SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended
June 30, 1995 , or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the transition period from
to
Commission file number 1-8637
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1388520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of each registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock - $1 par value 386,174,888
Description of Class Shares Outstanding
as of July 31, 1995
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TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
Time
Warner TWE
PART I. FINANCIAL INFORMATION
Consolidated balance sheets at June 30, 1995
and December 31, 1994 1 23
Consolidated statements of operations for the three
and six months ended June 30, 1995 and 1994 2 24
Consolidated statements of cash flows for the six
months ended June 30, 1995 and 1994 3 25
Notes to consolidated financial statements 4 26
Management's discussion and analysis of results
of operations and financial condition 13 32
Summarized financial information of the Time Warner Service
Partnerships and Paragon Communications set forth at pages 16
and 17, respectively, in the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995 of Time Warner Entertainment
Company, L.P. (Reg. No. 33-53742) is incorporated herein by
reference and filed as an exhibit to this report.
PART II. OTHER INFORMATION 38
<PAGE>
PART I. FINANCIAL INFORMATION
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1995 1994
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 597 $ 282
Receivables, less allowances of $738 and $768 1,295 1,439
Inventories 444 370
Prepaid expenses 831 726
Total current assets 3,167 2,817
Investments in and amounts due to and from
Entertainment Group 5,471 5,350
Investments, other 1,487 1,555
Music catalogues, contracts and copyrights 1,196 1,207
Goodwill 4,837 4,630
Cable television franchises 405 -
Other assets, primarily property, plant
and equipment 1,225 1,157
Total assets $17,788 $16,716
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,277 $ 1,379
Debt due within one year 341 355
Other current liabilities 1,327 1,238
Total current liabilities 2,945 2,972
Long-term debt 9,593 8,839
Deferred income taxes 2,696 2,700
Unearned portion of paid subscriptions 636 631
Other liabilities 439 426
Shareholders' equity
Preferred stock, $1 par value, 3.7 million
and 962 thousand shares outstanding,
$394 million and $140 million liquidation
preference 4 1
Common stock, $1 par value, 384.2 million
and 379.3 million shares outstanding
(excluding 45.7 million treasury shares) 384 379
Paid-in capital 3,010 2,588
Unrealized gains on certain marketable securities 134 130
Accumulated deficit (2,053) (1,950)
Total shareholders' equity 1,479 1,148
Total liabilities and shareholders' equity $17,788 $16,716
See accompanying notes.
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TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions, except per share amounts)
Revenues (a) $1,907 $1,667 $3,724 $3,225
Cost of revenues (a)(b) 1,019 906 2,122 1,798
Selling, general and administrative (a)(b) 704 591 1,280 1,145
Operating expenses 1,723 1,497 3,402 2,943
Business segment operating income 184 170 322 282
Equity in pretax income of Entertainment
Group (a) 84 66 106 111
Interest and other, net (a) (201) (179) (356) (337)
Corporate expenses (a) (19) (19) (39) (37)
Income before income taxes 48 38 33 19
Income taxes (56) (58) (88) (90)
Net loss (8) (20) (55) (71)
Preferred dividend requirements (5) (3) (8) (6)
Net loss applicable to common shares $(13) $(23) $(63) $(77)
Net loss per common share $(0.03) $(0.06) $(0.17) $(0.20)
Average common shares 381.4 378.8 380.5 378.7
__________________
(a) Includes the following income (expenses) resulting from
transactions with the Entertainment Group and other related
companies for the three and six months ended June 30, 1995,
respectively, and for the corresponding periods in the prior year:
revenues of $49 million and $94 million in 1995, and $53 million
and $92 million in 1994; cost of revenues of $(25) million and
$(49) million in 1995, and $(25) million and $(46) million in 1994;
selling, general and administrative of $16 million and $29 million
in 1995, and $7 million and $19 million in 1994; equity in pretax
income of Entertainment Group of $(26) and $(60) in 1995, and $(26)
million and $(64) million in 1994; interest and other, net of $(5)
and $1 in 1995, and $4 million and $15 million in 1994; and
corporate expenses of $15 million and $30 million in both 1995 and
1994.
(b) Includes depreciation and amortization
expense of: $ 119 $ 105 $ 231 $ 210
See accompanying notes.
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TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1995 1994
(millions)
OPERATIONS
Net loss $ (55) $ (71)
Adjustments for noncash and nonoperating items:
Depreciation and amortization 231 210
Noncash interest expense 116 107
Equity in pretax income of Entertainment Group,
net of distributions (101) (109)
Changes in operating assets and liabilitie (290) 106
Cash provided (used) by operations (99) 243
INVESTING ACTIVITIES
Investments and acquisitions (228) (67)
Capital expenditures (97) (95)
Investment proceeds 294 111
Cash used by investing activities (31) (51)
FINANCING ACTIVITIES
Borrowings 650 318
Debt repayments (166) (372)
Dividends paid (73) (69)
Other 34 23
Cash provided (used) by financing activities 445 (100)
INCREASE IN CASH AND EQUIVALENTS 315 92
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 282 200
CASH AND EQUIVALENTS AT END OF PERIOD $ 597 $ 292
See accompanying notes.
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include 100% of the
assets, liabilities, revenues, expenses, income, loss and cash
flows of Time Warner Inc. ("Time Warner" or the "Company") and
all companies in which Time Warner has a controlling voting
interest ("subsidiaries"), as if Time Warner and its
subsidiaries were a single company. Subsidiaries of Time
Warner are engaged principally in the Publishing and Music
businesses. Investments in Entertainment Group companies,
principally Time Warner Entertainment Company, L.P. ("TWE"),
which are engaged principally in the Filmed Entertainment,
Broadcasting-The WB Network, Programming-HBO and Cable
businesses, and investments in certain other companies in which
Time Warner has significant influence but less than a
controlling voting interest, are accounted for using the equity
method.
The accompanying financial statements are unaudited but in
the opinion of management contain all the adjustments
(consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position and the
results of operations and cash flows for the periods presented
in conformity with generally accepted accounting principles
applicable to interim periods. Certain reclassifications have
been made to the 1994 financial statements to conform to the
1995 presentation. The accompanying financial statements
should be read in conjunction with the audited consolidated
financial statements of Time Warner for the year ended December
31, 1994.
Intangible Assets
Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets.
Intangible assets are amortized over periods up to forty years
using the straight-line method. Time Warner separately reviews
the carrying value of intangible assets for each acquired
entity on a quarterly basis to determine whether an impairment
may exist. Time Warner considers relevant cash flow and
profitability information, including estimated future operating
results, trends and other available information, in assessing
whether the carrying value of intangible assets can be
recovered. Upon a determination that the carrying value of
intangible assets will not be recovered from the undiscounted
future cash flows of the acquired business, the carrying value
of such intangible assets would be considered impaired and will
be reduced by a charge to operations in the amount of the
impairment. Impairment is measured as any deficiency in
estimated undiscounted future cash flows of the acquired
business to recover the carrying value related to the
intangible assets.
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of," ("FAS 121") effective for fiscal years beginning
after December 15, 1995. The new rules establish standards for
the recognition and measurement of impairment losses on long-
lived assets and certain identifiable intangible assets,
including goodwill. Time Warner expects that the adoption of
FAS 121 will not have a material effect on its financial
statements.
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 interest rate swap contracts, the Company
either agrees to pay an amount equal to a specified floating
rate of interest times a notional principal amount, and to
receive in return an amount equal to a specified fixed rate of
interest times the same notional principal amount or, vice
versa, to receive a floating rate amount and to pay a fixed
rate amount. The notional amounts of the contracts are not
exchanged. No other cash payments are made unless the contract
is terminated prior to maturity, in which case the amount paid
or received in settlement is established by agreement at the
time of termination, and usually represents the net present
value, at current rates of interest, of the remaining
obligations to exchange payments under the terms of the
contract. Interest rate swap contracts are entered into with a
number of major financial institutions in order to minimize
credit risk.
The net amounts paid or payable, or received or receivable,
through the end of the accounting period are included in
interest expense. Because interest rate swap contracts are
used to modify the interest characteristics of Time Warner's
outstanding debt from a fixed to a floating rate basis or, vice
versa, unrealized gains or losses on interest rate swap
contracts are not recognized unless the contracts are
terminated prior to their maturity. Gains or losses on the
termination of contracts are deferred and amortized to income
over the remaining average life of the terminated contracts.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the
Entertainment Group at June 30, 1995 and December 31, 1994
consists of the following:
June 30, December 31,
1995 1994
(millions)
Investment in TWE $ 5,069 $ 5,284
Income tax and stock option related
distributions due from TWE 709 423
Credit agreement debt due to TWE (400) (400)
Other liabilities due to TWE, principally
related to home video distribution (234) (266)
Investment in and amounts due to and from TWE 5,144 5,041
Investment in other Entertainment Group companies 327 309
Total $5,471 $5,350
TWE is a Delaware limited partnership that was capitalized on
June 30, 1992 to own and operate substantially all of the
Filmed Entertainment, Programming-HBO and Cable businesses
previously owned by subsidiaries of Time Warner. Certain Time
Warner subsidiaries are the general partners ("Time Warner
General Partners") and in the aggregate hold 63.27% pro rata
priority capital and residual equity partnership interests in
TWE, and certain priority capital interests senior and junior
to the pro rata priority capital interest. The limited
partners are not affiliated with Time Warner and in the
aggregate hold 36.73% pro rata priority capital and residual
equity partnership interests. The TWE partnership agreement
provides for special allocations of income, loss and
distributions of partnership capital, including priority
distributions in the event of liquidation. TWE reported net
income of $60 million and $104 million in the six months ended
June 30, 1995 and 1994, respectively, no portion of which was
allocated to the limited partners.
Each Time Warner General Partner has guaranteed a pro rata
portion of $7 billion of TWE's debt and accrued interest at
June 30, 1995, based on the relative fair value of the net
assets each Time Warner General Partner contributed to TWE.
Such indebtedness is recourse to each Time Warner General
Partner only to the extent of its guarantee.
Set forth below is summarized financial information of the
Entertainment Group, which reflects the consolidation by TWE of
the TWE-Advance/Newhouse Partnership effective as of April 1,
1995.
TIME WARNER ENTERTAINMENT GROUP
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Operating Statement Information
Revenues $2,435 $2,063 $4,508 $3,990
Depreciation and amortization 283 242 513 458
Business segment operating income 274 231 475 437
Interest and other, net 175 150 339 296
Income before income taxes 84 66 106 111
Net income 59 54 70 95
Six Months
Ended June 30,
1995 1994
(millions)
Cash Flow Information
Cash provided by operations $ 697 $ 707
Capital expenditures (704) (504)
Investments and acquisitions (83) (78)
Investment proceeds 962 40
Loan to Time Warner - (250)
Increase (decrease) in debt (2) 28
Collections on note receivable from U S WEST 243 68
Capital distributions (5) (2)
Increase in cash and equivalents 1,192 8
June 30, December 31,
1995 1994
(millions)
Balance Sheet Information
Cash and equivalents $2,263 $1,071
Total current assets 4,773 3,571
Total assets 19,620 18,992
Total current liabilities 3,275 2,953
Long-term debt 7,037 7,160
Time Warner General Partners' senior capital 1,730 1,663
TWE partners' capital 6,154 6,233
The assets and cash flows of TWE are restricted by the TWE
partnership and credit agreements and are unavailable for use
by the partners and their affiliates except through the payment
of certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. At June 30, 1995 and
December 31, 1994, the Time Warner General Partners had
recorded $490 million and $334 million, respectively, of tax-
related distributions due from TWE, and $219 million and $89
million, respectively, of stock option related distributions
due from TWE, based on closing prices of Time Warner common
stock of $41.25 and $35.125, respectively. Time Warner is paid
when the options are exercised. In July 1995, the Time Warner
General Partners received $490 million of accrued tax-related
distributions from TWE.
On June 23, 1995, TWE sold 51% of its interest in Six Flags
Entertainment Corporation ("Six Flags") to an investment group
led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing
payment of certain intercompany indebtedness and licensing
fees. As a result of the transaction, TWE expects a cumulative
debt reduction of approximately $850 million, after the payment
of related taxes and fees and the deconsolidation of
approximately $128 million of third-party, zero-coupon indebtedness
of Six Flags due in 1999. The deconsolidation of such indebtedness
is reflected in TWE's balance sheet as of June 30, 1995, and
the remaining debt reduction is expected to occur
in the third quarter of 1995. TWE deferred approximately $140
million of income on the transaction principally as a result of
its guarantee of such debt. TWE will account for its remaining 49%
interest in Six Flags under the equity method of accounting.
3. CABLE TRANSACTIONS
On May 2, 1995, Time Warner acquired Summit Communications
Group, Inc. ("Summit"), which owns cable television systems
serving approximately 162,000 subscribers, in exchange for the
issuance of approximately 1.5 million shares of Time Warner
common stock and approximately 3.3 million shares of a new
convertible preferred stock ("Series C preferred stock") with
an aggregate liquidation value of approximately $330 million,
and the assumption of $140 million of indebtedness. The Series
C preferred stock is convertible into approximately 6.8 million
shares of Time Warner common stock at an effective price of $48
of liquidation value per common share. The acquisition was
accounted for by the purchase method of accounting for business
combinations; accordingly, the cost to acquire Summit of
approximately $383 million, including $330 million aggregate
liquidation value of Series C preferred stock, was
preliminarily allocated to the assets acquired in the amount of
$711 million and to the liabilities assumed in the amount of
$328 million, in proportion to estimates of their respective
fair values.
On April 1, 1995, TWE formed a cable television joint venture
with the Advance/Newhouse Partnership ("Advance/Newhouse") to which
Advance/Newhouse and TWE contributed cable television systems
(or interests therein) serving approximately 4.5 million
subscribers, as well as certain foreign cable investments and
programming investments. TWE owns a two-thirds equity interest
in the TWE-Advance/Newhouse Partnership and is the managing
partner. TWE consolidates the partnership and the one-third
equity interest owned by Advance/Newhouse is reflected in TWE's
balance sheet as minority interest. In accordance with the
partnership agreement, Advance/Newhouse can require TWE to
purchase its equity interest for fair market value at specified
intervals following the death of both of its principal
shareholders. Beginning in the third year, either partner can
initiate a dissolution in which TWE would receive two-thirds
and Advance/Newhouse would receive one-third of the
partnership's net assets. The assets contributed by TWE and
Advance/Newhouse to the partnership were recorded at their
predecessor's historical cost. No gain was recognized by TWE
upon the capitalization of the partnership.
Subsequent to June 30, 1995, Time Warner acquired KBLCOM
Incorporated ("KBLCOM"), which owns cable television systems
serving approximately 700,000 subscribers and a 50% interest in
Paragon Communications ("Paragon"), which owns cable television
systems serving an additional 972,000 subscribers. The other
50% interest in Paragon is already owned by TWE. To acquire
KBLCOM, Time Warner issued 1 million shares of common stock and
11 million shares of a new convertible preferred stock ("Series
D preferred stock") and assumed or incurred approximately $1.2
billion of indebtedness. The Series D preferred stock is
convertible into approximately 22.9 million shares of Time
Warner common stock at an effective price of $48 of liquidation
value per common share.
Time Warner's previously-announced acquisition of Cablevision
Industries Corporation ("CVI") and related companies is
expected to close during the fourth quarter of 1995.
4. LONG-TERM DEBT
On June 30, 1995, a wholly owned subsidiary of Time Warner
("TWI Cable"), TWE and the TWE-Advance/Newhouse Partnership
executed a five-year revolving credit facility (the "New Credit
Agreement"). The New Credit Agreement enables such
entities to refinance certain indebtedness assumed from the
companies acquired or to be acquired in the cable acquisitions,
to refinance existing indebtedness of TWE and to finance the
ongoing working capital, capital expenditure and other
corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4
billion in the case of TWI Cable, $5 billion in the case of the
TWE-Advance/Newhouse Partnership and $8.3 billion in the case
of TWE, subject in each case to certain limitations and
adjustments. Such borrowings will bear interest at specific
rates for each of the three borrowers, generally equal to LIBOR
plus a margin initially ranging from 50 to 87.5 basis points
based on the credit rating or financial leverage of the
applicable borrower. The New Credit Agreement contains certain
covenants for each borrower relating to, among other things,
additional indebtedness; liens on assets; cash flow coverage
and leverage ratios; and loans, advances, distributions and
other cash payments or transfers of assets from the borrowers
to their respective partners or affiliates.
On July 6, 1995, TWI Cable borrowed approximately $1.2
billion under the New Credit Agreement to refinance certain
indebtedness assumed or incurred in the acquisition of KBLCOM.
On July 31, 1995, Time Warner announced the redemption on
August 15, 1995 of all of its $1.8 billion principal amount of
outstanding Redeemable Reset Notes due August 15, 2002 (the
"Reset Notes") in exchange for new securities. The Reset Notes
will be redeemed in exchange for approximately $457 million
aggregate principal amount of Floating Rate Notes due August
15, 2000, approximately $274 million aggregate principal amount
of 7.975% Notes due August 15, 2004, approximately $548 million
aggregate principal amount of 8.11% Debentures due August 15,
2006, and approximately $548 million aggregate principal amount
of 8.18% Debentures due August 15, 2007.
On August 10, 1995, Time Warner announced the partial
redemption on September 18, 1995 of $1 billion principal amount
of its 8.75% Convertible Subordinated Debentures due 2015 for
an aggregate redemption price of $1.06 billion, including
redemption premiums and accrued interest thereon. The
redemption is expected to be financed with approximately $500
million of proceeds raised from the issuance of 7.75% ten-year
notes in June 1995, $363 million of net proceeds to be raised from the
issuance of Company-obligated mandatorily redeemable preferred
securities of a subsidiary in August 1995 and available cash
and equivalents.
5. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In August 1995, Time Warner will raise $363 million of net proceeds
through the issuance of approximately 12.1 million Company-obligated
mandatorily redeemable preferred securities of a subsidiary
("PERCS"), whose only assets will be an equivalent amount of
subordinated notes of Time Warner. Cumulative cash
distributions will be payable on the PERCS at an annual rate of
4%, or $1.24 per PERCS. The PERCS will be subject to mandatory
redemption on December 23, 1997, for an amount per PERCS equal
to the lesser of $54.41, and the then market value of a share
of common stock of Hasbro, Inc. ("Hasbro") payable in cash or,
at Time Warner's option, Hasbro common stock. Time Warner
currently has a 13.75% equity interest in Hasbro.
6. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Balance at beginning of year $1,148 $1,370
Net loss (55) (71)
Common dividends declared (69) (64)
Preferred dividends declared (8) (6)
Issuance of common stock and preferred stock
in Summit acquisition 383 -
Unrealized gains (losses) on certain marketable
equity investments 4 (74)
Other 76 58
Balance at June 30 $1,479 $1,213
7. SEGMENT INFORMATION
Information as to the operations of Time Warner and the
Entertainment Group in different business segments is set forth
below. Cable business segment information reflects the
consolidation by TWE of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995.
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues (millions)
Time Warner:
Publishing $ 928 $ 851 $1,759 $1,602
Music 986 822 1,977 1,634
Intersegment elimination (7) (6) (12) (11)
Total $1,907 $1,667 $3,724 $3,225
Entertainment Group:
Filmed Entertainment $1,358 $1,216 $2,565 $2,299
Broadcasting - The WB Network 3 - 6 -
Programming - HBO 396 374 786 736
Cable 760 560 1,338 1,111
Intersegment elimination (82) (87) (187) (156)
Total $2,435 $2,063 $4,508 $3,990
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Operating income (millions)
Time Warner:
Publishing $ 114 $ 106 $ 169 $ 156
Music 70 64 153 126
Total $ 184 $ 170 $ 322 $ 282
Entertainment Group:
Filmed Entertainment $ 90 $ 75 $ 155 $ 141
Broadcasting - The WB Network (12) - (33) -
Programming - HBO 70 62 137 118
Cable 126 94 216 178
Total $ 274 $ 231 $ 475 $ 437
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing $ 15 $ 11 $ 28 $ 23
Music 24 20 47 39
Total $ 39 $ 31 $ 75 $ 62
Entertainment Group:
Filmed Entertainment $ 42 $ 34 $ 65 $ 51
Broadcasting - The WB Network - - - -
Programming - HBO 5 4 9 8
Cable 117 82 207 166
Total $ 164 $ 120 $ 281 $ 225
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Amortization of Intangible Assets (1)
Time Warner:
Publishing $ 9 $ 8 $ 18 $ 16
Music 71 66 138 132
Total $ 80 $ 74 $ 156 $ 148
Entertainment Group:
Filmed Entertainment $ 43 $ 41 $ 80 $ 75
Broadcasting - The WB Network - - - -
Programming - HBO - 1 - 2
Cable 76 80 152 156
Total $ 119 $ 122 $ 232 $ 233
(1) Amortization includes all amortization relating to the
acquisitions of Warner Communications Inc. ("WCI") in 1989 and the
American Television and Communications Corporation ("ATC") minority
interest in 1992 and to other business combinations accounted for
by the purchase method.
8. CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to businesses of Time Warner and alleged damages in
connection with class action lawsuits. In the opinion of counsel
and management, the ultimate resolution of these matters will not
have a material effect on the consolidated financial statements of
Time Warner.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Interest expense $429 $374
Cash payments made for interest 289 246
Cash payments made for income taxes 141 135
Income tax refunds received 14 39
During the six months ended June 30, 1995 and 1994, Time Warner
realized $35 million and $210 million, respectively, from the
securitization of receivables.
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Time Warner had revenues of $1.907 billion and a net loss of $8
million ($.03 per common share) for the three months ended June 30,
1995, compared to revenues of $1.667 billion and a net loss of $20
million ($.06 per common share) for the three months ended June 30,
1994. As discussed more fully below, the improvement in Time
Warner's net loss principally resulted from an overall increase in
operating income generated by Time Warner's business segments and
increased income from Time Warner's equity in the pretax income of
the Entertainment Group, offset in part by a decrease in
investment-related income and higher floating-rates of interest
paid on Time Warner's $2.9 billion notional amount of interest rate
swap contracts.
Revenues of $3.724 billion and a net loss of $55 million ($.17
per common share) were reported for the six months ended June 30,
1995, compared to revenues of $3.225 billion and a net loss of $71
million ($.20 per common share) for the six months ended June 30,
1994. As discussed more fully below, the improvement in Time
Warner's net loss principally resulted from an overall increase in
operating income generated by Time Warner's business segments and
an increase in investment-related income, offset in part by lower
income from Time Warner's equity in the pretax income of the
Entertainment Group and higher floating-rates of interest paid on
Time Warner's interest rate swap contracts.
Time Warner's equity in the pretax income of the Entertainment
Group was $84 million in the three months ended June 30, 1995,
compared to $66 million in the three months ended June 30, 1994,
and was $106 million in the six months ended June 30, 1995,
compared to $111 million in the six months ended June 30, 1994. As
discussed more fully below, the Entertainment Group's operating
results for the three and six month periods ended June 30, 1995
reflect an overall increase in operating income generated by its
business segments and gains on the sale of certain unclustered
cable systems, offset by higher floating-rates of interest paid on
borrowings under TWE's bank credit agreement and minority interest
expense related to the consolidation of the operating results of
the TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
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.
EBITDA and operating income for Time Warner and the Entertainment
Group for the three and six months ended June 30, 1995 and 1994 is
as follows:
Three Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Time Warner:
Publishing $138 $125 $114 $106
Music 165 150 70 64
Total $303 $275 $184 $170
ENTERTAINMENT GROUP:
Filmed Entertainment $175 $150 $ 90 $ 75
Broadcasting - The WB Network (12) - (12) -
Programming - HBO 75 67 70 62
Cable 319 256 126 94
Total $557 $473 $274 $231
Six Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Time Warner:
Publishing $215 $195 $169 $156
Music 338 297 153 126
Total $553 $492 $322 $282
ENTERTAINMENT GROUP:
Filmed Entertainment $300 $267 $155 $141
Broadcasting - The WB Network (33) - (33) -
Programming - HBO 146 128 137 118
Cable 575 500 216 178
Total $988 $895 $475 $437
Certain factors affecting comparative operating results are
discussed below on a business segment basis. That discussion
includes, among other factors, an analysis of changes in the
operating income of the business segments before depreciation and
amortization ("EBITDA") in order to eliminate the effect on the
operating performance of the music, filmed entertainment and cable
businesses of significant amounts of amortization of intangible
assets recognized in the $14 billion acquisition of WCI in 1989,
the $1.3 billion acquisition of the ATC minority interest in 1992
and other business combinations accounted for by the purchase
method. Financial analysts generally consider EBITDA to be an
important measure of comparative operating performance for the
businesses of Time Warner and the Entertainment Group, and when
used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. However, EBITDA should be
considered in addition to, not as a substitute for, operating
income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally
accepted accounting principles.
Three Months Ended June 30, 1995 Compared to the Three Months Ended
June 30, 1994
Time Warner
PUBLISHING. Revenues increased to $928 million, compared to $851
million in the second quarter of 1994. EBITDA increased to $138
million from $125 million. Depreciation and amortization amounted
to $24 million in 1995 and $19 million in 1994. Operating income
increased to $114 million from $106 million. Revenues benefited
from increases in magazine circulation, advertising and book
revenues. Significant revenue gains were achieved by PEOPLE,
FORTUNE and book publisher Oxmoor House. EBITDA and operating
income increased as a result of the revenue gains, offset in part
by higher postal and paper costs as a result of price increases.
MUSIC. Revenues increased to $986 million, compared to $822
million in the second quarter of 1994. EBITDA increased to $165
million from $150 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted to
$95 million in 1995 and $86 million in 1994. Operating income
increased to $70 million from $64 million. The revenue growth
resulted from increases in both domestic and international recorded
music revenues, which benefited from a number of popular releases
and an increase in the percentage of compact disc to total unit
sales, and increased music publishing revenues. As a result of
increases in Time Warner's ownership in certain direct marketing
and merchandising joint ventures, revenues also benefited from the
consolidation of the operating results of such companies which had
previously been accounted for under the equity method of
accounting. EBITDA and operating income benefited principally from
the revenue gains and interest income on the resolution of a
recorded music tax matter, offset in part by lower results from
direct marketing activities attributable to higher amortization of
member acquisition costs and expenses incurred in connection with
the settlement of certain employment contracts.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$201 million in the second quarter of 1995, compared to $179
million in the second quarter of 1994. Interest expense increased
to $219 million, compared to $192 million, principally as a result
of higher floating-rates of interest paid on $2.9 billion notional
amount of interest rate swap contracts. Other income, net, of $18
million in the second quarter of 1995 increased from $13 million in
1994, principally because of the recognition in 1995 of interest
income on the resolution of a corporate tax matter, offset in part
by a decrease in investment-related income. Investment-related
income in 1994 benefited from gains on the sale of certain assets
which exceeded losses from reductions in the carrying value of
certain investments. Losses on foreign exchange contracts used to
hedge foreign exchange risk reduced investment-related income in
both periods.
Entertainment Group
FILMED ENTERTAINMENT. Revenues increased to $1.358 billion,
compared to $1.216 billion in the second quarter of 1994. EBITDA
increased to $175 million from $150 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $85 million in 1995 and $75 million in 1994.
Operating income increased to $90 million from $75 million.
Revenues benefited from increases in worldwide theatrical,
international home video and consumer products operations. Domestic
theatrical revenues in 1995 were led by the success of BATMAN
FOREVER. Revenues and operating results at Six Flags increased due
to higher attendance and in-park spending. EBITDA and operating
income benefited from the revenue gains and increased income from
licensing operations, offset in part by approximately one week less
of operating results of Six Flags in 1995 due to the sale of a 51%
interest in the theme park company on June 23, 1995.
BROADCASTING - THE WB NETWORK. The WB Network was launched in
January 1995, and generated $12 million of operating losses on $3
million of revenues in the second quarter of 1995. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
PROGRAMMING - HBO. Revenues increased to $396 million, compared
to $374 million in the second quarter of 1994. EBITDA increased to
$75 million from $67 million. Depreciation and amortization
amounted to $5 million in each period. Operating income increased
to $70 million from $62 million. Revenues benefited primarily from
an increase in subscribers, as well as from higher pay-TV rates.
EBITDA and operating income improved principally as a result of the
revenue gains.
CABLE. Revenues increased to $760 million, compared to $560
million in the second quarter of 1994. EBITDA increased to $319
million from $256 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $193 million
in 1995 and $162 million in 1994. Operating income increased to
$126 million from $94 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable and direct broadcast satellite subscribers
and nonregulated revenues, including pay-TV and advertising.
EBITDA and operating income increased as a result of the revenue
gains and contributions from the TWE-Advance/Newhouse Partnership,
offset in part by the impact of the second round of cable rate
regulations that went into effect in July 1994, higher start-up
costs for telephony operations and, with respect to operating
income only, higher depreciation and amortization relating to
increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$175 million in the second quarter of 1995, compared to $150
million in the second quarter of 1994. Interest expense increased
to $148 million, compared to $139 million in the second quarter of
1994, principally as a result of higher floating-rates of interest
paid on borrowings under TWE's bank credit agreement. Other
expense, net, increased to $27 million in the second quarter of
1995 from $11 million in 1994, principally because of the inclusion
in 1995 of minority interest expense related to the TWE-
Advance/Newhouse Partnership, offset in part by gains on the sale
of certain unclustered cable systems.
Six Months Ended June 30, 1995 Compared to the Six Months Ended
June 30, 1994
Time Warner
PUBLISHING. Revenues increased to $1.759 billion, compared to
$1.602 billion in the first six months of 1994. EBITDA increased
to $215 million from $195 million. Depreciation and amortization
amounted to $46 million in 1995 and $39 million in 1994. Operating
income increased to $169 million from $156 million. Revenues
benefited from increases in magazine circulation, advertising and
book revenues. Significant revenue gains were achieved by PEOPLE,
SPORTS ILLUSTRATED, TIME, FORTUNE and book publisher Oxmoor House.
EBITDA and operating income increased as a result of the revenue
gains, offset in part by higher postal and paper costs as a result
of price increases.
MUSIC. Revenues increased to $1.977 billion, compared to $1.634
billion in the first six months of 1994. EBITDA increased to $338
million from $297 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $185
million in 1995 and $171 million in 1994. Operating income
increased to $153 million from $126 million. The revenue growth
resulted from increases in both domestic and international recorded
music revenues, which benefited from a number of popular releases
and an increase in the percentage of compact disc to total unit
sales, and increased music publishing revenues. As a result of
increases in Time Warner's ownership in certain direct marketing
and merchandising joint ventures, revenues also benefited from the
consolidation of the operating results of such companies which had
previously been accounted for under the equity method of
accounting. EBITDA and operating income benefited principally from
the revenue gains and interest income on the resolution of a
recorded music tax matter, offset in part by lower results from
direct marketing activities attributable to higher amortization of
member acquisition costs and expenses incurred in connection with
the settlement of certain employment contracts.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$356 million in the first six months of 1995, compared to $337
million in the first six months of 1994. Interest expense
increased to $429 million from $374 million as a result of higher
floating-rates of interest paid on $2.9 billion notional amount of
interest rate swap contracts. There was other income, net, of $73
million in the first six months of 1995, compared to other income,
net, of $37 million in 1994, principally because of the recognition
in 1995 of interest income on the resolution of a corporate tax
matter and an increase in investment-related income. Investment-
related income in both periods benefited primarily from gains on
the sale of certain assets, including the sale of an interest in
QVC, Inc. in 1995, which exceeded losses from reductions in the
carrying value of certain investments taken in each period. The
increase in investment-related income in 1995 was offset in part by
higher losses on foreign exchange contracts used to hedge foreign
exchange risk.
Entertainment Group
FILMED ENTERTAINMENT. Revenues increased to $2.565 billion,
compared to $2.299 billion in the first six months of 1994. EBITDA
increased to $300 million from $267 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $145 million in 1995 and $126 million in 1994.
Operating income increased to $155 million from $141 million.
Revenues benefited from increases in worldwide theatrical,
international home video, consumer products and worldwide
television distribution operations. Lower domestic theatrical
revenues in the first quarter of 1995 were overcome by the second
quarter domestic box office performance of theatrical releases, led
by the success of BATMAN FOREVER. Revenues and operating results
at Six Flags increased due to higher attendance and in-park
spending. EBITDA and operating income benefited from the revenue
gains and increased income from licensing operations.
BROADCASTING - THE WB NETWORK. The WB Network was launched in
January 1995, and generated $33 million of operating losses on $6
million of revenues for the first six months of 1995. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
PROGRAMMING - HBO. Revenues increased to $786 million, compared
to $736 million in the first six months of 1994. EBITDA increased
to $146 million from $128 million. Depreciation and amortization
amounted to $9 million in 1995 and $10 million in 1994. Operating
income increased to $137 million from $118 million. Revenues
benefited primarily from an increase in subscribers, as well as
from higher pay-TV rates. EBITDA and operating income improved
principally as a result of the revenue gains.
CABLE. Revenues increased to $1.338 billion, compared to $1.111
billion in the first six months of 1994. EBITDA increased to $575
million from $500 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $359 million
in 1995 and $322 million in 1994. Operating income increased to
$216 million from $178 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable and direct broadcast satellite subscribers
and nonregulated revenues, including pay-TV and advertising.
EBITDA and operating income increased as a result of the revenue
gains and contributions from the TWE-Advance/Newhouse Partnership,
offset in part by the impact of the second round of cable rate
regulations that went into effect in July 1994, higher start-up
costs for telephony operations and, with respect to operating
income only, higher depreciation and amortization relating to
increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$339 million in the first six months of 1995, compared to $296
million in the first six months of 1994. Interest expense
increased to $299 million, compared with $276 million in the first
six months of 1994, principally as a result of higher floating-
rates of interest paid on borrowings under TWE's bank credit
agreement. Other expense, net, increased to $40 million in the
first six months of 1995 from $20 million in 1994, principally
because of the inclusion in 1995 of minority interest expense
related to the TWE-Advance/Newhouse Partnership, offset in part by
gains on the sale of certain unclustered cable systems.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1995
Time Warner
The financial condition of Time Warner changed moderately from
December 31, 1994, and is expected to be further affected by the
cable transactions, debt refinancings and asset sales that have
closed or are expected to close during the second half of 1995.
Time Warner had $9.9 billion of debt, $597 million of cash and
equivalents (net debt of $9.3 billion) and $1.5 billion of
shareholders' equity at June 30, 1995, compared to $9.2 billion of
debt, $282 million of cash and equivalents (net debt of $8.9
billion) and $1.1 billion of shareholders' equity at December 31,
1994. The increase in shareholders' equity reflects the issuance in
May 1995 of approximately 1.5 million shares of common stock and
approximately 3.3 million shares of Series C preferred stock to
acquire Summit. On a combined basis (Time Warner and the
Entertainment Group together), there was $14.1 billion of net debt
at June 30, 1995, compared to $15 billion of net debt at the
beginning of the year.
During 1995, Time Warner and TWE made progress in achieving
certain of their financial and operational objectives, principally
relating to the expansion of their reach in cable television, the
attainment of a new bank credit facility and their plan to reduce
debt with funds raised from the sale of non-core assets. Time
Warner completed its previously-announced acquisition of Summit in
May 1995 and KBLCOM in July 1995 and, together with the formation
of the TWE-Advance/Newhouse Partnership in April 1995, the total
number of subscribers under the management of Time Warner Cable has
increased to over 10 million, compared to 7.5 million at the end of
1994. The number of subscribers is expected to increase further,
to over 11.5 million, after the consummation of the acquisition of
CVI and related companies, which is expected to close in the fourth
quarter of 1995.
On June 30, 1995, TWI Cable, TWE and the TWE-Advance/Newhouse
Partnership executed a five-year revolving credit facility. The
New Credit Agreement enables such entities to refinance certain
indebtedness assumed from the companies acquired or to be acquired
in the cable acquisitions, to refinance existing indebtedness of
TWE and to finance the ongoing working capital, capital expenditure
and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4 billion
in the case of TWI Cable, $5 billion in the case of the TWE-
Advance/Newhouse Partnership and $8.3 billion in the case of TWE,
subject in each case to certain limitations and adjustments. Such
borrowings will bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially
ranging from 50 to 87.5 basis points based on the credit rating or
financial leverage of the applicable borrower. The New Credit
Agreement contains certain covenants for each borrower relating to,
among other things, additional indebtedness; liens on assets; cash
flow coverage and leverage ratios; and loans, advances,
distributions and other cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
On July 6, 1995, TWI Cable borrowed approximately $1.2 billion
under the New Credit Agreement to refinance certain indebtedness
assumed or incurred in the acquisition of KBLCOM, and TWE borrowed
approximately $2.6 billion to repay and terminate its existing bank
credit agreement.
Time Warner continues to pursue its plan to enhance its financial
position and that of the Entertainment Group through sales of non-
core assets and, to the extent that market conditions remain
favorable, through the issuance of debt to redeem or otherwise
repay certain higher-cost debt securities that are currently
outstanding. With the sale of 51% of TWE's interest in Six Flags
in June 1995, the sale of an interest in QVC, Inc. in February
1995, the sale or expected sale of certain unclustered cable
systems and the proceeds to be raised from the issuance of the
PERCS in August 1995, Time Warner and the Entertainment Group on a
combined basis will have raised approximately $1.6 billion for debt
reduction.
The $363 million of net proceeds to be raised from the issuance of
the PERCS, taken together with approximately $500 million of
proceeds raised from the issuance of 7.75% ten-year notes in June
1995 and available cash and equivalents, are expected to be used to
finance the partial redemption in September 1995 of $1 billion
principal amount of Time Warner's 8.75% Convertible Subordinated
Debentures due 2015 for an aggregate redemption price of $1.06
billion, including redemption premiums and accrued interest
thereon. Time Warner also filed a shelf registration statement
with the Securities and Exchange Commission in August 1995 for the
offering of up to $500 million of other mandatorily redeemable
preferred securities of certain subsidiaries, the proceeds of which
will be used to reduce debt. However, there can be no assurance
that such offering will be completed.
On July 31, 1995, Time Warner also announced the redemption on
August 15, 1995 of all of its $1.8 billion principal amount of
outstanding Reset Notes in exchange for new securities. The Reset
Notes will be redeemed in exchange for approximately $457 million
aggregate principal amount of Floating Rate Notes due August 15,
2000, approximately $274 million aggregate principal amount of
7.975% Notes due August 15, 2004, approximately $548 million
aggregate principal amount of 8.11% Debentures due August 15, 2006,
and approximately $548 million aggregate principal amount of 8.18%
Debentures due August 15, 2007.
During the first six months of 1995, cash used by Time Warner's
operations amounted to $99 million and reflected $553 million of
EBITDA from the Publishing and Music businesses, $5 million of net
distributions from TWE and $35 million from the securitization of
receivables, less $289 million of interest payments, $127 million
of income taxes, $39 million of corporate expenses and an increase
in working capital requirements. Cash provided by operations of
$243 million in the the first six months of 1994 reflected $492
million of EBITDA from the Publishing and Music businesses, $2
million of net distributions from TWE and $210 million from the
securitization of receivables, less $246 million of interest
payments, $96 million of income taxes, $37 million of corporate
expenses and an increase in working capital requirements.
Cash flows used in investing activities, excluding investment
proceeds, increased to $325 million in the first six months of
1995, compared to $162 million in the first six months of 1994,
principally as a result of higher investment spending by Time
Warner's business segments. As a result of management's debt
reduction program, investment proceeds increased to $294 million in
the first six months of 1995, compared to $111 million in the first
six months of 1994.
Cash flows from financing activities increased to $445 million of
cash provided in the first six months of 1995, compared to a use of
cash of $100 million in the first six months of 1994, principally
as a result of the issuance of $500 million principal amount of
7.75% ten-year notes in June 1995. In addition, cash dividends
paid increased to $73 million in the first six months of 1995,
compared to $69 million in the first six months of 1994.
Time Warner has no claim on the assets and cash flows of TWE,
except through the payment of certain fees and reimbursements, cash
distributions and loans. Tax-related distributions of $490 million
were received from TWE in July 1995 and an additional $150 million
of tax-related distributions are expected to be received from TWE
by the end of 1995. Management believes that 1995 operating cash
flow, cash and marketable securities and additional borrowing
capacity are and will continue to be sufficient to meet Time
Warner's liquidity needs without distributions and loans from TWE
above those permitted by existing agreements.
Time Warner uses derivative financial instruments to manage its
risk against fluctuations in interest rates and foreign currency
exchange rates. Interest rate swap contracts are used to adjust
the proportion of total debt that is subject to changes in short-
term rates. At June 30, 1995, Time Warner had interest rate swap
contracts to pay floating-rates of interest (average six-month
LIBOR rate of 6.6%) and receive fixed-rates of interest (average
rate of 5.5%) on $2.9 billion notional amount of indebtedness,
effectively converting 29% of Time Warner's underlying debt,
substantially all of which is fixed-rate, and 36% of the combined
debt of Time Warner and the Entertainment Group, to a floating-rate
basis. Time Warner had interest rate swap contracts on a like-
amount of notional indebtedness at December 31, 1994. Based on the
current levels of outstanding debt and interest rate swap
contracts, a 25 basis point increase in the level of interest rates
prevailing at June 30, 1995 would reduce Time Warner's annual
pretax income by an estimated $8 million. Interest rate swap
contracts are placed with a number of major financial institutions
in order to minimize credit risk.
Based on the level of interest rates prevailing at June 30, 1995,
the fair value of Time Warner's fixed-rate debt exceeded its
carrying value by $121 million and it would have cost $61 million
to terminate the related interest rate swap contracts, which
combined is the equivalent of an unrealized loss of $182 million.
Based on the level of interest rates prevailing at December 31,
1994, the fair value of Time Warner's fixed-rate debt was less than
its carrying value by $572 million and it would have cost $236
million to terminate its interest rate swap contracts, which
combined was the equivalent of an unrealized gain of $336 million.
Unrealized gains or losses on debt or interest rate swap contracts
are not recognized unless the debt is retired or the contracts are
terminated prior to their maturity.
Foreign exchange contracts are used primarily to hedge the risk
that unremitted or future royalties and license fees owed to Time
Warner or TWE domestic companies for the sale or anticipated sale
of U.S. copyrighted products abroad may be adversely affected by
changes in foreign currency exchange rates. At June 30, 1995, Time
Warner had contracts for the sale of $546 million and the purchase
of $151 million of foreign currencies at fixed rates, primarily
Japanese yen (11% of net contract value), French francs (13%),
English pounds (27%), Canadian dollars (15%) and German marks
(18%), compared to contracts for the sale of $551 million and the
purchase of $109 million of foreign currencies at December 31,
1994. Unrealized gains or losses are recorded in income;
accordingly, the carrying value of foreign exchange contracts
approximates market value. Time Warner had $26 million and TWE had
$13 million of net losses on foreign exchange contracts during the
first six months of 1995, which were or are expected to be offset
by corresponding increases in the dollar value of foreign currency
royalties and license fee payments that have been or are
anticipated to be received from the sale of U.S. copyrighted
products abroad. Time Warner reimburses or is reimbursed by TWE
for contract gains and losses related to TWE's foreign currency
exposure. Foreign currency contracts are placed with a number of
major financial institutions in order to minimize credit risk.
Entertainment Group
The financial condition of the Entertainment Group companies,
principally TWE, at June 30, 1995 was, and will continue to be,
affected by the formation of the TWE-Advance/Newhouse Partnership
and the other cable transactions and asset sales that have either
closed or are expected to close during 1995. TWE had $7.1 billion
of debt, $1.7 billion of Time Warner General Partners' senior
capital and $6.2 billion of partners' capital (net of the $528
million uncollected portion of the note receivable from U S WEST)
at June 30, 1995, compared to $7.2 billion of debt, $1.7 billion of
Time Warner General Partners' senior capital and $6.2 billion of
partners' capital at December 31, 1994. Principally as a result of
the proceeds received in the Six Flags transaction, cash and
equivalents increased to $2.3 billion at June 30, 1995, compared to
$1.1 billion at December 31, 1994, reducing the debt-net-of-cash
amounts for TWE to $4.8 billion and $6.1 billion, respectively.
In the first six months of 1995, cash provided by Entertainment
Group operations amounted to $697 million and reflected $988
million of EBITDA from the Filmed Entertainment, Broadcasting-The
WB Network, Programming-HBO and Cable businesses and a reduction in
working capital requirements, less $303 million of interest
payments, $34 million of income taxes and $30 million of corporate
expenses. Cash provided by operations of $707 million in the first
six months of 1994 reflected $895 million of business segment
EBITDA and a reduction in working capital requirements, less $240
million of interest payments, $29 million of income taxes and $30
million of corporate expenses.
Cash flows from investing activities increased to $175 million of
cash provided in the first six months of 1995, compared to a use of
cash of $792 million in the first six months of 1994, principally
as a result of a $922 million increase in investment proceeds
relating to management's debt reduction program. Capital
expenditures increased to $704 million in the first six months of
1995, compared to $504 million in the first six months of 1994.
Capital spending by Time Warner Cable amounted to $514 million in
the first six months of 1995, compared to $256 million in the first
six months of 1994, and was financed in part through $243 million
of collections on the note receivable from U S WEST. Cable capital
expenditures are budgeted to exceed $500 million for the remainder
of 1995, and are expected to be partially financed by approximately
$300 million of additional collections on the note receivable from
U S WEST. Because management believes that the conversion from
coaxial to fiber-optic cable is essential to achieving long-term
growth in revenue from telephony, cable and other services,
significant cable capital expenditures also are expected in
subsequent years and will be timed to match the rate at which
demand for the new services develops.
Cash flows provided by financing activities increased to $320
million in the first six months of 1995, compared to $94 million in
the first six months of 1994, principally as a result of a $175
million increase in collections on the note receivable from U S
WEST.
Warner Bros.' backlog, representing the amount of future revenue
not yet recorded from cash contracts for the licensing of films for
pay and basic cable, network and syndicated television exhibition
amounted to over $1 billion at June 30, 1995 compared to $852
million at December 31, 1994 (including amounts relating to HBO of
$156 million at June 30, 1995 and $175 million at December 31,
1994). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the note receivable from U S WEST and
additional borrowing capacity are and will continue to be
sufficient to meet its capital and liquidity needs.
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1995 1994
(millions)
ASSETS
Current assets
Cash and equivalents $ 2,263 $ 1,071
Receivables, including $234 and $266 due from
Time Warner, less allowances of $299 and $306 1,421 1,426
Inventories 907 956
Prepaid expenses 165 120
Total current assets 4,756 3,573
Noncurrent inventories 1,656 1,807
Loan receivable from Time Warner 400 400
Property, plant and equipment, net 3,944 3,784
Goodwill 4,095 4,433
Cable television franchises 3,123 3,236
Other assets 1,316 1,429
Total assets $19,290 $18,662
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 435 $ 514
Participations and programming costs 1,007 857
Other current liabilities, including $490
and $334 of distributions due to Time Warner 1,668 1,486
Total current liabilities 3,110 2,857
Long-term debt 7,037 7,160
Other long-term liabilities, including $219
and $89 of distributions due to Time Warner 942 749
Minority interest 317 -
Time Warner General Partners' senior capital 1,730 1,663
Partners' capital
Contributed capital 7,398 7,398
Undistributed partnership earnings (deficit) (716) (394)
Note receivable from U S WEST (528) (771)
Total partners' capital 6,154 6,233
Total liabilities and partners' capital $19,290 $18,662
See accompanying notes.
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Revenues (a) $2,392 $2,055 $4,438 $3,974
Cost of revenues (a)(b) 1,611 1,441 3,051 2,784
Selling, general and administrative (a)(b) 515 387 930 760
Operating expenses 2,126 1,828 3,981 3,544
Business segment operating income 266 227 457 430
Interest and other, net (a) (170) (144) (331) (280)
Corporate services (a) (15) (15) (30) (30)
Income before income taxes 81 68 96 120
Income taxes (25) (12) (36) (16)
Net income $ 56 $ 56 $ 60 $ 104
__________________
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE:
Selling, general and administrative $(30) $(26) $(52) $(43)
Corporate services (15) (15) (30) (30)
Interest and other, net 6 3 6 3
In addition, includes the following income (expenses) resulting
from transactions with equity affiliates of TWE or Time Warner:
Revenues $ 32 $ 58 $ 58 $ 67
Cost of revenues (36) (19) (53) (31)
Selling, general and administrative 7 9 12 14
(b) Includes depreciation and amortization
expense of: $275 $240 $501 $453
See accompanying notes.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1995 1994
(millions)
OPERATIONS
Net income $ 60 $ 104
Adjustments for noncash and nonoperating items:
Depreciation and amortization 501 453
Changes in operating assets and liabilities 164 120
Cash provided by operations 725 677
INVESTING ACTIVITIES
Investments and acquisitions (75) (46)
Capital expenditures (622) (496)
Loan to Time Warner - (250)
Investment proceeds 953 39
Cash provided (used) by investing activities 256 (753)
FINANCING ACTIVITIES
Borrowings 235 317
Debt repayments (237) (277)
Capital distributions (30) (27)
Collections on note receivable from U S WEST 243 68
Cash provided by financing activities 211 81
INCREASE IN CASH AND EQUIVALENTS 1,192 5
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,071 1,338
CASH AND EQUIVALENTS AT END OF PERIOD $2,263 $1,343
See accompanying notes.
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), is engaged principally in the Filmed
Entertainment, Broadcasting-The WB Network, Programming-HBO and
Cable businesses. Subsidiaries of Time Warner Inc. ("Time Warner")
are the general partners of TWE ("Time Warner General Partners")
and collectively hold 63.27% pro rata priority capital and residual
equity partnership interests in TWE, and certain priority capital
interests senior ("Time Warner General Partners' senior capital")
and junior to the pro rata priority capital interests, which they
received for the net assets, or the rights to cash flows, they
contributed to the partnership upon the capitalization of TWE. The
limited partners, subsidiaries of U S WEST, Inc. ("U S WEST"),
ITOCHU Corporation and Toshiba Corporation, hold 25.51%, 5.61% and
5.61% pro rata priority capital and residual equity partnership
interests, respectively. The TWE partnership agreement provides
for special allocations of income, loss and distributions of
partnership capital, including priority distributions in the event
of liquidation.
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of TWE
and all companies in which TWE has a direct and indirect
controlling voting interest ("subsidiaries"), as if TWE and its
subsidiaries were a single company. Investments in certain other
companies in which TWE has significant influence but less than a
controlling voting interest, are accounted for using the equity
method.
The accompanying financial statements are unaudited but in the
opinion of management contain all the adjustments (consisting of
those of a normal recurring nature) considered necessary to present
fairly the financial position and the results of operations and
cash flows for the periods presented, in conformity with generally
accepted accounting principles applicable to interim periods. The
accompanying financial statements should be read in conjunction
with the audited consolidated financial statements of TWE for the
year ended December 31, 1994.
Intangible Assets
Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets.
Intangible assets are amortized over periods up to forty years
using the straight-line method. TWE separately reviews the
carrying value of intangible assets for each acquired entity on a
quarterly basis to determine whether an impairment may exist.
TWE considers relevant cash flow and profitability information,
including estimated future operating results, trends and other
available information, in assessing whether the carrying value of
intangible assets can be recovered. Upon a determination that the
carrying value of intangible assets will not be recovered from the
undiscounted future cash flows of the acquired business, the
carrying value of such intangible assets would be considered
impaired and will be reduced by a charge to operations in the
amount of the impairment. Impairment is measured as any deficiency
in estimated undiscounted future cash flows of the acquired
business to recover the carrying value related to the intangible
assets.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS
121") effective for fiscal years beginning after December 15, 1995.
The new rules establish standards for the recognition and
measurement of impairment losses on long-lived assets and certain
identifiable intangible assets, including goodwill. TWE expects
that the adoption of FAS 121 will not have a material effect on its
financial statements.
2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture
with the Advance/Newhouse Partnership ("Advance/Newhouse") to which
Advance/Newhouse and TWE contributed cable television systems (or
interests therein) serving approximately 4.5 million subscribers,
as well as certain foreign cable investments and programming
investments. TWE owns a two-thirds equity interest in the TWE-
Advance/Newhouse Partnership and is the managing partner. TWE
consolidates the partnership and the one-third equity interest
owned by Advance/Newhouse is reflected in TWE's balance sheet as
minority interest. In accordance with the partnership agreement,
Advance/Newhouse can require TWE to purchase its equity interest
for fair market value at specified intervals following the death of
both of its principal shareholders. Beginning in the third year,
either partner can initiate a dissolution in which TWE would
receive two-thirds and Advance/Newhouse would receive one-third of
the partnership's net assets. The assets contributed by TWE and
Advance/Newhouse to the partnership were recorded at their
predecessor's historical cost, which, with respect to
Advance/Newhouse, consisted of assets contributed to the
partnership of approximately $338 million and liabilities assumed
by the partnership of approximately $9 million. No gain was
recognized by TWE upon the capitalization of the partnership. On a
pro forma basis, giving effect to the formation of the TWE-
Advance/Newhouse Partnership as if it had occurred at the beginning
of the periods, TWE would have reported $4.575 billion and $4.238
billion of revenues for the six months ended June 30, 1995 and
1994, respectively. The pro forma effect on TWE's net income for
each of the six month periods ended June 30, 1995 and 1994 is not
material.
3. SIX FLAGS
On June 23, 1995, TWE sold 51% of its interest in Six Flags
Entertainment Corporation ("Six Flags") to an investment group led
by Boston Ventures for $204 million and received $640 million in
additional proceeds from Six Flags, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the
transaction, TWE expects a cumulative debt reduction of
approximately $850 million, after the payment of related taxes and
fees and the deconsolidation of approximately $128 million of
third-party, zero-coupon indebtedness of Six Flags due in 1999.
The deconsolidation of such indebtedness is reflected in TWE's
balance sheet as of June 30, 1995, and the remaining debt reduction
is expected to occur in the third quarter of 1995. TWE deferred
approximately $140 million of income on the transaction principally
as a result of its guarantee of such debt. TWE will account for its
remaining 49% interest in Six Flags under the equity method of
accounting.
4. INVENTORIES
Inventories consist of:
June 30, 1995 December 31, 1994
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 442 $ 352 $ 585 $ 347
Completed and not released 153 37 123 24
In process and other 59 207 18 361
Library, less amortization - 743 - 769
Programming costs, less amortization 177 317 149 306
Merchandise 76 - 81 -
Total $ 907 $1,656 $ 956 $1,807
5. LONG-TERM DEBT
Long-term debt consists of:
June 30, December 31,
1995 1994
(millions)
Bank credit agreement, weighted average interest
rates of 6.7% and 6.5% $2,575 $2,550
Commercial paper, weighted average interest rates
of 6.5% and 6.2% 622 649
Publicly held notes and debentures 3,781 3,903
Other 59 58
Total $7,037 $7,160
On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and a
wholly owned subsidiary of Time Warner ("TWI Cable") executed a
five-year revolving credit facility (the "New Credit Agreement").
The New Credit Agreement enables such entities to refinance
certain indebtedness assumed from the companies acquired or to be
acquired in the cable acquisitions, to refinance existing
indebtedness of TWE and to finance the ongoing working capital,
capital expenditure and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4 billion
in the case of TWI Cable, $5 billion in the case of the TWE-
Advance/Newhouse Partnership and $8.3 billion in the case of TWE,
subject in each case to certain limitations and adjustments. Such
borrowings will bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially
ranging from 50 to 87.5 basis points based on the credit rating or
financial leverage of the applicable borrower. The New Credit
Agreement contains certain covenants for each borrower relating to,
among other things, additional indebtedness; liens on assets; cash
flow coverage and leverage ratios; and loans, advances,
distributions and other cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
On July 6, 1995, TWE borrowed approximately $2.6 billion under
the New Credit Agreement to repay and terminate its existing bank
credit agreement.
Each Time Warner General Partner has guaranteed a pro rata
portion of substantially all of TWE's debt and accrued interest
thereon based on the relative fair value of the net assets each
Time Warner General Partner contributed to TWE. Such indebtedness
is recourse to each Time Warner General Partner only to the extent
of its guarantee.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Balance at beginning of year $6,233 $6,000
Net income 60 104
Distributions (316) (120)
Reduction of stock option distribution liability - 174
Allocation of income to Time Warner General Partners'
senior capital (67) (62)
Collections on note receivable from U S WEST 243 68
Other 1 7
Balance at June 30 $6,154 $6,171
Since September 1993, certain assets formerly owned and operated
by TWE have been owned and operated by other partnerships ("Time
Warner Service Partnerships") in order to ensure compliance with
the Modification of Final Judgment entered on August 24, 1982 by
the United States District Court for the District of Columbia
applicable to U S WEST and its affiliated companies, which may have
included TWE. The Time Warner Service Partnerships make certain of
their assets and related services available to TWE and TWE is
required to make quarterly cash distributions of $12.5 million to
the Time Warner General Partners, which the partners in turn are
required to contribute to the Time Warner Service Partnerships. If
TWE is clearly not prohibited from owning or operating the assets
of the Time Warner Service Partnerships, they will be recontributed
to TWE on September 15, 1995 (or September 15, 1997 in the case of
certain assets), or earlier under certain circumstances, at their
then fair market value in exchange for partnership interests in
TWE. As a result of a judicial order issued to U S WEST in 1994,
TWE is no longer prohibited from owning or operating substantially
all of the assets of the Time Warner Service Partnerships.
In addition to Time Warner Service Partnership distributions, TWE
also is required to make distributions to reimburse the partners
for income taxes at statutory rates based on their allocable share
of taxable income, and to reimburse Time Warner for its stock
options granted to employees of TWE based on the amount by which
the market price of Time Warner common stock exceeds the option
exercise price on the exercise date. TWE accrues a stock option
distribution and a corresponding liability with respect to
unexercised options when the market price of Time Warner common
stock increases during the accounting period, and reverses
previously-accrued stock option distributions and the corresponding
liability when the market price of Time Warner common stock
declines.
During the six months ended June 30, 1995, TWE accrued $25
million of Time Warner Service Partnership distributions, $156
million of tax-related distributions and $135 million of stock
option distributions, based on closing prices of Time Warner common
stock of $41.25 at June 30, 1995 and $35.125 at December 31, 1994.
During the six months ended June 30, 1994, TWE accrued $25 million
of Time Warner Service Partnership distributions and $95 million of
tax-related distributions, and reversed $174 million of previously-
accrued stock option distributions as a result of a decline in the
market price of Time Warner common stock. TWE paid $490 million of
accrued tax distributions to the Time Warner General Partners in
July 1995.
7. SEGMENT INFORMATION
Information as to the operations of TWE in different business
segments is as set forth below. Cable business segment information
reflects the consolidation of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995.
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Revenues
Filmed Entertainment $1,355 $1,214 $2,561 $2,295
Broadcasting - The WB Network 3 - 6 -
Programming - HBO 392 369 777 727
Cable 724 559 1,281 1,108
Intersegment elimination (82) (87) (187) (156)
Total $2,392 $2,055 $4,438 $3,974
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Operating Income
Filmed Entertainment $ 83 $ 72 $148 $133
Broadcasting - The WB Network (12) - (33) -
Programming - HBO 70 61 137 118
Cable 125 94 205 179
Total $266 $227 $457 $430
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment $ 41 $ 33 $ 62 $ 49
Broadcasting - The WB Network - - - -
Programming - HBO 4 4 8 7
Cable 111 81 199 164
Total $156 $118 $269 $220
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment $ 43 $ 41 $ 80 $ 75
Broadcasting - The WB Network - - - -
Programming - HBO - 1 - 2
Cable 76 80 152 156
Total $119 $122 $232 $233
_______________
(1) Amortization includes amortization relating to the acquisition
of Warner Communications Inc. ("WCI") in 1989 and the American
Television and Communications Corporation ("ATC") minority interest
in 1992 and to other business combinations accounted for by the
purchase method.
8. COMMITMENTS AND CONTINGENCIES
Minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements at June 30, 1995
aggregated approximately $5.5 billion, which are payable
principally over a five-year period.
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of counsel and
management, the ultimate resolution of these matters will not have
a material effect on the consolidated financial statements of TWE.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Interest expense $ 296 $ 273
Cash payments made for interest 301 240
Cash payments made for income taxes (net) 34 29
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
TWE had revenues of $2.392 billion and net income of $56 million
for the three months ended June 30, 1995, compared to revenues of
$2.055 billion and net income of $56 million for the three months
ended June 30, 1994. Revenues of $4.438 billion and net income
of $60 million were reported for the six months ended June 30,
1995, compared to revenues of $3.974 billion and net income of
$104 million for the six months ended June 30, 1994.
As discussed more fully below, TWE's operating results for the
three and six month periods ended June 30, 1995 reflect an overall
increase in operating income generated by its business segments and
gains on the sale of certain unclustered cable systems, offset by
higher floating-rates of interest paid on borrowings under TWE's
bank credit agreement and minority interest expense related to the
consolidation of the operating results of the TWE-Advance/Newhouse
Partnership effective as of April 1, 1995.
As a U.S. partnership, TWE is not subject to U.S. federal and
state income taxation. Income and withholding taxes of $25 million
and $36 million in the three and six months ended June 30, 1995,
respectively, and $12 million and $16 million in the three and six
months ended June 30, 1994, respectively, have been provided in
respect of the operations of TWE's domestic and foreign subsidiary
corporations.
EBITDA and operating income for TWE for the three and six months
ended June 30, 1995 and 1994 is as follows:
Three Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Filmed Entertainment $167 $146 $ 83 $ 72
Broadcasting - The WB Network (12) - (12) -
Programming - HBO 74 66 70 61
Cable 312 255 125 94
Total $541 $467 $266 $227
Six Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Filmed Entertainment $290 $257 $148 $133
Broadcasting - The WB Network (33) - (33) -
Programming - HBO 145 127 137 118
Cable 556 499 205 179
Total $958 $883 $457 $430
Certain factors affecting comparative operating results are
discussed below on a business segment basis. That discussion
includes, among other factors, an analysis of changes in the
operating income of the business segments before depreciation and
amortization ("EBITDA") in order to eliminate the effect on the
operating performance of the filmed entertainment and cable
businesses of significant amounts of amortization of intangible
assets recognized in Time Warner's $14 billion acquisition of WCI
in 1989, the $1.3 billion acquisition of the ATC minority interest
in 1992 and other business combinations accounted for by the
purchase method. Financial analysts generally consider EBITDA to
be an important measure of comparative operating performance for
the businesses of TWE, and when used in comparison to debt levels
or the coverage of interest expense, as a measure of liquidity.
However, EBITDA should be considered in addition to, not as a
substitute for, operating income, net income, cash flow and other
measures of financial performance and liquidity reported in
accordance with generally accepted accounting principles.
Three Months Ended June 30, 1995 Compared to the Three Months Ended
June 30, 1994
FILMED ENTERTAINMENT. Revenues increased to $1.355 billion,
compared to $1.214 billion in the second quarter of 1994. EBITDA
increased to $167 million from $146 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $84 million in 1995 and $74 million in 1994.
Operating income increased to $83 million from $72 million.
Revenues benefited from increases in worldwide theatrical,
international home video and consumer products operations.
Domestic theatrical revenues in 1995 were led by the success of
BATMAN FOREVER. Revenues and operating results at Six Flags
increased due to higher attendance and in-park spending. EBITDA
and operating income benefited from the revenue gains and increased
income from licensing operations, offset in part by approximately
one week less of operating results of Six Flags in 1995 due to the
sale of a 51% interest in the theme park company on June 23, 1995.
BROADCASTING - THE WB NETWORK. The WB Network was launched on
January 11, 1995, and generated $12 million of operating losses on
$3 million of revenues in the second quarter of 1995. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
PROGRAMMING - HBO. Revenues increased to $392 million, compared
to $369 million in the second quarter of 1994. EBITDA increased to
$74 million from $66 million. Depreciation and amortization
amounted to $4 million in 1995 and $5 million in 1994. Operating
income increased to $70 million from $61 million. Revenues
benefited primarily from an increase in subscribers, as well as
from higher pay-TV rates. EBITDA and operating income improved
principally as a result of the revenue gains.
CABLE. Revenues increased to $724 million, compared to $559
million in the second quarter of 1994. EBITDA increased to $312
million from $255 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $187 million
in 1995 and $161 million in 1994. Operating income increased to
$125 million from $94 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable subscribers and nonregulated revenues,
including pay-TV and advertising. EBITDA and operating income
increased as a result of the revenue gains and contributions from
the TWE-Advance/Newhouse Partnership, offset in part by the impact
of the second round of cable rate regulations that went into effect
in July 1994, higher start-up costs for telephony operations and,
with respect to operating income only, higher depreciation and
amortization relating to increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$170 million in the second quarter of 1995, compared to $144
million in the second quarter of 1994. Interest expense increased
to $146 million, compared to $138 million in the second quarter of
1994, principally as a result of higher floating-rates of interest
paid on borrowings under TWE's bank credit agreement. Other
expense, net, increased to $24 million in the second quarter of
1995 from $6 million in 1994, principally because of the inclusion
in 1995 of minority interest expense related to the TWE-
Advance/Newhouse Partnership, offset in part by gains on the sale
of certain unclustered cable systems.
Six Months Ended June 30, 1995 Compared to the Six Months Ended
June 30, 1994
FILMED ENTERTAINMENT. Revenues increased to $2.561 billion,
compared to $2.295 billion in the first six months of 1994. EBITDA
increased to $290 million from $257 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $142 million in 1995 and $124 million in 1994.
Operating income increased to $148 million from $133 million.
Revenues benefited from increases in worldwide theatrical,
international home video, consumer products and worldwide
television distribution operations. Lower domestic theatrical
revenues in the first quarter of 1995 were overcome by the second
quarter domestic box office performance of theatrical releases, led
by the success of BATMAN FOREVER. Revenues and operating results
at Six Flags increased due to higher attendance and in-park
spending. EBITDA and operating income benefited from the revenue
gains and increased income from licensing operations.
BROADCASTING-THE WB NETWORK. The WB Network was launched on
January 11, 1995, and generated $33 million of operating losses on
$6 million of revenues in the first six months of 1995. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
PROGRAMMING - HBO. Revenues increased to $777 million, compared
to $727 million in the first six months of 1994. EBITDA increased
to $145 million from $127 million. Depreciation and amortization
amounted to $8 million in 1995 and $9 million in 1994. Operating
income increased to $137 million from $118 million. Revenues
benefited primarily from an increase in subscribers, as well as
from higher pay-TV rates. EBITDA and operating income improved
principally as a result of the revenue gains.
CABLE. Revenues increased to $1.281 billion, compared to $1.108
billion in the first six months of 1994. EBITDA increased to $556
million from $499 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $351 million
in 1995 and $320 million in 1994. Operating income increased to
$205 million from $179 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable subscribers and nonregulated revenues,
including pay-TV and advertising. EBITDA and operating income
increased as a result of the revenue gains and contributions from
the TWE-Advance/Newhouse Partnership, offset in part by the impact
of the second round of cable rate regulations that went into effect
in July 1994, higher start-up costs for telephony operations and,
with respect to operating income only, higher depreciation and
amortization relating to increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$331 million in the first six months of 1995, compared to $280
million in the first six months of 1994. Interest expense
increased to $296 million, compared with $273 million in the first
six months of 1994, principally as a result of higher floating-
rates of interest paid on borrowings under TWE's bank credit
agreement. Other expense, net, increased to $35 million in the
first six months of 1995 from $7 million in 1994, principally
because of the inclusion in 1995 of minority interest expense
related to the TWE-Advance/Newhouse Partnership, offset in part by
gains on the sale of certain unclustered cable systems.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1995
The financial condition of TWE at June 30, 1995 was affected by
the formation of the TWE-Advance/Newhouse Partnership and the Six
Flags transaction, and is expected to be further affected by the
other cable transactions agreed to by Time Warner that have closed
or are expected to close during 1995. TWE had $7.1 billion of
debt, $1.7 billion of Time Warner General Partners' senior capital
and $6.2 billion of partners' capital (net of the $528 million
uncollected portion of the note receivable from U S WEST) at June
30, 1995, compared to $7.2 billion of debt, $1.7 billion of Time
Warner General Partners' senior capital and $6.2 billion of
partners' capital at December 31, 1994. Principally as a result of
the proceeds received in the Six Flags transaction, cash and
equivalents increased to $2.3 billion at June 30, 1995, compared to
$1.1 billion at December 31, 1994, reducing the debt-net-of-cash
amounts to $4.8 billion and $6.1 billion, respectively.
During 1995, TWE and Time Warner made progress in achieving
certain of their financial and operational objectives, principally
relating to the expansion of their reach in cable television, the
attainment of a new bank credit facility and their plan to reduce
debt with funds raised from the sale of non-core assets. TWE
formed the TWE-Advance/Newhouse Partnership in April 1995 and,
together with Time Warner's completion of its previously-announced
acquisitions of Summit Communications Group, Inc. in May 1995 and
KBLCOM Incorporated in July 1995, the total number of subscribers
under the management of Time Warner Cable has increased to over 10
million, compared to 7.5 million at the end of 1994. The number of
subscribers is expected to increase further, to over 11.5 million,
after the consummation of Time Warner's acquisition of Cablevision
Industries Corporation and related companies, which is expected to
close in the fourth quarter of 1995.
On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and
TWI Cable executed a five-year revolving credit facility. The New
Credit Agreement enables such entities to refinance certain
indebtedness assumed from the companies acquired or to be acquired
in the cable acquisitions, to refinance existing indebtedness of
TWE and to finance the ongoing working capital, capital expenditure
and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4 billion
in the case of TWI Cable, $5 billion in the case of the TWE-
Advance/Newhouse Partnership and $8.3 billion in the case of TWE,
subject in each case to certain limitations and adjustments. Such
borrowings will bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially
ranging from 50 to 87.5 basis points based on the credit rating or
financial leverage of the applicable borrower. The New Credit
Agreement contains certain covenants for each borrower relating to,
among other things, additional indebtedness; liens on assets; cash
flow coverage and leverage ratios; and loans, advances,
distributions and other cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
On July 6, 1995, TWE borrowed approximately $2.6 billion under
the New Credit Agreement to repay and terminate its existing bank
credit agreement.
TWE continues to pursue its plan to enhance its financial
position through sales of non-core assets. With the sale of 51% of
its interest in Six Flags in June 1995 and the sale or expected
sale of certain unclustered cable systems, TWE expects a
cumulative debt reduction of approximately $1 billion, after the
payment of related taxes and fees and the deconsolidation of
approximately $128 million of third-party, zero-coupon indebtedness
of Six Flags due in 1999. The deconsolidation of such
indebtedness is reflected in TWE's balance sheet as of June 30,
1995, and the remaining debt reduction is expected to occur
in the second half of 1995.
In the first six months of 1995, cash provided by TWE's
operations amounted to $725 million and reflected $958 million of
EBITDA from the Filmed Entertainment, Broadcasting-The WB Network,
Programming-HBO and Cable businesses and a reduction in working
capital requirements, less $301 million of interest payments, $34
million of income taxes and $30 million of corporate expenses.
Cash provided by operations of $677 million in the first six months
of 1994 reflected $883 million of business segment EBITDA and a
reduction in working capital requirements, less $240 million of
interest payments, $29 million of income taxes and $30 million of
corporate expenses.
Cash flows from investing activities increased to $256 million of
cash provided in the first six months of 1995, compared to a use of
cash of $753 million in the first six months of 1994, principally
as a result of a $914 million increase in investment proceeds
relating to management's debt reduction program. Capital
expenditures increased to $622 million in the first six months of
1995, compared to $496 million in the first six months of 1994.
Capital spending by Time Warner Cable amounted to $433 million in
the first six months of 1995, compared to $248 million in the first
six months of 1994, and was financed in part through $243 million
of collections on the note receivable from U S WEST. Cable capital
expenditures are budgeted to exceed $500 million for the remainder
of 1995, and are expected to be partially financed by approximately
$300 million of additional collections on the note receivable from
U S WEST. Because management believes that the conversion from
coaxial to fiber-optic cable is essential to achieving long-term
growth in revenue from telephony, cable and other services,
significant cable capital expenditures also are expected in
subsequent years and will be timed to match the rate at which
demand for the new services develops.
Cash flows provided by financing activities increased to $211
million in the first six months of 1995, compared to $81 million in
the first six months of 1994, principally as a result of a $175
million increase in collections on the note receivable from U S
WEST.
Warner Bros.' backlog, representing the amount of future revenue
not yet recorded from cash contracts for the licensing of films for
pay and basic cable, network and syndicated television exhibition
amounted to over $1 billion at June 30, 1995 compared to $852
million at December 31, 1994 (including amounts relating to HBO of
$156 million at June 30, 1995 and $175 million at December 31,
1994). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the note receivable from U S WEST and
additional borrowing capacity are and will continue to be
sufficient to meet its capital and liquidity needs.
Based on the level of interest rates prevailing at June 30, 1995,
the fair value of TWE's long-term debt exceeded its carrying value
by $123 million. Based on the level of interest rates prevailing
at December 31, 1994, the fair value of TWE's long-term debt was
$460 million less than its carrying value. Unrealized gains or
losses on debt are not recognized unless the debt is retired prior
to its maturity.
Foreign exchange contracts are used 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. TWE is reimbursed by or reimburses Time
Warner for Time Warner contract gains and losses related to TWE's
exposure. At June 30, 1995, Time Warner had contracts for the sale
of $546 million and the purchase of $151 million of foreign
currencies at fixed rates and maturities of three months or less.
Of Time Warner's $395 million net sale contract position, $133
million related to TWE's exposure, primarily Japanese yen (20% of
net contract position related to TWE), French francs (20%), German
marks (10%) and Canadian dollars (21%), compared to a net sale
contract position of $188 million of foreign currencies at December
31, 1994. Unrealized gains or losses are recorded in income;
accordingly, the carrying value of foreign exchange contracts
approximates market value. TWE had $13 million of net losses on
foreign exchange contracts during the first six months of 1995,
which were or are expected to be offset by corresponding increases
in the dollar value of foreign currency license fee payments that
have been or are anticipated to be received from the sale of U.S.
copyrighted products abroad. Time Warner places foreign currency
contracts with a number of major financial institutions in order to
minimize credit risk.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the litigation entitled NORTHERN LAMINATING,
INC. RETIREMENT FUND v. MUNRO, et al. described on page I-41 of
Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1994 (the "1994 Form 10-K"). A Stipulation of
Voluntary Discontinuance without prejudice was approved by the
court on July 12, 1995.
Reference is made to the description of the Federal lawsuit filed
by TWE in November 1992 seeking to overturn major provisions of the
1992 Cable Act that appears on pages I-42 and I-43 of Time Warner's
1994 Form 10-K. Argument on cross motions for summary judgment in
connection with the must-carry portion of the case was held on July
17, 1995; post-argument submissions by all parties are due on
August 22, 1995. With respect to the remainder of the case,
briefing on the appeal was completed in early July 1995 and
argument of the appeal is scheduled for November 20, 1995.
On May 30, 1995, a purported class action was filed in the United
States District Court for the Central District of California,
entitled DIGITAL DISTRIBUTION INC. D/B/A COMPACT DISC WAREHOUSE v.
CEMA DISTRIBUTION, SONY MUSIC ENTERTAINMENT, INC., WARNER ELEKTRA
ATLANTIC CORPORATION, UNI DISTRIBUTION CORPORATION, BERTELSMANN
MUSIC GROUP, INC. AND POLYGRAM GROUP DISTRIBUTION, INC., No. 95-
3596 (JSL) (the "California Federal Action"). On July 19, 1995, a
purported class action was filed in the Superior Court of
California for the County of Los Angeles, entitled BRENDEN BARRY v.
CAMA DISTRIBUTION, SONY MUSIC ENTERTAINMENT, INC., WARNER ELEKTRA
ATLANTIC CORPORATION, UNI DISTRIBUTION CORPORATION, BERTELSMANN
MUSIC GROUP, INC. AND POLYGRAM GROUP DISTRIBUTION, INC., No. BC
131748 (the "California State Action"). The California Federal
Action is brought on behalf of direct purchasers of compact discs
("CDs") and the California State Action is brought on behalf of
indirect purchasers of CDs. In both actions, the plaintiffs allege
that Warner Elektra Atlantic Corporation ("WEA"), along with five
other distributors of recorded music CDs, violated the federal
and/or state antitrust laws and unfair competition laws, by
engaging in a conspiracy to fix prices of CDs, and seek an
injunction and treble damages. In the California Federal Action,
the defendants have moved to dismiss the complaint and stay the
proceedings pending the disposition of the motion to dismiss. An
initial conference is scheduled in early September 1995. In the
California State Action, defendants time to answer or move against
the complaint has been extended until October 15, 1995.
[An action similar to the California Federal Action was filed in
the United States District Court for the Southern District of New
York and then dismissed voluntarily by the plaintiff, effective as
of July 19, 1995. The plaintiff indicated that it intended to
intervene in the California Federal Action or file a separate
action in the same court.]
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Annual Meeting of Stockholders of Time Warner was held
on May 18, 1995.
(b) Not applicable.
(c) The following matters were voted upon at the Time Warner
Annual Meeting of Stockholders:
(i) Election of directors for terms expiring in 1998.
Broker
For Withheld Non-Votes
Merv Adelson 310,072,682 4,973,582 0
Beverly Sills Greenough 310,020,000 5,026,264 0
Michael A. Miles 310,851,464 4,194,800 0
Donald S. Perkins 310,737,122 4,309,142 0
Raymond S. Troubh 310,941,947 4,104,317 0
(ii) Adoption of amended and restated Time Warner Inc. Annual
Bonus Plan for Executive Officers:
Broker
Votes For Votes Against Abstentions Non-Votes
287,990,584 22,137,691 4,917,989 0
(iii) Appointment of Ernst & Young LLP as independent auditors
of Time Warner for 1995:
Broker
Votes For Votes Against Abstentions Non-Votes
312,574,237 1,395,455 1,076,572 0
(iv) Stockholder resolution relating to cigarette advertising in
Time Warner's magazines:
Broker
Votes For Votes Against Abstentions Non-Votes
15,842,233 245,079,278 13,045,154 41,079,599
(v) Stockholder resolution calling for the election of directors
annually and not by classes:
Broker
Votes For Votes Against Abstentions Non-Votes
89,948,660 122,102,463 61,906,541 41,088,600
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed
or incorporated by reference as a part of this report and such
Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K.
(i) Time Warner filed a Current Report on Form 8-K dated April
1, 1995 reporting in Item 2 that TWE had closed its previously
announced transaction with Advance/Newhouse Partnership regarding
the formation of the Time Warner Entertainment - Advance/Newhouse
Partnership.
(ii) Time Warner filed a Current Report on Form 8-K dated May
30, 1995 which sets forth the pro forma financial statements of
Time Warner Inc., reflecting the Unclustered Cable Disposition, the
Six Flags Transaction, the TWE - A/N Transaction, the Summit
Acquisition, the CVI Acquisition, the KBLCOM Acquisition and the
New Credit Agreement.
(iii) Time Warner filed a Current Report on Form 8-K dated June
15, 1995 which sets forth the financial statements of Newhouse
Broadcasting Cable Division of Newhouse Broadcasting Corporation.
(iv) Time Warner filed a Current Report on Form 8-K dated July
6, 1995 reporting in Item 2 that Time Warner had closed its
previously announced acquisition of KBLCOM Incorporated, formerly a
subsidiary of Houston Industries Incorporated.
<PAGE>
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements 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.
(Registrant)
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: August 14, 1995
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
10.1 Contribution Agreement, dated as of September 9, 1994,
among Time Warner Entertainment Company, L.P., Advance
Publications, Inc., Newhouse Broadcasting Corporation,
Advance/Newhouse Partnership, and Time Warner Entertainment-
Advance/Newhouse Partnership (incorporated by reference to
Exhibit 10(a) to Time Warner Entertainment Company, L.P.'s
Current Report on Form 8-K dated September 9, 1994).
10.2 Partnership Agreement, dated as of September 9, 1994,
between Time Warner Entertainment Company, L.P. and
Advance/Newhouse Partnership (incorporated by reference to
Exhibit 10(b) to Time Warner Entertainment Company, L.P.'s
Current Report on Form 8-K dated September 9, 1994).
10.3 Letter Agreement, dated April 1, 1995, among Time Warner
Entertainment Company, L.P., Advance/Newhouse Partnership,
Advance Publications, Inc. and Newhouse Broadcasting
Corporation (incorporated by reference to Exhibit 10(c) to
Time Warner Entertainment Company, L.P.'s Current Report on
Form 8-K dated April 1, 1995).
10.4 Credit Agreement among Time Warner Entertainment Company,
L.P., Time Warner Entertainment-Advance/Newhouse Partnership
and TWI Cable Inc., as borrowers, Chemical Bank, as
administrative agent, Bank of America National Trust and
Savings Association, The Bank of New York and Morgan Guaranty
Trust Company of New York, as documentation and syndication
agents, and the lending institutions named therein, dated as
of June 30, 1995 (incorporated by reference to Exhibit 10(a)
to Time Warner's Current Report on Form 8-K dated July 6,
1995).
10.5 Employment Agreement made as of May 17, 1995, between
Time Warner and Peter R. Haje.
27 Financial Data Schedule.
99.1 Summarized financial information of the Time Warner
Service Partnerships.
99.2 Summarized financial information of Paragon
Communications.
<PAGE>
<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 quarter
ended June 30, 1995 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 597
<SECURITIES> 0
<RECEIVABLES> 2,033
<ALLOWANCES> 738
<INVENTORY> 444
<CURRENT-ASSETS> 3,167
<PP&E> 1,551
<DEPRECIATION> 755
<TOTAL-ASSETS> 17,788
<CURRENT-LIABILITIES> 2,945
<BONDS> 9,593
<COMMON> 384
0
4
<OTHER-SE> 1,091
<TOTAL-LIABILITY-AND-EQUITY> 17,788
<SALES> 3,724
<TOTAL-REVENUES> 3,724
<CGS> 2,122
<TOTAL-COSTS> 2,122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 429
<INCOME-PRETAX> 33
<INCOME-TAX> 88
<INCOME-CONTINUING> (55)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF THE TIME WARNER SERVICE
PARTNERSHIPS
(Unaudited)
The Time Warner General Partners are the general partners of the
Time Warner Service Partnerships and collectively hold a 100%
priority capital interest and 87.5% residual equity interest
therein. The assets of the Time Warner Service Partnerships
principally include the satellite receiving dishes and broadcast
antennas used by TWE's Cable division, the transponders and other
transmission equipment employed by TWE's Programming-HBO and Filmed
Entertainment divisions and TWE's equity interests in certain
programming entities. A summary of financial information of the
Time Warner Service Partnerships is set forth below:
TIME WARNER SERVICE PARTNERSHIPS
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Operating Statement Information
Revenues $ 39 $ 9 $ 71 $ 17
Operating income (loss) 1 (2) 1 (8)
Gain on investments - 2 126 5
Net income (loss) (3) (5) 128 (13)
June 30, December 31,
1995 1994
(millions)
Balance Sheet Information
Investments and advances $ 67 $156
Property, plant and equipment, net 194 120
Due from (to) Time Warner 29 (38)
Total assets 307 279
Total liabilities 48 101
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF PARAGON COMMUNICATIONS
(Unaudited)
TWE has an indirect 50% ownership interest in Paragon
Communications ("Paragon"), a cable system joint venture accounted
for on the equity basis. On July 6, 1995, Time Warner acquired the
other 50% interest in Paragon from KBLCOM Incorporated. In
connection with this transaction, $226 million of Paragon's
indebtedness was repaid using funds provided equally by each of
Time Warner and TWE. A summary of financial information of Paragon
is set forth below:
PARAGON COMMUNICATIONS
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Operating Statement Information
Revenues $ 92 $ 87 $179 $173
Operating income 20 20 40 41
Net income 16 15 47 31
June 30, December 31,
1995 1994
(millions)
Balance Sheet Information
Property, plant and equipment, net $412 $392
Cable television franchises 201 206
Total assets 656 628
Debt 226 249
Total liabilities 305 323
EMPLOYMENT AGREEMENT dated May 17, 1995, effective
as of May 17, 1995 (the "Effective Date"), between TIME
WARNER INC., a Delaware corporation (the "Company"), and
Peter R. Haje (the "Executive").
The Executive is currently employed by the Company
pursuant to an Employment Agreement made as of September 19,
1990 (the "Prior Agreement"). The Company wishes to restate
the Prior Agreement and secure the services of the Executive
on a full-time basis for the period to and including December
31, 1999 (the "Term Date") and thereafter for a two-year
advisory period on and subject to the terms and conditions
set forth in this Agreement, and the Executive is willing for
the Prior Agreement to be so restated and to provide such
services on and subject to the terms and conditions set forth
in this Agreement. The parties therefore agree as follows:
1. Term of Employment. The Executive's "term of
employment", as this phrase is used throughout this Agree-
ment, shall be for the period beginning on the Effective Date
and ending on the Term Date, subject, however, to the terms
and conditions set forth in this Agreement. Notwithstanding
the foregoing or anything to the contrary contained in this
Agreement, the "term of employment", as used in Sections 3.6,
3.7, 3.8 and 8 through 12 shall mean the period ending at the
end of the Advisory Period (as defined in Section 13).
2. Employment. The Company shall employ the
Executive, and the Executive shall serve, as Executive Vice
President, Secretary and General Counsel of the Company
during the term of employment, and the Executive shall have
the authority, functions, duties, powers and responsibilities
normally associated with such position and as the Board of
Directors, the Chief Executive Officer or the President of
the Company may from time to time delegate to the Executive
in addition thereto. The Executive shall, subject to his
election as such from time to time and without additional
compensation, serve during the term of employment in such
additional offices of comparable or greater stature and
responsibility in the Company and its subsidiaries and as a
director and as a member of any committee of the Board of
Directors of the Company and its subsidiaries, to which he
may be elected from time to time. During the term of
employment, (i) the Executive's services shall be rendered on
a substantially full-time, exclusive basis and he will apply
on a full-time basis all of his skill and experience to the
performance of his duties in such employment, (ii) the
Executive shall report only to the Company's Board of
Directors, its Chief Executive Officer, its President or its
Chief Operating Officer, (iii) the Executive shall have no
other employment and, without the prior written consent of
the Chief Executive Officer or the President of the Company,
no outside business activities which require the devotion of
substantial amounts of the Executive's time and (iv) the
place for the performance of the Executive's services shall
be the principal executive offices of the Company in the New
York City metropolitan area, subject to such reasonable
travel as may be appropriate or required in the performance
of the Executive's duties in the business of the Company.
The foregoing shall be subject to the Company's policies, as
in effect from time to time, regarding vacations, holidays,
illness and the like and shall not prevent the Executive from
devoting such time to his personal affairs as shall not
interfere with the performance of his duties hereunder,
provided that the Executive complies with the provisions of
Sections 9 and 10 and any Company policies on conflicts of
interest and service as a director of another corporation,
partnership, trust or other entity ("Entity").
3. Compensation.
3.1 Base Salary. The Company shall pay or
cause to be paid to the Executive a base salary of not less
than $450,000 per annum during calendar year 1995 and not
less than $550,000 per annum during the remainder of the term
of employment (the "Base Salary"). The Company may increase,
but not decrease, the Base Salary at any time and from time
to time during the term of employment and upon each such
increase the term "Base Salary" shall mean such increased
amount. Base Salary shall be payable in monthly or more
frequent installments in accordance with the Company's then
current practices and policies with respect to senior
executives. For the purposes of this Agreement "senior
executives" shall mean executives of the Company at the same
level as the Executive.
3.2 Bonus. In addition to Base Salary, the
Executive may be entitled to receive during the term of
employment an annual cash bonus based on the performance of
the Company and of the Executive. Bonuses for senior
executives may be determined by the Compensation Committee of
the Company's Board of Directors or by the Chief Executive
Officer of the Company. Such determination with respect to
the amount, if any, of annual bonuses to be paid to the
Executive under this Agreement shall be final and conclusive
except as specifically provided otherwise in this Agreement.
Payments of any bonus compensation under this Section 3.2
shall be made in accordance with the Company's then current
practices and policies with respect to senior executives.
3.3 Deferred Compensation. In addition to
Base Salary and bonus as set forth in Sections 3.1 and 3.2,
the Executive shall be credited with deferred compensation
which shall be determined and paid out as provided in this
Agreement, including Annex A hereto. Subject to the
provisions of Section A.7 of Annex A, during the term of
employment, the Company shall credit to a special account
maintained on the Company's books for the Executive (the
"Account"), monthly, an amount equal to 50% of one-twelfth of
the Executive's then current Base Salary. If a lump sum
payment is made pursuant to Section 4.2.2 or 4.2.3, the
Company shall credit to the Account at the time of such
payment an amount equal to 50% of the Base Salary portion of
such lump sum payment. The Account shall be maintained by
the Company in accordance with the terms of this Agreement,
including Annex A, until the full amount which the Executive
is entitled to receive therefrom has been paid in full.
3.4 Deferred Bonus. In addition to any other
deferred bonus plan in which the Executive may be entitled to
participate, the Executive may elect by written notice
delivered to the Company at least 15 days prior to the
commencement of any calendar year during the term of
employment during which an annual cash bonus would otherwise
accrue or to which it would relate, to defer payment of and
to have the Company credit to the Account all or any portion
of the Executive's bonus for such year. Any such election
shall only apply to the calendar year during the term of
employment with respect to which such election is made and a
new election shall be required with respect to each
successive calendar year during the term of employment.
3.5 Prior Account. The parties confirm that
the Company has maintained a deferred compensation account
(the "Prior Account") for the Executive in accordance with
the Prior Agreement. The Prior Account shall be promptly
transferred to, and shall for all purposes be deemed part of,
the Account and shall continue to be maintained by the
Company in accordance with this Agreement. All prior credits
to the Prior Account shall be deemed to be credits made under
this Agreement, all "Account Retained Income" thereunder
shall be deemed to be Account Retained Income under this
Agreement and all increases or decreases to the Prior Account
as a result of income, gains, losses and other changes shall
be deemed to have been made under this Agreement.
3.6 Reimbursement. The Company shall pay or
reimburse the Executive for all reasonable travel,
entertainment and other business expenses actually incurred
or paid by the Executive during the term of employment in the
performance of his services under this Agreement provided
such expenses are incurred or paid in accordance with the
Company's then current practices and policies with respect to
senior executives of the Company and upon presentation of
expense statements or vouchers or such other supporting
information as the Company may customarily require of its
senior executives.
3.7 No Anticipatory Assignments. Except as
specifically contemplated in Section 12.8 or under the life
insurance policies and benefit plans referred to in Sections
7 and 8, respectively, neither the Executive, his legal
representative nor any beneficiary designated by him shall
have any right, without the prior written consent of the
Company, to assign, transfer, pledge, hypothecate, anticipate
or commute to any person or Entity any payment due in the
future pursuant to any provision of this Agreement, and any
attempt to do so shall be void and shall not be recognized by
the Company.
3.8 Indemnification. The Executive shall be
entitled throughout the term of employment in his capacity as
an officer or director of the Company or any of its
subsidiaries or a member of the Board of Representatives or
other governing body of any partnership or joint venture in
which the Company has an equity interest (and after the term
of employment, to the extent relating to his service as such
officer, director or member) to the benefit of the
indemnification provisions contained on the date hereof in
the Certificate of Incorporation and By-Laws of the Company
(not including any amendments or additions after the date of
execution hereof that limit or narrow, but including any that
add to or broaden, the protection afforded to the Executive
by those provisions), to the extent not prohibited by
applicable law at the time of the assertion of any liability
against the Executive.
4. Termination.
4.1 Termination for Cause. The Company may
terminate the term of employment, the Advisory Period and all
of the Company's obligations under this Agreement, other than
its obligations set forth below in this Section 4.1, only for
"cause" and only if the term of employment and Advisory
Period have not previously been terminated pursuant to any
other provision of this Agreement. Termination by the
Company for "cause" shall mean termination by action of the
Company's Board of Directors, or a committee thereof, because
of the Executive's conviction (treating a nolo contendere
plea as a conviction) of a felony (whether or not any right
to appeal has been or may be exercised) or willful refusal
without proper cause to perform his obligations under this
Agreement or because of the Executive's breach of any of the
covenants provided for in Section 9. Such termination shall
be effected by written notice thereof delivered by the
Company to the Executive and shall be effective as of the
date of such notice; provided, however, that if (i) such
termination is because of the Executive's willful refusal
without proper cause to perform any one or more of his
obligations under this Agreement, (ii) such notice is the
first such notice of termination for any reason delivered by
the Company to the Executive under this Section 4.1, and
(iii) within 15 days following the date of such notice the
Executive shall cease his refusal and shall use his best
efforts to perform such obligations, the termination shall
not be effective.
In the event of such termination by the Company for
cause, without prejudice to any other rights or remedies that
the Company may have at law or in equity, the Company shall
have no further obligations to the Executive other than
(i) to pay Base Salary and make credits of deferred
compensation to the Account or to pay Advisory Period
compensation, as the case may be, accrued through the
effective date of termination, (ii) to pay any annual bonus
pursuant to Section 3.2 to the Executive in respect of the
calendar year prior to the calendar year in which such
termination is effective, in the event such annual bonus has
been determined but not yet paid as of the date of such
termination and (iii) with respect to any rights the
Executive has in respect of amounts credited to the Account
or pursuant to any insurance or other benefit plans or
arrangements of the Company maintained for the benefit of its
senior executives. The Executive hereby disclaims any right
to receive a pro rata portion of the Executive's annual bonus
with respect to the year in which such termination occurs.
The last sentence of Section 3.3 and the provisions of
Sections 3.8, 8.2, 8.3 and 9 through 12 and Annex A shall
survive any termination pursuant to this Section 4.1.
4.2 Termination by Executive for Material
Breach by the Company and Wrongful Termination by the
Company. Unless previously terminated pursuant to any other
provision of this Agreement and unless a Disability Period
shall be in effect, the Executive shall have the right,
exercisable by written notice to the Company, to terminate
the term of employment and the Advisory Period effective 15
days after the giving of such notice, if, at the time of the
giving of such notice, the Company shall be in material
breach of its obligations under this Agreement; provided,
however, that, with the exception of clause (i) below, this
Agreement shall not so terminate if such notice is the first
such notice of termination delivered by the Executive
pursuant to this Section 4.2 and within such 15-day period
the Company shall have cured all such material breaches of
its obligations under this Agreement. A material breach by
the Company shall include, but not be limited to, (i) the
Company failing to cause the Executive to retain the title
specified in the first sentence of Section 2 or a more senior
title; (ii) the Executive being required to report to persons
other than those specified in Section 2; (iii) the Company
violating the provisions of Section 2 with respect to the
Executive's authority, functions, duties, powers or
responsibilities (whether or not accompanied by a change in
title); (iv) the Company requiring the Executive's primary
services to be rendered at a place other than at the
Company's principal executive offices in the New York City
metropolitan area; (v) the Company failing to cause the
successor to all or substantially all of the business and
assets of the Company expressly to assume the obligations of
the Company under this Agreement.
In the event of a termination pursuant to the
preceding paragraph of this Section 4.2, or in the event of a
termination of this Agreement or the term of employment or
the Advisory Period by the Company in breach of this
Agreement, the Executive shall be entitled to elect by
delivery of written notice to the Company, within 30 days
after written notice of such termination is given pursuant to
the preceding paragraph of this Section 4.2, either (A) to
cease being an employee of the Company and receive a lump sum
payment as provided in Section 4.2.2 or (B) to remain an
employee of the Company as provided in Section 4.2.3. After
the Executive makes such election, the following provisions
shall apply:
4.2.1 Regardless of the election made by
the Executive, (i) after the effective date of such
termination, the Executive shall have no further obligations
or liabilities to the Company whatsoever, except that
Sections 4.4 and 4.5 and Sections 6 through 12 shall survive
such termination, and (ii) the Executive shall be entitled to
receive any earned and unpaid Base Salary and deferred
compensation or Advisory Period compensation, as the case may
be, accrued through the date of such termination and if such
termination occurs during the term of employment, a pro rata
portion of the Executive's annual bonus for the year in which
such termination occurs through the date of such termination
based on the average of the regular annual bonus amounts
(excluding the amount of any special or spot bonuses) in
respect of the two calendar years for which the regular
annual bonus received by the Executive from the Company was
the greatest, all or a portion of which pro rata bonus will
be credited to the Account if the Executive previously
elected to defer all or any portion of the Executive's bonus
for such year pursuant to Section 3.4.
4.2.2 In the event the Executive shall
make the election provided in clause (A) above, the Company
shall pay to the Executive as damages in a lump sum within 30
days thereafter (provided that if the Executive was named in
the compensation table in the Company's then most recent
proxy statement, such lump sum payment shall be made within
30 days after the end of the calendar year in which such
notice of termination is given) an amount (discounted as
provided in the immediately following sentence) equal to all
amounts otherwise payable pursuant to Sections 3.1, 3.2, 3.3
and 13 for the year in which such termination occurs and for
each subsequent year through the end of the Advisory Period
(assuming that annual bonuses are required to be paid for
each such year during the term of employment, with each such
annual bonus being equal to the average of the regular annual
bonus amounts (excluding the amount of any special or spot
bonuses) in respect of the two calendar years for which the
regular annual bonus received by the Executive from the
Company was the greatest (assuming that no portion of such
bonus is deferred pursuant to Section 3.4). Any payments
required to be made to the Executive pursuant to this Section
4.2.2 upon such termination in respect of Sections 3.1, 3.2
and 13 and the credit to the Account provided for in the
penultimate sentence of Section 3.3 shall be discounted to
present value as of the date of payment from the times at
which such amounts would have become payable absent any such
termination at an annual discount rate for the relevant
periods equal to 120% of the "applicable Federal rate"
(within the meaning of Section 1274(d) of the Internal
Revenue Code of 1986 (the "Code"), in effect on the date of
such termination, compounded semi-annually, the use of which
rate is hereby elected by the parties hereto pursuant to
Treas. Reg. Section 1.280G-1 Q/A 32 (provided that, in the event
such election is not permitted under Section 280G of the Code
and the regulations thereunder, such other rate determined as
of such other date as is applicable for determining present
value under Section 280G of the Code shall be used).
4.2.3 In the event the Executive shall
make the election provided in clause (B) above, the term of
employment and the Advisory Period shall continue and the
Executive shall remain an employee of the Company through the
end of the Advisory Period and during such period the
Executive shall be entitled to receive, whether or not he
becomes disabled during such period but subject to Section 6,
(a) Base Salary at an annual rate equal to the greater of (i)
his Base Salary in effect immediately prior to the notice of
termination and (ii) the Base Salary provided for in Section
3.1, (b) an annual bonus (all or a portion of which may be
deferred by the Executive pursuant to Section 3.4) in respect
of each calendar year or portion thereof (in which case a pro
rata portion of such annual bonus will be payable) during the
term of employment equal to the average of the regular annual
bonus amounts (excluding the amount of any special or spot
bonuses) in respect of the two calendar years for which the
regular annual bonus received by the Executive from the
Company was the greatest as provided in Section 3.2, (c)
deferred compensation as provided in Section 3.3 and (d)
Advisory Period compensation as provided in Section 13.
Except as provided in the next sentence, if the Executive
accepts full-time employment with any other Entity during
such period or notifies the Company in writing of his
intention to terminate his status as an employee during such
period, then the term of employment and the Advisory Period
shall cease and the Executive shall cease to be an employee
of the Company effective upon the commencement of such
employment or the effective date of such termination as
specified by the Executive in such notice, whichever is
applicable, and the Executive shall be entitled to receive as
damages in a lump sum within 30 days after such commencement
or such effective date (provided that if the Executive was
named in the compensation table in the Company's then most
recent proxy statement, such lump sum payment shall be made
within 30 days after the end of the calendar year in which
such commencement or effective date occurred) an amount
(discounted as provided in the second sentence of Section
4.2.2) for the balance of the Base Salary, deferred
compensation (which shall be credited to the Account as
provided in the penultimate sentence of Section 3.3), regular
annual bonuses (assuming no deferral pursuant to Section 3.4)
and Advisory Period compensation the Executive would have
been entitled to receive pursuant to this Section 4.2.3 had
the Executive remained on the Company's payroll until the end
of the Advisory Period. Notwithstanding the preceding
sentence, if the Executive accepts employment with any
charitable or not-for-profit Entity or any family-owned
corporation, trust or partnership, then the Executive shall
be entitled to remain an employee of the Company and receive
the payments as provided in the first sentence of this
Section 4.2.3; and if the Executive accepts full-time
employment with any affiliate of the Company, then the
payments provided for in this Section 4.2.3 and the term of
employment and the Advisory Period shall cease and the
Executive shall not be entitled to any such lump sum payment.
For purposes of this Agreement, the term "affiliate" shall
mean any Entity which, directly or indirectly, controls, is
controlled by, or is under common control with, the Company.
4.3 Office Facilities. In the event the
Executive shall make the election provided in clause (B) of
Section 4.2, then for the period beginning on the day the
Executive makes such election and ending one year thereafter,
the Company shall, without charge to the Executive, make
available to the Executive office space at the Executive's
principal job location immediately prior to his termination
of employment, or other location reasonably close to such
location, together with secretarial services, office
facilities, services and furnishings, in each case reasonably
appropriate to an employee of the Executive's position and
responsibilities prior to such termination of employment.
4.4 Release. In partial consideration for
the Company's obligation to make the payments described in
Section 4.2, the Executive shall execute and deliver to the
Company a release in substantially the form attached hereto
as Annex B. The Company shall deliver such release to the
Executive within 10 days after the written notice of
termination is delivered pursuant to Section 4.2 and the
Executive shall execute and deliver such release to the
Company within 21 days after receipt thereof. If the
Executive shall fail to execute and deliver such release to
the Company within such 21 day period, or if the Executive
shall revoke his consent to such release as provided therein,
the Executive's term of employment shall terminate as
provided in Section 4.2, but the Executive shall receive, in
lieu of the payments provided for in said Section 4.2, a lump
sum cash payment in an amount determined in accordance with
the personnel policies of the Company relating to notice and
severance then generally applicable to employees with length
of service and compensation level of the Executive.
4.5 Mitigation. In the event of termination
of the term of employment and the Advisory Period by the
Executive pursuant to Section 4.2 as a result of a material
breach by the Company of any of its obligations hereunder, or
in the event of termination of the term of employment and the
Advisory Period by the Company in breach of this Agreement,
the Executive shall not be required to seek other employment
in order to mitigate his damages hereunder; provided,
however, that, notwithstanding the foregoing, if there are
any damages hereunder by reason of the events of termination
described above which are "contingent on a change" (within
the meaning of Section 280G(b)(2)(A)(i) of the Code), the
Executive shall be required to mitigate such damages
hereunder, including any such damages theretofore paid, but
not in excess of the extent, if any, necessary to prevent the
Company from losing any tax deductions to which it otherwise
would be entitled in connection with such damages if they
were not so "contingent on a change". In addition to any
obligation under the preceding sentence, and without dupli-
cation of any amounts required to be paid to the Company
thereunder, if any such termination occurs and the Executive,
whether or not required to mitigate his damages under the
preceding sentence, thereafter obtains other employment, the
total cash salary and bonus received in connection with such
other employment, whether paid to him or deferred for his
benefit, for any services through December 31, 1999 and for
services as a full-time employee from January 1, 2000 through
December 31, 2001, up to an amount equal to (x) the
discounted lump sum payment received by or for the account of
the Executive with respect to Base Salary, annual bonus and
deferred compensation under Section 3 and Advisory Period
compensation under Section 13 for such period, minus (y) the
amount of severance the Executive would have received in
accordance with the personnel policies of the Company if the
Executive had been job eliminated on the date of such
termination, provided that if such termination occurs during
the Advisory Period, the amount determined pursuant to this
clause (y) shall be zero, shall reduce, pro tanto, any amount
which the Company would otherwise be required to pay to the
Executive as a result of such termination and, to the extent
amounts have theretofore been paid to him as a result of such
termination, such cash salary and bonus shall be paid over to
the Company as received with respect to such period, but the
provisions of this sentence shall not apply to any type of
equity interest, bonus unit, phantom or restricted stock,
stock option, stock appreciation right or similar benefit
received as a result of such other employment. With respect
to the preceding sentences, any payments or rights to which
the Executive is entitled by reason of the termination of the
term of employment and the Advisory Period by the Executive
pursuant to Section 4.2 or in the event of the termination of
the term of employment by the Company in breach of this
Agreement shall be considered as damages hereunder. With
respect to the second preceding sentence, the Executive shall
in no event be required to pay the Company with respect to
any calendar year more than the discounted amount received by
him or credited to the Account with respect to Base Salary,
annual bonus and deferred compensation under Section 3 and
Advisory Period compensation under Section 13 for such year.
Any obligation of the Executive to mitigate his damages
pursuant to this Section 4.5 shall not be a defense or offset
to the Company's obligation to pay the Executive in full the
amounts provided in Section 4.2.2 or 4.2.3, as the case may
be, at the time provided therein or the timely and full
performance of any of the Company's other obligations under
this Agreement.
4.6 Payments. So long as the Executive
remains on the payroll of the Company or any subsidiary of
the Company, payments of salary, deferred compensation and
bonus required to be made pursuant to Section 4.2 shall be
made at the same times as such payments are made to senior
executives of the Company or such subsidiary.
5. Disability. If during the term of employment
and prior to any termination of this Agreement under Section
4.2, the Executive shall become physically or mentally
disabled, whether totally or partially, so that he is pre-
vented from performing his usual duties for a period of six
consecutive months, or for shorter periods aggregating six
months in any twelve-month period, the Company shall,
nevertheless, continue to pay the Executive his full
compensation and continue to credit the Account, when
otherwise due, as provided in Section 3 and Annex A, through
the last day of the sixth consecutive month of disability or
the date on which the shorter periods of disability shall
have equalled a total of six months in any twelve-month
period (such last day or date being referred to herein as the
"Disability Date"). If the Executive has not resumed his
usual duties on or prior to the Disability Date, the Company
shall pay the Executive a pro rata bonus for the year in
which the Disability Date occurs and shall pay the Executive
disability benefits for the period ending on the Term Date
(the "Disability Period"), in an amount equal to 75% of
(a) the Executive's Base Salary at the time the Executive
becomes disabled (and this reduced amount shall also be
deemed to be the Base Salary for purposes of determining the
amounts to be credited to his Account pursuant to Section 3.3
and Annex A as further disability benefits) and (b) the
average of the regular annual bonuses (excluding the amount
of any special or spot bonuses) in respect of the two
calendar years for which the annual bonus received by the
Executive from the Company was the greatest (all or a portion
of which may be deferred by the Executive pursuant to Section
3.4). If during the Disability Period the Executive shall
fully recover from his disability, the Company shall have the
right (exercisable within 60 days after notice from the
Executive of such recovery), but not the obligation, to
restore the Executive to full-time service at full compensa-
tion. If the Company elects to restore the Executive to
full-time service, then this Agreement shall continue in full
force and effect in all respects and the Term Date and
Advisory Period shall not be extended by virtue of the
occurrence of the Disability Period. If the Company elects
not to restore the Executive to full-time service, the
Executive shall be entitled to obtain other employment,
subject, however, to the following: (i) the Executive shall
be obligated to perform advisory services during any balance
of the Disability Period; and (ii) the provisions of Sec-
tions 9 and 10 shall continue to apply to the Executive
during the Disability Period. The advisory services referred
to in clause (i) of the immediately preceding sentence shall
consist of rendering advice concerning the business, affairs
and management of the Company as requested by the Chief
Executive Officer, the President or the Chief Operating
Officer of the Company but the Executive shall not be
required to devote more than five days (up to eight hours per
day) each month to such services, which shall be performed at
a time and place mutually convenient to both parties. Any
income from such other employment shall not be applied to
reduce the Company's obligations under this Agreement. The
Company shall be entitled to deduct from all payments to be
made to the Executive during the Disability Period pursuant
to this Section 5 an amount equal to all disability payments
received by the Executive during the Disability Period from
Workmen's Compensation, Social Security and disability
insurance policies maintained by the Company; provided,
however, that for so long as, and to the extent that,
proceeds paid to the Executive from such disability insurance
policies are not includible in his income for federal income
tax purposes, the Company's deduction with respect to such
payments shall be equal to the product of (i) such payments
and (ii) a fraction, the numerator of which is one and the
denominator of which is one less the maximum marginal rate of
federal income taxes applicable to individuals at the time of
receipt of such payments. All payments made under this
Section 5 after the Disability Date are intended to be
disability payments, regardless of the manner in which they
are computed. At the end of a Disability Period or if a
Disability Date occurs during the Advisory Period, the
Company shall pay to the Executive the full amount of the
Advisory Period compensation in accordance with Section 13
without regard to the preceding two sentences. Except as
otherwise provided in this Section 5, during the Disability
Period and the Advisory Period, the Executive shall be
entitled to all of the rights and benefits provided for in
this Agreement except that Section 4.2 shall not apply during
the Disability Period or the Advisory Period and the term of
employment and the Advisory Period shall end and the
Executive shall cease to be an employee of the Company at the
end of the Advisory Period and shall not be entitled to
notice and severance or to receive or be paid for any accrued
vacation time or unused sabbatical.
6. Death. Upon the death of the Executive during
the term of employment, this Agreement and all obligations of
the Company to make any payments under Sections 3, 4 and 5
shall terminate except that (i) the Executive's estate (or a
designated beneficiary) shall be entitled to receive, to the
extent being received by the Executive immediately prior to
his death, Base Salary and deferred compensation or, if
applicable, Advisory Period compensation, to the last day of
the month in which his death occurs and bonus compensation
(at the time bonuses are normally paid) based on the average
of the regular annual bonuses (excluding the amount of any
special or spot bonuses) in respect of the two calendar years
for which the annual bonus received by the Executive from the
Company was the greatest, but prorated according to the
number of whole or partial months the Executive was employed
by the Company in such calendar year, and (ii) the Account
shall be liquidated and revalued as provided in Annex A as of
the date of the Executive's death (except that all taxes
shall be computed and charged to the Account as of such date
of death to the extent not theretofore so computed and
charged) and the entire balance thereof (plus any amount due
under the last paragraph of Section A.6 of Annex A) shall be
paid to the Executive's estate (or a designated beneficiary)
in a single payment not later than 75 days following such
date of death.
7. Life Insurance. The Company shall maintain
$4,000,000 face amount of split ownership life insurance on
the life of the Executive, to be owned by the Executive or
the trustees of a trust for the benefit of the Executive's
spouse and/or descendants. Until the death of the Executive,
and irrespective of any termination of this Agreement except
pursuant to Section 4.1, the Company shall pay all premiums
on such policy and shall maintain such policy (without
reduction of the face amount of the coverage). At the death
of the Executive, or on the earlier surrender of such policy
by the owner, the Executive agrees that the owner of the
policy shall promptly pay to the Company an amount equal to
the premiums on such policy paid by the Company (net of
(i) tax benefits, if any, to the Company in respect of
payments of such premiums, (ii) any amounts payable by the
Company which had been paid by or on behalf of the Executive
with respect to such insurance, (iii) dividends received by
the Company in respect of such premiums, but only to the
extent such dividends are not used to purchase additional
insurance on the life of the Executive, and (iv) any unpaid
borrowings by the Company on the policy), whether before,
during or after the term of this Agreement. The owner of the
policy from time to time shall execute, deliver and maintain
a customary split dollar insurance and collateral assignment
form, assigning to the Company the proceeds of such policy
but only to the extent necessary to secure the reimbursement
obligation contained in the preceding sentence. The life
insurance provided for in this Section 7 shall be in addition
to any other insurance hereafter provided by the Company on
the life of the Executive under any group or individual
policy.
8. Other Benefits.
8.1 General Availability. To the extent that
(a) the Executive is eligible under the general provisions
thereof and (b) the Company maintains such plan or program
for the benefit of its senior executives, during the term of
employment and the Advisory Period and so long as the
Executive is an employee of the Company, the Executive shall
be eligible to participate in any pension, profit-sharing,
stock option or similar plan or program and in any group
insurance, hospitalization, medical, dental, accident,
disability or similar plan or program of the Company now
existing or established hereafter. In addition, so long as
the Executive is an employee of the Company during the term
of employment (but not the Advisory Period) the Executive
shall be entitled to receive other benefits generally
available to all senior executives of the Company to the
extent the Executive is eligible under the general provisions
thereof, including, without limitation, to the extent
maintained in effect by the Company for its senior
executives, an automobile allowance and financial services.
8.2 Benefits After a Termination or
Disability. During the period the Executive remains on the
payroll of the Company after a termination pursuant to
Section 4.2 and during the Disability Period and the Advisory
Period the Executive shall continue to be eligible to receive
the benefits required to be provided to the Executive under
Section 8.1 to the extent such benefits are maintained in
effect by the Company for its senior executives; provided,
however, the Executive shall not be entitled to any
additional awards or grants under any stock option,
restricted stock or other stock based incentive plan. The
Executive shall continue to be an employee of the Company for
purposes of any stock option and restricted shares agreements
and any other incentive plan awards during the term of
employment and the Advisory Period and until such time as the
Executive shall leave the payroll of the Company. At the
time the Executive's term of employment and Advisory Period
terminates and he leaves the payroll of the Company pursuant
to the provisions of Section 4.1, 4.2, 5 or 6, the
Executive's rights to benefits and payments under any benefit
plans or any insurance or other death benefit plans or
arrangements of the Company or under any stock option,
restricted stock, stock appreciation right, bonus unit,
management incentive or other plan of the Company shall be
determined, subject to the other terms and provisions of this
Agreement, in accordance with the terms and provisions of
such plans and any agreements under which such stock options,
restricted stock or other awards were granted; provided,
however, that notwithstanding the foregoing or any more
restrictive provisions of any such plan or agreement (but
without affecting any less restrictive or more favorable to
the Executive provisions of any such plan or agreement), if
the Executive leaves the payroll of the Company as a result
of a termination pursuant to Section 4.2, then all stock
options granted to the Executive by the Company shall (i)
become immediately exercisable at the time the Executive
shall leave the payroll of the Company pursuant to
Section 4.2 and (ii) shall remain exercisable (but not beyond
the term thereof) during the remainder of the term of
employment and the Advisory Period and for a period of three
months thereafter.
8.3 Payments in Lieu of Other Benefits. In
the event the term of employment and the Executive's
employment with the Company is terminated pursuant to
Sections 4.1, 4.2, 5 or 6 (and regardless of whether the
Executive elects clause (A) or (B) as provided in Section
4.2), the Executive shall not be entitled to notice and
severance or to be paid for any accrued vacation time or
unused sabbatical, the payments provided for in such Sections
being in lieu thereof.
9. Protection of Confidential Information; Non-
Compete. The provisions of Section 9.2 shall continue to
apply through the latest of (i) the end of the Advisory
Period (but not later than three years after the effective
date of any termination of this Agreement pursuant to Section
4.2) or (ii) the date the Executive ceases to be an employee
of the Company and leaves the payroll of the Company for any
reason. The provisions of Sections 9.1 and 9.3 shall
continue to apply until three years after the latest of the
events described in the preceding sentence.
9.1 Confidentiality Covenant. The Executive
acknowledges that his employment by the Company (which, for
purposes of this Section 9 shall mean Time Warner Inc. and
its affiliates) will, throughout the term of employment and
the Advisory Period, bring him into close contact with many
confidential affairs of the Company, including information
about costs, profits, markets, sales, products, key person-
nel, pricing policies, operational methods, technical pro-
cesses and other business affairs and methods and other
information not readily available to the public, and plans
for future development. The Executive further acknowledges
that the services to be performed under this Agreement are of
a special, unique, unusual, extraordinary and intellectual
character. The Executive further acknowledges that the
business of the Company is international in scope, that its
products are marketed throughout the world, that the Company
competes in nearly all of its business activities with other
Entities that are or could be located in nearly any part of
the world and that the nature of the Executive's services,
position and expertise are such that he is capable of compet-
ing with the Company from nearly any location in the world.
In recognition of the foregoing, the Executive covenants and
agrees:
9.1.1 The Executive shall keep secret
all confidential matters of the Company and shall not
intentionally disclose such matters to anyone outside of the
Company, either during or after the term of employment and
the Advisory Period, except with the Company's written
consent, provided that (i) the Executive shall have no such
obligation to the extent such matters are or become publicly
known other than as a result of the Executive's breach of his
obligations hereunder and (ii) the Executive may, after
giving prior notice to the Company to the extent practicable
under the circumstances, disclose such matters to the extent
required by applicable laws or governmental regulations or
judicial or regulatory process;
9.1.2 The Executive shall deliver
promptly to the Company on termination of his employment by
the Company, or at any other time the Company may so request,
at the Company's expense, all memoranda, notes, records,
reports and other documents (and all copies thereof) relating
to the Company's business, which he obtained while employed
by, or otherwise serving or acting on behalf of, the Company
and which he may then possess or have under his control; and
9.1.3 If the term of employment is
terminated pursuant to Section 4.1 or 4.2 for a period of one
year after such termination, without the prior written
consent of the Company, the Executive shall not employ, and
shall not cause any Entity of which he is an affiliate to
employ, any person who was a full-time executive employee of
the Company at the date of such termination or within six
months prior thereto.
9.2 Non-Compete. The Executive shall not,
directly or indirectly, without the prior written consent of
the Chief Executive Officer, the President or the Chief
Operating Officer of the Company, render any services to any
person or Entity or acquire any interest of any type in any
Entity, that might be deemed in competition with the Company;
provided, however, that the foregoing shall not be deemed to
prohibit the Executive from (a) acquiring, solely as an
investment and through market purchases, securities of any
Entity which are registered under Section 12(b) or 12(g) of
the Securities Exchange Act of 1934 and which are publicly
traded, so long as he is not part of any control group of
such Entity and such securities, if converted, do not
constitute more than one percent (1%) of the outstanding
voting power of that Entity, (b) acquiring, solely as an
investment, any securities of an Entity (other than an Entity
that has outstanding securities covered by the preceding
clause (a) so long as he remains a passive investor in such
Entity and does not become part of any control group thereof
and so long as such Entity is not, directly or indirectly, in
competition with the Company, (c) serving as a director of
any Entity that is not in competition with the Company or (d)
during the Advisory Period, being a partner in or of counsel
to a law firm that represents any person or Entity that is in
competition with the Company so long as the Executive does
not personally provide or assist in the provision of services
to any such person or Entity. For purposes of the foregoing,
a person or Entity shall be deemed to be in competition with
the Company if such person or it engages in any line of
business that is substantially the same as either (i) any
line of operating business which the Company engages in,
conducts or, to the knowledge of the Executive, has
definitive plans to engage in or conduct, or (ii) any
operating business that is engaged in or conducted by the
Company and as to which, to the knowledge of the Executive,
the Company covenants in writing, in connection with the
disposition of such business, not to compete therewith.
9.3 Specific Remedy. In addition to such
other rights and remedies as the Company may have at equity
or in law with respect to any breach of this Agreement, if
the Executive commits a material breach of any of the provi-
sions of Section 9.1, the Company shall have the right and
remedy to have such provisions specifically enforced by any
court having equity jurisdiction, it being acknowledged and
agreed that any such breach or threatened breach will cause
irreparable injury to the Company and that money damages will
not provide an adequate remedy to the Company.
9.4 Liquidated Damages. If the Executive
commits a material breach of the provisions of Section 9.2,
the Executive shall pay to the Company as liquidated damages
an amount equal to two and one-half times the Executive's
then current Base Salary, or if the Executive is not employed
by the Company at the time of such breach or such breach
occurs during the Advisory Period, an amount equal to two and
one-half times the most recent Base Salary paid to the
Executive by the Company. The Company shall be entitled to
offset any amounts owed by the Executive to the Company under
this Section 9.4 against any amounts owed by the Company to
the Executive under any provision of this Agreement or
otherwise, including without limitation, amounts payable to
the Executive under Sections 4.2. The Company and the
Executive agree that it is impossible to determine with any
reasonable accuracy the amount of prospective damages to the
Company upon a breach of Section 9.2 by the Executive and
further agree that the damages set forth in this Section 9.4
are reasonable, and not a penalty, based upon the facts and
circumstances of the parties and with due regard to future
expectations.
10. Ownership of Work Product. The Executive
acknowledges that during the term of employment and the
Advisory Period, he may conceive of, discover, invent or
create inventions, improvements, new contributions, literary
property, material, ideas and discoveries, whether patentable
or copyrightable or not (all of the foregoing being
collectively referred to herein as "Work Product"), and that
various business opportunities shall be presented to him by
reason of his employment by the Company. The Executive
acknowledges that all of the foregoing shall be owned by and
belong exclusively to the Company and that he shall have no
personal interest therein, provided that they are either
related in any manner to the business (commercial or experi-
mental) of the Company, or are, in the case of Work Product,
conceived or made on the Company's time or with the use of
the Company's facilities or materials, or, in the case of
business opportunities, are presented to him for the possible
interest or participation of the Company. The Executive
shall (i) promptly disclose any such Work Product and
business opportunities to the Company; (ii) assign to the
Company, upon request and without additional compensation,
the entire rights to such Work Product and business opportu-
nities; (iii) sign all papers necessary to carry out the
foregoing; and (iv) give testimony in support of his inven-
torship or creation in any appropriate case. The Executive
agrees that he will not assert any rights to any Work Product
or business opportunity as having been made or acquired by
him prior to the date of this Agreement except for Work
Product or business opportunities, if any, disclosed to and
acknowledged by the Company in writing prior to the date
hereof.
11. Notices. All notices, requests, consents and
other communications required or permitted to be given under
this Agreement shall be effective only if given in writing
and shall be deemed to have been duly given if delivered
personally or sent by prepaid telegram, or mailed first-
class, postage prepaid, by registered or certified mail, as
follows (or to such other or additional address as either
party shall designate by notice in writing to the other in
accordance herewith):
11.1 If to the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: Chief Executive Officer
(with a copy, similarly addressed
but Attention: Senior Vice President-
Administration)
11.2 If to the Executive, to his residence
address set forth on the records of the
Company.
12. General.
12.1 Governing Law. This Agreement shall be
governed by and construed and enforced in accordance with the
substantive laws of the State of New York applicable to
agreements made and to be performed entirely in New York.
12.2 Captions. The section headings con-
tained herein are for reference purposes only and shall not
in any way affect the meaning or interpretation of this
Agreement.
12.3 Entire Agreement. This Agreement,
including Annexes A, and B, sets forth the entire agreement
and understanding of the parties relating to the subject
matter of this Agreement and supersedes all prior agreements,
arrangements and understandings, written or oral, between the
parties, including without limitation, the Prior Agreement.
12.4 No Other Representations. No represen-
tation, 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 representa-
tion, promise or inducement not so set forth.
12.5 Assignability. This Agreement and the
Executive's rights and obligations hereunder may not be
assigned by the Executive. The Company may assign its rights
together with its obligations hereunder, in connection with
any sale, transfer or other disposition of all or
substantially all of its business and assets; and such rights
and obligations shall inure to, and be binding upon, any
successor to all or substantially all of the business and
assets of the Company, whether by merger, purchase of stock
or assets or otherwise. The Company shall cause such
successor expressly to assume such obligations.
12.6 Amendments; Waivers. This Agreement may
be amended, modified, superseded, cancelled, renewed or
extended and the terms or covenants hereof may be waived only
by written instrument executed by both of the parties hereto,
or in the case of a waiver, by the party waiving compliance.
The failure of either party at any time or times to require
performance of any provision hereof shall in no manner affect
such party's right at a later time to enforce the same. No
waiver by either party of the breach of any term or covenant
contained in this Agreement, in any one or more instances,
shall be deemed to be, or construed as, a further or
continuing waiver of any such breach, or a waiver of the
breach of any other term or covenant contained in this
Agreement.
12.7 Resolution of Disputes. Any dispute or
controversy arising with respect to this Agreement may be
referred by either party to ENDISPUTE for resolution in
arbitration in accordance with the rules and procedures of
ENDISPUTE. Any such proceedings shall take place in New York
City before a single arbitrator (rather than a panel of
arbitrators), pursuant to any streamlined or expedited
(rather than a comprehensive) arbitration process, before a
nonjudicial (rather than a judicial) arbitrator, and in
accordance with an arbitration process which, in the judgment
of such arbitrator, shall have the effect of reasonably
limiting or reducing the cost of such arbitration. The
resolution of any such dispute or controversy by the
arbitrator appointed in accordance with the procedures of
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,
ENDISPUTE is not in business or is no longer providing
arbitration services, then the American Arbitration
Association shall be substituted for ENDISPUTE for the
purposes of the foregoing provisions of this Section 12.7.
If the Executive shall be the prevailing party in such
arbitration, The Company shall promptly pay, upon demand of
the Executive, all legal fees, court costs and other costs
and expenses incurred by the Executive in any legal action
seeking to enforce the award in any court.
12.8 Beneficiaries. Whenever this Agreement
provides for any payment to the Executive's estate, such
payment may be made instead to such beneficiary or
beneficiaries as the Executive may designate by written
notice to the Company. The Executive shall have the right to
revoke any such designation and to redesignate a beneficiary
or beneficiaries by written notice to the Company (and to any
applicable insurance company) to such effect.
12.9 No Conflict. The Executive represents
and warrants to the Company that this Agreement is legal,
valid and binding upon the Executive and the execution of
this Agreement and the performance of the Executive's
obligations hereunder does not and will not constitute a
breach of, or conflict with the terms or provisions of, any
agreement or understanding to which the Executive is a party
(including, without limitation, any other employment
agreement). The Company represents and warrants to the
Executive that this Agreement is legal, valid and binding
upon the Company and the execution of this Agreement and the
performance of the Company's obligations hereunder does not
and will not constitute a breach of, or conflict with the
terms or provisions of, any agreement or understanding to
which the Company is a party.
12.10 Withholding Taxes. Payments made to
the Executive pursuant to this Agreement shall be subject to
withholding and social security taxes and other ordinary and
customary payroll deductions.
12.11 No Offset. Except as provided in
Section 9.4 of this Agreement, Neither the Company nor the
Executive shall have any right to offset any amounts owed by
one party hereunder against amounts owed or claimed to be
owed to such party, whether pursuant to this Agreement or
otherwise, and the Company and the Executive shall make all
the payments provided for in this Agreement in a timely
manner.
12.12 Severability. If any provision of this
Agreement shall be held invalid, the remainder of this
Agreement shall not be affected thereby; provided, however,
that the parties shall negotiate in good faith with respect
to equitable modification of the provision or application
thereof held to be invalid. To the extent that it may
effectively do so under applicable law, each party hereby
waives any provision of law which renders any provision of
this Agreement invalid, illegal or unenforceable in any
respect.
12.13 Definitions. The following terms are
defined in this Agreement in the places indicated:
Account - Section 3.3
Account Retained Income - Section A.6 of Annex A
Advisory Period - Section 13
affiliate - Section 4.2.3
Applicable Tax Law - Section A.5 of Annex A
Base Salary - Section 3.1
cause - Section 4.1
Code - Section 4.2.2
Company - the first paragraph on page 1
and Section 9.1
Disability Date - Section 5
Disability Period - Section 5
Effective Date - the first paragraph on page 1
eligible securities - Section A.1 of Annex A
Entity - Section 2
Executive - the first paragraph in page 1
fair market value - Section A.1 of Annex A
Investment Advisor - Section A.1 of Annex A
Other Period Deferred Amount - Section A.6 of
Annex A
Pay-Out Period - Section A.6 of Annex A
Prior Account - Section 3.5
Prior Agreement - the second paragraph on page 1
senior executives - Section 3.1
Term Date - the second paragraph on page 1
term of employment - Section 1
Valuation Date - Section A.6 of Annex A
Work Product - Section 10
13. Advisory Services. The Executive shall render
the advisory services described in this Section for the
period beginning on January 1, 2000 and ending on December
31, 2001 (the "Advisory Period"). During the Advisory
Period, the Executive will provide such advisory services
concerning the business, affairs and management of the
Company as may be requested by the Board of Directors, the
Chief Executive officer or the President of the Company, but
shall not be required to devote more than five days (up to
eight hours per day) each month to such services, which shall
be performed at a time and place mutually convenient to both
parties and consistent with the Executive's other activities.
If at any time during the Advisory Period, the Executive
engages in other full-time employment, the Executive shall
not be deemed to be in breach of this Section 14, but unless
such employment consists of the Executive providing services
to one or more (i) charitable or non-profit organizations or
(ii) family-owned corporations, trusts, or partnerships, the
term of employment and the Advisory Period shall terminate,
the Executive shall leave the payroll of the Company and the
Company shall have no further obligations under this
Agreement other than with respect to earned and unpaid
compensation and benefits. Notwithstanding the foregoing,
but subject to Section 9 of this Agreement, during the
Advisory Period the Executive may provide part-time services
to third parties (including serving as a member of the Board
of Directors of any such party). During the Advisory Period,
the Executive shall be entitled to receive compensation in an
amount equal to $400,000 per annum and shall continue to be
entitled to the benefits described in Section 8 hereof;
provided, however, that the Executive shall not be entitled
or (iii) to a driver or automobile allowance or financial
counseling during the Advisory Period, shall not accrue any
vacation time during the Advisory Period and shall not be
entitled to any severance pay at the end thereof. In
addition, during the first year of the Advisory Period the
Company shall provide the Executive with an office, office
facilities and a secretary at the Company's principal
executive headquarters or other location reasonably close to
such headquarters in mid-town Manhattan.
IN WITNESS WHEREOF, the parties have duly executed
this Agreement as of the date first above written.
TIME WARNER INC.
By ___________________________
Richard D. Parsons
President
______________________________
Peter R. Haje
<PAGE>
ANNEX A
Deferred Compensation Account
A.1 Investments. Funds credited to the Account,
at the Company's option, shall either be actually invested
and reinvested, or deemed invested and reinvested, in an
account in securities selected from time to time by an
investment advisor designated from time to time by the
Company (the "Investment Advisor"), substantially all of
which securities shall be "eligible securities". The
designation from time to time by the Company of an Investment
Advisor shall be subject to the approval of the Executive,
which approval shall not be withheld unreasonably. "Eligible
securities" are common and preferred stocks, warrants to
purchase common or preferred stocks, put and call options,
and corporate or governmental bonds, notes and debentures,
either listed on a national securities exchange or for which
price quotations are published in newspapers of general
circulation, including The Wall Street Journal, and
certificates of deposit. Eligible securities shall not
include the common or preferred stock, any warrants, options
or rights to purchase common or preferred stock or the notes
or debentures of the Company or any corporation or other
entity of which the Company owns directly or indirectly 5% or
more of any class of outstanding equity securities. The
Investment Advisor shall have the right, from time to time,
to designate eligible securities which shall be either
actually purchased and sold, or deemed to have been purchased
or sold, for the Account on the date of reference. Such
purchases may be made or deemed to be made on margin;
provided that the Company may, from time to time, by written
notice to the Executive and the Investment Advisor, limit or
prohibit margin purchases in any manner it deems prudent and,
upon three business days written notice to the Executive and
the Investment Advisor, cause all eligible securities
theretofore purchased or deemed purchased on margin to be
sold or deemed sold. The Investment Advisor shall notify the
Executive in writing of each transaction within five business
days thereafter and shall render to the Executive written
monthly reports as to the current status of his Account. In
the case of any purchase, the Account shall be charged with a
dollar amount equal to the quantity and kind of securities
purchased or deemed to have been purchased multiplied by the
fair market value of such securities on the date of reference
and shall be credited with the quantity and kind of
securities so purchased or deemed to have been purchased. In
the case of any sale, the Account shall be charged with the
quantity and kind of securities sold or deemed to have been
sold, and shall be credited with a dollar amount equal to the
quantity and kind of securities sold or deemed to have been
sold multiplied by the fair market value of such securities
on the date of reference. Such charges and credits to the
Account shall take place immediately upon the consummation of
the transactions to which they relate. As used herein "fair
market value" means either (i) if the security is actually
purchased or sold by the Company on the date of reference,
the actual purchase or sale price per security to the Company
or (ii) if the security is not purchased or sold on the date
of reference, in the case of a listed security, the closing
price per security on the date of reference, or if there were
no sales on such date, then the closing price per security on
the nearest preceding day on which there were such sales,
and, in the case of an unlisted security, the mean between
the bid and asked prices per security on the date of
reference, or if no such prices are available for such date,
then the mean between the bid and asked prices per security
on the nearest preceding day for which such prices are
available. If no bid or asked price information is available
with respect to a particular security, the price quoted to
the Company as the value of such security on the date of
reference (or the nearest preceding date for which such
information is available) shall be used for purposes of
administering the Account, including determining the fair
market value of such security. The Account shall be charged
currently with all interest paid or deemed payable by the
Account with respect to any credit extended or deemed
extended to the Account. Such interest shall be charged to
the Account, for margin purchases actually made, at the rates
and times actually paid by the Account and, for margin
purchases deemed to have been made, at the rates and times
then charged by an investment banking firm designated by the
Company with which the Company does significant business.
The Company may, in the Company's sole discretion, from time
to time serve as the lender with respect to any margin
transactions by notice to the then Investment Advisor and in
such case interest shall be charged at the rate and times
then charged by an investment banking firm designated by the
Company with which the Company does significant business.
Brokerage fees shall be charged to the Account, for
transactions actually made, at the rates and times actually
paid and, for transactions deemed to have been made, at the
rates and times then charged for transactions of like size
and kind by an investment banking firm designated by the
Company with which the Company does significant business.
A.2 Dividends and Interest. The Account
shall be credited with dollar amounts equal to cash dividends
paid from time to time upon the stocks held or deemed to be
held therein. Dividends shall be credited as of the payment
date. The Account shall similarly be credited with interest
payable on interest bearing securities held or deemed to be
held therein. Interest shall be credited as of the payment
date, except that in the case of purchases of interest-
bearing securities the Account shall be charged with the
dollar amount of interest accrued to the date of purchase,
and in the case of sales of such interest-bearing securities
the Account shall be credited with the dollar amount of
interest accrued to the date of sale. All dollar amounts of
dividends or interest credited to the Account pursuant to
this Section A.2 shall be charged with all taxes thereon
deemed payable by the Company (as and when determined
pursuant to Section A.5). The Investment Advisor shall have
the same right with respect to the investment and
reinvestment of net dividends and net interest as he has with
respect to the balance of the Account.
A.3 Adjustments. The Account shall be
equitably adjusted to reflect stock dividends, stock splits,
recapitalizations, mergers, consolidations, reorganizations
and other changes affecting the securities held or deemed to
be held therein.
A.4 Obligation of the Company. The Company
shall not be required to purchase, hold or dispose of any of
the securities designated by the Investment Advisor; however,
whether or not it elects to purchase or sell any such
securities, such transactions shall be deemed to have been
made and the Account shall be charged with all taxes
(including stock transfer taxes), interest, brokerage fees
and investment advisory fees, if any, deemed payable by the
Company and attributable to such transactions (in all cases
net after any tax benefits that the Company would be deemed
to derive from the payment thereof, as and when determined
pursuant to Section A.5), but no other costs of the Company.
The only obligation of the Company is its contractual
obligation to make payments to the Executive measured as set
forth below. To the extent that the Company, in its
discretion, purchases or holds any of the securities
designated by the Investment Advisor, the same shall remain
the sole property of the Company, subject to the claims of
its general creditors, and shall not be deemed to form part
of the Account. Neither the Executive nor his legal
representative nor any beneficiary designated by him shall
have any right, other than the right of an unsecured general
creditor, against the Company in respect of any portion of
the Account.
A.5 Taxes. The Account shall be charged with
all federal, state and local taxes deemed payable by the
Company with respect to income recognized upon the dividends
and interest received or deemed to have been received by the
Account pursuant to Section A.2 and gains recognized upon
sales of any of the securities which are deemed to have been
sold pursuant to Section A.1 or A.6. The Account shall be
credited with the amount of the tax benefit received by the
Company as a result of any payment of interest actually made
or deemed to be made pursuant to Section A.1 or A.2 and as a
result of any payment of brokerage fees and investment
advisory fees made or deemed to be made pursuant to Section
A.1. If any of the sales of the securities which are deemed
to have been sold pursuant to Section A.1 or A.6 results in a
loss to the Account, such net loss shall be deemed to offset
the income and gains referred to in the second preceding
sentence (and thus reduce the charge for taxes referred to
therein) to the extent then permitted under the Internal
Revenue Code of 1986, as amended from time to time, and under
applicable state and local income and franchise tax laws
(collectively referred to as "Applicable Tax Law"); provided,
however, that for the purposes of this Section A.5 the
Account shall, except as provided in the third following
sentence, be deemed to be a separate corporate taxpayer and
the losses referred to above shall be deemed to offset only
the income and gains referred to in the second preceding
sentence. Such losses shall be carried back and carried
forward within the Account to the extent permitted by
Applicable Tax Law in order to minimize the taxes deemed
payable on such income and gains within the Account. For the
purposes of this Section A.5, all charges and credits to the
Account for taxes shall be deemed to be made as of the end of
the Company's taxable year during which the transactions,
from which the liabilities for such taxes are deemed to have
arisen, are deemed to have occurred. Notwithstanding the
foregoing, if and to the extent that in any year there is a
net loss in the Account that cannot be offset against income
and gains in any prior year, then an amount equal to the tax
benefit to the Company of such net loss (after such net loss
is reduced by the amount of any net capital loss of the
Account for such year) shall be credited to the Account on
the last day of such year. If and to the extent that any
such net loss of the Account shall be utilized to determine a
credit to the Account pursuant to the preceding sentence, it
shall not thereafter be carried forward under this Section
A.5. For purposes of determining taxes payable by the
Company under any provision of this Annex A it shall be
assumed that the Company is a taxpayer and pays all taxes at
the maximum marginal rate of federal income taxes and state
and local income and franchise taxes (net of assumed federal
income tax benefits) applicable to business corporations and
that all of such dividends, interest, gains and losses are
allocable to its corporate headquarters, which are currently
located in New York City.
A.6 Payments. Subject to the provisions of
Section A.7, payments of deferred compensation shall be made
as provided in this Section A.6. Deferred compensation shall
be paid monthly for a period of 60 months (the "Pay-Out
Period") commencing on the first day of the month after the
end of the Advisory Period. On each payment date, the
Account shall be charged with the dollar amount of such
payment. On each payment date, the amount of cash held or
deemed to be held in the Account shall be not less than the
payment then due and the Company may select the securities to
be sold or deemed sold to provide such cash if the Investment
Advisor shall fail to do so on a timely basis. The amount of
any taxes payable with respect to any such sales shall be
computed, as provided in Section A.5 above, and deducted from
the Account, as of the end of the taxable year of the Company
during which such sales are deemed to have occurred. Solely
for the purpose of determining the amount of monthly payments
during the Pay-Out Period, the Account shall be valued on the
fifth trading day preceding the first monthly payment of each
year of the Pay-Out Period, or more frequently at the
Company's election (the "Valuation Date"), by adjusting all
of the securities held or deemed to be held in the Account to
their fair market value (net of the tax adjustment that would
be made thereon if sold, as estimated by the Company) and by
deducting from the Account the amount of all outstanding
indebtedness and all amounts with respect to which the
Executive has elected pursuant to clause (ii) of Section A.7
to receive payments at times different from the time provided
in this Section A.6 (the "Other Period Deferred Amount").
The extent, if any, by which the Account, valued as provided
in the immediately preceding sentence (but not reduced by the
Other Period Deferred Amount to the extent not theretofore
distributed), exceeds the aggregate amount of credits to the
Account pursuant to Sections 3.3, 3.4 and 3.5 of the
Agreement as of each Valuation Date and not theretofore
distributed or deemed distributed pursuant to this Section
A.6 is herein called "Account Retained Income". The amount
of each payment for the year, or such shorter period as may
be determined by the Company, of the Pay-Out Period
immediately succeeding such Valuation Date, including the
payment then due, shall be determined by dividing the aggre-
gate value of the Account, as valued and adjusted pursuant to
the second preceding sentence, by the number of payments
remaining to be paid in the Pay-Out Period, including the
payment then due; provided that each payment made shall be
deemed made first out of Account Retained Income (to the
extent remaining after all prior distributions thereof since
the last Valuation Date). The balance of the Account
(excluding the Other Period Deferred Amount), after all the
securities held or deemed to have been held therein have been
sold or deemed to have been sold and all indebtedness
liquidated, shall be paid to the Executive in the final
payment, which shall be decreased by deducting therefrom the
amount of all taxes attributable to the sale of any
securities held or deemed to have been held in the Account
since the end of the preceding taxable year of the Company,
which taxes shall be computed as of the date of such payment.
If this Agreement is terminated by the Company
pursuant to Section 4.1 or if the Executive terminates this
Agreement or the term of employment in breach of this
Agreement, the Account shall be valued as of the later of (i)
December 31, 2001 or (ii) twelve months after termination of
the Executive's employment with the Company, and the balance
of the Account, after the securities held or deemed to have
been held therein have been sold or deemed to have been sold
and all related indebtedness liquidated, shall be paid to the
Executive as soon as practicable and in any event within 75
days following the later of such dates in a final lump sum
payment, which shall be decreased by deducting therefrom the
amount of all taxes attributable to the sale of any
securities held or deemed to have been held in the Account
since the end of the preceding taxable year of the Company,
which taxes shall be computed as of the date of such payment.
Payments made pursuant to this paragraph shall be deemed made
first out of Account Retained Income.
If the Executive becomes disabled within the
meaning of Section 5 of the Agreement and is not thereafter
returned to full-time employment with the Company as provided
in said Section 5, then deferred compensation shall be paid
monthly during the Pay-Out Period commencing on the first day
of the month following the end of the Disability Period in
accordance with the provisions of the first paragraph of this
Section A.6.
If the Executive shall die at any time whether
during or after the term of employment, the Account shall be
valued as of the date of the Executive's death and the
balance of the Account shall be paid to the Executive's
estate or beneficiary within 75 days of such death in
accordance with the provisions of the second preceding
paragraph.
Within 90 days after the end of each taxable year
of the Company in which payments have been made from the
Account and at the time of the final payment made from the
Account, the Company shall compute and shall credit to the
Account, the amount of the tax benefit assumed to be received
by it from the payment to the Executive of amounts of Account
Retained Income included in any such payment. No additional
credits shall be made to the Account pursuant to the
preceding sentence in respect of the amounts credited to the
Account pursuant to the preceding sentence. Notwithstanding
any provision of this Section A.6, the Executive shall not be
entitled to receive pursuant to this Annex A an aggregate
amount that shall exceed the sum of (i) all credits made to
the Account pursuant to Sections 3.3, 3.4 and 3.5 of the
Agreement to which this Annex is attached, (ii) the net
cumulative amount (positive or negative) of all income,
gains, losses, interest and expenses charged or credited to
the Account pursuant to this Annex A (excluding credits made
pursuant to the second preceding sentence), after all credits
and charges to the Account with respect to the tax benefits
or burdens thereof, and (iii) an amount equal to the tax
benefit to the Company from the payment of the amount (if
positive) determined under clause (ii) above; and the final
payment(s) otherwise due may be adjusted or eliminated
accordingly. In determining the tax benefit to the Company
under clause (iii) above, the Company shall be deemed to have
made the payments under clause (ii) above with respect to the
same taxable years and in the same proportions as payments of
Account Retained Income were actually made from the Account.
Except as otherwise provided in this paragraph, the
computation of all taxes and tax benefits referred to in this
Section A.6 shall be determined in accordance with Section
A.5 above.
A.7 Other Payment Methods. Notwithstanding
the foregoing provisions of this Annex A, the Executive may,
prior to the commencement of any calendar year elect by
written notice to the Company to cause (i) all or any portion
of the amounts otherwise to be credited to the Account in
such year under Section 3.3 of the Agreement not to be so
credited but to be paid to the Executive on the date(s) such
credits otherwise would have been made thereunder and/or (ii)
all or any portion of the amounts to be credited to the
Account under Section 3.3 of the Agreement in such year
(after giving effect to clause (i) above) to be payable from
the Account at times different from those provided in Section
A.6 above but not earlier than the dates on which such
amounts were to be credited to the Account.
<PAGE>
ANNEX B
RELEASE
Pursuant to the terms of the Employment Agreement
dated [Date] between TIME WARNER INC., a Delaware corporation
(the "Company"), 75 Rockefeller Plaza, York, New York 10019
and the undersigned (the "Agreement"), and in consideration
of the payments made to me and other benefits to be received
by me pursuant thereto, I, [Name], being of lawful age, do
hereby release and forever discharge the Company and its
officers, shareholders, subsidiaries, agents, and employees,
from any and all actions, causes of action, claims, or
demands for general, special or punitive damages, attorney's
fees, expenses, or other compensation, which in any way
relate to or arise out of my employment with the Company or
any of its subsidiaries or the termination of such
employment, which I may now or hereafter have under any
federal, state or local law, regulation or order, including
without limitation, under the Age Discrimination in
Employment Act, as amended, through and including the date of
this Release; provided, however, that the execution of this
Release shall not prevent the undersigned from bringing a
lawsuit against the Company to enforce its obligations under
the Agreement.
I acknowledge that I have been given at least 21
days from the day I received a copy of this Release to sign
it and that I have been advised to consult an attorney. I
understand that I have the right to revoke my consent to this
Release for seven days following my signing. This Release
shall not become effective or enforceable until the
expiration of the seven-day period following the date it is
signed by me.
I further state that I have read this document and
the Agreement referred to herein, that I know the contents of
both and that I have executed the same as my own free act.
WITNESS my hand this ____ day of ___________ ,
____.
___________________________
[Name]
