<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994.
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 NO.)
75 ROCKEFELLER PLAZA, NEW YORK, N.Y. 10019
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
----------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
Pacific Stock Exchange
Rights to Purchase Series A Participating Cumulative New York Stock Exchange
Preferred Stock Pacific Stock Exchange
7.45% Notes due 1998 New York Stock Exchange
7.95% Notes due 2000 New York Stock Exchange
8 3/4% Debentures due 2017 New York Stock Exchange
8 3/4% Convertible Subordinated Debentures due 2015 New York Stock Exchange
9 1/8% Debentures due 2013 New York Stock Exchange
9.15% Debentures due 2023 New York Stock Exchange
Redeemable Reset Notes due 2002 New York Stock Exchange
Liquid Yield Option(TM) Notes due 2012 American Stock Exchange
Liquid Yield Option(TM) Notes due 2013 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 27, 1995, there were 379,770,491 shares of registrant's Common
Stock outstanding and the aggregate market value of such shares held by non-
affiliates of the registrant (based upon the closing price of such shares on
the New York Stock Exchange Composite Tape on March 27, 1995) was approximately
$14.3 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
<TABLE>
<CAPTION>
DESCRIPTION OF DOCUMENT PART OF THE FORM 10-K
----------------------- ---------------------
<S> <C>
Portions of the Definitive Proxy Statement Part III (Item 10 through Item 13)
to be used in connection with the
registrant's 1995 Annual Meeting of
Stockholders.
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
An organizational chart showing the Registrant's major business groups
and its ownership interests therein.
<PAGE>
PART I
ITEM 1. BUSINESS
Time Warner Inc. (the "Company") was incorporated in the State of Delaware in
August 1983 and is the successor to a New York corporation originally organized
in 1922. The Company changed its name from Time Incorporated following its
acquisition of 59.3% of the common stock of Warner Communications Inc. ("WCI")
in July 1989. WCI became a wholly owned subsidiary of the Company in January
1990 upon the completion of the merger of WCI and a subsidiary of the Company
(the "Merger"). As used in this report, the terms "Registrant," the "Company"
and "Time Warner" refer to Time Warner Inc. and its subsidiaries and divisions,
and includes Time Warner Entertainment Company, L.P. ("TWE"), which conducts
substantially all of the Entertainment businesses of the Company, unless the
context otherwise requires.
The Company is the largest media and entertainment company in the world. Its
businesses are carried on in three principal groups: Publishing, Music and
Entertainment. The Publishing group consists principally of the publication and
distribution of magazines and books; the Music group consists principally of
the production and distribution of recorded music and the ownership and
administration of music copyrights; and the Entertainment group consists
principally of the production and distribution of motion pictures and
television programming, the distribution of videocassettes, the ownership and
operation of retail stores and theme parks, the production and distribution of
pay television and cable programming, and the operation of cable television
systems. These businesses are conducted throughout the world through numerous
wholly owned, and in certain cases less than wholly owned, subsidiaries and
affiliates.
TWE was formed as a Delaware limited partnership in February 1992 pursuant to
an Agreement of Limited Partnership, dated as of October 29, 1991, as amended
(the "TWE Partnership Agreement"), and has, since its capitalization on June
30, 1992 (the "TWE Capitalization"), owned and operated substantially all of
the Entertainment group businesses, and certain other businesses, previously
owned and operated by the Company. Upon the TWE Capitalization, certain wholly
owned subsidiaries of the Company (the "Time Warner General Partners"),
contributed such businesses, or assigned the net cash flow derived therefrom
(or an amount equal to the net cash flow derived therefrom), to TWE and became
general partners of TWE. Also upon the TWE Capitalization, wholly owned
subsidiaries of ITOCHU Corporation (formerly C. Itoh & Co., Ltd.), a
corporation organized under the laws of Japan ("ITOCHU"), and Toshiba
Corporation, a corporation organized under the laws of Japan ("Toshiba"),
collectively contributed $1 billion to TWE and became limited partners of TWE.
On September 15, 1993, TWE consummated the transactions contemplated by the
Admission Agreement, dated as of May 16, 1993, as amended (the "Admission
Agreement"), between TWE and U S WEST, Inc., a Colorado corporation ("U S
WEST"). Pursuant to the Admission Agreement, a wholly owned subsidiary of U S
WEST made a capital contribution of $2.553 billion and became a limited partner
of TWE (the "U S WEST Transaction"). As a result of the U S WEST Transaction,
the Time Warner General Partners collectively own 63.27% pro rata priority
capital and residual equity interests in TWE and wholly owned subsidiaries of
ITOCHU, Toshiba and U S WEST (the "Class A Partners" or the "Limited Partners")
own pro rata priority capital and residual equity interests in TWE of 5.61%,
5.61% and 25.51%, respectively. Each of ITOCHU and Toshiba has the right to
maintain its original 6.25% pro rata priority capital and residual equity
interests by acquiring additional partnership interests. In addition, the Time
Warner General Partners own priority capital interests senior and junior to the
pro rata priority capital interests.
The Admission Agreement provides that TWE will use its best efforts to
upgrade a substantial portion of its cable systems to "Full Service
Network(TM)" capacity by the end of 1998. As systems are designated for such
upgrade and after any required approvals are obtained, U S WEST and TWE will
share joint control of those systems through a 50-50 management committee. The
"Full Service Network" business is expected to include substantially all of
TWE's cable systems, subject to obtaining necessary regulatory consents and
approvals. See "Entertainment--Description of Certain Provisions of the TWE
Partnership Agreement."
In September 1994, the Company agreed to acquire Summit Communications Group,
Inc. ("Summit"), which owns cable television systems serving approximately
162,000 subscribers in Winston-Salem, North
I-1
<PAGE>
Carolina and in certain suburbs of Atlanta, Georgia, in exchange for 900,000
shares of the Company's common stock, par value $1.00 per share ("Common
Stock"), and 3.2 million shares of a new Time Warner convertible preferred
stock ("Series C Preferred Stock"). The Series C Preferred Stock will have a
liquidation value of $100 per share, be convertible into 6.7 million shares of
Common Stock at an effective price of $48 per share of Common Stock, receive an
annual dividend of $3.75 per share for five years, and be redeemable at
liquidation value plus unpaid dividends after five years, or exchangeable in
part for Common Stock plus unpaid dividends by the holder beginning after the
third year and by the Company after the fourth year at the stated conversion
price plus a declining premium in years four and five and no premium
thereafter.
Also in September 1994, TWE agreed to form a cable television joint venture
with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting
Corporation ("Advance/Newhouse") to which Advance/Newhouse will contribute
cable television systems serving approximately 1.4 million subscribers and
related assets and TWE will contribute cable television systems (or interests
therein) serving approximately 2.8 million subscribers and related assets. TWE
will own a two-thirds equity interest in the TWE-Advance/Newhouse Partnership
and be the managing partner. Advance/Newhouse will own a one-third equity
interest in the partnership. 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 new venture will enlarge existing cable clusters already owned by the
partners in North Carolina, Florida and New York.
In January 1995, the Company agreed to acquire KBLCOM Incorporated
("KBLCOM"), a subsidiary of Houston Industries Incorporated, that owns cable
television systems serving approximately 690,000 subscribers and a 50% interest
in Paragon Communications ("Paragon"), which serves an additional 967,000 cable
subscribers. TWE owns the other 50% interest in Paragon. To acquire KBLCOM, the
Company will issue 1 million shares of Common Stock and 11 million shares of a
new Time Warner convertible preferred stock ("Series D Preferred Stock") and
assume or incur approximately $1.24 billion of indebtedness. The Series D
Preferred Stock will have a liquidation value of $100 per share, be convertible
into approximately 22.9 million shares of Common Stock at an effective price of
$48 per share of Common Stock, and receive an annual dividend of $3.75 per
share for four years. The Company will have the right to exchange the Series D
Preferred Stock for Common Stock at the stated conversion price plus unpaid
dividends after four years, or redeem the Series D Preferred Stock at the
liquidation value per share plus unpaid dividends after five years. KBLCOM's
systems serve subscribers in San Antonio and Laredo, Texas, the Minneapolis
metropolitan area, Portland, Oregon and Orange County, California. Paragon owns
systems in Tampa, Florida and northern Manhattan, as well as other locations.
In February 1995, the Company agreed to acquire Cablevision Industries
Corporation ("CVI") and related companies that own cable television systems
serving approximately 1.3 million subscribers principally in New York, North
Carolina, Florida, California's San Fernando Valley and Columbia, South
Carolina. In acquiring CVI and related companies, the Company will issue 2.5
million shares of Common Stock and 6.5 million shares of new convertible
preferred stocks (3.25 million shares of Series E Preferred Stock and 3.25
million shares of Series F Preferred Stock) and assume approximately $2 billion
of debt of CVI and related companies. Each series of preferred stock will have
a liquidation value of $100 per share, be convertible into approximately 13.5
million shares of Common Stock at an effective price of $48 per share of Common
Stock, and receive an annual dividend of $3.75 per share for a period of five
years with respect to the Series E Preferred Stock and a period of four years
with respect to the Series F Preferred Stock. The Company will have the right
to exchange the Series E Preferred Stock for Common Stock at the stated
conversion price plus unpaid dividends after five years and to exchange the
Series F Preferred Stock for Common Stock at the stated conversion price plus
unpaid dividends after four years. In addition, the Company may redeem either
series of preferred stock at the liquidation value per share plus unpaid
dividends after five years.
The Summit and Advance/Newhouse transactions are expected to close in the
first half of 1995. The KBLCOM and CVI transactions are expected to close later
in the year. All transactions are subject to customary closing conditions,
including the receipt of certain franchise and regulatory approvals.
I-2
<PAGE>
The Company also has announced its intention to enhance its financial
position and that of the Entertainment Group through sales of non-core assets,
such as the stock of Turner Broadcasting System, Inc. ("TBS") owned by Time
Warner, and/or certain smaller unclustered cable systems owned by Time Warner
or the Entertainment Group. Proceeds from asset sales will be used to reduce
debt. No assurance can be given as to whether or when any particular assets may
be sold, or the amount of the proceeds that may be received by the Company from
any such sales. Because of the announced transactions, Time Warner will explore
the possibility of bringing its various interests in cable operations together
in a separate, self-financed operating unit. This process is expected to be
undertaken over a 12-18 month period and will be dependent, among other things,
on successful negotiations with TWE's partners and certain creditors, and
receipt of franchise and other regulatory approvals. Accordingly, there can be
no assurance that the effort will succeed.
For financial information about the Company's industry segments and
operations in different geographical areas with respect to each of the years in
the three-year period ended December 31, 1994, see Note 10, "Segment
Information," to the Company's consolidated financial statements at pages F-19
through F-22 herein.
The Company's Entertainment Group, consisting of the Company's interests in
certain entertainment companies, principally TWE, was deconsolidated effective
January 1, 1993 as a result of the U S WEST Transaction. The TWE Partnership
Agreement and the TWE credit agreement impose restrictions on the ability of
TWE to make distributions to the Company and the Time Warner General Partners.
See Note 1, "Summary of Significant Accounting Policies," and Note 2,
"Entertainment Group," to the Company's consolidated financial statements at
pages F-6 through F-11 herein.
PUBLISHING
The Company's wholly owned publishing division, Time Inc., publishes
magazines and books and develops products for the multimedia and television
markets. It conducts these activities through wholly owned subsidiaries, joint
ventures, equity investments and partnerships.
MAGAZINES
General
Time Inc. publishes TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, LIFE,
SPORTS ILLUSTRATED FOR KIDS and ENTERTAINMENT WEEKLY. In June 1994, Time Inc.
launched IN STYLE, a monthly celebrity life style publication.
Time Inc. Ventures ("TIV") and its subsidiary Time Publishing Ventures, Inc.
("TPV") are responsible for international, regional and special interest
publishing and development activities, including Southern Progress Corporation
("Southern Progress"), Sunset Publishing Corporation ("Sunset Publishing"),
PARENTING, BABY TALK, HEALTH, HIPPOCRATES, MARTHA STEWART LIVING, and WHO
WEEKLY magazines and various joint ventures.
Southern Progress publishes SOUTHERN LIVING, PROGRESSIVE FARMER, SOUTHERN
ACCENTS and COOKING LIGHT magazines.
Time Inc., either directly or indirectly, has equity interests in ASIAWEEK,
American Family Publishers and Publishers Express. In 1994, Time Inc. sold its
interest in ELLE JAPON and YAZHOU ZHOUKAN and acquired full ownership of
President, Inc., which publishes PRESIDENT and DANCYU magazines.
TIV has management responsibility for most of the American Express Publishing
Corporation's operations, including TRAVEL & LEISURE and FOOD & WINE magazines.
TIV also operates an in-store advertising and demonstration business, Time Inc.
In-Store Marketing.
I-3
<PAGE>
Each magazine published by the Company has an editorial staff under the
general supervision of a managing editor and a business staff under the
management of a president or publisher. Magazine manufacturing and distribution
activities are generally managed by centralized staffs at Time Inc. Fulfillment
activities for Time Inc.'s magazines are generally administered from a
centralized facility in Tampa, Florida. PARENTING, SUNSET, BABY TALK, HEALTH,
HIPPOCRATES, MARTHA STEWART LIVING, VIBE, and Time Inc.'s overseas operations
employ independent fulfillment services and undertake their own manufacturing
and distribution.
Magazine publishing follows a seasonal pattern with revenues being generally
higher in the second and fourth quarters and lower in the first and third
quarters.
The individual magazines of the Company are summarized below:
TIME, a weekly magazine, summarizes the news and brings original
interpretation and insight to the week's events. The domestic advertising rate
base of TIME as of January 1995 was 4,000,000, which is unchanged from January
1994.
TIME Asia, TIME Atlantic, TIME Canada, TIME Latin America and TIME South
Pacific are weekly English-language editions of TIME which circulate outside
the United States. These editions had an aggregate worldwide advertising rate
base of 1,460,000 as of January 1995, compared to 1,480,000 in January 1994.
SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and
is designed to appeal to, spectators and participants in virtually all forms of
recreational and competitive sports. The advertising rate base as of January
1995 was 3,150,000, the same as in January 1994.
SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to
children ages eight through fourteen. Its advertising rate base as of January
1995 was 950,000, compared to 900,000 in January 1994, including 243,000 copies
distributed free to over 1,100 schools.
PEOPLE, a weekly magazine, reports on celebrities and other notable
personalities. The advertising rate base as of January 1995 was 3,150,000, the
same as in January 1994.
ENTERTAINMENT WEEKLY is a weekly magazine which includes reviews and reports
on television, movies, video, music and books. The advertising rate base as of
January 1995 was 1,125,000, compared to 1,075,000 in January 1994.
FORTUNE, a biweekly magazine, reports on worldwide economic and business
developments. The worldwide advertising rate base was 860,000 as of January
1995, compared to 870,000 in January 1994.
MONEY is a monthly magazine which reports on personal finance. The
advertising rate base as of January 1995 was 1,900,000, the same as in January
1994.
LIFE is a monthly magazine which features photographic essays. The
advertising rate base as of January 1995 was 1,500,000, the same as in January
1994.
IN STYLE is a monthly magazine which focuses on celebrities' lives and
lifestyles. The advertising rate base as of January 1995 was 550,000.
SOUTHERN LIVING is a monthly regional home, garden, food and travel magazine
focused on the South with an advertising rate base of 2,300,000 as of January
1995, which is the same as in January 1994.
PROGRESSIVE FARMER is a monthly regional farming magazine with an advertising
rate base of 410,000 as of January 1995, compared to 415,000 in January 1994.
SOUTHERN ACCENTS, published six times a year, features architecture, fine
homes and gardens, arts and travel and is targeted to affluent Southerners. Its
advertising rate base as of January 1995 was 275,000, compared to 250,000 in
January 1994.
I-4
<PAGE>
COOKING LIGHT is published nine times a year and features health and fitness
through active lifestyles and good nutrition. The advertising rate base as of
January 1995 was 1,200,000, compared to 1,100,000 in January 1994.
PARENTING is published ten times a year and is aimed at parents of children
under the age of ten. The advertising rate base increased as of January 1995 to
1,000,000, compared to 925,000 in January 1994.
SUNSET, The Magazine of Western Living, is a monthly regional magazine
focused on lifestyles in the West. The advertising rate base increased to
1,425,000 in January 1995, compared to 1,400,000 in January 1994.
HEALTH is a consumer health magazine published seven times a year, and
HIPPOCRATES is published ten times a year. Although similar in editorial
content, HEALTH is targeted at the consumer market, while HIPPOCRATES is a
trade magazine targeted at physicians and carries primarily trade advertising.
HEALTH had an advertising rate base of 900,000 in January 1995, the same as in
January 1994. HIPPOCRATES had a controlled circulation of 125,000 primary care
physicians in January 1995, the same as in January 1994.
MARTHA STEWART LIVING is published ten times a year and presents Martha
Stewart's personal perspective on entertaining, cooking, decorating and
gardening. Its advertising rate base as of January 1995 was 800,000, compared
to 725,000 in January 1994.
BABY TALK is published ten times a year and is targeted at expectant and new
mothers. In February 1995 its advertising rate base was 1,000,000, compared to
1,300,000 in January 1994. BABY TALK's ancillary publications are BABY ON THE
WAY (published semi-annually) and BABY ON THE WAY BASICS (published annually).
WHO WEEKLY is an Australian version of PEOPLE which focuses on celebrities
and other notable personalities. The advertising rate base as of January 1995
was 230,000, compared to 200,000 in January 1994.
VIBE is published ten times a year by a joint venture between a subsidiary of
TPV and affiliates of Quincy Jones Entertainment Company. It covers rap, rhythm
and blues, reggae and dance music, as well as politics and fashion. The
advertising rate base as of January 1995 was 250,000, compared to 200,000 in
January 1994.
Circulation
The Company's publications are sold primarily by subscription. Subscription
copies are delivered to subscribers through the mail. Subscriptions are sold by
direct-mail solicitation, subscription sales agencies, television and telephone
solicitation and insert cards in the Company's magazines and other
publications. Single copies of magazines are sold through retail news dealers
who are supplied in turn by regional wholesalers.
Advertising
Advertising carried in the Company's magazines is predominantly consumer
advertising. Many of the Company's magazines have numerous regional and
demographic editions which contain the same basic editorial material but permit
advertisers to concentrate their advertising in specific markets. Through the
use of selective binding and ink-jet technology, the Company creates special
custom editions targeted towards specific groups. This allows the Company to
deliver advertisers a more highly targeted audience by segmenting subscriber
lists to identify those subscribers advertisers desire most, as well as
providing the opportunity to personalize advertising messages.
Paper and Printing
Lightweight coated paper, which for certain magazines is recycled,
constitutes a significant component of physical costs in the production of
magazines. Time Inc. has contractual commitments to ensure an
I-5
<PAGE>
adequate supply of paper, but periodic shortages may occur in the event of
strikes or other unexpected disruptions in the paper industry. During 1994,
paper prices were relatively flat with some upward movement in the fourth
quarter. In 1995, the Company expects that paper prices will increase as a
result of increased demand in the paper market. Time Inc. purchases paper
principally from four independent manufacturers, in each case under contracts
that, for the most part, are either fixed-term or open-ended at prices
determined on a market price or formula price basis.
Printing and binding for the Company's magazines are accomplished primarily
by major domestic and international printing concerns in 20 locations. Magazine
printing contracts are either fixed-term or open-ended at fixed prices with, in
some cases, adjustments based on certain criteria.
BOOKS
General
The Company's book operations include Time Life Inc., Book-of-the-Month Club,
Inc., Warner Books, Inc. and Little, Brown and Company, each of which is a
wholly owned subsidiary of Time Inc., and the Oxmoor House and Sunset Books
divisions of Southern Progress and Sunset Publishing, respectively. In 1994,
the book operations distributed, in aggregate, approximately 159 million gross
units.
Time Life
Time Life is composed of several divisions including: Books, Music, Video and
Television, Education, Digital, Medical and International. Time Life is one of
the nation's largest direct marketers of books, music and videos. The products
are sold by direct response, including mail order, television and telephone,
through retail, institutional and license channels, and by door-to-door
independent distributors in some foreign markets. Editions of the books are
currently sold in 23 languages worldwide and approximately 40% of Time Life's
revenues are generated outside the United States. In 1994, Time Life created
Time-Life Digital, a division designed to develop all forms of digital media
from the company's extensive library of titles. Time-Life Medical was formed as
a joint venture in January 1995 to create and sell patient-education materials.
Editorial material is created by in-house staffs as well as through outside
book packagers. A significant product in 1994 was Time-Life Music's platinum
series "The Rolling Stone Collection: 25 Years of Essential Rock." Other 1994
best sellers included "Weight Watchers (R) Smart Choice Recipe Collection" from
Time-Life Books, "Sounds of the 70's" from Time-Life Music, and "Predators of
the Wild" from Time-Life Video. In 1993, Time Life began the development of two
ten-hour television documentary series, "Lost Civilizations" and "The History
of Rock 'n' Roll," each of which draw on Time Life's existing editorial
resources. First-run television rights to "Lost Civilizations" have been pre-
sold to NBC and "The History of Rock 'n' Roll," co-produced with TWE's
Telepictures Productions, aired in March 1995.
Manufacturing for Time-Life Books is done by several independent companies.
Manufacturing contracts are entered into on a series rather than a single title
basis and are fixed-price with provisions for cost of labor, material and
specification adjustments. These contracts, subject to certain limitations, may
be terminated by Time Life or the manufacturer. Time Life's fulfillment
activities, excluding international operations, are conducted from a
centralized facility in Richmond, Virginia.
Book-of-the-Month Club
Book-of-the-Month Club operates seven book clubs and three continuity
businesses with combined membership in excess of 3.1 million. Two of the clubs,
Book-of-the-Month Club and Quality Paperback Book Club, are general interest
clubs and the remaining clubs specialize in history, cooking and crafts,
business, children's books and the books of a particular author. In addition,
multimedia, audio and video products are offered through the clubs. In 1993,
Book-of-the-Month Club launched its businesses internationally, and now
operates in over 40 countries in Europe, Asia, Latin America and the Middle
East.
I-6
<PAGE>
Book-of-the-Month Club acquires the rights from publishers to manufacture and
distribute books and then has them printed by independent printing concerns.
Book-of-the-Month Club runs its own fulfillment and warehousing operations in
Mechanicsburg, Pennsylvania.
Warner Books
Warner Books publishes hardcover, mass market and trade paperback books.
Among its best selling hardcover books in 1994 were Robert James Waller's "Old
Songs in a New Cafe," "Slow Waltz in Cedar Bend" and "The Bridges of Madison
County" and James Redfield's "The Celestine Prophecy." Mass market paperback
books on the best seller list in 1994 included "Pleading Guilty" by Scott
Turow, "Along Came a Spider" by James Patterson, and "Where There's Smoke" and
"Hidden Fires" by Sandra Brown.
During 1994, Warner Books acquired a minority equity interest in The
Reference Press, Inc., a Texas-based print and electronic publisher of business
information and company profiles. In addition, through a joint venture with
Little, Brown, Warner Books operates Time Warner Electronic Publishing, which
is engaged in on-line and multimedia publishing.
Little, Brown
Little, Brown publishes general and children's trade books, legal and medical
reference books and textbooks. Through its subsidiary, Little, Brown (U.K.), it
also publishes general hardcover and mass market paperback books in the United
Kingdom. Among the trade hardcover books published by Little, Brown in 1994
were "The Day After Tomorrow" by Allan Folsom and "Long Walk to Freedom" by
Nelson Mandela.
Little, Brown handles book distribution for itself, Warner Books and Sunset
Books, as well as other publishers. The marketing of trade books is primarily
to retail stores and wholesalers throughout the United States, Canada and the
United Kingdom. Law and medical textbooks are sold primarily to university
retail stores. Professional reference books are sold to practitioners through
retail stores and direct marketing. Through their combined U.S. and U.K.
operations, Little, Brown and Warner Books have the ability to acquire English-
language publishing rights for the distribution of hard and softcover books
throughout the world.
Warner Books, Little, Brown, and Warner Music Group's Atlantic Records
operate a joint venture, Time Warner AudioBooks, to develop and market audio
versions of books and other materials published by Warner Books, Little, Brown
and other outside publishers.
Oxmoor House and Leisure Arts
Oxmoor House, the book publishing division of Southern Progress, markets how-
to books on a wide variety of topics including food and crafts, as well as
illustrated volumes on art and other subjects. Acquired in 1992 and integrated
into Oxmoor House, Leisure Arts is a well-established publisher and distributor
of instructional leaflets, continuity books series and magazines for the
needlework and crafts market.
Sunset Books
Sunset Books, the book publishing division of Sunset Publishing, markets
books on topics such as building and decorating, cooking, gardening and
landscaping, and travel. Sunset Books' unique marketing formula includes an
extensive network of home repair and garden centers.
OTHER PUBLISHING OPERATIONS
Multimedia and Television
Time Inc. continues to actively develop products for emerging technologies
such as on-line computer networks, the Full Service Network, and the CD-ROM
market. In 1994, Time Inc. launched PATHFINDER (TM), a site on the Internet
that includes electronic editions of editorial content derived from Time Inc.'s
magazine and book publications, as well as original content created exclusively
for the Internet. Time Inc. has also licensed its editorial content to various
other on-line information services, and has produced CD-ROM products through
licensing arrangements with third party CD-ROM developers.
I-7
<PAGE>
Time Inc. has undertaken development efforts in various television ventures,
both in combination with other Company divisions and independently. The most
significant of these activities is an entertainment news show, "EXTRA--The
Entertainment Magazine," produced in conjunction with the Telepictures division
of TWE, a six-day-a-week program utilizing the editorial resources of Time Inc.
to break exclusive stories.
Time Inc. In-Store Marketing
Time Inc. In-Store Marketing, an umbrella organization which is a subsidiary
of TIV, operates all of Time Inc.'s in-store advertising and demonstration
businesses, including Media Holdings, Inc. ("Media One") and SmartDemo Inc.
("SmartDemo"). Media One's primary product is a two-sided backlit advertising
display unit that is installed in supermarket checkout lanes. SmartDemo is an
in-store demonstration, couponing, sampling and merchandising business.
American Express Publishing
Time Inc., through its TIV subsidiary, has management responsibility for most
of American Express Publishing Corporation's operations, including its core
lifestyle magazines, TRAVEL & LEISURE and FOOD & WINE. TIV receives a fee for
managing these properties, as well as incentives for improving profitability.
American Family Publishers
Time Inc. is a 50% partner in American Family Publishers ("AFP"), a direct
mail magazine subscription sales agency. AFP sells magazine subscriptions for
approximately 200 major magazines in the United States, including many of the
Company's publications. AFP sells primarily through two heavily-promoted
nationwide sweepstakes mailings conducted each year.
Time Distribution Services
In January 1995, Time Distribution Services Inc. ("TDS"), a wholly owned
subsidiary of Time Inc., acquired substantially all of the assets of Time
Distribution Services, a joint venture between Time Inc. and Gruner & Jahr (the
successor to the New York Times Company's interest in Time Distribution
Services). TDS markets and distributes magazines published by Time Inc. and
certain other publishers in the United States and Canada, through wholesalers
to retail outlets such as newsstands and directly to supermarkets and drugstore
chains.
Warner Publisher Services
Warner Publisher Services ("WPS") is a major distributor of magazines and
paperback books sold through wholesalers in the United States and Canada, and
internationally. WPS is the sole national distributor for MAD magazine, the
publications of DC Comics and certain publications owned by other publishers,
including TEEN, VOGUE, WOMAN'S DAY, and the Dell Puzzle Books. WPS also
distributes the paperback books published by Warner Books as well as the full
paperback line of the Berkley Group. WPS is wholly owned by Time Inc.
Publishers Express
Time Inc. owns 23.5% of Publishers Express Inc., a corporation whose
shareholders consist of eleven other publishers, printers, paper companies and
direct mailers established to deliver second- and third-class mail and
advertising material in competition with the U.S. Postal Service. As of January
1995, the corporation was delivering in 24 cities throughout the United States.
POSTAL RATES
Postal costs represent a significant operating expense for the Company's
publishing activities. There were no general postal rate increases in 1994. An
increase of approximately 10% for first class and 14% for second, third and
fourth classes was implemented in January 1995 by the Postal Service.
I-8
<PAGE>
Publishing operations continue to minimize postal expense through the use of
certain cost-saving measures, including the utilization of contract carriers to
transport books and magazines to central postal centers. It has been the
Company's practice in selling books and other products by mail to include a
charge for postage and handling, which is adjusted from time to time to
partially offset any increased postage or handling costs.
COMPETITION
The Company's magazine operations compete for sales with numerous other
publishers and retailers, as well as other media. The general circulation
magazine industry is highly competitive both within itself and with other
advertising media which compete with the Company's magazines for audience and
advertising revenue.
The Company's book publishing operations compete for sales with numerous
other publishers and retailers as well as other media. In addition, the
acquisition of publication rights to important book titles is highly
competitive, and Warner Books and Little, Brown compete with numerous other
book publishers. WPS and TDS meet with direct competition from other
distributors operating throughout the United States and Canada in the
distribution of magazines and paperback books.
MUSIC
GENERAL
The Company's music business, conducted under the umbrella name Warner Music
Group ("WMG"), consists principally of a vertically integrated worldwide
recorded music business and a worldwide music publishing business.
The Company's domestic recorded music business, which was restructured in
1994 and early 1995, is conducted primarily through a division of WMG called
Warner Music U.S. ("WMUS") and its constituent companies, Elektra Entertainment
Group ("Elektra"), The Atlantic Group ("Atlantic") and Warner Bros. Records
("WBR"), and their affiliated labels; and through Warner Media Manufacturing
and Distribution ("WMMD") and its constituent companies, Warner-Elektra-
Atlantic Corporation ("WEA"), WEA Manufacturing Inc. ("WEA Mfg.") and Ivy Hill
Corporation ("Ivy Hill"). Outside of the United States, the Company's recorded
music business is conducted in more than 65 countries through WEA International
Inc. and a division of WCI, Warner Music International, and their subsidiaries
and affiliates ("WMI"), as well as through non-affiliated licensees. WMG also
conducts a home video business specializing in children's videos and fitness
videos through WarnerVision, a division of WMUS.
The Company's music publishing business is conducted principally through
wholly owned subsidiaries of WCI (collectively, "Warner/Chappell").
In 1994, approximately 57% of WMG's recorded music revenues were derived from
sources outside of the United States.
RECORDED MUSIC AND RELATED ACTIVITIES
WMI, WBR, Atlantic and Elektra produce, sell and license compact discs,
cassette tapes and music videos (in both videocassette and video laserdisc
configurations) of the performances of recording artists under contract to them
or for whose recordings they have acquired rights. WMG's recorded music and
video product is marketed under various labels, including the proprietary
labels "Warner Bros.," "Reprise," "Sire," "Tommy Boy," "Warner Nashville,"
"Elektra," "Asylum," "Nonesuch," "Atlantic," "WarnerVision," "EastWest
America," "Big Beat," "Atlantic Nashville," "WEA," "EastWest," "Teldec," "CGD,"
"Carrere," "Erato," "MMG," "DRO," "Telegram," "D-Day," "Muser" and "Fazer."
In addition, WMG has entered into joint venture agreements pursuant to which
WMG companies manufacture, distribute and market (both domestically and, in
most cases, internationally) recordings owned by such joint ventures. The terms
of such agreements vary widely, but each agreement typically provides the
I-9
<PAGE>
WMG record company with an equity interest and a profit participation in the
venture, with financing furnished either solely by WMG or by both parties.
Included among these arrangements are the labels "American Recordings,"
"Giant," "Interscope," "Maverick," "Qwest" and "Rhino." In early 1995, Elektra
entered into a joint venture arrangement with Sub Pop Ltd. ("Sub Pop"), an
independent record company based in Seattle.
WMG's record companies also acquire rights pursuant to agreements to
manufacture and distribute certain recordings that are marketed under the
licensor's proprietary label. Included among the labels distributed by WMUS
under such arrangements are "Beggars Banquet," "Curb," "Mammoth," "Matador" and
"Slash."
Recording artists are engaged under arrangements that generally provide that
the artist is to receive a percentage of the suggested retail selling price of
compact discs, cassette tapes and music videos sold. Most artists receive non-
returnable advance payments against future royalties.
Among the artists whose albums resulted in significant sales for WMG's record
companies during 1994 were: All-4-One, Anita Baker, Candlebox, Collective Soul,
Eric Clapton, Green Day, Madonna, Luis Miguel, John Michael Montgomery, Laura
Pausini, R.E.M., Stone Temple Pilots, Keith Sweat, Mariya Takeuchi and The
Three Tenors. In 1995, WMG's record companies expect to release albums by the
following artists: Tori Amos, AC/DC, Bjork, Tevin Campbell, Enya, En Vogue,
Michael Feinstein, Philip Glass, Van Halen, Quincy Jones, Andy Lau, Bette
Midler, Red Hot Chili Peppers, Linda Ronstadt, David Sanborn, Simply Red, Rod
Stewart and Skid Row.
WMG's domestic manufacturing, packaging and distribution operations are
conducted through WMMD and its constituent companies.
WEA Mfg. is engaged in the domestic manufacturing of audio and CD-ROM compact
discs, cassette tapes and videocassettes. WEA Mfg. conducts its operations from
facilities situated in Olyphant, Pennsylvania and in the greater Los Angeles
area. WEA Mfg. participated in the development of digital video discs ("DVD"),
the new digital configuration developed by Time Warner and Toshiba, and expects
to be manufacturing DVD early in 1996.
Ivy Hill is engaged in the offset lithography and packaging business through
facilities situated in four states. Ivy Hill is a major supplier of packaging
to the recorded music industry (including WMG's record companies) and also
supplies packaging for a wide variety of other consumer products.
WMG's recorded music product is marketed and distributed in the continental
United States by WEA, which supplies, directly or indirectly through sub-
distributors and wholesalers, thousands of record stores, department stores,
discount centers and other retail outlets across the country. Alternative
Distribution Alliance, a distribution company specializing in alternative rock
music, with a focus on new artists, operates as a joint venture among WMG, its
labels, Restless Records and Sub Pop.
Warner Special Products produces, primarily for telemarketers, compilations
of music for which it has obtained rights from WMG's recorded music companies,
as well as from third parties.
In foreign markets, WMI produces, distributes, promotes and sells recordings
of local artists and, in most cases, distributes the recordings of those
artists for whom WMG's domestic recording companies have international rights.
In certain countries, WMI licenses to non-affiliated parties rights to
distribute recordings of WMG's labels. WMI strengthened its operations during
1994 with the creation of Warner Music Benelux, combining affiliates in the
Netherlands and Belgium; the establishment of Warner Music Thailand; the
acquisition of NVC Arts, a classical video company in the U.K.; and the
formation of an international marketing alliance with China Records in the U.K.
WMI also operates two plants in Germany that manufacture compact discs,
cassette tapes and vinyl records for WMI's European affiliates and licensees
and for WMI companies outside Europe, as well as for unrelated parties.
Warner Music Enterprises ("WME"), a direct marketing company, operates
magazine-plus-CD/audio cassette continuity programs specializing in classical
music (BBC Music) and country music (New Country).
I-10
<PAGE>
During 1994, WME added a new rock music magazine, huH, to its existing Rock
Video Monthly service and launched Jazziz, a new jazz-oriented service. In
February 1995, WME launched Radio Aahs, a similar service for children.
Through joint ventures, WMG and Sony Music Entertainment ("Sony Music")
operate The Columbia House Company, the leading direct marketer of compact
discs, cassette tapes and videocassettes in the United States and Canada. WCI
owns a minority portion of Time Warner's 50% interest in the U.S. partnership
and all of Time Warner's 50% interest in the Canadian partnership. WMG and Sony
Music are also partners in Music Sound Exchange, a direct marketing catalog
that is primarily directed to selling music and related products to consumers
age 35 and over.
In March 1995, WMG entered into a joint venture with PolyGram International
Ltd. ("PolyGram") and Sony Music to directly market recorded music and filmed
entertainment repertoire in Europe through music clubs and video clubs.
WMG, with other partners, including another subsidiary of the Company, has an
equity interest in Digital Cable Radio Associates, an audio programming service
that delivers multiple channels of CD-quality stereo music via cable
television. In Europe, where the service is known as Music Choice Europe, it is
delivered via cable television and direct-to-home satellite.
WMG is a partner with Sony Pictures Entertainment, Inc. ("Sony Pictures"),
PolyGram, Thorn EMI ("EMI") and Hamburg radio executive Frank Otto in VIVA, a
24-hour German language music video channel carried on cable television in
Germany.
In January 1995, WMG entered into a joint venture with STAR TV, Bertlesmann
Music Group, EMI and Sony Pictures to develop programming for STAR TV's
existing pan-Asian music channel, Channel [V].
During 1994 and early 1995, WMG acquired the U.K. multimedia developer
Renegade and signed software development agreements in the U.S. with several
leading interactive programming creators, including Hyperbole Studios,
Imagination Pilots and Accolade (and acquired a minority interest in that
company). Also in 1994, WMG, along with Home Box Office and software developer
Michael Nash, created a new multimedia joint venture known as Inscape. WMG also
announced the formation of WarnerActive, a division of WEA that will publish
multimedia titles in the U.S., and Warner Interactive Entertainment which will
publish multimedia titles in international markets. Time Warner's other
divisions involved in CD-ROM production, including Time Warner Interactive
Group, will also be utilizing WarnerActive's services.
MUSIC PUBLISHING
Time Warner's music publishing companies own or control the rights to over a
million standard and contemporary compositions, including numerous popular
hits, folk songs and music from the stage and motion pictures. Certain works of
the following artists, authors and composers are included in Warner/Chappell's
catalogues: John Bettis, Michael Bolton, The Black Crowes, Phil Collins, Comden
& Green, Dubin & Warren, Genesis, George and Ira Gershwin, Gin Blossoms, Victor
Herbert, Michael Jackson, Elton John, Leiber & Stoller, Lerner & Lowe, Madonna,
Henry Mancini, Johnny Mercer, George Michael, Midnight Oil, Cole Porter, the
artist formerly known as Prince, R.E.M., Rodgers & Hart, Soul Asylum, Jule
Styne, Bernie Taupin, Van Halen, John Williams and the foreign administration
of the works of Irving Berlin.
Warner/Chappell also administers the film music of several television and
motion picture companies, including Lucasfilm, Ltd., Viacom Enterprises, Samuel
Goldwyn Productions and Famous Music (outside the United States and Japan).
Warner/Chappell's printed music division markets publications throughout the
world containing the works of Alabama, Phil Collins, Bon Jovi, The Eagles, The
Grateful Dead, Michael Jackson, Led Zeppelin, Madonna, John Mellencamp, the
artist formerly known as Prince, Rush, Bob Seger and many others. In July 1994,
Warner/Chappell acquired CPP/Belwin, Inc., one of the world's largest
publishers of printed music.
I-11
<PAGE>
Principal sources of revenues to Warner/Chappell are license fees for use of
its music copyrights on radio and television, in motion pictures and in other
public performances; royalties for use of its music copyrights on compact
discs, cassette tapes, vinyl records, music videos and in commercials; and
sales of published sheet music and song books for the home musician as well as
the professional and school markets, including methods for teaching musical
instruments.
LEGISLATION
As digital technology is applied to broadcast, cable and other means of
distribution, and more particularly to the interactive networks comprising the
"information superhighway," the virtually flawless reception and improved
potential for recording that digitization entails is expected to be the subject
of legislation in 1995. A bill has been introduced in the Senate (S.227), and
it is anticipated that one will be introduced shortly in the House, which will
provide royalties to performers and producers of sound recordings that are
publicly performed on digital subscription music services. Sound recordings are
the only copyrighted works for which there is no compensation for their public
performance. Passage of this legislation would favorably impact WMG's
interests. Prospects for passage may be improved by the bill's exclusion of
conventional analog distribution.
In addition, a bill to extend the term of ownership of copyrights for an
additional 20 years has been introduced in the House (H.R. 989). Passage of
this legislation would benefit all of the Company's copyright businesses,
including the businesses of WMG.
No assurance can be given that either of these bills will become law.
COMPETITION
The recorded music business is highly competitive. The revenues and income of
a company in the recording industry depend upon the public acceptance of the
company's recording artists and the recordings released in a particular year.
Although WMG is one of the largest recorded music companies in the world, its
competitive position is dependent upon its continuing ability to attract and
develop talent that can achieve a high degree of public acceptance. The
recorded music business continues to be adversely affected by counterfeiting,
piracy, parallel imports and, in particular, the home taping of recorded music.
In addition, the recorded music business also meets with competition from other
forms of entertainment, such as television, pre-recorded videocassettes and
video games.
Competition in the music publishing business is intense. Although WMG's music
publishing business is the largest on a worldwide basis, it competes with every
other music publishing company in acquiring musical compositions and in having
them recorded and performed.
ENTERTAINMENT
The Company's Entertainment Group consists of TWE's Filmed Entertainment,
Programming--HBO and Cable businesses, and also Time Warner's interests in
certain other businesses. Each of the three principal businesses is operated as
a separate division of TWE and, except as described below, in the same manner
as it was operated by the Company at the time of the TWE Capitalization. See
"--Description of Certain Provisions of the TWE Partnership Agreement--
Management and Operations of TWE."
As a result of the U S WEST Transaction, TWE may be deemed an "affiliated
enterprise" of a Regional Bell Operating Company ("RBOC") and, as such, may be
subject to certain restrictions of the Modification of Final Judgment entered
on August 24, 1982 by the United States District Court for the District of
Columbia and related decisions and decrees (the "Modification of Final
Judgment"). Generally, the Modification of Final Judgment prohibits the RBOCs,
including U S WEST, and any of their "affiliated enterprises," from among other
things, (i) providing long distance telecommunications services, which may
include operating or providing long distance services using TVROs or
satellites, or coaxial cable, fiber or microwave facilities, (ii) manufacturing
or providing telecommunications equipment and (iii) manufacturing
I-12
<PAGE>
"customer premises equipment," which may include cable television converter or
multimedia boxes. In addition, the Modification of Final Judgment may prohibit
the RBOCs and their "affiliated enterprises" from holding certain financial
interests in ventures that engage in the foregoing activities. Several bills
that would alleviate many of the restrictions contained in the Modification of
Final Judgment are under active consideration in the U.S. Congress.
In order to ensure compliance with the Modification of Final Judgment, prior
to U S WEST's investment in TWE, TWE distributed to the Time Warner General
Partners certain assets, including the satellite receiving dishes and broadcast
antennae used by TWE's cable division, the transponders and other transmission
equipment used by TWE's cable television programming and filmed entertainment
divisions and equity interests in certain programming entities (collectively,
the "TW Service Partnership Assets"). Such partners then contributed such
assets to newly formed sister partnerships in which the Time Warner General
Partners and subsidiaries of ITOCHU and Toshiba are the partners (the "Time
Warner Service Partnerships"). Upon the distribution of the TW Service
Partnership Assets to the Time Warner General Partners, the Time Warner General
Partners' junior priority capital interests were reduced by approximately $300
million. See "--Other Entertainment Group Assets--Time Warner Service
Partnerships."
On October 24, 1994, U S WEST was granted a waiver (the "Waiver") of certain
provisions of the Modification of Final Judgment that affected some of TWE's
businesses. Although the Waiver permits TWE, to a large extent, to conduct its
businesses as it did before the U S WEST Transaction, it does not remove all of
the "line of business" restrictions and requirements imposed by the
Modification of Final Judgment. As a result of the Waiver, TWE is no longer
prohibited from owning substantially all of the TW Service Partnership Assets.
Accordingly, pursuant to the terms of certain agreements, the TW Service
Partnership Assets no longer subject to such restrictions 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.
FILMED ENTERTAINMENT DIVISION
General
TWE's principal operations in the fields of motion pictures and television
are conducted by its Warner Bros. division ("WB"). The filmed entertainment
business includes the production, financing and distribution of feature motion
pictures, television series, made-for-television movies, mini-series for
television, first-run syndication programming, and animated programming for
theatrical and television exhibition; and the distribution of pre-recorded
videocassettes and videodiscs. TWE also is engaged in product licensing and the
ownership and operation of retail stores, movie theaters and theme parks; and,
since January 1995, the ownership and operation of a new national broadcast
television network, The WB.
Feature motion pictures and television programs are produced at various
locations throughout the world, including The Warner Bros. Studio in Burbank,
California and The Warner Hollywood Studio in West Hollywood, California. For
additional information, see Item 2 "Properties."
Feature Films
WB produces feature films either solely or under arrangements with other
producers, and is generally the principal source of financing for such films.
In addition, WB purchases outright, or licenses for distribution, completed
films produced by others. Acquired distribution rights may be limited to
specified territories, specified media and/or particular periods of time. The
terms of WB's agreements with independent motion picture producers and other
entities result from negotiations and vary depending upon the production, the
amount and type of financing by WB, the media covered, the territories covered,
the period of distribution and other factors. In some cases, producers,
directors, actors, writers and others participate in the proceeds generated by
the motion pictures in which they are involved.
WB operates a worldwide theatrical distribution organization through which it
distributes its own films, as well as films produced by others. During 1994,
52% of film rentals from WB theatrical distribution were generated in the
United States and Canada and 48% in international territories.
I-13
<PAGE>
Feature films are licensed to exhibitors under contracts that provide for the
length of the engagement, rental fees, which may be either a percentage of box
office receipts, with or without a guarantee of a fixed minimum, or a flat sum,
and other relevant terms. The number of feature films that a particular theater
exhibits depends upon its policy of program changes, the competitive conditions
in its area and the quality and appeal of the feature films available to it. WB
competes with all other distributors for playing time in theaters.
Geffen Films Inc. produces feature films through Geffen Pictures ("Geffen"),
a joint venture with TWE, which arranges for financing of the venture. Geffen
operates autonomously. The pictures produced by Geffen are released worldwide
by WB. In 1994, Geffen produced and WB released "Interview With the Vampire,"
starring Tom Cruise and Brad Pitt. In 1995, Geffen anticipates commencing the
production of "Executive Decision," starring Kurt Russell. Numerous other film
projects are in development.
WB has entered into distribution servicing agreements with Morgan Creek
Productions Inc. and its affiliates ("Morgan Creek"), pursuant to which, among
other things, WB provides domestic distribution services for all Morgan Creek
pictures through June 1998, and certain foreign distribution services for
selected pictures. In 1994, WB released such Morgan Creek pictures as "Ace
Ventura: Pet Detective," starring Jim Carrey and "Major League 2," starring
Charlie Sheen. Among the releases anticipated for 1995 are "Big Bully,"
starring Tom Arnold, and "Ace Ventura 2: When Nature Calls," starring Jim
Carrey.
An affiliate of WB has entered into a long-term arrangement with Monarchy
Enterprises C.V. ("Monarchy"), Le Studio Canal Plus and Alcor Film for the
financing, production and distribution of no fewer than 10 major motion
pictures involving an expected total production outlay in excess of $200
million. Arnon Milchan produces the pictures for Monarchy, with funding
provided primarily by Monarchy. The WB affiliate advances (and has the right to
recoup, together with a distribution fee) a portion of the production budget of
each film and all necessary marketing and distribution costs for the films. WB
has acquired all distribution rights in the United States and Canada, as well
as all international theatrical and home video rights to these motion pictures.
"Boys on the Side," starring Whoopi Goldberg and directed by Herb Ross, was
released in 1995 pursuant to this arrangement. Other productions scheduled to
commence in 1995 under the agreement include "Bogus," also starring Whoopi
Goldberg, and directed by Norman Jewison, as well as, "Empire," directed by
Allan Moyle, and "Copycat," directed by Jon Amiel. It is anticipated that four
to five pictures per year will be produced during the approximately five-year
production term of the agreement.
During 1994, WB released 36 motion pictures for theatrical exhibition, of
which 20 were produced by others. Among these 36 motion pictures, the following
have produced substantial gross receipts: "Maverick," "Interview With the
Vampire," "The Client," "Ace Ventura: Pet Detective," "Disclosure," "Natural
Born Killers" and "The Specialist." Significant revenues were also generated in
1994 by pictures originally released in 1993, including "Grumpy Old Men" and
"The Pelican Brief."
During 1995, WB currently expects to release domestically 23 pictures, of
which 9 will be produced by others. In addition to those previously mentioned,
such pictures include: "Outbreak," starring Dustin Hoffman, "Batman Forever,"
starring Val Kilmer, Tommy Lee Jones and Jim Carrey, "The Bridges of Madison
County," starring Clint Eastwood and Meryl Streep, "Free Willy 2: The Adventure
Home," "Under Seige 2: Dark Territory," starring Steven Seagal, and
"Assassins," starring Sylvester Stallone.
Warner Bros. Feature Animation was formed in January 1994 to create, develop
and produce feature-length animated motion pictures. Numerous projects are
currently in development and the first picture is expected to be released in
1997.
Television
WB, through its television production and distribution divisions and various
contractual arrangements, is the leading supplier of television programming in
the world. These WB divisions and suppliers produce
I-14
<PAGE>
and distribute filmed entertainment for television (including comedy and drama
series, animation shows, made-for-television movies, mini-series and first-run
syndication programming) for initial exhibition on networks, local stations or
cable systems. They include the wholly owned Warner Bros. Television Production
("Warner Bros. Television"), Telepictures Productions ("Telepictures"), Warner
Bros. Animation, Warner Bros. Domestic Television Distribution ("WBDTD") and
Warner Bros. International Television Distribution ("WBITD") divisions, the
joint ventures Time Telepictures Television and Quincy Jones/David Salzman
Entertainment Company, and contractual arrangements with the Prime Time
Entertainment Network ("PTEN") and Witt-Thomas-Harris Productions ("Witt-
Thomas").
WB television series for the 1994-95 broadcast season include: "Full House"
(in its eighth season), "Murphy Brown" (in its seventh season), "Family
Matters" (in its sixth season), "Sisters" (in its fifth season), "Step by Step"
(in its fourth season), "Hangin' with Mr. Cooper" (in its third season), "Kung
Fu: The Legend Continues" (in its third season), "Living Single" (in its second
season), "Lois & Clark: The New Adventures of Superman" (in its second season),
"The George Carlin Show" (in its second season), "ER" (the season's most
highly-rated new program), "Friends" (the season's highest-rated new comedy
series), "The Great Defender," "Hope & Gloria," "Medicine Ball," "On Our Own,"
"Pointman," "Something Wilder," "The Ties That Bind," "Under Suspicion," and
two half-hour comedy series for The WB, the new WB television network--"The
Wayans Bros." and "The Parent 'Hood." Warner Bros. Television is also producing
movies and mini-series for the 1994-95 broadcast season.
The Telepictures division, while continuing to specialize in reality and
reality-based series and specials for the first-run syndication market, is
expanding its activities into all media (network, first-run syndication and
cable) and all segments of the daily television schedule (daytime, prime time,
access and late-night). For the 1994-95 television season, Telepictures
productions include the successful, nationally syndicated "Jenny Jones" talk
show and the ten-hour mini-series "The History of Rock 'n' Roll" (broadcast in
March 1995) for PTEN. In 1992, Telepictures and TIV formed Time Telepictures
Television ("TTT"), a venture that is designed to bring together the
information resources of Time Inc. with the production and programming
expertise of Telepictures. TTT's first series is the six-day-a-week
entertainment magazine "EXTRA--The Entertainment Magazine," which debuted in
September 1994.
Warner Bros. Animation is responsible for the creation, development and
production of contemporary animation as well as for the creative use and
production of WB's classic animated properties. Warner Bros. Animation
currently supplies the Fox Children's Network with animated programming. In
September 1995, Warner Bros. Animation will be providing four series to Kids'
WB, the children's programming service of The WB. In addition, Warner Bros.
Animation is actively involved in the production of animated commercials.
PTEN, a consortium of leading television stations, offers prime time, first-
run programs which are exclusively supplied by WBDTD. The 1995 season of PTEN
includes a second season of "Babylon 5," "Kung Fu" (in its third season) and
the debut of "Pointman."
WB and Witt-Thomas have an exclusive, long-term feature film and television
production and distribution agreement. The agreement provides for Witt-Thomas
to exclusively create, develop and produce all forms of television for all
media. For the 1994-95 season, the team produced: "The John Larroquette Show"
(in its second season), "Daddy's Girls," "The Office" and "Muscle."
WBDTD is one of the industry's leading domestic distributors of television
programming. The division distributes over 5,800 hours in full syndication and
an additional 1,800 hours in limited markets; a substantial portion of this
programming is produced by WB's television divisions and ventures.
WBITD is the world's largest distributor of television programming. It
licenses more than 21,000 hours of television programming and feature films,
dubbed or subtitled in more than 40 languages, to telecasters in more than 160
countries. The division handles the distribution to the international
television marketplace (broadcast, pay and basic cable) for all of the product
produced by the WB television divisions and ventures, among others. WBITD
recently created Warner Bros. International Channels to expand its global
presence
I-15
<PAGE>
in television with the creation of a variety of thematic or general
entertainment programming services in both mature and emerging broadcast
markets throughout the world. WBTV-The Warner Channel, WB's first cable
satellite-delivered entertainment channel created exclusively for the
international marketplace, will launch in the summer of 1995 and will serve
Latin America as a family-oriented programming service. WBTV-The Warner
Channel, a venture of WB in association with the HBO Ole Partners, will utilize
the cable distribution expertise and facilities of HBO Ole. In alliance with
Home Box Office and other major motion picture studios, WB is a partner in
three other 24-hour pay television services--HBO Asia, HBO Brazil and HBO Ole.
WB's library of films for television distribution is comprised of films
produced by WB since 1949, as well as films produced by others and licensed to
WB for television exhibition in either selected markets or on a worldwide
basis. WB also owns a library of television series previously shown on network
television.
WB's 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 $852 million at December 31, 1994
compared to $724 million at December 31, 1993 (including amounts relating to
Programming-HBO of $175 million at December 31, 1994 and $178 million at
December 31, 1993). The backlog excludes advertising barter contracts.
During 1993, the Federal Communications Commission ("FCC") revised its rules
to allow the three major television networks to acquire financial interests and
syndication rights in programs produced for a network by outside producers such
as WB and to engage in the syndication of such programs abroad. Under the new
rules, the networks remain barred from actively syndicating any programs
domestically--both "off-network" (produced initially for network distribution)
and "first-run" (produced directly for syndication). With respect to first-run
syndicated programs, the networks remain barred from acquiring financial
interests if the program is not solely produced by the network. The new rules
also require the networks to release "off-network" programs into syndication no
later than four years after the program's network debut. The FCC rules were
upheld by the U.S. Court of Appeals for the Seventh Circuit in July 1994.
Until November 1993 the television networks, as a practical matter, continued
to be barred from acquiring financial interests and syndication rights in
outside-produced programs and from syndicating programs domestically or abroad
by consent decrees that each network entered into with the Department of
Justice over a decade ago. On November 8, 1993, however, the U.S. District
Court in Los Angeles issued a decision that eliminated those portions of the
consent decrees that restricted the networks' ability to obtain financial
interests and syndication rights and to distribute syndicated programs. With
these changes to the consent decrees, the above FCC rules are now the only
remaining restrictions on the networks' ability to acquire financial interests
and syndication rights in programs and to syndicate programs domestically.
These restrictions do not apply to The WB.
The District Court's decision and the 1993 FCC decision could adversely
affect the revenues WB derives from its off-network television syndication
operations. In addition, the FCC has stated that it will review the remaining
rules 18 months after the date of the District Court order and, if proponents
of the rules do not convince the FCC to retain the rules, the rules will
automatically expire in November 1995. If the remaining prohibitions on first-
run syndication are permitted to expire at that time, the revenues WB derives
from its first-run syndication operations also could be adversely affected.
FCC regulations also limit to three the number of hours of network (including
off-network) programs that television stations that are affiliated with the
networks and located in the top 50 markets may broadcast during the four-hour
prime time period. In such markets, the fourth hour of prime time programming
currently consists largely of first-run syndication programming. In October
1994, the FCC adopted a Notice of Proposed Rulemaking to examine whether these
regulations should be eliminated or modified. Comments are due at the FCC in
the spring of 1995. Repeal or modification of the off-network restriction might
have an advantageous impact on WB's sales of off-network syndicated programs,
but could adversely affect WB's sales of first-run syndication programming.
Repeal or modification of the network restriction could adversely affect
I-16
<PAGE>
WB's sales of both first-run and off-network programming if the networks
provide a network feed during that time period. The rule does not currently
apply to The WB. Repeal or modification of the rule is unlikely to have an
impact on The WB.
The WB Television Network
The WB, a new national television network, was launched by WB on January 11,
1995 (during the 1994-95 broadcast season). Tribune Broadcasting is the
network's flagship affiliate. Combining The WB's current broadcast affiliate
lineup with the reach of Tribune's WGN Superstation, The WB's national coverage
is approximately 80% of U.S. households. The WB's first night of programming is
Wednesday (featuring four half-hour comedies: "The Wayans Bros.," "The Parent
'Hood," "Unhappily Ever After" and "Muscle"). A second night will be added in
August 1995, and it is currently planned that an additional night will be added
each year thereafter. The WB launch programming is designed to appeal to young
adults, teens and kids, especially the 12-34 year old age group. In September
1995, The WB expects to unveil its new children's programming service, Kids'
WB, with 6 half-hours on Saturday morning and 2 half-hour morning strips
(Monday through Friday). Saturday morning highlights include a new animated
series from Steven Spielberg (the action/adventure "Freakazoid!"), brand new
episodes of the Peabody Award-winning "Steven Spielberg Presents Animaniacs"
and "Steven Spielberg Presents Pinky & The Brain" (favorites from
"Animaniacs"). On weekday mornings, Kids' WB will offer WB classic animation as
well as previously produced episodes of "Animaniacs." Viacom Inc. and Chris
Craft Industries Inc. launched United Paramount Network, a new broadcast
television network, in January 1995.
Home Video
Through its Warner Home Video division ("WHV"), WB distributes for home video
use pre-recorded videocasettes and laser optical videodiscs containing the
filmed entertainment product of WB. In addition, WHV distributes (or services
the distribution of) the entertainment product of other companies from which it
has acquired home video distribution or servicing rights. Such companies
include Metro Goldwyn Mayer/United Artists, Turner, Regency Pictures and Morgan
Creek Productions (in the United States and in selected international markets).
During 1994, WHV released eight titles into the North American rental market
whose sales exceeded 300,000 units each: "Maverick," "The Pelican Brief,"
"Demolition Man," "On Deadly Ground," "A Perfect World," "The Client," "Blown
Away" and "Grumpy Old Men." Internationally, the following titles generated
substantial home video revenue in 1994: "The Fugitive," "A Perfect World,"
"Demolition Man" and "Free Willy." Additionally, the Warner Bros. Family
Entertainment label was enhanced through the affordably-priced North American
video releases of "Black Beauty," "Secret Garden," "Thumbelina," "Batman: Mask
of the Phantasm" and "George Ballanchine's The Nutcracker," which generated
combined videocassette sales in excess of 11 million units. Also, WHV released
"The Fugitive" and "Ace Ventura: Pet Detective" at affordable prices,
generating combined sales of over 8 million units. Based on this experience,
WHV will continue the video release of certain "blockbuster" theatrical
releases and family entertainment programming on a direct to sell-through
basis.
WHV sells its product in the United States and in major international
territories through its own sales force, with warehousing and fulfillment
handled by divisions of the Warner Music Group and third parties. In some
international markets, WHV's product is distributed through licensees. All
product is manufactured under contract with independent laboratories.
In January 1995, Toshiba and WHV announced their proposal for a high density
digital video disc (DVD) format that features a double-sided, five-inch disc
with enough storage capacity for two full-length feature films. The proposal
was supported by a number of major consumer electronics companies and Hollywood
studios. Toshiba and WHV expect that the DVD format will be developed and
marketed for consumer introduction in 1996. Sony Corp. and Philips Electronics
NV have independently announced that they are developing a similar product
based on a separate, competing format.
I-17
<PAGE>
Competition
The production and distribution of theatrical motion pictures, television
product and videocassettes/ videodiscs are highly competitive businesses, as
each competes with the other as well as with other forms of entertainment.
Furthermore, there is increased competition in the television industry
evidenced by the increasing number and variety of basic cable and pay
television services now available. There is active competition among all
production companies in these industries for the services of producers,
directors, actors and others and for the acquisition of literary properties.
With respect to the distribution of television product, there is significant
competition from independent producers and distributors as well as major
studios. Revenues for filmed entertainment product depend in part upon general
economic conditions, but the competitive position of a producer or distributor
is still greatly affected by the quality of, and public response to, the
entertainment product it makes available to the marketplace. The television
network industry is extremely competitive as networks seek to attract audience
share and television stations for affiliation, and obtain advertising revenue
and distribution rights to television programming. There is strong competition
throughout the home video industry, both from home video subsidiaries of
several major motion picture studios and from independent companies.
Consumer Products
Warner Bros. Consumer Products, another division of WB, through its licensing
division ("WBCP Licensing"), acts as an agent for owners of copyrights and
trademarks in the consumer products marketplace. WBCP Licensing licenses rights
to names, photographs, likenesses, logos and similar representations or
endorsements with respect to the theatrical motion pictures and television
series produced or distributed by WB, including those featuring the cartoon
characters owned by DC Comics. WBCP Licensing operates in both domestic and
international markets, and meets with active competition in all phases of its
activities. In 1994, WBCP Licensing continued its major licensing programs for
"Looney Tunes," Steven Spielberg's "Tiny Toon Adventures," "Animaniacs" and the
animated television series "Adventures of Batman and Robin." In addition, WBCP
Licensing began a major licensing program for the new theatrical motion picture
"Batman Forever."
Warner Bros. Studio Stores
In 1994, the retail division of Warner Bros. Consumer Products ("WBCP
Retail") continued its expansion with the opening of 46 additional outlets in
the United States and five overseas, including stores in London, Glasgow and
Berlin. By the end of 1994, WBCP Retail had opened a total of 111 Warner Bros.
Studio Stores, 100 of which are located in select shopping locations throughout
the United States, 10 of which are located in the United Kingdom and one of
which is located in Germany. In 1995, WBCP Retail plans to open 20-25
additional stores in the United States and Europe. Also in 1994, WBCP Retail
entered into agreements to open its first franchised Warner Bros. Studio Stores
in Hong Kong and Singapore during 1995. Additional agreements to franchise
Warner Bros. Studio Stores throughout other countries in the Asia Pacific
Region are scheduled to be completed during 1995.
Theaters
Since WB, through its Warner Bros. International Theatres division, began its
program in 1987 to construct and operate new multiplex cinemas, it has opened
36 complexes with 294 screens in six foreign countries. WB operates nine
theaters in the United Kingdom, two in Germany and, through joint ventures, 17
theaters in Australia, two in Denmark, one in Portugal and five in Japan.
Directly and through joint ventures, WB plans to open ten new multiplex cinemas
in 1995; there are currently under construction three multiplex cinemas in the
United Kingdom, one in Australia, two in Portugal, two in Japan, one in Spain
and one in Holland.
Warner Bros. Theme Parks
WB, through joint ventures with certain Australian entities (including one
which is 34.25% owned by WB), owns and operates Sea World of Australia and a
400-acre movie studio and movie-related theme park
I-18
<PAGE>
named "Warner Bros. Movie World" as well as a water park complex, all near
Brisbane, Australia. In addition, WB and a German partner have under
construction a new regional theme park and studio complex in the Rhine/Ruhr
area of Germany, which is scheduled to open in 1996. The park and studio
complex will be modeled after Warner Bros. Movie World in Australia.
Six Flags Theme Parks
Six Flags Entertainment Corporation ("Six Flags") and its wholly owned
subsidiary, Six Flags Theme Parks Inc., became wholly owned subsidiaries of TWE
in September 1993 when TWE's ownership interest in Six Flags was increased from
50% to 100%.
Six Flags is the second largest theme park operator in the United States. Six
Flags owns or operates seven major theme parks: Six Flags Great Adventure (New
York-Philadelphia), Six Flags Great America (Chicago-Milwaukee), Six Flags
California (Los Angeles), Six Flags Houston (Houston), Six Flags Over Mid-
America (St. Louis), Six Flags Over Texas (Dallas-Ft. Worth) and Six Flags Over
Georgia (Atlanta).
Six Flags California includes Six Flags Magic Mountain and Six Flags
Hurricane Harbor, a 22-acre themed water park adjacent to Six Flags Magic
Mountain, that is expected to open in the summer of 1995.
Six Flags' co-venture parks, Six Flags Over Texas and Six Flags Over Georgia,
are owned by limited partnerships, the limited partners of which are
unaffiliated limited partnerships and the general partners of which are wholly
owned subsidiaries of Six Flags (the "Managing Subsidiaries"). The Managing
Subsidiaries have sole responsibility for the operation and management of the
co-venture parks. The co-venture partnerships are scheduled to liquidate
(subject to extension by the limited partners) on December 31, 1997.
Six Flags' theme parks are generally similar in design and operating
characteristics. Each park is divided into a number of contiguous entertainment
areas featuring different historical, geographic or other entertainment-related
themes. The design and operation of the theme parks are intended to provide a
full day of family entertainment. Admission is based on the concept of a one-
price ticket, which entitles a guest to virtually unlimited access to all
rides, shows, and attractions during a visit to the parks. Each park generally
has from 40 to 60 rides, including five to ten major attractions. These rides
generally include thrill rides, such as roller coasters, mine-train rides,
river-rapids rides, and log flumes, as well as rides for young children. The
theme parks also have a number of indoor and outdoor theaters that offer
entertainment at various times throughout the day and evening. In addition,
from time to time during the season, each of the theme parks offers special
concerts featuring well-known entertainers for which an additional admission
price may be charged.
Competition within the theme park industry exists on a regional rather than a
national basis. Principal factors relating to competition within the theme park
industry generally include the uniqueness and perceived quality of the rides
and attractions in a particular park, the proximity of a park to densely
populated areas, the atmosphere and cleanliness of a park, and the quality of
food and entertainment available. There are no major parks located within Six
Flags' core market areas (within a 50-mile radius) with the exception of Los
Angeles, where Six Flags California is near Disneyland and other attractions.
Six Flags' theme parks also compete with other recreational facilities and
forms of entertainment within their market areas.
For additional information, see Item 2 "Properties."
PROGRAMMING--HBO DIVISION
General
TWE's programming business is principally conducted by its Home Box Office
division ("Home Box Office"). The principal businesses of Home Box Office are
the programming and marketing of two pay television programming services, HBO
and Cinemax. HBO's programming includes commercial-free, uncut feature motion
pictures, sporting events, special entertainment events (such as concerts,
comedy shows and documentaries) and motion pictures produced by or for HBO.
Cinemax offers a broad range of motion pictures, including classic, family,
action-adventure, foreign and recently released feature films.
I-19
<PAGE>
At December 31, 1994, HBO had approximately 19.2 million subscribers,
compared to 18.0 million subscribers at year-end 1993, and Cinemax had
approximately 7.8 million subscribers, compared to 6.7 million subscribers at
year-end 1993. The overall gain of 2.3 million subscribers for the two services
represents the largest annual increase in Home Box Office subscribers since
1983.
Affiliates
Home Box Office's pay television services are principally distributed through
cable television systems and multi-point microwave systems with which Home Box
Office has a contractual relationship ("affiliates"). The HBO and Cinemax
services are transmitted via communications satellites to these affiliates,
which are generally charged a monthly fee on a per subscriber basis for each of
the services carried. Subscribers to HBO and Cinemax are then billed monthly by
their local affiliate for each service purchased and are free to cancel a
service at any time.
Individual dish owners wishing to subscribe to HBO or Cinemax must purchase a
consumer decoder from a local source and arrange for its activation.
Subscriptions for direct-by-satellite to the home ("DTH") viewing are available
through cable television system operators, HBO Direct Inc., a subsidiary of
TWE, satellite equipment dealers or unaffiliated program packagers. In 1994,
Home Box Office, through its affiliation agreements with United States
Satellite Broadcasting, Inc. ("USSB") and Primestar Partners L.P., began DTH
distribution of the HBO and Cinemax services by means of high-powered and mid-
powered Ku-Band frequency satellites.
Home Box Office formally introduced in 1993 a new "multichannel" format for
the delivery of HBO and Cinemax over multiple channels providing differing
schedules of HBO and Cinemax programming. As of year-end 1994, the new multi-
channel format was received by approximately 5.4 million HBO subscribers and
2.1 million Cinemax subscribers, including all DTH subscribers.
As a result of acquisitions and mergers in the cable television industry in
recent years, the percentage of Home Box Office's revenue from affiliates that
are large multiple system cable operators has increased and Home Box Office
anticipates that the consolidation among cable television operators will
continue. As of December 31, 1994, the largest single multiple system cable
operator with which Home Box Office does business is Tele-Communications, Inc.
("TCI"). Home Box Office's affiliation with TCI accounted for approximately 20%
of HBO and Cinemax combined subscribers. As of December 31, 1994, Time Warner
Cable (see "Cable Division--Video") accounted for an additional 12%. Home Box
Office attempts to assure itself of continuity in its relationships with
affiliates and has entered into multi-year contracts with certain of such
operators, including TCI. Home Box Office's agreements with its cable
affiliates are typically for terms of five years. Affiliation agreements with
some larger multiple system operators, including TCI, are for terms in excess
of five years. Although Home Box Office believes the prospects of continued
carriage of its pay programming services by the large cable operators are good,
the loss of one or more of them as distributors of Home Box Office's pay cable
television services could have a material adverse effect on Home Box Office's
business.
Programming
A majority of HBO's programming and a large portion of that on Cinemax
consists of recently released, uncut and uncensored feature motion pictures.
Home Box Office's practice has been to negotiate licensing agreements of
varying duration for such programming with major motion picture studios and
independent producers and distributors. These agreements typically grant pay
television exhibition rights to recently released and certain older films owned
by the particular studio, producer or distributor in exchange for a negotiated
fee which is a function of, among other things, HBO and Cinemax subscriber
levels and the films' box office performances. Home Box Office competes with
other pay cable, basic cable and broadcast networks, among others, for the
acquisition of programming product.
Home Box Office attempts to ensure access to future movies in a number of
ways. In addition to its exhibition of movies distributed by WB and its regular
licensing agreements with numerous distributors, it
I-20
<PAGE>
has entered into agreements with Sony Pictures Entertainment, Inc. ("Sony
Pictures"), Paramount Pictures Corporation ("Paramount"), Savoy Pictures
Entertainment, Inc. ("Savoy") and Twentieth Century Fox Film Corporation
("Fox") pursuant to which Home Box Office has acquired exclusive and non-
exclusive rights to exhibit on its pay television services all or a substantial
portion of the films produced, acquired and/or released by these entities
during the term of each agreement. Home Box Office has also entered into non-
exclusive license agreements with Fox, Paramount, Sony Pictures and MGM/UA for
older, library films.
In early 1995, Home Box Office entered into an agreement with DreamWorks LLC
pursuant to which Home Box Office acquired exclusive rights to exhibit on its
pay television services films from this new entertainment company formed by
Steven Spielberg, Jeffrey Katzenberg and David Geffen, as well as an agreement
with Orion Pictures Corporation for exclusive rights to certain of its library
films.
HBO also exhibits made-for-pay television motion pictures that are produced
by or for Home Box Office or one of its divisions or by outside production
companies from which Home Box Office licenses certain exclusive pay television
and other rights (frequently including domestic home video) for a negotiated
fee. Besides motion pictures, a significant portion of HBO's programming
consists of dramatic and comedy specials, television series, family shows,
documentaries and other programs that are produced specifically for HBO. Home
Box Office either negotiates a license to these programs with an outside
production company or produces the programs itself, or through a production
services entity, in which case all rights are generally retained and exploited
by Home Box Office. Home Box Office also acquires exclusive pay television
rights to show certain live and delayed-broadcast sporting events, such as
boxing matches and Wimbledon, and may also acquire additional rights to these
programs. In 1994, the quality of HBO's original programming was recognized by
15 Emmy Awards, two Peabody Awards and an Academy Award for the documentary "I
Am a Promise."
Other Interests
Home Box Office acquires home videocassette distribution rights for the
United States and Canada for a number of theatrical and made-for-pay television
motion pictures, concerts and comedy shows that it has produced or licensed for
pay television, including theatrical motion pictures distributed by Savoy. HBO
Video, a division of Home Box Office, exploits these rights. Certain aspects of
the distribution of videocassettes by HBO Video are carried out pursuant to a
service arrangement with WHV.
Time Warner Sports ("TWS"), a division of Home Box Office, operates TVKO, an
entity that distributes pay-per-view prize fights and other pay-per-view
programming. TWS also undertakes sports merchandising through a licensing
division that currently represents the 1996 European (Soccer) Championship. In
1994, merchandising clients included the United States Soccer Federation and
World Cup Soccer USA 1994.
In 1994, HBO Independent Productions ("HBOIP"), a division of Home Box
Office, produced four series for broadcast by the Fox network, "Roc," "Martin,"
"Get Smart" and "House of Buggin." HBOIP also produced a theatrical motion
picture, "Martin Lawrence--You So Crazy," which was distributed theatrically by
The Samuel Goldwyn Company and by means of home videocassettes by HBO Video. A
division of Home Box Office owns a 50% interest in, and is the managing general
partner of, a limited partnership that indirectly acquired the assets of
Citadel Entertainment, Inc. and its affiliates. The limited partnership
produces motion pictures and other programs for broadcast, basic cable and pay
television networks, including HBO, and motion pictures for theatrical
distribution.
Home Box Office and MAI, plc. ("MAI"), a U.K. television production and
distribution company, are co-owners of both a U.K. production company that
develops and produces television programming principally designed for the U.K.
market, and a joint venture, ITEL, for the foreign distribution of programming
produced by Home Box Office and MAI.
HBO Enterprises, a division of Home Box Office, distributes certain feature
length theatrical films and made-for-pay television programming to other cable
television or pay-per-view services. In addition, HBO
I-21
<PAGE>
Enterprises distributes Home Box Office original programming in domestic
syndication and foreign television when it controls such rights. WBITD
distributes in foreign markets certain television programming of HBO.
In September 1991, a subsidiary of Home Box Office and a Venezuelan company
launched HBO Ole, a Spanish-language pay television motion picture service, to
serve Central and South America, Mexico and the Caribbean. The launch of a
second motion picture service, Cinemax, occurred in February 1994. In April
1994, Sony Pictures became a partner in HBO Ole. In July 1994, HBO Ole,
together with a Brazilian company, launched a Portuguese-language pay
television movie service in Brazil. In June 1992, a Singapore subsidiary of the
Company launched a new English-language, movie-based HBO service in Singapore.
Home Box Office, together with its partner in the Asian venture, a subsidiary
of Paramount, has expanded this HBO service into other countries in Southeast
Asia including Thailand, the Philippines, Taiwan, Indonesia, Bangladesh, Brunei
and Papua New Guinea. In November 1994, Home Box Office, together with a
partner, launched a Czech-language pay television movie service in the Czech
Republic. Home Box Office also owns an interest in two general entertainment
programming services launched in the Czech Republic in September 1994. In
addition to its Latin American, Asian and Eastern European ventures, Home Box
Office has investments and/or licensing arrangements with pay television
services in Hungary, Scandinavia and New Zealand. See "Cable Division--Video--
Other Interests."
TWE holds an 11% interest in Crystal Dynamics, Inc., a developer and
distributor of video games.
TWE holds a 50% interest in Comedy Central, an advertiser-supported basic
cable television service. Comedy Central launched in April 1991 and was
available in 31 million homes at year-end 1994.
Competition
Home Box Office's businesses face strong competition. HBO and Cinemax compete
both for programming product and for the attention of television viewers with
commercial television networks and independent commercial television stations,
pay-per-view services and home video, as well as other basic and pay cable
television services, some of which have exclusive contracts with motion picture
studios and independent motion picture distributors.
In 1993, an entity affiliated with TCI, the multiple system cable operator
accounting for 20% of HBO and Cinemax combined subscribers, launched STARZ!, a
pay cable television service having exclusive contracts with several motion
picture studios. In February 1994, Viacom Inc., the parent company of the pay
cable television movie services Showtime and The Movie Channel, acquired a
controlling interest in the parent company of Paramount, with which Home Box
Office currently has an exclusive license agreement covering Paramount
theatrical releases through December 31, 1997.
Home Box Office's production divisions compete with other producers of
programs for broadcast networks, independent commercial television stations,
and basic cable and pay television networks. Home Box Office also competes with
other companies engaged in the distribution or exhibition of motion pictures
and with other communications media and entertainment and information sources.
See "Regulation and Legislation."
Regulation and Legislation
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"), among other things, imposes certain requirements concerning
the wholesale rates that Home Box Office may charge its affiliates and the
means by which Home Box Office may make its programming services available to
subscribers through distribution technologies other than cable television. In
April 1993, the FCC released regulations designed to implement these provisions
of the 1992 Cable Act, generally prohibiting vertically integrated programmers
in which cable companies hold a 5% or greater attributable interest, which
include the program services owned by Home Box Office, from offering different
price, terms, or conditions to competing multichannel video programming
distributors (which includes cable, multichannel microwave distribution
services ("MMDS"), DTH and home satellite distributors) in the geographic areas
in which they
I-22
<PAGE>
compete, unless the differential is justified by certain permissible factors
set forth in the regulations. These permissible justifications include the
different costs of delivering the programming to the distributor,
creditworthiness, financial stability, character, technical factors,
differences related to volume, penetration, channel positioning, promotional
advertising, prepayment discounts, retail pricing, and contract duration. The
rules also place certain restrictions on the ability of vertically integrated
programmers such as Home Box Office to enter into exclusive distribution
arrangements with cable operators. Although the HBO and Cinemax services are
currently provided to subscribers by means of a number of different
technologies including cable, MMDS and DTH, this legislation and the FCC's
implementing regulations could have a material adverse effect on Home Box
Office's business. In December 1994, the FCC substantially affirmed these rules
on reconsideration, and determined that it has authority to award monetary
damages for violations, but that no such remedy is necessary at this time. See
"Cable Division--Regulation and Legislation."
The leaders of both Houses of Congress have announced their intention to
introduce telecommunications legislation during 1995. The Senate Commerce
Committee has reported a comprehensive telecommunications reform bill. Several
issues will be subject to continuing negotiation and debate when the full
Senate considers the bill. The bill contains amendments to the program access
provisions of the 1992 Cable Act that may be adverse to HBO's interests by
weakening a programmer's ability to justify price differentials based on
volume. These provisions may be subject to further amendments as the bill moves
through the legislative process and the Company cannot predict whether any such
provisions will be enacted into law.
In November 1994, the FCC released a decision in its Telephone Company-Cable
Television Cross-Ownership proceeding making it clear that telephone companies
could own programmers such as Home Box Office, but could not offer their own
programming over their cable facilities within their telephone service areas.
Thus, telephone companies are free to produce, package and distribute video
programming to unaffiliated cable operators or other multichannel video
programming distributors. Such telephone company programming services might
compete with Home Box Office. Certain telephone companies have already formed
such ventures with individuals or entities with experience in program
production, and discussions regarding additional such ventures reportedly have
taken place.
In November 1994, the FCC also released a decision in its Sixth
Reconsideration, Fifth Report and Order, and Seventh Notice of Proposed
Rulemaking concluding that it had jurisdiction to regulate the rates of
discounted packages of pay services that were also offered on a per channel
basis. The FCC, however, ruled that the rates for such a collective offering of
pay services carried on cable systems as of April 1, 1993 would be presumed
reasonable and would not be regulated by the FCC. The FCC, at the same time,
reiterated its longstanding position that the 1992 Cable Act prohibited rate
regulation of pay services, such as HBO and other cable programming, when they
were offered on a per channel basis. Home Box Office has asked the FCC to
reconsider that portion of its decision that would subject pay services, such
as HBO, to rate regulation when made part of a discounted package.
CABLE DIVISION--VIDEO
General
TWE's cable television operations are conducted through its Time Warner Cable
division ("Time Warner Cable") with headquarters in Stamford, Connecticut.
As of December 31, 1994, Time Warner Cable's wholly and partially owned cable
systems served a total of 7.5 million cable subscribers located in 32 states,
of which cable systems serving 6 million subscribers were wholly owned or
otherwise consolidated. Time Warner Cable is the second-largest multiple system
cable operator in the United States, owning or operating 22 of the top 100 U.S.
cable systems, including Time Warner Cable of New York City, the largest
cluster of cable systems in the country. As of December 31, 1994, cable
television systems serving 922,000 subscribers (adjusted to reflect the partial
ownership of certain of such cable systems by the Time Warner General Partners
and their subsidiaries) were held by the Time Warner General Partners or their
subsidiaries as beneficial assets for TWE, pending completion of the transfer
of these cable systems to TWE.
I-23
<PAGE>
Through a network of coaxial and fiber-optic cables, TWE's cable television
system subscribers generally receive 36 or more channels of video programming,
including local broadcast television signals, locally produced or originated
video programming, distant broadcast television signals (such as WTBS, WWOR or
WGN), advertiser-supported video programming (such as ESPN and CNN) and premium
programming services (such as HBO, Cinemax, Showtime and The Movie Channel). In
some systems, Time Warner Cable also offers movies and other events on a pay-
per-view basis, as well as audio and other entertainment services.
In December 1994, Time Warner Cable introduced the Full Service Network in
its suburban Orlando, Florida cable system. The Full Service Network system is
expected to be connected to 4,000 customers by the end of 1995. The Full
Service Network systems will utilize fiber optics, digital compression, digital
switching and storage devices, and will be capable of providing the consumer
with video-on-demand including movies, interactive games, distance learning,
interactive shopping and access to long distance telephone service. Full
implementation of the Full Service Network system to the extent it incorporates
a form of telephone service will require changes in current government
regulation.
Pursuant to the Admission Agreement, TWE has agreed to use its best efforts
to complete upgrades to a substantial portion of its cable systems by the end
of 1998. Such upgrades include the broad deployment of fiber, electronics and
switching equipment. It is anticipated that substantial capital expenditures
will be required to complete these upgrades.
In recent years, Time Warner Cable has grown primarily as a result of
increases in the number of subscribers to its existing cable television systems
and the development of geographically-clustered systems through the exchange or
purchase of existing cable television systems. Future growth in subscribers is
expected to come from acquisitions, increased penetration of existing homes
passed (through rebuilds and the introduction of new services), population
growth, and extensions of existing systems. During 1994, Time Warner Cable
acquired systems in or near Charlotte, North Carolina, Memphis, Tennessee and
Austin, Texas. These acquisitions were funded with the proceeds from Time
Warner Cable's disposition of systems in Arizona, Colorado, Minnesota, Oklahoma
and Texas. These transactions resulted in a net decrease of 20,000 in Time
Warner Cable's reported basic subscribers. For information about pending
acquisitions of cable television systems announced by Time Warner in late 1994
and early 1995, see pages I-1 and I-2.
Most of TWE's cable television revenue is derived from monthly fees paid by
subscribers for cable video programming services. Additional revenue is
generated by selling time on cable television systems for commercial
advertisements to local, regional and, in some cases, national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable
programming and local origination programming shown on TWE's cable television
systems. In addition, pay-per-view service is offered in certain cable
television systems, which allows subscribers to choose to view specific movies
and events, such as concerts and sporting events, and to pay on a per-event
basis. Certain cable television systems also sell direct-by-satellite to the
home video services such as Primestar, for a monthly fee.
Programming
Time Warner Cable provides certain video programming to its subscribers
pursuant to multi-year contracts with program suppliers who are paid a monthly
fee per subscriber. Many of these contracts contain price escalation
provisions; however, in most cases the cable operator has a right to cancel the
contract if the supplier raises its price beyond agreed limits. The loss of any
one supplier would not have a material adverse effect on Time Warner Cable.
Service Charges
Subscribers to Time Warner Cable systems generally are charged monthly fees
based on the level of service selected. The monthly prices for various levels
of cable television services (excluding services offered on a per-channel or
per-program basis) range generally from $5 to $25 for residential customers.
Other services offered include equipment rentals, usually for an additional
monthly fee. Systems offering pay-per-view movies generally charge between $4
and $6 per movie, and systems offering pay-per-view events generally charge
between $6 and $50, depending on the event. A one-time installation fee is
generally charged for connecting subscribers to the cable television system.
I-24
<PAGE>
Subscribers may purchase premium programming services, and in certain systems
other per-channel services, for an additional monthly fee for each such
service, with discounts generally available for the purchase of more than one
service.
Commercial subscribers are charged rates for cable programming services that
vary depending on the nature of the contract.
Franchises
In general, Time Warner Cable operates its cable television systems pursuant
to non-exclusive franchises granted by franchising authorities for specified
periods of time, generally ranging from eight to 25 years and averaging
approximately 15 years. These franchise agreements typically specify the design
of the cable system that must be constructed and cover such matters as total
channel capacity; access by local governments, schools and non-profit and
community groups to public, educational and governmental channels; and
franchise fees to be paid to the franchising authority. The terms of a
franchise may also require improved facilities, increased channel capacity or
enhanced services. As a consequence, Time Warner Cable may make significant
additional investments in its cable television systems as part of the franchise
renewal process. Some franchises are nontransferable without prior approval of
the franchising authorities and may prohibit a material change in ownership or
control of the cable operator without prior approval. Although it has not
previously occurred with respect to a Time Warner Cable franchise, many
franchises provide for termination of the franchise in the event of a breach by
the cable operator of a material term of the franchise agreement.
Of Time Warner Cable's franchises, as of January 1, 1995, 398 franchises
serving approximately 1,600,000 subscribers expire during the period ending
December 31, 1997. Although Time Warner Cable has been successful in the past
in negotiating new franchise agreements, there can be no assurance as to the
renewal of franchises in the future.
Regulation and Legislation
Cable television is regulated by the federal government, some state
governments and most local governments. The following discussion summarizes
certain federal, state and local laws and regulations affecting cable
television.
Under the 1992 Cable Act, the FCC has implemented regulations covering, among
other things, cable rates, signal carriage, composition of certain service
offerings, consumer protection and customer service standards, leased access,
indecent programming on commercial leased and public, educational and
governmental channels, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of direct broadcast satellite system ownership and
operation. The implementation of the 1992 Cable Act continues to have an
adverse effect on the operations of Time Warner Cable.
The 1992 Cable Act subjects nearly all cable systems in the United States to
rate regulation of cable service other than services offered on a per-channel
or per-program basis, and to regulation of charges for service installation and
for certain equipment. Effective on September 1, 1993, FCC rules required rates
for certain equipment to be established based on actual cost, and rates for
regulated cable services to be established based on either a per-channel
benchmark of 10% below the average level of rates prevailing nationwide in
September 1992 or a cost-of-service standard, at the election of the cable
operator. Time Warner Cable elected to establish rates based on the 10% per-
channel benchmarks.
On October 29, 1993, TWE filed a petition for review of certain of the FCC's
rate regulation rules with the United States Court of Appeals for the D.C.
Circuit. Such petition contends, among other things, that the rate regulation
rules are contrary to the 1992 Cable Act, arbitrary and capricious and
unconstitutional. The case has been fully briefed and a decision is pending.
I-25
<PAGE>
On March 30, 1994, the FCC lowered, effective on May 15, 1994, the per-
channel benchmark from 10% to 17% below the average level of rates prevailing
in September 1992. From April 5, 1993 until May 15, 1994, the FCC had "frozen"
at April 5, 1993 levels, rates for regulated cable services and associated
equipment, other than for systems in which local franchising authorities
regulate rates.
If a franchising authority in the case of basic rates or the FCC in the case
of a complaint filed against a rate for a tier of service other than a "New
Product Tier" or similar unregulated service, as described below ("Cable
Programming Service") finds that a particular rate is above the applicable
benchmark, the rates can be ordered to be reduced to a level 17% below the rate
in effect on September 30, 1992 (but not below the applicable benchmark). With
respect to basic rates currently in effect that are found to be unreasonable,
it is the FCC's position that franchising authorities may order refunds
(including interest) dating back to September 1, 1993, or one year, whichever
is shorter. With respect to Cable Programming Service rates that are found to
be unreasonable, the FCC may order refunds (including interest) dating back to
the date of the first valid complaint filed on or after September 1, 1993
challenging that rate. However, in the case of basic as well as non-basic
rates, cable operators will have an opportunity to justify their rates through
cost-of-service showings made to the franchising authority or to the FCC, as
appropriate.
On November 18, 1994, the FCC released "going forward" rules that allow
limited increases in rates for new channels added to existing Cable Programming
Service tiers. The rules also allow cable operators to offer "New Product
Tiers" (or in certain cases, recently created tiers comprised of existing
programming) to be priced as operators elect provided certain conditions are
met.
The Company expects that legislation that would make significant changes to
the Communications Act of 1934 will be considered in Congress during 1995.
Among the proposed revisions currently contained in draft House legislation and
in the bill reported out of the Senate Commerce Committee are provisions that
would reduce rate regulation of cable programming services. While such a
provision would have a favorable impact on Time Warner Cable's revenues, the
Company cannot predict whether any such provision will be enacted into law.
One purported class-action brought in a Florida state court and one action by
the Wisconsin Attorney General have been brought alleging that the retiering
and a la carte pricing implementation by Time Warner Cable in response to the
FCC's new rate regulation rules violate those rules and/or state consumer
protection laws. A purported nationwide class action has also been brought in a
federal court in New York alleging that any charges imposed by Time Warner
Cable for additional outlet connections violate the 1992 Cable Act and the
FCC's rate regulation rules to the extent those charges exceed Time Warner
Cable's costs. Time Warner Cable has opposed each of these claims on the
grounds that any state law claims regarding cable rates are preempted by the
1992 Cable Act and rules, that any federal claims regarding cable rates must be
brought before the FCC in the first instance and that rates for premium
services cannot be regulated at all pursuant to the Cable Communications Policy
Act of 1984 (the "1984 Cable Act") and the 1992 Cable Act. The underlying claim
brought by the Wisconsin Attorney General has been settled but the preemption
issue in that matter is pending before a federal appellate court following an
unfavorable determination by a federal district court. The trial courts in the
purported class actions have also ruled against Time Warner Cable's preemption
arguments and Time Warner Cable has appealed or otherwise sought review of
those decisions.
The 1992 Cable Act contains requirements mandating the carriage of certain
"local" television broadcast stations by cable systems. These provisions allow
commercial television broadcast stations that are "local" to a cable system, to
elect whether to require the cable system to carry the station ("must carry"),
subject to certain exceptions, or whether the cable system will have to
negotiate for "retransmission consent" to carry the station. Local,
noncommercial television stations are given mandatory carriage rights only,
subject to certain exceptions. In addition, cable systems must obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations." Many stations, including the
majority of affiliates of the major broadcast networks, elected to negotiate
for retransmission consent. As of February 15, 1995, for all such stations that
TWE desires to carry, carriage agreements or temporary arrangements have been
effected.
I-26
<PAGE>
After enactment of the 1992 Cable Act, TWE and other cable operators and
programmers filed federal lawsuits seeking to overturn certain major
provisions, primarily on First Amendment grounds. For additional information,
see Item 3 "Legal Proceedings."
FCC regulations require that cable systems that have 1,000 or more
subscribers must, upon the appropriate request of a local television station,
delete the simultaneous or non-simultaneous network programming of a distant
station when such programming is under exclusive contract to the local station
for its area.
FCC regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of such
deletions will vary from area to area. The FCC has commenced a proceeding to
determine whether to relax or abolish the geographic limitations on program
exclusivity contained in its rules, which would allow parties to set the
geographic scope of exclusive distribution rights entirely by contract. It is
possible that the outcome of these proceedings will increase the amount of
programming that cable operators are requested to black out.
Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services and franchise renewal.
Although franchising authorities may impose franchise fees, under the 1984
Cable Act such payments cannot exceed 5% of a cable system's annual gross
revenues. Franchising authorities are also empowered in awarding new franchises
or renewing existing franchises to require cable operators in certain
circumstances to provide cable-related facilities and equipment and to enforce
compliance with service commitments.
The 1984 Cable Act established renewal procedures and criteria designed to
protect incumbent franchisees against arbitrary denials of renewal. While these
formal procedures are not mandatory unless timely invoked by either the cable
operator or the franchising authority, they can provide substantial protection
to incumbent franchisees. Nevertheless, renewal is by no means assured, as the
franchisee must meet certain statutory standards. Even if a franchise is
renewed, a franchising authority may impose new and more onerous requirements
such as upgrading facilities and equipment, although the municipality must take
into account the cost of meeting such requirements.
Questions concerning the ability of municipalities to impose certain
franchise restrictions upon cable television companies have been considered in
several federal appellate and district court decisions. These decisions have
been somewhat inconsistent and, until the U.S. Supreme Court rules definitively
on the scope of cable television's First Amendment protections, the legality of
the franchising process and of various specific franchise requirements is
likely to be in a state of uncertainty. However, the 1992 Cable Act, among
other things, prohibits franchising authorities from unreasonably refusing to
grant a franchise to a competing cable system and permits franchising
authorities to operate their own cable systems without franchises.
While the 1984 Cable Act exempted cable television systems from state utility
or common carrier regulation solely by reason of providing cable service,
certain states have adopted other cable television legislation and regulations.
The 1984 Cable Act codified existing FCC cross-ownership regulations, which,
in part, prohibit local exchange telephone companies ("LECs"), including the
Regional Bell Operating Companies ("RBOCs"), from providing video programming
directly to subscribers within their local exchange telephone service areas,
except in rural areas or by specific waiver of FCC rules. This statutory
provision has recently been held unconstitutional by six U.S. District Courts
and two U.S. Courts of Appeals. In light of these court decisions, the FCC
announced on March 17, 1995 that it will not enforce its cross-ownership
restrictions against those telephone companies that have won district court
injunctions against their enforcement or those companies that operate in the
Fourth and Ninth judicial circuits. In practice, the FCC's relaxed enforcement
policy will
I-27
<PAGE>
apply to six of the seven RBOCs. The cable television industry and the United
States Department of Justice intend to seek review of the two U.S. Courts of
Appeals decisions by the Supreme Court, but there is no assurance that the
Supreme Court will accept review, or, if accepted, reverse the lower courts.
The FCC has granted numerous authorizations to LECs to construct and operate
facilities on a common carrier basis for the provision of video programming to
the public. These common carrier facilities are known as "video dialtone"
systems. The FCC has also permitted Bell Atlantic to be a programmer on its own
video dialtone system in Northern Virginia, subject to certain conditions, and
has requested public comment on the conditions that should govern the provision
of programming by all LECs. The FCC thus far has not decided whether the
franchise provisions of the 1984 and 1992 Cable Acts apply to LECs that program
their own video dialtone systems. In August 1994, a U.S. Court of Appeals
affirmed the FCC's decision that a programmer unaffiliated with a LEC does not
need a franchise to program the video dialtone system. The cable industry
continues to challenge the FCC's conclusion that neither a LEC nor its
programmer would be required to obtain a local cable franchise.
In November 1994, the FCC reaffirmed its previous recommendation that
Congress amend the Communications Act of 1934 to allow LECs directly to own and
operate cable television systems. A draft bill that has been reported out of
the Senate Commerce Committee would, among other things, remove telephone
company-cable cross-ownership prohibitions. See "Cable Division--Telephony."
The outcome of these FCC, legislative or court proceedings and proposals, or
the effect of such outcome on the operations of Time Warner Cable, cannot be
predicted.
The 1984 Cable Act and FCC rules also prohibit the common ownership,
operation, control or interest in a cable system and a television broadcast
station in the same area. The FCC has recommended to Congress that this
restriction be repealed. Provisions that would eliminate or modify this and
other broadcast ownership rules are contained in the draft Senate bill that
contemplates significant changes to the Communications Act of 1934, although no
assurance can be given that such legislation will be enacted. The FCC has
relaxed its existing television network/cable cross-ownership prohibition
subject to certain national and local ownership caps. Pursuant to the 1992
Cable Act, the FCC on September 23, 1993 announced rules that set a limit of 40
percent of cable system channel capacity that can carry programming of video
programmers that are vertically integrated with the cable system. The FCC also
set a limit of 30 percent of total nationwide cable homes that can be served by
any multiple cable system operator, although this rule has been stayed pending
resolution of litigation in which the provision of the 1992 Cable Act requiring
the FCC to establish limits on horizontal concentration was declared
unconstitutional on First Amendment grounds by a U.S. District Court.
FCC regulations and federal statutory provisions also include matters
relating to restrictions on the sale of cable systems held for less than three
years, subscriber privacy requirements, carriage of local sports programming,
application of the fairness doctrine and rules governing political broadcasts,
and limitations on advertising contained in non-broadcast children's
programming.
Cable television systems are also subject to federal copyright licensing with
respect to carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals, subject to the retransmission consent provision of the 1992 Cable Act
described above. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations.
The U.S. Copyright Office has adopted regulations, which became effective
January 1, 1994, declaring that certain microwave video service providers, such
as MMDS (which is sometimes referred to as "wireless cable") operators, do not
qualify for the compulsory copyright license available to cable systems under
the Copyright Act of 1976. The compulsory license status of satellite master
antenna systems ("SMATV") is not covered by these regulations. The availability
of the compulsory license to other multichannel video service providers would
enhance their competitiveness with traditional cable systems.
I-28
<PAGE>
Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory license. The FCC
has recommended to Congress that it repeal the cable industry's compulsory
copyright license. No action has been taken with respect to this matter.
Time Warner Cable generally places its cable on poles or in conduits owned by
utility companies that control access to the poles and conduits and charge fees
for their use. The FCC is required by statute to regulate the rates certain
utilities may charge for cable pole attachments and conduit usage and the terms
and conditions they may impose. States can supplant the FCC regulations by
regulating such matters themselves; however, the majority of states have not
done so.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry or Time Warner Cable can be predicted at this time.
Competition
Cable television systems face strong competition for viewer attention from a
wide variety of established providers and new entrants, including broadcast
television, direct broadcast satellite ("DBS"); multichannel multipoint
distribution service ("MMDS" or "wireless cable"), satellite master antenna
television ("SMATV") systems and telephone companies. Cable television systems
also compete with these and other media for advertising dollars.
DBS. The FCC has awarded conditional permits to several companies for orbital
slots from which high-power Ku-Band DBS service can be provided. DBS services
offer pre-packaged programming that can be received by relatively small and
inexpensive receiving dishes. In 1994, two high-power DBS services sharing
common satellites became operational, DirecTV and USSB. Together, these
services were reported to have a total of approximately 500,000 subscribers
nationwide as of March 1, 1995. Primestar, a medium-power DBS service partially
owned by affiliates of TWE, was reported to have 340,000 subscribers as of that
date. In addition to DBS, most cable programming is available to owners of
larger, more expensive C-Band satellite dishes ("TVROs"), either directly from
the programmers or through third-party packagers.
MMDS/Wireless Cable. Wireless cable operators use microwave technology to
distribute video programming. In recent years, wireless cable has grown
rapidly, serving 550,000 subscribers via 143 systems as of June 1994 according
to the FCC. Wireless cable is now available in 23 of the nation's top 25
television markets. In recent years, the FCC has adopted rules to facilitate
the use of greater numbers of channels by wireless cable operators.
SMATV. SMATV systems provide cable service in numerous Time Warner Cable
service areas. The FCC reports that SMATV systems served approximately one
million subscribers nationwide as of June 1994.
Telephone Companies. Recent legislative, regulatory and judicial developments
have facilitated and will continue to facilitate the entry of telephone
companies into the provision of video programming. See "Cable Division--Video--
Regulation and Legislation." As of February 14, 1995, the FCC has authorized
construction of facilities to conduct a limited test of video dialtone service
for locations in which Time Warner Cable provides franchised cable television
service to approximately 762,000 subscribers, and the FCC has received
applications for video dialtone authorizations in locations in which Time
Warner Cable provides franchised cable television service to approximately
717,000 subscribers. The entry of telephone companies will provide substantial
additional competition to Time Warner Cable's cable systems.
Other. Cable television systems compete for viewer attention with numerous
other sources of news, information and entertainment, including videocassete
rental stores and other cable operators. Videocassette
I-29
<PAGE>
rental stores provide many of the same movies, special events and other
programs that are shown on cable television systems, often with earlier release
dates. The 1992 Cable Act provides that all cable franchises must be non-
exclusive. In practice, most franchises have always allowed the franchise
authority to award additional franchises, although additional cable operators
currently operate cable systems in an insignificant number of Time Warner
Cable's franchise areas. The 1992 Cable Act also permits municipalities to
operate cable systems without obtaining a franchise. It is unknown whether this
provision will encourage the building of additional municipally-owned cable
systems. To date, no such systems have been built in Time Warner Cable
franchise areas, although several municipalities have indicated an interest in
doing so.
Other Interests
TWE has a 50% interest in a joint venture established in 1991 to invest in,
and further develop, cable television systems in Hungary. TWE also has a 37
1/2% interest in TV-1000, a pay television service operating in Scandinavia; a
30% interest in N-TV, a German language news and information channel
distributed in Germany in which TBS also has a 32% interest; and a 28% interest
in IA, a general-interest regional television broadcaster serving the Berlin
and Brandenburg areas of Germany (all of which interests are under the
management responsibility of Home Box Office). TWE also owns indirectly 13% of
a New Zealand over-the-air subscription television service--Sky Network
Television as well as 22% of Kablevision, Sweden's second largest cable
television company.
CABLE DIVISION--TELEPHONY
Time Warner Cable's wireline telephony operations are conducted through Time
Warner Communications, a partnership wholly owned and controlled by TWE, which
has formed separate business entities to provide telephony services in various
geographic areas. Time Warner Communications seeks to take advantage of Time
Warner Cable's geographically clustered cable systems to efficiently develop
its telephone business.
The initial focus of Time Warner Communications following its formation in
1993 was the development of "alternative access" telephone operations in
metropolitan areas where Time Warner Cable operates cable systems. These
operations generally provide connections between large businesses and their
long distance telephone providers, between multiple business locations of a
large business, and between long distance telephone company locations. The
connections are marketed primarily to long distance telephone carriers and
large business customers, and are used primarily for high volume voice and data
communications. The networks on which these connections are made are comprised
of dedicated fiber optic strands within the affiliated cable systems' backbone
fiber networks, together with specially constructed high volume building
entrance facilities and specialized electronic equipment for transmission of
digital signals. Alternative access services do not require Time Warner
Communications to operate switching equipment.
As of December 31, 1994, Time Warner Communications had wholly or partly
owned alternative access businesses in operation in Austin, Texas; Charlotte,
North Carolina; Columbus, Ohio; Honolulu, Hawaii; Indianapolis, Indiana; Kansas
City, Kansas and Missouri; Lima, Ohio; and Raleigh, North Carolina. Similar
businesses are in development in a number of additional Time Warner Cable
cities. Revenues to date from these operations have been insignificant. Time
Warner Communications also opened an advanced network management center in
Denver in mid-1994 to monitor and manage operation of its networks.
One of the major business objectives of TWE is the entry of Time Warner
Communications into the switched "local exchange" telephone business. This
business would provide telephone service that is presently provided by monopoly
local exchange telephone companies ("LECs"). The service would be marketed both
to residential and business customers. Local exchange service will require
significant upgrades to, and usage of, the fiber optic and coaxial cable
networks of Time Warner Cable, together with high capacity switching equipment
similar to that employed by the LECs, and certain other specialized equipment.
Expenditures for such upgrades and equipment are expected to be significant.
I-30
<PAGE>
In order for Time Warner Communications to be able to connect its local
exchange service customers to LEC customers in an area, Time Warner
Communications must obtain rights to interconnect its network with that of the
LEC. In May 1994, Time Warner Communications announced an agreement under which
Time Warner Communications and Rochester Telephone Corporation agreed to
interconnect their networks in Rochester, New York, enabling each company to
complete calls originated by their telephone service customers to telephone
service customers of the other company. Time Warner Communications believes the
agreement to be the first of its kind between a major telephone company and a
cable company that requires equal compensation to each company for completing
calls.
Based on this agreement, Time Warner Communications began a limited initial
trial of competitive residential telephone service in Rochester in December
1994. Time Warner Communications expects its local exchange telephone service
to be generally available over the Rochester Time Warner Cable network in the
second half of 1995.
Time Warner Communications generally has been able to conduct its alternative
access businesses despite regulatory and other impediments such as difficulties
in obtaining rights to connect its lines to LEC facilities in order to carry
calls from large businesses to long distance telephone companies, and the
insistence by some cable franchise authorities on onerous conditions to permit
use of their rights of way. Provision of switched local exchange services,
however, is heavily regulated by each state. The ability of Time Warner
Communications to obtain entry to, and compete effectively in, the local
exchange telephone business will be dependent on procompetitive legislation or
regulation that currently exists only in a few states. Time Warner
Communications has been certified to provide local exchange service throughout
New York State, and currently has an application on file with the Ohio Public
Utilities Commission to provide such service. Time Warner Communications will
continue to support procompetitive legislative reform, and to apply for local
exchange service authority, in the states where Time Warner Cable has major
cable systems.
The Company anticipates that telecommunications legislation will be
considered in Congress during 1995. The Senate Commerce Committee has reported
out to the Senate floor for consideration a comprehensive bill that would,
among other things, preempt state and local barriers which prevent cable
operators and others from providing telephone service in competition with the
LECs, and require all providers of telephony, including those that employ
technology such as that contemplated for Time Warner Cable's Full Service
Network, to make their networks available for use by unrelated persons on a
common carrier basis with respect to the telephone service offered. To
facilitate a transition to competition, the proposed Senate legislation would
require telecommunications carriers to allow interconnection to their
facilities, to provide reciprocal compensation for origination and completion
of calls, to provide nondiscriminatory access to unbundled network functions
and services, and to provide telephone number portability and local dialing
parity. Comparable telecommunications reform legislation may be introduced in
the House. The actual provisions of the bills that may be introduced, final
enactment of any such legislation or its impact on Time Warner Communications'
business, cannot be predicted.
Time Warner Telecommunications
The Company's wireless telephone, paging and data service operations are
conducted through Time Warner Telecommunications ("TWT"), a division of TWE,
which has its headquarters in Washington, D.C.
TWT plans to provide cellular service, paging and data services under the
Time Warner brand in various markets by reselling cellular service purchased at
wholesale rates from existing facilities-based cellular carriers. On November
9, 1994, the New York Public Service Commission approved TWT's tariff to
provide resold cellular service in New York State. On November 21, 1994, TWT
formally commenced the provision of residential and business cellular service
in Rochester, New York. TWT will seek to distinguish itself from other wireless
carriers through its customer service, the strength of the Time Warner brand
name, and by selling its wireless services with other Time Warner products and
services.
I-31
<PAGE>
The provision of cellular services are regulated by the FCC and the public
service commissions of some states (including New York). As a reseller, TWT
does not need approval from the FCC prior to offering cellular services to
customers in any state. Draft federal telecommunications legislation referenced
elsewhere herein would, if enacted, preempt state or local regulation of the
entry of, or the rates charged by, any commercial mobile service including
cellular telephone services.
DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT
The following description summarizes certain provisions of the TWE
Partnership Agreement relating to the ongoing operations of TWE. Such
description does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the TWE Partnership
Agreement.
Management and Operations of TWE
Board of Representatives. Subject to certain authority of the Management
Committee (as described below) with respect to the Cable division, the business
and affairs of TWE are managed under the direction of a board of
representatives (the "Board of Representatives" or the "Board") that is
comprised of representatives appointed by the Time Warner General Partners (the
"Class B Representatives") and representatives appointed by the Limited
Partners (the "Class A Representatives").
The Class B Representatives control all Board decisions except for certain
matters including (i) the merger or consolidation of TWE; (ii) the sale or
other disposition of assets of TWE generating in excess of 10% of the
consolidated revenues of TWE during the previous fiscal year or representing in
excess of 10% of the fair market value of the total assets of TWE (in each
case, other than in connection with certain joint ventures and "cable asset
swaps" as to which the thresholds are greater); (iii) any acquisition by TWE,
other than in the ordinary course of business, if the consideration paid by TWE
in connection with such acquisition would exceed the greater of (1) $750
million and (2) 10% of the consolidated revenues of TWE for the most recently
ended fiscal year of TWE; (iv) the engagement by TWE in any business other than
the businesses then being conducted by TWE, as they may evolve from time to
time and any business related to such businesses (provided that TWE may not
engage in the manufacturing, sale or servicing of hardware, other than as may
be incidental to TWE's businesses); (v) the incurrence by TWE of indebtedness
for money borrowed if, after giving effect to such incurrence, the ratio of
total indebtedness for money borrowed to cash flow would exceed the greater of
(x) 5.00 to 1.00 and (y) .5 over the analogous ratio in the TWE credit
agreement as in effect from time to time; (vi) cash distributions other than as
provided in the TWE Partnership Agreement; (vii) the dissolution or voluntary
bankruptcy of TWE; and (viii) any amendment to the TWE Partnership Agreement.
Each of the matters described in clauses (i) through (v) requires the
approval of a majority vote of the Class A Representatives who were appointed
by partners that have a residual equity interest of at least 5% and a majority
vote of the Class B Representatives; and each of the matters described in
clauses (vi) through (viii) requires the unanimous approval of all
representatives. Each partner's representatives collectively have voting power
in proportion to the residual equity interest of the partner that designated
such representative.
The managing general partners, both of which are wholly owned subsidiaries of
the Company, may take any action without the approval or consent of the Board
if such action may be authorized by the Class B Representatives without the
approval of the Class A Representatives. However, see "Full Service Network
Management Committee," below.
Full Service Network Management Committee. In connection with the U S WEST
Transaction, the Board established the Full Service Network business, which,
subject to obtaining necessary franchise and
I-32
<PAGE>
other approvals, will be comprised of the businesses and operations of the
cable television systems of TWE that are from time to time designated to become
a part thereof. Subject to obtaining necessary franchise and other approvals
relating to the designated systems, the business and affairs of the Full
Service Network business will be governed by a Full Service Network Management
Committee (the "Management Committee"). The Management Committee is comprised
of six voting members, three designated by U S WEST and three designated by
TWE. Each of the other Limited Partners has the right to designate non-voting
members to the Management Committee. If U S WEST at any time owns less than 50%
of the partnership interest which it owned, directly or indirectly, as of
September 15, 1993 or if a "change in control" of U S WEST occurs, U S WEST's
right to designate any members of the Management Committee will terminate. The
Full Service Network business is managed on a day-to-day basis by the officers
of the cable division. The approval of a majority of the members of the
Management Committee is required for certain significant transactions relating
to the Full Service Network business, including, among other things, the sale,
pledge or encumbrance of assets of the Full Service Network business, the
acquisition of cable assets, the making of commitments or expenditures relating
to the Full Service Network business, in each case subject to agreed upon
thresholds, certain decisions with respect to design, architecture and
designation of cable systems for upgrade and the adoption of the annual
business plan.
Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's three principal partnership divisions is managed on a
day-to-day basis by the officers of such division. Upon the TWE Capitalization,
the officers of Time Warner also became officers of TWE and the officers of the
Time Warner General Partners became the officers of the corresponding
partnership divisions and the subdivisions thereof.
Certain Covenants
Covenant Not to Compete. For so long as any partner (or affiliate of any
partner) owns in excess of 5% of TWE or 15% of TWE Japan and in the case of any
Time Warner General Partner, for one year thereafter, such partner (including
its affiliates) is generally prohibited from competing or owning an interest in
the three principal lines of business of TWE--cable, cable programming and
filmed entertainment (including the ownership and operation of theme parks)--as
such businesses may evolve, subject to certain agreed upon exceptions, limited
passive investments and inadvertent violations. The covenant not to compete
does not prohibit (i) U S WEST from conducting cable and certain regional
programming businesses in the 14-state region in which it provides telephone
service, (ii) any party from engaging in the cable business in a region in
which TWE is not then engaging in the cable business, subject to TWE's right of
first refusal with respect to such cable business, or (iii) any party from
engaging in the telephone or information services business.
Transactions with Affiliates. Subject to agreed upon exceptions for existing
arrangements, TWE will not enter into any transaction with any partner or any
of its affiliates other than on an arm's-length basis.
Registration Rights
Beginning on June 30, 2002 (or as early as June 30, 1999 if certain threshold
cash distributions are not made to the Limited Partners), the Limited Partners
holding, individually or in the aggregate, at least 10% of the residual equity
of TWE will have the right to request that TWE reconstitute itself as a
corporation and register for sale in a public offering an amount of partnership
interests held by such Limited Partners determined by an investment banking
firm so as to maximize trading liquidity and minimize the initial public
offering discount, if any. Upon any such request, the parties will cause an
investment banker to determine the price at which the interests sought to be
registered could be sold in a public offering (the "Appraised Value"). Upon
determination of the Appraised Value, TWE may elect either to register such
interests or purchase such interests at the Appraised Value, subject to certain
adjustments. If TWE elects to register the interests and the proposed public
offering price (as determined immediately prior to the time the public offering
is to be declared effective) is less than 92.5% of the Appraised Value, TWE
will have a second option to purchase such interests immediately prior to the
time such public offering would otherwise have been
I-33
<PAGE>
declared effective by the Securities and Exchange Commission at the proposed
public offering price less underwriting fees and discounts. If TWE exercises
its purchase option, it will be required to pay the fees and expenses of the
underwriters. Upon exercise of either purchase option, TWE may also elect to
purchase the entire partnership interests of the Limited Partners requesting
registration at the relevant price, subject to certain adjustments.
In addition to the foregoing, U S WEST will have the right to exercise an
additional demand registration right (in which the other Limited Partners would
be entitled to participate) beginning 18 months following the date on which TWE
reconstitutes itself as a corporation and registers the sale of securities
pursuant to a previously exercised demand registration right.
Beginning on June 30, 1995, at the request of any Time Warner General
Partner, TWE will effect a public offering of the partnership interests of the
Time Warner General Partners or reconstitute TWE as a corporation and register
the shares held by the Time Warner General Partners. In any such case, the
Limited Partners will have standard "piggy-back" registration rights.
Upon any reconstitution of TWE into a corporation, each partner will acquire
preferred and common equity in the corporation corresponding in both relative
value, rate of return and priority to the partnership interests it held prior
to such reconstitution, subject to certain adjustments to compensate the
partners for the effects of converting their partnership interests into capital
stock.
Certain Put Rights of the Limited Partners
Change in Control Put. Upon the occurrence of a change in control of the
Company, at the request of any Limited Partner, TWE will be required to elect
either to liquidate TWE within a two-year period or to purchase the interest of
such partner at fair market value (without any minority discount) as determined
by investment bankers. A "change in control" of the Company shall be deemed to
have occurred:
(x) whenever, in any three-year period, a majority of the members of the
Board of Directors of the Company elected during such three-year period shall
have been so elected against the recommendation of the management of the
Company or the Board of Directors shall be deemed to have been elected against
the recommendation of such Board of Directors of the Company in office
immediately prior to such election; provided, however, that for purposes of
this clause (x) a member of such Board of Directors shall be deemed to have
been elected against the recommendation of such Board of Directors if his or
her initial election occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended) or other
actual or threatened solicitation of proxies or consents by or on behalf of a
person other than such Board of Directors; or
(y) whenever any person shall acquire (whether by merger, consolidation,
sale, assignment, lease, transfer or otherwise, in one transaction or any
related series of transactions), or otherwise beneficially own voting
securities of the Company that represent in excess of 50% of the voting power
of all outstanding voting securities of the Company generally entitled to vote
for the election of directors, if such person acquires or publicly announces
its intention to initially acquire ten percent or more of such voting
securities in a transaction that has not been approved by the management of the
Company within 30 days after the date of such acquisition or public
announcement.
Change in Government Regulation Put. Upon a change in any applicable federal
or state law or regulation that would prohibit ITOCHU or Toshiba from
continuing to own all or any part of its partnership interest in TWE, or would
materially adversely affect the value of ITOCHU's or Toshiba's partnership
interest relative to the value of the partnership interests held by all other
partners, TWE will be required to elect either to purchase that portion of such
partner's partnership interest required to enable such partner to continue to
own its partnership interest at fair market value (giving effect to the
minority discount) as determined by investment bankers or to take reasonable
actions to remedy the effect of such change in law or regulation.
I-34
<PAGE>
Assignment of Put Rights, etc. TWE, with the consent of such assignee, may
assign to the Company, any general partner or any third party, the obligation
to pay the applicable put price in connection with the exercise of a change in
control or change in government regulation put right by a Limited Partner and
the right to receive the partnership interests in payment therefor.
With respect to any of the put rights of the Limited Partners, TWE may pay
the applicable put price in cash or Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or
quoted on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the
put price to the Company by the Company). The amount of any Marketable
Securities comprising the applicable put price shall be determined based on the
market price of such securities during the seven months following the closing
of such put transaction. In the case of a change in government regulation put,
up to 33% of the applicable put price may be paid in notes issued by TWE (or if
TWE assigns its obligations to pay the put price to the Company by the
Company).
U S WEST Change in Government Regulation Remedies
U S WEST is not entitled to the benefit of the put right upon a change in law
or government regulation to which ITOCHU and Toshiba are entitled. See "--
Certain Put Rights of the Limited Partners--Change in Government Regulation
Put." However, upon a change in law or government regulation prior to September
15, 1996 that prohibits U S WEST from owning, or materially adversely affects
the value (relative to the value of the interests of all other partners) of, U
S WEST's partnership interest, U S WEST will have the right to request that TWE
either remedy such problem (provided such remedy would not have a significant
impact on the business and operation of TWE or any of its divisions) or assist
U S WEST in selling its interest to a third party. Upon any such sale to a
third party, TWE will share 20% of the loss or gain experienced by U S WEST
upon such sale.
Restrictions on Transfer by Time Warner General Partners
Time Warner General Partners. Any Time Warner General Partner is permitted to
dispose of any partnership interest (and any Time Warner General Partner and
any parent of any Time Warner General Partner may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) the Company would
not own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the later of December 31, 1997 and the
date on which the Limited Partners have received cash distributions of $500
million per $1 billion of investment, and (b) 35% of the residual equity of TWE
if such disposition occurs after such date, (ii) no person or entity would own,
directly or indirectly, a partnership interest greater than that owned,
directly or indirectly, by the Company, and (iii) a subsidiary of the Company
would be a managing general partner of TWE.
No other dispositions are permitted, except that the Company may sell its
entire partnership interest subject to the Limited Partners' rights of first
refusal and "tag-along" rights pursuant to which the Company must provide for
the concurrent sale of the partnership interests of the Limited Partners so
requesting.
OTHER ENTERTAINMENT GROUP ASSETS
Time Warner Service Partnerships
Concurrently with the closing of the U S WEST Transaction, TWE and the Time
Warner Service Partnerships entered into various agreements pursuant to which,
among other things, the Time Warner Service Partnerships provide program signal
delivery services to TWE's cable systems and transmission services to the
Programming--HBO and Filmed Entertainment divisions and TWE provides billing,
collection and marketing services to the Time Warner Service Partnerships. The
Time Warner Service Partnerships receive commercially reasonable fees for the
provision of such services. The Time Warner Service Partnerships own the TVROs
and broadcast antennae used to transmit programming signals to each of TWE's
cable systems, and the satellite transponders and other transmission equipment
used to transmit the HBO and Cinemax services to Home Box Office affiliates and
DTH subscribers.
I-35
<PAGE>
In addition, TWE and the Time Warner Service Partnerships have entered into a
series of agreements pursuant to which the Time Warner Service Partnerships
will recontribute the TW Service Partnership Assets to TWE at their then fair
market value in exchange for partnership interests in TWE on September 15, 1995
(or September 15, 1997 in the case of its interests in Court TV and E!
Entertainment Television), or earlier under certain circumstances, but only to
the extent that at such time such assets are then owned by the Time Warner
Service Partnerships and TWE is clearly not prohibited from owning or operating
such assets. As a result of a judicial order issued to U S WEST on October 24,
1994, TWE is no longer prohibited from owning or operating substantially all of
the TW Service Partnership Assets.
The TW Service Partnership Assets also include various equity investments,
including, among others, an interest of approximately 49% in E! Entertainment
Television, a Los Angeles-based basic cable channel specializing in promoting
the entertainment industry and serving approximately 28 million subscribers as
of year-end 1994; an interest of approximately 15% in Black Entertainment
Television, a basic cable television service providing entertainment
programming directed primarily to African-American audiences; an interest of
approximately 21% in Primestar Partners L.P., a joint venture with several
other cable operators and a subsidiary of General Electric Company that has
developed the delivery of a package of programming services to TVRO owners; a
majority interest in Court TV, a 24-hour basic cable television service
launched in the summer of 1991 featuring live and taped trial coverage, plus
commentary by prominent lawyers, which is managed through the Company's
American Lawyer Media affiliate; and an interest of approximately 13% in The
3DO Company, a company engaged in the development of multimedia technology.
TWE Japan
The Company owns a 37.25% interest in, U S WEST owns a 12.75% interest in,
and each of Toshiba and ITOCHU owns a 25% interest in, Time Warner
Entertainment Japan Inc. ("TWE Japan"). TWE Japan was organized to conduct
TWE's businesses in Japan, including home video distribution, theatrical film
and television distribution and merchandising businesses, and to expand and
develop new business opportunities. Pursuant to distribution and merchandising
agreements entered into between TWE and TWE Japan, TWE Japan receives
distribution fees generally comparable to those currently received by TWE for
performing distribution services for unaffiliated third parties.
In early 1995, the Company, TWE Japan, U S WEST, Toshiba and ITOCHU agreed
jointly to establish TITUS Communications Corp. ("TITUS"), a multiple system
operator that will start new CATV operations in ten or more selected locations
throughout Japan, each of which covers 150,000-200,000 households. The
agreement also contemplates that TITUS eventually will provide telephone
service as well as video services in its operating areas.
DC Comics
TWE and WCI each owns a 50% interest in DC Comics, a New York general
partnership, formed in June 1992 to continue the business previously conducted
by DC Comics Inc., a New York corporation. DC Comics publishes more than 60
regularly issued comics magazines, among the most popular of which are
"Superman," "Batman," "Wonder Woman," "Teen Titans" and "The Sandman," as well
as story collections sold as books. DC Comics also derives revenues from motion
pictures, television syndication, product licensing, books for juvenile and
adult markets and foreign publishing. Trademarks in DC Comics' principal
characters have been registered in the United States Patent and Trademark
Office and in certain foreign countries.
Cinamerica Theatres, L.P.
WCI owns a 50% interest in Cinamerica Theatres, L.P., an unconsolidated joint
venture with Paramount Communications Inc., which owns and operates two theater
circuits: Mann Theatres and Festival Cinemas. The joint venture operates 349
screens in 65 theaters, principally located in California and Colorado.
I-36
<PAGE>
E.C. Publications
E.C. Publications, Inc. is the publisher of MAD, a magazine featuring
articles of humorous and satirical interest, which is regularly published eight
times a year and also in periodic special editions. E.C. Publications is wholly
owned by the Company.
OTHER INTERESTS
TURNER BROADCASTING SYSTEM, INC.
The Company purchased equity securities of TBS as part of a private placement
of securities by TBS in 1987 to a consortium of cable television operators and
individual investors. The Company thereafter acquired additional securities in
TBS from time to time and, at December 31, 1994, it had economic and voting
interests in TBS of 19.6% and 6.4%, respectively. TBS's business includes the
ownership and operation of domestic and international entertainment networks
(including TBS SuperStation, Turner Network Television ("TNT"), the Cartoon
Network and TNT Latin America); the production and distribution of
entertainment and news programming worldwide (including Turner Pictures, TBS
Productions, Hanna-Barbera Cartoons, Castle Rock Entertainment, New Line
Cinema, Cable News Network ("CNN"), Headline News and CNN International); and
the ownership of two professional sports teams (the Atlanta Braves and the
Atlanta Hawks).
AMERICAN LAWYER MEDIA
American Lawyer Media, L.P. ("ALM"), which is majority-owned by the Company,
operates a chain of metropolitan and regional legal and business newspapers and
also publishes THE AMERICAN LAWYER, a national monthly magazine with a
subscription-only readership among lawyers across the United States, and
COUNSEL CONNECT, an on-line service connecting lawyers in law firms and
corporate legal departments worldwide. As of February 25, 1994, Mead Data
Central became a minority partner in COUNSEL CONNECT, and the name was changed
to "LEXIS COUNSEL CONNECT." ALM also publishes four weekly and five daily
newspapers, which in most cases enjoy local official status for the publication
of court opinions, legal notices, and/or official court notices; one monthly
newsletter and a monthly law firm management information service. ALM also
provides certain services to Court TV, a basic cable television service
launched in 1991 in which the Company has an indirect majority interest.
HASBRO, INC.
The Company owns approximately 14% of the outstanding common stock of Hasbro,
Inc., one of the world's largest toy companies. For a description of the
issuance by the Company of zero coupon exchangeable notes due 2012 that are
exchangeable for the shares of Hasbro common stock owned by the Company, see
Note 5 "Long-Term Debt" to the Company's consolidated financial statements at
pages F-14 and F-15 herein.
ATARI CORPORATION
The Company owns approximately 25% of Atari Corporation, which is engaged in
the design, manufacture and sale of interactive multimedia entertainment
systems.
ATARI GAMES CORPORATION
The Company owns 100% of Atari Games Corporation, which is engaged in the
design, manufacture and sale of interactive video games for arcades and home
systems.
TIME WARNER INTERACTIVE INC.
Time Warner Interactive Inc. is an indirect wholly owned subsidiary of the
Company that produces and publishes interactive consumer entertainment products
for delivery across the spectrum of digital channels: broadband, narrow-band,
CD-ROM, cartridge and location-based systems.
I-37
<PAGE>
CURRENCY RATES AND REGULATIONS
The Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict
the extent to which such controls and fluctuations in currency exchange rates
may affect its operations in the future or its ability to remit dollars from
abroad. See Note 1 "Summary of Significant Accounting Policies--Foreign
Currency" to the consolidated financial statements set forth at page F-6
herein. For the revenues, operating income from and identifiable assets of
foreign operations, see Note 10 "Segment Information" to the consolidated
financial statements set forth at pages F-19 through F-22 herein.
EMPLOYEES
At December 31, 1994, the Company employed a total of approximately 53,300
persons. This number includes approximately 24,500 persons employed by TWE.
I-38
<PAGE>
ITEM 2. PROPERTIES
PUBLISHING, MUSIC AND CORPORATE
The following table sets forth certain information as of December 31, 1994
with respect to the Company's principal properties (over 250,000 square feet in
area) that are used primarily by its publishing and music divisions or occupied
for corporate offices, all of which the Company considers adequate for its
present needs, and all of which were substantially used by the Company or were
leased to outside tenants:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FEET TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE FLOOR SPACE EXPIRATION DATE OF LEASE
-------- ------------- ----------- ------------------------
<S> <C> <C> <C>
New York, New York Executive and 560,000 Leased by the Company.
75 Rockefeller Plaza administrative offices Lease expires in 2014.
Rockefeller Center (Corporate, Music and Approximately 142,000 sq.
Filmed Entertainment) ft. are sublet to outside
tenants.
New York, New York Business and editorial 1,481,000 Leased by the Company.
Time & Life Bldg. offices (Publishing and Most leases expire in
Rockefeller Center Corporate) 2007. Approximately
64,000 sq. ft. are sublet
to outside tenants.
Mechanicsburg, Office and warehouse 358,000 Owned and occupied by the
Pennsylvania space (Publishing) Company.
1225 S. Market St.
Olyphant, Manufacturing, 1,058,000 Owned and occupied by the
Pennsylvania warehouses, distribution Company.
1400 and 1444 East and office space (Music)
Lackawanna Avenue
Indianapolis, Indiana Warehouse space 252,000 Owned by the Company.
4200 N. Industrial (Publishing) Approximately 142,000 sq.
Street ft. are leased to outside
tenants.
Nortorf, Manufacturing, 334,000 Owned and occupied by the
Germany distribution and office Company.
Niedernstrasse 3-7 space (Music)
Alsdorf, Manufacturing, 269,000 Owned and occupied by the
Germany distribution and office Company.
Max-Planck Strasse 1- space (Music)
9
Terre Haute, Manufacturing and office 269,000 Leased by the Company.
Indiana space (Music) Lease expires in 2001.
Bldg. 102, Fort Har-
rison
Industrial Park
Other: Office bldgs., plants and 1,718,000 Owned by the Company.
U.S. and abroad, warehouses (Publishing,
including locations Music and Corporate)
in
Europe, Asia, Latin
America, Australia
and New Zealand.
4,535,000 Leased by the Company.
Approximately 52,000 sq.
ft. are sublet to outside
tenants.
----------
Total 10,834,000
==========
</TABLE>
I-39
<PAGE>
ENTERTAINMENT
The following table sets forth certain information as of December 31, 1994
with respect to TWE's principal properties (over 125,000 square feet in area),
all of which TWE considers adequate for its present needs, and all of which
were substantially used by TWE or were leased to outside tenants.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FEET
FLOOR TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE SPACE/ACRES EXPIRATION DATE OF LEASE
-------- ------------- ----------- ------------------------
<C> <S> <C> <C>
New York, New York Business offices 335,000 sq. ft. Leased by TWE.
HBO Building, 1100 (Programming--HBO) Lease expires in 2004.
Avenue of the
Americas
New York, New York Business offices 139,000 sq. ft. Leased by TWE.
1325 Avenue of the (Filmed Entertainment) Lease expires in 2010.
Americas
Baltimore, Maryland Warehouse (Filmed 387,000 sq. ft. Owned by TWE.
White Marsh Entertainment)
Los Angeles, Califor- Warehouse 182,000 sq. ft. Leased by TWE.
nia (Filmed Entertainment) Lease expires in 1997.
9210 San Fernando
Burbank, California Sound stages, 3,422,000 Owned by TWE.
The Warner Bros. administrative, sq. ft. of
Studio technical and dressing improved
room space on 158
structures, screening acres (a)
theaters,
machinery and equipment
facilities, back lot and
parking lot and other
Burbank properties
(Filmed
Entertainment)
West Hollywood, Sound stages, 350,000 Owned by TWE.
California administrative, sq. ft. of Approx. 20,000 sq. ft. are
The Warner technical and dressing improved leased to outside tenants.
Hollywood Studio room space on 11
structures, screening acres
theaters,
machinery and equipment
facilities (Filmed
Entertainment)
Valencia, California Location filming (Filmed 225 acres Owned by TWE.
Undeveloped Land Entertainment)
Atlanta, Georgia Theme park 270 acres Owned by limited
Six Flags Over Geor- (Filmed Entertainment) partners of Six Flags
gia Over Georgia co-venture
partnership.
Dallas-Fort Worth, Theme park 200 acres Owned by limited
Texas (Filmed Entertainment) partners of Six Flags
Six Flags Over Texas Over Texas co-venture
partnership.
St. Louis, Missouri Theme park 500 acres Owned by Six Flags.
Six Flags Over Mid- (Filmed Entertainment)
America
</TABLE>
I-40
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FEET
FLOOR TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE SPACE/ACRES EXPIRATION DATE OF LEASE
-------- ------------- ----------- ------------------------
<C> <S> <C> <C>
Houston, Texas Theme park 105 acres Owned by Six Flags.
Six Flags Houston (Filmed Entertainment)
Jackson, New Jersey Theme park 2,200 acres (b) Owned by Six Flags.
Six Flags Great (Filmed Entertainment)
Adventure
Los Angeles, Califor- Theme park 260 acres Owned by Six Flags.
nia (Filmed Entertainment)
Six Flags California
Gurnee, Illinois Theme park 300 acres Owned by Six Flags.
Six Flags Great (Filmed Entertainment)
America
Other, in the U.S. and Office buildings, retail 1,625,000 sq. ft. (c) Owned by TWE.
abroad, including stores, theatres, plants Approx. 26,000 sq. ft. are
locations in Europe, and leased to outside tenants.
Asia, Latin America, warehouses (Filmed 5,910,000 sq. ft. (c)(d) Leased by TWE.
Australia and New Entertainment, Approx. 69,000 sq. ft. are
Zealand Programming--HBO, sublet to outside tenants.
Cable)
-------------------------
Totals 12,350,000 sq. ft.
4,229 acres
=========================
</TABLE>
--------
(a) Ten acres consist of various parcels adjoining The Warner Bros. Studio,
with mixed commercial, office and residential uses.
(b) 1,640 acres of which are undeveloped land available for expansion.
(c) Excludes 9,085,000 sq. ft. of owned and 2,021,000 sq. ft. of leased
properties used by the Cable division for headend, hub, and tower sites.
(d) Includes 108,000 sq. ft. of office space occupied by Time Warner corporate
staff who provide services to TWE pursuant to arrangements set forth in the
TWE Partnership Agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties, in the ordinary course of
business, to litigations involving property, personal injury and contract
claims. The amounts that the Company believes may be recoverable in these
matters are either covered by insurance or are not material.
In June 1989, a purported stockholder class action was filed in the Supreme
Court of the State of New York, County of New York, entitled Northern
Laminating, Inc. Retirement Fund v. Munro, et al., Index No. 12653-89, against
the Company and its Board of Directors, alleging that defendants breached their
fiduciary duties by the Company's tender offer (the "Tender Offer") for WCI
(pursuant to which the Company purchased 100 million shares of WCI common stock
on July 24, 1989) and by the terms of the Agreement and Plan of Merger (as
amended, the "Merger Agreement") among the Company, TW Sub Inc., then a wholly
owned subsidiary of the Company, and WCI which purports to prevent defendants
from considering other offers, and that defendants, by similar acts, engaged in
a combination and conspiracy in restraint of trade. Plaintiff seeks, among
other things, a declaratory judgment that defendants breached their fiduciary
duties and monetary damages for defendants' purported breach of fiduciary
duties. Defendants have not been required to respond to the amended complaint.
A Stipulation of Voluntary Discontinuance without prejudice was submitted to
the court on September 14, 1994, and is awaiting approval.
Since 1989, there has been pending in the Court of Chancery for the State of
Delaware, in and for New Castle County (the "Delaware Chancery Court") a
consolidated stockholder litigation, In re Warner Communications Inc.
Shareholders Litigation, Consol. Civ. Action No. 10671 (the "Warner Stockholder
I-41
<PAGE>
Litigation"), commenced against WCI, its Board of Directors and the Company,
alleging that WCI's Board of Directors breached their fiduciary duties to WCI's
stockholders, and the Company aided and abetted such alleged breach, by not
ensuring that the securities distributed to WCI stockholders in the Merger
contained certain protective covenants and redemption provisions. The amended
complaint seeks, among other things, to enjoin the consummation of the Tender
Offer and the Merger, or to rescind the Tender Offer and the Merger. The
defendants have not yet been required to respond to the amended complaint. The
action has been stayed pending resolution of the Berger action described below.
Another 1989 purported stockholder class action, Berger, et al. v. Warner
Communications Inc., et al., Index No. 91-3735, filed in the New York Supreme
Court against WCI, certain of WCI's directors, the Company, Wasserstein Perella
& Co., Inc. ("Wasserstein Perella"), Shearson Lehman Hutton Inc. ("Shearson
Lehman") and Lazard Freres & Co. ("Lazard") alleges, among other things, that
WCI's directors and the Company breached their fiduciary duties to WCI's
stockholders by structuring the Merger as a freezeout of WCI's minority
stockholders, and by failing to ensure that the securities to be distributed to
stockholders in the Merger would in fact trade at the value imputed to those
securities, and that Wasserstein Perella, Shearson Lehman and Lazard aided and
abetted those breaches of fiduciary duty. The complaint seeks, among other
things, a declaratory judgment that defendants have breached their fiduciary
duties, compensatory damages and a judgment declaring the Merger a nullity. On
April 9, 1991, a court order effected defendants' stipulation to the
certification of a plaintiff class consisting of those persons who held shares
of WCI common stock on August 23, 1989 and before the effective date of the
Merger, except defendants in this litigation and any person or entity related
to or affiliated with any defendants. Argument on both sides' motions for
partial summary judgment on plaintiffs' contract claim for additional interest
of approximately $20 million in connection with the consideration paid in the
merger transaction was heard on February 22, 1994. On August 16, 1994, the
court granted defendants' motion for partial summary judgment and dismissed
plaintiffs' contract claim. Plaintiffs filed a Notice of Appeal on September
14, 1994.
On January 24, 1994, a purported class action entitled Dr. Arun Shingala v.
Gerald M. Levin, et al., Civil Action No. 13356, was filed against the Company
and its directors in the Court of Chancery of the State of Delaware, New Castle
County, on behalf of all stockholders of the Company, other than defendants and
their related or affiliated entities. The complaint alleges that the defendant
directors acting on behalf of the Company have adopted a plan ("rights plan")
to thwart any attempt to take over control of the Company which the defendants
find unfavorable to their personal interests. Plaintiff contends that
defendants' actions are in violation of their fiduciary duties and seeks a
judgment rescinding the adoption of the rights plan and ordering the director
defendants jointly and severally to account for all damages which reasonably
flow from the actions and transactions alleged. The parties have agreed to
dismiss the action without prejudice and without compensation to the plaintiffs
or their attorneys. An order effecting that agreement was approved by the court
on March 16, 1995.
In November 1992, TWE filed a federal lawsuit seeking to overturn major
provisions of the 1992 Cable Act primarily on First Amendment grounds. The
complaint, filed in the U.S. District Court for the District of Columbia
against the FCC and the United States of America, challenges the provisions of
the 1992 Cable Act relating to rate regulation, must carry, retransmission
consent, terms of dealing by vertically integrated programmers, uniform pricing
and operation of cable systems by municipal authorities, the number of
subscribers that a cable operator could serve nationwide, free previews of
certain premium channels and educational channel set-aside requirements for
direct broadcast satellite service. In addition, the complaint seeks to
overturn several parts of the 1984 Cable Act relating to public, educational
and government access requirements and commercial leased channels. The
complaint seeks injunctions against the enforcement or implementation of these
provisions. Several other parties have also filed similar lawsuits and these
actions have been at least partially consolidated with the action filed by TWE.
Hearings on the plaintiffs' motions for summary judgment and the defendants'
motions to dismiss or for summary judgment were held in March 1993. On April 8,
1993, in a 2-1 decision, the District Court upheld the constitutionality of the
must carry provisions of the 1992 Cable Act. On May 3, 1993, TWE filed an
appeal from this decision directly to the U.S. Supreme Court. The U.S. Supreme
Court heard argument on that appeal in January 1994 and on June 27, 1994 the
U.S. Supreme Court vacated the judgment of the District Court regarding the
must-carry
I-42
<PAGE>
provisions and remanded the case to that court for further factual findings. On
September 16, 1993, a one-judge District Court upheld the constitutionality on
First Amendment grounds of all the other challenged provisions except
restrictions on the number of subscribers that a cable operator could serve
nationwide, free pay TV previews and direct broadcast channel usage. TWE
appealed this decision to the U.S. Court of Appeals for the D.C. Circuit on
November 12, 1993. Briefing on the appeal is scheduled to be completed by early
July 1995. For a description of the 1984 Cable Act and the 1992 Cable Act, see
Item 1 "Business--Cable Division--Regulation and Legislation."
By letters dated July 15, 1993 and September 21, 1993 (the "Access Letters"),
the Dallas Regional Office of the Federal Trade Commission (the "FTC") informed
WEA that it is conducting a preliminary investigation to determine whether WEA
is "unreasonably restricting the resale of previously owned compact discs" and
"unreasonably restricting the sale of new compact discs." The Access Letters
allege that WEA's conduct may violate Section 5 of the Federal Trade Commission
Act, but also say that neither the Access Letters nor the existence of the
investigation "should be viewed as an accusation by the FTC or its staff of any
wrongdoing by [WEA]." The Access Letters request that WEA voluntarily submit
the documents and information requested therein. The FTC investigation also
includes other major distributors of recorded music. In the course of the
investigation, the FTC issued a subpoena for the deposition of a former WEA
executive. WEA has complied with the Access Letters and subpoena. In early
October 1994, WEA (and other major distributors of recorded music) received a
follow-up subpoena for the production of documents, stating that the FTC is
investigating whether members of the pre-recorded music distributing industry
may be engaging in unfair methods of competition by fixing prices or by
engaging in concerted activities to limit the availability of cooperative
advertising or promotional funds to retailers who distribute used compact discs
or advertise prices of compact discs below specified levels. WEA produced
documents in late December in response to the subpoena.
In October 1993, a purported class action was filed in the United States
District Court for the Northern District of Georgia entitled Samuel D. Moore,
et al. v. American Federation of Television and Radio Artists, et al., No. 93-
Civ-2358. The action was brought by fifteen named music performers or
representatives of deceased performers on behalf of an alleged class of
performers who participated in the creation or production of phonograph
recordings for one or more of the defendant recording companies. The named
defendants include the American Federation of Television and Radio Artists
("AFTRA"), the AFTRA Health and Retirement Fund ("Fund"), each present trustee
of the Fund and fifty named recording companies, including four WCI
subsidiaries. The named defendant recording companies comprise substantially
all of the domestic recording industry and the complaint seeks to establish a
defendant class for purposes of the litigation. The complaint seeks recovery
against the recording companies for, among other things, breach of contract,
breach of fiduciary duty, fraud, embezzlement and RICO violations, all growing
out of alleged failure by the recording companies to make proper contributions
to the Fund pursuant to the Phono Code, which is negotiated by AFTRA and most
of the domestic recording companies, and other alleged failures to meet the
terms of the Phono Code and individual contracts. Plaintiffs seek from the
defendant record companies substantial monetary damages, treble damages,
attorneys' fees and costs and the imposition of a constructive trust over the
master recordings created from recorded performances of the plaintiffs. In
March 1994, plaintiffs filed an amended complaint. In March and April 1994,
AFTRA, the Fund, the Fund's trustees and certain of the defendant recording
companies, including the four WCI subsidiaries, moved to dismiss plaintiffs'
amended complaint. On August 2, 1994, the court, among other things, dismissed
the claims against the Fund and the Fund's trustees, converted AFTRA's motion
to one for summary judgment (and allowed re-briefing) and dismissed all claims
against the defendant recording companies except the RICO claim. The record
company defendants in the one remaining RICO claim have answered the amended
complaint and filed a motion for summary judgment seeking dismissal of the
claim. The court has granted AFTRA's motion, and the record company defendants'
motion for summary judgment remains pending.
On February 21, 1995, counsel for plaintiffs filed a new lawsuit, entitled
Samuel D. Moore, et al. v. Sony Music Entertainment Group, et al., No. 95-Civ-
1221, in the United States District Court for the Southern
I-43
<PAGE>
District of New York. The action was brought by all but one of the named
plaintiffs in the Georgia federal suit, with one new plaintiff. The plaintiffs
are suing on behalf of an alleged class of performers and derivatively on
behalf of the AFTRA Fund. The named defendants include the Fund's trustees, the
Fund, and the recording companies that were named as defendants in the Georgia
federal suit. The complaint is based on substantially the same allegations as
the complaint in the Georgia federal suit, and seeks to recover substantial
monetary damages, liquidated damages, and attorney's fees from the recording
companies. The record company defendants have simultaneously moved in the
Southern District of New York for an order transferring the new case to the
Northern District of Georgia, and moved in the Northern District of Georgia for
an order staying plaintiffs from proceeding with the New York federal action.
On July 14, 1994, the Company received a civil investigative demand from the
United States Department of Justice in furtherance of an investigation into
certain worldwide activities of the Warner Music Group and other companies in
the recorded music industry principally related to cable, wire and satellite-
delivered music and music video programmers. The Company has complied with the
civil investigative demand to the extent that it sought information and
documents with respect to domestic activities of the Warner Music Group and has
objected to responding with respect to foreign activities on the ground that
the Department of Justice lacks jurisdiction to inquire into such activities.
On November 3, 1994, the Department of Justice filed a petition in the United
States District Court for the District of Columbia seeking to compel the
Company and the other companies to provide documents from their files in the
United States that deal with overseas activities.
The Company and its subsidiaries are also subject to industry investigations
by certain government agencies and/or proceedings under the antitrust laws that
have been filed by private parties in which, in some cases, other companies in
the same or related industries are also defendants. The Company and its
subsidiaries have denied or will deny liability in all of these actions. In all
but a few similar past actions, the damages, if any, recovered from the Company
or the amounts, if any, for which the actions were settled were small or
nominal in relation to the damages sought; and it is the opinion of the
management of the Company that any settlements or adverse judgments in the
similar actions currently pending will not involve the payment of amounts or
have other results that would have a material adverse effect on the financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
I-44
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G (3), the information regarding the
Company's executive officers required by Item 401(b) of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth the name of each executive officer of the
Company, the office held by such officer and the age, as of March 17, 1995, of
such officer:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Gerald M. Levin......... 55 Chairman of the Board and Chief Executive Officer
Richard D. Parsons...... 46 President
Peter R. Haje........... 60 Executive Vice President, General Counsel and Secretary
Timothy A. Boggs........ 44 Senior Vice President
Richard J. Bressler..... 37 Senior Vice President and Chief Financial Officer
Tod R. Hullin........... 51 Senior Vice President
Philip R. Lochner, Jr... 52 Senior Vice President
</TABLE>
Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1990:
Mr. Levin.................. Chairman of the Board of Directors and Chief
Executive Officer since January 21, 1993. Prior
to that he served as President and Co-Chief
Executive Officer from February 20, 1992; Vice
Chairman and Chief Operating Officer from May
1991; and Vice Chairman of the Board prior to
that.
Mr. Parsons................ President since February 1, 1995. Prior to that
he served as Chairman of The Dime Savings Bank of
New York, FSB ("DSB") from January 1991 and Chief
Executive Officer of DSB from July 1990. Prior to
that he was President of DSB.
Mr. Haje................... Executive Vice President and General Counsel
since October 1, 1990 and Secretary since May 20,
1993. Prior to that, he was a member of the law
firm of Paul, Weiss, Rifkind, Wharton & Garrison.
Mr. Boggs.................. Senior Vice President since November 19, 1992.
Prior to that he served as Vice President of
Public Affairs.
Mr. Bressler............... Senior Vice President and Chief Financial Officer
since March 16, 1995. Prior to that he served as
Senior Vice President, Finance from January 2,
1995; and as a Vice President prior to that.
Mr. Hullin................. Senior Vice President since February 7, 1991.
Prior to that, he served as Senior Vice
President, Corporate Affairs of SmithKline
Beecham (diversified health care company).
Mr. Lochner................ Senior Vice President since July 18, 1991. Prior
to that, he was a Commissioner of the Securities
and Exchange Commission from March 1990 to June
1991. Prior to his tenure with the SEC, Mr.
Lochner served as Deputy General Counsel and
Senior Vice President of Time Warner from January
to March 1990.
I-45
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's Common Stock is the New York Stock
Exchange. The Common Stock is also listed on the Pacific Stock Exchange and the
London Stock Exchange. For quarterly price information with respect to the
Company's Common Stock for the two years ended December 31, 1994, see
"Quarterly Financial Information" at page F-27 herein, which information is
incorporated herein by reference.
The approximate number of holders of record of the Company's Common Stock as
of March 1, 1995 was 19,000.
For information on the frequency and amount of dividends paid with respect to
the Company's Common Stock during the two years ended December 31, 1994, see
"Quarterly Financial Information" at page F-27 herein, which information is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information of the Company for the five years ended
December 31, 1994 is set forth at page F-26 herein and is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis" at pages F-28 through F-36 herein is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
and the report of independent auditors thereon set forth at pages F-2 through
F-23 and F-25 herein are incorporated herein by reference.
Quarterly Financial Information set forth at page F-27 herein is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
II-1
<PAGE>
PART III
ITEMS 10, 11, 12 AND 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Information called for by PART III (Items 10, 11, 12 and 13) is incorporated
by reference from the Company's definitive Proxy Statement to be filed in
connection with its 1995 Annual Meeting of Stockholders pursuant to Regulation
14A, except that the information regarding the Company's executive officers
called for by Item 401(b) of Regulation S-K has been included in PART I of this
report and the information called for by Items 402(k) and 402(l) of Regulation
S-K is not incorporated by reference.
III-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)-(2) Financial Statements and Schedules:
(i) The list of consolidated financial statements and schedules set forth
in the accompanying Index to Consolidated Financial Statements and Other
Financial Information at page F-1 herein is incorporated herein by
reference. Such consolidated financial statements and schedules are filed
as part of this report.
(ii) The financial statements of the Time Warner Service Partnerships and
the report of independent auditors thereon, set forth at pages F-64 through
F-73 in the 1994 Annual Report on Form 10-K of Time Warner Entertainment
Company, L.P. (Reg. No. 33-53742) (the "TWE's 1994 Form 10-K") are
incorporated herein by reference and are filed as an exhibit to this
report.
(iii) The financial statements and financial statement schedule of
Paragon Communications and the report of independent accountants thereon,
set forth at pages F-74 through F-83 in TWE's 1994 Form 10-K, are
incorporated herein by reference and are filed as an exhibit to this
report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and such Exhibit Index is
incorporated herein by reference. Exhibits 10.1 through 10.24 listed on the
accompanying Exhibit Index identify management contracts or compensatory
plans or arrangements required to be filed as exhibits to this report, and
such listing is incorporated herein by reference.
(b) No reports on Form 8-K were filed by Time Warner during the quarter
ended December 31, 1994.
IV-1
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Time Warner Inc.
/s/ Peter R. Haje
By ..................................
PETER R. HAJE EXECUTIVE VICE
PRESIDENT, GENERAL COUNSEL AND
SECRETARY
Date: March 30, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Gerald M. Levin
............................. Director, Chairman of the March 30,
(GERALD M. LEVIN) Board and Chief Executive 1995
Officer (principal executive
officer)
/s/ Richard J. Bressler
............................. Senior Vice President and March 30,
(RICHARD J. BRESSLER) Chief Financial Officer 1995
(principal financial officer)
/s/ John A. LaBarca
............................. Vice President and Controller March 30,
(JOHN A. LABARCA) (principal accounting 1995
officer)
*
............................. Director March 30,
(MERV ADELSON) 1995
*
............................. Director March 30,
(LAWRENCE B. BUTTENWIESER) 1995
*
............................. Director March 30,
(EDWARD S. FINKELSTEIN) 1995
*
............................. Director March 30,
(BEVERLY SILLS GREENOUGH) 1995
*
............................. Director March 30,
(CARLA A. HILLS) 1995
*
............................. Director March 30,
(DAVID T. KEARNS) 1995
IV-2
<PAGE>
SIGNATURE TITLE DATE
*
............................. Director March 30,
(HENRY LUCE III) 1995
*
............................. Director March 30,
(REUBEN MARK) 1995
*
............................. Director March 30,
(MICHAEL A. MILES) 1995
*
............................. Director March 30,
(J. RICHARD MUNRO) 1995
*
............................. Director March 30,
(RICHARD D. PARSONS) 1995
*
............................. Director March 30,
(DONALD S. PERKINS) 1995
*
............................. Director March 30,
(RAYMOND S. TROUBH) 1995
*
............................. Director March 30,
(FRANCIS T. VINCENT, JR.) 1995
/s/ Peter R. Haje
*By: ........................
ATTORNEY-IN-FACT
IV-3
<PAGE>
TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----------
TIME
WARNER TWE
------ ----
<S> <C> <C>
Consolidated Financial Statements:
Balance Sheet..................................................... F-2 F-38
Statement of Operations........................................... F-3 F-39
Statement of Cash Flows........................................... F-4 F-40
Statement of Shareholders' Equity and Partnership Capital......... F-5 F-41
Notes to Consolidated Financial Statements........................ F-6 F-42
Report of Management............................................... F-24
Report of Independent Auditors..................................... F-25 F-57
Selected Financial Information..................................... F-26 F-58
Quarterly Financial Information.................................... F-27 F-59
Management's Discussion and Analysis:
Results of Operations............................................. F-28 F-60
Financial Condition and Liquidity................................. F-32 F-62
Supplementary Information.......................................... F-65
Financial Statement Schedule VIII--Valuation and Qualifying Ac-
counts............................................................ F-37 F-66
</TABLE>
All other financial statements and schedules are omitted because the required
information is not present, or is not present in amounts sufficient to require
submission of the financial statements or schedules, or because the information
required is included in the consolidated financial statements and notes
thereto.
F-1
<PAGE>
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents......................................... $ 282 $ 200
Receivables, less allowances of $768 and $676................ 1,439 1,400
Inventories.................................................. 370 321
Prepaid expenses............................................. 726 613
------- -------
Total current assets......................................... 2,817 2,534
Investments in and amounts due to and from Entertainment
Group....................................................... 5,350 5,627
Other investments............................................ 1,555 1,613
Land and buildings........................................... 412 393
Furniture, fixtures and other equipment...................... 998 878
------- -------
1,410 1,271
Less accumulated depreciation................................ (657) (505)
------- -------
Property, plant and equipment................................ 753 766
Music catalogues, contracts and copyrights................... 1,207 1,309
Goodwill..................................................... 4,630 4,691
Other assets................................................. 404 352
------- -------
Total assets................................................. $16,716 $16,892
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................. $ 648 $ 532
Royalties payable............................................ 731 567
Debt due within one year..................................... 355 120
Other current liabilities.................................... 1,238 1,006
------- -------
Total current liabilities.................................... 2,972 2,225
Long-term debt............................................... 8,839 9,291
Deferred income taxes........................................ 2,700 2,998
Unearned portion of paid subscriptions....................... 631 633
Other liabilities............................................ 426 375
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 250 million shares authorized,
962 thousand shares outstanding, $140 million liquidation
preference.................................................. 1 1
Common stock, $1 par value, 750 million shares authorized,
379.3 million and 378.3 million shares outstanding.......... 379 378
Paid-in capital.............................................. 2,588 2,537
Unrealized gains on certain marketable securities............ 130 205
Accumulated deficit.......................................... (1,950) (1,751)
------- -------
Total shareholders' equity................................... 1,148 1,370
------- -------
Total liabilities and shareholders' equity................... $16,716 $16,892
======= =======
</TABLE>
See accompanying notes.
F-2
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RESTATED
1994 1993 1992(A) 1992
------ ------ -------- -------
<S> <C> <C> <C> <C>
Revenues (b)................................. $7,396 $6,581 $6,309 $13,070
------ ------ ------ -------
Cost of revenues (b) (c)..................... 4,307 3,780 3,633 8,451
Selling, general and administrative (b) (c).. 2,376 2,210 2,147 3,276
------ ------ ------ -------
Operating expenses........................... 6,683 5,990 5,780 11,727
------ ------ ------ -------
Business segment operating income............ 713 591 529 1,343
Equity in pretax income of Entertainment
Group (b)................................... 176 281 226 --
Interest and other, net (b).................. (724) (718) (351) (882)
Corporate expenses (b)....................... (76) (73) (81) (141)
------ ------ ------ -------
Income before income taxes................... 89 81 323 320
Income taxes................................. (180) (245) (237) (234)
------ ------ ------ -------
Income (loss) before extraordinary item...... (91) (164) 86 86
Extraordinary loss on retirement of debt, net
of $37 million income tax benefit........... -- (57) -- --
------ ------ ------ -------
Net income (loss)............................ (91) (221) 86 86
Preferred dividend requirements.............. (13) (118) (628) (628)
------ ------ ------ -------
Net loss applicable to common shares......... $ (104) $ (339) $ (542) $ (542)
====== ====== ====== =======
Loss per common share:
Loss before extraordinary item............... $ (.27) $ (.75) $(1.46) $ (1.46)
====== ====== ====== =======
Net loss..................................... $ (.27) $ (.90) $(1.46) $ (1.46)
====== ====== ====== =======
Average common shares........................ 378.9 374.7 371.0 371.0
====== ====== ====== =======
--------
(a) The 1994 and 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The 1992
historical financial statements have not been changed; however, financial
statements for 1992 retroactively reflecting the deconsolidation are
presented as supplementary information under the column heading "restated"
to facilitate comparative analysis (Note 1).
(b) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the years ended
December 31, 1994 and 1993, respectively: revenues-$203 million and $170
million; cost of revenues-$(109) million and $(87) million; selling,
general and administrative-$47 million and $59 million; equity in pretax
income of Entertainment Group-$(120) million and $(115) million; interest
and other, net-$13 million and $(4) million; and corporate expenses-$60
million in each year.
(c)Includes depreciation and amortization ex-
pense of:................................... $ 437 $ 424 $ 384 $ 1,172
====== ====== ====== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
RESTATED
1994 1993 1992(A) 1992
----- ------ -------- ------
<S> <C> <C> <C> <C>
OPERATIONS
Net income (loss)............................. $ (91) $ (221) $ 86 $ 86
Adjustments for noncash and nonoperating
items:
Depreciation and amortization................. 437 424 384 1,172
Noncash interest expense...................... 219 185 64 64
Unusual tax charge and extraordinary loss (b). -- 127 -- --
Equity in pretax income of Entertainment
Group, net of distributions.................. (56) (261) (43) --
Equity in (income) losses of other investee
companies, net of distributions.............. (17) -- 7 45
Changes in operating assets and liabilities:
Receivables.................................. (47) (71) 37 (235)
Inventories.................................. (38) 20 (16) (120)
Accounts payable and other liabilities....... 324 206 65 140
Other balance sheet changes.................. (258) (152) (22) 8
----- ------ ------ ------
Cash provided by operations................... 473 257 562 1,160
----- ------ ------ ------
INVESTING ACTIVITIES
Investments and acquisitions.................. (187) (175) (122) (389)
Capital expenditures.......................... (164) (198) (172) (574)
Investment proceeds........................... 118 103 913 88
----- ------ ------ ------
Cash provided (used) by investing activities.. (233) (270) 619 (875)
----- ------ ------ ------
FINANCING ACTIVITIES
Increase (decrease) in debt................... (44) 3,115 (42) 20
Redemption of Series D preferred stock........ -- (3,494) -- --
Dividends paid................................ (142) (299) (386) (386)
TWE capital contribution...................... -- -- -- 1,000
Stock option and dividend reinvestment plans.. 34 92 23 23
Other, principally financing costs prior to
1994......................................... (6) (143) (69) (199)
----- ------ ------ ------
Cash provided (used) by financing activities.. (158) (729) (474) 458
----- ------ ------ ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS... $ 82 $ (742) $ 707 $ 743
===== ====== ====== ======
</TABLE>
--------
(a) The 1994 and 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The 1992
historical financial statements have not been changed; however, financial
statements for 1992 retroactively reflecting the deconsolidation are
presented as supplementary information under the column heading "restated"
to facilitate comparative analysis (Note 1).
(b) Includes $70 million increase in deferred income tax liability as a result
of a new tax law enacted in 1993 and $57 million extraordinary loss on the
retirement of debt.
See accompanying notes.
F-4
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN UNREALIZED ACCUMULATED
STOCK STOCK CAPITAL GAINS DEFICIT TOTAL
--------- ------ ------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1991................... $ 123 $370 $8,269 $ -- $ (264) $8,498
Net income.............. 86 86
Dividends on common
stock--$.265 per share. (98) (98)
Dividends on Series B, C
and D preferred stock--
$9.28, $4.375 and $5.50
(in kind) per share,
respectively........... 7 333 (628) (288)
Purchase of stock....... (1) (61) (62)
Shares issued pursuant
to stock option and
dividend reinvestment
plans.................. 1 28 29
Other................... 1 37 (36) 2
----- ---- ------ ---- ------- ------
BALANCE AT DECEMBER 31,
1992................... 129 372 8,606 -- (940) 8,167
Net loss................ (221) (221)
Dividends on common
stock--$.31 per share.. (116) (116)
Dividends on Series B
preferred stock--$9.28
per share.............. 4 (13) (9)
Dividends on Series C
and D preferred stock
to dates of redemption
or exchange............ (106) (106)
Exchange of Series C
preferred stock and
redemption of Series D
preferred stock (Notes
5 and 7)............... (128) (6,240) (311) (6,679)
Unrealized gains on cer-
tain marketable equity
investments at adoption
of FAS 115............. 205 205
Shares issued pursuant
to stock option and
dividend reinvestment
plans.................. 4 116 120
Other................... 2 51 (44) 9
----- ---- ------ ---- ------- ------
BALANCE AT DECEMBER 31,
1993................... 1 378 2,537 205 (1,751) 1,370
Net loss................ (91) (91)
Dividends on common
stock--$.35 per share
($.09 per share per
quarter effective for
the second quarter of
1994).................. (133) (133)
Dividends on Series B
preferred stock--$9.28
per share.............. 4 (13) (9)
Unrealized losses on
certain marketable eq-
uity investments....... (75) (75)
Shares issued pursuant
to stock option and
dividend reinvestment
plans.................. 1 53 54
Other................... (6) 38 32
----- ---- ------ ---- ------- ------
BALANCE AT DECEMBER 31,
1994................... $ 1 $379 $2,588 $130 $(1,950) $1,148
===== ==== ====== ==== ======= ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of Time Warner
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. Significant intercompany accounts and
transactions between the consolidated companies have been eliminated.
Investments in companies in which Time Warner has significant influence but
less than a controlling voting interest are accounted for using the equity
method. Under the equity method, only Time Warner's investment in and amounts
due to and from the equity investee are included in the consolidated balance
sheet, only Time Warner's share of the investee's earnings is included in the
consolidated operating results, and only the dividends, cash distributions,
loans or other cash received from the investee, less any additional cash
investment, loan repayments or other cash paid to the investee, are included in
the consolidated cash flows.
Prior to 1993, Time Warner's Entertainment Group companies ("Entertainment
Group"), principally Time Warner Entertainment Company, L.P. ("TWE"), were
consolidated. Due to changes in TWE's governance provisions at the time U S
WEST, Inc. ("U S WEST") was admitted as an additional limited partner (Note 2),
TWE and the other Entertainment Group companies were deconsolidated, effective
as of January 1, 1993, and have since been accounted for using the equity
method. The 1992 historical financial statements of Time Warner were not
changed; accordingly, they include TWE and other Entertainment Group companies
on a consolidated basis. However, financial statements for 1992 retroactively
reflecting the deconsolidation of the Entertainment Group also are presented
under the caption "restated" to facilitate comparative analysis.
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
investments in companies in which Time Warner does not have the controlling
interest or an ownership and voting interest so large as to exert significant
influence are accounted for at market value, if the investments are publicly
traded and there are no resale restrictions, or at cost, if the sale of a
publicly-traded investment is restricted or if the investment is not publicly
traded. Unrealized gains and losses on investments accounted for at market
value are reported net-of-tax in a separate component of shareholders' equity
until the investment is sold, at which time the realized gain or loss is
included in income. Dividends and other distributions of earnings from both
market value and cost method investments are included in income when declared.
Time Warner's $14 billion cost to acquire Warner Communications Inc. ("WCI")
was allocated to the net assets acquired as of December 31, 1989 in accordance
with the purchase method of accounting for business combinations. The
acquisition was financed principally by $8.3 billion of long-term debt and $5.6
billion of Series C and Series D preferred stock ("old Series C and Series D
preferred stock"), which was redeemed with or exchanged for debt in 1993 (Notes
5 and 7).
The effect of changes in Time Warner's ownership interests resulting from the
issuance of equity capital by consolidated subsidiaries or equity investees to
unaffiliated parties is included in income. The effect of the four-for-one
common stock split on September 10, 1992 has been reflected retroactively.
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1994 presentation.
REVENUES AND COSTS
The unearned portion of paid subscriptions is deferred until magazines are
delivered to subscribers. Upon each delivery, a proportionate share of the
gross subscription price is included in revenues.
F-6
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories of magazines, books, cassettes and compact discs are stated at
the lower of cost or estimated realizable value. Cost is determined using
first-in, first-out; last-in, first-out; and average cost methods. In
accordance with industry practice, certain products are sold to customers with
the right to return unsold items. Revenues from such sales represent gross
sales less a provision for future returns. Returned goods included in inventory
are valued at estimated realizable value but not in excess of cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided
generally on the straight-line method over useful lives ranging up to twenty-
five years for buildings and improvements and up to fifteen years for
furniture, fixtures and equipment.
INTANGIBLE ASSETS
Intangible assets are recorded when the cost of acquired companies exceeds
the fair value of their tangible assets. Generally accepted accounting
principles require that all intangible assets be amortized over no more than a
forty-year period. Amortization of goodwill amounted to $158 million, $148
million and $257 million ($142 million on a restated basis) in 1994, 1993 and
1992, respectively; amortization of music copyrights, artists' contracts and
record catalogues amounted to $115 million, $113 million and $113 million; and
amortization of other intangible assets amounted to $31 million, $31 million
and $310 million ($8 million on a restated basis). Accumulated amortization of
intangible assets at December 31, 1994 and 1993 amounted to $1.505 billion and
$1.245 billion, respectively.
FOREIGN CURRENCY
The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional
currency. Local currency assets and liabilities are translated at the rates of
exchange on the balance sheet date, and local currency revenues and expenses
are translated at average rates of exchange during the period. Resulting
translation gains or losses, which have not been material, are included in
accumulated deficit. Foreign currency transaction gains and losses, which have
not been material, are included in operating results.
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 exchange rates. At
December 31, 1994, Time Warner had contracts for the sale of $551 million and
the purchase of $109 million of foreign currencies at fixed rates, primarily
Japanese yen (25% of net contract value), French francs (19%), English pounds
(17%), Canadian dollars (9%) and German marks (14%), compared to contracts for
the sale of $653 million and the purchase of $80 million of foreign currencies
at December 31, 1993. Unrealized gains or losses are recorded in income;
accordingly, the carrying value of foreign exchange contracts approximates
market value. Time Warner had $33 million and TWE had $20 million of net losses
on foreign exchange contracts during 1994, 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.
INCOME TAXES
Income taxes are provided using the liability method prescribed by FASB
Statement No. 109, "Accounting for Income Taxes." Under the liability method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment.
F-7
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Realization of the net operating loss and investment tax credit
carryforwards, which were acquired in acquisitions, are accounted for as a
reduction of goodwill.
The principal operations of the Entertainment Group are conducted by
partnerships. Income tax expense includes all income taxes related to Time
Warner's allocable share of partnership income and its equity in the income tax
expense of corporate subsidiaries of the partnerships.
INTEREST RATE SWAP CONTRACTS
Interest rate swap contracts are used to adjust the proportion of total debt
that is subject to changes in short-term interest rates and the proportion that
is subject to fixed 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 equal to the 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. Gains or losses on
the termination of contracts are deferred and amortized to income over the
remaining average life of the terminated contracts.
TREASURY STOCK
The purchase of Time Warner common and other capital stock by Time Warner or
its subsidiaries is accounted for as if the stock had been retired and is no
longer outstanding.
LOSS PER COMMON SHARE
Loss per common share is based upon the net loss applicable to common shares
after preferred dividend requirements and upon the weighted average of common
shares outstanding during the period. The conversion of securities convertible
into common stock and the exercise of stock options were not assumed in the
calculations of loss per common share because the effect would have been
antidilutive.
2.ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1994 and 1993 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1993
------ ------
(MILLIONS)
<S> <C> <C>
Investment in TWE.............................................. $5,284 $5,085
Income tax and stock option related distributions due from TWE. 423 547
Credit agreement debt due to TWE............................... (400) --
Other liabilities due to TWE, principally related to home video
distribution.................................................. (266) (257)
------ ------
Investment in and amounts due to and from TWE.................. 5,041 5,375
Investment in other Entertainment Group companies.............. 309 252
------ ------
Total.......................................................... $5,350 $5,627
====== ======
</TABLE>
F-8
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The
Time Warner subsidiaries are the general partners ("Time Warner General
Partners") and subsidiaries of U S WEST, ITOCHU Corporation ("ITOCHU") and
Toshiba Corporation ("Toshiba") are the limited partners. The Time Warner
General Partners contributed the assets and liabilities or the rights to the
cash flow of substantially all of Time Warner's Filmed Entertainment,
Programming-HBO and Cable businesses at the initial capitalization of TWE, and
ITOCHU and Toshiba each contributed $500 million of cash. On September 15,
1993, U S WEST contributed $1.532 billion of cash and a $1.021 billion 4.4%
note ("U S WEST Note") for its interests. The initial capital amounts assigned
to each partner were based on the fair value of the assets each contributed to
the partnership and have the following priority in the event of liquidation or
dissolution:
<TABLE>
<CAPTION>
INITIAL % OWNED BY
CAPITAL TIME WARNER
PRIORITY OF CONTRIBUTED CAPITAL AMOUNTS(A) GENERAL PARTNERS
------------------------------- ---------- ----------------
(BILLIONS)
<S> <C> <C>
Senior capital...................................... $1.4 100.00%
Pro rata priority capital........................... 5.6 63.27%
Junior priority capital............................. 2.6 100.00%
Residual equity capital............................. 3.3 63.27%
</TABLE>
--------
(a) Excludes partnership income or loss (to the extent earned) allocated
thereto.
Under the TWE partnership agreement, partnership income, to the extent
earned, is first allocated to the partners so that the economic burden of the
income tax consequences of partnership operations is borne as though the
partnership were taxed as a corporation ("special tax allocations"), then to
the senior, pro rata priority and junior priority capital interests, in order
of priority, at rates of return ranging from 8% to 13.25% per annum, and
finally to the residual equity interests. For the purpose of the foregoing
allocations, partnership income is based on the fair value of assets
contributed to the partnership, and differs from net income of TWE, which is
based on the historical cost of contributed assets. Partnership losses
generally are allocated first to eliminate prior allocations of partnership
income to, and then to reduce the initial capital amounts of, the residual
equity, junior priority capital and pro rata priority capital interests, in
that order, then to reduce the Time Warner General Partners' senior capital,
including partnership income allocated thereto, and finally to reduce any
special tax allocations. To the extent partnership income is insufficient to
satisfy all special allocations in a particular accounting period, the unearned
portion is carried over until satisfied out of future partnership income.
The senior capital owned by the Time Warner General Partners and partnership
income allocated thereto is required to be distributed in three annual
installments beginning July 1, 1997; earlier distributions may be made under
certain circumstances. The junior priority capital owned by the Time Warner
General Partners may be increased if certain performance targets are achieved
between 1992 and 2001.
TWE reported net income of $161 million, $198 million and $160 million in
1994, 1993 and 1992, respectively, no portion of which was allocated to the
limited partners. Time Warner did not recognize a gain when TWE was
capitalized. TWE recorded the assets contributed by the Time Warner General
Partners at Time Warner's historical cost. The excess of the Time Warner
General Partners' interest in the net assets of TWE over the net book value of
their investment in TWE is being amortized to income over a twenty year period
at the rate of $17 million per year prior to the admission of U S WEST, and $72
million per year thereafter.
U S WEST has an option to obtain up to an additional 6.33% of pro rata
priority capital and residual equity interests, depending on cable operating
performance. The option is exercisable between January 1, 1999
F-9
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and on or about May 31, 2005 at a maximum exercise price of $1.25 billion to
$1.8 billion, depending on the year of exercise. Either U S WEST or TWE may
elect that the exercise price be paid with partnership interests rather than
cash. Each of ITOCHU and Toshiba have options to obtain up to an additional
.64% of pro rata priority capital and residual equity interests in certain
circumstances, payable in cash.
Each Time Warner General Partner has guaranteed a pro rata portion of $7
billion of TWE's debt and accrued interest at December 31, 1994, based on the
relative fair value of the net assets each Time Warner General Partner
contributed to TWE. Such indebtedness is recourse to each Time Warner General
Partner only to the extent of its guarantee. In addition to their interests in
TWE and the other Entertainment Group companies, the assets of the Time Warner
General Partners include the equivalent of 29.6 million common shares of Turner
Broadcasting System, Inc., 12.1 million common shares of Hasbro, Inc., 43.7
million common shares of Time Warner, and substantially all the assets of Time
Warner's music business. There are no restrictions on the ability of the Time
Warner General Partner guarantors to transfer assets, other than TWE assets, to
parties that are not guarantors.
The summarized financial information for the Entertainment Group set forth
below reflects the consolidation of Six Flags Entertainment Corporation ("Six
Flags") as of January 1, 1993 as a result of the increase in TWE's ownership
from 50% to 100% in September 1993. The 1992 historical financial information
has not been changed; however, financial information for 1992 retroactively
reflecting the consolidation is presented as supplementary information under
the column heading "restated" to facilitate comparative analysis.
TIME WARNER ENTERTAINMENT GROUP
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues...................................... $ 8,509 $7,963 $7,251 $6,761
Depreciation and amortization................. 959 909 857 788
Business segment operating income............. 852 905 855 814
Interest and other, net....................... 616 564 569 531
Income before income taxes.................... 176 281 226 223
Income before extraordinary item.............. 136 217 173 173
Net income.................................... 136 207 173 173
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
CASH FLOW INFORMATION
Cash provided by operations................... $ 1,341 $1,276 $ 864 $ 781
Capital expenditures.......................... (1,235) (613) (423) (402)
Investments and acquisitions.................. (186) (368) (383) (279)
Loan to Time Warner........................... (400) -- -- --
Increase (decrease) in debt................... 48 (659) (791) (837)
Capital contributions......................... 234 1,548 1,012 1,012
Capital distributions......................... (120) (20) (183) (183)
Increase (decrease) in cash and equivalents... (267) 1,302 24 13
</TABLE>
F-10
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
------- -------
(MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION
Cash and equivalents........................................... $ 1,071 $ 1,338
Total current assets........................................... 3,571 3,766
Total assets................................................... 18,992 18,202
Total current liabilities...................................... 2,953 2,301
Long-term debt................................................. 7,160 7,125
Time Warner General Partners' senior capital, consisting of
$1.364 billion initial capital amount plus accrued income..... 1,663 1,536
TWE partners' capital, before deduction of the U S WEST Note... 7,004 7,005
U S WEST Note.................................................. 771 1,005
</TABLE>
The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. The Time Warner General Partners received
$115 million of tax-related distributions from TWE in 1994. There was an
additional $334 million of such distributions due from TWE at December 31,
1994, compared to $276 million at December 31, 1993. The Time Warner General
Partners also had accrued $89 million and $271 million, respectively, of stock
option related distributions due from TWE at December 31, 1994 and December 31,
1993, respectively, based on closing prices of Time Warner common stock of
$35.125 and $44.25, respectively. Time Warner is paid when the options are
exercised and received $5 million and $20 million of stock option distributions
in 1994 and 1993, respectively. In addition to the tax, stock option and Time
Warner General Partners' senior capital distributions, TWE may make other
distributions, generally depending on excess cash and credit agreement
limitations. The Time Warner General Partners' full share of such distributions
may be deferred if the limited partners do not receive certain threshold
amounts by certain dates.
In the normal course of conducting their businesses, Time Warner and its
subsidiaries and affiliates have had various transactions with TWE and other
Entertainment Group companies, generally on terms resulting from a negotiation
between the affected units that in management's view results in reasonable
allocations. Time Warner provides TWE with certain corporate support services
for which it receives a fee of $60 million per year through June 30, 1995, and
increasing annual amounts as adjusted for inflation thereafter.
3. CABLE TRANSACTIONS
In September 1994, Time Warner agreed to acquire Summit Communications Group,
Inc. ("Summit"), which owns cable television systems serving 162,000
subscribers, in exchange for 900,000 shares of Time Warner common stock and 3.2
million shares of a new Time Warner convertible preferred stock ("new Series C
preferred stock") having a liquidation value of $100 per share. The new Series
C preferred stock will be convertible into 6.7 million shares of Time Warner
common stock at an effective price of $48 of liquidation value per common
share, receive an annual dividend of $3.75 per share for five years, and be
redeemable at liquidation value plus unpaid dividends after five years, or
exchangeable in part for common stock by the holder beginning after the third
year and by Time Warner after the fourth year at the stated conversion price
plus a declining premium in years four and five and no premium thereafter. The
Time Warner consideration is subject to adjustment after closing based on the
working capital of Summit at closing.
In September 1994, TWE agreed to form a cable television joint venture with
subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting
Corporation ("Advance/Newhouse") to which
F-11
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Advance/Newhouse will contribute cable television systems serving 1.4 million
subscribers and related assets and TWE will contribute cable television systems
(or interests therein) serving 2.8 million subscribers and related assets. TWE
will own a two-thirds equity interest in the TWE-Advance/Newhouse Partnership
and be the managing partner. Advance/Newhouse will own a one-third equity
interest in the partnership. 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.
In January 1995, Time Warner agreed to acquire KBLCOM Incorporated
("KBLCOM"), a subsidiary of Houston Industries Incorporated that owns cable
television systems serving approximately 690,000 subscribers and a 50% interest
in Paragon Communications ("Paragon"), which serves an additional 967,000 cable
subscribers. TWE owns the other 50% interest in Paragon. To acquire KBLCOM,
Time Warner will issue 1 million shares of common stock and 11 million shares
of a new convertible preferred stock ("new Series D preferred stock") and
assume or incur $1.24 billion of indebtedness. The new Series D preferred stock
will have a liquidation value of $100 per share, be convertible into 22.9
million shares of Time Warner common stock at an effective price of $48 of
liquidation value per common share, and receive an annual dividend of $3.75 per
share for four years. Time Warner will have the right to exchange the new
Series D preferred stock for common stock at the stated conversion price after
four years.
In February 1995, Time Warner agreed to acquire Cablevision Industries
Corporation ("CVI") and related companies that own cable television systems
serving 1.3 million subscribers. To acquire CVI and related companies, Time
Warner will issue 2.5 million shares of common stock and 6.5 million shares of
new convertible preferred stocks (3.25 million shares of "Series E preferred
stock" and 3.25 million shares of "Series F preferred stock") and assume
approximately $2 billion of debt of CVI and related companies. The Series E and
F preferred stocks will have a liquidation value of $100 per share, be
convertible into 13.5 million shares of Time Warner common stock at an
effective price of $48 of liquidation value per common share, and receive an
annual dividend of $3.75 per share for a period of five years with respect to
the Series E preferred stock and a period of four years with respect to the
Series F preferred stock. Time Warner will have the right to exchange the
Series E preferred stock for common stock at the stated conversion price after
five years and to exchange the Series F preferred stock for common stock at the
stated conversion price after four years. The amount of common stock and Series
F preferred stock to be issued will be adjusted if the level of indebtedness,
negative working capital and related items at the closing differ from
approximately $2 billion.
To the extent that any of the new Series C, D, E or F preferred stocks remain
outstanding following the end of the period in which the $3.75 per share
dividend is to be paid, holders will receive a dividend equal to the common
dividend declared times the number of common shares into which their preferred
shares are convertible. While they are outstanding, each of the Series C, D, E
and F preferred stocks will be entitled to vote with the common stock on all
matters on which the common stock is entitled to vote, and each share of any
such preferred stock will be entitled to two votes per share on any such
matter.
The Summit and Advance/Newhouse transactions are expected to close in the
first half of 1995. The KBLCOM and CVI transactions are expected to close later
in the year. All transactions are subject to customary closing conditions,
including the receipt of certain franchise and regulatory approvals.
F-12
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4.OTHER INVESTMENTS
Time Warner's other investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
(MILLIONS)
<S> <C> <C>
Equity method investments........................................ $ 985 $ 798
Market value method investments(/1/)............................. 435 553
Cost method investments.......................................... 135 262
------ ------
Total............................................................ $1,555 $1,613
====== ======
</TABLE>
--------
(1) Unrestricted marketable equity securities not accounted for using the
equity method are stated at market value. Such amounts include the market
value of 12.058 million shares of common stock of Hasbro, Inc., which can
be used, at Time Warner's option, to satisfy its obligations with respect
to the zero coupon exchangeable notes due 2012 (Note 5).
In addition to TWE and its equity investees, companies accounted for using
the equity method include Turner Broadcasting System, Inc. ("TBS") (19.6%
owned); Cinamerica Theatres, L.P. (50% owned) and The Columbia House Company
partnerships (50% owned) and other music joint ventures (generally 50% owned).
Equity investees of TWE include Paragon Communications (50% owned), certain
other cable system joint ventures (generally 50% owned) and Comedy Partners,
L.P. (50% owned).
A summary of financial information as reported by the equity investees of
Time Warner and TWE on a 100% basis is set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- ------
<S> <C> <C> <C> <C>
(MILLIONS)
Revenues........................................ $4,444 $3,363 $3,020 $4,102
Operating income................................ 584 450 433 555
Income before extraordinary items and cumulative
effect of a change in accounting principle..... 281 201 162 168
Net income (loss)............................... 256 (135) 207 212
Current assets.................................. 2,113 1,586 1,257 1,473
Total assets.................................... 5,194 4,111 3,277 5,421
Current liabilities............................. 1,136 755 589 951
Long-term debt.................................. 3,730 2,606 1,794 3,022
Total liabilities............................... 5,423 3,992 2,606 4,376
</TABLE>
The market value and cost of Time Warner's investment in TBS at December 31,
1994 was $900 million and $527 million, respectively. The sale, transfer or
other disposition of substantially all of the shares of TBS capital stock is
restricted pursuant to shareholder agreements. The TBS securities also may be
considered restricted securities under the Securities Act of 1933 and, if so,
could only be sold pursuant to an effective registration statement or in a
transaction exempt from the registration requirements of the Securities Act of
1933.
F-13
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1993
------ ------
(MILLIONS)
<S> <C> <C>
9.5% Notes due November 1, 1994(/1/)............................ $ -- $ 125
5.2% Notes due April 15, 1994(/1/).............................. -- 250
6.05% Notes due July 1, 1995.................................... -- 300
7.45% Notes due February 1, 1998................................ 500 500
7.95% Notes due February 1, 2000................................ 500 500
Redeemable reset notes due August 15, 2002 (8.7% yield)......... 1,719 1,572
Zero coupon exchangeable notes due December 17, 2012 (6.25%
yield)......................................................... 547 514
Zero coupon convertible notes due June 22, 2013 (5% yield)...... 970 923
9.125% Debentures due January 15, 2013.......................... 1,000 1,000
8.75% Convertible subordinated debentures due January 10, 2015.. 2,226 2,226
8.75% Debentures due April 1, 2017.............................. 248 248
9.15% Debentures due February 1, 2023........................... 1,000 1,000
Credit agreement debt due to TWE (6.7% interest rate)........... 400 --
Other........................................................... 129 133
------ ------
Subtotal........................................................ 9,239 9,291
Reclassification of debt due to TWE to amounts due to the Enter-
tainment Group................................................. (400) --
------ ------
Total........................................................... $8,839 $9,291
====== ======
</TABLE>
--------
(1) Classified as long-term in 1993 because of the intent and ability to
refinance under Time Warner's credit agreement with TWE.
Time Warner and TWE entered into a credit agreement in 1994 that allows Time
Warner to borrow up to $400 million from TWE through September 15, 2000.
Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement, and used the
proceeds principally to repay its 9.5% notes due November 1, 1994 and its 5.2%
notes due April 15, 1994. Under TWE's bank credit agreement, TWE's loans to
Time Warner cannot exceed $1.1 billion at December 31, 1994, increasing to no
more than $1.5 billion on July 1, 1995.
The redeemable reset notes due August 15, 2002 do not pay interest for
periods prior to August 15, 1995, the first redemption date, at which time an
interest rate will be set. The interest rate will be reset on August 15, 1998,
the second redemption date. The notes are redeemable at par on each redemption
date, payable in any combination of cash and debt securities, if Time Warner
elects to redeem the notes, or in any combination of cash or equity or debt
securities of Time Warner or any other entity, as Time Warner will determine,
if the holders elect to have the notes redeemed. Unamortized discount was $82
million and $229 million at December 31, 1994 and 1993, respectively.
The zero coupon notes do not pay interest until maturity. The zero coupon
exchangeable notes due December 17, 2012 are exchangeable at any time by the
holder into 7.301 shares of common stock of Hasbro, Inc. ("Hasbro shares") per
$1,000 principal amount, subject to Time Warner's right to pay in whole or in
part with cash instead of Hasbro shares. Time Warner can elect to redeem the
notes any time after December 17, 1997, and holders can elect to have the notes
redeemed prior thereto in the event of a change of control, at the issue price
plus accrued interest. Holders also can elect to have the notes redeemed at the
issue price plus accrued interest on December 17, 1997, 2002 and 2007, subject
to Time Warner's right to pay in whole or in part with Hasbro shares instead of
cash. Unamortized discount was $1.104 billion and $1.137 billion at December
31, 1994 and 1993, respectively.
F-14
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The zero coupon convertible notes due June 22, 2013 are convertible at any
time by the holders into 18.7 million shares of Time Warner common stock at the
rate of 7.759 shares for each $1,000 principal amount of notes. Time Warner can
elect to redeem the notes any time after June 22, 1998, and holders can elect
to have the notes redeemed prior thereto in the event of a change in control,
at the issue price plus accrued interest. Holders also can elect to have the
notes redeemed at the issue price plus accrued interest on June 22, 1998, 2003
and 2008, subject to Time Warner's right to pay in whole or in part with Time
Warner common stock instead of cash. Unamortized discount was $1.445 billion
and $1.492 billion at December 31, 1994 and 1993, respectively.
$3.125 billion of 8.75% convertible subordinated debentures due January 10,
2015 were issued in exchange for the old Series C preferred stock in April 1993
(Note 7). $900 million of such debentures were redeemed in July 1993. The
$2.226 billion of 8.75% convertible subordinated debentures outstanding at
December 31, 1994 are convertible into 46.6 million shares of Time Warner
common stock at the rate of $47.73 principal amount of indebtedness per common
share and are redeemable at any time, in whole or in part, at Time Warner's
option, at 104.375% of par until January 9, 1996, decreasing ratably each year
thereafter to 100% of par on January 10, 2000.
An after-tax cost of $57 million was incurred in connection with the
redemption of debt in 1993, principally the redemption of $900 million of 8.75%
convertible subordinated debentures and $529 million of WCI senior and
subordinated debentures.
Each Time Warner General Partner has guaranteed a pro rata portion of $7
billion of TWE's debt and accrued interest at December 31, 1994, as more fully
described in Note 2. TWE's credit agreement contains certain restrictive
covenants relating to, among other things, additional indebtedness; cash flow
coverage and leverage ratios; and loans, advances, distributions or other cash
payments or transfers of assets to Time Warner and its subsidiaries.
At December 31, 1994, Time Warner had interest rate swap contracts to pay
floating-rates of interest (average six-month LIBOR rate of 5.9%) and receive
fixed-rates of interest (average rate of 5.5%) on $2.9 billion notional amount
of indebtedness, effectively converting approximately 32% of Time Warner's
underlying debt, substantially all of which is fixed-rate, to a floating-rate
basis. The notional amount of outstanding contracts by year of maturity is as
follows: 1995-$300 million; 1996-$300 million; 1998-$700 million; 1999-$1.2
billion; and 2000-$400 million.
Based on the level of interest rates prevailing at December 31, 1994, the
fair value of Time Warner's fixed-rate debt was $572 million less than its
carrying value and it would have cost $236 million to terminate the related
interest rate swap contracts, which combined is the equivalent of an unrealized
gain of $336 million. Based on the level of interest rates prevailing at
December 31, 1993, the fair value of Time Warner's fixed-rate debt exceeded its
carrying value by $530 million and the Company would have received $4 million
to terminate its interest rate swap contracts, which combined was the
equivalent of an unrealized loss of $526 million. Accounting recognition is not
given to unrealized gains or losses on debt or interest rate swap contracts
unless the debt is retired or the contracts are terminated prior to their
maturity.
Interest expense amounted to $769 million in 1994, $698 million in 1993 and
$729 million in 1992 ($287 million on a restated basis, which was before the
old Series C and D preferred stocks were redeemed with or exchanged for long-
term debt). The weighted average interest rate on Time Warner's total debt,
including the effect of interest rate swap contracts, was 8.1% and 7.6% at
December 31, 1994 and 1993, respectively.
Annual repayments of long-term debt for the five years subsequent to December
31, 1994 consist of $500 million due in 1998. Such repayments exclude the
aggregate repurchase or redemption prices of $1.801 billion in 1995, $656
million in 1997 and $1.151 billion in 1998 relating to the redeemable reset
notes, zero coupon exchangeable notes and zero coupon convertible notes,
respectively, in the years in which the holders of such debt may first exercise
their redemption options.
F-15
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Domestic............................................. $(78) $(57) $ 83 $ 80
Foreign.............................................. 167 138 240 240
---- ---- ---- ----
Total................................................ $ 89 $ 81 $323 $320
==== ==== ==== ====
Current and deferred income taxes (tax benefits) provided are as follows:
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Federal:
Current(/1/)....................................... $ 66 $ 45 $ 9 $ 9
Deferred(/2/)...................................... (81) 11 24 21
Foreign:
Current(/3/)....................................... 194 168 159 159
Deferred........................................... (45) (11) 14 14
State and Local:
Current............................................ 79 86 45 45
Deferred........................................... (33) (54) (14) (14)
---- ---- ---- ----
Total................................................ $180 $245 $237 $234
==== ==== ==== ====
</TABLE>
--------
(1) Includes utilization of tax carryforwards of $48 million in 1994, $136
million in 1993 and $15 million in 1992. Excludes current tax benefits of
$11 million in 1994 and $14 million in 1993 resulting from the exercise of
stock options and vesting of restricted stock awards, which were credited
directly to paid-in-capital, and $6 million of current tax benefits
resulting from the retirement of debt, which reduced the extraordinary
loss in 1993.
(2) Includes $70 million unusual charge in 1993 to increase deferred tax
liability for increase in tax rate.
(3) Includes foreign withholding taxes of $74 million in 1994, $79 million in
1993 and $57 million in 1992.
The differences between income taxes expected at the U.S. federal statutory
income tax rate and income taxes provided are as set forth below. The
relationship between income before income taxes and income tax expense is most
affected by the amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes and by a $70 million
charge ($.19 per common share) in 1993 to adjust the deferred income tax
liability for the increase in the U.S. federal statutory rate from 34% to 35%
enacted into law that year.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Taxes on income at U.S. federal statutory rate.......... $ 31 $ 28 $110 $109
State and local taxes, net.............................. 30 21 20 20
Nondeductible expenses.................................. 107 107 92 90
Charge to increase deferred tax liability
for increase in tax rate............................... -- 70 -- --
Foreign income taxed at different
rates, net of U.S. foreign tax credits................. 1 13 14 14
Other................................................... 11 6 1 1
---- ---- ---- ----
Total................................................... $180 $245 $237 $234
==== ==== ==== ====
</TABLE>
F-16
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of Time Warner's net deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
(MILLIONS)
<S> <C> <C>
Assets acquired in business combinations......................... $2,276 $2,146
Depreciation and amortization.................................... 619 1,026
Unrealized appreciation of certain marketable securities......... 91 142
Other............................................................ 460 460
------ ------
Deferred tax liabilities......................................... 3,446 3,774
------ ------
Tax carryforwards................................................ 264 312
Accrued liabilities.............................................. 206 137
Reserves for doubtful receivables and returns.................... 200 160
Other............................................................ 76 167
------ ------
Deferred tax assets.............................................. 746 776
------ ------
Net deferred tax liabilities..................................... $2,700 $2,998
====== ======
</TABLE>
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $700 million at December 31, 1994. Determination of the amount of
unrecognized deferred U.S. income tax liability with respect to such earnings
is not practicable. If such earnings are repatriated, additional U.S. income
and foreign withholding taxes are expected to be offset by the accompanying
foreign tax credits.
U.S. federal tax carryforwards at December 31, 1994 consisted of $39 million
of net operating losses that expire from 1997 to 2008, $224 million of
investment tax credits that expire from 1996 to 2008, and $26 million of
alternative minimum tax credits that have no expiration dates. The utilization
of certain carryforwards is subject to limitations under U.S. federal income
tax laws.
7.CAPITAL STOCK
The outstanding capital stock of Time Warner at December 31, 1994 consisted
of 962,068 shares of Series B preferred stock and 379.3 million shares of
common stock (net of 45.7 million shares of common stock in treasury, as to
which 43.7 million were held by the Time Warner General Partners). At January
31, 1995, there were approximately 19,000 holders of record of Time Warner
common stock.
Pursuant to a shareholder rights plan adopted in January 1994, Time Warner
distributed one right per common share which becomes exercisable in certain
events involving the acquisition of 15% or more of Time Warner common stock.
Upon the occurrence of such an event, each right entitles its holder to
purchase for $150 the economic equivalent of common stock of Time Warner, or in
certain circumstances, of the acquiror, worth twice as much. In connection with
the plan, 4 million shares of preferred stock were reserved. The rights expire
on January 20, 2004.
Each share of Series B preferred stock is: (1) entitled to a liquidation
preference of $145, (2) entitled to earn dividends at a rate of 6.4% per annum
of its $145 liquidation value through May 31, 1995 and at a rate of 3% per
annum thereafter, payable quarterly in cash, (3) not entitled to vote, except
in certain circumstances, and (4) redeemable, in whole or in part, (a) by Time
Warner prior to May 31, 1995 in exchange for shares or fractional shares of any
class or series of publicly-traded Time Warner stock ("Public Stock") equal in
value to the liquidation value of the Series B stock and (b) by Time Warner or
the holder on or after May 31, 1995 in exchange for, at Time Warner's option,
cash or shares or fractional shares of Public Stock equal in value to the
liquidation value of the Series B stock plus a premium of 2% of liquidation
value for each year after May 31, 1995 to the redemption date.
F-17
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993, Time Warner redeemed its old Series D preferred stock for cash and
exchanged its old Series C preferred stock for 8.75% convertible subordinated
debentures due January 10, 2015. The old Series D redemption was financed
principally by the proceeds from the issuance of long-term notes and
debentures.
At December 31, 1994, Time Warner had reserved 143.8 million shares of common
stock for the conversion of the 8.75% convertible subordinated debentures, zero
coupon convertible notes and other convertible securities, and for the exercise
of outstanding options to purchase shares of common stock. Approximately 43
million additional shares will be reserved for the conversion of the new Series
C, D, E and F preferred stocks issuable in the cable acquisitons that are
expected to close in 1995 (Note 3).
8. STOCK OPTION PLANS
Options to purchase Time Warner common stock under various stock option plans
have been granted to employees of Time Warner and TWE, generally at fair market
value at the date of grant. Generally, the options become exercisable over a
three-year vesting period and expire ten years from the date of grant. A
summary of stock option activity under all plans is as follows:
<TABLE>
<CAPTION>
THOUSANDS EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance at December 31, 1993..................... 72,954 $ 8-48
Granted.......................................... 6,071 32-41
Exercised........................................ (1,262) 8-36
Cancelled........................................ (152) 22-45
------
Balance at December 31, 1994..................... 77,611 $ 8-48
======
At December 31, 1994:
Exercisable.................................... 63,106
Available for future grants.................... 8,849
</TABLE>
For options granted to employees of TWE, Time Warner is reimbursed for the
amount by which the market value of Time Warner common stock on the exercise
date exceeds the exercise price, or the greater of the exercise price or $27.75
for options granted prior to the TWE capitalization. There were 30.2 million
options held by employees of TWE at December 31, 1994, 21.3 million of which
were exercisable (Note 2).
There were 4.8 million options exercised in 1993 at prices ranging from $8-
$36 per share, 933,000 options exercised in 1992 at prices ranging from $8-$28
per share, and 57.7 million options exercisable and 4.4 million options
available for grant at December 31, 1993.
9. BENEFIT PLANS
Time Warner and its subsidiaries have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities.
Pension expense included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
RESTATED
1994 1993 1992 1992
-------- -------- -------- --------
(MILLIONS)
<S> <C> <C> <C> <C>
Service cost................................ $34 $25 $24 $37
Interest cost............................... 50 45 42 54
Actual return on plan assets................ (2) (52) (34) (44)
Net amortization and deferral............... (45) 10 (9) (13)
--- --- --- ---
Total....................................... $37 $28 $23 $34
=== === === ===
</TABLE>
F-18
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
The status of funded pension plans is as follows:
<CAPTION>
DECEMBER
31,
------------
1994 1993
----- -----
(MILLIONS)
<S> <C> <C>
Accumulated benefit obligation (89% vested)....................... $ 394 $ 450
Effect of future salary increases................................. 132 134
----- -----
Projected benefit obligation...................................... 526 584
Plan assets at fair value......................................... 495 505
----- -----
Projected benefit obligation in excess of plan assets............. (31) (79)
Unamortized actuarial losses...................................... 49 120
Unamortized plan changes.......................................... (7) (8)
Other............................................................. (8) (9)
----- -----
Prepaid pension asset............................................. $ 3 $ 24
===== =====
</TABLE>
The following assumptions were used in accounting for pension plans:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate................................... 8.5% 7.5% 8.5%
Return on plan assets............................................ 9% 9% 10%
Rate of increase in compensation................................. 6% 6% 6%
</TABLE>
Employees of Time Warner's operations in foreign countries participate to
varying degrees in local pension plans, which in the aggregate are not
significant.
Time Warner also has an employee stock ownership plan, 401(k) savings plans
and profit sharing plans, as to which the expense was $51 million in 1994, $46
million in 1993 and $57 million ($41 million on a restated basis) in 1992.
Contributions to the 401(k) plans are based upon a percentage of the employees'
elected contributions. Contributions to the employee stock ownership and profit
sharing plans are determined by management and approved by the board of
directors of the participating companies.
10. SEGMENT INFORMATION
Information as to the operations of Time Warner and the Entertainment Group
in different business segments is set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Time Warner:
Publishing.................................... $3,433 $3,270 $3,123 $ 3,123
Music......................................... 3,986 3,334 3,214 3,214
Entertainment Group........................... -- -- -- 6,761
Intersegment elimination...................... (23) (23) (28) (28)
------ ------ ------ -------
Total......................................... $7,396 $6,581 $6,309 $13,070
====== ====== ====== =======
Entertainment Group:
Filmed Entertainment.......................... $5,041 $4,565 $3,945 $ 3,455
Programming-HBO............................... 1,513 1,441 1,444 1,444
Cable......................................... 2,242 2,208 2,091 2,091
Intersegment elimination...................... (287) (251) (229) (229)
------ ------ ------ -------
Total......................................... $8,509 $7,963 $7,251 $ 6,761
====== ====== ====== =======
</TABLE>
F-19
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
OPERATING INCOME
Time Warner:
Publishing........................................... $347 $295 $254 $ 254
Music................................................ 366 296 275 275
Entertainment Group.................................. -- -- -- 814
---- ---- ---- ------
Total................................................ $713 $591 $529 $1,343
==== ==== ==== ======
Entertainment Group:
Filmed Entertainment................................. $275 $286 $254 $ 213
Programming-HBO...................................... 237 213 201 201
Cable................................................ 340 406 400 400
---- ---- ---- ------
Total................................................ $852 $905 $855 $ 814
==== ==== ==== ======
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing........................................... $ 47 $ 45 $ 42 $ 42
Music................................................ 86 87 79 79
Entertainment Group.................................. -- -- -- 371
---- ---- ---- ------
Total................................................ $133 $132 $121 $ 492
==== ==== ==== ======
Entertainment Group:
Filmed Entertainment................................. $127 $ 92 $ 81 $ 42
Programming-HBO...................................... 14 14 13 13
Cable................................................ 340 327 316 316
---- ---- ---- ------
Total................................................ $481 $433 $410 $ 371
==== ==== ==== ======
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(/1/)
Time Warner:
Publishing........................................... $ 36 $ 32 $ 32 $ 32
Music................................................ 268 260 231 231
Entertainment Group.................................. -- -- -- 417
---- ---- ---- ------
Total................................................ $304 $292 $263 $ 680
==== ==== ==== ======
Entertainment Group:
Filmed Entertainment................................. $163 $171 $185 $ 155
Programming-HBO...................................... 6 3 1 1
Cable................................................ 309 302 261 261
---- ---- ---- ------
Total................................................ $478 $476 $447 $ 417
==== ==== ==== ======
</TABLE>
--------
(1) Amortization includes all amortization relating to the acquisition of WCI
in 1989, the acquisition of the minority interest in American Television
and Communications Corporation ("ATC") in 1992 and other business
combinations accounted for by the purchase method.
F-20
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information as to the assets and capital expenditures of Time Warner and the
Entertainment Group is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Time Warner:
Publishing.................................... $ 2,013 $ 1,897 $ 1,886 $ 1,886
Music......................................... 7,672 7,401 7,418 7,418
Entertainment Group(/1/)...................... 5,350 5,627 5,392 15,715
Corporate(/2/)................................ 1,681 1,967 2,347 2,347
------- ------- ------- -------
Total......................................... $16,716 $16,892 $17,043 $27,366
======= ======= ======= =======
Entertainment Group:
Filmed Entertainment.......................... $ 7,998 $ 7,567 $ 7,381 $ 6,502
Programming-HBO............................... 911 875 936 936
Cable......................................... 8,303 8,102 8,146 8,146
Corporate(/2/)................................ 1,780 1,658 270 302
------- ------- ------- -------
Total......................................... $18,992 $18,202 $16,733 $15,886
======= ======= ======= =======
--------
(1) At December 31, 1992 on an historical basis, Entertainment Group assets
represent total assets of the Entertainment Group, less certain assets
related to transactions with other Time Warner companies. Entertainment
Group assets for all other periods presented represent Time Warner's
investment in and amounts due to and from the Entertainment Group.
(2) Consists principally of cash and investments.
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Time Warner:
Publishing.................................... $ 50 $ 41 $ 40 $ 40
Music......................................... 108 91 124 124
Entertainment Group........................... -- -- -- 402
Corporate..................................... 6 66 8 8
------- ------- ------- -------
Total......................................... $ 164 $ 198 $ 172 $ 574
======= ======= ======= =======
Entertainment Group:
Filmed Entertainment.......................... $ 441 $ 244 $ 122 $ 101
Programming-HBO............................... 14 16 28 28
Cable(/1/).................................... 778 353 273 273
Corporate..................................... 2 -- -- --
------- ------- ------- -------
Total......................................... $ 1,235 $ 613 $ 423 $ 402
======= ======= ======= =======
</TABLE>
--------
(1)The 1994 increase was funded in part through $234 million of collections on
the U S WEST Note (Note 2).
F-21
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information as to Time Warner's operations in different geographical areas
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
United States(/1/)............................. $ 4,944 $ 4,414 $ 4,220 $10,981
Europe......................................... 1,445 1,296 1,411 1,411
Pacific Rim.................................... 724 583 430 430
Rest of World.................................. 283 288 248 248
------- ------- ------- -------
Total.......................................... $ 7,396 $ 6,581 $ 6,309 $13,070
======= ======= ======= =======
OPERATING INCOME
United States.................................. $ 494 $ 436 $ 311 $ 1,143
Europe......................................... 108 102 155 140
Pacific Rim.................................... 74 28 32 31
Rest of World.................................. 37 25 31 29
------- ------- ------- -------
Total.......................................... $ 713 $ 591 $ 529 $ 1,343
======= ======= ======= =======
ASSETS
United States.................................. $13,961 $14,328 $14,581 $24,878
Europe......................................... 1,717 1,635 1,608 1,626
Pacific Rim.................................... 636 514 498 502
Rest of World.................................. 402 415 356 360
------- ------- ------- -------
Total.......................................... $16,716 $16,892 $17,043 $27,366
======= ======= ======= =======
</TABLE>
--------
(1) Time Warner's revenues in 1994, 1993 and on a restated basis in 1992 do
not include the revenues of the Entertainment Group, which had export
revenues of $1.693 billion in 1994, $1.650 billion in 1993 and $1.379
billion in 1992, principally from the sale of Filmed Entertainment
products abroad.
11.COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $157 million in 1994, $163 million in 1993
and $258 million ($159 million on a restated basis) in 1992. The minimum
rental commitments under noncancellable long-term operating leases are: 1995-
$137 million; 1996-$126 million; 1997-$115 million; 1998-$123 million; 1999-
$118 million and after 1999-$998 million.
Minimum commitments and guarantees under certain licensing, artists and
other agreements aggregated approximately $2 billion at December 31, 1994,
which are payable principally over a seven-year period. Such amounts do not
include the Time Warner General Partner guarantees of approximately $7 billion
of TWE debt.
Pending legal proceedings are substantially limited to litigation incidental
to the businesses of Time Warner and alleged damages in connection with class
action lawsuits. In the opinion of counsel and management, the ultimate
resolution of these matters will not have a material effect on the financial
statements of Time Warner.
F-22
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12.ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
RESTATED
1994 1993 1992 1992
---- ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
Cash payments made for interest..................... $539 $ 330 $ 260 $ 651
Cash payments made for income taxes................. 389 234 207 247
Tax-related distributions received from TWE......... 115 -- -- --
Income tax refunds received......................... 50 52 42 44
Borrowings.......................................... 582 4,714 1,349 8,026
Repayments.......................................... 626 1,599 1,391 8,006
Noncash Series D dividends declared................. -- -- 337 337
</TABLE>
During the year ended December 31, 1994, Time Warner realized $179 million
from the securitization of receivables. On April 1, 1993, Time Warner issued
$3.125 billion of debentures in a noncash exchange for the old Series C
preferred stock (Notes 5 and 7).
The principal balance sheet effects of the deconsolidation of the
Entertainment Group in 1993 were to decrease cash and equivalents by $36
million, receivables by $1.060 billion, inventories by $2.632 billion,
investments by $690 million, property, plant and equipment by $2.548 billion,
cable television franchises by $3.660 billion, goodwill by $4.356 billion,
other assets by $733 million, debt by $7.178 billion, minority interests by
$961 million and other liabilities by $2.184 billion, and to increase the
investments in and amounts due to and from the Entertainment Group by $5.392
billion. The principal balance sheet effects of the acquisition of the ATC
minority interest in 1992 were to increase investments by $156 million, cable
television franchise costs by $865 million, goodwill by $410 million, deferred
income taxes by $299 million and long-term debt by $1.312 billion, and to
eliminate the ATC minority interest of $180 million. On a restated basis, the
investments in and amounts due to and from the Entertainment Group were
increased $1.431 billion.
Investment proceeds in 1992 on a restated basis include $875 million from the
collection of a note receivable from TWE. Cash equivalents consist of
commercial paper and other investments that are readily convertible into cash,
and have original maturities of three months or less.
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
(MILLIONS)
<S> <C> <C>
Accrued expenses.................................................. $ 875 $ 716
Accrued compensation.............................................. 308 228
Deferred revenues................................................. 55 62
------ ------
Total............................................................. $1,238 $1,006
====== ======
</TABLE>
F-23
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles, and
necessarily include some amounts that are based on management's best estimates
and judgments.
Time Warner maintains a system of internal accounting controls designed to
provide management with reasonable assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions are
executed in accordance with management's authorization and recorded properly.
The concept of reasonable assurance is based on the recognition that the cost
of a system of internal control should not exceed the benefits derived and that
the evaluation of those factors requires estimates and judgments by management.
Further, because of inherent limitations in any system of internal accounting
control, errors or irregularities may occur and not be detected. Nevertheless,
management believes that a high level of internal control is maintained by Time
Warner through the selection and training of qualified personnel, the
establishment and communication of accounting and business policies, and its
internal audit program.
The Audit Committee of the Board of Directors, composed solely of directors
who are not employees of Time Warner, meets periodically with management and
with Time Warner's internal auditors and independent auditors to review matters
relating to the quality of financial reporting and internal accounting control,
and the nature, extent and results of their audits. Time Warner's internal
auditors and independent auditors have free access to the Audit Committee.
<TABLE>
<S> <C> <C>
Gerald M. Levin Richard D. Parsons Richard J. Bressler
Chairman and President Senior Vice President
Chief Executive Officer and Chief Financial Officer
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TIME WARNER INC.
We have audited the accompanying consolidated balance sheet of Time Warner Inc.
("Time Warner") as of December 31, 1994 and 1993, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1994. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of Time Warner's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Time Warner at
December 31, 1994 and 1993, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
New York, New York
February 7, 1995
F-25
<PAGE>
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1994 set forth below has been derived from and should be
read in conjunction with the financial statements and other financial
information presented elsewhere herein. The selected historical financial
information for 1994 and 1993 reflects the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The selected
historical financial information for periods prior to such date have not been
changed; however, selected financial information for 1992 retroactively
reflecting the deconsolidation is presented as supplementary information under
the column heading "restated" to facilitate comparative analysis.
The selected historical financial information for 1993 reflects the issuance
of $6.1 billion of long-term debt and the use of $.5 billion of cash and
equivalents in 1993 for the exchange or redemption of preferred stock having
an aggregate liquidation preference of $6.4 billion. The selected historical
financial information for 1992 reflects the capitalization of TWE on June 30,
1992 and associated refinancings, and the acquisition of the 18.7% minority
interest in ATC as of June 30, 1992, using the purchase method of accounting
for business combinations.
Per common share amounts and average common shares have been restated to
give effect to the four-for-one common stock split that occurred on September
10, 1992.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
RESTATED
SELECTED OPERATING 1994 1993 1992 1992 1991 1990
STATEMENT INFORMATION ------- ------- -------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $ 7,396 $ 6,581 $ 6,309 $13,070 $12,021 $11,517
Depreciation and amorti-
zation.................. 437 424 384 1,172 1,109 1,138
Business segment operat-
ing income.............. 713 591 529 1,343 1,154 1,114
Equity in pretax income
of Entertainment Group.. 176 281 226 -- -- --
Interest and other, net.. 724 718 351 882 966 1,133
Net income (loss) (a)(b). (91) (221) 86 86 (99) (227)
Net loss applicable to
common shares (after
preferred dividends).... (104) (339) (542) (542) (692) (786)
Per share of common
stock:
Net loss (a)(b)......... $ (0.27) $ (0.90) $ (1.46) $ (1.46) $ (2.40) $ (3.42)
Dividends............... $ 0.35 $ 0.31 $ 0.265 $ 0.265 $ 0.25 $ 0.25
Average common shares
(b)..................... 378.9 374.7 371.0 371.0 288.2 229.9
<CAPTION>
SELECTED BALANCE SHEET
INFORMATION
<S> <C> <C> <C> <C> <C> <C>
Investments in and
amounts due to
and from Entertainment
Group................... $ 5,350 $ 5,627 $ 5,392 $ -- $ -- $ --
Total assets............. 16,716 16,892 17,043 27,366 24,889 25,337
Long-term debt........... 8,839 9,291 2,897 10,068 8,716 11,184
Shareholders' equity:
Preferred stock liquida-
tion preference........ 140 140 6,532 6,532 6,256 5,954
Equity applicable to
common stock........... 1,008 1,230 1,635 1,635 2,242 360
Total shareholders' eq-
uity................... 1,148 1,370 8,167 8,167 8,498 6,314
Total capitalization
(long-term debt plus
shareholders' equity)... 9,987 10,661 11,064 18,235 17,214 17,498
</TABLE>
--------
(a) The net loss for the year ended December 31, 1993 includes an
extraordinary loss on the retirement of debt of $57 million ($.15 per
common share) and an unusual charge of $70 million ($.19 per common share)
from the effect of the new income tax law on Time Warner's deferred income
tax liability. The net loss for the year ended December 31, 1991 includes
a $36 million after-tax charge ($.12 per common share) relating to the
restructuring of the Publishing division.
(b) In August 1991, Time Warner completed the sale of 137.9 million shares of
common stock pursuant to a rights offering. Net proceeds of $2.558 billion
from the rights offering were used to reduce indebtedness under Time
Warner's bank credit agreement. If the rights offering had been completed
at the beginning of 1991, net loss for the year would have been reduced to
$33 million, or $1.70 per common share, and there would have been 369.3
million shares of common stock outstanding during the year.
F-26
<PAGE>
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY IN
PRETAX NET
OPERATING INCOME INCOME (LOSS) NET INCOME DIVIDENDS COMMON
INCOME OF (LOSS) OF APPLICABLE (LOSS) PER PER AVERAGE STOCK
BUSINESS ENTERTAINMENT NET INCOME TO COMMON COMMON COMMON COMMON ------------
QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(B) SHARE(B) SHARE SHARES HIGH LOW
-------- -------- --------- ------------- ---------- ------------ ---------- --------- ------- ---- ----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994
1st $1,558 $112 $ 45 $(51) $ (54) $(0.14) $0.08 378.6 $44 1/4 $36 5/8
2nd 1,667 170 66 (20) (23) (0.06) 0.09 378.8 40 5/8 34 1/2
3rd 1,884 141 66 (32) (35) (0.09) 0.09 379.1 38 3/4 34
4th 2,287 290 (1) 12 8 0.02 0.09 379.2 37 3/4 31 1/2
Year 7,396 713 176 (91) (104) (0.27) 0.35 378.9 44 1/4 31 1/2
<CAPTION>
1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st $1,519 $112 $108 $(15) $(124) $(0.33) $0.07 372.5 $37 1/4 $28 3/4
2nd (a) 1,567 135 53 (80) (83) (0.22) 0.08 373.8 39 5/8 30 5/8
3rd (a) 1,535 91 118 (133) (136) (0.36) 0.08 375.2 43 5/8 37 1/4
4th 1,960 253 2 7 4 0.01 0.08 377.2 46 7/8 40 1/4
Year (a) 6,581 591 281 (221) (339) (0.90) 0.31 374.7 46 7/8 28 3/4
</TABLE>
--------
(a) The net loss for the second quarter of 1993 includes an extraordinary loss
on the retirement of debt of $35 million ($.09 per common share). The net
loss for the third quarter of 1993 includes an extraordinary loss on the
retirement of debt of $22 million ($.06 per common share) and an unusual
charge of $70 million ($.19 per common share) due to the effect of the new
income tax law on Time Warner's deferred income tax liability.
(b) After preferred dividend requirements.
F-27
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1994 VS. 1993
Time Warner had revenues of $7.396 billion and a net loss of $91 million
($.27 per common share) in 1994, compared to revenues of $6.581 billion and a
net loss of $221 million ($.90 per common share) in 1993. Included in the 1993
results is an extraordinary loss on the retirement of debt of $57 million ($.15
per common share) and a one-time tax charge of $70 million ($.19 per common
share) that resulted from the effect on the Company's deferred income tax
liability of the increase in the corporate income tax rate enacted in August
1993.
Operating income and EBITDA for Time Warner and the Entertainment Group in
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
OPERATING INCOME EBITDA
----------------- -------------
1994 1993 1994 1993
-------- -------- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Time Warner:
Publishing...................................... $ 347 $ 295 $ 430 $ 372
Music........................................... 366 296 720 643
-------- -------- ------ ------
Total........................................... $ 713 $ 591 $1,150 $1,015
======== ======== ====== ======
Entertainment Group:
Filmed Entertainment............................ $ 275 $ 286 $ 565 $ 549
Programming--HBO................................ 237 213 257 230
Cable........................................... 340 406 989 1,035
-------- -------- ------ ------
Total........................................... $ 852 $ 905 $1,811 $1,814
======== ======== ====== ======
</TABLE>
Time Warner's equity in the pretax income of the Entertainment Group was $176
million in 1994, compared to $281 million in 1993. During the first quarter of
1993, the Entertainment Group had a one-time gain from the sale of certain
assets that was substantially offset by investment reserves included in Time
Warner's other expenses.
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, and by the one-time tax charge in 1993. 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.
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.
F-28
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
TIME WARNER
Publishing. Revenues increased to $3.433 billion, compared to $3.270 billion
in 1993. Operating income increased to $347 million from $295 million.
Depreciation and amortization amounted to $83 million in 1994 and $77 million
in 1993. EBITDA increased to $430 million from $372 million. Revenues benefited
principally from increases in magazine advertising and circulation revenues,
which were aided in part by several special issues during 1994. Significant
revenue gains were achieved by People, Sports Illustrated and Southern Living.
Operating income, EBITDA and operating margins improved principally as a result
of the revenue gains and continued cost containment.
Music. Revenues increased to $3.986 billion, compared to $3.334 billion in
1994. Operating income increased to $366 million from $296 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $354 million in 1994 and $347 million in 1993. EBITDA
increased to $720 million from $643 million. The revenue growth resulted from
increases in both domestic and international recorded music revenues, which
benefited from a number of popular releases during the year and an increase in
the percentage of compact disc to total unit sales, and increased music
publishing revenues. Operating income and EBITDA benefited from these revenue
gains and increased results from direct marketing activities attributable to
new members and lower amortization of member acquisition costs, offset in part
by costs associated with the reorganization of the domestic music companies and
continuing investment in new business ventures.
Interest and Other, Net. Interest and other, net, increased to $724 million
in 1994, compared to $718 million in 1993. Interest expense increased to $769
million from $698 million as a result of a full twelve months of interest on
the debt issued during the first three months of 1993 to redeem or exchange
preferred stock, offset in part by savings from lower-cost debt used to fund
the redemption of certain notes and debentures in 1993. There was other income,
net, of $45 million in 1994, compared to other expense, net, of $20 million in
1993, principally because of an increase in investment-related income,
including an increase in the amortization of the excess of the Time Warner
General Partners' interest in the net assets of TWE over the net book value of
their investment in TWE to reflect U S WEST as a partner for a full year.
Investment-related income was reduced in part in both years by adjustments to
the carrying value of certain investments, expenses in connection with the
settlement of certain employment contracts and losses on foreign exchange
contracts used to hedge foreign exchange risk.
ENTERTAINMENT GROUP
Filmed Entertainment. Revenues increased to $5.041 billion, compared to
$4.565 billion in 1993. Operating income decreased to $275 million from $286
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $290 million in 1994 and $263 million in 1993.
EBITDA increased to $565 million from $549 million. Worldwide home video,
syndication and consumer products revenues increased at Warner Bros., offset in
part by lower worldwide theatrical revenues. Revenues at Six Flags increased as
a result of overall attendance growth and higher revenues per visitor.
Operating income and EBITDA margins decreased principally as a result of lower
theatrical results in comparison to the exceptionally strong theatrical results
in 1993.
Programming--HBO. Revenues increased to $1.513 billion, compared to $1.441
billion in 1993. Operating income increased to $237 million from $213 million.
Depreciation and amortization amounted to $20 million in 1994 and $17 million
in 1993. EBITDA increased to $257 million from $230 million. Revenues benefited
from an increase in subscribers and higher pay-TV rates. Operating income,
EBITDA and operating margins improved principally as a result of the revenue
gains.
F-29
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Cable. Revenues increased to $2.242 billion, compared to $2.208 billion in
1993. Operating income decreased to $340 million from $406 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest, amounted to $649
million in 1994 and $629 million in 1993. EBITDA decreased to $989 million from
$1.035 billion. Revenues and operating results in 1994 were adversely affected
by two rounds of cable rate regulation that in general reduced the rates cable
operators are allowed to charge for regulated services, the first of which went
into effect in September 1993 and the second of which went into effect in July
1994. The unfavorable effects of rate regulation were offset in part by an
increase in subscribers and nonregulated revenues. Actions that were undertaken
to mitigate the impact of rate regulation included a number of cost containment
measures and a continued emphasis on near and long-term strategies to increase
revenues from unregulated services.
Interest and Other, Net. Interest and other, net, increased to $616 million
in 1994, compared to $564 million in 1993. Interest expense decreased to $567
million, compared with $580 million in 1993. There was other expense, net, of
$49 million in 1994, compared to other income, net, of $16 million in 1993.
Investment-related and foreign currency contract losses in 1994 exceeded an
increase in interest income on higher cash balances and the interest-bearing
note receivable from U S WEST. A gain on the sale of certain assets and other
investment-related income exceeded investment losses in 1993.
1993 VS. 1992
Time Warner had 1993 revenues of $6.581 billion, a loss of $94 million ($.56
per common share) before a one-time tax charge and an extraordinary loss, and a
net loss of $221 million ($.90 per common share), compared to 1992 revenues of
$13.070 billion ($6.309 billion on a restated basis) and net income of $86
million (a loss of $1.46 per common share after preferred dividends). The one-
time tax charge of $70 million ($.19 per common share) resulted from the effect
on the company's deferred income tax liability of the increase in the corporate
income tax rate enacted in August 1993; the extraordinary loss of $57 million
($.15 per common share) resulted from the retirement of debt in 1993. The
improvement in per share results in 1993 includes the after-tax benefits of
replacing preferred stock with debt in the first quarter. Preferred dividends
were $118 million in 1993, compared to $628 million in 1992.
Operating income and EBITDA for Time Warner and the Entertainment Group in
1993 and 1992 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
OPERATING INCOME EBITDA
-------------------- ----------------------
RESTATED RESTATED
1993 1992 1992 1993 1992 1992
---- -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Time Warner:
Publishing.......................... $295 $254 $ 254 $ 372 $ 328 $ 328
Music............................... 296 275 275 643 585 585
Entertainment Group................. -- -- 814 -- -- 1,602
---- ---- ------ ------ ------ ------
Total............................... $591 $529 $1,343 $1,015 $ 913 $2,515
==== ==== ====== ====== ====== ======
Entertainment Group:
Filmed Entertainment................ $286 $254 $ 213 $ 549 $ 520 $ 410
Programming-HBO..................... 213 201 201 230 215 215
Cable............................... 406 400 400 1,035 977 977
---- ---- ------ ------ ------ ------
Total............................... $905 $855 $ 814 $1,814 $1,712 $1,602
==== ==== ====== ====== ====== ======
</TABLE>
F-30
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Time Warner's equity in the pretax income of the Entertainment Group was $281
million in 1993, compared to $226 million on a restated basis in 1992. The
Entertainment Group had a one-time gain from the sale of certain assets in
1993.
TIME WARNER
Publishing. Revenues increased to $3.270 billion compared to $3.123 billion
in 1992. Operating income increased to $295 million from $254 million.
Depreciation and amortization amounted to $77 million in 1993 and $74 million
in 1992. EBITDA increased to $372 million from $328 million. Revenues benefited
from increased magazine circulation revenues, higher book publishing revenues
and the full year impact of the 1992 Leisure Arts acquisition. Magazine
circulation revenues reflected higher overall subscription and newsstand sales,
led by People, Time and Entertainment Weekly, as well as increases at American
Family Publishers, the subscription agency. Despite a difficult market,
advertising revenues were nearly flat. Operating income and EBITDA increased as
a result of the revenue gains and improved operating margins achieved through
continued cost savings.
Music. Revenues increased to $3.334 billion compared to $3.214 billion in
1992. Operating income increased to $296 million from $275 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $347 million in 1993 and $310 million in 1992. EBITDA
increased to $643 million from $585 million. The revenue gains primarily
reflected an increase in domestic recorded music sales and Warner/Chappell
Music Publishing revenues. An increase in unit volume was achieved
internationally, principally because of an increase in Pacific Rim sales.
International dollar-denominated revenues did not increase, however, because of
exchange rate fluctuations. Overall, revenues benefited from a broad range of
popular releases from both new and established artists, increased unit sales of
compact discs and higher average unit selling prices. Operating income and
EBITDA increased principally as a result of the revenue gains and improved
margins, offset in part by start-up costs for new business ventures.
Interest and Other, Net. Interest and other, net, decreased to $718 million
in 1993 compared to $882 million ($351 million on a restated basis) in 1992.
Interest expense decreased to $698 million compared to $729 million ($287
million on a restated basis) in 1992. The decrease in interest and other, net,
on an historical basis resulted primarily from the exclusion in 1993 of the
expenses of the Entertainment Group, which was deconsolidated in 1993, offset
in part by an increase in interest expense from higher debt levels associated
with the redemption and exchange of preferred stock. Other expenses, net, in
1993 included reductions in the carrying value of certain investments offset by
investment-related income. Other expenses, net, in 1992 included an expense in
connection with the settlement of senior management employment contracts, ATC
minority interest expense and litigation-related costs.
ENTERTAINMENT GROUP
Filmed Entertainment. Revenues increased to $4.565 billion compared to $3.455
billion ($3.945 billion on a restated basis) in 1992. Operating income
increased to $286 million from $213 million ($254 million on a restated basis).
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $263 million in 1993 and $197 million ($266 million on a
restated basis) in 1992. EBITDA increased to $549 million from $410 million
($520 million on a restated basis). The increase in revenues, operating income
and EBITDA on an historical basis resulted primarily from the inclusion in 1993
of the operating results of Six Flags, which previously had been accounted for
using the equity method. Revenues at Warner Bros. increased during the period
primarily due to increases in international theatrical, international
syndication and domestic home video revenues, as well as increased revenues
from retail
F-31
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
operations. Record international revenues of $1.650 billion would have been
greater but for unfavorable exchange rate fluctuations. Warner Bros. ranked
number one at both the domestic and international box office in 1993, led by
the success of The Fugitive and The Bodyguard. Revenues at Six Flags increased,
benefiting from higher revenues per visitor. Operating income and EBITDA
benefited from the revenue gains.
Programming--HBO. Revenues decreased to $1.441 billion compared to $1.444
billion in 1992. Operating income increased to $213 million from $201 million.
Depreciation and amortization amounted to $17 million in 1993 and $14 million
in 1992. EBITDA increased to $230 million from $215 million. The decrease in
revenues reflects lower HBO Video sales, which in 1992 were favorably affected
by a children's sell-thru title, offset in part by higher subscriber revenues,
principally as a result of higher pay-TV rates at HBO and an increase in
subscribers. Operating income and EBITDA benefited primarily from improved
results from new businesses, including Time Warner Sports and the Comedy
Central joint venture.
Cable. Revenues increased to $2.208 billion compared to $2.091 billion in
1992. Operating income increased to $406 million from $400 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest, amounted to $629
million in 1993 and $577 million in 1992. EBITDA increased to $1.035 billion
from $977 million. Revenues increased principally as a result of growth in the
number of cable subscribers and increases in advertising sales and pay-per-
view. The increase in subscribers accounted for approximately three quarters of
the revenue increase. Operating income and EBITDA benefited from the revenue
gains and increased income from cable joint ventures, but was negatively
affected in the fourth quarter by the first round of cable rate regulation,
which went into effect on September 1, 1993.
Interest and Other, Net. Interest and other, net, increased to $564 million
in 1993 compared to $531 million ($569 million on a restated basis) in 1992.
Interest expense increased to $580 million compared to $442 million ($491
million on a restated basis) in 1992. The increase in interest expense resulted
primarily from the higher average debt levels attributable to the TWE
capitalization, the higher interest cost of the TWE notes and debentures issued
to refinance TWE bank debt, and the consolidation of Six Flags' interest
expense in 1993. Other income, net, in 1993 included gains on the sale of
certain assets partially offset by losses from and reductions in the carrying
value of certain investments. Other expenses, net, on a restated basis in 1992
is principally attributable to losses on certain investments and litigation-
related costs.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1994
TIME WARNER
Despite the $14 billion of debt incurred as a result of the 1989 acquisition
of Warner Communications, Time Warner continues to be able to finance growth
and expansion in critical areas. In the last three years alone, the Company on
a combined basis (Time Warner and the Entertainment Group together) spent in
excess of $1.4 billion making new investments and acquisitions and $2.8 billion
on capital expenditures. Significant year-to-year improvements in EBITDA and
the $14 billion refinancing of higher cost debt and preferred stocks during
1992 and 1993, which was aided by favorable conditions in the credit markets
and the investment in TWE by ITOCHU, Toshiba and U S WEST, have enabled the
Company to finance this level of investment while at the same time improving
its leverage and coverage ratios.
A commonly-used leverage ratio is total debt, less cash ("Net debt") to total
business segment EBITDA, less corporate expenses ("Adjusted EBITDA"). A
commonly-used coverage ratio is Adjusted EBITDA to total interest expense and
preferred dividends. Those ratios for 1994 and 1993 were as set forth below for
F-32
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
both Time Warner and Time Warner and the Entertainment Group combined. Certain
rating agencies and other credit analysts place more emphasis on the combined
ratios while others place more emphasis on the Time Warner stand-alone ratios.
It should be understood, however, that the assets of the Entertainment Group
are not freely available to meet the cash needs of Time Warner.
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Time Warner
Net debt/Adjusted EBITDA.......................................... 8.30x 9.78x
Adjusted EBITDA/Interest and preferred dividends.................. 1.37x 1.15x
Time Warner and Entertainment Group combined
Net debt/Adjusted EBITDA.......................................... 5.32x 5.57x
Adjusted EBITDA/Interest and preferred dividends.................. 2.09x 1.93x
</TABLE>
Time Warner had $9.2 billion of debt, $282 million of cash and equivalents
(net debt of $8.9 billion), and $1.1 billion of equity at December 31, 1994,
compared to $9.4 billion of debt, $200 million of cash and equivalents (net
debt of $9.2 billion), and $1.4 billion of equity at December 31, 1993. On a
combined basis, there was $15 billion of net debt at both the beginning and end
of the year.
During the latter half of 1994 and continuing into 1995, the Company
announced that it will significantly expand its reach in cable television by
acquiring Summit, KBLCOM and CVI and related companies, which together own
systems serving approximately 2.2 million basic cable subscribers and a 50%
partnership interest in Paragon (with TWE as the other partner), which owns
systems serving approximately 967,000 basic cable subscribers. Time Warner will
issue 4.4 million shares of common stock and approximately $2.1 billion
liquidation value of new 3.75% convertible preferred stocks, and assume or
incur approximately $3.4 billion of debt to acquire these companies. In
addition, subsidiaries of Advance and Newhouse will contribute cable television
systems that serve approximately 1.4 million basic cable subscribers to a joint
venture in which TWE will have a two-thirds interest. In accordance with the
TWE-Advance/Newhouse joint venture agreement, certain of Time Warner's newly-
acquired cable systems may be transferred on a tax-efficient basis to the TWE-
Advance/Newhouse Partnership. Such transfers, if they are made, are expected to
be structured on a leveraged basis.
The new preferred stocks that are to be issued in the cable transactions will
initially have annual dividends totalling $78 million and generally will be
convertible immediately or exchangeable after four or five years into
approximately 43 million shares of Time Warner common stock at an effective
conversion price of $48 of liquidation value per common share. New or revised
bank credit facilities will be required for Time Warner, TWE and the TWE-
Advance/Newhouse Partnership as a result of these transactions, which
management feels will be obtained at a reasonable cost. Upon consummation of
the transactions, which are subject to customary franchise and regulatory
approvals, the total number of cable subscribers under the management of Time
Warner Cable is expected to increase to approximately 11.5 million, compared to
7.5 million at the end of 1994.
The Company also has announced its intention to enhance its financial
position and that of the Entertainment Group through sales of non-core assets,
such as the TBS stock owned by Time Warner, certain investments owned by the
Entertainment Group or certain, smaller unclustered cable systems owned by Time
Warner or the Entertainment Group. Proceeds from asset sales will be used to
reduce debt. The Entertainment Group's interest in QVC, Inc. was sold in
February 1995 to a group that had tendered for all of that company's capital
stock. Approximately $200 million of proceeds will be used to reduce debt.
F-33
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The Company does not expect its leverage and coverage ratios to deteriorate
as a result of the cable acquisitions and asset dispositions. In the first full
year after the cable transactions are completed, operating results are expected
to be negatively impacted by approximately $.40 to $.45 per common share,
principally as a result of the non cash amortization of the intangible assets
that will be recognized in the allocation of the purchase price. Asset sales
are expected to result in one-time gains.
Because of the announced transactions, the Company will explore the
possibility of bringing its various interests in cable operations together in a
separate, self-financed operating unit. This process is expected to be
undertaken over a 12-18 month period and will be dependent on, among other
things, successful negotiations with TWE's partners and certain creditors, and
the receipt of franchise and other regulatory approvals. Accordingly, there can
be no assurance that the effort will succeed.
During 1994, cash provided by Time Warner's operations amounted to $473
million and consisted of $1.150 billion of EBITDA from the Publishing and Music
businesses, $120 million of net distributions from TWE and $179 million from
the securitization of receivables, less $539 million of interest payments, $339
million of income taxes, $76 million of corporate expenses and working capital
requirements. Cash provided by operations of $257 million in 1993 consisted of
$1.015 billion of EBITDA from the Publishing and Music businesses and $20
million of net distributions from TWE, less $330 million of interest payments,
$182 million of income taxes, $73 million of corporate expenses, and working
capital requirements.
Cash flows used in investing activities in 1994, excluding investment
proceeds, were $351 million, compared to $373 million in 1993. Cash dividends
paid decreased to $142 million in 1994, compared to $299 million in 1993,
principally as a result of the redemption and exchange of preferred stock in
1993. 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 $115 million were received from TWE in 1994
and are expected to exceed $350 million in 1995.
Time Warner and TWE entered into a credit agreement in 1994, which allows
Time Warner to borrow up to $400 million from TWE through September 15, 2000.
Time Warner borrowed $400 million in 1994 under the credit agreement, and used
the proceeds to reduce other debt. TWE is permitted under its bank credit
agreement to make additional loans to Time Warner, which in the aggregate
cannot exceed $1.1 billion at December 31, 1994, increasing to no more than
$1.5 billion on July 1, 1995. Management believes that 1995 operating cash
flow, cash and marketable securities and additional borrowing capacity are
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 December 31, 1994, Time Warner had
interest rate swap contracts to pay floating-rates of interest (average six-
month LIBOR rate of 5.9%) and receive fixed-rates of interest (average rate of
5.5%) on $2.9 billion notional amount of indebtedness, effectively converting
32% of Time Warner's underlying debt, substantially all of which is fixed-rate,
and 37% of the debt of Time Warner and the Entertainment Group combined, to a
floating-rate basis. 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 December 31, 1994 would reduce Time Warner's
annual pretax income by an estimated $12 million. The notional amount of
outstanding contracts at December 31, 1994 by year of maturity, along with the
related average fixed-rates of interest to be received and the average
floating-rates of interest to be paid, are as follows: 1995-$300 million
(receive-6.05%; pay-6.95%); 1996-$300 million (receive-4.55%; pay-6.13%); 1998-
$700 million (receive-5.52%; pay-6.06%); 1999-$1.2 billion (receive-5.51%; pay-
5.66%); and 2000-$400 million (receive-5.48%; pay-5.50%).
F-34
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Foreign exchange contracts are used primarily to hedge the risk that
unremitted or future royalties and license fees owed to Time Warner and TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in exchange rates.
Time Warner often closes foreign exchange sale contracts by purchasing an
offsetting purchase contract. A summary of foreign exchange contracts at
December 31, 1994 and 1993 is set forth below:
<TABLE>
<CAPTION>
SALE CONTRACTS PURCHASE CONTRACTS
----------------------- -----------------------
U.S. AVERAGE AVERAGE U.S. AVERAGE AVERAGE NET
DOLLAR DAYS TO FORWARD DOLLAR DAYS TO FORWARD SALE
FOREIGN CURRENCY VALUE MATURITY RATE VALUE MATURITY RATE POSITION
---------------- ------ -------- ------- ------ -------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994:
Canadian dollar....... $ 70 31 .7283 $ 29 33 .7166 $ 41
English pound......... 93 22 1.5704 19 16 1.5511 74
French franc.......... 82 84 .1745 -- -- -- 82
German mark........... 61 49 .6296 -- -- -- 61
Japanese yen.......... 109 23 .0101 -- -- -- 109
Other currencies...... 136 58 -- 61 61 -- 75
---- ---- ----
Total................. $551 $109 $442
==== ==== ====
DECEMBER 31, 1993:
Canadian dollar....... $ 87 60 .7543 $ -- -- -- $ 87
English pound......... 75 45 1.4810 11 59 1.4708 64
French franc.......... 69 40 .1732 6 17 .1700 63
German mark........... 169 85 .5812 6 37 .5651 163
Japanese yen.......... 184 174 .0094 25 48 .0092 159
Other currencies...... 69 126 -- 32 46 -- 37
---- ---- ----
Total................. $653 $ 80 $573
==== ==== ====
</TABLE>
ENTERTAINMENT GROUP
The financial condition of the Entertainment Group companies, principally
TWE, at December 31, 1994 remained essentially unchanged from year end 1993,
but is expected to be significantly affected by the formation of the TWE-
Advance/Newhouse Partnership and the other cable transactions announced for
1995 by Time Warner. TWE had $7.2 billion of long-term debt at December 31,
1994, $1.7 billion of Time Warner General Partners' senior capital and $6.2
billion of partners' capital (net of the $771 million uncollected portion of
the U S WEST Note), compared to $7.1 billion of long-term debt, $1.5 billion of
Time Warner General Partners' senior capital and $6 billion of partners'
capital at December 31, 1993. Cash and equivalents were $1.1 billion at
December 31, 1994 compared to $1.3 billion at December 31, 1993, resulting in
net debt of $6.1 billion and $5.8 billion, respectively.
Entertainment Group leverage and coverage ratios for 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Net debt/Adjusted EBITDA...................................... 3.50x 3.31x
Adjusted EBITDA/Interest...................................... 3.09x 3.02x
</TABLE>
F-35
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The formation of the TWE-Advance/Newhouse Partnership and sales of non-core
assets are expected to improve the Entertainment Group's leverage and coverage
ratios. In accordance with the TWE-Advance/Newhouse joint venture agreement,
certain of Time Warner's newly-acquired cable systems may be transferred on a
tax-efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers, if
they are made, are expected to be structured on a leveraged basis, which could
result in an overall adverse impact on the Entertainment Group ratios.
During 1994, cash provided by Entertainment Group operations amounted to
$1.341 billion and consisted of $1.811 billion of EBITDA from the Filmed
Entertainment, Programming-HBO and Cable businesses and a reduction in working
capital requirements, less $521 million of interest payments, $69 million of
income taxes and $60 million of corporate expenses. Cash provided by operations
of $1.276 billion in 1993 consisted of $1.814 billion of business segment
EBITDA and a reduction in working capital requirements, less $450 million of
interest payments, $70 million of income taxes and $60 million of corporate
expenses. Capital expenditures increased to $1.235 billion in 1994, compared to
$613 million in 1993. Capital spending by Time Warner Cable amounted to $778
million in 1994, compared to $353 million in 1993, and was financed in part
through $234 million of collections on the U S WEST Note. Cable capital
expenditures are budgeted to exceed $1 billion for 1995, and are expected to be
partially financed by $550 million of collections on the U S WEST Note. Because
management believes that the conversion from coaxial to fiber-optic cable is
essential to achieving long-term growth in revenue from telephony and
unregulated cable 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.
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 $852 million
at December 31, 1994, compared to $724 million at December 31, 1993 (including
amounts relating to HBO of $175 million at December 31, 1994 and $178 million
at December 31, 1993). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the U S WEST Note and additional borrowing capacity
are sufficient to meet its capital and liquidity needs.
F-36
<PAGE>
TIME WARNER INC.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
1994(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 131 $ 197 $ (171)(b) $ 157
Reserves for sales returns
and allowances:
Magazines and books........ 349 1,401 (1,370)(c)(d) 380
Recorded music............. 196 421 (386)(c) 231
----- ------ ------- -----
Total..................... $ 676 $2,019 $(1,927) $ 768
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(154) $ (905) $ 900 (d) $(159)
===== ====== ======= =====
1993(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 122 $ 194 $ (185)(b) $ 131
Reserves for sales returns
and allowances:
Magazines and books........ 336 1,265 (1,252)(c)(d) 349
Recorded music............. 186 366 (356)(c) 196
----- ------ ------- -----
Total..................... $ 644 $1,825 $(1,793) $ 676
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(146) $ (855) $ 847 (d) $(154)
===== ====== ======= =====
RESTATED 1992(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 123 $ 132 $ (133)(b) $ 122
Reserves for sales returns
and allowances:
Magazines and books........ 314 1,109 (1,087)(c)(d) 336
Recorded music............. 179 333 (326)(c) 186
----- ------ ------- -----
Total..................... $ 616 $1,574 $(1,546) $ 644
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(159) $ (797) $ 810 (d) $(146)
===== ====== ======= =====
1992(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 275 $ 194 $ (181)(b) $ 288
Reserves for sales returns
and allowances:
Magazines and books........ 314 1,109 (1,087)(c)(d) 336
Recorded music and home
video..................... 257 419 (416)(c) 260
----- ------ ------- -----
Total..................... $ 846 $1,722 $(1,684) $ 884
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(159) $ (797) $ 810 (d) $(146)
===== ====== ======= =====
</TABLE>
--------
(a) The 1994 and 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The
historical financial statements for periods prior to such date have not been
changed; however, financial information for 1992 retroactively reflecting
the deconsolidation is presented as supplementary information under the
column heading "restated" to facilitate comparative analysis.
(b) Represents uncollectible receivables charged against reserve.
(c) Represents returns or allowances applied against reserve.
(d) The distribution of magazines not owned by Time Warner results in a
receivable recorded at the sales price and a corresponding liability to the
publisher recorded at the sales price less the distribution commission
recognized by Time Warner as revenue. Therefore, it would be misleading to
compare magazine revenues to the provision charged to the reserve for
magazine returns that is deducted from accounts receivable without also
considering the related offsetting activity in the reserve for magazine
returns that is deducted from the liability due to the publishers.
F-37
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents......................................... $ 1,071 $ 1,338
Receivables, including $266 and $257 due from Time Warner,
less allowances of $306 and $257............................ 1,426 1,313
Inventories.................................................. 956 980
Prepaid expenses............................................. 120 114
------- -------
Total current assets......................................... 3,573 3,745
Noncurrent inventories....................................... 1,807 1,760
Loan receivable from Time Warner............................. 400 --
Investments.................................................. 666 540
Land and buildings........................................... 841 680
Cable television equipment................................... 3,619 3,044
Furniture, fixtures and other equipment...................... 1,588 1,319
------- -------
6,048 5,043
Less accumulated depreciation................................ (2,264) (1,943)
------- -------
Property, plant and equipment................................ 3,784 3,100
Goodwill..................................................... 4,433 4,560
Cable television franchises.................................. 3,236 3,510
Other assets................................................. 763 748
------- -------
Total assets................................................. $18,662 $17,963
======= =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................. $ 514 $ 366
Participations and programming costs......................... 857 770
Other current liabilities, including $334 and $108 of distri-
butions due to Time Warner.................................. 1,486 1,129
------- -------
Total current liabilities.................................... 2,857 2,265
Long-term debt............................................... 7,160 7,125
Other long-term liabilities, including $89 and $439 of dis-
tributions due to Time Warner............................... 749 1,037
Time Warner General Partners' senior capital................. 1,663 1,536
PARTNERS' CAPITAL
Contributed capital.......................................... 7,398 7,398
Undistributed partnership earnings (deficit)................. (394) (393)
Note receivable from U S WEST................................ (771) (1,005)
------- -------
Total partners' capital...................................... 6,233 6,000
------- -------
Total liabilities and partners' capital...................... $18,662 $17,963
======= =======
</TABLE>
See accompanying notes.
F-38
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
RESTATED
1994 1993 1992(A) 1992
------ ------ -------- ------
<S> <C> <C> <C> <C>
Revenues (b).................................. $8,460 $7,946 $7,251 $6,761
------ ------ ------ ------
Cost of revenues (b) (c)...................... 5,976 5,679 5,274 4,837
Selling, general and administrative (b) (c)... 1,636 1,384 1,141 1,129
------ ------ ------ ------
Operating expenses............................ 7,612 7,063 6,415 5,966
------ ------ ------ ------
Business segment operating income............. 848 883 836 795
Interest and other, net (b)................... (587) (551) (563) (525)
Corporate services (b)........................ (60) (60) (60) (60)
------ ------ ------ ------
Income before income taxes.................... 201 272 213 210
Income taxes.................................. (40) (64) (53) (50)
------ ------ ------ ------
Income before extraordinary item.............. 161 208 160 160
Extraordinary loss on retirement of debt, net
of $7 million
income tax benefit........................... -- (10) -- --
------ ------ ------ ------
Net income.................................... $ 161 $ 198 $ 160 $ 160
====== ====== ====== ======
--------
(a) The 1994 and 1993 financial statements reflect the consolidation of Six
Flags effective January 1, 1993 as a result of the 1993 Six Flags
acquisition. The 1992 historical financial statements have not been
changed; however, financial statements for 1992 retroactively reflecting
the consolidation are presented as supplementary information under the
column heading "restated" to facilitate comparative analysis (Notes 1 and
3).
(b) Includes the following income (expenses) resulting from transactions with
the partners of TWE (Note 12):
Selling, general and administrative.......... $ (97) $ (65) $ (122) $ (122)
Interest and other, net...................... 20 2 (204) (204)
Corporate services........................... (60) (60) (60) (60)
In addition, includes the following income (expenses) resulting from trans-
actions with equity investees of TWE or Time Warner (Note 12):
Revenues..................................... $ 112 $ 67 $ 41 $ 41
Cost of revenues............................. (70) (88) (34) (34)
Selling, general and administrative.......... 25 27 30 30
Interest and other, net...................... 1 1 5 5
(c)Includes depreciation and amortization ex-
pense of:.................................... $ 943 $ 902 $ 851 $ 782
====== ====== ====== ======
</TABLE>
See accompanying notes.
F-39
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
RESTATED
1994 1993 1992(A) 1992
------ ------ -------- -----
<S> <C> <C> <C> <C>
OPERATIONS
Net income.................................... $ 161 $ 198 $ 160 $ 160
Adjustments for noncash and nonoperating
items:
Depreciation and amortization................. 943 902 851 782
Equity in (income) losses of investee compa-
nies, net of distributions................... 58 (21) 48 53
Changes in operating assets and liabilities:
Receivables.................................. (192) 1 (272) (272)
Inventories.................................. (76) (158) (105) (104)
Accounts payable and other liabilities....... 400 260 146 137
Other balance sheet changes.................. 2 89 36 25
------ ------ ----- -----
Cash provided by operations................... 1,296 1,271 864 781
------ ------ ----- -----
INVESTING ACTIVITIES
Investments and acquisitions.................. (156) (347) (382) (279)
Capital expenditures.......................... (1,153) (613) (423) (402)
Loan to Time Warner........................... (400) -- -- --
Investment proceeds........................... 50 180 50 50
------ ------ ----- -----
Cash used by investing activities............. (1,659) (780) (755) (631)
------ ------ ----- -----
FINANCING ACTIVITIES
Increase (decrease) in debt................... 32 (659) (791) (837)
Capital contributions, including collections
on note receivable
from U S WEST................................ 234 1,548 1,012 1,012
Capital distributions......................... (170) (33) (183) (183)
Other, principally financing costs prior to
1994......................................... -- (45) (123) (129)
------ ------ ----- -----
Cash provided (used) by financing activities.. 96 811 (85) (137)
------ ------ ----- -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS... $ (267) $1,302 $ 24 $ 13
====== ====== ===== =====
</TABLE>
--------
(a)The 1994 and 1993 financial statements reflect the consolidation of Six
Flags effective January 1, 1993 as a result of the 1993 Six Flags
acquisition. The 1992 historical financial statements have not been changed;
however, financial statements for 1992 retroactively reflecting the
consolidation are presented as supplementary information under the column
heading "restated" to facilitate comparative analysis (Notes 1 and 3).
See accompanying notes.
F-40
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(MILLIONS)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
---------------------------------------------
GENERAL UNDISTRIBUTED
PARTNERS' PARTNERSHIP U S TOTAL
SENIOR CONTRIBUTED EARNINGS WEST PARTNERS'
CAPITAL CAPITAL (DEFICIT) NOTE CAPITAL
--------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1991................... $ -- $ 6,717 $ -- $ -- $ 6,717
Net income before TWE
Capitalization......... 97 97
Distributions........... (259) (259)
Pushdown of cost to ac-
quire ATC minority in-
terest................. 1,431 1,431
Other................... 1 1
TWE Capitalization:
Contributions.......... 1,000 1,000
Assumption of addi-
tional debt........... (2,545) (2,545)
------ ------- ----- ------- -------
BALANCE AT JUNE 30,
1992................... -- 6,442 -- -- 6,442
Net income after TWE
Capitalization......... 63 63
Contributions (a)....... 12 12
Distributions (a)....... (41) (41)
Other................... (3) (36) (39)
------ ------- ----- ------- -------
BALANCE AT DECEMBER 31,
1992................... -- 6,451 (14) -- 6,437
Net income.............. 198 198
Admission of USW:
Contributions.......... 2,553 (1,021) 1,532
Time Warner General
Partners' senior capi-
tal................... 1,501 (1,501) (1,501)
Distributions (a)....... (95) (539) (634)
Allocation of income.... 35 (35) (35)
Collections............. 16 16
Other................... (10) (3) (13)
------ ------- ----- ------- -------
BALANCE AT DECEMBER 31,
1993................... 1,536 7,398 (393) (1,005) 6,000
Net income.............. 161 161
Distributions (a)....... (46) (46)
Allocation of income.... 127 (127) (127)
Collections............. 234 234
Other................... 11 11
------ ------- ----- ------- -------
BALANCE AT DECEMBER 31,
1994................... $1,663 $ 7,398 $(394) $ (771) $ 6,233
====== ======= ===== ======= =======
</TABLE>
--------
(a) Distributions in 1994, 1993 and 1992 included $173 million, $252 million
and $24 million, respectively, of tax-related distributions, and $50
million and $13 million of cash distributions to the Time Warner Service
Partnerships in 1994 and 1993, respectively. Stock option distributions of
$274 million and $17 million were accrued in 1993 and 1992, respectively,
because of an increase in the market price of Time Warner common stock and
$177 million of such previously-accrued stock option distributions were
reversed in 1994 because the market price of Time Warner common stock
declined during the period. In addition, Time Warner General Partners'
junior priority capital was reduced in 1993 for the $95 million historical
cost of the Time Warner Service Partnership Assets distributed to the Time
Warner General Partners. A $12 million contribution was made by the Time
Warner General Partners in 1992 after the TWE Capitalization pursuant to
the net worth adjustment provision of the partnership agreement. (Note 7.)
See accompanying notes.
F-41
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), was capitalized on June 30, 1992 (the "TWE Capitalization") to own and
operate substantially all of the Filmed Entertainment, Programming-HBO and
Cable businesses previously owned by subsidiaries of Time Warner Inc. ("Time
Warner"). At December 31, 1994, the general partners of TWE, subsidiaries of
Time Warner ("Time Warner General Partners"), together directly and indirectly
held 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 interests, which they received for the net assets, or the
rights to cash flows, they contributed to the partnership at the TWE
Capitalization; and subsidiaries of U S WEST, Inc. ("U S WEST"), ITOCHU
Corporation ("ITOCHU") and Toshiba Corporation ("Toshiba" and collectively, the
"Limited Partners"), held 25.51%, 5.61% and 5.61% pro rata priority capital and
residual equity partnership interests, respectively. ITOCHU and Toshiba each
contributed $500 million of cash at the TWE Capitalization for their limited
partnership interests. U S WEST contributed $1.532 billion of cash and a $1.021
billion 4.4% note ("U S WEST Note") on September 15, 1993 for its limited
partnership interests.
In lieu of contributing certain assets (the "Beneficial Assets"), the Time
Warner General Partners assigned to TWE the net cash flow generated by such
assets or agreed to pay an amount equal to the net cash flow generated by such
assets. TWE has the right to receive from the Time Warner General Partners, at
the limited partners' option, an amount equal to the fair value of the
Beneficial Assets, net of associated liabilities, that have not been
contributed to TWE by June 30, 1996, rather than continuing to receive the net
cash flow, or an amount equal to the net cash flow, generated by such
Beneficial Assets. The consolidated financial statements include the assets and
liabilities of the businesses contributed by the Time Warner General Partners,
including the Beneficial Assets and associated liabilities, all at Time
Warner's historical cost basis of accounting.
Time Warner's $14 billion acquisition of Warner Communications Inc. ("WCI")
as of December 31, 1989, and $1.3 billion acquisition of the minority interest
in American Television and Communications Corporation ("ATC") on June 26, 1992
were accounted for by the purchase method of accounting. WCI subsequently
contributed filmed entertainment and cable assets to TWE, and ATC subsequently
contributed its cable assets. The financial statements of TWE reflect an
allocable portion of Time Warner's cost to acquire WCI and the ATC minority
interest in accordance with the pushdown method of accounting.
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of TWE and all
companies in which TWE has a controlling voting interest ("subsidiaries"), as
if TWE and its subsidiaries were a single company. Significant intercompany
accounts and transactions between the consolidated companies have been
eliminated. Significant accounts and transactions between TWE and its partners
and affiliates are disclosed as related party transactions (Note 12).
Investments in companies in which TWE has significant influence but less than
a controlling voting interest are accounted for using the equity method. Under
the equity method, only TWE's investment in and amounts due to and from the
equity investee are included in the consolidated balance sheet, only TWE's
share of the investee's earnings is included in the consolidated operating
results, and only the dividends, cash distributions, loans or other cash
received from the investee, less any additional cash investment, loan
repayments or other cash paid to the investee, are included in the consolidated
cash flows.
F-42
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
investments in companies in which TWE does not have the controlling interest or
an ownership and voting interest so large as to exert significant influence are
accounted for at market value if the investments are publicly traded and there
are no resale restrictions, or at cost, if the sale of a publicly-traded
investment is restricted or if the investment is not publicly traded.
Unrealized gains and losses on investments accounted for at market value are
reported in partners' capital until the investment is sold, at which time, the
realized gain or loss is included in income. Dividends and other distributions
of earnings from both market value and cost method investments are included in
income when declared.
Six Flags Entertainment Corporation ("Six Flags") was consolidated effective
January 1, 1993 as a result of the increase of TWE's ownership and voting
control in Six Flags from 50% to 100% in September 1993 (Note 3). The 1992
historical financial statements of TWE were not changed; accordingly, they
include Six Flags on the equity method. However, financial statements for 1992
retroactively reflecting the consolidation also are presented under the caption
"restated" to facilitate comparative analysis. Certain other reclassifications
have been made to the prior years' financial statements to conform to the 1994
presentation.
REVENUES AND COSTS
Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, basic cable, broadcast
network and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is completed
within eighteen months of initial release. Theatrical revenues are recognized
as the films are exhibited. Home video revenues, less a provision for returns,
are recognized when the home videos are sold. Revenues from cable and broadcast
television distribution are recognized when the films are available to
telecast. Television films and series are initially produced for the networks
or first-run television syndication (the primary markets) and may be
subsequently licensed to foreign or other domestic television markets. Revenues
from television license agreements are recognized when the films or series are
available to telecast, except for barter agreements where the recognition of
revenue is deferred until the related advertisements are telecast.
Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost includes direct production and
acquisition costs, production overhead and capitalized interest. A portion of
the cost to acquire WCI was allocated to its theatrical and television product
as of December 31, 1989, including an allocation to product that had been
exhibited at least once in all markets ("Library"). Individual films and series
are amortized, and the related participations and residuals are accrued, based
on the proportion that current revenues from the film or series bear to an
estimate of total revenues anticipated from all markets. These estimates are
revised periodically and losses, if any, are provided in full. WCI acquisition
cost allocated to the Library is amortized on a straight-line basis over twenty
years. Current film inventories include the unamortized cost of completed
feature films allocated to the primary markets, television films and series in
production pursuant to a contract of sale, film rights acquired for the home
video market and advances pursuant to agreements to distribute third-party
films in the primary markets. Noncurrent film inventories include the
unamortized cost of completed theatrical and television films allocated to the
secondary markets, theatrical films in production and WCI acquisition cost
allocated to the Library.
A significant portion of cable system and cable programming revenues are
derived from subscriber fees, which are recorded as revenue in the period the
service is provided. The right to exhibit feature films and other programming
on pay cable services during one or more availability periods ("programming
costs") generally is recorded when the programming is initially available for
exhibition, and is allocated to the appropriate availability periods and
amortized as the programming is exhibited.
F-43
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead,
interest and certain start-up costs incurred in developing new franchises.
Depreciation is provided generally on the straight-line method over useful
lives ranging up to twenty-five years for buildings and improvements and up to
fifteen years for furniture, fixtures and cable television and other equipment.
INTANGIBLE ASSETS
Intangible assets are recorded when the cost of acquired companies exceeds
the fair value of their tangible assets. Generally accepted accounting
principles require that all intangible assets be amortized over no more than a
forty-year period. Amortization of goodwill amounted to $129 million in 1994,
$132 million in 1993 and $115 million ($124 million on a restated basis) in
1992; amortization of cable television franchises amounted to $208 million,
$222 million and $194 million, respectively; and amortization of other
intangible assets amounted to $141 million, $122 million and $108 million ($129
million on a restated basis), respectively. Accumulated amortization of
intangible assets at December 31, 1994 and 1993 amounted to $1.867 billion and
$1.438 billion, respectively.
FOREIGN CURRENCY
The financial position and operating results of substantially all of the
foreign operations of TWE are consolidated using the local currency as the
functional currency. Local currency assets and liabilities are translated at
the rates of exchange on the balance sheet date, and local currency revenues
and expenses are translated at average rates of exchange during the period.
Resulting translation gains or losses, which have not been material, are
included in partners' capital. Foreign currency transaction gains and losses,
which have not been material, are included in operating results.
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 exchange rates. TWE is reimbursed by or reimburses Time
Warner for Time Warner contract gains and losses related to TWE's exposure. At
December 31, 1994, Time Warner had contracts for the sale of $551 million and
the purchase of $109 million of foreign currencies at fixed rates and
maturities of three months or less. Of Time Warner's $442 million net sale
contract position, $188 million related to TWE's exposure, primarily Japanese
yen (41% of net contract position related to TWE), French francs (18%), German
marks (12%) and Canadian dollars (11%), compared to a net sale contract
position of $226 million of foreign currencies at December 31, 1993. Unrealized
gains or losses are recorded in income; accordingly, the carrying value of
foreign exchange contracts approximates market value. TWE had $20 million of
net losses on foreign exchange contracts during 1994, 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.
INCOME TAXES
As a Delaware limited partnership, TWE is not subject to U.S. federal and
state income taxation. However, certain of TWE's operations are conducted by
subsidiary corporations that are subject to domestic or foreign taxation.
Income taxes are provided on the income of such corporations using the
liability method of accounting for income taxes prescribed by FASB Statement
No. 109, "Accounting for Income Taxes." The consolidated financial statements
for periods prior to the TWE Capitalization include, for comparative purposes,
the income and withholding tax consequences of those TWE operations subject to
domestic or foreign taxation, as determined on a stand-alone basis consistent
with the liability method of accounting for income taxes.
F-44
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTEREST RATE SWAP CONTRACTS
TWE used interest rate swap contracts in 1992 and prior years to adjust the
proportion of total debt that was subject to changes in short-term interest
rates and the proportion that was subject to fixed rates. There were no
material amounts of contracts outstanding during the years ended December 31,
1994 and 1993. Under the previous interest rate swap contracts, TWE had agreed
to pay an amount equal to a specified fixed-rate of interest times a notional
principal amount, and to receive in return an amount equal to a specified
floating-rate of interest times the same notional principal amount. The
notional amounts of the contracts were not exchanged. No other cash payments
were made unless the contracts were terminated prior to maturity, in which case
the amount paid or received in settlement was equal to the present value, at
current rates of interest, of the remaining obligations to exchange payments
under the terms of the contract. The interest rate swap contracts were 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 was included in interest expense. Gains or losses on
the termination of contracts were deferred and amortized to income over the
remaining average life of the terminated contracts.
2. TWE--ADVANCE/NEWHOUSE PARTNERSHIP
In September 1994, TWE agreed to form a cable television joint venture with
subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting
Corporation ("Advance/Newhouse") to which Advance/ Newhouse will contribute
cable television systems serving 1.4 million subscribers and related assets,
and TWE will contribute cable television systems (or interests therein) serving
2.8 million subscribers and related assets. TWE will own a two-thirds equity
interest in the TWE-Advance/Newhouse Partnership and be the managing partner.
Advance/Newhouse will own a one-third equity interest in the partnership.
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
transaction is expected to close in the first half of 1995 and is subject to
customary closing conditions, including the receipt of certain franchise and
regulatory approvals.
3. INVESTMENTS
TWE's investments consist of:
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1994 1993
----- -----
(MILLIONS)
<S> <C> <C>
Equity method investments.......................................... $ 629 $ 517
Cost method investments............................................ 37 23
----- -----
Total.............................................................. $ 666 $ 540
===== =====
</TABLE>
Companies accounted for using the equity method include Paragon
Communications (50% owned), certain other cable system joint ventures
(generally 50% owned), Comedy Partners, L.P. (50% owned), Six Flags (50% owned
in 1992), E! Entertainment Corporation (50% owned in 1992), and in 1994 only,
certain
F-45
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
international cable and programming joint ventures (generally 25% owned). A
summary of financial information as reported by the equity investees of TWE on
a 100% basis is set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
Revenues......................................... $ 722 $ 596 $ 549 $1,039
Operating income................................. 11 115 65 116
Net income (loss)................................ (53) 80 13 6
Current assets................................... 192 72 125 182
Total assets..................................... 1,281 1,054 1,033 1,896
Current liabilities.............................. 305 163 181 328
Long-term debt................................... 554 613 632 1,147
Total liabilities................................ 926 794 869 1,670
</TABLE>
In September 1993, TWE provided Six Flags with $136 million to repurchase the
50% common stock interest held by other stockholders and preferred stock of
certain subsidiaries. TWE also provided $414 million to finance the repurchase
or retirement of all indebtedness of Six Flags and its subsidiaries, except for
the zero coupon notes due 1999. As a result, TWE has consolidated Six Flags
effective January 1, 1993.
4. INVENTORIES
TWE's inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1994 1993
------------------ ------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization.............. $585 $ 347 $604 $ 318
Completed and not released............... 123 24 140 23
In process and other..................... 18 361 7 340
Library, less amortization............... -- 769 -- 821
Programming costs, less amortization...... 149 306 147 258
Merchandise............................... 81 -- 82 --
---- ------ ---- ------
Total..................................... $956 $1,807 $980 $1,760
==== ====== ==== ======
</TABLE>
Excluding the Library, the unamortized cost of completed films at December
31, 1994 amounted to $1.079 billion, more than 90% of which is expected to be
amortized within three years after release. Excluding the effects of accounting
for the acquisition of WCI, the total cost incurred in the production of
theatrical and television films amounted to $1.667 billion in 1994, $1.784
billion in 1993 and $1.652 billion in 1992; and the total cost amortized
amounted to $1.640 billion, $1.619 billion and $1.535 billion, respectively.
F-46
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
(MILLIONS)
<S> <C> <C>
Credit agreement, weighted average interest rates of 6.5% and
4.2%............................................................ $2,550 $2,425
Commercial paper, weighted average interest rates of 6.2% and
3.8%............................................................ 649 772
Six Flags 9.25% zero coupon notes due December 15, 1999.......... 123 112
9 5/8% notes due May 1, 2002..................................... 600 600
7 1/4% debentures due September 1, 2008.......................... 599 599
10.15% notes due May 1, 2012..................................... 250 250
8 7/8% notes due October 1, 2012................................. 347 347
8 3/8% debentures due March 15, 2023............................. 990 990
8 3/8% debentures due July 15, 2033.............................. 994 994
Other............................................................ 58 36
------ ------
Total............................................................ $7,160 $7,125
====== ======
</TABLE>
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 (the "Time Warner General Partner Guarantees"). Such
indebtedness is recourse to each Time Warner General Partner only to the extent
of its guarantee. The indenture pursuant to which TWE's notes and debentures
have been issued (the "Indenture") requires the unanimous consent of the
holders of the notes and debentures to terminate the Time Warner General
Partner Guarantees prior to June 30, 1997, and the consent of a majority of
such holders to effect a termination thereafter. There are generally no
restrictions on the ability of the Time Warner General Partner guarantors to
transfer material assets, other than TWE assets, to parties that are not
guarantors.
As of December 31, 1994, the TWE bank credit agreement provided for up to
$5.2 billion of borrowings and consisted of a $4.2 billion revolving credit
facility with available credit reducing at June 30, 1995 and thereafter by $200
million per quarter through June 30, 1996, by $125 million per quarter from
September 30, 1996 through September 30, 1999, and by $1.575 billion at final
maturity on December 31, 1999; and a $986 million term loan with repayments of
$66 million on June 30, 1995, $98 million per quarter beginning September 30,
1995 through March 31, 1996, $27 million per quarter beginning June 30, 1996
through June 30, 1999, $20 million on September 30, 1999 and a final repayment
of $255 million on December 31, 1999. Unused credit is available for general
business purposes and to support commercial paper borrowings. Outstanding
borrowings under the credit agreement generally bear interest at LIBOR plus
5/8% per annum. The credit agreement contains covenants relating to, among
other things, additional indebtedness; liens on assets; acquisitions and
investments; cash flow coverage and leverage ratios; and loans, advances,
distributions or other cash payments or transfers of assets to its partners or
their affiliates.
An after-tax cost of $10 million was incurred by Six Flags in 1993 in
connection with the retirement of its debt (Note 3). The Six Flags zero coupon
senior notes due 1999 are guaranteed by TWE.
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. Based on the level of interest rates prevailing at December 31, 1993,
the fair value of TWE's long-term debt exceeded its carrying value by $290
million. Accounting recognition is not given to unrealized gains or losses on
debt unless the debt is retired prior to its maturity.
F-47
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest expense was $563 million in 1994, $573 million in 1993 and $436
million in 1992 ($486 million on a restated basis). The weighted average
interest rate on TWE's total debt was 7.6% and 6.7% at December 31, 1994 and
1993, respectively. Interest expense in 1992 prior to the TWE Capitalization
includes interest expense related to Time Warner's credit and interest rate
swap contracts on a pushdown basis and interest expense on $875 million of
loans due to WCI, which were repaid at the TWE Capitalization.
Annual repayments of long-term debt for the five years subsequent to December
31, 1994 are: 1995- $262 million; 1996-$179 million; 1997-$108 million; 1998-
$372 million and 1999-$2.4 billion.
6. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Domestic............................................... $242 $271 $168 $165
Foreign................................................ (41) 1 45 45
---- ---- ---- ----
Total.................................................. $201 $272 $213 $210
==== ==== ==== ====
</TABLE>
As a partnership, TWE is not subject to U.S. federal, state or local income
taxation (Note 1). Income taxes (benefits) of TWE and subsidiary corporations
are as set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Federal:
Current(/1/).......................................... $ 6 $10 $-- $--
Deferred.............................................. (2) (12) 3 --
Foreign:
Current(/2/).......................................... 53 68 42 42
Deferred.............................................. (16) (4) 8 8
State and local:
Current............................................... 14 20 -- --
Deferred.............................................. (15) (18) -- --
--- --- --- ---
Total income taxes...................................... $40 $64 $53 $50
=== === === ===
</TABLE>
--------
(1)Includes utilization of Six Flags' tax carryforwards in the amount of $35
million in 1994 and $75 million in 1993.
(2)Includes foreign withholding taxes of $44 million in 1994, $59 million in
1993 and $34 million in 1992.
The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $9.5 billion at December 31, 1994, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
F-48
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. TWE PARTNERS' CAPITAL
The TWE partnership agreement provides for special allocations of income,
loss and distributions of partnership capital, including priority distributions
in the event of liquidation or dissolution. The initial capital amounts
assigned to each partner were based on the fair value of the assets each
contributed to the partnership. Partnership income, to the extent earned, is
first allocated to the partners so that the economic burden of the income tax
consequences of partnership operations is borne as though the partnership were
taxed as a corporation ("special tax allocations"), then to the senior, pro
rata and junior priority capital interests, in order of priority, at rates of
return ranging from 8% to 13.25% per annum, and finally to the residual equity
interests. For the purpose of the foregoing allocations, partnership income is
based on the fair value of assets contributed to the partnership, and differs
from net income of TWE, which is based on the historical cost of contributed
assets. Partnership losses generally are allocated first to eliminate prior
allocations of partnership income to, and then to reduce the initial capital
amounts of, the residual equity, junior priority capital and pro rata priority
capital interests, in that order, then to reduce Time Warner General Partners'
senior capital, including partnership income allocated thereto, and finally to
reduce any special tax allocations. To the extent partnership income is
insufficient to satisfy all special allocations in a particular accounting
period, the unearned portion is carried over until satisfied out of future
partnership income.
A summary of the priority of contributed capital and limitations on the
allocation of partnership income is as set forth below:
<TABLE>
<CAPTION>
TIME
INITIAL INCOME WARNER
CAPITAL ALLOCATIONS GENERAL U S
AMOUNTS(A) LIMITED TO PARTNERS WEST ITOCHU TOSHIBA
---------- ------------ -------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
(BILLIONS) (% PER ANNUM (OWNERSHIP %)
COMPOUNDED
QUARTERLY)
PRIORITY OF CONTRIBUTED
CAPITAL
Special tax allocations. $ 0 No limit .........as necessary........
Senior capital.......... 1.4 8.00% 100.00% -- -- --
Pro rata priority capi-
tal.................... 5.6 13.00%(b) 63.27% 25.51% 5.61% 5.61%
Junior priority capital. 2.6 13.25%(c) 100.00% -- -- --
Residual equity capital. 3.3 No limit 63.27% 25.51% 5.61% 5.61%
</TABLE>
--------
(a)Excludes partnership income or loss (to the extent earned) allocated
thereto.
(b)11.00% to the extent concurrently distributed.
(c)11.25% to the extent concurrently distributed.
Senior capital and partnership income allocated thereto is required to be
distributed in three annual installments beginning July 1, 1997; earlier
distributions may be made under certain circumstances ("Senior Capital
Distributions"). Senior capital and partnership income allocated thereto
amounted to $1.663 billion at December 31, 1994, consisting of $1.364 billion
initial capital amount plus accrued income. Junior priority capital is subject
to a retroactive adjustment based on TWE's operating performance over five- and
ten-year periods.
U S WEST has an option to increase its pro rata priority capital and residual
equity interests to as much as 31.84%, depending on cable operating
performance. The option is exercisable between January 1, 1999
F-49
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and on or about May 31, 2005 at a maximum exercise price ranging from $1.25
billion to $1.8 billion, depending on the year of exercise. U S WEST or TWE may
elect that the exercise price be paid with partnership interests rather than
cash. Prior to the exercise of the U S WEST option, each of ITOCHU and Toshiba
has the right to maintain its original 6.25% pro rata priority capital and
residual equity interests by acquiring additional partnership interests at fair
market value; thereafter, each would have the right to maintain the percentage
of the pro rata priority capital and residual equity interests it held
immediately prior to U S WEST's exercise.
Distributions and loans to the partners are subject to partnership and credit
agreement limitations. Generally, TWE must be in compliance with the cash flow
coverage and leverage ratios, restricted payment limitations and other credit
agreement covenants in order to make such distributions or loans.
Certain assets of TWE (the "Time Warner Service Partnership Assets") were
distributed to the Time Warner General Partners prior to the admission of U S
WEST in 1993 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 (the "MFJ") applicable to U S WEST and its affiliated
companies, which may have included TWE. The Time Warner General Partners
contributed the Time Warner Service Partnership Assets to newly-formed
partnerships (the "Time Warner Service Partnerships") in which the Time Warner
General Partners are the general partners and subsidiaries of ITOCHU and
Toshiba are the limited partners. The Time Warner Service Partnerships make
certain of their assets and related services available to TWE (Note 12). If TWE
is clearly not prohibited from owning or operating the Time Warner Service
Partnership Assets, 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 on October
24, 1994, TWE is no longer prohibited from owning or operating substantially
all of the Time Warner Service Partnership Assets.
For financial statement purposes, the distribution of Time Warner Service
Partnership Assets was accounted for at historical cost. For partnership
agreement purposes, the initial capital amount of General Partners' junior
priority capital of $3 billion was reduced by approximately $300 million to
give effect to such distribution. TWE is required to make quarterly cash
distributions of Time Warner General Partners' junior priority capital in the
amount of $12.5 million to the Time Warner General Partners ("TWSP
Distributions"), which the General Partners are then required to contribute to
the Time Warner Service Partnerships. TWE paid $50 million and $12.5 million of
TWSP Distributions to the Time Warner General Partners in 1994 and 1993,
respectively, which were recorded as additional reductions of Time Warner
General Partners' junior priority capital.
TWE reimburses Time Warner for the amount by which the market price on the
exercise date of Time Warner common stock options granted to employees of TWE
exceeds the exercise price or, with respect to options granted prior to the TWE
Capitalization, the greater of the exercise price and $27.75, the market price
of the common stock at the TWE Capitalization ("Stock Option Distributions").
TWE accrues Stock Option Distributions and a corresponding liability with
respect to unexercised options when the market price of Time Warner common
stock increases during the accounting period, and reverses previously-accrued
Stock Option Distributions and the corresponding liability when the market
price of Time Warner common stock declines. At December 31, 1994 and 1993, TWE
had recorded a liability for Stock Option Distributions of $89 million and $271
million, respectively, based on the unexercised options and the market prices
at such dates of $35.125 and $44.25, respectively, per Time Warner common
share. TWE paid $5 million of Stock Option Distributions to Time Warner in
1994, compared to $20 million in 1993.
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income
from TWE ("Tax Distributions"), including any
F-50
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
taxable income generated by the Beneficial Assets, subject to limitations
referred to herein. The aggregate amount of such Tax Distributions is computed
generally by reference to the taxes that TWE would have been required to pay if
it were a corporation. TWE paid $115 million of Tax Distributions to the Time
Warner General Partners in 1994 and had recorded an additional liability to the
Time Warner General Partners for Tax Distributions of $334 million at December
31, 1994, compared to a liability of $276 million at December 31, 1993. All Tax
Distributions are permitted to be paid beginning July 1, 1995 and, accordingly,
such amounts are classified as a current liability at December 31, 1994.
In addition to Stock Option Distributions, Tax Distributions, Senior Capital
Distributions and TWSP Distributions, quarterly cash distributions may be made
to the partners to the extent of excess cash, as defined ("Excess Cash
Distribution"). Assuming that no additional partnership interests are issued to
new partners and that certain cash distribution thresholds are met, cash
distributions other than Stock Option Distributions, Tax Distributions, Senior
Capital Distributions and TWSP Distributions will in the aggregate be made
63.27% to the Time Warner General Partners and 36.73% to the Limited Partners
prior to June 30, 1998; thereafter, the Time Warner General Partners also will
be entitled to additional distributions with respect to junior priority
capital. If aggregate distributions made to the Limited Partners, generally
from all sources, have not reached approximately $800 million by June 30, 1997,
cash distributions to the Time Warner General Partners with respect to the Time
Warner General Partners' pro rata priority and residual equity capital, other
than Stock Option Distributions and Tax Distributions, will be deferred until
such threshold is met. Similarly, if such aggregate distributions to the
Limited Partners have not reached approximately $1.6 billion by June 30, 1998,
cash distributions with respect to junior priority capital, other than TWSP
Distributions, will be deferred until such threshold is met. If any such
deferral occurs, a portion of the corresponding partnership income allocations
with respect to such deferred amounts will be made at a rate higher than
otherwise would have been the case. If a division of TWE or a substantial
portion thereof is sold, the net proceeds of such sale, less expenses and
proceeds used to repay outstanding debt, will be required to be distributed
with respect to the partners' partnership interests. Similar distributions are
required to be made in the event of a financing or refinancing of debt. Subject
to any limitations on the incurrence of additional debt contained in the TWE
partnership and credit agreements, and the Indenture, TWE may borrow funds to
make distributions.
8. STOCK OPTION PLANS
Options to purchase Time Warner common stock under various stock option plans
have been granted to employees of TWE, generally at fair market value at the
date of grant. Generally, the options become exercisable over a three-year
vesting period and expire ten years from the date of grant. A summary of stock
option activity with respect to employees of TWE is as follows:
<TABLE>
<CAPTION>
THOUSANDS OF SHARES EXERCISE
OF TIME WARNER PRICE
COMMON STOCK PER SHARE
------------------- ---------
<S> <C> <C>
Balance at December 31, 1993...................... 26,880 $ 8-45
Granted........................................... 3,856 33-41
Exercised......................................... (437) 8-36
Cancelled......................................... (101) 22-45
------
Balance at December 31, 1994...................... 30,198 $ 8-45
======
Exercisable at December 31, 1994.................. 21,318
======
</TABLE>
TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 7. There were 1.9 million options exercised by
employees of TWE in 1993 and 129,000 options exercised in 1992 at prices
ranging from $8-$36 per share, and there were 18.5 million options exercisable
at December 31, 1993.
F-51
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. BENEFIT PLANS
TWE and its divisions have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities.
Pension expense included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Service cost......................................... $ 26 $ 21 $ 15 $ 13
Interest cost........................................ 24 19 14 12
Actual return on plan assets......................... 4 (21) (12) (10)
Net amortization and deferral........................ (21) 5 (4) (4)
---- ---- ---- ----
Total................................................ $ 33 $ 24 $ 13 $ 11
==== ==== ==== ====
</TABLE>
The status of funded pension plans is as follows:
<TABLE>
<CAPTION>
DECEMBER
31,
------------
1994 1993
----- -----
(MILLIONS)
<S> <C> <C>
Accumulated benefit obligation (88% vested)...................... $ 172 $ 189
Effect of future salary increases................................ 91 94
----- -----
Projected benefit obligation..................................... 263 283
Plan assets at fair value........................................ 225 221
----- -----
Projected benefit obligation in excess of plan assets............ (38) (62)
Unamortized actuarial losses..................................... 24 53
Unamortized plan changes......................................... 4 9
Other............................................................ (4) (7)
----- -----
Accrued pension liability........................................ $ (14) $ (7)
===== =====
</TABLE>
The following assumptions were used in accounting for pension plans:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate................................... 8.5% 7.5% 8.5%
Return on plan assets............................................ 9% 9% 10%
Rate of increase in compensation levels.......................... 6% 6% 6%
</TABLE>
Certain domestic employees of TWE participate in multiemployer pension plans
as to which the expense amounted to $18 million in 1994, $19 million in 1993
and $20 million in 1992. Employees in foreign countries participate to varying
degrees in local pension plans, which in the aggregate are not significant.
Certain domestic employees also participate in Time Warner's 401(k) savings
plans and profit sharing plans, as to which the expense was $23 million in
1994, $20 million in 1993 and $16 million in 1992. Contributions to the 401(k)
plans are based upon a percentage of the employees' elected contributions.
Contributions to the profit sharing plans are determined by management.
F-52
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SEGMENT INFORMATION
Information as to the operations of TWE in different business segments is as
set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
REVENUES(/1/)
Filmed Entertainment.......................... $5,033 $4,557 $3,945 $3,455
Programming-HBO............................... 1,494 1,435 1,444 1,444
Cable......................................... 2,220 2,205 2,091 2,091
Intersegment elimination...................... (287) (251) (229) (229)
------ ------ ------ ------
Total......................................... $8,460 $7,946 $7,251 $6,761
====== ====== ====== ======
--------
(1) Substantially all operations outside of the United States support the
export of domestic products. Revenues include export sales of $1.693
billion in 1994, $1.650 billion in 1993 and $1.379 billion in 1992.
Approximately 60% of export revenues are from sales to European customers.
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
OPERATING INCOME
Filmed Entertainment.......................... $ 257 $ 263 $ 235 $ 194
Programming-HBO............................... 236 213 201 201
Cable......................................... 355 407 400 400
------ ------ ------ ------
Total......................................... $ 848 $ 883 $ 836 $ 795
====== ====== ====== ======
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment.......................... $ 122 $ 87 $ 75 $ 36
Programming-HBO............................... 13 14 13 13
Cable......................................... 330 325 316 316
------ ------ ------ ------
Total......................................... $ 465 $ 426 $ 404 $ 365
====== ====== ====== ======
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS(/1/)
Filmed Entertainment.......................... $ 163 $ 171 $ 185 $ 155
Programming-HBO............................... 6 3 1 1
Cable......................................... 309 302 261 261
------ ------ ------ ------
Total......................................... $ 478 $ 476 $ 447 $ 417
====== ====== ====== ======
</TABLE>
--------
(1) Amortization includes amortization relating to the acquisitions of WCI in
1989 and the ATC minority interest in 1992 and to other business
combinations accounted for by the purchase method.
F-53
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information as to the assets and capital expenditures of TWE is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Filmed Entertainment........................... $ 7,947 $ 7,525 $ 7,346 $ 6,468
Programming-HBO................................ 895 855 936 936
Cable.......................................... 8,191 8,041 8,142 8,142
Corporate(/1/)................................. 1,629 1,542 270 302
------- ------- ------- -------
Total.......................................... $18,662 $17,963 $16,694 $15,848
======= ======= ======= =======
--------
(1)Consists principally of cash, cash equivalents and other investments.
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
<S> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Filmed Entertainment........................... $ 441 $ 244 $ 122 $ 101
Programming-HBO................................ 13 17 28 28
Cable(/1/)..................................... 699 352 273 273
------- ------- ------- -------
Total.......................................... $ 1,153 $ 613 $ 423 $ 402
======= ======= ======= =======
</TABLE>
--------
(1)The 1994 increase was funded in part through $234 million of collections on
the U S WEST Note (Note 1).
11.COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $143 million in 1994, $119 million in 1993 and
$99 million ($107 million on a restated basis) in 1992. The minimum rental
commitments under noncancellable long-term operating leases are: 1995-$132
million; 1996-$130 million; 1997-$117 million; 1998-$110 million; 1999-$100
million and after 1999-$784 million.
Minimum commitments and guarantees under certain programming, licensing,
franchise and other agreements at December 31, 1994 aggregated approximately
$3.7 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.
12.RELATED PARTY TRANSACTIONS
In the normal course of conducting their businesses, TWE units have had
various transactions with Time Warner units, generally on terms resulting from
a negotiation among the affected parties that in management's view results in
reasonable allocations. Employees of TWE participate in various Time Warner
medical, stock option (Note 8) and other benefit plans (Note 9) for which TWE
is charged its allocable share of plan expenses, including administrative
costs. Time Warner's corporate group provides various other services to TWE.
The Music division of WCI provides home videocassette distribution services to
certain
F-54
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TWE operations, and certain TWE units have placed advertising in magazines
published by Time Warner's Publishing division.
TWE is required to pay a $130 million advisory fee to U S WEST over a five-
year period ending September 15, 1998 for U S WEST's expertise in
telecommunications, telephony and information technology, and its participation
in the management and upgrade of the cable systems to Full Service Network(TM)
capacity.
Time Warner provides TWE with certain corporate support services for which
Time Warner is paid $60 million per year through June 30, 1995, and increasing
annual amounts as adjusted for inflation thereafter. The corporate services
agreement runs through June 30, 1997, and may be extended by agreement of both
parties. Management believes that the corporate services fee is representative
of the cost of corporate services that would be necessary for the stand-alone
operations of TWE.
Time Warner and TWE entered into a credit agreement in 1994 that allows Time
Warner to borrow up to $400 million from TWE through September 15, 2000.
Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement. Under TWE's
bank credit agreement, TWE's loans to Time Warner cannot exceed $1.1 billion at
December 31, 1994, increasing to no more than $1.5 billion on July 1, 1995.
TWE has service agreements with the Time Warner Service Partnerships for
program signal delivery and transmission services, and TWE provides billing,
collection and marketing services to the Time Warner Service Partnerships. TWE
also has distribution and merchandising agreements with Time Warner
Entertainment Japan Inc., a company owned by partners of TWE to conduct TWE's
businesses in Japan.
In addition to transactions with its partners, TWE has had transactions with
Paragon Communications, Comedy Partners, L.P. and its other equity investees
and with Turner Broadcasting System, Inc., The Columbia House Company
partnerships, Cinamerica Theatres, L.P. and other equity investees of Time
Warner, generally with respect to sales of product in the ordinary course of
business.
Long-term debt and interest expense prior to the TWE Capitalization include
the effects of the pushdown of a portion of the Time Warner credit agreement
debt that was related to the WCI acquisition, based on the proportion that the
fair value of the WCI contributed businesses acquired bore to the fair value of
all of the WCI net assets acquired. Interest expense prior to the TWE
Capitalization also reflects interest on $875 million of loans due to WCI,
which were repaid at the TWE Capitalization, at a rate approximating the rate
applicable to borrowings under the Time Warner credit agreement.
13.SUPPLEMENTAL INFORMATION
Supplemental information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
RESTATED
1994 1993 1992 1992
---- ------ -------- ------
(MILLIONS)
<S> <C> <C> <C> <C>
Cash payments made for interest................... $521 $ 450 $ 418 $ 391
Cash payments made for income taxes (net)......... 69 70 39 39
Borrowings........................................ 977 3,075 6,856 6,677
Repayments........................................ 945 3,734 7,647 7,514
Noncash assumption of debt........................ -- -- 2,545 2,545
Noncash pushdown of cost to acquire ATC minority
interest.......................................... -- -- 1,431 1,431
Noncash capital contributions (distributions),
net............................................... 4 384 (117) (117)
</TABLE>
F-55
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The principal balance sheet effects of the consolidation of Six Flags in 1993
were to increase cash and equivalents by $11 million, property, plant and
equipment by $398 million, goodwill by $310 million, other assets by $159
million, debt by $608 million and other liabilities by $238 million, and to
decrease investments by $32 million. The principal balance sheet effects of the
acquisition of the ATC minority interest in 1992 were to increase investments
by $156 million, cable television franchises by $865 million, goodwill by
$410 million and partners' capital by $1.431 billion. A noncash effect of the
TWE Capitalization in 1992 was the assumption by TWE of $2.545 billion of Time
Warner debt in excess of the amount reflected as a liability prior to the TWE
Capitalization. Cash equivalents consist of commercial paper and other
investments that are readily convertible into cash, and have original
maturities of three months or less.
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
<S> <C> <C>
(MILLIONS)
Accrued expenses................................................. $ 827 $ 767
Accrued compensation............................................. 143 101
Deferred revenues................................................ 150 129
Tax Distributions due to Time Warner General Partners............ 334 108
Debt due within one year......................................... 32 24
------ ------
Total............................................................ $1,486 $1,129
====== ======
</TABLE>
F-56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE PARTNERS OF
TIME WARNER ENTERTAINMENT COMPANY, L.P.
We have audited the accompanying consolidated balance sheet of Time Warner
Entertainment Company, L.P. ("TWE") as of December 31, 1994 and 1993, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
TWE's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TWE at December
31, 1994 and 1993, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
New York, New York
February 7, 1995
F-57
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1994 set forth below has been derived from and should be
read in conjunction with the consolidated financial statements and other
financial information presented elsewhere herein. Capitalized terms are as
defined and described in such consolidated financial statements, or elsewhere
herein. The selected historical financial information for 1994 and 1993 gives
effect to the consolidation of Six Flags effective as of January 1, 1993, as a
result of the 1993 Six Flags acquisition. The selected historical financial
information for periods prior to such date has not been changed; however,
selected financial information for 1992 retroactively reflecting the
consolidation is presented as supplementary information under the column
heading "restated" to facilitate comparative analysis.
The selected historical financial information for 1993 gives effect to the
admission of U S WEST as an additional limited partner of TWE as of September
15, 1993 and the issuance of $2.6 billion of TWE debentures during the year to
reduce indebtedness under the TWE credit agreement, and for 1992 gives effect
to the initial capitalization of TWE and associated refinancings as of the
dates such transactions were consummated and Time Warner's acquisition of the
ATC minority interest as of June 30, 1992, using the purchase method of
accounting and reflected in the consolidated financial statements of TWE under
the pushdown method of accounting.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
RESTATED
SELECTED OPERATING STATEMENT 1994 1993 1992 1992 1991 1990
INFORMATION ------- ------- -------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $ 8,460 $ 7,946 $ 7,251 $ 6,761 $ 6,068 $ 5,671
Depreciation and amortiza-
tion........................ 943 902 851 782 733 775
Business segment operating
income...................... 848 883 836 795 712 549
Interest and other, net...... 587 551 563 525 520 648
Income (loss) before extraor-
dinary item................. 161 208 160 160 97 (180)
Net income (loss)............ 161 198 160 160 97 (180)
<CAPTION>
DECEMBER 31,
------------------------------------------------
RESTATED
SELECTED BALANCE SHEET 1994 1993 1992 1992 1991 1990
INFORMATION ------- ------- -------- ------- ------- -------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total assets................. $18,662 $17,963 $16,694 $15,848 $14,230 $14,415
Debt due within one year..... 32 24 102 7 878 7
Long-term debt............... 7,160 7,125 7,684 7,171 4,571 6,516
Time Warner General Partners'
senior capital.............. 1,663 1,536 -- -- -- --
Partners' capital............ 6,233 6,000 6,437 6,437 6,717 5,809
</TABLE>
F-58
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING
INCOME OF NET
BUSINESS INCOME
QUARTER REVENUES SEGMENTS (LOSS)
------- -------- ---------- ------
(MILLIONS)
<S> <C> <C> <C>
1994
1st.................................................. $1,919 $203 $ 48
2nd.................................................. 2,055 227 56
3rd.................................................. 2,203 235 41
4th.................................................. 2,283 183 16
Year................................................. 8,460 848 161
1993
1st.................................................. $1,757 $208 $ 93
2nd (a).............................................. 1,865 235 40
3rd (a).............................................. 2,174 279 76
4th.................................................. 2,150 161 (11)
Year (a)............................................. 7,946 883 198
</TABLE>
--------
(a) Net income for each of the second and third quarters of 1993 includes an
extraordinary loss on the retirement of debt of $2 million and $8 million,
respectively.
F-59
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1994 VS. 1993
TWE had revenues of $8.460 billion and net income of $161 million in 1994,
compared to revenues of $7.946 billion and net income of $198 million in 1993.
An extraordinary loss on the retirement of debt of $10 million and a one-time
gain from the sale of certain assets are included in the 1993 results.
Operating income and EBITDA for TWE in 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
OPERATING
INCOME EBITDA
--------- -------------
1994 1993 1994 1993
---- ---- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C>
Filmed Entertainment.................................... $257 $263 $ 542 $ 521
Programming--HBO........................................ 236 213 255 230
Cable................................................... 355 407 994 1,034
---- ---- ------ ------
Total................................................... $848 $883 $1,791 $1,785
==== ==== ====== ======
</TABLE>
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $40 million in the year ended
December 31, 1994, and $64 million in the year ended December 31, 1993 have
been provided in respect of the operations of TWE's domestic and foreign
subsidiary corporations.
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.
Filmed Entertainment. Revenues increased to $5.033 billion, compared to
$4.557 billion in 1993. Operating income decreased to $257 million from $263
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $285 million in 1994 and $258 million in 1993.
EBITDA increased to $542 million from $521 million. Worldwide home video,
syndication and consumer products revenues increased at Warner Bros., offset in
part by lower worldwide theatrical revenues. Revenues at Six Flags increased as
a result of overall attendance growth and higher revenues per visitor.
Operating income and EBITDA margins decreased principally as a result of lower
theatrical results in comparison to the exceptionally strong theatrical results
in 1993.
Programming--HBO. Revenues increased to $1.494 billion, compared to $1.435
billion in 1993. Operating income increased to $236 million from $213 million.
Depreciation and amortization amounted to $19 million in 1994 and $17 million
in 1993. EBITDA increased to $255 million from $230 million. Revenues benefited
from an increase in subscribers and higher pay-TV rates. Operating income,
EBITDA and operating margins improved principally as a result of the revenue
gains.
F-60
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Cable. Revenues increased to $2.220 billion, compared to $2.205 billion in
1993. Operating income decreased to $355 million from $407 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest, amounted to $639
million in 1994 and $627 million in 1993. EBITDA decreased to $994 million from
$1.034 billion. Revenues and operating results in 1994 were adversely affected
by two rounds of cable rate regulation that in general reduced the rates cable
operators are allowed to charge for regulated services, the first of which went
into effect in September 1993 and the second of which went into effect in July
1994. The unfavorable effects of rate regulation were offset in part by an
increase in subscribers and nonregulated revenues. Actions that were undertaken
to mitigate the impact of rate regulation included a number of cost containment
measures and a continued emphasis on near and long-term strategies to increase
revenues from unregulated services.
Interest and Other, Net. Interest and other, net, increased to $587 million
in 1994, compared to $551 million in 1993. Interest expense decreased to $563
million, compared with $573 million in 1993. There was other expense, net, of
$24 million in 1994, compared to other income, net, of $22 million in 1993.
Investment-related and foreign currency contract losses in 1994 exceeded an
increase in interest income on higher cash balances and the interest-bearing
note receivable from U S WEST. A gain on the sale of certain assets and other
investment-related income exceeded investment losses in 1993.
1993 VS. 1992
TWE had 1993 revenues of $7.946 billion, income of $208 million before an
extraordinary loss of $10 million on the retirement of debt and net income of
$198 million, compared to 1992 revenues of $6.761 billion ($7.251 billion on a
restated basis) and net income of $160 million.
Operating income and EBITDA for TWE for 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
OPERATING INCOME EBITDA
------------------------------ ------------------------------
HISTORICAL RESTATED HISTORICAL HISTORICAL RESTATED HISTORICAL
1993 1992 1992 1993 1992 1992
---------- -------- ---------- ---------- -------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Filmed Entertainment.... $263 $235 $194 $ 521 $ 495 $ 385
Programming--HBO........ 213 201 201 230 215 215
Cable................... 407 400 400 1,034 977 977
---- ---- ---- ------ ------ ------
Total................... $883 $836 $795 $1,785 $1,687 $1,577
==== ==== ==== ====== ====== ======
</TABLE>
Filmed Entertainment. Revenues increased to $4.557 billion compared to $3.455
billion ($3.945 billion on a restated basis) in 1992. Operating income
increased to $263 million from $194 million ($235 million on a restated basis).
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $258 million in 1993 and $191 million ($260 million on a
restated basis) in 1992. EBITDA increased to $521 million from $385 million
($495 million on a restated basis). The increase in revenues, operating income
and EBITDA on an historical basis resulted primarily from the inclusion in 1993
of the operating results of Six Flags, which previously had been accounted for
using the equity method. Revenues at Warner Bros. increased during the period
primarily due to increases in international theatrical, international
syndication and domestic home video revenues, as well as increased revenues
from retail operations. Record international revenues of $1.650 billion would
have been greater but for unfavorable exchange rate fluctuations. Warner Bros.
ranked number one at both the domestic and international box office in 1993,
led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags
increased, benefiting from higher revenues per visitor. Operating income and
EBITDA benefited from the revenue gains.
F-61
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Programming--HBO. Revenues decreased to $1.435 billion compared to $1.444
billion in 1992. Operating income increased to $213 million from $201 million.
Depreciation and amortization amounted to $17 million in 1993 and $14 million
in 1992. EBITDA increased to $230 million from $215 million. The decrease in
revenues reflects lower HBO Video sales, which in 1992 were favorably affected
by a children's sell-thru title, offset in part by higher subscriber revenues,
principally as a result of higher pay-TV rates at HBO and an increase in
subscribers. Operating income and EBITDA benefited primarily from improved
results from new businesses, including Time Warner Sports and the Comedy
Central joint venture.
Cable. Revenues increased to $2.205 billion compared to $2.091 billion in
1992. Operating income increased to $407 million from $400 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest amounted to $627
million in 1993 and $577 million in 1992. EBITDA increased to $1.034 billion
from $977 million. Revenues increased principally as a result of growth in the
number of cable subscribers and increases in advertising sales and pay-per-
view. The increase in subscribers accounted for approximately three quarters of
the revenue increase. Operating income and EBITDA benefited from the revenue
gains and increased income from cable joint ventures, but was negatively
affected in the fourth quarter by the first round of cable rate regulation,
which went into effect on September 1, 1993.
Interest and Other, Net. Interest and other, net, increased to $551 million
in 1993 from $525 million ($563 million on a restated basis) in 1992. Interest
expense increased to $573 million compared with $436 million ($486 million on a
restated basis) in 1992. The increase in interest expense resulted primarily
from the higher average debt levels attributable to the TWE capitalization, the
higher interest cost of the TWE notes and debentures issued to refinance TWE
bank debt, and the consolidation of Six Flags' interest expense in 1993. Other
income, net, in 1993 included gains on the sale of certain assets partially
offset by losses from and reductions in the carrying value of certain
investments. Other expenses, net, on a restated basis in 1992 is principally
attributable to losses on certain investments and litigation-related costs.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1994
Despite the $7 billion of debt incurred by Time Warner in its 1989
acquisition of Warner Communications Inc. that was allocated to TWE under the
pushdown method of accounting and the adverse effects on the cable business
since September 1993 from government-imposed rate regulation, TWE continues to
be able to finance growth and expansion in critical areas. In the last three
years alone, TWE has spent approximately $900 million making new investments
and acquisitions and approximately $2.2 billion on capital expenditures. Annual
improvements in EBITDA and the $2.8 billion of capital contributions (excluding
the $771 million uncollected portion of the U S WEST Note) by ITOCHU, Toshiba
and U S WEST, have enabled TWE to finance this level of investment while at the
same time maintaining its leverage and coverage ratios at relatively constant
levels.
A commonly-used leverage ratio is total debt, less cash ("Net debt") to total
business segment EBITDA, less corporate expenses ("Adjusted EBITDA"). A
commonly-used coverage ratio is Adjusted EBITDA to total interest expense.
Those ratios for 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Net debt/Adjusted EBITDA............................................ 3.54x 3.37x
Adjusted EBITDA/Interest expense.................................... 3.07x 3.01x
</TABLE>
F-62
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The financial condition of TWE at December 31, 1994 remained essentially
unchanged from year end 1993, but is expected to be significantly affected by
the formation of the TWE-Advance/Newhouse Partnership and other cable
transactions announced by Time Warner for 1995. TWE had $7.2 billion of long-
term debt at December 31, 1994, $1.7 billion of Time Warner General Partners'
senior capital and $6.2 billion of partners' capital (net of the $771 million
uncollected portion of the U S WEST Note), compared to $7.1 billion of long-
term debt, $1.5 billion of Time Warner General Partners' senior capital and $6
billion of partners' capital at December 31, 1993. Cash and equivalents were
$1.1 billion at December 31, 1994 compared to $1.3 billion at December 31,
1993, resulting in net debt of $6.1 billion and $5.8 billion, respectively.
Time Warner and TWE entered into a credit agreement in 1994 that allows Time
Warner to borrow up to $400 million from TWE through September 15, 2000. Time
Warner borrowed $400 million in 1994 under the credit agreement. Under TWE's
bank credit agreement, TWE's loans to Time Warner cannot exceed $1.1 billion at
December 31, 1994, increasing to no more than $1.5 billion on July 1, 1995.
During the latter half of 1994 and continuing into 1995, Time Warner and TWE
announced a series of cable transactions, all of which are subject to customary
franchise and regulatory approvals, that are expected to increase the total
number of cable subscribers under the management of Time Warner Cable to
approximately 11.5 million, compared to 7.5 million at the end of 1994. As part
of this cable television expansion, TWE will own a two-thirds interest in a
joint venture it will form with subsidiaries of Advance and Newhouse, which
will contribute cable television systems that serve approximately 1.4 million
basic television subscribers. In accordance with the TWE-Advance/Newhouse joint
venture agreement, certain cable systems to be acquired by Time Warner in its
acquisitions of Summit Communications Group, Inc., KBLCOM Incorporated and
Cablevision Industries Corporation and related companies, may be transferred on
a tax-efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers,
if they are made, are expected to be structured on a leveraged basis. New or
revised bank credit facilities will be required for TWE and the
TWE-Advance/Newhouse Partnership as a result of these transactions, which
management feels will be obtained at a reasonable cost.
Time Warner also has announced its intention to enhance its financial
position and that of TWE through sales of non-core assets, which may include
certain smaller, unclustered cable systems and certain investments owned by
TWE. Proceeds from asset sales will be used to reduce debt.
The formation of the TWE-Advance/Newhouse Partnership and sales of non-core
assets are expected to improve TWE's leverage and coverage ratios. In
accordance with the TWE-Advance/Newhouse joint venture agreement, certain of
Time Warner's newly-acquired cable systems may be transferred on a tax-
efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers, if
they are made, are expected to be structured on a leveraged basis, which could
result in an overall adverse impact on the TWE ratios.
Because of the announced transactions, Time Warner will explore the
possibility of bringing its various interests in cable operations together in a
separate, self-financed operating unit. This process is expected to be
undertaken over a 12-18 month period and will be dependent on, among other
things, successful negotiations with TWE's partners and certain creditors, and
the receipt of franchise and other regulatory approvals. Accordingly, there can
be no assurance that the effort will succeed.
During 1994, cash provided by TWE operations amounted to $1.296 billion and
consisted of $1.791 billion of EBITDA from the Filmed Entertainment,
Programming-HBO and Cable businesses and a reduction in working capital
requirements, less $521 million of interest payments, $69 million of income
taxes and $60 million of corporate expenses. Cash provided by operations of
$1.271 billion in 1993 consisted of
F-63
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
$1.785 billion of business segment EBITDA and a reduction in working capital
requirements, less $450 million of interest payments, $70 million of income
taxes and $60 million of corporate expenses. Capital expenditures increased to
$1.153 billion in 1994, compared to $613 million in 1993. Capital spending by
Time Warner Cable amounted to $699 million in 1994, compared to $352 million in
1993, and was financed in part through $234 million of collections on the U S
WEST Note. Cable capital expenditures are budgeted to exceed $1 billion for
1995, and are expected to be partially financed by $550 million of collections
on the U S WEST Note. Because management believes that the conversion from
coaxial to fiber-optic cable is essential to achieving long-term growth in
revenue from telephony and unregulated cable 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.
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 $852 million
at December 31, 1994, compared to $724 million at December 31, 1993 (including
amounts relating to HBO of $175 million at December 31, 1994 and $178 million
at December 31, 1993). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the U S WEST Note and additional borrowing capacity
are sufficient to meet its capital and liquidity needs.
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 exchange rates. TWE is reimbursed by or reimburses Time
Warner for Time Warner contract gains and losses related to TWE's exposure. At
December 31, 1994, Time Warner had contracts for the sale of $551 million and
the purchase of $109 million of foreign currencies at fixed rates and
maturities of three months or less. Of Time Warner's $442 million net sale
contract position, $188 million related to TWE's exposure, primarily Japanese
yen (41% of net contract position related to TWE), French francs (18%), German
marks (12%) and Canadian dollars (11%), compared to a net sale contract
position of $226 million of foreign currencies at December 31, 1993.
F-64
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF SIX FLAGS
Six Flags was formed by a group of companies, including a subsidiary of Time
Warner ("Enterprises") which owned 50% of Six Flags common stock, to effect
the acquisition on December 29, 1991 of Six Flags Theme Parks Inc. ("1991 SF
Acquisition"). Enterprises' interest in Six Flags was contributed to TWE at
the TWE capitalization. In December 1992, Six Flags redeemed certain of its
equity with $102 million of proceeds from the issuance of zero coupon senior
notes due 1999 and $12 million of proceeds from the issuance of additional
shares of Six Flags common stock ("1992 SF Recapitalization"). TWE continued
to own 50% of the common stock of Six Flags following the 1992 SF
Recapitalization, until September 17, 1993, when it provided Six Flags with
$136 million to repurchase all the common stock held by the other stockholders
and preferred stock of certain subsidiaries. TWE also provided $414 million to
finance the repurchase or retirement of all the indebtedness of Six Flags and
its subsidiaries, except for the zero coupon senior notes due 1999 ("1993 SF
Acquisition and Refinancing"). As a result of the 1993 SF Acquisition and
Refinancing, TWE has consolidated Six Flags effective January 1, 1993.
Summarized financial information of Six Flags is set forth below:
SIX FLAGS ENTERTAINMENT CORPORATION
<TABLE>
<CAPTION>
YEARS ENDED
IN DECEMBER
-----------------
1994 1993 1992
---- ----- -----
(MILLIONS)
<S> <C> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues.................................................... $557 $533 $ 490
Operating income............................................ 68 55 51
Income (loss) before extraordinary item (a)................. 8 2 (6)
Net income (loss) (a)....................................... 8 (8) (6)
<CAPTION>
YEARS ENDED
IN DECEMBER
------------
1994 1993
----- -----
(MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET INFORMATION
Total assets................................................ $ 894 $ 900
Zero coupon senior notes due 1999 (9.25% yield)............. 123 112
Capital lease obligations to TWE, weighted average interest
rates
of 6.7% and 6.3% (b)....................................... 401 301
Long-term notes due to TWE, weighted average interest rates
of 9.2% and 10%............................................ 75 226
Shareholders' equity........................................ 99 90
</TABLE>
--------
(a) The 1993 SF Acquisition and Refinancing, certain transactions with respect
to the 1992 SF Recapitalization, and the 1991 SF Acquisition were
accounted for using the purchase method of accounting for business
combinations. If the 1993 SF Acquisition and Refinancing had occurred at
the beginning of the year, the 1993 income before extraordinary item would
have been $7 million; if the 1992 SF Recapitalization had occurred at the
beginning of the year, the 1992 net loss would have been $18 million.
(b) Six Flags has entered into sale and leaseback transactions with TWE with
respect to all of its wholly-owned theme parks. Sale proceeds of $114
million in 1994 and $301 million in 1993 were used to repay indebtedness
to TWE incurred in connection with the 1993 SF Acquisition and
Refinancing. The leases have been accounted for as capital leases and
expire in 2008.
F-65
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
1994:
Reserves deducted from accounts re-
ceivable:
Allowance for doubtful accounts... $161 $ 49 $ (22)(a) $188
Reserves for sales returns and al-
lowances......................... 96 164 (142)(b) 118
---- ---- ----- ----
Total............................ $257 $213 $(164) $306
==== ==== ===== ====
1993:
Reserves deducted from accounts re-
ceivable:
Allowance for doubtful accounts... $166 $ 27 $ (32)(a) $161
Reserves for sales returns and al-
lowances......................... 74 131 (109)(b) 96
---- ---- ----- ----
Total............................ $240 $158 $(141) $257
==== ==== ===== ====
1992:
Reserves deducted from accounts re-
ceivable:
Allowance for doubtful accounts... $152 $ 62 $ (48)(a) $166
Reserves for sales returns and al-
lowances......................... 78 86 (90)(b) 74
---- ---- ----- ----
Total............................ $230 $148 $(138) $240
==== ==== ===== ====
</TABLE>
--------
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
F-66
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
3.(i)(a) Restated Certificate of Incorporation of the Registrant *
as filed with the Secretary of State of the State of
Delaware on May 26, 1993 (which is incorporated herein
by reference to Exhibit 3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993
(the "June 1993 Form 10-Q").
3.(i)(b) Certificate of Ownership and Merger merging TWE Holdings *
Inc. into Time Warner Inc. as filed with the Secretary
of State of the State of Delaware on September 24, 1993
(which is incorporated herein by reference to Exhibit
3.(i)(b) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 (the "Registrant's
1993 Form 10-K")).
3.(i)(c) Certificate of the Voting Powers, Designations, *
Preferences and Relative Participating, Optional and
Other Rights and Qualifications of Series A
Participating Cumulative Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on January 26, 1994 (which is
incorporated herein by reference to Exhibit 3.(i)(c) to
the Registrant's 1993 Form 10-K).
3.(ii) By-laws of the Registrant, as amended through March 18, *
1993 (which is incorporated herein by reference to
Exhibit 3.3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 (the
"Registrant's 1992 Form 10-K")).
4.1 Specimen Certificate of the Registrant's Common Stock *
(which is incorporated herein by reference to Exhibit
4.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991 (the "Registrant's 1991
Form 10-K").
4.2 Specimen Certificate of Series B 6.4% Preferred Stock of *
the Registrant (which is incorporated herein by
reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1990).
4.3 Indenture dated as of March 15, 1993 between the *
Registrant and Chemical Bank, as Trustee, relating to
the 8 3/4% Convertible Subordinated Debentures due 2015
of the Registrant (which is incorporated herein by
reference to Exhibit 4.4 to the Registrant's 1992 Form
10-K).
4.4 Specimen Certificate of the Registrant's 8 3/4% *
Convertible Subordinated Debentures due 2015 (which is
incorporated herein by reference to Exhibit 4.5 to the
Registrant's 1992 Form 10-K).
4.5 Rights Agreement dated as of January 20, 1994 between *
the Registrant and Chemical Bank, as Rights Agent (which
is incorporated herein by reference to Exhibit 4(a) to
the Registrant's Current Report on Form 8-K dated
January 20, 1994).
4.6 Indenture dated as of April 30, 1992, as amended by the *
First Supplemental Indenture, dated as of June 30, 1992,
among Time Warner Entertainment Company, L.P. ("TWE"),
the Registrant, certain of its subsidiaries party
thereto and The Bank of New York, as Trustee (which is
incorporated herein by reference to Exhibits 10(g) and
10(h) to the Registrant's Current Report on Form 8-K
dated July 14, 1992).
4.7 Second Supplemental Indenture, dated as of December 9, *
1992, among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.2 to Amendment No. 1 to the Registration
Statement on Form S-4 Reg. No. 33-67688 of TWE filed
with the Commission on October 25, 1993 (the "1993 TWE
S-4")).
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
4.8 Third Supplemental Indenture, dated as of October 12, *
1993, among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.3 to the 1993 TWE S-4).
4.9 Fourth Supplemental Indenture, dated as of March 29, *
1994, among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.4 to TWE's Annual Report on Form 10-K for the
year ended December 31, 1993 ("TWE's 1993 Form
10-K")).
4.10 Fifth Supplemental Indenture, dated as of December 28, *
1994 among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.5 to TWE's Annual Report on Form 10-K for the
year ended December 31, 1994 ("TWE's 1994 Form
10-K")).
4.11 Indenture, dated as of October 15, 1985, between the *
Registrant and Marine Midland Bank, N.A., as successor
Trustee (which is incorporated herein by reference to
Exhibit 4(a) to the Registrant's Registration Statement
on Form S-3 Reg. No. 33-724 filed with the Commission on
October 8, 1985).
4.12 Indenture dated as of October 15, 1992, as amended by the *
First Supplemental Indenture dated as of December 15,
1992, as supplemented by the Second Supplemental
Indenture dated as of January 15, 1993, between the
Registrant and Chemical Bank, as Trustee (which is
incorporated herein by reference to Exhibit 4.10 to the
Registrant's 1992 Form 10-K).
4.13 Indenture dated as of January 15, 1993, between the *
Registrant and Chemical Bank, as Trustee (which is
incorporated herein by reference to Exhibit 4.11 to the
Registrant's 1992 Form 10-K).
4.14 First Supplemental Indenture dated as of June 15, 1993, *
between the Registrant and Chemical Bank, as Trustee, to
the Indenture dated as of January 15, 1993 between the
Registrant and Chemical Bank, as Trustee, including as
Exhibit A the Form of Liquid Yield Option Note due 2013
(which is incorporated herein by reference to Exhibit 4
to the Registrant's June 1993 Form 10-Q).
10.1 Time Warner 1981 Stock Option Plan, as amended through *
May 14, 1991 (which is incorporated herein by reference
to Exhibit 10.1 to the Registrant's 1991 Form 10-K).
10.2 Time Warner 1986 Stock Option Plan, as amended through *
May 14, 1991 (which is incorporated herein by reference
to Exhibit 10.2 to the Registrant's 1991 Form 10-K).
10.3 1988 Stock Incentive Plan of Time Warner Inc., as amended *
through May 14, 1991 (which is incorporated herein by
reference to Exhibit 10.3 to the Registrant's 1991 Form
10-K).
10.4 Time Warner 1989 Stock Incentive Plan, as amended through *
May 14, 1991 (which is incorporated herein by reference
to Exhibit 10.4 to the Registrant's 1991 Form 10-K).
10.5 Time Warner 1989 WCI Replacement Stock Option Plan, as
amended through February 14, 1995.
10.6 Time Warner 1989 Lorimar Non-Employee Replacement Stock *
Option Plan, as amended through May 14, 1991 (which is
incorporated herein by reference to Exhibit 10.6 to the
Registrant's 1991 Form 10-K).
10.7 Time Warner 1994 Stock Option Plan, as amended through
November 17, 1994.
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
10.8 Time Warner Corporate Group Stock Incentive Plan, as
amended through May 14, 1991.
10.9 Time Warner 1988 Restricted Stock Plan for Non-Employee *
Directors, as amended through November 18, 1993 (which is
incorporated herein by reference to Exhibit 10.8 to the
Registrant's 1993 Form 10-K).
10.10 Deferred Compensation Plan for Directors of Time Warner, *
as amended through November 18, 1993 (which is
incorporated herein by reference to Exhibit 10.9 to the
Registrant's 1993 Form 10-K).
10.11 Time Warner Retirement Plan for Outside Directors, as *
amended through September 21, 1989 (which is incorporated
herein by reference to Exhibit 10.10 to the Registrant's
1991 Form 10-K).
10.12 Time Warner Annual Bonus Plan for the Chief Executive *
Officer (which is incorporated herein by reference to
Annex A to the Registrant's definitive Proxy Statement
dated March 30, 1994, used in connection with the
Registrant's 1994 Annual Meeting of Stockholders).
10.13 Amended and Restated Employment and Termination Agreement *
dated as of March 3, 1989, as amended and restated as of
January 10, 1990, between the Registrant and
J. Richard Munro (which is incorporated herein by
reference to Exhibit 10.26 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1989).
10.14 Amended and Restated Employment Agreement dated as of *
November 15, 1990, between the Registrant and Gerald M.
Levin (which is incorporated herein by reference to
Exhibit 10.26 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990 (the
"Registrant's 1990 Form 10-K")).
10.15 Amended and Restated Employment Agreement made as of *
August 23, 1989, as amended on July 21, 1993, between WCI
and the Registrant, on the one hand, and Bert W.
Wasserman, on the other hand (which is incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993).
10.16 Employment Agreement made as of September 19, 1990, *
between the Registrant and Peter R. Haje (which is
incorporated herein by reference to Exhibit 10.29 to the
Registrant's 1990 Form 10-K).
10.17 Employment Agreement made as of November 2, 1994, between
the Registrant and Richard D. Parsons.
10.18 Employment Agreement effective as of January 1, 1995,
between the Registrant and Richard J. Bressler.
10.19 Amended and Restated Employment Agreement effective as of
January 1, 1994, between the Registrant and Tod R.
Hullin.
10.20 Amended and Restated Employment Agreement effective as of
January 1, 1994, between the Registrant and Philip R.
Lochner, Jr.
10.21 Employment Agreement dated as of February 1, 1992, *
between the Registrant and Timothy A. Boggs (which is
incorporated herein by reference to Exhibit 10.2 to the
Registrant's 1992 Form 10-K).
10.22 Employment Agreement dated as of July 1, 1992, between *
the Registrant and Geoffrey W. Holmes (which is
incorporated herein by reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992).
10.23 The Time Warner Deferred Compensation Plan, as amended
and restated as of November 1, 1994, as amended by
Amendment No. 1, effective as of December 7, 1994, and
Amendment No. 2, effective as of January 1, 1994.
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
10.24 Travel and Accident Insurance Policy issued by INA Life *
Insurance Company of New York (which is incorporated
herein by reference to Exhibit 10.44 to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1988).
10.25 Amended and Restated Credit Agreement, dated as of June *
23, 1992, among TWE, Bankers Trust Company and Chemical
Bank, as Managing Agents, the Co-Agents and Agents named
therein and the banks named therein (which is
incorporated herein by reference to Exhibit 10(f) to the
Registrant's Current Report on Form 8-K dated July 14,
1992 (the "July Form 8-K")).
10.26 Amendment No. 1 to the Amended and Restated Credit *
Agreement, dated as of June 23, 1992, among TWE, Bankers
Trust Company and Chemical Bank, as Managing Agents, the
Co-Agents and Agents named therein and the banks named
therein (which is incorporated herein by reference to
Exhibit 10.24 to the Registration Statement on
Form S-4 Reg. No. 33-61338 of Six Flags Entertainment
Corporation filed with the Commission on April 20, 1993).
10.27 Amendment No. 2 to the Amended and Restated Credit *
Agreement, dated as of June 23, 1992, among TWE, Bankers
Trust Company and Chemical Bank, as Managing Agents, the
Co-Agents and Agents named therein and the banks named
therein (which is incorporated herein by reference to
Exhibit 10.3 to the 1993 TWE S-4).
10.28 Amendment No. 3 to the Amended and Restated Credit *
Agreement, dated as of
June 23, 1992, among TWE, Bankers Trust Company and
Chemical Bank, as Managing Agents, the Agents and Co-
Agents named therein and the banks named therein (which
is incorporated herein by reference to Exhibit 10.4 to
the 1993 TWE S-4).
10.29 Amendment No. 4 to the Amended and Restated Credit *
Agreement, dated as of
June 23, 1992, among TWE, Bankers Trust Company and
Chemical Bank, as Managing Agents, the Agents and the Co-
Agents named therein and the banks named therein (which
is incorporated herein by reference to Exhibit 10.5 to
TWE's 1993 Form 10-K).
10.30 Amendment No. 5 to the Amended and Restated Credit *
Agreement, dated as of July 1, 1994, among TWE, Bankers
Trust Company and Chemical Bank, as Managing Agents, the
Agents and the Co-Agents named therein and the banks
named therein (which is incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1994).
10.31 Amendment No. 6 to the Amended and Restated Credit *
Agreement, dated as of
February 1, 1995 among TWE, Bankers Trust Company and
Chemical Bank, as Managing Agents, the Agents and the Co-
Agents named therein and the banks named therein (which
is incorporated herein by reference to Exhibit 10.7 to
TWE's 1994 Form 10-K).
10.32 Agreement of Limited Partnership, dated as of October 29, *
1992, as amended by the Letter Agreement, dated February
11, 1992, and the Letter Agreement dated June 23, 1992,
among the Registrant and certain of its subsidiaries,
ITOCHU Corporation and Toshiba Corporation (which is
incorporated herein by reference to Exhibit (A) to the
Registrant's Current Report on Form 8-K dated October 29,
1991 and Exhibits 10(b) and 10(c) to the Registrant's
Current Report on Form 8-K dated July 14, 1992).
10.33 Admission Agreement, dated as of May 16, 1993, between *
TWE and U S WEST, Inc. (which is incorporated herein by
reference to Exhibit 10(a) to TWE's Current Report on
Form 8-K dated May 16, 1993).
10.34 Amendment Agreement, dated as of September 14, 1993, *
amending the TWE Partnership Agreement, as amended (which
is incorporated herein by reference to Exhibit 3.2 to
TWE's 1993 Form 10-K).
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
10.35 Letter Agreement, dated May 16, 1993, between the *
Registrant and ITOCHU Corporation (which is incorporated
herein by reference to Exhibit 10(b) to TWE's Current
Report on Form 8-K dated May 16, 1993).
10.36 Letter Agreement, dated May 16, 1993, between the *
Registrant and Toshiba Corporation (which is incorporated
herein by reference to Exhibit 10(c) to TWE's Current
Report on Form 8-K dated May 16, 1993).
10.37 Option Agreement, dated as of September 15, 1993, between *
TWE and U S WEST, Inc. (which is incorporated herein by
reference to Exhibit 10.9 to TWE's 1993 Form 10-K).
10.38 Promissory Note of U S WEST Cable Corporation, dated *
September 15, 1993 (which is incorporated herein by
reference to Exhibit 10.10 to TWE's 1993 Form 10-K).
10.39 Guarantee, dated as of September 15, 1993, by U S WEST, *
Inc. of the Promissory Note of U S WEST Cable
Corporation, dated September 15, 1993 (which is
incorporated herein by reference to Exhibit 10.11 to
TWE's 1993 Form 10-K).
10.40 Contribution Agreement dated as of September 9, 1994 *
among TWE, Advance Publications, Inc., Newhouse
Broadcasting Corporation, Advance/Newhouse Partnership,
and Time Warner Entertainment-Advance/Newhouse
Partnership (which is incorporated herein by reference to
Exhibit 10(a) to TWE's Current Report on Form 8-K dated
September 9, 1994 ("TWE's September Form 8-K")).
10.41 Partnership Agreement, dated as of September 9, 1994, *
between TWE and Advance/Newhouse Partnership (which is
incorporated herein by reference to Exhibit 10(b) to
TWE's September Form 8-K).
10.42 Agreement and Plan of Merger dated as of January 26, *
1995, among KBLCOM Incorporated, Houston Industries
Incorporated, Registrant and TW KBLCOM Acquisition Sub
(which is incorporated herein by reference to Exhibit
2(a) to the Registrant's Current Report on Form 8-K dated
January 26, 1995).
10.43 Agreement and Plan of Merger dated as of February 6, *
1995, among Cablevision Industries Corporation, Alan
Gerry, Registrant and TW CVI Acquisition Sub (which is
incorporated herein by reference to Exhibit 2(a) to the
Registrant's Current Report on Form 8-K dated February 6,
1995 (the "February Form 8-K")).
10.44 Agreement and Plan of Merger dated as of February 6, *
1995, among Cablevision Properties, Inc., Alan Gerry and
Registrant (which is incorporated herein by reference to
Exhibit 2(b) to the February Form 8-K).
10.45 Agreement and Plan of Merger dated as of February 6, *
1995, among Cablevision Management Corporation of
Philadelphia, Alan Gerry and Registrant (which is
incorporated herein by reference to Exhibit 2(c) to the
February Form 8-K).
10.46 Purchase Agreement dated as of February 6, 1995, among *
Alan Gerry, Cablevision Industries of Delaware, Inc., ARA
Cablevision Inc., Cablevision Industries Limited
Partnership, Cablevision Industries of Tennessee L.P.,
Cablevision Industries of Saratoga Associates,
Cablevision of Fairhaven/Acushnet, Cablevision Industries
of Middle Florida, Inc., Cablevision Industries of
Florida, Inc. and Registrant (which is incorporated
herein by reference to Exhibit 2(d) to the February Form
8-K).
10.47 Supplemental Agreement dated as of February 6, 1995, *
including Annex A thereto, among Cablevision Industries
Corporation, Cablevision Industries of Delaware, Inc.,
ARA Cablevision Inc., Cablevision Industries Limited
Partnership, Cablevision Industries of Tennessee L.P.,
Cablevision Industries of Saratoga Associates,
Cablevision of Fairhaven/Acushnet, Cablevision Industries
of Middle Florida, Inc., Cablevision Industries of
Florida, Inc., Alan Gerry, Registrant and TW CVI
Acquisition Sub. (which is incorporated herein by
reference to Exhibit 2(e) to the February Form 8-K).
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
24 Powers of Attorney, dated as of March 30, 1995.
27 Financial Data Schedule.
99.1 The 1994 financial statements of the Time Warner Service
Partnerships and the report of independent auditors
thereon.
99.2 The 1994 financial statements and financial statement
schedule of Paragon Communications and the report of
independent accountants thereon.
99.3 Annual Report on Form 11-K of the Time Warner Employees'
Savings Plan for the year ended December 30, 1994 (to be
filed by amendment).
99.4 Annual Report on Form 11-K of the Time Warner Thrift Plan
for the year ended December 31, 1994 (to be filed by
amendment).
99.5 Annual Report on Form 11-K of the Time Warner Cable
Employees Savings Plan for the year ended December 31,
1994 (to be filed by amendment).
99.6 Annual Report on Form 11-K of the Paragon Communications
Employees Stock Savings Plan for the year ended December
31, 1994 (to be filed by amendment).
</TABLE>
--------
* Incorporated by reference.
The Registrant hereby agrees to furnish to the Securities and Exchange
Commission at its request copies of long-term debt instruments defining the
rights of holders of the Registrant's outstanding long-term debt that are not
required to be filed herewith.
vi
<PAGE>
EXHIBIT 10.5
As Amended through
February 14, 1995
TIME WARNER
1989 WCI REPLACEMENT STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner 1989 Replacement Stock Option Plan
(hereinafter the "Plan") is to provide for the granting of stock options to
certain employees and prospective employees of and advisors and consultants to
the Company or its Subsidiaries (other than officers and directors of the
Company). The general purpose of the Plan is to promote the interests of the
Company and its stockholders by providing to certain employees and prospective
employees of and advisors and consultants to the Company or its Subsidiaries
additional incentives to continue and increase their efforts with respect to,
the Company or its Subsidiaries. In particular, the Plan is intended to provide
replacement stock options to employees and prospective employees of and advisors
and consultants to WCI or its subsidiaries who (a) hold outstanding stock
options and/or stock appreciation rights previously granted under a WCI
Agreement or (b) were made commitments, prior to the Effective Time, to be
granted stock options upon the recommendations of (i) the Executive Compensation
and Stock Option Committee of the Board of Directors of WCI or (ii) the
management of WCI.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural)
have the meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement specified in
Section 11.
(b) "Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of law, the
stockholders of the Company) shall approve (i) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted
into cash, securities or other property, other than a merger of the Company
in which the holders of Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (ii) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or
<PAGE>
substantially all, of the assets of the Company, or (iii) the adoption of
any plan or proposal for the liquidation or dissolution of the Company.
(c) "Board" means the Board of Directors of the Company.
(d) "Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board ceased for any reason to constitute a majority thereof unless
the election, or the nomination for election by the Company's stockholders,
of each new director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of the
period.
(e) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto. Reference
to any specific Code section shall include any successor section.
(f) "Committee" means the Committee of the Board appointed
pursuant to Section 4.
(g) "Common Stock" means the common stock, par value $1.00 per
share, of the Company.
(h) "Company" means Time Warner Inc., a Delaware corporation.
(i) "Composite Tape" means the New York Stock Exchange Composite
Tape.
(j) "Control Purchase" means any transaction in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act), corporation or other entity (other than the Company or any employee
benefit plan sponsored by the Company or any Subsidiary) (i) shall purchase
any Common Stock (or securities convertible into Common Stock) for cash,
securities or any other consideration pursuant to a tender offer or
exchange offer, without the prior consent of the Board, or (ii) shall
become the "beneficial owner" (as such term is defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from the rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Rule 13d-3(d) in the case
of rights to acquire the Company's securities).
-2-
<PAGE>
(k) "Effective Date" means the date the Plan becomes effective
pursuant to Section 14.
(l) "Effective Time" means the date WCI becomes a wholly-owned
subsidiary of the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any successor
section.
(n) "Holder" means an employee or prospective employee of or an
advisor or consultant to the Company or a Subsidiary who has received an
Option under the Plan.
(o) "Option" means each stock option granted pursuant to the
terms of the Plan. Each Option is intended to be a nonqualified stock
option subject to section 83 of the Code, and not an "incentive stock
option," within the meaning of section 422A(b) of the Code.
(p) "Plan" has the meaning as ascribed thereto in Section 1.
(q) "SEC" means the Securities and Exchange Commission.
(r) "Subsidiary" means any present or future subsidiary of the
Company as such term is defined in section 425 of the Code and any present
or future trade or business, whether or not incorporated, controlled by or
under common control with the Company. An entity shall be deemed a
Subsidiary of the Company only for such periods as the requisite ownership
or control relationship is maintained.
(s) "Total Disability" means a permanent and total disability as
defined in section 22(e)(3) of the Code.
(t) "WCI" means Warner Communications Inc., a Delaware
corporation.
(u) "WCI Agreement" means the stock option and/or appreciation
rights plans maintained by WCI, including plans assumed by WCI (other than
stock option plans established by Lorimar Telepictures Corporation for non-
employees), and contractual stock appreciation rights not entered into
pursuant to a formal plan.
-3-
<PAGE>
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 12, the
----------------
maximum number of shares of Common Stock in respect of which Options may be
granted is 4,600,000. If an Option shall expire, terminate or be cancelled for
any reason without having been exercised, the shares of Common Stock subject to
such expired, terminated or cancelled portion of the Option shall not become
available for purposes of the Plan.
3.2. Character of Shares. Shares of Common Stock deliverable under
-------------------
the terms of the Plan may be, in whole or in part, authorized and unissued
shares of Common Stock or issued shares of Common Stock held in the Company's
treasury, or both.
3.3. Reservation of Shares. The Company shall at all times reserve a
---------------------
number of shares of Common Stock (authorized or unissued Common Stock, issued
Common Stock held in the Company's treasury, or both) equal to the maximum
number of shares that may be subject to Options granted under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject
------
to the express provisions of the Plan, the Board shall have plenary authority,
in its discretion, to grant Options under the Plan and to determine the terms
and conditions (which need not be identical) of all Options so granted,
including, without limitation, (a) the individuals to whom, and the time or
times at which, Options shall be granted or awarded, (b) the number of shares to
be subject to each Option, (c) when an Option can be exercised and whether in
whole or in installments, and (d) the form, terms and provisions of any
Agreement (which terms may be amended, subject to Section 13).
4.2. Factors to Consider. In making determinations hereunder, the
-------------------
Board may take into account the nature of the services rendered by the
respective employees, prospective employees, advisors and consultants, their
present and potential contributions to the success of the Company and its
Subsidiaries and such other factors as the Board in its discretion shall deem
relevant.
4.3. Interpretation. Subject to the express provisions of the Plan,
--------------
the Board shall have plenary authority to interpret the Plan, to prescribe,
amend and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determination of the Board on the matters referred to in this Section 4
shall be conclusive.
-4-
<PAGE>
4.4. Delegation to Committee. Notwithstanding anything to the
-----------------------
contrary contained herein, the Board may at any time, or from time to time,
appoint a Committee of at least three members, who shall be members of the
Compensation Committee of the Board (or such other persons as the Board may
designate), each of whom shall be a "disinterested person" within the meaning of
the rules and regulations of the SEC, and delegate to such Committee the
authority of the Board to administer the Plan. Upon such appointment and
delegation, the Committee shall have all the powers, privileges and duties of
the Board, and shall be substituted for the Board, in the administration of the
Plan, except for the power to appoint members of the Committee and to terminate,
modify or amend the Plan. The Board may from time to time appoint members of
any such Committee in substitution for or in addition to members previously
appointed, may fill vacancies in the Committee and may discharge the Committee.
The Committee shall select one of its members as its chairman and shall hold its
meetings at such times and places as it shall deem advisable. A majority of its
members shall constitute a quorum and all determinations shall be made by a
majority of such quorum. Any determination reduced to writing and signed by all
of the members shall be fully as effective as if it had been made by a majority
vote at a meeting duly called and held. Notwithstanding any of the foregoing,
the Board may designate one or more persons, who at the time of such designation
are not disinterested persons, to serve on the Committee effective upon the date
such person or persons qualify as disinterested persons.
5. ELIGIBILITY
5.1. General. Options may be granted only to employees or
-------
prospective employees of and advisors or consultants to the Company or any of
its Subsidiaries, who are not officers or directors of the Company; provided,
--------
however, that such employees, prospective employees, advisors or consultants
-------
hold stock options and/or stock appreciation rights which were previously
granted under a WCI Agreement or were made commitments to be granted options
based upon the recommendations of (i) the Executive Compensation and Stock
Option Committee of the Board of Directors of WCI or (ii) the management of
WCI. The exercise of Options granted to a prospective employee shall be
conditioned upon such person becoming an employee of the Company or any of its
Subsidiaries. For purposes of the Plan, the term "prospective employee" shall
mean any person who holds an outstanding offer of employment on specific terms
from the Company or any of its Subsidiaries. Options may be granted to
employees, advisors and consultants who hold or have held Options under any
other plan of the Company or its Subsidiaries.
-5-
<PAGE>
5.2. Ineligibility for Options. No person designated by the Board to
-------------------------
serve on the Committee effective at such future time that he or she qualifies as
a disinterested person shall be eligible to receive any Options under the Plan
during the period from the date such designation is made to the date such
designation becomes effective. Notwithstanding Section 5.1, no member of the
Committee, while serving as such, shall be eligible to receive an Option under
the Plan.
6. OPTIONS
6.1. Option Price. With respect to any Option granted on or after
------------
the Effective Time, the purchase price per share of Common Stock subject thereto
shall be an amount equal to the greater of $150 or the average of the closing
sales prices of a share of Common Stock, as reported on the Composite Tape, for
the 10 trading day period beginning with the first trading day immediately
following the Effective Time; and, with respect to any Option granted prior to
the Effective Time, the purchase price per share of Common Stock subject thereto
shall be an amount equal to the WCI stock option or commitment exercise price
per share, as the case may be, divided by .465.
6.2. Term of Options. The term of each Option shall be for such
---------------
period as the Board shall determine, as set forth in the applicable Agreement.
6.3. Exercise of Options. An Option granted under the Plan shall
-------------------
become (and remain) exercisable during the term of the Option to the extent
provided in the applicable Agreement and this Plan and, unless the Agreement
otherwise provides, may be exercised to the extent exercisable, in whole or in
part, at any time and from time to time during such term; provided, however,
-------- -------
that subsequent to the grant of an Option, the Board, at any time before
complete termination of such Option, may accelerate the time or times at which
such Option may be exercised in whole or in part (without reducing the term of
such Option).
6.4. Manner of Exercise. Payment of the Option purchase price shall
------------------
be made in cash or in whole shares of Common Stock already owned by the Holder
or, partly in cash and partly in such Common Stock; provided, however, that such
-------- -------
payment may be made in whole or in part in shares of Common Stock only if and to
the extent permitted by the applicable Agreement. An Option shall be exercised
by written notice to the Company upon such terms and conditions as provided in
the Agreement. The Company shall effect the transfer of the shares of Common
Stock purchased under the Option as soon as practicable, and within a reasonable
time thereafter such transfer shall be evidenced on the books of the Company.
No
-6-
<PAGE>
Holder or other person exercising an Option shall have any of the rights of a
stockholder of the Company with respect to shares of Common Stock subject to an
Option granted under the Plan until due exercise and full payment has been made.
No adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date of such exercise and full payment.
6.5. Nontransferability of Options. Options shall not be
-----------------------------
transferable other than by will or the laws of descent and distribution, and
Options may be exercised during the lifetime of the Holder thereof only by such
Holder (or his or her court appointed legal representative).
7. ACCELERATION OF OPTIONS
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period in
any Agreement or in the Plan or in the event of any Approved Transaction, Board
Change or Control Purchase, unless the applicable Agreement provides otherwise,
each outstanding Option granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby.
8. TERMINATION OF EMPLOYMENT
8.1. General. If a Holder's employment shall terminate prior to the
-------
complete exercise of an Option, then such Option shall thereafter be exercisable
solely to the extent provided in the applicable Agreement; provided, however,
-------- -------
that (a) no Option may be exercised after the scheduled expiration date of such
Option; (b) if the Holder's employment terminates by reason of death or Total
Disability, the Option shall remain exercisable for a period of at least one
year following such termination (but not later than the scheduled expiration of
such Option); and (c) any termination by the Company for cause will be treated
in accordance with the provisions of Section 8.2.
8.2. Termination by Company for Cause. If a Holder's employment with
--------------------------------
the Company or a Subsidiary shall be terminated by the Company or such
Subsidiary prior to the exercise of any Option for cause (for these purposes,
cause shall have the meaning ascribed thereto in any employment agreement to
which such Holder is a party or, in the absence thereof, shall include but not
be limited to, insubordination, dishonesty, incompetence, moral turpitude, other
misconduct of any kind and the refusal to perform his duties and
responsibilities for any reason other than illness or incapacity; provided,
--------
however, that if such termination occurs within 12 months after an Approved
-------
-7-
<PAGE>
Transaction, Control Purchase or Board Change, termination for cause shall mean
only a felony conviction for fraud, misappropriation or embezzlement), then all
Options held by such Holder shall immediately terminate.
8.3. Special Rule. Notwithstanding any other provision of the Plan,
------------
the Board may provide in the applicable Agreement that the Option shall become
and/or remain exercisable at rates and times at variance with the rules
otherwise herein set forth; provided, however, that any such Agreement
-------- -------
provisions at variance with the exercisability rules otherwise set forth herein
shall be effective only if reflected in the terms of an employment agreement
approved or ratified by the Board.
8.4. Miscellaneous. The Board may determine whether any given leave
-------------
of absence constitutes a termination of employment. Options granted under the
Plan shall not be affected by any change of employment so long as the Holder
continues to be an employee of the Company or a Subsidiary.
9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Option shall confer on any
Holder any right to continue in the employ of the Company or any of its
Subsidiaries or interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of the Holder at any time, with or
without cause; subject, however, to the provisions of any employment agreement
------- -------
between the Holder and Company or any Subsidiary.
10. NONALIENATION OF BENEFITS
No right or benefit under the Plan shall be subject to anticipation,
alienation, sale, assignment, hypothecation, pledge, exchange, transfer,
encumbrance or charge, and any attempt to anticipate, alienate, sell, assign,
hypothecate, pledge, exchange, transfer, encumber or charge the same shall be
void. No right or benefit hereunder shall in any manner be liable for or
subject to the debts, contracts, liabilities or torts of the person entitled to
such benefits.
11. WRITTEN AGREEMENT
Each grant of an Option shall be evidenced by a stock option
agreement, in such form and containing such terms and provisions not
inconsistent with the provisions of the Plan as the Board from time to time
shall approve. Subject to Section 14, the effective date of the granting of an
Option shall be the date on which the Board approves such grant or such later
date
-8-
<PAGE>
on which any conditions to the effectiveness of such grant shall have been
satisfied. Each grantee of an Option shall be notified promptly of such grant
and a written Agreement shall be promptly executed and delivered by the Company
and the grantee, provided that such grant of Options shall terminate if such
written Agreement is not signed by such grantee (or his attorney) and delivered
to the Company within 60 days after the date the Board approved such grant or
such later date on which conditions to the effectiveness of such grant shall
have been satisfied. Any such written Agreement may contain (but shall not be
required to contain) such provisions as the Board deems appropriate to ensure
that the penalty provisions of section 4999 of the Code will not apply to any
stock or cash received by the Holder from the Company.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes the character or amount of the
Common Stock while any portion of any Option theretofore granted under the Plan
is outstanding but unexercised or unvested, the Board shall make such adjustment
in the character and number of shares subject to such Option, and in the option
price, as shall be applicable, equitable and appropriate in order to make such
Option, immediately after any such change, as nearly as may be practicable,
equivalent to such Option, immediately prior to any such change. If any merger,
consolidation or similar transaction affects the Common Stock subject to any
unexercised or unvested Option theretofore granted under the Plan, the Board or
any surviving or acquiring corporation shall take such action as is equitable
and appropriate to substitute a new award for such Option or to assume such
Option in order to make such new or assumed Option as nearly as may be
practicable, equivalent to the old Option. If any such change or transaction
shall occur, the number and kind of shares for which an Option may thereafter be
granted under the Plan shall be adjusted to give effect thereto.
13. TERMINATION AND AMENDMENT
13.1. General. Unless the Plan shall theretofore have been
-------
terminated as hereinafter provided, no Options may be granted under the Plan on
or after the sixtieth (60th) day following the Effective Time. The Board may at
any time prior to the sixtieth (60th) day following the Effective Time terminate
the Plan, and the Board may at any time modify or amend the Plan in such
respects as it shall deem advisable; provided, however, that any such
-------- -------
modification or amendment shall comply with all applicable laws, applicable
stock exchange
-9-
<PAGE>
listing requirements, and applicable requirements for exemption (to the extent
necessary) under Rule 16b-3 under the Exchange Act.
13.2. Modification. No termination, modification or amendment of the
------------
Plan may, without the consent of the person to whom any Option shall theretofore
have been granted, adversely affect the rights of such person with respect to
such Option. No modification, extension, renewal or other change in any Option
granted under the Plan shall be made after the grant of such Option, unless the
same is consistent with the provisions of the Plan. With the consent of the
Holder and subject to the terms and conditions of the Plan (including Section
13.1), the Board may amend outstanding Agreements with any Holder, including,
without limitation, any amendment which would (a) accelerate the time or times
at which the Option may be exercised and/or (b) extend the scheduled expiration
date of the Option. Without limiting the generality of the foregoing, the Board
may but only with the Holder's consent, agree to cancel any Option under the
Plan and issue a new Option in substitution therefor, provided that the Option
so substituted shall satisfy all of the requirements of the Plan as of the date
such substitute Option is granted.
14. EFFECTIVENESS OF THE PLAN
The Plan shall become effective at the time it is duly approved by the
Board. Prior to the Effective Date, the Board may, in its discretion, grant or
authorize the granting of Options under the Plan as if the Effective Date had
occurred, provided that the exercise of Options so granted shall be expressly
subject to the occurrence of the Effective Date.
15. GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company with respect to Options shall be subject
to all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, the Company shall use its reasonable efforts to comply with
any legal requirements (a) to maintain a registration statement in effect under
the Securities Act of 1933 with respect to all shares of Common Stock that may
be issued to Holders under the Plan, and (b) to file in a timely manner all
reports required to be filed by it under the Exchange Act.
-10-
<PAGE>
16. WITHHOLDING
The Company's obligation to deliver shares of Common Stock in respect
of any Option granted under the Plan shall be subject to applicable federal,
state and local tax withholding requirements. Federal, state and local
withholding taxes paid by a Holder upon the exercise of any Option may be paid
in shares of Common Stock upon such terms and conditions as the Board shall
determine; provided, however, that the Board in its sole discretion may
-------- -------
disapprove such payment and require that such taxes be paid in cash.
17. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
18. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Option, each Holder shall be deemed to have agreed
that such Option, is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment under any pension, retirement or other employee benefit
plan of the Company or any Subsidiary. In addition, each beneficiary of a
deceased Holder shall be deemed to have agreed that such Option, as applicable,
will not affect the amount of any life insurance coverage, if any, provided by
the Company on the life of the Holder which is payable to such beneficiary under
any life insurance plan covering employees of the Company or any Subsidiary.
19. GOVERNING LAW
The Plan shall be governed by, and construed in accordance
with, the laws of the State of New York.
-11-
<PAGE>
EXHIBIT 10.7
As Amended through
November 17, 1994
TIME WARNER INC.
1994 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner Inc. 1994 Stock Option Plan (hereinafter the
"Plan") is to provide for the granting of nonqualified stock options and stock
appreciation rights to certain employees of and consultants and advisors to Time
Warner Inc. and its Subsidiaries in recognition of the valuable services
provided, and contemplated to be provided, by such employees, consultants and
advisors. The general purpose of the Plan is to promote the interests of Time
Warner and its stockholders and to reward dedicated employees, consultants and
advisors of Time Warner and its Subsidiaries by providing them additional
incentives to continue and increase their efforts with respect to, and to remain
in the employ of, Time Warner or its Subsidiaries. This plan is being adopted
in connection with the development of an overall long-term compensation program
for Time Warner and its Subsidiaries.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement and stock
appreciation rights agreement specified in Section 12, both individually
and collectively, as the context so requires.
(b) "Approved Transaction" means any transaction in which the Board
(or, if approval of the Board is not required as a matter of law, the
stockholders of Time Warner) shall approve (i) any consolidation or merger
of Time Warner in which Time Warner is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted
into cash, securities or other property, other than a merger of Time Warner
in which the
<PAGE>
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (ii) any sale, lease, exchange, or other
transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of Time Warner, or (iii) the adoption
of any plan or proposal for the liquidation or dissolution of Time Warner.
(c) "Award" means grants of Options and/or SARs under this Plan.
(d) "Board" means the Board of Directors of Time Warner.
(e) "Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire
Board ceased for any reason to constitute a majority thereof unless the
election, or the nomination for election by Time Warner's stockholders, of
each new director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of the
period.
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute or statutes thereto. Reference to
any specific Code section shall include any successor section.
(g) "Committee" means the Committee comprised of members of the Board
appointed pursuant to Section 4.
(h) "Common Stock" means the common stock, par value $1.00 per share,
of Time Warner.
(i) "Composite Tape" means the New York Stock Exchange Composite
Tape.
(j) "Control Purchase" means any transaction in which any person (as
such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act), corporation or other entity (other than Time Warner or any employee
benefit plan sponsored by Time Warner or any of its Subsidiaries) (i) shall
purchase any Common Stock (or securities convertible into Common Stock) for
cash, securities or any other consideration pursuant to a tender offer or
exchange offer,
-2-
<PAGE>
without the prior consent of the Board, or (ii) shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Time Warner
representing 20% or more of the combined voting power of the then
outstanding securities of Time Warner ordinarily (and apart from the rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Rule 13d-3(d) in the case
of rights to acquire Time Warner's securities).
(k) "Effective Date" means the date the Plan becomes effective
pursuant to Section 15.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any successor
section.
(m) "Fair Market Value" of a share of Common Stock means the average
of the high and low sales prices of a share of Common Stock on the
Composite Tape on the date in question, except as otherwise provided in
Section 6.5.
(n) "General SARs" means stock appreciation rights subject to the
terms of Section 6.5(b).
(o) "Holder" means an employee of or a consultant or advisor to Time
Warner or any of its Subsidiaries who has received an Award under this
Plan.
(p) "Limited SARs" means stock appreciation rights subject to the
terms of Section 6.5(c).
(q) "Minimum Price Per Share" means the highest gross price (before
brokerage commissions, soliciting dealers' fees and similar charges) paid
or to be paid for any share of Common Stock (whether by way of exchange,
conversion, distribution, liquidation or otherwise) in, or in connection
with, any Approved Transaction or Control Purchase which occurs at any time
during the period beginning on the sixtieth day prior to the date on which
Limited SARs are exercised and ending on the date on which Limited SARs are
exercised. If the consideration paid or to be paid in any such Approved
Transaction or Control Purchase shall consist, in whole or in part, of
consideration other than cash, the
-3-
<PAGE>
Board shall take such action, as in its judgment it deems appropriate, to
establish the cash value of such consideration, but such valuation shall
not be less than the value, if any, attributed to such consideration by any
other party to such Approved Transaction or Control Purchase.
(r) "Option" means any nonqualified stock option granted pursuant to
this Plan.
(s) "Plan" has the meaning ascribed thereto in
Section 1.
(t) "SARs" means General SARs and Limited SARs.
(u) "SEC" means the Securities and Exchange Commission.
(v) "Subsidiary" of a person means any present or future subsidiary
of such person as such term is defined in section 425 of the Code and any
present or future trade or business, whether or not incorporated,
controlled by or under common control with such person. An entity shall be
deemed a Subsidiary of a person only for such periods as the requisite
ownership or control relationship is maintained.
(w) "Time Warner" means Time Warner Inc., a Delaware corporation, and
any successor thereto.
(x) "Total Disability" means a permanent and total disability as
defined in section 22(e)(3) of the Code.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 12 and this
----------------
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is the sum of 1.5% (one and one-half percent) of the
number of shares of Common Stock outstanding on December 31, 1993 plus 1.25%
(one and one-quarter percent) of the number of shares of Common Stock
outstanding on December 31, 1994. If and to the extent that an Option shall
expire, terminate or be cancelled for any reason without having been exercised
(or without having been considered to have been exercised as provided in Section
6.5(a)), the shares of Common Stock subject to such expired, terminated or
cancelled portion of the Option shall again become available for purposes
-4-
<PAGE>
of the Plan.
3.2. Character of Shares. Shares of Common Stock deliverable under the
-------------------
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in Time Warner's treasury, or
both.
3.3. Reservation of Shares. Time Warner shall at all times reserve a
---------------------
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in Time Warner's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to the
------
express provisions of the Plan, the Board shall have plenary authority, in its
discretion, to grant Awards under the Plan and to determine the terms and
conditions (which need not be identical) of all Awards so granted, including
without limitation, (a) the individuals to whom, and the time or times at which,
Awards shall be granted or awarded, (b) the number of shares to be subject to
each Award, (c) when an Option or SAR can be exercised and whether in whole or
in installments, and (d) the form, terms and provisions of any Agreement (which
terms may be amended, subject to Section 14).
4.2. Factors to Consider. In making determinations hereunder, the Board
-------------------
may take into account the nature of the services rendered by the respective
employees, consultants or advisors, their dedication and past contributions to
Time Warner and its Subsidiaries, their present and potential contributions to
the success of Time Warner and its Subsidiaries and such other factors as the
Board in its discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
--------------
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on the matters referred to in this Section 4
shall be conclusive.
4.4. Delegation to Committee. Notwithstanding anything to
-----------------------
-5-
<PAGE>
the contrary contained herein, the Board may at any time, or from time to time,
appoint a Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board, and
shall be substituted for the Board, in the administration of the Plan to the
extent provided in such delegation, except for the power to appoint members of
the Committee and to terminate, modify or amend the Plan. The Board may from
time to time appoint members of any such Committee in substitution for or in
addition to members previously appointed, may fill vacancies in such Committee
and may discharge such Committee.
Any such Committee shall select one of its members as its chairman and
shall hold its meetings at such times and places as it shall deem advisable. A
majority of members shall constitute a quorum and all determinations shall be
made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
5. ELIGIBILITY
Awards may be made only to (a) employees of Time Warner or any of its
Subsidiaries (including officers and directors of any of Time Warner's
Subsidiaries), other than officers or directors of Time Warner who are subject
to Section 16 of the Exchange Act, (b) prospective employees of Time Warner or
any of its Subsidiaries and (c) consultants or advisors to Time Warner or any of
its Subsidiaries. The exercise of Options and SARs granted to a prospective
employee shall be conditioned upon such person becoming an employee of Time
Warner or any of its Subsidiaries. For purposes of the Plan, the term
"prospective employee" shall mean any person who holds an outstanding offer of
employment on specific terms from Time Warner or any of its Subsidiaries.
Awards may be made to employees, consultants and advisors who hold or have held
Awards under this Plan or any similar or other awards under any other plan of
Time Warner or its Subsidiaries.
6. OPTIONS AND SARS
-6-
<PAGE>
6.1. Option Prices. Subject to Section 5.2, the purchase price of the
-------------
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
6.2. Term of Options. The term of each Option shall be for such period as
---------------
the Board shall determine, as set forth in the applicable Agreement.
6.3. Exercise of Options. An Option granted under the Plan shall become
-------------------
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option). The Agreement may contain conditions precedent to the exercisability
of Options, including without limitation, the achievement of minimum performance
criteria.
6.4. Manner of Exercise. Payment of the Option purchase price shall be
------------------
made in cash or in whole shares of Common Stock already owned by the Holder or,
partly in cash and partly in such Common Stock; provided, however, that such
payment may be made in whole or in part in shares of Common Stock only if and to
the extent permitted by the applicable Agreement. An Option shall be exercised
by written notice to Time Warner upon such terms and conditions as provided in
the Agreement. Time Warner shall effect the transfer of the shares of Common
Stock purchased under the Option as soon as practicable, and within a reasonable
time thereafter such transfer shall be evidenced on the books of Time Warner.
No Holder or other person exercising an Option shall have any of the rights of a
stockholder of Time Warner with respect to shares of Common Stock subject to an
Option granted under the Plan until due exercise and full payment has been made.
No adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date of such due exercise and full payment.
6.5. SARs. (a) General Conditions. The Board may (but shall not be
----
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any
-7-
<PAGE>
Option (hereinafter called a "related Option"), with respect to all or a portion
of the shares of Common Stock subject to the related Option.
A SAR may be granted either concurrently with the grant of the related
Option or at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Subject to the terms and
provisions of this Section 6.5, each SAR shall be exercisable to the extent the
related Option is then exercisable (and may be subject to such additional
limitations on exercisability as the Agreement may provide), and in no event
after the complete termination or full exercise of the related Option. SARs
shall be exercisable in whole or in part upon notice to Time Warner upon such
terms and conditions as provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered to have
been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock in respect of which other Awards may be granted. Upon the exercise
or termination of the related Option, the SARs with respect thereto shall be
considered to have been exercised or terminated to the extent of the number of
shares of Common Stock with respect to which the related Option was so exercised
or terminated.
The provisions of Sections 4 and 6 through 21 (to the extent that such
provisions are applicable to Options) shall also be applicable to SARs unless
the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the time the
related Option is exercisable and subject to the terms and provisions of this
Section 6.5, upon the exercise of General SARs, the Holder thereof shall be
entitled to receive consideration (in the form hereinafter provided) equal in
value to the excess of the Fair Market Value on the date of exercise of the
shares of Common Stock with respect to which such General SARs have been
exercised over the aggregate related Option purchase price for such shares;
provided, however, that the Board may, in any Agreement granting General SARs
provide that the appreciation realizable upon exercise thereof shall be measured
from a base higher than the related Option purchase price.
Upon the exercise of a General SAR, the Holder may specify
-8-
<PAGE>
the form of consideration to be received by such Holder, which shall be in
shares of Common Stock (valued at Fair Market Value on the date of exercise of
such General SAR), or in cash, or partly in cash and partly in shares of Common
Stock. Any election by the Holder of a General SAR to receive cash in full or
partial settlement of such General SAR shall comply with all applicable laws and
shall be subject to the discretion of the Board to settle General SARs only in
shares of Common Stock if necessary or advisable in the judgment of the Board to
preserve pooling of interests accounting treatment for any proposed transaction
involving the Company. Unless otherwise specified in the applicable Agreement,
the number of General SARs which may be exercised for cash, or partly for cash
and partly for shares of Common Stock, during any calendar quarter, may not
exceed 20% of the aggregate number of shares of Common Stock originally subject
to the related Option (as such original number, without giving effect to the
exercise of any portion of the related Option, shall have been retroactively
adjusted in accordance with Section 13 or any corresponding provisions of an
applicable Agreement).
For purposes of this Section 6.5, the date of exercise of a General SAR
shall mean the date on which Time Warner shall have received notice from the
Holder of the General SAR of the exercise of such General SAR.
(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board
Change, and (b) ending on the ninetieth day (or such other date specified in the
Agreement) following such date. The effective date of exercise of a Limited SAR
shall be deemed to be the date on which Time Warner shall have received notice
from the Holder of the exercise thereof.
Upon the exercise of Limited SARs granted in connection with an Option,
except as otherwise provided in the Agreement and the immediately succeeding
sentence, the Holder thereof shall receive in cash an amount equal to the
product computed by multiplying (a) the excess of (i) the higher of (A) the
Minimum Price Per Share, or (B) the highest reported closing sales price of a
share of Common Stock as reported on the Composite Tape at any time during the
period beginning on the sixtieth day prior to the date on which such Limited
SARs are exercised and ending on the date on which such Limited SARs are
exercised over (ii) the per share Option price of the related Nonqualified Stock
Option, by (b) the
-9-
<PAGE>
number of shares of Common Stock with respect to which such Limited SARs are
being exercised. The Board shall have the discretion to settle Limited SARs by
the delivery of Common Stock rather than cash if in the judgment of the Board
such action is necessary or advisable to preserve pooling of interests
accounting treatment for any proposed transaction involving the Company.
6.6. Nontransferability of Options and SARs. Except as set forth in this
--------------------------------------
Section 6.6, Options and SARs shall not be transferable other than by will or
the laws of descent and distribution, and Options and SARs may be exercised
during the lifetime of the Holder thereof only by such Holder (or his or her
court appointed legal representative). The Agreement may provide that Options
and SARs are transferable to members of a Holder's immediate family, to trusts
for the benefit of such immediate family members and to partnerships in which
such family members are the only partners.
7. ACCELERATION OF OPTIONS AND SARS
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period in
any Agreement or in the Plan or in the event of any Approved Transaction, Board
Change or Control Purchase, unless the applicable Agreement provides otherwise,
each outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby.
8. TERMINATION OF EMPLOYMENT
8.1. General. If a Holder's employment shall terminate prior to the
-------
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the applicable Agreement; provided, however, that (a) no
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates by reason of death or Total Disability,
the Option shall remain exercisable for a period of at least one year following
such termination (but not later than the scheduled expiration of such Option);
and (c) any termination by the employing company for cause will be treated in
accordance with the provisions of Section 8.2.
-10-
<PAGE>
8.2. Termination for Cause. If a Holder's employment with Time Warner or
---------------------
any of its Subsidiaries shall be terminated by Time Warner or such Subsidiary
prior to the exercise of any Option for cause (for these purposes, cause shall
have the meaning ascribed thereto in any employment agreement to which such
Holder is a party or, in the absence thereof, shall include but not be limited
to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct
of any kind and the refusal to perform his duties and responsibilities for any
reason other than illness or incapacity; provided, however, that if such
termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, termination for cause shall mean only a felony
conviction for fraud, misappropriation or embezzlement), then all Options held
by such Holder shall immediately terminate.
8.3. Special Rule. Notwithstanding any other provision of the Plan, the
------------
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
8.4. Miscellaneous. The Board may determine whether any given leave of
-------------
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or one of its Subsidiaries.
9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any Holder
any right to continue in the employ of Time Warner or any of its Subsidiaries or
interfere in any way with the right of Time Warner or a Subsidiary to terminate
the employment of the Holder at any time, with or without cause; subject,
however, to the provisions of any employment agreement between the Holder and
Time Warner or any of its Subsidiaries.
10. NONALIENATION OF BENEFITS
Except as specifically provided in Section 6.6, no right or
-11-
<PAGE>
benefit under the Plan shall be subject to anticipation, alienation, sale,
assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge,
and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void. No right or
benefit hereunder shall in any manner be liable for or subject to the debts,
contracts, liabilities or torts of the person entitled to such benefits.
11. WRITTEN AGREEMENT
Each grant of an Option shall be evidenced by a stock option agreement and
each SAR shall be evidenced by a stock appreciation rights agreement, each in
such form and containing such terms and provisions not inconsistent with the
provisions of the Plan as the Board from time to time shall approve; provided,
however, that such Awards may be evidenced by a single agreement. The effective
date of the granting of an Award shall be the date on which the Board approves
such grant. Each grantee of an Option or SAR shall be notified promptly of such
grant and a written Agreement shall be promptly executed and delivered by Time
Warner and the grantee, provided that such grant of Options or SARs shall
terminate if such written Agreement is not signed by such grantee (or his
attorney) and delivered to Time Warner within 60 days after the date the Board
approved such grant or if the effectiveness of such grant is conditioned upon
the grantee becoming an employee of Time Warner or one of its Subsidiaries, the
execution by the grantee of an employment agreement with Time Warner or one of
its Subsidiaries or any other similar condition, within 60 days after the
occurrence of such condition, if later. Any such written Agreement may contain
(but shall not be required to contain) such provisions as the Board deems
appropriate to ensure that the penalty provisions of section 4999 of the Code
will not apply to any stock or cash received by the Holder from Time Warner or
any of its Subsidiaries.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes the character or amount of the
Common Stock while any portion of any Award theretofore granted under the Plan
is outstanding but unexercised, the Board shall make such adjustments in the
character and number of shares subject to such Award and, in the
-12-
<PAGE>
option price, as shall be applicable, equitable and appropriate in order to make
such Award, immediately after any such change, as nearly as may be practicable,
equivalent to such Award, immediately prior to any such change. If any merger,
consolidation or similar transaction affects the Common Stock subject to any
unexercised Award theretofore granted under the Plan, the Board or any surviving
or acquiring corporation shall take such action as is equitable and appropriate
to substitute a new award for such Award or to assume such Award in order to
make such new or assumed Award, as nearly as may be practicable, equivalent to
the old Award. If any such change or transaction shall occur, the number and
kind of shares for which Awards may thereafter be granted under the Plan shall
be adjusted to give effect thereto.
13. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine to
the effect that if a Holder elects to sell all or any shares of Common Stock
that such Holder acquired upon the exercise of an Option awarded under the Plan,
then such Holder shall not sell such shares unless such Holder shall have first
offered in writing to sell such shares to Time Warner at Fair Market Value on a
date specified in such offer (which date shall be at least three business days
and not more than 10 business days following the date of such offer). In any
such event, certificates representing shares issued upon exercise of Options
shall bear a restrictive legend to the effect that transferability of such
shares are subject to the restrictions contained in the Plan and the applicable
Agreement and Time Warner may cause the registrar of its Common Stock to place a
stop transfer order with respect to such shares.
14. TERMINATION AND AMENDMENT
14.1. General. Unless the Plan shall theretofore have been terminated as
-------
hereinafter provided, no Awards may be made under the Plan on or after the tenth
anniversary of the Effective Date. The Board may at any time prior to the tenth
anniversary of the Effective Date terminate the Plan, and the Board may at any
time modify or amend the Plan in such respects as it shall deem advisable;
provided, however, that any such modification or amendment shall comply with all
applicable laws and stock exchange listing requirements.
-13-
<PAGE>
14.2. Modification. No termination, modification or amendment of the Plan
------------
may, without the consent of the person to whom any Award shall theretofore have
been granted, adversely affect the rights of such person with respect to such
Award. No modification, extension, renewal or other change in any Award granted
under the Plan shall be made after the grant of such Award, unless the same is
consistent with the provisions of the Plan. With the consent of the Holder and
subject to the terms and conditions of the Plan (including Section 14.1), the
Board may amend outstanding Agreements with any Holder, including, without
limitation, any amendment which would (a) accelerate the time or times at which
the Award may be exercised and/or (b) extend the scheduled expiration date of
the Award. Without limiting the generality of the foregoing, the Board may but
solely with the Holder's consent, agree to cancel any Award under the Plan and
issue a new Award in substitution therefor, provided that the Award so
substituted shall satisfy all of the requirements of the Plan as of the date
such new Award is made.
15. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the Board of Directors of
Time Warner.
16. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject to
all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner shall use its reasonable efforts to comply with
any legal requirements (a) to maintain a registration statement in effect under
the Securities Act of 1933 with respect to all shares of Common Stock that may
be issued to Holders under the Plan, and (b) to file in a timely manner all
reports required to be filed by it under the Exchange Act.
-14-
<PAGE>
17. WITHHOLDING
Time Warner's obligation to deliver shares of Common Stock or pay cash in
respect of any Award under the Plan shall be subject to applicable federal,
state and local tax withholding requirements. Federal, state and local
withholding taxes paid by a Holder upon the exercise of any Option may be paid
in shares of Common Stock upon such terms and conditions as the Board shall
determine; provided, however, that the Board in its sole discretion may
disapprove such payment and require that such taxes be paid in cash.
18. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of applicable law, then such terms or provisions shall be deemed
inoperative to the extent necessary to avoid the conflict with applicable law
without invalidating the remaining provisions hereof.
19. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as creating
any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
20. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award, each Holder shall be deemed to have agreed that
such Award is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment under any pension, retirement or other employee benefit
plan of Time Warner or any of its Subsidiaries. In addition, each beneficiary
of a deceased Holder shall be deemed to have agreed that such Award will not
affect the amount of any life insurance coverage, if any, provided by Time
Warner or any of its Subsidiaries on the life of the Holder which is payable to
such beneficiary under any life insurance plan covering employees of
-15-
<PAGE>
Time Warner or any of its Subsidiaries.
21. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the laws
of the State of New York.
-16-
<PAGE>
EXHIBIT 10.8
As Amended through
May 14, 1991
TIME WARNER
CORPORATE GROUP
STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Time Warner Corporate Group Stock Incentive Plan
(hereinafter the "Plan"), is to provide for the granting of stock options, stock
appreciation rights and restricted shares to certain employees of Time Warner
Inc., Warner Communications Inc., Time Warner Enterprises, Inc. and their
respective Subsidiaries in recognition of the valuable services provided, and
contemplated to be provided, by such employees. The general purpose of the Plan
is to promote the interests of Time Warner and its stockholders and to reward
dedicated employees of these companies by providing such employees additional
incentives to continue and increase their efforts with respect to, and to remain
in the employ of, Time Warner or its Subsidiaries. This plan is being adopted
in connection with the development of an overall long-term compensation program
for these companies and it is expected that certain Options granted hereunder
will become exercisable only if certain performance criteria are met.
2. CERTAIN DEFINITIONS
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the stock option agreement, stock appreciation
rights agreement and the restricted shares agreement specified in Section
12, both individually and collectively, as the context so requires.
(b) "Approved Transaction" means any transaction in which the Board
(or, if approval of the Board is not required as a matter of law, the
stockholders of Time Warner) shall approve (i) any consolidation or merger
of Time Warner in which Time Warner is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted
into cash, securities or other property, other than a merger of Time Warner
in which the holders of Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the
<PAGE>
surviving corporation immediately after the merger, or (ii) any sale,
lease, exchange, or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of Time
Warner, or (iii) the adoption of any plan or proposal for the liquidation
or dissolution of Time Warner.
(c) "Award" means grants of Options, SARs and/or Restricted Shares
under this Plan.
(d) "Board" means the Board of Directors of Time Warner.
(e) "Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire
Board ceased for any reason to constitute a majority thereof unless the
election, or the nomination for election by Time Warner's stockholders, of
each new director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of the
period.
(f) "Cash Award" means the amount of cash, if any, to be paid to an
employee pursuant to Section 7.5.
(g) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute or statutes thereto. Reference to
any specific Code section shall include any successor section.
(h) "Committee" means the Committee comprised of members of the Board
appointed pursuant to Section 4.
(i) "Common Stock" means the common stock, par value $1.00 per share,
of Time Warner.
(j) "Composite Tape" means the New York Stock Exchange Composite
Tape.
(k) "Control Purchase" means any transaction in which any person (as
such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act), corporation or other entity (other than Time Warner or any employee
benefit plan sponsored by Time Warner or any if its Subsidiaries) (i) shall
purchase any Common Stock (or securities convertible into Common Stock) for
cash, securities or any other consideration pursuant to a tender offer or
exchange offer,
-2-
<PAGE>
without the prior consent of the Board, or (ii) shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Time Warner
representing 20% or more of the combined voting power of the then
outstanding securities of Time Warner ordinarily (and apart from the rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Rule 13d-3(d) in the case
of rights to acquire Time Warner's securities).
(l) "Dividend Equivalents" means, with respect to Restricted Shares
to be issued at the end of the Restriction Period, to the extent specified
by the Board only, an amount equal to the regular cash dividends and all
other distributions (or the economic equivalent thereof) which are payable
to stockholders of record during the Restriction Period on a like number of
shares of Common Stock.
(m) "Effective Date" means the date the Plan becomes effective
pursuant to Section 16.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any successor
section.
(o) "Fair Market Value" of a share of Common Stock means the average
of the high and low sales prices of a share of Common Stock on the
Composite Tape on the date in question, except as otherwise provided in
Section 6.5.
(p) "General SARs" means stock appreciation rights subject to the
terms of Section 6.5(b).
(q) "Holder" means an employee of Time Warner or any of its
Subsidiaries who has received an Award under this Plan.
(r) "ISO" means an incentive stock option within the meaning of
section 422A(b) of the Code.
(s) "Limited SARs" means stock appreciation rights subject to the
terms of Section 6.5(c).
(t) "Minimum Price Per Share" means the highest gross price (before
brokerage commissions, soliciting dealers'
-3-
<PAGE>
fees and similar charges) paid or to be paid for any share of Common Stock
(whether by way of exchange, conversion, distribution, liquidation or
otherwise) in, or in connection with, any Approved Transaction or Control
Purchase which occurs at any time during the period beginning on the
sixtieth day prior to the date on which Limited SARs are exercised and
ending on the date on which Limited SARs are exercised. If the
consideration paid or to be paid in any such Approved Transaction or
Control Purchase shall consist, in whole or in part, of consideration other
than cash, the Board shall take such action, as in its judgment it deems
appropriate, to establish the cash value of such consideration, but such
valuation shall not be less than the value, if any, attributed to such
consideration by any other party to such Approved Transaction or Control
Purchase.
(u) "Nonqualified Stock Option" means a stock option that is
designated as a nonqualified stock option.
(v) "Option" means any ISO or Nonqualified Stock Option.
(w) "Plan" has the meaning ascribed thereto in
Section 1.
(x) "Restricted Shares" means shares of Common Stock or the right to
receive shares of Common Stock, as the case may be, awarded pursuant to
Section 7.
(y) "Restriction Period" means a period of time beginning on the date
of each award of Restricted Shares and ending on the Valuation Date with
respect to such award.
(z) "Retained Distributions" has the meaning ascribed thereto in
Section 7.3.
(aa) "SARs" means General SARs and Limited SARs.
(bb) "SEC" means the Securities and Exchange Commission.
(cc) "Subsidiary" of a person means any present or future subsidiary
of such person as such term is defined in section 425 of the Code and any
present or future trade or business, whether or not incorporated,
controlled by or under common control with such person. An entity shall be
deemed a Subsidiary of a person only for such periods as the
-4-
<PAGE>
requisite ownership or control relationship is maintained.
(dd) "Time Warner" means Time Warner Inc., a Delaware corporation,
and any successor thereto.
(ee) "Total Disability" means a permanent and total disability as
defined in section 22(e)(3) of the Code.
(ff) "Valuation Date" with respect to any Restricted Shares awarded
hereunder means the date designated as such in the Agreement with respect
to such award of Restricted Shares pursuant to Section 7.
3. STOCK SUBJECT TO THE PLAN
3.1. Number of Shares. Subject to the provisions of Section 13 and this
----------------
Section 3, the maximum number of shares of Common Stock in respect of which
Awards may be granted is 325,000. If and to the extent that an Option shall
expire, terminate or be cancelled for any reason without having been exercised
(or without having been considered to have been exercised as provided in Section
6.5(a)), the shares of Common Stock subject to such expired, terminated or
cancelled portion of the Option shall again become available for purposes of the
Plan. In addition, any Restricted Shares which are forfeited under the terms of
the Plan or any Agreement shall again become available for purposes of the Plan.
3.2. Character of Shares. Shares of Common Stock deliverable under the
-------------------
terms of the Plan may be, in whole or in part, authorized and unissued shares of
Common Stock or issued shares of Common Stock held in Time Warner's treasury, or
both.
3.3. Reservation of Shares. Time Warner shall at all times reserve a
---------------------
number of shares of Common Stock (authorized and unissued Common Stock, issued
Common Stock held in Time Warner's treasury, or both) equal to the maximum
number of shares that may be subject to outstanding Awards and future Awards
under the Plan.
4. ADMINISTRATION
4.1. Powers. The Plan shall be administered by the Board. Subject to the
------
express provisions of the Plan, the Board shall have plenary authority, in its
discretion, to grant Awards under
-5-
<PAGE>
the Plan and to determine the terms and conditions (which need not be identical)
of all Awards so granted, including without limitation, (a) the purchase price,
if any, of each Restricted Share, (b) the individuals to whom, and the time or
times at which, Awards shall be granted or awarded, (c) the number of shares to
be subject to each Award, (d) whether an Option shall be an ISO or a
Nonqualified Stock Option, (e) when an Option or SAR can be exercised and
whether in whole or in installments, (f) the time or times and the conditions
subject to which Restricted Shares shall become vested and any Cash Awards shall
become payable, and (g) the form, terms and provisions of any Agreement (which
terms may be amended, subject to Section 15).
4.2. Factors to Consider. In making determinations hereunder, the Board
-------------------
may take into account the nature of the services rendered by the respective
employees, their dedication and past contributions to Time Warner and its
Subsidiaries, their present and potential contributions to the success of Time
Warner and its Subsidiaries and such other factors as the Board in its
discretion shall deem relevant.
4.3. Interpretation. Subject to the express provisions of the Plan, the
--------------
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind the rules and regulations relating to it and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The determinations of the Board on the matters referred to in this Section 4
shall be conclusive.
4.4. Delegation to Committee. Notwithstanding anything to the contrary
-----------------------
contained herein, the Board may at any time, or from time to time, appoint a
Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board, and
shall be substituted for the Board, in the administration of the Plan to the
extent provided in such delegation, except for the power to appoint members of
the Committee and to terminate, modify or amend the Plan. The Board may from
time to time appoint members of any such Committee in substitution for or in
addition to members previously appointed, may fill vacancies in such Committee
and may discharge such Committee.
Any such Committee shall select one of its members as its chairman and
shall hold its meeting at such times and places as
-6-
<PAGE>
it shall deem advisable. A majority of members shall constitute a quorum and
all determinations shall be made by a majority of such quorum. Any
determination reduced to writing and signed by all of the members shall be fully
as effective as if it had been made by a majority vote at a meeting duly called
and held.
5. ELIGIBILITY
5.1. General. Awards may be made only to (a) employees of Time Warner or
-------
any of its Subsidiaries (including officers and directors of any of Time
Warner's Subsidiaries), other than officers or directors of Time Warner who are
subject to Section 16 of the Exchange Act, and (b) prospective employees of Time
Warner or any of its Subsidiaries. The exercise of Options and SARs and the
vesting of Restricted Shares granted to a prospective employee shall be
conditioned upon such person becoming an employee of Time Warner or any of its
Subsidiaries. For purposes of the Plan, the term "prospective employee" shall
mean any person who holds an outstanding offer of employment on specific terms
from Time Warner or any of its Subsidiaries. Awards may be made to employees
who hold or have held Awards under this Plan or any similar or other awards
under any other plan of Time Warner or its Subsidiaries.
5.2. Special ISO Rule. No ISO shall be granted to an employee who, at the
----------------
time the ISO is granted, owns (or is considered as owning within the meaning of
section 425(d) of the Code) stock possessing more than 10% of the total combined
voting power of all classes of stock of Time Warner or any of its Subsidiaries,
unless at the time the ISO is granted the option price is at least 110% of the
Fair Market Value of the Common Stock subject to the ISO and the ISO by its
terms is not exercisable after the expiration of five years from the date it is
granted.
6. OPTIONS AND SARS
6.1. Option Prices. Subject to Section 5.2, the purchase price of the
-------------
Common Stock under each Option shall be determined by the Board and set forth in
the applicable Agreement, but shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of grant.
6.2. Term of Options. The term of each Option shall be for such period as
---------------
the Board shall determine, as set forth in the
-7-
<PAGE>
applicable Agreement, but not more than 10 years from the date of grant in the
case of an ISO (except as provided in Section 5.2).
6.3. Exercise of Options. An Option granted under the Plan shall become
-------------------
(and remain) exercisable during the term of the Option to the extent provided in
the applicable Agreement and this Plan and, unless the Agreement otherwise
provides, may be exercised to the extent exercisable, in whole or in part, at
any time and from time to time during such term; provided, however, that
subsequent to the grant of an Option, the Board, at any time before complete
termination of such Option, may accelerate the time or times at which such
Option may be exercised in whole or in part (without reducing the term of such
Option). The Agreement may contain conditions precedent to the exercisability
of Options, including without limitation, the achievement of minimum performance
criteria.
6.4. Manner of Exercise. Payment of the Option purchase price shall be
------------------
made in cash or in whole shares of Common Stock already owned by the Holder or,
partly in cash and partly in such Common Stock; provided, however, that such
payment may be made in whole or in part in shares of Common Stock only if and to
the extent permitted by the applicable Agreement. An Option shall be exercised
by written notice to Time Warner upon such terms and conditions as provided in
the Agreement. Time Warner shall effect the transfer of the shares of Common
Stock purchased under the Option as soon as practicable, and within a reasonable
time thereafter such transfer shall be evidenced on the books of Time Warner.
No Holder or other person exercising an Option shall have any of the rights of a
stockholder of Time Warner with respect to shares of Common Stock subject to an
Option granted under the Plan until due exercise and full payment has been made.
No adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date of such due exercise and full payment.
6.5. SARS. (a) General Conditions. The Board may (but shall not be
obligated to) grant General SARs and/or Limited SARs pursuant to the provisions
of this Section 6.5 to a Holder of any Option (hereinafter called a "related
Option"), with respect to all or a portion of the shares of Common Stock subject
to the related Option.
A SAR may be granted either concurrently with the grant of the related
Option or at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Subject to the terms and
provisions of this
-8-
<PAGE>
Section 6.5, each SAR shall be exercisable to the extent the related Option is
then exercisable (and may be subject to such additional limitations on
exercisability as the Agreement may provide), and in no event after the complete
termination or full exercise of the related Option. SARs shall be exercisable in
whole or in part upon notice to Time Warner upon such terms and conditions as
provided in the Agreement.
Upon the exercise of SARs, the related Option shall be considered to have
been exercised to the extent of the number of shares of Common Stock with
respect to which such SARs are exercised and shall be considered to have been
exercised to that extent for purposes of determining the number of shares of
Common Stock in respect of which other Awards may be granted. Upon the exercise
or termination of the related Option, the SARs with respect thereto shall be
considered to have been exercised or terminated to the extent of the number of
shares of Common Stock with respect to which the related Option was so exercised
or terminated.
The provisions of Sections 4, 6 and 8 through 22 (to the extent that such
provisions are applicable to Options) shall also be applicable to SARs unless
the context otherwise requires.
(b) General SARs. General SARs shall be exercisable only at the time the
related Option is exercisable and subject to the terms and provisions of this
Section 6.5, upon the exercise of General SARs, the Holder thereof shall be
entitled to receive consideration (in the form hereinafter provided) equal in
value to the excess of the Fair Market Value on the date of exercise of the
shares of Common Stock with respect to which such General SARs have been
exercised over the aggregate related Option purchase price for such shares;
provided, however, that the Board may, in any Agreement granting General SARs
provide that the appreciation realizable upon exercise thereof shall be measured
from a base higher than the related Option purchase price.
Upon the exercise of a General SAR, the Holder may specify the form of
consideration to be received by such Holder, which shall be in shares of Common
Stock (valued at Fair Market Value on the date of exercise of such General SAR),
or in cash, or partly in cash and partly in shares of Common Stock. Any
election by the Holder of a General SAR to receive cash in full or partial
settlement of such General SAR shall comply with all applicable laws. Unless
otherwise specified in the applicable Agreement, the number of General SARs
which may be exercised for cash, or partly for cash and partly for shares of
Common Stock,
-9-
<PAGE>
during any calendar quarter, may not exceed 20% of the aggregate number of
shares of Common Stock originally subject to the related Option (as such
original number, without giving effect to the exercise of any portion of the
related Option, shall have been retroactively adjusted in accordance with
Section 13 or any corresponding provisions of an applicable Agreement).
For purposes of this Section 6.5, the date of exercise of a General SAR
shall mean the date on which Time Warner shall have received notice from the
Holder of the General SAR of the exercise of such General SAR.
(c) Limited SARs. Limited SARs may be exercised only during the period
(a) beginning on the first day following either (i) the date of an Approved
Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board
Change, and (b) ending on the ninetieth day (or such other date specified in the
Agreement) following such date. The effective date of exercise of a Limited SAR
shall be deemed to be the date on which Time Warner shall have received notice
from the Holder of the exercise thereof.
Upon the exercise of Limited SARs granted in connection with an ISO, except
as otherwise provided in the Agreement, the Holder thereof shall receive in cash
an amount equal to the excess of the Fair Market Value on the date of exercise
of such Limited SARs of the shares of Common Stock with respect to which such
Limited SARs shall have been exercised over the aggregate related Option
purchase price for such shares.
Upon the exercise of Limited SARs granted in connection with a Nonqualified
Stock Option, except as otherwise provided in the Agreement, the Holder thereof
shall receive in cash an amount equal to the product computed by multiplying (a)
the excess of (i) the higher of (A) the Minimum Price Per Share, or (B) the
highest reported closing sales price of a share of Common Stock as reported on
the Composite Tape at any time during the period beginning on the sixtieth day
prior to the date on which such Limited SARs are exercised and ending on the
date on which such Limited SARs are exercised over (ii) the per share Option
price of the related Nonqualified Stock Option, by (b) the number of shares of
Common Stock with respect to which such Limited SARs are being exercised.
6.6. Nontransferability of Options and SARs. Options and SARs shall not
--------------------------------------
be transferable other than by will or the laws of descent and distribution, and
Options and SARs may be exercised
-10-
<PAGE>
during the lifetime of the Holder thereof only by such Holder (or his or her
court appointed legal representative).
7. RESTRICTED SHARES
7.1. Valuation Date, Issuance and Price. The Board shall determine
----------------------------------
whether shares of Common Stock covered by awards of Restricted Shares will be
issued at the beginning or the end of the Restriction Period, whether Dividend
Equivalents will be paid during the Restriction Period in the event shares of
the Common Stock are to be issued at the end of the Restriction Period and shall
designate a Valuation Date with respect to each award of Restricted Shares and
may prescribe other restrictions, terms and conditions applicable to the vesting
of such Restricted Shares in addition to those provided in the Plan. The Board
shall determine the price, if any, to be paid by the Holder for the Restricted
Shares; provided, however, that the issuance of Restricted Shares shall be made
for at least the minimum consideration necessary to permit such Restricted
Shares to be deemed fully paid and nonassessable. All determinations made by
the Board pursuant to this Section 7.1 shall be specified in the Agreement.
7.2. Issuance of Restricted Shares at Beginning of the Restriction Period.
--------------------------------------------------------------------
If shares of Common Stock are issued at the beginning of the Restriction Period,
the stock certificate or certificates representing such Restricted Shares shall
be registered in the name of the Holder to whom such Restricted Shares shall
have been awarded. During the Restriction Period, certificates representing the
Restricted Shares and any securities constituting Retained Distributions shall
bear a restrictive legend to the effect that ownership of the Restricted Shares
(and such Retained Distributions), and the enjoyment of all rights appurtenant
thereto, are subject to the restrictions, terms and conditions provided in the
Plan and the applicable Agreement. Such certificates shall remain in the
custody of Time Warner and the Holder shall deposit with Time Warner stock
powers or other instruments of assignment, each endorsed in blank, so as to
permit retransfer to Time Warner of all or any portion of the Restricted Shares
and any securities constituting Retained Distributions that shall be forfeited
or otherwise not become vested in accordance with the Plan and the applicable
Agreement.
7.3. Restrictions. Restricted Shares issued at the beginning of the
------------
Restriction Period shall constitute issued and outstanding shares of Common
Stock for all corporate purposes.
-11-
<PAGE>
The Holder will have the right to vote such Restricted Shares, to receive and
retain all regular cash dividends and such other distributions, as the Board may
in its sole discretion designate, paid or distributed on such Restricted Shares
and to exercise all other rights, powers and privileges of a Holder of Common
Stock with respect to such Restricted Shares; except, that, (a) the Holder will
not be entitled to delivery of the stock certificate or certificates
representing such Restricted Shares until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled or waived; (b) Time Warner will retain custody of the stock
certificate or certificates representing the Restricted Shares during the
Restriction Period as provided in Section 7.2; (c) other than regular cash
dividends and such other distributions as the Board may in its sole discretion
designate, Time Warner will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Shares (and such
Retained Distributions will be subject to the same restrictions, terms and
vesting and other conditions as are applicable to the Restricted Shares) until
such time, if ever, as the Restricted Shares with respect to which such Retained
Distributions shall have been made, paid or declared shall have become vested,
and such Retained Distributions shall not bear interest or be segregated in a
separate account; (d) the Holder may not sell, assign, transfer, pledge,
exchange, encumber or dispose of the Restricted Shares or any Retained
Distributions or his interest in any of them during the Restriction Period; and
(e) a breach of any restrictions, terms or conditions provided in the Plan or
established by the Board with respect to any Restricted Shares or Retained
Distributions will cause a forfeiture of such Restricted Shares and any Retained
Distributions with respect thereto.
7.4. Issuance of Stock at End of the Restriction Period. Restricted
--------------------------------------------------
Shares issued at the end of the Restriction Period shall not constitute issued
and outstanding shares of Common Stock and the Holder shall not have any of the
rights of a stockholder with respect to the shares of Common Stock covered by
such an award of Restricted Shares, in each case, until such shares shall have
been transferred to the Holder at the end of the Restriction Period. If and to
the extent that shares of Common Stock are to be issued at the end of the
Restriction Period, the Holder shall be entitled to receive Dividend Equivalents
with respect to the shares of Common Stock covered thereby either (a) during the
Restriction Period or (b) in accordance with the rules applicable to Retained
Distributions, as the Board may specify in the Agreement.
-12-
<PAGE>
7.5. Cash Awards. In connection with any award of Restricted Shares, an
-----------
Agreement may provide for the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested. Such Cash Awards shall be payable in accordance with such additional
restrictions, terms and conditions as shall be prescribed by the Board in the
Agreement and shall be in addition to any other salary, incentive, bonus or
other compensation payments which such Holder shall be otherwise entitled or
eligible to receive from Time Warner or any of its Subsidiaries.
7.6. Completion of Restriction Period. On the Valuation Date with respect
--------------------------------
to each award of Restricted Shares, and the satisfaction of any other applicable
restrictions, terms and conditions (a) all or part of such Restricted Shares
shall become vested, (b) any Retained Distributions and any unpaid Dividend
Equivalents with respect to such Restricted Shares shall become vested to the
extent that the Restricted Shares related thereto shall have become vested and
(c) any Cash Award to be received by the Holder with respect to such Restricted
Shares shall become payable, all in accordance with the terms of the applicable
Agreement. Any such Restricted Shares, Retained Distributions and any unpaid
Dividend Equivalents that shall not become vested shall be forfeited to Time
Warner and the Holder shall not thereafter have any rights (including dividend
and voting rights) with respect to such Restricted Shares, Retained
Distributions and any unpaid Dividend Equivalents that shall have been so
forfeited.
8. ACCELERATION OF OPTIONS, SARS AND RESTRICTED SHARES
If a Holder's employment shall terminate by reason of death or Total
Disability, notwithstanding any contrary waiting period or installment period or
Restriction Period in any Agreement or in the Plan or in the event of any
Approved Transaction, Board Change or Control Purchase, unless the applicable
Agreement provides otherwise: (a) in the case of an Option or SAR, each such
outstanding Option or SAR granted under the Plan shall immediately become
exercisable in full in respect of the aggregate number of shares covered
thereby; and (b) in the case of Restricted Shares, the Restriction Period
applicable to each such award of Restricted Shares shall be deemed to have
expired and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents shall become vested and any Cash Award payable
pursuant to the applicable Agreement shall be adjusted in such manner as
provided in the
-13-
<PAGE>
Agreement.
9. TERMINATION OF EMPLOYMENT
9.1. General. If a Holder's employment shall terminate prior to the
-------
complete exercise of an Option (or deemed exercise thereof, as provided in
Section 6.5(a)), then such Option shall thereafter be exercisable solely to the
extent provided in the applicable Agreement; provided, however, that (a) no
Option may be exercised after the scheduled expiration date of such Option; (b)
if the Holder's employment terminates by reason of death or Total Disability,
the Option shall remain exercisable for a period of at least one year following
such termination (but not later than the scheduled expiration of such Option);
and (c) any termination by the employing company for cause will be treated in
accordance with the provisions of Section 9.2.
9.2. Termination for Cause. If a Holder's employment with Time Warner or
---------------------
any of its Subsidiaries shall be terminated by Time Warner or such Subsidiary
during the Restriction Period with respect to any Restricted Shares or prior to
the exercise of any Option for cause (for these purposes, cause shall have the
meaning ascribed thereto in any employment agreement to which such Holder is a
party or, in the absence thereof, shall include but not be limited to,
insubordination, dishonesty, incompetence, moral turpitude, other misconduct of
any kind and the refusal to perform his duties and responsibilities for any
reason other than illness or incapacity; provided, however, that if such
termination occurs within 12 months after an Approved Transaction, Control
Purchase or Board Change, termination for cause shall mean only a felony
conviction for fraud, misappropriation or embezzlement), then (a) all Options
held by such Holder shall immediately terminate and (b) such Holder's rights to
all Restricted Shares, Retained Distributions, any unpaid Dividend Equivalents
and any Cash Awards shall be forfeited immediately.
9.3. Special Rule. Notwithstanding any other provision of the Plan, the
------------
Board may provide in the applicable Agreement that the Award shall become and/or
remain exercisable at rates and times at variance with the rules otherwise
herein set forth; provided, however, that any such Agreement provisions at
variance with the exercisability rules otherwise set forth herein shall be
effective only if reflected in the terms of an employment agreement approved or
ratified by the Board.
-14-
<PAGE>
9.4. Miscellaneous. The Board may determine whether any given leave of
-------------
absence constitutes a termination of employment. Awards made under the Plan
shall not be affected by any change of employment so long as the Holder
continues to be an employee of Time Warner or any of its Subsidiaries.
10. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT
Nothing contained in the Plan or in any Award shall confer on any Holder
any right to continue in the employ of Time Warner or any of its Subsidiaries or
interfere in any way with the right of Time Warner or a Subsidiary to terminate
the employment of the Holder at any time, with or without cause; subject,
however, to the provisions of any employment agreement between the Holder and
Time Warner or any of its Subsidiaries.
11. NONALIENATION OF BENEFITS
No right or benefit under the Plan shall be subject to anticipation,
alienation, sale, assignment, hypothecation, pledge, exchange, transfer,
encumbrance or charge, and any attempt to anticipate, alienate, sell, assign,
hypothecate, pledge, exchange, transfer, encumber or charge the same shall be
void. No right or benefit hereunder shall in any manner be liable for or
subject to the debts, contracts, liabilities or torts of the person entitled to
such benefits.
12. WRITTEN AGREEMENT
Each award of Restricted Shares and any right to a Cash Award hereunder
shall be evidenced by a restricted shares agreement; each grant of an Option
shall be evidenced by a stock option agreement which shall designate the Options
granted thereunder as ISOs or Nonqualified Stock Options; and each SAR shall be
evidenced by a stock appreciation rights agreement, each in such form and
containing such terms and provisions not inconsistent with the provisions of the
Plan as the Board from time to time shall approve; provided, however, that such
Awards may be evidenced by a single agreement. The effective date of the
granting of an Award shall be the date on which the Board approves such grant.
Each grantee of an Option, SAR or Restricted Shares shall be notified promptly
of such grant and a written Agreement shall be promptly executed and delivered
by Time Warner and the grantee, provided that such grant of Options,
-15-
<PAGE>
SARs or Restricted Shares shall terminate if such written Agreement is not
signed by such grantee (or his attorney) and delivered to Time Warner within 60
days after the date the Board approved such grant or if the effectiveness of
such grant is conditioned upon the grantee becoming an employee of Time Warner
or one of its Subsidiaries, the execution by the grantee of an employment
agreement with Time Warner or one of its subsidiaries or any other similar
condition, within 60 days after the occurrence of such condition, if later. Any
such written Agreement may contain (but shall not be required to contain) such
provisions as the Board deems appropriate to ensure that the penalty provisions
of section 4999 of the Code will not apply to any stock or cash received by the
Holder from Time Warner or any of its Subsidiaries.
13. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, dividend, distribution, combination,
reclassification or recapitalization that changes the character or amount of the
Common Stock while any portion of any Award theretofore granted under the Plan
is outstanding but unexercised or unvested, the Board shall make such
adjustments in the character and number of shares subject to such Award, in the
option price, in the relevant appreciation base and in the Cash Awards, as shall
be applicable, equitable and appropriate in order to make such Award,
immediately after any such change, as nearly as may be practicable, equivalent
to such Award, immediately prior to any such change. If any merger,
consolidation or similar transaction affects the Common Stock subject to any
unexercised or unvested Award theretofore granted under the Plan, the Board or
any surviving or acquiring corporation shall take such action as is equitable
and appropriate to substitute a new award for such Award or to assume such Award
in order to make such new or assumed Award, as nearly as may be practicable,
equivalent to the old Award. If any such change or transaction shall occur, the
number and kind of shares for which Awards may thereafter be granted under the
Plan shall be adjusted to give effect thereto.
14. RIGHT OF FIRST REFUSAL
The Agreements may contain such provisions as the Board shall determine to
the effect that if a Holder elects to sell all or any shares of Common Stock
that such Holder acquired upon the exercise of an Option or upon the vesting of
Restricted Shares
-16-
<PAGE>
awarded under the Plan, then such Holder shall not sell such shares unless such
Holder shall have first offered in writing to sell such shares to Time Warner at
Fair Market Value on a date specified in such offer (which date shall be at
least three business days and not more than 10 business days following the date
of such offer). In any such event, certificates representing shares issued upon
exercise of Options and the vesting of Restricted Shares shall bear a
restrictive legend to the effect that transferability of such shares are subject
to the restrictions contained in the Plan and the applicable Agreement and Time
Warner may cause the registrar of its Common Stock to place a stop transfer
order with respect to such shares.
15. TERMINATION AND AMENDMENT
15.1. General. Unless the Plan shall theretofore have been terminated as
-------
hereinafter provided, no Awards may be made under the Plan on or after the tenth
anniversary of the Effective Date. The Board may at any time prior to the tenth
anniversary of the Effective Date terminate the Plan, and the Board may at any
time modify or amend the Plan in such respects as it shall deem advisable;
provided, however, that any such modification or amendment shall comply with all
applicable laws and stock exchange listing requirements.
15.2. Modification. No termination, modification or amendment of the Plan
------------
may, without the consent of the person to whom any Award shall theretofore have
been granted, adversely affect the rights of such person with respect to such
Award. No modification, extension, renewal or other change in any Award granted
under the Plan shall be made after the grant of such Award, unless the same is
consistent with the provisions of the Plan. With the consent of the Holder and
subject to the terms and conditions of the Plan (including Section 15.1), the
Board may amend outstanding Agreements with any Holder, including, without
limitation, any amendment which would (a) accelerate the time or times at which
the Award may be exercised and/or (b) extend the scheduled expiration date of
the Award. Without limiting the generality of the foregoing, the Board may but
solely with the Holder's consent, agree to cancel any Award under the Plan and
issue a new Award in substitution therefor, provided that the Award so
substituted shall satisfy all of the requirements of the Plan as of the date
such new Award is made.
-17-
<PAGE>
16. EFFECTIVENESS OF THE PLAN
The Plan shall become effective upon approval by the Board of Directors of
Time Warner.
17. GOVERNMENT AND OTHER REGULATIONS
The obligation of Time Warner with respect to Awards shall be subject to
all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any securities exchange on which the
Common Stock may be listed. For so long as the Common Stock is registered under
the Exchange Act, Time Warner shall use its reasonable efforts to comply with
any legal requirements (a) to maintain a registration statement in effect under
the Securities Act of 1933 with respect to all shares of Common Stock that may
be issued to Holders under the Plan, and (b) to file in a timely manner all
reports required to be filed by it under the Exchange Act.
18. WITHHOLDING
Time Warner's obligation to deliver shares of Common Stock or pay cash in
respect of any Award or Cash Award under the Plan shall be subject to applicable
federal, state and local tax withholding requirements. Federal, state and local
withholding taxes paid by a Holder upon the exercise of any Option and upon the
vesting of Restricted Shares may be paid in shares of Common Stock upon such
terms and conditions as the Board shall determine; provided, however, that the
Board in its sole discretion may disapprove such payment and require that such
taxes be paid in cash.
19. SEPARABILITY
If any of the terms or provisions of this Plan conflict with the
requirements of section 422A of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of
section 422A of the Code. If this Plan does not contain any provision required
to be included herein under section 422A of the Code, such provision shall be
deemed to be incorporated herein with the same force and effect
-18-
<PAGE>
as if such provision had been set out at length herein; provided, however, that
to the extent any Option which is intended to qualify as an ISO cannot so
qualify, such Option, to that extent, shall be deemed to be a Nonqualified Stock
Option for all purposes of the Plan.
20. NON-EXCLUSIVITY OF THE PLAN
The adoption of the Plan by the Board shall not be construed as creating
any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION
By acceptance of an Award or Cash Award, as applicable, each Holder shall
be deemed to have agreed that such Award or Cash Award, as applicable, is
special incentive compensation that will not be taken into account, in any
manner, as salary, compensation or bonus in determining the amount of any
payment under any pension, retirement or other employee benefit plan of Time
Warner or any of its Subsidiaries. In addition, each beneficiary of a deceased
Holder shall be deemed to have agreed that such Award or Cash Award, as
applicable, will not affect the amount of any life insurance coverage, if any,
provided by Time Warner or any of its Subsidiaries on the life of the Holder
which is payable to such beneficiary under any life insurance plan covering
employees of Time Warner or any of its Subsidiaries.
22. GOVERNING LAW
The Plan shall be governed by, and construed in accordance with, the laws
of the State of New York.
-19-
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT made as of November 2, 1994 between TIME WARNER INC.,
a Delaware corporation (the "Company"), and Richard D. Parsons (the
"Executive").
The Company wishes to secure the services of the Executive on a full-time
basis for the period to and including December 31, 1999 (the "Term Date") on and
subject to the terms and conditions set forth in this Agreement, and the
Executive is willing to provide such services on and subject to the terms and
conditions set forth in this Agreement. The parties therefore agree as follows:
1. Term of Employment. The Executive's "term of employment", as this
------------------
phrase is used throughout this Agreement, shall be for the period beginning on
the Effective Date and ending on the Term Date, subject, however, to the terms
and conditions set forth in this Agreement. The "Effective Date" shall mean
February 1, 1995; provided that, if the mergers of Dime Bancorp, Inc. and Anchor
Bancorp, Inc. and of their bank subsidiaries (collectively, the "Merger") shall
not have taken place by January 16, 1995, then the Executive may postpone the
Effective Date to a date not later than fifteen days following completion of the
Merger; provided further, that no such postponement shall extend the Effective
Date beyond April 1, 1995 without the consent of the Company.
2. Employment. The Company shall employ the Executive, and the Executive
----------
shall serve, as the President of the Company, commencing on the Effective Date
and continuing thereafter during the term of employment. The Executive shall
have responsibility for the direction and supervision of the following functions
of the Company, with the authority, duties and powers appropriate and customary
to discharge such responsibility: all corporate staff functions, including
without limitation, legal, finance, communications and public affairs and
administration, and each of the Executive Vice Presidents or Senior Vice
Presidents in charge of each such function shall report to the Executive. In
addition, the Executive shall have such other authority, functions, duties
<PAGE>
2
and responsibilities as the Board of Directors or the Chief Executive Officer of
the Company may from time to time delegate to the Executive in addition thereto,
consistent with his stature as the President of the Company. The Executive
shall, subject to his election as such from time to time and without additional
compensation, serve during the term of employment in such additional offices of
comparable or greater stature and responsibility in the Company and its
subsidiaries and as a director and as a member of any committee of the Board of
Directors of the Company and its subsidiaries, to which he may be elected from
time to time. During the term of employment, (i) the Executive's services shall
be rendered on a substantially full-time, exclusive basis and he will apply on a
full-time basis all of his skill and experience to the performance of his duties
in such employment, (ii) the Executive shall report only to the Company's Board
of Directors and to the Company's Chief Executive Officer, (iii) the Executive
shall have no other employment and, without the prior written consent of the
Chief Executive Officer of the Company, no outside business activities which
require the devotion of substantial amounts of the Executive's time and (iv) the
place for the performance of the Executive's services shall be the Company's
principal executive offices 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 policies of the Company, as in effect from time to time,
regarding vacations, holidays, illness and the like and shall not prevent the
Executive from devoting such time to his personal affairs as shall not interfere
with the performance of his duties hereunder; provided, however, that the
Executive shall in any event comply with the provisions of Sections 9 and 10 and
any generally applicable Company policies on conflicts of interest and service
as a director of another corporation, partnership, trust or other entity
("Entity").
The Company shall use its best efforts to cause the Executive to be a
member of its Board of Directors throughout the term of employment and shall
include him in the management slate for election as a director at every
stockholders' meeting at which his term as a director would otherwise expire.
<PAGE>
3
3. Compensation.
------------
3.1 Base Salary. The Company shall pay or cause to be paid to the
-----------
Executive a base salary of not less than $600,000 per annum during the term of
employment (the "Base Salary"). The Company may increase, but not decrease, the
Base Salary at any time and from time to time during the term of employment and
upon each such increase the term "Base Salary" shall mean such increased amount,
(subject to Section 5). Base Salary shall be payable in monthly or more
frequent installments in accordance with the Company's then current practices
and policies with respect to senior executives. For the purposes of this
Agreement, "senior executives" shall mean the executive officers of the Company.
3.2 Bonus. In addition to Base Salary, the Executive shall be eligible to
-----
receive during the term of employment an annual cash bonus based on the
performance of the Company and of the Executive in an amount commensurate with
the position and duties of the Executive relative to other senior executives of
the Company. The actual amount of any such annual cash bonus to be paid to the
Executive will be determined by the Compensation Committee of the Company's
Board of Directors based upon a recommendation of the Company's Chief Executive
Officer. Such determination with respect to the amount, if any, of annual cash
bonuses to be paid to the Executive under this Agreement shall be final and
conclusive except as specifically provided otherwise in this Agreement.
Payments of any bonus compensation under this Section 3.2 shall be made in
accordance with the Company's then current practices and policies with respect
to senior executives. Notwithstanding the foregoing, determination and payment
of any bonus compensation under this Section 3.2 may be made pursuant to a plan
intended to assure the deductibility of such bonus compensation pursuant to
Section 162(m) of the Internal Revenue Code of 1986 (the "Code").
3.3 Conditional Deferred Compensation. In addition to Base Salary and
---------------------------------
annual bonus as set forth in Sections 3.1 and 3.2, the Executive shall be
credited with
<PAGE>
4
deferred compensation which shall be determined and paid out as provided in this
Agreement, including Annex A attached hereto.
3.3.1 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 Base Salary. If a lump sum payment is made pursuant
to Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, the Company shall 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.
3.3.2 The amounts credited to the Account pursuant to Section 3.3.1 and
the earnings, if any, on such amounts in accordance with Annex A shall be deemed
earned by the Executive only if the Executive fulfills the Executive's
obligations under Section 9.2 of this Agreement. If the Executive breaches the
provisions of said Section 9.2 whether during or after the termination of the
Executive's employment with the Company, then the Company shall calculate the
portion of the Account attributable to credits made to the Account during the
last sixty months that the Company made credits to the Account pursuant to
Section 3.3.1 and the earnings, if any, on such amounts and no payments from the
Account shall be made to the Executive in respect of that portion of the Account
and the Company shall be entitled to retain that portion of the Account. If the
Executive has elected pursuant to Section A.7 of Annex A not to defer some or
all of the amounts provided in Section 3.3.1 during the sixty month period
referred to in the preceding sentence, then the amounts that would have been
deferred during such period but for such election will be added to the amount
calculated pursuant to the preceding sentence and the Company shall be entitled
to retain that amount as well, but only out of, and up to the maximum of,
amounts, if any, credited to the Account pursuant to Section 3.3.1 and the
earnings, if any, thereon. The remainder of the Account, if any, after
deduction of the amount calculated pursuant to the
<PAGE>
5
preceding two sentences, and the earnings, if any, thereon shall be paid to the
Executive in accordance with Annex A. Notwithstanding the foregoing, amounts
credited to the Account pursuant to Section 3.4 and the earnings, if any, on
such amounts shall be paid to the Executive in accordance with Annex A,
irrespective of any breach by the Executive of any of the provisions of this
Agreement, and except as set forth in Annex A, no deductions shall be made
therefrom.
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 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.
3.6 No Anticipatory Assignments. Except as specifically contemplated in
---------------------------
Section 12.8 or under the life insurance policies and benefit plans referred to
in Sections 7 and 8, respectively, neither the Executive, his legal
representative nor any beneficiary designated by him shall have any right,
without the prior written consent of the Company, to assign, transfer, pledge,
hypothecate, anticipate or commute to
<PAGE>
6
any person or Entity any payment due in the future pursuant to any provision of
this Agreement, and any attempt to do so shall be void and shall not be
recognized by the Company.
3.7 Indemnification. The Executive shall be entitled throughout the term
---------------
of employment in his capacity as an officer or director of the Company or any of
its subsidiaries or 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 or as a trustee or fiduciary of any plan, program, trust or other
entity established for the benefit of the Company, its subsidiaries or any of
their respective employees in connection with the business of the Company (and
after the term of employment, to the extent relating to his service as such
officer, director,member, trustee or fiduciary) to the benefit of the
indemnification provisions contained on the date hereof in the Certificate of
Incorporation and By-Laws of the Company (not including any amendments or
additions after the date of execution hereof that limit or narrow, but including
any that add to or broaden, the protection afforded to the Executive by those
provisions), to the extent not prohibited by applicable law at the time of the
assertion of any liability against the Executive.
4. Termination.
-----------
4.1 Termination for Cause. The Company may terminate the term of
---------------------
employment and all of the Company's obligations hereunder, other than its
obligations set forth below in this Section 4.1, only for "cause" and only if
the term of employment has not previously been terminated pursuant to any other
provision of this Agreement. Termination by the Company for "cause" shall mean
termination by action of the Company's Board of Directors, or a committee
thereof, after a hearing in which the Executive has had the opportunity to
address the Board, because of the Executive's conviction (treating a nolo
contendere plea as a conviction) of a felony (whether or not any right to appeal
has been or may be exercised) or willful refusal without proper cause to perform
his obligations under this Agreement or because of the Execu-
<PAGE>
7
tive's material breach of any of the covenants provided for in Section 9. Such
termination shall be effected by written notice thereof delivered by the Company
to the Executive and shall be effective as of the date of such notice; provided,
however, that if (i) such termination is because of the Executive's willful
refusal without proper cause to perform any one or more of his obligations under
this Agreement, (ii) such notice is the first such notice of termination for any
reason delivered by the Company to the Executive under this Section 4.1, and
(iii) within 15 days following the date of such notice the Executive shall cease
his refusal and shall use his best efforts to perform such obligations, the
termination shall not be effective.
In the event of such termination by the Company for cause, 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 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 through the effective date of
termination (provided that amounts referred to in the second sentence of Section
3.3.1 and the earnings thereon, if any, shall remain in the Account and continue
to be invested in accordance with Annex A and be paid to the Executive in
accordance with Annex A, except as otherwise provided in Section 3.3.2, if
applicable) or pursuant to any insurance or other benefit plans or arrangements
of the Company maintained for the benefit of its senior executives. The last
sentence of Section 3.3.1 and the provisions of Sections 3.3.2, 3.7, 8.2, 8.3
and 9 through 12 and Annex A shall survive any termination pursuant to this
Section 4.1.
4.2 Termination by Executive for Material Breach by the Company and
---------------------------------------------------------------
Wrongful Termination by the Company.
-----------------------------------
<PAGE>
8
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 this Agreement (other than those provisions that specifically
survive such termination) effective 15 days after the giving of such notice, if,
at the time of the giving of such notice, the Company shall be in material
breach of its obligations under this Agreement; provided, however, that, with
the exception of clause (i) below, this Agreement shall not so terminate if such
notice is the first such notice of termination delivered by the Executive
pursuant to this Section 4.2 and within such 15-day period the Company shall
have cured all such material breaches of its obligations under this Agreement.
A material breach by the Company shall include, but not be limited to, (i) the
Company failing to cause the Executive to retain the title specified in the
first sentence of Section 2; (ii) the Executive being required to report to
persons other than those specified in Section 2; (iii) the Company violating the
provisions of Section 2 or any written delegation from the Chief Executive
Officer with respect to the Executive's authority, functions, duties, powers or
responsibilities (whether or not accompanied by a change in title); (iv) the
Company requiring the Executive's primary services to be rendered at a place
other than at the Company's principal executive offices in the New York City
metropolitan area; (v) the Company breaching its obligations under the last
paragraph of Section 2; and (vi) the Company failing to cause the successor to
all or substantially all of the business and assets of the Company expressly to
assume the obligations of the Company under this Agreement.
In the event of a termination pursuant to the preceding paragraph of this
Section 4.2, or in the event of a termination of this Agreement or the term of
employment by the Company in breach of this Agreement, 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 by the Company or by the
Executive pursuant to the preceding paragraph of this Section 4.2, either (A) to
cease being an employee of the Company and receive the lump sum
<PAGE>
9
payment (and credits) as provided in Section 4.2.2 or (B) to remain an employee
of the Company as provided in Section 4.2.3. After the Executive makes such
election, the following provisions shall apply:
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
3.3.2, 3.7, 4.6 and 4.8 and Sections 6 through 12 and Annex A shall survive such
termination, and (ii) the Executive shall be entitled to receive any earned and
unpaid Base Salary and deferred compensation accrued through the effective date
of such termination and a pro rata portion of the Executive's "Average Annual
Bonus" (as determined pursuant to Section 4.4) for the year in which such
termination occurs through the date of such termination, provided that all or a
portion of such pro rata Average Annual Bonus will be credited to the Account in
accordance with any timely deferral election the Executive may previously have
made pursuant to Section 3.4.
4.2.2 In the event the Executive shall make the election provided in
clause (A) of Section 4.2 above, the Company shall pay the Executive (or credit
to the Account with respect to Section 3.3) as damages in a lump sum within 30
days thereafter (provided that if the Executive was named in the compensation
table in the Company's then most recent proxy statement, such lump sum payment
shall be made within 30 days after the end of the calendar year in which such
notice of termination is given) an amount (discounted as provided in the
immediately following sentence) equal to the greater of (i) all amounts
otherwise payable (or to be credited) pursuant to Sections 3.1, 3.2 and 3.3 for
the year in which such termination occurs and for each subsequent year through
and including the Term Date, and (ii) all amounts that would be payable (or
credited) pursuant to Sections 3.1, 3.2 and 3.3 if the Term Date had been a date
one year after the date of such notice of termination (assuming, in the case of
either (i) or (ii) above, that annual bonuses are required to be paid for each
such year in an amount equal to the Average Annual Bonus, with the bonus for any
partial calendar year appropriately pro
<PAGE>
10
rated according to the number of whole or partial months the Executive was
employed by the Company in such calendar year). Any payments required to be
made to the Executive pursuant to this Section 4.2.2 upon such termination in
respect of Sections 3.1 and 3.2 and the credit to the Account provided for in
the penultimate sentence of Section 3.3.1 shall be discounted to present value
as of the date of payment from the times at which such amounts would have become
payable absent any such termination at an annual discount rate for the relevant
periods equal to 120% of the "applicable Federal rate" (within the meaning of
Section 1274(d) of the Code), in effect on the date of such termination,
compounded semi-annually.
4.2.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company for the period ending on the later of (i) the
Term Date, and (ii) the date which is one year after the date notice of
termination is given under this Section 4.2, and during such period the
Executive shall be entitled to receive, whether or not he thereafter becomes
disabled during such period but subject to Section 6, (a) salary at an annual
rate equal to the Base Salary, (b) deferred compensation as provided in Section
3.3, and (c) an annual bonus (all or a portion of which may be deferred by the
Executive pursuant to Section 3.4) in respect of each calendar year or portion
thereof (in which case a pro rata portion of such annual bonus will be payable)
during such period equal to the Average Annual Bonus (with any partial calendar
year bonus appropriately pro rated according to the number of whole or partial
months the Executive was employed by the Company in such calendar year). 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 of the Company during such
period, then the term of employment shall cease and the Executive shall cease to
be an employee of the Company effective upon the commencement of such employment
or the effective date of such termination as specified by the Executive in such
notice, whichever is applicable, and the Executive shall be entitled to receive
as damages in a lump sum
<PAGE>
11
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) equal to the balance of the Base Salary, deferred compensation (which
shall be credited to the Account as provided in the penultimate sentence of
Section 3.3.1) and regular annual bonuses (each equal to the Average Annual
Bonus, with the bonus for any partial calendar year appropriately pro rated
according to the number of whole or partial months the Executive was employed by
the Company in such calendar year) that the Executive would have been entitled
pursuant to this Section 4.2.3 had the Executive remained on the Company's
payroll until the end of the period described in the first sentence of this
Section 4.2.3. Notwithstanding the preceding sentence, if the Executive accepts
employment with any not-for-profit Entity, then the Executive shall be entitled
to remain an employee of the Company and receive the payments as provided in the
first sentence of this Section 4.2.3; and if the Executive accepts full-time
employment with any affiliate of the Company, then the payments (and credits)
provided for in this Section 4.2.3 and the term of employment shall cease and
the Executive shall not be entitled to any such lump sum payment. For purposes
of this Agreement, the term "affiliate" shall mean any Entity which, directly or
indirectly, controls, is controlled by, or is under common control with, the
Company.
4.3 After the Term Date. If at the Term Date, the term of employment
-------------------
shall not have been previously terminated pursuant to the provisions of this
Agreement, no Disability Period is then in effect and the parties shall not have
agreed in writing to an extension or renewal of this Agreement or on the terms
of a new written employment agreement, then the term of employment shall
continue and the Executive shall continue to be employed by the Company pursuant
to the terms of this Agreement, subject to termination by either party hereto on
90 days written notice delivered to the other party. Such 90-day notice may be
given by either party on or after October 1, 1999 so that the term of employment
may
<PAGE>
12
end on the Term Date or any date thereafter. If the Executive shall terminate
this Agreement on or after the Term Date, then the Executive shall receive Base
Salary, deferred compensation and a pro rata annual bonus through the effective
date of termination with the pro rata annual bonus being equal to a portion of
the Average Annual Bonus based on the number of whole or partial months in such
year prior to the date of termination. If the Company shall terminate the term
of employment and this Agreement (other than those provisions that specifically
survive such termination) on or after the Term Date for any reason (other than
cause as defined in Section 4.1, in which case Section 4.1 shall apply, and
disregarding any termination occurring pursuant to Section 5), then in lieu of
the provisions of Section 4.2, the Executive shall be entitled to elect by
delivery of written notice to the Company, within 30 days after such notice of
termination is given, either (A) to cease being an employee of the Company and
receive a lump sum payment (and credits) as provided in Section 4.3.2 or (B)
remain an employee of the Company for a period of twelve months pursuant to
Section 4.3.3 and receive the payments (and credits) provided in Section 4.3.3.
After the Executive makes such election, the following provisions shall apply:
4.3.1 Regardless of the election made by the Executive, at the end of the
90-day notice period provided for in the first sentence of Section 4.3 the
Executive shall have no further obligations or liabilities to the Company
whatsoever, except that Sections 3.3.2, 3.7, 4.6 and 4.8 and Sections 6 through
12 and Annex A shall survive such termination.
4.3.2 In the event the Executive shall make the election provided in
clause (A) above, the Company shall pay the Executive (or credit to the Account
with respect to Section 3.3) in a lump sum at the end of the 90-day notice
period provided for in the first sentence of Section 4.3 (provided that if the
Executive was named in the compensation table in the Company's then most recent
proxy statement, such lump sum payment shall be made within 30 days after the
end of the year in which such notice of termination is given) an
<PAGE>
13
amount (discounted as provided in the second sentence of Section 4.2.2) equal to
the sum of (i) one year's Base Salary, (ii) the annual amount of deferred
compensation to be credited to the Account pursuant to Section 3.3.1 (which
shall be credited to the Account as provided in the penultimate sentence of
Section 3.3.1), and (iii) an amount equal to the Average Annual Bonus plus a pro
rata portion of the Average Annual Bonus for any elapsed portion of the calendar
year preceding such notice of termination.
4.3.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company until the date which is twelve months after
the end of the 90-day period referred to in the first sentence of Section 4.3
and during such period the Executive shall be entitled to receive, whether or
not he thereafter becomes disabled during such period but subject to Section 6,
(i) salary at an annual rate equal to the Base Salary, (ii) credits to the
Account of deferred compensation as provided in Section 3.3.1, and (iii) an
annual bonus (all or any portion of which may be deferred by the Executive
pursuant to Section 3.4) equal to the Average Annual Bonus for the year in which
such notice of termination is given plus a pro rata portion of the Average
Annual bonus for any portion of such twelve month period included in the
succeeding calendar year.
4.4 Determination of Average Annual Bonus. For purposes of this
-------------------------------------
Agreement, the term "Average Annual Bonus" means the amount, determined as of
the applicable "Determination Date", that is equal to the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses) paid
to the Executive under Section 3.2 (assuming no portion of such bonus is
deferred pursuant to Section 3.4) with respect to the two calendar years
immediately preceding the calendar year in which such Determination Date occurs;
provided, however, that if no such annual bonuses shall have been determined
prior to such Determination Date then the Average Annual Bonus shall be an
amount equal to 150% of the Base Salary and if one such annual bonus shall have
been determined prior to the Determination Date, the Average Annual
<PAGE>
14
Bonus shall be the average of 150% of the Base Salary and such one annual bonus.
For purposes of determining the Average Annual Bonus, the "Determination
Date":
(i) Under Section 4.2, shall be the date notice of termination is given by
the Executive or the Company as described in such Section 4.2 (disregarding any
notice that becomes ineffective because the Company cures its breach, as
provided in Section 4.2);
(ii) Under Section 4.3, shall be the date notice of termination is given
by the Company or the Executive pursuant to such Section 4.3;
(iii) Under Section 5, shall be the Disability Date; and
(iv) Under Section 6, shall be the date of the Executive's death.
4.5 Office Facilities. In the event the Executive shall make the election
-----------------
provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on
the day the Executive makes such election and ending one year thereafter, the
Company shall, without charge to the Executive, make available to the Executive
office space at the Executive's principal job location immediately prior to his
termination of employment, or other location reasonably close to such location,
together with secretarial services, office facilities, services and furnishings,
in each case reasonably appropriate to an employee of the Executive's position
and responsibilities prior to such termination of employment.
4.6 Release. In partial consideration for the Company's obligation to
-------
make the payments described in Sections 4.2 and 4.3, the Company shall be
entitled to require the Executive to execute and deliver to the Company a
release in substantially the form attached hereto as Annex B. If the Company so
elects, the Company shall deliver such release to
<PAGE>
15
the Executive within 10 days after the written notice of termination is
delivered pursuant to Section 4.2 or 4.3 and the Executive shall execute and
deliver such release to the Company within 21 days after receipt thereof. Upon
receipt by the Company of such release signed by the Executive, the Company
shall deliver to the Executive a release substantially in the form attached
hereto as Annex C, signed by the Company. If the Company shall request the
Executive to execute an Annex B release and the Executive shall fail to execute
and deliver such release to the Company within such 21 day period, or if the
Executive shall revoke his consent to such release as provided therein, the
Company shall have no obligation to deliver the Annex C release and the
Executive's term of employment shall terminate as provided in Section 4.2 or
4.3, as applicable, but the Executive shall receive, in lieu of the payments
provided for in said Section 4.2 or 4.3, a lump sum cash payment in an amount
determined in accordance with the personnel policies of the Company relating to
notice and severance then generally applicable to senior executives of the
Company with length of service and compensation level of the Executive.
4.7 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5,
----------
if the term of employment is in effect and the Executive is still employed by
the Company pursuant to this Agreement on the date the Executive first becomes
eligible for normal retirement under any retirement plan of the Company or any
subsidiary of the Company (the "Retirement Date"), then this Agreement shall
terminate automatically on such date and the Executive's employment with the
Company shall thereafter be governed by the policies generally applicable to
employees of the Company and the Executive shall not thereafter be entitled to
the payments provided in such Sections to the extent not received by or for the
account of the Executive on or prior to the Retirement Date. In addition, no
benefits or payments provided in Sections 4.2, 4.3 or 5 shall include any period
after the Retirement Date and if the provision of benefits or calculation of
payments provided in any such Section would include any period subsequent to the
Retirement Date, such provision of benefits shall end on the Retirement Date and
the calculation of payments shall cover only the
<PAGE>
16
period ending on the Retirement Date. Notwithstanding the foregoing, the
provisions of Annex A shall apply to the investment and payment of deferred
compensation after any such termination, the provisions of Section 7 shall
survive any such termination and the provisions of Sections 12.1 and 12.7 shall
apply to any dispute with respect to this Agreement that arises after any such
termination.
4.8 Mitigation. In the event of termination of the term of employment by
----------
the Executive pursuant to Section 4.2 as a result of a material breach by the
Company of any of its obligations hereunder, or in the event of termination of
the term of employment by the Company pursuant to Section 4.3 or 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 duplication of any amounts required to be paid to the Company
thereunder, if any such termination occurs and the Executive, whether or not
required to mitigate his damages under the preceding sentence, thereafter
obtains other employment with any Entity other than a not-for-profit
organization or a governmental agency or body, the total cash salary and bonus
received in connection with such other employment, whether paid to him or
deferred for his benefit, for services through (i) in the case of a termination
pursuant to Section 4.2, the later of (x) the Term Date or (y) one year after
the date notice of termination is delivered pursuant to Section 4.2, and (ii) in
the case of a termination pursuant to Section 4.3, the date which is one year
after the end of the 90-day notice period referred to in the first sentence of
Section 4.3, in either case up to an amount equal to (x) the discounted lump sum
<PAGE>
17
payment and credit to the Account received by or for the account of the
Executive with respect to Base Salary, annual bonus and deferred compensation
under Section 3 for such period, minus (y) the amount of severance the Executive
would have received in accordance with the personnel policies of the Company if
the Executive had been job eliminated, shall reduce, pro tanto, any amount which
--- -----
the Company would otherwise be required to pay to the Executive as a result of
such termination and, to the extent amounts have theretofore been paid to him as
a result of such termination, such cash salary and bonus shall be paid over to
the Company as received with respect to such period, but the provisions of this
sentence shall not apply to any type of equity interest, bonus unit, phantom or
restricted stock, stock option, stock appreciation right or similar benefit
received as a result of such other employment. With respect to the preceding
sentences, any payments or rights to which the Executive is entitled by reason
of the termination of the term of employment by the Executive pursuant to
Section 4.2 or in the event of the termination of the term of employment by the
Company pursuant to Section 4.3 or 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 for such year. Any obligation of the Executive to mitigate his
damages pursuant to this Section 4.8 shall not be a defense or offset to the
Company's obligation to pay the Executive in full the amounts provided in
Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, as the case may be, at the time provided
therein or the timely and full performance of any of the Company's other
obligations under this Agreement.
4.9 Payments. So long as the Executive remains on the payroll of the
--------
Company, payments of salary, deferred compensation and bonus required to be made
pursuant to Section 4.2 or 4.3 shall be made at the same times as such payments
are made to senior executives of the Company.
<PAGE>
18
5. Disability. If during the term of employment and prior to any
----------
termination of this Agreement under Section 4.2 or 4.3, the Executive shall
become physically or mentally disabled, whether totally or partially, so that he
is prevented from performing his usual duties for a period of six consecutive
months, or for shorter periods aggregating six months in any twelve-month
period, the Company shall, nevertheless, continue to pay the Executive his full
compensation and continue to credit to 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 portion of the calendar year in
which the Disability Date occurs that shall precede such date and shall pay the
Executive disability benefits for the longer of (i) the period from the
Disability Date through the Term Date or (ii) one year following the Disability
Date (in the case of either (i) or (ii), the "Disability Period"), in an annual
amount equal to 75% of (a) the Base Salary (and this reduced amount shall also
be deemed to be the Base Salary for purposes of determining the amounts to be
credited to his Account pursuant to Section 3.3 and Annex A as further
disability benefits), and (b) the Average Annual Bonus (all or a portion of
which may be deferred by the Executive pursuant to Section 3.4), with the bonus
for any partial calendar year pro rated according to the number of whole or
partial months the Executive was employed by the Company in such calendar year.
If during the Disability Period the Executive shall fully recover from his
disability, the Company shall have the right (exercisable within 60 days after
notice from the Executive of such recovery), but not the obligation, to restore
the Executive to full-time service at full compensation. The Disability Period
shall continue during such 60-day period. If the Company elects to restore the
Executive to full-time service, then this Agreement shall continue in full force
and effect in all respects, including without limitation, the provisions of
Section 3 which shall apply in lieu of the
<PAGE>
19
Disability provisions of this Section 5, and the Term Date shall not be extended
by virtue of the occurrence of the Disability Period. If the Company does not
elect to restore the Executive to full-time service, the Executive may terminate
this Agreement by written notice to the Company within 60 days after the
termination of the sixty-day period provided for above, in which case neither
party shall have any further obligations hereunder after the date of such
termination. If the Company elects not to restore the Executive to full-time
service and the Executive does not elect to terminate this Agreement, the
Executive shall be entitled to obtain other employment, subject, however, to the
following: (i) the Executive shall be obligated to perform advisory services
during any balance of the Disability Period; and (ii) the provisions of Sections
9 and 10 shall continue to apply to the Executive during the Disability Period.
The advisory services referred to in clause (i) of the immediately preceding
sentence shall consist of rendering advice concerning the business, affairs and
management of the Company as requested by the Board of Directors or the Chief
Executive Officer of the Company but the Executive shall not be required to
devote more than five days (up to eight hours per day) each month to such
services, which shall be performed at a time and place mutually convenient to
both parties. Any income from such other employment shall not be applied to
reduce the Company's obligations under this Agreement. The Company shall be
entitled to deduct from all payments to be made to the Executive during the
Disability Period pursuant to this Section 5 an amount equal to all disability
payments received by the Executive during the Disability Period from Workmen's
Compensation, Social Security and disability insurance policies maintained by
the Company; provided, however, that for so long as, and to the extent that,
proceeds paid to the Executive from such disability insurance policies are not
includible in his income for federal income tax purposes, the Company's
deduction with respect to such payments shall be equal to the product of (i)
such payments and (ii) a fraction, the numerator of which is one and the
denominator of which is one less the maximum marginal rate of federal income
taxes applicable to individuals at the time of receipt of such payments. All
payments made under this Section 5 with respect to periods after the
<PAGE>
20
Disability Date are intended to be disability payments, regardless of the manner
in which they are computed. Except as otherwise provided in this Section 5, the
term of employment shall continue during the Disability Period and the Executive
shall be entitled to all of the rights and benefits provided for in this
Agreement except that, Sections 4.2 and 4.3 shall not apply during the
Disability Period (unless the Company terminates this Agreement in breach hereof
in which case Section 4.2 shall apply) and unless the Company has restored the
Executive to full-time service at full compensation prior to the end of the
Disability Period, the term of employment shall end and the Executive shall
cease to be an employee of the Company at the end of the Disability Period and
shall not be entitled to notice and severance or to receive or be paid for any
accrued vacation time or unused sabbatical.
6. Death. Upon the death of the Executive during the term of employment,
-----
this Agreement and all obligations of the Company to make any payments under
Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a
designated beneficiary) shall be entitled to receive, to the extent being
received by the Executive immediately prior to his death, Base Salary and
deferred compensation to the last day of the month in which his death occurs and
bonus compensation (at the time bonuses are normally paid) equal to the Average
Annual Bonus, but prorated according to the number of whole or partial months
the Executive was employed by the Company in such calendar year, and (ii) the
Account shall be liquidated and revalued as provided in Annex A as of the date
of the Executive's death (except that all taxes shall be computed and charged to
the Account as of such date of death to the extent not theretofore so computed
and charged) and the entire balance thereof (plus any amount due under the last
paragraph of Section A.6 of Annex A) shall be paid to the Executive's estate (or
a designated beneficiary) in a single payment not later than 75 days following
such date of death.
7. Life Insurance. Subject to the Executive's satisfactory completion of
--------------
any applications and other documentation and any physical examination that may
be required
<PAGE>
21
by the insurer and to the availability of insurance, the Company shall obtain
$4,000,000 face amount of split ownership life insurance on the life of the
Executive. The Company shall pay all premiums on such policy and shall maintain
such policy (without reduction of the face amount of the coverage) for the life
of the Executive notwithstanding any termination or expiration of the term of
employment or this Agreement (other than a termination pursuant to Section 4.1).
The Executive shall be entitled to designate the beneficiary or beneficiaries of
such policy, which may include a trust. At the death of the Executive, the
Executive's estate (or the owner of the policy if such owner is a trust as
contemplated below) shall promptly pay to the Company an amount equal to the
premiums on such policy paid by the Company (net of (i) tax benefits, if any, to
the Company in respect of payments of such premiums, (ii) any amounts payable by
the Company which had been paid by or on behalf of the Executive with respect to
such insurance, (iii) dividends received by the Company in respect of such
premiums, but only to the extent such dividends are not used to purchase
additional insurance on the life of the Executive, and (iv) any unpaid
borrowings by the Company on the policy), whether before, during or after the
term of this Agreement but in no event shall such payment to the Company exceed
the amount of the death benefit paid under the policy. Except as hereinafter
provided, the Company shall own the policy and shall provide by endorsement or
collateral assignment as it may deem appropriate for the payment of benefits on
the death of the Executive. In the event that the Executive advises the Company
in writing within 30 days of the date of this Agreement that the Executive
desires to have such policy owned by the trustees of a trust for the benefit of
the Executive's spouse and/or descendants, the Company shall permit such
ownership provided the trustees of the trust enter into a split dollar insurance
agreement and collateral assignment in favor of the Company which in the
Company's reasonable judgment satisfactorily protects the Company's investment
in such policy. 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.
<PAGE>
22
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 senior executives of the Company during the
term of employment and so long as the Executive is an employee of the Company,
the Executive shall be eligible to participate in any pension, profit-sharing,
stock option or similar plan or program and in any group insurance,
hospitalization, medical, dental, accident, disability or similar plan, program
or practice of the Company now existing or established hereafter. In addition,
the Executive shall be entitled during the term of employment and so long as the
Executive is an employee of the Company, to receive other benefits generally
available to all senior executives of the Company to the extent the Executive is
eligible under the general provisions thereof, including, without limitation, to
the extent maintained in effect by the Company for its senior executives,
payment for financial services.
In addition to any retirement benefits to which the Executive is entitled
under the Time Warner Employees' Pension Plan, any supplemental retirement or
excess benefit plan maintained by the Company or any of its affiliates or any
successor plans thereto (hereinafter collectively referred to as the "Pension
Plan"), the Company will, following the Executive's termination of employment
for any reason, except by the Company for cause pursuant to Section 4.1 and
except for a termination by the Executive in breach of this Agreement, pay or
cause to be paid to the Executive or his beneficiary as the case may be, in
accordance with the following provisions, an amount which is equivalent to the
excess of (the "Excess Amount") (i) the amount such Executive or beneficiary
would be entitled to receive under the Pension Plan assuming the Executive had
five additional years of service (as such term is defined in the Pension Plan)
taking into account all the provisions of the Pension Plan as are from time to
time in effect and applicable to the Executive or his beneficiary over (ii) the
amount such Executive or beneficiary would be entitled to receive under the
Pension Plan based on actual years of
<PAGE>
23
service taking into account all the provisions of the Pension Plan as are from
time to time in effect and applicable to the Executive or his beneficiary.
If the Executive or his beneficiary is entitled to an Excess Amount as
described in the preceding paragraph, the Company shall pay the Excess Amount to
the Executive or his beneficiary as follows. If the Executive is otherwise
entitled to benefits under the Pension Plan, then the Excess Amount shall be
paid at the same times and in the same manner as shall be elected by the
Executive or his beneficiary for payment of amounts under the Pension Plan. If
the Executive is not otherwise entitled to benefits under the Pension Plan, then
the Excess Amount shall be paid at the time(s) and in one of the forms of
payment permitted under the Pension Plan as elected by the Executive or his
beneficiary. If the Executive or his beneficiary dies before any payments
described above have been made, the payments shall be made to the beneficiary
thereof at the same time and in the same manner as they would have been paid if
the payments were to be made under the Pension Plan.
8.2 Benefits After a Termination or Disability. During the period the
------------------------------------------
Executive remains on the payroll of the Company after a termination pursuant to
Section 4.2 or 4.3 and during the Disability Period the Executive shall continue
to be eligible to receive the benefits required to be provided to the Executive
under Section 8.1 to the extent such benefits are maintained in effect by the
Company for its senior executives; provided, however, the Executive shall not be
entitled to any additional awards or grants under any stock option, restricted
stock or other stock based incentive plan; provided further, however, that if
this Agreement is terminated pursuant to Section 4.2, the Executive shall be
entitled to receive all of the stock options provided for in Annex D attached
hereto. The Executive shall continue to be an employee of the Company for
purposes of any stock option and restricted shares agreements and any other
incentive plan awards during the term of employment and until such time as the
Executive shall leave the payroll of the Company. At the time the Executive's
term of employment terminates and he leaves the payroll of the Company pursuant
to the provisions of Section 4.1, 4.2, 4.3, 5 or 6,
<PAGE>
24
the Executive's rights to benefits and payments under any benefit plans,
programs or practices or any insurance or other death benefit plans or
arrangements of the Company or under any stock option, restricted stock, stock
appreciation right, bonus unit, management incentive or other plan of the
Company shall be determined, subject to the other terms and provisions of this
Agreement, in accordance with the terms and provisions of such plans, programs
or practices and any agreements under which such stock options, restricted stock
or other awards were granted; provided, however, that notwithstanding the
foregoing or any more restrictive provisions of any such plan or agreement, if
the Executive leaves the payroll of the Company as a result of a termination
pursuant to Section 4.2, then all stock options granted to the Executive by the
Company shall become immediately exercisable at the time the Executive shall
leave the Company's payroll pursuant to Section 4.2.
8.3 Payments in Lieu of Other Benefits. In the event the term of
----------------------------------
employment and the Executive's employment by the Company is terminated pursuant
to Sections 4.1, 4.2, 4.3, 5 or 6 (and regardless of whether the Executive
elects clause (A) or (B) as provided in Section 4.2 and 4.3), the Executive
shall not be entitled to notice and severance or to be paid for any accrued
vacation time or unused sabbatical, the payments provided for in such Sections
being in lieu thereof.
8.4 Stock Options. Prior to or promptly after execution of this
-------------
Agreement, the Company will recommend that the Compensation Committee of the
Board of Directors (the "Committee") grant or undertake to grant the Executive
options to purchase shares of the Company's Common Stock in accordance with
Annex D attached hereto (the "Contract Options"). All Contract Options granted
to the Executive shall be subject to substantially the same terms and conditions
as options granted to other senior executives of the Company during 1994, except
as otherwise provided in Annex D. The Executive shall be eligible to receive
grants of stock options in addition to the Contract Options in the discretion of
the Committee.
9. Protection of Confidential Information; Non-Compete. The Executive
---------------------------------------------------
acknowledges that his employment by the
<PAGE>
25
Company (which, for purposes of all of Section 9 shall mean Time Warner Inc. and
its affiliates) will, throughout the term of employment, bring him into close
contact with many confidential affairs of the Company, including information
about costs, profits, markets, sales, products, key personnel, pricing policies,
operational methods, technical processes and other business affairs and methods
and other information not readily available to the public, and plans for future
development. The Executive further acknowledges that the services to be
performed under this Agreement are of a special, unique, unusual, extraordinary
and intellectual character. The Executive further acknowledges that the
business of the Company is international in scope, that its products are
marketed throughout the world, that the Company competes in nearly all of its
business activities with other Entities that are or could be located in nearly
any part of the world and that the nature of the Executive's services, position
and expertise are such that he is capable of competing with the Company from
nearly any location in the world. In recognition of the foregoing, the
Executive covenants and agrees as set forth below in this Section 9.
9.1 Confidentiality Covenant. The Executive covenants and agrees that (i)
------------------------
through the date he ceases to be an employee of the Company and leaves the
payroll of the Company for any reason, and (ii) for twelve months after the
effective date of termination of the Executive's employment and of the other
provisions of this Agreement pursuant to Section 4.1, 4.2 or 4.3, and (iii) with
respect to Sections 9.1.1. and 9.1.2, for an additional 36 months after the
later of the dates described in clauses (i) and (ii) above:
9.1.1 The Executive shall keep secret all confidential matters of the
Company and shall not intentionally disclose such matters to anyone outside of
the Company, either during or after the term of employment, except during the
term of employment, in connection with his duties hereunder, or except with the
Company's written consent, provided that (i) the Executive shall have no such
obligation to the extent such matters are or become publicly known other than as
a result of the Executive's breach of his obligations hereunder,
<PAGE>
26
and (ii) the Executive may, after giving prior notice to the Company to the
extent practicable under the circumstances, disclose such matters to the extent
required by applicable laws or governmental regulations or judicial or
regulatory process.
9.1.2 The Executive shall deliver promptly to the Company on termination
of his employment by the Company, or at any other time the Company may so
request, at the Company's expense, all memoranda, notes, records, reports and
other documents (and all copies thereof) relating to the Company's business,
other than publicly available documents or documents relating to the terms and
conditions of the Executive's employment, which he obtained while employed by,
or otherwise serving or acting on behalf of, the Company and which he may then
possess or have under his control; provided that if the Executive is to continue
as a director, consultant or advisor to the Company after such termination, the
Executive may retain such documents as are necessary or appropriate to the
performance of his duties unless and until the Company requests that such
documents be delivered to it; and
9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2
or 4.3, the Executive shall not employ, and shall not cause any Entity of which
he is an affiliate to employ, without the prior written consent of Time Warner
Inc., 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 covenants and agrees that (i) through the
-----------
date the Executive ceases to be an employee of the Company and leaves the
payroll of the Company for any reason, and (ii) with respect to an Entity that
is engaged in competition with the Company and that had, or the parent Entity or
predecessor Entity of which had, consolidated gross revenues from all sources,
including non-competitive businesses, of $2 billion or more for the fiscal year
preceding the Executive's commencement of service for such Entity, through the
date that is twelve months after the effective date of any notice of termination
of the Executive's employment with the Company pursuant to Section 4.1, 4.2 or
4.3, the Executive
<PAGE>
27
shall not, directly or indirectly, without the prior written consent of the
Chief Executive Officer of Time Warner Inc., render any services to any person
or Entity or acquire any interest of any type in any Entity, that shall be
deemed in competition with the Company; provided, however, that the foregoing
shall not be deemed to prohibit the Executive from (a) acquiring, solely as an
investment and through market purchases, securities of any Entity which are
registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
and which are publicly traded, so long as he is not part of any control group of
such Entity and such securities, if converted, do not constitute more than one
percent (1%) of the outstanding voting power of that Entity or (b) acquiring,
solely as an investment, any securities of an Entity (other than an Entity that
has outstanding securities covered by the preceding clause (a)) so long as he
remains a passive investor in such Entity and does not become part of any
control group thereof. 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 then is or has been engaged in or conducted by the
Company and as to which, to the knowledge of the Executive, the Company
covenants or has covenanted in writing, in connection with the disposition of
such business, not to compete therewith.
9.3 Specific Remedy. In addition to such other rights and remedies as the
---------------
Company may have at equity or in law with respect to any breach of this
Agreement, if the Executive commits a material breach of any of the provisions
of Section 9.1 or 9.2, the Company shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company.
<PAGE>
28
10. Ownership of Work Product. The Executive acknowledges that during the
-------------------------
term of employment, he may conceive of, discover, invent or create inventions,
improvements, new contributions, literary property, material, ideas and
discoveries, whether patentable or copyrightable or not (all of the foregoing
being collectively referred to herein as "Work Product"), and that various
business opportunities shall be presented to him by reason of his employment by
the Company. The Executive acknowledges that all of the foregoing shall be
owned by and belong exclusively to the Company and that he shall have no
personal interest therein, provided that they are either related in any manner
to the business (commercial or experimental) of the Company's, or are, in the
case of Work Product, conceived or made on the Company's time or with the use of
the Company's facilities or materials, or, in the case of business
opportunities, are presented to him for the possible interest or participation
of the Company. The Executive shall (i) promptly disclose any such Work Product
and business opportunities to the Company; (ii) assign to the Company, upon
request and without additional compensation, the entire rights to such Work
Product and business opportunities; (iii) sign all papers necessary to carry out
the foregoing; and (iv) give testimony in support of his inventorship or
creation in any appropriate case. The Executive agrees that he will not assert
any rights to any Work Product or business opportunity as having been made or
acquired by him prior to the date of this Agreement except for Work Product or
business opportunities, if any, disclosed to and acknowledged by the Company in
writing prior to the date hereof. Notwithstanding the foregoing, the Executive
may, provided that Section 9.2 is complied with, acquire an interest in any
business opportunity presented to the Company hereunder if the Company declines
to pursue such business opportunity and if such investment is approved by the
Chief Executive Officer of the Company in writing.
11. Notices. All notices, requests, consents and other communications
-------
required or permitted to be given under this Agreement shall be effective only
if given in writing and shall be deemed to have been duly given if delivered
personally or sent by prepaid telegram, or mailed first-class, postage
<PAGE>
29
prepaid, by registered or certified mail, as follows (or to such other or
additional address as either party shall designate by notice in writing to the
other in accordance herewith):
11.1 If to the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: Chief Executive Officer
(with a copy, similarly addressed
but Attention: General Counsel)
11.2 If to the Executive, to his residence
address set forth on the records of the
Company.
12. General.
-------
12.1 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the substantive laws of the State of
New York applicable to agreements made and to be performed entirely in New York.
12.2 Captions. The section headings contained herein are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12.3 Entire Agreement. This Agreement, including Annexes A, B C, and
----------------
D sets forth the entire agreement and understanding of the parties relating to
the subject matter of this Agreement and supersedes all prior agreements,
arrangements and understandings, written or oral, between the parties.
12.4 No Other Representations. No representation, promise or
------------------------
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or be liable for any alleged representation,
promise or inducement not so set forth.
<PAGE>
30
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 the
business and assets of the Company; and such rights and obligations shall inure
to, and be binding upon, any successor to all or substantially all of the
business and assets of the Company (as the case may be), whether by merger,
purchase of stock or assets or otherwise. The Company shall cause such
successor expressly to assume such obligations.
12.6 Amendments; Waivers. This Agreement may be amended, modified,
-------------------
superseded, cancelled, renewed or extended and the terms or covenants hereof may
be waived only by written instrument executed by both of the parties hereto, or
in the case of a waiver, by the party waiving compliance. The failure of either
party at any time or times to require performance of any provision hereof shall
in no manner affect such party's right at a later time to enforce the same. No
waiver by either party of the breach of any term or covenant contained in this
Agreement, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such breach, or a waiver of the breach of
any other term or covenant contained in this Agreement.
12.7 Resolution of Disputes. Any dispute or controversy arising with
----------------------
respect to this Agreement may be referred by either party to JAMS/ENDISPUTE for
resolution in arbitration in accordance with the rules and procedures of
JAMS/ENDISPUTE. Any such proceedings shall take place in New York City before a
single arbitrator (rather than a panel of arbitrators), pursuant to any
streamlined or expedited (rather than a comprehensive) arbitration process,
before a nonjudicial (rather than a judicial) arbitrator, and in accordance with
an arbitration process which, in the judgment of such arbitrator, shall have the
effect of reasonably limiting or reducing the cost of such arbitration. The
resolution of any such dispute or controversy by the arbitrator appointed in
accordance with the procedures of JAMS/ENDISPUTE shall be final and binding.
Judgment upon the award rendered by such arbitrator may be
<PAGE>
31
entered in any court having jurisdiction thereof, and the parties consent to the
jurisdiction of the New York courts for this purpose. The prevailing party
shall be entitled to recover the costs of arbitration (including reasonable
attorneys fees and the fees of experts) from the losing party. If at the time
any dispute or controversy arises with respect to this Agreement, JAMS/ENDISPUTE
is not in business or is no longer providing arbitration services, then the
American Arbitration Association shall be substituted for JAMS/ENDISPUTE for the
purposes of the foregoing provisions of this Section 12.7. If the Executive
shall be the prevailing party in such arbitration, the Company shall promptly
pay, upon demand of the Executive, all legal fees, court costs and other costs
and expenses incurred by the Executive in any legal action seeking to enforce
the award in any court.
12.8 Beneficiaries. Whenever this Agreement provides for any payment
-------------
to the Executive's estate, such payment may be made instead to such beneficiary
or beneficiaries as the Executive may designate by written notice to the
Company. The Executive shall have the right to revoke any such designation and
to redesignate a beneficiary or beneficiaries by written notice to the Company
(and to any applicable insurance company) to such effect.
12.9 No Conflict. The Executive represents and warrants to the
-----------
Company that this Agreement is legal, valid and binding upon the Executive and
the execution of this Agreement and the performance of the Executive's
obligations hereunder does not and will not constitute a breach of, or conflict
with the terms or provisions of, any agreement or understanding to which the
Executive is a party (including, without limitation, any other employment
agreement). The Company represents and warrants to the Executive that this
Agreement is legal, valid and binding upon the Company and the execution of this
Agreement and the performance of the Company's obligations hereunder does not
and will not constitute a breach of, or conflict with the terms or provisions
of, any agreement or understanding to which the Company is a party.
<PAGE>
32
12.10 Withholding Taxes. Payments made to the Executive pursuant to
-----------------
this Agreement shall be subject to withholding and social security taxes and
other ordinary and customary payroll deductions.
12.11 No Offset. Neither the Company nor the Executive shall have
---------
any right to offset any amounts owed by one party hereunder against amounts owed
or claimed to be owed to such party, whether pursuant to this Agreement or
otherwise, and the Company and the Executive shall make all the payments
provided for in this Agreement in a timely manner.
12.12 Severability. If any provision of this Agreement shall be held
------------
invalid, the remainder of this Agreement shall not be affected thereby;
provided, however, that the parties shall negotiate in good faith with respect
to equitable modification of the provision or application thereof held to be
invalid. To the extent that it may effectively do so under applicable law, each
party hereby waives any provision of law which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.
12.13 Definitions. The following terms are defined in this
-----------
Agreement in the places indicated:
Account - Section 3.3.1
Account Retained Income - Section A.6 of Annex A
affiliate - Section 4.2.3
applicable Federal rate - Section 4.2.2
Applicable Tax Law - Section A.5 of Annex A
Average Annual Bonus - Section 4.4
Base Salary - Section 3.1
cause - Section 4.1
Code - Section 3.2
Company - the first paragraph on page 1
and Section 9.1
Contract Options - Section 8.4
Determination Date - Section 4.4
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
<PAGE>
33
Excess Amount - Section 8.1
Executive - the first paragraph on 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
Pension Plan - Section 8.1
Pay-Out Period - Section A.6 of Annex A
Retirement Date - Section 4.7
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
IN WITNESS WHEREOF, the parties have duly executed
this Agreement as of the date first above written.
TIME WARNER INC.
By /s/ Gerald M. Levin
------------------------
Gerald M. Levin
Chairman and Chief
Executive Officer
/s/ Richard D. Parsons
-------------------------
Richard D. Parsons
<PAGE>
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
<PAGE>
A-2
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
<PAGE>
A-3
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
<PAGE>
A-4
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
<PAGE>
A-5
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 later of (i) the
Term Date and (ii) the date the Executive ceases to be an employee of the
Company and leaves the payroll of the Company for any reason, provided, however,
that if the Executive was named in the compensation table in the Company's
<PAGE>
A-6
then most recent proxy statement, such payments shall commence on January 1st of
the year following the year in which the latest of such events occurs. On each
payment date, the Account shall be charged with the dollar amount of such
payment. On each payment date, the amount of cash held or deemed to be held in
the Account shall be not less than the payment then due and the Company may
select the securities to be sold or deemed sold to provide such 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 and 3.4 of the Agreement as of each Valuation Date and
not theretofore distributed or deemed distributed pursuant to this Section A.6
is herein called "Account Retained Income". The amount of each payment for the
year, or such shorter period as may be determined by the Company, of the Pay-Out
Period immediately succeeding such Valuation Date, including the payment then
due, shall be determined by dividing the aggregate value of the Account, as
valued and adjusted pursuant to the second preceding sentence, by the number of
payments remaining to be paid in the Pay-Out Period, including the payment then
due; provided that each payment made shall be deemed made first
<PAGE>
A-7
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 Company shall calculate the portion of the Account
attributable to credits made to the Account pursuant to Section 3.3 of the
Agreement during the last sixty months that the Company made credits to the
Account and the earnings thereon, if any, or if the Executive has elected
pursuant to Section A.7 hereof not to defer some or all of the amounts provided
in Section 3.3.1 during the sixty month period referred to in this sentence,
then the amounts that would have been deferred during such period but for such
election will be added to the amounts calculated pursuant to this sentence. The
remaining portion of the Account, after excluding the amount calculated pursuant
to the preceding sentence, shall be valued as of the date the Executive's
employment terminates and, after the securities held or deemed to have been held
therein have been sold or deemed to have been sold and all related indebtedness
liquidated, shall be paid to the Executive as soon as practicable and in any
event within 75 days following such date of termination 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
that portion of 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. The
portion of the Account calculated pursuant to the first sentence of this
paragraph shall remain in the Account and continue to be invested in accordance
with this Annex A and be paid to the
<PAGE>
A-8
Executive in one lump sum within 75 days after the expiration of twelve months
from the date of such termination in accordance with the provisions of the
preceding sentence; provided, however, if the Executive breaches the provisions
of Section 9.2 of the Agreement at any time prior to the date of such payment,
whether during or after the termination of his employment with the Company, then
the Company shall be entitled to retain the portion of the Account determined in
accordance with the first sentence of this paragraph and no payments of such
portion of the Account shall be made to the Executive. 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.
At the time each payment is 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 and 3.4 of the
Agreement to which this Annex is attached, (ii) the net cumulative amount
(positive or negative)
<PAGE>
A-9
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 made as of
_____________, 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]
<PAGE>
ANNEX C
RELEASE
-------
In connection with the Employment Agreement made as of ____________,
between TIME WARNER INC., (the "Company"), and [TK] (the "Agreement"), the
Company does hereby release and forever discharge [TK] and his estate, heirs,
beneficiaries and representatives, from any and all actions, causes of action,
claims, or demands for general, special or punitive damages, attorney's fees,
expenses, or other compensation, which in any way relate to or arise out of his
employment with the Company or any of its affiliates or the termination of such
employment, which the Company may now or hereafter have under any federal, state
or local law, regulation or order, through and including the date of this
Release; provided, however, that the execution of this Release shall not prevent
-------- -------
the Company from bringing a lawsuit against [TK] (x) to enforce his obligations
under [Section 9] of the Agreement or (y) to seek damages or reimbursement for
fraud or embezzlement committed by him during his employment with the Company.
IN WITNESS WHEREOF the Company has caused this Release to be executed
on its behalf by a duly authorized officer this __ day of ______, 199_.
TIME WARNER INC.
___________________________
<PAGE>
ANNEX D
-------
CONTRACT OPTIONS
----------------
To be granted not later than February 28, 1995 or, if later, the Effective Date:
-------------------------------------------------------------------------------
Not less than 300,000 shares of Common Stock, allocated as follows:
No. of Shares Exercise Price
------------- --------------
300,000 fair market value*
To be granted not later than February 28, 1996:
----------------------------------------------
Not less than 300,000 shares of Common Stock, allocated as follows:
No. of Shares Exercise Price
------------- --------------
150,000 fair market value*
75,000 125% of fair market value*
75,000 150% of fair market value*
All Contract Options shall have a term of 10 years from the date of grant
and, upon becoming exercisable, shall remain exercisable by the Executive (or
his estate or beneficiary) for the full 10 year term thereof, except in the
event the Executive's employment with the Company pursuant to the Employment
Agreement to which this Annex D is attached or any successor employment
agreement between the Company and the Executive is terminated by the Company for
"cause" or by the Executive in breach thereof, and in any such case, the
Contract Options shall terminate and be null and void on the date of any such
termination.
* In each case, fair market value is determined at date of grant.
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT made as of December 1, 1994, effective as of January
1, 1995 (the "Effective Date"), between TIME WARNER INC., a Delaware corporation
(the "Company"), and Richard J. Bressler (the "Executive").
The Executive is currently employed by the Company pursuant to an
Employment Agreement dated as of January 1, 1992 (the "Prior Agreement").
Effective on the Effective Date, the Company wishes to restate the Prior
Agreement and secure the services of the Executive on a full-time basis for the
period to and including December 31, 1999 (the "Term Date") on and subject to
the terms and conditions set forth in this Agreement, and the Executive is
willing for the Prior Agreement to be so restated and to provide such services
on and subject to the terms and conditions set forth in this Agreement. The
parties therefore agree as follows:
1. Term of Employment. The Executive's "term of employment", as this
------------------
phrase is used throughout this Agreement, shall be for the period beginning on
the Effective Date and ending on the Term Date, subject, however, to the terms
and conditions set forth in this Agreement.
2. Employment. The Company shall employ the Executive, and the Executive
----------
shall serve, as Senior Vice President, Finance of the Company during the term of
employment, and the Executive shall have the authority, functions, duties,
powers and responsibilities normally associated with such position and as the
Board of Directors, the Chief Executive Officer, the Chief Operating 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
<PAGE>
2
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 Chief Operating Officer or its
President, (iii) the Executive shall have no other employment and, without the
prior written consent of the Chief Executive Officer, the Chief Operating
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 $300,000 per annum during the term of
employment (the "Base Salary"). The Company may increase, but not decrease, the
Base Salary at any time and from time to time during the term of employment and
upon each such increase the term "Base Salary" shall mean such increased amount.
Base Salary shall be payable in monthly or more frequent installments in
accordance with the Company's then current practices and policies with respect
to senior executives. For the purposes of this Agreement "senior executives"
shall mean executives of the Company at the same level as the Executive.
<PAGE>
3
3.2 Bonus. In addition to Base Salary, the Executive may be entitled to
-----
receive during the term of employment an annual cash bonus based on the
performance of the Company and of the Executive. The Executive's target bonus
shall be 100% of the Executive's Base Salary but the Executive acknowledges that
his actual bonus will vary depending upon the performance of the Company and 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,
the Chief Operating Officer or the President of the Company. Such determination
with respect to the amount, if any, of annual bonuses to be paid to the
Executive under this Agreement shall be final and conclusive except as
specifically provided otherwise in this Agreement. Payments of any bonus
compensation under this Section 3.2 shall be made in accordance with the
Company's then current practices and policies with respect to senior executives.
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, 4.2.3,
4.3.2 or 4.3.3, 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
<PAGE>
4
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
<PAGE>
5
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 and all of the Company's obligations hereunder, other than its
obligations set forth below in this Section 4.1, only for "cause" and only if
the term of employment has not previously been terminated pursuant to any other
provision of this Agreement. Termination by the Company for "cause" shall mean
termination by action of the Company's Board of Directors, or a committee
thereof, because of the Executive's conviction (treating a nolo contendere plea
as a conviction) of a felony (whether or not any right to appeal has been or may
be exercised) or willful refusal without proper cause to perform his obligations
under this Agreement or because of the Executive's 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
<PAGE>
6
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 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 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
<PAGE>
7
pursuant to this Section 4.2 and within such 15-day period the Company shall
have cured all such material breaches of its obligations under this Agreement.
A material breach by the Company shall include, but not be limited to, (i) the
Company failing to cause the Executive to retain the title specified in the
first sentence of Section 2 or a more senior title; (ii) the Executive being
required to report to persons other than those specified in Section 2; (iii) the
Company violating the provisions of Section 2 with respect to the Executive's
authority, functions, duties, powers or responsibilities (whether or not
accompanied by a change in title); (iv) the Company requiring the Executive's
primary services to be rendered at a place other than at the Company's principal
executive offices in the New York City metropolitan area; and (v) the Company
failing to cause the successor to all or substantially all of the business and
assets of the Company expressly to assume the obligations of the Company under
this Agreement.
In the event of a termination pursuant to the preceding paragraph of this
Section 4.2, or in the event of a termination of this Agreement or the term of
employment by the Company in breach of this Agreement, 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 4.5
and 4.7 and Sections 6 through 12 and Annex A shall survive such termination,
and (ii) the Executive shall be entitled to receive any earned and unpaid Base
Salary and deferred compensation accrued through the Termination Date and a pro
rata portion of the Executive's annual bonus for the year in
<PAGE>
8
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,
provided that if such termination occurs prior to the determination of the
Executive's annual bonus for 1995, the annual bonus used for such calculation
shall not be less than the target annual bonus provided for in Section 3.2 and
if such termination occurs after the determination of the Executive's annual
bonus for 1995 but prior to the determination of the Executive's annual bonus
for 1996, the annual bonus used for such calculation shall not be less than the
average of the target annual bonus provided for in Section 3.2 and such 1995
annual bonus, 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 the greater of (i) all amounts
otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year in which
such termination occurs and for each subsequent year through and including the
Term Date and (ii) all amounts that would be payable pursuant to Sections 3.1,
3.2 and 3.3 if the Term Date had been a date three years after the date of such
notice of termination (assuming, in the case of either (i) or (ii) above, that
annual bonuses are required to be paid for each such year, with each such annual
bonus being equal to the average of the regular annual bonus amounts (excluding
the amount of any special or spot bonuses) in respect of the two calendar years
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
<PAGE>
9
pursuant to Section 3.4), with the bonus for any partial calendar year
appropriately pro rated; provided, however, that if such termination occurs
prior to the determination of the Executive's annual bonus for 1995, then each
such annual bonus shall not be less than the target annual bonus provided for in
Section 3.2 and if such termination occurs after the determination of the
Executive's annual bonus for 1995 but prior to the determination of the
Executive's annual bonus for 1996, the annual bonus used for such calculation
shall not be less than the average of the target annual bonus provided for in
Section 3.2 and such 1995 annual bonus. Any payments required to be made to the
Executive pursuant to this Section 4.2.2 upon such termination in respect of
Sections 3.1 and 3.2 and the credit to the Account provided for in the
penultimate sentence of Section 3.3 shall be discounted to present value as of
the date of payment from the times at which such amounts would have become
payable absent any such termination at an annual discount rate for the relevant
periods equal to 120% of the "applicable Federal rate" (within the meaning of
Section 1274(d) of the Internal Revenue Code of 1986 (the "Code")), in effect on
the date of such termination, compounded semi-annually, the use of which rate is
hereby elected by the parties hereto pursuant to Treas. Reg. (S)1.280G-1 Q/A 32
(provided that, in the event such election is not permitted under Section 280G
of the Code and the regulations thereunder, such other rate determined as of
such other date as is applicable for determining present value under Section
280G of the Code shall be used).
4.2.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company for the period ending on the later of (i) the
Term Date and (ii) the date which is three years after the date notice of
termination is given under this Section 4.2, and during such period the
Executive shall be entitled to receive, whether or not he becomes disabled
during such period but subject to Section 6, (a) Base Salary at an annual rate
equal to his Base Salary in effect immediately prior to the notice of
termination as provided in Section 3.1, (b) deferred compensation as provided in
Section 3.3 and (c) an annual bonus
<PAGE>
10
(all or a portion of which may be deferred by the Executive pursuant to Section
3.4) in respect of each calendar year or portion thereof (in which case a pro
rata portion of such annual bonus will be payable) during such period equal to
the average of the regular annual bonus amounts (excluding the amount of any
special or spot bonuses) in respect of the two calendar years for which the
regular annual bonus received by the Executive from the Company was the
greatest; provided, however, that if such termination occurs prior to the
determination of the Executive's annual bonus for 1995, then each such annual
bonus shall not be less than the target annual bonus provided for in Section 3.2
and if such termination occurs after the determination of the Executive's annual
bonus for 1995 but prior to the determination of the Executive's annual bonus
for 1996, the annual bonus used for such calculation shall not be less than the
average of the target annual bonus provided for in Section 3.2 and such 1995
annual bonus. Except as provided in the next sentence, if the Executive accepts
full-time employment with any other Entity during such period or notifies the
Company in writing of his intention to terminate his status as an employee
during such period, then the term of employment shall cease and the Executive
shall cease to be an employee of the Company effective upon the commencement of
such employment or the effective date of such termination as specified by the
Executive in such notice, whichever is applicable, and the Executive shall be
entitled to receive as 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) and annual bonuses
(assuming no deferral pursuant to Section 3.4) the Executive would have been
entitled to receive pursuant to this Section 4.2.3 had the Executive remained on
the Company's payroll until the end of the period described in the first
sentence of this Section 4.2.3. Notwithstanding the preceding
<PAGE>
11
sentence, if the Executive accepts employment with any not-for-profit Entity,
then the Executive shall be entitled to remain an employee of the Company and
receive the payments as provided in the first sentence of this Section 4.2.3;
and if the Executive accepts full-time employment with any affiliate of the
Company, then the payments provided for in this Section 4.2.3 and the term of
employment shall cease and the Executive shall not be entitled to any such lump
sum payment. For purposes of this Agreement, the term "affiliate" shall mean
any Entity which, directly or indirectly, controls, is controlled by, or is
under common control with, the Company.
4.3 After the Term Date. If at the Term Date, the term of employment
-------------------
shall not have been previously terminated pursuant to the provisions of this
Agreement, no Disability Period is then in effect and the parties shall not have
agreed to an extension or renewal of this Agreement or on the terms of a new
employment agreement, then the term of employment shall continue and the
Executive shall continue to be employed by the Company pursuant to the terms of
this Agreement, subject to termination by either party hereto on 60 days written
notice delivered to the other party. If the Company shall terminate the term of
employment on or after the Term Date for any reason (other than cause as defined
in Section 4.1, in which case Section 4.1 shall apply), which the Company shall
have the right to do so long as no Disability Date (as defined in Section 5) has
occurred prior to the delivery by the Company of written notice of termination,
then in lieu of the provisions of Section 4.2, the Executive shall be entitled
to elect by delivery of written notice to the Company, within 30 days after such
notice of termination is given, either (A) to cease being an employee of the
Company and receive a lump sum payment as provided in Section 4.3.2 or (B)
remain an employee of the Company for a period of twelve months pursuant to
Section 4.3.3 and receive the payments provided in Section 4.3.3. After the
Executive makes such election, the following provisions shall apply:
4.3.1 Regardless of the election made by the Executive, at the end of the
60-day notice period provided for in the first sentence of Section 4.3 the
Executive shall
<PAGE>
12
have no further obligations or liabilities to the Company whatsoever, except
that Sections 4.5 and 4.7 and Sections 6 through 12 shall survive such
termination.
4.3.2 In the event the Executive shall make the election provided in
clause (A) above, the Company shall pay to the Executive in a lump sum at the
end of the 60-day notice period provided for in the first sentence of Section
4.3 (provided that if the Executive was named in the compensation table in the
Company's then most recent proxy statement, such lump sum payment shall be made
within 30 days after the end of the year in which such notice of termination is
given) an amount (discounted as provided in the second sentence of Section
4.2.2) equal to three times the sum of (i) the Executive's Base Salary as in
effect immediately prior to such notice of termination, (ii) an amount equal to
the average of the regular annual bonus amounts (excluding the amount of any
special or spot bonuses) received by the Executive from the Company for the two
calendar years immediately preceding the calendar year in which such notice of
termination is given (assuming that no portion of such bonus is deferred
pursuant to Section 3.4), and (iii) the annual amount of deferred compensation
payable by the Company to the Account pursuant to Section 3.3 as in effect
immediately prior to such notice of termination (which shall be credited to the
Account as provided in the penultimate sentence of Section 3.3).
4.3.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company until the date which is twelve months after
the end of the 60-day period referred to in the first sentence of Section 4.3
and during such period the Executive shall be entitled to receive, whether or
not he becomes disabled during such period but subject to Section 6, (i) the
Executive's Base Salary as in effect immediately prior to such notice of
termination, (ii) an annual bonus (all or any portion of which may be deferred
by the Executive pursuant to Section 3.4) equal to the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses)
received by the Executive from the Company for the two calendar years
<PAGE>
13
immediately preceding the calendar year in which such notice of termination is
given, and (iii) deferred compensation as provided in Section 3.3 of this
Agreement. At the end of such twelve month period the term of employment shall
cease, the Executive shall cease to be an employee of the Company and the
Company shall pay to the Executive in a lump sum (discounted as provided in the
second sentence of Section 4.2.2) an amount equal to two times the sum of the
amounts described in clauses (i), (ii) and (iii) of Section 4.3.2. Except as
provided in the next sentence, if the Executive accepts full-time employment
with any other Entity during such twelve-month period or notifies the Company in
writing of his intention to terminate his employment during such period, the
Executive shall cease to be an employee of the Company and the term of
employment shall cease effective upon the commencement of such employment or the
effective date of such termination as specified by the Executive in such notice,
whichever is applicable, and shall be entitled to receive a lump sum payment
within 30 days after such commencement or such effective date (provided that if
the Executive was named in the compensation table in the Company's then most
recent proxy statement, such lump sum payment shall be made within 30 days after
the end of the year in which such commencement or effective date occurred) an
amount (discounted as provided in the second sentence of Section 4.2.2) for the
balance of the Base Salary, deferred compensation (which shall be credited to
the Account as provided in the penultimate sentence of Section 3.3) and regular
annual bonuses the Executive would have been entitled to receive pursuant to
this Section 4.3.3 (including the lump sum) had the Executive remained on the
Company's payroll until the end of such twelve-month period. Notwithstanding
the preceding sentence, if the Executive accepts employment with any not-for-
profit Entity, then the Executive shall be entitled to remain an employee of the
Company and receive the payments as provided in the first sentence of this
Section 4.3.3; and if the Executive accepts full-time employment with any
affiliate of the Company, then the term of employment and the payments provided
for in this Section 4.3.3 shall cease and the Executive shall not be entitled to
any such lump sum payment.
<PAGE>
14
4.4 Office Facilities. In the event the Executive shall make the election
-----------------
provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on
the day the Executive makes such election and ending one year thereafter, the
Company shall, without charge to the Executive, make available to the Executive
office space at the Executive's principal job location immediately prior to his
termination of employment, or other location reasonably close to such location,
together with secretarial services, office facilities, services and furnishings,
in each case reasonably appropriate to an employee of the Executive's position
and responsibilities prior to such termination of employment.
4.5 Release. In partial consideration for the Company's obligation to
-------
make the payments described in Sections 4.2 and 4.3, the Executive shall execute
and deliver to the Company a release in substantially the form attached hereto
as Annex B. The Company shall deliver such release to the Executive within 10
days after the written notice of termination is delivered pursuant to Section
4.2 or 4.3 and the Executive shall execute and deliver such release to the
Company within 21 days after receipt thereof. If the Executive shall fail to
execute and deliver such release to the Company within such 21 day period, or if
the Executive shall revoke his consent to such release as provided therein, the
Executive's term of employment shall terminate as provided in Section 4.2 or
4.3, as applicable, but the Executive shall receive, in lieu of the payments
provided for in said Section 4.2 or 4.3, a lump sum cash payment in an amount
determined in accordance with the personnel policies of the Company relating to
notice and severance then generally applicable to employees with length of
service and compensation level of the Executive.
4.6 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5,
----------
if the term of employment is in effect and the Executive is still employed by
the Company pursuant to this Agreement on the date the Executive first becomes
eligible for normal retirement under any retirement plan of the Company or any
subsidiary of the Company (the "Retirement Date"), then this Agreement shall
terminate automatically on such date and the Executive's employment with
<PAGE>
15
the Company shall thereafter be governed by the policies generally applicable to
employees of the Company, and the Executive shall not thereafter be entitled to
the payments provided in such Sections to the extent not received by the
Executive on or prior to the Retirement Date. In addition, no benefits or
payments provided in Sections 4.2, 4.3 or 5 shall include any period after the
Retirement Date and if the provision of benefits or calculation of payments
provided in any such Section would include any period subsequent to the
Retirement Date, such provision of benefits shall end on the Retirement Date and
the calculation of payments shall cover only the period ending on the Retirement
Date. Notwithstanding the foregoing, the Company's obligations under Section 7
of this Agreement shall continue after any such termination and the provisions
of Sections 12.1 and 12.7 shall apply to any dispute with respect to this
Agreement that arises after any such termination.
4.7 Mitigation. In the event of termination of the term of employment by
----------
the Executive pursuant to Section 4.2 as a result of a material breach by the
Company of any of its obligations hereunder, or in the event of termination of
the term of employment by the Company pursuant to Section 4.3 or 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 duplication of any amounts required to be paid to the Company
thereunder, if any such termination occurs and the Executive, whether or not
required to mitigate his damages under the preceding sentence, thereafter
obtains other employment, the total cash salary and bonus received in connection
with such
<PAGE>
16
other employment, whether paid to him or deferred for his benefit, for services
through (i) in the case of a termination pursuant to Section 4.2, the later of
(x) the Term Date or (y) three years after the date notice of termination is
delivered pursuant to Section 4.2, and (ii) in the case of a termination
pursuant to Section 4.3, the date which is three years after the end of the 60-
day notice period referred to in the first sentence of Section 4.3, in either
case up to an amount equal to (x) the discounted lump sum payment received by or
for the account of the Executive with respect to Base Salary, annual bonus and
deferred compensation under Section 3 for such period, minus (y) the amount of
severance the Executive would have received in accordance with the personnel
policies of the Company if the Executive had been job eliminated, shall reduce,
pro tanto, any amount which the Company would otherwise be required to pay to
--- -----
the Executive as a result of such termination and, to the extent amounts have
theretofore been paid to him as a result of such termination, such cash salary
and bonus shall be paid over to the Company as received with respect to such
period, but the provisions of this sentence shall not apply to any type of
equity interest, bonus unit, phantom or restricted stock, stock option, stock
appreciation right or similar benefit received as a result of such other
employment. With respect to the preceding sentences, any payments or rights to
which the Executive is entitled by reason of the termination of the term of
employment by the Executive pursuant to Section 4.2 or in the event of the
termination of the term of employment by the Company pursuant to Section 4.3 or
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 for such
year. Any obligation of the Executive to mitigate his damages pursuant to this
Section 4.7 shall not be a defense or offset to the Company's obligation to pay
the Executive in full the amounts provided in Section 4.2.2, 4.2.3, 4.3.2 or
4.3.3, as the case may be, at the time provided therein or the timely and full
performance of any of the Company's other obligations under this Agreement.
<PAGE>
17
4.8 Payments. So long as the Executive remains on the payroll of the
--------
Company or any subsidiary of the Company, payments of salary, deferred
compensation and bonus required to be made pursuant to Section 4.2 or 4.3 shall
be made at the same times as such payments are made to senior executives of the
Company or such subsidiary.
5. Disability. If during the term of employment and prior to any
----------
termination of this Agreement under Section 4.2 or 4.3, the Executive shall
become physically or mentally disabled, whether totally or partially, so that he
is prevented from performing his usual duties for a period of six consecutive
months, or for shorter periods aggregating six months in any twelve-month
period, the Company shall, nevertheless, continue to pay the Executive his full
compensation and continue to credit the 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 longer of (i) the
period ending on the Term Date or (ii) three years (in the case of either (i) or
(ii), the "Disability Period"), in an 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); provided, however, that if such disability
occurs prior to the determination of the Executive's annual bonus for 1995, then
each such annual bonus shall not be less than the target annual bonus provided
for in Section 3.2 and if such disability
<PAGE>
18
occurs after the determination of the Executive's annual bonus for 1995 but
prior to the determination of the Executive's annual bonus for 1996, then each
such annual bonus shall not be less than the average of the target annual bonus
provided for in Section 3.2 and such 1995 annual bonus. If during the
Disability Period the Executive shall fully recover from his disability, the
Company shall have the right (exercisable within 60 days after notice from the
Executive of such recovery), but not the obligation, to restore the Executive to
full-time service at full compensation. If the Company elects to restore the
Executive to full-time service, then this Agreement shall continue in full force
and effect in all respects and the Term Date shall not be extended by virtue of
the occurrence of the Disability Period. If the Company elects not to restore
the Executive to full-time service, the Executive shall be entitled to obtain
other employment, subject, however, to the following: (i) the Executive shall
be obligated to perform advisory services during any balance of the Disability
Period; and (ii) the provisions of Sections 9 and 10 shall continue to apply to
the Executive during the Disability Period. The advisory services referred to
in clause (i) of the immediately preceding sentence shall consist of rendering
advice concerning the business, affairs and management of the Company as
requested by the Chief Executive Officer or the 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
<PAGE>
19
(ii) a fraction, the numerator of which is one and the denominator of which is
one less the maximum marginal rate of federal income taxes applicable to
individuals at the time of receipt of such payments. All payments made under
this Section 5 after the Disability Date are intended to be disability
payments, regardless of the manner in which they are computed. Except as
otherwise provided in this Section 5, the term of employment shall continue
during the Disability Period and the Executive shall be entitled to all of the
rights and benefits provided for in this Agreement except that, Sections 4.2 and
4.3 shall not apply during the Disability Period and unless the Company has
restored the Executive to fill-time service at full compensation prior to the
end of the Disability Period, the term of employment shall end and the Executive
shall cease to be an employee of the Company at the end of the Disability Period
and shall not be entitled to notice and severance or to receive or be paid for
any accrued vacation time or unused sabbatical.
6. Death. Upon the death of the Executive during the term of employment,
-----
this Agreement and all obligations of the Company to make any payments under
Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a
designated beneficiary) shall be entitled to receive, to the extent being
received by the Executive immediately prior to his death, Base Salary and
deferred compensation to the last day of the month in which his death occurs and
bonus compensation (at the time bonuses are normally paid) based on the average
of the regular annual bonuses (excluding the amount of any special or spot
bonuses) in respect of the two calendar years for which the annual bonus
received by the Executive from the Company was the greatest, provided that if
such death occurs prior to the determination of the Executive's annual bonus for
1995, the annual bonus used for such calculation shall not be less than the
target annual bonus provided for in Section 3.2 and if such death occurs after
the determination of the Executive's annual bonus for 1995 but prior to the
determination of the Executive's annual bonus for 1996, the annual bonus used
for such calculation shall not be less than the average of the target annual
bonus provided for in Section 3.2 and such 1995 annual bonus, but in any event,
prorated according to the
<PAGE>
20
number of whole or partial months the Executive was employed by the Company in
such calendar year, and (ii) the Account shall be liquidated and revalued as
provided in Annex A as of the date of the Executive's death (except that all
taxes shall be computed and charged to the Account as of such date of death to
the extent not theretofore so computed and charged) and the entire balance
thereof (plus any amount due under the last paragraph of Section A.6 of Annex A)
shall be paid to the Executive's estate (or a designated beneficiary) in a
single payment not later than 75 days following such date of death.
7. Life Insurance. Subject to the Executive's satisfactory completion of
--------------
any applications and other documentation and any physical examination that may
be required by the insurer and to the availability of insurance, the Company
shall obtain $2,000,000 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
<PAGE>
21
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 so long as the Executive is an employee of the Company, the
Executive shall be eligible to participate in any pension, profit-sharing, stock
option or similar plan or program and in any group insurance, hospitalization,
medical, dental, accident, disability or similar plan or program of the Company
now existing or established hereafter. In addition, the Executive shall be
entitled during the term of employment and so long as the Executive is an
employee of the Company, to receive other benefits generally available to all
senior executives of the Company to the extent the Executive is eligible under
the general provisions thereof, including, without limitation, to the extent
maintained in effect by the Company for its senior executives, an automobile
allowance and financial services.
8.2 Benefits After a Termination or Disability. During the period the
------------------------------------------
Executive remains on the payroll of the Company after a termination pursuant to
Section 4.2 or 4.3 and during the Disability Period the Executive shall continue
to be eligible to receive the benefits required to be provided to the Executive
under Section 8.1 to the extent such benefits are maintained in effect by the
Company for its senior executives; provided, however, the Executive shall not be
entitled to any additional awards or grants under any stock option, restricted
stock or other stock based incentive plan. The Executive shall continue to be
an employee of the Company for purposes of any stock option and restricted
shares agreements and any other incentive plan awards during the term of
employment and until such time as the Executive shall leave the payroll of the
Company. At the time the Executive's term of employment with the Company
terminates and he leaves the payroll of the Company
<PAGE>
22
pursuant to the provisions of Section 4.1, 4.2, 4.3, 5 or 6, the Executive's
rights to benefits and payments under any benefit plans or any insurance or
other death benefit plans or arrangements of the Company or under any stock
option, restricted stock, stock appreciation right, bonus unit, management
incentive or other plan of the Company shall be determined, subject to the other
terms and provisions of this Agreement, in accordance with the terms and
provisions of such plans and any agreements under which such stock options,
restricted stock or other awards were granted; provided, however, that
notwithstanding the foregoing or any more restrictive provisions of any such
plan or agreement, if the Executive leaves the payroll of the Company as a
result of a termination pursuant to Section 4.2, then 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 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, 4.3, 5 or 6 (and regardless of whether the
Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), the
Executive shall not be entitled to notice and severance or to be paid for any
accrued vacation time or unused sabbatical, the payments provided for in such
Sections being in lieu thereof.
9. Protection of Confidential Information; Non-Compete. The provisions of
---------------------------------------------------
Section 9.2 shall continue to apply through the latest of (i) the Term Date,
(ii) the date the Executive ceases to be an employee of the Company and leaves
the payroll of the Company for any reason and (iii) twelve months after the
termination of the Executive's employment with the Company pursuant to Section
4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue to apply
until three years after the latest of the events described in the preceding
sentence.
<PAGE>
23
9.1 Confidentiality Covenant. The Executive acknowledges that his
------------------------
employment by the Company (which, for purposes of this Section 9 shall mean Time
Warner Inc. and its affiliates) will, throughout the term of employment, bring
him into close contact with many confidential affairs of the Company, including
information about costs, profits, markets, sales, products, key personnel,
pricing policies, operational methods, technical processes and other business
affairs and methods and other information not readily available to the public,
and plans for future development. The Executive further acknowledges that the
services to be performed under this Agreement are of a special, unique, unusual,
extraordinary and intellectual character. The Executive further acknowledges
that the business of the Company is international in scope, that its products
are marketed throughout the world, that the Company competes in nearly all of
its business activities with other Entities that are or could be located in
nearly any part of the world and that the nature of the Executive's services,
position and expertise are such that he is capable of competing with the Company
from nearly any location in the world. In recognition of the foregoing, the
Executive covenants and agrees:
9.1.1 The Executive shall keep secret all confidential matters of the
Company and shall not intentionally disclose such matters to anyone outside of
the Company, either during or after the term of employment, except with the
Company's written consent, provided that (i) the Executive shall have no such
obligation to the extent such matters are or become publicly known other than as
a result of the Executive's breach of his obligations hereunder and (ii) the
Executive may, after giving prior notice to the Company to the extent
practicable under the circumstances, disclose such matters to the extent
required by applicable laws or governmental regulations or judicial or
regulatory process;
9.1.2 The Executive shall deliver promptly to the Company on termination
of his employment by the Company, or at any other time the Company may so
request, at the Company's expense, all memoranda, notes, records, reports and
other documents (and all copies thereof) relating to the
<PAGE>
24
Company's business, which he obtained while employed by, or otherwise serving or
acting on behalf of, the Company and which he may then possess or have under his
control; and
9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2
or 4.3, for a period of one year after such termination, without the prior
written consent of the Company, the Executive shall not employ, and shall not
cause any Entity of which he is an affiliate to employ, any person who was a
full-time 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 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, or (c) serving as a director of any Entity that is not in
competition with the Company. For purposes of the foregoing, a person or Entity
shall be deemed to be in competition with the Company if such person or it
engages in any line of business that is substantially the same as either (i) any
line of operating business which the Company engages in, conducts or, to the
knowledge of the Executive, has definitive plans to engage in or conduct, or
(ii) any operating business that is engaged in or conducted by the Company and
as
<PAGE>
25
to which, to the knowledge of the Executive, the Company covenants in writing,
in connection with the disposition of such business, not to compete therewith.
9.3 Specific Remedy. In addition to such other rights and remedies as the
---------------
Company may have at equity or in law with respect to any breach of this
Agreement, if the Executive commits a material breach of any of the provisions
of Section 9.1, the Company shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company.
9.4 Liquidated Damages. If the Executive commits a material breach of the
------------------
provisions of Section 9.2, the Executive shall pay to the Company as liquidated
damages an amount equal to two and one-half times the Executive's then current
Base Salary, or if the Executive is not employed by the Company at the time of
such breach, an amount equal to two and one-half times the most recent Base
Salary paid to the Executive by the Company. The Company shall be entitled to
offset any amounts owed by the Executive to the Company under this Section 9.4
against any amounts owed by the Company to the Executive under any provision of
this Agreement or otherwise, including without limitation, amounts payable to
the Executive under Sections 4.2 or 4.3. The Company and the Executive agree
that it is impossible to determine with any reasonable accuracy the amount of
prospective damages to the Company upon a breach of Section 9.2 by the Executive
and further agree that the damages set forth in this Section 9.4 are reasonable,
and not a penalty, based upon the facts and circumstances of the parties and
with due regard to future expectations.
10. Ownership of Work Product. The Executive acknowledges that during the
-------------------------
term of employment, he may conceive of, discover, invent or create inventions,
improvements, new contributions, literary property, material, ideas and
discoveries, whether patentable or copyrightable or not (all of the foregoing
being collectively referred to herein as
<PAGE>
26
"Work Product"), and that various business opportunities shall be presented to
him by reason of his employment by the Company. The Executive acknowledges that
all of the foregoing shall be owned by and belong exclusively to the Company and
that he shall have no personal interest therein, provided that they are either
related in any manner to the business (commercial or experimental) of the
Company, or are, in the case of Work Product, conceived or made on the Company's
time or with the use of the Company's facilities or materials, or, in the case
of business opportunities, are presented to him for the possible interest or
participation of the Company. The Executive shall (i) promptly disclose any
such Work Product and business opportunities to the Company; (ii) assign to the
Company, upon request and without additional compensation, the entire rights to
such Work Product and business opportunities; (iii) sign all papers necessary to
carry out the foregoing; and (iv) give testimony in support of his inventorship
or creation in any appropriate case. The Executive agrees that he will not
assert any rights to any Work Product or business opportunity as having been
made or acquired by him prior to the date of this Agreement except for Work
Product or business opportunities, if any, disclosed to and acknowledged by the
Company in writing prior to the date hereof.
11. Notices. All notices, requests, consents and other communications
-------
required or permitted to be given under this Agreement shall be effective only
if given in writing and shall be deemed to have been duly given if delivered
personally or sent by prepaid telegram, or mailed first-class, postage prepaid,
by registered or certified mail, as follows (or to such other or additional
address as either party shall designate by notice in writing to the other in
accordance herewith):
11.1 If to the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: Chief Executive Officer
(with a copy, similarly addressed
<PAGE>
27
but Attention: General Counsel)
11.2 If to the Executive, to his residence
address set forth on the records of the Company.
12. General.
-------
12.1 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the substantive laws of the State of
New York applicable to agreements made and to be performed entirely in New York.
12.2 Captions. The section headings contained herein are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12.3 Entire Agreement. This Agreement, including Annexes A and B,
----------------
sets forth the entire agreement and understanding of the parties relating to the
subject matter of this Agreement and at the Effective Date, supersedes all prior
agreements, arrangements and understandings, written or oral, between the
parties, including without limitation, the Prior Agreement. The Prior Agreement
shall remain in full force and effect until the Effective Date.
12.4 No Other Representations. No representation, promise or
------------------------
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or be liable for any alleged representation,
promise or inducement not so set forth.
12.5 Assignability. This Agreement and the Executive's rights and
-------------
obligations hereunder may not be assigned by the Executive. The Company may
assign its rights together with its obligations hereunder, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets; and such rights and obligations shall inure to, and be
binding upon, any successor to all or substantially all of the business and
assets of the Company, whether by merger, purchase of stock or assets or
otherwise.
<PAGE>
28
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 JAMS/ENDISPUTE for
resolution in arbitration in accordance with the rules and procedures of
JAMS/ENDISPUTE. Any such proceedings shall take place in New York City before a
single arbitrator (rather than a panel of arbitrators), pursuant to any
streamlined or expedited (rather than a comprehensive) arbitration process,
before a nonjudicial (rather than a judicial) arbitrator, and in accordance with
an arbitration process which, in the judgment of such arbitrator, shall have the
effect of reasonably limiting or reducing the cost of such arbitration. The
resolution of any such dispute or controversy by the arbitrator appointed in
accordance with the procedures of JAMS/ENDISPUTE shall be final and binding.
Judgment upon the award rendered by such arbitrator may be entered in any court
having jurisdiction thereof, and the parties consent to the jurisdiction of the
New York courts for this purpose. The prevailing party shall be entitled to
recover the costs of arbitration (including reasonable attorneys fees and the
fees of experts) from the losing party. If at the time any dispute or
controversy arises with respect to this Agreement, JAMS/ENDISPUTE is not in
business or is no longer providing arbitration services, then the American
Arbitration Association shall be substituted for JAMS/ENDISPUTE
<PAGE>
29
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
<PAGE>
30
Company and the Executive shall make all the payments provided for in this
Agreement in a timely manner.
12.12 Severability. If any provision of this Agreement shall be held
------------
invalid, the remainder of this Agreement shall not be affected thereby;
provided, however, that the parties shall negotiate in good faith with respect
to equitable modification of the provision or application thereof held to be
invalid. To the extent that it may effectively do so under applicable law, each
party hereby waives any provision of law which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.
12.13 Definitions. The following terms are defined in this Agreement
-----------
in the places indicated:
Account - Section 3.3
Account Retained Income - Section A.6 of Annex A
affiliate - Section 4.2.3
Applicable Tax Law - Section A.5 of Annex A
Base Salary - Section 3.1
cause - Section 4.1
Code - Section 4.2.2
Company - the first paragraph on page 1
and Section 9.1
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
Retirement Date - Section 4.6
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
<PAGE>
31
IN WITNESS WHEREOF, the parties have duly executed
this Agreement as of the date first above written.
TIME WARNER INC.
By /s/ Gerald M. Levin
--------------------------
Gerald M. Levin
Chairman and Chief Executive Officer
/s/ Richard J. Bressler
---------------------------
Richard J. Bressler
<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
<PAGE>
A-2
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
<PAGE>
A-3
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
<PAGE>
A-4
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
<PAGE>
A-5
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 later of (i) the
Term Date and (ii) the date the Executive ceases to be an employee of the
Company and leaves the payroll of the Company for any reason, provided, however,
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such payments shall commence on January 1st of the
year following the year in which the
<PAGE>
A-6
latest of such events occurs. On each payment date, the Account shall be
charged with the dollar amount of such payment. On each payment date, the
amount of cash held or deemed to be held in the Account shall be not less than
the payment then due and the Company may select the securities to be sold or
deemed sold to provide such 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 aggregate value of the Account, as valued and
adjusted pursuant to the second preceding sentence, by the number of payments
remaining to be paid in the Pay-Out Period, including the payment then due;
provided that each payment made shall be deemed made first out of Account
Retained Income (to the extent remaining after all prior distributions thereof
since the last Valuation Date).
<PAGE>
A-7
The balance of the Account (excluding the Other Period Deferred Amount), after
all the securities held or deemed to have been held therein have been sold or
deemed to have been sold and all indebtedness liquidated, shall be paid to the
Executive in the final payment, which shall be decreased by deducting therefrom
the amount of all taxes attributable to the sale of any securities held or
deemed to have been held in the Account since the end of the preceding taxable
year of the Company, which taxes shall be computed as of the date of such
payment.
If this Agreement is terminated by the Company pursuant to Section 4.1
or if the Executive terminates this Agreement or the term of employment in
breach of this Agreement, the Account shall be valued as of the later of (i) the
Term Date or (ii) twelve months after termination of the Executive's employment
with the Company, and the balance of the Account, after the securities held or
deemed to have been held therein have been sold or deemed to have been sold and
all related indebtedness liquidated, shall be paid to the 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
<PAGE>
A-8
within 75 days of such death in accordance with the provisions of the second
preceding paragraph.
Within 90 days after the end of each taxable year of the Company in
which payments have been made from the Account and at the time of the final
payment from the Account, the Company shall compute and shall credit to the
Account, the amount of the tax benefit assumed to be received by it from the
payment to the Executive of amounts of Account Retained Income 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
<PAGE>
A-9
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 made as of
_____________, 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]
<PAGE>
EXHIBIT 10.19
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of February 15, 1994,
effective as of January 1, 1994 (the "Effective Date"), as amended on October
11, 1994 and March 15, 1995, between TIME WARNER INC., a Delaware corporation
(the "Company"), and Tod R. Hullin (the "Executive").
The Executive is currently employed by the Company pursuant to an
Employment Agreement dated as of January 17, 1991 (the "Prior Agreement"). The
Company wishes to restate the Prior Agreement and secure the services of the
Executive on a full-time basis for the period to and including December 31, 1998
(the "Term Date") on and subject to the terms and conditions set forth in this
Agreement, and the Executive is willing for the Prior Agreement to be so
restated and to provide such services on and subject to the terms and conditions
set forth in this Agreement. The parties therefore agree as follows:
1. Term of Employment. The Executive's "term of employment", as this
------------------
phrase is used throughout this Agreement, shall be for the period beginning on
the Effective Date and ending on the Term Date, subject, however, to the terms
and conditions set forth in this Agreement.
2. Employment. The Company shall employ the Executive, and the Executive
----------
shall serve, as Senior Vice President - Communications and Public Affairs of the
Company during the term of employment, and the Executive shall have the
authority, functions, duties, powers and responsibilities normally associated
with such position and as the Board of Directors, the Chief Executive Officer or
the Chief Operating Officer of the Company may from time to time delegate to the
Executive in addition thereto. The Executive shall, subject to his election as
such from time to time and without additional compensation, serve during the
term of employment in such additional offices of comparable or greater stature
and responsibility in the Company and its subsidiaries and as a director and as
a member of any committee of the Board of Directors of the Company and its
subsidiaries, to which he may be elected from time to time. During the term of
employment, (i) the Executive's services shall be rendered on a substantially
full-time, exclusive basis and he will apply on a
<PAGE>
2
full-time basis all of his skill and experience to the performance of his duties
in such employment, (ii) the Executive shall report only to the Company's Board
of Directors, its Chief Executive Officer or its Chief Operating Officer, (iii)
the Executive shall have no other employment and, without the prior written
consent of the Chief Executive Officer or the Chief Operating Officer of the
Company, no outside business activities which require the devotion of
substantial amounts of the Executive's time and (iv) the place for the
performance of the Executive's services shall be the principal executive offices
of the Company 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 $325,000 per annum during the term of
employment (the "Base Salary"). The Company may increase, but not decrease, the
Base Salary at any time and from time to time during the term of employment and
upon each such increase the term "Base Salary" shall mean such increased amount.
Base Salary shall be payable in monthly or more frequent installments in
accordance with the Company's then current practices and policies with respect
to senior executives. For the purposes of this Agreement "senior executives"
shall mean executives of the Company at the same 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. The Executive's target bonus
shall be 100% of the Executive's Base Salary but the Executive acknowledges that
his actual bonus will vary depending upon the
<PAGE>
3
performance of the Company and 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, 4.2.3,
4.3.2 or 4.3.3, 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.
<PAGE>
4
3.5 Prior Account. The parties confirm that the Company has maintained a
-------------
deferred compensation account (the "Prior Account") for the Executive in
accordance with the Prior Agreement. The Prior Account shall be promptly
transferred to, and shall for all purposes be deemed part of, the 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
<PAGE>
5
Certificate of Incorporation and By-Laws of the Company (not including any
amendments or additions after the date of execution hereof that limit or narrow,
but including any that add to or broaden, the protection afforded to the
Executive by those provisions), to the extent not prohibited by applicable law
at the time of the assertion of any liability against the Executive.
4. Termination.
-----------
4.1 Termination for Cause. The Company may terminate the term of
---------------------
employment and all of the Company's obligations hereunder, other than its
obligations set forth below in this Section 4.1, only for "cause" and only if
the term of employment has not previously been terminated pursuant to any other
provision of this Agreement. Termination by the Company for "cause" shall mean
termination by action of the Company's Board of Directors, or a committee
thereof, because of the Executive's conviction (treating a nolo contendere plea
as a conviction) of a felony (whether or not any right to appeal has been or may
be exercised) or willful refusal without proper cause to perform his obligations
under this Agreement or because of the Executive's 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 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
<PAGE>
6
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 effective 15 days after the giving
of such notice, if, at the time of the giving of such notice, the Company shall
be in material breach of its obligations under this Agreement; provided,
however, that, with the exception of clause (i) below, this Agreement shall not
so terminate if such notice is the first such notice of termination delivered by
the Executive pursuant to this Section 4.2 and within such 15-day period the
Company shall have cured all such material breaches of its obligations under
this Agreement. A material breach by the Company shall include, but not be
limited to, (i) the Company failing to cause the Executive to retain the title
specified in the first sentence of Section 2 or a more senior title; (ii) the
Executive being required to report to persons other than those specified in
Section 2; (iii) the Company violating the provisions of Section 2 with respect
to the Executive's authority, functions, duties, powers or responsibilities
(whether or not accompanied by a change in title); (iv) the Company requiring
the Executive's primary services to be rendered at a place other than at the
Company's principal executive offices in the New York City metropolitan area;
and (v) the Company failing to cause the successor to all or substantially all
of the business and assets of the Company expressly to assume the obligations of
the Company under this Agreement.
<PAGE>
7
In the event of a termination pursuant to the preceding paragraph of this
Section 4.2, or in the event of a termination of this Agreement or the term of
employment by the Company in breach of this Agreement, 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 4.5
and 4.7 and Sections 6 through 12 shall survive such termination, and (ii) the
Executive shall be entitled to receive any earned and unpaid Base Salary and
deferred compensation accrued through the Termination Date and a pro rata
portion of the Executive's annual bonus for the year in which such termination
occurs through the date of such termination based on the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses) in
respect of the two calendar years 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 the greater of (i) all amounts
otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year in which
such termination occurs and for each subsequent year through and including the
Term Date and (ii) all amounts that would be payable pursuant to Sections 3.1,
3.2
<PAGE>
8
and 3.3 if the Term Date had been a date three years after the date of such
notice of termination (assuming, in the case of either (i) or (ii) above, that
annual bonuses are required to be paid for each such year, with each such annual
bonus being equal to the average of the regular annual bonus amounts (excluding
the amount of any special or spot bonuses) in respect of the two calendar years
for which the regular annual bonus received by the Executive from the Company
was the greatest (assuming that no portion of such bonus is deferred pursuant to
Section 3.4), with the bonus for any partial calendar year appropriately
annualized). Any payments required to be made to the Executive pursuant to this
Section 4.2.2 upon such termination in respect of Sections 3.1 and 3.2 and the
credit to the Account provided for in the penultimate sentence of Section 3.3
shall be discounted to present value as of the date of payment from the times at
which such amounts would have become payable absent any such termination at an
annual discount rate for the relevant periods equal to 120% of the "applicable
Federal rate" (within the meaning of Section 1274(d) of the Internal Revenue
Code of 1986 (the "Code")), in effect on the date of such termination,
compounded semi-annually, the use of which rate is hereby elected by the parties
hereto pursuant to Treas. Reg. (S)1.280G-1 Q/A 32 (provided that, in the event
such election is not permitted under Section 280G of the Code and the
regulations thereunder, such other rate determined as of such other date as is
applicable for determining present value under Section 280G of the Code shall be
used).
4.2.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company for the period ending on the later of (i) the
Term Date and (ii) the date which is three years after the date notice of
termination is given under this Section 4.2, and during such period the
Executive shall be entitled to receive, whether or not he becomes disabled
during such period but subject to Section 6, (a) Base Salary at an annual rate
equal to his Base Salary in effect immediately prior to the notice of
termination as provided in Section 3.1, (b) an annual bonus (all or a portion of
which may be deferred by the Executive pursuant to Section 3.4) in respect of
each calendar year or portion thereof (in which case a pro rata portion of such
annual bonus will be payable) during such period equal to the average of the
regular annual bonus amounts (excluding the
<PAGE>
9
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 (with any partial calendar year bonus appropriately annualized) as
provided in Section 3.2 and (c) deferred compensation as provided in Section
3.3. Except as provided in the next sentence, if the Executive accepts full-
time employment with any other Entity during such period or notifies the Company
in writing of his intention to terminate his status as an employee during such
period, then the term of employment shall cease and the Executive shall cease to
be an employee of the Company effective upon the commencement of such employment
or the effective date of such termination as specified by the Executive in such
notice, whichever is applicable, and the Executive shall be entitled to receive
as 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) and regular annual bonuses (assuming no
deferral pursuant to Section 3.4) the Executive would have been entitled to
receive pursuant to this Section 4.2.3 had the Executive remained on the
Company's payroll until the end of the period described in the first sentence of
this Section 4.2.3. Notwithstanding the preceding sentence, if the Executive
accepts employment with any not-for-profit Entity, then the Executive shall be
entitled to remain an employee of the Company and receive the payments as
provided in the first sentence of this Section 4.2.3; and if the Executive
accepts full-time employment with any affiliate of the Company, then the
payments provided for in this Section 4.2.3 and the term of employment shall
cease and the Executive shall not be entitled to any such lump sum payment. For
purposes of this Agreement, the term "affiliate" shall mean any Entity which,
directly or indirectly, controls, is controlled by, or is under common control
with, the Company.
4.3 After the Term Date. If at the Term Date, the term of employment
-------------------
shall not have been previously terminated pursuant to the provisions of this
Agreement, no Disability Period is then in effect and the parties shall not
<PAGE>
10
have agreed to an extension or renewal of this Agreement or on the terms of a
new employment agreement, then the term of employment shall continue and the
Executive shall continue to be employed by the Company pursuant to the terms of
this Agreement, subject to termination by either party hereto on 60 days written
notice delivered to the other party. If the Company shall terminate the term of
employment on or after the Term Date for any reason (other than cause as defined
in Section 4.1, in which case Section 4.1 shall apply), which the Company shall
have the right to do so long as no Disability Date (as defined in Section 5) has
occurred prior to the delivery by the Company of written notice of termination,
then in lieu of the provisions of Section 4.2, the Executive shall be entitled
to elect by delivery of written notice to the Company, within 30 days after such
notice of termination is given, either (A) to cease being an employee of the
Company and receive a lump sum payment as provided in Section 4.3.2 or (B)
remain an employee of the Company for a period of twelve months pursuant to
Section 4.3.3 and receive the payments provided in Section 4.3.3. After the
Executive makes such election, the following provisions shall apply:
4.3.1 Regardless of the election made by the Executive, at the end of the
60-day notice period provided for in the first sentence of Section 4.3 the
Executive shall have no further obligations or liabilities to the Company
whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 shall
survive such termination.
4.3.2 In the event the Executive shall make the election provided in
clause (A) above, the Company shall pay to the Executive in a lump sum at the
end of the 60-day notice period provided for in the first sentence of Section
4.3 (provided that if the Executive was named in the compensation table in the
Company's then most recent proxy statement, such lump sum payment shall be made
within 30 days after the end of the year in which such notice of termination is
given) an amount (discounted as provided in the second sentence of Section
4.2.2) equal to three times the sum of (i) the Executive's Base Salary as in
effect immediately prior to such notice of termination, (ii) an amount equal to
the average regular annual bonus amounts (excluding the amount of any special or
spot bonuses) received by the Executive from the Company for the two calendar
years immediately preceding the calendar year in which such notice of
termination is given
<PAGE>
11
(assuming that no portion of such bonus is deferred pursuant to Section 3.4),
with the bonus for any partial calendar year appropriately annualized and (iii)
the annual amount of deferred compensation payable by the Company to the Account
pursuant to Section 3.3 as in effect immediately prior to such notice of
termination (which shall be credited to the Account as provided in the
penultimate sentence of Section 3.3).
4.3.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company until the date which is twelve months after
the end of the 60-day period referred to in the first sentence of Section 4.3
and during such period the Executive shall be entitled to receive, whether or
not he becomes disabled during such period but subject to Section 6, (i) the
Executive's Base Salary as in effect immediately prior to such notice of
termination, (ii) an annual bonus (all or any portion of which may be deferred
by the Executive pursuant to Section 3.4) equal to the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses)
received by the Executive from the Company for the two calendar years
immediately preceding the calendar year in which such notice of termination is
given (with the bonus for any partial calendar year appropriately annualized)
and (iii) deferred compensation as provided in Section 3.3 of this Agreement.
At the end of such twelve month period the term of employment shall cease, the
Executive shall cease to be an employee of the Company and the Company shall pay
to the Executive in a lump sum (discounted as provided in the second sentence of
Section 4.2.2) an amount equal to two times the sum of the amounts described in
clauses (i), (ii) and (iii) of Section 4.3.2. Except as provided in the next
sentence, if the Executive accepts full-time employment with any other Entity
during such twelve-month period or notifies the Company in writing of his
intention to terminate his employment during such period, the Executive shall
cease to be an employee of the Company and the term of employment shall cease
effective upon the commencement of such employment or the effective date of such
termination as specified by the Executive in such notice, whichever is
applicable, and shall be entitled to receive a lump sum payment within 30 days
after such commencement or such effective date (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
<PAGE>
12
the 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) and regular
annual bonuses the Executive would have been entitled to receive pursuant to
this Section 4.3.3 (including the lump sum) had the Executive remained on the
Company's payroll until the end of such twelve-month period. Notwithstanding
the preceding sentence, if the Executive accepts employment with any not-for-
profit Entity, then the Executive shall be entitled to remain an employee of the
Company and receive the payments as provided in the first sentence of this
Section 4.3.3; and if the Executive accepts full-time employment with any
affiliate of the Company, then the term of employment and the payments provided
for in this Section 4.3.3 shall cease and the Executive shall not be entitled to
any such lump sum payment.
4.4 Office Facilities. In the event the Executive shall make the election
-----------------
provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on
the day the Executive makes such election and ending one year thereafter, the
Company shall, without charge to the Executive, make available to the Executive
office space at the Executive's principal job location immediately prior to his
termination of employment, or other location reasonably close to such location,
together with secretarial services, office facilities, services and furnishings,
in each case reasonably appropriate to an employee of the Executive's position
and responsibilities prior to such termination of employment.
4.5 Release. In partial consideration for the Company's obligation to
-------
make the payments described in Sections 4.2 and 4.3, the Executive shall execute
and deliver to the Company a release in substantially the form attached hereto
as Annex B. The Company shall deliver such release to the Executive within 10
days after the written notice of termination is delivered pursuant to Section
4.2 or 4.3 and the Executive shall execute and deliver such release to the
Company within 21 days after receipt thereof. If the Executive shall fail to
execute and deliver such release to the Company within such 21 day period, or if
the Executive shall revoke his consent to such release as provided therein, the
Executive's term of employment shall terminate as provided in Section 4.2 or
4.3, as applicable, but the Executive shall receive, in lieu
<PAGE>
13
of the payments provided for in said Section 4.2 or 4.3, a lump sum cash payment
in an amount determined in accordance with the personnel policies of the Company
relating to notice and severance then generally applicable to employees with
length of service and compensation level of the Executive.
4.6 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5,
----------
if the term of employment is in effect and the Executive is still employed by
the Company pursuant to this Agreement on the date the Executive first becomes
eligible for normal retirement under any retirement plan of the Company or any
subsidiary of the Company (the "Retirement Date"), then this Agreement shall
terminate automatically on such date and the Executive's employment with the
Company shall thereafter be governed by the policies generally applicable to
employees of the Company, and the Executive shall not thereafter be entitled to
the payments provided in such Sections to the extent not received by the
Executive on or prior to the Retirement Date. In addition, no benefits or
payments provided in Sections 4.2, 4.3 or 5 shall include any period after the
Retirement Date and if the provision of benefits or calculation of payments
provided in any such Section would include any period subsequent to the
Retirement Date, such provision of benefits shall end on the Retirement Date and
the calculation of payments shall cover only the period ending on the Retirement
Date. Notwithstanding the foregoing, the Company's obligations under Section 7
of this Agreement shall continue after any such termination and the provisions
of Sections 12.1 and 12.7 shall apply to any dispute with respect to this
Agreement that arises after any such termination.
4.7 Mitigation. In the event of termination of the term of employment by
----------
the Executive pursuant to Section 4.2 as a result of a material breach by the
Company of any of its obligations hereunder, or in the event of termination of
the term of employment by the Company pursuant to Section 4.3 or 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,
<PAGE>
14
but not in excess of the extent, if any, necessary to prevent the Company from
losing any tax deductions to which it otherwise would be entitled in connection
with such damages if they were not so "contingent on a change". In addition to
any obligation under the preceding sentence, and without duplication of any
amounts required to be paid to the Company thereunder, if any such termination
occurs and the Executive, whether or not required to mitigate his damages under
the preceding sentence, thereafter obtains other employment, the total cash
salary and bonus received in connection with such other employment, whether paid
to him or deferred for his benefit, for services through (i) in the case of a
termination pursuant to Section 4.2, the later of (x) the Term Date or (y) three
years after the date notice of termination is delivered pursuant to Section 4.2,
and (ii) in the case of a termination pursuant to Section 4.3, the date which is
three years after the end of the 60-day notice period referred to in the first
sentence of Section 4.3, in either case up to an amount equal to (x) the
discounted lump sum payment received by or for the account of the Executive with
respect to Base Salary, annual bonus and deferred compensation under Section 3
for such period, minus (y) the amount of severance the Executive would have
received in accordance with the personnel policies of the Company if the
Executive had been job eliminated, shall reduce, pro tanto, any amount which the
--- -----
Company would otherwise be required to pay to the Executive as a result of such
termination and, to the extent amounts have theretofore been paid to him as a
result of such termination, such cash salary and bonus shall be paid over to the
Company as received with respect to such period, but the provisions of this
sentence shall not apply to any type of equity interest, bonus unit, phantom or
restricted stock, stock option, stock appreciation right or similar benefit
received as a result of such other employment. With respect to the preceding
sentences, any payments or rights to which the Executive is entitled by reason
of the termination of the term of employment by the Executive pursuant to
Section 4.2 or in the event of the termination of the term of employment by the
Company pursuant to Section 4.3 or 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 for such year. Any obligation of the Executive to mitigate his
<PAGE>
15
damages pursuant to this Section 4.7 shall not be a defense or offset to the
Company's obligation to pay the Executive in full the amounts provided in
Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, as the case may be, at the time provided
therein or the timely and full performance of any of the Company's other
obligations under this Agreement.
4.8 Payments. So long as the Executive remains on the payroll of the
--------
Company or any subsidiary of the Company, payments of salary, deferred
compensation and bonus required to be made pursuant to Section 4.2 or 4.3 shall
be made at the same times as such payments are made to senior executives of the
Company or such subsidiary.
5. Disability. If during the term of employment and prior to any
----------
termination of this Agreement under Section 4.2 or 4.3, the Executive shall
become physically or mentally disabled, whether totally or partially, so that he
is prevented from performing his usual duties for a period of six consecutive
months, or for shorter periods aggregating six months in any twelve-month
period, the Company shall, nevertheless, continue to pay the Executive his full
compensation and continue to credit the 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 longer of (i) the
period ending on the Term Date or (ii) three years (in the case of either (i) or
(ii), the "Disability Period"), in an 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
<PAGE>
16
3.4). If during the Disability Period the Executive shall fully recover from
his disability, the Company shall have the right (exercisable within 60 days
after notice from the Executive of such recovery), but not the obligation, to
restore the Executive to full-time service at full compensation. If the Company
elects to restore the Executive to full-time service, then this Agreement shall
continue in full force and effect in all respects and the Term Date shall not be
extended by virtue of the occurrence of the Disability Period. If the Company
elects not to restore the Executive to full-time service, the Executive shall be
entitled to obtain other employment, subject, however, to the following: (i)
the Executive shall be obligated to perform advisory services during any balance
of the Disability Period; and (ii) the provisions of Sections 9 and 10 shall
continue to apply to the Executive during the Disability Period. The advisory
services referred to in clause (i) of the immediately preceding sentence shall
consist of rendering advice concerning the business, affairs and management of
the Company as requested by the Chief Executive Officer or the 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. Except as otherwise provided in this
Section 5, the term of employment shall continue during the Disability Period
and the Executive shall be entitled to all of the rights
<PAGE>
17
and benefits provided for in this Agreement except that, Sections 4.2 and 4.3
shall not apply during the Disability Period and unless the Company has restored
the Executive to fill-time service at full compensation prior to the end of the
Disability Period, the term of employment shall end and the Executive shall
cease to be an employee of the Company at the end of the Disability Period and
shall not be entitled to notice and severance or to receive or be paid for any
accrued vacation time or unused sabbatical.
6. Death. Upon the death of the Executive during the term of employment,
-----
this Agreement and all obligations of the Company to make any payments under
Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a
designated beneficiary) shall be entitled to receive, to the extent being
received by the Executive immediately prior to his death, Base Salary and
deferred compensation to the last day of the month in which his death occurs and
bonus compensation (at the time bonuses are normally paid) based on the average
of the regular annual bonuses (excluding the amount of any special or spot
bonuses) in respect of the two calendar years 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. Subject to the Executive's satisfactory completion of
--------------
any applications and other documentation and any physical examination that may
be required by the insurer and to the availability of insurance, the Company
shall obtain $2,000,000 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
<PAGE>
18
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 so long as the Executive is an employee of the Company, the
Executive shall be eligible to participate in any pension, profit-sharing, stock
option or similar plan or program and in any group insurance, hospitalization,
medical, dental, accident, disability or similar plan or program of the Company
now existing or established hereafter. In addition, the Executive shall be
entitled during the term of employment and so long as the Executive is an
employee of the Company, to receive other benefits generally available to all
senior executives of the Company to the extent the Executive is eligible under
the general provisions thereof, including, without limitation, to the extent
maintained in effect by the Company
<PAGE>
19
for its senior executives, an automobile allowance and financial services.
In addition to any retirement benefits to which the Executive is entitled
under the Time Warner Employees' Pension Plan, any supplemental retirement or
excess benefit plan maintained by the Company or any of its affiliates or any
successor plans thereto (hereinafter collectively referred to as the "Pension
Plan"), the Company will, following the Executive's termination of employment
for any reason, except by the Company for cause pursuant to Section 4.1 and
except for a termination by the Executive in breach of this Agreement, pay or
cause to be paid to the Executive or his beneficiary as the case may be, in
accordance with the following provisions, an amount which is equivalent to the
excess of (the "Excess Amount") (i) the amount such Executive or beneficiary
would be entitled to receive under the Pension Plan assuming the Executive had
five additional years of service (as such term is defined in the Pension Plan)
taking into account all the provisions of the Pension Plan as are from time to
time in effect and applicable to the Executive or his beneficiary over (ii) the
amount such Executive or beneficiary would be entitled to receive under the
Pension Plan based on actual years of service taking into account all the
provisions of the Pension Plan as are from time to time in effect and applicable
to the Executive or his beneficiary.
If the Executive or his beneficiary is entitled to an Excess Amount as
described in the preceding paragraph, the Company shall pay the Excess Amount to
the Executive or his beneficiary as follows. If the Executive is otherwise
entitled to benefits under the Pension Plan, then the Excess Amount shall be
paid at the same times and in the same manner as shall be elected by the
Executive or his beneficiary for payment of amounts under the Pension Plan. If
the Executive is not otherwise entitled to benefits under the Pension Plan, then
the Excess Amount shall be paid at the time(s) and in one of the forms of
payment permitted under the Pension Plan as elected by the Executive or his
beneficiary. If the Executive or his beneficiary dies before any payments
described above have been made, the payments shall be made to the beneficiary
thereof at the same time and in the same manner as they would have been paid if
the payments were to be made under the Pension Plan.
<PAGE>
20
8.2 Benefits After a Termination or Disability. During the period the
------------------------------------------
Executive remains on the payroll of the Company after a termination pursuant to
Section 4.2 or 4.3 and during the Disability Period the Executive shall continue
to be eligible to 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 until such time as the Executive shall leave the payroll of the
Company. At the time the Executive's term of employment with the Company
terminates and he leaves the payroll of the Company pursuant to the provisions
of Section 4.1, 4.2, 4.3, 5 or 6, the Executive's rights to benefits and
payments under any benefit plans or any insurance or other death benefit plans
or arrangements of the Company or under any stock option, restricted stock,
stock appreciation right, bonus unit, management incentive or other plan of the
Company shall be determined, subject to the other terms and provisions of this
Agreement, in accordance with the terms and provisions of such plans and any
agreements under which such stock options, restricted stock or other awards were
granted; provided, however, that notwithstanding the foregoing or any more
restrictive provisions of any such plan or agreement, if the Executive leaves
the payroll of the Company as a result of a termination pursuant to Section 4.2,
then 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 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, 4.3, 5 or 6 (and regardless of whether the
Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), the
Executive shall not be entitled to notice and severance or to be paid for any
accrued vacation time or unused sabbatical, the payments provided for in such
Sections being in lieu thereof.
<PAGE>
21
9. Protection of Confidential Information; Non-Compete. The provisions of
---------------------------------------------------
Section 9.2 shall continue to apply through the latest of (i) the Term Date,
(ii) the date the Executive ceases to be an employee of the Company and leaves
the payroll of the Company for any reason and (iii) twelve months after the
termination of the Executive's employment with the Company pursuant to Section
4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue to apply
until three years after the latest of the events described in the preceding
sentence.
9.1 Confidentiality Covenant. The Executive acknowledges that his
------------------------
employment by the Company (which, for purposes of this Section 9 shall mean Time
Warner Inc. and its affiliates) will, throughout the term of employment, bring
him into close contact with many confidential affairs of the Company, including
information about costs, profits, markets, sales, products, key personnel,
pricing policies, operational methods, technical processes and other business
affairs and methods and other information not readily available to the public,
and plans for future development. The Executive further acknowledges that the
services to be performed under this Agreement are of a special, unique, unusual,
extraordinary and intellectual character. The Executive further acknowledges
that the business of the Company is international in scope, that its products
are marketed throughout the world, that the Company competes in nearly all of
its business activities with other Entities that are or could be located in
nearly any part of the world and that the nature of the Executive's services,
position and expertise are such that he is capable of competing with the Company
from nearly any location in the world. In recognition of the foregoing, the
Executive covenants and agrees:
9.1.1 The Executive shall keep secret all confidential matters of the
Company and shall not intentionally disclose such matters to anyone outside of
the Company, either during or after the term of employment, except with the
Company's written consent, provided that (i) the Executive shall have no such
obligation to the extent such matters are or become publicly known other than as
a result of the Executive's breach of his obligations hereunder and (ii) the
Executive may, after giving prior notice to the Company to the extent
practicable under the circumstances, disclose such matters to
<PAGE>
22
the extent required by applicable laws or governmental regulations or judicial
or regulatory process;
9.1.2 The Executive shall deliver promptly to the Company on termination
of his employment by the Company, or at any other time the Company may so
request, at the Company's expense, all memoranda, notes, records, reports and
other documents (and all copies thereof) relating to the Company's business,
which he obtained while employed by, or otherwise serving or acting on behalf
of, the Company and which he may then possess or have under his control; and
9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2
or 4.3, for a period of one year after such termination, without the prior
written consent of the Company, the Executive shall not employ, and shall not
cause any Entity of which he is an affiliate to employ, any person who was a
full-time 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 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, or (c) serving as a director of any Entity that is not in
competition with the Company. For purposes of the foregoing, a person or Entity
shall be deemed to be in competition with the Company if such person or it
engages in any line of business that is substantially the same
<PAGE>
23
as either (i) any line of operating business which the Company engages in,
conducts or, to the knowledge of the Executive, has definitive plans to engage
in or conduct, or (ii) any operating business that is engaged in or conducted by
the Company and as to which, to the knowledge of the Executive, the Company
covenants in writing, in connection with the disposition of such business, not
to compete therewith.
9.3 Specific Remedy. In addition to such other rights and remedies as the
---------------
Company may have at equity or in law with respect to any breach of this
Agreement, if the Executive commits a material breach of any of the provisions
of Section 9.1, the Company shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company.
9.4 Liquidated Damages. If the Executive commits a material breach of the
------------------
provisions of Section 9.2, the Executive shall pay to the Company as liquidated
damages an amount equal to two and one-half times the Executive's then current
Base Salary, or if the Executive is not employed by the Company at the time of
such breach, an amount equal to two and one-half times the most recent Base
Salary paid to the Executive by the Company. The Company shall be entitled to
offset any amounts owed by the Executive to the Company under this Section 9.4
against any amounts owed by the Company to the Executive under any provision of
this Agreement or otherwise, including without limitation, amounts payable to
the Executive under Sections 4.2 or 4.3. The Company and the Executive agree
that it is impossible to determine with any reasonable accuracy the amount of
prospective damages to the Company upon a breach of Section 9.2 by the Executive
and further agree that the damages set forth in this Section 9.4 are reasonable,
and not a penalty, based upon the facts and circumstances of the parties and
with due regard to future expectations.
10. Ownership of Work Product. The Executive acknowledges that during the
-------------------------
term of employment, he may conceive of, discover, invent or create inventions,
improvements, new contributions, literary property, material, ideas and
discoveries, whether patentable or copyrightable or not
<PAGE>
24
(all of the foregoing being collectively referred to herein as "Work Product"),
and that various business opportunities shall be presented to him by reason of
his employment by the Company. The Executive acknowledges that all of the
foregoing shall be owned by and belong exclusively to the Company and that he
shall have no personal interest therein, provided that they are either related
in any manner to the business (commercial or experimental) of the Company, or
are, in the case of Work Product, conceived or made on the Company's time or
with the use of the Company's facilities or materials, or, in the case of
business opportunities, are presented to him for the possible interest or
participation of the Company. The Executive shall (i) promptly disclose any
such Work Product and business opportunities to the Company; (ii) assign to the
Company, upon request and without additional compensation, the entire rights to
such Work Product and business opportunities; (iii) sign all papers necessary to
carry out the foregoing; and (iv) give testimony in support of his inventorship
or creation in any appropriate case. The Executive agrees that he will not
assert any rights to any Work Product or business opportunity as having been
made or acquired by him prior to the date of this Agreement except for Work
Product or business opportunities, if any, disclosed to and acknowledged by the
Company in writing prior to the date hereof.
11. Notices. All notices, requests, consents and other communications
-------
required or permitted to be given under this Agreement shall be effective only
if given in writing and shall be deemed to have been duly given if delivered
personally or sent by prepaid telegram, or mailed first-class, postage prepaid,
by registered or certified mail, as follows (or to such other or additional
address as either party shall designate by notice in writing to the other in
accordance herewith):
11.1 If to the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: Chief Executive Officer
(with a copy, similarly addressed
but Attention: General Counsel)
<PAGE>
25
11.2 If to the Executive, to his residence address set
forth on the records of the Company.
12. General.
-------
12.1 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the substantive laws of the State of
New York applicable to agreements made and to be performed entirely in New York.
12.2 Captions. The section headings contained herein are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12.3 Entire Agreement. This Agreement, including Annexes A and B,
----------------
sets forth the entire agreement and understanding of the parties relating to the
subject matter of this Agreement and supersedes all prior agreements,
arrangements and understandings, written or oral, between the parties, including
without limitation, the Prior Agreement.
12.4 No Other Representations. No representation, promise or
------------------------
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or be liable for any alleged representation,
promise or inducement not so set forth.
12.5 Assignability. This Agreement and the Executive's rights and
-------------
obligations hereunder may not be assigned by the Executive. The Company may
assign its rights together with its obligations hereunder, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets; and such rights and obligations shall inure to, and be
binding upon, any successor to all or substantially all of the business and
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,
<PAGE>
26
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
<PAGE>
27
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:
<PAGE>
28
Account - Section 3.3
Account Retained Income - Section A.6 of Annex A
affiliate - Section 4.2.3
Applicable Tax Law - Section A.5 of Annex A
Base Salary - Section 3.1
cause - Section 4.1
Code - Section 4.2.2
Company - the first paragraph on page 1
and Section 9.1
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
Retirement Date - Section 4.6
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
IN WITNESS WHEREOF, the parties have duly executed
this Agreement as of the date first above written.
TIME WARNER INC.
By /s/ Gerald M. Levin
--------------------------
Gerald M. Levin
Chairman and
Chief Executive Officer
/s/ Tod R. Hullin
------------------------
Tod R. Hullin
<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
<PAGE>
A-2
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
<PAGE>
A-3
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
<PAGE>
A-4
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
<PAGE>
A-5
Company of such net loss (after such net loss is reduced by the amount of any
net capital loss of the Account for such year) shall be credited to the Account
on the last day of such year. If and to the extent that any such net loss of
the Account shall be utilized to determine a credit to the Account pursuant to
the preceding sentence, it shall not thereafter be carried forward under this
Section A.5. For purposes of determining taxes payable by the Company under any
provision of this Annex A it shall be assumed that the Company is a taxpayer and
pays all taxes at the maximum marginal rate of federal income taxes and state
and local income and franchise taxes (net of assumed federal income tax
benefits) applicable to business corporations and that all of such dividends,
interest, gains and losses are allocable to its corporate headquarters, which
are currently located in New York City.
A.6 Payments. Subject to the provisions of Section A.7, payments of
--------
deferred compensation shall be made as provided in this Section A.6. Deferred
compensation shall be paid monthly for a period of 60 months (the "Pay-Out
Period") commencing on the first day of the month after the later of (i) the
Term Date and (ii) the date the Executive ceases to be an employee of the
Company and leaves the payroll of the Company for any reason, provided, however,
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such payments shall commence on January 1st of the
year following the year in which the latest of such events occurs. On each
payment date, the Account shall be charged with the dollar amount of such
payment. On each payment date, the amount of cash held or deemed to be held in
the Account shall be not less than the payment then due and the Company may
select the securities to be sold or deemed sold to provide such 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
<PAGE>
A-6
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 aggregate value of the Account, as valued and
adjusted pursuant to the second preceding sentence, by the number of payments
remaining to be paid in the Pay-Out Period, including the payment then due;
provided that each payment made shall be deemed made first out of Account
Retained Income (to the extent remaining after all prior distributions thereof
since the last Valuation Date). The balance of the Account (excluding the Other
Period Deferred Amount), after all the securities held or deemed to have been
held therein have been sold or deemed to have been sold and all indebtedness
liquidated, shall be paid to the Executive in the final payment, which shall be
decreased by deducting therefrom the amount of all taxes attributable to the
sale of any securities held or deemed to have been held in the Account since the
end of the preceding taxable year of the Company, which taxes shall be computed
as of the date of such payment.
If this Agreement is terminated by the Company pursuant to Section 4.1
or if the Executive terminates this Agreement or the term of employment in
breach of this Agreement, the Account shall be valued as of the later of (i) the
Term Date or (ii) twelve months after termination of the Executive's employment
with the Company, and the balance of the Account, after the securities held or
deemed to have been held therein have been sold or deemed to have been sold and
all related indebtedness liquidated, shall be paid to the 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
<PAGE>
A-7
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 the taxable year of the Company in
which payments have been made from the Account and at the time of the final
payment from the Account, the Company shall compute and shall credit to the
Account, the amount of the tax benefit assumed to be received by it from the
payment to the Executive of amounts of Account Retained Income 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;
<PAGE>
A-8
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 made as of
_____________, 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]
<PAGE>
EXHIBIT 10.20
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of February 15, 1994,
effective as of January 1, 1994 (the "Effective Date"), as amended on October
11, 1994 and March 15, 1995, between TIME WARNER INC., a Delaware corporation
(the "Company"), and Philip R. Lochner, Jr. (the "Executive").
The Executive is currently employed by the Company pursuant to an
Employment Agreement dated as of July 18, 1991 (the "Prior Agreement"). The
Company wishes to restate the Prior Agreement and secure the services of the
Executive on a full-time basis for the period to and including December 31, 1998
(the "Term Date") on and subject to the terms and conditions set forth in this
Agreement, and the Executive is willing for the Prior Agreement to be so
restated and to provide such services on and subject to the terms and conditions
set forth in this Agreement. The parties therefore agree as follows:
1. Term of Employment. The Executive's "term of employment", as this
------------------
phrase is used throughout this Agreement, shall be for the period beginning on
the Effective Date and ending on the Term Date, subject, however, to the terms
and conditions set forth in this Agreement.
2. Employment. The Company shall employ the Executive, and the Executive
----------
shall serve, as Senior Vice President - Administration of the Company during the
term of employment, and the Executive shall have the authority, functions,
duties, powers and responsibilities normally associated with such position and
as the Board of Directors, the Chief Executive Officer or the Chief Operating
Officer of the Company may from time to time delegate to the Executive in
addition thereto. The Executive shall, subject to his election as such from
time to time and without additional compensation, serve during the term of
employment in such additional offices of comparable or greater stature and
responsibility in the Company and its subsidiaries and as a director and as a
member of any committee of the Board of Directors of the Company and its
subsidiaries, to which he may be elected from time to time. During the term of
employment, (i) the Executive's services shall be rendered on a substantially
full-time, exclusive basis and he will apply on a full-time basis all of his
skill and
<PAGE>
2
experience to the performance of his duties in such employment, (ii) the
Executive shall report only to the Company's Board of Directors, its Chief
Executive Officer or its Chief Operating Officer, (iii) the Executive shall have
no other employment and, without the prior written consent of the Chief
Executive Officer or the Chief Operating Officer of the Company, no outside
business activities which require the devotion of substantial amounts of the
Executive's time and (iv) the place for the performance of the Executive's
services shall be the principal executive offices of the Company 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 $325,000 per annum during the term of
employment (the "Base Salary"). The Company may increase, but not decrease, the
Base Salary at any time and from time to time during the term of employment and
upon each such increase the term "Base Salary" shall mean such increased amount.
Base Salary shall be payable in monthly or more frequent installments in
accordance with the Company's then current practices and policies with respect
to senior executives. For the purposes of this Agreement "senior executives"
shall mean executives of the Company at the same 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. The Executive's target bonus
shall be 100% of the Executive's Base Salary but the Executive acknowledges that
his actual bonus will vary depending upon the performance of the Company and the
Executive. Bonuses for
<PAGE>
3
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, 4.2.3,
4.3.2 or 4.3.3, 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
<PAGE>
4
"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
<PAGE>
5
execution hereof that limit or narrow, but including any that add to or broaden,
the protection afforded to the Executive by those provisions), to the extent not
prohibited by applicable law at the time of the assertion of any liability
against the Executive.
4. Termination.
-----------
4.1 Termination for Cause. The Company may terminate the term of
---------------------
employment and all of the Company's obligations hereunder, other than its
obligations set forth below in this Section 4.1, only for "cause" and only if
the term of employment has not previously been terminated pursuant to any other
provision of this Agreement. Termination by the Company for "cause" shall mean
termination by action of the Company's Board of Directors, or a committee
thereof, because of the Executive's conviction (treating a nolo contendere plea
as a conviction) of a felony (whether or not any right to appeal has been or may
be exercised) or willful refusal without proper cause to perform his obligations
under this Agreement or because of the Executive's 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 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
<PAGE>
6
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 effective 15 days after the giving
of such notice, if, at the time of the giving of such notice, the Company shall
be in material breach of its obligations under this Agreement; provided,
however, that, with the exception of clause (i) below, this Agreement shall not
so terminate if such notice is the first such notice of termination delivered by
the Executive pursuant to this Section 4.2 and within such 15-day period the
Company shall have cured all such material breaches of its obligations under
this Agreement. A material breach by the Company shall include, but not be
limited to, (i) the Company failing to cause the Executive to retain the title
specified in the first sentence of Section 2 or a more senior title; (ii) the
Executive being required to report to persons other than those specified in
Section 2; (iii) the Company violating the provisions of Section 2 with respect
to the Executive's authority, functions, duties, powers or responsibilities
(whether or not accompanied by a change in title); (iv) the Company requiring
the Executive's primary services to be rendered at a place other than at the
Company's principal executive offices in the New York City metropolitan area;
and (v) the Company failing to cause the successor to all or substantially all
of the business and assets of the Company expressly to assume the obligations of
the Company under this Agreement.
In the event of a termination pursuant to the preceding paragraph of this
Section 4.2, or in the event of a termination of this Agreement or the term of
employment by the
<PAGE>
7
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 4.5
and 4.7 and Sections 6 through 12 shall survive such termination, and (ii) the
Executive shall be entitled to receive any earned and unpaid Base Salary and
deferred compensation accrued through the Termination Date and a pro rata
portion of the Executive's annual bonus for the year in which such termination
occurs through the date of such termination based on the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses) in
respect of the two calendar years 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 the greater of (i) all amounts
otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year in which
such termination occurs and for each subsequent year through and including the
Term Date and (ii) all amounts that would be payable pursuant to Sections 3.1,
3.2 and 3.3 if the Term Date had been a date three years after the date of such
notice of termination (assuming, in the case of either (i) or (ii) above, that
annual bonuses are required to
<PAGE>
8
be paid for each such year, with each such annual bonus being equal to the
average of the regular annual bonus amounts (excluding the amount of any special
or spot bonuses) in respect of the two calendar years for which the regular
annual bonus received by the Executive from the Company was the greatest
(assuming that no portion of such bonus is deferred pursuant to Section 3.4),
with the bonus for any partial calendar year appropriately annualized). Any
payments required to be made to the Executive pursuant to this Section 4.2.2
upon such termination in respect of Sections 3.1 and 3.2 and the credit to the
Account provided for in the penultimate sentence of Section 3.3 shall be
discounted to present value as of the date of payment from the times at which
such amounts would have become payable absent any such termination at an annual
discount rate for the relevant periods equal to 120% of the "applicable Federal
rate" (within the meaning of Section 1274(d) of the Internal Revenue Code of
1986 (the "Code")), in effect on the date of such termination, compounded semi-
annually, the use of which rate is hereby elected by the parties hereto pursuant
to Treas. Reg. (S)1.280G-1 Q/A 32 (provided that, in the event such election is
not permitted under Section 280G of the Code and the regulations thereunder,
such other rate determined as of such other date as is applicable for
determining present value under Section 280G of the Code shall be used).
4.2.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company for the period ending on the later of (i) the
Term Date and (ii) the date which is three years after the date notice of
termination is given under this Section 4.2, and during such period the
Executive shall be entitled to receive, whether or not he becomes disabled
during such period but subject to Section 6, (a) Base Salary at an annual rate
equal to his Base Salary in effect immediately prior to the notice of
termination as provided in Section 3.1, (b) an annual bonus (all or a portion of
which may be deferred by the Executive pursuant to Section 3.4) in respect of
each calendar year or portion thereof (in which case a pro rata portion of such
annual bonus will be payable) during such period equal to the average of the
regular annual bonus amounts (excluding the amount of any special or spot
bonuses) in respect of the two calendar years for which the regular annual bonus
received by the Executive from the Company was the greatest (with any
<PAGE>
9
partial calendar year bonus appropriately annualized) as provided in Section 3.2
and (c) deferred compensation as provided in Section 3.3. Except as provided in
the next sentence, if the Executive accepts full-time employment with any other
Entity during such period or notifies the Company in writing of his intention to
terminate his status as an employee during such period, then the term of
employment shall cease and the Executive shall cease to be an employee of the
Company effective upon the commencement of such employment or the effective date
of such termination as specified by the Executive in such notice, whichever is
applicable, and the Executive shall be entitled to receive as 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)
and regular annual bonuses (assuming no deferral pursuant to Section 3.4) the
Executive would have been entitled to receive pursuant to this Section 4.2.3 had
the Executive remained on the Company's payroll until the end of the period
described in the first sentence of this Section 4.2.3. Notwithstanding the
preceding sentence, if the Executive accepts employment with any not-for-profit
Entity, then the Executive shall be entitled to remain an employee of the
Company and receive the payments as provided in the first sentence of this
Section 4.2.3; and if the Executive accepts full-time employment with any
affiliate of the Company, then the payments provided for in this Section 4.2.3
and the term of employment shall cease and the Executive shall not be entitled
to any such lump sum payment. For purposes of this Agreement, the term
"affiliate" shall mean any Entity which, directly or indirectly, controls, is
controlled by, or is under common control with, the Company.
4.3 After the Term Date. If at the Term Date, the term of employment
-------------------
shall not have been previously terminated pursuant to the provisions of this
Agreement, no Disability Period is then in effect and the parties shall not have
agreed to an extension or renewal of this Agreement or on the terms of a new
employment agreement, then the term of employment shall continue and the
Executive shall continue to
<PAGE>
10
be employed by the Company pursuant to the terms of this Agreement, subject to
termination by either party hereto on 60 days written notice delivered to the
other party. If the Company shall terminate the term of employment on or after
the Term Date for any reason (other than cause as defined in Section 4.1, in
which case Section 4.1 shall apply), which the Company shall have the right to
do so long as no Disability Date (as defined in Section 5) has occurred prior to
the delivery by the Company of written notice of termination, then in lieu of
the provisions of Section 4.2, the Executive shall be entitled to elect by
delivery of written notice to the Company, within 30 days after such notice of
termination is given, either (A) to cease being an employee of the Company and
receive a lump sum payment as provided in Section 4.3.2 or (B) remain an
employee of the Company for a period of twelve months pursuant to Section 4.3.3
and receive the payments provided in Section 4.3.3. After the Executive makes
such election, the following provisions shall apply:
4.3.1 Regardless of the election made by the Executive, at the end of the
60-day notice period provided for in the first sentence of Section 4.3 the
Executive shall have no further obligations or liabilities to the Company
whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 shall
survive such termination.
4.3.2 In the event the Executive shall make the election provided in
clause (A) above, the Company shall pay to the Executive in a lump sum at the
end of the 60-day notice period provided for in the first sentence of Section
4.3 (provided that if the Executive was named in the compensation table in the
Company's then most recent proxy statement, such lump sum payment shall be made
within 30 days after the end of the year in which such notice of termination is
given) an amount (discounted as provided in the second sentence of Section
4.2.2) equal to three times the sum of (i) the Executive's Base Salary as in
effect immediately prior to such notice of termination, (ii) an amount equal to
the average regular annual bonus amounts (excluding the amount of any special or
spot bonuses) received by the Executive from the Company for the two calendar
years immediately preceding the calendar year in which such notice of
termination is given (assuming that no portion of such bonus is deferred
pursuant to Section 3.4), with the bonus for any partial calendar year
appropriately annualized and (iii) the annual amount of
<PAGE>
11
deferred compensation payable by the Company to the Account pursuant to Section
3.3 as in effect immediately prior to such notice of termination (which shall be
credited to the Account as provided in the penultimate sentence of Section 3.3).
4.3.3 In the event the Executive shall make the election provided in
clause (B) above, the term of employment shall continue and the Executive shall
remain an employee of the Company until the date which is twelve months after
the end of the 60-day period referred to in the first sentence of Section 4.3
and during such period the Executive shall be entitled to receive, whether or
not he becomes disabled during such period but subject to Section 6, (i) the
Executive's Base Salary as in effect immediately prior to such notice of
termination, (ii) an annual bonus (all or any portion of which may be deferred
by the Executive pursuant to Section 3.4) equal to the average of the regular
annual bonus amounts (excluding the amount of any special or spot bonuses)
received by the Executive from the Company for the two calendar years
immediately preceding the calendar year in which such notice of termination is
given (with the bonus for any partial calendar year appropriately annualized)
and (iii) deferred compensation as provided in Section 3.3 of this Agreement.
At the end of such twelve month period the term of employment shall cease, the
Executive shall cease to be an employee of the Company and the Company shall pay
to the Executive in a lump sum (discounted as provided in the second sentence of
Section 4.2.2) an amount equal to two times the sum of the amounts described in
clauses (i), (ii) and (iii) of Section 4.3.2. Except as provided in the next
sentence, if the Executive accepts full-time employment with any other Entity
during such twelve-month period or notifies the Company in writing of his
intention to terminate his employment during such period, the Executive shall
cease to be an employee of the Company and the term of employment shall cease
effective upon the commencement of such employment or the effective date of such
termination as specified by the Executive in such notice, whichever is
applicable, and shall be entitled to receive a lump sum payment within 30 days
after such commencement or such effective date (provided that if the Executive
was named in the compensation table in the Company's then most recent proxy
statement, such lump sum payment shall be made within 30 days after the end of
the year in which such commencement or effective date occurred) an amount
(discounted as provided in the second sentence of Section 4.2.2) for the balance
of the Base Salary, deferred
<PAGE>
12
compensation (which shall be credited to the Account as provided in the
penultimate sentence of Section 3.3) and regular annual bonuses the Executive
would have been entitled to receive pursuant to this Section 4.3.3 (including
the lump sum) had the Executive remained on the Company's payroll until the end
of such twelve-month period. Notwithstanding the preceding sentence, if the
Executive accepts employment with any not-for-profit Entity, then the Executive
shall be entitled to remain an employee of the Company and receive the payments
as provided in the first sentence of this Section 4.3.3; and if the Executive
accepts full-time employment with any affiliate of the Company, then the term of
employment and the payments provided for in this Section 4.3.3 shall cease and
the Executive shall not be entitled to any such lump sum payment.
4.4 Office Facilities. In the event the Executive shall make the election
-----------------
provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on
the day the Executive makes such election and ending one year thereafter, the
Company shall, without charge to the Executive, make available to the Executive
office space at the Executive's principal job location immediately prior to his
termination of employment, or other location reasonably close to such location,
together with secretarial services, office facilities, services and furnishings,
in each case reasonably appropriate to an employee of the Executive's position
and responsibilities prior to such termination of employment.
4.5 Release. In partial consideration for the Company's obligation to
-------
make the payments described in Sections 4.2 and 4.3, the Executive shall execute
and deliver to the Company a release in substantially the form attached hereto
as Annex B. The Company shall deliver such release to the Executive within 10
days after the written notice of termination is delivered pursuant to Section
4.2 or 4.3 and the Executive shall execute and deliver such release to the
Company within 21 days after receipt thereof. If the Executive shall fail to
execute and deliver such release to the Company within such 21 day period, or if
the Executive shall revoke his consent to such release as provided therein, the
Executive's term of employment shall terminate as provided in Section 4.2 or
4.3, as applicable, but the Executive shall receive, in lieu of the payments
provided for in said Section 4.2 or 4.3, a lump sum cash payment in an amount
determined in accordance with the personnel policies of the Company relating to
notice and
<PAGE>
13
severance then generally applicable to employees with length of service and
compensation level of the Executive.
4.6 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5,
----------
if the term of employment is in effect and the Executive is still employed by
the Company pursuant to this Agreement on the date the Executive first becomes
eligible for normal retirement under any retirement plan of the Company or any
subsidiary of the Company (the "Retirement Date"), then this Agreement shall
terminate automatically on such date and the Executive's employment with the
Company shall thereafter be governed by the policies generally applicable to
employees of the Company, and the Executive shall not thereafter be entitled to
the payments provided in such Sections to the extent not received by the
Executive on or prior to the Retirement Date. In addition, no benefits or
payments provided in Sections 4.2, 4.3 or 5 shall include any period after the
Retirement Date and if the provision of benefits or calculation of payments
provided in any such Section would include any period subsequent to the
Retirement Date, such provision of benefits shall end on the Retirement Date and
the calculation of payments shall cover only the period ending on the Retirement
Date. Notwithstanding the foregoing, the Company's obligations under Section 7
of this Agreement shall continue after any such termination and the provisions
of Sections 12.1 and 12.7 shall apply to any dispute with respect to this
Agreement that arises after any such termination.
4.7 Mitigation. In the event of termination of the term of employment by
----------
the Executive pursuant to Section 4.2 as a result of a material breach by the
Company of any of its obligations hereunder, or in the event of termination of
the term of employment by the Company pursuant to Section 4.3 or 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
<PAGE>
14
they were not so "contingent on a change". In addition to any obligation under
the preceding sentence, and without duplication of any amounts required to be
paid to the Company thereunder, if any such termination occurs and the
Executive, whether or not required to mitigate his damages under the preceding
sentence, thereafter obtains other employment, the total cash salary and bonus
received in connection with such other employment, whether paid to him or
deferred for his benefit, for services through (i) in the case of a termination
pursuant to Section 4.2, the later of (x) the Term Date or (y) three years after
the date notice of termination is delivered pursuant to Section 4.2, and (ii) in
the case of a termination pursuant to Section 4.3, the date which is three years
after the end of the 60-day notice period referred to in the first sentence of
Section 4.3, in either case up to an amount equal to (x) the discounted lump sum
payment received by or for the account of the Executive with respect to Base
Salary, annual bonus and deferred compensation under Section 3 for such period,
minus (y) the amount of severance the Executive would have received in
accordance with the personnel policies of the Company if the Executive had been
job eliminated, shall reduce, pro tanto, any amount which the Company would
--- -----
otherwise be required to pay to the Executive as a result of such termination
and, to the extent amounts have theretofore been paid to him as a result of such
termination, such cash salary and bonus shall be paid over to the Company as
received with respect to such period, but the provisions of this sentence shall
not apply to any type of equity interest, bonus unit, phantom or restricted
stock, stock option, stock appreciation right or similar benefit received as a
result of such other employment. With respect to the preceding sentences, any
payments or rights to which the Executive is entitled by reason of the
termination of the term of employment by the Executive pursuant to Section 4.2
or in the event of the termination of the term of employment by the Company
pursuant to Section 4.3 or 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 for such year. Any obligation of the Executive to mitigate his
damages pursuant to this Section 4.7 shall not be a defense or offset to the
Company's obligation to pay the Executive in full the amounts provided in
Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3,
<PAGE>
15
as the case may be, at the time provided therein or the timely and full
performance of any of the Company's other obligations under this Agreement.
4.8 Payments. So long as the Executive remains on the payroll of the
--------
Company or any subsidiary of the Company, payments of salary, deferred
compensation and bonus required to be made pursuant to Section 4.2 or 4.3 shall
be made at the same times as such payments are made to senior executives of the
Company or such subsidiary.
5. Disability. If during the term of employment and prior to any
----------
termination of this Agreement under Section 4.2 or 4.3, the Executive shall
become physically or mentally disabled, whether totally or partially, so that he
is prevented from performing his usual duties for a period of six consecutive
months, or for shorter periods aggregating six months in any twelve-month
period, the Company shall, nevertheless, continue to pay the Executive his full
compensation and continue to credit the 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 longer of (i) the
period ending on the Term Date or (ii) three years (in the case of either (i) or
(ii), the "Disability Period"), in an 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
<PAGE>
16
Executive of such recovery), but not the obligation, to restore the Executive to
full-time service at full compensation. If the Company elects to restore the
Executive to full-time service, then this Agreement shall continue in full force
and effect in all respects and the Term Date shall not be extended by virtue of
the occurrence of the Disability Period. If the Company elects not to restore
the Executive to full-time service, the Executive shall be entitled to obtain
other employment, subject, however, to the following: (i) the Executive shall
be obligated to perform advisory services during any balance of the Disability
Period; and (ii) the provisions of Sections 9 and 10 shall continue to apply to
the Executive during the Disability Period. The advisory services referred to
in clause (i) of the immediately preceding sentence shall consist of rendering
advice concerning the business, affairs and management of the Company as
requested by the Chief Executive Officer or the 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. Except as otherwise provided in this
Section 5, the term of employment shall continue during the Disability Period
and the Executive shall be entitled to all of the rights and benefits provided
for in this Agreement except that, Sections 4.2 and 4.3 shall not apply during
the Disability Period and unless the Company has restored the Executive to
<PAGE>
17
fill-time service at full compensation prior to the end of the Disability
Period, the term of employment shall end and the Executive shall cease to be an
employee of the Company at the end of the Disability Period and shall not be
entitled to notice and severance or to receive or be paid for any accrued
vacation time or unused sabbatical.
6. Death. Upon the death of the Executive during the term of employment,
-----
this Agreement and all obligations of the Company to make any payments under
Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a
designated beneficiary) shall be entitled to receive, to the extent being
received by the Executive immediately prior to his death, Base Salary and
deferred compensation to the last day of the month in which his death occurs and
bonus compensation (at the time bonuses are normally paid) based on the average
of the regular annual bonuses (excluding the amount of any special or spot
bonuses) in respect of the two calendar years 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. Subject to the Executive's satisfactory completion of
--------------
any applications and other documentation and any physical examination that may
be required by the insurer and to the availability of insurance, the Company
shall obtain $2,000,000 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
<PAGE>
18
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 so long as the Executive is an employee of the Company, the
Executive shall be eligible to participate in any pension, profit-sharing, stock
option or similar plan or program and in any group insurance, hospitalization,
medical, dental, accident, disability or similar plan or program of the Company
now existing or established hereafter. In addition, the Executive shall be
entitled during the term of employment and so long as the Executive is an
employee of the Company, to receive other benefits generally available to all
senior executives of the Company to the extent the Executive is eligible under
the general provisions thereof, including, without limitation, to the extent
maintained in effect by the Company for its senior executives, an automobile
allowance and financial services.
<PAGE>
19
8.2 Benefits After a Termination or Disability. During the period the
------------------------------------------
Executive remains on the payroll of the Company after a termination pursuant to
Section 4.2 or 4.3 and during the Disability Period the Executive shall continue
to be eligible to 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 until such time as the Executive shall leave the payroll of the
Company. At the time the Executive's term of employment with the Company
terminates and he leaves the payroll of the Company pursuant to the provisions
of Section 4.1, 4.2, 4.3, 5 or 6, the Executive's rights to benefits and
payments under any benefit plans or any insurance or other death benefit plans
or arrangements of the Company or under any stock option, restricted stock,
stock appreciation right, bonus unit, management incentive or other plan of the
Company shall be determined, subject to the other terms and provisions of this
Agreement, in accordance with the terms and provisions of such plans and any
agreements under which such stock options, restricted stock or other awards were
granted; provided, however, that notwithstanding the foregoing or any more
restrictive provisions of any such plan or agreement, if the Executive leaves
the payroll of the Company as a result of a termination pursuant to Section 4.2,
then 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 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, 4.3, 5 or 6 (and regardless of whether the
Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), the
Executive shall not be entitled to notice and severance or to be paid for any
accrued vacation time or unused sabbatical, the payments provided for in such
Sections being in lieu thereof.
<PAGE>
20
9. Protection of Confidential Information; Non-Compete. The provisions of
---------------------------------------------------
Section 9.2 shall continue to apply through the latest of (i) the Term Date,
(ii) the date the Executive ceases to be an employee of the Company and leaves
the payroll of the Company for any reason and (iii) twelve months after the
termination of the Executive's employment with the Company pursuant to Section
4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue to apply
until three years after the latest of the events described in the preceding
sentence.
9.1 Confidentiality Covenant. The Executive acknowledges that his
------------------------
employment by the Company (which, for purposes of this Section 9 shall mean Time
Warner Inc. and its affiliates) will, throughout the term of employment, bring
him into close contact with many confidential affairs of the Company, including
information about costs, profits, markets, sales, products, key personnel,
pricing policies, operational methods, technical processes and other business
affairs and methods and other information not readily available to the public,
and plans for future development. The Executive further acknowledges that the
services to be performed under this Agreement are of a special, unique, unusual,
extraordinary and intellectual character. The Executive further acknowledges
that the business of the Company is international in scope, that its products
are marketed throughout the world, that the Company competes in nearly all of
its business activities with other Entities that are or could be located in
nearly any part of the world and that the nature of the Executive's services,
position and expertise are such that he is capable of competing with the Company
from nearly any location in the world. In recognition of the foregoing, the
Executive covenants and agrees:
9.1.1 The Executive shall keep secret all confidential matters of the
Company and shall not intentionally disclose such matters to anyone outside of
the Company, either during or after the term of employment, except with the
Company's written consent, provided that (i) the Executive shall have no such
obligation to the extent such matters are or become publicly known other than as
a result of the Executive's breach of his obligations hereunder and (ii) the
Executive may, after giving prior notice to the Company to the extent
practicable under the circumstances, disclose such matters to
<PAGE>
21
the extent required by applicable laws or governmental regulations or judicial
or regulatory process;
9.1.2 The Executive shall deliver promptly to the Company on termination
of his employment by the Company, or at any other time the Company may so
request, at the Company's expense, all memoranda, notes, records, reports and
other documents (and all copies thereof) relating to the Company's business,
which he obtained while employed by, or otherwise serving or acting on behalf
of, the Company and which he may then possess or have under his control; and
9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2
or 4.3, for a period of one year after such termination, without the prior
written consent of the Company, the Executive shall not employ, and shall not
cause any Entity of which he is an affiliate to employ, any person who was a
full-time 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 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, or (c) serving as a director of any Entity that is not in
competition with the Company. For purposes of the foregoing, a person or Entity
shall be deemed to be in competition with the Company if such person or it
engages in any line of business that is substantially the same
<PAGE>
22
as either (i) any line of operating business which the Company engages in,
conducts or, to the knowledge of the Executive, has definitive plans to engage
in or conduct, or (ii) any operating business that is engaged in or conducted by
the Company and as to which, to the knowledge of the Executive, the Company
covenants in writing, in connection with the disposition of such business, not
to compete therewith.
9.3 Specific Remedy. In addition to such other rights and remedies as the
---------------
Company may have at equity or in law with respect to any breach of this
Agreement, if the Executive commits a material breach of any of the provisions
of Section 9.1, the Company shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company.
9.4 Liquidated Damages. If the Executive commits a material breach of the
------------------
provisions of Section 9.2, the Executive shall pay to the Company as liquidated
damages an amount equal to two and one-half times the Executive's then current
Base Salary, or if the Executive is not employed by the Company at the time of
such breach, an amount equal to two and one-half times the most recent Base
Salary paid to the Executive by the Company. The Company shall be entitled to
offset any amounts owed by the Executive to the Company under this Section 9.4
against any amounts owed by the Company to the Executive under any provision of
this Agreement or otherwise, including without limitation, amounts payable to
the Executive under Sections 4.2 or 4.3. The Company and the Executive agree
that it is impossible to determine with any reasonable accuracy the amount of
prospective damages to the Company upon a breach of Section 9.2 by the Executive
and further agree that the damages set forth in this Section 9.4 are reasonable,
and not a penalty, based upon the facts and circumstances of the parties and
with due regard to future expectations.
10. Ownership of Work Product. The Executive acknowledges that during the
-------------------------
term of employment, he may conceive of, discover, invent or create inventions,
improvements, new contributions, literary property, material, ideas and
discoveries, whether patentable or copyrightable or not
<PAGE>
23
(all of the foregoing being collectively referred to herein as "Work Product"),
and that various business opportunities shall be presented to him by reason of
his employment by the Company. The Executive acknowledges that all of the
foregoing shall be owned by and belong exclusively to the Company and that he
shall have no personal interest therein, provided that they are either related
in any manner to the business (commercial or experimental) of the Company, or
are, in the case of Work Product, conceived or made on the Company's time or
with the use of the Company's facilities or materials, or, in the case of
business opportunities, are presented to him for the possible interest or
participation of the Company. The Executive shall (i) promptly disclose any
such Work Product and business opportunities to the Company; (ii) assign to the
Company, upon request and without additional compensation, the entire rights to
such Work Product and business opportunities; (iii) sign all papers necessary to
carry out the foregoing; and (iv) give testimony in support of his inventorship
or creation in any appropriate case. The Executive agrees that he will not
assert any rights to any Work Product or business opportunity as having been
made or acquired by him prior to the date of this Agreement except for Work
Product or business opportunities, if any, disclosed to and acknowledged by the
Company in writing prior to the date hereof.
11. Notices. All notices, requests, consents and other communications
-------
required or permitted to be given under this Agreement shall be effective only
if given in writing and shall be deemed to have been duly given if delivered
personally or sent by prepaid telegram, or mailed first-class, postage prepaid,
by registered or certified mail, as follows (or to such other or additional
address as either party shall designate by notice in writing to the other in
accordance herewith):
11.1 If to the Company:
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: Chief Executive Officer
(with a copy, similarly addressed
but Attention: General Counsel)
<PAGE>
24
11.2 If to the Executive, to his residence
address set forth on the records of the Company.
12. General.
-------
12.1 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the substantive laws of the State of
New York applicable to agreements made and to be performed entirely in New York.
12.2 Captions. The section headings contained herein are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12.3 Entire Agreement. This Agreement, including Annexes A and B,
----------------
sets forth the entire agreement and understanding of the parties relating to the
subject matter of this Agreement and supersedes all prior agreements,
arrangements and understandings, written or oral, between the parties, including
without limitation, the Prior Agreement.
12.4 No Other Representations. No representation, promise or
------------------------
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or be liable for any alleged representation,
promise or inducement not so set forth.
12.5 Assignability. This Agreement and the Executive's rights and
-------------
obligations hereunder may not be assigned by the Executive. The Company may
assign its rights together with its obligations hereunder, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets; and such rights and obligations shall inure to, and be
binding upon, any successor to all or substantially all of the business and
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,
<PAGE>
25
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
<PAGE>
26
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:
<PAGE>
27
Account - Section 3.3
Account Retained Income - Section A.6 of Annex A
affiliate - Section 4.2.3
Applicable Tax Law - Section A.5 of Annex A
Base Salary - Section 3.1
cause - Section 4.1
Code - Section 4.2.2
Company - the first paragraph on page 1
and Section 9.1
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
Retirement Date - Section 4.6
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
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
TIME WARNER INC.
By /s/ Gerald M. Levin
-------------------------
Gerald M. Levin
Chairman and
Chief Executive Officer
/s/ Philip R. Lochner, Jr.
-----------------------------
Philip R. Lochner, Jr.
<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
<PAGE>
A-2
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
<PAGE>
A-3
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
<PAGE>
A-4
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
<PAGE>
A-5
Company of such net loss (after such net loss is reduced by the amount of any
net capital loss of the Account for such year) shall be credited to the Account
on the last day of such year. If and to the extent that any such net loss of
the Account shall be utilized to determine a credit to the Account pursuant to
the preceding sentence, it shall not thereafter be carried forward under this
Section A.5. For purposes of determining taxes payable by the Company under any
provision of this Annex A it shall be assumed that the Company is a taxpayer and
pays all taxes at the maximum marginal rate of federal income taxes and state
and local income and franchise taxes (net of assumed federal income tax
benefits) applicable to business corporations and that all of such dividends,
interest, gains and losses are allocable to its corporate headquarters, which
are currently located in New York City.
A.6 Payments. Subject to the provisions of Section A.7, payments of
--------
deferred compensation shall be made as provided in this Section A.6. Deferred
compensation shall be paid monthly for a period of 60 months (the "Pay-Out
Period") commencing on the first day of the month after the later of (i) the
Term Date and (ii) the date the Executive ceases to be an employee of the
Company and leaves the payroll of the Company for any reason, provided, however,
that if the Executive was named in the compensation table in the Company's then
most recent proxy statement, such payments shall commence on January 1st of the
year following the year in which the latest of such events occurs. On each
payment date, the Account shall be charged with the dollar amount of such
payment. On each payment date, the amount of cash held or deemed to be held in
the Account shall be not less than the payment then due and the Company may
select the securities to be sold or deemed sold to provide such 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
<PAGE>
A-6
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 aggregate value of the Account, as valued and
adjusted pursuant to the second preceding sentence, by the number of payments
remaining to be paid in the Pay-Out Period, including the payment then due;
provided that each payment made shall be deemed made first out of Account
Retained Income (to the extent remaining after all prior distributions thereof
since the last Valuation Date). The balance of the Account (excluding the Other
Period Deferred Amount), after all the securities held or deemed to have been
held therein have been sold or deemed to have been sold and all indebtedness
liquidated, shall be paid to the Executive in the final payment, which shall be
decreased by deducting therefrom the amount of all taxes attributable to the
sale of any securities held or deemed to have been held in the Account since the
end of the preceding taxable year of the Company, which taxes shall be computed
as of the date of such payment.
If this Agreement is terminated by the Company pursuant to Section 4.1
or if the Executive terminates this Agreement or the term of employment in
breach of this Agreement, the Account shall be valued as of the later of (i) the
Term Date or (ii) twelve months after termination of the Executive's employment
with the Company, and the balance of the Account, after the securities held or
deemed to have been held therein have been sold or deemed to have been sold and
all related indebtedness liquidated, shall be paid to the 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
<PAGE>
A-7
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 the taxable year of the Company in
which payments have been made from the Account and at the time of the final
payment from the Account, the Company shall compute and shall credit to the
Account, the amount of the tax benefit assumed to be received by it from the
payment to the Executive of amounts of Account Retained Income 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;
<PAGE>
A-8
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 made as of
_____________, 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]
<PAGE>
EXHIBIT 10.23
TIME WARNER
DEFERRED COMPENSATION PLAN
(AMENDED AND RESTATED AS OF NOVEMBER 1, 1994)
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.1 ESTABLISHMENT OF PLAN. Time Warner Inc. (the "Company") has
established this plan for certain Employees effective as of September 15, 1993,
known as the Time Warner Deferred Compensation Plan (the "Plan").
The purposes of the Plan are to provide Eligible Employees a means of
irrevocably deferring to a future year the receipt of certain compensation and
to enable Employing Companies that participate in certain qualified defined
contribution plans to provide benefits under this Plan to certain Employees with
respect to certain compensation in excess of the Compensation Limit.
1.2 APPLICABILITY OF PLAN. The provisions of the Plan are applicable only
to Employees of Employing Companies employed on or after the effective date of
the Plan.
The Plan is intended to be an unfunded, non-qualified deferred compensation
plan maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees.
ARTICLE II
DEFINITIONS
2.1 DEFINITIONS. Whenever used in the Plan, the following terms shall
have the respective meanings set forth below unless otherwise expressly
provided, and when the defined meaning is intended, the term is capitalized.
2.2 "CODE" means the Internal Revenue Code of 1986, as amended.
2.3 "COMMITTEE" means the committee appointed by the Company as provided
in Section 7.1.
2.4 "COMPANY" means Time Warner Inc.
2.5 "COMPENSATION LIMIT" means the compensation limit of Section
401(a)(17) of the Code, as adjusted under Section 401(a)(17)(B) of the Code for
increases in the cost of living.
2.6 "DEFERRED COMPENSATION ACCOUNT" means the separate account
established
<PAGE>
under Article V of the Plan for each Participant representing amounts deferred
by a Participant pursuant to Article III and Employing Company Allocations
credited to a Participant pursuant to Article IV.
2.7 "DISABILITY" means permanent and total disability as determined by
the Social Security Administration or any disability which qualifies a
Participant for benefits under the provisions of the Time Warner Inc. Long Term
Disability Plan or, in the case of an employee covered by a long term disability
plan of TWE or a Related Company, under the provisions of such plan, whichever
shall occur first.
2.8 "ELIGIBLE EMPLOYEE" means an individual who meets the eligibility
requirements of Section 3.1.
2.9 "EMPLOYEE" means an individual employed by an Employing Company.
2.10 "EMPLOYING COMPANY" means: (a) the Company, (b) TWE and (c) each
Related Company which has been authorized by the Committee to participate in the
Plan and has adopted the Plan.
2.11 "EMPLOYING COMPANY ALLOCATIONS" means the allocations made under the
Plan pursuant to Article IV.
2.12 "INACTIVE PARTICIPANT" means a Participant whose employment has
terminated and whose Deferred Compensation Account has not been fully
distributed.
2.13 "PARTICIPANT" means each Employee who participates in the Plan in
accordance with the terms and conditions of the Plan.
2.14 "PLAN" means this plan, the Time Warner Deferred Compensation Plan as
set forth herein and as it may be amended from time to time.
2.15 "RELATED COMPANY" means any entity of which, as of the time of
computation, at least 50% of the outstanding voting stock or ownership interest
is owned, either directly or indirectly, by the Company or TWE.
2.16 "RETIREMENT" means that a Participant, as of the date his or her
employment terminates, is eligible for retirement under the then current
qualified defined benefit plan of the Company, TWE or the Related Company from
which he or she is terminating employment. If such company does not have a
qualified defined benefit plan, eligibility for retirement shall be determined
by the applicable provision in the qualified defined contribution plan of such
company for which the Participant is eligible, and, if more than one, the plan
which would result in the earliest distribution under this Plan.
2.17 "TWE" means Time Warner Entertainment Company, L.P.
2
<PAGE>
2.18 "VALUATION DATE" means the last day of each calendar month. On and
after December 1, 1994, Valuation Date means each day of each calendar month.
ARTICLE III
PARTICIPANT DEFERRALS
3.1 ELIGIBILITY. The Employees who shall be eligible to make deferral
elections under the Plan are those salaried officers and other key employees of
an Employing Company who at the time of a deferral election pursuant to Section
3.3 below:
(i) are on the U.S. payroll of the Employing Company; and
(ii) have a current base salary plus bonus in excess of the
Compensation Limit or are otherwise designated as eligible
by the Committee. For purposes of this subsection 3.1(ii),
"bonus" means any annual bonus paid pursuant to a regular
program (but excluding long-term cash incentive plan
payments and commission, spot and similar bonuses) for the
year preceding the current calendar year, except that, in
the case of a deferral election to be made by a newly hired
Employee, with respect to a bonus to be earned in (A) the
current year, "bonus" means the target or otherwise
estimated bonus for that portion of the current calendar
year after the date of his or her hire, and (B) the year
following hire, "bonus" means the target or otherwise
estimated bonus for the current calendar year.
The Committee may from time to time, in its sole and absolute discretion,
modify the above eligibility requirements and make such additional or other
requirements for eligibility as it may determine.
3.2 COMPENSATION ELIGIBLE FOR DEFERRAL. An Eligible Employee may elect to
defer receipt of all or a specified portion of any bonus, but only to the extent
the receipt thereof would cause the Eligible Employee's compensation to exceed
the Compensation Limit. Each such deferral shall be expressed as a percentage,
in 10% increments only, but in no event shall any election result in a deferral
of less than $5,000. In the case of a deferral election made on or after
November 1, 1994, the Eligible Employee may elect to have the designated
percentage apply only to that portion of the bonus in excess of a certain dollar
amount that he or she specifies when making the election. For purposes of this
Section 3.2, "bonus" means any annual bonus paid pursuant to a regular program
(but excluding long-term cash incentive plan payments and commission, spot and
similar bonuses) and which would otherwise be payable in cash to an Eligible
Employee for services as an Employee.
3
<PAGE>
3.3 DEFERRAL ELECTIONS. An Eligible Employee with the consent of the
Committee may annually make an irrevocable election to defer certain
compensation described in Section 3.2 and participate herein by timely
delivering a properly executed election to the Committee on a form prescribed by
the Committee. The election form shall specify with respect to the compensation
to be deferred for the year, pursuant to the provisions of Section 3.2 and
Article VI:
(i) the percentage of the regular bonus to be deferred, or, for
elections made on or after November 1, 1994, the certain
dollar amount of such bonus in excess of which the deferral
has been elected, if applicable; and
(ii) the time for the commencement of payment of the deferred
compensation, which must be either on account of retirement
or at an in-service year to be specified by the Eligible
Employee. Compensation which is to be deferred to an in-
service payment date must be deferred for no fewer than
three calendar years following the year in which it was
earned.
3.4 EFFECTIVE DATE OF ELECTION. (a) An election to defer compensation
must be received by the Committee prior to the beginning of the calendar year in
which such compensation is earned. Such an election shall become irrevocable as
of the last day of the calendar year prior to the calendar year in which such
compensation is earned.
(b) Notwithstanding the date specified in subsection (a) above, the
Committee may prescribe an earlier or later date by which time an Eligible
Employee must elect to defer such compensation.
(c) Under no circumstances may an Eligible Employee at any time defer
compensation to which he or she has attained a legally enforceable right to
receive currently.
ARTICLE IV
EMPLOYING COMPANY ALLOCATIONS
4.1 EMPLOYING COMPANY ALLOCATIONS. (a) Subject to the right of the
Company or the Committee to modify, amend or terminate the Plan, and to modify,
suspend or discontinue the respective Employing Company Allocations under the
Plan, each Employing Company may make Employing Company Allocations with respect
to a designated year, on behalf of the employees of such Employing Company who
are eligible as provided in this Article IV to have Employing Company
Allocations allocated to their Deferred Compensation Accounts under the Plan for
such year.
(b) All Employing Company Allocations shall be allocated and credited to
each such Deferred Compensation Account as provided in Section 5.3(a) in an
amount equal to the
4
<PAGE>
allocation under such qualified defined contribution plan the Employee would
have received if his or her Compensation in excess of the Compensation Limit
were included, or such other amount determined by the Committee, in its sole and
absolute discretion, under the applicable provisions of this Plan.
(c) An Employee is eligible to have an Employing Company Allocation
credited to his or her Deferred Compensation Account under the Plan for any year
only if the Employee's Compensation exceeds the Compensation Limit in effect for
such plan year.
(d) Employing Company Allocations shall be credited only with respect to an
Employee's Compensation in excess of the Compensation Limit in effect for the
year for which such allocations are credited, up to a maximum Compensation of
$250,000 for 1994. The maximum Compensation shall be increased by 5% annually
for each year after 1994, but shall in no event exceed $350,000.
(e) All Employing Company Allocations shall be distributed in accordance
with the provisions of Article VI, provided however, that the provisions in
Sections 6.1(e) and 6.3 for in-service payments shall not apply to such amounts.
4.2 COMPENSATION. For purposes of this Article, "Compensation" for any
Employee shall have the same meaning as defined in the qualified defined
contribution plan of the Employing Company with respect to which it is making an
Employing Company Allocation on behalf of the Employee, provided however, that
the Compensation Limit in such qualified defined contribution plan's definition
shall be disregarded and any bonuses deferred under this Plan shall be included
in this definition of Compensation unless any such bonus would be excluded under
the definition of compensation in such qualified defined contribution plan,
regardless of the Compensation Limit. The Committee, in its sole and absolute
discretion, may make such modifications to such definition with respect to the
Plan as it considers necessary or desirable.
4.3 ELIGIBILITY, PARTICIPATION AND VESTING. As to any Employee, the rules
regarding eligibility, participation and vesting of the qualified defined
contribution plan of the Employing Company with respect to which it is making an
Employing Company Allocation on behalf of the Employee shall also apply to this
Plan, but only as to such Employing Company Allocation. The Committee, in its
sole and absolute discretion, may make such modifications to such rules with
respect to the Plan as it considers necessary or desirable. Any such Employing
Company Allocations for eligible employees of Time Warner Inc. participating in
the Time Warner Employees' Stock Ownership Plan ("TESOP") and for eligible
employees participating in the Warner Music Group Inc. Profit Sharing Plan (the
"Profit Sharing Plan"), shall become vested, in the case of the TESOP
participants, only after four Periods of Service or Years of Service, and in the
case of the Profit Sharing Plan participants, only after five Years of Service.
"Period of Service" or "Year of Service" shall be as determined under each such
respective qualified plan.
ARTICLE V
5
<PAGE>
DEFERRED COMPENSATION ACCOUNT
5.1 DEFERRED COMPENSATION ACCOUNT. (a) A Deferred Compensation Account
shall be established for each Participant who makes a deferral election pursuant
to Article III or for whom an Employing Company Allocation is credited pursuant
to Article IV. Compensation deferred by a Participant in any year under the
Plan and Employing Company Allocations, along with the hypothetical income on
such amounts, shall be credited to the Participant's Deferred Compensation
Account.
(b) The Company shall maintain the Deferred Compensation Accounts of
all Participants who are employed, at the time a deferred amount would otherwise
be payable or an Employing Company Allocation is credited, by an Employing
Company other than TWE or an Employing Company owned primarily through TWE. TWE
shall maintain the Deferred Compensation Accounts of all Participants who are
employed, at such times, by TWE or any Employing Company owned primarily through
TWE.
(c) All payments made under the Plan shall be made directly by the
Company or TWE, as applicable pursuant to subsection (b) above, from the
respective company's general assets and no deferred compensation or Employing
Company Allocations shall be segregated or earmarked or held in trust.
5.2 HYPOTHETICAL INVESTMENT. (a) Amounts credited to a Participant's
Deferred Compensation Account shall be deemed to be invested in the following
deemed investment vehicle: A hypothetical fixed income fund which shall be
deemed to accrue interest, compounded monthly on each Valuation Date, for each
month of the deferral period, at a deemed rate which shall be equal to the long-
term applicable federal rate for each such month as announced by the Internal
Revenue Service. On and after December 1, 1994, such interest shall be
compounded daily on each Valuation Date.
(b) If the Committee shall determine in good faith that it is
impossible or impractical to maintain the deemed investment vehicle described in
subsection (a) above, the Committee may, in its sole and absolute discretion,
replace such investment vehicle with a deemed investment vehicle which the
Committee has determined, in its sole and absolute discretion, to be
substantially similar thereto.
5.3 MANNER OF HYPOTHETICAL INVESTMENT. (a) For purposes of the
hypothetical investment under Section 5.2, deferred compensation, including any
Employing Company Allocations, shall be considered to be invested on the date
the recordkeeper of the Plan records the deferral amount. For amounts deferred
pursuant to deferral elections made prior to November 1, 1994, deferred
compensation shall be considered to be invested as of the first day of the month
in which the compensation would otherwise have been payable.
6
<PAGE>
(b) Distributions from Deferred Compensation Accounts pursuant to
Article VI shall accrue interest only through the Valuation Date immediately
prior to the commencement of processing of any such distribution.
(c) As of each Valuation Date, the value of a Participant's or
Inactive Participant's Deferred Compensation Account shall be equal to the sum
of:
(i) the amounts, if any, deferred by the Participant pursuant to
Article III;
(ii) the amounts, if any, of Employing Company Allocations
credited pursuant to Article IV; and
(iii) interest which has accrued pursuant to this Article V;
reduced by:
(iv) any amounts distributed pursuant to Article VI.
5.4 STATEMENT OF ACCOUNT. As soon as practicable after the end of
each calendar quarter, a statement shall be sent to each Participant and
Inactive Participant with respect to the value of his or her Deferred
Compensation Account as of the end of such quarter.
ARTICLE VI
PAYMENT OF DEFERRED COMPENSATION ACCOUNT
6.1 PAYMENT ON ACCOUNT OF RETIREMENT. (a) In the event of the
termination of the Participant's employment with the Company, TWE or a Related
Company on account of his or her Retirement, the Participant's Deferred
Compensation Account shall be distributed to him or her in five annual
installment payments.
(b) Notwithstanding subsection (a) above, if the value of the
Participant's Deferred Compensation Account is less than $50,000 as of the
Valuation Date immediately prior to the date of Retirement, payment shall be
made in a lump sum.
(c) Notwithstanding subsection (a) above, if the value of the
Participant's Deferred Compensation Account is $50,000 or more and such
Participant has requested a lump sum payment, by delivering written notice to
the Committee on a form prescribed by it, at least one calendar year prior to
his or her Retirement date, the Committee may, in its sole and absolute
discretion, make payment in a lump sum.
7
<PAGE>
(d) The first installment, or lump sum, as the case may be, shall be
distributed as soon as practicable after the January 1 immediately following the
date of Retirement. Subsequent annual installment payments shall be distributed
as soon as practicable after each following January 1.
(e) Notwithstanding the payment provisions in subsections (a), (b),
(c) and (d) above, the Committee may instead, in its sole and absolute
discretion, prior to a Participant's actual Retirement date, make one special
in-service payment in a lump sum of all or any portion of the Participant's
Deferred Compensation Account (but not less than $5,000), to be distributed as
soon as practicable after the expiration of 36 months following the month in
which the Participant has requested such special in-service payment by
delivering written notice to the Committee on a form prescribed by it.
(i) The value of any such special in-service payment shall not
include amounts payable under existing in-service payment
elections or amounts attributable to Employing Company
Allocations.
(ii) Interest which has accrued with respect to any special in-
service payment shall be payable at the time of such payment
and shall be calculated pursuant to Section 5.2.
(iii) In the event of the termination of the Participant's
employment with the Company, TWE or a Related Company for
any reason, prior to the payment of any such special in-
service payment, any such amount shall be paid in the same
manner and at the same time or times as any other payments
of the Participant's account due under this Article.
Interest on such in-service payment shall be paid at the
time of such payment and shall be calculated pursuant to
Section 5.2. In the event of death, payment shall be made
as provided for in Section 6.5.
6.2 PAYMENT ON ACCOUNT OF DISABILITY. (a) In the event a Participant
meets the definition of Disability, the value of the Participant's Deferred
Compensation Account shall be distributed to him or her in five annual
installment payments.
(b) Notwithstanding subsection (a) above, if the value of the
Participant's Deferred Compensation Account is less than $50,000 as of the
Valuation Date immediately prior to the date the definition of Disability is
met, payment shall be made in a lump sum.
(c) The first installment, or lump sum, as the case may be, shall be
distributed as soon as practicable after the January 1 immediately following the
date the Participant has met the definition of Disability. Subsequent annual
installment payments shall be distributed as soon as practicable after each
following January 1.
8
<PAGE>
(d) If a Participant or Inactive Participant no longer meets the
definition of Disability and returns to work with the Company, TWE or a Related
Company, no further payments shall be made on account of the prior Disability
and distribution of his or her remaining Deferred Compensation Account shall be
made as otherwise provided in this Article VI.
6.3 IN-SERVICE PAYMENTS (a) An in-service payment elected by a
Participant pursuant to Section 3.3(ii) shall be distributed in a lump sum as
soon as practicable after January 1 in the year specified by the Participant.
(b) Notwithstanding subsection (a) above, if the Participant has
requested, by delivering written notice to the Committee prior to January 1 of
the year preceding that in which the in-service payment is to be made, the
Committee may, in its sole and absolute discretion, defer such payment until
such later year as the Participant may request. Any such additional deferral
(i) must be for full calendar years, and for no fewer than three calendar years
following the year in which payment would have been made but for the additional
deferral, (ii) must be for the whole amount originally deferred, (iii) can only
be made once with respect to any in-service payment, and (iv) shall be
distributed in a lump sum as soon as practicable after January 1 in the year
specified by the Participant.
(c) Interest which has accrued with respect to the amount of any in-
service payment shall be payable at the time of such payment and shall be
calculated pursuant to Section 5.2.
(d) In the event of the termination of a Participant's employment for
any reason prior to the time any in-service payment under this Section 6.3 would
have been made, distribution of such payment shall be made according to the
manner of payment specified in Section 6.1, 6.2, 6.4 or 6.5, based on the
Participant's actual reason for termination of employment.
(e) The Committee may, in its sole and absolute discretion, defer any
in-service payment previously elected by any officer of the Company or TWE who
at the time of the designated in-service payment date is at or above the level
of a senior vice president. In the event of any such deferral by the Committee,
payment shall be made under this Article VI as if such officer had made a
deferral election for payment on account of Retirement.
6.4 PAYMENT ON ACCOUNT OF TERMINATION OF EMPLOYMENT OTHER THAN ON ACCOUNT
OF DEATH, DISABILITY OR RETIREMENT. (a) In the event of the termination of
employment with the Company, TWE or a Related Company for reasons other than
death, Disability or Retirement, the value of the Participant's Deferred
Compensation Account shall be distributed to him or her in five annual
installment payments. A Participant shall not be considered to have terminated
employment for purposes of the Plan if he or she transfers directly to the
Company, TWE or a Related Company.
9
<PAGE>
(b) Notwithstanding subsection (a) above, if the value of the
Participant's Deferred Compensation Account is less than $50,000 as of the
Valuation Date immediately prior to the date of such termination, payment shall
be made in a lump sum.
(c) The first installment, or lump sum, as the case may be, shall be
distributed as soon as practicable after the January 1 immediately following the
date the Participant has terminated employment. Subsequent annual installment
payments shall be distributed as soon as practicable after each following
January 1.
6.5 PAYMENT TO BENEFICIARY OR ESTATE IN THE EVENT OF DEATH.
Notwithstanding the provisions for payment described in Sections 6.1, 6.2, 6.3
and 6.4 above, in the event of the death of a Participant or Inactive
Participant before the distribution of his or her Deferred Compensation Account
has commenced, or before such account has been fully distributed, such account
shall be determined as of the Valuation Date coincident with or immediately
prior to the date that the Committee commences the processing of the
distribution, after both a written notice of his or her death and a death
certificate have been received by the Committee. Such account shall be
distributed in a lump sum to the person or persons designated from time to time
by a Participant or Inactive Participant by written notice to the Committee as
beneficiary or beneficiaries to receive payments under the Plan after his or her
death, which designation has not been revoked by notice to the Committee at the
date of such death. Any such notice shall be in such form as required by the
Committee or acceptable to it which is properly completed and delivered to the
Committee, any member thereof or its designee and shall be deemed to have been
given when it is actually received by any such individual. If no person has
been designated as beneficiary, or if no person so designated survives the
Participant or Inactive Participant, such account shall be distributed in a lump
sum as soon as practicable thereafter to his or her estate.
6.6 SEVERE UNFORESEEABLE FINANCIAL EMERGENCY PAYMENTS. Notwithstanding
any other provisions of the Plan, if the Committee determines, after
consideration of an application of a Participant or Inactive Participant, that
such individual has a severe unforeseeable financial emergency of such a
substantial nature and beyond the individual's control that a payment of
compensation previously deferred under the Plan is warranted, the Committee may,
in its sole and absolute discretion, direct that all or a portion of the balance
of his or her Deferred Compensation Account be paid to such individual in such
manner and at such time as the Committee shall specify, but only to the extent
reasonably required to satisfy the emergency need.
6.7 INCAPACITY. The Committee may direct that any amounts distributable
under the Plan to a person under a legal disability be made to (and be withheld
until the appointment of) a representative qualified pursuant to law to receive
such payment on such person's behalf.
6.8 VALUATION OF DISTRIBUTIONS. For purposes of distribution pursuant to
this Article VI, the balance of each Deferred Compensation Account shall be
valued as of the Valuation Date immediately preceding the date that the
Committee commences the processing of the
10
<PAGE>
distribution of the balance of such account, or the particular installment
thereof.
6.9 METHOD OF PAYING INSTALLMENTS. Installment payments as provided for
in this Article VI shall be paid as follows: 20% of the value of the Deferred
Compensation Account subject to installment payments shall be paid in the first
installment; 25% of the remaining value shall be paid in the second installment;
33.3% of the remaining value shall be paid in the third installment; 50% of the
remaining value shall be paid in the fourth installment; and all of the
remaining value in the account shall be paid in the fifth and final installment.
ARTICLE VII
ADMINISTRATION
7.1 THE COMMITTEE. The Plan shall be administered by a Committee,
consisting of not less than three members to be appointed by the Company and to
serve at the pleasure of the Company. Any member of the Committee may resign at
any time by giving notice to the Company. Any such resignation shall take
effect at the date of receipt of such notice or at any later date specified
therein; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. No member of the
Committee shall receive any compensation for his or her services as such.
Participants and Inactive Participants may be members of the Committee but may
not participate in any decision affecting their own account in any case where
the Committee may take discretionary action under Article VI.
A majority of the members of the Committee shall constitute a quorum for
the transaction of business. All resolutions or other action taken by the
Committee shall be by a vote of a majority of its members present at any meeting
or, without a meeting, by instrument in writing signed by all its members.
Members of the Committee may participate in a meeting of such Committee by means
of a conference telephone or similar communications equipment that enables all
persons participating in the meeting to hear each other, and such participation
in a meeting shall constitute presence in person at the meeting.
The Committee shall be the administrator of the Plan and shall have all
powers necessary to administer the Plan, including discretionary authority to
determine eligibility for benefits and to decide claims under the terms of the
Plan, except to the extent that any such powers are vested in any other
fiduciary by the Plan or by the Committee. The Committee may from time to time
establish rules for the administration of the Plan, and it shall have the
exclusive right to interpret the Plan to decide any matters arising in
connection with the administration and operation of the Plan. All its rules,
interpretations and decisions shall be conclusive and binding on the Employing
Companies and on Eligible Employees, Participants and Inactive Participants.
The Committee may delegate any of its powers or duties to others as it
shall determine and may retain counsel, agents and such clerical and accounting
services as it may require in carrying out the provisions of the Plan.
11
<PAGE>
The Committee may rely conclusively upon all tables, valuations,
certificates, opinions and reports furnished by any actuary, accountant,
controller, counsel or other person who is employed or engaged for any purpose
in connection with the administration of the Plan.
Neither the Committee nor a member of the board of directors of the Company
or the board of directors (or governing body) of TWE or a Related Company and no
employee of the Company, TWE or any Related Company shall be liable for any act
or action hereunder, whether of omission or commission, by any other member or
employee or by any agent to whom duties in connection with the administration of
the Plan have been delegated or for anything done or omitted to be done in
connection with the Plan.
The Committee shall keep a record of all its proceedings and of all
payments directed by it to be made to Participants or Inactive Participants or
payments made by it for expenses or otherwise.
7.2 INDEMNIFICATION. The Company and TWE shall, to the fullest extent
permitted by law, indemnify each director, officer or employee of the Company,
TWE or any Related Company (including the heirs, executors, administrators and
other personal representatives of such person) and each member of the Committee
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement, actually and reasonably incurred by such person in connection
with any threatened, pending or actual suit, action or proceeding (whether
civil, criminal, administrative or investigative in nature or otherwise) in
which such person may be involved by reason of the fact that he or she is or was
serving any employee benefit plans of the Company, TWE or any Related Company in
any capacity at the request of such company.
7.3 EXPENSES OF ADMINISTRATION. Any expense incurred by the Company or
the Committee relative to the administration of the Plan shall be paid by the
Employing Companies in such proportions as the Company may direct.
7.4 BENEFIT CLAIMS. All claims for benefits under the Plan by a
Participant or beneficiary shall be made in writing to a person designated by
the Committee for such purpose. If the designated person receiving a claim for
benefits believes that the claim should be denied, he or she shall notify the
claimant in writing of the denial of the claim within ninety (90) days after his
or her receipt thereof. Such notice shall (a) set forth the specific reason or
reasons for the denial, making reference to the pertinent provisions of the Plan
or the Plan documents, if applicable, on which the denial is based, (b) describe
any additional material or information that should be received before the claim
request may be acted upon favorably, and explain why such material or
information, if any, is needed and (c) inform the person making the claim of his
or her right pursuant to this Article to request review of the decision by the
Committee. Any such person who believes that he or she has submitted all
available and relevant information may appeal the denial of a claim to the
Committee by submitting a written request for review to the Committee within
sixty (60) days after the date on which such denial is received. Such period
may be extended by the Committee for good cause shown. The person making the
request for review may examine pertinent Plan documents. The request for review
12
<PAGE>
may discuss any issues relevant to the claim. The Committee shall decide
whether or not to grant the claim within sixty (60) days after receipt of the
request for review, but this period may be extended by the Committee for up to
an additional sixty (60) days in special circumstances. If such an extension of
time for review is required because of special circumstances, written notice of
the extension shall be furnished to the claimant prior to the commencement of
the extension. The Committee's decision shall be in writing, shall include
specific reasons for the decision and shall refer to pertinent provisions of the
Plan or of Plan documents, if applicable, on which the decision is based.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.1 AMENDMENTS. The Company (by action of its board of directors) or the
Committee (for the Company, TWE and the other Employing Companies) may at any
time amend the Plan by an instrument in writing.
8.2 TERMINATION OR SUSPENSION. The continuance of the Plan and the
ability of an Eligible Employee to make a deferral for any year are not assumed
as contractual obligations of the Company, TWE or any other Employing Company.
The Company reserves the right (for itself, TWE and the other Employing
Companies) by action of its board of directors or the Committee, to terminate or
suspend the Plan, or to terminate or suspend the Plan with respect to itself,
TWE or an Employing Company. TWE or any Employing Company may terminate or
suspend the Plan with respect to itself by executing and delivering to the
Company or the Committee such documents as the Company or Committee shall deem
necessary or desirable.
8.3 PARTICIPANTS' RIGHTS TO PAYMENT. No termination of the Plan or
amendment thereto shall deprive a Participant or Inactive Participant of the
right to payment of deferred compensation credited as of the date of termination
or amendment, in accordance with the terms of the Plan as of the date of such
termination or amendment; provided, however, that in the event of termination of
the Plan, or termination of the Plan with respect to the Company, TWE or one or
more other Employing Companies, the Committee may, in its sole and absolute
discretion, accelerate the payment of all such credited deferred compensation on
a uniform basis for all Participants and Inactive Participants or, in the case
of termination of the Plan with respect to TWE or one or more other Employing
Companies, for all Participants and Inactive Participants of TWE or such other
Employing Companies only.
ARTICLE IX
PARTICIPATING COMPANIES
9.1 ADOPTION BY OTHER ENTITIES. Upon the approval of the Company or
the Committee, the Plan may be adopted by TWE or any Related Company by
executing and delivering to the Company or the Committee such documents as the
Company or Committee
13
<PAGE>
shall deem necessary or desirable. The provisions of the Plan shall be fully
applicable to such entity except as may otherwise be agreed to by such adopting
company and the Company or Committee.
ARTICLE X
GENERAL PROVISIONS
10.1 PARTICIPANTS' RIGHTS UNSECURED. The right of any Participant or
Inactive Participant to receive future payments under the provisions of the
Plan shall be an unsecured claim against the general assets of the Employing
Company employing the Participant at the time that his or her compensation is
deferred. The Company, TWE (except for their respective obligations under
Section 5.1(b) and (c)) and any other Employing Company or former Employing
Company shall not guarantee or be liable for payment of benefits to the
employees of any other Employing Company or former Employing Company under the
Plan.
10.2 NON-ASSIGNABILITY. No right to receive any payment hereunder shall be
transferrable or assignable by a Participant or Inactive Participant other than
by will or by the laws of descent and distribution or by a court of competent
jurisdiction. Any other attempted assignment or alienation of any payment
hereunder shall be void and of no force or effect.
10.3 RELATED COMPANY CEASING TO BE SUCH. (a) In the event that a
corporation or unincorporated entity ceases at any time to meet the definition
of a Related Company, such corporation or entity shall cease as of such time to
be an Employing Company, if it had been such, and those of its Employees who
would have been Eligible Employees under the Plan shall cease to be such.
(b) Payments to Participants employed by any Related Company which
ceases to be such shall be made pursuant to Article VI unless prior to the end
of the year in which such company ceases to be a Related Company, it adopts a
non-qualified deferred compensation plan and agrees to the transfer of the
Deferred Compensation Accounts of all such Participants to its plan and to
assume all obligations accrued under the Plan as of the date of such transfer
with respect to such accounts and subsequent distributions thereof.
10.4 LEGAL FEES. All expenses (including legal fees, court costs and fees
of experts) incurred or expected to be incurred by a Participant or Inactive
Participant in connection with any actual, threatened or contemplated legal,
administrative or other proceeding (whether brought against the Company, TWE,
any Employing Company or former Employing Company or Related Company by a
Participant or Inactive Participant or otherwise)with respect to the
individual's rights (i) to payment, as provided for in Article VI, for all
compensation deferred hereunder pursuant to Articles III or IV, (ii) to the
appropriate investment of all such deferred compensation as provided for in
Article V, or (iii) otherwise relating to Participants' or Inactive
Participants' rights hereunder shall be paid or reimbursed to such Participant
or Inactive Participant by the Company, TWE, Employing Company or former
Employing Company or Related
14
<PAGE>
Company within 20 days after the receipt by the Company, TWE or Related Company,
as the case may be, of a statement or statements from such Participant or
Inactive Participant requesting such payment or reimbursement or such payment
from time to time, whether prior to, delivering or after final disposition
thereof. Such statement or statements shall evidence the expenses incurred by
such Participant or Inactive Participant and shall include or be accompanied by
an undertaking by such Participant or Inactive Participant to repay the amounts
paid or reimbursed, without interest, if ultimately such Participant or Inactive
Participant shall wholly fail on his or her claim, but in no other case.
10.5 NO RIGHTS AGAINST THE COMPANY. The establishment of the Plan, any
amendment or other modification thereof, or any payments hereunder, shall not be
construed as giving to any Employee, Eligible Employee, Participant or Inactive
Participant any legal or equitable rights against the Company, TWE or any other
Employing Company or former Employing Company, its shareholders, directors,
officers or other employees, except as may be contemplated by or under the Plan
including, without limitation, the right of any Participant or Inactive
Participant to be paid as provided under the Plan. Participation in the Plan
does not give rise to any actual or implied contract of employment. A
Participant may be terminated at any time for any reason in accordance with the
procedures of the Employing Company.
10.6 WITHHOLDING. Each Employing Company or former Employing Company shall
withhold any federal, state and local income or employment tax (including
F.I.C.A. obligations for both social security and medicare) which by any present
or future law it is, or may be, required to withhold with respect to any
deferral of compensation pursuant to the Plan, any Employing Company Allocation,
any income deemed accrued or any distribution under the Plan, with respect to
any of its former or present Employees. The Committee shall provide or direct
the provision of information necessary or appropriate to enable each such
company to so withhold.
10.7 NO GUARANTEE OF TAX CONSEQUENCES. The Committee, the Company, TWE and
any Employing Company or former Employing Company do not make any commitment or
guarantee that any amounts deferred for the benefit of a Participant or Inactive
Participant will be excludible from the gross income of the Participant or
Inactive Participant in the year of deferral for federal, state or local income
or employment tax purposes, or that any other federal, state or local tax
treatment will apply to or be available to any Participant or Inactive
Participant. It shall be the obligation of each Eligible Employee, Participant
or Inactive Participant to determine whether any deferral under the Plan is
excludible from his or her gross income for federal, state and local income or
employment tax purposes, and to take appropriate action if he or she has reason
to believe that any such deferral is not so excludible.
10.8 SEVERABILITY. If a provision of the Plan shall be held illegal or
invalid, the illegality or invalidity shall not affect the remaining parts of
the Plan, and the Plan shall be construed and enforced as if the illegal or
invalid provision had not been included in the Plan.
10.9 GOVERNING LAW. The provisions of the Plan shall be governed by and
construed
15
<PAGE>
in accordance with the laws of the State of New York.
16
<PAGE>
AMENDMENT NO. 1
TO
TIME WARNER DEFERRED COMPENSATION PLAN
STATEMENT OF AMENDMENTS
1. Article III is hereby amended by adding the following new Section 3.5 to the
end thereof:
"3.5 CERTAIN INCENTIVE PLANS. Notwithstanding anything to the
contrary herein, the term "bonus" wherever used in this Article III shall
include any amounts paid to eligible employees of the following divisions of
TWE: Home Box Office and Home Box Office Communications, who participate in the
1993-1995 Cash Flow Incentive Plan, the 1996-1999 Cash Flow Incentive Plan, and
any successor plan, with respect to amounts they may earn under such incentive
plans, provided, however, that any such elections shall be made irrevocably
either before the beginning of the term of the applicable plan or within 30 days
after the signing of an eligible employee's renegotiated or newly negotiated
employment contract."
2. Section 6.3(b) is hereby amended by adding the following new sentence to the
end thereof:
"In lieu of specifying the year in which the payment is to be made,
the Participant may specify that payment of the deferral shall be made on
account of retirement, in which case it shall be distributed in a lump sum as
soon as practicable after the January 1 immediately following the date of
Retirement."
3. Item Numbers 1 and 2 are effective as of December 7, 1994.
AMENDMENT NO. 2
TO
TIME WARNER DEFERRED COMPENSATION PLAN
STATEMENT OF AMENDMENTS
1. The third sentence of Section 4.3 is hereby amended to read in its entirety
as follows:
"Any such Employing Company Allocations for (i) eligible employees
participating in the Time Warner Employees' Savings Plan (the "Savings Plan"),
(ii) eligible employees participating in the Time Warner Employees' Stock
Ownership Plan ("TESOP"), (iii) eligible employees participating in the Time
Warner Thrift Plan (the "Thrift Plan"), and (iv) eligible employees
participating in the Warner Music Group Inc. Profit Sharing Plan (the "Profit
Sharing Plan"), shall become vested, in the case of the (i) Savings Plan or
TESOP participants, only after four Periods of Service or Years of Service, (ii)
Thrift Plan participants, only after five Periods of Service or Years of
Service, and (iii) Profit Sharing Plan participants, only after five Years of
Service."
2. Item Number 1 is effective as of January 1, 1994.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF TIME WARNER INC.
Set forth below are the names of certain subsidiaries, at least 50% owned,
directly or indirectly, of Time Warner and TWE as of December 31, 1994. Certain
subsidiaries which when considered in the aggregate would not constitute a
significant subsidiary, are omitted from the list below. Indented subsidiaries
are direct subsidiaries of the company under which they are indented.
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
TIME WARNER INC. (Registrant): Delaware
Asiaweek Limited................................... 80 Hong Kong
Sunset Publishing Corporation...................... 100 Delaware
Time International Inc. ........................... 100 Delaware
Time Inc.(1)....................................... 100 Delaware
American Family Publishers (partnership).......... 50 New York
Book-of-the-Month Club, Inc. ..................... 100 New York
Entertainment Weekly, Inc. ....................... 100 Delaware
Little, Brown and Company (Inc.).................. 100 Massachusetts
TDS Ventures, Inc. ............................... 100 Delaware
Time Distribution Services (partnership).......... 63 New York
Time Customer Service, Inc. ...................... 100 Delaware
Time Publishing Ventures, Inc. ................... 100 Delaware
Southern Progress Corporation(2)................. 100 Delaware
Time Inc. Ventures................................ 100 Delaware
Health Publications, Inc. ....................... 100 Delaware
Hippocrates Partners (partnership).............. 50 California
TWC Ventures Inc. ................................ 100 Delaware
Time Life Inc. ................................... 100 Delaware
Time-Life Customer Service, Inc. ................ 100 Delaware
Warner Books, Inc. ............................... 100 New York
Warner Publisher Services Inc. ................... 100 New York
Time TBS Holdings, Inc. ........................... 100 Delaware
TW Service Holding I, L.P. (partnership)........... (3) Delaware
TW Service Holding II, L.P. (partnership).......... (3) Delaware
TW Programming Co. (partnership).................. (4) New York
TW Transmission Co. (partnership)................. (4) New York
TW Cable Service Co. (partnership)................ (4) New York
E/Court Holdings Co. (partnership)................ (4) New York
TW/BET Holding Co. (partnership).................. (4) New York
TW/Three D Holding Co. (partnership).............. (4) New York
TWQ II Co. (partnership).......................... (4) New York
TWQ I Co., L.P. (partnership)..................... (5) Delaware
WCI Record Club Inc. .............................. 100(6) Delaware
The Columbia House Company (partnership).......... 50 New York
Warner Communications Inc. ........................ 100 Delaware
Time Warner Interactive Inc. ..................... 100 Delaware
Atari Games Corporation........................... 100 California
DC Comics (partnership)........................... 50(7) New York
Warner Bros. Music International Inc. ............ 100 Delaware
Warner-Tamerlane Publishing Corp. ................ 100 California
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
WB Music Corp. .................................. 100 California
W Cinemas Holding Inc. .......................... 100 Delaware
W Cinemas Inc. ................................. 100 Delaware
Alpha Theatres Inc. ............................ 100 Delaware
NPP Music Corp. ................................. 100 Delaware
Warner/Chappell Music, Inc. ..................... 100 Delaware
New Chappell Inc.(8)............................ 100 Delaware
Super Hype Publishing, Inc. .................... 100 New York
Cotillion Music, Inc. .......................... 100 Delaware
Walden Music, Inc. ............................. 100 New York
Summy-Birchard, Inc. ........................... 100 Wyoming
Warner Bros. Publications Inc. ................. 100 New York
CPP/Belwin, Inc. ............................... 100 Delaware
Lorimar Motion Picture Management, Inc. ......... 100 California
E.C. Publications, Inc. ......................... 100 New York
WCI/Am Law Inc. ................................. 100 Delaware
American Lawyer Media, L.P. .................... 83.25 Delaware
Warner Music Group Inc. ......................... 100 Delaware
Warner Bros. Records Inc. ....................... 100 Delaware
Atlantic Recording Corporation.................. 100 Delaware
Warner-Elektra-Atlantic Corporation............. 100 New York
WEA International Inc.(9)........................ 100 Delaware
Warner Music Canada Ltd. ....................... 100 Canada
The Columbia House Company (Canada) (partner-
ship)......................................... 50 Canada
Warner Special Products Inc. .................... 100 Delaware
Warner Custom Music Corp. ...................... 100 California
WEA Manufacturing Inc. .......................... 100 Delaware
Allied Record Company........................... 100 California
Time Warner Limited.............................. 100 U.K.
Warner Music International Services Ltd. ....... 100 U.K.
Time Warner UK Limited......................... 100 U.K.
Warner Chappell Music Group (UK) Ltd. ......... 100 U.K.
Warner Chappell Music Limited................. 100 U.K.
Magnet Music Ltd. ........................... 100 U.K.
Warner Music (U.K.) Limited.................... 100 U.K.
Ivy Hill Corporation............................. 100 Delaware
Warner Cable Communications Inc.(10)............. 100 Delaware
TWI Ventures Ltd. ............................... 100 Delaware
American Television and Communications Corpora-
tion............................................. 100(11) Delaware
American Communications Corporation.............. 100 Indiana
American Digital Communications, Inc. ........... 100 Delaware
ATC Cablevision of San Marino, Inc. ............. 100 California
ATC Cablevision of South Pasadena, Inc. ......... 100 California
ATC Holdings II, Inc. ........................... 100 Delaware
ARP 113, Inc. .................................. 100 Delaware
Paragon Communications (partnership)............ 50(12) Colorado
ATC/PPV, Inc. ................................... 100 Delaware
Carolina Network Corporation..................... 100 Delaware
Philadelphia Community Antenna Television Compa-
ny.............................................. 100 Pennsylvania
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
Lower Bucks Cablevision, Inc. .................. 100 Pennsylvania
Tri-County Cable Television Company............. 100 New Jersey
Public Cable Company............................. 100 Maine
Public Cable Company (partnership).............. 77 Maine
Time Warner Operations Inc. ...................... 100(13) Delaware
HBO Film Management, Inc. ...................... 100 Delaware
Kremlin Productions, Inc. ...................... 100 Delaware
Simba Productions, Inc. ........................ 100 Delaware
WAC Productions, Inc. .......................... 100 Delaware
Running Mates, Inc. ............................ 100 Delaware
SUBSIDIARIES OF TIME WARNER ENTERTAINMENT COMPANY, L.P.
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
Century Venture Corporation........................ 50 Delaware
CV of Viera Joint Venture (partnership)............ 50 Florida
Erie Telecommunications, Inc. ..................... 54.19 Pennsylvania
Kansas City Cable Partners......................... 50 Colorado
Time Warner Cable New Zealand Holdings Ltd. ....... 100(14) New Zealand
Queens Inner Unity Cable System.................... 50 New York
Comedy Partners, L.P. (partnership)................ 50 New York
Warner Cable of New Jersey Inc. ................... 100 Delaware
Warner Cable of Vermont Inc. ...................... 100 Delaware
HBO Direct, Inc. .................................. 100 Delaware
HBO Turkey Holdings I Inc. ....................... 100 Delaware
HBO Turkey Holdings II Inc. ...................... 100 Delaware
TW Buffer Inc. ................................... 100 Delaware
Warner Bros. (F.E.) Inc. ........................ 100 Delaware
Warner Bros. (Japan) Inc. ....................... 100 Delaware
Warner Bros. (South) Inc. ....................... 100 Delaware
Warner Bros. (Transatlantic) Inc. ............... 100 Delaware
Bethel Productions Inc. ........................ 100 Delaware
Warner Films Consolidated Inc. .................. 100 Delaware
Exeter Distributing Inc. ....................... 100 Delaware
Riverside Avenue Distributing Inc. ............. 100 Delaware
HBO Asia Holdings, L.P. (partnership).............. 99 Delaware
HBO Pacific Partners, C.V. ....................... 83.33 Neth. Antiles
Home Box Office (Singapore) Pty. Ltd. ........... 100 Singapore
Turner/HBO Ltd. Purpose Joint Venture (partner-
ship)............................................. 50 New York
Acapulco 37 S.A. de C.V. .......................... 100 Mexico
Warner Bros. Gesellschaft mbH...................... 100 Austria
Time Warner Entertainment Limited.................. 100 U.K.
The Bountiful Company Limited..................... 50 U.K.
Warner Bros. Studio Stores Ltd. .................. 100 U.K.
Warner Bros. Consumer Products (UK) Ltd. ......... 100 U.K.
TWE Finance Limited............................... 100 U.K.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
Warner Bros. Theatres Ltd. ..................... 100 U.K.
Warner Bros. Distributors Ltd. ................. 100 U.K.
Lorimar Telepictures International Ltd. ....... 100 U.K.
Warner Bros. International Television
Distribution Italia S.p.A. .................. 100 Italy
Torremodo Ltd. ............................... 100 U.K.
Victory Film Production, Ltd. ................ 100 U.K.
Warner Bros. Theatres (U.K.) Limited............ 100 U.K.
Warner Bros. Investments (Pilsworth) Ltd. ..... 100 U.K.
Warner Bros. Theatres Advertising Agency Limit-
ed............................................ 100 U.K.
Warner Bros. Productions Limited................ 100 U.K.
Warner Home Video (U.K.) Limited................ 100 U.K.
Metro Color Laboratories (U.K.) Ltd. ............. 100 U.K.
Kay Holdings Ltd. .............................. 100 U.K.
Metrocolor (London) Limited.................... 100 U.K.
Geffen Pictures (partnership)..................... 50 New York
Lorimar Distribution International (Canada)
Corp. ........................................... 100 Canada
Lorimar Canada Inc. .............................. 100 Canada
Productions et Editions Cinematographiques
Francaises SARL (PECF)........................... 100 France
Warner Home Video France S.A. .................. 100 France
Time Warner Entertainment Australia Pty. Ltd. .... 100 Australia
Lorimar Telepictures Pty. Limited............... 100 Australia
Warner Bros. (Australia) Pty. Ltd. ............. 100 Australia
Warner Holdings Australia Pty. Limited.......... 100 Australia
Warner Bros. Properties (Australia) Pty. Ltd. . 100 Australia
Warner Bros. Theatres (Australia) Pty. Limited. 100 Australia
Warner World Australia Pty. Limited............ 100 Australia
Movie World Enterprises Partnership (partner-
ship)........................................ 50 Australia
Warner Home Video Pty. Limited.................. 100 Australia
Warner Bros. Video Pty. Ltd. .................. 100 Australia
Warner Sea World Aviation Pty. Ltd. ............ 100 Australia
Sea World Aviation Partnership (partnership)... 50 Australia
Warner Sea World Investments Pty. Limited....... 100 Australia
Sari Lodge Pty. Limited........................ 50 Australia
Sea World Management Pty. Ltd................. 100 Australia
Warner Sea World Operations Pty. Ltd............ 100 Australia
Sea World Enterprises Partnership (partner-
ship)......................................... 50 Australia
Warner Sea World Units Pty. Ltd................. 100 Australia
Time Warner Germany Holding GmbH.................. 100(15) Germany
Time Warner Entertainment Germany GmbH.......... 100 Germany
Time Warner Entertainment Germany GmbH and Co.
OHG........................................... 100(16) Germany
Warner Bros. Movie World GmbH & Co. KG........ 60 Germany
Warner Bros. Deutschland Pay TV GmbH........... 100 Germany
Warner Home Video GmbH......................... 100 Germany
Warner Home Video Spol SRO.................... 100 Czech Republic
GWHS Grundstrucks Verwaltungs GmbH............. 100 Germany
Warner Bros. Film GmbH ........................ 100 Germany
Warner Bros. Film GmbH Kinobetriebe........... 100 Germany
Warner Bros. Film GmbH Multiplex Cinemas
Mulheim...................................... 100 Germany
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE STATE OR OTHER
OWNED BY JURISDICTION OF
IMMEDIATE INCORPORATION OR
NAME PARENT ORGANIZATION
---- ---------- ----------------
<S> <C> <C>
Time Warner Merchandising Canada Inc. ............ 100 Canada
Warner Bros. Canada Inc. ......................... 100 Canada
Warner Bros. Distributing (Canada) Limited........ 100 Canada
Warner Home Video (Canada) Ltd.................... 100 Canada
Warner Bros. (Africa) (Pty) Ltd................... 100 So. Africa
Warner Bros. Belgium SA/NV........................ 100 Belgium
Warner Bros. (D) A/S.............................. 100 Denmark
Warner & Metronome Films A/S.................... 50 Denmark
Warner Bros. Theatres Denmark A/S............... 100 Denmark
Scala Biografome I/S (partnership)............. 50 Denmark
Dagmar Teatret I/S (partnership)............... 50 Denmark
Warner Bros. Film Ve Video Sanayi Ve Ticaret
A.S. ............................................ 100 Turkey
Warner Bros. Finland OY........................... 100 Finland
Warner Bros. (Holland) B.V........................ 100 Netherlands
Warner Home Video (Nederland) B.V............... 100 Netherlands
Warner Bros. Theatres (Holland) B.V............. 100 Netherlands
Warner Bros. Holdings Sweden AB................... 100 Sweden
Warner Bros. (Sweden) AB........................ 100 Sweden
Warner Home Video (Sweden) AB................... 100 Sweden
Warner Bros. Italia S.p.A. ....................... 100 Italy
Cinema Data Service S.r.L. ..................... 100 Italy
Warner Entertainment Italia S.r.L............... 100 Italy
Warner Bros. (Korea) Inc.......................... 100 Korea
Warner Bros. (Mexico) S.A......................... 100 Mexico
Warner Bros. (N.Z.) Limited....................... 100 New Zealand
Warner Home Video (N.Z.) Limited................ 100 New Zealand
Warner Bros. Norway A/S........................... 100 Norway
Warner Bros. Singapore Pte. Ltd. ................. 100 Singapore
Warner Home Video (Ireland) Ltd. ................. 100 Ireland
Warner Home Video Portugal Lda.................... 100 Portugal
Warner-Lusomundo Sociedade Iberica de Cinemas
Lda. ............................................ 50 Portugal
Warner Home Video Espanola S.A.................... 100 Spain
Warner Bros. Consumer Products S.A.............. 100 Spain
Warner Mycal Corporation.......................... 50 Japan
Kabelkom Management Co. (partnership) (17)........ 50 Delaware
Kabelkom Holding Co. (partnership) (17)........... 50 Delaware
Quincy Jones Entertainment Company L.P. (partner-
ship)............................................ 50 Delaware
Six Flags Entertainment Corporation............... 100 Delaware
SF Holdings Inc. ................................ 100 Delaware
Six Flags Theme Parks Inc. ..................... 100 Delaware
DC Comics (partnership)........................... 50(7) New York
</TABLE>
--------
(1) The names of five subsidiaries of Time Inc. carrying on the magazine
publishing business are omitted.
(2) The names of nine subsidiaries of Southern Progress Corporation carrying
on the magazine or book publishing business are omitted.
(3) The General Partners of TWE own 87.5%, Toshiba America Entertainment, Inc.
owns 6.25% and Itochu Entertainment Inc. owns 6.25%.
(4) TW Service Holding I, L.P. owns 99% and TW Service Holding II, L.P. owns
1%.
5
<PAGE>
(5) American Television and Communications Corporation, Warner Cable
Communications Inc. and Warner Communications Inc. are the General
Partners and TW Service Holding I, L.P. and TW Service Holding II, L.P.
are the Limited Partners.
(6) Time Warner Inc. owns 80% and Warner Communications Inc. owns 20%.
(7) Warner Communications Inc. owns 50% and TWE owns 50%.
(8) The names of 16 subsidiaries of New Chappell Inc. carrying on
substantially the same music publishing operations in foreign countries
are omitted.
(9) The names of 34 subsidiaries of WEA International Inc. carrying on
substantially the same record, tape and video cassette distribution
operations in foreign countries are omitted.
(10) The names of six subsidiaries of Warner Cable Communications Inc. carrying
on the cable television business are omitted.
(11) Time Warner Inc. owns 86.34%, Warner Communications Inc. owns 7.8% and
Time TBS Holdings, Inc. owns 5.86%.
(12) American Television and Communications Corporation owns 50% of Paragon
Communications through two indirectly owned subsidiaries--31.09% through
ATC Holdings II, Inc. and 18.91% through ARP 113, Inc.
(13) Time Warner Inc. owns 87.21% and Warner Communications Inc. owns 12.79%.
(14) TWE owns 99% and Time Warner Inc. owns 1%.
(15) TWE owns 99% and HBO Direct, Inc. owns 1%.
(16) Time Warner Entertainment Germany GmbH owns 85% and Time Warner Germany
Holding GmbH owns 15%.
(17) The names of 13 subsidiaries of Kabelkom Management Co. and Kabelkom
Holding Co. carrying on substantially the same cable television operations
in Hungary are omitted.
6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our reports dated February 7,
1995, with respect to the consolidated financial statements and schedule of
Time Warner Inc. and Time Warner Entertainment Company, L.P. ("TWE") included
in this Annual Report on Form 10-K for the year ended December 31, 1994, and
our report dated March 3, 1995, with respect to the combined financial
statements of the Time Warner Service Partnerships included in TWE's Annual
Report on Form 10-K for the year ended December 31, 1994, incorporated by
reference in this Annual Report on Form 10-K for the year ended December 31,
1994, in each of the following:
<TABLE>
<S> <C>
1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031 and No. 2-76753
on Form S-8;
2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement No. 2-75960 on
Form S-16 and Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 33-
58262 on Form S-3;
3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8;
4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477 and No. 2-67216
on Form S-8;
5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8;
6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507 on Form S-8 and
Registration Statement No. 33-48381 on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247 on Form S-8;
8. Registration Statement No. 33-33076 (the Prospectus constituting a part thereof also
applies to Registration Statements No. 33-29029 and No. 33-29030) on Form S-8;
9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and Registration
Statement No. 33-51471 on Form S-8;
10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on Form S-3;
11. Registration Statement No. 33-35317 on Form S-8;
12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8;
13. Registration Statement No. 33-47151 on Form S-8;
14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 33-47705 on
Form S-4;
15. Registration Statement No. 33-57812 on Form S-3;
16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8;
17. Registration Statement No. 33-50237 on Form S-3; and
18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective Amendment No. 1 to
Registration Statement No. 33-57667 on Form S-8.
</TABLE>
Ernst & Young LLP
New York, New York
March 30, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated
January 19, 1995, except as to Note 6, which is as of January 27, 1995, with
respect to the financial statements and schedule of Paragon Communications
which are incorporated by reference in this Annual Report on Form 10-K for the
year ended December 31, 1994, in each of the following:
1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031
and No. 2-76753 on Form S-8;
2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement
No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form S-3
to Registration Statement No. 33-58262 on Form S-3;
3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8;
4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477
and No. 2-67216 on Form S-8;
5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8;
6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507
on Form S-8 and Registration Statement No. 33-48381 on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247
on Form S-8;
8. Registration Statement No. 33-33076 (the Prospectus constituting a part
thereof also applies to Registration Statements No. 33-29029 and No. 33-
29030) on Form S-8;
9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8;
10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on
Form S-3;
11. Registration Statement No. 33-35317 on Form S-8;
12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8;
13. Registration Statement No. 33-47151 on Form S-8;
14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
No. 33-47705 on Form S-4;
15. Registration Statement No. 33-62774 on Form S-8;
16. Registration Statement No. 33-51015 on Form S-8;
17. Registration Statement No. 33-50237 on Form S-3;
18. Registration Statement No. 33-51471 on Form S-8;
19. Registration Statement No. 33-57812 on Form S-3;
20. Registration Statement No. 33-75144 on Form S-3; and
21. Registration Statements No. 33-53213 and No. 33-57667 on Form S-8 and
Post-Effective Amendment No. 1 to Registration Statement No. 33-57667.
PRICE WATERHOUSE LLP
Denver, Colorado
March 30, 1995
<PAGE>
Exhibit 24
----------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and
directors of TIME WARNER INC., a Delaware Corporation (the "Corporation"),
hereby constitutes and appoints RICHARD J. BRESSLER, PETER R. HAJE, GERALD M.
LEVIN, PHILIP R. LOCHNER, JR., AND RICHARD D. PARSONS each of them, his or her
true and lawful attorneys-in-fact and agents, with full power to act without the
others, for him or her and in his or her name, place and stead, in any and all
capacities, to sign the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994, pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and to sign any and all amendments to
said Annual Report on Form 10-K, and to file such Annual Report on Form 10-K,
with all exhibits thereto, and any and all other documents in connection
therewith, with the Securities and Exchange Commission, under the provisions of
the Exchange Act, hereby granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform any and all acts and
things requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his or her
name as of the 30th day of March, 1995.
(i) Principal Executive Officer:
/s/ Gerald M. Levin
----------------------------
Gerald M. Levin
Chairman of the Board,
President and Chief Executive Officer
(ii) Principal Financial Officer:
/s/ Richard J. Bressler
-----------------------------
Richard J. Bressler
Senior Vice President and
Chief Financial Officer
<PAGE>
(iii) Principal Accounting Officer:
/s/ John A. LaBarca
-----------------------------
John A. LaBarca
Vice President and
Controller
(iv) Directors:
/s/ Merv Adelson
-----------------------------
Merv Adelson
/s/ Lawrence B. Buttenwieser
----------------------------
Lawrence B. Buttenwieser
/s/ Edward S. Finkelstein
-----------------------------
Edward S. Finkelstein
/s/ Beverly Sills Greenough
-----------------------------
Beverly Sills Greenough
/s/ Carla A. Hills
----------------------------
Carla A. Hills
/s/ David T. Kearns
----------------------------
David T. Kearns
/s/ Henry Luce III
----------------------------
Henry Luce III
-2-
<PAGE>
/s/ Reuben Mark
----------------------------
Reuben Mark
/s/ Michael A. Miles
----------------------------
Michael A. Miles
/s/ J. Richard Munro
----------------------------
J. Richard Munro
/s/ Richard D. Parsons
----------------------------
Richard D. Parsons
/s/ Donald S. Perkins
----------------------------
Donald S. Perkins
/s/ Raymond S. Troubh
----------------------------
Raymond S. Troubh
/s/ Francis T. Vincent, Jr.
----------------------------
Francis T. Vincent, Jr.
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Time Warner Inc. for the year ended December 31, 1994
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 282
<SECURITIES> 0
<RECEIVABLES> 2,207
<ALLOWANCES> 768
<INVENTORY> 370
<CURRENT-ASSETS> 2,817
<PP&E> 1,410
<DEPRECIATION> 657
<TOTAL-ASSETS> 16,716
<CURRENT-LIABILITIES> 2,972
<BONDS> 8,839
<COMMON> 379
0
1
<OTHER-SE> 768
<TOTAL-LIABILITY-AND-EQUITY> 16,716
<SALES> 7,396
<TOTAL-REVENUES> 7,396
<CGS> 4,307
<TOTAL-COSTS> 4,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 769
<INCOME-PRETAX> 89
<INCOME-TAX> 180
<INCOME-CONTINUING> (91)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (91)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
<PAGE>
EXHIBIT 99.1
TIME WARNER SERVICE PARTNERSHIPS
COMBINED BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables, less allowances of $176 and $156.............. $ 3,150 $ 3,800
Prepaid expenses........................................... 429 198
-------- --------
Total current assets....................................... 3,579 3,998
Investments and advances................................... 155,522 149,605
Cable television equipment................................. 105,155 34,362
Furniture, fixtures and other equipment.................... 44,739 18,648
-------- --------
149,894 53,010
Less accumulated depreciation.............................. (29,559) (20,950)
-------- --------
Property, plant and equipment.............................. 120,335 32,060
-------- --------
Total assets............................................... $279,436 $185,663
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable........................................... $ 29,649 $ 3,541
Debt due to Time Warner.................................... 32,320 17,036
Other current liabilities, including $5,877 due to Time
Warner in 1994............................................ 24,926 1,277
-------- --------
Total current liabilities.................................. 86,895 21,854
Capital lease obligations.................................. 14,113 --
Partners' capital.......................................... 178,428 163,809
-------- --------
Total liabilities and partners' capital.................... $279,436 $185,663
======== ========
</TABLE>
See accompanying notes.
1
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
COMBINED STATEMENT OF OPERATIONS
(THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 15,
1993 (INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ----------------
<S> <C> <C>
Revenues......................................... $ 49,940 $ 7,735
-------- --------
Cost of revenues (a)............................. 61,948 8,428
Selling, general and administrative (a).......... 23,389 1,310
-------- --------
Operating expenses............................... 85,337 9,738
-------- --------
Operating loss................................... (35,397) (2,003)
Equity in losses of investee companies........... (14,706) (12,026)
Gain on investments.............................. 9,314 10,019
Interest expense................................. (2,714) (93)
-------- --------
Net loss......................................... $(43,503) $ (4,103)
======== ========
--------
(a)Includes depreciation and amortization expense
of: ............................................ $ 13,033 $ 1,443
======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
COMBINED STATEMENT OF CASH FLOWS
(THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 15,
1993 (INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ----------------
<S> <C> <C>
OPERATIONS
Net loss.......................................... $(43,503) $ (4,103)
Adjustments for noncash and nonoperating items:
Depreciation and amortization..................... 13,033 1,443
Equity in losses of investee companies............ 14,706 12,026
Gain on investments............................... (9,314) (10,019)
Changes in operating assets and liabilities:
Receivables....................................... 1,327 (3,800)
Accounts payable and other current liabilities.... 44,551 4,589
Other balance sheet changes....................... 465 (198)
-------- --------
Cash provided (used) by operations................ 21,265 (62)
-------- --------
INVESTING ACTIVITIES
Investments and acquisitions...................... (22,722) (32,780)
Capital expenditures.............................. (81,668) (432)
Investment proceeds............................... 19,105 3,738
-------- --------
Cash used by investing activities................. (85,285) (29,474)
-------- --------
FINANCING ACTIVITIES
Increase in debt due to Time Warner............... 15,284 17,036
Repayments of capital lease obligations........... (1,264) --
Capital contributions from General Partners....... 50,000 12,500
-------- --------
Cash provided by financing activities............. 64,020 29,536
-------- --------
CHANGE IN CASH.................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
COMBINED STATEMENT OF PARTNERS' CAPITAL
(THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PARTNERS'
CAPITAL
---------
<S> <C>
INITIAL CAPITALIZATION AT SEPTEMBER 15, 1993......................... $ 94,575
Net loss............................................................. (4,103)
Capital contributions................................................ 12,500
Unrealized gains on certain marketable equity investments at adoption
of FAS 115.......................................................... 60,837
--------
BALANCE AT DECEMBER 31, 1993......................................... 163,809
Net loss............................................................. (43,503)
Capital contributions................................................ 50,726
Increase in unrealized gains on certain marketable equity invest-
ments............................................................... 7,396
--------
BALANCE AT DECEMBER 31, 1994......................................... $178,428
========
</TABLE>
See accompanying notes.
4
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On September 15, 1993, a wholly-owned subsidiary of U S WEST, Inc. ("US
WEST") was admitted as an additional limited partner of Time Warner
Entertainment Company, L.P. ("TWE") (the "US WEST Transaction"). The
Modification of Final Judgment entered on August 24, 1982 by the United States
District Court for the District of Columbia (the "MFJ") prohibits regional Bell
operating companies such as U S WEST, and their affiliates, which may include
TWE, from engaging in certain business activities and practices. Accordingly,
certain assets of TWE (the "Time Warner Service Partnership Assets") were
distributed to the general partners of TWE prior to the U S WEST Transaction,
and then were contributed to three limited partnerships (TW Service Holding I,
L.P., TW Service Holding II, L.P. and TWQ I Co., L.P.) and seven general
partnerships owned by certain of the limited partnerships (TW Cable Service
Co., TW Transmission Co., E/Court Holdings Co., TW Programming Co., TWQ II Co.,
TW/BET Holding Co. and TW/Three D Holding Co.). Such limited and general
partnerships are collectively referred to as the "Time Warner Service
Partnerships." The general partners of TWE, which are direct or indirect
wholly-owned subsidiaries of Time Warner Inc. ("Time Warner"), are the general
partners of the Time Warner Service Partnerships (the "General Partners") and
collectively hold a 100% priority capital interest and 87.5% residual equity
interest in the Time Warner Service Partnerships. Subsidiaries of Toshiba
Corporation and ITOCHU Corporation are the limited partners of the Time Warner
Service Partnerships and each holds a 6.25% residual equity interest (Note 4).
The Time Warner Service Partnership Assets principally included 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. The Time Warner Service Partnership Assets are reflected
in the accompanying combined financial statements at TWE's historical cost.
Pursuant to a series of agreements with TWE, if TWE is clearly not prohibited
from owning or operating the Time Warner Service Partnership Assets, they will
be recontributed to TWE on September 15, 1995 (or September 15, 1997 in the
case of its interests in Courtroom Television Network and E! Entertainment
Television, Inc.), 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 on October 24, 1994, TWE is no longer
prohibited from owning or operating the Time Warner Service Partnership Assets,
except for certain equity interests in companies in which the Time Warner
Service Partnerships do not have the controlling interest or an ownership and
voting interest so large as to exert significant influence.
Unless amended by the mutual consent of the partners of TWE, TWE is required
to make quarterly cash distributions of capital in the amount of $12.5 million
to the General Partners through September 30, 1998; such amounts are then
required to be contributed to the Time Warner Service Partnerships in exchange
for additional General Partners' priority capital interests ("Time Warner
Service Partnership Contributions"). The Time Warner Service Partnership
Contributions were $50 million in 1994 and $12.5 million in 1993.
As U.S. partnerships, the Time Warner Service Partnerships are not subject to
U.S. federal, state or local income taxation.
5
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
BASIS OF COMBINATION AND
ACCOUNTING FOR INVESTMENTS
The combined financial statements include 100% of the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Time Warner Service
Partnerships and all companies in which the Time Warner Service Partnerships
have a controlling voting interest ("subsidiaries"), as if the Time Warner
Service Partnerships and their subsidiaries were a single company. Significant
intercompany accounts and transactions between the combined companies are
eliminated. Significant accounts and transactions between the Time Warner
Service Partnerships and its partners and affiliates are disclosed as related
party transactions (Note 6).
Investments in companies in which the Time Warner Service Partnerships have
significant influence but less than a controlling voting interest are accounted
for using the equity method. Under the equity method, only the Time Warner
Service Partnerships' investment in and amounts due to and from the equity
investee are included in the combined balance sheet, only the Time Warner
Service Partnerships' share of the investee's losses is included in the
combined net loss, and only the dividends, cash distributions, loans or other
cash received from the investee, less any additional cash investment, loan
repayments or other cash paid to the investee are included in the combined cash
flows.
In accordance with Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," investments
in companies in which the Time Warner Service Partnerships do not have the
controlling interest or an ownership and voting interest so large as to exert
significant influence are accounted for at market value if the investments are
publicly traded and there are no resale restrictions, or at cost, if the sale
of a publicly-traded investment is restricted or if the investment is not
publicly traded. Unrealized gains and losses on investments accounted for at
market value are reported in partners' capital until the investment is sold, at
which time, the realized gain or loss is included in income. Dividends and
other distributions of earnings from both market value and cost method
investments are included in income when declared.
The Time Warner Service Partnerships consolidated their interest in Courtroom
Television Network ("Court TV") effective January 1, 1994, because of their
increased investment in the partnership relative to the other unaffiliated
partners. Certain reclassifications have been made to the prior period's
financial statements to conform to the 1994 presentation.
REVENUES
Subscriber fees and fees received from services provided to TWE are recorded
as revenue in the period the service is provided. Advertising revenue is
recognized when the advertisement is aired.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment principally consist of cable television and
transmission equipment and are stated at cost. Depreciation is provided
generally on the straight-line method over useful lives ranging up to fifteen
years.
2.INVESTMENTS AND ADVANCES
The Time Warner Service Partnerships' investments consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
-------- --------
(THOUSANDS)
<S> <C> <C>
Equity method investments.................................... $ 26,547 $ 33,704
Market value method investments.............................. 112,197 96,301
Cost method investments...................................... 16,778 19,600
-------- --------
Total........................................................ $155,522 $149,605
======== ========
</TABLE>
6
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Investments accounted for using the equity method include E! Entertainment
Television, Inc. (49% owned), Primestar Partners, L.P. (21% owned, "Primestar")
and, in 1993 only, Court TV, which was consolidated effective January 1, 1994.
Equity method investments at December 31, 1993 include advances of
approximately $17 million that were repaid to the Time Warner Service
Partnerships in March 1994. A summary of financial information as reported by
the equity investees of the Time Warner Service Partnerships on a 100% basis
for the years ended December 31, 1994 and 1993 is set forth below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993
------------ ------------
(THOUSANDS)
<S> <C> <C>
Revenues............................................ $ 67,720 $ 46,806
Operating loss...................................... (61,950) (60,357)
Net loss............................................ (64,125) (67,544)
Current assets...................................... 34,391 27,564
Total assets........................................ 324,853 144,262
Current liabilities................................. 23,338 16,308
Long-term debt...................................... 262,000 71,567
Total liabilities................................... 368,598 220,901
</TABLE>
Equity interests in QVC, Inc. (8% owned, "QVC"), The 3DO Company (13% owned)
and Black Entertainment Television (15% owned) are accounted for at market
value. The interest in QVC was sold in February 1995 to a group that had
tendered for all of that company's capital stock. Proceeds of approximately
$200 million were received, which will be paid, loaned, distributed or
otherwise transferred to Time Warner.
3.DEBT DUE TO TIME WARNER
The Time Warner Service Partnerships can borrow up to a maximum of $125
million from Time Warner through January 1, 1998. Each borrowing is at the
discretion of Time Warner. Interest on outstanding borrowings is payable
quarterly at a per annum rate equal to the weighted average interest rate
applicable to borrowings by TWE under its bank credit agreement, which was 6.5%
and 4.2% at December 31, 1994 and 1993, respectively. Outstanding borrowings
are payable on January 1, 1998 or on earlier demand. Outstanding borrowings
were approximately $32 million and $17 million at December 31, 1994 and 1993,
respectively.
4.PARTNERS' CAPITAL
The partnership agreements provide for special allocations of income, loss
and distributions of partnership capital, including priority distributions in
the event of liquidation or dissolution. Capital amounts assigned to each
partner are based on the fair value of the assets each contributed to the
partnership plus Time Warner Service Partnership Contributions funded by TWE
distributions (Note 1). Partnership income, to the extent earned, is first
allocated to the partners so that the economic burden of the income tax
consequences of partnership operations is borne as though the partnership were
taxed as a corporation ("special tax allocations"), then to the General
Partners' priority capital interest in the initial capital amount of $337
million plus Time Warner Service Partnership Contributions at rates of return
of up to 13.25% per annum (11.25% to the extent concurrently distributed) from
the date such contributions are made, and finally to the residual equity
interests. For the purpose of the foregoing allocations, partnership income or
loss is based on the fair value of the Time Warner Service Partnership Assets
and differs from net income or loss of the Time Warner Service Partnerships,
which is based on the historical cost of the Time Warner Service Partnership
Assets. Partnership losses generally are allocated first to eliminate prior
allocations of partnership income to, and then to reduce the initial capital
amounts of, the residual equity and General Partners' priority capital
interest, in that order, and then to reduce any special tax allocations. To the
extent partnership income
7
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
is insufficient to satisfy all special allocations in a particular accounting
period, the unearned portion is carried over until satisfied out of future
partnership income.
The Time Warner Service Partnerships may make quarterly cash distributions to
its partners to the extent of excess cash, as defined, subject to certain
limitations contained in the Time Warner Service Partnerships and TWE
partnership agreements.
5.COMMITMENTS AND CONTINGENCIES
Total rent expense was $7 million for the year ended December 31, 1994 and
$2.9 million for the period from September 15, 1993 (inception) through
December 31, 1993. The minimum rental commitments under noncancellable long-
term operating and capital leases are: 1995-$3.3 million; 1996-$3.2 million;
1997-$2.8 million; 1998-$2.4 million; 1999-$2.2 million and after 1999-$10.8
million.
Minimum commitments under contracts related to the operation of certain
satellites and the purchase of certain equipment at December 31, 1994 were
approximately $122 million, which are payable principally over a five-year
period.
On March 9, 1994, TW Programming Co. entered into an agreement with certain
other partners in Primestar, pursuant to which it is obligated to provide
letters of credit to support a portion of the indebtedness incurred under a
$565 million satellite construction credit facility entered into by Primestar
as of March 9, 1994. Time Warner has delivered its letter of credit for the
account of TW Programming Co. in the amount of $69 million. Under the credit
facility, TW Programming Co. is obligated to renew and increase the amount of
the letters of credit provided by it to a minimum of $102 million on March 9,
1995; a minimum of $127 million on March 9, 1996; and a minimum of $131 million
on March 9, 1997. The bank lenders may draw on the letters of credit provided
by the partners of Primestar, on a pro rata basis, in the event any amount is
due and payable under the facility or if any letter of credit is not renewed or
increased as required, and in certain other circumstances. Under the agreement,
if TW Programming Co. or any other partner of Primestar fails to satisfy its
obligation to provide letters of credit as required, its partnership interest
in Primestar and any claims for repayment of any drawings under its letters of
credit are subject to forfeiture. Time Warner has no obligation to TW
Programming Co. to continue to renew or increase letters of credit which TW
Programming Co. is required to provide under its agreement.
6.RELATED PARTY TRANSACTIONS
The Time Warner Service Partnerships have entered into various service
agreements with TWE pursuant to which, among other things, the Time Warner
Service Partnerships have provided program signal delivery services to TWE's
cable systems and transmission services to TWE's Programming-HBO and Filmed
Entertainment divisions, and TWE has provided billing, collection and marketing
services to the Time Warner Service Partnerships.
In the normal course of conducting their businesses, the Time Warner Service
Partnerships have had various other transactions with Time Warner and TWE,
generally on terms resulting from a negotiation among the affected operating
units that in management's view results in reasonable allocations. Employees of
the Time Warner Service Partnerships participated in various Time Warner
pension, medical, stock and other benefit plans for which the Time Warner
Service Partnerships were charged their allocable share of plan expenses,
including administrative costs. Time Warner's corporate group provides various
other services to the Time Warner Service Partnerships.
8
<PAGE>
TIME WARNER SERVICE PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Court TV has affiliation agreements with its partners, including certain
cable systems owned directly or indirectly by TWE, that provide for the
delivery of minimum subscriber levels by the cable systems. Effective January
1, 1995, Court TV will begin to charge TWE for services provided under such
agreements.
Income (expenses) recorded by the Time Warner Service Partnerships resulting
from transactions with related parties are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 15, 1993
YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -------------------
(THOUSANDS)
<S> <C> <C>
Revenues.................................. $ 2,991 $ 806
Cost of revenues.......................... (6,779) (739)
Selling, general and administrative....... (2,523) (398)
Interest expense.......................... (319) (93)
</TABLE>
The Time Warner Service Partnerships have funding arrangements with Time
Warner that provide for additional borrowings and capital contributions, as
described in Notes 3 and 4, respectively.
7.SUPPLEMENTAL INFORMATION
Supplemental information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 15, 1993
YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -------------------
(THOUSANDS)
<S> <C> <C>
Cash payments made for interest........... $ 2,581 $ --
Borrowings................................ 23,111 17,036
Repayments................................ 7,827 --
Noncash capital contributions............. 726 --
</TABLE>
The principal balance sheet effects of the consolidation of Court TV in 1994
were to increase cash by $.296 million; receivables by $.677 million; prepaid
expenses by $.696 million; property, plant and equipment by $18.914 million;
accounts payable by $1.311 million; other current liabilities by $3.709
million; and capital lease obligations by $15.563 million. The principal
balance sheet effects of the capitalization of the Time Warner Service
Partnerships on September 15, 1993 were to increase investments by $61.733
million; property, plant and equipment by $33.071 million; accounts payable and
other current liabilities by $.229 million; and partners' capital by $94.575
million.
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1993
------- ------
(THOUSANDS)
<S> <C> <C>
Accrued expenses................................................ $14,862 $ 971
Programming costs............................................... 2,737 306
Due to Time Warner.............................................. 5,877 --
Capital lease obligations....................................... 1,450 --
------- ------
$24,926 $1,277
======= ======
</TABLE>
9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE PARTNERS OF
TIME WARNER SERVICE PARTNERSHIPS
We have audited the accompanying combined balance sheet of the Time Warner
Service Partnerships as of December 31, 1994 and 1993, and the related
combined statements of operations, cash flows and partners' capital for the
year ended December 31, 1994 and the period from September 15, 1993
(Inception) through December 31, 1993. These financial statements are the
responsibility of the Time Warner Service Partnerships' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Time Warner
Service Partnerships at December 31, 1994 and 1993, and the combined results
of their operations and their cash flows for the year ended December 31, 1994
and the period from September 15, 1993 (Inception) through December 31, 1993,
in conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 3, 1995
10
<PAGE>
EXHIBIT 99.2
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
BALANCE SHEET
DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
ASSETS
Cash and equivalents, including restricted cash of $5,010
in 1994 and $4,887 in 1993.............................. $ 9,114 $ 7,187
Receivables, net of allowances for doubtful accounts of
$2,265 in 1994 and $1,824 in 1993....................... 14,980 13,364
Prepaid expenses......................................... 1,333 1,164
Property, plant and equipment............................ 660,842 611,365
Less accumulated depreciation............................ (269,116) (226,496)
--------- ---------
Property, plant and equipment, net....................... 391,726 384,869
Cable television franchises, less accumulated amortiza-
tion of $94,315 in 1994 and $84,110 in 1993............. 205,773 215,809
Other assets, less accumulated amortization of $2,611 in
1994 and $2,401 in 1993................................. 4,901 5,014
--------- ---------
Total assets............................................. $ 627,827 $ 627,407
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses.................... $ 74,105 $ 69,468
Debt..................................................... 249,000 320,317
--------- ---------
Total liabilities........................................ 323,105 389,785
Partners' capital:
Partners' contribution................................... 143,904 143,904
Accumulated income....................................... 160,818 93,718
--------- ---------
Total partners' capital.................................. 304,722 237,622
--------- ---------
Total liabilities and partners' capital.................. $ 627,827 $ 627,407
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
STATEMENT OF OPERATIONS AND ACCUMULATED INCOME
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $348,323 $338,200 $315,999
Costs and expenses:
Operating and programming*....................... 140,549 133,183 123,682
Selling, general, and administrative*............ 59,582 60,211 58,457
Depreciation and amortization.................... 62,883 59,669 58,439
-------- -------- --------
Total costs and expenses......................... 263,014 253,063 240,578
-------- -------- --------
Operating income................................. 85,309 85,137 75,421
Other income..................................... 18 999 2,528
Interest expense, net............................ (18,227) (21,654) (28,127)
-------- -------- --------
Net income....................................... 67,100 64,482 49,822
Accumulated income (deficit) at beginning of the
year............................................ 93,718 29,410 (20,412)
Adjustment for pension liability................. -- (174) --
-------- -------- --------
Accumulated income at end of the year............ $160,818 $ 93,718 $ 29,410
======== ======== ========
--------
* Includes the following expenses resulting from
transactions with the partners or their
affiliates (Note 3):............................ $ 24,900 $ 25,200 $ 23,900
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income....................................... $ 67,100 $ 64,482 $ 49,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 62,883 59,669 58,439
(Increase) decrease in accounts receivable and
prepaid expenses................................ (1,785) (2,703) 171
Increase (decrease) in accounts payable and ac-
crued expenses.................................. 4,637 (3,293) (1,236)
Other............................................ 210 (720) 2,903
-------- -------- --------
Net cash provided by operating activities........ 133,045 117,435 110,099
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions.......... (59,694) (53,771) (65,666)
Other............................................ (107) 664 (5,435)
-------- -------- --------
Net cash used in investing activities............ (59,801) (53,107) (71,101)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in commercial paper and revolving credit
facility, net................................... (21,317) (15,101) 10,711
Payments on senior institutional notes........... (50,000) (50,000) (50,000)
-------- -------- --------
Net cash used in financing activities............ (71,317) (65,101) (39,289)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS........................................... 1,927 (773) (291)
Cash and equivalents at beginning of the year.... 7,187 7,960 8,251
-------- -------- --------
Cash and equivalents at end of the year.......... $ 9,114 $ 7,187 $ 7,960
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest (net of
amounts capitalized)............................ $ 19,660 $ 22,756 $ 29,802
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
STATEMENT OF PARTNERS' CAPITAL
(THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PARTNERS'
ATC KBLCOM CAPITAL
-------- -------- ---------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991..................... $ 61,746 $ 61,746 $123,492
Net income for the year ended December 31, 1992.. 24,911 24,911 49,822
-------- -------- --------
BALANCE AT DECEMBER 31, 1992..................... 86,657 86,657 173,314
Net income for the year ended December 31, 1993.. 32,241 32,241 64,482
Adjustment for pension liability................. (87) (87) (174)
-------- -------- --------
BALANCE AT DECEMBER 31, 1993..................... 118,811 118,811 237,622
Net income for the year ended December 31, 1994.. 33,550 33,550 67,100
-------- -------- --------
BALANCE AT DECEMBER 31, 1994..................... $152,361 $152,361 $304,722
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paragon Communications ("Paragon") is a Colorado general partnership owned
equally by subsidiaries of American Television and Communications Corporation
("ATC") and by KBLCOM Incorporated ("KBLCOM"). ATC is an indirect, wholly-owned
subsidiary of Time Warner Inc. ("Time Warner"). KBLCOM is a wholly-owned
subsidiary of Houston Industries Incorporated. The operations consist primarily
of selling video programming, which is distributed to subscribers for a monthly
fee through communication networks of coaxial and fiber-optic cables.
In October 1991, Time Warner entered into an agreement to form a limited
partnership, Time Warner Entertainment Company, L.P. ("TWE"), with subsidiaries
of Toshiba Corporation ("Toshiba") and ITOCHU Corporation ("ITOCHU"). On June
30, 1992, Time Warner subsidiaries contributed substantially all assets of the
filmed entertainment, HBO programming, and cable businesses and certain other
assets to TWE, subject to certain liabilities. In lieu of contributing certain
assets to TWE, including ATC's interest in Paragon, certain Time Warner
subsidiaries agreed to pay TWE an amount equal to the net cash flow generated
by such assets. On September 15, 1993, a wholly-owned subsidiary of U S WEST,
Inc. ("USW") was admitted as an additional limited partner. As a result of the
USW transaction, the subsidiaries of USW, Toshiba, and ITOCHU hold pro-rata
priority capital and residual equity partnership interests of 25.51%, 5.61%,
and 5.61%, respectively, in TWE. The subsidiaries of Time Warner in the
aggregate hold pro-rata priority capital and residual equity partnership
interests of 63.27% in TWE.
REVENUE AND PROGRAMMING
Subscriber fees are recorded as revenue in the period the service is
provided. Subscriber fees for regulated services and equipment are based upon
rates that management believes are determined in accordance with the guidelines
of the Cable Television Consumer Protection Act of 1992 (the "Cable Act"). The
cost to acquire the rights to the programming ("programming costs") generally
is recorded when the product is initially available for exhibition.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible into
cash and have original maturities of three months or less. Restricted cash
includes converter deposits held by Paragon which are refundable to customers.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include materials, applicable labor,
overhead, and interest. Depreciation is computed generally by the straight-line
method over estimated useful lives ranging up to twenty years for buildings and
improvements and up to fifteen years for furniture, fixtures, and other
equipment. Expenditures for improvements and repairs are expensed as incurred.
Expenditures for major improvements and upgrades are capitalized and included
in property, plant and equipment.
CABLE TELEVISION FRANCHISES
Cable television franchises are stated at cost. Amortization is computed
using the straight-line method over periods ranging up to forty years.
5
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Paragon is not an income tax paying entity. Accordingly, no provision is made
for income taxes since Paragon's operations are reportable by its partners on
their income tax returns.
2.DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
-------- --------
(THOUSANDS)
<S> <C> <C>
Short term commercial paper, face amounts of $221,073, less
unamortized discount of $756, and weighted average interest
rate of 3.48% at December 31, 1993(/1/).................... $ -- $220,317
Revolving Credit Agreement, unsecured, which provides for an
aggregate of $225 million in revolving credit facilities,
with an average interest rate of 6.7% at December 31,
1994....................................................... 199,000 --
Senior institutional notes dated July 12, 1988, unsecured,
at a fixed rate of 9.56% per annum, due in annual
installments of $50 million commencing July 1992 through
July 1995.................................................. 50,000 100,000
-------- --------
Total debt.................................................. $249,000 $320,317
======== ========
</TABLE>
--------
(1)Short term commercial paper was supported by Paragon's revolving credit
agreement under which Paragon maintained unused availability at least to the
extent of the outstanding commercial paper. The commercial paper program was
discontinued effective September 1, 1994.
The aforementioned Revolving Credit Agreement contains certain covenants
which restrict merger or sale of assets, the amount of debt, distributions to
partners, certain investments and requires the maintenance of certain ratios,
including cash flow (operating income before depreciation and amortization) to
interest, debt to cash flow and debt service ratios. Based on the borrowing
rates currently available to the partnership for loans with similar terms and
maturities, the carrying value is a reasonable estimate of the fair value of
the debt at December 31, 1994.
The Revolving Credit Agreement will be terminated when the expected
acquisition of KBLCOM by Time Warner is consummated. It is anticipated that the
senior institutional notes will mature prior to the completion of the
acquisition (See Note 6).
3.RELATED PARTY TRANSACTIONS
ATC and KBLCOM receive management fees for various services equal to a total
of two and one-half percent of Paragon's gross receipts. Paragon paid
management fees of $6.8 million, $6.6 million, and $6.2 million to ATC and $1.7
million, $1.7 million, and $1.5 million to KBLCOM for the years ended December
31, 1994, 1993 and 1992, respectively.
6
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Additionally, Paragon has various transactions with ATC in the normal course
of conducting its business. ATC charges Paragon for certain expenses incurred
on the behalf of Paragon. Advances to or from ATC fluctuate daily and are
settled on a monthly basis. The statement of operations includes charges for
programming, construction and design services provided by TWE. The total of
these charges was $16.4 million, $16.9 million, and $16.2 million in 1994, 1993
and 1992, respectively. Management believes that these charges were based on
customary rates.
4.COMMITMENTS
Paragon presently has certain cable television franchises containing
provisions for construction of cable plant and services to customers according
to various requirements within the franchise areas. In connection with certain
obligations under existing franchise agreements, Paragon obtains surety bonds
or letters of credit guaranteeing performance to municipalities and public
utilities. Payment is required only in the event of nonperformance and no such
payments have been made.
Paragon is committed under non-cancelable operating leases involving certain
real and personal property. Net rent expense, primarily office facilities and
pole attachment and conduit usage agreements with utilities, was $5.4 million,
$5.1 million, and $4.8 million for the years ended December 31, 1994, 1993, and
1992, respectively.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1994 are: $2.7 million in 1995; $2.5 million in 1996; $2.1 million
in 1997; $1.6 million in 1998; $1.4 million in 1999; and $7.0 million
thereafter, totaling $17.3 million.
5.PENSION PLAN AND OTHER BENEFIT PLANS
Paragon has a non-contributory defined benefit pension plan (the "Pension
Plan") covering the majority of its employees. The benefits under the Pension
Plan are determined based on formulas which reflect employees' years of service
and compensation levels during their employment period. The projected unit
credit method is used to determine pension costs of the Pension Plan. Paragon's
funding policy is to contribute amounts to the plan sufficient to meet minimum
funding requirements set forth in the Employment Retirement Income Security Act
of 1974, plus such additional amounts as Paragon may determine to be
appropriate. At December 31, 1994, the assets of the Pension Plan were invested
primarily in short term, interest bearing securities. Paragon also sponsors an
unfunded excess benefit plan, a non-qualified plan that provides defined
pension benefits in excess of certain qualified plan limits imposed by federal
tax law.
Paragon also participates in a non-contributory multi-employer plan for union
employees of one of its divisions. Contributions are made based on a specified
percentage of an employee's compensation.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Total net pension cost:
Defined benefit plans................................ $ 1,785 $ 1,142 $ 988
Multi-employer plan.................................. 907 950 734
-------- -------- --------
Total net pension cost............................... $ 2,692 $ 2,092 $ 1,722
======== ======== ========
</TABLE>
7
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Components of net pension cost for Paragon's de-
fined benefit plans:
Service cost...................................... $ 1,308 $ 874 $ 769
Interest cost on projected benefit obligation..... 696 488 378
Actual return on plan assets...................... (178) (108) (100)
Net amortization and deferral..................... (41) (112) (59)
-------- -------- ------
Net pension cost.................................. $ 1,785 $ 1,142 $ 988
======== ======== ======
</TABLE>
Funding Status of Paragon's Defined Benefit Plans:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
(THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$5,274 and $4,632 at December 31, 1994 and 1993, respectively... $5,800 $5,343
====== ======
Projected benefit obligation..................................... $7,923 $7,486
Less: Plan assets at fair value.................................. 5,423 4,054
------ ------
Projected benefit obligation in excess of fair value of plan as-
sets............................................................ 2,500 3,432
Less: Unrecognized net loss (gain) from experience different from
that assumed and effect of changes in assumptions............... 983 2,316
Unrecognized prior service cost.................................. 119 152
Unrecognized net obligation...................................... 342 380
Plus: Additional minimum liability............................... -- 706
------ ------
Accrued pension cost included in accounts payable
and accrued expenses............................................ $1,056 $1,290
====== ======
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of eight and one-half percent in 1994 and seven and one-half percent in
1993. An increase in future compensation rates of six percent was assumed in
both years. The expected long-term rate of return on assets was nine percent in
1994 and ten percent in 1993.
Paragon also maintains a defined contribution plan, the Paragon Employees
Stock Savings Plan (the "ESSP"), covering substantially all of its employees,
whereby two dollars are contributed by Paragon to a participant's account for
each three dollars contributed by a participant through payroll deductions. The
Paragon management committee has the right in any year to set the maximum
amount of Paragon's contribution. Paragon's defined contribution plan expense
for the ESSP was $983,000, $938,000, and $790,000 in the years ended December
31, 1994, 1993 and 1992, respectively.
6.SUBSEQUENT EVENT
On January 27, 1995, Time Warner and Houston Industries Incorporated
announced an agreement under which Time Warner expects to acquire KBLCOM.
Closing of the acquisition, which is subject to franchise transfers and other
approvals, is expected to take place in the second half of 1995.
8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS OF
PARAGON COMMUNICATIONS
In our opinion, the accompanying balance sheet and the related statements of
operations and accumulated income (deficit), of partners' capital and of cash
flows present fairly, in all material respects, the financial position of
Paragon Communications (a Partnership) at December 31, 1994 and 1993, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Our audits also included the Financial Statement Schedule VIII. In our opinion,
this Financial Statement Schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
financial statements.
Price Waterhouse LLP
Denver, Colorado
January 19, 1995, except as to Note 6, which is as of January 27, 1995.
9
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
----------- ---------- ---------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C>
1994:
Deducted from asset accounts:
Allowance for doubtful ac-
counts........................ $ 1,824 $ 7,320 $(6,879)(a) $ 2,265
Accumulated amortization re-
lated to:
Cable franchises............... 84,110 10,205 -- 94,315
Other assets................... 2,401 210 -- 2,611
1993:
Deducted from asset accounts:
Allowance for doubtful ac-
counts........................ $ 1,545 $ 6,218 $(5,939)(a) $ 1,824
Accumulated amortization re-
lated to:
Cable television franchises.... 73,539 10,851 (280) 84,110
Other assets................... 1,977 424 -- 2,401
1992:
Deducted from asset accounts:
Allowance for doubtful ac-
counts........................ $ 1,822 $ 5,439 $(5,716)(a) $ 1,545
Accumulated amortization re-
lated to:
Cable television franchises.... 62,405 11,134 -- 73,539
Other assets................... 1,530 447 -- 1,977
</TABLE>
--------
(a) Uncollectible accounts written off, net of recoveries.
10
