions are applicable to Options) shall also be applicable to Limited SARs
unless the context otherwise requires.
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 following such date. The effective date of exercise of a
Limited SAR shall be deemed to be the date on which Time Warner shall have
received notice from the Holder 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 Holder thereof 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 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
-8-
<PAGE>
pooling of interests accounting treatment for any proposed transaction involving
Time Warner.
7.7. Nontransferability of Options and Limited SARs. Options and
Limited SARs shall not be transferable other than by will or the laws of descent
and distribution, and Options and Limited SARs may be exercised during the
lifetime of the Holder thereof only by such Holder (or his or her court
appointed legal representative).
8. NO RIGHT TO NOMINATION
Nothing contained in the Plan or in any Award shall confer on any
Outside Director the right to be nominated for reelection to the Board.
9. NONALIENATION OF BENEFITS
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.
10. WRITTEN AGREEMENT
Each grant of an Option and Limited SARs shall be evidenced by an
Agreement consistent with the terms of the Plan.
11. 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 character and number of shares subject to
such Award and the option price shall be appropriately adjusted
-9-
<PAGE>
by the Board, whose determination shall be conclusive. 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.
Notwithstanding anything to the contrary contained in this Plan, upon
consummation of the mergers contemplated by the Amended and Restated Agreement
and Plan of Merger dated as of September 22, 1995 among Time Warner, Turner
Broadcasting System, Inc., TW Inc. ("New Time Warner"), Time Warner Acquisition
Corp. and TW Acquisition Corp. and the assumption of this Plan by New Time
Warner: (i) New Time Warner shall be substituted for Time Warner for all
purposes of this Plan, (ii) Common Stock as used in this Plan shall mean the
common stock, par value $.01 per share, of New Time Warner ("New Time Warner
Common Stock"), (iii) the Board shall mean the Board of New Time Warner, and
(iv) each outstanding Option and Limited SAR shall automatically become an
Option to purchase and a Limited SAR with respect to New Time Warner Common
Stock on a one-for-one basis at the same exercise price.
12. TERMINATION AND AMENDMENT
The Board may at any time terminate the Plan or make such amendments to
the Plan as it shall deem advisable; provided, however, that the Plan may not be
amended more than once every six months (other than to comply with changes to
the Code or the Employee Retirement Income Security Act of 1974, as amended),
and any amendment to the Plan shall comply with all applicable laws and stock
exchange listing requirements, including without limitation, Rule 16b-3 under
the Exchange Act. No termination, modification or amendment of the Plan may,
without the consent of the person to whom any Award shall theretofore have been
granted, adversely affect the rights of such person with respect to such Award.
No modification, extension, renewal or other change in any Award granted under
the Plan shall be made after the grant of such Award, unless the same is
consistent with the provisions of the Plan.
13. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the stockholders of
Time Warner entitled to vote at the annual
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<PAGE>
meeting of such stockholders to be held in 1996, or any adjournment thereof.
14. 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.
15. 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 by a Holder 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.
16. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of applicable law or Rule 16b-3 under the Exchange Act, then such
terms or provisions shall be deemed inoperative to the extent necessary to avoid
the conflict with applicable law or such Rule without invalidating the remaining
provisions hereof.
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<PAGE>
17. NON-EXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of Time Warner for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements for Outside Directors as it may deem desirable.
18. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
19. BENEFICIARIES.
Each Outside Director 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 an Outside
Director 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 an Outside Director as his or her beneficiary or if no person
designated by such Outside Director as his or her beneficiary survives such
Outside Director, the Outside Director's beneficiary shall be his or her estate.
-12-
<PAGE>
AMENDMENT NO. 1
TO THE
TIME WARNER INC.
DEFERRED COMPENSATION PLAN
1. Section 3.2(a) is amended by adding the phrase "and on and after June 18,
1999, signing bonuses" after the parenthetical clause in the last sentence.
2. Section 3.2(b) is amended by adding the following sentence at the end
thereof:
On and after June 18, 1999, an Eligible Employee's employment
agreement with the Company or another Employing Company may also
provide for a mandatory deferral of certain compensation under the
Plan.
<PAGE>
AMENDMENT NO. 2
TO THE
TIME WARNER INC.
DEFERRED COMPENSATION PLAN
1. Section 2.18 is amended to read as follows:
2.18 Investment Direction: A Participant's or Inactive Participant's
direction to the recordkeeper of the Plan, in the form and manner
prescribed by the Committee, in accordance with directions made by
telephone, through the intranet of the applicable Employing Company or
through the Internet, directing which Investment Funds will be
credited with his or her deferrals and transfers of all or part of the
deferred amounts and any earnings thereon from other Investment Funds,
the Pre-1999 Plan and certain employment agreements, as provided for
herein.
2. Section 3.5 is amended by adding the following sentence at the end thereof:
On and after September 13, 1999, notwithstanding anything to the
contrary herein, the term "bonus", wherever used in this Article III,
shall also include any amounts payable to Eligible Employees
participating in the Time Warner Cable Long Term Cash Plan, provided
that any such elections must be made no later than two Years before
the Year in which payment would be made.
3. Section 5.4(b)(iii) is amended to read as follows:
(iii) can only be made three times (once prior to September 13, 1999)
with respect to any in-service payment,
<PAGE>
AMENDMENT NO. 3
TO THE
TIME WARNER INC.
DEFERRED COMPENSATION PLAN
1. Section 1.2 is amended by adding the following sentence at the end thereof:
On July 1, 2000, or such later date as determined by the Committee,
the Plan will also accept transfers of account balances attributable
to compensation previously irrevocably transferred under the Time
Warner Excess Profit Sharing Plan (the "Excess Profit Sharing Plan"),
subject to the terms and conditions for making such transfers
specified in the Excess Profit Sharing Plan.
2. Section 2.5 is amended by adding the following three sentences at the end
thereof:
The beneficiary designation, if any, in effect for the Plan will
override and supercede any Excess Profit Sharing Plan designation. If
there is none on file for the Plan, the Excess Profit Sharing Plan
designation will continue to apply to any transferred balance from the
Excess Profit Sharing Plan until a Plan designation is made. Any such
new designation will apply to all balances in the Plan.
3. Section 2.18 is amended by adding the term "the Excess Profit Sharing Plan"
after the term "the Pre-1999 Plan."
4. Section 3.6 is amended by adding the following section 3.6(c) at the end
thereof:
(c) Each "Eligible Participant" in the Excess Profit Sharing Plan may
make a one time election no later than July 1, 2000 or such other date
as may be determined by the Committee (which shall become irrevocable
as of such date) by a written notice to the Committee to have his or
her entire account balance in the Excess Profit Sharing Plan
transferred to and deferred under his or her Deferred Compensation
Account in the Plan. For purposes of this Section, an "Eligible
Participant" is any Participant in the Excess Profit Sharing Plan who
has not been designated (either individually or by class) by the
Committee, in its sole discretion, as being ineligible to make such
transfers.
5. Section 5.4(b)(i) is amended to read as follows:
(i) must be for full Years, and for no fewer than 36 months from the
beginning of the month in which the in-service deferral would
have been paid but for the additional deferral,
<PAGE>
2
6. Section 5.4(b)(iii) is amended to read as follows:
(iii) can only be made five times (once prior to September 13, 1999
and three times prior to October 25, 1999) with respect to any
in-service payment,
7. Article V is amended by adding the following section 5.13 at the end
thereof:
5.13 Transfers from the Pre-1999 Plan and the Excess Profit Sharing
Plan. All balances transferred from the Pre-1999 Plan and the Excess
Profit Sharing Plan shall be subject to the provisions of this Article
V as part of a Participant's or Inactive Participant's Deferred
Compensation Account.
<PAGE>
AMENDMENT NO. 4
TO THE
TIME WARNER INC.
DEFERRED COMPENSATION PLAN
1. Section 4.2(a) is amended by adding the following sentence before the last
sentence thereof:
On and after January 1, 2000, the available deemed Investment Funds
shall include, on a deemed investment basis, all of the similarly
named funds (both core funds and mutual funds in the mutual funds
option) offered under the Time Warner Defined Contribution Plans
Master Trust.
2. Article IV is amended by adding the following section 4.8 at the end
thereof:
4.8 Investment of Account Balances Transferred from the Excess Profit
Sharing Plan. The account balances which are to be transferred from
the Excess Profit Sharing Plan to the Plan shall be deemed invested in
the fund using the investment crediting rate based on the Capital
Preservation Fund of the Time Warner Defined Contribution Plans Master
Trust. Participants in the Plan who have such account balances
transferred to the Plan will be permitted to make two investment
changes (for their entire Plan account balances) in the calendar
quarter of the transfer instead of one.
<PAGE>
AMENDMENT NO. 5
TO THE
TIME WARNER INC.
DEFERRED COMPENSATION PLAN
1. Section 3.4 is amended by adding the following sentence at the end thereof:
Notwithstanding the foregoing, after November 15, 1999, an election to
defer compensation shall be made prior to July 1 of the Year preceding
that in which it would be payable, at which time it shall become
irrevocable.
2. Section 3.5 is amended by adding the following sentence at the end thereof:
After November 15, 1999, any such elections pursuant to this section
shall be made prior to July 1 of the final Year of the respective
plan, at which time it shall become irrevocable.
3. The first sentence of Section 5.4(b) is amended to read as follows:
Notwithstanding subsection (a) above, a Participant may request, by
delivering written notice to the Committee on a form prescribed by it
prior to July 1 (January 1 for notices given before November 15, 1999)
of the Year preceding that in which the in-service payment is to be
made, that the Committee, in its sole and absolute discretion, defer
such payment until such later Year as the Participant requests.
<PAGE>
AMENDMENT NO. 6
TO THE
TIME WARNER INC.
DEFERRED COMPENSATION PLAN
1. Section 1.2 is amended by substituting the term "Benefits Officer" for the
word "Committee."
2. Section 2.2(a) is amended by substituting the term "Benefits Officer" for
the word Committee."
3. Section 2.4 is redesignated as section 2.5 and amended by substituting the
term "Benefits Officer" for the word "Committee", wherever it appears
therein and by substituting the phrase "such officer's designee" for the
phrase "any member thereof or its designee" at the end of the second
sentence thereof. Subsequent sections are renumbered accordingly.
4. A new Section 2.6 is added to read as follows:
BENEFITS OFFICER: The Benefits Officer as provided for herein.
5. Section 2.7 is redesignated as section 2.3 and amended to read as follows:
ADMINISTRATIVE COMMITTEE: The Administrative Committee as provided for
herein.
Subsequent sections are renumbered accordingly.
6 Sections 2.14 and 2.18 are amended by substituting the term "Benefits
Officer" for the word "Committee" wherever it appears therein.
7. Article III is amended to substitute the term "Benefits Officer" for the
word "Committee" wherever it appears therein, except in section 3.6, which
is amended to add the word "Administrative" before the word "Committee" in
both sentences.
8. The last sentence of section 3.1 is amended to read as follows:
The Benefits Officer may, from time to time, modify the above
eligibility requirements and make such additional or other
requirements for eligibility as such officer may determine.
9. Article V is amended by substituting the term "Benefits Officer" for the
word "Committee" wherever it appears therein, except in section 5.11, which
is amended by adding the word "Investment" before the word "Committee" and
by
<PAGE>
2
substituting the phrases "such officer" or "such officers", as appropriate,
wherever the words "it" or "its" appear in reference to the Benefits
Officer.
10. Article VI is amended by adding the following sections after section 6.5:
6.6 THE BENEFITS OFFICER; APPOINTMENT. The Benefits Officer shall be
appointed by the Chief Executive Officer of the Company and may be
removed by the Chief Executive Officer. The Benefits Officer may not
serve concurrently on the Administrative Committee or the Investment
Committee. The Benefits Officer may resign at any time by giving
notice to the Chief Executive Officer of the Company. Any such
resignation shall take effect at the date of receipt of such notice or
at any later date specified therein; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to
make it effective. A Participant may be appointed as the Benefits
Officer. The Benefits Officer shall not receive compensation for his
or her services as such.
6.7 DELEGATION OF DUTIES. The Benefits Officer may delegate any of his
powers or duties to others as he or she shall determine, and may
authorize others to execute or deliver any instrument or to make any
payment in his or her behalf. The Benefits Officer may employ such
counsel, agents and clerical, medical, accounting and actuarial
services as he or she may require in carrying out his or her
functions.
6.8 BENEFITS OFFICER; SETTLOR AND MINISTERIAL FUNCTIONS. The Benefits
Officer shall have the duty to execute settlor and ministerial
functions on behalf of the Company, including, without limitation,
amending and modifying the terms of the Plan and performing
ministerial functions with respect to the Plan, except to the extent
specifically limited by resolution of the Board or by the terms
herein. The Benefits Officer shall have solely ministerial and settlor
functions, and shall have no fiduciary authority, obligations or
status with respect to the Plan, such as, without limitation,
authority or discretion to interpret or administer the Plan, set
investment policy with respect to the Plan, or resolve factual
disputes arising in connection with the interpretation, administration
and operation of the Plan, and all such fiduciary authority,
obligations and status shall be retained by the Administrative
Committee and Investment Committee as set forth herein, and the
Benefits Officer will present any issues related to such authority,
obligations or status to the Administrative Committee for its
resolution. Prior to March 15, 2000, the Administrative Committee has
the functions delegated to the Benefits Officer.
Subsequent sections are renumbered accordingly.
11. Section 6.10 is amended by adding the word "Administrative" before the
word "Committee" and by adding the words "Investment Committee and Benefits
Officer" after the word "Committee."
<PAGE>
3
12. Section 6.11 is amended to read as follows:
6.11 Expenses of Administration. Any expense incurred by the Company,
the Administrative Committee, the Investment Committee or the Benefits
Officer relative to the administration of the Plan shall be paid by
the Employing Companies in such proportions as the Company may direct.
13. Article VII is amended by adding the word "Administrative" before the word
"Committee" wherever it appears therein.
14. Article VIII is amended by substituting the word "Benefits Officer" for the
word "Committee" wherever it appears therein and by substituting the phrase
"such officer" for the word "its" in section 8.3.
15. Section 10.5 is amended by substituting the term "Benefits Officer" for the
word "Committee" in the last sentence thereof.
16. Section 10.6 is amended by adding the word "Administrative" before the word
"Committee" and the term "Benefits Officer" after the word "Committee."
<PAGE>
EMPLOYMENT AGREEMENT made as of January 9, 2000, effective as of July 1,
1999 (the "Effective Date"), between TIME WARNER INC., a Delaware corporation
(the "Company"), and Joan N. Sumner.
You and the Company desire to set forth the terms and conditions of your
employment by the Company and agree as follows:
1. Term of Employment. Your "term of employment", as this phrase is used
throughout this Agreement, shall be for the period beginning on the Effective
Date and ending on December 31, 2003 ("Term Date"), subject, however, to earlier
termination as set forth in this Agreement.
2. Employment. You shall serve as a Senior Vice President of the Company
during the term of employment, and you shall have the authority, functions,
duties, powers and responsibilities normally associated with such position as it
relates to investor relations and such additional authority, functions, duties,
powers and responsibilities as the Board of Directors, the Chief Executive
Officer or the President of the Company may from time to time delegate to you in
addition thereto. During the term of employment, (i) your services shall be
rendered on a substantially full-time, exclusive basis and you will apply on a
full-time basis all of your skill and experience to the performance of your
duties, (ii) you shall report only to the Company's Board of Directors, its
Chief Executive Officer or its President, (iii) you 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 your time and (iv) the place for the
performance of your 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 required in the performance of your duties. 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.
<PAGE>
3. Compensation.
3.1 Base Salary. The Company shall pay you 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 during the term of
employment. Base Salary shall be paid in accordance with the Company's customary
payroll practices.
3.2 Bonus. In addition to Base Salary, the Company typically pays its
executives an annual cash bonus ("Bonus"). Although your Bonus is fully
discretionary, the Company expresses its expectation about bonus payments,
assuming satisfactory personal and Company performance, as a target percentage
of Base Salary, and in your case that target is 100%. Each year, your personal
performance will be considered in the context of your executive duties and any
individual goals set for you, and your actual Bonus will be determined. Although
as a general matter the Company expects to pay bonuses at the target level in
cases of satisfactory individual performance, it does not commit to do so, and
your Bonus may be negatively affected by the exercise of the Company's
discretion or by overall Company performance.
3.3 Deferred Compensation. In addition to Base Salary and Bonus, you
shall be credited with a defined contribution which shall be determined and paid
out on a deferred basis as provided in this Agreement. During the term of
employment, the Company shall credit to an account maintained for you (the
"Deferred Account"), in 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"), annually, an amount equal to the following
("Deferred Compensation"): during the period from the Effective Date through
December 31, 2000, 25% of your then current Base Salary; during the period from
January 1, 2001 through December 31, 2001, 35% of your then current Base Salary;
and during the period from January 1, 2002 through the Term Date, 50% of your
then current Base Salary. Such amount shall be credited pro rata during each
year of the term of employment at the same time you receive payments of Base
Salary.
3.4 Indemnification. You shall be entitled throughout the term of
employment 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 hereof that limit or
narrow, but including any that add to or broaden, the protection afforded to you
by those provisions).
2
<PAGE>
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 your 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 your obligations
under this Agreement or because of your 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 you and shall be effective as of the date of such
notice; provided, however, that if (i) such termination is because of your
willful refusal without proper cause to perform any one or more of your
obligations under this Agreement, (ii) such notice is the first such notice of
termination for any reason delivered by the Company to you under this Section
4.1, and (iii) within 15 days following the date of such notice you shall cease
your refusal and shall use your best efforts to perform such obligations, the
termination shall not be effective.
In the event of 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 you other than (i) to
pay Base Salary and make credits of Deferred Compensation through the effective
date of termination, (ii) to pay any Bonus that has been determined but not yet
paid as of the date of such termination and (iii) with respect to any rights you
have pursuant to any insurance or other benefit plans or arrangements of the
Company. You hereby disclaim any right to receive a pro rata portion of any
Bonus with respect to the year in which such termination occurs.
4.2 Termination by You 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, you 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 is in
material breach of its obligations under this Agreement;
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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 you pursuant to this Section 4.2 and within such 15-day
period the Company shall have cured all such material breaches. A material
breach by the Company shall include, but not be limited to, (i) the Company
violating Section 2 with respect to your title, reporting lines, duties or place
of employment or (ii) 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 you, to
terminate your employment under this Agreement without cause, which notice shall
specify the effective date of such termination.
4.2.1 After the effective date of a termination pursuant to this
Section 4.2 (a "termination without cause"), you shall receive Base Salary,
Deferred Compensation and a pro rata portion of your Average Annual Bonus (as
defined below) through the effective date of termination. Your Average Annual
Bonus shall be 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 annual
bonus received by you from the Company was the greatest.
4.2.2 After the effective date of a termination without cause,
you 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 such termination and during such period you shall be entitled
to receive, whether or not you become disabled during such period but subject to
Section 6, (a) Base Salary at an annual rate equal to your Base Salary in effect
immediately prior to the notice of termination, (b) an annual Bonus in respect
of each calendar year or portion thereof (in which case a pro rata portion of
such Bonus will be payable) during such period equal to the Average Annual Bonus
and (c) credits of Deferred Compensation. Except as provided in the second
succeeding sentence, if you accept other full-time employment during such period
or notify the Company in writing of your intention to terminate your status as
an employee during such period, you shall cease to be an employee of the Company
effective upon the commencement of such other employment or the effective date
of such termination as specified by you in such notice, whichever is applicable,
and you shall be entitled to receive, as severance, a lump sum payment within 30
days after such
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commencement or such effective date (provided that if you were 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 payments you
would have received pursuant to this Section 4.2.2 had you remained on the
Company's payroll. That lump sum 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. Notwithstanding the foregoing, if you accept
employment with any not-for-profit entity, then you 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 you accept full-time employment with any
affiliate of the Company, then the payments provided for in this Section 4.2.2
shall immediately cease and you 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 you shall
continue to be employed by the Company pursuant to the terms of this Agreement,
subject to termination by either party hereto on 60 days written notice
delivered to the other party (which notice may be delivered by either party at
any time on or after the date which is 60 days prior to the Term Date). If the
Company shall terminate the term of employment on or after the Term Date for any
reason (other than 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 such termination shall be
deemed for all purposes of this Agreement to be a "termination without cause"
under Section 4.2 and the provisions of Sections 4.2.1 and 4.2.2 shall apply.
4.4 Special Termination by You. You may elect to terminate this
Agreement, effective December 31, 2000, by written notice delivered to the
Company no
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earlier than June 15, 2000 and no later than July 15, 2000. In the event
you make such election, (a) you shall cease to be an employee of the Company on
December 31, 2000, (b) the non-compete provisions of Section 9.2 shall not apply
to you after that date and (c) the Company shall pay you Base Salary and make
credits of Deferred Compensation through December 31, 2000 and shall pay you a
Bonus for the year 2000 which shall not be less than your 1999 Bonus multiplied
by a fraction, the numerator of which is the sum of all regular annual bonuses
(excluding any special or spot bonuses) paid to all Senior Vice Presidents and
Executive Vice Presidents of the Company with respect to the year 2000 and the
denominator of which is the sum of all such bonuses paid to such officers with
respect to the year 1999; provided, however, that the annual bonuses of any such
officer shall be included in the foregoing calculation only if such officer was
a Senior Vice President or Executive Vice President during both 1999 and 2000.
4.5 Office Facilities. In the event of a termination without cause,
then for the period beginning on the effective date of such termination and
ending one year thereafter, the Company shall, without charge to you, make
available to you office space at or near your principal job location immediately
prior to such termination, together with secretarial services, office
facilities, services and furnishings, in each case reasonably appropriate to an
employee of your position and responsibilities prior to such termination but
taking into account your reduced need for such office space, secretarial
services and office facilities, services and furnishings as a result of you no
longer being a full-time employee.
4.6 Release. A condition precedent to the Company's obligation to make
the payments associated with a termination without cause shall be your execution
and delivery of a release in the form attached hereto as Annex A. If you shall
fail to execute and deliver such release, or if you revoke such release as
provided therein, then in lieu of the payments provided for herein, you shall
receive a severance payment determined in accordance with the Company's policies
relating to notice and severance.
4.7 Retirement. Notwithstanding the provisions of this Agreement
relating to a termination without cause and Disability, on the date you first
become 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 your
employment with the Company shall thereafter be governed by the policies
generally applicable to employees of the Company, and you shall not
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thereafter be entitled to the payments provided in this Agreement to the
extent not received by you on or prior to the Retirement Date. In addition, no
benefits or payments provided in this Agreement relating to termination without
cause and Disability shall include any period after the Retirement Date and if
the provision of benefits or calculation of payments provided in this Agreement
with respect thereto 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.
4.8 Mitigation. The payments provided for in this Agreement in the
event of a termination without cause are not subject to mitigation unless your
failure to mitigate would result in the Company losing tax deductions to which
it would otherwise have been entitled. In such an event, you will engage in
whatever mitigation is necessary to preserve the Company's tax deductions. In
addition to any obligation under the preceding sentence, and without duplication
of any amounts required to be paid to the Company thereunder, if after a
termination without cause you obtain other employment with any entity other than
a not-for-profit entity, then the total cash salary and bonus received in
connection with such other employment, whether paid to you or deferred for your
benefit, for services through the later of (i) the Term Date or (ii) eighteen
months after the effective date of such termination without cause, up to an
amount equal to (a) the discounted lump sum payment received by you or for your
account with respect to Base Salary, Bonus and Deferred Compensation for such
period, minus (b) the amount of severance you would have received in accordance
with the personnel policies of the Company if you had been job eliminated, shall
reduce, pro tanto, any amount which the Company would otherwise be required to
pay to you as a result of such termination and, to the extent amounts have
theretofore been paid to you 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 you are entitled by reason of the termination of employment without cause
shall be considered as damages hereunder. With respect to the second preceding
sentence, you shall in no event be required to pay the Company with respect to
any calendar year more than the discounted amount received by you or credited to
the Deferred Plan with respect to Base Salary, Bonus and Deferred Compensation
for such year. Any obligation to mitigate your damages pursuant to this Section
4.8 shall not be a defense or offset to the Company's obligation to pay you in
full the amounts provided in this Agreement upon the
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occurrence of a termination without cause, at the time provided herein,
or the timely and full performance of any of the Company's other obligations
under this Agreement.
4.9 Payments. So long as you remain on the payroll of the Company or
any subsidiary of the Company, payments of Base Salary, Deferred Compensation
and Bonus required to be made after a termination without cause shall be made at
the same times as similar payments are made to other senior executives of the
Company.
5. Disability.
5.1 Disability Payments. If during the term of employment and prior to
any termination without cause, you become physically or mentally disabled,
whether totally or partially, so that you are prevented from performing your
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 your full compensation and continue to make the
Deferred Compensation credits when otherwise due, 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 you have not resumed your usual duties on or prior to the Disability
Date, the Company shall pay you a pro rata Bonus for the year in which the
Disability Date occurs and shall pay you disability benefits for the longer of
(i) the period ending on the Term Date or (ii) eighteen months (in the case of
either (i) or (ii) (the "Disability Period"), in an annual amount equal to 75%
of (a) your Base Salary at the time you become 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 as Deferred Compensation) and (b) the
Average Annual Bonus.
5.2 Recovery from Disability. If during the Disability Period you
shall fully recover from your disability, the Company shall have the right
(exercisable within 60 days after notice from you of such recovery), but not the
obligation, to restore you to full-time service at full compensation. If the
Company elects to restore you 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 you to full-time service, you shall be entitled to obtain
other employment, subject, however, to the following: (i) you shall perform
advisory services during any balance of the
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Disability Period; and (ii) you shall comply with the provisions of
Sections 9 and 10 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
you 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.
5.3 Other Disability Provisions. The Company shall be entitled to
deduct from all payments to be made to you during the Disability Period pursuant
to this Section 5 an amount equal to all disability payments received by you
during the Disability Period from Worker'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 you from such
disability insurance policies are not includible in your 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 you 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 you to full-time service at full compensation prior to the
end of the Disability Period, the term of employment shall end and you 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. If you die during the term of employment, this Agreement and all
obligations of the Company to make any payments hereunder shall terminate except
that your estate (or a designated beneficiary) shall be entitled to receive Base
Salary and Deferred Compensation to the last day of the month in which your
death occurs and Bonus compensation (at the time bonuses are normally paid)
based on the Average Annual Bonus, but prorated
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according to the number of whole or partial months you were employed by the
Company in such calendar year.
7. Life Insurance. During your employment with the Company, the Company
shall (i) provide you with $50,000 of group life insurance and (ii) pay you
annually an amount equal to two times the premium you 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 million. You 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 you hereunder 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) you are 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 you are an employee of the Company, you 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, you
shall be entitled during the term of employment and so long as you are an
employee of the Company, to receive other benefits generally available to all
senior executives of the Company, 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 you
remain on the payroll of the Company after a termination without cause or during
the Disability Period, you shall continue to be eligible to participate in the
benefit plans and to receive the benefits required to be provided to you under
this Agreement to the extent such benefits are maintained in effect by the
Company for its senior executives; provided, however, you shall not
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be entitled to any additional awards or grants under any stock option,
restricted stock or other stock based incentive plan. You 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 until such time as you
leave the payroll of the Company. At the time you leave the payroll of the
Company, your 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 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 you leave the payroll of the
Company as a result of a termination pursuant to Section 4.2, then (i) all stock
options granted to you by the Company after the date of this Agreement shall
vest and become immediately exercisable at the time you leave the payroll of the
Company, (ii) all stock options granted to you by the Company after the date of
this Agreement shall remain exercisable (but not beyond the term thereof) during
the remainder of the term of employment and for a period of three months
thereafter or such longer period as may be specified in any stock option
agreement and (iii) the Company shall not be permitted to determine that your
employment was terminated for "unsatisfactory performance" within the meaning of
any stock option agreement between the you and the Company.
8.3 Payments in Lieu of Other Benefits. In the event the term of
employment and your employment with the Company is terminated pursuant to any
section of this Agreement, you 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. You acknowledge that your 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 you 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. You further acknowledge that the services to
be
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performed under this Agreement are of a special, unique, unusual, extraordinary
and intellectual character. You further acknowledge 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 your services, position and expertise are such that you are
capable of competing with the Company from nearly any location in the world. In
recognition of the foregoing, you covenant and agree:
9.1.1 You shall keep secret all confidential matters of the
Company and shall not 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) you shall have no such obligation to the extent such
matters are or become publicly known other than as a result of your breach of
your obligations hereunder and (ii) you 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 You shall deliver promptly to the Company on termination of
your employment, or at any other time the Company may so request, all memoranda,
notes, records, reports and other documents (and all copies thereof) relating to
the Company's business, which you obtained while employed by, or otherwise
serving or acting on behalf of, the Company and which you may then possess or
have under your control; and
9.1.3 If the term of employment is terminated pursuant to Section
4, for a period of one year after such termination, without the prior written
consent of the Company, you shall not employ, and shall not cause any entity of
which you are 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 your secretary or executive assistant or
to any other employee eligible to receive overtime pay.
9.2 Non-Compete. During the term of employment and, subject to Section
4.4, through the later of (i) the Term Date, (ii) the date you leave the payroll
of the Company and (iii) twelve months after the effective date of any
termination of the term of employment pursuant to Section 4, you 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
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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 you from 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 you are 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. 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 either (i) any line of operating business which the
Company engages in, conducts or, to your knowledge, 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 your knowledge, 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 you commit a material breach of any of the provisions of Sections
9.1 or 9.2, the Company shall have the right and remedy to have such provisions
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company.
10. Ownership of Work Product. You acknowledge that during the term of
employment, you 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 you by reason of your employment by
the Company. You acknowledge that all of the foregoing shall be owned by and
belong exclusively to the Company and that you 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 you for the possible interest or participation of the Company.
You 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
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papers necessary to carry out the foregoing; and (iv) give testimony in
support of your inventorship or creation in any appropriate case. You agree that
you will not assert any rights to any Work Product or business opportunity as
having been made or acquired by you 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 a nationally recognized overnight delivery service, 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 you, to your residence address set forth on the records of
the Company.
12. General.
12.1 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the substantive laws of the State of New York
applicable to agreements made and to be performed entirely in New York.
12.2 Captions. The section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
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12.3 Entire Agreement. This Agreement, including Annex A, 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.
12.5 Assignability. This Agreement and your rights and obligations
hereunder may not be assigned by you and except as specifically contemplated in
this Agreement, neither you, your legal representative nor any beneficiary
designated by you 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. 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 you 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 and your employment hereunder (whether based on
contract or tort or
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upon any federal, state or local statute, including but not limited to claims
asserted under the Age Discrimination in Employment Act, Title VII of the Civil
Rights Act of 1964, as amended, any state Fair Employment Practices Act and/or
the Americans with Disability Act) shall, at the election of either you or the
Company, be submitted to JAMS/ENDISPUTE for resolution in arbitration in
accordance with the rules and procedures of JAMS/ENDISPUTE. Either party shall
make such election by delivering written notice thereof to the other party at
any time (but not later than 45 days after such party receives notice of the
commencement of any administrative or regulatory proceeding or the filing of any
lawsuit relating to any such dispute or controversy) and thereupon any such
dispute or controversy shall be resolved only in accordance with the provisions
of this Section 12.7. Any such proceedings shall take place in New York City
before a single arbitrator (rather than a panel of arbitrators), pursuant to any
streamlined or expedited (rather than a comprehensive) arbitration process,
before a nonjudicial (rather than a judicial) arbitrator, and in accordance with
an arbitration process which, in the judgment of such arbitrator, shall have the
effect of reasonably limiting or reducing the cost of such arbitration. The
resolution of any such dispute or controversy by the arbitrator appointed in
accordance with the procedures of JAMS/ENDISPUTE shall be final and binding.
Judgment upon the award rendered by such arbitrator may be entered in any court
having jurisdiction thereof, and the parties consent to the jurisdiction of the
New York courts for this purpose. The prevailing party shall be entitled to
recover the costs of arbitration (including reasonable attorneys fees and the
fees of experts) from the losing party. If at the time any dispute or
controversy arises with respect to this Agreement, JAMS/ENDISPUTE is not in
business or is no longer providing arbitration services, then the American
Arbitration Association shall be substituted for JAMS/ENDISPUTE for the purposes
of the foregoing provisions of this Section 12.7. If you shall be the prevailing
party in such arbitration, the Company shall promptly pay, upon your demand, all
legal fees, court costs and other costs and expenses incurred by you in any
legal action seeking to enforce the award in any court.
12.8 Beneficiaries. Whenever this Agreement provides for any payment
to your estate, such payment may be made instead to such beneficiary or
beneficiaries as you may designate by written notice to the Company. You 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. You represent and warrant to the Company that this
Agreement is legal, valid and binding upon you and the execution of this
Agreement and the
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performance of your 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 you are a party (including, without
limitation, any other employment agreement). The Company represents and warrants
to you 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 you 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 you nor the Company 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
you and the Company 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 Survival. Sections 3.4, 8.2, 8.3 and 9 through 12 shall survive
any termination of the term of employment by the Company for cause and any
termination by you pursuant to Section 4.4. Sections 4.6, 4.8 and 6 through 12
shall survive any termination of the term of employment without cause.
12.14 Definitions. The following terms are defined in this Agreement
in the places indicated:
affiliate - Section 4.2.2
Average Annual Bonus - Section 4.2.1
Base Salary - Section 3.1
Bonus - Section 3.2
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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
Deferred Plan - Section 3.3
Disability Date - Section 5
Disability Period - Section 5
Effective Date - the first paragraph on page 1
Retirement Date - Section 4.7
Term Date - Section 1
term of employment - Section 1
termination without cause - Section 4.2.1
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/ Andrew J. Kaslow
---------------------
Andrew J. Kaslow
Senior Vice President
/s/ Joan N. Sumner
---------------------
Joan N. Sumner
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ANNEX A
RELEASE
Pursuant to the terms of the Employment Agreement made as of _____________,
between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller
Plaza, New York, New York 10019 and the undersigned (the "Agreement"), and in
consideration of the payments made to me and other benefits to be received by me
pursuant thereto, I, [Name], being of lawful age, do hereby release and forever
discharge the Company and its officers, shareholders, subsidiaries, agents, and
employees, from any and all actions, causes of action, claims, or demands for
general, special or punitive damages, attorney's fees, expenses, or other
compensation, which in any way relate to or arise out of my employment with the
Company or any of its subsidiaries or the termination of such employment, which
I may now or hereafter have under any federal, state or local law, regulation or
order, including without limitation, under the Age Discrimination in Employment
Act, as amended, through and including the date of this Release; provided,
however, that the execution of this Release shall not prevent the undersigned
from bringing a lawsuit against the Company to enforce its obligations under the
Agreement.
I acknowledge that I have been given at least 21 days from the day I
received a copy of this Release to sign it and that I have been advised to
consult an attorney. I understand that I have the right to revoke my consent to
this Release for seven days following my signing. This Release shall not become
effective or enforceable until the expiration of the seven-day period following
the date it is signed by me.
I ALSO ACKNOWLEDGE THAT BY SIGNING THIS RELEASE I MAY BE GIVING UP VALAUBLE
LEGAL RIGHTS AND THAT I HAVE BEEN ADVISED TO CONSULT A LAWYER BEFORE SIGNING. I
further state that I have read this document and the Agreement referred to
herein, that I know the contents of both and that I have executed the same as my
own free act.
WITNESS my hand this ____ day of ___________, ____.
---------------------------
[Name]
<PAGE>
EMPLOYMENT AGREEMENT made as of November 9, 1999, effective as of July 12,
1999 (the "Effective Date"), between TIME WARNER INC., a Delaware corporation
(the "Company"), and Joseph A. Ripp.
You and the Company desire to set forth the terms and conditions of your
employment by the Company and agree as follows:
1. Term of Employment. Your "term of employment", as this phrase is used
throughout this Agreement, shall be for the period beginning on the Effective
Date and ending on July 11, 2004 ("Term Date"), subject, however, to earlier
termination as set forth in this Agreement.
2. Employment. You shall serve as Executive Vice President and Chief
Financial Officer of the Company during the term of employment, and you 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 you in
addition thereto. During the term of employment, (i) your services shall be
rendered on a substantially full-time, exclusive basis and you will apply on a
full-time basis all of your skill and experience to the performance of your
duties, (ii) you shall report only to the Company's Board of Directors, its
Chief Executive Officer or its President, (iii) you 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 your time and (iv) the place for the
performance of your 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 required in the performance of your duties. 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.
3. Compensation.
3.1 Base Salary. The Company shall pay you a base salary of not less
than $450,000 per annum during the term of employment (the "Base Salary"). The
Company
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may increase, but not decrease, the Base Salary during the term of
employment. Base Salary shall be paid in accordance with the Company's customary
payroll practices.
3.2 Bonus. In addition to Base Salary, you may be entitled to receive
during the term of employment an annual cash bonus ("Bonus") based on your
performance and the performance of the Company. The determination of any such
Bonus is entirely within the Company's discretion.
3.3 Deferred Compensation. In addition to Base Salary and Bonus, you
shall be credited with a defined contribution which shall be determined and paid
out on a deferred basis as provided in this Agreement. During the term of
employment, the Company shall credit to an account maintained for you (the
"Deferred Account"), in 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"), annually, an amount equal to 50% of your then
current Base Salary ("Deferred Compensation"). Such amount shall be credited pro
rata during each year of the term of employment at the same time you receive
payments of Base Salary.
3.4 Indemnification. You shall be entitled throughout the term of
employment 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 hereof that limit or
narrow, but including any that add to or broaden, the protection afforded to you
by those provisions).
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 your 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 your obligations
under this Agreement or because of your 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 you and
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shall be effective as of the date of such notice; provided, however,
that if (i) such termination is because of your willful refusal without proper
cause to perform any one or more of your obligations under this Agreement, (ii)
such notice is the first such notice of termination for any reason delivered by
the Company to you under this Section 4.1, and (iii) within 15 days following
the date of such notice you shall cease your refusal and shall use your best
efforts to perform such obligations, the termination shall not be effective.
In the event of 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 you other than (i) to
pay Base Salary and make credits of Deferred Compensation through the effective
date of termination, (ii) to pay any Bonus that has been determined but not yet
paid as of the date of such termination and (iii) with respect to any rights you
have pursuant to any insurance or other benefit plans or arrangements of the
Company. You hereby disclaim any right to receive a pro rata portion of any
Bonus with respect to the year in which such termination occurs.
4.2 Termination by You 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, you 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 is 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
you pursuant to this Section 4.2 and within such 15-day period the Company shall
have cured all such material breaches. A material breach by the Company shall
include, but not be limited to, (i) the Company violating Section 2 with respect
to your title, reporting lines, duties or place of employment or (ii) 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
you, to terminate your employment under this Agreement without cause, which
notice shall specify the effective date of such termination.
3
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4.2.1 After the effective date of a termination pursuant to this
Section 4.2 (a "termination without cause"), you shall receive Base Salary,
Deferred Compensation and a pro rata portion of your Average Annual Bonus (as
defined below) through the effective date of termination. Your Average Annual
Bonus shall be 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 annual
bonus received by you from the Company or Time Inc. was the greatest.
4.2.2 After the effective date of a termination without cause,
you 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 such termination and during such period you shall be entitled to
receive, whether or not you become disabled during such period but subject to
Section 6, (a) Base Salary at an annual rate equal to your Base Salary in effect
immediately prior to the notice of termination, (b) an annual Bonus in respect
of each calendar year or portion thereof (in which case a pro rata portion of
such Bonus will be payable) during such period equal to the Average Annual Bonus
and (c) credits of Deferred Compensation. Except as provided in the second
succeeding sentence, if you accept other full-time employment during such period
or notify the Company in writing of your intention to terminate your status as
an employee during such period, you shall cease to be an employee of the Company
effective upon the commencement of such other employment or the effective date
of such termination as specified by you in such notice, whichever is applicable,
and you shall be entitled to receive, as severance, a lump sum payment within 30
days after such commencement or such effective date (provided that if you were
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 payments you would have received pursuant to this Section 4.2.2
had you remained on the Company's payroll. That lump sum 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 Internal Revenue Code of
1986, as amended (the "Code"), in effect on the date of such termination,
compounded semi-annually. Notwithstanding the foregoing, if you accept
employment with any not-for-profit entity, then you 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 you accept full-time employment with
any affiliate of the Company, then the payments provided for in this
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Section 4.2.2 shall immediately cease and you 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 you shall
continue to be employed by the Company pursuant to the terms of this Agreement,
subject to termination by either party hereto on 60 days written notice
delivered to the other party (which notice may be delivered by either party at
any time on or after the date which is 60 days prior to the Term Date). If the
Company shall terminate the term of employment on or after the Term Date for any
reason (other than 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 such termination shall be
deemed for all purposes of this Agreement to be a "termination without cause"
under Section 4.2 and the provisions of Sections 4.2.1 and 4.2.2 shall apply.
4.4 Office Facilities. In the event of a termination without cause,
then for the period beginning on the effective date of such termination and
ending one year thereafter, the Company shall, without charge to you, make
available to you office space at or near your principal job location immediately
prior to such termination, together with secretarial services, office
facilities, services and furnishings, in each case reasonably appropriate to an
employee of your position and responsibilities prior to such termination but
taking into account your reduced need for such office space, secretarial
services and office facilities, services and furnishings as a result of you no
longer being a full-time employee.
4.5 Release. A condition precedent to the Company's obligation to make
the payments associated with a termination without cause shall be your execution
and delivery of a release in the form attached hereto as Annex A. If you shall
fail to execute and deliver such release, or if you revoke such release as
provided therein, then in lieu of the payments provided for herein, you shall
receive a severance payment determined in accordance with the Company's policies
relating to notice and severance.
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4.6 Retirement. Notwithstanding the provisions of this Agreement
relating to a termination without cause and Disability, on the date you first
become eligible for normal retirement (which is currently at age 65 under the
Time Warner Employees' Pension Plan) 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 your
employment with the Company shall thereafter be governed by the policies
generally applicable to employees of the Company, and you shall not thereafter
be entitled to the payments provided in this Agreement to the extent not
received by you on or prior to the Retirement Date. In addition, no benefits or
payments provided in this Agreement relating to termination without cause and
Disability shall include any period after the Retirement Date and if the
provision of benefits or calculation of payments provided in this Agreement with
respect thereto 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.
4.7 Mitigation. The payments provided for in this Agreement in the
event of a termination without cause are not subject to mitigation unless your
failure to mitigate would result in the Company losing tax deductions to which
it would otherwise have been entitled. In such an event, you will engage in
whatever mitigation is necessary to preserve the Company's tax deductions. In
addition to any obligation under the preceding sentence, and without duplication
of any amounts required to be paid to the Company thereunder, if after a
termination without cause you obtain other employment with any entity other than
a not-for-profit entity, then the total cash salary and bonus received in
connection with such other employment, whether paid to you or deferred for your
benefit, for services through the later of (i) the Term Date or (ii) one year
after the effective date of such termination without cause, up to an amount
equal to (a) the discounted lump sum payment received by you or for your account
with respect to Base Salary, Bonus and Deferred Compensation for such period,
minus (b) the amount of severance you would have received in accordance with the
personnel policies of the Company if you had been job eliminated, shall reduce,
pro tanto, any amount which the Company would otherwise be required to pay to
you as a result of such termination and, to the extent amounts have theretofore
been paid to you 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 you are entitled by
reason of the termination of employment without cause shall
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be considered as damages hereunder. With respect to the second preceding
sentence, you shall in no event be required to pay the Company with respect to
any calendar year more than the discounted amount received by you or credited to
the Deferred Plan with respect to Base Salary, Bonus and Deferred Compensation
for such year. Any obligation to mitigate your damages pursuant to this Section
4.7 shall not be a defense or offset to the Company's obligation to pay you in
full the amounts provided in this Agreement upon the occurrence of a termination
without cause, at the time provided herein, or the timely and full performance
of any of the Company's other obligations under this Agreement.
4.8 Payments. So long as you remain on the payroll of the Company or
any subsidiary of the Company, payments of Base Salary, Deferred Compensation
and Bonus required to be made after a termination without cause shall be made at
the same times as similar payments are made to other senior executives of the
Company.
5. Disability.
5.1 Disability Payments. If during the term of employment and prior to
any termination without cause, you become physically or mentally disabled,
whether totally or partially, so that you are prevented from performing your
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 your full compensation and continue to make the
Deferred Compensation credits when otherwise due, 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 you have not resumed your usual duties on or prior to the Disability
Date, the Company shall pay you a pro rata Bonus for the year in which the
Disability Date occurs and shall pay you 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)
your Base Salary at the time you become 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 as Deferred Compensation) and (b) the Average Annual
Bonus.
5.2 Recovery from Disability. If during the Disability Period you
shall fully recover from your disability, the Company shall have the right
(exercisable within 60 days after notice from you of such recovery), but not the
obligation, to restore you to full-time
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service at full compensation. If the Company elects to restore you 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 you to full-time
service, you shall be entitled to obtain other employment, subject, however, to
the following: (i) you shall perform advisory services during any balance of the
Disability Period; and (ii) you shall comply with the provisions of Sections 9
and 10 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 you 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.
5.3 Other Disability Provisions. The Company shall be entitled to
deduct from all payments to be made to you during the Disability Period pursuant
to this Section 5 an amount equal to all disability payments received by you
during the Disability Period from Worker'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 you from such
disability insurance policies are not includible in your 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 you 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 you to full-time service at full compensation prior to the
end of the Disability Period, the term of employment shall end and you 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. If you die during the term of employment, this Agreement and all
obligations of the Company to make any payments hereunder shall terminate except
that your
8
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estate (or a designated beneficiary) shall be entitled to receive Base
Salary and Deferred Compensation to the last day of the month in which your
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 you were employed by the Company in such calendar year.
7. Life Insurance. During your employment with the Company, the Company
shall (i) provide you with $50,000 of group life insurance and (ii) pay you
annually an amount equal to two times the premium you 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 $4 million. You 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 you hereunder 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) you are 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 you are an employee of the Company, you 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, you
shall be entitled during the term of employment and so long as you are an
employee of the Company, to receive other benefits generally available to all
senior executives of the Company, 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 you
remain on the payroll of the Company after a termination without cause or during
the Disability Period, you shall continue to be eligible to participate in the
benefit plans and to receive the
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benefits required to be provided to you under this Agreement to the extent such
benefits are maintained in effect by the Company for its senior executives;
provided, however, you shall not be entitled to any additional awards or grants
under any stock option, restricted stock or other stock based incentive plan.
You 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
until such time as you leave the payroll of the Company. At the time you leave
the payroll of the Company, your 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 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 you leave the payroll
of the Company as a result of a termination pursuant to Section 4.2, then (i)
all stock options granted to you by the Company after the date of this Agreement
shall vest and become immediately exercisable at the time you leave the payroll
of the Company, (ii) all stock options granted to you by the Company after the
date of this Agreement shall remain exercisable (but not beyond the term
thereof) during the remainder of the term of employment and for a period of
three months thereafter or such longer period as may be specified in any stock
option agreement and (iii) the Company shall not be permitted to determine that
your employment was terminated for "unsatisfactory performance" within the
meaning of any stock option agreement between the you and the Company.
8.3 Payments in Lieu of Other Benefits. In the event the term of
employment and your employment with the Company is terminated pursuant to any
section of this Agreement, you 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. You acknowledge that your 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 you 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
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public, and plans for future development. You further acknowledge that the
services to be performed under this Agreement are of a special, unique, unusual,
extraordinary and intellectual character. You further acknowledge 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 your services, position and
expertise are such that you are capable of competing with the Company from
nearly any location in the world. In recognition of the foregoing, you covenant
and agree:
9.1.1 You shall keep secret all confidential matters of the
Company and shall not 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) you shall have no such obligation to the extent such
matters are or become publicly known other than as a result of your breach of
your obligations hereunder and (ii) you 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 You shall deliver promptly to the Company on termination of
your employment, or at any other time the Company may so request, all memoranda,
notes, records, reports and other documents (and all copies thereof) relating to
the Company's business, which you obtained while employed by, or otherwise
serving or acting on behalf of, the Company and which you may then possess or
have under your control; and
9.1.3 If the term of employment is terminated pursuant to Section
4, for a period of one year after such termination, without the prior written
consent of the Company, you shall not employ, and shall not cause any entity of
which you are 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 your secretary or executive assistant or
to any other employee eligible to receive overtime pay.
9.2 Non-Compete. During the term of employment and through the later
of (i) the Term Date, (ii) the date you leave the payroll of the Company and
(iii) twelve months after the effective date of any termination of the term of
employment pursuant to Section 4, you 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
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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 you 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 you are 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)) so long as you remain a passive investor in such entity and
do 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 your knowledge, 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 your knowledge, the Company
covenants in writing, in connection with the disposition of such business, not
to compete therewith; provided, however, that after you are 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
your 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 you commit a material breach of any of the provisions of Sections
9.1 or 9.2, the Company shall have the right and remedy to have such provisions
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company.
10. Ownership of Work Product. You acknowledge that during the term of
employment, you 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 you by reason of your employment by
the Company. You acknowledge that all of the foregoing shall be owned by
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and belong exclusively to the Company and that you 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 you for the possible interest or participation of the Company.
You 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 your inventorship or creation in any appropriate case.
You agree that you will not assert any rights to any Work Product or business
opportunity as having been made or acquired by you 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 a nationally recognized overnight delivery service, 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 you, to your residence address set forth on the records of
the Company.
13
<PAGE>
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 Annex A, 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 Employment Agreement between you and Time Inc. dated January 12,
1996 and any side letters related thereto.
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 your rights and obligations
hereunder may not be assigned by you and except as specifically contemplated in
this Agreement, neither you, your legal representative nor any beneficiary
designated by you 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. 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 any 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
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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 and your employment hereunder (whether based on
contract or tort or upon any federal, state or local statute, including but not
limited to claims asserted under the Age Discrimination in Employment Act, Title
VII of the Civil Rights Act of 1964, as amended, any state Fair Employment
Practices Act and/or the Americans with Disability Act) shall, at the election
of either you or the Company, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party shall make such election by delivering written notice thereof to
the other party at any time (but not later than 45 days after such party
receives notice of the commencement of any administrative or regulatory
proceeding or the filing of any lawsuit relating to any such dispute or
controversy) and thereupon any such dispute or controversy shall be resolved
only in accordance with the provisions of this Section 12.7. Any such
proceedings shall take place in New York City before a single arbitrator (rather
than a panel of arbitrators), pursuant to any streamlined or expedited (rather
than a comprehensive) arbitration process, before a nonjudicial (rather than a
judicial) arbitrator, and in accordance with an arbitration process which, in
the judgment of such arbitrator, shall have the effect of reasonably limiting or
reducing the cost of such arbitration. The resolution of any such dispute or
controversy by the arbitrator appointed in accordance with the procedures of
JAMS/ENDISPUTE shall be final and binding. Judgment upon the award rendered by
such arbitrator may be entered in any court having jurisdiction thereof, and the
parties consent to the jurisdiction of the New York courts for this purpose. The
prevailing party shall be entitled to recover the costs of arbitration
(including reasonable attorneys fees and the fees of experts) from the losing
party. If at the time any dispute or controversy arises with respect to this
Agreement, JAMS/ENDISPUTE is not in business or is no longer providing
arbitration services, then the American Arbitration Association shall be
substituted for JAMS/ENDISPUTE for the purposes of the foregoing provisions of
this Section 12.7. If you shall be the prevailing party in such arbitration, the
Company shall promptly pay, upon your demand, all legal fees, court costs and
other costs and expenses incurred by you in any legal action seeking to enforce
the award in any court.
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12.8 Beneficiaries. Whenever this Agreement provides for any payment
to your estate, such payment may be made instead to such beneficiary or
beneficiaries as you may designate by written notice to the Company. You 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. You represent and warrant to the Company that this
Agreement is legal, valid and binding upon you and the execution of this
Agreement and the performance of your 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 you are a party (including, without
limitation, any other employment agreement). The Company represents and warrants
to you 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 you 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 you nor the Company 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 you and the Company 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 Survival. Sections 3.4, 8.2, 8.3 and 9 through 12 shall
survive any termination of the term of employment by the Company for cause.
Sections 3.4, 4.4, 4.5, 4.7 and 6 through 12 shall survive any termination of
the term of employment without cause.
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12.14 Definitions. The following terms are defined in this
Agreement in the places indicated:
affiliate - Section 4.2.2
Average Annual Bonus - Section 4.2.1
Base Salary - Section 3.1
Bonus - Section 3.2
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
Deferred Plan - Section 3.3
Disability Date - Section 5
Disability Period - Section 5
Effective Date - the first paragraph on page 1
Retirement Date - Section 4.6
Term Date - Section 1
term of employment - Section 1
termination without cause - Section 4.2.1
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/ Joseph A. Ripp
---------------------------
Joseph A. Ripp
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ANNEX A
RELEASE
Pursuant to the terms of the Employment Agreement made as of _____________,
between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller
Plaza, New York, New York 10019 and the undersigned (the "Agreement"), and in
consideration of the payments made to me and other benefits to be received by me
pursuant thereto, I, [Name], being of lawful age, do hereby release and forever
discharge the Company and its officers, shareholders, subsidiaries, agents, and
employees, from any and all actions, causes of action, claims, or demands for
general, special or punitive damages, attorney's fees, expenses, or other
compensation, which in any way relate to or arise out of my employment with the
Company or any of its subsidiaries or the termination of such employment, which
I may now or hereafter have under any federal, state or local law, regulation or
order, including without limitation, under the Age Discrimination in Employment
Act, as amended, through and including the date of this Release; provided,
however, that the execution of this Release shall not prevent the undersigned
from bringing a lawsuit against the Company to enforce its obligations under the
Agreement.
I acknowledge that I have been given at least 21 days from the day I
received a copy of this Release to sign it and that I have been advised to
consult an attorney. I understand that I have the right to revoke my consent to
this Release for seven days following my signing. This Release shall not become
effective or enforceable until the expiration of the seven-day period following
the date it is signed by me.
I ALSO ACKNOWLEDGE THAT BY SIGNING THIS RELEASE I MAY BE GIVING UP VALAUBLE
LEGAL RIGHTS AND THAT I HAVE BEEN ADVISED TO CONSULT A LAWYER BEFORE SIGNING. I
further state that I have read this document and the Agreement referred to
herein, that I know the contents of both and that I have executed the same as my
own free act.
WITNESS my hand this ____ day of ___________, ____.
---------------------------
[Name]
<PAGE>
EMPLOYMENT AGREEMENT made as of November 29, 1999, effective as of January
1, 2000 (the "Effective Date"), between TIME WARNER INC., a Delaware corporation
(the "Company"), and Christopher P. Bogart.
You are currently employed by the Company pursuant to an Employment
Agreement made as of January 23, 1998 ( the "Prior Agreement"). The Company
wishes to replace the Prior Agreement with this Agreement, effective January 1,
2000, in order to secure your services on a full-time basis for the period of
January 1, 2000 to and including December 31, 2004 (the "Term Date"), on and
subject to the terms and conditions set forth in this Agreement. You are willing
for the Prior Agreement to be so replaced and to provide your services on and
subject to the terms and conditions set forth in this Agreement. The parties
therefore agree as follows:
1. Term of Employment. Your "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 earlier termination as
set forth in this Agreement.
2. Employment. You shall serve as Executive Vice President, General Counsel
and Secretary of the Company during the term of employment, and you 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 you in
addition thereto. During the term of employment, (i) your services shall be
rendered on a substantially full-time, exclusive basis and you will apply on a
full-time basis all of your skill and experience to the performance of your
duties, (ii) you shall report only to the Company's Board of Directors, its
Chief Executive Officer or its President, (iii) you 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 your time and (iv) the place for the
performance of your 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 required in the performance of your duties. 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.
<PAGE>
3. Compensation.
3.1 Base Salary. The Company shall pay you a base salary of not less
than $400,000 per annum during the term of employment (the "Base Salary"). The
Company may increase, but not decrease, the Base Salary during the term of
employment. Base Salary shall be paid in accordance with the Company's customary
payroll practices.
3.2 Bonus. In addition to Base Salary, you may be entitled to receive
during the term of employment an annual cash bonus ("Bonus") based on your
performance and the performance of the Company. The determination of any such
Bonus is entirely within the Company's discretion.
3.3 Deferred Compensation. In addition to Base Salary and Bonus as set
forth in Sections 3.1 and 3.2, you will be credited with deferred compensation
which shall be determined and paid out as provided in this Agreement and in
Annex A hereto. Unless you shall make the election described in the last
sentence of this Section 3.3 and subject to the provisions of Section A.8 of
Annex A, 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 you (the "Trust
Account"), monthly, an amount equal to one twelfth of 50% of your then current
Base Salary. The Trust Account shall be maintained by the Trustee in accordance
with the terms of this Agreement and Annex A and the trust agreement ( the
"Trust Agreement") establishing the Rabbi Trust (which Trust Agreement shall in
all respects be in furtherance of, and not inconsistent with, the terms of this
Agreement, including Annex A), until the full amount which you are entitled to
receive therefrom has been paid in full. The Company has established and shall
maintain the Rabbi Trust as a grantor trust within the meaning of subpart E,
part 1, 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 your benefit. You 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 (a) to have 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 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"), or (b) to have 50% of the payments to be made by the Company pursuant
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 you may be entitled to participate, you may elect by written notice
delivered to the Company not later than June 30 of the calendar year during the
term of employment during which a Bonus would otherwise accrue or to which it
would relate, to defer payment of and to
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have the Company either pay to the Rabbi Trust for credit to the Trust Account
or credit to the Deferred Plan all or any portion of your Bonus for such year
(or such election may direct that such deferred portion be divided 50% to the
Rabbi Trust and 50% to 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 you in the Rabbi Trust
in accordance with the Prior Agreement. The Prior Account 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 Indemnification. You shall be entitled throughout the term of
employment 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 hereof that limit or
narrow, but including any that add to or broaden, the protection afforded to you
by those provisions).
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 your 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 your obligations
under this Agreement or because of your 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 you and shall be effective as of the date of such
notice; provided, however, that if (i) such termination is because of your
willful refusal without proper cause to perform any one or more of your
obligations under this Agreement, (ii) such notice is the first such notice of
termination for any reason delivered by the Company to you under this Section
4.1, and (iii) within 15 days
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following the date of such notice you shall cease
your refusal and shall use your best efforts to perform such obligations, the
termination shall not be effective.
In the event of 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 you other than (i) to
pay Base Salary and make credits of Deferred Compensation through the effective
date of termination, (ii) to pay any Bonus that has been determined but not yet
paid as of the date of such termination and (iii) with respect to any rights you
have pursuant to any insurance or other benefit plans or arrangements of the
Company. You hereby disclaim any right to receive a pro rata portion of any
Bonus with respect to the year in which such termination occurs.
4.2 Termination by You 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, you 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 is 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
you pursuant to this Section 4.2 and within such 15-day period the Company shall
have cured all such material breaches. A material breach by the Company shall
include, but not be limited to, (i) the Company violating Section 2 with respect
to your title, reporting lines, duties or place of employment or (ii) 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
you, to terminate your employment under this Agreement without cause, which
notice shall specify the effective date of such termination.
4.2.1 After the effective date of a termination pursuant to this
Section 4.2 (a "termination without cause"), you shall receive Base Salary,
Deferred Compensation and a pro rata portion of your Average Annual Bonus (as
defined below) through the effective date of termination. Your Average Annual
Bonus shall be 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 annual
bonus received by you from the Company was the greatest; provided that if the
date of notice for such termination under this Section 4.2.1 (or for purposes of
Section 5.1, the Disability Date, or for purposes of Section 6, the date of
death) is before the final
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determination of your Bonus for the year 2000, your Average Annual Bonus shall
be twice the amount of your regular annual bonus (excluding any special or spot
bonus) for the year 1999.
4.2.2 After the effective date of a termination without cause, you
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 such termination and during such period you shall be entitled to receive,
whether or not you become disabled during such period but subject to Section 6,
(a) Base Salary at an annual rate equal to your Base Salary in effect
immediately prior to the notice of termination, (b) an annual Bonus in respect
of each calendar year or portion thereof (in which case a pro rata portion of
such Bonus will be payable) during such period equal to the Average Annual Bonus
(which payment shall be subject to any Bonus deferral election made pursuant to
Section 3.4; provided that such election must be made not later than 15 days
after such termination (and not later than June 30) for the calendar year in
which such termination occurs and for any subsequent calendar year must be made
before January 1 of such calendar year) and (c) credits of Deferred
Compensation. Except as provided in the third succeeding sentence, if you accept
other full-time employment during such period or notify the Company in writing
of your intention to terminate your status as an employee during such period,
you shall cease to be an employee of the Company effective upon the commencement
of such other employment or the effective date of such termination as specified
by you in such notice, whichever is applicable, and you shall be entitled to
receive, as severance, a lump sum payment within 30 days after such commencement
or such effective date (provided that if you were 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 payments you would
have received pursuant to this Section 4.2.2 (excluding Deferred Compensation,
which is provided for below in this Section 4.2.2) had you remained on the
Company's payroll. That lump sum 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 Internal Revenue Code of 1986, as amended (the "Code"),
in effect on the date of such termination, compounded semi-annually. If a lump
sum payment is made pursuant to this 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 portion of such lump sum payment (as discounted) which is
attributable to Base Salary; provided, however, that you may elect by written
notice to the Company no later than the effective date of such termination or
the commencement of such other employment to have all or 50% of such amount
credited instead to the Deferred Plan. Notwithstanding the foregoing, if you
accept employment with any not-for-profit entity, then
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<PAGE>
you 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 you
accept full-time employment with any affiliate of the Company, then the payments
provided for in this Section 4.2.2 shall immediately cease and you 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 you shall
continue to be employed by the Company pursuant to the terms of this Agreement,
subject to termination by either party hereto on 60 days written notice
delivered to the other party (which notice may be delivered by either party at
any time on or after the date which is 60 days prior to the Term Date). If the
Company shall terminate the term of employment on or after the Term Date for any
reason (other than 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 such termination shall be
deemed for all purposes of this Agreement to be a "termination without cause"
under Section 4.2 and the provisions of Sections 4.2.1 and 4.2.2 shall apply.
4.4 Office Facilities. In the event of a termination without cause,
then for the period beginning on the effective date of such termination and
ending one year thereafter, the Company shall, without charge to you, make
available to you office space at or near your principal job location immediately
prior to such termination, together with secretarial services, office
facilities, services and furnishings, in each case reasonably appropriate to an
employee of your position and responsibilities prior to such termination but
taking into account your reduced need for such office space, secretarial
services and office facilities, services and furnishings as a result of you no
longer being a full-time employee.
4.5 Release. A condition precedent to the Company's obligation to make
the payments associated with a termination without cause shall be your execution
and delivery of a release in the form attached hereto as Annex A. If you shall
fail to execute and deliver such release, or if you revoke such release as
provided therein, then in lieu of the payments provided for herein, you shall
receive a severance payment determined in accordance with the Company's policies
relating to notice and severance.
4.6 Retirement. Notwithstanding the provisions of this Agreement
relating to a termination without cause and Disability, on the date you first
become eligible for
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normal retirement (which is currently at age 65 under the Time Warner Employees'
Pension Plan) 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 your employment with the Company shall
thereafter be governed by the policies generally applicable to employees of the
Company, and you shall not thereafter be entitled to the payments provided in
this Agreement to the extent not received by you on or prior to the Retirement
Date. In addition, no benefits or payments provided in this Agreement relating
to termination without cause and Disability shall include any period after the
Retirement Date and if the provision of benefits or calculation of payments
provided in this Agreement with respect thereto 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.
4.7 Mitigation. The payments provided for in this Agreement in the
event of a termination without cause are not subject to mitigation unless your
failure to mitigate would result in the Company losing tax deductions to which
it would otherwise have been entitled. In such an event, you will engage in
whatever mitigation is necessary to preserve the Company's tax deductions. In
addition to any obligation under the preceding sentence, and without duplication
of any amounts required to be paid to the Company thereunder, if after a
termination without cause you obtain other employment with any entity other than
a not-for-profit entity, then the total cash salary and bonus received in
connection with such other employment, whether paid to you or deferred for your
benefit, for services through the later of (i) the Term Date or (ii) one year
after the effective date of such termination without cause, up to an amount
equal to (a) the discounted lump sum payment received by you or for your account
with respect to Base Salary, Bonus and Deferred Compensation for such period,
minus (b) the amount of severance you would have received in accordance with the
personnel policies of the Company if you had been job eliminated, shall reduce,
pro tanto, any amount which the Company would otherwise be required to pay to
you as a result of such termination and, to the extent amounts have theretofore
been paid to you 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. The
provisions of the preceding sentence (i) 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 and (ii) shall treat 70% of the compensation payable to you as a
partner or shareholder or counsel to a law firm, regardless of how characterized
by such entity, as "cash salary and bonus" and the other 30% as an equity
interest benefit. With respect to the preceding sentences, any payments or
rights to which you are entitled by reason of the termination of employment
without cause shall be considered as damages hereunder. With respect to the
third preceding sentence, (i) you shall in no event be required to pay the
Company with respect to any calendar year more than the discounted amount
received by you or credited to the Deferred Plan with respect to Base Salary,
Bonus
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and Deferred Compensation for such year and (ii) subject to the provisions
of the second sentence of this Section 4.7, you shall not be required to pay the
Company any amount with respect to services rendered by you during the first
twelve months following the date of termination of your employment hereunder.
Any obligation to mitigate your damages pursuant to this Section 4.7 shall not
be a defense or offset to the Company's obligation to pay you in full the
amounts provided in this Agreement upon the occurrence of a termination without
cause, at the time provided herein, or the timely and full performance of any of
the Company's other obligations under this Agreement.
4.8 Payments. So long as you remain on the payroll of the Company or
any subsidiary of the Company, payments of Base Salary, Deferred Compensation
and Bonus required to be made after a termination without cause shall be made at
the same times as similar payments are made to other senior executives of the
Company.
5. Disability.
5.1 Disability Payments. If during the term of employment and prior to
any termination without cause, you become physically or mentally disabled,
whether totally or partially, so that you are prevented from performing your
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 your full compensation and continue to make the
Deferred Compensation credits when otherwise due, 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 you have not resumed your usual duties on or prior to the Disability
Date, the Company shall pay you a pro rata Bonus for the year in which the
Disability Date occurs and shall pay you 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)
your Base Salary at the time you become 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 as Deferred Compensation) and (b) the Average Annual
Bonus. Unless timely elected before a Disability Date, you may not elect to
defer any portion of your Bonus for the calendar year in which the Disability
Period commences and for any subsequent calendar years of the Disability Period,
you must make any bonus deferral election before January 1 of such year.
5.2 Recovery from Disability. If during the Disability Period you
shall fully recover from your disability, the Company shall have the right
(exercisable within 60 days after notice from you of such recovery), but not the
obligation, to restore you to full-time service at full compensation. If the
Company elects to restore you to full-time service, then this
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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 you to full-time service, you shall be
entitled to obtain other employment, subject, however, to the following: (i) you
shall perform advisory services during any balance of the Disability Period; and
(ii) you shall comply with the provisions of Sections 9 and 10 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 you 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.
5.3 Other Disability Provisions. The Company shall be entitled to
deduct from all payments to be made to you during the Disability Period pursuant
to this Section 5 an amount equal to all disability payments received by you
during the Disability Period from Worker'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 you from such
disability insurance policies are not includible in your 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 you 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 you to full-time service at full compensation prior to the
end of the Disability Period, the term of employment shall end and you 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. If you die during the term of employment, this Agreement and all
obligations of the Company to make any payments hereunder shall terminate except
that your estate (or a designated beneficiary) shall be entitled to receive Base
Salary and Deferred Compensation to the last day of the month in which your
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 you were employed by the Company in such calendar year.
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7. Life Insurance. During your employment with the Company, the Company
shall (i) provide you with $50,000 of group life insurance and (ii) pay you
annually an amount equal to two times the premium you 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 $4 million. You 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 you hereunder 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) you are 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 you are an employee of the Company, you 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, you
shall be entitled during the term of employment and so long as you are an
employee of the Company, to receive other benefits generally available to all
senior executives of the Company, 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 you
remain on the payroll of the Company after a termination without cause or during
the Disability Period, you shall continue to be eligible to participate in the
benefit plans and to receive the benefits required to be provided to you under
this Agreement to the extent such benefits are maintained in effect by the
Company for its senior executives; provided, however, you shall not be entitled
to any additional awards or grants under any stock option, restricted stock or
other stock based incentive plan. You 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 until such time as you leave the payroll of the
Company. At the time you leave the payroll of the Company, your 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
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shall be determined 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 you leave the
payroll of the Company as a result of a termination pursuant to Section 4.2,
then (i) all stock options granted to you by the Company after the date of this
Agreement shall vest and become immediately exercisable at the time you leave
the payroll of the Company, (ii) all stock options granted to you by the Company
after the date of this Agreement shall remain exercisable (but not beyond the
term thereof) during the remainder of the term of employment and for a period of
three months thereafter or such longer period as may be specified in any stock
option agreement and (iii) the Company shall not be permitted to determine that
your employment was terminated for "unsatisfactory performance" within the
meaning of any stock option agreement between the you and the Company.
8.3 Payments in Lieu of Other Benefits. In the event the term of
employment and your employment with the Company is terminated pursuant to any
section of this Agreement, you 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. You acknowledge that your 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 you 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. You further acknowledge that the services to
be performed under this Agreement are of a special, unique, unusual,
extraordinary and intellectual character. You further acknowledge 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 your services, position and
expertise are such that you are capable of competing with the Company from
nearly any location in the world. In recognition of the foregoing, you covenant
and agree:
9.1.1 You shall keep secret all confidential matters of the
Company and shall not 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) you shall have no such obligation to the extent such
matters are or become publicly known
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other than as a result of your breach of your obligations hereunder and (ii) you
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 You shall deliver promptly to the Company on termination
of your employment, or at any other time the Company may so request, all
confidential information and if it shall be so requested by the Company, any
other memoranda, notes, records, reports and other documents (and all copies
thereof) relating to the Company's business, which you obtained while employed
by, or otherwise serving or acting on behalf of, the Company and which you may
then possess or have under your control; and
9.1.3 If the term of employment is terminated pursuant to
Section 4, for a period of one year after such termination, without the prior
written consent of the Company, you shall not employ, and shall not cause any
entity of which you are 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 your secretary or
executive assistant or to any other employee eligible to receive overtime pay.
9.2 Non-Compete. During the term of employment and through the later
of (i) the Term Date, (ii) the date you leave the payroll of the Company and
(iii) twelve months after the effective date of any termination of the term of
employment pursuant to Section 4, you 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 you 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
you are 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; or (b) after the effective
date of a termination pursuant to Section 4.1 or after your resignation in
breach of this Agreement or after a termination pursuant to Section 4.2, being a
partner or shareholder in or of counsel to or in some other like capacity
providing legal services to a law firm that represents any Competitive Entity
and personally providing legal services to such Competitive Entity, except that
if such termination is pursuant to Section 4.1 or after your resignation in the
breach of this Agreement, you shall not personally provide or assist in the
provision of services to any such Competitive Entity with respect to any line of
its business which causes it to be 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
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business which the Company engages in, conducts or, to your knowledge, 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 your knowledge, the
Company covenants in writing, in connection with the disposition of such
business, not to compete therewith; provided, however, that after you are 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 your commencement of service for such Competitive Entity.
No provision of this Section 9.2 shall be deemed a waiver by the Company of any
rules or standards of professional responsibility or ethical conduct or to
release you from or to modify the confidentiality provisions of Section 9.1.
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 you commit a material breach of any of the provisions of Sections
9.1 or 9.2, the Company shall have the right and remedy to have such provisions
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company.
10. Ownership of Work Product. You acknowledge that during the term of
employment, you 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 you by reason of your employment by
the Company. You acknowledge that all of the foregoing shall be owned by and
belong exclusively to the Company and that you 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 you for the possible interest or participation of the Company.
You 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 your inventorship or creation in any appropriate case.
You agree that you will not assert any rights to any Work Product or business
opportunity as having been made or acquired by you prior to the date of this
Agreement except for Work Product or business opportunities, if any, disclosed
to and acknowledged by the Company in writing prior to the date hereof.
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11. Notices. All notices, requests, consents and other communications
required or permitted to be given under this Agreement shall be effective only
if given in writing and shall be deemed to have been duly given if delivered
personally or sent by a nationally recognized overnight delivery service, 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: President)
11.2 If to you, to your 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 Annex A, 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.
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12.5 Assignability. This Agreement and your rights and obligations
hereunder may not be assigned by you and except as specifically contemplated in
this Agreement, neither you, your legal representative nor any beneficiary
designated by you 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. 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 any 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 and your employment hereunder (whether based on
contract or tort or upon any federal, state or local statute, including but not
limited to claims asserted under the Age Discrimination in Employment Act, Title
VII of the Civil Rights Act of 1964, as amended, any state Fair Employment
Practices Act and/or the Americans with Disability Act) shall, at the election
of either you or the Company, 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
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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 you shall be the prevailing
party in such arbitration, the Company shall promptly pay, upon your demand, all
legal fees, court costs and other costs and expenses incurred by you in any
legal action seeking to enforce the award in any court.
12.8 Beneficiaries. Whenever this Agreement provides for any payment
to your estate, such payment may be made instead to such beneficiary or
beneficiaries as you may designate by written notice to the Company. You 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. You represent and warrant to the Company that this
Agreement is legal, valid and binding upon you and the execution of this
Agreement and the performance of your 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 you are a party (including, without
limitation, any other employment agreement). The Company represents and warrants
to you 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 you 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 you nor the Company 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
you and the Company 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 Survival. Sections 3.4, 8.2, 8.3 and 9 through 12 shall survive
any termination of the term of employment by the Company for cause. Sections
3.4, 4.4, 4.5, 4.7 and 6 through 12 shall survive any termination of the term of
employment without cause.
12.14 Definitions. The following terms are defined in this Agreement
in the places indicated:
Account Retained Income - Section 3.5
affiliate - Section 4.2.2
Average Annual Bonus - Section 4.2.1
Annex A - Section 3.3
Base Salary - Section 3.1
Bonus - Section 3.2
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 Account - Section 3.3
Deferred Compensation - Section 3.3
Deferred Plan - Section 3.3
Disability Date - Section 5
Disability Period - Section 5
Effective Date - the first paragraph on page 1
GUL - Section 7
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
Rabbi Trust - Section 3.3
Retirement Date - Section 4.6
Term Date - Section 1
term of employment - Section 1
termination without cause - Section 4.2.1
Trust Account - Section 3.3
Trustee - Section 3.3
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/ Christopher P. Bogart
---------------------------------
Christopher P. Bogart
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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 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
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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 charged with all
taxes
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<PAGE>
(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 the last day of such year. If and to the extent
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<PAGE>
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 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.
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
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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 Deferral Plan pursuant to Section
A.6 hereof and not therefore 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 of the Trust
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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
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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.
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<PAGE>
ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement made as of
_____________, between TIME WARNER INC., a Delaware corporation (the "Company"),
75 Rockefeller Plaza, New York, New York 10019 and the undersigned (the
"Agreement"), and in consideration of the payments made to me and other benefits
to be received by me pursuant thereto, I, [Name], being of lawful age, do hereby
release and forever discharge the Company and its officers, shareholders,
subsidiaries, agents, and employees, from any and all actions, causes of action,
claims, or demands for general, special or punitive damages, attorney's fees,
expenses, or other compensation, which in any way relate to or arise out of my
employment with the Company or any of its subsidiaries or the termination of
such employment, which I may now or hereafter have under any federal, state or
local law, regulation or order, including without limitation, under the Age
Discrimination in Employment Act, as amended, through and including the date of
this Release; provided, however, that the execution of this Release shall not
prevent the undersigned from bringing a lawsuit against the Company to enforce
its obligations under the Agreement.
I acknowledge that I have been given at least 21 days from the day I
received a copy of this Release to sign it and that I have been advised to
consult an attorney. I understand that I have the right to revoke my consent to
this Release for seven days following my signing. This Release shall not become
effective or enforceable until the expiration of the seven-day period following
the date it is signed by me.
I ALSO ACKNOWLEDGE THAT BY SIGNING THIS RELEASE I MAY BE GIVING UP
VALAUBLE LEGAL RIGHTS AND THAT I HAVE BEEN ADVISED TO CONSULT A LAWYER BEFORE
SIGNING. I further state that I have read this document and the Agreement
referred to herein, that I know the contents of both and that I have executed
the same as my own free act.
WITNESS my hand this ____ day of ___________, ____.
___________________________
[Name]
<PAGE>
EMPLOYMENT AGREEMENT made as of March 15, 2000, effective as of January 1,
2000 (the "Effective Date"), between TIME WARNER INC., a Delaware corporation
(the "Company"), and Edward I. Adler.
You are currently employed by the Company pursuant to an employment
agreement made as of September 3, 1997 (the "Prior Agreement"). You and the
Company desire to terminate the Prior Agreement and to set forth the terms and
conditions of your employment by the Company and agree as follows:
1. Term of Employment. Your "term of employment", as this phrase is used
throughout this Agreement, shall be for the period beginning on the Effective
Date and ending on December 31, 2003 ("Term Date"), subject, however, to earlier
termination as set forth in this Agreement.
2. Employment. You shall serve as Senior Vice President - Corporate
Communications of the Company during the term of employment, and you 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 you in
addition thereto. During the term of employment, (i) your services shall be
rendered on a substantially full-time, exclusive basis and you will apply on a
full-time basis all of your skill and experience to the performance of your
duties, (ii) you shall report only to the Company's Board of Directors, its
Chief Executive Officer or its President, (iii) you 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 your time and (iv) the place for the
performance of your 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 required in the performance of your duties. 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.
<PAGE>
3. Compensation.
3.1 Base Salary. The Company shall pay you 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 during the term of
employment. Base Salary shall be paid in accordance with the Company's customary
payroll practices.
3.2 Bonus. In addition to Base Salary, the Company typically pays its
executives an annual cash bonus ("Bonus"). Although your Bonus is fully
discretionary, the Company expresses its expectation about bonus payments,
assuming satisfactory personal and Company performance, as a target percentage
of Base Salary, and in your case that target is 100%. Each year, your personal
performance will be considered in the context of your executive duties and any
individual goals set for you, and your actual Bonus will be determined. Although
as a general matter the Company expects to pay bonuses at the target level in
cases of satisfactory individual performance it does not commit to do so, and
your Bonus may be negatively affected by the exercise of the Company's
discretion or by overall Company performance.
3.3 Deferred Compensation. In addition to Base Salary and Bonus, you
shall be credited with a defined contribution which shall be determined and paid
out on a deferred basis as provided in this Agreement. During the term of
employment, the Company shall credit to an account maintained for you (the
"Deferred Account"), in 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"), annually, an amount equal to 25% of your then
current Base Salary ("Deferred Compensation"). Such amount shall be credited pro
rata during each year of the term of employment at the same time you receive
payments of Base Salary.
3.4 Indemnification. You shall be entitled throughout the term of
employment 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 hereof that limit or
narrow, but including any that add to or broaden, the protection afforded to you
by those provisions).
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4. Termination.
4.1 Termination for Cause. The Company may terminate the term of
employment and all of the Company's obligations 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 your 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 your obligations
under this Agreement or because of your 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 you and shall be effective as of the date of such
notice; provided, however, that if (i) such termination is because of your
willful refusal without proper cause to perform any one or more of your
obligations under this Agreement, (ii) such notice is the first such notice of
termination for any reason delivered by the Company to you under this Section
4.1, and (iii) within 15 days following the date of such notice you shall cease
your refusal and shall use your best efforts to perform such obligations, the
termination shall not be effective.
In the event of 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 you other than (i) to
pay Base Salary and make credits of Deferred Compensation through the effective
date of termination, (ii) to pay any Bonus that has been determined but not yet
paid as of the date of such termination and (iii) with respect to any rights you
have pursuant to any insurance or other benefit plans or arrangements of the
Company. You hereby disclaim any right to receive a pro rata portion of any
Bonus with respect to the year in which such termination occurs.
4.2 Termination by You 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, you 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 is 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
you pursuant to this
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Section 4.2 and within such 15-day period the Company shall have cured all such
material breaches. A material breach by the Company shall include, but not be
limited to, (i) the Company violating Section 2 with respect to your title,
reporting lines, duties or place of employment or (ii) 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
you, to terminate your employment under this Agreement without cause, which
notice shall specify the effective date of such termination.
4.2.1 After the effective date of a termination pursuant to this
Section 4.2 (a "termination without cause"), you shall receive Base Salary,
Deferred Compensation and a pro rata portion of your Average Annual Bonus (as
defined below) through the effective date of termination. Your Average Annual
Bonus shall be 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 annual
bonus received by you from the Company was the greatest.
4.2.2 After the effective date of a termination without cause,
you 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 such termination and during such period you shall be entitled
to receive, whether or not you become disabled during such period but subject to
Section 6, (a) Base Salary at an annual rate equal to your Base Salary in effect
immediately prior to the notice of termination, (b) an annual Bonus in respect
of each calendar year or portion thereof (in which case a pro rata portion of
such Bonus will be payable) during such period equal to the Average Annual Bonus
and (c) credits of Deferred Compensation. Except as provided in the second
succeeding sentence, if you accept other full-time employment during such period
or notify the Company in writing of your intention to terminate your status as
an employee during such period, you shall cease to be an employee of the Company
effective upon the commencement of such other employment or the effective date
of such termination as specified by you in such notice, whichever is applicable,
and you shall be entitled to receive, as severance, a lump sum payment within 30
days after such commencement or such effective date (provided that if you were
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
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<PAGE>
effective date occurred), discounted as provided in the immediately following
sentence, equal to the balance of the payments you would have received pursuant
to this Section 4.2.2 had you remained on the Company's payroll. That lump sum
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 Internal
Revenue Code of 1986, as amended (the "Code"), in effect on the date of such
termination, compounded semi-annually. Notwithstanding the foregoing, if you
accept employment with any not-for-profit entity, then you 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 you accept full-time employment
with any affiliate of the Company, then the payments provided for in this
Section 4.2.2 shall immediately cease and you 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 you shall
continue to be employed by the Company pursuant to the terms of this Agreement,
subject to termination by either party hereto on 60 days written notice
delivered to the other party (which notice may be delivered by either party at
any time on or after the date which is 60 days prior to the Term Date). If the
Company shall terminate the term of employment on or after the Term Date for any
reason (other than 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 such termination shall be
deemed for all purposes of this Agreement to be a "termination without cause"
under Section 4.2 and the provisions of Sections 4.2.1 and 4.2.2 shall apply.
4.4 Office Facilities. In the event of a termination without cause,
then for the period beginning on the effective date of such termination and
ending six months thereafter, the Company shall, without charge to you, make
available to you office space at or near your principal job location immediately
prior to such termination, together with secretarial services, office
facilities, services and furnishings, in each case reasonably appropriate to an
employee of your position and responsibilities prior to such termination but
taking into account
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<PAGE>
your reduced need for such office space, secretarial services and office
facilities, services and furnishings as a result of you no longer being a
full-time employee.
4.5 Release. A condition precedent to the Company's obligation to make
the payments associated with a termination without cause shall be your execution
and delivery of a release in the form attached hereto as Annex A. If you shall
fail to execute and deliver such release, or if you revoke such release as
provided therein, then in lieu of the payments provided for herein, you shall
receive a severance payment determined in accordance with the Company's policies
relating to notice and severance.
4.6 Retirement. Notwithstanding the provisions of this Agreement
relating to a termination without cause and Disability, on the date you first
become 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 your
employment with the Company shall thereafter be governed by the policies
generally applicable to employees of the Company, and you shall not thereafter
be entitled to the payments provided in this Agreement to the extent not
received by you on or prior to the Retirement Date. In addition, no benefits or
payments provided in this Agreement relating to termination without cause and
Disability shall include any period after the Retirement Date and if the
provision of benefits or calculation of payments provided in this Agreement with
respect thereto 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.
4.7 Mitigation. The payments provided for in this Agreement in the
event of a termination without cause are not subject to mitigation unless your
failure to mitigate would result in the Company losing tax deductions to which
it would otherwise have been entitled. In such an event, you will engage in
whatever mitigation is necessary to preserve the Company's tax deductions. With
respect to the preceding sentences, any payments or rights to which you are
entitled by reason of the termination of employment without cause shall be
considered as damages hereunder. Any obligation to mitigate your damages
pursuant to this Section 4.7 shall not be a defense or offset to the Company's
obligation to pay you in full the amounts provided in this Agreement upon the
occurrence of a termination without cause, at the time provided herein, or the
timely and full performance of any of the Company's other obligations under this
Agreement.
6
<PAGE>
4.8 Payments. So long as you remain on the payroll of the Company or
any subsidiary of the Company, payments of Base Salary, Deferred Compensation
and Bonus required to be made after a termination without cause shall be made at
the same times as similar payments are made to other senior executives of the
Company.
5. Disability.
5.1 Disability Payments. If during the term of employment and prior to
any termination without cause, you become physically or mentally disabled,
whether totally or partially, so that you are prevented from performing your
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 your full compensation and continue to make the
Deferred Compensation credits when otherwise due, 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 you have not resumed your usual duties on or prior to the Disability
Date, the Company shall pay you a pro rata Bonus for the year in which the
Disability Date occurs and shall pay you disability benefits for the longer of
(i) the period ending on the Term Date or (ii) eighteen months (in the case of
either (i) or (ii) (the "Disability Period"), in an annual amount equal to 75%
of (a) your Base Salary at the time you become 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 as Deferred Compensation) and (b) the
Average Annual Bonus.
5.2 Recovery from Disability. If during the Disability Period you
shall fully recover from your disability, the Company shall have the right
(exercisable within 60 days after notice from you of such recovery), but not the
obligation, to restore you to full-time service at full compensation. If the
Company elects to restore you 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 you to full-time service, you shall be entitled to obtain
other employment, subject, however, to the following: (i) you shall perform
advisory services during any balance of the Disability Period; and (ii) you
shall comply with the provisions of Sections 9 and 10 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
7
<PAGE>
you 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.
5.3 Other Disability Provisions. The Company shall be entitled to
deduct from all payments to be made to you during the Disability Period pursuant
to this Section 5 an amount equal to all disability payments received by you
during the Disability Period from Worker'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 you from such
disability insurance policies are not includible in your 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 you 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 you to full-time service at full compensation prior to the
end of the Disability Period, the term of employment shall end and you 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. If you die during the term of employment, this Agreement and all
obligations of the Company to make any payments hereunder shall terminate except
that your estate (or a designated beneficiary) shall be entitled to receive Base
Salary and Deferred Compensation to the last day of the month in which your
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 you were employed by the Company in such calendar year.
7. Life Insurance. During your employment with the Company, the Company
shall (i) provide you with $50,000 of group life insurance and (ii) pay you
annually an amount equal to two times the premium you would have to pay to
obtain life insurance under the Group
8
<PAGE>
Universal Life ("GUL") insurance program made available by the Company in an
amount equal to $2 million. You 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 you
hereunder 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) you are 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 you are an employee of the Company, you 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, you
shall be entitled during the term of employment and so long as you are an
employee of the Company, to receive other benefits generally available to all
senior executives of the Company, 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 you
remain on the payroll of the Company after a termination without cause or during
the Disability Period, you shall continue to be eligible to participate in the
benefit plans and to receive the benefits required to be provided to you under
this Agreement to the extent such benefits are maintained in effect by the
Company for its senior executives; provided, however, you shall not be entitled
to any additional awards or grants under any stock option, restricted stock or
other stock based incentive plan. You 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 until such time as you leave the payroll of the
Company. At the time you leave the payroll of the Company, your 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
9
<PAGE>
shall be determined 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 you leave the
payroll of the Company as a result of a termination pursuant to Section 4.2,
then (i) all stock options granted to you by the Company after the date of this
Agreement shall vest and become immediately exercisable at the time you leave
the payroll of the Company, (ii) all stock options granted to you by the Company
after the date of this Agreement shall remain exercisable (but not beyond the
term thereof) during the remainder of the term of employment and for a period of
three months thereafter or such longer period as may be specified in any stock
option agreement and (iii) the Company shall not be permitted to determine that
your employment was terminated for "unsatisfactory performance" within the
meaning of any stock option agreement between the you and the Company.
8.3 Payments in Lieu of Other Benefits. In the event the term of
employment and your employment with the Company is terminated pursuant to any
section of this Agreement, you 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. You acknowledge that your 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 you 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. You further acknowledge that the services to
be performed under this Agreement are of a special, unique, unusual,
extraordinary and intellectual character. You further acknowledge 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 your services, position and
expertise are such that you are capable of competing with the Company from
nearly any location in the world. In recognition of the foregoing, you covenant
and agree:
10
<PAGE>
9.1.1 You shall keep secret all confidential matters of the
Company and shall not 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) you shall have no such obligation to the extent such
matters are or become publicly known other than as a result of your breach of
your obligations hereunder and (ii) you 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 You shall deliver promptly to the Company on termination of
your employment, or at any other time the Company may so request, all memoranda,
notes, records, reports and other documents (and all copies thereof) relating to
the Company's business, which you obtained while employed by, or otherwise
serving or acting on behalf of, the Company and which you may then possess or
have under your control; and
9.1.3 If the term of employment is terminated pursuant to Section
4, for a period of one year after such termination, without the prior written
consent of the Company, you shall not employ, and shall not cause any entity of
which you are 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 your secretary or executive assistant or
to any other employee eligible to receive overtime pay.
9.2 Non-Compete. During the term of employment and through the later
of (i) the Term Date, (ii) the date you leave the payroll of the Company and
(iii) twelve months after the effective date of any termination of the term of
employment pursuant to Section 4, you 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 (a
"Competitive Entity"); provided, however, that the foregoing shall not be deemed
to prohibit you from 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 you are 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. For purposes of the foregoing, a person or entity shall be deemed to be
a Competitive Entity if such person or entity engages in any line of business
that is substantially the same as
11
<PAGE>
either (i) any line of operating business which the Company engages in, conducts
or, to your knowledge, 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 your knowledge, the Company covenants in writing, in connection with
the disposition of such business, not to compete therewith. Notwithstanding the
preceding sentence, after a termination of the term of employment pursuant to
Section 4, a Competitive Entity shall consist of the following: AT & T
Corporation, Bertelsmann AG, BPI Communications Inc., Cahners Business
Information (a division of Reed Elsevier plc.), The Walt Disney Company, Dow
Jones & Company Inc., Gannett Co., Inc., General Electric Company, The News
Corporation, The New York Times Company, The Seagram Company, Ltd., Sony
Corporation, and Viacom Inc. and their respective subsidiaries and affiliates
and any successor to any of the media and entertainment businesses thereof.
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 you commit a material breach of any of the provisions of Sections
9.1 or 9.2, the Company shall have the right and remedy to have such provisions
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company.
10. Ownership of Work Product. You acknowledge that during the term of
employment, you 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 you by reason of your employment by
the Company. You acknowledge that all of the foregoing shall be owned by and
belong exclusively to the Company and that you 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 you for the possible interest or participation of the Company.
You 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 your inventorship or creation in any appropriate case.
You agree that you will not assert any rights
12
<PAGE>
to any Work Product or business opportunity as having been made or acquired by
you 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 a nationally recognized overnight delivery service, 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 you, to your 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 Annex A, 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.
13
<PAGE>
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 your rights and obligations
hereunder may not be assigned by you and except as specifically contemplated in
this Agreement, neither you, your legal representative nor any beneficiary
designated by you 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. 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 upon any such assignment, 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 any
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 and your employment hereunder (whether based on
contract or tort or upon any federal, state or local statute, including but not
limited to claims asserted under the Age Discrimination in Employment Act, Title
VII of the Civil Rights Act of 1964, as amended, any state Fair Employment
Practices Act and/or the Americans with Disability Act) shall, at the election
of either you or the Company, be submitted to JAMS/ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE.
Either party
14
<PAGE>
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 you shall be the prevailing
party in such arbitration, the Company shall promptly pay, upon your demand, all
legal fees, court costs and other costs and expenses incurred by you in any
legal action seeking to enforce the award in any court.
12.8 Beneficiaries. Whenever this Agreement provides for any payment
to your estate, such payment may be made instead to such beneficiary or
beneficiaries as you may designate by written notice to the Company. You 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. You represent and warrant to the Company that this
Agreement is legal, valid and binding upon you and the execution of this
Agreement and the performance of your 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 you are a party (including, without
limitation, any other employment agreement). The Company represents and warrants
to you that this Agreement is legal, valid and binding upon the Company and the
execution of this Agreement and the performance of the Company's
15
<PAGE>
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 you 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 you nor the Company 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 you and the Company 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 Survival. Sections 3.4, 8.2, 8.3 and 9 through 12 shall
survive any termination of the term of employment by the Company for cause.
Sections 3.4, 4.4, 4.5, 4.7 and 6 through 12 shall survive any termination of
the term of employment without cause.
12.14 Definitions. The following terms are defined in this
Agreement in the places indicated:
affiliate - Section 4.2.2
Average Annual Bonus - Section 4.2.1
Base Salary - Section 3.1
Bonus - Section 3.2
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
Deferred Plan - Section 3.3
Disability Date - Section 5
Disability Period - Section 5
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Effective Date - the first paragraph on page 1
Retirement Date - Section 4.6
Term Date - Section 1
term of employment - Section 1
termination without cause - Section 4.2.1
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/ Edward I. Adler
------------------------------
Edward I. Adler
17
<PAGE>
ANNEX A
RELEASE
Pursuant to the terms of the Employment Agreement made as of _____________,
between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller
Plaza, New York, New York 10019 and the undersigned (the "Agreement"), and in
consideration of the payments made to me and other benefits to be received by me
pursuant thereto, I, [Name], being of lawful age, do hereby release and forever
discharge the Company and its officers, shareholders, subsidiaries, agents, and
employees, from any and all actions, causes of action, claims, or demands for
general, special or punitive damages, attorney's fees, expenses, or other
compensation, which in any way relate to or arise out of my employment with the
Company or any of its subsidiaries or the termination of such employment, which
I may now or hereafter have under any federal, state or local law, regulation or
order, including without limitation, under the Age Discrimination in Employment
Act, as amended, through and including the date of this Release; provided,
however, that the execution of this Release shall not prevent the undersigned
from bringing a lawsuit against the Company to enforce its obligations under the
Agreement.
I acknowledge that I have been given at least 21 days from the day I
received a copy of this Release to sign it and that I have been advised to
consult an attorney. I understand that I have the right to revoke my consent to
this Release for seven days following my signing. This Release shall not become
effective or enforceable until the expiration of the seven-day period following
the date it is signed by me.
I ALSO ACKNOWLEDGE THAT BY SIGNING THIS RELEASE I MAY BE GIVING UP VALAUBLE
LEGAL RIGHTS AND THAT I HAVE BEEN ADVISED TO CONSULT A LAWYER BEFORE SIGNING. I
further state that I have read this document and the Agreement referred to
herein, that I know the contents of both and that I have executed the same as my
own free act.
WITNESS my hand this ____ day of ___________, ____.
---------------------------
[Name]
<PAGE>
EXHIBIT 12.1
TIME WARNER INC.
RATIO OF EARNINGS TO FIXED CHARGES
(in millions, except ratios)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999(a) 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and extraordinary items ....... $3,500 $ 586 $ 832 $ 4 $ 2
Interest expense ......................................... 1,519 891 1,049 968 877
Amortization of capitalized interest ..................... 9 10 18 6 2
Portion of rents representative of an interest factor .... 172 94 78 63 57
Preferred stock dividend requirements of majority-owned
subsidiaries .......................................... 57 52 72 72 11
Adjustment for partially owned subsidiaries and 50% owned
companies ............................................. 440 960 938 801 691
Undistributed losses of less than 50% owned
companies.............................................. 46 42 4 52 117
------ ------ ------ ------ ------
Total earnings ..................................... $5,743 $2,635 $2,991 $1,966 $1,757
====== ====== ====== ====== ======
Fixed charges:
Interest expense ......................................... $1,519 $ 891 $1,049 $ 968 $ 877
Capitalized interest ..................................... 6 1 15 7 4
Portion of rents representative of an interest factor .... 172 94 78 63 57
Preferred stock dividend requirements of majority-owned
subsidiaries .......................................... 57 52 72 72 11
Adjustment for partially owned subsidiaries and 50% owned
companies ............................................. 86 721 622 607 697
------ ------ ------ ------ ------
Total fixed charges ................................ $1,840 $1,759 $1,836 $1,717 $1,646
====== ====== ====== ====== ======
Ratio of earnings to fixed charges .......................... 3.1x 1.5x 1.6x 1.1x 1.1x
=== === === === ===
</TABLE>
- ------------------------
(a) The 1999 ratio of earnings to fixed charges reflects the consolidation of
the Entertainment Group, which substantially consists of TWE, retroactive to the
beginning of 1999. Because Time Warner's ratios of earnings to fixed charges for
all periods presented include 100% of TWE's earnings and fixed charges, the
ratios for periods prior to 1999 would not have changed as a result of such
consolidation. However, the individual components as presented above are no
longer comparable.
<PAGE>
EXHIBIT 12.2
TIME WARNER ENTERTAINMENT COMPANY, L.P.
RATIO OF EARNINGS TO FIXED CHARGES
(in millions, except ratios)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and extraordinary items ....... $2,909 $ 418 $ 722 $ 280 $ 183
Interest expense ......................................... 561 566 490 475 571
Amortization of capitalized interest ..................... 5 14 48 36 33
Portion of rents representative of an interest factor .... 77 72 72 68 58
Preferred stock dividend requirements of majority-owned
subsidiaries .......................................... 5 20 19 -- --
Adjustment for partially owned subsidiaries and 50% owned
companies ............................................. 420 300 323 219 175
Undistributed (earnings) losses of less than 50% owned
companies.............................................. 10 34 (13) 21 76
------ ------ ------ ------ ------
Total earnings ..................................... $3,987 $1,424 $1,661 $1,099 $1,096
====== ====== ====== ====== ======
Fixed charges:
Interest expense ......................................... $ 561 $ 566 $ 490 $ 475 $ 571
Capitalized interest ..................................... 5 4 33 39 33
Portion of rents representative of an interest factor .... 77 72 72 68 58
Preferred stock dividend requirements of majority-owned
subsidiaries .......................................... 5 20 19 -- --
Adjustment for partially owned subsidiaries and 50% owned
companies ............................................. 85 60 22 22 27
------ ------ ------ ------ ------
Total fixed charges ................................ $ 733 $ 722 $ 636 $ 604 $ 689
====== ====== ====== ====== ======
Ratio of earnings to fixed charges .......................... 5.4x 2.0x 2.6x 1.8x 1.6x
=== === === === ===
</TABLE>
<PAGE>
EXHIBIT 21
Time Warner maintains over 1,000 subsidiaries. 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, 1999 (unless otherwise indicated), which carry
on a substantial portion of Time Warner's lines of business. The names of
various consolidated wholly owned subsidiaries, including subsidiaries carrying
on the same line of business as the parent (including entertainment and news
production and distribution, music publishing, recorded music and video
distribution, magazine and book publishing and distribution, and cable
television), domestically and internationally, have been omitted. None of the
foregoing omitted subsidiaries, considered either alone or together with the
other subsidiaries of its immediate parent, constitutes a significant
subsidiary. 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
NAME PARENT OR ORGANIZATION
---- ------ ---------------
<S> <C> <C>
TIME WARNER INC. (Registrant)............................... Delaware
Turner Broadcasting System, Inc. ......................... 100 Georgia
Turner Arena Productions and Sales, Inc. ............... 100 Georgia
Atlanta Hockey Club, Inc. .............................. 100 Georgia
Atlanta National League Baseball Club, Inc. ............ 100 Georgia
Hawks Basketball, Inc. ................................. 100 Georgia
CNN Investment Company, Inc. ........................... 100 Delaware
Cable News Network LP, LLLP........................... 100(1) Delaware
Cable News International, Inc. ....................... 100 Georgia
CNN America, Inc. .................................... 100 Delaware
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 Delaware
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
Superstation, Inc. ................................... 100 Georgia
Turner Home Entertainment, Inc. .......................... 100 Georgia
Turner Pictures Group, Inc. .............................. 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, Inc. ............................... 100 Georgia
Turner Network Sales, Inc. ............................... 100 Georgia
Turner Private Networks, Inc. ............................ 100 Georgia
Turner Properties, Inc. .................................. 100 Georgia
Turner Sports, Inc. ...................................... 100 Georgia
World Championship Wrestling, Inc. ....................... 100 Georgia
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION
NAME PARENT OR ORGANIZATION
---- ------ ---------------
<S> <C> <C>
Time Warner Companies, Inc. .............................. 100 Delaware
American Television and Communications Corporation
('ATC')................................................. 100(4) Delaware
Asiaweek Limited........................................ 80 Hong Kong
Sunset Publishing Corporation........................... 100 Delaware
Time International Inc. ................................ 100 Delaware
Time Inc................................................ 100 Delaware
TAF Holdings, Inc. ................................... 100 Delaware
American Family Enterprises (partnership)........... 50 New York
Book-of-the-Month Club, Inc. ......................... 100 New York
Book-of-the-Month Club Holdings LLC................. 100 Delaware
BD Book Clubs G.P................................. 50(5) Delaware
Entertainment Weekly, Inc. ........................... 100 Delaware
Time Distribution Services, Inc. ..................... 100 Delaware
Time Customer Service, Inc. .......................... 100 Delaware
Time Inc. Ventures.................................... 100 Delaware
Time Publishing Ventures, Inc. ..................... 100 Delaware
Southern Progress Corporation..................... 100 Delaware
The Parenting Group Inc........................... 100 Delaware
Time Life Inc. ....................................... 100 Delaware
Time-Life Customer Service, Inc. ................... 100 Delaware
Time Warner Trade Publishing Inc...................... 100 Delaware
Little, Brown and Company (Inc.)................... 100 Massachusetts
Warner Books, Inc.................................. 100 New York
Warner Publisher Services Inc. ....................... 100 New York
Time Warner Digital Media LLC........................... 100 Delaware
TWI Cable Inc........................................... 100 Delaware
Summit Communications Group, Inc. .................... 100 Delaware
WCI Record Club Inc. ................................... 100(6) Delaware
The Columbia House Company (partnership).............. 50 New York
Warner Communications Inc. ............................. 100 Delaware
Elektra Entertainment Group Inc. ..................... 100 Delaware
DC Comics (partnership)............................... 50(7) New York
Warner-Tamerlane Publishing Corp. .................... 100 California
WB Music Corp. ....................................... 100 California
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. .............................. 100 Delaware
CPP/Belwin, Inc. ................................... 100 Delaware
E.C. Publications, Inc. .............................. 100 New York
Warner Music Group Inc. .............................. 100 Delaware
London-Sire Records 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
Rhino Entertainment Company....................... 100 Delaware
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION
NAME PARENT OR ORGANIZATION
---- ------ ---------------
<S> <C> <C>
Warner-Elektra-Atlantic Corporation................. 100 New York
WEA International Inc................................. 100 Delaware
Warner Music Canada Ltd. ........................... 100 Canada
The Columbia House Company (Canada)
(partnership)..................................... 50 Canada
Warner Music Newco Limited............................ 100 U.K.
Embleton Ltd. ...................................... 100 B.V.I.
London Records 90 Limited......................... 100 U.K.
Warner Special Products Inc. ......................... 100 Delaware
Warner Custom Music Corp............................ 100 California
WEA Manufacturing Inc. ............................... 100 Delaware
Ivy Hill Corporation.................................. 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
Queens Inner Unity Cable System............................. 100(8) 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(9) New York
DC Comics (partnership)..................................... 50(7) New York
Quincy Jones Entertainment Company L.P. (partnership)....... 50 Delaware
</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) Time Warner Companies, Inc. owns 92.20%, and Warner Communications Inc. owns
7.8%.
(5) Effective February 2000, Book-of-the-Month Club Holdings LLC owns 50% and
Doubleday Direct, Inc. owns 50%.
(6) Time Warner Companies, Inc. owns 80% and Warner Communications Inc. owns
20%.
(7) Warner Communications Inc. owns 50% and TWE owns 50%.
(8) TWE owns approximately 72.19% and TWQUICS Holdings L.L.C. owns approximately
27.81%.
(9) CTV Holdings L.L.C. owns 33 1/3% & CTV Holdings II L.L.C. owns 16 2/3%.
3
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our reports dated
February 2, 2000, 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,
1999 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.)
(constitutes a post-effective amendment to and prospectus also relates
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.;
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.)
(constitutes a post-effective amendment to and prospectus also relates to
Registration Statement No. 333-32813);
16. Registration Statement No. 333-75409 on Form S-8 and related prospectus
of Time Warner Inc.;
17. Registration Statement No. 333-79253 on Form S-8 and related prospectus
of Time Warner Inc.;
18. Registration Statement No. 333-79263 on Form S-8 and related prospectus
of Time Warner Inc.; and
19. Registration Statement No. 333-93221 on Form S-8 and related prospectus
of Time Warner Inc.
ERNST & YOUNG LLP
New York, New York
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TIME WARNER INC.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Inc. for the year ended December 31, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,284
<SECURITIES> 0
<RECEIVABLES> 6,613
<ALLOWANCES> 1,682
<INVENTORY> 6,383
<CURRENT-ASSETS> 9,861
<PP&E> 14,325
<DEPRECIATION> 5,597
<TOTAL-ASSETS> 51,239
<CURRENT-LIABILITIES> 9,670
<BONDS> 18,083
<COMMON> 13
0
1
<OTHER-SE> 9,699
<TOTAL-LIABILITY-AND-EQUITY> 51,239
<SALES> 27,333
<TOTAL-REVENUES> 27,333
<CGS> 13,649
<TOTAL-COSTS> 13,649
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,519
<INCOME-PRETAX> 3,500
<INCOME-TAX> 1,540
<INCOME-CONTINUING> 1,960
<DISCONTINUED> 0
<EXTRAORDINARY> 12
<CHANGES> 0
<NET-INCOME> 1,948
<EPS-BASIC> 1.50
<EPS-DILUTED> 1.42
</TABLE>
