0000736157-95-000027.txt : 19950815 0000736157-95-000027.hdr.sgml : 19950815 ACCESSION NUMBER: 0000736157-95-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIME WARNER INC CENTRAL INDEX KEY: 0000736157 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 131388520 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08637 FILM NUMBER: 95562370 BUSINESS ADDRESS: STREET 1: TIME & LIFE BLDG ROCKFELLER CENTER STREET 2: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 FORMER COMPANY: FORMER CONFORMED NAME: TIME INC /DE/ DATE OF NAME CHANGE: 19890801 10-Q 1 2QTR 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended June 30, 1995 , or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from to Commission file number 1-8637 TIME WARNER INC. (Exact name of registrant as specified in its charter) Delaware 13-1388520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 Rockefeller Plaza New York, New York 10019 (212) 484-8000 (Address, including zip code, and telephone number, including area code, of each registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock - $1 par value 386,174,888 Description of Class Shares Outstanding as of July 31, 1995 TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P. INDEX TO FORM 10-Q Page Time Warner TWE PART I. FINANCIAL INFORMATION Consolidated balance sheets at June 30, 1995 and December 31, 1994 1 23 Consolidated statements of operations for the three and six months ended June 30, 1995 and 1994 2 24 Consolidated statements of cash flows for the six months ended June 30, 1995 and 1994 3 25 Notes to consolidated financial statements 4 26 Management's discussion and analysis of results of operations and financial condition 13 32 Summarized financial information of the Time Warner Service Partnerships and Paragon Communications set forth at pages 16 and 17, respectively, in the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 of Time Warner Entertainment Company, L.P. (Reg. No. 33-53742) is incorporated herein by reference and filed as an exhibit to this report. PART II. OTHER INFORMATION 38 PART I. FINANCIAL INFORMATION TIME WARNER INC. CONSOLIDATED BALANCE SHEET (Unaudited) June 30, December 31, 1995 1994 (millions, except per share amounts) ASSETS Current assets Cash and equivalents $ 597 $ 282 Receivables, less allowances of $738 and $768 1,295 1,439 Inventories 444 370 Prepaid expenses 831 726 Total current assets 3,167 2,817 Investments in and amounts due to and from Entertainment Group 5,471 5,350 Investments, other 1,487 1,555 Music catalogues, contracts and copyrights 1,196 1,207 Goodwill 4,837 4,630 Cable television franchises 405 - Other assets, primarily property, plant and equipment 1,225 1,157 Total assets $17,788 $16,716 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable $ 1,277 $ 1,379 Debt due within one year 341 355 Other current liabilities 1,327 1,238 Total current liabilities 2,945 2,972 Long-term debt 9,593 8,839 Deferred income taxes 2,696 2,700 Unearned portion of paid subscriptions 636 631 Other liabilities 439 426 Shareholders' equity Preferred stock, $1 par value, 3.7 million and 962 thousand shares outstanding, $394 million and $140 million liquidation preference 4 1 Common stock, $1 par value, 384.2 million and 379.3 million shares outstanding (excluding 45.7 million treasury shares) 384 379 Paid-in capital 3,010 2,588 Unrealized gains on certain marketable securities 134 130 Accumulated deficit (2,053) (1,950) Total shareholders' equity 1,479 1,148 Total liabilities and shareholders' equity $17,788 $16,716 See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions, except per share amounts) Revenues (a) $1,907 $1,667 $3,724 $3,225 Cost of revenues (a)(b) 1,019 906 2,122 1,798 Selling, general and administrative (a)(b) 704 591 1,280 1,145 Operating expenses 1,723 1,497 3,402 2,943 Business segment operating income 184 170 322 282 Equity in pretax income of Entertainment Group (a) 84 66 106 111 Interest and other, net (a) (201) (179) (356) (337) Corporate expenses (a) (19) (19) (39) (37) Income before income taxes 48 38 33 19 Income taxes (56) (58) (88) (90) Net loss (8) (20) (55) (71) Preferred dividend requirements (5) (3) (8) (6) Net loss applicable to common shares $(13) $(23) $(63) $(77) Net loss per common share $(0.03) $(0.06) $(0.17) $(0.20) Average common shares 381.4 378.8 380.5 378.7 __________________ (a) Includes the following income (expenses) resulting from transactions with the Entertainment Group and other related companies for the three and six months ended June 30, 1995, respectively, and for the corresponding periods in the prior year: revenues of $49 million and $94 million in 1995, and $53 million and $92 million in 1994; cost of revenues of $(25) million and $(49) million in 1995, and $(25) million and $(46) million in 1994; selling, general and administrative of $16 million and $29 million in 1995, and $7 million and $19 million in 1994; equity in pretax income of Entertainment Group of $(26) and $(60) in 1995, and $(26) million and $(64) million in 1994; interest and other, net of $(5) and $1 in 1995, and $4 million and $15 million in 1994; and corporate expenses of $15 million and $30 million in both 1995 and 1994. (b) Includes depreciation and amortization expense of: $ 119 $ 105 $ 231 $ 210 See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1995 1994 (millions) OPERATIONS Net loss $ (55) $ (71) Adjustments for noncash and nonoperating items: Depreciation and amortization 231 210 Noncash interest expense 116 107 Equity in pretax income of Entertainment Group, net of distributions (101) (109) Changes in operating assets and liabilitie (290) 106 Cash provided (used) by operations (99) 243 INVESTING ACTIVITIES Investments and acquisitions (228) (67) Capital expenditures (97) (95) Investment proceeds 294 111 Cash used by investing activities (31) (51) FINANCING ACTIVITIES Borrowings 650 318 Debt repayments (166) (372) Dividends paid (73) (69) Other 34 23 Cash provided (used) by financing activities 445 (100) INCREASE IN CASH AND EQUIVALENTS 315 92 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 282 200 CASH AND EQUIVALENTS AT END OF PERIOD $ 597 $ 292 See accompanying notes. TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of Time Warner Inc. ("Time Warner" or the "Company") and all companies in which Time Warner has a controlling voting interest ("subsidiaries"), as if Time Warner and its subsidiaries were a single company. Subsidiaries of Time Warner are engaged principally in the Publishing and Music businesses. Investments in Entertainment Group companies, principally Time Warner Entertainment Company, L.P. ("TWE"), which are engaged principally in the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses, and investments in certain other companies in which Time Warner has significant influence but less than a controlling voting interest, are accounted for using the equity method. The accompanying financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. Certain reclassifications have been made to the 1994 financial statements to conform to the 1995 presentation. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Time Warner for the year ended December 31, 1994. Intangible Assets Intangible assets are recorded when the cost of acquired companies exceeds the fair value of their tangible assets. Intangible assets are amortized over periods up to forty years using the straight-line method. Time Warner separately reviews the carrying value of intangible assets for each acquired entity on a quarterly basis to determine whether an impairment may exist. Time Warner considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of intangible assets can be recovered. Upon a determination that the carrying value of intangible assets will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such intangible assets would be considered impaired and will be reduced by a charge to operations in the amount of the impairment. Impairment is measured as any deficiency in estimated undiscounted future cash flows of the acquired business to recover the carrying value related to the intangible assets. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS 121") effective for fiscal years beginning after December 15, 1995. The new rules establish standards for the recognition and measurement of impairment losses on long- lived assets and certain identifiable intangible assets, including goodwill. Time Warner expects that the adoption of FAS 121 will not have a material effect on its financial statements. Interest Rate Swap Contracts Interest rate swap contracts are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. Under interest rate swap contracts, the Company either agrees to pay an amount equal to a specified floating rate of interest times a notional principal amount, and to receive in return an amount equal to a specified fixed rate of interest times the same notional principal amount or, vice versa, to receive a floating rate amount and to pay a fixed rate amount. The notional amounts of the contracts are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. Interest rate swap contracts are entered into with a number of major financial institutions in order to minimize credit risk. The net amounts paid or payable, or received or receivable, through the end of the accounting period are included in interest expense. Because interest rate swap contracts are used to modify the interest characteristics of Time Warner's outstanding debt from a fixed to a floating rate basis or, vice versa, unrealized gains or losses on interest rate swap contracts are not recognized unless the contracts are terminated prior to their maturity. Gains or losses on the termination of contracts are deferred and amortized to income over the remaining average life of the terminated contracts. 2. ENTERTAINMENT GROUP Time Warner's investment in and amounts due to and from the Entertainment Group at June 30, 1995 and December 31, 1994 consists of the following: June 30, December 31, 1995 1994 (millions) Investment in TWE $ 5,069 $ 5,284 Income tax and stock option related distributions due from TWE 709 423 Credit agreement debt due to TWE (400) (400) Other liabilities due to TWE, principally related to home video distribution (234) (266) Investment in and amounts due to and from TWE 5,144 5,041 Investment in other Entertainment Group companies 327 309 Total $5,471 $5,350 TWE is a Delaware limited partnership that was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment, Programming-HBO and Cable businesses previously owned by subsidiaries of Time Warner. Certain Time Warner subsidiaries are the general partners ("Time Warner General Partners") and in the aggregate hold 63.27% pro rata priority capital and residual equity partnership interests in TWE, and certain priority capital interests senior and junior to the pro rata priority capital interest. The limited partners are not affiliated with Time Warner and in the aggregate hold 36.73% pro rata priority capital and residual equity partnership interests. The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. TWE reported net income of $60 million and $104 million in the six months ended June 30, 1995 and 1994, respectively, no portion of which was allocated to the limited partners. Each Time Warner General Partner has guaranteed a pro rata portion of $7 billion of TWE's debt and accrued interest at June 30, 1995, based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. Set forth below is summarized financial information of the Entertainment Group, which reflects the consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995. TIME WARNER ENTERTAINMENT GROUP Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Operating Statement Information Revenues $2,435 $2,063 $4,508 $3,990 Depreciation and amortization 283 242 513 458 Business segment operating income 274 231 475 437 Interest and other, net 175 150 339 296 Income before income taxes 84 66 106 111 Net income 59 54 70 95 Six Months Ended June 30, 1995 1994 (millions) Cash Flow Information Cash provided by operations $ 697 $ 707 Capital expenditures (704) (504) Investments and acquisitions (83) (78) Investment proceeds 962 40 Loan to Time Warner - (250) Increase (decrease) in debt (2) 28 Collections on note receivable from U S WEST 243 68 Capital distributions (5) (2) Increase in cash and equivalents 1,192 8 June 30, December 31, 1995 1994 (millions) Balance Sheet Information Cash and equivalents $2,263 $1,071 Total current assets 4,773 3,571 Total assets 19,620 18,992 Total current liabilities 3,275 2,953 Long-term debt 7,037 7,160 Time Warner General Partners' senior capital 1,730 1,663 TWE partners' capital 6,154 6,233 The assets and cash flows of TWE are restricted by the TWE partnership and credit agreements and are unavailable for use by the partners and their affiliates except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. At June 30, 1995 and December 31, 1994, the Time Warner General Partners had recorded $490 million and $334 million, respectively, of tax- related distributions due from TWE, and $219 million and $89 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $41.25 and $35.125, respectively. Time Warner is paid when the options are exercised. In July 1995, the Time Warner General Partners received $490 million of accrued tax-related distributions from TWE. On June 23, 1995, TWE sold 51% of its interest in Six Flags Entertainment Corporation ("Six Flags") to an investment group led by Boston Ventures for $204 million and received $640 million in additional proceeds from Six Flags, representing payment of certain intercompany indebtedness and licensing fees. As a result of the transaction, TWE expects a cumulative debt reduction of approximately $850 million, after the payment of related taxes and fees and the deconsolidation of approximately $128 million of third-party, zero-coupon indebtedness of Six Flags due in 1999. The deconsolidation of such indebtedness is reflected in TWE's balance sheet as of June 30, 1995, and the remaining debt reduction is expected to occur in the third quarter of 1995. TWE deferred approximately $140 million of income on the transaction principally as a result of its guarantee of such debt. TWE will account for its remaining 49% interest in Six Flags under the equity method of accounting. 3. CABLE TRANSACTIONS On May 2, 1995, Time Warner acquired Summit Communications Group, Inc. ("Summit"), which owns cable television systems serving approximately 162,000 subscribers, in exchange for the issuance of approximately 1.5 million shares of Time Warner common stock and approximately 3.3 million shares of a new convertible preferred stock ("Series C preferred stock") with an aggregate liquidation value of approximately $330 million, and the assumption of $140 million of indebtedness. The Series C preferred stock is convertible into approximately 6.8 million shares of Time Warner common stock at an effective price of $48 of liquidation value per common share. The acquisition was accounted for by the purchase method of accounting for business combinations; accordingly, the cost to acquire Summit of approximately $383 million, including $330 million aggregate liquidation value of Series C preferred stock, was preliminarily allocated to the assets acquired in the amount of $711 million and to the liabilities assumed in the amount of $328 million, in proportion to estimates of their respective fair values. On April 1, 1995, TWE formed a cable television joint venture with the Advance/Newhouse Partnership ("Advance/Newhouse") to which Advance/Newhouse and TWE contributed cable television systems (or interests therein) serving approximately 4.5 million subscribers, as well as certain foreign cable investments and programming investments. TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and is the managing partner. TWE consolidates the partnership and the one-third equity interest owned by Advance/Newhouse is reflected in TWE's balance sheet as minority interest. In accordance with the partnership agreement, Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The assets contributed by TWE and Advance/Newhouse to the partnership were recorded at their predecessor's historical cost. No gain was recognized by TWE upon the capitalization of the partnership. Subsequent to June 30, 1995, Time Warner acquired KBLCOM Incorporated ("KBLCOM"), which owns cable television systems serving approximately 700,000 subscribers and a 50% interest in Paragon Communications ("Paragon"), which owns cable television systems serving an additional 972,000 subscribers. The other 50% interest in Paragon is already owned by TWE. To acquire KBLCOM, Time Warner issued 1 million shares of common stock and 11 million shares of a new convertible preferred stock ("Series D preferred stock") and assumed or incurred approximately $1.2 billion of indebtedness. The Series D preferred stock is convertible into approximately 22.9 million shares of Time Warner common stock at an effective price of $48 of liquidation value per common share. Time Warner's previously-announced acquisition of Cablevision Industries Corporation ("CVI") and related companies is expected to close during the fourth quarter of 1995. 4. LONG-TERM DEBT On June 30, 1995, a wholly owned subsidiary of Time Warner ("TWI Cable"), TWE and the TWE-Advance/Newhouse Partnership executed a five-year revolving credit facility (the "New Credit Agreement"). The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance existing indebtedness of TWE and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains certain covenants for each borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and loans, advances, distributions and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWI Cable borrowed approximately $1.2 billion under the New Credit Agreement to refinance certain indebtedness assumed or incurred in the acquisition of KBLCOM. On July 31, 1995, Time Warner announced the redemption on August 15, 1995 of all of its $1.8 billion principal amount of outstanding Redeemable Reset Notes due August 15, 2002 (the "Reset Notes") in exchange for new securities. The Reset Notes will be redeemed in exchange for approximately $457 million aggregate principal amount of Floating Rate Notes due August 15, 2000, approximately $274 million aggregate principal amount of 7.975% Notes due August 15, 2004, approximately $548 million aggregate principal amount of 8.11% Debentures due August 15, 2006, and approximately $548 million aggregate principal amount of 8.18% Debentures due August 15, 2007. On August 10, 1995, Time Warner announced the partial redemption on September 18, 1995 of $1 billion principal amount of its 8.75% Convertible Subordinated Debentures due 2015 for an aggregate redemption price of $1.06 billion, including redemption premiums and accrued interest thereon. The redemption is expected to be financed with approximately $500 million of proceeds raised from the issuance of 7.75% ten-year notes in June 1995, $363 million of net proceeds to be raised from the issuance of Company-obligated mandatorily redeemable preferred securities of a subsidiary in August 1995 and available cash and equivalents. 5. MANDATORILY REDEEMABLE PREFERRED SECURITIES In August 1995, Time Warner will raise $363 million of net proceeds through the issuance of approximately 12.1 million Company-obligated mandatorily redeemable preferred securities of a subsidiary ("PERCS"), whose only assets will be an equivalent amount of subordinated notes of Time Warner. Cumulative cash distributions will be payable on the PERCS at an annual rate of 4%, or $1.24 per PERCS. The PERCS will be subject to mandatory redemption on December 23, 1997, for an amount per PERCS equal to the lesser of $54.41, and the then market value of a share of common stock of Hasbro, Inc. ("Hasbro") payable in cash or, at Time Warner's option, Hasbro common stock. Time Warner currently has a 13.75% equity interest in Hasbro. 6. CAPITAL STOCK Changes in shareholders' equity are as follows: Six Months Ended June 30, 1995 1994 (millions) Balance at beginning of year $1,148 $1,370 Net loss (55) (71) Common dividends declared (69) (64) Preferred dividends declared (8) (6) Issuance of common stock and preferred stock in Summit acquisition 383 - Unrealized gains (losses) on certain marketable equity investments 4 (74) Other 76 58 Balance at June 30 $1,479 $1,213 7. SEGMENT INFORMATION Information as to the operations of Time Warner and the Entertainment Group in different business segments is set forth below. Cable business segment information reflects the consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995. Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 Revenues (millions) Time Warner: Publishing $ 928 $ 851 $1,759 $1,602 Music 986 822 1,977 1,634 Intersegment elimination (7) (6) (12) (11) Total $1,907 $1,667 $3,724 $3,225 Entertainment Group: Filmed Entertainment $1,358 $1,216 $2,565 $2,299 Broadcasting - The WB Network 3 - 6 - Programming - HBO 396 374 786 736 Cable 760 560 1,338 1,111 Intersegment elimination (82) (87) (187) (156) Total $2,435 $2,063 $4,508 $3,990 Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 Operating income (millions) Time Warner: Publishing $ 114 $ 106 $ 169 $ 156 Music 70 64 153 126 Total $ 184 $ 170 $ 322 $ 282 Entertainment Group: Filmed Entertainment $ 90 $ 75 $ 155 $ 141 Broadcasting - The WB Network (12) - (33) - Programming - HBO 70 62 137 118 Cable 126 94 216 178 Total $ 274 $ 231 $ 475 $ 437 Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Depreciation of Property, Plant and Equipment Time Warner: Publishing $ 15 $ 11 $ 28 $ 23 Music 24 20 47 39 Total $ 39 $ 31 $ 75 $ 62 Entertainment Group: Filmed Entertainment $ 42 $ 34 $ 65 $ 51 Broadcasting - The WB Network - - - - Programming - HBO 5 4 9 8 Cable 117 82 207 166 Total $ 164 $ 120 $ 281 $ 225 Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Amortization of Intangible Assets (1) Time Warner: Publishing $ 9 $ 8 $ 18 $ 16 Music 71 66 138 132 Total $ 80 $ 74 $ 156 $ 148 Entertainment Group: Filmed Entertainment $ 43 $ 41 $ 80 $ 75 Broadcasting - The WB Network - - - - Programming - HBO - 1 - 2 Cable 76 80 152 156 Total $ 119 $ 122 $ 232 $ 233 (1) Amortization includes all amortization relating to the acquisitions of Warner Communications Inc. ("WCI") in 1989 and the American Television and Communications Corporation ("ATC") minority interest in 1992 and to other business combinations accounted for by the purchase method. 8. CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to businesses of Time Warner and alleged damages in connection with class action lawsuits. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of Time Warner. 9. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Six Months Ended June 30, 1995 1994 (millions) Interest expense $429 $374 Cash payments made for interest 289 246 Cash payments made for income taxes 141 135 Income tax refunds received 14 39 During the six months ended June 30, 1995 and 1994, Time Warner realized $35 million and $210 million, respectively, from the securitization of receivables. TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Time Warner had revenues of $1.907 billion and a net loss of $8 million ($.03 per common share) for the three months ended June 30, 1995, compared to revenues of $1.667 billion and a net loss of $20 million ($.06 per common share) for the three months ended June 30, 1994. As discussed more fully below, the improvement in Time Warner's net loss principally resulted from an overall increase in operating income generated by Time Warner's business segments and increased income from Time Warner's equity in the pretax income of the Entertainment Group, offset in part by a decrease in investment-related income and higher floating-rates of interest paid on Time Warner's $2.9 billion notional amount of interest rate swap contracts. Revenues of $3.724 billion and a net loss of $55 million ($.17 per common share) were reported for the six months ended June 30, 1995, compared to revenues of $3.225 billion and a net loss of $71 million ($.20 per common share) for the six months ended June 30, 1994. As discussed more fully below, the improvement in Time Warner's net loss principally resulted from an overall increase in operating income generated by Time Warner's business segments and an increase in investment-related income, offset in part by lower income from Time Warner's equity in the pretax income of the Entertainment Group and higher floating-rates of interest paid on Time Warner's interest rate swap contracts. Time Warner's equity in the pretax income of the Entertainment Group was $84 million in the three months ended June 30, 1995, compared to $66 million in the three months ended June 30, 1994, and was $106 million in the six months ended June 30, 1995, compared to $111 million in the six months ended June 30, 1994. As discussed more fully below, the Entertainment Group's operating results for the three and six month periods ended June 30, 1995 reflect an overall increase in operating income generated by its business segments and gains on the sale of certain unclustered cable systems, offset by higher floating-rates of interest paid on borrowings under TWE's bank credit agreement and minority interest expense related to the consolidation of the operating results of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995. The relationship between income before income taxes and income tax expense of Time Warner is principally affected by the amortization of goodwill and certain other financial statement expenses that are not deductible for income tax purposes. Income tax expense of Time Warner includes all income taxes related to its allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of the Entertainment Group. EBITDA and operating income for Time Warner and the Entertainment Group for the three and six months ended June 30, 1995 and 1994 is as follows: Three Months Ended June 30, EBITDA Operating Income 1995 1994 1995 1994 (millions) Time Warner: Publishing $138 $125 $114 $106 Music 165 150 70 64 Total $303 $275 $184 $170 ENTERTAINMENT GROUP: Filmed Entertainment $175 $150 $ 90 $ 75 Broadcasting - The WB Network (12) - (12) - Programming - HBO 75 67 70 62 Cable 319 256 126 94 Total $557 $473 $274 $231 Six Months Ended June 30, EBITDA Operating Income 1995 1994 1995 1994 (millions) Time Warner: Publishing $215 $195 $169 $156 Music 338 297 153 126 Total $553 $492 $322 $282 ENTERTAINMENT GROUP: Filmed Entertainment $300 $267 $155 $141 Broadcasting - The WB Network (33) - (33) - Programming - HBO 146 128 137 118 Cable 575 500 216 178 Total $988 $895 $475 $437 Certain factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the music, filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in the $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of Time Warner and the Entertainment Group, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. Three Months Ended June 30, 1995 Compared to the Three Months Ended June 30, 1994 Time Warner PUBLISHING. Revenues increased to $928 million, compared to $851 million in the second quarter of 1994. EBITDA increased to $138 million from $125 million. Depreciation and amortization amounted to $24 million in 1995 and $19 million in 1994. Operating income increased to $114 million from $106 million. Revenues benefited from increases in magazine circulation, advertising and book revenues. Significant revenue gains were achieved by PEOPLE, FORTUNE and book publisher Oxmoor House. EBITDA and operating income increased as a result of the revenue gains, offset in part by higher postal and paper costs as a result of price increases. MUSIC. Revenues increased to $986 million, compared to $822 million in the second quarter of 1994. EBITDA increased to $165 million from $150 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $95 million in 1995 and $86 million in 1994. Operating income increased to $70 million from $64 million. The revenue growth resulted from increases in both domestic and international recorded music revenues, which benefited from a number of popular releases and an increase in the percentage of compact disc to total unit sales, and increased music publishing revenues. As a result of increases in Time Warner's ownership in certain direct marketing and merchandising joint ventures, revenues also benefited from the consolidation of the operating results of such companies which had previously been accounted for under the equity method of accounting. EBITDA and operating income benefited principally from the revenue gains and interest income on the resolution of a recorded music tax matter, offset in part by lower results from direct marketing activities attributable to higher amortization of member acquisition costs and expenses incurred in connection with the settlement of certain employment contracts. INTEREST AND OTHER, NET. Interest and other, net, increased to $201 million in the second quarter of 1995, compared to $179 million in the second quarter of 1994. Interest expense increased to $219 million, compared to $192 million, principally as a result of higher floating-rates of interest paid on $2.9 billion notional amount of interest rate swap contracts. Other income, net, of $18 million in the second quarter of 1995 increased from $13 million in 1994, principally because of the recognition in 1995 of interest income on the resolution of a corporate tax matter, offset in part by a decrease in investment-related income. Investment-related income in 1994 benefited from gains on the sale of certain assets which exceeded losses from reductions in the carrying value of certain investments. Losses on foreign exchange contracts used to hedge foreign exchange risk reduced investment-related income in both periods. Entertainment Group FILMED ENTERTAINMENT. Revenues increased to $1.358 billion, compared to $1.216 billion in the second quarter of 1994. EBITDA increased to $175 million from $150 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $85 million in 1995 and $75 million in 1994. Operating income increased to $90 million from $75 million. Revenues benefited from increases in worldwide theatrical, international home video and consumer products operations. Domestic theatrical revenues in 1995 were led by the success of BATMAN FOREVER. Revenues and operating results at Six Flags increased due to higher attendance and in-park spending. EBITDA and operating income benefited from the revenue gains and increased income from licensing operations, offset in part by approximately one week less of operating results of Six Flags in 1995 due to the sale of a 51% interest in the theme park company on June 23, 1995. BROADCASTING - THE WB NETWORK. The WB Network was launched in January 1995, and generated $12 million of operating losses on $3 million of revenues in the second quarter of 1995. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING - HBO. Revenues increased to $396 million, compared to $374 million in the second quarter of 1994. EBITDA increased to $75 million from $67 million. Depreciation and amortization amounted to $5 million in each period. Operating income increased to $70 million from $62 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $760 million, compared to $560 million in the second quarter of 1994. EBITDA increased to $319 million from $256 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $193 million in 1995 and $162 million in 1994. Operating income increased to $126 million from $94 million. Revenues benefited from the formation of the TWE-Advance/Newhouse Partnership in April 1995 and increases in basic cable and direct broadcast satellite subscribers and nonregulated revenues, including pay-TV and advertising. EBITDA and operating income increased as a result of the revenue gains and contributions from the TWE-Advance/Newhouse Partnership, offset in part by the impact of the second round of cable rate regulations that went into effect in July 1994, higher start-up costs for telephony operations and, with respect to operating income only, higher depreciation and amortization relating to increased capital spending. INTEREST AND OTHER, NET. Interest and other, net, increased to $175 million in the second quarter of 1995, compared to $150 million in the second quarter of 1994. Interest expense increased to $148 million, compared to $139 million in the second quarter of 1994, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreement. Other expense, net, increased to $27 million in the second quarter of 1995 from $11 million in 1994, principally because of the inclusion in 1995 of minority interest expense related to the TWE- Advance/Newhouse Partnership, offset in part by gains on the sale of certain unclustered cable systems. Six Months Ended June 30, 1995 Compared to the Six Months Ended June 30, 1994 Time Warner PUBLISHING. Revenues increased to $1.759 billion, compared to $1.602 billion in the first six months of 1994. EBITDA increased to $215 million from $195 million. Depreciation and amortization amounted to $46 million in 1995 and $39 million in 1994. Operating income increased to $169 million from $156 million. Revenues benefited from increases in magazine circulation, advertising and book revenues. Significant revenue gains were achieved by PEOPLE, SPORTS ILLUSTRATED, TIME, FORTUNE and book publisher Oxmoor House. EBITDA and operating income increased as a result of the revenue gains, offset in part by higher postal and paper costs as a result of price increases. MUSIC. Revenues increased to $1.977 billion, compared to $1.634 billion in the first six months of 1994. EBITDA increased to $338 million from $297 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $185 million in 1995 and $171 million in 1994. Operating income increased to $153 million from $126 million. The revenue growth resulted from increases in both domestic and international recorded music revenues, which benefited from a number of popular releases and an increase in the percentage of compact disc to total unit sales, and increased music publishing revenues. As a result of increases in Time Warner's ownership in certain direct marketing and merchandising joint ventures, revenues also benefited from the consolidation of the operating results of such companies which had previously been accounted for under the equity method of accounting. EBITDA and operating income benefited principally from the revenue gains and interest income on the resolution of a recorded music tax matter, offset in part by lower results from direct marketing activities attributable to higher amortization of member acquisition costs and expenses incurred in connection with the settlement of certain employment contracts. INTEREST AND OTHER, NET. Interest and other, net, increased to $356 million in the first six months of 1995, compared to $337 million in the first six months of 1994. Interest expense increased to $429 million from $374 million as a result of higher floating-rates of interest paid on $2.9 billion notional amount of interest rate swap contracts. There was other income, net, of $73 million in the first six months of 1995, compared to other income, net, of $37 million in 1994, principally because of the recognition in 1995 of interest income on the resolution of a corporate tax matter and an increase in investment-related income. Investment- related income in both periods benefited primarily from gains on the sale of certain assets, including the sale of an interest in QVC, Inc. in 1995, which exceeded losses from reductions in the carrying value of certain investments taken in each period. The increase in investment-related income in 1995 was offset in part by higher losses on foreign exchange contracts used to hedge foreign exchange risk. Entertainment Group FILMED ENTERTAINMENT. Revenues increased to $2.565 billion, compared to $2.299 billion in the first six months of 1994. EBITDA increased to $300 million from $267 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $145 million in 1995 and $126 million in 1994. Operating income increased to $155 million from $141 million. Revenues benefited from increases in worldwide theatrical, international home video, consumer products and worldwide television distribution operations. Lower domestic theatrical revenues in the first quarter of 1995 were overcome by the second quarter domestic box office performance of theatrical releases, led by the success of BATMAN FOREVER. Revenues and operating results at Six Flags increased due to higher attendance and in-park spending. EBITDA and operating income benefited from the revenue gains and increased income from licensing operations. BROADCASTING - THE WB NETWORK. The WB Network was launched in January 1995, and generated $33 million of operating losses on $6 million of revenues for the first six months of 1995. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING - HBO. Revenues increased to $786 million, compared to $736 million in the first six months of 1994. EBITDA increased to $146 million from $128 million. Depreciation and amortization amounted to $9 million in 1995 and $10 million in 1994. Operating income increased to $137 million from $118 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $1.338 billion, compared to $1.111 billion in the first six months of 1994. EBITDA increased to $575 million from $500 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $359 million in 1995 and $322 million in 1994. Operating income increased to $216 million from $178 million. Revenues benefited from the formation of the TWE-Advance/Newhouse Partnership in April 1995 and increases in basic cable and direct broadcast satellite subscribers and nonregulated revenues, including pay-TV and advertising. EBITDA and operating income increased as a result of the revenue gains and contributions from the TWE-Advance/Newhouse Partnership, offset in part by the impact of the second round of cable rate regulations that went into effect in July 1994, higher start-up costs for telephony operations and, with respect to operating income only, higher depreciation and amortization relating to increased capital spending. INTEREST AND OTHER, NET. Interest and other, net, increased to $339 million in the first six months of 1995, compared to $296 million in the first six months of 1994. Interest expense increased to $299 million, compared with $276 million in the first six months of 1994, principally as a result of higher floating- rates of interest paid on borrowings under TWE's bank credit agreement. Other expense, net, increased to $40 million in the first six months of 1995 from $20 million in 1994, principally because of the inclusion in 1995 of minority interest expense related to the TWE-Advance/Newhouse Partnership, offset in part by gains on the sale of certain unclustered cable systems. FINANCIAL CONDITION AND LIQUIDITY June 30, 1995 Time Warner The financial condition of Time Warner changed moderately from December 31, 1994, and is expected to be further affected by the cable transactions, debt refinancings and asset sales that have closed or are expected to close during the second half of 1995. Time Warner had $9.9 billion of debt, $597 million of cash and equivalents (net debt of $9.3 billion) and $1.5 billion of shareholders' equity at June 30, 1995, compared to $9.2 billion of debt, $282 million of cash and equivalents (net debt of $8.9 billion) and $1.1 billion of shareholders' equity at December 31, 1994. The increase in shareholders' equity reflects the issuance in May 1995 of approximately 1.5 million shares of common stock and approximately 3.3 million shares of Series C preferred stock to acquire Summit. On a combined basis (Time Warner and the Entertainment Group together), there was $14.1 billion of net debt at June 30, 1995, compared to $15 billion of net debt at the beginning of the year. During 1995, Time Warner and TWE made progress in achieving certain of their financial and operational objectives, principally relating to the expansion of their reach in cable television, the attainment of a new bank credit facility and their plan to reduce debt with funds raised from the sale of non-core assets. Time Warner completed its previously-announced acquisition of Summit in May 1995 and KBLCOM in July 1995 and, together with the formation of the TWE-Advance/Newhouse Partnership in April 1995, the total number of subscribers under the management of Time Warner Cable has increased to over 10 million, compared to 7.5 million at the end of 1994. The number of subscribers is expected to increase further, to over 11.5 million, after the consummation of the acquisition of CVI and related companies, which is expected to close in the fourth quarter of 1995. On June 30, 1995, TWI Cable, TWE and the TWE-Advance/Newhouse Partnership executed a five-year revolving credit facility. The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance existing indebtedness of TWE and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE- Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains certain covenants for each borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and loans, advances, distributions and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWI Cable borrowed approximately $1.2 billion under the New Credit Agreement to refinance certain indebtedness assumed or incurred in the acquisition of KBLCOM, and TWE borrowed approximately $2.6 billion to repay and terminate its existing bank credit agreement. Time Warner continues to pursue its plan to enhance its financial position and that of the Entertainment Group through sales of non- core assets and, to the extent that market conditions remain favorable, through the issuance of debt to redeem or otherwise repay certain higher-cost debt securities that are currently outstanding. With the sale of 51% of TWE's interest in Six Flags in June 1995, the sale of an interest in QVC, Inc. in February 1995, the sale or expected sale of certain unclustered cable systems and the proceeds to be raised from the issuance of the PERCS in August 1995, Time Warner and the Entertainment Group on a combined basis will have raised approximately $1.6 billion for debt reduction. The $363 million of net proceeds to be raised from the issuance of the PERCS, taken together with approximately $500 million of proceeds raised from the issuance of 7.75% ten-year notes in June 1995 and available cash and equivalents, are expected to be used to finance the partial redemption in September 1995 of $1 billion principal amount of Time Warner's 8.75% Convertible Subordinated Debentures due 2015 for an aggregate redemption price of $1.06 billion, including redemption premiums and accrued interest thereon. Time Warner also filed a shelf registration statement with the Securities and Exchange Commission in August 1995 for the offering of up to $500 million of other mandatorily redeemable preferred securities of certain subsidiaries, the proceeds of which will be used to reduce debt. However, there can be no assurance that such offering will be completed. On July 31, 1995, Time Warner also announced the redemption on August 15, 1995 of all of its $1.8 billion principal amount of outstanding Reset Notes in exchange for new securities. The Reset Notes will be redeemed in exchange for approximately $457 million aggregate principal amount of Floating Rate Notes due August 15, 2000, approximately $274 million aggregate principal amount of 7.975% Notes due August 15, 2004, approximately $548 million aggregate principal amount of 8.11% Debentures due August 15, 2006, and approximately $548 million aggregate principal amount of 8.18% Debentures due August 15, 2007. During the first six months of 1995, cash used by Time Warner's operations amounted to $99 million and reflected $553 million of EBITDA from the Publishing and Music businesses, $5 million of net distributions from TWE and $35 million from the securitization of receivables, less $289 million of interest payments, $127 million of income taxes, $39 million of corporate expenses and an increase in working capital requirements. Cash provided by operations of $243 million in the the first six months of 1994 reflected $492 million of EBITDA from the Publishing and Music businesses, $2 million of net distributions from TWE and $210 million from the securitization of receivables, less $246 million of interest payments, $96 million of income taxes, $37 million of corporate expenses and an increase in working capital requirements. Cash flows used in investing activities, excluding investment proceeds, increased to $325 million in the first six months of 1995, compared to $162 million in the first six months of 1994, principally as a result of higher investment spending by Time Warner's business segments. As a result of management's debt reduction program, investment proceeds increased to $294 million in the first six months of 1995, compared to $111 million in the first six months of 1994. Cash flows from financing activities increased to $445 million of cash provided in the first six months of 1995, compared to a use of cash of $100 million in the first six months of 1994, principally as a result of the issuance of $500 million principal amount of 7.75% ten-year notes in June 1995. In addition, cash dividends paid increased to $73 million in the first six months of 1995, compared to $69 million in the first six months of 1994. Time Warner has no claim on the assets and cash flows of TWE, except through the payment of certain fees and reimbursements, cash distributions and loans. Tax-related distributions of $490 million were received from TWE in July 1995 and an additional $150 million of tax-related distributions are expected to be received from TWE by the end of 1995. Management believes that 1995 operating cash flow, cash and marketable securities and additional borrowing capacity are and will continue to be sufficient to meet Time Warner's liquidity needs without distributions and loans from TWE above those permitted by existing agreements. Time Warner uses derivative financial instruments to manage its risk against fluctuations in interest rates and foreign currency exchange rates. Interest rate swap contracts are used to adjust the proportion of total debt that is subject to changes in short- term rates. At June 30, 1995, Time Warner had interest rate swap contracts to pay floating-rates of interest (average six-month LIBOR rate of 6.6%) and receive fixed-rates of interest (average rate of 5.5%) on $2.9 billion notional amount of indebtedness, effectively converting 29% of Time Warner's underlying debt, substantially all of which is fixed-rate, and 36% of the combined debt of Time Warner and the Entertainment Group, to a floating-rate basis. Time Warner had interest rate swap contracts on a like- amount of notional indebtedness at December 31, 1994. Based on the current levels of outstanding debt and interest rate swap contracts, a 25 basis point increase in the level of interest rates prevailing at June 30, 1995 would reduce Time Warner's annual pretax income by an estimated $8 million. Interest rate swap contracts are placed with a number of major financial institutions in order to minimize credit risk. Based on the level of interest rates prevailing at June 30, 1995, the fair value of Time Warner's fixed-rate debt exceeded its carrying value by $121 million and it would have cost $61 million to terminate the related interest rate swap contracts, which combined is the equivalent of an unrealized loss of $182 million. Based on the level of interest rates prevailing at December 31, 1994, the fair value of Time Warner's fixed-rate debt was less than its carrying value by $572 million and it would have cost $236 million to terminate its interest rate swap contracts, which combined was the equivalent of an unrealized gain of $336 million. Unrealized gains or losses on debt or interest rate swap contracts are not recognized unless the debt is retired or the contracts are terminated prior to their maturity. Foreign exchange contracts are used primarily to hedge the risk that unremitted or future royalties and license fees owed to Time Warner or TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. At June 30, 1995, Time Warner had contracts for the sale of $546 million and the purchase of $151 million of foreign currencies at fixed rates, primarily Japanese yen (11% of net contract value), French francs (13%), English pounds (27%), Canadian dollars (15%) and German marks (18%), compared to contracts for the sale of $551 million and the purchase of $109 million of foreign currencies at December 31, 1994. Unrealized gains or losses are recorded in income; accordingly, the carrying value of foreign exchange contracts approximates market value. Time Warner had $26 million and TWE had $13 million of net losses on foreign exchange contracts during the first six months of 1995, which were or are expected to be offset by corresponding increases in the dollar value of foreign currency royalties and license fee payments that have been or are anticipated to be received from the sale of U.S. copyrighted products abroad. Time Warner reimburses or is reimbursed by TWE for contract gains and losses related to TWE's foreign currency exposure. Foreign currency contracts are placed with a number of major financial institutions in order to minimize credit risk. Entertainment Group The financial condition of the Entertainment Group companies, principally TWE, at June 30, 1995 was, and will continue to be, affected by the formation of the TWE-Advance/Newhouse Partnership and the other cable transactions and asset sales that have either closed or are expected to close during 1995. TWE had $7.1 billion of debt, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital (net of the $528 million uncollected portion of the note receivable from U S WEST) at June 30, 1995, compared to $7.2 billion of debt, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital at December 31, 1994. Principally as a result of the proceeds received in the Six Flags transaction, cash and equivalents increased to $2.3 billion at June 30, 1995, compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash amounts for TWE to $4.8 billion and $6.1 billion, respectively. In the first six months of 1995, cash provided by Entertainment Group operations amounted to $697 million and reflected $988 million of EBITDA from the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses and a reduction in working capital requirements, less $303 million of interest payments, $34 million of income taxes and $30 million of corporate expenses. Cash provided by operations of $707 million in the first six months of 1994 reflected $895 million of business segment EBITDA and a reduction in working capital requirements, less $240 million of interest payments, $29 million of income taxes and $30 million of corporate expenses. Cash flows from investing activities increased to $175 million of cash provided in the first six months of 1995, compared to a use of cash of $792 million in the first six months of 1994, principally as a result of a $922 million increase in investment proceeds relating to management's debt reduction program. Capital expenditures increased to $704 million in the first six months of 1995, compared to $504 million in the first six months of 1994. Capital spending by Time Warner Cable amounted to $514 million in the first six months of 1995, compared to $256 million in the first six months of 1994, and was financed in part through $243 million of collections on the note receivable from U S WEST. Cable capital expenditures are budgeted to exceed $500 million for the remainder of 1995, and are expected to be partially financed by approximately $300 million of additional collections on the note receivable from U S WEST. Because management believes that the conversion from coaxial to fiber-optic cable is essential to achieving long-term growth in revenue from telephony, cable and other services, significant cable capital expenditures also are expected in subsequent years and will be timed to match the rate at which demand for the new services develops. Cash flows provided by financing activities increased to $320 million in the first six months of 1995, compared to $94 million in the first six months of 1994, principally as a result of a $175 million increase in collections on the note receivable from U S WEST. Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition amounted to over $1 billion at June 30, 1995 compared to $852 million at December 31, 1994 (including amounts relating to HBO of $156 million at June 30, 1995 and $175 million at December 31, 1994). The backlog excludes advertising barter contracts. Management believes that TWE's 1995 operating cash flow, cash and equivalents, collections on the note receivable from U S WEST and additional borrowing capacity are and will continue to be sufficient to meet its capital and liquidity needs. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) June 30, December 31, 1995 1994 (millions) ASSETS Current assets Cash and equivalents $ 2,263 $ 1,071 Receivables, including $234 and $266 due from Time Warner, less allowances of $299 and $306 1,421 1,426 Inventories 907 956 Prepaid expenses 165 120 Total current assets 4,756 3,573 Noncurrent inventories 1,656 1,807 Loan receivable from Time Warner 400 400 Property, plant and equipment, net 3,944 3,784 Goodwill 4,095 4,433 Cable television franchises 3,123 3,236 Other assets 1,316 1,429 Total assets $19,290 $18,662 LIABILITIES AND PARTNERS' CAPITAL Current liabilities Accounts payable $ 435 $ 514 Participations and programming costs 1,007 857 Other current liabilities, including $490 and $334 of distributions due to Time Warner 1,668 1,486 Total current liabilities 3,110 2,857 Long-term debt 7,037 7,160 Other long-term liabilities, including $219 and $89 of distributions due to Time Warner 942 749 Minority interest 317 - Time Warner General Partners' senior capital 1,730 1,663 Partners' capital Contributed capital 7,398 7,398 Undistributed partnership earnings (deficit) (716) (394) Note receivable from U S WEST (528) (771) Total partners' capital 6,154 6,233 Total liabilities and partners' capital $19,290 $18,662 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Revenues (a) $2,392 $2,055 $4,438 $3,974 Cost of revenues (a)(b) 1,611 1,441 3,051 2,784 Selling, general and administrative (a)(b) 515 387 930 760 Operating expenses 2,126 1,828 3,981 3,544 Business segment operating income 266 227 457 430 Interest and other, net (a) (170) (144) (331) (280) Corporate services (a) (15) (15) (30) (30) Income before income taxes 81 68 96 120 Income taxes (25) (12) (36) (16) Net income $ 56 $ 56 $ 60 $ 104 __________________ (a) Includes the following income (expenses) resulting from transactions with the partners of TWE: Selling, general and administrative $(30) $(26) $(52) $(43) Corporate services (15) (15) (30) (30) Interest and other, net 6 3 6 3 In addition, includes the following income (expenses) resulting from transactions with equity affiliates of TWE or Time Warner: Revenues $ 32 $ 58 $ 58 $ 67 Cost of revenues (36) (19) (53) (31) Selling, general and administrative 7 9 12 14 (b) Includes depreciation and amortization expense of: $275 $240 $501 $453 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1995 1994 (millions) OPERATIONS Net income $ 60 $ 104 Adjustments for noncash and nonoperating items: Depreciation and amortization 501 453 Changes in operating assets and liabilities 164 120 Cash provided by operations 725 677 INVESTING ACTIVITIES Investments and acquisitions (75) (46) Capital expenditures (622) (496) Loan to Time Warner - (250) Investment proceeds 953 39 Cash provided (used) by investing activities 256 (753) FINANCING ACTIVITIES Borrowings 235 317 Debt repayments (237) (277) Capital distributions (30) (27) Collections on note receivable from U S WEST 243 68 Cash provided by financing activities 211 81 INCREASE IN CASH AND EQUIVALENTS 1,192 5 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,071 1,338 CASH AND EQUIVALENTS AT END OF PERIOD $2,263 $1,343 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), is engaged principally in the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses. Subsidiaries of Time Warner Inc. ("Time Warner") are the general partners of TWE ("Time Warner General Partners") and collectively hold 63.27% pro rata priority capital and residual equity partnership interests in TWE, and certain priority capital interests senior ("Time Warner General Partners' senior capital") and junior to the pro rata priority capital interests, which they received for the net assets, or the rights to cash flows, they contributed to the partnership upon the capitalization of TWE. The limited partners, subsidiaries of U S WEST, Inc. ("U S WEST"), ITOCHU Corporation and Toshiba Corporation, hold 25.51%, 5.61% and 5.61% pro rata priority capital and residual equity partnership interests, respectively. The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of TWE and all companies in which TWE has a direct and indirect controlling voting interest ("subsidiaries"), as if TWE and its subsidiaries were a single company. Investments in certain other companies in which TWE has significant influence but less than a controlling voting interest, are accounted for using the equity method. The accompanying financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented, in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of TWE for the year ended December 31, 1994. Intangible Assets Intangible assets are recorded when the cost of acquired companies exceeds the fair value of their tangible assets. Intangible assets are amortized over periods up to forty years using the straight-line method. TWE separately reviews the carrying value of intangible assets for each acquired entity on a quarterly basis to determine whether an impairment may exist. TWE considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of intangible assets can be recovered. Upon a determination that the carrying value of intangible assets will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such intangible assets would be considered impaired and will be reduced by a charge to operations in the amount of the impairment. Impairment is measured as any deficiency in estimated undiscounted future cash flows of the acquired business to recover the carrying value related to the intangible assets. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS 121") effective for fiscal years beginning after December 15, 1995. The new rules establish standards for the recognition and measurement of impairment losses on long-lived assets and certain identifiable intangible assets, including goodwill. TWE expects that the adoption of FAS 121 will not have a material effect on its financial statements. 2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP On April 1, 1995, TWE formed a cable television joint venture with the Advance/Newhouse Partnership ("Advance/Newhouse") to which Advance/Newhouse and TWE contributed cable television systems (or interests therein) serving approximately 4.5 million subscribers, as well as certain foreign cable investments and programming investments. TWE owns a two-thirds equity interest in the TWE- Advance/Newhouse Partnership and is the managing partner. TWE consolidates the partnership and the one-third equity interest owned by Advance/Newhouse is reflected in TWE's balance sheet as minority interest. In accordance with the partnership agreement, Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The assets contributed by TWE and Advance/Newhouse to the partnership were recorded at their predecessor's historical cost, which, with respect to Advance/Newhouse, consisted of assets contributed to the partnership of approximately $338 million and liabilities assumed by the partnership of approximately $9 million. No gain was recognized by TWE upon the capitalization of the partnership. On a pro forma basis, giving effect to the formation of the TWE- Advance/Newhouse Partnership as if it had occurred at the beginning of the periods, TWE would have reported $4.575 billion and $4.238 billion of revenues for the six months ended June 30, 1995 and 1994, respectively. The pro forma effect on TWE's net income for each of the six month periods ended June 30, 1995 and 1994 is not material. 3. SIX FLAGS On June 23, 1995, TWE sold 51% of its interest in Six Flags Entertainment Corporation ("Six Flags") to an investment group led by Boston Ventures for $204 million and received $640 million in additional proceeds from Six Flags, representing payment of certain intercompany indebtedness and licensing fees. As a result of the transaction, TWE expects a cumulative debt reduction of approximately $850 million, after the payment of related taxes and fees and the deconsolidation of approximately $128 million of third-party, zero-coupon indebtedness of Six Flags due in 1999. The deconsolidation of such indebtedness is reflected in TWE's balance sheet as of June 30, 1995, and the remaining debt reduction is expected to occur in the third quarter of 1995. TWE deferred approximately $140 million of income on the transaction principally as a result of its guarantee of such debt. TWE will account for its remaining 49% interest in Six Flags under the equity method of accounting. 4. INVENTORIES Inventories consist of: June 30, 1995 December 31, 1994 Current Noncurrent Current Noncurrent (millions) Film costs: Released, less amortization $ 442 $ 352 $ 585 $ 347 Completed and not released 153 37 123 24 In process and other 59 207 18 361 Library, less amortization - 743 - 769 Programming costs, less amortization 177 317 149 306 Merchandise 76 - 81 - Total $ 907 $1,656 $ 956 $1,807 5. LONG-TERM DEBT Long-term debt consists of: June 30, December 31, 1995 1994 (millions) Bank credit agreement, weighted average interest rates of 6.7% and 6.5% $2,575 $2,550 Commercial paper, weighted average interest rates of 6.5% and 6.2% 622 649 Publicly held notes and debentures 3,781 3,903 Other 59 58 Total $7,037 $7,160 On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and a wholly owned subsidiary of Time Warner ("TWI Cable") executed a five-year revolving credit facility (the "New Credit Agreement"). The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance existing indebtedness of TWE and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE- Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains certain covenants for each borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and loans, advances, distributions and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWE borrowed approximately $2.6 billion under the New Credit Agreement to repay and terminate its existing bank credit agreement. Each Time Warner General Partner has guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest thereon based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. 6. PARTNERS' CAPITAL Changes in partners' capital were as follows: Six Months Ended June 30, 1995 1994 (millions) Balance at beginning of year $6,233 $6,000 Net income 60 104 Distributions (316) (120) Reduction of stock option distribution liability - 174 Allocation of income to Time Warner General Partners' senior capital (67) (62) Collections on note receivable from U S WEST 243 68 Other 1 7 Balance at June 30 $6,154 $6,171 Since September 1993, certain assets formerly owned and operated by TWE have been owned and operated by other partnerships ("Time Warner Service Partnerships") in order to ensure compliance with the Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia applicable to U S WEST and its affiliated companies, which may have included TWE. The Time Warner Service Partnerships make certain of their assets and related services available to TWE and TWE is required to make quarterly cash distributions of $12.5 million to the Time Warner General Partners, which the partners in turn are required to contribute to the Time Warner Service Partnerships. If TWE is clearly not prohibited from owning or operating the assets of the Time Warner Service Partnerships, they will be recontributed to TWE on September 15, 1995 (or September 15, 1997 in the case of certain assets), or earlier under certain circumstances, at their then fair market value in exchange for partnership interests in TWE. As a result of a judicial order issued to U S WEST in 1994, TWE is no longer prohibited from owning or operating substantially all of the assets of the Time Warner Service Partnerships. In addition to Time Warner Service Partnership distributions, TWE also is required to make distributions to reimburse the partners for income taxes at statutory rates based on their allocable share of taxable income, and to reimburse Time Warner for its stock options granted to employees of TWE based on the amount by which the market price of Time Warner common stock exceeds the option exercise price on the exercise date. TWE accrues a stock option distribution and a corresponding liability with respect to unexercised options when the market price of Time Warner common stock increases during the accounting period, and reverses previously-accrued stock option distributions and the corresponding liability when the market price of Time Warner common stock declines. During the six months ended June 30, 1995, TWE accrued $25 million of Time Warner Service Partnership distributions, $156 million of tax-related distributions and $135 million of stock option distributions, based on closing prices of Time Warner common stock of $41.25 at June 30, 1995 and $35.125 at December 31, 1994. During the six months ended June 30, 1994, TWE accrued $25 million of Time Warner Service Partnership distributions and $95 million of tax-related distributions, and reversed $174 million of previously- accrued stock option distributions as a result of a decline in the market price of Time Warner common stock. TWE paid $490 million of accrued tax distributions to the Time Warner General Partners in July 1995. 7. SEGMENT INFORMATION Information as to the operations of TWE in different business segments is as set forth below. Cable business segment information reflects the consolidation of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995. Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Revenues Filmed Entertainment $1,355 $1,214 $2,561 $2,295 Broadcasting - The WB Network 3 - 6 - Programming - HBO 392 369 777 727 Cable 724 559 1,281 1,108 Intersegment elimination (82) (87) (187) (156) Total $2,392 $2,055 $4,438 $3,974 Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Operating Income Filmed Entertainment $ 83 $ 72 $148 $133 Broadcasting - The WB Network (12) - (33) - Programming - HBO 70 61 137 118 Cable 125 94 205 179 Total $266 $227 $457 $430 Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Depreciation of Property, Plant and Equipment Filmed Entertainment $ 41 $ 33 $ 62 $ 49 Broadcasting - The WB Network - - - - Programming - HBO 4 4 8 7 Cable 111 81 199 164 Total $156 $118 $269 $220 Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Amortization of Intangible Assets (1) Filmed Entertainment $ 43 $ 41 $ 80 $ 75 Broadcasting - The WB Network - - - - Programming - HBO - 1 - 2 Cable 76 80 152 156 Total $119 $122 $232 $233 _______________ (1) Amortization includes amortization relating to the acquisition of Warner Communications Inc. ("WCI") in 1989 and the American Television and Communications Corporation ("ATC") minority interest in 1992 and to other business combinations accounted for by the purchase method. 8. COMMITMENTS AND CONTINGENCIES Minimum commitments and guarantees under certain programming, licensing, franchise and other agreements at June 30, 1995 aggregated approximately $5.5 billion, which are payable principally over a five-year period. Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of TWE. 9. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Six Months Ended June 30, 1995 1994 (millions) Interest expense $ 296 $ 273 Cash payments made for interest 301 240 Cash payments made for income taxes (net) 34 29 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS TWE had revenues of $2.392 billion and net income of $56 million for the three months ended June 30, 1995, compared to revenues of $2.055 billion and net income of $56 million for the three months ended June 30, 1994. Revenues of $4.438 billion and net income of $60 million were reported for the six months ended June 30, 1995, compared to revenues of $3.974 billion and net income of $104 million for the six months ended June 30, 1994. As discussed more fully below, TWE's operating results for the three and six month periods ended June 30, 1995 reflect an overall increase in operating income generated by its business segments and gains on the sale of certain unclustered cable systems, offset by higher floating-rates of interest paid on borrowings under TWE's bank credit agreement and minority interest expense related to the consolidation of the operating results of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $25 million and $36 million in the three and six months ended June 30, 1995, respectively, and $12 million and $16 million in the three and six months ended June 30, 1994, respectively, have been provided in respect of the operations of TWE's domestic and foreign subsidiary corporations. EBITDA and operating income for TWE for the three and six months ended June 30, 1995 and 1994 is as follows: Three Months Ended June 30, EBITDA Operating Income 1995 1994 1995 1994 (millions) Filmed Entertainment $167 $146 $ 83 $ 72 Broadcasting - The WB Network (12) - (12) - Programming - HBO 74 66 70 61 Cable 312 255 125 94 Total $541 $467 $266 $227 Six Months Ended June 30, EBITDA Operating Income 1995 1994 1995 1994 (millions) Filmed Entertainment $290 $257 $148 $133 Broadcasting - The WB Network (33) - (33) - Programming - HBO 145 127 137 118 Cable 556 499 205 179 Total $958 $883 $457 $430 Certain factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in Time Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of TWE, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. Three Months Ended June 30, 1995 Compared to the Three Months Ended June 30, 1994 FILMED ENTERTAINMENT. Revenues increased to $1.355 billion, compared to $1.214 billion in the second quarter of 1994. EBITDA increased to $167 million from $146 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $84 million in 1995 and $74 million in 1994. Operating income increased to $83 million from $72 million. Revenues benefited from increases in worldwide theatrical, international home video and consumer products operations. Domestic theatrical revenues in 1995 were led by the success of BATMAN FOREVER. Revenues and operating results at Six Flags increased due to higher attendance and in-park spending. EBITDA and operating income benefited from the revenue gains and increased income from licensing operations, offset in part by approximately one week less of operating results of Six Flags in 1995 due to the sale of a 51% interest in the theme park company on June 23, 1995. BROADCASTING - THE WB NETWORK. The WB Network was launched on January 11, 1995, and generated $12 million of operating losses on $3 million of revenues in the second quarter of 1995. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING - HBO. Revenues increased to $392 million, compared to $369 million in the second quarter of 1994. EBITDA increased to $74 million from $66 million. Depreciation and amortization amounted to $4 million in 1995 and $5 million in 1994. Operating income increased to $70 million from $61 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $724 million, compared to $559 million in the second quarter of 1994. EBITDA increased to $312 million from $255 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $187 million in 1995 and $161 million in 1994. Operating income increased to $125 million from $94 million. Revenues benefited from the formation of the TWE-Advance/Newhouse Partnership in April 1995 and increases in basic cable subscribers and nonregulated revenues, including pay-TV and advertising. EBITDA and operating income increased as a result of the revenue gains and contributions from the TWE-Advance/Newhouse Partnership, offset in part by the impact of the second round of cable rate regulations that went into effect in July 1994, higher start-up costs for telephony operations and, with respect to operating income only, higher depreciation and amortization relating to increased capital spending. INTEREST AND OTHER, NET. Interest and other, net, increased to $170 million in the second quarter of 1995, compared to $144 million in the second quarter of 1994. Interest expense increased to $146 million, compared to $138 million in the second quarter of 1994, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreement. Other expense, net, increased to $24 million in the second quarter of 1995 from $6 million in 1994, principally because of the inclusion in 1995 of minority interest expense related to the TWE- Advance/Newhouse Partnership, offset in part by gains on the sale of certain unclustered cable systems. Six Months Ended June 30, 1995 Compared to the Six Months Ended June 30, 1994 FILMED ENTERTAINMENT. Revenues increased to $2.561 billion, compared to $2.295 billion in the first six months of 1994. EBITDA increased to $290 million from $257 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $142 million in 1995 and $124 million in 1994. Operating income increased to $148 million from $133 million. Revenues benefited from increases in worldwide theatrical, international home video, consumer products and worldwide television distribution operations. Lower domestic theatrical revenues in the first quarter of 1995 were overcome by the second quarter domestic box office performance of theatrical releases, led by the success of BATMAN FOREVER. Revenues and operating results at Six Flags increased due to higher attendance and in-park spending. EBITDA and operating income benefited from the revenue gains and increased income from licensing operations. BROADCASTING-THE WB NETWORK. The WB Network was launched on January 11, 1995, and generated $33 million of operating losses on $6 million of revenues in the first six months of 1995. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING - HBO. Revenues increased to $777 million, compared to $727 million in the first six months of 1994. EBITDA increased to $145 million from $127 million. Depreciation and amortization amounted to $8 million in 1995 and $9 million in 1994. Operating income increased to $137 million from $118 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $1.281 billion, compared to $1.108 billion in the first six months of 1994. EBITDA increased to $556 million from $499 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $351 million in 1995 and $320 million in 1994. Operating income increased to $205 million from $179 million. Revenues benefited from the formation of the TWE-Advance/Newhouse Partnership in April 1995 and increases in basic cable subscribers and nonregulated revenues, including pay-TV and advertising. EBITDA and operating income increased as a result of the revenue gains and contributions from the TWE-Advance/Newhouse Partnership, offset in part by the impact of the second round of cable rate regulations that went into effect in July 1994, higher start-up costs for telephony operations and, with respect to operating income only, higher depreciation and amortization relating to increased capital spending. INTEREST AND OTHER, NET. Interest and other, net, increased to $331 million in the first six months of 1995, compared to $280 million in the first six months of 1994. Interest expense increased to $296 million, compared with $273 million in the first six months of 1994, principally as a result of higher floating- rates of interest paid on borrowings under TWE's bank credit agreement. Other expense, net, increased to $35 million in the first six months of 1995 from $7 million in 1994, principally because of the inclusion in 1995 of minority interest expense related to the TWE-Advance/Newhouse Partnership, offset in part by gains on the sale of certain unclustered cable systems. FINANCIAL CONDITION AND LIQUIDITY June 30, 1995 The financial condition of TWE at June 30, 1995 was affected by the formation of the TWE-Advance/Newhouse Partnership and the Six Flags transaction, and is expected to be further affected by the other cable transactions agreed to by Time Warner that have closed or are expected to close during 1995. TWE had $7.1 billion of debt, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital (net of the $528 million uncollected portion of the note receivable from U S WEST) at June 30, 1995, compared to $7.2 billion of debt, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital at December 31, 1994. Principally as a result of the proceeds received in the Six Flags transaction, cash and equivalents increased to $2.3 billion at June 30, 1995, compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash amounts to $4.8 billion and $6.1 billion, respectively. During 1995, TWE and Time Warner made progress in achieving certain of their financial and operational objectives, principally relating to the expansion of their reach in cable television, the attainment of a new bank credit facility and their plan to reduce debt with funds raised from the sale of non-core assets. TWE formed the TWE-Advance/Newhouse Partnership in April 1995 and, together with Time Warner's completion of its previously-announced acquisitions of Summit Communications Group, Inc. in May 1995 and KBLCOM Incorporated in July 1995, the total number of subscribers under the management of Time Warner Cable has increased to over 10 million, compared to 7.5 million at the end of 1994. The number of subscribers is expected to increase further, to over 11.5 million, after the consummation of Time Warner's acquisition of Cablevision Industries Corporation and related companies, which is expected to close in the fourth quarter of 1995. On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and TWI Cable executed a five-year revolving credit facility. The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance existing indebtedness of TWE and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE- Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains certain covenants for each borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and loans, advances, distributions and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWE borrowed approximately $2.6 billion under the New Credit Agreement to repay and terminate its existing bank credit agreement. TWE continues to pursue its plan to enhance its financial position through sales of non-core assets. With the sale of 51% of its interest in Six Flags in June 1995 and the sale or expected sale of certain unclustered cable systems, TWE expects a cumulative debt reduction of approximately $1 billion, after the payment of related taxes and fees and the deconsolidation of approximately $128 million of third-party, zero-coupon indebtedness of Six Flags due in 1999. The deconsolidation of such indebtedness is reflected in TWE's balance sheet as of June 30, 1995, and the remaining debt reduction is expected to occur in the second half of 1995. In the first six months of 1995, cash provided by TWE's operations amounted to $725 million and reflected $958 million of EBITDA from the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses and a reduction in working capital requirements, less $301 million of interest payments, $34 million of income taxes and $30 million of corporate expenses. Cash provided by operations of $677 million in the first six months of 1994 reflected $883 million of business segment EBITDA and a reduction in working capital requirements, less $240 million of interest payments, $29 million of income taxes and $30 million of corporate expenses. Cash flows from investing activities increased to $256 million of cash provided in the first six months of 1995, compared to a use of cash of $753 million in the first six months of 1994, principally as a result of a $914 million increase in investment proceeds relating to management's debt reduction program. Capital expenditures increased to $622 million in the first six months of 1995, compared to $496 million in the first six months of 1994. Capital spending by Time Warner Cable amounted to $433 million in the first six months of 1995, compared to $248 million in the first six months of 1994, and was financed in part through $243 million of collections on the note receivable from U S WEST. Cable capital expenditures are budgeted to exceed $500 million for the remainder of 1995, and are expected to be partially financed by approximately $300 million of additional collections on the note receivable from U S WEST. Because management believes that the conversion from coaxial to fiber-optic cable is essential to achieving long-term growth in revenue from telephony, cable and other services, significant cable capital expenditures also are expected in subsequent years and will be timed to match the rate at which demand for the new services develops. Cash flows provided by financing activities increased to $211 million in the first six months of 1995, compared to $81 million in the first six months of 1994, principally as a result of a $175 million increase in collections on the note receivable from U S WEST. Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition amounted to over $1 billion at June 30, 1995 compared to $852 million at December 31, 1994 (including amounts relating to HBO of $156 million at June 30, 1995 and $175 million at December 31, 1994). The backlog excludes advertising barter contracts. Management believes that TWE's 1995 operating cash flow, cash and equivalents, collections on the note receivable from U S WEST and additional borrowing capacity are and will continue to be sufficient to meet its capital and liquidity needs. Based on the level of interest rates prevailing at June 30, 1995, the fair value of TWE's long-term debt exceeded its carrying value by $123 million. Based on the level of interest rates prevailing at December 31, 1994, the fair value of TWE's long-term debt was $460 million less than its carrying value. Unrealized gains or losses on debt are not recognized unless the debt is retired prior to its maturity. Foreign exchange contracts are used primarily to hedge the risk that unremitted or future license fees owed to TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's exposure. At June 30, 1995, Time Warner had contracts for the sale of $546 million and the purchase of $151 million of foreign currencies at fixed rates and maturities of three months or less. Of Time Warner's $395 million net sale contract position, $133 million related to TWE's exposure, primarily Japanese yen (20% of net contract position related to TWE), French francs (20%), German marks (10%) and Canadian dollars (21%), compared to a net sale contract position of $188 million of foreign currencies at December 31, 1994. Unrealized gains or losses are recorded in income; accordingly, the carrying value of foreign exchange contracts approximates market value. TWE had $13 million of net losses on foreign exchange contracts during the first six months of 1995, which were or are expected to be offset by corresponding increases in the dollar value of foreign currency license fee payments that have been or are anticipated to be received from the sale of U.S. copyrighted products abroad. Time Warner places foreign currency contracts with a number of major financial institutions in order to minimize credit risk. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to the litigation entitled NORTHERN LAMINATING, INC. RETIREMENT FUND v. MUNRO, et al. described on page I-41 of Time Warner's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). A Stipulation of Voluntary Discontinuance without prejudice was approved by the court on July 12, 1995. Reference is made to the description of the Federal lawsuit filed by TWE in November 1992 seeking to overturn major provisions of the 1992 Cable Act that appears on pages I-42 and I-43 of Time Warner's 1994 Form 10-K. Argument on cross motions for summary judgment in connection with the must-carry portion of the case was held on July 17, 1995; post-argument submissions by all parties are due on August 22, 1995. With respect to the remainder of the case, briefing on the appeal was completed in early July 1995 and argument of the appeal is scheduled for November 20, 1995. On May 30, 1995, a purported class action was filed in the United States District Court for the Central District of California, entitled DIGITAL DISTRIBUTION INC. D/B/A COMPACT DISC WAREHOUSE v. CEMA DISTRIBUTION, SONY MUSIC ENTERTAINMENT, INC., WARNER ELEKTRA ATLANTIC CORPORATION, UNI DISTRIBUTION CORPORATION, BERTELSMANN MUSIC GROUP, INC. AND POLYGRAM GROUP DISTRIBUTION, INC., No. 95- 3596 (JSL) (the "California Federal Action"). On July 19, 1995, a purported class action was filed in the Superior Court of California for the County of Los Angeles, entitled BRENDEN BARRY v. CAMA DISTRIBUTION, SONY MUSIC ENTERTAINMENT, INC., WARNER ELEKTRA ATLANTIC CORPORATION, UNI DISTRIBUTION CORPORATION, BERTELSMANN MUSIC GROUP, INC. AND POLYGRAM GROUP DISTRIBUTION, INC., No. BC 131748 (the "California State Action"). The California Federal Action is brought on behalf of direct purchasers of compact discs ("CDs") and the California State Action is brought on behalf of indirect purchasers of CDs. In both actions, the plaintiffs allege that Warner Elektra Atlantic Corporation ("WEA"), along with five other distributors of recorded music CDs, violated the federal and/or state antitrust laws and unfair competition laws, by engaging in a conspiracy to fix prices of CDs, and seek an injunction and treble damages. In the California Federal Action, the defendants have moved to dismiss the complaint and stay the proceedings pending the disposition of the motion to dismiss. An initial conference is scheduled in early September 1995. In the California State Action, defendants time to answer or move against the complaint has been extended until October 15, 1995. [An action similar to the California Federal Action was filed in the United States District Court for the Southern District of New York and then dismissed voluntarily by the plaintiff, effective as of July 19, 1995. The plaintiff indicated that it intended to intervene in the California Federal Action or file a separate action in the same court.] Item 4. Submission of Matters to a Vote of Security-Holders. (a) The Annual Meeting of Stockholders of Time Warner was held on May 18, 1995. (b) Not applicable. (c) The following matters were voted upon at the Time Warner Annual Meeting of Stockholders: (i) Election of directors for terms expiring in 1998. Broker For Withheld Non-Votes Merv Adelson 310,072,682 4,973,582 0 Beverly Sills Greenough 310,020,000 5,026,264 0 Michael A. Miles 310,851,464 4,194,800 0 Donald S. Perkins 310,737,122 4,309,142 0 Raymond S. Troubh 310,941,947 4,104,317 0 (ii) Adoption of amended and restated Time Warner Inc. Annual Bonus Plan for Executive Officers: Broker Votes For Votes Against Abstentions Non-Votes 287,990,584 22,137,691 4,917,989 0 (iii) Appointment of Ernst & Young LLP as independent auditors of Time Warner for 1995: Broker Votes For Votes Against Abstentions Non-Votes 312,574,237 1,395,455 1,076,572 0 (iv) Stockholder resolution relating to cigarette advertising in Time Warner's magazines: Broker Votes For Votes Against Abstentions Non-Votes 15,842,233 245,079,278 13,045,154 41,079,599 (v) Stockholder resolution calling for the election of directors annually and not by classes: Broker Votes For Votes Against Abstentions Non-Votes 89,948,660 122,102,463 61,906,541 41,088,600 (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K. (i) Time Warner filed a Current Report on Form 8-K dated April 1, 1995 reporting in Item 2 that TWE had closed its previously announced transaction with Advance/Newhouse Partnership regarding the formation of the Time Warner Entertainment - Advance/Newhouse Partnership. (ii) Time Warner filed a Current Report on Form 8-K dated May 30, 1995 which sets forth the pro forma financial statements of Time Warner Inc., reflecting the Unclustered Cable Disposition, the Six Flags Transaction, the TWE - A/N Transaction, the Summit Acquisition, the CVI Acquisition, the KBLCOM Acquisition and the New Credit Agreement. (iii) Time Warner filed a Current Report on Form 8-K dated June 15, 1995 which sets forth the financial statements of Newhouse Broadcasting Cable Division of Newhouse Broadcasting Corporation. (iv) Time Warner filed a Current Report on Form 8-K dated July 6, 1995 reporting in Item 2 that Time Warner had closed its previously announced acquisition of KBLCOM Incorporated, formerly a subsidiary of Houston Industries Incorporated. TIME WARNER INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Time Warner Inc. (Registrant) By: /s/ Richard J. Bressler Name: Richard J. Bressler Title: Senior Vice President and Chief Financial Officer Dated: August 14, 1995 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K Exhibit No. Description of Exhibit 10.1 Contribution Agreement, dated as of September 9, 1994, among Time Warner Entertainment Company, L.P., Advance Publications, Inc., Newhouse Broadcasting Corporation, Advance/Newhouse Partnership, and Time Warner Entertainment- Advance/Newhouse Partnership (incorporated by reference to Exhibit 10(a) to Time Warner Entertainment Company, L.P.'s Current Report on Form 8-K dated September 9, 1994). 10.2 Partnership Agreement, dated as of September 9, 1994, between Time Warner Entertainment Company, L.P. and Advance/Newhouse Partnership (incorporated by reference to Exhibit 10(b) to Time Warner Entertainment Company, L.P.'s Current Report on Form 8-K dated September 9, 1994). 10.3 Letter Agreement, dated April 1, 1995, among Time Warner Entertainment Company, L.P., Advance/Newhouse Partnership, Advance Publications, Inc. and Newhouse Broadcasting Corporation (incorporated by reference to Exhibit 10(c) to Time Warner Entertainment Company, L.P.'s Current Report on Form 8-K dated April 1, 1995). 10.4 Credit Agreement among Time Warner Entertainment Company, L.P., Time Warner Entertainment-Advance/Newhouse Partnership and TWI Cable Inc., as borrowers, Chemical Bank, as administrative agent, Bank of America National Trust and Savings Association, The Bank of New York and Morgan Guaranty Trust Company of New York, as documentation and syndication agents, and the lending institutions named therein, dated as of June 30, 1995 (incorporated by reference to Exhibit 10(a) to Time Warner's Current Report on Form 8-K dated July 6, 1995). 10.5 Employment Agreement made as of May 17, 1995, between Time Warner and Peter R. Haje. 27 Financial Data Schedule. 99.1 Summarized financial information of the Time Warner Service Partnerships. 99.2 Summarized financial information of Paragon Communications. EX-27 2 ART 5 FDS FOR 2Q 10Q
5 TIME WARNER INC. FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the financial statements of Time Warner Inc. for the quarter ended June 30, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 597 0 2,033 738 444 3,167 1,551 755 17,788 2,945 9,593 384 0 4 1,091 17,788 3,724 3,724 2,122 2,122 0 0 429 33 88 (55) 0 0 0 (55) (.17) (.17)
EX-99.1 3 TIME WARNER ENTERTAINMENT COMPANY, L.P. SUPPLEMENTARY INFORMATION SUMMARIZED FINANCIAL INFORMATION OF THE TIME WARNER SERVICE PARTNERSHIPS (Unaudited) The Time Warner General Partners are the general partners of the Time Warner Service Partnerships and collectively hold a 100% priority capital interest and 87.5% residual equity interest therein. The assets of the Time Warner Service Partnerships principally include the satellite receiving dishes and broadcast antennas used by TWE's Cable division, the transponders and other transmission equipment employed by TWE's Programming-HBO and Filmed Entertainment divisions and TWE's equity interests in certain programming entities. A summary of financial information of the Time Warner Service Partnerships is set forth below: TIME WARNER SERVICE PARTNERSHIPS Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Operating Statement Information Revenues $ 39 $ 9 $ 71 $ 17 Operating income (loss) 1 (2) 1 (8) Gain on investments - 2 126 5 Net income (loss) (3) (5) 128 (13) June 30, December 31, 1995 1994 (millions) Balance Sheet Information Investments and advances $ 67 $156 Property, plant and equipment, net 194 120 Due from (to) Time Warner 29 (38) Total assets 307 279 Total liabilities 48 101 EX-99.2 4 TIME WARNER ENTERTAINMENT COMPANY, L.P. SUPPLEMENTARY INFORMATION SUMMARIZED FINANCIAL INFORMATION OF PARAGON COMMUNICATIONS (Unaudited) TWE has an indirect 50% ownership interest in Paragon Communications ("Paragon"), a cable system joint venture accounted for on the equity basis. On July 6, 1995, Time Warner acquired the other 50% interest in Paragon from KBLCOM Incorporated. In connection with this transaction, $226 million of Paragon's indebtedness was repaid using funds provided equally by each of Time Warner and TWE. A summary of financial information of Paragon is set forth below: PARAGON COMMUNICATIONS Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 (millions) Operating Statement Information Revenues $ 92 $ 87 $179 $173 Operating income 20 20 40 41 Net income 16 15 47 31 June 30, December 31, 1995 1994 (millions) Balance Sheet Information Property, plant and equipment, net $412 $392 Cable television franchises 201 206 Total assets 656 628 Debt 226 249 Total liabilities 305 323 EX-10.5 5 EMPLOYMENT AGREEMENT dated May 17, 1995, effective as of May 17, 1995 (the "Effective Date"), between TIME WARNER INC., a Delaware corporation (the "Company"), and Peter R. Haje (the "Executive"). The Executive is currently employed by the Company pursuant to an Employment Agreement made as of September 19, 1990 (the "Prior Agreement"). The Company wishes to restate the Prior Agreement and secure the services of the Executive on a full-time basis for the period to and including December 31, 1999 (the "Term Date") and thereafter for a two-year advisory period on and subject to the terms and conditions set forth in this Agreement, and the Executive is willing for the Prior Agreement to be so restated and to provide such services on and subject to the terms and conditions set forth in this Agreement. The parties therefore agree as follows: 1. Term of Employment. The Executive's "term of employment", as this phrase is used throughout this Agree- ment, shall be for the period beginning on the Effective Date and ending on the Term Date, subject, however, to the terms and conditions set forth in this Agreement. Notwithstanding the foregoing or anything to the contrary contained in this Agreement, the "term of employment", as used in Sections 3.6, 3.7, 3.8 and 8 through 12 shall mean the period ending at the end of the Advisory Period (as defined in Section 13). 2. Employment. The Company shall employ the Executive, and the Executive shall serve, as Executive Vice President, Secretary and General Counsel of the Company during the term of employment, and the Executive shall have the authority, functions, duties, powers and responsibilities normally associated with such position and as the Board of Directors, the Chief Executive Officer or the President of the Company may from time to time delegate to the Executive in addition thereto. The Executive shall, subject to his election as such from time to time and without additional compensation, serve during the term of employment in such additional offices of comparable or greater stature and responsibility in the Company and its subsidiaries and as a director and as a member of any committee of the Board of Directors of the Company and its subsidiaries, to which he may be elected from time to time. During the term of employment, (i) the Executive's services shall be rendered on a substantially full-time, exclusive basis and he will apply on a full-time basis all of his skill and experience to the performance of his duties in such employment, (ii) the Executive shall report only to the Company's Board of Directors, its Chief Executive Officer, its President or its Chief Operating Officer, (iii) the Executive shall have no other employment and, without the prior written consent of the Chief Executive Officer or the President of the Company, no outside business activities which require the devotion of substantial amounts of the Executive's time and (iv) the place for the performance of the Executive's services shall be the principal executive offices of the Company in the New York City metropolitan area, subject to such reasonable travel as may be appropriate or required in the performance of the Executive's duties in the business of the Company. The foregoing shall be subject to the Company's policies, as in effect from time to time, regarding vacations, holidays, illness and the like and shall not prevent the Executive from devoting such time to his personal affairs as shall not interfere with the performance of his duties hereunder, provided that the Executive complies with the provisions of Sections 9 and 10 and any Company policies on conflicts of interest and service as a director of another corporation, partnership, trust or other entity ("Entity"). 3. Compensation. 3.1 Base Salary. The Company shall pay or cause to be paid to the Executive a base salary of not less than $450,000 per annum during calendar year 1995 and not less than $550,000 per annum during the remainder of the term of employment (the "Base Salary"). The Company may increase, but not decrease, the Base Salary at any time and from time to time during the term of employment and upon each such increase the term "Base Salary" shall mean such increased amount. Base Salary shall be payable in monthly or more frequent installments in accordance with the Company's then current practices and policies with respect to senior executives. For the purposes of this Agreement "senior executives" shall mean executives of the Company at the same level as the Executive. 3.2 Bonus. In addition to Base Salary, the Executive may be entitled to receive during the term of employment an annual cash bonus based on the performance of the Company and of the Executive. Bonuses for senior executives may be determined by the Compensation Committee of the Company's Board of Directors or by the Chief Executive Officer of the Company. Such determination with respect to the amount, if any, of annual bonuses to be paid to the Executive under this Agreement shall be final and conclusive except as specifically provided otherwise in this Agreement. Payments of any bonus compensation under this Section 3.2 shall be made in accordance with the Company's then current practices and policies with respect to senior executives. 3.3 Deferred Compensation. In addition to Base Salary and bonus as set forth in Sections 3.1 and 3.2, the Executive shall be credited with deferred compensation which shall be determined and paid out as provided in this Agreement, including Annex A hereto. Subject to the provisions of Section A.7 of Annex A, during the term of employment, the Company shall credit to a special account maintained on the Company's books for the Executive (the "Account"), monthly, an amount equal to 50% of one-twelfth of the Executive's then current Base Salary. If a lump sum payment is made pursuant to Section 4.2.2 or 4.2.3, the Company shall credit to the Account at the time of such payment an amount equal to 50% of the Base Salary portion of such lump sum payment. The Account shall be maintained by the Company in accordance with the terms of this Agreement, including Annex A, until the full amount which the Executive is entitled to receive therefrom has been paid in full. 3.4 Deferred Bonus. In addition to any other deferred bonus plan in which the Executive may be entitled to participate, the Executive may elect by written notice delivered to the Company at least 15 days prior to the commencement of any calendar year during the term of employment during which an annual cash bonus would otherwise accrue or to which it would relate, to defer payment of and to have the Company credit to the Account all or any portion of the Executive's bonus for such year. Any such election shall only apply to the calendar year during the term of employment with respect to which such election is made and a new election shall be required with respect to each successive calendar year during the term of employment. 3.5 Prior Account. The parties confirm that the Company has maintained a deferred compensation account (the "Prior Account") for the Executive in accordance with the Prior Agreement. The Prior Account shall be promptly transferred to, and shall for all purposes be deemed part of, the Account and shall continue to be maintained by the Company in accordance with this Agreement. All prior credits to the Prior Account shall be deemed to be credits made under this Agreement, all "Account Retained Income" thereunder shall be deemed to be Account Retained Income under this Agreement and all increases or decreases to the Prior Account as a result of income, gains, losses and other changes shall be deemed to have been made under this Agreement. 3.6 Reimbursement. The Company shall pay or reimburse the Executive for all reasonable travel, entertainment and other business expenses actually incurred or paid by the Executive during the term of employment in the performance of his services under this Agreement provided such expenses are incurred or paid in accordance with the Company's then current practices and policies with respect to senior executives of the Company and upon presentation of expense statements or vouchers or such other supporting information as the Company may customarily require of its senior executives. 3.7 No Anticipatory Assignments. Except as specifically contemplated in Section 12.8 or under the life insurance policies and benefit plans referred to in Sections 7 and 8, respectively, neither the Executive, his legal representative nor any beneficiary designated by him shall have any right, without the prior written consent of the Company, to assign, transfer, pledge, hypothecate, anticipate or commute to any person or Entity any payment due in the future pursuant to any provision of this Agreement, and any attempt to do so shall be void and shall not be recognized by the Company. 3.8 Indemnification. The Executive shall be entitled throughout the term of employment in his capacity as an officer or director of the Company or any of its subsidiaries or a member of the Board of Representatives or other governing body of any partnership or joint venture in which the Company has an equity interest (and after the term of employment, to the extent relating to his service as such officer, director or member) to the benefit of the indemnification provisions contained on the date hereof in the Certificate of Incorporation and By-Laws of the Company (not including any amendments or additions after the date of execution hereof that limit or narrow, but including any that add to or broaden, the protection afforded to the Executive by those provisions), to the extent not prohibited by applicable law at the time of the assertion of any liability against the Executive. 4. Termination. 4.1 Termination for Cause. The Company may terminate the term of employment, the Advisory Period and all of the Company's obligations under this Agreement, other than its obligations set forth below in this Section 4.1, only for "cause" and only if the term of employment and Advisory Period have not previously been terminated pursuant to any other provision of this Agreement. Termination by the Company for "cause" shall mean termination by action of the Company's Board of Directors, or a committee thereof, because of the Executive's conviction (treating a nolo contendere plea as a conviction) of a felony (whether or not any right to appeal has been or may be exercised) or willful refusal without proper cause to perform his obligations under this Agreement or because of the Executive's breach of any of the covenants provided for in Section 9. Such termination shall be effected by written notice thereof delivered by the Company to the Executive and shall be effective as of the date of such notice; provided, however, that if (i) such termination is because of the Executive's willful refusal without proper cause to perform any one or more of his obligations under this Agreement, (ii) such notice is the first such notice of termination for any reason delivered by the Company to the Executive under this Section 4.1, and (iii) within 15 days following the date of such notice the Executive shall cease his refusal and shall use his best efforts to perform such obligations, the termination shall not be effective. In the event of such termination by the Company for cause, without prejudice to any other rights or remedies that the Company may have at law or in equity, the Company shall have no further obligations to the Executive other than (i) to pay Base Salary and make credits of deferred compensation to the Account or to pay Advisory Period compensation, as the case may be, accrued through the effective date of termination, (ii) to pay any annual bonus pursuant to Section 3.2 to the Executive in respect of the calendar year prior to the calendar year in which such termination is effective, in the event such annual bonus has been determined but not yet paid as of the date of such termination and (iii) with respect to any rights the Executive has in respect of amounts credited to the Account or pursuant to any insurance or other benefit plans or arrangements of the Company maintained for the benefit of its senior executives. The Executive hereby disclaims any right to receive a pro rata portion of the Executive's annual bonus with respect to the year in which such termination occurs. The last sentence of Section 3.3 and the provisions of Sections 3.8, 8.2, 8.3 and 9 through 12 and Annex A shall survive any termination pursuant to this Section 4.1. 4.2 Termination by Executive for Material Breach by the Company and Wrongful Termination by the Company. Unless previously terminated pursuant to any other provision of this Agreement and unless a Disability Period shall be in effect, the Executive shall have the right, exercisable by written notice to the Company, to terminate the term of employment and the Advisory Period effective 15 days after the giving of such notice, if, at the time of the giving of such notice, the Company shall be in material breach of its obligations under this Agreement; provided, however, that, with the exception of clause (i) below, this Agreement shall not so terminate if such notice is the first such notice of termination delivered by the Executive pursuant to this Section 4.2 and within such 15-day period the Company shall have cured all such material breaches of its obligations under this Agreement. A material breach by the Company shall include, but not be limited to, (i) the Company failing to cause the Executive to retain the title specified in the first sentence of Section 2 or a more senior title; (ii) the Executive being required to report to persons other than those specified in Section 2; (iii) the Company violating the provisions of Section 2 with respect to the Executive's authority, functions, duties, powers or responsibilities (whether or not accompanied by a change in title); (iv) the Company requiring the Executive's primary services to be rendered at a place other than at the Company's principal executive offices in the New York City metropolitan area; (v) the Company failing to cause the successor to all or substantially all of the business and assets of the Company expressly to assume the obligations of the Company under this Agreement. In the event of a termination pursuant to the preceding paragraph of this Section 4.2, or in the event of a termination of this Agreement or the term of employment or the Advisory Period by the Company in breach of this Agreement, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after written notice of such termination is given pursuant to the preceding paragraph of this Section 4.2, either (A) to cease being an employee of the Company and receive a lump sum payment as provided in Section 4.2.2 or (B) to remain an employee of the Company as provided in Section 4.2.3. After the Executive makes such election, the following provisions shall apply: 4.2.1 Regardless of the election made by the Executive, (i) after the effective date of such termination, the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 4.4 and 4.5 and Sections 6 through 12 shall survive such termination, and (ii) the Executive shall be entitled to receive any earned and unpaid Base Salary and deferred compensation or Advisory Period compensation, as the case may be, accrued through the date of such termination and if such termination occurs during the term of employment, a pro rata portion of the Executive's annual bonus for the year in which such termination occurs through the date of such termination based on the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest, all or a portion of which pro rata bonus will be credited to the Account if the Executive previously elected to defer all or any portion of the Executive's bonus for such year pursuant to Section 3.4. 4.2.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay to the Executive as damages in a lump sum within 30 days thereafter (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such notice of termination is given) an amount (discounted as provided in the immediately following sentence) equal to all amounts otherwise payable pursuant to Sections 3.1, 3.2, 3.3 and 13 for the year in which such termination occurs and for each subsequent year through the end of the Advisory Period (assuming that annual bonuses are required to be paid for each such year during the term of employment, with each such annual bonus being equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest (assuming that no portion of such bonus is deferred pursuant to Section 3.4). Any payments required to be made to the Executive pursuant to this Section 4.2.2 upon such termination in respect of Sections 3.1, 3.2 and 13 and the credit to the Account provided for in the penultimate sentence of Section 3.3 shall be discounted to present value as of the date of payment from the times at which such amounts would have become payable absent any such termination at an annual discount rate for the relevant periods equal to 120% of the "applicable Federal rate" (within the meaning of Section 1274(d) of the Internal Revenue Code of 1986 (the "Code"), in effect on the date of such termination, compounded semi-annually, the use of which rate is hereby elected by the parties hereto pursuant to Treas. Reg. Section 1.280G-1 Q/A 32 (provided that, in the event such election is not permitted under Section 280G of the Code and the regulations thereunder, such other rate determined as of such other date as is applicable for determining present value under Section 280G of the Code shall be used). 4.2.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment and the Advisory Period shall continue and the Executive shall remain an employee of the Company through the end of the Advisory Period and during such period the Executive shall be entitled to receive, whether or not he becomes disabled during such period but subject to Section 6, (a) Base Salary at an annual rate equal to the greater of (i) his Base Salary in effect immediately prior to the notice of termination and (ii) the Base Salary provided for in Section 3.1, (b) an annual bonus (all or a portion of which may be deferred by the Executive pursuant to Section 3.4) in respect of each calendar year or portion thereof (in which case a pro rata portion of such annual bonus will be payable) during the term of employment equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest as provided in Section 3.2, (c) deferred compensation as provided in Section 3.3 and (d) Advisory Period compensation as provided in Section 13. Except as provided in the next sentence, if the Executive accepts full-time employment with any other Entity during such period or notifies the Company in writing of his intention to terminate his status as an employee during such period, then the term of employment and the Advisory Period shall cease and the Executive shall cease to be an employee of the Company effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and the Executive shall be entitled to receive as damages in a lump sum within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) for the balance of the Base Salary, deferred compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3), regular annual bonuses (assuming no deferral pursuant to Section 3.4) and Advisory Period compensation the Executive would have been entitled to receive pursuant to this Section 4.2.3 had the Executive remained on the Company's payroll until the end of the Advisory Period. Notwithstanding the preceding sentence, if the Executive accepts employment with any charitable or not-for-profit Entity or any family-owned corporation, trust or partnership, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.2.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the payments provided for in this Section 4.2.3 and the term of employment and the Advisory Period shall cease and the Executive shall not be entitled to any such lump sum payment. For purposes of this Agreement, the term "affiliate" shall mean any Entity which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. 4.3 Office Facilities. In the event the Executive shall make the election provided in clause (B) of Section 4.2, then for the period beginning on the day the Executive makes such election and ending one year thereafter, the Company shall, without charge to the Executive, make available to the Executive office space at the Executive's principal job location immediately prior to his termination of employment, or other location reasonably close to such location, together with secretarial services, office facilities, services and furnishings, in each case reasonably appropriate to an employee of the Executive's position and responsibilities prior to such termination of employment. 4.4 Release. In partial consideration for the Company's obligation to make the payments described in Section 4.2, the Executive shall execute and deliver to the Company a release in substantially the form attached hereto as Annex B. The Company shall deliver such release to the Executive within 10 days after the written notice of termination is delivered pursuant to Section 4.2 and the Executive shall execute and deliver such release to the Company within 21 days after receipt thereof. If the Executive shall fail to execute and deliver such release to the Company within such 21 day period, or if the Executive shall revoke his consent to such release as provided therein, the Executive's term of employment shall terminate as provided in Section 4.2, but the Executive shall receive, in lieu of the payments provided for in said Section 4.2, a lump sum cash payment in an amount determined in accordance with the personnel policies of the Company relating to notice and severance then generally applicable to employees with length of service and compensation level of the Executive. 4.5 Mitigation. In the event of termination of the term of employment and the Advisory Period by the Executive pursuant to Section 4.2 as a result of a material breach by the Company of any of its obligations hereunder, or in the event of termination of the term of employment and the Advisory Period by the Company in breach of this Agreement, the Executive shall not be required to seek other employment in order to mitigate his damages hereunder; provided, however, that, notwithstanding the foregoing, if there are any damages hereunder by reason of the events of termination described above which are "contingent on a change" (within the meaning of Section 280G(b)(2)(A)(i) of the Code), the Executive shall be required to mitigate such damages hereunder, including any such damages theretofore paid, but not in excess of the extent, if any, necessary to prevent the Company from losing any tax deductions to which it otherwise would be entitled in connection with such damages if they were not so "contingent on a change". In addition to any obligation under the preceding sentence, and without dupli- cation of any amounts required to be paid to the Company thereunder, if any such termination occurs and the Executive, whether or not required to mitigate his damages under the preceding sentence, thereafter obtains other employment, the total cash salary and bonus received in connection with such other employment, whether paid to him or deferred for his benefit, for any services through December 31, 1999 and for services as a full-time employee from January 1, 2000 through December 31, 2001, up to an amount equal to (x) the discounted lump sum payment received by or for the account of the Executive with respect to Base Salary, annual bonus and deferred compensation under Section 3 and Advisory Period compensation under Section 13 for such period, minus (y) the amount of severance the Executive would have received in accordance with the personnel policies of the Company if the Executive had been job eliminated on the date of such termination, provided that if such termination occurs during the Advisory Period, the amount determined pursuant to this clause (y) shall be zero, shall reduce, pro tanto, any amount which the Company would otherwise be required to pay to the Executive as a result of such termination and, to the extent amounts have theretofore been paid to him as a result of such termination, such cash salary and bonus shall be paid over to the Company as received with respect to such period, but the provisions of this sentence shall not apply to any type of equity interest, bonus unit, phantom or restricted stock, stock option, stock appreciation right or similar benefit received as a result of such other employment. With respect to the preceding sentences, any payments or rights to which the Executive is entitled by reason of the termination of the term of employment and the Advisory Period by the Executive pursuant to Section 4.2 or in the event of the termination of the term of employment by the Company in breach of this Agreement shall be considered as damages hereunder. With respect to the second preceding sentence, the Executive shall in no event be required to pay the Company with respect to any calendar year more than the discounted amount received by him or credited to the Account with respect to Base Salary, annual bonus and deferred compensation under Section 3 and Advisory Period compensation under Section 13 for such year. Any obligation of the Executive to mitigate his damages pursuant to this Section 4.5 shall not be a defense or offset to the Company's obligation to pay the Executive in full the amounts provided in Section 4.2.2 or 4.2.3, as the case may be, at the time provided therein or the timely and full performance of any of the Company's other obligations under this Agreement. 4.6 Payments. So long as the Executive remains on the payroll of the Company or any subsidiary of the Company, payments of salary, deferred compensation and bonus required to be made pursuant to Section 4.2 shall be made at the same times as such payments are made to senior executives of the Company or such subsidiary. 5. Disability. If during the term of employment and prior to any termination of this Agreement under Section 4.2, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is pre- vented from performing his usual duties for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, the Company shall, nevertheless, continue to pay the Executive his full compensation and continue to credit the Account, when otherwise due, as provided in Section 3 and Annex A, through the last day of the sixth consecutive month of disability or the date on which the shorter periods of disability shall have equalled a total of six months in any twelve-month period (such last day or date being referred to herein as the "Disability Date"). If the Executive has not resumed his usual duties on or prior to the Disability Date, the Company shall pay the Executive a pro rata bonus for the year in which the Disability Date occurs and shall pay the Executive disability benefits for the period ending on the Term Date (the "Disability Period"), in an amount equal to 75% of (a) the Executive's Base Salary at the time the Executive becomes disabled (and this reduced amount shall also be deemed to be the Base Salary for purposes of determining the amounts to be credited to his Account pursuant to Section 3.3 and Annex A as further disability benefits) and (b) the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest (all or a portion of which may be deferred by the Executive pursuant to Section 3.4). If during the Disability Period the Executive shall fully recover from his disability, the Company shall have the right (exercisable within 60 days after notice from the Executive of such recovery), but not the obligation, to restore the Executive to full-time service at full compensa- tion. If the Company elects to restore the Executive to full-time service, then this Agreement shall continue in full force and effect in all respects and the Term Date and Advisory Period shall not be extended by virtue of the occurrence of the Disability Period. If the Company elects not to restore the Executive to full-time service, the Executive shall be entitled to obtain other employment, subject, however, to the following: (i) the Executive shall be obligated to perform advisory services during any balance of the Disability Period; and (ii) the provisions of Sec- tions 9 and 10 shall continue to apply to the Executive during the Disability Period. The advisory services referred to in clause (i) of the immediately preceding sentence shall consist of rendering advice concerning the business, affairs and management of the Company as requested by the Chief Executive Officer, the President or the Chief Operating Officer of the Company but the Executive shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties. Any income from such other employment shall not be applied to reduce the Company's obligations under this Agreement. The Company shall be entitled to deduct from all payments to be made to the Executive during the Disability Period pursuant to this Section 5 an amount equal to all disability payments received by the Executive during the Disability Period from Workmen's Compensation, Social Security and disability insurance policies maintained by the Company; provided, however, that for so long as, and to the extent that, proceeds paid to the Executive from such disability insurance policies are not includible in his income for federal income tax purposes, the Company's deduction with respect to such payments shall be equal to the product of (i) such payments and (ii) a fraction, the numerator of which is one and the denominator of which is one less the maximum marginal rate of federal income taxes applicable to individuals at the time of receipt of such payments. All payments made under this Section 5 after the Disability Date are intended to be disability payments, regardless of the manner in which they are computed. At the end of a Disability Period or if a Disability Date occurs during the Advisory Period, the Company shall pay to the Executive the full amount of the Advisory Period compensation in accordance with Section 13 without regard to the preceding two sentences. Except as otherwise provided in this Section 5, during the Disability Period and the Advisory Period, the Executive shall be entitled to all of the rights and benefits provided for in this Agreement except that Section 4.2 shall not apply during the Disability Period or the Advisory Period and the term of employment and the Advisory Period shall end and the Executive shall cease to be an employee of the Company at the end of the Advisory Period and shall not be entitled to notice and severance or to receive or be paid for any accrued vacation time or unused sabbatical. 6. Death. Upon the death of the Executive during the term of employment, this Agreement and all obligations of the Company to make any payments under Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a designated beneficiary) shall be entitled to receive, to the extent being received by the Executive immediately prior to his death, Base Salary and deferred compensation or, if applicable, Advisory Period compensation, to the last day of the month in which his death occurs and bonus compensation (at the time bonuses are normally paid) based on the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest, but prorated according to the number of whole or partial months the Executive was employed by the Company in such calendar year, and (ii) the Account shall be liquidated and revalued as provided in Annex A as of the date of the Executive's death (except that all taxes shall be computed and charged to the Account as of such date of death to the extent not theretofore so computed and charged) and the entire balance thereof (plus any amount due under the last paragraph of Section A.6 of Annex A) shall be paid to the Executive's estate (or a designated beneficiary) in a single payment not later than 75 days following such date of death. 7. Life Insurance. The Company shall maintain $4,000,000 face amount of split ownership life insurance on the life of the Executive, to be owned by the Executive or the trustees of a trust for the benefit of the Executive's spouse and/or descendants. Until the death of the Executive, and irrespective of any termination of this Agreement except pursuant to Section 4.1, the Company shall pay all premiums on such policy and shall maintain such policy (without reduction of the face amount of the coverage). At the death of the Executive, or on the earlier surrender of such policy by the owner, the Executive agrees that the owner of the policy shall promptly pay to the Company an amount equal to the premiums on such policy paid by the Company (net of (i) tax benefits, if any, to the Company in respect of payments of such premiums, (ii) any amounts payable by the Company which had been paid by or on behalf of the Executive with respect to such insurance, (iii) dividends received by the Company in respect of such premiums, but only to the extent such dividends are not used to purchase additional insurance on the life of the Executive, and (iv) any unpaid borrowings by the Company on the policy), whether before, during or after the term of this Agreement. The owner of the policy from time to time shall execute, deliver and maintain a customary split dollar insurance and collateral assignment form, assigning to the Company the proceeds of such policy but only to the extent necessary to secure the reimbursement obligation contained in the preceding sentence. The life insurance provided for in this Section 7 shall be in addition to any other insurance hereafter provided by the Company on the life of the Executive under any group or individual policy. 8. Other Benefits. 8.1 General Availability. To the extent that (a) the Executive is eligible under the general provisions thereof and (b) the Company maintains such plan or program for the benefit of its senior executives, during the term of employment and the Advisory Period and so long as the Executive is an employee of the Company, the Executive shall be eligible to participate in any pension, profit-sharing, stock option or similar plan or program and in any group insurance, hospitalization, medical, dental, accident, disability or similar plan or program of the Company now existing or established hereafter. In addition, so long as the Executive is an employee of the Company during the term of employment (but not the Advisory Period) the Executive shall be entitled to receive other benefits generally available to all senior executives of the Company to the extent the Executive is eligible under the general provisions thereof, including, without limitation, to the extent maintained in effect by the Company for its senior executives, an automobile allowance and financial services. 8.2 Benefits After a Termination or Disability. During the period the Executive remains on the payroll of the Company after a termination pursuant to Section 4.2 and during the Disability Period and the Advisory Period the Executive shall continue to be eligible to receive the benefits required to be provided to the Executive under Section 8.1 to the extent such benefits are maintained in effect by the Company for its senior executives; provided, however, the Executive shall not be entitled to any additional awards or grants under any stock option, restricted stock or other stock based incentive plan. The Executive shall continue to be an employee of the Company for purposes of any stock option and restricted shares agreements and any other incentive plan awards during the term of employment and the Advisory Period and until such time as the Executive shall leave the payroll of the Company. At the time the Executive's term of employment and Advisory Period terminates and he leaves the payroll of the Company pursuant to the provisions of Section 4.1, 4.2, 5 or 6, the Executive's rights to benefits and payments under any benefit plans or any insurance or other death benefit plans or arrangements of the Company or under any stock option, restricted stock, stock appreciation right, bonus unit, management incentive or other plan of the Company shall be determined, subject to the other terms and provisions of this Agreement, in accordance with the terms and provisions of such plans and any agreements under which such stock options, restricted stock or other awards were granted; provided, however, that notwithstanding the foregoing or any more restrictive provisions of any such plan or agreement (but without affecting any less restrictive or more favorable to the Executive provisions of any such plan or agreement), if the Executive leaves the payroll of the Company as a result of a termination pursuant to Section 4.2, then all stock options granted to the Executive by the Company shall (i) become immediately exercisable at the time the Executive shall leave the payroll of the Company pursuant to Section 4.2 and (ii) shall remain exercisable (but not beyond the term thereof) during the remainder of the term of employment and the Advisory Period and for a period of three months thereafter. 8.3 Payments in Lieu of Other Benefits. In the event the term of employment and the Executive's employment with the Company is terminated pursuant to Sections 4.1, 4.2, 5 or 6 (and regardless of whether the Executive elects clause (A) or (B) as provided in Section 4.2), the Executive shall not be entitled to notice and severance or to be paid for any accrued vacation time or unused sabbatical, the payments provided for in such Sections being in lieu thereof. 9. Protection of Confidential Information; Non- Compete. The provisions of Section 9.2 shall continue to apply through the latest of (i) the end of the Advisory Period (but not later than three years after the effective date of any termination of this Agreement pursuant to Section 4.2) or (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason. The provisions of Sections 9.1 and 9.3 shall continue to apply until three years after the latest of the events described in the preceding sentence. 9.1 Confidentiality Covenant. The Executive acknowledges that his employment by the Company (which, for purposes of this Section 9 shall mean Time Warner Inc. and its affiliates) will, throughout the term of employment and the Advisory Period, bring him into close contact with many confidential affairs of the Company, including information about costs, profits, markets, sales, products, key person- nel, pricing policies, operational methods, technical pro- cesses and other business affairs and methods and other information not readily available to the public, and plans for future development. The Executive further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. The Executive further acknowledges that the business of the Company is international in scope, that its products are marketed throughout the world, that the Company competes in nearly all of its business activities with other Entities that are or could be located in nearly any part of the world and that the nature of the Executive's services, position and expertise are such that he is capable of compet- ing with the Company from nearly any location in the world. In recognition of the foregoing, the Executive covenants and agrees: 9.1.1 The Executive shall keep secret all confidential matters of the Company and shall not intentionally disclose such matters to anyone outside of the Company, either during or after the term of employment and the Advisory Period, except with the Company's written consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder and (ii) the Executive may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; 9.1.2 The Executive shall deliver promptly to the Company on termination of his employment by the Company, or at any other time the Company may so request, at the Company's expense, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company's business, which he obtained while employed by, or otherwise serving or acting on behalf of, the Company and which he may then possess or have under his control; and 9.1.3 If the term of employment is terminated pursuant to Section 4.1 or 4.2 for a period of one year after such termination, without the prior written consent of the Company, the Executive shall not employ, and shall not cause any Entity of which he is an affiliate to employ, any person who was a full-time executive employee of the Company at the date of such termination or within six months prior thereto. 9.2 Non-Compete. The Executive shall not, directly or indirectly, without the prior written consent of the Chief Executive Officer, the President or the Chief Operating Officer of the Company, render any services to any person or Entity or acquire any interest of any type in any Entity, that might be deemed in competition with the Company; provided, however, that the foregoing shall not be deemed to prohibit the Executive from (a) acquiring, solely as an investment and through market purchases, securities of any Entity which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are publicly traded, so long as he is not part of any control group of such Entity and such securities, if converted, do not constitute more than one percent (1%) of the outstanding voting power of that Entity, (b) acquiring, solely as an investment, any securities of an Entity (other than an Entity that has outstanding securities covered by the preceding clause (a) so long as he remains a passive investor in such Entity and does not become part of any control group thereof and so long as such Entity is not, directly or indirectly, in competition with the Company, (c) serving as a director of any Entity that is not in competition with the Company or (d) during the Advisory Period, being a partner in or of counsel to a law firm that represents any person or Entity that is in competition with the Company so long as the Executive does not personally provide or assist in the provision of services to any such person or Entity. For purposes of the foregoing, a person or Entity shall be deemed to be in competition with the Company if such person or it engages in any line of business that is substantially the same as either (i) any line of operating business which the Company engages in, conducts or, to the knowledge of the Executive, has definitive plans to engage in or conduct, or (ii) any operating business that is engaged in or conducted by the Company and as to which, to the knowledge of the Executive, the Company covenants in writing, in connection with the disposition of such business, not to compete therewith. 9.3 Specific Remedy. In addition to such other rights and remedies as the Company may have at equity or in law with respect to any breach of this Agreement, if the Executive commits a material breach of any of the provi- sions of Section 9.1, the Company shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 9.4 Liquidated Damages. If the Executive commits a material breach of the provisions of Section 9.2, the Executive shall pay to the Company as liquidated damages an amount equal to two and one-half times the Executive's then current Base Salary, or if the Executive is not employed by the Company at the time of such breach or such breach occurs during the Advisory Period, an amount equal to two and one-half times the most recent Base Salary paid to the Executive by the Company. The Company shall be entitled to offset any amounts owed by the Executive to the Company under this Section 9.4 against any amounts owed by the Company to the Executive under any provision of this Agreement or otherwise, including without limitation, amounts payable to the Executive under Sections 4.2. The Company and the Executive agree that it is impossible to determine with any reasonable accuracy the amount of prospective damages to the Company upon a breach of Section 9.2 by the Executive and further agree that the damages set forth in this Section 9.4 are reasonable, and not a penalty, based upon the facts and circumstances of the parties and with due regard to future expectations. 10. Ownership of Work Product. The Executive acknowledges that during the term of employment and the Advisory Period, he may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not (all of the foregoing being collectively referred to herein as "Work Product"), and that various business opportunities shall be presented to him by reason of his employment by the Company. The Executive acknowledges that all of the foregoing shall be owned by and belong exclusively to the Company and that he shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experi- mental) of the Company, or are, in the case of Work Product, conceived or made on the Company's time or with the use of the Company's facilities or materials, or, in the case of business opportunities, are presented to him for the possible interest or participation of the Company. The Executive shall (i) promptly disclose any such Work Product and business opportunities to the Company; (ii) assign to the Company, upon request and without additional compensation, the entire rights to such Work Product and business opportu- nities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of his inven- torship or creation in any appropriate case. The Executive agrees that he will not assert any rights to any Work Product or business opportunity as having been made or acquired by him prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Company in writing prior to the date hereof. 11. Notices. All notices, requests, consents and other communications required or permitted to be given under this Agreement shall be effective only if given in writing and shall be deemed to have been duly given if delivered personally or sent by prepaid telegram, or mailed first- class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith): 11.1 If to the Company: Time Warner Inc. 75 Rockefeller Plaza New York, New York 10019 Attention: Chief Executive Officer (with a copy, similarly addressed but Attention: Senior Vice President- Administration) 11.2 If to the Executive, to his residence address set forth on the records of the Company. 12. General. 12.1 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the State of New York applicable to agreements made and to be performed entirely in New York. 12.2 Captions. The section headings con- tained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12.3 Entire Agreement. This Agreement, including Annexes A, and B, sets forth the entire agreement and understanding of the parties relating to the subject matter of this Agreement and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties, including without limitation, the Prior Agreement. 12.4 No Other Representations. No represen- tation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or be liable for any alleged representa- tion, promise or inducement not so set forth. 12.5 Assignability. This Agreement and the Executive's rights and obligations hereunder may not be assigned by the Executive. The Company may assign its rights together with its obligations hereunder, in connection with any sale, transfer or other disposition of all or substantially all of its business and assets; and such rights and obligations shall inure to, and be binding upon, any successor to all or substantially all of the business and assets of the Company, whether by merger, purchase of stock or assets or otherwise. The Company shall cause such successor expressly to assume such obligations. 12.6 Amendments; Waivers. This Agreement may be amended, modified, superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12.7 Resolution of Disputes. Any dispute or controversy arising with respect to this Agreement may be referred by either party to ENDISPUTE for resolution in arbitration in accordance with the rules and procedures of ENDISPUTE. Any such proceedings shall take place in New York City before a single arbitrator (rather than a panel of arbitrators), pursuant to any streamlined or expedited (rather than a comprehensive) arbitration process, before a nonjudicial (rather than a judicial) arbitrator, and in accordance with an arbitration process which, in the judgment of such arbitrator, shall have the effect of reasonably limiting or reducing the cost of such arbitration. The resolution of any such dispute or controversy by the arbitrator appointed in accordance with the procedures of ENDISPUTE shall be final and binding. Judgment upon the award rendered by such arbitrator may be entered in any court having jurisdiction thereof, and the parties consent to the jurisdiction of the New York courts for this purpose. The prevailing party shall be entitled to recover the costs of arbitration (including reasonable attorneys fees and the fees of experts) from the losing party. If at the time any dispute or controversy arises with respect to this Agreement, ENDISPUTE is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for ENDISPUTE for the purposes of the foregoing provisions of this Section 12.7. If the Executive shall be the prevailing party in such arbitration, The Company shall promptly pay, upon demand of the Executive, all legal fees, court costs and other costs and expenses incurred by the Executive in any legal action seeking to enforce the award in any court. 12.8 Beneficiaries. Whenever this Agreement provides for any payment to the Executive's estate, such payment may be made instead to such beneficiary or beneficiaries as the Executive may designate by written notice to the Company. The Executive shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company (and to any applicable insurance company) to such effect. 12.9 No Conflict. The Executive represents and warrants to the Company that this Agreement is legal, valid and binding upon the Executive and the execution of this Agreement and the performance of the Executive's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Executive is a party (including, without limitation, any other employment agreement). The Company represents and warrants to the Executive that this Agreement is legal, valid and binding upon the Company and the execution of this Agreement and the performance of the Company's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Company is a party. 12.10 Withholding Taxes. Payments made to the Executive pursuant to this Agreement shall be subject to withholding and social security taxes and other ordinary and customary payroll deductions. 12.11 No Offset. Except as provided in Section 9.4 of this Agreement, Neither the Company nor the Executive shall have any right to offset any amounts owed by one party hereunder against amounts owed or claimed to be owed to such party, whether pursuant to this Agreement or otherwise, and the Company and the Executive shall make all the payments provided for in this Agreement in a timely manner. 12.12 Severability. If any provision of this Agreement shall be held invalid, the remainder of this Agreement shall not be affected thereby; provided, however, that the parties shall negotiate in good faith with respect to equitable modification of the provision or application thereof held to be invalid. To the extent that it may effectively do so under applicable law, each party hereby waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect. 12.13 Definitions. The following terms are defined in this Agreement in the places indicated: Account - Section 3.3 Account Retained Income - Section A.6 of Annex A Advisory Period - Section 13 affiliate - Section 4.2.3 Applicable Tax Law - Section A.5 of Annex A Base Salary - Section 3.1 cause - Section 4.1 Code - Section 4.2.2 Company - the first paragraph on page 1 and Section 9.1 Disability Date - Section 5 Disability Period - Section 5 Effective Date - the first paragraph on page 1 eligible securities - Section A.1 of Annex A Entity - Section 2 Executive - the first paragraph in page 1 fair market value - Section A.1 of Annex A Investment Advisor - Section A.1 of Annex A Other Period Deferred Amount - Section A.6 of Annex A Pay-Out Period - Section A.6 of Annex A Prior Account - Section 3.5 Prior Agreement - the second paragraph on page 1 senior executives - Section 3.1 Term Date - the second paragraph on page 1 term of employment - Section 1 Valuation Date - Section A.6 of Annex A Work Product - Section 10 13. Advisory Services. The Executive shall render the advisory services described in this Section for the period beginning on January 1, 2000 and ending on December 31, 2001 (the "Advisory Period"). During the Advisory Period, the Executive will provide such advisory services concerning the business, affairs and management of the Company as may be requested by the Board of Directors, the Chief Executive officer or the President of the Company, but shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties and consistent with the Executive's other activities. If at any time during the Advisory Period, the Executive engages in other full-time employment, the Executive shall not be deemed to be in breach of this Section 14, but unless such employment consists of the Executive providing services to one or more (i) charitable or non-profit organizations or (ii) family-owned corporations, trusts, or partnerships, the term of employment and the Advisory Period shall terminate, the Executive shall leave the payroll of the Company and the Company shall have no further obligations under this Agreement other than with respect to earned and unpaid compensation and benefits. Notwithstanding the foregoing, but subject to Section 9 of this Agreement, during the Advisory Period the Executive may provide part-time services to third parties (including serving as a member of the Board of Directors of any such party). During the Advisory Period, the Executive shall be entitled to receive compensation in an amount equal to $400,000 per annum and shall continue to be entitled to the benefits described in Section 8 hereof; provided, however, that the Executive shall not be entitled or (iii) to a driver or automobile allowance or financial counseling during the Advisory Period, shall not accrue any vacation time during the Advisory Period and shall not be entitled to any severance pay at the end thereof. In addition, during the first year of the Advisory Period the Company shall provide the Executive with an office, office facilities and a secretary at the Company's principal executive headquarters or other location reasonably close to such headquarters in mid-town Manhattan. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. TIME WARNER INC. By ___________________________ Richard D. Parsons President ______________________________ Peter R. Haje ANNEX A Deferred Compensation Account A.1 Investments. Funds credited to the Account, at the Company's option, shall either be actually invested and reinvested, or deemed invested and reinvested, in an account in securities selected from time to time by an investment advisor designated from time to time by the Company (the "Investment Advisor"), substantially all of which securities shall be "eligible securities". The designation from time to time by the Company of an Investment Advisor shall be subject to the approval of the Executive, which approval shall not be withheld unreasonably. "Eligible securities" are common and preferred stocks, warrants to purchase common or preferred stocks, put and call options, and corporate or governmental bonds, notes and debentures, either listed on a national securities exchange or for which price quotations are published in newspapers of general circulation, including The Wall Street Journal, and certificates of deposit. Eligible securities shall not include the common or preferred stock, any warrants, options or rights to purchase common or preferred stock or the notes or debentures of the Company or any corporation or other entity of which the Company owns directly or indirectly 5% or more of any class of outstanding equity securities. The Investment Advisor shall have the right, from time to time, to designate eligible securities which shall be either actually purchased and sold, or deemed to have been purchased or sold, for the Account on the date of reference. Such purchases may be made or deemed to be made on margin; provided that the Company may, from time to time, by written notice to the Executive and the Investment Advisor, limit or prohibit margin purchases in any manner it deems prudent and, upon three business days written notice to the Executive and the Investment Advisor, cause all eligible securities theretofore purchased or deemed purchased on margin to be sold or deemed sold. The Investment Advisor shall notify the Executive in writing of each transaction within five business days thereafter and shall render to the Executive written monthly reports as to the current status of his Account. In the case of any purchase, the Account shall be charged with a dollar amount equal to the quantity and kind of securities purchased or deemed to have been purchased multiplied by the fair market value of such securities on the date of reference and shall be credited with the quantity and kind of securities so purchased or deemed to have been purchased. In the case of any sale, the Account shall be charged with the quantity and kind of securities sold or deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities sold or deemed to have been sold multiplied by the fair market value of such securities on the date of reference. Such charges and credits to the Account shall take place immediately upon the consummation of the transactions to which they relate. As used herein "fair market value" means either (i) if the security is actually purchased or sold by the Company on the date of reference, the actual purchase or sale price per security to the Company or (ii) if the security is not purchased or sold on the date of reference, in the case of a listed security, the closing price per security on the date of reference, or if there were no sales on such date, then the closing price per security on the nearest preceding day on which there were such sales, and, in the case of an unlisted security, the mean between the bid and asked prices per security on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices per security on the nearest preceding day for which such prices are available. If no bid or asked price information is available with respect to a particular security, the price quoted to the Company as the value of such security on the date of reference (or the nearest preceding date for which such information is available) shall be used for purposes of administering the Account, including determining the fair market value of such security. The Account shall be charged currently with all interest paid or deemed payable by the Account with respect to any credit extended or deemed extended to the Account. Such interest shall be charged to the Account, for margin purchases actually made, at the rates and times actually paid by the Account and, for margin purchases deemed to have been made, at the rates and times then charged by an investment banking firm designated by the Company with which the Company does significant business. The Company may, in the Company's sole discretion, from time to time serve as the lender with respect to any margin transactions by notice to the then Investment Advisor and in such case interest shall be charged at the rate and times then charged by an investment banking firm designated by the Company with which the Company does significant business. Brokerage fees shall be charged to the Account, for transactions actually made, at the rates and times actually paid and, for transactions deemed to have been made, at the rates and times then charged for transactions of like size and kind by an investment banking firm designated by the Company with which the Company does significant business. A.2 Dividends and Interest. The Account shall be credited with dollar amounts equal to cash dividends paid from time to time upon the stocks held or deemed to be held therein. Dividends shall be credited as of the payment date. The Account shall similarly be credited with interest payable on interest bearing securities held or deemed to be held therein. Interest shall be credited as of the payment date, except that in the case of purchases of interest- bearing securities the Account shall be charged with the dollar amount of interest accrued to the date of purchase, and in the case of sales of such interest-bearing securities the Account shall be credited with the dollar amount of interest accrued to the date of sale. All dollar amounts of dividends or interest credited to the Account pursuant to this Section A.2 shall be charged with all taxes thereon deemed payable by the Company (as and when determined pursuant to Section A.5). The Investment Advisor shall have the same right with respect to the investment and reinvestment of net dividends and net interest as he has with respect to the balance of the Account. A.3 Adjustments. The Account shall be equitably adjusted to reflect stock dividends, stock splits, recapitalizations, mergers, consolidations, reorganizations and other changes affecting the securities held or deemed to be held therein. A.4 Obligation of the Company. The Company shall not be required to purchase, hold or dispose of any of the securities designated by the Investment Advisor; however, whether or not it elects to purchase or sell any such securities, such transactions shall be deemed to have been made and the Account shall be charged with all taxes (including stock transfer taxes), interest, brokerage fees and investment advisory fees, if any, deemed payable by the Company and attributable to such transactions (in all cases net after any tax benefits that the Company would be deemed to derive from the payment thereof, as and when determined pursuant to Section A.5), but no other costs of the Company. The only obligation of the Company is its contractual obligation to make payments to the Executive measured as set forth below. To the extent that the Company, in its discretion, purchases or holds any of the securities designated by the Investment Advisor, the same shall remain the sole property of the Company, subject to the claims of its general creditors, and shall not be deemed to form part of the Account. Neither the Executive nor his legal representative nor any beneficiary designated by him shall have any right, other than the right of an unsecured general creditor, against the Company in respect of any portion of the Account. A.5 Taxes. The Account shall be charged with all federal, state and local taxes deemed payable by the Company with respect to income recognized upon the dividends and interest received or deemed to have been received by the Account pursuant to Section A.2 and gains recognized upon sales of any of the securities which are deemed to have been sold pursuant to Section A.1 or A.6. The Account shall be credited with the amount of the tax benefit received by the Company as a result of any payment of interest actually made or deemed to be made pursuant to Section A.1 or A.2 and as a result of any payment of brokerage fees and investment advisory fees made or deemed to be made pursuant to Section A.1. If any of the sales of the securities which are deemed to have been sold pursuant to Section A.1 or A.6 results in a loss to the Account, such net loss shall be deemed to offset the income and gains referred to in the second preceding sentence (and thus reduce the charge for taxes referred to therein) to the extent then permitted under the Internal Revenue Code of 1986, as amended from time to time, and under applicable state and local income and franchise tax laws (collectively referred to as "Applicable Tax Law"); provided, however, that for the purposes of this Section A.5 the Account shall, except as provided in the third following sentence, be deemed to be a separate corporate taxpayer and the losses referred to above shall be deemed to offset only the income and gains referred to in the second preceding sentence. Such losses shall be carried back and carried forward within the Account to the extent permitted by Applicable Tax Law in order to minimize the taxes deemed payable on such income and gains within the Account. For the purposes of this Section A.5, all charges and credits to the Account for taxes shall be deemed to be made as of the end of the Company's taxable year during which the transactions, from which the liabilities for such taxes are deemed to have arisen, are deemed to have occurred. Notwithstanding the foregoing, if and to the extent that in any year there is a net loss in the Account that cannot be offset against income and gains in any prior year, then an amount equal to the tax benefit to the Company of such net loss (after such net loss is reduced by the amount of any net capital loss of the Account for such year) shall be credited to the Account on the last day of such year. If and to the extent that any such net loss of the Account shall be utilized to determine a credit to the Account pursuant to the preceding sentence, it shall not thereafter be carried forward under this Section A.5. For purposes of determining taxes payable by the Company under any provision of this Annex A it shall be assumed that the Company is a taxpayer and pays all taxes at the maximum marginal rate of federal income taxes and state and local income and franchise taxes (net of assumed federal income tax benefits) applicable to business corporations and that all of such dividends, interest, gains and losses are allocable to its corporate headquarters, which are currently located in New York City. A.6 Payments. Subject to the provisions of Section A.7, payments of deferred compensation shall be made as provided in this Section A.6. Deferred compensation shall be paid monthly for a period of 60 months (the "Pay-Out Period") commencing on the first day of the month after the end of the Advisory Period. On each payment date, the Account shall be charged with the dollar amount of such payment. On each payment date, the amount of cash held or deemed to be held in the Account shall be not less than the payment then due and the Company may select the securities to be sold or deemed sold to provide such cash if the Investment Advisor shall fail to do so on a timely basis. The amount of any taxes payable with respect to any such sales shall be computed, as provided in Section A.5 above, and deducted from the Account, as of the end of the taxable year of the Company during which such sales are deemed to have occurred. Solely for the purpose of determining the amount of monthly payments during the Pay-Out Period, the Account shall be valued on the fifth trading day preceding the first monthly payment of each year of the Pay-Out Period, or more frequently at the Company's election (the "Valuation Date"), by adjusting all of the securities held or deemed to be held in the Account to their fair market value (net of the tax adjustment that would be made thereon if sold, as estimated by the Company) and by deducting from the Account the amount of all outstanding indebtedness and all amounts with respect to which the Executive has elected pursuant to clause (ii) of Section A.7 to receive payments at times different from the time provided in this Section A.6 (the "Other Period Deferred Amount"). The extent, if any, by which the Account, valued as provided in the immediately preceding sentence (but not reduced by the Other Period Deferred Amount to the extent not theretofore distributed), exceeds the aggregate amount of credits to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement as of each Valuation Date and not theretofore distributed or deemed distributed pursuant to this Section A.6 is herein called "Account Retained Income". The amount of each payment for the year, or such shorter period as may be determined by the Company, of the Pay-Out Period immediately succeeding such Valuation Date, including the payment then due, shall be determined by dividing the aggre- gate value of the Account, as valued and adjusted pursuant to the second preceding sentence, by the number of payments remaining to be paid in the Pay-Out Period, including the payment then due; provided that each payment made shall be deemed made first out of Account Retained Income (to the extent remaining after all prior distributions thereof since the last Valuation Date). The balance of the Account (excluding the Other Period Deferred Amount), after all the securities held or deemed to have been held therein have been sold or deemed to have been sold and all indebtedness liquidated, shall be paid to the Executive in the final payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. If this Agreement is terminated by the Company pursuant to Section 4.1 or if the Executive terminates this Agreement or the term of employment in breach of this Agreement, the Account shall be valued as of the later of (i) December 31, 2001 or (ii) twelve months after termination of the Executive's employment with the Company, and the balance of the Account, after the securities held or deemed to have been held therein have been sold or deemed to have been sold and all related indebtedness liquidated, shall be paid to the Executive as soon as practicable and in any event within 75 days following the later of such dates in a final lump sum payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. Payments made pursuant to this paragraph shall be deemed made first out of Account Retained Income. If the Executive becomes disabled within the meaning of Section 5 of the Agreement and is not thereafter returned to full-time employment with the Company as provided in said Section 5, then deferred compensation shall be paid monthly during the Pay-Out Period commencing on the first day of the month following the end of the Disability Period in accordance with the provisions of the first paragraph of this Section A.6. If the Executive shall die at any time whether during or after the term of employment, the Account shall be valued as of the date of the Executive's death and the balance of the Account shall be paid to the Executive's estate or beneficiary within 75 days of such death in accordance with the provisions of the second preceding paragraph. Within 90 days after the end of each taxable year of the Company in which payments have been made from the Account and at the time of the final payment made from the Account, the Company shall compute and shall credit to the Account, the amount of the tax benefit assumed to be received by it from the payment to the Executive of amounts of Account Retained Income included in any such payment. No additional credits shall be made to the Account pursuant to the preceding sentence in respect of the amounts credited to the Account pursuant to the preceding sentence. Notwithstanding any provision of this Section A.6, the Executive shall not be entitled to receive pursuant to this Annex A an aggregate amount that shall exceed the sum of (i) all credits made to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement to which this Annex is attached, (ii) the net cumulative amount (positive or negative) of all income, gains, losses, interest and expenses charged or credited to the Account pursuant to this Annex A (excluding credits made pursuant to the second preceding sentence), after all credits and charges to the Account with respect to the tax benefits or burdens thereof, and (iii) an amount equal to the tax benefit to the Company from the payment of the amount (if positive) determined under clause (ii) above; and the final payment(s) otherwise due may be adjusted or eliminated accordingly. In determining the tax benefit to the Company under clause (iii) above, the Company shall be deemed to have made the payments under clause (ii) above with respect to the same taxable years and in the same proportions as payments of Account Retained Income were actually made from the Account. Except as otherwise provided in this paragraph, the computation of all taxes and tax benefits referred to in this Section A.6 shall be determined in accordance with Section A.5 above. A.7 Other Payment Methods. Notwithstanding the foregoing provisions of this Annex A, the Executive may, prior to the commencement of any calendar year elect by written notice to the Company to cause (i) all or any portion of the amounts otherwise to be credited to the Account in such year under Section 3.3 of the Agreement not to be so credited but to be paid to the Executive on the date(s) such credits otherwise would have been made thereunder and/or (ii) all or any portion of the amounts to be credited to the Account under Section 3.3 of the Agreement in such year (after giving effect to clause (i) above) to be payable from the Account at times different from those provided in Section A.6 above but not earlier than the dates on which such amounts were to be credited to the Account. ANNEX B RELEASE Pursuant to the terms of the Employment Agreement dated [Date] between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller Plaza, York, New York 10019 and the undersigned (the "Agreement"), and in consideration of the payments made to me and other benefits to be received by me pursuant thereto, I, [Name], being of lawful age, do hereby release and forever discharge the Company and its officers, shareholders, subsidiaries, agents, and employees, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of my employment with the Company or any of its subsidiaries or the termination of such employment, which I may now or hereafter have under any federal, state or local law, regulation or order, including without limitation, under the Age Discrimination in Employment Act, as amended, through and including the date of this Release; provided, however, that the execution of this Release shall not prevent the undersigned from bringing a lawsuit against the Company to enforce its obligations under the Agreement. I acknowledge that I have been given at least 21 days from the day I received a copy of this Release to sign it and that I have been advised to consult an attorney. I understand that I have the right to revoke my consent to this Release for seven days following my signing. This Release shall not become effective or enforceable until the expiration of the seven-day period following the date it is signed by me. I further state that I have read this document and the Agreement referred to herein, that I know the contents of both and that I have executed the same as my own free act. WITNESS my hand this ____ day of ___________ , ____. ___________________________ [Name]