10-K405 1 FORM 10-K405 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994. COMMISSION FILE NUMBER 1-8637 ---------------- TIME WARNER INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 13-1388520 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 75 ROCKEFELLER PLAZA, NEW YORK, N.Y. 10019 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) ---------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $1.00 par value New York Stock Exchange Pacific Stock Exchange Rights to Purchase Series A Participating Cumulative New York Stock Exchange Preferred Stock Pacific Stock Exchange 7.45% Notes due 1998 New York Stock Exchange 7.95% Notes due 2000 New York Stock Exchange 8 3/4% Debentures due 2017 New York Stock Exchange 8 3/4% Convertible Subordinated Debentures due 2015 New York Stock Exchange 9 1/8% Debentures due 2013 New York Stock Exchange 9.15% Debentures due 2023 New York Stock Exchange Redeemable Reset Notes due 2002 New York Stock Exchange Liquid Yield Option(TM) Notes due 2012 American Stock Exchange Liquid Yield Option(TM) Notes due 2013 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 27, 1995, there were 379,770,491 shares of registrant's Common Stock outstanding and the aggregate market value of such shares held by non- affiliates of the registrant (based upon the closing price of such shares on the New York Stock Exchange Composite Tape on March 27, 1995) was approximately $14.3 billion. DOCUMENTS INCORPORATED BY REFERENCE:
DESCRIPTION OF DOCUMENT PART OF THE FORM 10-K ----------------------- --------------------- Portions of the Definitive Proxy Statement Part III (Item 10 through Item 13) to be used in connection with the registrant's 1995 Annual Meeting of Stockholders.
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- An organizational chart showing the Registrant's major business groups and its ownership interests therein. PART I ITEM 1. BUSINESS Time Warner Inc. (the "Company") was incorporated in the State of Delaware in August 1983 and is the successor to a New York corporation originally organized in 1922. The Company changed its name from Time Incorporated following its acquisition of 59.3% of the common stock of Warner Communications Inc. ("WCI") in July 1989. WCI became a wholly owned subsidiary of the Company in January 1990 upon the completion of the merger of WCI and a subsidiary of the Company (the "Merger"). As used in this report, the terms "Registrant," the "Company" and "Time Warner" refer to Time Warner Inc. and its subsidiaries and divisions, and includes Time Warner Entertainment Company, L.P. ("TWE"), which conducts substantially all of the Entertainment businesses of the Company, unless the context otherwise requires. The Company is the largest media and entertainment company in the world. Its businesses are carried on in three principal groups: Publishing, Music and Entertainment. The Publishing group consists principally of the publication and distribution of magazines and books; the Music group consists principally of the production and distribution of recorded music and the ownership and administration of music copyrights; and the Entertainment group consists principally of the production and distribution of motion pictures and television programming, the distribution of videocassettes, the ownership and operation of retail stores and theme parks, the production and distribution of pay television and cable programming, and the operation of cable television systems. These businesses are conducted throughout the world through numerous wholly owned, and in certain cases less than wholly owned, subsidiaries and affiliates. TWE was formed as a Delaware limited partnership in February 1992 pursuant to an Agreement of Limited Partnership, dated as of October 29, 1991, as amended (the "TWE Partnership Agreement"), and has, since its capitalization on June 30, 1992 (the "TWE Capitalization"), owned and operated substantially all of the Entertainment group businesses, and certain other businesses, previously owned and operated by the Company. Upon the TWE Capitalization, certain wholly owned subsidiaries of the Company (the "Time Warner General Partners"), contributed such businesses, or assigned the net cash flow derived therefrom (or an amount equal to the net cash flow derived therefrom), to TWE and became general partners of TWE. Also upon the TWE Capitalization, wholly owned subsidiaries of ITOCHU Corporation (formerly C. Itoh & Co., Ltd.), a corporation organized under the laws of Japan ("ITOCHU"), and Toshiba Corporation, a corporation organized under the laws of Japan ("Toshiba"), collectively contributed $1 billion to TWE and became limited partners of TWE. On September 15, 1993, TWE consummated the transactions contemplated by the Admission Agreement, dated as of May 16, 1993, as amended (the "Admission Agreement"), between TWE and U S WEST, Inc., a Colorado corporation ("U S WEST"). Pursuant to the Admission Agreement, a wholly owned subsidiary of U S WEST made a capital contribution of $2.553 billion and became a limited partner of TWE (the "U S WEST Transaction"). As a result of the U S WEST Transaction, the Time Warner General Partners collectively own 63.27% pro rata priority capital and residual equity interests in TWE and wholly owned subsidiaries of ITOCHU, Toshiba and U S WEST (the "Class A Partners" or the "Limited Partners") own pro rata priority capital and residual equity interests in TWE of 5.61%, 5.61% and 25.51%, respectively. Each of ITOCHU and Toshiba has the right to maintain its original 6.25% pro rata priority capital and residual equity interests by acquiring additional partnership interests. In addition, the Time Warner General Partners own priority capital interests senior and junior to the pro rata priority capital interests. The Admission Agreement provides that TWE will use its best efforts to upgrade a substantial portion of its cable systems to "Full Service Network(TM)" capacity by the end of 1998. As systems are designated for such upgrade and after any required approvals are obtained, U S WEST and TWE will share joint control of those systems through a 50-50 management committee. The "Full Service Network" business is expected to include substantially all of TWE's cable systems, subject to obtaining necessary regulatory consents and approvals. See "Entertainment--Description of Certain Provisions of the TWE Partnership Agreement." In September 1994, the Company agreed to acquire Summit Communications Group, Inc. ("Summit"), which owns cable television systems serving approximately 162,000 subscribers in Winston-Salem, North I-1 Carolina and in certain suburbs of Atlanta, Georgia, in exchange for 900,000 shares of the Company's common stock, par value $1.00 per share ("Common Stock"), and 3.2 million shares of a new Time Warner convertible preferred stock ("Series C Preferred Stock"). The Series C Preferred Stock will have a liquidation value of $100 per share, be convertible into 6.7 million shares of Common Stock at an effective price of $48 per share of Common Stock, receive an annual dividend of $3.75 per share for five years, and be redeemable at liquidation value plus unpaid dividends after five years, or exchangeable in part for Common Stock plus unpaid dividends by the holder beginning after the third year and by the Company after the fourth year at the stated conversion price plus a declining premium in years four and five and no premium thereafter. Also in September 1994, TWE agreed to form a cable television joint venture with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting Corporation ("Advance/Newhouse") to which Advance/Newhouse will contribute cable television systems serving approximately 1.4 million subscribers and related assets and TWE will contribute cable television systems (or interests therein) serving approximately 2.8 million subscribers and related assets. TWE will own a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and be the managing partner. Advance/Newhouse will own a one-third equity interest in the partnership. Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The new venture will enlarge existing cable clusters already owned by the partners in North Carolina, Florida and New York. In January 1995, the Company agreed to acquire KBLCOM Incorporated ("KBLCOM"), a subsidiary of Houston Industries Incorporated, that owns cable television systems serving approximately 690,000 subscribers and a 50% interest in Paragon Communications ("Paragon"), which serves an additional 967,000 cable subscribers. TWE owns the other 50% interest in Paragon. To acquire KBLCOM, the Company will issue 1 million shares of Common Stock and 11 million shares of a new Time Warner convertible preferred stock ("Series D Preferred Stock") and assume or incur approximately $1.24 billion of indebtedness. The Series D Preferred Stock will have a liquidation value of $100 per share, be convertible into approximately 22.9 million shares of Common Stock at an effective price of $48 per share of Common Stock, and receive an annual dividend of $3.75 per share for four years. The Company will have the right to exchange the Series D Preferred Stock for Common Stock at the stated conversion price plus unpaid dividends after four years, or redeem the Series D Preferred Stock at the liquidation value per share plus unpaid dividends after five years. KBLCOM's systems serve subscribers in San Antonio and Laredo, Texas, the Minneapolis metropolitan area, Portland, Oregon and Orange County, California. Paragon owns systems in Tampa, Florida and northern Manhattan, as well as other locations. In February 1995, the Company agreed to acquire Cablevision Industries Corporation ("CVI") and related companies that own cable television systems serving approximately 1.3 million subscribers principally in New York, North Carolina, Florida, California's San Fernando Valley and Columbia, South Carolina. In acquiring CVI and related companies, the Company will issue 2.5 million shares of Common Stock and 6.5 million shares of new convertible preferred stocks (3.25 million shares of Series E Preferred Stock and 3.25 million shares of Series F Preferred Stock) and assume approximately $2 billion of debt of CVI and related companies. Each series of preferred stock will have a liquidation value of $100 per share, be convertible into approximately 13.5 million shares of Common Stock at an effective price of $48 per share of Common Stock, and receive an annual dividend of $3.75 per share for a period of five years with respect to the Series E Preferred Stock and a period of four years with respect to the Series F Preferred Stock. The Company will have the right to exchange the Series E Preferred Stock for Common Stock at the stated conversion price plus unpaid dividends after five years and to exchange the Series F Preferred Stock for Common Stock at the stated conversion price plus unpaid dividends after four years. In addition, the Company may redeem either series of preferred stock at the liquidation value per share plus unpaid dividends after five years. The Summit and Advance/Newhouse transactions are expected to close in the first half of 1995. The KBLCOM and CVI transactions are expected to close later in the year. All transactions are subject to customary closing conditions, including the receipt of certain franchise and regulatory approvals. I-2 The Company also has announced its intention to enhance its financial position and that of the Entertainment Group through sales of non-core assets, such as the stock of Turner Broadcasting System, Inc. ("TBS") owned by Time Warner, and/or certain smaller unclustered cable systems owned by Time Warner or the Entertainment Group. Proceeds from asset sales will be used to reduce debt. No assurance can be given as to whether or when any particular assets may be sold, or the amount of the proceeds that may be received by the Company from any such sales. Because of the announced transactions, Time Warner will explore the possibility of bringing its various interests in cable operations together in a separate, self-financed operating unit. This process is expected to be undertaken over a 12-18 month period and will be dependent, among other things, on successful negotiations with TWE's partners and certain creditors, and receipt of franchise and other regulatory approvals. Accordingly, there can be no assurance that the effort will succeed. For financial information about the Company's industry segments and operations in different geographical areas with respect to each of the years in the three-year period ended December 31, 1994, see Note 10, "Segment Information," to the Company's consolidated financial statements at pages F-19 through F-22 herein. The Company's Entertainment Group, consisting of the Company's interests in certain entertainment companies, principally TWE, was deconsolidated effective January 1, 1993 as a result of the U S WEST Transaction. The TWE Partnership Agreement and the TWE credit agreement impose restrictions on the ability of TWE to make distributions to the Company and the Time Warner General Partners. See Note 1, "Summary of Significant Accounting Policies," and Note 2, "Entertainment Group," to the Company's consolidated financial statements at pages F-6 through F-11 herein. PUBLISHING The Company's wholly owned publishing division, Time Inc., publishes magazines and books and develops products for the multimedia and television markets. It conducts these activities through wholly owned subsidiaries, joint ventures, equity investments and partnerships. MAGAZINES General Time Inc. publishes TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, LIFE, SPORTS ILLUSTRATED FOR KIDS and ENTERTAINMENT WEEKLY. In June 1994, Time Inc. launched IN STYLE, a monthly celebrity life style publication. Time Inc. Ventures ("TIV") and its subsidiary Time Publishing Ventures, Inc. ("TPV") are responsible for international, regional and special interest publishing and development activities, including Southern Progress Corporation ("Southern Progress"), Sunset Publishing Corporation ("Sunset Publishing"), PARENTING, BABY TALK, HEALTH, HIPPOCRATES, MARTHA STEWART LIVING, and WHO WEEKLY magazines and various joint ventures. Southern Progress publishes SOUTHERN LIVING, PROGRESSIVE FARMER, SOUTHERN ACCENTS and COOKING LIGHT magazines. Time Inc., either directly or indirectly, has equity interests in ASIAWEEK, American Family Publishers and Publishers Express. In 1994, Time Inc. sold its interest in ELLE JAPON and YAZHOU ZHOUKAN and acquired full ownership of President, Inc., which publishes PRESIDENT and DANCYU magazines. TIV has management responsibility for most of the American Express Publishing Corporation's operations, including TRAVEL & LEISURE and FOOD & WINE magazines. TIV also operates an in-store advertising and demonstration business, Time Inc. In-Store Marketing. I-3 Each magazine published by the Company has an editorial staff under the general supervision of a managing editor and a business staff under the management of a president or publisher. Magazine manufacturing and distribution activities are generally managed by centralized staffs at Time Inc. Fulfillment activities for Time Inc.'s magazines are generally administered from a centralized facility in Tampa, Florida. PARENTING, SUNSET, BABY TALK, HEALTH, HIPPOCRATES, MARTHA STEWART LIVING, VIBE, and Time Inc.'s overseas operations employ independent fulfillment services and undertake their own manufacturing and distribution. Magazine publishing follows a seasonal pattern with revenues being generally higher in the second and fourth quarters and lower in the first and third quarters. The individual magazines of the Company are summarized below: TIME, a weekly magazine, summarizes the news and brings original interpretation and insight to the week's events. The domestic advertising rate base of TIME as of January 1995 was 4,000,000, which is unchanged from January 1994. TIME Asia, TIME Atlantic, TIME Canada, TIME Latin America and TIME South Pacific are weekly English-language editions of TIME which circulate outside the United States. These editions had an aggregate worldwide advertising rate base of 1,460,000 as of January 1995, compared to 1,480,000 in January 1994. SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and is designed to appeal to, spectators and participants in virtually all forms of recreational and competitive sports. The advertising rate base as of January 1995 was 3,150,000, the same as in January 1994. SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to children ages eight through fourteen. Its advertising rate base as of January 1995 was 950,000, compared to 900,000 in January 1994, including 243,000 copies distributed free to over 1,100 schools. PEOPLE, a weekly magazine, reports on celebrities and other notable personalities. The advertising rate base as of January 1995 was 3,150,000, the same as in January 1994. ENTERTAINMENT WEEKLY is a weekly magazine which includes reviews and reports on television, movies, video, music and books. The advertising rate base as of January 1995 was 1,125,000, compared to 1,075,000 in January 1994. FORTUNE, a biweekly magazine, reports on worldwide economic and business developments. The worldwide advertising rate base was 860,000 as of January 1995, compared to 870,000 in January 1994. MONEY is a monthly magazine which reports on personal finance. The advertising rate base as of January 1995 was 1,900,000, the same as in January 1994. LIFE is a monthly magazine which features photographic essays. The advertising rate base as of January 1995 was 1,500,000, the same as in January 1994. IN STYLE is a monthly magazine which focuses on celebrities' lives and lifestyles. The advertising rate base as of January 1995 was 550,000. SOUTHERN LIVING is a monthly regional home, garden, food and travel magazine focused on the South with an advertising rate base of 2,300,000 as of January 1995, which is the same as in January 1994. PROGRESSIVE FARMER is a monthly regional farming magazine with an advertising rate base of 410,000 as of January 1995, compared to 415,000 in January 1994. SOUTHERN ACCENTS, published six times a year, features architecture, fine homes and gardens, arts and travel and is targeted to affluent Southerners. Its advertising rate base as of January 1995 was 275,000, compared to 250,000 in January 1994. I-4 COOKING LIGHT is published nine times a year and features health and fitness through active lifestyles and good nutrition. The advertising rate base as of January 1995 was 1,200,000, compared to 1,100,000 in January 1994. PARENTING is published ten times a year and is aimed at parents of children under the age of ten. The advertising rate base increased as of January 1995 to 1,000,000, compared to 925,000 in January 1994. SUNSET, The Magazine of Western Living, is a monthly regional magazine focused on lifestyles in the West. The advertising rate base increased to 1,425,000 in January 1995, compared to 1,400,000 in January 1994. HEALTH is a consumer health magazine published seven times a year, and HIPPOCRATES is published ten times a year. Although similar in editorial content, HEALTH is targeted at the consumer market, while HIPPOCRATES is a trade magazine targeted at physicians and carries primarily trade advertising. HEALTH had an advertising rate base of 900,000 in January 1995, the same as in January 1994. HIPPOCRATES had a controlled circulation of 125,000 primary care physicians in January 1995, the same as in January 1994. MARTHA STEWART LIVING is published ten times a year and presents Martha Stewart's personal perspective on entertaining, cooking, decorating and gardening. Its advertising rate base as of January 1995 was 800,000, compared to 725,000 in January 1994. BABY TALK is published ten times a year and is targeted at expectant and new mothers. In February 1995 its advertising rate base was 1,000,000, compared to 1,300,000 in January 1994. BABY TALK's ancillary publications are BABY ON THE WAY (published semi-annually) and BABY ON THE WAY BASICS (published annually). WHO WEEKLY is an Australian version of PEOPLE which focuses on celebrities and other notable personalities. The advertising rate base as of January 1995 was 230,000, compared to 200,000 in January 1994. VIBE is published ten times a year by a joint venture between a subsidiary of TPV and affiliates of Quincy Jones Entertainment Company. It covers rap, rhythm and blues, reggae and dance music, as well as politics and fashion. The advertising rate base as of January 1995 was 250,000, compared to 200,000 in January 1994. Circulation The Company's publications are sold primarily by subscription. Subscription copies are delivered to subscribers through the mail. Subscriptions are sold by direct-mail solicitation, subscription sales agencies, television and telephone solicitation and insert cards in the Company's magazines and other publications. Single copies of magazines are sold through retail news dealers who are supplied in turn by regional wholesalers. Advertising Advertising carried in the Company's magazines is predominantly consumer advertising. Many of the Company's magazines have numerous regional and demographic editions which contain the same basic editorial material but permit advertisers to concentrate their advertising in specific markets. Through the use of selective binding and ink-jet technology, the Company creates special custom editions targeted towards specific groups. This allows the Company to deliver advertisers a more highly targeted audience by segmenting subscriber lists to identify those subscribers advertisers desire most, as well as providing the opportunity to personalize advertising messages. Paper and Printing Lightweight coated paper, which for certain magazines is recycled, constitutes a significant component of physical costs in the production of magazines. Time Inc. has contractual commitments to ensure an I-5 adequate supply of paper, but periodic shortages may occur in the event of strikes or other unexpected disruptions in the paper industry. During 1994, paper prices were relatively flat with some upward movement in the fourth quarter. In 1995, the Company expects that paper prices will increase as a result of increased demand in the paper market. Time Inc. purchases paper principally from four independent manufacturers, in each case under contracts that, for the most part, are either fixed-term or open-ended at prices determined on a market price or formula price basis. Printing and binding for the Company's magazines are accomplished primarily by major domestic and international printing concerns in 20 locations. Magazine printing contracts are either fixed-term or open-ended at fixed prices with, in some cases, adjustments based on certain criteria. BOOKS General The Company's book operations include Time Life Inc., Book-of-the-Month Club, Inc., Warner Books, Inc. and Little, Brown and Company, each of which is a wholly owned subsidiary of Time Inc., and the Oxmoor House and Sunset Books divisions of Southern Progress and Sunset Publishing, respectively. In 1994, the book operations distributed, in aggregate, approximately 159 million gross units. Time Life Time Life is composed of several divisions including: Books, Music, Video and Television, Education, Digital, Medical and International. Time Life is one of the nation's largest direct marketers of books, music and videos. The products are sold by direct response, including mail order, television and telephone, through retail, institutional and license channels, and by door-to-door independent distributors in some foreign markets. Editions of the books are currently sold in 23 languages worldwide and approximately 40% of Time Life's revenues are generated outside the United States. In 1994, Time Life created Time-Life Digital, a division designed to develop all forms of digital media from the company's extensive library of titles. Time-Life Medical was formed as a joint venture in January 1995 to create and sell patient-education materials. Editorial material is created by in-house staffs as well as through outside book packagers. A significant product in 1994 was Time-Life Music's platinum series "The Rolling Stone Collection: 25 Years of Essential Rock." Other 1994 best sellers included "Weight Watchers (R) Smart Choice Recipe Collection" from Time-Life Books, "Sounds of the 70's" from Time-Life Music, and "Predators of the Wild" from Time-Life Video. In 1993, Time Life began the development of two ten-hour television documentary series, "Lost Civilizations" and "The History of Rock 'n' Roll," each of which draw on Time Life's existing editorial resources. First-run television rights to "Lost Civilizations" have been pre- sold to NBC and "The History of Rock 'n' Roll," co-produced with TWE's Telepictures Productions, aired in March 1995. Manufacturing for Time-Life Books is done by several independent companies. Manufacturing contracts are entered into on a series rather than a single title basis and are fixed-price with provisions for cost of labor, material and specification adjustments. These contracts, subject to certain limitations, may be terminated by Time Life or the manufacturer. Time Life's fulfillment activities, excluding international operations, are conducted from a centralized facility in Richmond, Virginia. Book-of-the-Month Club Book-of-the-Month Club operates seven book clubs and three continuity businesses with combined membership in excess of 3.1 million. Two of the clubs, Book-of-the-Month Club and Quality Paperback Book Club, are general interest clubs and the remaining clubs specialize in history, cooking and crafts, business, children's books and the books of a particular author. In addition, multimedia, audio and video products are offered through the clubs. In 1993, Book-of-the-Month Club launched its businesses internationally, and now operates in over 40 countries in Europe, Asia, Latin America and the Middle East. I-6 Book-of-the-Month Club acquires the rights from publishers to manufacture and distribute books and then has them printed by independent printing concerns. Book-of-the-Month Club runs its own fulfillment and warehousing operations in Mechanicsburg, Pennsylvania. Warner Books Warner Books publishes hardcover, mass market and trade paperback books. Among its best selling hardcover books in 1994 were Robert James Waller's "Old Songs in a New Cafe," "Slow Waltz in Cedar Bend" and "The Bridges of Madison County" and James Redfield's "The Celestine Prophecy." Mass market paperback books on the best seller list in 1994 included "Pleading Guilty" by Scott Turow, "Along Came a Spider" by James Patterson, and "Where There's Smoke" and "Hidden Fires" by Sandra Brown. During 1994, Warner Books acquired a minority equity interest in The Reference Press, Inc., a Texas-based print and electronic publisher of business information and company profiles. In addition, through a joint venture with Little, Brown, Warner Books operates Time Warner Electronic Publishing, which is engaged in on-line and multimedia publishing. Little, Brown Little, Brown publishes general and children's trade books, legal and medical reference books and textbooks. Through its subsidiary, Little, Brown (U.K.), it also publishes general hardcover and mass market paperback books in the United Kingdom. Among the trade hardcover books published by Little, Brown in 1994 were "The Day After Tomorrow" by Allan Folsom and "Long Walk to Freedom" by Nelson Mandela. Little, Brown handles book distribution for itself, Warner Books and Sunset Books, as well as other publishers. The marketing of trade books is primarily to retail stores and wholesalers throughout the United States, Canada and the United Kingdom. Law and medical textbooks are sold primarily to university retail stores. Professional reference books are sold to practitioners through retail stores and direct marketing. Through their combined U.S. and U.K. operations, Little, Brown and Warner Books have the ability to acquire English- language publishing rights for the distribution of hard and softcover books throughout the world. Warner Books, Little, Brown, and Warner Music Group's Atlantic Records operate a joint venture, Time Warner AudioBooks, to develop and market audio versions of books and other materials published by Warner Books, Little, Brown and other outside publishers. Oxmoor House and Leisure Arts Oxmoor House, the book publishing division of Southern Progress, markets how- to books on a wide variety of topics including food and crafts, as well as illustrated volumes on art and other subjects. Acquired in 1992 and integrated into Oxmoor House, Leisure Arts is a well-established publisher and distributor of instructional leaflets, continuity books series and magazines for the needlework and crafts market. Sunset Books Sunset Books, the book publishing division of Sunset Publishing, markets books on topics such as building and decorating, cooking, gardening and landscaping, and travel. Sunset Books' unique marketing formula includes an extensive network of home repair and garden centers. OTHER PUBLISHING OPERATIONS Multimedia and Television Time Inc. continues to actively develop products for emerging technologies such as on-line computer networks, the Full Service Network, and the CD-ROM market. In 1994, Time Inc. launched PATHFINDER (TM), a site on the Internet that includes electronic editions of editorial content derived from Time Inc.'s magazine and book publications, as well as original content created exclusively for the Internet. Time Inc. has also licensed its editorial content to various other on-line information services, and has produced CD-ROM products through licensing arrangements with third party CD-ROM developers. I-7 Time Inc. has undertaken development efforts in various television ventures, both in combination with other Company divisions and independently. The most significant of these activities is an entertainment news show, "EXTRA--The Entertainment Magazine," produced in conjunction with the Telepictures division of TWE, a six-day-a-week program utilizing the editorial resources of Time Inc. to break exclusive stories. Time Inc. In-Store Marketing Time Inc. In-Store Marketing, an umbrella organization which is a subsidiary of TIV, operates all of Time Inc.'s in-store advertising and demonstration businesses, including Media Holdings, Inc. ("Media One") and SmartDemo Inc. ("SmartDemo"). Media One's primary product is a two-sided backlit advertising display unit that is installed in supermarket checkout lanes. SmartDemo is an in-store demonstration, couponing, sampling and merchandising business. American Express Publishing Time Inc., through its TIV subsidiary, has management responsibility for most of American Express Publishing Corporation's operations, including its core lifestyle magazines, TRAVEL & LEISURE and FOOD & WINE. TIV receives a fee for managing these properties, as well as incentives for improving profitability. American Family Publishers Time Inc. is a 50% partner in American Family Publishers ("AFP"), a direct mail magazine subscription sales agency. AFP sells magazine subscriptions for approximately 200 major magazines in the United States, including many of the Company's publications. AFP sells primarily through two heavily-promoted nationwide sweepstakes mailings conducted each year. Time Distribution Services In January 1995, Time Distribution Services Inc. ("TDS"), a wholly owned subsidiary of Time Inc., acquired substantially all of the assets of Time Distribution Services, a joint venture between Time Inc. and Gruner & Jahr (the successor to the New York Times Company's interest in Time Distribution Services). TDS markets and distributes magazines published by Time Inc. and certain other publishers in the United States and Canada, through wholesalers to retail outlets such as newsstands and directly to supermarkets and drugstore chains. Warner Publisher Services Warner Publisher Services ("WPS") is a major distributor of magazines and paperback books sold through wholesalers in the United States and Canada, and internationally. WPS is the sole national distributor for MAD magazine, the publications of DC Comics and certain publications owned by other publishers, including TEEN, VOGUE, WOMAN'S DAY, and the Dell Puzzle Books. WPS also distributes the paperback books published by Warner Books as well as the full paperback line of the Berkley Group. WPS is wholly owned by Time Inc. Publishers Express Time Inc. owns 23.5% of Publishers Express Inc., a corporation whose shareholders consist of eleven other publishers, printers, paper companies and direct mailers established to deliver second- and third-class mail and advertising material in competition with the U.S. Postal Service. As of January 1995, the corporation was delivering in 24 cities throughout the United States. POSTAL RATES Postal costs represent a significant operating expense for the Company's publishing activities. There were no general postal rate increases in 1994. An increase of approximately 10% for first class and 14% for second, third and fourth classes was implemented in January 1995 by the Postal Service. I-8 Publishing operations continue to minimize postal expense through the use of certain cost-saving measures, including the utilization of contract carriers to transport books and magazines to central postal centers. It has been the Company's practice in selling books and other products by mail to include a charge for postage and handling, which is adjusted from time to time to partially offset any increased postage or handling costs. COMPETITION The Company's magazine operations compete for sales with numerous other publishers and retailers, as well as other media. The general circulation magazine industry is highly competitive both within itself and with other advertising media which compete with the Company's magazines for audience and advertising revenue. The Company's book publishing operations compete for sales with numerous other publishers and retailers as well as other media. In addition, the acquisition of publication rights to important book titles is highly competitive, and Warner Books and Little, Brown compete with numerous other book publishers. WPS and TDS meet with direct competition from other distributors operating throughout the United States and Canada in the distribution of magazines and paperback books. MUSIC GENERAL The Company's music business, conducted under the umbrella name Warner Music Group ("WMG"), consists principally of a vertically integrated worldwide recorded music business and a worldwide music publishing business. The Company's domestic recorded music business, which was restructured in 1994 and early 1995, is conducted primarily through a division of WMG called Warner Music U.S. ("WMUS") and its constituent companies, Elektra Entertainment Group ("Elektra"), The Atlantic Group ("Atlantic") and Warner Bros. Records ("WBR"), and their affiliated labels; and through Warner Media Manufacturing and Distribution ("WMMD") and its constituent companies, Warner-Elektra- Atlantic Corporation ("WEA"), WEA Manufacturing Inc. ("WEA Mfg.") and Ivy Hill Corporation ("Ivy Hill"). Outside of the United States, the Company's recorded music business is conducted in more than 65 countries through WEA International Inc. and a division of WCI, Warner Music International, and their subsidiaries and affiliates ("WMI"), as well as through non-affiliated licensees. WMG also conducts a home video business specializing in children's videos and fitness videos through WarnerVision, a division of WMUS. The Company's music publishing business is conducted principally through wholly owned subsidiaries of WCI (collectively, "Warner/Chappell"). In 1994, approximately 57% of WMG's recorded music revenues were derived from sources outside of the United States. RECORDED MUSIC AND RELATED ACTIVITIES WMI, WBR, Atlantic and Elektra produce, sell and license compact discs, cassette tapes and music videos (in both videocassette and video laserdisc configurations) of the performances of recording artists under contract to them or for whose recordings they have acquired rights. WMG's recorded music and video product is marketed under various labels, including the proprietary labels "Warner Bros.," "Reprise," "Sire," "Tommy Boy," "Warner Nashville," "Elektra," "Asylum," "Nonesuch," "Atlantic," "WarnerVision," "EastWest America," "Big Beat," "Atlantic Nashville," "WEA," "EastWest," "Teldec," "CGD," "Carrere," "Erato," "MMG," "DRO," "Telegram," "D-Day," "Muser" and "Fazer." In addition, WMG has entered into joint venture agreements pursuant to which WMG companies manufacture, distribute and market (both domestically and, in most cases, internationally) recordings owned by such joint ventures. The terms of such agreements vary widely, but each agreement typically provides the I-9 WMG record company with an equity interest and a profit participation in the venture, with financing furnished either solely by WMG or by both parties. Included among these arrangements are the labels "American Recordings," "Giant," "Interscope," "Maverick," "Qwest" and "Rhino." In early 1995, Elektra entered into a joint venture arrangement with Sub Pop Ltd. ("Sub Pop"), an independent record company based in Seattle. WMG's record companies also acquire rights pursuant to agreements to manufacture and distribute certain recordings that are marketed under the licensor's proprietary label. Included among the labels distributed by WMUS under such arrangements are "Beggars Banquet," "Curb," "Mammoth," "Matador" and "Slash." Recording artists are engaged under arrangements that generally provide that the artist is to receive a percentage of the suggested retail selling price of compact discs, cassette tapes and music videos sold. Most artists receive non- returnable advance payments against future royalties. Among the artists whose albums resulted in significant sales for WMG's record companies during 1994 were: All-4-One, Anita Baker, Candlebox, Collective Soul, Eric Clapton, Green Day, Madonna, Luis Miguel, John Michael Montgomery, Laura Pausini, R.E.M., Stone Temple Pilots, Keith Sweat, Mariya Takeuchi and The Three Tenors. In 1995, WMG's record companies expect to release albums by the following artists: Tori Amos, AC/DC, Bjork, Tevin Campbell, Enya, En Vogue, Michael Feinstein, Philip Glass, Van Halen, Quincy Jones, Andy Lau, Bette Midler, Red Hot Chili Peppers, Linda Ronstadt, David Sanborn, Simply Red, Rod Stewart and Skid Row. WMG's domestic manufacturing, packaging and distribution operations are conducted through WMMD and its constituent companies. WEA Mfg. is engaged in the domestic manufacturing of audio and CD-ROM compact discs, cassette tapes and videocassettes. WEA Mfg. conducts its operations from facilities situated in Olyphant, Pennsylvania and in the greater Los Angeles area. WEA Mfg. participated in the development of digital video discs ("DVD"), the new digital configuration developed by Time Warner and Toshiba, and expects to be manufacturing DVD early in 1996. Ivy Hill is engaged in the offset lithography and packaging business through facilities situated in four states. Ivy Hill is a major supplier of packaging to the recorded music industry (including WMG's record companies) and also supplies packaging for a wide variety of other consumer products. WMG's recorded music product is marketed and distributed in the continental United States by WEA, which supplies, directly or indirectly through sub- distributors and wholesalers, thousands of record stores, department stores, discount centers and other retail outlets across the country. Alternative Distribution Alliance, a distribution company specializing in alternative rock music, with a focus on new artists, operates as a joint venture among WMG, its labels, Restless Records and Sub Pop. Warner Special Products produces, primarily for telemarketers, compilations of music for which it has obtained rights from WMG's recorded music companies, as well as from third parties. In foreign markets, WMI produces, distributes, promotes and sells recordings of local artists and, in most cases, distributes the recordings of those artists for whom WMG's domestic recording companies have international rights. In certain countries, WMI licenses to non-affiliated parties rights to distribute recordings of WMG's labels. WMI strengthened its operations during 1994 with the creation of Warner Music Benelux, combining affiliates in the Netherlands and Belgium; the establishment of Warner Music Thailand; the acquisition of NVC Arts, a classical video company in the U.K.; and the formation of an international marketing alliance with China Records in the U.K. WMI also operates two plants in Germany that manufacture compact discs, cassette tapes and vinyl records for WMI's European affiliates and licensees and for WMI companies outside Europe, as well as for unrelated parties. Warner Music Enterprises ("WME"), a direct marketing company, operates magazine-plus-CD/audio cassette continuity programs specializing in classical music (BBC Music) and country music (New Country). I-10 During 1994, WME added a new rock music magazine, huH, to its existing Rock Video Monthly service and launched Jazziz, a new jazz-oriented service. In February 1995, WME launched Radio Aahs, a similar service for children. Through joint ventures, WMG and Sony Music Entertainment ("Sony Music") operate The Columbia House Company, the leading direct marketer of compact discs, cassette tapes and videocassettes in the United States and Canada. WCI owns a minority portion of Time Warner's 50% interest in the U.S. partnership and all of Time Warner's 50% interest in the Canadian partnership. WMG and Sony Music are also partners in Music Sound Exchange, a direct marketing catalog that is primarily directed to selling music and related products to consumers age 35 and over. In March 1995, WMG entered into a joint venture with PolyGram International Ltd. ("PolyGram") and Sony Music to directly market recorded music and filmed entertainment repertoire in Europe through music clubs and video clubs. WMG, with other partners, including another subsidiary of the Company, has an equity interest in Digital Cable Radio Associates, an audio programming service that delivers multiple channels of CD-quality stereo music via cable television. In Europe, where the service is known as Music Choice Europe, it is delivered via cable television and direct-to-home satellite. WMG is a partner with Sony Pictures Entertainment, Inc. ("Sony Pictures"), PolyGram, Thorn EMI ("EMI") and Hamburg radio executive Frank Otto in VIVA, a 24-hour German language music video channel carried on cable television in Germany. In January 1995, WMG entered into a joint venture with STAR TV, Bertlesmann Music Group, EMI and Sony Pictures to develop programming for STAR TV's existing pan-Asian music channel, Channel [V]. During 1994 and early 1995, WMG acquired the U.K. multimedia developer Renegade and signed software development agreements in the U.S. with several leading interactive programming creators, including Hyperbole Studios, Imagination Pilots and Accolade (and acquired a minority interest in that company). Also in 1994, WMG, along with Home Box Office and software developer Michael Nash, created a new multimedia joint venture known as Inscape. WMG also announced the formation of WarnerActive, a division of WEA that will publish multimedia titles in the U.S., and Warner Interactive Entertainment which will publish multimedia titles in international markets. Time Warner's other divisions involved in CD-ROM production, including Time Warner Interactive Group, will also be utilizing WarnerActive's services. MUSIC PUBLISHING Time Warner's music publishing companies own or control the rights to over a million standard and contemporary compositions, including numerous popular hits, folk songs and music from the stage and motion pictures. Certain works of the following artists, authors and composers are included in Warner/Chappell's catalogues: John Bettis, Michael Bolton, The Black Crowes, Phil Collins, Comden & Green, Dubin & Warren, Genesis, George and Ira Gershwin, Gin Blossoms, Victor Herbert, Michael Jackson, Elton John, Leiber & Stoller, Lerner & Lowe, Madonna, Henry Mancini, Johnny Mercer, George Michael, Midnight Oil, Cole Porter, the artist formerly known as Prince, R.E.M., Rodgers & Hart, Soul Asylum, Jule Styne, Bernie Taupin, Van Halen, John Williams and the foreign administration of the works of Irving Berlin. Warner/Chappell also administers the film music of several television and motion picture companies, including Lucasfilm, Ltd., Viacom Enterprises, Samuel Goldwyn Productions and Famous Music (outside the United States and Japan). Warner/Chappell's printed music division markets publications throughout the world containing the works of Alabama, Phil Collins, Bon Jovi, The Eagles, The Grateful Dead, Michael Jackson, Led Zeppelin, Madonna, John Mellencamp, the artist formerly known as Prince, Rush, Bob Seger and many others. In July 1994, Warner/Chappell acquired CPP/Belwin, Inc., one of the world's largest publishers of printed music. I-11 Principal sources of revenues to Warner/Chappell are license fees for use of its music copyrights on radio and television, in motion pictures and in other public performances; royalties for use of its music copyrights on compact discs, cassette tapes, vinyl records, music videos and in commercials; and sales of published sheet music and song books for the home musician as well as the professional and school markets, including methods for teaching musical instruments. LEGISLATION As digital technology is applied to broadcast, cable and other means of distribution, and more particularly to the interactive networks comprising the "information superhighway," the virtually flawless reception and improved potential for recording that digitization entails is expected to be the subject of legislation in 1995. A bill has been introduced in the Senate (S.227), and it is anticipated that one will be introduced shortly in the House, which will provide royalties to performers and producers of sound recordings that are publicly performed on digital subscription music services. Sound recordings are the only copyrighted works for which there is no compensation for their public performance. Passage of this legislation would favorably impact WMG's interests. Prospects for passage may be improved by the bill's exclusion of conventional analog distribution. In addition, a bill to extend the term of ownership of copyrights for an additional 20 years has been introduced in the House (H.R. 989). Passage of this legislation would benefit all of the Company's copyright businesses, including the businesses of WMG. No assurance can be given that either of these bills will become law. COMPETITION The recorded music business is highly competitive. The revenues and income of a company in the recording industry depend upon the public acceptance of the company's recording artists and the recordings released in a particular year. Although WMG is one of the largest recorded music companies in the world, its competitive position is dependent upon its continuing ability to attract and develop talent that can achieve a high degree of public acceptance. The recorded music business continues to be adversely affected by counterfeiting, piracy, parallel imports and, in particular, the home taping of recorded music. In addition, the recorded music business also meets with competition from other forms of entertainment, such as television, pre-recorded videocassettes and video games. Competition in the music publishing business is intense. Although WMG's music publishing business is the largest on a worldwide basis, it competes with every other music publishing company in acquiring musical compositions and in having them recorded and performed. ENTERTAINMENT The Company's Entertainment Group consists of TWE's Filmed Entertainment, Programming--HBO and Cable businesses, and also Time Warner's interests in certain other businesses. Each of the three principal businesses is operated as a separate division of TWE and, except as described below, in the same manner as it was operated by the Company at the time of the TWE Capitalization. See "--Description of Certain Provisions of the TWE Partnership Agreement-- Management and Operations of TWE." As a result of the U S WEST Transaction, TWE may be deemed an "affiliated enterprise" of a Regional Bell Operating Company ("RBOC") and, as such, may be subject to certain restrictions of the Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia and related decisions and decrees (the "Modification of Final Judgment"). Generally, the Modification of Final Judgment prohibits the RBOCs, including U S WEST, and any of their "affiliated enterprises," from among other things, (i) providing long distance telecommunications services, which may include operating or providing long distance services using TVROs or satellites, or coaxial cable, fiber or microwave facilities, (ii) manufacturing or providing telecommunications equipment and (iii) manufacturing I-12 "customer premises equipment," which may include cable television converter or multimedia boxes. In addition, the Modification of Final Judgment may prohibit the RBOCs and their "affiliated enterprises" from holding certain financial interests in ventures that engage in the foregoing activities. Several bills that would alleviate many of the restrictions contained in the Modification of Final Judgment are under active consideration in the U.S. Congress. In order to ensure compliance with the Modification of Final Judgment, prior to U S WEST's investment in TWE, TWE distributed to the Time Warner General Partners certain assets, including the satellite receiving dishes and broadcast antennae used by TWE's cable division, the transponders and other transmission equipment used by TWE's cable television programming and filmed entertainment divisions and equity interests in certain programming entities (collectively, the "TW Service Partnership Assets"). Such partners then contributed such assets to newly formed sister partnerships in which the Time Warner General Partners and subsidiaries of ITOCHU and Toshiba are the partners (the "Time Warner Service Partnerships"). Upon the distribution of the TW Service Partnership Assets to the Time Warner General Partners, the Time Warner General Partners' junior priority capital interests were reduced by approximately $300 million. See "--Other Entertainment Group Assets--Time Warner Service Partnerships." On October 24, 1994, U S WEST was granted a waiver (the "Waiver") of certain provisions of the Modification of Final Judgment that affected some of TWE's businesses. Although the Waiver permits TWE, to a large extent, to conduct its businesses as it did before the U S WEST Transaction, it does not remove all of the "line of business" restrictions and requirements imposed by the Modification of Final Judgment. As a result of the Waiver, TWE is no longer prohibited from owning substantially all of the TW Service Partnership Assets. Accordingly, pursuant to the terms of certain agreements, the TW Service Partnership Assets no longer subject to such restrictions will be recontributed to TWE on September 15, 1995 (or September 15, 1997 in the case of certain assets), or earlier under certain circumstances, at their then fair market value, in exchange for partnership interests in TWE. FILMED ENTERTAINMENT DIVISION General TWE's principal operations in the fields of motion pictures and television are conducted by its Warner Bros. division ("WB"). The filmed entertainment business includes the production, financing and distribution of feature motion pictures, television series, made-for-television movies, mini-series for television, first-run syndication programming, and animated programming for theatrical and television exhibition; and the distribution of pre-recorded videocassettes and videodiscs. TWE also is engaged in product licensing and the ownership and operation of retail stores, movie theaters and theme parks; and, since January 1995, the ownership and operation of a new national broadcast television network, The WB. Feature motion pictures and television programs are produced at various locations throughout the world, including The Warner Bros. Studio in Burbank, California and The Warner Hollywood Studio in West Hollywood, California. For additional information, see Item 2 "Properties." Feature Films WB produces feature films either solely or under arrangements with other producers, and is generally the principal source of financing for such films. In addition, WB purchases outright, or licenses for distribution, completed films produced by others. Acquired distribution rights may be limited to specified territories, specified media and/or particular periods of time. The terms of WB's agreements with independent motion picture producers and other entities result from negotiations and vary depending upon the production, the amount and type of financing by WB, the media covered, the territories covered, the period of distribution and other factors. In some cases, producers, directors, actors, writers and others participate in the proceeds generated by the motion pictures in which they are involved. WB operates a worldwide theatrical distribution organization through which it distributes its own films, as well as films produced by others. During 1994, 52% of film rentals from WB theatrical distribution were generated in the United States and Canada and 48% in international territories. I-13 Feature films are licensed to exhibitors under contracts that provide for the length of the engagement, rental fees, which may be either a percentage of box office receipts, with or without a guarantee of a fixed minimum, or a flat sum, and other relevant terms. The number of feature films that a particular theater exhibits depends upon its policy of program changes, the competitive conditions in its area and the quality and appeal of the feature films available to it. WB competes with all other distributors for playing time in theaters. Geffen Films Inc. produces feature films through Geffen Pictures ("Geffen"), a joint venture with TWE, which arranges for financing of the venture. Geffen operates autonomously. The pictures produced by Geffen are released worldwide by WB. In 1994, Geffen produced and WB released "Interview With the Vampire," starring Tom Cruise and Brad Pitt. In 1995, Geffen anticipates commencing the production of "Executive Decision," starring Kurt Russell. Numerous other film projects are in development. WB has entered into distribution servicing agreements with Morgan Creek Productions Inc. and its affiliates ("Morgan Creek"), pursuant to which, among other things, WB provides domestic distribution services for all Morgan Creek pictures through June 1998, and certain foreign distribution services for selected pictures. In 1994, WB released such Morgan Creek pictures as "Ace Ventura: Pet Detective," starring Jim Carrey and "Major League 2," starring Charlie Sheen. Among the releases anticipated for 1995 are "Big Bully," starring Tom Arnold, and "Ace Ventura 2: When Nature Calls," starring Jim Carrey. An affiliate of WB has entered into a long-term arrangement with Monarchy Enterprises C.V. ("Monarchy"), Le Studio Canal Plus and Alcor Film for the financing, production and distribution of no fewer than 10 major motion pictures involving an expected total production outlay in excess of $200 million. Arnon Milchan produces the pictures for Monarchy, with funding provided primarily by Monarchy. The WB affiliate advances (and has the right to recoup, together with a distribution fee) a portion of the production budget of each film and all necessary marketing and distribution costs for the films. WB has acquired all distribution rights in the United States and Canada, as well as all international theatrical and home video rights to these motion pictures. "Boys on the Side," starring Whoopi Goldberg and directed by Herb Ross, was released in 1995 pursuant to this arrangement. Other productions scheduled to commence in 1995 under the agreement include "Bogus," also starring Whoopi Goldberg, and directed by Norman Jewison, as well as, "Empire," directed by Allan Moyle, and "Copycat," directed by Jon Amiel. It is anticipated that four to five pictures per year will be produced during the approximately five-year production term of the agreement. During 1994, WB released 36 motion pictures for theatrical exhibition, of which 20 were produced by others. Among these 36 motion pictures, the following have produced substantial gross receipts: "Maverick," "Interview With the Vampire," "The Client," "Ace Ventura: Pet Detective," "Disclosure," "Natural Born Killers" and "The Specialist." Significant revenues were also generated in 1994 by pictures originally released in 1993, including "Grumpy Old Men" and "The Pelican Brief." During 1995, WB currently expects to release domestically 23 pictures, of which 9 will be produced by others. In addition to those previously mentioned, such pictures include: "Outbreak," starring Dustin Hoffman, "Batman Forever," starring Val Kilmer, Tommy Lee Jones and Jim Carrey, "The Bridges of Madison County," starring Clint Eastwood and Meryl Streep, "Free Willy 2: The Adventure Home," "Under Seige 2: Dark Territory," starring Steven Seagal, and "Assassins," starring Sylvester Stallone. Warner Bros. Feature Animation was formed in January 1994 to create, develop and produce feature-length animated motion pictures. Numerous projects are currently in development and the first picture is expected to be released in 1997. Television WB, through its television production and distribution divisions and various contractual arrangements, is the leading supplier of television programming in the world. These WB divisions and suppliers produce I-14 and distribute filmed entertainment for television (including comedy and drama series, animation shows, made-for-television movies, mini-series and first-run syndication programming) for initial exhibition on networks, local stations or cable systems. They include the wholly owned Warner Bros. Television Production ("Warner Bros. Television"), Telepictures Productions ("Telepictures"), Warner Bros. Animation, Warner Bros. Domestic Television Distribution ("WBDTD") and Warner Bros. International Television Distribution ("WBITD") divisions, the joint ventures Time Telepictures Television and Quincy Jones/David Salzman Entertainment Company, and contractual arrangements with the Prime Time Entertainment Network ("PTEN") and Witt-Thomas-Harris Productions ("Witt- Thomas"). WB television series for the 1994-95 broadcast season include: "Full House" (in its eighth season), "Murphy Brown" (in its seventh season), "Family Matters" (in its sixth season), "Sisters" (in its fifth season), "Step by Step" (in its fourth season), "Hangin' with Mr. Cooper" (in its third season), "Kung Fu: The Legend Continues" (in its third season), "Living Single" (in its second season), "Lois & Clark: The New Adventures of Superman" (in its second season), "The George Carlin Show" (in its second season), "ER" (the season's most highly-rated new program), "Friends" (the season's highest-rated new comedy series), "The Great Defender," "Hope & Gloria," "Medicine Ball," "On Our Own," "Pointman," "Something Wilder," "The Ties That Bind," "Under Suspicion," and two half-hour comedy series for The WB, the new WB television network--"The Wayans Bros." and "The Parent 'Hood." Warner Bros. Television is also producing movies and mini-series for the 1994-95 broadcast season. The Telepictures division, while continuing to specialize in reality and reality-based series and specials for the first-run syndication market, is expanding its activities into all media (network, first-run syndication and cable) and all segments of the daily television schedule (daytime, prime time, access and late-night). For the 1994-95 television season, Telepictures productions include the successful, nationally syndicated "Jenny Jones" talk show and the ten-hour mini-series "The History of Rock 'n' Roll" (broadcast in March 1995) for PTEN. In 1992, Telepictures and TIV formed Time Telepictures Television ("TTT"), a venture that is designed to bring together the information resources of Time Inc. with the production and programming expertise of Telepictures. TTT's first series is the six-day-a-week entertainment magazine "EXTRA--The Entertainment Magazine," which debuted in September 1994. Warner Bros. Animation is responsible for the creation, development and production of contemporary animation as well as for the creative use and production of WB's classic animated properties. Warner Bros. Animation currently supplies the Fox Children's Network with animated programming. In September 1995, Warner Bros. Animation will be providing four series to Kids' WB, the children's programming service of The WB. In addition, Warner Bros. Animation is actively involved in the production of animated commercials. PTEN, a consortium of leading television stations, offers prime time, first- run programs which are exclusively supplied by WBDTD. The 1995 season of PTEN includes a second season of "Babylon 5," "Kung Fu" (in its third season) and the debut of "Pointman." WB and Witt-Thomas have an exclusive, long-term feature film and television production and distribution agreement. The agreement provides for Witt-Thomas to exclusively create, develop and produce all forms of television for all media. For the 1994-95 season, the team produced: "The John Larroquette Show" (in its second season), "Daddy's Girls," "The Office" and "Muscle." WBDTD is one of the industry's leading domestic distributors of television programming. The division distributes over 5,800 hours in full syndication and an additional 1,800 hours in limited markets; a substantial portion of this programming is produced by WB's television divisions and ventures. WBITD is the world's largest distributor of television programming. It licenses more than 21,000 hours of television programming and feature films, dubbed or subtitled in more than 40 languages, to telecasters in more than 160 countries. The division handles the distribution to the international television marketplace (broadcast, pay and basic cable) for all of the product produced by the WB television divisions and ventures, among others. WBITD recently created Warner Bros. International Channels to expand its global presence I-15 in television with the creation of a variety of thematic or general entertainment programming services in both mature and emerging broadcast markets throughout the world. WBTV-The Warner Channel, WB's first cable satellite-delivered entertainment channel created exclusively for the international marketplace, will launch in the summer of 1995 and will serve Latin America as a family-oriented programming service. WBTV-The Warner Channel, a venture of WB in association with the HBO Ole Partners, will utilize the cable distribution expertise and facilities of HBO Ole. In alliance with Home Box Office and other major motion picture studios, WB is a partner in three other 24-hour pay television services--HBO Asia, HBO Brazil and HBO Ole. WB's library of films for television distribution is comprised of films produced by WB since 1949, as well as films produced by others and licensed to WB for television exhibition in either selected markets or on a worldwide basis. WB also owns a library of television series previously shown on network television. WB's backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition, amounted to $852 million at December 31, 1994 compared to $724 million at December 31, 1993 (including amounts relating to Programming-HBO of $175 million at December 31, 1994 and $178 million at December 31, 1993). The backlog excludes advertising barter contracts. During 1993, the Federal Communications Commission ("FCC") revised its rules to allow the three major television networks to acquire financial interests and syndication rights in programs produced for a network by outside producers such as WB and to engage in the syndication of such programs abroad. Under the new rules, the networks remain barred from actively syndicating any programs domestically--both "off-network" (produced initially for network distribution) and "first-run" (produced directly for syndication). With respect to first-run syndicated programs, the networks remain barred from acquiring financial interests if the program is not solely produced by the network. The new rules also require the networks to release "off-network" programs into syndication no later than four years after the program's network debut. The FCC rules were upheld by the U.S. Court of Appeals for the Seventh Circuit in July 1994. Until November 1993 the television networks, as a practical matter, continued to be barred from acquiring financial interests and syndication rights in outside-produced programs and from syndicating programs domestically or abroad by consent decrees that each network entered into with the Department of Justice over a decade ago. On November 8, 1993, however, the U.S. District Court in Los Angeles issued a decision that eliminated those portions of the consent decrees that restricted the networks' ability to obtain financial interests and syndication rights and to distribute syndicated programs. With these changes to the consent decrees, the above FCC rules are now the only remaining restrictions on the networks' ability to acquire financial interests and syndication rights in programs and to syndicate programs domestically. These restrictions do not apply to The WB. The District Court's decision and the 1993 FCC decision could adversely affect the revenues WB derives from its off-network television syndication operations. In addition, the FCC has stated that it will review the remaining rules 18 months after the date of the District Court order and, if proponents of the rules do not convince the FCC to retain the rules, the rules will automatically expire in November 1995. If the remaining prohibitions on first- run syndication are permitted to expire at that time, the revenues WB derives from its first-run syndication operations also could be adversely affected. FCC regulations also limit to three the number of hours of network (including off-network) programs that television stations that are affiliated with the networks and located in the top 50 markets may broadcast during the four-hour prime time period. In such markets, the fourth hour of prime time programming currently consists largely of first-run syndication programming. In October 1994, the FCC adopted a Notice of Proposed Rulemaking to examine whether these regulations should be eliminated or modified. Comments are due at the FCC in the spring of 1995. Repeal or modification of the off-network restriction might have an advantageous impact on WB's sales of off-network syndicated programs, but could adversely affect WB's sales of first-run syndication programming. Repeal or modification of the network restriction could adversely affect I-16 WB's sales of both first-run and off-network programming if the networks provide a network feed during that time period. The rule does not currently apply to The WB. Repeal or modification of the rule is unlikely to have an impact on The WB. The WB Television Network The WB, a new national television network, was launched by WB on January 11, 1995 (during the 1994-95 broadcast season). Tribune Broadcasting is the network's flagship affiliate. Combining The WB's current broadcast affiliate lineup with the reach of Tribune's WGN Superstation, The WB's national coverage is approximately 80% of U.S. households. The WB's first night of programming is Wednesday (featuring four half-hour comedies: "The Wayans Bros.," "The Parent 'Hood," "Unhappily Ever After" and "Muscle"). A second night will be added in August 1995, and it is currently planned that an additional night will be added each year thereafter. The WB launch programming is designed to appeal to young adults, teens and kids, especially the 12-34 year old age group. In September 1995, The WB expects to unveil its new children's programming service, Kids' WB, with 6 half-hours on Saturday morning and 2 half-hour morning strips (Monday through Friday). Saturday morning highlights include a new animated series from Steven Spielberg (the action/adventure "Freakazoid!"), brand new episodes of the Peabody Award-winning "Steven Spielberg Presents Animaniacs" and "Steven Spielberg Presents Pinky & The Brain" (favorites from "Animaniacs"). On weekday mornings, Kids' WB will offer WB classic animation as well as previously produced episodes of "Animaniacs." Viacom Inc. and Chris Craft Industries Inc. launched United Paramount Network, a new broadcast television network, in January 1995. Home Video Through its Warner Home Video division ("WHV"), WB distributes for home video use pre-recorded videocasettes and laser optical videodiscs containing the filmed entertainment product of WB. In addition, WHV distributes (or services the distribution of) the entertainment product of other companies from which it has acquired home video distribution or servicing rights. Such companies include Metro Goldwyn Mayer/United Artists, Turner, Regency Pictures and Morgan Creek Productions (in the United States and in selected international markets). During 1994, WHV released eight titles into the North American rental market whose sales exceeded 300,000 units each: "Maverick," "The Pelican Brief," "Demolition Man," "On Deadly Ground," "A Perfect World," "The Client," "Blown Away" and "Grumpy Old Men." Internationally, the following titles generated substantial home video revenue in 1994: "The Fugitive," "A Perfect World," "Demolition Man" and "Free Willy." Additionally, the Warner Bros. Family Entertainment label was enhanced through the affordably-priced North American video releases of "Black Beauty," "Secret Garden," "Thumbelina," "Batman: Mask of the Phantasm" and "George Ballanchine's The Nutcracker," which generated combined videocassette sales in excess of 11 million units. Also, WHV released "The Fugitive" and "Ace Ventura: Pet Detective" at affordable prices, generating combined sales of over 8 million units. Based on this experience, WHV will continue the video release of certain "blockbuster" theatrical releases and family entertainment programming on a direct to sell-through basis. WHV sells its product in the United States and in major international territories through its own sales force, with warehousing and fulfillment handled by divisions of the Warner Music Group and third parties. In some international markets, WHV's product is distributed through licensees. All product is manufactured under contract with independent laboratories. In January 1995, Toshiba and WHV announced their proposal for a high density digital video disc (DVD) format that features a double-sided, five-inch disc with enough storage capacity for two full-length feature films. The proposal was supported by a number of major consumer electronics companies and Hollywood studios. Toshiba and WHV expect that the DVD format will be developed and marketed for consumer introduction in 1996. Sony Corp. and Philips Electronics NV have independently announced that they are developing a similar product based on a separate, competing format. I-17 Competition The production and distribution of theatrical motion pictures, television product and videocassettes/ videodiscs are highly competitive businesses, as each competes with the other as well as with other forms of entertainment. Furthermore, there is increased competition in the television industry evidenced by the increasing number and variety of basic cable and pay television services now available. There is active competition among all production companies in these industries for the services of producers, directors, actors and others and for the acquisition of literary properties. With respect to the distribution of television product, there is significant competition from independent producers and distributors as well as major studios. Revenues for filmed entertainment product depend in part upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace. The television network industry is extremely competitive as networks seek to attract audience share and television stations for affiliation, and obtain advertising revenue and distribution rights to television programming. There is strong competition throughout the home video industry, both from home video subsidiaries of several major motion picture studios and from independent companies. Consumer Products Warner Bros. Consumer Products, another division of WB, through its licensing division ("WBCP Licensing"), acts as an agent for owners of copyrights and trademarks in the consumer products marketplace. WBCP Licensing licenses rights to names, photographs, likenesses, logos and similar representations or endorsements with respect to the theatrical motion pictures and television series produced or distributed by WB, including those featuring the cartoon characters owned by DC Comics. WBCP Licensing operates in both domestic and international markets, and meets with active competition in all phases of its activities. In 1994, WBCP Licensing continued its major licensing programs for "Looney Tunes," Steven Spielberg's "Tiny Toon Adventures," "Animaniacs" and the animated television series "Adventures of Batman and Robin." In addition, WBCP Licensing began a major licensing program for the new theatrical motion picture "Batman Forever." Warner Bros. Studio Stores In 1994, the retail division of Warner Bros. Consumer Products ("WBCP Retail") continued its expansion with the opening of 46 additional outlets in the United States and five overseas, including stores in London, Glasgow and Berlin. By the end of 1994, WBCP Retail had opened a total of 111 Warner Bros. Studio Stores, 100 of which are located in select shopping locations throughout the United States, 10 of which are located in the United Kingdom and one of which is located in Germany. In 1995, WBCP Retail plans to open 20-25 additional stores in the United States and Europe. Also in 1994, WBCP Retail entered into agreements to open its first franchised Warner Bros. Studio Stores in Hong Kong and Singapore during 1995. Additional agreements to franchise Warner Bros. Studio Stores throughout other countries in the Asia Pacific Region are scheduled to be completed during 1995. Theaters Since WB, through its Warner Bros. International Theatres division, began its program in 1987 to construct and operate new multiplex cinemas, it has opened 36 complexes with 294 screens in six foreign countries. WB operates nine theaters in the United Kingdom, two in Germany and, through joint ventures, 17 theaters in Australia, two in Denmark, one in Portugal and five in Japan. Directly and through joint ventures, WB plans to open ten new multiplex cinemas in 1995; there are currently under construction three multiplex cinemas in the United Kingdom, one in Australia, two in Portugal, two in Japan, one in Spain and one in Holland. Warner Bros. Theme Parks WB, through joint ventures with certain Australian entities (including one which is 34.25% owned by WB), owns and operates Sea World of Australia and a 400-acre movie studio and movie-related theme park I-18 named "Warner Bros. Movie World" as well as a water park complex, all near Brisbane, Australia. In addition, WB and a German partner have under construction a new regional theme park and studio complex in the Rhine/Ruhr area of Germany, which is scheduled to open in 1996. The park and studio complex will be modeled after Warner Bros. Movie World in Australia. Six Flags Theme Parks Six Flags Entertainment Corporation ("Six Flags") and its wholly owned subsidiary, Six Flags Theme Parks Inc., became wholly owned subsidiaries of TWE in September 1993 when TWE's ownership interest in Six Flags was increased from 50% to 100%. Six Flags is the second largest theme park operator in the United States. Six Flags owns or operates seven major theme parks: Six Flags Great Adventure (New York-Philadelphia), Six Flags Great America (Chicago-Milwaukee), Six Flags California (Los Angeles), Six Flags Houston (Houston), Six Flags Over Mid- America (St. Louis), Six Flags Over Texas (Dallas-Ft. Worth) and Six Flags Over Georgia (Atlanta). Six Flags California includes Six Flags Magic Mountain and Six Flags Hurricane Harbor, a 22-acre themed water park adjacent to Six Flags Magic Mountain, that is expected to open in the summer of 1995. Six Flags' co-venture parks, Six Flags Over Texas and Six Flags Over Georgia, are owned by limited partnerships, the limited partners of which are unaffiliated limited partnerships and the general partners of which are wholly owned subsidiaries of Six Flags (the "Managing Subsidiaries"). The Managing Subsidiaries have sole responsibility for the operation and management of the co-venture parks. The co-venture partnerships are scheduled to liquidate (subject to extension by the limited partners) on December 31, 1997. Six Flags' theme parks are generally similar in design and operating characteristics. Each park is divided into a number of contiguous entertainment areas featuring different historical, geographic or other entertainment-related themes. The design and operation of the theme parks are intended to provide a full day of family entertainment. Admission is based on the concept of a one- price ticket, which entitles a guest to virtually unlimited access to all rides, shows, and attractions during a visit to the parks. Each park generally has from 40 to 60 rides, including five to ten major attractions. These rides generally include thrill rides, such as roller coasters, mine-train rides, river-rapids rides, and log flumes, as well as rides for young children. The theme parks also have a number of indoor and outdoor theaters that offer entertainment at various times throughout the day and evening. In addition, from time to time during the season, each of the theme parks offers special concerts featuring well-known entertainers for which an additional admission price may be charged. Competition within the theme park industry exists on a regional rather than a national basis. Principal factors relating to competition within the theme park industry generally include the uniqueness and perceived quality of the rides and attractions in a particular park, the proximity of a park to densely populated areas, the atmosphere and cleanliness of a park, and the quality of food and entertainment available. There are no major parks located within Six Flags' core market areas (within a 50-mile radius) with the exception of Los Angeles, where Six Flags California is near Disneyland and other attractions. Six Flags' theme parks also compete with other recreational facilities and forms of entertainment within their market areas. For additional information, see Item 2 "Properties." PROGRAMMING--HBO DIVISION General TWE's programming business is principally conducted by its Home Box Office division ("Home Box Office"). The principal businesses of Home Box Office are the programming and marketing of two pay television programming services, HBO and Cinemax. HBO's programming includes commercial-free, uncut feature motion pictures, sporting events, special entertainment events (such as concerts, comedy shows and documentaries) and motion pictures produced by or for HBO. Cinemax offers a broad range of motion pictures, including classic, family, action-adventure, foreign and recently released feature films. I-19 At December 31, 1994, HBO had approximately 19.2 million subscribers, compared to 18.0 million subscribers at year-end 1993, and Cinemax had approximately 7.8 million subscribers, compared to 6.7 million subscribers at year-end 1993. The overall gain of 2.3 million subscribers for the two services represents the largest annual increase in Home Box Office subscribers since 1983. Affiliates Home Box Office's pay television services are principally distributed through cable television systems and multi-point microwave systems with which Home Box Office has a contractual relationship ("affiliates"). The HBO and Cinemax services are transmitted via communications satellites to these affiliates, which are generally charged a monthly fee on a per subscriber basis for each of the services carried. Subscribers to HBO and Cinemax are then billed monthly by their local affiliate for each service purchased and are free to cancel a service at any time. Individual dish owners wishing to subscribe to HBO or Cinemax must purchase a consumer decoder from a local source and arrange for its activation. Subscriptions for direct-by-satellite to the home ("DTH") viewing are available through cable television system operators, HBO Direct Inc., a subsidiary of TWE, satellite equipment dealers or unaffiliated program packagers. In 1994, Home Box Office, through its affiliation agreements with United States Satellite Broadcasting, Inc. ("USSB") and Primestar Partners L.P., began DTH distribution of the HBO and Cinemax services by means of high-powered and mid- powered Ku-Band frequency satellites. Home Box Office formally introduced in 1993 a new "multichannel" format for the delivery of HBO and Cinemax over multiple channels providing differing schedules of HBO and Cinemax programming. As of year-end 1994, the new multi- channel format was received by approximately 5.4 million HBO subscribers and 2.1 million Cinemax subscribers, including all DTH subscribers. As a result of acquisitions and mergers in the cable television industry in recent years, the percentage of Home Box Office's revenue from affiliates that are large multiple system cable operators has increased and Home Box Office anticipates that the consolidation among cable television operators will continue. As of December 31, 1994, the largest single multiple system cable operator with which Home Box Office does business is Tele-Communications, Inc. ("TCI"). Home Box Office's affiliation with TCI accounted for approximately 20% of HBO and Cinemax combined subscribers. As of December 31, 1994, Time Warner Cable (see "Cable Division--Video") accounted for an additional 12%. Home Box Office attempts to assure itself of continuity in its relationships with affiliates and has entered into multi-year contracts with certain of such operators, including TCI. Home Box Office's agreements with its cable affiliates are typically for terms of five years. Affiliation agreements with some larger multiple system operators, including TCI, are for terms in excess of five years. Although Home Box Office believes the prospects of continued carriage of its pay programming services by the large cable operators are good, the loss of one or more of them as distributors of Home Box Office's pay cable television services could have a material adverse effect on Home Box Office's business. Programming A majority of HBO's programming and a large portion of that on Cinemax consists of recently released, uncut and uncensored feature motion pictures. Home Box Office's practice has been to negotiate licensing agreements of varying duration for such programming with major motion picture studios and independent producers and distributors. These agreements typically grant pay television exhibition rights to recently released and certain older films owned by the particular studio, producer or distributor in exchange for a negotiated fee which is a function of, among other things, HBO and Cinemax subscriber levels and the films' box office performances. Home Box Office competes with other pay cable, basic cable and broadcast networks, among others, for the acquisition of programming product. Home Box Office attempts to ensure access to future movies in a number of ways. In addition to its exhibition of movies distributed by WB and its regular licensing agreements with numerous distributors, it I-20 has entered into agreements with Sony Pictures Entertainment, Inc. ("Sony Pictures"), Paramount Pictures Corporation ("Paramount"), Savoy Pictures Entertainment, Inc. ("Savoy") and Twentieth Century Fox Film Corporation ("Fox") pursuant to which Home Box Office has acquired exclusive and non- exclusive rights to exhibit on its pay television services all or a substantial portion of the films produced, acquired and/or released by these entities during the term of each agreement. Home Box Office has also entered into non- exclusive license agreements with Fox, Paramount, Sony Pictures and MGM/UA for older, library films. In early 1995, Home Box Office entered into an agreement with DreamWorks LLC pursuant to which Home Box Office acquired exclusive rights to exhibit on its pay television services films from this new entertainment company formed by Steven Spielberg, Jeffrey Katzenberg and David Geffen, as well as an agreement with Orion Pictures Corporation for exclusive rights to certain of its library films. HBO also exhibits made-for-pay television motion pictures that are produced by or for Home Box Office or one of its divisions or by outside production companies from which Home Box Office licenses certain exclusive pay television and other rights (frequently including domestic home video) for a negotiated fee. Besides motion pictures, a significant portion of HBO's programming consists of dramatic and comedy specials, television series, family shows, documentaries and other programs that are produced specifically for HBO. Home Box Office either negotiates a license to these programs with an outside production company or produces the programs itself, or through a production services entity, in which case all rights are generally retained and exploited by Home Box Office. Home Box Office also acquires exclusive pay television rights to show certain live and delayed-broadcast sporting events, such as boxing matches and Wimbledon, and may also acquire additional rights to these programs. In 1994, the quality of HBO's original programming was recognized by 15 Emmy Awards, two Peabody Awards and an Academy Award for the documentary "I Am a Promise." Other Interests Home Box Office acquires home videocassette distribution rights for the United States and Canada for a number of theatrical and made-for-pay television motion pictures, concerts and comedy shows that it has produced or licensed for pay television, including theatrical motion pictures distributed by Savoy. HBO Video, a division of Home Box Office, exploits these rights. Certain aspects of the distribution of videocassettes by HBO Video are carried out pursuant to a service arrangement with WHV. Time Warner Sports ("TWS"), a division of Home Box Office, operates TVKO, an entity that distributes pay-per-view prize fights and other pay-per-view programming. TWS also undertakes sports merchandising through a licensing division that currently represents the 1996 European (Soccer) Championship. In 1994, merchandising clients included the United States Soccer Federation and World Cup Soccer USA 1994. In 1994, HBO Independent Productions ("HBOIP"), a division of Home Box Office, produced four series for broadcast by the Fox network, "Roc," "Martin," "Get Smart" and "House of Buggin." HBOIP also produced a theatrical motion picture, "Martin Lawrence--You So Crazy," which was distributed theatrically by The Samuel Goldwyn Company and by means of home videocassettes by HBO Video. A division of Home Box Office owns a 50% interest in, and is the managing general partner of, a limited partnership that indirectly acquired the assets of Citadel Entertainment, Inc. and its affiliates. The limited partnership produces motion pictures and other programs for broadcast, basic cable and pay television networks, including HBO, and motion pictures for theatrical distribution. Home Box Office and MAI, plc. ("MAI"), a U.K. television production and distribution company, are co-owners of both a U.K. production company that develops and produces television programming principally designed for the U.K. market, and a joint venture, ITEL, for the foreign distribution of programming produced by Home Box Office and MAI. HBO Enterprises, a division of Home Box Office, distributes certain feature length theatrical films and made-for-pay television programming to other cable television or pay-per-view services. In addition, HBO I-21 Enterprises distributes Home Box Office original programming in domestic syndication and foreign television when it controls such rights. WBITD distributes in foreign markets certain television programming of HBO. In September 1991, a subsidiary of Home Box Office and a Venezuelan company launched HBO Ole, a Spanish-language pay television motion picture service, to serve Central and South America, Mexico and the Caribbean. The launch of a second motion picture service, Cinemax, occurred in February 1994. In April 1994, Sony Pictures became a partner in HBO Ole. In July 1994, HBO Ole, together with a Brazilian company, launched a Portuguese-language pay television movie service in Brazil. In June 1992, a Singapore subsidiary of the Company launched a new English-language, movie-based HBO service in Singapore. Home Box Office, together with its partner in the Asian venture, a subsidiary of Paramount, has expanded this HBO service into other countries in Southeast Asia including Thailand, the Philippines, Taiwan, Indonesia, Bangladesh, Brunei and Papua New Guinea. In November 1994, Home Box Office, together with a partner, launched a Czech-language pay television movie service in the Czech Republic. Home Box Office also owns an interest in two general entertainment programming services launched in the Czech Republic in September 1994. In addition to its Latin American, Asian and Eastern European ventures, Home Box Office has investments and/or licensing arrangements with pay television services in Hungary, Scandinavia and New Zealand. See "Cable Division--Video-- Other Interests." TWE holds an 11% interest in Crystal Dynamics, Inc., a developer and distributor of video games. TWE holds a 50% interest in Comedy Central, an advertiser-supported basic cable television service. Comedy Central launched in April 1991 and was available in 31 million homes at year-end 1994. Competition Home Box Office's businesses face strong competition. HBO and Cinemax compete both for programming product and for the attention of television viewers with commercial television networks and independent commercial television stations, pay-per-view services and home video, as well as other basic and pay cable television services, some of which have exclusive contracts with motion picture studios and independent motion picture distributors. In 1993, an entity affiliated with TCI, the multiple system cable operator accounting for 20% of HBO and Cinemax combined subscribers, launched STARZ!, a pay cable television service having exclusive contracts with several motion picture studios. In February 1994, Viacom Inc., the parent company of the pay cable television movie services Showtime and The Movie Channel, acquired a controlling interest in the parent company of Paramount, with which Home Box Office currently has an exclusive license agreement covering Paramount theatrical releases through December 31, 1997. Home Box Office's production divisions compete with other producers of programs for broadcast networks, independent commercial television stations, and basic cable and pay television networks. Home Box Office also competes with other companies engaged in the distribution or exhibition of motion pictures and with other communications media and entertainment and information sources. See "Regulation and Legislation." Regulation and Legislation The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), among other things, imposes certain requirements concerning the wholesale rates that Home Box Office may charge its affiliates and the means by which Home Box Office may make its programming services available to subscribers through distribution technologies other than cable television. In April 1993, the FCC released regulations designed to implement these provisions of the 1992 Cable Act, generally prohibiting vertically integrated programmers in which cable companies hold a 5% or greater attributable interest, which include the program services owned by Home Box Office, from offering different price, terms, or conditions to competing multichannel video programming distributors (which includes cable, multichannel microwave distribution services ("MMDS"), DTH and home satellite distributors) in the geographic areas in which they I-22 compete, unless the differential is justified by certain permissible factors set forth in the regulations. These permissible justifications include the different costs of delivering the programming to the distributor, creditworthiness, financial stability, character, technical factors, differences related to volume, penetration, channel positioning, promotional advertising, prepayment discounts, retail pricing, and contract duration. The rules also place certain restrictions on the ability of vertically integrated programmers such as Home Box Office to enter into exclusive distribution arrangements with cable operators. Although the HBO and Cinemax services are currently provided to subscribers by means of a number of different technologies including cable, MMDS and DTH, this legislation and the FCC's implementing regulations could have a material adverse effect on Home Box Office's business. In December 1994, the FCC substantially affirmed these rules on reconsideration, and determined that it has authority to award monetary damages for violations, but that no such remedy is necessary at this time. See "Cable Division--Regulation and Legislation." The leaders of both Houses of Congress have announced their intention to introduce telecommunications legislation during 1995. The Senate Commerce Committee has reported a comprehensive telecommunications reform bill. Several issues will be subject to continuing negotiation and debate when the full Senate considers the bill. The bill contains amendments to the program access provisions of the 1992 Cable Act that may be adverse to HBO's interests by weakening a programmer's ability to justify price differentials based on volume. These provisions may be subject to further amendments as the bill moves through the legislative process and the Company cannot predict whether any such provisions will be enacted into law. In November 1994, the FCC released a decision in its Telephone Company-Cable Television Cross-Ownership proceeding making it clear that telephone companies could own programmers such as Home Box Office, but could not offer their own programming over their cable facilities within their telephone service areas. Thus, telephone companies are free to produce, package and distribute video programming to unaffiliated cable operators or other multichannel video programming distributors. Such telephone company programming services might compete with Home Box Office. Certain telephone companies have already formed such ventures with individuals or entities with experience in program production, and discussions regarding additional such ventures reportedly have taken place. In November 1994, the FCC also released a decision in its Sixth Reconsideration, Fifth Report and Order, and Seventh Notice of Proposed Rulemaking concluding that it had jurisdiction to regulate the rates of discounted packages of pay services that were also offered on a per channel basis. The FCC, however, ruled that the rates for such a collective offering of pay services carried on cable systems as of April 1, 1993 would be presumed reasonable and would not be regulated by the FCC. The FCC, at the same time, reiterated its longstanding position that the 1992 Cable Act prohibited rate regulation of pay services, such as HBO and other cable programming, when they were offered on a per channel basis. Home Box Office has asked the FCC to reconsider that portion of its decision that would subject pay services, such as HBO, to rate regulation when made part of a discounted package. CABLE DIVISION--VIDEO General TWE's cable television operations are conducted through its Time Warner Cable division ("Time Warner Cable") with headquarters in Stamford, Connecticut. As of December 31, 1994, Time Warner Cable's wholly and partially owned cable systems served a total of 7.5 million cable subscribers located in 32 states, of which cable systems serving 6 million subscribers were wholly owned or otherwise consolidated. Time Warner Cable is the second-largest multiple system cable operator in the United States, owning or operating 22 of the top 100 U.S. cable systems, including Time Warner Cable of New York City, the largest cluster of cable systems in the country. As of December 31, 1994, cable television systems serving 922,000 subscribers (adjusted to reflect the partial ownership of certain of such cable systems by the Time Warner General Partners and their subsidiaries) were held by the Time Warner General Partners or their subsidiaries as beneficial assets for TWE, pending completion of the transfer of these cable systems to TWE. I-23 Through a network of coaxial and fiber-optic cables, TWE's cable television system subscribers generally receive 36 or more channels of video programming, including local broadcast television signals, locally produced or originated video programming, distant broadcast television signals (such as WTBS, WWOR or WGN), advertiser-supported video programming (such as ESPN and CNN) and premium programming services (such as HBO, Cinemax, Showtime and The Movie Channel). In some systems, Time Warner Cable also offers movies and other events on a pay- per-view basis, as well as audio and other entertainment services. In December 1994, Time Warner Cable introduced the Full Service Network in its suburban Orlando, Florida cable system. The Full Service Network system is expected to be connected to 4,000 customers by the end of 1995. The Full Service Network systems will utilize fiber optics, digital compression, digital switching and storage devices, and will be capable of providing the consumer with video-on-demand including movies, interactive games, distance learning, interactive shopping and access to long distance telephone service. Full implementation of the Full Service Network system to the extent it incorporates a form of telephone service will require changes in current government regulation. Pursuant to the Admission Agreement, TWE has agreed to use its best efforts to complete upgrades to a substantial portion of its cable systems by the end of 1998. Such upgrades include the broad deployment of fiber, electronics and switching equipment. It is anticipated that substantial capital expenditures will be required to complete these upgrades. In recent years, Time Warner Cable has grown primarily as a result of increases in the number of subscribers to its existing cable television systems and the development of geographically-clustered systems through the exchange or purchase of existing cable television systems. Future growth in subscribers is expected to come from acquisitions, increased penetration of existing homes passed (through rebuilds and the introduction of new services), population growth, and extensions of existing systems. During 1994, Time Warner Cable acquired systems in or near Charlotte, North Carolina, Memphis, Tennessee and Austin, Texas. These acquisitions were funded with the proceeds from Time Warner Cable's disposition of systems in Arizona, Colorado, Minnesota, Oklahoma and Texas. These transactions resulted in a net decrease of 20,000 in Time Warner Cable's reported basic subscribers. For information about pending acquisitions of cable television systems announced by Time Warner in late 1994 and early 1995, see pages I-1 and I-2. Most of TWE's cable television revenue is derived from monthly fees paid by subscribers for cable video programming services. Additional revenue is generated by selling time on cable television systems for commercial advertisements to local, regional and, in some cases, national advertisers. Advertising time is sold as inserts into certain non-broadcast cable programming and local origination programming shown on TWE's cable television systems. In addition, pay-per-view service is offered in certain cable television systems, which allows subscribers to choose to view specific movies and events, such as concerts and sporting events, and to pay on a per-event basis. Certain cable television systems also sell direct-by-satellite to the home video services such as Primestar, for a monthly fee. Programming Time Warner Cable provides certain video programming to its subscribers pursuant to multi-year contracts with program suppliers who are paid a monthly fee per subscriber. Many of these contracts contain price escalation provisions; however, in most cases the cable operator has a right to cancel the contract if the supplier raises its price beyond agreed limits. The loss of any one supplier would not have a material adverse effect on Time Warner Cable. Service Charges Subscribers to Time Warner Cable systems generally are charged monthly fees based on the level of service selected. The monthly prices for various levels of cable television services (excluding services offered on a per-channel or per-program basis) range generally from $5 to $25 for residential customers. Other services offered include equipment rentals, usually for an additional monthly fee. Systems offering pay-per-view movies generally charge between $4 and $6 per movie, and systems offering pay-per-view events generally charge between $6 and $50, depending on the event. A one-time installation fee is generally charged for connecting subscribers to the cable television system. I-24 Subscribers may purchase premium programming services, and in certain systems other per-channel services, for an additional monthly fee for each such service, with discounts generally available for the purchase of more than one service. Commercial subscribers are charged rates for cable programming services that vary depending on the nature of the contract. Franchises In general, Time Warner Cable operates its cable television systems pursuant to non-exclusive franchises granted by franchising authorities for specified periods of time, generally ranging from eight to 25 years and averaging approximately 15 years. These franchise agreements typically specify the design of the cable system that must be constructed and cover such matters as total channel capacity; access by local governments, schools and non-profit and community groups to public, educational and governmental channels; and franchise fees to be paid to the franchising authority. The terms of a franchise may also require improved facilities, increased channel capacity or enhanced services. As a consequence, Time Warner Cable may make significant additional investments in its cable television systems as part of the franchise renewal process. Some franchises are nontransferable without prior approval of the franchising authorities and may prohibit a material change in ownership or control of the cable operator without prior approval. Although it has not previously occurred with respect to a Time Warner Cable franchise, many franchises provide for termination of the franchise in the event of a breach by the cable operator of a material term of the franchise agreement. Of Time Warner Cable's franchises, as of January 1, 1995, 398 franchises serving approximately 1,600,000 subscribers expire during the period ending December 31, 1997. Although Time Warner Cable has been successful in the past in negotiating new franchise agreements, there can be no assurance as to the renewal of franchises in the future. Regulation and Legislation Cable television is regulated by the federal government, some state governments and most local governments. The following discussion summarizes certain federal, state and local laws and regulations affecting cable television. Under the 1992 Cable Act, the FCC has implemented regulations covering, among other things, cable rates, signal carriage, composition of certain service offerings, consumer protection and customer service standards, leased access, indecent programming on commercial leased and public, educational and governmental channels, programmer access to cable systems, programming agreements, technical standards, consumer electronics equipment compatibility, ownership of home wiring, program exclusivity, equal employment opportunity, and various aspects of direct broadcast satellite system ownership and operation. The implementation of the 1992 Cable Act continues to have an adverse effect on the operations of Time Warner Cable. The 1992 Cable Act subjects nearly all cable systems in the United States to rate regulation of cable service other than services offered on a per-channel or per-program basis, and to regulation of charges for service installation and for certain equipment. Effective on September 1, 1993, FCC rules required rates for certain equipment to be established based on actual cost, and rates for regulated cable services to be established based on either a per-channel benchmark of 10% below the average level of rates prevailing nationwide in September 1992 or a cost-of-service standard, at the election of the cable operator. Time Warner Cable elected to establish rates based on the 10% per- channel benchmarks. On October 29, 1993, TWE filed a petition for review of certain of the FCC's rate regulation rules with the United States Court of Appeals for the D.C. Circuit. Such petition contends, among other things, that the rate regulation rules are contrary to the 1992 Cable Act, arbitrary and capricious and unconstitutional. The case has been fully briefed and a decision is pending. I-25 On March 30, 1994, the FCC lowered, effective on May 15, 1994, the per- channel benchmark from 10% to 17% below the average level of rates prevailing in September 1992. From April 5, 1993 until May 15, 1994, the FCC had "frozen" at April 5, 1993 levels, rates for regulated cable services and associated equipment, other than for systems in which local franchising authorities regulate rates. If a franchising authority in the case of basic rates or the FCC in the case of a complaint filed against a rate for a tier of service other than a "New Product Tier" or similar unregulated service, as described below ("Cable Programming Service") finds that a particular rate is above the applicable benchmark, the rates can be ordered to be reduced to a level 17% below the rate in effect on September 30, 1992 (but not below the applicable benchmark). With respect to basic rates currently in effect that are found to be unreasonable, it is the FCC's position that franchising authorities may order refunds (including interest) dating back to September 1, 1993, or one year, whichever is shorter. With respect to Cable Programming Service rates that are found to be unreasonable, the FCC may order refunds (including interest) dating back to the date of the first valid complaint filed on or after September 1, 1993 challenging that rate. However, in the case of basic as well as non-basic rates, cable operators will have an opportunity to justify their rates through cost-of-service showings made to the franchising authority or to the FCC, as appropriate. On November 18, 1994, the FCC released "going forward" rules that allow limited increases in rates for new channels added to existing Cable Programming Service tiers. The rules also allow cable operators to offer "New Product Tiers" (or in certain cases, recently created tiers comprised of existing programming) to be priced as operators elect provided certain conditions are met. The Company expects that legislation that would make significant changes to the Communications Act of 1934 will be considered in Congress during 1995. Among the proposed revisions currently contained in draft House legislation and in the bill reported out of the Senate Commerce Committee are provisions that would reduce rate regulation of cable programming services. While such a provision would have a favorable impact on Time Warner Cable's revenues, the Company cannot predict whether any such provision will be enacted into law. One purported class-action brought in a Florida state court and one action by the Wisconsin Attorney General have been brought alleging that the retiering and a la carte pricing implementation by Time Warner Cable in response to the FCC's new rate regulation rules violate those rules and/or state consumer protection laws. A purported nationwide class action has also been brought in a federal court in New York alleging that any charges imposed by Time Warner Cable for additional outlet connections violate the 1992 Cable Act and the FCC's rate regulation rules to the extent those charges exceed Time Warner Cable's costs. Time Warner Cable has opposed each of these claims on the grounds that any state law claims regarding cable rates are preempted by the 1992 Cable Act and rules, that any federal claims regarding cable rates must be brought before the FCC in the first instance and that rates for premium services cannot be regulated at all pursuant to the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the 1992 Cable Act. The underlying claim brought by the Wisconsin Attorney General has been settled but the preemption issue in that matter is pending before a federal appellate court following an unfavorable determination by a federal district court. The trial courts in the purported class actions have also ruled against Time Warner Cable's preemption arguments and Time Warner Cable has appealed or otherwise sought review of those decisions. The 1992 Cable Act contains requirements mandating the carriage of certain "local" television broadcast stations by cable systems. These provisions allow commercial television broadcast stations that are "local" to a cable system, to elect whether to require the cable system to carry the station ("must carry"), subject to certain exceptions, or whether the cable system will have to negotiate for "retransmission consent" to carry the station. Local, noncommercial television stations are given mandatory carriage rights only, subject to certain exceptions. In addition, cable systems must obtain retransmission consent for the carriage of all "distant" commercial broadcast stations, except for certain "superstations." Many stations, including the majority of affiliates of the major broadcast networks, elected to negotiate for retransmission consent. As of February 15, 1995, for all such stations that TWE desires to carry, carriage agreements or temporary arrangements have been effected. I-26 After enactment of the 1992 Cable Act, TWE and other cable operators and programmers filed federal lawsuits seeking to overturn certain major provisions, primarily on First Amendment grounds. For additional information, see Item 3 "Legal Proceedings." FCC regulations require that cable systems that have 1,000 or more subscribers must, upon the appropriate request of a local television station, delete the simultaneous or non-simultaneous network programming of a distant station when such programming is under exclusive contract to the local station for its area. FCC regulations also enable television broadcast stations that have obtained exclusive distribution rights for syndicated programming in their market to require a cable system to delete or "black out" such programming from other television stations which are carried by the cable system. The extent of such deletions will vary from area to area. The FCC has commenced a proceeding to determine whether to relax or abolish the geographic limitations on program exclusivity contained in its rules, which would allow parties to set the geographic scope of exclusive distribution rights entirely by contract. It is possible that the outcome of these proceedings will increase the amount of programming that cable operators are requested to black out. Cable television systems are also subject to local regulation, typically imposed through the franchising process. Local officials may be involved in the initial franchise selection, system design and construction, safety, rate regulation, customer service standards, billing practices, community-related programming and services and franchise renewal. Although franchising authorities may impose franchise fees, under the 1984 Cable Act such payments cannot exceed 5% of a cable system's annual gross revenues. Franchising authorities are also empowered in awarding new franchises or renewing existing franchises to require cable operators in certain circumstances to provide cable-related facilities and equipment and to enforce compliance with service commitments. The 1984 Cable Act established renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal. While these formal procedures are not mandatory unless timely invoked by either the cable operator or the franchising authority, they can provide substantial protection to incumbent franchisees. Nevertheless, renewal is by no means assured, as the franchisee must meet certain statutory standards. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading facilities and equipment, although the municipality must take into account the cost of meeting such requirements. Questions concerning the ability of municipalities to impose certain franchise restrictions upon cable television companies have been considered in several federal appellate and district court decisions. These decisions have been somewhat inconsistent and, until the U.S. Supreme Court rules definitively on the scope of cable television's First Amendment protections, the legality of the franchising process and of various specific franchise requirements is likely to be in a state of uncertainty. However, the 1992 Cable Act, among other things, prohibits franchising authorities from unreasonably refusing to grant a franchise to a competing cable system and permits franchising authorities to operate their own cable systems without franchises. While the 1984 Cable Act exempted cable television systems from state utility or common carrier regulation solely by reason of providing cable service, certain states have adopted other cable television legislation and regulations. The 1984 Cable Act codified existing FCC cross-ownership regulations, which, in part, prohibit local exchange telephone companies ("LECs"), including the Regional Bell Operating Companies ("RBOCs"), from providing video programming directly to subscribers within their local exchange telephone service areas, except in rural areas or by specific waiver of FCC rules. This statutory provision has recently been held unconstitutional by six U.S. District Courts and two U.S. Courts of Appeals. In light of these court decisions, the FCC announced on March 17, 1995 that it will not enforce its cross-ownership restrictions against those telephone companies that have won district court injunctions against their enforcement or those companies that operate in the Fourth and Ninth judicial circuits. In practice, the FCC's relaxed enforcement policy will I-27 apply to six of the seven RBOCs. The cable television industry and the United States Department of Justice intend to seek review of the two U.S. Courts of Appeals decisions by the Supreme Court, but there is no assurance that the Supreme Court will accept review, or, if accepted, reverse the lower courts. The FCC has granted numerous authorizations to LECs to construct and operate facilities on a common carrier basis for the provision of video programming to the public. These common carrier facilities are known as "video dialtone" systems. The FCC has also permitted Bell Atlantic to be a programmer on its own video dialtone system in Northern Virginia, subject to certain conditions, and has requested public comment on the conditions that should govern the provision of programming by all LECs. The FCC thus far has not decided whether the franchise provisions of the 1984 and 1992 Cable Acts apply to LECs that program their own video dialtone systems. In August 1994, a U.S. Court of Appeals affirmed the FCC's decision that a programmer unaffiliated with a LEC does not need a franchise to program the video dialtone system. The cable industry continues to challenge the FCC's conclusion that neither a LEC nor its programmer would be required to obtain a local cable franchise. In November 1994, the FCC reaffirmed its previous recommendation that Congress amend the Communications Act of 1934 to allow LECs directly to own and operate cable television systems. A draft bill that has been reported out of the Senate Commerce Committee would, among other things, remove telephone company-cable cross-ownership prohibitions. See "Cable Division--Telephony." The outcome of these FCC, legislative or court proceedings and proposals, or the effect of such outcome on the operations of Time Warner Cable, cannot be predicted. The 1984 Cable Act and FCC rules also prohibit the common ownership, operation, control or interest in a cable system and a television broadcast station in the same area. The FCC has recommended to Congress that this restriction be repealed. Provisions that would eliminate or modify this and other broadcast ownership rules are contained in the draft Senate bill that contemplates significant changes to the Communications Act of 1934, although no assurance can be given that such legislation will be enacted. The FCC has relaxed its existing television network/cable cross-ownership prohibition subject to certain national and local ownership caps. Pursuant to the 1992 Cable Act, the FCC on September 23, 1993 announced rules that set a limit of 40 percent of cable system channel capacity that can carry programming of video programmers that are vertically integrated with the cable system. The FCC also set a limit of 30 percent of total nationwide cable homes that can be served by any multiple cable system operator, although this rule has been stayed pending resolution of litigation in which the provision of the 1992 Cable Act requiring the FCC to establish limits on horizontal concentration was declared unconstitutional on First Amendment grounds by a U.S. District Court. FCC regulations and federal statutory provisions also include matters relating to restrictions on the sale of cable systems held for less than three years, subscriber privacy requirements, carriage of local sports programming, application of the fairness doctrine and rules governing political broadcasts, and limitations on advertising contained in non-broadcast children's programming. Cable television systems are also subject to federal copyright licensing with respect to carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals, subject to the retransmission consent provision of the 1992 Cable Act described above. The amount of this royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried, and the location of the cable system with respect to over-the-air television stations. The U.S. Copyright Office has adopted regulations, which became effective January 1, 1994, declaring that certain microwave video service providers, such as MMDS (which is sometimes referred to as "wireless cable") operators, do not qualify for the compulsory copyright license available to cable systems under the Copyright Act of 1976. The compulsory license status of satellite master antenna systems ("SMATV") is not covered by these regulations. The availability of the compulsory license to other multichannel video service providers would enhance their competitiveness with traditional cable systems. I-28 Various bills have been introduced into Congress over the past several years that would eliminate or modify the cable television compulsory license. The FCC has recommended to Congress that it repeal the cable industry's compulsory copyright license. No action has been taken with respect to this matter. Time Warner Cable generally places its cable on poles or in conduits owned by utility companies that control access to the poles and conduits and charge fees for their use. The FCC is required by statute to regulate the rates certain utilities may charge for cable pole attachments and conduit usage and the terms and conditions they may impose. States can supplant the FCC regulations by regulating such matters themselves; however, the majority of states have not done so. The foregoing does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the cable television industry. Other existing federal regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements, currently are the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable television industry or Time Warner Cable can be predicted at this time. Competition Cable television systems face strong competition for viewer attention from a wide variety of established providers and new entrants, including broadcast television, direct broadcast satellite ("DBS"); multichannel multipoint distribution service ("MMDS" or "wireless cable"), satellite master antenna television ("SMATV") systems and telephone companies. Cable television systems also compete with these and other media for advertising dollars. DBS. The FCC has awarded conditional permits to several companies for orbital slots from which high-power Ku-Band DBS service can be provided. DBS services offer pre-packaged programming that can be received by relatively small and inexpensive receiving dishes. In 1994, two high-power DBS services sharing common satellites became operational, DirecTV and USSB. Together, these services were reported to have a total of approximately 500,000 subscribers nationwide as of March 1, 1995. Primestar, a medium-power DBS service partially owned by affiliates of TWE, was reported to have 340,000 subscribers as of that date. In addition to DBS, most cable programming is available to owners of larger, more expensive C-Band satellite dishes ("TVROs"), either directly from the programmers or through third-party packagers. MMDS/Wireless Cable. Wireless cable operators use microwave technology to distribute video programming. In recent years, wireless cable has grown rapidly, serving 550,000 subscribers via 143 systems as of June 1994 according to the FCC. Wireless cable is now available in 23 of the nation's top 25 television markets. In recent years, the FCC has adopted rules to facilitate the use of greater numbers of channels by wireless cable operators. SMATV. SMATV systems provide cable service in numerous Time Warner Cable service areas. The FCC reports that SMATV systems served approximately one million subscribers nationwide as of June 1994. Telephone Companies. Recent legislative, regulatory and judicial developments have facilitated and will continue to facilitate the entry of telephone companies into the provision of video programming. See "Cable Division--Video-- Regulation and Legislation." As of February 14, 1995, the FCC has authorized construction of facilities to conduct a limited test of video dialtone service for locations in which Time Warner Cable provides franchised cable television service to approximately 762,000 subscribers, and the FCC has received applications for video dialtone authorizations in locations in which Time Warner Cable provides franchised cable television service to approximately 717,000 subscribers. The entry of telephone companies will provide substantial additional competition to Time Warner Cable's cable systems. Other. Cable television systems compete for viewer attention with numerous other sources of news, information and entertainment, including videocassete rental stores and other cable operators. Videocassette I-29 rental stores provide many of the same movies, special events and other programs that are shown on cable television systems, often with earlier release dates. The 1992 Cable Act provides that all cable franchises must be non- exclusive. In practice, most franchises have always allowed the franchise authority to award additional franchises, although additional cable operators currently operate cable systems in an insignificant number of Time Warner Cable's franchise areas. The 1992 Cable Act also permits municipalities to operate cable systems without obtaining a franchise. It is unknown whether this provision will encourage the building of additional municipally-owned cable systems. To date, no such systems have been built in Time Warner Cable franchise areas, although several municipalities have indicated an interest in doing so. Other Interests TWE has a 50% interest in a joint venture established in 1991 to invest in, and further develop, cable television systems in Hungary. TWE also has a 37 1/2% interest in TV-1000, a pay television service operating in Scandinavia; a 30% interest in N-TV, a German language news and information channel distributed in Germany in which TBS also has a 32% interest; and a 28% interest in IA, a general-interest regional television broadcaster serving the Berlin and Brandenburg areas of Germany (all of which interests are under the management responsibility of Home Box Office). TWE also owns indirectly 13% of a New Zealand over-the-air subscription television service--Sky Network Television as well as 22% of Kablevision, Sweden's second largest cable television company. CABLE DIVISION--TELEPHONY Time Warner Cable's wireline telephony operations are conducted through Time Warner Communications, a partnership wholly owned and controlled by TWE, which has formed separate business entities to provide telephony services in various geographic areas. Time Warner Communications seeks to take advantage of Time Warner Cable's geographically clustered cable systems to efficiently develop its telephone business. The initial focus of Time Warner Communications following its formation in 1993 was the development of "alternative access" telephone operations in metropolitan areas where Time Warner Cable operates cable systems. These operations generally provide connections between large businesses and their long distance telephone providers, between multiple business locations of a large business, and between long distance telephone company locations. The connections are marketed primarily to long distance telephone carriers and large business customers, and are used primarily for high volume voice and data communications. The networks on which these connections are made are comprised of dedicated fiber optic strands within the affiliated cable systems' backbone fiber networks, together with specially constructed high volume building entrance facilities and specialized electronic equipment for transmission of digital signals. Alternative access services do not require Time Warner Communications to operate switching equipment. As of December 31, 1994, Time Warner Communications had wholly or partly owned alternative access businesses in operation in Austin, Texas; Charlotte, North Carolina; Columbus, Ohio; Honolulu, Hawaii; Indianapolis, Indiana; Kansas City, Kansas and Missouri; Lima, Ohio; and Raleigh, North Carolina. Similar businesses are in development in a number of additional Time Warner Cable cities. Revenues to date from these operations have been insignificant. Time Warner Communications also opened an advanced network management center in Denver in mid-1994 to monitor and manage operation of its networks. One of the major business objectives of TWE is the entry of Time Warner Communications into the switched "local exchange" telephone business. This business would provide telephone service that is presently provided by monopoly local exchange telephone companies ("LECs"). The service would be marketed both to residential and business customers. Local exchange service will require significant upgrades to, and usage of, the fiber optic and coaxial cable networks of Time Warner Cable, together with high capacity switching equipment similar to that employed by the LECs, and certain other specialized equipment. Expenditures for such upgrades and equipment are expected to be significant. I-30 In order for Time Warner Communications to be able to connect its local exchange service customers to LEC customers in an area, Time Warner Communications must obtain rights to interconnect its network with that of the LEC. In May 1994, Time Warner Communications announced an agreement under which Time Warner Communications and Rochester Telephone Corporation agreed to interconnect their networks in Rochester, New York, enabling each company to complete calls originated by their telephone service customers to telephone service customers of the other company. Time Warner Communications believes the agreement to be the first of its kind between a major telephone company and a cable company that requires equal compensation to each company for completing calls. Based on this agreement, Time Warner Communications began a limited initial trial of competitive residential telephone service in Rochester in December 1994. Time Warner Communications expects its local exchange telephone service to be generally available over the Rochester Time Warner Cable network in the second half of 1995. Time Warner Communications generally has been able to conduct its alternative access businesses despite regulatory and other impediments such as difficulties in obtaining rights to connect its lines to LEC facilities in order to carry calls from large businesses to long distance telephone companies, and the insistence by some cable franchise authorities on onerous conditions to permit use of their rights of way. Provision of switched local exchange services, however, is heavily regulated by each state. The ability of Time Warner Communications to obtain entry to, and compete effectively in, the local exchange telephone business will be dependent on procompetitive legislation or regulation that currently exists only in a few states. Time Warner Communications has been certified to provide local exchange service throughout New York State, and currently has an application on file with the Ohio Public Utilities Commission to provide such service. Time Warner Communications will continue to support procompetitive legislative reform, and to apply for local exchange service authority, in the states where Time Warner Cable has major cable systems. The Company anticipates that telecommunications legislation will be considered in Congress during 1995. The Senate Commerce Committee has reported out to the Senate floor for consideration a comprehensive bill that would, among other things, preempt state and local barriers which prevent cable operators and others from providing telephone service in competition with the LECs, and require all providers of telephony, including those that employ technology such as that contemplated for Time Warner Cable's Full Service Network, to make their networks available for use by unrelated persons on a common carrier basis with respect to the telephone service offered. To facilitate a transition to competition, the proposed Senate legislation would require telecommunications carriers to allow interconnection to their facilities, to provide reciprocal compensation for origination and completion of calls, to provide nondiscriminatory access to unbundled network functions and services, and to provide telephone number portability and local dialing parity. Comparable telecommunications reform legislation may be introduced in the House. The actual provisions of the bills that may be introduced, final enactment of any such legislation or its impact on Time Warner Communications' business, cannot be predicted. Time Warner Telecommunications The Company's wireless telephone, paging and data service operations are conducted through Time Warner Telecommunications ("TWT"), a division of TWE, which has its headquarters in Washington, D.C. TWT plans to provide cellular service, paging and data services under the Time Warner brand in various markets by reselling cellular service purchased at wholesale rates from existing facilities-based cellular carriers. On November 9, 1994, the New York Public Service Commission approved TWT's tariff to provide resold cellular service in New York State. On November 21, 1994, TWT formally commenced the provision of residential and business cellular service in Rochester, New York. TWT will seek to distinguish itself from other wireless carriers through its customer service, the strength of the Time Warner brand name, and by selling its wireless services with other Time Warner products and services. I-31 The provision of cellular services are regulated by the FCC and the public service commissions of some states (including New York). As a reseller, TWT does not need approval from the FCC prior to offering cellular services to customers in any state. Draft federal telecommunications legislation referenced elsewhere herein would, if enacted, preempt state or local regulation of the entry of, or the rates charged by, any commercial mobile service including cellular telephone services. DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT The following description summarizes certain provisions of the TWE Partnership Agreement relating to the ongoing operations of TWE. Such description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the TWE Partnership Agreement. Management and Operations of TWE Board of Representatives. Subject to certain authority of the Management Committee (as described below) with respect to the Cable division, the business and affairs of TWE are managed under the direction of a board of representatives (the "Board of Representatives" or the "Board") that is comprised of representatives appointed by the Time Warner General Partners (the "Class B Representatives") and representatives appointed by the Limited Partners (the "Class A Representatives"). The Class B Representatives control all Board decisions except for certain matters including (i) the merger or consolidation of TWE; (ii) the sale or other disposition of assets of TWE generating in excess of 10% of the consolidated revenues of TWE during the previous fiscal year or representing in excess of 10% of the fair market value of the total assets of TWE (in each case, other than in connection with certain joint ventures and "cable asset swaps" as to which the thresholds are greater); (iii) any acquisition by TWE, other than in the ordinary course of business, if the consideration paid by TWE in connection with such acquisition would exceed the greater of (1) $750 million and (2) 10% of the consolidated revenues of TWE for the most recently ended fiscal year of TWE; (iv) the engagement by TWE in any business other than the businesses then being conducted by TWE, as they may evolve from time to time and any business related to such businesses (provided that TWE may not engage in the manufacturing, sale or servicing of hardware, other than as may be incidental to TWE's businesses); (v) the incurrence by TWE of indebtedness for money borrowed if, after giving effect to such incurrence, the ratio of total indebtedness for money borrowed to cash flow would exceed the greater of (x) 5.00 to 1.00 and (y) .5 over the analogous ratio in the TWE credit agreement as in effect from time to time; (vi) cash distributions other than as provided in the TWE Partnership Agreement; (vii) the dissolution or voluntary bankruptcy of TWE; and (viii) any amendment to the TWE Partnership Agreement. Each of the matters described in clauses (i) through (v) requires the approval of a majority vote of the Class A Representatives who were appointed by partners that have a residual equity interest of at least 5% and a majority vote of the Class B Representatives; and each of the matters described in clauses (vi) through (viii) requires the unanimous approval of all representatives. Each partner's representatives collectively have voting power in proportion to the residual equity interest of the partner that designated such representative. The managing general partners, both of which are wholly owned subsidiaries of the Company, may take any action without the approval or consent of the Board if such action may be authorized by the Class B Representatives without the approval of the Class A Representatives. However, see "Full Service Network Management Committee," below. Full Service Network Management Committee. In connection with the U S WEST Transaction, the Board established the Full Service Network business, which, subject to obtaining necessary franchise and I-32 other approvals, will be comprised of the businesses and operations of the cable television systems of TWE that are from time to time designated to become a part thereof. Subject to obtaining necessary franchise and other approvals relating to the designated systems, the business and affairs of the Full Service Network business will be governed by a Full Service Network Management Committee (the "Management Committee"). The Management Committee is comprised of six voting members, three designated by U S WEST and three designated by TWE. Each of the other Limited Partners has the right to designate non-voting members to the Management Committee. If U S WEST at any time owns less than 50% of the partnership interest which it owned, directly or indirectly, as of September 15, 1993 or if a "change in control" of U S WEST occurs, U S WEST's right to designate any members of the Management Committee will terminate. The Full Service Network business is managed on a day-to-day basis by the officers of the cable division. The approval of a majority of the members of the Management Committee is required for certain significant transactions relating to the Full Service Network business, including, among other things, the sale, pledge or encumbrance of assets of the Full Service Network business, the acquisition of cable assets, the making of commitments or expenditures relating to the Full Service Network business, in each case subject to agreed upon thresholds, certain decisions with respect to design, architecture and designation of cable systems for upgrade and the adoption of the annual business plan. Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers of TWE, and each of TWE's three principal partnership divisions is managed on a day-to-day basis by the officers of such division. Upon the TWE Capitalization, the officers of Time Warner also became officers of TWE and the officers of the Time Warner General Partners became the officers of the corresponding partnership divisions and the subdivisions thereof. Certain Covenants Covenant Not to Compete. For so long as any partner (or affiliate of any partner) owns in excess of 5% of TWE or 15% of TWE Japan and in the case of any Time Warner General Partner, for one year thereafter, such partner (including its affiliates) is generally prohibited from competing or owning an interest in the three principal lines of business of TWE--cable, cable programming and filmed entertainment (including the ownership and operation of theme parks)--as such businesses may evolve, subject to certain agreed upon exceptions, limited passive investments and inadvertent violations. The covenant not to compete does not prohibit (i) U S WEST from conducting cable and certain regional programming businesses in the 14-state region in which it provides telephone service, (ii) any party from engaging in the cable business in a region in which TWE is not then engaging in the cable business, subject to TWE's right of first refusal with respect to such cable business, or (iii) any party from engaging in the telephone or information services business. Transactions with Affiliates. Subject to agreed upon exceptions for existing arrangements, TWE will not enter into any transaction with any partner or any of its affiliates other than on an arm's-length basis. Registration Rights Beginning on June 30, 2002 (or as early as June 30, 1999 if certain threshold cash distributions are not made to the Limited Partners), the Limited Partners holding, individually or in the aggregate, at least 10% of the residual equity of TWE will have the right to request that TWE reconstitute itself as a corporation and register for sale in a public offering an amount of partnership interests held by such Limited Partners determined by an investment banking firm so as to maximize trading liquidity and minimize the initial public offering discount, if any. Upon any such request, the parties will cause an investment banker to determine the price at which the interests sought to be registered could be sold in a public offering (the "Appraised Value"). Upon determination of the Appraised Value, TWE may elect either to register such interests or purchase such interests at the Appraised Value, subject to certain adjustments. If TWE elects to register the interests and the proposed public offering price (as determined immediately prior to the time the public offering is to be declared effective) is less than 92.5% of the Appraised Value, TWE will have a second option to purchase such interests immediately prior to the time such public offering would otherwise have been I-33 declared effective by the Securities and Exchange Commission at the proposed public offering price less underwriting fees and discounts. If TWE exercises its purchase option, it will be required to pay the fees and expenses of the underwriters. Upon exercise of either purchase option, TWE may also elect to purchase the entire partnership interests of the Limited Partners requesting registration at the relevant price, subject to certain adjustments. In addition to the foregoing, U S WEST will have the right to exercise an additional demand registration right (in which the other Limited Partners would be entitled to participate) beginning 18 months following the date on which TWE reconstitutes itself as a corporation and registers the sale of securities pursuant to a previously exercised demand registration right. Beginning on June 30, 1995, at the request of any Time Warner General Partner, TWE will effect a public offering of the partnership interests of the Time Warner General Partners or reconstitute TWE as a corporation and register the shares held by the Time Warner General Partners. In any such case, the Limited Partners will have standard "piggy-back" registration rights. Upon any reconstitution of TWE into a corporation, each partner will acquire preferred and common equity in the corporation corresponding in both relative value, rate of return and priority to the partnership interests it held prior to such reconstitution, subject to certain adjustments to compensate the partners for the effects of converting their partnership interests into capital stock. Certain Put Rights of the Limited Partners Change in Control Put. Upon the occurrence of a change in control of the Company, at the request of any Limited Partner, TWE will be required to elect either to liquidate TWE within a two-year period or to purchase the interest of such partner at fair market value (without any minority discount) as determined by investment bankers. A "change in control" of the Company shall be deemed to have occurred: (x) whenever, in any three-year period, a majority of the members of the Board of Directors of the Company elected during such three-year period shall have been so elected against the recommendation of the management of the Company or the Board of Directors shall be deemed to have been elected against the recommendation of such Board of Directors of the Company in office immediately prior to such election; provided, however, that for purposes of this clause (x) a member of such Board of Directors shall be deemed to have been elected against the recommendation of such Board of Directors if his or her initial election occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than such Board of Directors; or (y) whenever any person shall acquire (whether by merger, consolidation, sale, assignment, lease, transfer or otherwise, in one transaction or any related series of transactions), or otherwise beneficially own voting securities of the Company that represent in excess of 50% of the voting power of all outstanding voting securities of the Company generally entitled to vote for the election of directors, if such person acquires or publicly announces its intention to initially acquire ten percent or more of such voting securities in a transaction that has not been approved by the management of the Company within 30 days after the date of such acquisition or public announcement. Change in Government Regulation Put. Upon a change in any applicable federal or state law or regulation that would prohibit ITOCHU or Toshiba from continuing to own all or any part of its partnership interest in TWE, or would materially adversely affect the value of ITOCHU's or Toshiba's partnership interest relative to the value of the partnership interests held by all other partners, TWE will be required to elect either to purchase that portion of such partner's partnership interest required to enable such partner to continue to own its partnership interest at fair market value (giving effect to the minority discount) as determined by investment bankers or to take reasonable actions to remedy the effect of such change in law or regulation. I-34 Assignment of Put Rights, etc. TWE, with the consent of such assignee, may assign to the Company, any general partner or any third party, the obligation to pay the applicable put price in connection with the exercise of a change in control or change in government regulation put right by a Limited Partner and the right to receive the partnership interests in payment therefor. With respect to any of the put rights of the Limited Partners, TWE may pay the applicable put price in cash or Marketable Securities (defined as any debt or equity securities that are listed on a national securities exchange or quoted on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the put price to the Company by the Company). The amount of any Marketable Securities comprising the applicable put price shall be determined based on the market price of such securities during the seven months following the closing of such put transaction. In the case of a change in government regulation put, up to 33% of the applicable put price may be paid in notes issued by TWE (or if TWE assigns its obligations to pay the put price to the Company by the Company). U S WEST Change in Government Regulation Remedies U S WEST is not entitled to the benefit of the put right upon a change in law or government regulation to which ITOCHU and Toshiba are entitled. See "-- Certain Put Rights of the Limited Partners--Change in Government Regulation Put." However, upon a change in law or government regulation prior to September 15, 1996 that prohibits U S WEST from owning, or materially adversely affects the value (relative to the value of the interests of all other partners) of, U S WEST's partnership interest, U S WEST will have the right to request that TWE either remedy such problem (provided such remedy would not have a significant impact on the business and operation of TWE or any of its divisions) or assist U S WEST in selling its interest to a third party. Upon any such sale to a third party, TWE will share 20% of the loss or gain experienced by U S WEST upon such sale. Restrictions on Transfer by Time Warner General Partners Time Warner General Partners. Any Time Warner General Partner is permitted to dispose of any partnership interest (and any Time Warner General Partner and any parent of any Time Warner General Partner may issue or sell equity) at any time so long as, immediately after giving effect thereto, (i) the Company would not own, directly or indirectly, less than (a) 43.75% of the residual equity of TWE, if such disposition occurs prior to the later of December 31, 1997 and the date on which the Limited Partners have received cash distributions of $500 million per $1 billion of investment, and (b) 35% of the residual equity of TWE if such disposition occurs after such date, (ii) no person or entity would own, directly or indirectly, a partnership interest greater than that owned, directly or indirectly, by the Company, and (iii) a subsidiary of the Company would be a managing general partner of TWE. No other dispositions are permitted, except that the Company may sell its entire partnership interest subject to the Limited Partners' rights of first refusal and "tag-along" rights pursuant to which the Company must provide for the concurrent sale of the partnership interests of the Limited Partners so requesting. OTHER ENTERTAINMENT GROUP ASSETS Time Warner Service Partnerships Concurrently with the closing of the U S WEST Transaction, TWE and the Time Warner Service Partnerships entered into various agreements pursuant to which, among other things, the Time Warner Service Partnerships provide program signal delivery services to TWE's cable systems and transmission services to the Programming--HBO and Filmed Entertainment divisions and TWE provides billing, collection and marketing services to the Time Warner Service Partnerships. The Time Warner Service Partnerships receive commercially reasonable fees for the provision of such services. The Time Warner Service Partnerships own the TVROs and broadcast antennae used to transmit programming signals to each of TWE's cable systems, and the satellite transponders and other transmission equipment used to transmit the HBO and Cinemax services to Home Box Office affiliates and DTH subscribers. I-35 In addition, TWE and the Time Warner Service Partnerships have entered into a series of agreements pursuant to which the Time Warner Service Partnerships will recontribute the TW Service Partnership Assets to TWE at their then fair market value in exchange for partnership interests in TWE on September 15, 1995 (or September 15, 1997 in the case of its interests in Court TV and E! Entertainment Television), or earlier under certain circumstances, but only to the extent that at such time such assets are then owned by the Time Warner Service Partnerships and TWE is clearly not prohibited from owning or operating such assets. As a result of a judicial order issued to U S WEST on October 24, 1994, TWE is no longer prohibited from owning or operating substantially all of the TW Service Partnership Assets. The TW Service Partnership Assets also include various equity investments, including, among others, an interest of approximately 49% in E! Entertainment Television, a Los Angeles-based basic cable channel specializing in promoting the entertainment industry and serving approximately 28 million subscribers as of year-end 1994; an interest of approximately 15% in Black Entertainment Television, a basic cable television service providing entertainment programming directed primarily to African-American audiences; an interest of approximately 21% in Primestar Partners L.P., a joint venture with several other cable operators and a subsidiary of General Electric Company that has developed the delivery of a package of programming services to TVRO owners; a majority interest in Court TV, a 24-hour basic cable television service launched in the summer of 1991 featuring live and taped trial coverage, plus commentary by prominent lawyers, which is managed through the Company's American Lawyer Media affiliate; and an interest of approximately 13% in The 3DO Company, a company engaged in the development of multimedia technology. TWE Japan The Company owns a 37.25% interest in, U S WEST owns a 12.75% interest in, and each of Toshiba and ITOCHU owns a 25% interest in, Time Warner Entertainment Japan Inc. ("TWE Japan"). TWE Japan was organized to conduct TWE's businesses in Japan, including home video distribution, theatrical film and television distribution and merchandising businesses, and to expand and develop new business opportunities. Pursuant to distribution and merchandising agreements entered into between TWE and TWE Japan, TWE Japan receives distribution fees generally comparable to those currently received by TWE for performing distribution services for unaffiliated third parties. In early 1995, the Company, TWE Japan, U S WEST, Toshiba and ITOCHU agreed jointly to establish TITUS Communications Corp. ("TITUS"), a multiple system operator that will start new CATV operations in ten or more selected locations throughout Japan, each of which covers 150,000-200,000 households. The agreement also contemplates that TITUS eventually will provide telephone service as well as video services in its operating areas. DC Comics TWE and WCI each owns a 50% interest in DC Comics, a New York general partnership, formed in June 1992 to continue the business previously conducted by DC Comics Inc., a New York corporation. DC Comics publishes more than 60 regularly issued comics magazines, among the most popular of which are "Superman," "Batman," "Wonder Woman," "Teen Titans" and "The Sandman," as well as story collections sold as books. DC Comics also derives revenues from motion pictures, television syndication, product licensing, books for juvenile and adult markets and foreign publishing. Trademarks in DC Comics' principal characters have been registered in the United States Patent and Trademark Office and in certain foreign countries. Cinamerica Theatres, L.P. WCI owns a 50% interest in Cinamerica Theatres, L.P., an unconsolidated joint venture with Paramount Communications Inc., which owns and operates two theater circuits: Mann Theatres and Festival Cinemas. The joint venture operates 349 screens in 65 theaters, principally located in California and Colorado. I-36 E.C. Publications E.C. Publications, Inc. is the publisher of MAD, a magazine featuring articles of humorous and satirical interest, which is regularly published eight times a year and also in periodic special editions. E.C. Publications is wholly owned by the Company. OTHER INTERESTS TURNER BROADCASTING SYSTEM, INC. The Company purchased equity securities of TBS as part of a private placement of securities by TBS in 1987 to a consortium of cable television operators and individual investors. The Company thereafter acquired additional securities in TBS from time to time and, at December 31, 1994, it had economic and voting interests in TBS of 19.6% and 6.4%, respectively. TBS's business includes the ownership and operation of domestic and international entertainment networks (including TBS SuperStation, Turner Network Television ("TNT"), the Cartoon Network and TNT Latin America); the production and distribution of entertainment and news programming worldwide (including Turner Pictures, TBS Productions, Hanna-Barbera Cartoons, Castle Rock Entertainment, New Line Cinema, Cable News Network ("CNN"), Headline News and CNN International); and the ownership of two professional sports teams (the Atlanta Braves and the Atlanta Hawks). AMERICAN LAWYER MEDIA American Lawyer Media, L.P. ("ALM"), which is majority-owned by the Company, operates a chain of metropolitan and regional legal and business newspapers and also publishes THE AMERICAN LAWYER, a national monthly magazine with a subscription-only readership among lawyers across the United States, and COUNSEL CONNECT, an on-line service connecting lawyers in law firms and corporate legal departments worldwide. As of February 25, 1994, Mead Data Central became a minority partner in COUNSEL CONNECT, and the name was changed to "LEXIS COUNSEL CONNECT." ALM also publishes four weekly and five daily newspapers, which in most cases enjoy local official status for the publication of court opinions, legal notices, and/or official court notices; one monthly newsletter and a monthly law firm management information service. ALM also provides certain services to Court TV, a basic cable television service launched in 1991 in which the Company has an indirect majority interest. HASBRO, INC. The Company owns approximately 14% of the outstanding common stock of Hasbro, Inc., one of the world's largest toy companies. For a description of the issuance by the Company of zero coupon exchangeable notes due 2012 that are exchangeable for the shares of Hasbro common stock owned by the Company, see Note 5 "Long-Term Debt" to the Company's consolidated financial statements at pages F-14 and F-15 herein. ATARI CORPORATION The Company owns approximately 25% of Atari Corporation, which is engaged in the design, manufacture and sale of interactive multimedia entertainment systems. ATARI GAMES CORPORATION The Company owns 100% of Atari Games Corporation, which is engaged in the design, manufacture and sale of interactive video games for arcades and home systems. TIME WARNER INTERACTIVE INC. Time Warner Interactive Inc. is an indirect wholly owned subsidiary of the Company that produces and publishes interactive consumer entertainment products for delivery across the spectrum of digital channels: broadband, narrow-band, CD-ROM, cartridge and location-based systems. I-37 CURRENCY RATES AND REGULATIONS The Company's foreign operations are subject to the risk of fluctuation in currency exchange rates and to exchange controls. The Company cannot predict the extent to which such controls and fluctuations in currency exchange rates may affect its operations in the future or its ability to remit dollars from abroad. See Note 1 "Summary of Significant Accounting Policies--Foreign Currency" to the consolidated financial statements set forth at page F-6 herein. For the revenues, operating income from and identifiable assets of foreign operations, see Note 10 "Segment Information" to the consolidated financial statements set forth at pages F-19 through F-22 herein. EMPLOYEES At December 31, 1994, the Company employed a total of approximately 53,300 persons. This number includes approximately 24,500 persons employed by TWE. I-38 ITEM 2. PROPERTIES PUBLISHING, MUSIC AND CORPORATE The following table sets forth certain information as of December 31, 1994 with respect to the Company's principal properties (over 250,000 square feet in area) that are used primarily by its publishing and music divisions or occupied for corporate offices, all of which the Company considers adequate for its present needs, and all of which were substantially used by the Company or were leased to outside tenants:
APPROXIMATE SQUARE FEET TYPE OF OWNERSHIP; LOCATION PRINCIPAL USE FLOOR SPACE EXPIRATION DATE OF LEASE -------- ------------- ----------- ------------------------ New York, New York Executive and 560,000 Leased by the Company. 75 Rockefeller Plaza administrative offices Lease expires in 2014. Rockefeller Center (Corporate, Music and Approximately 142,000 sq. Filmed Entertainment) ft. are sublet to outside tenants. New York, New York Business and editorial 1,481,000 Leased by the Company. Time & Life Bldg. offices (Publishing and Most leases expire in Rockefeller Center Corporate) 2007. Approximately 64,000 sq. ft. are sublet to outside tenants. Mechanicsburg, Office and warehouse 358,000 Owned and occupied by the Pennsylvania space (Publishing) Company. 1225 S. Market St. Olyphant, Manufacturing, 1,058,000 Owned and occupied by the Pennsylvania warehouses, distribution Company. 1400 and 1444 East and office space (Music) Lackawanna Avenue Indianapolis, Indiana Warehouse space 252,000 Owned by the Company. 4200 N. Industrial (Publishing) Approximately 142,000 sq. Street ft. are leased to outside tenants. Nortorf, Manufacturing, 334,000 Owned and occupied by the Germany distribution and office Company. Niedernstrasse 3-7 space (Music) Alsdorf, Manufacturing, 269,000 Owned and occupied by the Germany distribution and office Company. Max-Planck Strasse 1- space (Music) 9 Terre Haute, Manufacturing and office 269,000 Leased by the Company. Indiana space (Music) Lease expires in 2001. Bldg. 102, Fort Har- rison Industrial Park Other: Office bldgs., plants and 1,718,000 Owned by the Company. U.S. and abroad, warehouses (Publishing, including locations Music and Corporate) in Europe, Asia, Latin America, Australia and New Zealand. 4,535,000 Leased by the Company. Approximately 52,000 sq. ft. are sublet to outside tenants. ---------- Total 10,834,000 ==========
I-39 ENTERTAINMENT The following table sets forth certain information as of December 31, 1994 with respect to TWE's principal properties (over 125,000 square feet in area), all of which TWE considers adequate for its present needs, and all of which were substantially used by TWE or were leased to outside tenants.
APPROXIMATE SQUARE FEET FLOOR TYPE OF OWNERSHIP; LOCATION PRINCIPAL USE SPACE/ACRES EXPIRATION DATE OF LEASE -------- ------------- ----------- ------------------------ New York, New York Business offices 335,000 sq. ft. Leased by TWE. HBO Building, 1100 (Programming--HBO) Lease expires in 2004. Avenue of the Americas New York, New York Business offices 139,000 sq. ft. Leased by TWE. 1325 Avenue of the (Filmed Entertainment) Lease expires in 2010. Americas Baltimore, Maryland Warehouse (Filmed 387,000 sq. ft. Owned by TWE. White Marsh Entertainment) Los Angeles, Califor- Warehouse 182,000 sq. ft. Leased by TWE. nia (Filmed Entertainment) Lease expires in 1997. 9210 San Fernando Burbank, California Sound stages, 3,422,000 Owned by TWE. The Warner Bros. administrative, sq. ft. of Studio technical and dressing improved room space on 158 structures, screening acres (a) theaters, machinery and equipment facilities, back lot and parking lot and other Burbank properties (Filmed Entertainment) West Hollywood, Sound stages, 350,000 Owned by TWE. California administrative, sq. ft. of Approx. 20,000 sq. ft. are The Warner technical and dressing improved leased to outside tenants. Hollywood Studio room space on 11 structures, screening acres theaters, machinery and equipment facilities (Filmed Entertainment) Valencia, California Location filming (Filmed 225 acres Owned by TWE. Undeveloped Land Entertainment) Atlanta, Georgia Theme park 270 acres Owned by limited Six Flags Over Geor- (Filmed Entertainment) partners of Six Flags gia Over Georgia co-venture partnership. Dallas-Fort Worth, Theme park 200 acres Owned by limited Texas (Filmed Entertainment) partners of Six Flags Six Flags Over Texas Over Texas co-venture partnership. St. Louis, Missouri Theme park 500 acres Owned by Six Flags. Six Flags Over Mid- (Filmed Entertainment) America
I-40
APPROXIMATE SQUARE FEET FLOOR TYPE OF OWNERSHIP; LOCATION PRINCIPAL USE SPACE/ACRES EXPIRATION DATE OF LEASE -------- ------------- ----------- ------------------------ Houston, Texas Theme park 105 acres Owned by Six Flags. Six Flags Houston (Filmed Entertainment) Jackson, New Jersey Theme park 2,200 acres (b) Owned by Six Flags. Six Flags Great (Filmed Entertainment) Adventure Los Angeles, Califor- Theme park 260 acres Owned by Six Flags. nia (Filmed Entertainment) Six Flags California Gurnee, Illinois Theme park 300 acres Owned by Six Flags. Six Flags Great (Filmed Entertainment) America Other, in the U.S. and Office buildings, retail 1,625,000 sq. ft. (c) Owned by TWE. abroad, including stores, theatres, plants Approx. 26,000 sq. ft. are locations in Europe, and leased to outside tenants. Asia, Latin America, warehouses (Filmed 5,910,000 sq. ft. (c)(d) Leased by TWE. Australia and New Entertainment, Approx. 69,000 sq. ft. are Zealand Programming--HBO, sublet to outside tenants. Cable) ------------------------- Totals 12,350,000 sq. ft. 4,229 acres =========================
-------- (a) Ten acres consist of various parcels adjoining The Warner Bros. Studio, with mixed commercial, office and residential uses. (b) 1,640 acres of which are undeveloped land available for expansion. (c) Excludes 9,085,000 sq. ft. of owned and 2,021,000 sq. ft. of leased properties used by the Cable division for headend, hub, and tower sites. (d) Includes 108,000 sq. ft. of office space occupied by Time Warner corporate staff who provide services to TWE pursuant to arrangements set forth in the TWE Partnership Agreement. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties, in the ordinary course of business, to litigations involving property, personal injury and contract claims. The amounts that the Company believes may be recoverable in these matters are either covered by insurance or are not material. In June 1989, a purported stockholder class action was filed in the Supreme Court of the State of New York, County of New York, entitled Northern Laminating, Inc. Retirement Fund v. Munro, et al., Index No. 12653-89, against the Company and its Board of Directors, alleging that defendants breached their fiduciary duties by the Company's tender offer (the "Tender Offer") for WCI (pursuant to which the Company purchased 100 million shares of WCI common stock on July 24, 1989) and by the terms of the Agreement and Plan of Merger (as amended, the "Merger Agreement") among the Company, TW Sub Inc., then a wholly owned subsidiary of the Company, and WCI which purports to prevent defendants from considering other offers, and that defendants, by similar acts, engaged in a combination and conspiracy in restraint of trade. Plaintiff seeks, among other things, a declaratory judgment that defendants breached their fiduciary duties and monetary damages for defendants' purported breach of fiduciary duties. Defendants have not been required to respond to the amended complaint. A Stipulation of Voluntary Discontinuance without prejudice was submitted to the court on September 14, 1994, and is awaiting approval. Since 1989, there has been pending in the Court of Chancery for the State of Delaware, in and for New Castle County (the "Delaware Chancery Court") a consolidated stockholder litigation, In re Warner Communications Inc. Shareholders Litigation, Consol. Civ. Action No. 10671 (the "Warner Stockholder I-41 Litigation"), commenced against WCI, its Board of Directors and the Company, alleging that WCI's Board of Directors breached their fiduciary duties to WCI's stockholders, and the Company aided and abetted such alleged breach, by not ensuring that the securities distributed to WCI stockholders in the Merger contained certain protective covenants and redemption provisions. The amended complaint seeks, among other things, to enjoin the consummation of the Tender Offer and the Merger, or to rescind the Tender Offer and the Merger. The defendants have not yet been required to respond to the amended complaint. The action has been stayed pending resolution of the Berger action described below. Another 1989 purported stockholder class action, Berger, et al. v. Warner Communications Inc., et al., Index No. 91-3735, filed in the New York Supreme Court against WCI, certain of WCI's directors, the Company, Wasserstein Perella & Co., Inc. ("Wasserstein Perella"), Shearson Lehman Hutton Inc. ("Shearson Lehman") and Lazard Freres & Co. ("Lazard") alleges, among other things, that WCI's directors and the Company breached their fiduciary duties to WCI's stockholders by structuring the Merger as a freezeout of WCI's minority stockholders, and by failing to ensure that the securities to be distributed to stockholders in the Merger would in fact trade at the value imputed to those securities, and that Wasserstein Perella, Shearson Lehman and Lazard aided and abetted those breaches of fiduciary duty. The complaint seeks, among other things, a declaratory judgment that defendants have breached their fiduciary duties, compensatory damages and a judgment declaring the Merger a nullity. On April 9, 1991, a court order effected defendants' stipulation to the certification of a plaintiff class consisting of those persons who held shares of WCI common stock on August 23, 1989 and before the effective date of the Merger, except defendants in this litigation and any person or entity related to or affiliated with any defendants. Argument on both sides' motions for partial summary judgment on plaintiffs' contract claim for additional interest of approximately $20 million in connection with the consideration paid in the merger transaction was heard on February 22, 1994. On August 16, 1994, the court granted defendants' motion for partial summary judgment and dismissed plaintiffs' contract claim. Plaintiffs filed a Notice of Appeal on September 14, 1994. On January 24, 1994, a purported class action entitled Dr. Arun Shingala v. Gerald M. Levin, et al., Civil Action No. 13356, was filed against the Company and its directors in the Court of Chancery of the State of Delaware, New Castle County, on behalf of all stockholders of the Company, other than defendants and their related or affiliated entities. The complaint alleges that the defendant directors acting on behalf of the Company have adopted a plan ("rights plan") to thwart any attempt to take over control of the Company which the defendants find unfavorable to their personal interests. Plaintiff contends that defendants' actions are in violation of their fiduciary duties and seeks a judgment rescinding the adoption of the rights plan and ordering the director defendants jointly and severally to account for all damages which reasonably flow from the actions and transactions alleged. The parties have agreed to dismiss the action without prejudice and without compensation to the plaintiffs or their attorneys. An order effecting that agreement was approved by the court on March 16, 1995. In November 1992, TWE filed a federal lawsuit seeking to overturn major provisions of the 1992 Cable Act primarily on First Amendment grounds. The complaint, filed in the U.S. District Court for the District of Columbia against the FCC and the United States of America, challenges the provisions of the 1992 Cable Act relating to rate regulation, must carry, retransmission consent, terms of dealing by vertically integrated programmers, uniform pricing and operation of cable systems by municipal authorities, the number of subscribers that a cable operator could serve nationwide, free previews of certain premium channels and educational channel set-aside requirements for direct broadcast satellite service. In addition, the complaint seeks to overturn several parts of the 1984 Cable Act relating to public, educational and government access requirements and commercial leased channels. The complaint seeks injunctions against the enforcement or implementation of these provisions. Several other parties have also filed similar lawsuits and these actions have been at least partially consolidated with the action filed by TWE. Hearings on the plaintiffs' motions for summary judgment and the defendants' motions to dismiss or for summary judgment were held in March 1993. On April 8, 1993, in a 2-1 decision, the District Court upheld the constitutionality of the must carry provisions of the 1992 Cable Act. On May 3, 1993, TWE filed an appeal from this decision directly to the U.S. Supreme Court. The U.S. Supreme Court heard argument on that appeal in January 1994 and on June 27, 1994 the U.S. Supreme Court vacated the judgment of the District Court regarding the must-carry I-42 provisions and remanded the case to that court for further factual findings. On September 16, 1993, a one-judge District Court upheld the constitutionality on First Amendment grounds of all the other challenged provisions except restrictions on the number of subscribers that a cable operator could serve nationwide, free pay TV previews and direct broadcast channel usage. TWE appealed this decision to the U.S. Court of Appeals for the D.C. Circuit on November 12, 1993. Briefing on the appeal is scheduled to be completed by early July 1995. For a description of the 1984 Cable Act and the 1992 Cable Act, see Item 1 "Business--Cable Division--Regulation and Legislation." By letters dated July 15, 1993 and September 21, 1993 (the "Access Letters"), the Dallas Regional Office of the Federal Trade Commission (the "FTC") informed WEA that it is conducting a preliminary investigation to determine whether WEA is "unreasonably restricting the resale of previously owned compact discs" and "unreasonably restricting the sale of new compact discs." The Access Letters allege that WEA's conduct may violate Section 5 of the Federal Trade Commission Act, but also say that neither the Access Letters nor the existence of the investigation "should be viewed as an accusation by the FTC or its staff of any wrongdoing by [WEA]." The Access Letters request that WEA voluntarily submit the documents and information requested therein. The FTC investigation also includes other major distributors of recorded music. In the course of the investigation, the FTC issued a subpoena for the deposition of a former WEA executive. WEA has complied with the Access Letters and subpoena. In early October 1994, WEA (and other major distributors of recorded music) received a follow-up subpoena for the production of documents, stating that the FTC is investigating whether members of the pre-recorded music distributing industry may be engaging in unfair methods of competition by fixing prices or by engaging in concerted activities to limit the availability of cooperative advertising or promotional funds to retailers who distribute used compact discs or advertise prices of compact discs below specified levels. WEA produced documents in late December in response to the subpoena. In October 1993, a purported class action was filed in the United States District Court for the Northern District of Georgia entitled Samuel D. Moore, et al. v. American Federation of Television and Radio Artists, et al., No. 93- Civ-2358. The action was brought by fifteen named music performers or representatives of deceased performers on behalf of an alleged class of performers who participated in the creation or production of phonograph recordings for one or more of the defendant recording companies. The named defendants include the American Federation of Television and Radio Artists ("AFTRA"), the AFTRA Health and Retirement Fund ("Fund"), each present trustee of the Fund and fifty named recording companies, including four WCI subsidiaries. The named defendant recording companies comprise substantially all of the domestic recording industry and the complaint seeks to establish a defendant class for purposes of the litigation. The complaint seeks recovery against the recording companies for, among other things, breach of contract, breach of fiduciary duty, fraud, embezzlement and RICO violations, all growing out of alleged failure by the recording companies to make proper contributions to the Fund pursuant to the Phono Code, which is negotiated by AFTRA and most of the domestic recording companies, and other alleged failures to meet the terms of the Phono Code and individual contracts. Plaintiffs seek from the defendant record companies substantial monetary damages, treble damages, attorneys' fees and costs and the imposition of a constructive trust over the master recordings created from recorded performances of the plaintiffs. In March 1994, plaintiffs filed an amended complaint. In March and April 1994, AFTRA, the Fund, the Fund's trustees and certain of the defendant recording companies, including the four WCI subsidiaries, moved to dismiss plaintiffs' amended complaint. On August 2, 1994, the court, among other things, dismissed the claims against the Fund and the Fund's trustees, converted AFTRA's motion to one for summary judgment (and allowed re-briefing) and dismissed all claims against the defendant recording companies except the RICO claim. The record company defendants in the one remaining RICO claim have answered the amended complaint and filed a motion for summary judgment seeking dismissal of the claim. The court has granted AFTRA's motion, and the record company defendants' motion for summary judgment remains pending. On February 21, 1995, counsel for plaintiffs filed a new lawsuit, entitled Samuel D. Moore, et al. v. Sony Music Entertainment Group, et al., No. 95-Civ- 1221, in the United States District Court for the Southern I-43 District of New York. The action was brought by all but one of the named plaintiffs in the Georgia federal suit, with one new plaintiff. The plaintiffs are suing on behalf of an alleged class of performers and derivatively on behalf of the AFTRA Fund. The named defendants include the Fund's trustees, the Fund, and the recording companies that were named as defendants in the Georgia federal suit. The complaint is based on substantially the same allegations as the complaint in the Georgia federal suit, and seeks to recover substantial monetary damages, liquidated damages, and attorney's fees from the recording companies. The record company defendants have simultaneously moved in the Southern District of New York for an order transferring the new case to the Northern District of Georgia, and moved in the Northern District of Georgia for an order staying plaintiffs from proceeding with the New York federal action. On July 14, 1994, the Company received a civil investigative demand from the United States Department of Justice in furtherance of an investigation into certain worldwide activities of the Warner Music Group and other companies in the recorded music industry principally related to cable, wire and satellite- delivered music and music video programmers. The Company has complied with the civil investigative demand to the extent that it sought information and documents with respect to domestic activities of the Warner Music Group and has objected to responding with respect to foreign activities on the ground that the Department of Justice lacks jurisdiction to inquire into such activities. On November 3, 1994, the Department of Justice filed a petition in the United States District Court for the District of Columbia seeking to compel the Company and the other companies to provide documents from their files in the United States that deal with overseas activities. The Company and its subsidiaries are also subject to industry investigations by certain government agencies and/or proceedings under the antitrust laws that have been filed by private parties in which, in some cases, other companies in the same or related industries are also defendants. The Company and its subsidiaries have denied or will deny liability in all of these actions. In all but a few similar past actions, the damages, if any, recovered from the Company or the amounts, if any, for which the actions were settled were small or nominal in relation to the damages sought; and it is the opinion of the management of the Company that any settlements or adverse judgments in the similar actions currently pending will not involve the payment of amounts or have other results that would have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. I-44 EXECUTIVE OFFICERS OF THE COMPANY Pursuant to General Instruction G (3), the information regarding the Company's executive officers required by Item 401(b) of Regulation S-K is hereby included in Part I of this report. The following table sets forth the name of each executive officer of the Company, the office held by such officer and the age, as of March 17, 1995, of such officer:
NAME AGE OFFICE ---- --- ------ Gerald M. Levin......... 55 Chairman of the Board and Chief Executive Officer Richard D. Parsons...... 46 President Peter R. Haje........... 60 Executive Vice President, General Counsel and Secretary Timothy A. Boggs........ 44 Senior Vice President Richard J. Bressler..... 37 Senior Vice President and Chief Financial Officer Tod R. Hullin........... 51 Senior Vice President Philip R. Lochner, Jr... 52 Senior Vice President
Set forth below are the principal positions held by each of the executive officers named above since March 1, 1990: Mr. Levin.................. Chairman of the Board of Directors and Chief Executive Officer since January 21, 1993. Prior to that he served as President and Co-Chief Executive Officer from February 20, 1992; Vice Chairman and Chief Operating Officer from May 1991; and Vice Chairman of the Board prior to that. Mr. Parsons................ President since February 1, 1995. Prior to that he served as Chairman of The Dime Savings Bank of New York, FSB ("DSB") from January 1991 and Chief Executive Officer of DSB from July 1990. Prior to that he was President of DSB. Mr. Haje................... Executive Vice President and General Counsel since October 1, 1990 and Secretary since May 20, 1993. Prior to that, he was a member of the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Boggs.................. Senior Vice President since November 19, 1992. Prior to that he served as Vice President of Public Affairs. Mr. Bressler............... Senior Vice President and Chief Financial Officer since March 16, 1995. Prior to that he served as Senior Vice President, Finance from January 2, 1995; and as a Vice President prior to that. Mr. Hullin................. Senior Vice President since February 7, 1991. Prior to that, he served as Senior Vice President, Corporate Affairs of SmithKline Beecham (diversified health care company). Mr. Lochner................ Senior Vice President since July 18, 1991. Prior to that, he was a Commissioner of the Securities and Exchange Commission from March 1990 to June 1991. Prior to his tenure with the SEC, Mr. Lochner served as Deputy General Counsel and Senior Vice President of Time Warner from January to March 1990. I-45 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market for the Company's Common Stock is the New York Stock Exchange. The Common Stock is also listed on the Pacific Stock Exchange and the London Stock Exchange. For quarterly price information with respect to the Company's Common Stock for the two years ended December 31, 1994, see "Quarterly Financial Information" at page F-27 herein, which information is incorporated herein by reference. The approximate number of holders of record of the Company's Common Stock as of March 1, 1995 was 19,000. For information on the frequency and amount of dividends paid with respect to the Company's Common Stock during the two years ended December 31, 1994, see "Quarterly Financial Information" at page F-27 herein, which information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The selected financial information of the Company for the five years ended December 31, 1994 is set forth at page F-26 herein and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis" at pages F-28 through F-36 herein is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data of the Company and the report of independent auditors thereon set forth at pages F-2 through F-23 and F-25 herein are incorporated herein by reference. Quarterly Financial Information set forth at page F-27 herein is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. II-1 PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by PART III (Items 10, 11, 12 and 13) is incorporated by reference from the Company's definitive Proxy Statement to be filed in connection with its 1995 Annual Meeting of Stockholders pursuant to Regulation 14A, except that the information regarding the Company's executive officers called for by Item 401(b) of Regulation S-K has been included in PART I of this report and the information called for by Items 402(k) and 402(l) of Regulation S-K is not incorporated by reference. III-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1)-(2) Financial Statements and Schedules: (i) The list of consolidated financial statements and schedules set forth in the accompanying Index to Consolidated Financial Statements and Other Financial Information at page F-1 herein is incorporated herein by reference. Such consolidated financial statements and schedules are filed as part of this report. (ii) The financial statements of the Time Warner Service Partnerships and the report of independent auditors thereon, set forth at pages F-64 through F-73 in the 1994 Annual Report on Form 10-K of Time Warner Entertainment Company, L.P. (Reg. No. 33-53742) (the "TWE's 1994 Form 10-K") are incorporated herein by reference and are filed as an exhibit to this report. (iii) The financial statements and financial statement schedule of Paragon Communications and the report of independent accountants thereon, set forth at pages F-74 through F-83 in TWE's 1994 Form 10-K, are incorporated herein by reference and are filed as an exhibit to this report. (3) Exhibits: The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report and such Exhibit Index is incorporated herein by reference. Exhibits 10.1 through 10.24 listed on the accompanying Exhibit Index identify management contracts or compensatory plans or arrangements required to be filed as exhibits to this report, and such listing is incorporated herein by reference. (b) No reports on Form 8-K were filed by Time Warner during the quarter ended December 31, 1994. IV-1 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Time Warner Inc. /s/ Peter R. Haje By .................................. PETER R. HAJE EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY Date: March 30, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Gerald M. Levin ............................. Director, Chairman of the March 30, (GERALD M. LEVIN) Board and Chief Executive 1995 Officer (principal executive officer) /s/ Richard J. Bressler ............................. Senior Vice President and March 30, (RICHARD J. BRESSLER) Chief Financial Officer 1995 (principal financial officer) /s/ John A. LaBarca ............................. Vice President and Controller March 30, (JOHN A. LABARCA) (principal accounting 1995 officer) * ............................. Director March 30, (MERV ADELSON) 1995 * ............................. Director March 30, (LAWRENCE B. BUTTENWIESER) 1995 * ............................. Director March 30, (EDWARD S. FINKELSTEIN) 1995 * ............................. Director March 30, (BEVERLY SILLS GREENOUGH) 1995 * ............................. Director March 30, (CARLA A. HILLS) 1995 * ............................. Director March 30, (DAVID T. KEARNS) 1995 IV-2 SIGNATURE TITLE DATE * ............................. Director March 30, (HENRY LUCE III) 1995 * ............................. Director March 30, (REUBEN MARK) 1995 * ............................. Director March 30, (MICHAEL A. MILES) 1995 * ............................. Director March 30, (J. RICHARD MUNRO) 1995 * ............................. Director March 30, (RICHARD D. PARSONS) 1995 * ............................. Director March 30, (DONALD S. PERKINS) 1995 * ............................. Director March 30, (RAYMOND S. TROUBH) 1995 * ............................. Director March 30, (FRANCIS T. VINCENT, JR.) 1995 /s/ Peter R. Haje *By: ........................ ATTORNEY-IN-FACT IV-3 TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
PAGE ----------- TIME WARNER TWE ------ ---- Consolidated Financial Statements: Balance Sheet..................................................... F-2 F-38 Statement of Operations........................................... F-3 F-39 Statement of Cash Flows........................................... F-4 F-40 Statement of Shareholders' Equity and Partnership Capital......... F-5 F-41 Notes to Consolidated Financial Statements........................ F-6 F-42 Report of Management............................................... F-24 Report of Independent Auditors..................................... F-25 F-57 Selected Financial Information..................................... F-26 F-58 Quarterly Financial Information.................................... F-27 F-59 Management's Discussion and Analysis: Results of Operations............................................. F-28 F-60 Financial Condition and Liquidity................................. F-32 F-62 Supplementary Information.......................................... F-65 Financial Statement Schedule VIII--Valuation and Qualifying Ac- counts............................................................ F-37 F-66
All other financial statements and schedules are omitted because the required information is not present, or is not present in amounts sufficient to require submission of the financial statements or schedules, or because the information required is included in the consolidated financial statements and notes thereto. F-1 TIME WARNER INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, (MILLIONS, EXCEPT PER SHARE AMOUNTS)
1994 1993 ------- ------- ASSETS CURRENT ASSETS Cash and equivalents......................................... $ 282 $ 200 Receivables, less allowances of $768 and $676................ 1,439 1,400 Inventories.................................................. 370 321 Prepaid expenses............................................. 726 613 ------- ------- Total current assets......................................... 2,817 2,534 Investments in and amounts due to and from Entertainment Group....................................................... 5,350 5,627 Other investments............................................ 1,555 1,613 Land and buildings........................................... 412 393 Furniture, fixtures and other equipment...................... 998 878 ------- ------- 1,410 1,271 Less accumulated depreciation................................ (657) (505) ------- ------- Property, plant and equipment................................ 753 766 Music catalogues, contracts and copyrights................... 1,207 1,309 Goodwill..................................................... 4,630 4,691 Other assets................................................. 404 352 ------- ------- Total assets................................................. $16,716 $16,892 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................. $ 648 $ 532 Royalties payable............................................ 731 567 Debt due within one year..................................... 355 120 Other current liabilities.................................... 1,238 1,006 ------- ------- Total current liabilities.................................... 2,972 2,225 Long-term debt............................................... 8,839 9,291 Deferred income taxes........................................ 2,700 2,998 Unearned portion of paid subscriptions....................... 631 633 Other liabilities............................................ 426 375 SHAREHOLDERS' EQUITY Preferred stock, $1 par value, 250 million shares authorized, 962 thousand shares outstanding, $140 million liquidation preference.................................................. 1 1 Common stock, $1 par value, 750 million shares authorized, 379.3 million and 378.3 million shares outstanding.......... 379 378 Paid-in capital.............................................. 2,588 2,537 Unrealized gains on certain marketable securities............ 130 205 Accumulated deficit.......................................... (1,950) (1,751) ------- ------- Total shareholders' equity................................... 1,148 1,370 ------- ------- Total liabilities and shareholders' equity................... $16,716 $16,892 ======= =======
See accompanying notes. F-2 TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, (MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESTATED 1994 1993 1992(A) 1992 ------ ------ -------- ------- Revenues (b)................................. $7,396 $6,581 $6,309 $13,070 ------ ------ ------ ------- Cost of revenues (b) (c)..................... 4,307 3,780 3,633 8,451 Selling, general and administrative (b) (c).. 2,376 2,210 2,147 3,276 ------ ------ ------ ------- Operating expenses........................... 6,683 5,990 5,780 11,727 ------ ------ ------ ------- Business segment operating income............ 713 591 529 1,343 Equity in pretax income of Entertainment Group (b)................................... 176 281 226 -- Interest and other, net (b).................. (724) (718) (351) (882) Corporate expenses (b)....................... (76) (73) (81) (141) ------ ------ ------ ------- Income before income taxes................... 89 81 323 320 Income taxes................................. (180) (245) (237) (234) ------ ------ ------ ------- Income (loss) before extraordinary item...... (91) (164) 86 86 Extraordinary loss on retirement of debt, net of $37 million income tax benefit........... -- (57) -- -- ------ ------ ------ ------- Net income (loss)............................ (91) (221) 86 86 Preferred dividend requirements.............. (13) (118) (628) (628) ------ ------ ------ ------- Net loss applicable to common shares......... $ (104) $ (339) $ (542) $ (542) ====== ====== ====== ======= Loss per common share: Loss before extraordinary item............... $ (.27) $ (.75) $(1.46) $ (1.46) ====== ====== ====== ======= Net loss..................................... $ (.27) $ (.90) $(1.46) $ (1.46) ====== ====== ====== ======= Average common shares........................ 378.9 374.7 371.0 371.0 ====== ====== ====== ======= -------- (a) The 1994 and 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The 1992 historical financial statements have not been changed; however, financial statements for 1992 retroactively reflecting the deconsolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Note 1). (b) Includes the following income (expenses) resulting from transactions with the Entertainment Group and other related companies for the years ended December 31, 1994 and 1993, respectively: revenues-$203 million and $170 million; cost of revenues-$(109) million and $(87) million; selling, general and administrative-$47 million and $59 million; equity in pretax income of Entertainment Group-$(120) million and $(115) million; interest and other, net-$13 million and $(4) million; and corporate expenses-$60 million in each year. (c)Includes depreciation and amortization ex- pense of:................................... $ 437 $ 424 $ 384 $ 1,172 ====== ====== ====== =======
See accompanying notes. F-3 TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, (MILLIONS)
RESTATED 1994 1993 1992(A) 1992 ----- ------ -------- ------ OPERATIONS Net income (loss)............................. $ (91) $ (221) $ 86 $ 86 Adjustments for noncash and nonoperating items: Depreciation and amortization................. 437 424 384 1,172 Noncash interest expense...................... 219 185 64 64 Unusual tax charge and extraordinary loss (b). -- 127 -- -- Equity in pretax income of Entertainment Group, net of distributions.................. (56) (261) (43) -- Equity in (income) losses of other investee companies, net of distributions.............. (17) -- 7 45 Changes in operating assets and liabilities: Receivables.................................. (47) (71) 37 (235) Inventories.................................. (38) 20 (16) (120) Accounts payable and other liabilities....... 324 206 65 140 Other balance sheet changes.................. (258) (152) (22) 8 ----- ------ ------ ------ Cash provided by operations................... 473 257 562 1,160 ----- ------ ------ ------ INVESTING ACTIVITIES Investments and acquisitions.................. (187) (175) (122) (389) Capital expenditures.......................... (164) (198) (172) (574) Investment proceeds........................... 118 103 913 88 ----- ------ ------ ------ Cash provided (used) by investing activities.. (233) (270) 619 (875) ----- ------ ------ ------ FINANCING ACTIVITIES Increase (decrease) in debt................... (44) 3,115 (42) 20 Redemption of Series D preferred stock........ -- (3,494) -- -- Dividends paid................................ (142) (299) (386) (386) TWE capital contribution...................... -- -- -- 1,000 Stock option and dividend reinvestment plans.. 34 92 23 23 Other, principally financing costs prior to 1994......................................... (6) (143) (69) (199) ----- ------ ------ ------ Cash provided (used) by financing activities.. (158) (729) (474) 458 ----- ------ ------ ------ INCREASE (DECREASE) IN CASH AND EQUIVALENTS... $ 82 $ (742) $ 707 $ 743 ===== ====== ====== ======
-------- (a) The 1994 and 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The 1992 historical financial statements have not been changed; however, financial statements for 1992 retroactively reflecting the deconsolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Note 1). (b) Includes $70 million increase in deferred income tax liability as a result of a new tax law enacted in 1993 and $57 million extraordinary loss on the retirement of debt. See accompanying notes. F-4 TIME WARNER INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (MILLIONS, EXCEPT PER SHARE AMOUNTS)
PREFERRED COMMON PAID-IN UNREALIZED ACCUMULATED STOCK STOCK CAPITAL GAINS DEFICIT TOTAL --------- ------ ------- ---------- ----------- ------ BALANCE AT DECEMBER 31, 1991................... $ 123 $370 $8,269 $ -- $ (264) $8,498 Net income.............. 86 86 Dividends on common stock--$.265 per share. (98) (98) Dividends on Series B, C and D preferred stock-- $9.28, $4.375 and $5.50 (in kind) per share, respectively........... 7 333 (628) (288) Purchase of stock....... (1) (61) (62) Shares issued pursuant to stock option and dividend reinvestment plans.................. 1 28 29 Other................... 1 37 (36) 2 ----- ---- ------ ---- ------- ------ BALANCE AT DECEMBER 31, 1992................... 129 372 8,606 -- (940) 8,167 Net loss................ (221) (221) Dividends on common stock--$.31 per share.. (116) (116) Dividends on Series B preferred stock--$9.28 per share.............. 4 (13) (9) Dividends on Series C and D preferred stock to dates of redemption or exchange............ (106) (106) Exchange of Series C preferred stock and redemption of Series D preferred stock (Notes 5 and 7)............... (128) (6,240) (311) (6,679) Unrealized gains on cer- tain marketable equity investments at adoption of FAS 115............. 205 205 Shares issued pursuant to stock option and dividend reinvestment plans.................. 4 116 120 Other................... 2 51 (44) 9 ----- ---- ------ ---- ------- ------ BALANCE AT DECEMBER 31, 1993................... 1 378 2,537 205 (1,751) 1,370 Net loss................ (91) (91) Dividends on common stock--$.35 per share ($.09 per share per quarter effective for the second quarter of 1994).................. (133) (133) Dividends on Series B preferred stock--$9.28 per share.............. 4 (13) (9) Unrealized losses on certain marketable eq- uity investments....... (75) (75) Shares issued pursuant to stock option and dividend reinvestment plans.................. 1 53 54 Other................... (6) 38 32 ----- ---- ------ ---- ------- ------ BALANCE AT DECEMBER 31, 1994................... $ 1 $379 $2,588 $130 $(1,950) $1,148 ===== ==== ====== ==== ======= ======
See accompanying notes. F-5 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of Time Warner Inc. ("Time Warner" or the "Company") and all companies in which Time Warner has a controlling voting interest ("subsidiaries"), as if Time Warner and its subsidiaries were a single company. Significant intercompany accounts and transactions between the consolidated companies have been eliminated. Investments in companies in which Time Warner has significant influence but less than a controlling voting interest are accounted for using the equity method. Under the equity method, only Time Warner's investment in and amounts due to and from the equity investee are included in the consolidated balance sheet, only Time Warner's share of the investee's earnings is included in the consolidated operating results, and only the dividends, cash distributions, loans or other cash received from the investee, less any additional cash investment, loan repayments or other cash paid to the investee, are included in the consolidated cash flows. Prior to 1993, Time Warner's Entertainment Group companies ("Entertainment Group"), principally Time Warner Entertainment Company, L.P. ("TWE"), were consolidated. Due to changes in TWE's governance provisions at the time U S WEST, Inc. ("U S WEST") was admitted as an additional limited partner (Note 2), TWE and the other Entertainment Group companies were deconsolidated, effective as of January 1, 1993, and have since been accounted for using the equity method. The 1992 historical financial statements of Time Warner were not changed; accordingly, they include TWE and other Entertainment Group companies on a consolidated basis. However, financial statements for 1992 retroactively reflecting the deconsolidation of the Entertainment Group also are presented under the caption "restated" to facilitate comparative analysis. In accordance with Financial Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in companies in which Time Warner does not have the controlling interest or an ownership and voting interest so large as to exert significant influence are accounted for at market value, if the investments are publicly traded and there are no resale restrictions, or at cost, if the sale of a publicly-traded investment is restricted or if the investment is not publicly traded. Unrealized gains and losses on investments accounted for at market value are reported net-of-tax in a separate component of shareholders' equity until the investment is sold, at which time the realized gain or loss is included in income. Dividends and other distributions of earnings from both market value and cost method investments are included in income when declared. Time Warner's $14 billion cost to acquire Warner Communications Inc. ("WCI") was allocated to the net assets acquired as of December 31, 1989 in accordance with the purchase method of accounting for business combinations. The acquisition was financed principally by $8.3 billion of long-term debt and $5.6 billion of Series C and Series D preferred stock ("old Series C and Series D preferred stock"), which was redeemed with or exchanged for debt in 1993 (Notes 5 and 7). The effect of changes in Time Warner's ownership interests resulting from the issuance of equity capital by consolidated subsidiaries or equity investees to unaffiliated parties is included in income. The effect of the four-for-one common stock split on September 10, 1992 has been reflected retroactively. Certain reclassifications have been made to the prior years' financial statements to conform to the 1994 presentation. REVENUES AND COSTS The unearned portion of paid subscriptions is deferred until magazines are delivered to subscribers. Upon each delivery, a proportionate share of the gross subscription price is included in revenues. F-6 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Inventories of magazines, books, cassettes and compact discs are stated at the lower of cost or estimated realizable value. Cost is determined using first-in, first-out; last-in, first-out; and average cost methods. In accordance with industry practice, certain products are sold to customers with the right to return unsold items. Revenues from such sales represent gross sales less a provision for future returns. Returned goods included in inventory are valued at estimated realizable value but not in excess of cost. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided generally on the straight-line method over useful lives ranging up to twenty- five years for buildings and improvements and up to fifteen years for furniture, fixtures and equipment. INTANGIBLE ASSETS Intangible assets are recorded when the cost of acquired companies exceeds the fair value of their tangible assets. Generally accepted accounting principles require that all intangible assets be amortized over no more than a forty-year period. Amortization of goodwill amounted to $158 million, $148 million and $257 million ($142 million on a restated basis) in 1994, 1993 and 1992, respectively; amortization of music copyrights, artists' contracts and record catalogues amounted to $115 million, $113 million and $113 million; and amortization of other intangible assets amounted to $31 million, $31 million and $310 million ($8 million on a restated basis). Accumulated amortization of intangible assets at December 31, 1994 and 1993 amounted to $1.505 billion and $1.245 billion, respectively. FOREIGN CURRENCY The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses, which have not been material, are included in accumulated deficit. Foreign currency transaction gains and losses, which have not been material, are included in operating results. Foreign exchange contracts are used primarily to hedge the risk that unremitted or future royalties and license fees owed to Time Warner or TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in exchange rates. At December 31, 1994, Time Warner had contracts for the sale of $551 million and the purchase of $109 million of foreign currencies at fixed rates, primarily Japanese yen (25% of net contract value), French francs (19%), English pounds (17%), Canadian dollars (9%) and German marks (14%), compared to contracts for the sale of $653 million and the purchase of $80 million of foreign currencies at December 31, 1993. Unrealized gains or losses are recorded in income; accordingly, the carrying value of foreign exchange contracts approximates market value. Time Warner had $33 million and TWE had $20 million of net losses on foreign exchange contracts during 1994, which were or are expected to be offset by corresponding increases in the dollar value of foreign currency royalties and license fee payments that have been or are anticipated to be received from the sale of U.S. copyrighted products abroad. Time Warner reimburses or is reimbursed by TWE for contract gains and losses related to TWE's foreign currency exposure. Foreign currency contracts are placed with a number of major financial institutions in order to minimize credit risk. INCOME TAXES Income taxes are provided using the liability method prescribed by FASB Statement No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. F-7 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Realization of the net operating loss and investment tax credit carryforwards, which were acquired in acquisitions, are accounted for as a reduction of goodwill. The principal operations of the Entertainment Group are conducted by partnerships. Income tax expense includes all income taxes related to Time Warner's allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of the partnerships. INTEREST RATE SWAP CONTRACTS Interest rate swap contracts are used to adjust the proportion of total debt that is subject to changes in short-term interest rates and the proportion that is subject to fixed rates. Under interest rate swap contracts, the Company either agrees to pay an amount equal to a specified floating-rate of interest times a notional principal amount, and to receive in return an amount equal to a specified fixed-rate of interest times the same notional principal amount or, vice versa, to receive a floating-rate amount and to pay a fixed-rate amount. The notional amounts of the contracts are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is equal to the present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. Interest rate swap contracts are entered into with a number of major financial institutions in order to minimize credit risk. The net amounts paid or payable, or received or receivable, through the end of the accounting period are included in interest expense. Gains or losses on the termination of contracts are deferred and amortized to income over the remaining average life of the terminated contracts. TREASURY STOCK The purchase of Time Warner common and other capital stock by Time Warner or its subsidiaries is accounted for as if the stock had been retired and is no longer outstanding. LOSS PER COMMON SHARE Loss per common share is based upon the net loss applicable to common shares after preferred dividend requirements and upon the weighted average of common shares outstanding during the period. The conversion of securities convertible into common stock and the exercise of stock options were not assumed in the calculations of loss per common share because the effect would have been antidilutive. 2.ENTERTAINMENT GROUP Time Warner's investment in and amounts due to and from the Entertainment Group at December 31, 1994 and 1993 consist of the following:
DECEMBER 31, -------------- 1994 1993 ------ ------ (MILLIONS) Investment in TWE.............................................. $5,284 $5,085 Income tax and stock option related distributions due from TWE. 423 547 Credit agreement debt due to TWE............................... (400) -- Other liabilities due to TWE, principally related to home video distribution.................................................. (266) (257) ------ ------ Investment in and amounts due to and from TWE.................. 5,041 5,375 Investment in other Entertainment Group companies.............. 309 252 ------ ------ Total.......................................................... $5,350 $5,627 ====== ======
F-8 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) TWE is a Delaware limited partnership that was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment, Programming- HBO and Cable businesses previously owned by subsidiaries of Time Warner. The Time Warner subsidiaries are the general partners ("Time Warner General Partners") and subsidiaries of U S WEST, ITOCHU Corporation ("ITOCHU") and Toshiba Corporation ("Toshiba") are the limited partners. The Time Warner General Partners contributed the assets and liabilities or the rights to the cash flow of substantially all of Time Warner's Filmed Entertainment, Programming-HBO and Cable businesses at the initial capitalization of TWE, and ITOCHU and Toshiba each contributed $500 million of cash. On September 15, 1993, U S WEST contributed $1.532 billion of cash and a $1.021 billion 4.4% note ("U S WEST Note") for its interests. The initial capital amounts assigned to each partner were based on the fair value of the assets each contributed to the partnership and have the following priority in the event of liquidation or dissolution:
INITIAL % OWNED BY CAPITAL TIME WARNER PRIORITY OF CONTRIBUTED CAPITAL AMOUNTS(A) GENERAL PARTNERS ------------------------------- ---------- ---------------- (BILLIONS) Senior capital...................................... $1.4 100.00% Pro rata priority capital........................... 5.6 63.27% Junior priority capital............................. 2.6 100.00% Residual equity capital............................. 3.3 63.27%
-------- (a) Excludes partnership income or loss (to the extent earned) allocated thereto. Under the TWE partnership agreement, partnership income, to the extent earned, is first allocated to the partners so that the economic burden of the income tax consequences of partnership operations is borne as though the partnership were taxed as a corporation ("special tax allocations"), then to the senior, pro rata priority and junior priority capital interests, in order of priority, at rates of return ranging from 8% to 13.25% per annum, and finally to the residual equity interests. For the purpose of the foregoing allocations, partnership income is based on the fair value of assets contributed to the partnership, and differs from net income of TWE, which is based on the historical cost of contributed assets. Partnership losses generally are allocated first to eliminate prior allocations of partnership income to, and then to reduce the initial capital amounts of, the residual equity, junior priority capital and pro rata priority capital interests, in that order, then to reduce the Time Warner General Partners' senior capital, including partnership income allocated thereto, and finally to reduce any special tax allocations. To the extent partnership income is insufficient to satisfy all special allocations in a particular accounting period, the unearned portion is carried over until satisfied out of future partnership income. The senior capital owned by the Time Warner General Partners and partnership income allocated thereto is required to be distributed in three annual installments beginning July 1, 1997; earlier distributions may be made under certain circumstances. The junior priority capital owned by the Time Warner General Partners may be increased if certain performance targets are achieved between 1992 and 2001. TWE reported net income of $161 million, $198 million and $160 million in 1994, 1993 and 1992, respectively, no portion of which was allocated to the limited partners. Time Warner did not recognize a gain when TWE was capitalized. TWE recorded the assets contributed by the Time Warner General Partners at Time Warner's historical cost. The excess of the Time Warner General Partners' interest in the net assets of TWE over the net book value of their investment in TWE is being amortized to income over a twenty year period at the rate of $17 million per year prior to the admission of U S WEST, and $72 million per year thereafter. U S WEST has an option to obtain up to an additional 6.33% of pro rata priority capital and residual equity interests, depending on cable operating performance. The option is exercisable between January 1, 1999 F-9 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and on or about May 31, 2005 at a maximum exercise price of $1.25 billion to $1.8 billion, depending on the year of exercise. Either U S WEST or TWE may elect that the exercise price be paid with partnership interests rather than cash. Each of ITOCHU and Toshiba have options to obtain up to an additional .64% of pro rata priority capital and residual equity interests in certain circumstances, payable in cash. Each Time Warner General Partner has guaranteed a pro rata portion of $7 billion of TWE's debt and accrued interest at December 31, 1994, based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. In addition to their interests in TWE and the other Entertainment Group companies, the assets of the Time Warner General Partners include the equivalent of 29.6 million common shares of Turner Broadcasting System, Inc., 12.1 million common shares of Hasbro, Inc., 43.7 million common shares of Time Warner, and substantially all the assets of Time Warner's music business. There are no restrictions on the ability of the Time Warner General Partner guarantors to transfer assets, other than TWE assets, to parties that are not guarantors. The summarized financial information for the Entertainment Group set forth below reflects the consolidation of Six Flags Entertainment Corporation ("Six Flags") as of January 1, 1993 as a result of the increase in TWE's ownership from 50% to 100% in September 1993. The 1992 historical financial information has not been changed; however, financial information for 1992 retroactively reflecting the consolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis. TIME WARNER ENTERTAINMENT GROUP
YEARS ENDED DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------- ------ -------- ------ (MILLIONS) OPERATING STATEMENT INFORMATION Revenues...................................... $ 8,509 $7,963 $7,251 $6,761 Depreciation and amortization................. 959 909 857 788 Business segment operating income............. 852 905 855 814 Interest and other, net....................... 616 564 569 531 Income before income taxes.................... 176 281 226 223 Income before extraordinary item.............. 136 217 173 173 Net income.................................... 136 207 173 173 YEARS ENDED DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------- ------ -------- ------ (MILLIONS) CASH FLOW INFORMATION Cash provided by operations................... $ 1,341 $1,276 $ 864 $ 781 Capital expenditures.......................... (1,235) (613) (423) (402) Investments and acquisitions.................. (186) (368) (383) (279) Loan to Time Warner........................... (400) -- -- -- Increase (decrease) in debt................... 48 (659) (791) (837) Capital contributions......................... 234 1,548 1,012 1,012 Capital distributions......................... (120) (20) (183) (183) Increase (decrease) in cash and equivalents... (267) 1,302 24 13
F-10 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, --------------- 1994 1993 ------- ------- (MILLIONS) BALANCE SHEET INFORMATION Cash and equivalents........................................... $ 1,071 $ 1,338 Total current assets........................................... 3,571 3,766 Total assets................................................... 18,992 18,202 Total current liabilities...................................... 2,953 2,301 Long-term debt................................................. 7,160 7,125 Time Warner General Partners' senior capital, consisting of $1.364 billion initial capital amount plus accrued income..... 1,663 1,536 TWE partners' capital, before deduction of the U S WEST Note... 7,004 7,005 U S WEST Note.................................................. 771 1,005
The assets and cash flows of TWE are restricted by the TWE partnership and credit agreements and are unavailable for use by the partners except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. The Time Warner General Partners received $115 million of tax-related distributions from TWE in 1994. There was an additional $334 million of such distributions due from TWE at December 31, 1994, compared to $276 million at December 31, 1993. The Time Warner General Partners also had accrued $89 million and $271 million, respectively, of stock option related distributions due from TWE at December 31, 1994 and December 31, 1993, respectively, based on closing prices of Time Warner common stock of $35.125 and $44.25, respectively. Time Warner is paid when the options are exercised and received $5 million and $20 million of stock option distributions in 1994 and 1993, respectively. In addition to the tax, stock option and Time Warner General Partners' senior capital distributions, TWE may make other distributions, generally depending on excess cash and credit agreement limitations. The Time Warner General Partners' full share of such distributions may be deferred if the limited partners do not receive certain threshold amounts by certain dates. In the normal course of conducting their businesses, Time Warner and its subsidiaries and affiliates have had various transactions with TWE and other Entertainment Group companies, generally on terms resulting from a negotiation between the affected units that in management's view results in reasonable allocations. Time Warner provides TWE with certain corporate support services for which it receives a fee of $60 million per year through June 30, 1995, and increasing annual amounts as adjusted for inflation thereafter. 3. CABLE TRANSACTIONS In September 1994, Time Warner agreed to acquire Summit Communications Group, Inc. ("Summit"), which owns cable television systems serving 162,000 subscribers, in exchange for 900,000 shares of Time Warner common stock and 3.2 million shares of a new Time Warner convertible preferred stock ("new Series C preferred stock") having a liquidation value of $100 per share. The new Series C preferred stock will be convertible into 6.7 million shares of Time Warner common stock at an effective price of $48 of liquidation value per common share, receive an annual dividend of $3.75 per share for five years, and be redeemable at liquidation value plus unpaid dividends after five years, or exchangeable in part for common stock by the holder beginning after the third year and by Time Warner after the fourth year at the stated conversion price plus a declining premium in years four and five and no premium thereafter. The Time Warner consideration is subject to adjustment after closing based on the working capital of Summit at closing. In September 1994, TWE agreed to form a cable television joint venture with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting Corporation ("Advance/Newhouse") to which F-11 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Advance/Newhouse will contribute cable television systems serving 1.4 million subscribers and related assets and TWE will contribute cable television systems (or interests therein) serving 2.8 million subscribers and related assets. TWE will own a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and be the managing partner. Advance/Newhouse will own a one-third equity interest in the partnership. Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. In January 1995, Time Warner agreed to acquire KBLCOM Incorporated ("KBLCOM"), a subsidiary of Houston Industries Incorporated that owns cable television systems serving approximately 690,000 subscribers and a 50% interest in Paragon Communications ("Paragon"), which serves an additional 967,000 cable subscribers. TWE owns the other 50% interest in Paragon. To acquire KBLCOM, Time Warner will issue 1 million shares of common stock and 11 million shares of a new convertible preferred stock ("new Series D preferred stock") and assume or incur $1.24 billion of indebtedness. The new Series D preferred stock will have a liquidation value of $100 per share, be convertible into 22.9 million shares of Time Warner common stock at an effective price of $48 of liquidation value per common share, and receive an annual dividend of $3.75 per share for four years. Time Warner will have the right to exchange the new Series D preferred stock for common stock at the stated conversion price after four years. In February 1995, Time Warner agreed to acquire Cablevision Industries Corporation ("CVI") and related companies that own cable television systems serving 1.3 million subscribers. To acquire CVI and related companies, Time Warner will issue 2.5 million shares of common stock and 6.5 million shares of new convertible preferred stocks (3.25 million shares of "Series E preferred stock" and 3.25 million shares of "Series F preferred stock") and assume approximately $2 billion of debt of CVI and related companies. The Series E and F preferred stocks will have a liquidation value of $100 per share, be convertible into 13.5 million shares of Time Warner common stock at an effective price of $48 of liquidation value per common share, and receive an annual dividend of $3.75 per share for a period of five years with respect to the Series E preferred stock and a period of four years with respect to the Series F preferred stock. Time Warner will have the right to exchange the Series E preferred stock for common stock at the stated conversion price after five years and to exchange the Series F preferred stock for common stock at the stated conversion price after four years. The amount of common stock and Series F preferred stock to be issued will be adjusted if the level of indebtedness, negative working capital and related items at the closing differ from approximately $2 billion. To the extent that any of the new Series C, D, E or F preferred stocks remain outstanding following the end of the period in which the $3.75 per share dividend is to be paid, holders will receive a dividend equal to the common dividend declared times the number of common shares into which their preferred shares are convertible. While they are outstanding, each of the Series C, D, E and F preferred stocks will be entitled to vote with the common stock on all matters on which the common stock is entitled to vote, and each share of any such preferred stock will be entitled to two votes per share on any such matter. The Summit and Advance/Newhouse transactions are expected to close in the first half of 1995. The KBLCOM and CVI transactions are expected to close later in the year. All transactions are subject to customary closing conditions, including the receipt of certain franchise and regulatory approvals. F-12 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4.OTHER INVESTMENTS Time Warner's other investments consist of:
DECEMBER 31, ------------- 1994 1993 ------ ------ (MILLIONS) Equity method investments........................................ $ 985 $ 798 Market value method investments(/1/)............................. 435 553 Cost method investments.......................................... 135 262 ------ ------ Total............................................................ $1,555 $1,613 ====== ======
-------- (1) Unrestricted marketable equity securities not accounted for using the equity method are stated at market value. Such amounts include the market value of 12.058 million shares of common stock of Hasbro, Inc., which can be used, at Time Warner's option, to satisfy its obligations with respect to the zero coupon exchangeable notes due 2012 (Note 5). In addition to TWE and its equity investees, companies accounted for using the equity method include Turner Broadcasting System, Inc. ("TBS") (19.6% owned); Cinamerica Theatres, L.P. (50% owned) and The Columbia House Company partnerships (50% owned) and other music joint ventures (generally 50% owned). Equity investees of TWE include Paragon Communications (50% owned), certain other cable system joint ventures (generally 50% owned) and Comedy Partners, L.P. (50% owned). A summary of financial information as reported by the equity investees of Time Warner and TWE on a 100% basis is set forth below:
YEARS ENDED DECEMBER 31, ------------------------------ RESTATED 1994 1993 1992 1992 ------ ------ -------- ------ (MILLIONS) Revenues........................................ $4,444 $3,363 $3,020 $4,102 Operating income................................ 584 450 433 555 Income before extraordinary items and cumulative effect of a change in accounting principle..... 281 201 162 168 Net income (loss)............................... 256 (135) 207 212 Current assets.................................. 2,113 1,586 1,257 1,473 Total assets.................................... 5,194 4,111 3,277 5,421 Current liabilities............................. 1,136 755 589 951 Long-term debt.................................. 3,730 2,606 1,794 3,022 Total liabilities............................... 5,423 3,992 2,606 4,376
The market value and cost of Time Warner's investment in TBS at December 31, 1994 was $900 million and $527 million, respectively. The sale, transfer or other disposition of substantially all of the shares of TBS capital stock is restricted pursuant to shareholder agreements. The TBS securities also may be considered restricted securities under the Securities Act of 1933 and, if so, could only be sold pursuant to an effective registration statement or in a transaction exempt from the registration requirements of the Securities Act of 1933. F-13 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. LONG-TERM DEBT Long-term debt consists of:
DECEMBER 31, -------------- 1994 1993 ------ ------ (MILLIONS) 9.5% Notes due November 1, 1994(/1/)............................ $ -- $ 125 5.2% Notes due April 15, 1994(/1/).............................. -- 250 6.05% Notes due July 1, 1995.................................... -- 300 7.45% Notes due February 1, 1998................................ 500 500 7.95% Notes due February 1, 2000................................ 500 500 Redeemable reset notes due August 15, 2002 (8.7% yield)......... 1,719 1,572 Zero coupon exchangeable notes due December 17, 2012 (6.25% yield)......................................................... 547 514 Zero coupon convertible notes due June 22, 2013 (5% yield)...... 970 923 9.125% Debentures due January 15, 2013.......................... 1,000 1,000 8.75% Convertible subordinated debentures due January 10, 2015.. 2,226 2,226 8.75% Debentures due April 1, 2017.............................. 248 248 9.15% Debentures due February 1, 2023........................... 1,000 1,000 Credit agreement debt due to TWE (6.7% interest rate)........... 400 -- Other........................................................... 129 133 ------ ------ Subtotal........................................................ 9,239 9,291 Reclassification of debt due to TWE to amounts due to the Enter- tainment Group................................................. (400) -- ------ ------ Total........................................................... $8,839 $9,291 ====== ======
-------- (1) Classified as long-term in 1993 because of the intent and ability to refinance under Time Warner's credit agreement with TWE. Time Warner and TWE entered into a credit agreement in 1994 that allows Time Warner to borrow up to $400 million from TWE through September 15, 2000. Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time Warner borrowed $400 million in 1994 under the credit agreement, and used the proceeds principally to repay its 9.5% notes due November 1, 1994 and its 5.2% notes due April 15, 1994. Under TWE's bank credit agreement, TWE's loans to Time Warner cannot exceed $1.1 billion at December 31, 1994, increasing to no more than $1.5 billion on July 1, 1995. The redeemable reset notes due August 15, 2002 do not pay interest for periods prior to August 15, 1995, the first redemption date, at which time an interest rate will be set. The interest rate will be reset on August 15, 1998, the second redemption date. The notes are redeemable at par on each redemption date, payable in any combination of cash and debt securities, if Time Warner elects to redeem the notes, or in any combination of cash or equity or debt securities of Time Warner or any other entity, as Time Warner will determine, if the holders elect to have the notes redeemed. Unamortized discount was $82 million and $229 million at December 31, 1994 and 1993, respectively. The zero coupon notes do not pay interest until maturity. The zero coupon exchangeable notes due December 17, 2012 are exchangeable at any time by the holder into 7.301 shares of common stock of Hasbro, Inc. ("Hasbro shares") per $1,000 principal amount, subject to Time Warner's right to pay in whole or in part with cash instead of Hasbro shares. Time Warner can elect to redeem the notes any time after December 17, 1997, and holders can elect to have the notes redeemed prior thereto in the event of a change of control, at the issue price plus accrued interest. Holders also can elect to have the notes redeemed at the issue price plus accrued interest on December 17, 1997, 2002 and 2007, subject to Time Warner's right to pay in whole or in part with Hasbro shares instead of cash. Unamortized discount was $1.104 billion and $1.137 billion at December 31, 1994 and 1993, respectively. F-14 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The zero coupon convertible notes due June 22, 2013 are convertible at any time by the holders into 18.7 million shares of Time Warner common stock at the rate of 7.759 shares for each $1,000 principal amount of notes. Time Warner can elect to redeem the notes any time after June 22, 1998, and holders can elect to have the notes redeemed prior thereto in the event of a change in control, at the issue price plus accrued interest. Holders also can elect to have the notes redeemed at the issue price plus accrued interest on June 22, 1998, 2003 and 2008, subject to Time Warner's right to pay in whole or in part with Time Warner common stock instead of cash. Unamortized discount was $1.445 billion and $1.492 billion at December 31, 1994 and 1993, respectively. $3.125 billion of 8.75% convertible subordinated debentures due January 10, 2015 were issued in exchange for the old Series C preferred stock in April 1993 (Note 7). $900 million of such debentures were redeemed in July 1993. The $2.226 billion of 8.75% convertible subordinated debentures outstanding at December 31, 1994 are convertible into 46.6 million shares of Time Warner common stock at the rate of $47.73 principal amount of indebtedness per common share and are redeemable at any time, in whole or in part, at Time Warner's option, at 104.375% of par until January 9, 1996, decreasing ratably each year thereafter to 100% of par on January 10, 2000. An after-tax cost of $57 million was incurred in connection with the redemption of debt in 1993, principally the redemption of $900 million of 8.75% convertible subordinated debentures and $529 million of WCI senior and subordinated debentures. Each Time Warner General Partner has guaranteed a pro rata portion of $7 billion of TWE's debt and accrued interest at December 31, 1994, as more fully described in Note 2. TWE's credit agreement contains certain restrictive covenants relating to, among other things, additional indebtedness; cash flow coverage and leverage ratios; and loans, advances, distributions or other cash payments or transfers of assets to Time Warner and its subsidiaries. At December 31, 1994, Time Warner had interest rate swap contracts to pay floating-rates of interest (average six-month LIBOR rate of 5.9%) and receive fixed-rates of interest (average rate of 5.5%) on $2.9 billion notional amount of indebtedness, effectively converting approximately 32% of Time Warner's underlying debt, substantially all of which is fixed-rate, to a floating-rate basis. The notional amount of outstanding contracts by year of maturity is as follows: 1995-$300 million; 1996-$300 million; 1998-$700 million; 1999-$1.2 billion; and 2000-$400 million. Based on the level of interest rates prevailing at December 31, 1994, the fair value of Time Warner's fixed-rate debt was $572 million less than its carrying value and it would have cost $236 million to terminate the related interest rate swap contracts, which combined is the equivalent of an unrealized gain of $336 million. Based on the level of interest rates prevailing at December 31, 1993, the fair value of Time Warner's fixed-rate debt exceeded its carrying value by $530 million and the Company would have received $4 million to terminate its interest rate swap contracts, which combined was the equivalent of an unrealized loss of $526 million. Accounting recognition is not given to unrealized gains or losses on debt or interest rate swap contracts unless the debt is retired or the contracts are terminated prior to their maturity. Interest expense amounted to $769 million in 1994, $698 million in 1993 and $729 million in 1992 ($287 million on a restated basis, which was before the old Series C and D preferred stocks were redeemed with or exchanged for long- term debt). The weighted average interest rate on Time Warner's total debt, including the effect of interest rate swap contracts, was 8.1% and 7.6% at December 31, 1994 and 1993, respectively. Annual repayments of long-term debt for the five years subsequent to December 31, 1994 consist of $500 million due in 1998. Such repayments exclude the aggregate repurchase or redemption prices of $1.801 billion in 1995, $656 million in 1997 and $1.151 billion in 1998 relating to the redeemable reset notes, zero coupon exchangeable notes and zero coupon convertible notes, respectively, in the years in which the holders of such debt may first exercise their redemption options. F-15 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. INCOME TAXES Domestic and foreign pretax income (loss) are as follows:
YEARS ENDED DECEMBER 31, ------------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ---- (MILLIONS) Domestic............................................. $(78) $(57) $ 83 $ 80 Foreign.............................................. 167 138 240 240 ---- ---- ---- ---- Total................................................ $ 89 $ 81 $323 $320 ==== ==== ==== ==== Current and deferred income taxes (tax benefits) provided are as follows: YEARS ENDED DECEMBER 31, ------------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ---- (MILLIONS) Federal: Current(/1/)....................................... $ 66 $ 45 $ 9 $ 9 Deferred(/2/)...................................... (81) 11 24 21 Foreign: Current(/3/)....................................... 194 168 159 159 Deferred........................................... (45) (11) 14 14 State and Local: Current............................................ 79 86 45 45 Deferred........................................... (33) (54) (14) (14) ---- ---- ---- ---- Total................................................ $180 $245 $237 $234 ==== ==== ==== ====
-------- (1) Includes utilization of tax carryforwards of $48 million in 1994, $136 million in 1993 and $15 million in 1992. Excludes current tax benefits of $11 million in 1994 and $14 million in 1993 resulting from the exercise of stock options and vesting of restricted stock awards, which were credited directly to paid-in-capital, and $6 million of current tax benefits resulting from the retirement of debt, which reduced the extraordinary loss in 1993. (2) Includes $70 million unusual charge in 1993 to increase deferred tax liability for increase in tax rate. (3) Includes foreign withholding taxes of $74 million in 1994, $79 million in 1993 and $57 million in 1992. The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as set forth below. The relationship between income before income taxes and income tax expense is most affected by the amortization of goodwill and certain other financial statement expenses that are not deductible for income tax purposes and by a $70 million charge ($.19 per common share) in 1993 to adjust the deferred income tax liability for the increase in the U.S. federal statutory rate from 34% to 35% enacted into law that year.
YEARS ENDED DECEMBER 31, ----------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ---- (MILLIONS) Taxes on income at U.S. federal statutory rate.......... $ 31 $ 28 $110 $109 State and local taxes, net.............................. 30 21 20 20 Nondeductible expenses.................................. 107 107 92 90 Charge to increase deferred tax liability for increase in tax rate............................... -- 70 -- -- Foreign income taxed at different rates, net of U.S. foreign tax credits................. 1 13 14 14 Other................................................... 11 6 1 1 ---- ---- ---- ---- Total................................................... $180 $245 $237 $234 ==== ==== ==== ====
F-16 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Significant components of Time Warner's net deferred tax liabilities are as follows:
DECEMBER 31, ------------- 1994 1993 ------ ------ (MILLIONS) Assets acquired in business combinations......................... $2,276 $2,146 Depreciation and amortization.................................... 619 1,026 Unrealized appreciation of certain marketable securities......... 91 142 Other............................................................ 460 460 ------ ------ Deferred tax liabilities......................................... 3,446 3,774 ------ ------ Tax carryforwards................................................ 264 312 Accrued liabilities.............................................. 206 137 Reserves for doubtful receivables and returns.................... 200 160 Other............................................................ 76 167 ------ ------ Deferred tax assets.............................................. 746 776 ------ ------ Net deferred tax liabilities..................................... $2,700 $2,998 ====== ======
U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of foreign subsidiaries aggregating approximately $700 million at December 31, 1994. Determination of the amount of unrecognized deferred U.S. income tax liability with respect to such earnings is not practicable. If such earnings are repatriated, additional U.S. income and foreign withholding taxes are expected to be offset by the accompanying foreign tax credits. U.S. federal tax carryforwards at December 31, 1994 consisted of $39 million of net operating losses that expire from 1997 to 2008, $224 million of investment tax credits that expire from 1996 to 2008, and $26 million of alternative minimum tax credits that have no expiration dates. The utilization of certain carryforwards is subject to limitations under U.S. federal income tax laws. 7.CAPITAL STOCK The outstanding capital stock of Time Warner at December 31, 1994 consisted of 962,068 shares of Series B preferred stock and 379.3 million shares of common stock (net of 45.7 million shares of common stock in treasury, as to which 43.7 million were held by the Time Warner General Partners). At January 31, 1995, there were approximately 19,000 holders of record of Time Warner common stock. Pursuant to a shareholder rights plan adopted in January 1994, Time Warner distributed one right per common share which becomes exercisable in certain events involving the acquisition of 15% or more of Time Warner common stock. Upon the occurrence of such an event, each right entitles its holder to purchase for $150 the economic equivalent of common stock of Time Warner, or in certain circumstances, of the acquiror, worth twice as much. In connection with the plan, 4 million shares of preferred stock were reserved. The rights expire on January 20, 2004. Each share of Series B preferred stock is: (1) entitled to a liquidation preference of $145, (2) entitled to earn dividends at a rate of 6.4% per annum of its $145 liquidation value through May 31, 1995 and at a rate of 3% per annum thereafter, payable quarterly in cash, (3) not entitled to vote, except in certain circumstances, and (4) redeemable, in whole or in part, (a) by Time Warner prior to May 31, 1995 in exchange for shares or fractional shares of any class or series of publicly-traded Time Warner stock ("Public Stock") equal in value to the liquidation value of the Series B stock and (b) by Time Warner or the holder on or after May 31, 1995 in exchange for, at Time Warner's option, cash or shares or fractional shares of Public Stock equal in value to the liquidation value of the Series B stock plus a premium of 2% of liquidation value for each year after May 31, 1995 to the redemption date. F-17 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In 1993, Time Warner redeemed its old Series D preferred stock for cash and exchanged its old Series C preferred stock for 8.75% convertible subordinated debentures due January 10, 2015. The old Series D redemption was financed principally by the proceeds from the issuance of long-term notes and debentures. At December 31, 1994, Time Warner had reserved 143.8 million shares of common stock for the conversion of the 8.75% convertible subordinated debentures, zero coupon convertible notes and other convertible securities, and for the exercise of outstanding options to purchase shares of common stock. Approximately 43 million additional shares will be reserved for the conversion of the new Series C, D, E and F preferred stocks issuable in the cable acquisitons that are expected to close in 1995 (Note 3). 8. STOCK OPTION PLANS Options to purchase Time Warner common stock under various stock option plans have been granted to employees of Time Warner and TWE, generally at fair market value at the date of grant. Generally, the options become exercisable over a three-year vesting period and expire ten years from the date of grant. A summary of stock option activity under all plans is as follows:
THOUSANDS EXERCISE PRICE OF SHARES PER SHARE --------- -------------- Balance at December 31, 1993..................... 72,954 $ 8-48 Granted.......................................... 6,071 32-41 Exercised........................................ (1,262) 8-36 Cancelled........................................ (152) 22-45 ------ Balance at December 31, 1994..................... 77,611 $ 8-48 ====== At December 31, 1994: Exercisable.................................... 63,106 Available for future grants.................... 8,849
For options granted to employees of TWE, Time Warner is reimbursed for the amount by which the market value of Time Warner common stock on the exercise date exceeds the exercise price, or the greater of the exercise price or $27.75 for options granted prior to the TWE capitalization. There were 30.2 million options held by employees of TWE at December 31, 1994, 21.3 million of which were exercisable (Note 2). There were 4.8 million options exercised in 1993 at prices ranging from $8- $36 per share, 933,000 options exercised in 1992 at prices ranging from $8-$28 per share, and 57.7 million options exercisable and 4.4 million options available for grant at December 31, 1993. 9. BENEFIT PLANS Time Warner and its subsidiaries have defined benefit pension plans covering substantially all domestic employees. Pension benefits are based on formulas that reflect the employees' years of service and compensation levels during their employment period. Qualifying plans are funded in accordance with government pension and income tax regulations. Plan assets are invested in equity and fixed income securities. Pension expense included the following:
YEARS ENDED DECEMBER 31, ----------------------------------- RESTATED 1994 1993 1992 1992 -------- -------- -------- -------- (MILLIONS) Service cost................................ $34 $25 $24 $37 Interest cost............................... 50 45 42 54 Actual return on plan assets................ (2) (52) (34) (44) Net amortization and deferral............... (45) 10 (9) (13) --- --- --- --- Total....................................... $37 $28 $23 $34 === === === ===
F-18 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The status of funded pension plans is as follows:
DECEMBER 31, ------------ 1994 1993 ----- ----- (MILLIONS) Accumulated benefit obligation (89% vested)....................... $ 394 $ 450 Effect of future salary increases................................. 132 134 ----- ----- Projected benefit obligation...................................... 526 584 Plan assets at fair value......................................... 495 505 ----- ----- Projected benefit obligation in excess of plan assets............. (31) (79) Unamortized actuarial losses...................................... 49 120 Unamortized plan changes.......................................... (7) (8) Other............................................................. (8) (9) ----- ----- Prepaid pension asset............................................. $ 3 $ 24 ===== =====
The following assumptions were used in accounting for pension plans:
1994 1993 1992 ---- ---- ---- Weighted average discount rate................................... 8.5% 7.5% 8.5% Return on plan assets............................................ 9% 9% 10% Rate of increase in compensation................................. 6% 6% 6%
Employees of Time Warner's operations in foreign countries participate to varying degrees in local pension plans, which in the aggregate are not significant. Time Warner also has an employee stock ownership plan, 401(k) savings plans and profit sharing plans, as to which the expense was $51 million in 1994, $46 million in 1993 and $57 million ($41 million on a restated basis) in 1992. Contributions to the 401(k) plans are based upon a percentage of the employees' elected contributions. Contributions to the employee stock ownership and profit sharing plans are determined by management and approved by the board of directors of the participating companies. 10. SEGMENT INFORMATION Information as to the operations of Time Warner and the Entertainment Group in different business segments is set forth below:
YEARS ENDED DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------ ------ -------- ------- (MILLIONS) REVENUES Time Warner: Publishing.................................... $3,433 $3,270 $3,123 $ 3,123 Music......................................... 3,986 3,334 3,214 3,214 Entertainment Group........................... -- -- -- 6,761 Intersegment elimination...................... (23) (23) (28) (28) ------ ------ ------ ------- Total......................................... $7,396 $6,581 $6,309 $13,070 ====== ====== ====== ======= Entertainment Group: Filmed Entertainment.......................... $5,041 $4,565 $3,945 $ 3,455 Programming-HBO............................... 1,513 1,441 1,444 1,444 Cable......................................... 2,242 2,208 2,091 2,091 Intersegment elimination...................... (287) (251) (229) (229) ------ ------ ------ ------- Total......................................... $8,509 $7,963 $7,251 $ 6,761 ====== ====== ====== =======
F-19 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ------ (MILLIONS) OPERATING INCOME Time Warner: Publishing........................................... $347 $295 $254 $ 254 Music................................................ 366 296 275 275 Entertainment Group.................................. -- -- -- 814 ---- ---- ---- ------ Total................................................ $713 $591 $529 $1,343 ==== ==== ==== ====== Entertainment Group: Filmed Entertainment................................. $275 $286 $254 $ 213 Programming-HBO...................................... 237 213 201 201 Cable................................................ 340 406 400 400 ---- ---- ---- ------ Total................................................ $852 $905 $855 $ 814 ==== ==== ==== ====== YEARS ENDED DECEMBER 31, ------------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ------ (MILLIONS) DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT Time Warner: Publishing........................................... $ 47 $ 45 $ 42 $ 42 Music................................................ 86 87 79 79 Entertainment Group.................................. -- -- -- 371 ---- ---- ---- ------ Total................................................ $133 $132 $121 $ 492 ==== ==== ==== ====== Entertainment Group: Filmed Entertainment................................. $127 $ 92 $ 81 $ 42 Programming-HBO...................................... 14 14 13 13 Cable................................................ 340 327 316 316 ---- ---- ---- ------ Total................................................ $481 $433 $410 $ 371 ==== ==== ==== ====== YEARS ENDED DECEMBER 31, ------------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ------ (MILLIONS) AMORTIZATION OF INTANGIBLE ASSETS(/1/) Time Warner: Publishing........................................... $ 36 $ 32 $ 32 $ 32 Music................................................ 268 260 231 231 Entertainment Group.................................. -- -- -- 417 ---- ---- ---- ------ Total................................................ $304 $292 $263 $ 680 ==== ==== ==== ====== Entertainment Group: Filmed Entertainment................................. $163 $171 $185 $ 155 Programming-HBO...................................... 6 3 1 1 Cable................................................ 309 302 261 261 ---- ---- ---- ------ Total................................................ $478 $476 $447 $ 417 ==== ==== ==== ======
-------- (1) Amortization includes all amortization relating to the acquisition of WCI in 1989, the acquisition of the minority interest in American Television and Communications Corporation ("ATC") in 1992 and other business combinations accounted for by the purchase method. F-20 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information as to the assets and capital expenditures of Time Warner and the Entertainment Group is as follows:
DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------- ------- -------- ------- (MILLIONS) ASSETS Time Warner: Publishing.................................... $ 2,013 $ 1,897 $ 1,886 $ 1,886 Music......................................... 7,672 7,401 7,418 7,418 Entertainment Group(/1/)...................... 5,350 5,627 5,392 15,715 Corporate(/2/)................................ 1,681 1,967 2,347 2,347 ------- ------- ------- ------- Total......................................... $16,716 $16,892 $17,043 $27,366 ======= ======= ======= ======= Entertainment Group: Filmed Entertainment.......................... $ 7,998 $ 7,567 $ 7,381 $ 6,502 Programming-HBO............................... 911 875 936 936 Cable......................................... 8,303 8,102 8,146 8,146 Corporate(/2/)................................ 1,780 1,658 270 302 ------- ------- ------- ------- Total......................................... $18,992 $18,202 $16,733 $15,886 ======= ======= ======= ======= -------- (1) At December 31, 1992 on an historical basis, Entertainment Group assets represent total assets of the Entertainment Group, less certain assets related to transactions with other Time Warner companies. Entertainment Group assets for all other periods presented represent Time Warner's investment in and amounts due to and from the Entertainment Group. (2) Consists principally of cash and investments. YEARS ENDED DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------- ------- -------- ------- (MILLIONS) CAPITAL EXPENDITURES Time Warner: Publishing.................................... $ 50 $ 41 $ 40 $ 40 Music......................................... 108 91 124 124 Entertainment Group........................... -- -- -- 402 Corporate..................................... 6 66 8 8 ------- ------- ------- ------- Total......................................... $ 164 $ 198 $ 172 $ 574 ======= ======= ======= ======= Entertainment Group: Filmed Entertainment.......................... $ 441 $ 244 $ 122 $ 101 Programming-HBO............................... 14 16 28 28 Cable(/1/).................................... 778 353 273 273 Corporate..................................... 2 -- -- -- ------- ------- ------- ------- Total......................................... $ 1,235 $ 613 $ 423 $ 402 ======= ======= ======= =======
-------- (1)The 1994 increase was funded in part through $234 million of collections on the U S WEST Note (Note 2). F-21 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information as to Time Warner's operations in different geographical areas is as follows:
YEARS ENDED DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------- ------- -------- ------- (MILLIONS) REVENUES United States(/1/)............................. $ 4,944 $ 4,414 $ 4,220 $10,981 Europe......................................... 1,445 1,296 1,411 1,411 Pacific Rim.................................... 724 583 430 430 Rest of World.................................. 283 288 248 248 ------- ------- ------- ------- Total.......................................... $ 7,396 $ 6,581 $ 6,309 $13,070 ======= ======= ======= ======= OPERATING INCOME United States.................................. $ 494 $ 436 $ 311 $ 1,143 Europe......................................... 108 102 155 140 Pacific Rim.................................... 74 28 32 31 Rest of World.................................. 37 25 31 29 ------- ------- ------- ------- Total.......................................... $ 713 $ 591 $ 529 $ 1,343 ======= ======= ======= ======= ASSETS United States.................................. $13,961 $14,328 $14,581 $24,878 Europe......................................... 1,717 1,635 1,608 1,626 Pacific Rim.................................... 636 514 498 502 Rest of World.................................. 402 415 356 360 ------- ------- ------- ------- Total.......................................... $16,716 $16,892 $17,043 $27,366 ======= ======= ======= =======
-------- (1) Time Warner's revenues in 1994, 1993 and on a restated basis in 1992 do not include the revenues of the Entertainment Group, which had export revenues of $1.693 billion in 1994, $1.650 billion in 1993 and $1.379 billion in 1992, principally from the sale of Filmed Entertainment products abroad. 11.COMMITMENTS AND CONTINGENCIES Total rent expense amounted to $157 million in 1994, $163 million in 1993 and $258 million ($159 million on a restated basis) in 1992. The minimum rental commitments under noncancellable long-term operating leases are: 1995- $137 million; 1996-$126 million; 1997-$115 million; 1998-$123 million; 1999- $118 million and after 1999-$998 million. Minimum commitments and guarantees under certain licensing, artists and other agreements aggregated approximately $2 billion at December 31, 1994, which are payable principally over a seven-year period. Such amounts do not include the Time Warner General Partner guarantees of approximately $7 billion of TWE debt. Pending legal proceedings are substantially limited to litigation incidental to the businesses of Time Warner and alleged damages in connection with class action lawsuits. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the financial statements of Time Warner. F-22 TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12.ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows:
YEARS ENDED DECEMBER 31, --------------------------- RESTATED 1994 1993 1992 1992 ---- ------ -------- ------ (MILLIONS) Cash payments made for interest..................... $539 $ 330 $ 260 $ 651 Cash payments made for income taxes................. 389 234 207 247 Tax-related distributions received from TWE......... 115 -- -- -- Income tax refunds received......................... 50 52 42 44 Borrowings.......................................... 582 4,714 1,349 8,026 Repayments.......................................... 626 1,599 1,391 8,006 Noncash Series D dividends declared................. -- -- 337 337
During the year ended December 31, 1994, Time Warner realized $179 million from the securitization of receivables. On April 1, 1993, Time Warner issued $3.125 billion of debentures in a noncash exchange for the old Series C preferred stock (Notes 5 and 7). The principal balance sheet effects of the deconsolidation of the Entertainment Group in 1993 were to decrease cash and equivalents by $36 million, receivables by $1.060 billion, inventories by $2.632 billion, investments by $690 million, property, plant and equipment by $2.548 billion, cable television franchises by $3.660 billion, goodwill by $4.356 billion, other assets by $733 million, debt by $7.178 billion, minority interests by $961 million and other liabilities by $2.184 billion, and to increase the investments in and amounts due to and from the Entertainment Group by $5.392 billion. The principal balance sheet effects of the acquisition of the ATC minority interest in 1992 were to increase investments by $156 million, cable television franchise costs by $865 million, goodwill by $410 million, deferred income taxes by $299 million and long-term debt by $1.312 billion, and to eliminate the ATC minority interest of $180 million. On a restated basis, the investments in and amounts due to and from the Entertainment Group were increased $1.431 billion. Investment proceeds in 1992 on a restated basis include $875 million from the collection of a note receivable from TWE. Cash equivalents consist of commercial paper and other investments that are readily convertible into cash, and have original maturities of three months or less. Other current liabilities consist of:
DECEMBER 31, ------------- 1994 1993 ------ ------ (MILLIONS) Accrued expenses.................................................. $ 875 $ 716 Accrued compensation.............................................. 308 228 Deferred revenues................................................. 55 62 ------ ------ Total............................................................. $1,238 $1,006 ====== ======
F-23 REPORT OF MANAGEMENT The accompanying consolidated financial statements have been prepared by management in conformity with generally accepted accounting principles, and necessarily include some amounts that are based on management's best estimates and judgments. Time Warner maintains a system of internal accounting controls designed to provide management with reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgments by management. Further, because of inherent limitations in any system of internal accounting control, errors or irregularities may occur and not be detected. Nevertheless, management believes that a high level of internal control is maintained by Time Warner through the selection and training of qualified personnel, the establishment and communication of accounting and business policies, and its internal audit program. The Audit Committee of the Board of Directors, composed solely of directors who are not employees of Time Warner, meets periodically with management and with Time Warner's internal auditors and independent auditors to review matters relating to the quality of financial reporting and internal accounting control, and the nature, extent and results of their audits. Time Warner's internal auditors and independent auditors have free access to the Audit Committee. Gerald M. Levin Richard D. Parsons Richard J. Bressler Chairman and President Senior Vice President Chief Executive Officer and Chief Financial Officer
F-24 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS TIME WARNER INC. We have audited the accompanying consolidated balance sheet of Time Warner Inc. ("Time Warner") as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of Time Warner's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Time Warner at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP New York, New York February 7, 1995 F-25 TIME WARNER INC. SELECTED FINANCIAL INFORMATION The selected financial information for each of the five years in the period ended December 31, 1994 set forth below has been derived from and should be read in conjunction with the financial statements and other financial information presented elsewhere herein. The selected historical financial information for 1994 and 1993 reflects the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The selected historical financial information for periods prior to such date have not been changed; however, selected financial information for 1992 retroactively reflecting the deconsolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis. The selected historical financial information for 1993 reflects the issuance of $6.1 billion of long-term debt and the use of $.5 billion of cash and equivalents in 1993 for the exchange or redemption of preferred stock having an aggregate liquidation preference of $6.4 billion. The selected historical financial information for 1992 reflects the capitalization of TWE on June 30, 1992 and associated refinancings, and the acquisition of the 18.7% minority interest in ATC as of June 30, 1992, using the purchase method of accounting for business combinations. Per common share amounts and average common shares have been restated to give effect to the four-for-one common stock split that occurred on September 10, 1992.
YEARS ENDED DECEMBER 31, ----------------------------------------------------- RESTATED SELECTED OPERATING 1994 1993 1992 1992 1991 1990 STATEMENT INFORMATION ------- ------- -------- ------- ------- ------- (MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues................. $ 7,396 $ 6,581 $ 6,309 $13,070 $12,021 $11,517 Depreciation and amorti- zation.................. 437 424 384 1,172 1,109 1,138 Business segment operat- ing income.............. 713 591 529 1,343 1,154 1,114 Equity in pretax income of Entertainment Group.. 176 281 226 -- -- -- Interest and other, net.. 724 718 351 882 966 1,133 Net income (loss) (a)(b). (91) (221) 86 86 (99) (227) Net loss applicable to common shares (after preferred dividends).... (104) (339) (542) (542) (692) (786) Per share of common stock: Net loss (a)(b)......... $ (0.27) $ (0.90) $ (1.46) $ (1.46) $ (2.40) $ (3.42) Dividends............... $ 0.35 $ 0.31 $ 0.265 $ 0.265 $ 0.25 $ 0.25 Average common shares (b)..................... 378.9 374.7 371.0 371.0 288.2 229.9 SELECTED BALANCE SHEET INFORMATION Investments in and amounts due to and from Entertainment Group................... $ 5,350 $ 5,627 $ 5,392 $ -- $ -- $ -- Total assets............. 16,716 16,892 17,043 27,366 24,889 25,337 Long-term debt........... 8,839 9,291 2,897 10,068 8,716 11,184 Shareholders' equity: Preferred stock liquida- tion preference........ 140 140 6,532 6,532 6,256 5,954 Equity applicable to common stock........... 1,008 1,230 1,635 1,635 2,242 360 Total shareholders' eq- uity................... 1,148 1,370 8,167 8,167 8,498 6,314 Total capitalization (long-term debt plus shareholders' equity)... 9,987 10,661 11,064 18,235 17,214 17,498
-------- (a) The net loss for the year ended December 31, 1993 includes an extraordinary loss on the retirement of debt of $57 million ($.15 per common share) and an unusual charge of $70 million ($.19 per common share) from the effect of the new income tax law on Time Warner's deferred income tax liability. The net loss for the year ended December 31, 1991 includes a $36 million after-tax charge ($.12 per common share) relating to the restructuring of the Publishing division. (b) In August 1991, Time Warner completed the sale of 137.9 million shares of common stock pursuant to a rights offering. Net proceeds of $2.558 billion from the rights offering were used to reduce indebtedness under Time Warner's bank credit agreement. If the rights offering had been completed at the beginning of 1991, net loss for the year would have been reduced to $33 million, or $1.70 per common share, and there would have been 369.3 million shares of common stock outstanding during the year. F-26 TIME WARNER INC. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
EQUITY IN PRETAX NET OPERATING INCOME INCOME (LOSS) NET INCOME DIVIDENDS COMMON INCOME OF (LOSS) OF APPLICABLE (LOSS) PER PER AVERAGE STOCK BUSINESS ENTERTAINMENT NET INCOME TO COMMON COMMON COMMON COMMON ------------ QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(B) SHARE(B) SHARE SHARES HIGH LOW -------- -------- --------- ------------- ---------- ------------ ---------- --------- ------- ---- ---- (MILLIONS, EXCEPT PER SHARE AMOUNTS) 1994 1st $1,558 $112 $ 45 $(51) $ (54) $(0.14) $0.08 378.6 $44 1/4 $36 5/8 2nd 1,667 170 66 (20) (23) (0.06) 0.09 378.8 40 5/8 34 1/2 3rd 1,884 141 66 (32) (35) (0.09) 0.09 379.1 38 3/4 34 4th 2,287 290 (1) 12 8 0.02 0.09 379.2 37 3/4 31 1/2 Year 7,396 713 176 (91) (104) (0.27) 0.35 378.9 44 1/4 31 1/2 1993 1st $1,519 $112 $108 $(15) $(124) $(0.33) $0.07 372.5 $37 1/4 $28 3/4 2nd (a) 1,567 135 53 (80) (83) (0.22) 0.08 373.8 39 5/8 30 5/8 3rd (a) 1,535 91 118 (133) (136) (0.36) 0.08 375.2 43 5/8 37 1/4 4th 1,960 253 2 7 4 0.01 0.08 377.2 46 7/8 40 1/4 Year (a) 6,581 591 281 (221) (339) (0.90) 0.31 374.7 46 7/8 28 3/4
-------- (a) The net loss for the second quarter of 1993 includes an extraordinary loss on the retirement of debt of $35 million ($.09 per common share). The net loss for the third quarter of 1993 includes an extraordinary loss on the retirement of debt of $22 million ($.06 per common share) and an unusual charge of $70 million ($.19 per common share) due to the effect of the new income tax law on Time Warner's deferred income tax liability. (b) After preferred dividend requirements. F-27 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS 1994 VS. 1993 Time Warner had revenues of $7.396 billion and a net loss of $91 million ($.27 per common share) in 1994, compared to revenues of $6.581 billion and a net loss of $221 million ($.90 per common share) in 1993. Included in the 1993 results is an extraordinary loss on the retirement of debt of $57 million ($.15 per common share) and a one-time tax charge of $70 million ($.19 per common share) that resulted from the effect on the Company's deferred income tax liability of the increase in the corporate income tax rate enacted in August 1993. Operating income and EBITDA for Time Warner and the Entertainment Group in 1994 and 1993 were as follows:
YEARS ENDED DECEMBER 31, ------------------------------- OPERATING INCOME EBITDA ----------------- ------------- 1994 1993 1994 1993 -------- -------- ------ ------ (MILLIONS) Time Warner: Publishing...................................... $ 347 $ 295 $ 430 $ 372 Music........................................... 366 296 720 643 -------- -------- ------ ------ Total........................................... $ 713 $ 591 $1,150 $1,015 ======== ======== ====== ====== Entertainment Group: Filmed Entertainment............................ $ 275 $ 286 $ 565 $ 549 Programming--HBO................................ 237 213 257 230 Cable........................................... 340 406 989 1,035 -------- -------- ------ ------ Total........................................... $ 852 $ 905 $1,811 $1,814 ======== ======== ====== ======
Time Warner's equity in the pretax income of the Entertainment Group was $176 million in 1994, compared to $281 million in 1993. During the first quarter of 1993, the Entertainment Group had a one-time gain from the sale of certain assets that was substantially offset by investment reserves included in Time Warner's other expenses. The relationship between income before income taxes and income tax expense of Time Warner is principally affected by the amortization of goodwill and certain other financial statement expenses that are not deductible for income tax purposes, and by the one-time tax charge in 1993. Income tax expense of Time Warner includes all income taxes related to its allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of the Entertainment Group. Certain factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the music, filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in the $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of Time Warner and the Entertainment Group, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. F-28 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) TIME WARNER Publishing. Revenues increased to $3.433 billion, compared to $3.270 billion in 1993. Operating income increased to $347 million from $295 million. Depreciation and amortization amounted to $83 million in 1994 and $77 million in 1993. EBITDA increased to $430 million from $372 million. Revenues benefited principally from increases in magazine advertising and circulation revenues, which were aided in part by several special issues during 1994. Significant revenue gains were achieved by People, Sports Illustrated and Southern Living. Operating income, EBITDA and operating margins improved principally as a result of the revenue gains and continued cost containment. Music. Revenues increased to $3.986 billion, compared to $3.334 billion in 1994. Operating income increased to $366 million from $296 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $354 million in 1994 and $347 million in 1993. EBITDA increased to $720 million from $643 million. The revenue growth resulted from increases in both domestic and international recorded music revenues, which benefited from a number of popular releases during the year and an increase in the percentage of compact disc to total unit sales, and increased music publishing revenues. Operating income and EBITDA benefited from these revenue gains and increased results from direct marketing activities attributable to new members and lower amortization of member acquisition costs, offset in part by costs associated with the reorganization of the domestic music companies and continuing investment in new business ventures. Interest and Other, Net. Interest and other, net, increased to $724 million in 1994, compared to $718 million in 1993. Interest expense increased to $769 million from $698 million as a result of a full twelve months of interest on the debt issued during the first three months of 1993 to redeem or exchange preferred stock, offset in part by savings from lower-cost debt used to fund the redemption of certain notes and debentures in 1993. There was other income, net, of $45 million in 1994, compared to other expense, net, of $20 million in 1993, principally because of an increase in investment-related income, including an increase in the amortization of the excess of the Time Warner General Partners' interest in the net assets of TWE over the net book value of their investment in TWE to reflect U S WEST as a partner for a full year. Investment-related income was reduced in part in both years by adjustments to the carrying value of certain investments, expenses in connection with the settlement of certain employment contracts and losses on foreign exchange contracts used to hedge foreign exchange risk. ENTERTAINMENT GROUP Filmed Entertainment. Revenues increased to $5.041 billion, compared to $4.565 billion in 1993. Operating income decreased to $275 million from $286 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $290 million in 1994 and $263 million in 1993. EBITDA increased to $565 million from $549 million. Worldwide home video, syndication and consumer products revenues increased at Warner Bros., offset in part by lower worldwide theatrical revenues. Revenues at Six Flags increased as a result of overall attendance growth and higher revenues per visitor. Operating income and EBITDA margins decreased principally as a result of lower theatrical results in comparison to the exceptionally strong theatrical results in 1993. Programming--HBO. Revenues increased to $1.513 billion, compared to $1.441 billion in 1993. Operating income increased to $237 million from $213 million. Depreciation and amortization amounted to $20 million in 1994 and $17 million in 1993. EBITDA increased to $257 million from $230 million. Revenues benefited from an increase in subscribers and higher pay-TV rates. Operating income, EBITDA and operating margins improved principally as a result of the revenue gains. F-29 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) Cable. Revenues increased to $2.242 billion, compared to $2.208 billion in 1993. Operating income decreased to $340 million from $406 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $649 million in 1994 and $629 million in 1993. EBITDA decreased to $989 million from $1.035 billion. Revenues and operating results in 1994 were adversely affected by two rounds of cable rate regulation that in general reduced the rates cable operators are allowed to charge for regulated services, the first of which went into effect in September 1993 and the second of which went into effect in July 1994. The unfavorable effects of rate regulation were offset in part by an increase in subscribers and nonregulated revenues. Actions that were undertaken to mitigate the impact of rate regulation included a number of cost containment measures and a continued emphasis on near and long-term strategies to increase revenues from unregulated services. Interest and Other, Net. Interest and other, net, increased to $616 million in 1994, compared to $564 million in 1993. Interest expense decreased to $567 million, compared with $580 million in 1993. There was other expense, net, of $49 million in 1994, compared to other income, net, of $16 million in 1993. Investment-related and foreign currency contract losses in 1994 exceeded an increase in interest income on higher cash balances and the interest-bearing note receivable from U S WEST. A gain on the sale of certain assets and other investment-related income exceeded investment losses in 1993. 1993 VS. 1992 Time Warner had 1993 revenues of $6.581 billion, a loss of $94 million ($.56 per common share) before a one-time tax charge and an extraordinary loss, and a net loss of $221 million ($.90 per common share), compared to 1992 revenues of $13.070 billion ($6.309 billion on a restated basis) and net income of $86 million (a loss of $1.46 per common share after preferred dividends). The one- time tax charge of $70 million ($.19 per common share) resulted from the effect on the company's deferred income tax liability of the increase in the corporate income tax rate enacted in August 1993; the extraordinary loss of $57 million ($.15 per common share) resulted from the retirement of debt in 1993. The improvement in per share results in 1993 includes the after-tax benefits of replacing preferred stock with debt in the first quarter. Preferred dividends were $118 million in 1993, compared to $628 million in 1992. Operating income and EBITDA for Time Warner and the Entertainment Group in 1993 and 1992 were as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------- OPERATING INCOME EBITDA -------------------- ---------------------- RESTATED RESTATED 1993 1992 1992 1993 1992 1992 ---- -------- ------ ------ -------- ------ (MILLIONS) Time Warner: Publishing.......................... $295 $254 $ 254 $ 372 $ 328 $ 328 Music............................... 296 275 275 643 585 585 Entertainment Group................. -- -- 814 -- -- 1,602 ---- ---- ------ ------ ------ ------ Total............................... $591 $529 $1,343 $1,015 $ 913 $2,515 ==== ==== ====== ====== ====== ====== Entertainment Group: Filmed Entertainment................ $286 $254 $ 213 $ 549 $ 520 $ 410 Programming-HBO..................... 213 201 201 230 215 215 Cable............................... 406 400 400 1,035 977 977 ---- ---- ------ ------ ------ ------ Total............................... $905 $855 $ 814 $1,814 $1,712 $1,602 ==== ==== ====== ====== ====== ======
F-30 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) Time Warner's equity in the pretax income of the Entertainment Group was $281 million in 1993, compared to $226 million on a restated basis in 1992. The Entertainment Group had a one-time gain from the sale of certain assets in 1993. TIME WARNER Publishing. Revenues increased to $3.270 billion compared to $3.123 billion in 1992. Operating income increased to $295 million from $254 million. Depreciation and amortization amounted to $77 million in 1993 and $74 million in 1992. EBITDA increased to $372 million from $328 million. Revenues benefited from increased magazine circulation revenues, higher book publishing revenues and the full year impact of the 1992 Leisure Arts acquisition. Magazine circulation revenues reflected higher overall subscription and newsstand sales, led by People, Time and Entertainment Weekly, as well as increases at American Family Publishers, the subscription agency. Despite a difficult market, advertising revenues were nearly flat. Operating income and EBITDA increased as a result of the revenue gains and improved operating margins achieved through continued cost savings. Music. Revenues increased to $3.334 billion compared to $3.214 billion in 1992. Operating income increased to $296 million from $275 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $347 million in 1993 and $310 million in 1992. EBITDA increased to $643 million from $585 million. The revenue gains primarily reflected an increase in domestic recorded music sales and Warner/Chappell Music Publishing revenues. An increase in unit volume was achieved internationally, principally because of an increase in Pacific Rim sales. International dollar-denominated revenues did not increase, however, because of exchange rate fluctuations. Overall, revenues benefited from a broad range of popular releases from both new and established artists, increased unit sales of compact discs and higher average unit selling prices. Operating income and EBITDA increased principally as a result of the revenue gains and improved margins, offset in part by start-up costs for new business ventures. Interest and Other, Net. Interest and other, net, decreased to $718 million in 1993 compared to $882 million ($351 million on a restated basis) in 1992. Interest expense decreased to $698 million compared to $729 million ($287 million on a restated basis) in 1992. The decrease in interest and other, net, on an historical basis resulted primarily from the exclusion in 1993 of the expenses of the Entertainment Group, which was deconsolidated in 1993, offset in part by an increase in interest expense from higher debt levels associated with the redemption and exchange of preferred stock. Other expenses, net, in 1993 included reductions in the carrying value of certain investments offset by investment-related income. Other expenses, net, in 1992 included an expense in connection with the settlement of senior management employment contracts, ATC minority interest expense and litigation-related costs. ENTERTAINMENT GROUP Filmed Entertainment. Revenues increased to $4.565 billion compared to $3.455 billion ($3.945 billion on a restated basis) in 1992. Operating income increased to $286 million from $213 million ($254 million on a restated basis). Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $263 million in 1993 and $197 million ($266 million on a restated basis) in 1992. EBITDA increased to $549 million from $410 million ($520 million on a restated basis). The increase in revenues, operating income and EBITDA on an historical basis resulted primarily from the inclusion in 1993 of the operating results of Six Flags, which previously had been accounted for using the equity method. Revenues at Warner Bros. increased during the period primarily due to increases in international theatrical, international syndication and domestic home video revenues, as well as increased revenues from retail F-31 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) operations. Record international revenues of $1.650 billion would have been greater but for unfavorable exchange rate fluctuations. Warner Bros. ranked number one at both the domestic and international box office in 1993, led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags increased, benefiting from higher revenues per visitor. Operating income and EBITDA benefited from the revenue gains. Programming--HBO. Revenues decreased to $1.441 billion compared to $1.444 billion in 1992. Operating income increased to $213 million from $201 million. Depreciation and amortization amounted to $17 million in 1993 and $14 million in 1992. EBITDA increased to $230 million from $215 million. The decrease in revenues reflects lower HBO Video sales, which in 1992 were favorably affected by a children's sell-thru title, offset in part by higher subscriber revenues, principally as a result of higher pay-TV rates at HBO and an increase in subscribers. Operating income and EBITDA benefited primarily from improved results from new businesses, including Time Warner Sports and the Comedy Central joint venture. Cable. Revenues increased to $2.208 billion compared to $2.091 billion in 1992. Operating income increased to $406 million from $400 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $629 million in 1993 and $577 million in 1992. EBITDA increased to $1.035 billion from $977 million. Revenues increased principally as a result of growth in the number of cable subscribers and increases in advertising sales and pay-per- view. The increase in subscribers accounted for approximately three quarters of the revenue increase. Operating income and EBITDA benefited from the revenue gains and increased income from cable joint ventures, but was negatively affected in the fourth quarter by the first round of cable rate regulation, which went into effect on September 1, 1993. Interest and Other, Net. Interest and other, net, increased to $564 million in 1993 compared to $531 million ($569 million on a restated basis) in 1992. Interest expense increased to $580 million compared to $442 million ($491 million on a restated basis) in 1992. The increase in interest expense resulted primarily from the higher average debt levels attributable to the TWE capitalization, the higher interest cost of the TWE notes and debentures issued to refinance TWE bank debt, and the consolidation of Six Flags' interest expense in 1993. Other income, net, in 1993 included gains on the sale of certain assets partially offset by losses from and reductions in the carrying value of certain investments. Other expenses, net, on a restated basis in 1992 is principally attributable to losses on certain investments and litigation- related costs. FINANCIAL CONDITION AND LIQUIDITY DECEMBER 31, 1994 TIME WARNER Despite the $14 billion of debt incurred as a result of the 1989 acquisition of Warner Communications, Time Warner continues to be able to finance growth and expansion in critical areas. In the last three years alone, the Company on a combined basis (Time Warner and the Entertainment Group together) spent in excess of $1.4 billion making new investments and acquisitions and $2.8 billion on capital expenditures. Significant year-to-year improvements in EBITDA and the $14 billion refinancing of higher cost debt and preferred stocks during 1992 and 1993, which was aided by favorable conditions in the credit markets and the investment in TWE by ITOCHU, Toshiba and U S WEST, have enabled the Company to finance this level of investment while at the same time improving its leverage and coverage ratios. A commonly-used leverage ratio is total debt, less cash ("Net debt") to total business segment EBITDA, less corporate expenses ("Adjusted EBITDA"). A commonly-used coverage ratio is Adjusted EBITDA to total interest expense and preferred dividends. Those ratios for 1994 and 1993 were as set forth below for F-32 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) both Time Warner and Time Warner and the Entertainment Group combined. Certain rating agencies and other credit analysts place more emphasis on the combined ratios while others place more emphasis on the Time Warner stand-alone ratios. It should be understood, however, that the assets of the Entertainment Group are not freely available to meet the cash needs of Time Warner.
1994 1993 ----- ----- Time Warner Net debt/Adjusted EBITDA.......................................... 8.30x 9.78x Adjusted EBITDA/Interest and preferred dividends.................. 1.37x 1.15x Time Warner and Entertainment Group combined Net debt/Adjusted EBITDA.......................................... 5.32x 5.57x Adjusted EBITDA/Interest and preferred dividends.................. 2.09x 1.93x
Time Warner had $9.2 billion of debt, $282 million of cash and equivalents (net debt of $8.9 billion), and $1.1 billion of equity at December 31, 1994, compared to $9.4 billion of debt, $200 million of cash and equivalents (net debt of $9.2 billion), and $1.4 billion of equity at December 31, 1993. On a combined basis, there was $15 billion of net debt at both the beginning and end of the year. During the latter half of 1994 and continuing into 1995, the Company announced that it will significantly expand its reach in cable television by acquiring Summit, KBLCOM and CVI and related companies, which together own systems serving approximately 2.2 million basic cable subscribers and a 50% partnership interest in Paragon (with TWE as the other partner), which owns systems serving approximately 967,000 basic cable subscribers. Time Warner will issue 4.4 million shares of common stock and approximately $2.1 billion liquidation value of new 3.75% convertible preferred stocks, and assume or incur approximately $3.4 billion of debt to acquire these companies. In addition, subsidiaries of Advance and Newhouse will contribute cable television systems that serve approximately 1.4 million basic cable subscribers to a joint venture in which TWE will have a two-thirds interest. In accordance with the TWE-Advance/Newhouse joint venture agreement, certain of Time Warner's newly- acquired cable systems may be transferred on a tax-efficient basis to the TWE- Advance/Newhouse Partnership. Such transfers, if they are made, are expected to be structured on a leveraged basis. The new preferred stocks that are to be issued in the cable transactions will initially have annual dividends totalling $78 million and generally will be convertible immediately or exchangeable after four or five years into approximately 43 million shares of Time Warner common stock at an effective conversion price of $48 of liquidation value per common share. New or revised bank credit facilities will be required for Time Warner, TWE and the TWE- Advance/Newhouse Partnership as a result of these transactions, which management feels will be obtained at a reasonable cost. Upon consummation of the transactions, which are subject to customary franchise and regulatory approvals, the total number of cable subscribers under the management of Time Warner Cable is expected to increase to approximately 11.5 million, compared to 7.5 million at the end of 1994. The Company also has announced its intention to enhance its financial position and that of the Entertainment Group through sales of non-core assets, such as the TBS stock owned by Time Warner, certain investments owned by the Entertainment Group or certain, smaller unclustered cable systems owned by Time Warner or the Entertainment Group. Proceeds from asset sales will be used to reduce debt. The Entertainment Group's interest in QVC, Inc. was sold in February 1995 to a group that had tendered for all of that company's capital stock. Approximately $200 million of proceeds will be used to reduce debt. F-33 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) The Company does not expect its leverage and coverage ratios to deteriorate as a result of the cable acquisitions and asset dispositions. In the first full year after the cable transactions are completed, operating results are expected to be negatively impacted by approximately $.40 to $.45 per common share, principally as a result of the non cash amortization of the intangible assets that will be recognized in the allocation of the purchase price. Asset sales are expected to result in one-time gains. Because of the announced transactions, the Company will explore the possibility of bringing its various interests in cable operations together in a separate, self-financed operating unit. This process is expected to be undertaken over a 12-18 month period and will be dependent on, among other things, successful negotiations with TWE's partners and certain creditors, and the receipt of franchise and other regulatory approvals. Accordingly, there can be no assurance that the effort will succeed. During 1994, cash provided by Time Warner's operations amounted to $473 million and consisted of $1.150 billion of EBITDA from the Publishing and Music businesses, $120 million of net distributions from TWE and $179 million from the securitization of receivables, less $539 million of interest payments, $339 million of income taxes, $76 million of corporate expenses and working capital requirements. Cash provided by operations of $257 million in 1993 consisted of $1.015 billion of EBITDA from the Publishing and Music businesses and $20 million of net distributions from TWE, less $330 million of interest payments, $182 million of income taxes, $73 million of corporate expenses, and working capital requirements. Cash flows used in investing activities in 1994, excluding investment proceeds, were $351 million, compared to $373 million in 1993. Cash dividends paid decreased to $142 million in 1994, compared to $299 million in 1993, principally as a result of the redemption and exchange of preferred stock in 1993. Time Warner has no claim on the assets and cash flows of TWE except through the payment of certain fees and reimbursements, cash distributions and loans. Tax-related distributions of $115 million were received from TWE in 1994 and are expected to exceed $350 million in 1995. Time Warner and TWE entered into a credit agreement in 1994, which allows Time Warner to borrow up to $400 million from TWE through September 15, 2000. Time Warner borrowed $400 million in 1994 under the credit agreement, and used the proceeds to reduce other debt. TWE is permitted under its bank credit agreement to make additional loans to Time Warner, which in the aggregate cannot exceed $1.1 billion at December 31, 1994, increasing to no more than $1.5 billion on July 1, 1995. Management believes that 1995 operating cash flow, cash and marketable securities and additional borrowing capacity are sufficient to meet Time Warner's liquidity needs without distributions and loans from TWE above those permitted by existing agreements. Time Warner uses derivative financial instruments to manage its risk against fluctuations in interest rates and foreign currency exchange rates. Interest rate swap contracts are used to adjust the proportion of total debt that is subject to changes in short-term rates. At December 31, 1994, Time Warner had interest rate swap contracts to pay floating-rates of interest (average six- month LIBOR rate of 5.9%) and receive fixed-rates of interest (average rate of 5.5%) on $2.9 billion notional amount of indebtedness, effectively converting 32% of Time Warner's underlying debt, substantially all of which is fixed-rate, and 37% of the debt of Time Warner and the Entertainment Group combined, to a floating-rate basis. Based on the current levels of outstanding debt and interest rate swap contracts, a 25 basis point increase in the level of interest rates prevailing at December 31, 1994 would reduce Time Warner's annual pretax income by an estimated $12 million. The notional amount of outstanding contracts at December 31, 1994 by year of maturity, along with the related average fixed-rates of interest to be received and the average floating-rates of interest to be paid, are as follows: 1995-$300 million (receive-6.05%; pay-6.95%); 1996-$300 million (receive-4.55%; pay-6.13%); 1998- $700 million (receive-5.52%; pay-6.06%); 1999-$1.2 billion (receive-5.51%; pay- 5.66%); and 2000-$400 million (receive-5.48%; pay-5.50%). F-34 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) Foreign exchange contracts are used primarily to hedge the risk that unremitted or future royalties and license fees owed to Time Warner and TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in exchange rates. Time Warner often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. A summary of foreign exchange contracts at December 31, 1994 and 1993 is set forth below:
SALE CONTRACTS PURCHASE CONTRACTS ----------------------- ----------------------- U.S. AVERAGE AVERAGE U.S. AVERAGE AVERAGE NET DOLLAR DAYS TO FORWARD DOLLAR DAYS TO FORWARD SALE FOREIGN CURRENCY VALUE MATURITY RATE VALUE MATURITY RATE POSITION ---------------- ------ -------- ------- ------ -------- ------- -------- (DOLLARS IN MILLIONS) DECEMBER 31, 1994: Canadian dollar....... $ 70 31 .7283 $ 29 33 .7166 $ 41 English pound......... 93 22 1.5704 19 16 1.5511 74 French franc.......... 82 84 .1745 -- -- -- 82 German mark........... 61 49 .6296 -- -- -- 61 Japanese yen.......... 109 23 .0101 -- -- -- 109 Other currencies...... 136 58 -- 61 61 -- 75 ---- ---- ---- Total................. $551 $109 $442 ==== ==== ==== DECEMBER 31, 1993: Canadian dollar....... $ 87 60 .7543 $ -- -- -- $ 87 English pound......... 75 45 1.4810 11 59 1.4708 64 French franc.......... 69 40 .1732 6 17 .1700 63 German mark........... 169 85 .5812 6 37 .5651 163 Japanese yen.......... 184 174 .0094 25 48 .0092 159 Other currencies...... 69 126 -- 32 46 -- 37 ---- ---- ---- Total................. $653 $ 80 $573 ==== ==== ====
ENTERTAINMENT GROUP The financial condition of the Entertainment Group companies, principally TWE, at December 31, 1994 remained essentially unchanged from year end 1993, but is expected to be significantly affected by the formation of the TWE- Advance/Newhouse Partnership and the other cable transactions announced for 1995 by Time Warner. TWE had $7.2 billion of long-term debt at December 31, 1994, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital (net of the $771 million uncollected portion of the U S WEST Note), compared to $7.1 billion of long-term debt, $1.5 billion of Time Warner General Partners' senior capital and $6 billion of partners' capital at December 31, 1993. Cash and equivalents were $1.1 billion at December 31, 1994 compared to $1.3 billion at December 31, 1993, resulting in net debt of $6.1 billion and $5.8 billion, respectively. Entertainment Group leverage and coverage ratios for 1994 and 1993 were as follows:
1994 1993 ----- ----- Net debt/Adjusted EBITDA...................................... 3.50x 3.31x Adjusted EBITDA/Interest...................................... 3.09x 3.02x
F-35 TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) The formation of the TWE-Advance/Newhouse Partnership and sales of non-core assets are expected to improve the Entertainment Group's leverage and coverage ratios. In accordance with the TWE-Advance/Newhouse joint venture agreement, certain of Time Warner's newly-acquired cable systems may be transferred on a tax-efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers, if they are made, are expected to be structured on a leveraged basis, which could result in an overall adverse impact on the Entertainment Group ratios. During 1994, cash provided by Entertainment Group operations amounted to $1.341 billion and consisted of $1.811 billion of EBITDA from the Filmed Entertainment, Programming-HBO and Cable businesses and a reduction in working capital requirements, less $521 million of interest payments, $69 million of income taxes and $60 million of corporate expenses. Cash provided by operations of $1.276 billion in 1993 consisted of $1.814 billion of business segment EBITDA and a reduction in working capital requirements, less $450 million of interest payments, $70 million of income taxes and $60 million of corporate expenses. Capital expenditures increased to $1.235 billion in 1994, compared to $613 million in 1993. Capital spending by Time Warner Cable amounted to $778 million in 1994, compared to $353 million in 1993, and was financed in part through $234 million of collections on the U S WEST Note. Cable capital expenditures are budgeted to exceed $1 billion for 1995, and are expected to be partially financed by $550 million of collections on the U S WEST Note. Because management believes that the conversion from coaxial to fiber-optic cable is essential to achieving long-term growth in revenue from telephony and unregulated cable services, significant cable capital expenditures also are expected in subsequent years and will be timed to match the rate at which demand for the new services develops. Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition, amounted to $852 million at December 31, 1994, compared to $724 million at December 31, 1993 (including amounts relating to HBO of $175 million at December 31, 1994 and $178 million at December 31, 1993). The backlog excludes advertising barter contracts. Management believes that TWE's 1995 operating cash flow, cash and equivalents, collections on the U S WEST Note and additional borrowing capacity are sufficient to meet its capital and liquidity needs. F-36 TIME WARNER INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ----------- ---------- ---------- ---------- --------- (MILLIONS) 1994(A): Reserves deducted from ac- counts receivable: Allowance for doubtful ac- counts..................... $ 131 $ 197 $ (171)(b) $ 157 Reserves for sales returns and allowances: Magazines and books........ 349 1,401 (1,370)(c)(d) 380 Recorded music............. 196 421 (386)(c) 231 ----- ------ ------- ----- Total..................... $ 676 $2,019 $(1,927) $ 768 ===== ====== ======= ===== Reserves deducted from amounts due to publishers (accounts payable): Allowance for magazine and book returns............... $(154) $ (905) $ 900 (d) $(159) ===== ====== ======= ===== 1993(A): Reserves deducted from ac- counts receivable: Allowance for doubtful ac- counts..................... $ 122 $ 194 $ (185)(b) $ 131 Reserves for sales returns and allowances: Magazines and books........ 336 1,265 (1,252)(c)(d) 349 Recorded music............. 186 366 (356)(c) 196 ----- ------ ------- ----- Total..................... $ 644 $1,825 $(1,793) $ 676 ===== ====== ======= ===== Reserves deducted from amounts due to publishers (accounts payable): Allowance for magazine and book returns............... $(146) $ (855) $ 847 (d) $(154) ===== ====== ======= ===== RESTATED 1992(A): Reserves deducted from ac- counts receivable: Allowance for doubtful ac- counts..................... $ 123 $ 132 $ (133)(b) $ 122 Reserves for sales returns and allowances: Magazines and books........ 314 1,109 (1,087)(c)(d) 336 Recorded music............. 179 333 (326)(c) 186 ----- ------ ------- ----- Total..................... $ 616 $1,574 $(1,546) $ 644 ===== ====== ======= ===== Reserves deducted from amounts due to publishers (accounts payable): Allowance for magazine and book returns............... $(159) $ (797) $ 810 (d) $(146) ===== ====== ======= ===== 1992(A): Reserves deducted from ac- counts receivable: Allowance for doubtful ac- counts..................... $ 275 $ 194 $ (181)(b) $ 288 Reserves for sales returns and allowances: Magazines and books........ 314 1,109 (1,087)(c)(d) 336 Recorded music and home video..................... 257 419 (416)(c) 260 ----- ------ ------- ----- Total..................... $ 846 $1,722 $(1,684) $ 884 ===== ====== ======= ===== Reserves deducted from amounts due to publishers (accounts payable): Allowance for magazine and book returns............... $(159) $ (797) $ 810 (d) $(146) ===== ====== ======= =====
-------- (a) The 1994 and 1993 financial statements reflect the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The historical financial statements for periods prior to such date have not been changed; however, financial information for 1992 retroactively reflecting the deconsolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis. (b) Represents uncollectible receivables charged against reserve. (c) Represents returns or allowances applied against reserve. (d) The distribution of magazines not owned by Time Warner results in a receivable recorded at the sales price and a corresponding liability to the publisher recorded at the sales price less the distribution commission recognized by Time Warner as revenue. Therefore, it would be misleading to compare magazine revenues to the provision charged to the reserve for magazine returns that is deducted from accounts receivable without also considering the related offsetting activity in the reserve for magazine returns that is deducted from the liability due to the publishers. F-37 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET DECEMBER 31, (MILLIONS)
1994 1993 ------- ------- ASSETS CURRENT ASSETS Cash and equivalents......................................... $ 1,071 $ 1,338 Receivables, including $266 and $257 due from Time Warner, less allowances of $306 and $257............................ 1,426 1,313 Inventories.................................................. 956 980 Prepaid expenses............................................. 120 114 ------- ------- Total current assets......................................... 3,573 3,745 Noncurrent inventories....................................... 1,807 1,760 Loan receivable from Time Warner............................. 400 -- Investments.................................................. 666 540 Land and buildings........................................... 841 680 Cable television equipment................................... 3,619 3,044 Furniture, fixtures and other equipment...................... 1,588 1,319 ------- ------- 6,048 5,043 Less accumulated depreciation................................ (2,264) (1,943) ------- ------- Property, plant and equipment................................ 3,784 3,100 Goodwill..................................................... 4,433 4,560 Cable television franchises.................................. 3,236 3,510 Other assets................................................. 763 748 ------- ------- Total assets................................................. $18,662 $17,963 ======= ======= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Accounts payable............................................. $ 514 $ 366 Participations and programming costs......................... 857 770 Other current liabilities, including $334 and $108 of distri- butions due to Time Warner.................................. 1,486 1,129 ------- ------- Total current liabilities.................................... 2,857 2,265 Long-term debt............................................... 7,160 7,125 Other long-term liabilities, including $89 and $439 of dis- tributions due to Time Warner............................... 749 1,037 Time Warner General Partners' senior capital................. 1,663 1,536 PARTNERS' CAPITAL Contributed capital.......................................... 7,398 7,398 Undistributed partnership earnings (deficit)................. (394) (393) Note receivable from U S WEST................................ (771) (1,005) ------- ------- Total partners' capital...................................... 6,233 6,000 ------- ------- Total liabilities and partners' capital...................... $18,662 $17,963 ======= =======
See accompanying notes. F-38 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, (MILLIONS)
RESTATED 1994 1993 1992(A) 1992 ------ ------ -------- ------ Revenues (b).................................. $8,460 $7,946 $7,251 $6,761 ------ ------ ------ ------ Cost of revenues (b) (c)...................... 5,976 5,679 5,274 4,837 Selling, general and administrative (b) (c)... 1,636 1,384 1,141 1,129 ------ ------ ------ ------ Operating expenses............................ 7,612 7,063 6,415 5,966 ------ ------ ------ ------ Business segment operating income............. 848 883 836 795 Interest and other, net (b)................... (587) (551) (563) (525) Corporate services (b)........................ (60) (60) (60) (60) ------ ------ ------ ------ Income before income taxes.................... 201 272 213 210 Income taxes.................................. (40) (64) (53) (50) ------ ------ ------ ------ Income before extraordinary item.............. 161 208 160 160 Extraordinary loss on retirement of debt, net of $7 million income tax benefit........................... -- (10) -- -- ------ ------ ------ ------ Net income.................................... $ 161 $ 198 $ 160 $ 160 ====== ====== ====== ====== -------- (a) The 1994 and 1993 financial statements reflect the consolidation of Six Flags effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The 1992 historical financial statements have not been changed; however, financial statements for 1992 retroactively reflecting the consolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Notes 1 and 3). (b) Includes the following income (expenses) resulting from transactions with the partners of TWE (Note 12): Selling, general and administrative.......... $ (97) $ (65) $ (122) $ (122) Interest and other, net...................... 20 2 (204) (204) Corporate services........................... (60) (60) (60) (60) In addition, includes the following income (expenses) resulting from trans- actions with equity investees of TWE or Time Warner (Note 12): Revenues..................................... $ 112 $ 67 $ 41 $ 41 Cost of revenues............................. (70) (88) (34) (34) Selling, general and administrative.......... 25 27 30 30 Interest and other, net...................... 1 1 5 5 (c)Includes depreciation and amortization ex- pense of:.................................... $ 943 $ 902 $ 851 $ 782 ====== ====== ====== ======
See accompanying notes. F-39 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, (MILLIONS)
RESTATED 1994 1993 1992(A) 1992 ------ ------ -------- ----- OPERATIONS Net income.................................... $ 161 $ 198 $ 160 $ 160 Adjustments for noncash and nonoperating items: Depreciation and amortization................. 943 902 851 782 Equity in (income) losses of investee compa- nies, net of distributions................... 58 (21) 48 53 Changes in operating assets and liabilities: Receivables.................................. (192) 1 (272) (272) Inventories.................................. (76) (158) (105) (104) Accounts payable and other liabilities....... 400 260 146 137 Other balance sheet changes.................. 2 89 36 25 ------ ------ ----- ----- Cash provided by operations................... 1,296 1,271 864 781 ------ ------ ----- ----- INVESTING ACTIVITIES Investments and acquisitions.................. (156) (347) (382) (279) Capital expenditures.......................... (1,153) (613) (423) (402) Loan to Time Warner........................... (400) -- -- -- Investment proceeds........................... 50 180 50 50 ------ ------ ----- ----- Cash used by investing activities............. (1,659) (780) (755) (631) ------ ------ ----- ----- FINANCING ACTIVITIES Increase (decrease) in debt................... 32 (659) (791) (837) Capital contributions, including collections on note receivable from U S WEST................................ 234 1,548 1,012 1,012 Capital distributions......................... (170) (33) (183) (183) Other, principally financing costs prior to 1994......................................... -- (45) (123) (129) ------ ------ ----- ----- Cash provided (used) by financing activities.. 96 811 (85) (137) ------ ------ ----- ----- INCREASE (DECREASE) IN CASH AND EQUIVALENTS... $ (267) $1,302 $ 24 $ 13 ====== ====== ===== =====
-------- (a)The 1994 and 1993 financial statements reflect the consolidation of Six Flags effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The 1992 historical financial statements have not been changed; however, financial statements for 1992 retroactively reflecting the consolidation are presented as supplementary information under the column heading "restated" to facilitate comparative analysis (Notes 1 and 3). See accompanying notes. F-40 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL (MILLIONS)
PARTNERS' CAPITAL --------------------------------------------- GENERAL UNDISTRIBUTED PARTNERS' PARTNERSHIP U S TOTAL SENIOR CONTRIBUTED EARNINGS WEST PARTNERS' CAPITAL CAPITAL (DEFICIT) NOTE CAPITAL --------- ----------- ------------- -------- --------- BALANCE AT DECEMBER 31, 1991................... $ -- $ 6,717 $ -- $ -- $ 6,717 Net income before TWE Capitalization......... 97 97 Distributions........... (259) (259) Pushdown of cost to ac- quire ATC minority in- terest................. 1,431 1,431 Other................... 1 1 TWE Capitalization: Contributions.......... 1,000 1,000 Assumption of addi- tional debt........... (2,545) (2,545) ------ ------- ----- ------- ------- BALANCE AT JUNE 30, 1992................... -- 6,442 -- -- 6,442 Net income after TWE Capitalization......... 63 63 Contributions (a)....... 12 12 Distributions (a)....... (41) (41) Other................... (3) (36) (39) ------ ------- ----- ------- ------- BALANCE AT DECEMBER 31, 1992................... -- 6,451 (14) -- 6,437 Net income.............. 198 198 Admission of USW: Contributions.......... 2,553 (1,021) 1,532 Time Warner General Partners' senior capi- tal................... 1,501 (1,501) (1,501) Distributions (a)....... (95) (539) (634) Allocation of income.... 35 (35) (35) Collections............. 16 16 Other................... (10) (3) (13) ------ ------- ----- ------- ------- BALANCE AT DECEMBER 31, 1993................... 1,536 7,398 (393) (1,005) 6,000 Net income.............. 161 161 Distributions (a)....... (46) (46) Allocation of income.... 127 (127) (127) Collections............. 234 234 Other................... 11 11 ------ ------- ----- ------- ------- BALANCE AT DECEMBER 31, 1994................... $1,663 $ 7,398 $(394) $ (771) $ 6,233 ====== ======= ===== ======= =======
-------- (a) Distributions in 1994, 1993 and 1992 included $173 million, $252 million and $24 million, respectively, of tax-related distributions, and $50 million and $13 million of cash distributions to the Time Warner Service Partnerships in 1994 and 1993, respectively. Stock option distributions of $274 million and $17 million were accrued in 1993 and 1992, respectively, because of an increase in the market price of Time Warner common stock and $177 million of such previously-accrued stock option distributions were reversed in 1994 because the market price of Time Warner common stock declined during the period. In addition, Time Warner General Partners' junior priority capital was reduced in 1993 for the $95 million historical cost of the Time Warner Service Partnership Assets distributed to the Time Warner General Partners. A $12 million contribution was made by the Time Warner General Partners in 1992 after the TWE Capitalization pursuant to the net worth adjustment provision of the partnership agreement. (Note 7.) See accompanying notes. F-41 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), was capitalized on June 30, 1992 (the "TWE Capitalization") to own and operate substantially all of the Filmed Entertainment, Programming-HBO and Cable businesses previously owned by subsidiaries of Time Warner Inc. ("Time Warner"). At December 31, 1994, the general partners of TWE, subsidiaries of Time Warner ("Time Warner General Partners"), together directly and indirectly held 63.27% pro rata priority capital and residual equity partnership interests in TWE, and certain priority capital interests senior and junior to the pro rata priority capital interests, which they received for the net assets, or the rights to cash flows, they contributed to the partnership at the TWE Capitalization; and subsidiaries of U S WEST, Inc. ("U S WEST"), ITOCHU Corporation ("ITOCHU") and Toshiba Corporation ("Toshiba" and collectively, the "Limited Partners"), held 25.51%, 5.61% and 5.61% pro rata priority capital and residual equity partnership interests, respectively. ITOCHU and Toshiba each contributed $500 million of cash at the TWE Capitalization for their limited partnership interests. U S WEST contributed $1.532 billion of cash and a $1.021 billion 4.4% note ("U S WEST Note") on September 15, 1993 for its limited partnership interests. In lieu of contributing certain assets (the "Beneficial Assets"), the Time Warner General Partners assigned to TWE the net cash flow generated by such assets or agreed to pay an amount equal to the net cash flow generated by such assets. TWE has the right to receive from the Time Warner General Partners, at the limited partners' option, an amount equal to the fair value of the Beneficial Assets, net of associated liabilities, that have not been contributed to TWE by June 30, 1996, rather than continuing to receive the net cash flow, or an amount equal to the net cash flow, generated by such Beneficial Assets. The consolidated financial statements include the assets and liabilities of the businesses contributed by the Time Warner General Partners, including the Beneficial Assets and associated liabilities, all at Time Warner's historical cost basis of accounting. Time Warner's $14 billion acquisition of Warner Communications Inc. ("WCI") as of December 31, 1989, and $1.3 billion acquisition of the minority interest in American Television and Communications Corporation ("ATC") on June 26, 1992 were accounted for by the purchase method of accounting. WCI subsequently contributed filmed entertainment and cable assets to TWE, and ATC subsequently contributed its cable assets. The financial statements of TWE reflect an allocable portion of Time Warner's cost to acquire WCI and the ATC minority interest in accordance with the pushdown method of accounting. BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of TWE and all companies in which TWE has a controlling voting interest ("subsidiaries"), as if TWE and its subsidiaries were a single company. Significant intercompany accounts and transactions between the consolidated companies have been eliminated. Significant accounts and transactions between TWE and its partners and affiliates are disclosed as related party transactions (Note 12). Investments in companies in which TWE has significant influence but less than a controlling voting interest are accounted for using the equity method. Under the equity method, only TWE's investment in and amounts due to and from the equity investee are included in the consolidated balance sheet, only TWE's share of the investee's earnings is included in the consolidated operating results, and only the dividends, cash distributions, loans or other cash received from the investee, less any additional cash investment, loan repayments or other cash paid to the investee, are included in the consolidated cash flows. F-42 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In accordance with Financial Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in companies in which TWE does not have the controlling interest or an ownership and voting interest so large as to exert significant influence are accounted for at market value if the investments are publicly traded and there are no resale restrictions, or at cost, if the sale of a publicly-traded investment is restricted or if the investment is not publicly traded. Unrealized gains and losses on investments accounted for at market value are reported in partners' capital until the investment is sold, at which time, the realized gain or loss is included in income. Dividends and other distributions of earnings from both market value and cost method investments are included in income when declared. Six Flags Entertainment Corporation ("Six Flags") was consolidated effective January 1, 1993 as a result of the increase of TWE's ownership and voting control in Six Flags from 50% to 100% in September 1993 (Note 3). The 1992 historical financial statements of TWE were not changed; accordingly, they include Six Flags on the equity method. However, financial statements for 1992 retroactively reflecting the consolidation also are presented under the caption "restated" to facilitate comparative analysis. Certain other reclassifications have been made to the prior years' financial statements to conform to the 1994 presentation. REVENUES AND COSTS Feature films are produced or acquired for initial exhibition in theaters followed by distribution in the home video, pay cable, basic cable, broadcast network and syndicated television markets. Generally, distribution to the theatrical, home video and pay cable markets (the primary markets) is completed within eighteen months of initial release. Theatrical revenues are recognized as the films are exhibited. Home video revenues, less a provision for returns, are recognized when the home videos are sold. Revenues from cable and broadcast television distribution are recognized when the films are available to telecast. Television films and series are initially produced for the networks or first-run television syndication (the primary markets) and may be subsequently licensed to foreign or other domestic television markets. Revenues from television license agreements are recognized when the films or series are available to telecast, except for barter agreements where the recognition of revenue is deferred until the related advertisements are telecast. Inventories of theatrical and television product are stated at the lower of amortized cost or net realizable value. Cost includes direct production and acquisition costs, production overhead and capitalized interest. A portion of the cost to acquire WCI was allocated to its theatrical and television product as of December 31, 1989, including an allocation to product that had been exhibited at least once in all markets ("Library"). Individual films and series are amortized, and the related participations and residuals are accrued, based on the proportion that current revenues from the film or series bear to an estimate of total revenues anticipated from all markets. These estimates are revised periodically and losses, if any, are provided in full. WCI acquisition cost allocated to the Library is amortized on a straight-line basis over twenty years. Current film inventories include the unamortized cost of completed feature films allocated to the primary markets, television films and series in production pursuant to a contract of sale, film rights acquired for the home video market and advances pursuant to agreements to distribute third-party films in the primary markets. Noncurrent film inventories include the unamortized cost of completed theatrical and television films allocated to the secondary markets, theatrical films in production and WCI acquisition cost allocated to the Library. A significant portion of cable system and cable programming revenues are derived from subscriber fees, which are recorded as revenue in the period the service is provided. The right to exhibit feature films and other programming on pay cable services during one or more availability periods ("programming costs") generally is recorded when the programming is initially available for exhibition, and is allocated to the appropriate availability periods and amortized as the programming is exhibited. F-43 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Additions to cable property, plant and equipment generally include material, labor, overhead, interest and certain start-up costs incurred in developing new franchises. Depreciation is provided generally on the straight-line method over useful lives ranging up to twenty-five years for buildings and improvements and up to fifteen years for furniture, fixtures and cable television and other equipment. INTANGIBLE ASSETS Intangible assets are recorded when the cost of acquired companies exceeds the fair value of their tangible assets. Generally accepted accounting principles require that all intangible assets be amortized over no more than a forty-year period. Amortization of goodwill amounted to $129 million in 1994, $132 million in 1993 and $115 million ($124 million on a restated basis) in 1992; amortization of cable television franchises amounted to $208 million, $222 million and $194 million, respectively; and amortization of other intangible assets amounted to $141 million, $122 million and $108 million ($129 million on a restated basis), respectively. Accumulated amortization of intangible assets at December 31, 1994 and 1993 amounted to $1.867 billion and $1.438 billion, respectively. FOREIGN CURRENCY The financial position and operating results of substantially all of the foreign operations of TWE are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses, which have not been material, are included in partners' capital. Foreign currency transaction gains and losses, which have not been material, are included in operating results. Foreign exchange contracts are used primarily to hedge the risk that unremitted or future license fees owed to TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in exchange rates. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's exposure. At December 31, 1994, Time Warner had contracts for the sale of $551 million and the purchase of $109 million of foreign currencies at fixed rates and maturities of three months or less. Of Time Warner's $442 million net sale contract position, $188 million related to TWE's exposure, primarily Japanese yen (41% of net contract position related to TWE), French francs (18%), German marks (12%) and Canadian dollars (11%), compared to a net sale contract position of $226 million of foreign currencies at December 31, 1993. Unrealized gains or losses are recorded in income; accordingly, the carrying value of foreign exchange contracts approximates market value. TWE had $20 million of net losses on foreign exchange contracts during 1994, which were or are expected to be offset by corresponding increases in the dollar value of foreign currency license fee payments that have been or are anticipated to be received from the sale of U.S. copyrighted products abroad. Time Warner places foreign currency contracts with a number of major financial institutions in order to minimize credit risk. INCOME TAXES As a Delaware limited partnership, TWE is not subject to U.S. federal and state income taxation. However, certain of TWE's operations are conducted by subsidiary corporations that are subject to domestic or foreign taxation. Income taxes are provided on the income of such corporations using the liability method of accounting for income taxes prescribed by FASB Statement No. 109, "Accounting for Income Taxes." The consolidated financial statements for periods prior to the TWE Capitalization include, for comparative purposes, the income and withholding tax consequences of those TWE operations subject to domestic or foreign taxation, as determined on a stand-alone basis consistent with the liability method of accounting for income taxes. F-44 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INTEREST RATE SWAP CONTRACTS TWE used interest rate swap contracts in 1992 and prior years to adjust the proportion of total debt that was subject to changes in short-term interest rates and the proportion that was subject to fixed rates. There were no material amounts of contracts outstanding during the years ended December 31, 1994 and 1993. Under the previous interest rate swap contracts, TWE had agreed to pay an amount equal to a specified fixed-rate of interest times a notional principal amount, and to receive in return an amount equal to a specified floating-rate of interest times the same notional principal amount. The notional amounts of the contracts were not exchanged. No other cash payments were made unless the contracts were terminated prior to maturity, in which case the amount paid or received in settlement was equal to the present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. The interest rate swap contracts were entered into with a number of major financial institutions in order to minimize credit risk. The net amounts paid or payable, or received or receivable, through the end of the accounting period was included in interest expense. Gains or losses on the termination of contracts were deferred and amortized to income over the remaining average life of the terminated contracts. 2. TWE--ADVANCE/NEWHOUSE PARTNERSHIP In September 1994, TWE agreed to form a cable television joint venture with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting Corporation ("Advance/Newhouse") to which Advance/ Newhouse will contribute cable television systems serving 1.4 million subscribers and related assets, and TWE will contribute cable television systems (or interests therein) serving 2.8 million subscribers and related assets. TWE will own a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and be the managing partner. Advance/Newhouse will own a one-third equity interest in the partnership. Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The transaction is expected to close in the first half of 1995 and is subject to customary closing conditions, including the receipt of certain franchise and regulatory approvals. 3. INVESTMENTS TWE's investments consist of:
DECEMBER 31, ----------- 1994 1993 ----- ----- (MILLIONS) Equity method investments.......................................... $ 629 $ 517 Cost method investments............................................ 37 23 ----- ----- Total.............................................................. $ 666 $ 540 ===== =====
Companies accounted for using the equity method include Paragon Communications (50% owned), certain other cable system joint ventures (generally 50% owned), Comedy Partners, L.P. (50% owned), Six Flags (50% owned in 1992), E! Entertainment Corporation (50% owned in 1992), and in 1994 only, certain F-45 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) international cable and programming joint ventures (generally 25% owned). A summary of financial information as reported by the equity investees of TWE on a 100% basis is set forth below:
YEARS ENDED DECEMBER 31, ------------------------------ RESTATED 1994 1993 1992 1992 ------ ------ -------- ------ (MILLIONS) Revenues......................................... $ 722 $ 596 $ 549 $1,039 Operating income................................. 11 115 65 116 Net income (loss)................................ (53) 80 13 6 Current assets................................... 192 72 125 182 Total assets..................................... 1,281 1,054 1,033 1,896 Current liabilities.............................. 305 163 181 328 Long-term debt................................... 554 613 632 1,147 Total liabilities................................ 926 794 869 1,670
In September 1993, TWE provided Six Flags with $136 million to repurchase the 50% common stock interest held by other stockholders and preferred stock of certain subsidiaries. TWE also provided $414 million to finance the repurchase or retirement of all indebtedness of Six Flags and its subsidiaries, except for the zero coupon notes due 1999. As a result, TWE has consolidated Six Flags effective January 1, 1993. 4. INVENTORIES TWE's inventories consist of:
DECEMBER 31, ------------------------------------- 1994 1993 ------------------ ------------------ CURRENT NONCURRENT CURRENT NONCURRENT ------- ---------- ------- ---------- (MILLIONS) Film costs: Released, less amortization.............. $585 $ 347 $604 $ 318 Completed and not released............... 123 24 140 23 In process and other..................... 18 361 7 340 Library, less amortization............... -- 769 -- 821 Programming costs, less amortization...... 149 306 147 258 Merchandise............................... 81 -- 82 -- ---- ------ ---- ------ Total..................................... $956 $1,807 $980 $1,760 ==== ====== ==== ======
Excluding the Library, the unamortized cost of completed films at December 31, 1994 amounted to $1.079 billion, more than 90% of which is expected to be amortized within three years after release. Excluding the effects of accounting for the acquisition of WCI, the total cost incurred in the production of theatrical and television films amounted to $1.667 billion in 1994, $1.784 billion in 1993 and $1.652 billion in 1992; and the total cost amortized amounted to $1.640 billion, $1.619 billion and $1.535 billion, respectively. F-46 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. LONG-TERM DEBT Long-term debt consists of:
DECEMBER 31, ------------- 1994 1993 ------ ------ (MILLIONS) Credit agreement, weighted average interest rates of 6.5% and 4.2%............................................................ $2,550 $2,425 Commercial paper, weighted average interest rates of 6.2% and 3.8%............................................................ 649 772 Six Flags 9.25% zero coupon notes due December 15, 1999.......... 123 112 9 5/8% notes due May 1, 2002..................................... 600 600 7 1/4% debentures due September 1, 2008.......................... 599 599 10.15% notes due May 1, 2012..................................... 250 250 8 7/8% notes due October 1, 2012................................. 347 347 8 3/8% debentures due March 15, 2023............................. 990 990 8 3/8% debentures due July 15, 2033.............................. 994 994 Other............................................................ 58 36 ------ ------ Total............................................................ $7,160 $7,125 ====== ======
Each Time Warner General Partner has guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest thereon based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE (the "Time Warner General Partner Guarantees"). Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. The indenture pursuant to which TWE's notes and debentures have been issued (the "Indenture") requires the unanimous consent of the holders of the notes and debentures to terminate the Time Warner General Partner Guarantees prior to June 30, 1997, and the consent of a majority of such holders to effect a termination thereafter. There are generally no restrictions on the ability of the Time Warner General Partner guarantors to transfer material assets, other than TWE assets, to parties that are not guarantors. As of December 31, 1994, the TWE bank credit agreement provided for up to $5.2 billion of borrowings and consisted of a $4.2 billion revolving credit facility with available credit reducing at June 30, 1995 and thereafter by $200 million per quarter through June 30, 1996, by $125 million per quarter from September 30, 1996 through September 30, 1999, and by $1.575 billion at final maturity on December 31, 1999; and a $986 million term loan with repayments of $66 million on June 30, 1995, $98 million per quarter beginning September 30, 1995 through March 31, 1996, $27 million per quarter beginning June 30, 1996 through June 30, 1999, $20 million on September 30, 1999 and a final repayment of $255 million on December 31, 1999. Unused credit is available for general business purposes and to support commercial paper borrowings. Outstanding borrowings under the credit agreement generally bear interest at LIBOR plus 5/8% per annum. The credit agreement contains covenants relating to, among other things, additional indebtedness; liens on assets; acquisitions and investments; cash flow coverage and leverage ratios; and loans, advances, distributions or other cash payments or transfers of assets to its partners or their affiliates. An after-tax cost of $10 million was incurred by Six Flags in 1993 in connection with the retirement of its debt (Note 3). The Six Flags zero coupon senior notes due 1999 are guaranteed by TWE. Based on the level of interest rates prevailing at December 31, 1994, the fair value of TWE's long-term debt was $460 million less than its carrying value. Based on the level of interest rates prevailing at December 31, 1993, the fair value of TWE's long-term debt exceeded its carrying value by $290 million. Accounting recognition is not given to unrealized gains or losses on debt unless the debt is retired prior to its maturity. F-47 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest expense was $563 million in 1994, $573 million in 1993 and $436 million in 1992 ($486 million on a restated basis). The weighted average interest rate on TWE's total debt was 7.6% and 6.7% at December 31, 1994 and 1993, respectively. Interest expense in 1992 prior to the TWE Capitalization includes interest expense related to Time Warner's credit and interest rate swap contracts on a pushdown basis and interest expense on $875 million of loans due to WCI, which were repaid at the TWE Capitalization. Annual repayments of long-term debt for the five years subsequent to December 31, 1994 are: 1995- $262 million; 1996-$179 million; 1997-$108 million; 1998- $372 million and 1999-$2.4 billion. 6. INCOME TAXES Domestic and foreign pretax income (loss) are as follows:
YEARS ENDED DECEMBER 31, ------------------------ RESTATED 1994 1993 1992 1992 ---- ---- -------- ---- (MILLIONS) Domestic............................................... $242 $271 $168 $165 Foreign................................................ (41) 1 45 45 ---- ---- ---- ---- Total.................................................. $201 $272 $213 $210 ==== ==== ==== ====
As a partnership, TWE is not subject to U.S. federal, state or local income taxation (Note 1). Income taxes (benefits) of TWE and subsidiary corporations are as set forth below:
YEARS ENDED DECEMBER 31, ------------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ---- (MILLIONS) Federal: Current(/1/).......................................... $ 6 $10 $-- $-- Deferred.............................................. (2) (12) 3 -- Foreign: Current(/2/).......................................... 53 68 42 42 Deferred.............................................. (16) (4) 8 8 State and local: Current............................................... 14 20 -- -- Deferred.............................................. (15) (18) -- -- --- --- --- --- Total income taxes...................................... $40 $64 $53 $50 === === === ===
-------- (1)Includes utilization of Six Flags' tax carryforwards in the amount of $35 million in 1994 and $75 million in 1993. (2)Includes foreign withholding taxes of $44 million in 1994, $59 million in 1993 and $34 million in 1992. The financial statement basis of TWE's assets exceeds the corresponding tax basis by $9.5 billion at December 31, 1994, principally as a result of differences in accounting for depreciable and amortizable assets for financial statement and income tax purposes. F-48 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. TWE PARTNERS' CAPITAL The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation or dissolution. The initial capital amounts assigned to each partner were based on the fair value of the assets each contributed to the partnership. Partnership income, to the extent earned, is first allocated to the partners so that the economic burden of the income tax consequences of partnership operations is borne as though the partnership were taxed as a corporation ("special tax allocations"), then to the senior, pro rata and junior priority capital interests, in order of priority, at rates of return ranging from 8% to 13.25% per annum, and finally to the residual equity interests. For the purpose of the foregoing allocations, partnership income is based on the fair value of assets contributed to the partnership, and differs from net income of TWE, which is based on the historical cost of contributed assets. Partnership losses generally are allocated first to eliminate prior allocations of partnership income to, and then to reduce the initial capital amounts of, the residual equity, junior priority capital and pro rata priority capital interests, in that order, then to reduce Time Warner General Partners' senior capital, including partnership income allocated thereto, and finally to reduce any special tax allocations. To the extent partnership income is insufficient to satisfy all special allocations in a particular accounting period, the unearned portion is carried over until satisfied out of future partnership income. A summary of the priority of contributed capital and limitations on the allocation of partnership income is as set forth below:
TIME INITIAL INCOME WARNER CAPITAL ALLOCATIONS GENERAL U S AMOUNTS(A) LIMITED TO PARTNERS WEST ITOCHU TOSHIBA ---------- ------------ -------- ----- ------ ------- (BILLIONS) (% PER ANNUM (OWNERSHIP %) COMPOUNDED QUARTERLY) PRIORITY OF CONTRIBUTED CAPITAL Special tax allocations. $ 0 No limit .........as necessary........ Senior capital.......... 1.4 8.00% 100.00% -- -- -- Pro rata priority capi- tal.................... 5.6 13.00%(b) 63.27% 25.51% 5.61% 5.61% Junior priority capital. 2.6 13.25%(c) 100.00% -- -- -- Residual equity capital. 3.3 No limit 63.27% 25.51% 5.61% 5.61%
-------- (a)Excludes partnership income or loss (to the extent earned) allocated thereto. (b)11.00% to the extent concurrently distributed. (c)11.25% to the extent concurrently distributed. Senior capital and partnership income allocated thereto is required to be distributed in three annual installments beginning July 1, 1997; earlier distributions may be made under certain circumstances ("Senior Capital Distributions"). Senior capital and partnership income allocated thereto amounted to $1.663 billion at December 31, 1994, consisting of $1.364 billion initial capital amount plus accrued income. Junior priority capital is subject to a retroactive adjustment based on TWE's operating performance over five- and ten-year periods. U S WEST has an option to increase its pro rata priority capital and residual equity interests to as much as 31.84%, depending on cable operating performance. The option is exercisable between January 1, 1999 F-49 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and on or about May 31, 2005 at a maximum exercise price ranging from $1.25 billion to $1.8 billion, depending on the year of exercise. U S WEST or TWE may elect that the exercise price be paid with partnership interests rather than cash. Prior to the exercise of the U S WEST option, each of ITOCHU and Toshiba has the right to maintain its original 6.25% pro rata priority capital and residual equity interests by acquiring additional partnership interests at fair market value; thereafter, each would have the right to maintain the percentage of the pro rata priority capital and residual equity interests it held immediately prior to U S WEST's exercise. Distributions and loans to the partners are subject to partnership and credit agreement limitations. Generally, TWE must be in compliance with the cash flow coverage and leverage ratios, restricted payment limitations and other credit agreement covenants in order to make such distributions or loans. Certain assets of TWE (the "Time Warner Service Partnership Assets") were distributed to the Time Warner General Partners prior to the admission of U S WEST in 1993 in order to ensure compliance with the Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia (the "MFJ") applicable to U S WEST and its affiliated companies, which may have included TWE. The Time Warner General Partners contributed the Time Warner Service Partnership Assets to newly-formed partnerships (the "Time Warner Service Partnerships") in which the Time Warner General Partners are the general partners and subsidiaries of ITOCHU and Toshiba are the limited partners. The Time Warner Service Partnerships make certain of their assets and related services available to TWE (Note 12). If TWE is clearly not prohibited from owning or operating the Time Warner Service Partnership Assets, they will be recontributed to TWE on September 15, 1995 (or September 15, 1997 in the case of certain assets), or earlier under certain circumstances, at their then fair market value in exchange for partnership interests in TWE. As a result of a judicial order issued to U S WEST on October 24, 1994, TWE is no longer prohibited from owning or operating substantially all of the Time Warner Service Partnership Assets. For financial statement purposes, the distribution of Time Warner Service Partnership Assets was accounted for at historical cost. For partnership agreement purposes, the initial capital amount of General Partners' junior priority capital of $3 billion was reduced by approximately $300 million to give effect to such distribution. TWE is required to make quarterly cash distributions of Time Warner General Partners' junior priority capital in the amount of $12.5 million to the Time Warner General Partners ("TWSP Distributions"), which the General Partners are then required to contribute to the Time Warner Service Partnerships. TWE paid $50 million and $12.5 million of TWSP Distributions to the Time Warner General Partners in 1994 and 1993, respectively, which were recorded as additional reductions of Time Warner General Partners' junior priority capital. TWE reimburses Time Warner for the amount by which the market price on the exercise date of Time Warner common stock options granted to employees of TWE exceeds the exercise price or, with respect to options granted prior to the TWE Capitalization, the greater of the exercise price and $27.75, the market price of the common stock at the TWE Capitalization ("Stock Option Distributions"). TWE accrues Stock Option Distributions and a corresponding liability with respect to unexercised options when the market price of Time Warner common stock increases during the accounting period, and reverses previously-accrued Stock Option Distributions and the corresponding liability when the market price of Time Warner common stock declines. At December 31, 1994 and 1993, TWE had recorded a liability for Stock Option Distributions of $89 million and $271 million, respectively, based on the unexercised options and the market prices at such dates of $35.125 and $44.25, respectively, per Time Warner common share. TWE paid $5 million of Stock Option Distributions to Time Warner in 1994, compared to $20 million in 1993. Cash distributions are required to be made to the partners to permit them to pay income taxes at statutory rates based on their allocable taxable income from TWE ("Tax Distributions"), including any F-50 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) taxable income generated by the Beneficial Assets, subject to limitations referred to herein. The aggregate amount of such Tax Distributions is computed generally by reference to the taxes that TWE would have been required to pay if it were a corporation. TWE paid $115 million of Tax Distributions to the Time Warner General Partners in 1994 and had recorded an additional liability to the Time Warner General Partners for Tax Distributions of $334 million at December 31, 1994, compared to a liability of $276 million at December 31, 1993. All Tax Distributions are permitted to be paid beginning July 1, 1995 and, accordingly, such amounts are classified as a current liability at December 31, 1994. In addition to Stock Option Distributions, Tax Distributions, Senior Capital Distributions and TWSP Distributions, quarterly cash distributions may be made to the partners to the extent of excess cash, as defined ("Excess Cash Distribution"). Assuming that no additional partnership interests are issued to new partners and that certain cash distribution thresholds are met, cash distributions other than Stock Option Distributions, Tax Distributions, Senior Capital Distributions and TWSP Distributions will in the aggregate be made 63.27% to the Time Warner General Partners and 36.73% to the Limited Partners prior to June 30, 1998; thereafter, the Time Warner General Partners also will be entitled to additional distributions with respect to junior priority capital. If aggregate distributions made to the Limited Partners, generally from all sources, have not reached approximately $800 million by June 30, 1997, cash distributions to the Time Warner General Partners with respect to the Time Warner General Partners' pro rata priority and residual equity capital, other than Stock Option Distributions and Tax Distributions, will be deferred until such threshold is met. Similarly, if such aggregate distributions to the Limited Partners have not reached approximately $1.6 billion by June 30, 1998, cash distributions with respect to junior priority capital, other than TWSP Distributions, will be deferred until such threshold is met. If any such deferral occurs, a portion of the corresponding partnership income allocations with respect to such deferred amounts will be made at a rate higher than otherwise would have been the case. If a division of TWE or a substantial portion thereof is sold, the net proceeds of such sale, less expenses and proceeds used to repay outstanding debt, will be required to be distributed with respect to the partners' partnership interests. Similar distributions are required to be made in the event of a financing or refinancing of debt. Subject to any limitations on the incurrence of additional debt contained in the TWE partnership and credit agreements, and the Indenture, TWE may borrow funds to make distributions. 8. STOCK OPTION PLANS Options to purchase Time Warner common stock under various stock option plans have been granted to employees of TWE, generally at fair market value at the date of grant. Generally, the options become exercisable over a three-year vesting period and expire ten years from the date of grant. A summary of stock option activity with respect to employees of TWE is as follows:
THOUSANDS OF SHARES EXERCISE OF TIME WARNER PRICE COMMON STOCK PER SHARE ------------------- --------- Balance at December 31, 1993...................... 26,880 $ 8-45 Granted........................................... 3,856 33-41 Exercised......................................... (437) 8-36 Cancelled......................................... (101) 22-45 ------ Balance at December 31, 1994...................... 30,198 $ 8-45 ====== Exercisable at December 31, 1994.................. 21,318 ======
TWE reimburses Time Warner for the use of Time Warner stock options on the basis described in Note 7. There were 1.9 million options exercised by employees of TWE in 1993 and 129,000 options exercised in 1992 at prices ranging from $8-$36 per share, and there were 18.5 million options exercisable at December 31, 1993. F-51 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. BENEFIT PLANS TWE and its divisions have defined benefit pension plans covering substantially all domestic employees. Pension benefits are based on formulas that reflect the employees' years of service and compensation levels during their employment period. Qualifying plans are funded in accordance with government pension and income tax regulations. Plan assets are invested in equity and fixed income securities. Pension expense included the following:
YEARS ENDED DECEMBER 31 ------------------------- RESTATED 1994 1993 1992 1992 ---- ---- -------- ---- (MILLIONS) Service cost......................................... $ 26 $ 21 $ 15 $ 13 Interest cost........................................ 24 19 14 12 Actual return on plan assets......................... 4 (21) (12) (10) Net amortization and deferral........................ (21) 5 (4) (4) ---- ---- ---- ---- Total................................................ $ 33 $ 24 $ 13 $ 11 ==== ==== ==== ====
The status of funded pension plans is as follows:
DECEMBER 31, ------------ 1994 1993 ----- ----- (MILLIONS) Accumulated benefit obligation (88% vested)...................... $ 172 $ 189 Effect of future salary increases................................ 91 94 ----- ----- Projected benefit obligation..................................... 263 283 Plan assets at fair value........................................ 225 221 ----- ----- Projected benefit obligation in excess of plan assets............ (38) (62) Unamortized actuarial losses..................................... 24 53 Unamortized plan changes......................................... 4 9 Other............................................................ (4) (7) ----- ----- Accrued pension liability........................................ $ (14) $ (7) ===== =====
The following assumptions were used in accounting for pension plans:
1994 1993 1992 ---- ---- ---- Weighted average discount rate................................... 8.5% 7.5% 8.5% Return on plan assets............................................ 9% 9% 10% Rate of increase in compensation levels.......................... 6% 6% 6%
Certain domestic employees of TWE participate in multiemployer pension plans as to which the expense amounted to $18 million in 1994, $19 million in 1993 and $20 million in 1992. Employees in foreign countries participate to varying degrees in local pension plans, which in the aggregate are not significant. Certain domestic employees also participate in Time Warner's 401(k) savings plans and profit sharing plans, as to which the expense was $23 million in 1994, $20 million in 1993 and $16 million in 1992. Contributions to the 401(k) plans are based upon a percentage of the employees' elected contributions. Contributions to the profit sharing plans are determined by management. F-52 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. SEGMENT INFORMATION Information as to the operations of TWE in different business segments is as set forth below:
YEARS ENDED DECEMBER 31, ------------------------------- RESTATED 1994 1993 1992 1992 ------ ------ -------- ------ (MILLIONS) REVENUES(/1/) Filmed Entertainment.......................... $5,033 $4,557 $3,945 $3,455 Programming-HBO............................... 1,494 1,435 1,444 1,444 Cable......................................... 2,220 2,205 2,091 2,091 Intersegment elimination...................... (287) (251) (229) (229) ------ ------ ------ ------ Total......................................... $8,460 $7,946 $7,251 $6,761 ====== ====== ====== ====== -------- (1) Substantially all operations outside of the United States support the export of domestic products. Revenues include export sales of $1.693 billion in 1994, $1.650 billion in 1993 and $1.379 billion in 1992. Approximately 60% of export revenues are from sales to European customers. YEARS ENDED DECEMBER 31, ------------------------------- RESTATED 1994 1993 1992 1992 ------ ------ -------- ------ (MILLIONS) OPERATING INCOME Filmed Entertainment.......................... $ 257 $ 263 $ 235 $ 194 Programming-HBO............................... 236 213 201 201 Cable......................................... 355 407 400 400 ------ ------ ------ ------ Total......................................... $ 848 $ 883 $ 836 $ 795 ====== ====== ====== ====== YEARS ENDED DECEMBER 31, ------------------------------- RESTATED 1994 1993 1992 1992 ------ ------ -------- ------ (MILLIONS) DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT Filmed Entertainment.......................... $ 122 $ 87 $ 75 $ 36 Programming-HBO............................... 13 14 13 13 Cable......................................... 330 325 316 316 ------ ------ ------ ------ Total......................................... $ 465 $ 426 $ 404 $ 365 ====== ====== ====== ====== YEARS ENDED DECEMBER 31, ------------------------------- RESTATED 1994 1993 1992 1992 ------ ------ -------- ------ (MILLIONS) AMORTIZATION OF INTANGIBLE ASSETS(/1/) Filmed Entertainment.......................... $ 163 $ 171 $ 185 $ 155 Programming-HBO............................... 6 3 1 1 Cable......................................... 309 302 261 261 ------ ------ ------ ------ Total......................................... $ 478 $ 476 $ 447 $ 417 ====== ====== ====== ======
-------- (1) Amortization includes amortization relating to the acquisitions of WCI in 1989 and the ATC minority interest in 1992 and to other business combinations accounted for by the purchase method. F-53 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information as to the assets and capital expenditures of TWE is as follows:
DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------- ------- -------- ------- (MILLIONS) ASSETS Filmed Entertainment........................... $ 7,947 $ 7,525 $ 7,346 $ 6,468 Programming-HBO................................ 895 855 936 936 Cable.......................................... 8,191 8,041 8,142 8,142 Corporate(/1/)................................. 1,629 1,542 270 302 ------- ------- ------- ------- Total.......................................... $18,662 $17,963 $16,694 $15,848 ======= ======= ======= ======= -------- (1)Consists principally of cash, cash equivalents and other investments. YEARS ENDED DECEMBER 31, -------------------------------- RESTATED 1994 1993 1992 1992 ------- ------- -------- ------- (MILLIONS) CAPITAL EXPENDITURES Filmed Entertainment........................... $ 441 $ 244 $ 122 $ 101 Programming-HBO................................ 13 17 28 28 Cable(/1/)..................................... 699 352 273 273 ------- ------- ------- ------- Total.......................................... $ 1,153 $ 613 $ 423 $ 402 ======= ======= ======= =======
-------- (1)The 1994 increase was funded in part through $234 million of collections on the U S WEST Note (Note 1). 11.COMMITMENTS AND CONTINGENCIES Total rent expense amounted to $143 million in 1994, $119 million in 1993 and $99 million ($107 million on a restated basis) in 1992. The minimum rental commitments under noncancellable long-term operating leases are: 1995-$132 million; 1996-$130 million; 1997-$117 million; 1998-$110 million; 1999-$100 million and after 1999-$784 million. Minimum commitments and guarantees under certain programming, licensing, franchise and other agreements at December 31, 1994 aggregated approximately $3.7 billion, which are payable principally over a five-year period. Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements. 12.RELATED PARTY TRANSACTIONS In the normal course of conducting their businesses, TWE units have had various transactions with Time Warner units, generally on terms resulting from a negotiation among the affected parties that in management's view results in reasonable allocations. Employees of TWE participate in various Time Warner medical, stock option (Note 8) and other benefit plans (Note 9) for which TWE is charged its allocable share of plan expenses, including administrative costs. Time Warner's corporate group provides various other services to TWE. The Music division of WCI provides home videocassette distribution services to certain F-54 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) TWE operations, and certain TWE units have placed advertising in magazines published by Time Warner's Publishing division. TWE is required to pay a $130 million advisory fee to U S WEST over a five- year period ending September 15, 1998 for U S WEST's expertise in telecommunications, telephony and information technology, and its participation in the management and upgrade of the cable systems to Full Service Network(TM) capacity. Time Warner provides TWE with certain corporate support services for which Time Warner is paid $60 million per year through June 30, 1995, and increasing annual amounts as adjusted for inflation thereafter. The corporate services agreement runs through June 30, 1997, and may be extended by agreement of both parties. Management believes that the corporate services fee is representative of the cost of corporate services that would be necessary for the stand-alone operations of TWE. Time Warner and TWE entered into a credit agreement in 1994 that allows Time Warner to borrow up to $400 million from TWE through September 15, 2000. Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time Warner borrowed $400 million in 1994 under the credit agreement. Under TWE's bank credit agreement, TWE's loans to Time Warner cannot exceed $1.1 billion at December 31, 1994, increasing to no more than $1.5 billion on July 1, 1995. TWE has service agreements with the Time Warner Service Partnerships for program signal delivery and transmission services, and TWE provides billing, collection and marketing services to the Time Warner Service Partnerships. TWE also has distribution and merchandising agreements with Time Warner Entertainment Japan Inc., a company owned by partners of TWE to conduct TWE's businesses in Japan. In addition to transactions with its partners, TWE has had transactions with Paragon Communications, Comedy Partners, L.P. and its other equity investees and with Turner Broadcasting System, Inc., The Columbia House Company partnerships, Cinamerica Theatres, L.P. and other equity investees of Time Warner, generally with respect to sales of product in the ordinary course of business. Long-term debt and interest expense prior to the TWE Capitalization include the effects of the pushdown of a portion of the Time Warner credit agreement debt that was related to the WCI acquisition, based on the proportion that the fair value of the WCI contributed businesses acquired bore to the fair value of all of the WCI net assets acquired. Interest expense prior to the TWE Capitalization also reflects interest on $875 million of loans due to WCI, which were repaid at the TWE Capitalization, at a rate approximating the rate applicable to borrowings under the Time Warner credit agreement. 13.SUPPLEMENTAL INFORMATION Supplemental information with respect to cash flows is as follows:
YEARS ENDED DECEMBER 31, --------------------------- RESTATED 1994 1993 1992 1992 ---- ------ -------- ------ (MILLIONS) Cash payments made for interest................... $521 $ 450 $ 418 $ 391 Cash payments made for income taxes (net)......... 69 70 39 39 Borrowings........................................ 977 3,075 6,856 6,677 Repayments........................................ 945 3,734 7,647 7,514 Noncash assumption of debt........................ -- -- 2,545 2,545 Noncash pushdown of cost to acquire ATC minority interest.......................................... -- -- 1,431 1,431 Noncash capital contributions (distributions), net............................................... 4 384 (117) (117)
F-55 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The principal balance sheet effects of the consolidation of Six Flags in 1993 were to increase cash and equivalents by $11 million, property, plant and equipment by $398 million, goodwill by $310 million, other assets by $159 million, debt by $608 million and other liabilities by $238 million, and to decrease investments by $32 million. The principal balance sheet effects of the acquisition of the ATC minority interest in 1992 were to increase investments by $156 million, cable television franchises by $865 million, goodwill by $410 million and partners' capital by $1.431 billion. A noncash effect of the TWE Capitalization in 1992 was the assumption by TWE of $2.545 billion of Time Warner debt in excess of the amount reflected as a liability prior to the TWE Capitalization. Cash equivalents consist of commercial paper and other investments that are readily convertible into cash, and have original maturities of three months or less. Other current liabilities consist of:
DECEMBER 31, ------------- 1994 1993 ------ ------ (MILLIONS) Accrued expenses................................................. $ 827 $ 767 Accrued compensation............................................. 143 101 Deferred revenues................................................ 150 129 Tax Distributions due to Time Warner General Partners............ 334 108 Debt due within one year......................................... 32 24 ------ ------ Total............................................................ $1,486 $1,129 ====== ======
F-56 REPORT OF INDEPENDENT AUDITORS THE PARTNERS OF TIME WARNER ENTERTAINMENT COMPANY, L.P. We have audited the accompanying consolidated balance sheet of Time Warner Entertainment Company, L.P. ("TWE") as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and partnership capital for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of TWE's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TWE at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP New York, New York February 7, 1995 F-57 TIME WARNER ENTERTAINMENT COMPANY, L.P. SELECTED FINANCIAL INFORMATION The selected financial information for each of the five years in the period ended December 31, 1994 set forth below has been derived from and should be read in conjunction with the consolidated financial statements and other financial information presented elsewhere herein. Capitalized terms are as defined and described in such consolidated financial statements, or elsewhere herein. The selected historical financial information for 1994 and 1993 gives effect to the consolidation of Six Flags effective as of January 1, 1993, as a result of the 1993 Six Flags acquisition. The selected historical financial information for periods prior to such date has not been changed; however, selected financial information for 1992 retroactively reflecting the consolidation is presented as supplementary information under the column heading "restated" to facilitate comparative analysis. The selected historical financial information for 1993 gives effect to the admission of U S WEST as an additional limited partner of TWE as of September 15, 1993 and the issuance of $2.6 billion of TWE debentures during the year to reduce indebtedness under the TWE credit agreement, and for 1992 gives effect to the initial capitalization of TWE and associated refinancings as of the dates such transactions were consummated and Time Warner's acquisition of the ATC minority interest as of June 30, 1992, using the purchase method of accounting and reflected in the consolidated financial statements of TWE under the pushdown method of accounting.
YEARS ENDED DECEMBER 31, ------------------------------------------------ RESTATED SELECTED OPERATING STATEMENT 1994 1993 1992 1992 1991 1990 INFORMATION ------- ------- -------- ------- ------- ------- (MILLIONS) Revenues..................... $ 8,460 $ 7,946 $ 7,251 $ 6,761 $ 6,068 $ 5,671 Depreciation and amortiza- tion........................ 943 902 851 782 733 775 Business segment operating income...................... 848 883 836 795 712 549 Interest and other, net...... 587 551 563 525 520 648 Income (loss) before extraor- dinary item................. 161 208 160 160 97 (180) Net income (loss)............ 161 198 160 160 97 (180) DECEMBER 31, ------------------------------------------------ RESTATED SELECTED BALANCE SHEET 1994 1993 1992 1992 1991 1990 INFORMATION ------- ------- -------- ------- ------- ------- (MILLIONS) Total assets................. $18,662 $17,963 $16,694 $15,848 $14,230 $14,415 Debt due within one year..... 32 24 102 7 878 7 Long-term debt............... 7,160 7,125 7,684 7,171 4,571 6,516 Time Warner General Partners' senior capital.............. 1,663 1,536 -- -- -- -- Partners' capital............ 6,233 6,000 6,437 6,437 6,717 5,809
F-58 TIME WARNER ENTERTAINMENT COMPANY, L.P. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
OPERATING INCOME OF NET BUSINESS INCOME QUARTER REVENUES SEGMENTS (LOSS) ------- -------- ---------- ------ (MILLIONS) 1994 1st.................................................. $1,919 $203 $ 48 2nd.................................................. 2,055 227 56 3rd.................................................. 2,203 235 41 4th.................................................. 2,283 183 16 Year................................................. 8,460 848 161 1993 1st.................................................. $1,757 $208 $ 93 2nd (a).............................................. 1,865 235 40 3rd (a).............................................. 2,174 279 76 4th.................................................. 2,150 161 (11) Year (a)............................................. 7,946 883 198
-------- (a) Net income for each of the second and third quarters of 1993 includes an extraordinary loss on the retirement of debt of $2 million and $8 million, respectively. F-59 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS 1994 VS. 1993 TWE had revenues of $8.460 billion and net income of $161 million in 1994, compared to revenues of $7.946 billion and net income of $198 million in 1993. An extraordinary loss on the retirement of debt of $10 million and a one-time gain from the sale of certain assets are included in the 1993 results. Operating income and EBITDA for TWE in 1994 and 1993 were as follows:
YEARS ENDED DECEMBER 31, ----------------------- OPERATING INCOME EBITDA --------- ------------- 1994 1993 1994 1993 ---- ---- ------ ------ (MILLIONS) Filmed Entertainment.................................... $257 $263 $ 542 $ 521 Programming--HBO........................................ 236 213 255 230 Cable................................................... 355 407 994 1,034 ---- ---- ------ ------ Total................................................... $848 $883 $1,791 $1,785 ==== ==== ====== ======
As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $40 million in the year ended December 31, 1994, and $64 million in the year ended December 31, 1993 have been provided in respect of the operations of TWE's domestic and foreign subsidiary corporations. Certain factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in Time Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of TWE, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. Filmed Entertainment. Revenues increased to $5.033 billion, compared to $4.557 billion in 1993. Operating income decreased to $257 million from $263 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $285 million in 1994 and $258 million in 1993. EBITDA increased to $542 million from $521 million. Worldwide home video, syndication and consumer products revenues increased at Warner Bros., offset in part by lower worldwide theatrical revenues. Revenues at Six Flags increased as a result of overall attendance growth and higher revenues per visitor. Operating income and EBITDA margins decreased principally as a result of lower theatrical results in comparison to the exceptionally strong theatrical results in 1993. Programming--HBO. Revenues increased to $1.494 billion, compared to $1.435 billion in 1993. Operating income increased to $236 million from $213 million. Depreciation and amortization amounted to $19 million in 1994 and $17 million in 1993. EBITDA increased to $255 million from $230 million. Revenues benefited from an increase in subscribers and higher pay-TV rates. Operating income, EBITDA and operating margins improved principally as a result of the revenue gains. F-60 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) Cable. Revenues increased to $2.220 billion, compared to $2.205 billion in 1993. Operating income decreased to $355 million from $407 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $639 million in 1994 and $627 million in 1993. EBITDA decreased to $994 million from $1.034 billion. Revenues and operating results in 1994 were adversely affected by two rounds of cable rate regulation that in general reduced the rates cable operators are allowed to charge for regulated services, the first of which went into effect in September 1993 and the second of which went into effect in July 1994. The unfavorable effects of rate regulation were offset in part by an increase in subscribers and nonregulated revenues. Actions that were undertaken to mitigate the impact of rate regulation included a number of cost containment measures and a continued emphasis on near and long-term strategies to increase revenues from unregulated services. Interest and Other, Net. Interest and other, net, increased to $587 million in 1994, compared to $551 million in 1993. Interest expense decreased to $563 million, compared with $573 million in 1993. There was other expense, net, of $24 million in 1994, compared to other income, net, of $22 million in 1993. Investment-related and foreign currency contract losses in 1994 exceeded an increase in interest income on higher cash balances and the interest-bearing note receivable from U S WEST. A gain on the sale of certain assets and other investment-related income exceeded investment losses in 1993. 1993 VS. 1992 TWE had 1993 revenues of $7.946 billion, income of $208 million before an extraordinary loss of $10 million on the retirement of debt and net income of $198 million, compared to 1992 revenues of $6.761 billion ($7.251 billion on a restated basis) and net income of $160 million. Operating income and EBITDA for TWE for 1993 and 1992 were as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- OPERATING INCOME EBITDA ------------------------------ ------------------------------ HISTORICAL RESTATED HISTORICAL HISTORICAL RESTATED HISTORICAL 1993 1992 1992 1993 1992 1992 ---------- -------- ---------- ---------- -------- ---------- (MILLIONS) Filmed Entertainment.... $263 $235 $194 $ 521 $ 495 $ 385 Programming--HBO........ 213 201 201 230 215 215 Cable................... 407 400 400 1,034 977 977 ---- ---- ---- ------ ------ ------ Total................... $883 $836 $795 $1,785 $1,687 $1,577 ==== ==== ==== ====== ====== ======
Filmed Entertainment. Revenues increased to $4.557 billion compared to $3.455 billion ($3.945 billion on a restated basis) in 1992. Operating income increased to $263 million from $194 million ($235 million on a restated basis). Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $258 million in 1993 and $191 million ($260 million on a restated basis) in 1992. EBITDA increased to $521 million from $385 million ($495 million on a restated basis). The increase in revenues, operating income and EBITDA on an historical basis resulted primarily from the inclusion in 1993 of the operating results of Six Flags, which previously had been accounted for using the equity method. Revenues at Warner Bros. increased during the period primarily due to increases in international theatrical, international syndication and domestic home video revenues, as well as increased revenues from retail operations. Record international revenues of $1.650 billion would have been greater but for unfavorable exchange rate fluctuations. Warner Bros. ranked number one at both the domestic and international box office in 1993, led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags increased, benefiting from higher revenues per visitor. Operating income and EBITDA benefited from the revenue gains. F-61 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) Programming--HBO. Revenues decreased to $1.435 billion compared to $1.444 billion in 1992. Operating income increased to $213 million from $201 million. Depreciation and amortization amounted to $17 million in 1993 and $14 million in 1992. EBITDA increased to $230 million from $215 million. The decrease in revenues reflects lower HBO Video sales, which in 1992 were favorably affected by a children's sell-thru title, offset in part by higher subscriber revenues, principally as a result of higher pay-TV rates at HBO and an increase in subscribers. Operating income and EBITDA benefited primarily from improved results from new businesses, including Time Warner Sports and the Comedy Central joint venture. Cable. Revenues increased to $2.205 billion compared to $2.091 billion in 1992. Operating income increased to $407 million from $400 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest amounted to $627 million in 1993 and $577 million in 1992. EBITDA increased to $1.034 billion from $977 million. Revenues increased principally as a result of growth in the number of cable subscribers and increases in advertising sales and pay-per- view. The increase in subscribers accounted for approximately three quarters of the revenue increase. Operating income and EBITDA benefited from the revenue gains and increased income from cable joint ventures, but was negatively affected in the fourth quarter by the first round of cable rate regulation, which went into effect on September 1, 1993. Interest and Other, Net. Interest and other, net, increased to $551 million in 1993 from $525 million ($563 million on a restated basis) in 1992. Interest expense increased to $573 million compared with $436 million ($486 million on a restated basis) in 1992. The increase in interest expense resulted primarily from the higher average debt levels attributable to the TWE capitalization, the higher interest cost of the TWE notes and debentures issued to refinance TWE bank debt, and the consolidation of Six Flags' interest expense in 1993. Other income, net, in 1993 included gains on the sale of certain assets partially offset by losses from and reductions in the carrying value of certain investments. Other expenses, net, on a restated basis in 1992 is principally attributable to losses on certain investments and litigation-related costs. FINANCIAL CONDITION AND LIQUIDITY DECEMBER 31, 1994 Despite the $7 billion of debt incurred by Time Warner in its 1989 acquisition of Warner Communications Inc. that was allocated to TWE under the pushdown method of accounting and the adverse effects on the cable business since September 1993 from government-imposed rate regulation, TWE continues to be able to finance growth and expansion in critical areas. In the last three years alone, TWE has spent approximately $900 million making new investments and acquisitions and approximately $2.2 billion on capital expenditures. Annual improvements in EBITDA and the $2.8 billion of capital contributions (excluding the $771 million uncollected portion of the U S WEST Note) by ITOCHU, Toshiba and U S WEST, have enabled TWE to finance this level of investment while at the same time maintaining its leverage and coverage ratios at relatively constant levels. A commonly-used leverage ratio is total debt, less cash ("Net debt") to total business segment EBITDA, less corporate expenses ("Adjusted EBITDA"). A commonly-used coverage ratio is Adjusted EBITDA to total interest expense. Those ratios for 1994 and 1993 were as follows:
1994 1993 ----- ----- Net debt/Adjusted EBITDA............................................ 3.54x 3.37x Adjusted EBITDA/Interest expense.................................... 3.07x 3.01x
F-62 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) The financial condition of TWE at December 31, 1994 remained essentially unchanged from year end 1993, but is expected to be significantly affected by the formation of the TWE-Advance/Newhouse Partnership and other cable transactions announced by Time Warner for 1995. TWE had $7.2 billion of long- term debt at December 31, 1994, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital (net of the $771 million uncollected portion of the U S WEST Note), compared to $7.1 billion of long- term debt, $1.5 billion of Time Warner General Partners' senior capital and $6 billion of partners' capital at December 31, 1993. Cash and equivalents were $1.1 billion at December 31, 1994 compared to $1.3 billion at December 31, 1993, resulting in net debt of $6.1 billion and $5.8 billion, respectively. Time Warner and TWE entered into a credit agreement in 1994 that allows Time Warner to borrow up to $400 million from TWE through September 15, 2000. Time Warner borrowed $400 million in 1994 under the credit agreement. Under TWE's bank credit agreement, TWE's loans to Time Warner cannot exceed $1.1 billion at December 31, 1994, increasing to no more than $1.5 billion on July 1, 1995. During the latter half of 1994 and continuing into 1995, Time Warner and TWE announced a series of cable transactions, all of which are subject to customary franchise and regulatory approvals, that are expected to increase the total number of cable subscribers under the management of Time Warner Cable to approximately 11.5 million, compared to 7.5 million at the end of 1994. As part of this cable television expansion, TWE will own a two-thirds interest in a joint venture it will form with subsidiaries of Advance and Newhouse, which will contribute cable television systems that serve approximately 1.4 million basic television subscribers. In accordance with the TWE-Advance/Newhouse joint venture agreement, certain cable systems to be acquired by Time Warner in its acquisitions of Summit Communications Group, Inc., KBLCOM Incorporated and Cablevision Industries Corporation and related companies, may be transferred on a tax-efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers, if they are made, are expected to be structured on a leveraged basis. New or revised bank credit facilities will be required for TWE and the TWE-Advance/Newhouse Partnership as a result of these transactions, which management feels will be obtained at a reasonable cost. Time Warner also has announced its intention to enhance its financial position and that of TWE through sales of non-core assets, which may include certain smaller, unclustered cable systems and certain investments owned by TWE. Proceeds from asset sales will be used to reduce debt. The formation of the TWE-Advance/Newhouse Partnership and sales of non-core assets are expected to improve TWE's leverage and coverage ratios. In accordance with the TWE-Advance/Newhouse joint venture agreement, certain of Time Warner's newly-acquired cable systems may be transferred on a tax- efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers, if they are made, are expected to be structured on a leveraged basis, which could result in an overall adverse impact on the TWE ratios. Because of the announced transactions, Time Warner will explore the possibility of bringing its various interests in cable operations together in a separate, self-financed operating unit. This process is expected to be undertaken over a 12-18 month period and will be dependent on, among other things, successful negotiations with TWE's partners and certain creditors, and the receipt of franchise and other regulatory approvals. Accordingly, there can be no assurance that the effort will succeed. During 1994, cash provided by TWE operations amounted to $1.296 billion and consisted of $1.791 billion of EBITDA from the Filmed Entertainment, Programming-HBO and Cable businesses and a reduction in working capital requirements, less $521 million of interest payments, $69 million of income taxes and $60 million of corporate expenses. Cash provided by operations of $1.271 billion in 1993 consisted of F-63 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) $1.785 billion of business segment EBITDA and a reduction in working capital requirements, less $450 million of interest payments, $70 million of income taxes and $60 million of corporate expenses. Capital expenditures increased to $1.153 billion in 1994, compared to $613 million in 1993. Capital spending by Time Warner Cable amounted to $699 million in 1994, compared to $352 million in 1993, and was financed in part through $234 million of collections on the U S WEST Note. Cable capital expenditures are budgeted to exceed $1 billion for 1995, and are expected to be partially financed by $550 million of collections on the U S WEST Note. Because management believes that the conversion from coaxial to fiber-optic cable is essential to achieving long-term growth in revenue from telephony and unregulated cable services, significant cable capital expenditures also are expected in subsequent years and will be timed to match the rate at which demand for the new services develops. Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition, amounted to $852 million at December 31, 1994, compared to $724 million at December 31, 1993 (including amounts relating to HBO of $175 million at December 31, 1994 and $178 million at December 31, 1993). The backlog excludes advertising barter contracts. Management believes that TWE's 1995 operating cash flow, cash and equivalents, collections on the U S WEST Note and additional borrowing capacity are sufficient to meet its capital and liquidity needs. Foreign exchange contracts are used primarily to hedge the risk that unremitted or future license fees owed to TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in exchange rates. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's exposure. At December 31, 1994, Time Warner had contracts for the sale of $551 million and the purchase of $109 million of foreign currencies at fixed rates and maturities of three months or less. Of Time Warner's $442 million net sale contract position, $188 million related to TWE's exposure, primarily Japanese yen (41% of net contract position related to TWE), French francs (18%), German marks (12%) and Canadian dollars (11%), compared to a net sale contract position of $226 million of foreign currencies at December 31, 1993. F-64 TIME WARNER ENTERTAINMENT COMPANY, L.P. SUPPLEMENTARY INFORMATION SUMMARIZED FINANCIAL INFORMATION OF SIX FLAGS Six Flags was formed by a group of companies, including a subsidiary of Time Warner ("Enterprises") which owned 50% of Six Flags common stock, to effect the acquisition on December 29, 1991 of Six Flags Theme Parks Inc. ("1991 SF Acquisition"). Enterprises' interest in Six Flags was contributed to TWE at the TWE capitalization. In December 1992, Six Flags redeemed certain of its equity with $102 million of proceeds from the issuance of zero coupon senior notes due 1999 and $12 million of proceeds from the issuance of additional shares of Six Flags common stock ("1992 SF Recapitalization"). TWE continued to own 50% of the common stock of Six Flags following the 1992 SF Recapitalization, until September 17, 1993, when it provided Six Flags with $136 million to repurchase all the common stock held by the other stockholders and preferred stock of certain subsidiaries. TWE also provided $414 million to finance the repurchase or retirement of all the indebtedness of Six Flags and its subsidiaries, except for the zero coupon senior notes due 1999 ("1993 SF Acquisition and Refinancing"). As a result of the 1993 SF Acquisition and Refinancing, TWE has consolidated Six Flags effective January 1, 1993. Summarized financial information of Six Flags is set forth below: SIX FLAGS ENTERTAINMENT CORPORATION
YEARS ENDED IN DECEMBER ----------------- 1994 1993 1992 ---- ----- ----- (MILLIONS) OPERATING STATEMENT INFORMATION Revenues.................................................... $557 $533 $ 490 Operating income............................................ 68 55 51 Income (loss) before extraordinary item (a)................. 8 2 (6) Net income (loss) (a)....................................... 8 (8) (6) YEARS ENDED IN DECEMBER ------------ 1994 1993 ----- ----- (MILLIONS) BALANCE SHEET INFORMATION Total assets................................................ $ 894 $ 900 Zero coupon senior notes due 1999 (9.25% yield)............. 123 112 Capital lease obligations to TWE, weighted average interest rates of 6.7% and 6.3% (b)....................................... 401 301 Long-term notes due to TWE, weighted average interest rates of 9.2% and 10%............................................ 75 226 Shareholders' equity........................................ 99 90
-------- (a) The 1993 SF Acquisition and Refinancing, certain transactions with respect to the 1992 SF Recapitalization, and the 1991 SF Acquisition were accounted for using the purchase method of accounting for business combinations. If the 1993 SF Acquisition and Refinancing had occurred at the beginning of the year, the 1993 income before extraordinary item would have been $7 million; if the 1992 SF Recapitalization had occurred at the beginning of the year, the 1992 net loss would have been $18 million. (b) Six Flags has entered into sale and leaseback transactions with TWE with respect to all of its wholly-owned theme parks. Sale proceeds of $114 million in 1994 and $301 million in 1993 were used to repay indebtedness to TWE incurred in connection with the 1993 SF Acquisition and Refinancing. The leases have been accounted for as capital leases and expire in 2008. F-65 TIME WARNER ENTERTAINMENT COMPANY, L.P. SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ----------- ---------- ---------- ---------- --------- (MILLIONS) 1994: Reserves deducted from accounts re- ceivable: Allowance for doubtful accounts... $161 $ 49 $ (22)(a) $188 Reserves for sales returns and al- lowances......................... 96 164 (142)(b) 118 ---- ---- ----- ---- Total............................ $257 $213 $(164) $306 ==== ==== ===== ==== 1993: Reserves deducted from accounts re- ceivable: Allowance for doubtful accounts... $166 $ 27 $ (32)(a) $161 Reserves for sales returns and al- lowances......................... 74 131 (109)(b) 96 ---- ---- ----- ---- Total............................ $240 $158 $(141) $257 ==== ==== ===== ==== 1992: Reserves deducted from accounts re- ceivable: Allowance for doubtful accounts... $152 $ 62 $ (48)(a) $166 Reserves for sales returns and al- lowances......................... 78 86 (90)(b) 74 ---- ---- ----- ---- Total............................ $230 $148 $(138) $240 ==== ==== ===== ====
-------- (a) Represents uncollectible receivables charged against the reserve. (b) Represents returns or allowances applied against the reserve. F-66 EXHIBIT INDEX
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 3.(i)(a) Restated Certificate of Incorporation of the Registrant * as filed with the Secretary of State of the State of Delaware on May 26, 1993 (which is incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (the "June 1993 Form 10-Q"). 3.(i)(b) Certificate of Ownership and Merger merging TWE Holdings * Inc. into Time Warner Inc. as filed with the Secretary of State of the State of Delaware on September 24, 1993 (which is incorporated herein by reference to Exhibit 3.(i)(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (the "Registrant's 1993 Form 10-K")). 3.(i)(c) Certificate of the Voting Powers, Designations, * Preferences and Relative Participating, Optional and Other Rights and Qualifications of Series A Participating Cumulative Preferred Stock of the Registrant as filed with the Secretary of State of the State of Delaware on January 26, 1994 (which is incorporated herein by reference to Exhibit 3.(i)(c) to the Registrant's 1993 Form 10-K). 3.(ii) By-laws of the Registrant, as amended through March 18, * 1993 (which is incorporated herein by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (the "Registrant's 1992 Form 10-K")). 4.1 Specimen Certificate of the Registrant's Common Stock * (which is incorporated herein by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (the "Registrant's 1991 Form 10-K"). 4.2 Specimen Certificate of Series B 6.4% Preferred Stock of * the Registrant (which is incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990). 4.3 Indenture dated as of March 15, 1993 between the * Registrant and Chemical Bank, as Trustee, relating to the 8 3/4% Convertible Subordinated Debentures due 2015 of the Registrant (which is incorporated herein by reference to Exhibit 4.4 to the Registrant's 1992 Form 10-K). 4.4 Specimen Certificate of the Registrant's 8 3/4% * Convertible Subordinated Debentures due 2015 (which is incorporated herein by reference to Exhibit 4.5 to the Registrant's 1992 Form 10-K). 4.5 Rights Agreement dated as of January 20, 1994 between * the Registrant and Chemical Bank, as Rights Agent (which is incorporated herein by reference to Exhibit 4(a) to the Registrant's Current Report on Form 8-K dated January 20, 1994). 4.6 Indenture dated as of April 30, 1992, as amended by the * First Supplemental Indenture, dated as of June 30, 1992, among Time Warner Entertainment Company, L.P. ("TWE"), the Registrant, certain of its subsidiaries party thereto and The Bank of New York, as Trustee (which is incorporated herein by reference to Exhibits 10(g) and 10(h) to the Registrant's Current Report on Form 8-K dated July 14, 1992). 4.7 Second Supplemental Indenture, dated as of December 9, * 1992, among TWE, the Registrant, certain of its subsidiaries party thereto and The Bank of New York, as Trustee (which is incorporated herein by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form S-4 Reg. No. 33-67688 of TWE filed with the Commission on October 25, 1993 (the "1993 TWE S-4")).
i
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 4.8 Third Supplemental Indenture, dated as of October 12, * 1993, among TWE, the Registrant, certain of its subsidiaries party thereto and The Bank of New York, as Trustee (which is incorporated herein by reference to Exhibit 4.3 to the 1993 TWE S-4). 4.9 Fourth Supplemental Indenture, dated as of March 29, * 1994, among TWE, the Registrant, certain of its subsidiaries party thereto and The Bank of New York, as Trustee (which is incorporated herein by reference to Exhibit 4.4 to TWE's Annual Report on Form 10-K for the year ended December 31, 1993 ("TWE's 1993 Form 10-K")). 4.10 Fifth Supplemental Indenture, dated as of December 28, * 1994 among TWE, the Registrant, certain of its subsidiaries party thereto and The Bank of New York, as Trustee (which is incorporated herein by reference to Exhibit 4.5 to TWE's Annual Report on Form 10-K for the year ended December 31, 1994 ("TWE's 1994 Form 10-K")). 4.11 Indenture, dated as of October 15, 1985, between the * Registrant and Marine Midland Bank, N.A., as successor Trustee (which is incorporated herein by reference to Exhibit 4(a) to the Registrant's Registration Statement on Form S-3 Reg. No. 33-724 filed with the Commission on October 8, 1985). 4.12 Indenture dated as of October 15, 1992, as amended by the * First Supplemental Indenture dated as of December 15, 1992, as supplemented by the Second Supplemental Indenture dated as of January 15, 1993, between the Registrant and Chemical Bank, as Trustee (which is incorporated herein by reference to Exhibit 4.10 to the Registrant's 1992 Form 10-K). 4.13 Indenture dated as of January 15, 1993, between the * Registrant and Chemical Bank, as Trustee (which is incorporated herein by reference to Exhibit 4.11 to the Registrant's 1992 Form 10-K). 4.14 First Supplemental Indenture dated as of June 15, 1993, * between the Registrant and Chemical Bank, as Trustee, to the Indenture dated as of January 15, 1993 between the Registrant and Chemical Bank, as Trustee, including as Exhibit A the Form of Liquid Yield Option Note due 2013 (which is incorporated herein by reference to Exhibit 4 to the Registrant's June 1993 Form 10-Q). 10.1 Time Warner 1981 Stock Option Plan, as amended through * May 14, 1991 (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's 1991 Form 10-K). 10.2 Time Warner 1986 Stock Option Plan, as amended through * May 14, 1991 (which is incorporated herein by reference to Exhibit 10.2 to the Registrant's 1991 Form 10-K). 10.3 1988 Stock Incentive Plan of Time Warner Inc., as amended * through May 14, 1991 (which is incorporated herein by reference to Exhibit 10.3 to the Registrant's 1991 Form 10-K). 10.4 Time Warner 1989 Stock Incentive Plan, as amended through * May 14, 1991 (which is incorporated herein by reference to Exhibit 10.4 to the Registrant's 1991 Form 10-K). 10.5 Time Warner 1989 WCI Replacement Stock Option Plan, as amended through February 14, 1995. 10.6 Time Warner 1989 Lorimar Non-Employee Replacement Stock * Option Plan, as amended through May 14, 1991 (which is incorporated herein by reference to Exhibit 10.6 to the Registrant's 1991 Form 10-K). 10.7 Time Warner 1994 Stock Option Plan, as amended through November 17, 1994.
ii
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 10.8 Time Warner Corporate Group Stock Incentive Plan, as amended through May 14, 1991. 10.9 Time Warner 1988 Restricted Stock Plan for Non-Employee * Directors, as amended through November 18, 1993 (which is incorporated herein by reference to Exhibit 10.8 to the Registrant's 1993 Form 10-K). 10.10 Deferred Compensation Plan for Directors of Time Warner, * as amended through November 18, 1993 (which is incorporated herein by reference to Exhibit 10.9 to the Registrant's 1993 Form 10-K). 10.11 Time Warner Retirement Plan for Outside Directors, as * amended through September 21, 1989 (which is incorporated herein by reference to Exhibit 10.10 to the Registrant's 1991 Form 10-K). 10.12 Time Warner Annual Bonus Plan for the Chief Executive * Officer (which is incorporated herein by reference to Annex A to the Registrant's definitive Proxy Statement dated March 30, 1994, used in connection with the Registrant's 1994 Annual Meeting of Stockholders). 10.13 Amended and Restated Employment and Termination Agreement * dated as of March 3, 1989, as amended and restated as of January 10, 1990, between the Registrant and J. Richard Munro (which is incorporated herein by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.14 Amended and Restated Employment Agreement dated as of * November 15, 1990, between the Registrant and Gerald M. Levin (which is incorporated herein by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 (the "Registrant's 1990 Form 10-K")). 10.15 Amended and Restated Employment Agreement made as of * August 23, 1989, as amended on July 21, 1993, between WCI and the Registrant, on the one hand, and Bert W. Wasserman, on the other hand (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993). 10.16 Employment Agreement made as of September 19, 1990, * between the Registrant and Peter R. Haje (which is incorporated herein by reference to Exhibit 10.29 to the Registrant's 1990 Form 10-K). 10.17 Employment Agreement made as of November 2, 1994, between the Registrant and Richard D. Parsons. 10.18 Employment Agreement effective as of January 1, 1995, between the Registrant and Richard J. Bressler. 10.19 Amended and Restated Employment Agreement effective as of January 1, 1994, between the Registrant and Tod R. Hullin. 10.20 Amended and Restated Employment Agreement effective as of January 1, 1994, between the Registrant and Philip R. Lochner, Jr. 10.21 Employment Agreement dated as of February 1, 1992, * between the Registrant and Timothy A. Boggs (which is incorporated herein by reference to Exhibit 10.2 to the Registrant's 1992 Form 10-K). 10.22 Employment Agreement dated as of July 1, 1992, between * the Registrant and Geoffrey W. Holmes (which is incorporated herein by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992). 10.23 The Time Warner Deferred Compensation Plan, as amended and restated as of November 1, 1994, as amended by Amendment No. 1, effective as of December 7, 1994, and Amendment No. 2, effective as of January 1, 1994.
iii
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 10.24 Travel and Accident Insurance Policy issued by INA Life * Insurance Company of New York (which is incorporated herein by reference to Exhibit 10.44 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988). 10.25 Amended and Restated Credit Agreement, dated as of June * 23, 1992, among TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the Co-Agents and Agents named therein and the banks named therein (which is incorporated herein by reference to Exhibit 10(f) to the Registrant's Current Report on Form 8-K dated July 14, 1992 (the "July Form 8-K")). 10.26 Amendment No. 1 to the Amended and Restated Credit * Agreement, dated as of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the Co-Agents and Agents named therein and the banks named therein (which is incorporated herein by reference to Exhibit 10.24 to the Registration Statement on Form S-4 Reg. No. 33-61338 of Six Flags Entertainment Corporation filed with the Commission on April 20, 1993). 10.27 Amendment No. 2 to the Amended and Restated Credit * Agreement, dated as of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the Co-Agents and Agents named therein and the banks named therein (which is incorporated herein by reference to Exhibit 10.3 to the 1993 TWE S-4). 10.28 Amendment No. 3 to the Amended and Restated Credit * Agreement, dated as of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the Agents and Co- Agents named therein and the banks named therein (which is incorporated herein by reference to Exhibit 10.4 to the 1993 TWE S-4). 10.29 Amendment No. 4 to the Amended and Restated Credit * Agreement, dated as of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the Agents and the Co- Agents named therein and the banks named therein (which is incorporated herein by reference to Exhibit 10.5 to TWE's 1993 Form 10-K). 10.30 Amendment No. 5 to the Amended and Restated Credit * Agreement, dated as of July 1, 1994, among TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the Agents and the Co-Agents named therein and the banks named therein (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994). 10.31 Amendment No. 6 to the Amended and Restated Credit * Agreement, dated as of February 1, 1995 among TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the Agents and the Co- Agents named therein and the banks named therein (which is incorporated herein by reference to Exhibit 10.7 to TWE's 1994 Form 10-K). 10.32 Agreement of Limited Partnership, dated as of October 29, * 1992, as amended by the Letter Agreement, dated February 11, 1992, and the Letter Agreement dated June 23, 1992, among the Registrant and certain of its subsidiaries, ITOCHU Corporation and Toshiba Corporation (which is incorporated herein by reference to Exhibit (A) to the Registrant's Current Report on Form 8-K dated October 29, 1991 and Exhibits 10(b) and 10(c) to the Registrant's Current Report on Form 8-K dated July 14, 1992). 10.33 Admission Agreement, dated as of May 16, 1993, between * TWE and U S WEST, Inc. (which is incorporated herein by reference to Exhibit 10(a) to TWE's Current Report on Form 8-K dated May 16, 1993). 10.34 Amendment Agreement, dated as of September 14, 1993, * amending the TWE Partnership Agreement, as amended (which is incorporated herein by reference to Exhibit 3.2 to TWE's 1993 Form 10-K).
iv
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 10.35 Letter Agreement, dated May 16, 1993, between the * Registrant and ITOCHU Corporation (which is incorporated herein by reference to Exhibit 10(b) to TWE's Current Report on Form 8-K dated May 16, 1993). 10.36 Letter Agreement, dated May 16, 1993, between the * Registrant and Toshiba Corporation (which is incorporated herein by reference to Exhibit 10(c) to TWE's Current Report on Form 8-K dated May 16, 1993). 10.37 Option Agreement, dated as of September 15, 1993, between * TWE and U S WEST, Inc. (which is incorporated herein by reference to Exhibit 10.9 to TWE's 1993 Form 10-K). 10.38 Promissory Note of U S WEST Cable Corporation, dated * September 15, 1993 (which is incorporated herein by reference to Exhibit 10.10 to TWE's 1993 Form 10-K). 10.39 Guarantee, dated as of September 15, 1993, by U S WEST, * Inc. of the Promissory Note of U S WEST Cable Corporation, dated September 15, 1993 (which is incorporated herein by reference to Exhibit 10.11 to TWE's 1993 Form 10-K). 10.40 Contribution Agreement dated as of September 9, 1994 * among TWE, Advance Publications, Inc., Newhouse Broadcasting Corporation, Advance/Newhouse Partnership, and Time Warner Entertainment-Advance/Newhouse Partnership (which is incorporated herein by reference to Exhibit 10(a) to TWE's Current Report on Form 8-K dated September 9, 1994 ("TWE's September Form 8-K")). 10.41 Partnership Agreement, dated as of September 9, 1994, * between TWE and Advance/Newhouse Partnership (which is incorporated herein by reference to Exhibit 10(b) to TWE's September Form 8-K). 10.42 Agreement and Plan of Merger dated as of January 26, * 1995, among KBLCOM Incorporated, Houston Industries Incorporated, Registrant and TW KBLCOM Acquisition Sub (which is incorporated herein by reference to Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated January 26, 1995). 10.43 Agreement and Plan of Merger dated as of February 6, * 1995, among Cablevision Industries Corporation, Alan Gerry, Registrant and TW CVI Acquisition Sub (which is incorporated herein by reference to Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated February 6, 1995 (the "February Form 8-K")). 10.44 Agreement and Plan of Merger dated as of February 6, * 1995, among Cablevision Properties, Inc., Alan Gerry and Registrant (which is incorporated herein by reference to Exhibit 2(b) to the February Form 8-K). 10.45 Agreement and Plan of Merger dated as of February 6, * 1995, among Cablevision Management Corporation of Philadelphia, Alan Gerry and Registrant (which is incorporated herein by reference to Exhibit 2(c) to the February Form 8-K). 10.46 Purchase Agreement dated as of February 6, 1995, among * Alan Gerry, Cablevision Industries of Delaware, Inc., ARA Cablevision Inc., Cablevision Industries Limited Partnership, Cablevision Industries of Tennessee L.P., Cablevision Industries of Saratoga Associates, Cablevision of Fairhaven/Acushnet, Cablevision Industries of Middle Florida, Inc., Cablevision Industries of Florida, Inc. and Registrant (which is incorporated herein by reference to Exhibit 2(d) to the February Form 8-K). 10.47 Supplemental Agreement dated as of February 6, 1995, * including Annex A thereto, among Cablevision Industries Corporation, Cablevision Industries of Delaware, Inc., ARA Cablevision Inc., Cablevision Industries Limited Partnership, Cablevision Industries of Tennessee L.P., Cablevision Industries of Saratoga Associates, Cablevision of Fairhaven/Acushnet, Cablevision Industries of Middle Florida, Inc., Cablevision Industries of Florida, Inc., Alan Gerry, Registrant and TW CVI Acquisition Sub. (which is incorporated herein by reference to Exhibit 2(e) to the February Form 8-K).
v
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 21 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Price Waterhouse LLP, Independent Accountants. 24 Powers of Attorney, dated as of March 30, 1995. 27 Financial Data Schedule. 99.1 The 1994 financial statements of the Time Warner Service Partnerships and the report of independent auditors thereon. 99.2 The 1994 financial statements and financial statement schedule of Paragon Communications and the report of independent accountants thereon. 99.3 Annual Report on Form 11-K of the Time Warner Employees' Savings Plan for the year ended December 30, 1994 (to be filed by amendment). 99.4 Annual Report on Form 11-K of the Time Warner Thrift Plan for the year ended December 31, 1994 (to be filed by amendment). 99.5 Annual Report on Form 11-K of the Time Warner Cable Employees Savings Plan for the year ended December 31, 1994 (to be filed by amendment). 99.6 Annual Report on Form 11-K of the Paragon Communications Employees Stock Savings Plan for the year ended December 31, 1994 (to be filed by amendment).
-------- * Incorporated by reference. The Registrant hereby agrees to furnish to the Securities and Exchange Commission at its request copies of long-term debt instruments defining the rights of holders of the Registrant's outstanding long-term debt that are not required to be filed herewith. vi EX-10.5 2 AMENDED WCI REPLACEMENT EXHIBIT 10.5 As Amended through February 14, 1995 TIME WARNER 1989 WCI REPLACEMENT STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The purpose of the Time Warner 1989 Replacement Stock Option Plan (hereinafter the "Plan") is to provide for the granting of stock options to certain employees and prospective employees of and advisors and consultants to the Company or its Subsidiaries (other than officers and directors of the Company). The general purpose of the Plan is to promote the interests of the Company and its stockholders by providing to certain employees and prospective employees of and advisors and consultants to the Company or its Subsidiaries additional incentives to continue and increase their efforts with respect to, the Company or its Subsidiaries. In particular, the Plan is intended to provide replacement stock options to employees and prospective employees of and advisors and consultants to WCI or its subsidiaries who (a) hold outstanding stock options and/or stock appreciation rights previously granted under a WCI Agreement or (b) were made commitments, prior to the Effective Time, to be granted stock options upon the recommendations of (i) the Executive Compensation and Stock Option Committee of the Board of Directors of WCI or (ii) the management of WCI. 2. CERTAIN DEFINITIONS The following terms (whether used in the singular or plural) have the meanings indicated when used in the Plan: (a) "Agreement" means the stock option agreement specified in Section 11. (b) "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company. (c) "Board" means the Board of Directors of the Company. (d) "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board ceased for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section. (f) "Committee" means the Committee of the Board appointed pursuant to Section 4. (g) "Common Stock" means the common stock, par value $1.00 per share, of the Company. (h) "Company" means Time Warner Inc., a Delaware corporation. (i) "Composite Tape" means the New York Stock Exchange Composite Tape. (j) "Control Purchase" means any transaction in which any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any Subsidiary) (i) shall purchase any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, or (ii) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) in the case of rights to acquire the Company's securities). -2- (k) "Effective Date" means the date the Plan becomes effective pursuant to Section 14. (l) "Effective Time" means the date WCI becomes a wholly-owned subsidiary of the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. (n) "Holder" means an employee or prospective employee of or an advisor or consultant to the Company or a Subsidiary who has received an Option under the Plan. (o) "Option" means each stock option granted pursuant to the terms of the Plan. Each Option is intended to be a nonqualified stock option subject to section 83 of the Code, and not an "incentive stock option," within the meaning of section 422A(b) of the Code. (p) "Plan" has the meaning as ascribed thereto in Section 1. (q) "SEC" means the Securities and Exchange Commission. (r) "Subsidiary" means any present or future subsidiary of the Company as such term is defined in section 425 of the Code and any present or future trade or business, whether or not incorporated, controlled by or under common control with the Company. An entity shall be deemed a Subsidiary of the Company only for such periods as the requisite ownership or control relationship is maintained. (s) "Total Disability" means a permanent and total disability as defined in section 22(e)(3) of the Code. (t) "WCI" means Warner Communications Inc., a Delaware corporation. (u) "WCI Agreement" means the stock option and/or appreciation rights plans maintained by WCI, including plans assumed by WCI (other than stock option plans established by Lorimar Telepictures Corporation for non- employees), and contractual stock appreciation rights not entered into pursuant to a formal plan. -3- 3. STOCK SUBJECT TO THE PLAN 3.1. Number of Shares. Subject to the provisions of Section 12, the ---------------- maximum number of shares of Common Stock in respect of which Options may be granted is 4,600,000. If an Option shall expire, terminate or be cancelled for any reason without having been exercised, the shares of Common Stock subject to such expired, terminated or cancelled portion of the Option shall not become available for purposes of the Plan. 3.2. Character of Shares. Shares of Common Stock deliverable under ------------------- the terms of the Plan may be, in whole or in part, authorized and unissued shares of Common Stock or issued shares of Common Stock held in the Company's treasury, or both. 3.3. Reservation of Shares. The Company shall at all times reserve a --------------------- number of shares of Common Stock (authorized or unissued Common Stock, issued Common Stock held in the Company's treasury, or both) equal to the maximum number of shares that may be subject to Options granted under the Plan. 4. ADMINISTRATION 4.1. Powers. The Plan shall be administered by the Board. Subject ------ to the express provisions of the Plan, the Board shall have plenary authority, in its discretion, to grant Options under the Plan and to determine the terms and conditions (which need not be identical) of all Options so granted, including, without limitation, (a) the individuals to whom, and the time or times at which, Options shall be granted or awarded, (b) the number of shares to be subject to each Option, (c) when an Option can be exercised and whether in whole or in installments, and (d) the form, terms and provisions of any Agreement (which terms may be amended, subject to Section 13). 4.2. Factors to Consider. In making determinations hereunder, the ------------------- Board may take into account the nature of the services rendered by the respective employees, prospective employees, advisors and consultants, their present and potential contributions to the success of the Company and its Subsidiaries and such other factors as the Board in its discretion shall deem relevant. 4.3. Interpretation. Subject to the express provisions of the Plan, -------------- the Board shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the Plan. The determination of the Board on the matters referred to in this Section 4 shall be conclusive. -4- 4.4. Delegation to Committee. Notwithstanding anything to the ----------------------- contrary contained herein, the Board may at any time, or from time to time, appoint a Committee of at least three members, who shall be members of the Compensation Committee of the Board (or such other persons as the Board may designate), each of whom shall be a "disinterested person" within the meaning of the rules and regulations of the SEC, and delegate to such Committee the authority of the Board to administer the Plan. Upon such appointment and delegation, the Committee shall have all the powers, privileges and duties of the Board, and shall be substituted for the Board, in the administration of the Plan, except for the power to appoint members of the Committee and to terminate, modify or amend the Plan. The Board may from time to time appoint members of any such Committee in substitution for or in addition to members previously appointed, may fill vacancies in the Committee and may discharge the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum and all determinations shall be made by a majority of such quorum. Any determination reduced to writing and signed by all of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. Notwithstanding any of the foregoing, the Board may designate one or more persons, who at the time of such designation are not disinterested persons, to serve on the Committee effective upon the date such person or persons qualify as disinterested persons. 5. ELIGIBILITY 5.1. General. Options may be granted only to employees or ------- prospective employees of and advisors or consultants to the Company or any of its Subsidiaries, who are not officers or directors of the Company; provided, -------- however, that such employees, prospective employees, advisors or consultants ------- hold stock options and/or stock appreciation rights which were previously granted under a WCI Agreement or were made commitments to be granted options based upon the recommendations of (i) the Executive Compensation and Stock Option Committee of the Board of Directors of WCI or (ii) the management of WCI. The exercise of Options granted to a prospective employee shall be conditioned upon such person becoming an employee of the Company or any of its Subsidiaries. For purposes of the Plan, the term "prospective employee" shall mean any person who holds an outstanding offer of employment on specific terms from the Company or any of its Subsidiaries. Options may be granted to employees, advisors and consultants who hold or have held Options under any other plan of the Company or its Subsidiaries. -5- 5.2. Ineligibility for Options. No person designated by the Board to ------------------------- serve on the Committee effective at such future time that he or she qualifies as a disinterested person shall be eligible to receive any Options under the Plan during the period from the date such designation is made to the date such designation becomes effective. Notwithstanding Section 5.1, no member of the Committee, while serving as such, shall be eligible to receive an Option under the Plan. 6. OPTIONS 6.1. Option Price. With respect to any Option granted on or after ------------ the Effective Time, the purchase price per share of Common Stock subject thereto shall be an amount equal to the greater of $150 or the average of the closing sales prices of a share of Common Stock, as reported on the Composite Tape, for the 10 trading day period beginning with the first trading day immediately following the Effective Time; and, with respect to any Option granted prior to the Effective Time, the purchase price per share of Common Stock subject thereto shall be an amount equal to the WCI stock option or commitment exercise price per share, as the case may be, divided by .465. 6.2. Term of Options. The term of each Option shall be for such --------------- period as the Board shall determine, as set forth in the applicable Agreement. 6.3. Exercise of Options. An Option granted under the Plan shall ------------------- become (and remain) exercisable during the term of the Option to the extent provided in the applicable Agreement and this Plan and, unless the Agreement otherwise provides, may be exercised to the extent exercisable, in whole or in part, at any time and from time to time during such term; provided, however, -------- ------- that subsequent to the grant of an Option, the Board, at any time before complete termination of such Option, may accelerate the time or times at which such Option may be exercised in whole or in part (without reducing the term of such Option). 6.4. Manner of Exercise. Payment of the Option purchase price shall ------------------ be made in cash or in whole shares of Common Stock already owned by the Holder or, partly in cash and partly in such Common Stock; provided, however, that such -------- ------- payment may be made in whole or in part in shares of Common Stock only if and to the extent permitted by the applicable Agreement. An Option shall be exercised by written notice to the Company upon such terms and conditions as provided in the Agreement. The Company shall effect the transfer of the shares of Common Stock purchased under the Option as soon as practicable, and within a reasonable time thereafter such transfer shall be evidenced on the books of the Company. No -6- Holder or other person exercising an Option shall have any of the rights of a stockholder of the Company with respect to shares of Common Stock subject to an Option granted under the Plan until due exercise and full payment has been made. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such exercise and full payment. 6.5. Nontransferability of Options. Options shall not be ----------------------------- transferable other than by will or the laws of descent and distribution, and Options may be exercised during the lifetime of the Holder thereof only by such Holder (or his or her court appointed legal representative). 7. ACCELERATION OF OPTIONS If a Holder's employment shall terminate by reason of death or Total Disability, notwithstanding any contrary waiting period or installment period in any Agreement or in the Plan or in the event of any Approved Transaction, Board Change or Control Purchase, unless the applicable Agreement provides otherwise, each outstanding Option granted under the Plan shall immediately become exercisable in full in respect of the aggregate number of shares covered thereby. 8. TERMINATION OF EMPLOYMENT 8.1. General. If a Holder's employment shall terminate prior to the ------- complete exercise of an Option, then such Option shall thereafter be exercisable solely to the extent provided in the applicable Agreement; provided, however, -------- ------- that (a) no Option may be exercised after the scheduled expiration date of such Option; (b) if the Holder's employment terminates by reason of death or Total Disability, the Option shall remain exercisable for a period of at least one year following such termination (but not later than the scheduled expiration of such Option); and (c) any termination by the Company for cause will be treated in accordance with the provisions of Section 8.2. 8.2. Termination by Company for Cause. If a Holder's employment with -------------------------------- the Company or a Subsidiary shall be terminated by the Company or such Subsidiary prior to the exercise of any Option for cause (for these purposes, cause shall have the meaning ascribed thereto in any employment agreement to which such Holder is a party or, in the absence thereof, shall include but not be limited to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind and the refusal to perform his duties and responsibilities for any reason other than illness or incapacity; provided, -------- however, that if such termination occurs within 12 months after an Approved ------- -7- Transaction, Control Purchase or Board Change, termination for cause shall mean only a felony conviction for fraud, misappropriation or embezzlement), then all Options held by such Holder shall immediately terminate. 8.3. Special Rule. Notwithstanding any other provision of the Plan, ------------ the Board may provide in the applicable Agreement that the Option shall become and/or remain exercisable at rates and times at variance with the rules otherwise herein set forth; provided, however, that any such Agreement -------- ------- provisions at variance with the exercisability rules otherwise set forth herein shall be effective only if reflected in the terms of an employment agreement approved or ratified by the Board. 8.4. Miscellaneous. The Board may determine whether any given leave ------------- of absence constitutes a termination of employment. Options granted under the Plan shall not be affected by any change of employment so long as the Holder continues to be an employee of the Company or a Subsidiary. 9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT Nothing contained in the Plan or in any Option shall confer on any Holder any right to continue in the employ of the Company or any of its Subsidiaries or interfere in any way with the right of the Company or a Subsidiary to terminate the employment of the Holder at any time, with or without cause; subject, however, to the provisions of any employment agreement ------- ------- between the Holder and Company or any Subsidiary. 10. NONALIENATION OF BENEFITS No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits. 11. WRITTEN AGREEMENT Each grant of an Option shall be evidenced by a stock option agreement, in such form and containing such terms and provisions not inconsistent with the provisions of the Plan as the Board from time to time shall approve. Subject to Section 14, the effective date of the granting of an Option shall be the date on which the Board approves such grant or such later date -8- on which any conditions to the effectiveness of such grant shall have been satisfied. Each grantee of an Option shall be notified promptly of such grant and a written Agreement shall be promptly executed and delivered by the Company and the grantee, provided that such grant of Options shall terminate if such written Agreement is not signed by such grantee (or his attorney) and delivered to the Company within 60 days after the date the Board approved such grant or such later date on which conditions to the effectiveness of such grant shall have been satisfied. Any such written Agreement may contain (but shall not be required to contain) such provisions as the Board deems appropriate to ensure that the penalty provisions of section 4999 of the Code will not apply to any stock or cash received by the Holder from the Company. 12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC. In the event of any stock split, dividend, distribution, combination, reclassification or recapitalization that changes the character or amount of the Common Stock while any portion of any Option theretofore granted under the Plan is outstanding but unexercised or unvested, the Board shall make such adjustment in the character and number of shares subject to such Option, and in the option price, as shall be applicable, equitable and appropriate in order to make such Option, immediately after any such change, as nearly as may be practicable, equivalent to such Option, immediately prior to any such change. If any merger, consolidation or similar transaction affects the Common Stock subject to any unexercised or unvested Option theretofore granted under the Plan, the Board or any surviving or acquiring corporation shall take such action as is equitable and appropriate to substitute a new award for such Option or to assume such Option in order to make such new or assumed Option as nearly as may be practicable, equivalent to the old Option. If any such change or transaction shall occur, the number and kind of shares for which an Option may thereafter be granted under the Plan shall be adjusted to give effect thereto. 13. TERMINATION AND AMENDMENT 13.1. General. Unless the Plan shall theretofore have been ------- terminated as hereinafter provided, no Options may be granted under the Plan on or after the sixtieth (60th) day following the Effective Time. The Board may at any time prior to the sixtieth (60th) day following the Effective Time terminate the Plan, and the Board may at any time modify or amend the Plan in such respects as it shall deem advisable; provided, however, that any such -------- ------- modification or amendment shall comply with all applicable laws, applicable stock exchange -9- listing requirements, and applicable requirements for exemption (to the extent necessary) under Rule 16b-3 under the Exchange Act. 13.2. Modification. No termination, modification or amendment of the ------------ Plan may, without the consent of the person to whom any Option shall theretofore have been granted, adversely affect the rights of such person with respect to such Option. No modification, extension, renewal or other change in any Option granted under the Plan shall be made after the grant of such Option, unless the same is consistent with the provisions of the Plan. With the consent of the Holder and subject to the terms and conditions of the Plan (including Section 13.1), the Board may amend outstanding Agreements with any Holder, including, without limitation, any amendment which would (a) accelerate the time or times at which the Option may be exercised and/or (b) extend the scheduled expiration date of the Option. Without limiting the generality of the foregoing, the Board may but only with the Holder's consent, agree to cancel any Option under the Plan and issue a new Option in substitution therefor, provided that the Option so substituted shall satisfy all of the requirements of the Plan as of the date such substitute Option is granted. 14. EFFECTIVENESS OF THE PLAN The Plan shall become effective at the time it is duly approved by the Board. Prior to the Effective Date, the Board may, in its discretion, grant or authorize the granting of Options under the Plan as if the Effective Date had occurred, provided that the exercise of Options so granted shall be expressly subject to the occurrence of the Effective Date. 15. GOVERNMENT AND OTHER REGULATIONS The obligation of the Company with respect to Options shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of any registration statement required under the Securities Act of 1933, and the rules and regulations of any securities exchange on which the Common Stock may be listed. For so long as the Common Stock is registered under the Exchange Act, the Company shall use its reasonable efforts to comply with any legal requirements (a) to maintain a registration statement in effect under the Securities Act of 1933 with respect to all shares of Common Stock that may be issued to Holders under the Plan, and (b) to file in a timely manner all reports required to be filed by it under the Exchange Act. -10- 16. WITHHOLDING The Company's obligation to deliver shares of Common Stock in respect of any Option granted under the Plan shall be subject to applicable federal, state and local tax withholding requirements. Federal, state and local withholding taxes paid by a Holder upon the exercise of any Option may be paid in shares of Common Stock upon such terms and conditions as the Board shall determine; provided, however, that the Board in its sole discretion may -------- ------- disapprove such payment and require that such taxes be paid in cash. 17. NON-EXCLUSIVITY OF THE PLAN The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 18. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION By acceptance of an Option, each Holder shall be deemed to have agreed that such Option, is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment under any pension, retirement or other employee benefit plan of the Company or any Subsidiary. In addition, each beneficiary of a deceased Holder shall be deemed to have agreed that such Option, as applicable, will not affect the amount of any life insurance coverage, if any, provided by the Company on the life of the Holder which is payable to such beneficiary under any life insurance plan covering employees of the Company or any Subsidiary. 19. GOVERNING LAW The Plan shall be governed by, and construed in accordance with, the laws of the State of New York. -11- EX-10.7 3 AMENDED STOCK OPTION PLAN EXHIBIT 10.7 As Amended through November 17, 1994 TIME WARNER INC. 1994 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The purpose of the Time Warner Inc. 1994 Stock Option Plan (hereinafter the "Plan") is to provide for the granting of nonqualified stock options and stock appreciation rights to certain employees of and consultants and advisors to Time Warner Inc. and its Subsidiaries in recognition of the valuable services provided, and contemplated to be provided, by such employees, consultants and advisors. The general purpose of the Plan is to promote the interests of Time Warner and its stockholders and to reward dedicated employees, consultants and advisors of Time Warner and its Subsidiaries by providing them additional incentives to continue and increase their efforts with respect to, and to remain in the employ of, Time Warner or its Subsidiaries. This plan is being adopted in connection with the development of an overall long-term compensation program for Time Warner and its Subsidiaries. 2. CERTAIN DEFINITIONS The following terms (whether used in the singular or plural) have the meanings indicated when used in the Plan: (a) "Agreement" means the stock option agreement and stock appreciation rights agreement specified in Section 12, both individually and collectively, as the context so requires. (b) "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of Time Warner) shall approve (i) any consolidation or merger of Time Warner in which Time Warner is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger of Time Warner in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of Time Warner, or (iii) the adoption of any plan or proposal for the liquidation or dissolution of Time Warner. (c) "Award" means grants of Options and/or SARs under this Plan. (d) "Board" means the Board of Directors of Time Warner. (e) "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board ceased for any reason to constitute a majority thereof unless the election, or the nomination for election by Time Warner's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section. (g) "Committee" means the Committee comprised of members of the Board appointed pursuant to Section 4. (h) "Common Stock" means the common stock, par value $1.00 per share, of Time Warner. (i) "Composite Tape" means the New York Stock Exchange Composite Tape. (j) "Control Purchase" means any transaction in which any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than Time Warner or any employee benefit plan sponsored by Time Warner or any of its Subsidiaries) (i) shall purchase any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, -2- without the prior consent of the Board, or (ii) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Time Warner representing 20% or more of the combined voting power of the then outstanding securities of Time Warner ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) in the case of rights to acquire Time Warner's securities). (k) "Effective Date" means the date the Plan becomes effective pursuant to Section 15. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. (m) "Fair Market Value" of a share of Common Stock means the average of the high and low sales prices of a share of Common Stock on the Composite Tape on the date in question, except as otherwise provided in Section 6.5. (n) "General SARs" means stock appreciation rights subject to the terms of Section 6.5(b). (o) "Holder" means an employee of or a consultant or advisor to Time Warner or any of its Subsidiaries who has received an Award under this Plan. (p) "Limited SARs" means stock appreciation rights subject to the terms of Section 6.5(c). (q) "Minimum Price Per Share" means the highest gross price (before brokerage commissions, soliciting dealers' fees and similar charges) paid or to be paid for any share of Common Stock (whether by way of exchange, conversion, distribution, liquidation or otherwise) in, or in connection with, any Approved Transaction or Control Purchase which occurs at any time during the period beginning on the sixtieth day prior to the date on which Limited SARs are exercised and ending on the date on which Limited SARs are exercised. If the consideration paid or to be paid in any such Approved Transaction or Control Purchase shall consist, in whole or in part, of consideration other than cash, the -3- Board shall take such action, as in its judgment it deems appropriate, to establish the cash value of such consideration, but such valuation shall not be less than the value, if any, attributed to such consideration by any other party to such Approved Transaction or Control Purchase. (r) "Option" means any nonqualified stock option granted pursuant to this Plan. (s) "Plan" has the meaning ascribed thereto in Section 1. (t) "SARs" means General SARs and Limited SARs. (u) "SEC" means the Securities and Exchange Commission. (v) "Subsidiary" of a person means any present or future subsidiary of such person as such term is defined in section 425 of the Code and any present or future trade or business, whether or not incorporated, controlled by or under common control with such person. An entity shall be deemed a Subsidiary of a person only for such periods as the requisite ownership or control relationship is maintained. (w) "Time Warner" means Time Warner Inc., a Delaware corporation, and any successor thereto. (x) "Total Disability" means a permanent and total disability as defined in section 22(e)(3) of the Code. 3. STOCK SUBJECT TO THE PLAN 3.1. Number of Shares. Subject to the provisions of Section 12 and this ---------------- Section 3, the maximum number of shares of Common Stock in respect of which Awards may be granted is the sum of 1.5% (one and one-half percent) of the number of shares of Common Stock outstanding on December 31, 1993 plus 1.25% (one and one-quarter percent) of the number of shares of Common Stock outstanding on December 31, 1994. If and to the extent that an Option shall expire, terminate or be cancelled for any reason without having been exercised (or without having been considered to have been exercised as provided in Section 6.5(a)), the shares of Common Stock subject to such expired, terminated or cancelled portion of the Option shall again become available for purposes -4- of the Plan. 3.2. Character of Shares. Shares of Common Stock deliverable under the ------------------- terms of the Plan may be, in whole or in part, authorized and unissued shares of Common Stock or issued shares of Common Stock held in Time Warner's treasury, or both. 3.3. Reservation of Shares. Time Warner shall at all times reserve a --------------------- number of shares of Common Stock (authorized and unissued Common Stock, issued Common Stock held in Time Warner's treasury, or both) equal to the maximum number of shares that may be subject to outstanding Awards and future Awards under the Plan. 4. ADMINISTRATION 4.1. Powers. The Plan shall be administered by the Board. Subject to the ------ express provisions of the Plan, the Board shall have plenary authority, in its discretion, to grant Awards under the Plan and to determine the terms and conditions (which need not be identical) of all Awards so granted, including without limitation, (a) the individuals to whom, and the time or times at which, Awards shall be granted or awarded, (b) the number of shares to be subject to each Award, (c) when an Option or SAR can be exercised and whether in whole or in installments, and (d) the form, terms and provisions of any Agreement (which terms may be amended, subject to Section 14). 4.2. Factors to Consider. In making determinations hereunder, the Board ------------------- may take into account the nature of the services rendered by the respective employees, consultants or advisors, their dedication and past contributions to Time Warner and its Subsidiaries, their present and potential contributions to the success of Time Warner and its Subsidiaries and such other factors as the Board in its discretion shall deem relevant. 4.3. Interpretation. Subject to the express provisions of the Plan, the -------------- Board shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the Plan. The determinations of the Board on the matters referred to in this Section 4 shall be conclusive. 4.4. Delegation to Committee. Notwithstanding anything to ----------------------- -5- the contrary contained herein, the Board may at any time, or from time to time, appoint a Committee and delegate to such Committee the authority of the Board to administer the Plan, including to the extent provided by the Board, the power to further delegate such authority. Upon such appointment and delegation, any such Committee shall have all the powers, privileges and duties of the Board, and shall be substituted for the Board, in the administration of the Plan to the extent provided in such delegation, except for the power to appoint members of the Committee and to terminate, modify or amend the Plan. The Board may from time to time appoint members of any such Committee in substitution for or in addition to members previously appointed, may fill vacancies in such Committee and may discharge such Committee. Any such Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of members shall constitute a quorum and all determinations shall be made by a majority of such quorum. Any determination reduced to writing and signed by all of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. 5. ELIGIBILITY Awards may be made only to (a) employees of Time Warner or any of its Subsidiaries (including officers and directors of any of Time Warner's Subsidiaries), other than officers or directors of Time Warner who are subject to Section 16 of the Exchange Act, (b) prospective employees of Time Warner or any of its Subsidiaries and (c) consultants or advisors to Time Warner or any of its Subsidiaries. The exercise of Options and SARs granted to a prospective employee shall be conditioned upon such person becoming an employee of Time Warner or any of its Subsidiaries. For purposes of the Plan, the term "prospective employee" shall mean any person who holds an outstanding offer of employment on specific terms from Time Warner or any of its Subsidiaries. Awards may be made to employees, consultants and advisors who hold or have held Awards under this Plan or any similar or other awards under any other plan of Time Warner or its Subsidiaries. 6. OPTIONS AND SARS -6- 6.1. Option Prices. Subject to Section 5.2, the purchase price of the ------------- Common Stock under each Option shall be determined by the Board and set forth in the applicable Agreement, but shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. 6.2. Term of Options. The term of each Option shall be for such period as --------------- the Board shall determine, as set forth in the applicable Agreement. 6.3. Exercise of Options. An Option granted under the Plan shall become ------------------- (and remain) exercisable during the term of the Option to the extent provided in the applicable Agreement and this Plan and, unless the Agreement otherwise provides, may be exercised to the extent exercisable, in whole or in part, at any time and from time to time during such term; provided, however, that subsequent to the grant of an Option, the Board, at any time before complete termination of such Option, may accelerate the time or times at which such Option may be exercised in whole or in part (without reducing the term of such Option). The Agreement may contain conditions precedent to the exercisability of Options, including without limitation, the achievement of minimum performance criteria. 6.4. Manner of Exercise. Payment of the Option purchase price shall be ------------------ made in cash or in whole shares of Common Stock already owned by the Holder or, partly in cash and partly in such Common Stock; provided, however, that such payment may be made in whole or in part in shares of Common Stock only if and to the extent permitted by the applicable Agreement. An Option shall be exercised by written notice to Time Warner upon such terms and conditions as provided in the Agreement. Time Warner shall effect the transfer of the shares of Common Stock purchased under the Option as soon as practicable, and within a reasonable time thereafter such transfer shall be evidenced on the books of Time Warner. No Holder or other person exercising an Option shall have any of the rights of a stockholder of Time Warner with respect to shares of Common Stock subject to an Option granted under the Plan until due exercise and full payment has been made. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such due exercise and full payment. 6.5. SARs. (a) General Conditions. The Board may (but shall not be ---- obligated to) grant General SARs and/or Limited SARs pursuant to the provisions of this Section 6.5 to a Holder of any -7- Option (hereinafter called a "related Option"), with respect to all or a portion of the shares of Common Stock subject to the related Option. A SAR may be granted either concurrently with the grant of the related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such related Option. Subject to the terms and provisions of this Section 6.5, each SAR shall be exercisable to the extent the related Option is then exercisable (and may be subject to such additional limitations on exercisability as the Agreement may provide), and in no event after the complete termination or full exercise of the related Option. SARs shall be exercisable in whole or in part upon notice to Time Warner upon such terms and conditions as provided in the Agreement. Upon the exercise of SARs, the related Option shall be considered to have been exercised to the extent of the number of shares of Common Stock with respect to which such SARs are exercised and shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock in respect of which other Awards may be granted. Upon the exercise or termination of the related Option, the SARs with respect thereto shall be considered to have been exercised or terminated to the extent of the number of shares of Common Stock with respect to which the related Option was so exercised or terminated. The provisions of Sections 4 and 6 through 21 (to the extent that such provisions are applicable to Options) shall also be applicable to SARs unless the context otherwise requires. (b) General SARs. General SARs shall be exercisable only at the time the related Option is exercisable and subject to the terms and provisions of this Section 6.5, upon the exercise of General SARs, the Holder thereof shall be entitled to receive consideration (in the form hereinafter provided) equal in value to the excess of the Fair Market Value on the date of exercise of the shares of Common Stock with respect to which such General SARs have been exercised over the aggregate related Option purchase price for such shares; provided, however, that the Board may, in any Agreement granting General SARs provide that the appreciation realizable upon exercise thereof shall be measured from a base higher than the related Option purchase price. Upon the exercise of a General SAR, the Holder may specify -8- the form of consideration to be received by such Holder, which shall be in shares of Common Stock (valued at Fair Market Value on the date of exercise of such General SAR), or in cash, or partly in cash and partly in shares of Common Stock. Any election by the Holder of a General SAR to receive cash in full or partial settlement of such General SAR shall comply with all applicable laws and shall be subject to the discretion of the Board to settle General SARs only in shares of Common Stock if necessary or advisable in the judgment of the Board to preserve pooling of interests accounting treatment for any proposed transaction involving the Company. Unless otherwise specified in the applicable Agreement, the number of General SARs which may be exercised for cash, or partly for cash and partly for shares of Common Stock, during any calendar quarter, may not exceed 20% of the aggregate number of shares of Common Stock originally subject to the related Option (as such original number, without giving effect to the exercise of any portion of the related Option, shall have been retroactively adjusted in accordance with Section 13 or any corresponding provisions of an applicable Agreement). For purposes of this Section 6.5, the date of exercise of a General SAR shall mean the date on which Time Warner shall have received notice from the Holder of the General SAR of the exercise of such General SAR. (c) Limited SARs. Limited SARs may be exercised only during the period (a) beginning on the first day following either (i) the date of an Approved Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board Change, and (b) ending on the ninetieth day (or such other date specified in the Agreement) following such date. The effective date of exercise of a Limited SAR shall be deemed to be the date on which Time Warner shall have received notice from the Holder of the exercise thereof. Upon the exercise of Limited SARs granted in connection with an Option, except as otherwise provided in the Agreement and the immediately succeeding sentence, the Holder thereof shall receive in cash an amount equal to the product computed by multiplying (a) the excess of (i) the higher of (A) the Minimum Price Per Share, or (B) the highest reported closing sales price of a share of Common Stock as reported on the Composite Tape at any time during the period beginning on the sixtieth day prior to the date on which such Limited SARs are exercised and ending on the date on which such Limited SARs are exercised over (ii) the per share Option price of the related Nonqualified Stock Option, by (b) the -9- number of shares of Common Stock with respect to which such Limited SARs are being exercised. The Board shall have the discretion to settle Limited SARs by the delivery of Common Stock rather than cash if in the judgment of the Board such action is necessary or advisable to preserve pooling of interests accounting treatment for any proposed transaction involving the Company. 6.6. Nontransferability of Options and SARs. Except as set forth in this -------------------------------------- Section 6.6, Options and SARs shall not be transferable other than by will or the laws of descent and distribution, and Options and SARs may be exercised during the lifetime of the Holder thereof only by such Holder (or his or her court appointed legal representative). The Agreement may provide that Options and SARs are transferable to members of a Holder's immediate family, to trusts for the benefit of such immediate family members and to partnerships in which such family members are the only partners. 7. ACCELERATION OF OPTIONS AND SARS If a Holder's employment shall terminate by reason of death or Total Disability, notwithstanding any contrary waiting period or installment period in any Agreement or in the Plan or in the event of any Approved Transaction, Board Change or Control Purchase, unless the applicable Agreement provides otherwise, each outstanding Option or SAR granted under the Plan shall immediately become exercisable in full in respect of the aggregate number of shares covered thereby. 8. TERMINATION OF EMPLOYMENT 8.1. General. If a Holder's employment shall terminate prior to the ------- complete exercise of an Option (or deemed exercise thereof, as provided in Section 6.5(a)), then such Option shall thereafter be exercisable solely to the extent provided in the applicable Agreement; provided, however, that (a) no Option may be exercised after the scheduled expiration date of such Option; (b) if the Holder's employment terminates by reason of death or Total Disability, the Option shall remain exercisable for a period of at least one year following such termination (but not later than the scheduled expiration of such Option); and (c) any termination by the employing company for cause will be treated in accordance with the provisions of Section 8.2. -10- 8.2. Termination for Cause. If a Holder's employment with Time Warner or --------------------- any of its Subsidiaries shall be terminated by Time Warner or such Subsidiary prior to the exercise of any Option for cause (for these purposes, cause shall have the meaning ascribed thereto in any employment agreement to which such Holder is a party or, in the absence thereof, shall include but not be limited to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind and the refusal to perform his duties and responsibilities for any reason other than illness or incapacity; provided, however, that if such termination occurs within 12 months after an Approved Transaction, Control Purchase or Board Change, termination for cause shall mean only a felony conviction for fraud, misappropriation or embezzlement), then all Options held by such Holder shall immediately terminate. 8.3. Special Rule. Notwithstanding any other provision of the Plan, the ------------ Board may provide in the applicable Agreement that the Award shall become and/or remain exercisable at rates and times at variance with the rules otherwise herein set forth; provided, however, that any such Agreement provisions at variance with the exercisability rules otherwise set forth herein shall be effective only if reflected in the terms of an employment agreement approved or ratified by the Board. 8.4. Miscellaneous. The Board may determine whether any given leave of ------------- absence constitutes a termination of employment. Awards made under the Plan shall not be affected by any change of employment so long as the Holder continues to be an employee of Time Warner or one of its Subsidiaries. 9. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT Nothing contained in the Plan or in any Award shall confer on any Holder any right to continue in the employ of Time Warner or any of its Subsidiaries or interfere in any way with the right of Time Warner or a Subsidiary to terminate the employment of the Holder at any time, with or without cause; subject, however, to the provisions of any employment agreement between the Holder and Time Warner or any of its Subsidiaries. 10. NONALIENATION OF BENEFITS Except as specifically provided in Section 6.6, no right or -11- benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits. 11. WRITTEN AGREEMENT Each grant of an Option shall be evidenced by a stock option agreement and each SAR shall be evidenced by a stock appreciation rights agreement, each in such form and containing such terms and provisions not inconsistent with the provisions of the Plan as the Board from time to time shall approve; provided, however, that such Awards may be evidenced by a single agreement. The effective date of the granting of an Award shall be the date on which the Board approves such grant. Each grantee of an Option or SAR shall be notified promptly of such grant and a written Agreement shall be promptly executed and delivered by Time Warner and the grantee, provided that such grant of Options or SARs shall terminate if such written Agreement is not signed by such grantee (or his attorney) and delivered to Time Warner within 60 days after the date the Board approved such grant or if the effectiveness of such grant is conditioned upon the grantee becoming an employee of Time Warner or one of its Subsidiaries, the execution by the grantee of an employment agreement with Time Warner or one of its Subsidiaries or any other similar condition, within 60 days after the occurrence of such condition, if later. Any such written Agreement may contain (but shall not be required to contain) such provisions as the Board deems appropriate to ensure that the penalty provisions of section 4999 of the Code will not apply to any stock or cash received by the Holder from Time Warner or any of its Subsidiaries. 12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC. In the event of any stock split, dividend, distribution, combination, reclassification or recapitalization that changes the character or amount of the Common Stock while any portion of any Award theretofore granted under the Plan is outstanding but unexercised, the Board shall make such adjustments in the character and number of shares subject to such Award and, in the -12- option price, as shall be applicable, equitable and appropriate in order to make such Award, immediately after any such change, as nearly as may be practicable, equivalent to such Award, immediately prior to any such change. If any merger, consolidation or similar transaction affects the Common Stock subject to any unexercised Award theretofore granted under the Plan, the Board or any surviving or acquiring corporation shall take such action as is equitable and appropriate to substitute a new award for such Award or to assume such Award in order to make such new or assumed Award, as nearly as may be practicable, equivalent to the old Award. If any such change or transaction shall occur, the number and kind of shares for which Awards may thereafter be granted under the Plan shall be adjusted to give effect thereto. 13. RIGHT OF FIRST REFUSAL The Agreements may contain such provisions as the Board shall determine to the effect that if a Holder elects to sell all or any shares of Common Stock that such Holder acquired upon the exercise of an Option awarded under the Plan, then such Holder shall not sell such shares unless such Holder shall have first offered in writing to sell such shares to Time Warner at Fair Market Value on a date specified in such offer (which date shall be at least three business days and not more than 10 business days following the date of such offer). In any such event, certificates representing shares issued upon exercise of Options shall bear a restrictive legend to the effect that transferability of such shares are subject to the restrictions contained in the Plan and the applicable Agreement and Time Warner may cause the registrar of its Common Stock to place a stop transfer order with respect to such shares. 14. TERMINATION AND AMENDMENT 14.1. General. Unless the Plan shall theretofore have been terminated as ------- hereinafter provided, no Awards may be made under the Plan on or after the tenth anniversary of the Effective Date. The Board may at any time prior to the tenth anniversary of the Effective Date terminate the Plan, and the Board may at any time modify or amend the Plan in such respects as it shall deem advisable; provided, however, that any such modification or amendment shall comply with all applicable laws and stock exchange listing requirements. -13- 14.2. Modification. No termination, modification or amendment of the Plan ------------ may, without the consent of the person to whom any Award shall theretofore have been granted, adversely affect the rights of such person with respect to such Award. No modification, extension, renewal or other change in any Award granted under the Plan shall be made after the grant of such Award, unless the same is consistent with the provisions of the Plan. With the consent of the Holder and subject to the terms and conditions of the Plan (including Section 14.1), the Board may amend outstanding Agreements with any Holder, including, without limitation, any amendment which would (a) accelerate the time or times at which the Award may be exercised and/or (b) extend the scheduled expiration date of the Award. Without limiting the generality of the foregoing, the Board may but solely with the Holder's consent, agree to cancel any Award under the Plan and issue a new Award in substitution therefor, provided that the Award so substituted shall satisfy all of the requirements of the Plan as of the date such new Award is made. 15. EFFECTIVENESS OF THE PLAN The Plan shall become effective upon approval by the Board of Directors of Time Warner. 16. GOVERNMENT AND OTHER REGULATIONS The obligation of Time Warner with respect to Awards shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of any registration statement required under the Securities Act of 1933, and the rules and regulations of any securities exchange on which the Common Stock may be listed. For so long as the Common Stock is registered under the Exchange Act, Time Warner shall use its reasonable efforts to comply with any legal requirements (a) to maintain a registration statement in effect under the Securities Act of 1933 with respect to all shares of Common Stock that may be issued to Holders under the Plan, and (b) to file in a timely manner all reports required to be filed by it under the Exchange Act. -14- 17. WITHHOLDING Time Warner's obligation to deliver shares of Common Stock or pay cash in respect of any Award under the Plan shall be subject to applicable federal, state and local tax withholding requirements. Federal, state and local withholding taxes paid by a Holder upon the exercise of any Option may be paid in shares of Common Stock upon such terms and conditions as the Board shall determine; provided, however, that the Board in its sole discretion may disapprove such payment and require that such taxes be paid in cash. 18. SEPARABILITY If any of the terms or provisions of this Plan conflict with the requirements of applicable law, then such terms or provisions shall be deemed inoperative to the extent necessary to avoid the conflict with applicable law without invalidating the remaining provisions hereof. 19. NON-EXCLUSIVITY OF THE PLAN The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 20. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION By acceptance of an Award, each Holder shall be deemed to have agreed that such Award is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment under any pension, retirement or other employee benefit plan of Time Warner or any of its Subsidiaries. In addition, each beneficiary of a deceased Holder shall be deemed to have agreed that such Award will not affect the amount of any life insurance coverage, if any, provided by Time Warner or any of its Subsidiaries on the life of the Holder which is payable to such beneficiary under any life insurance plan covering employees of -15- Time Warner or any of its Subsidiaries. 21. GOVERNING LAW The Plan shall be governed by, and construed in accordance with, the laws of the State of New York. -16- EX-10.8 4 AMENDED CORPORATE GROUP STOCK INCENTIVE EXHIBIT 10.8 As Amended through May 14, 1991 TIME WARNER CORPORATE GROUP STOCK INCENTIVE PLAN 1. PURPOSE OF THE PLAN The purpose of the Time Warner Corporate Group Stock Incentive Plan (hereinafter the "Plan"), is to provide for the granting of stock options, stock appreciation rights and restricted shares to certain employees of Time Warner Inc., Warner Communications Inc., Time Warner Enterprises, Inc. and their respective Subsidiaries in recognition of the valuable services provided, and contemplated to be provided, by such employees. The general purpose of the Plan is to promote the interests of Time Warner and its stockholders and to reward dedicated employees of these companies by providing such employees additional incentives to continue and increase their efforts with respect to, and to remain in the employ of, Time Warner or its Subsidiaries. This plan is being adopted in connection with the development of an overall long-term compensation program for these companies and it is expected that certain Options granted hereunder will become exercisable only if certain performance criteria are met. 2. CERTAIN DEFINITIONS The following terms (whether used in the singular or plural) have the meanings indicated when used in the Plan: (a) "Agreement" means the stock option agreement, stock appreciation rights agreement and the restricted shares agreement specified in Section 12, both individually and collectively, as the context so requires. (b) "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of Time Warner) shall approve (i) any consolidation or merger of Time Warner in which Time Warner is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger of Time Warner in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of Time Warner, or (iii) the adoption of any plan or proposal for the liquidation or dissolution of Time Warner. (c) "Award" means grants of Options, SARs and/or Restricted Shares under this Plan. (d) "Board" means the Board of Directors of Time Warner. (e) "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board ceased for any reason to constitute a majority thereof unless the election, or the nomination for election by Time Warner's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (f) "Cash Award" means the amount of cash, if any, to be paid to an employee pursuant to Section 7.5. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section. (h) "Committee" means the Committee comprised of members of the Board appointed pursuant to Section 4. (i) "Common Stock" means the common stock, par value $1.00 per share, of Time Warner. (j) "Composite Tape" means the New York Stock Exchange Composite Tape. (k) "Control Purchase" means any transaction in which any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than Time Warner or any employee benefit plan sponsored by Time Warner or any if its Subsidiaries) (i) shall purchase any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, -2- without the prior consent of the Board, or (ii) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Time Warner representing 20% or more of the combined voting power of the then outstanding securities of Time Warner ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) in the case of rights to acquire Time Warner's securities). (l) "Dividend Equivalents" means, with respect to Restricted Shares to be issued at the end of the Restriction Period, to the extent specified by the Board only, an amount equal to the regular cash dividends and all other distributions (or the economic equivalent thereof) which are payable to stockholders of record during the Restriction Period on a like number of shares of Common Stock. (m) "Effective Date" means the date the Plan becomes effective pursuant to Section 16. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. (o) "Fair Market Value" of a share of Common Stock means the average of the high and low sales prices of a share of Common Stock on the Composite Tape on the date in question, except as otherwise provided in Section 6.5. (p) "General SARs" means stock appreciation rights subject to the terms of Section 6.5(b). (q) "Holder" means an employee of Time Warner or any of its Subsidiaries who has received an Award under this Plan. (r) "ISO" means an incentive stock option within the meaning of section 422A(b) of the Code. (s) "Limited SARs" means stock appreciation rights subject to the terms of Section 6.5(c). (t) "Minimum Price Per Share" means the highest gross price (before brokerage commissions, soliciting dealers' -3- fees and similar charges) paid or to be paid for any share of Common Stock (whether by way of exchange, conversion, distribution, liquidation or otherwise) in, or in connection with, any Approved Transaction or Control Purchase which occurs at any time during the period beginning on the sixtieth day prior to the date on which Limited SARs are exercised and ending on the date on which Limited SARs are exercised. If the consideration paid or to be paid in any such Approved Transaction or Control Purchase shall consist, in whole or in part, of consideration other than cash, the Board shall take such action, as in its judgment it deems appropriate, to establish the cash value of such consideration, but such valuation shall not be less than the value, if any, attributed to such consideration by any other party to such Approved Transaction or Control Purchase. (u) "Nonqualified Stock Option" means a stock option that is designated as a nonqualified stock option. (v) "Option" means any ISO or Nonqualified Stock Option. (w) "Plan" has the meaning ascribed thereto in Section 1. (x) "Restricted Shares" means shares of Common Stock or the right to receive shares of Common Stock, as the case may be, awarded pursuant to Section 7. (y) "Restriction Period" means a period of time beginning on the date of each award of Restricted Shares and ending on the Valuation Date with respect to such award. (z) "Retained Distributions" has the meaning ascribed thereto in Section 7.3. (aa) "SARs" means General SARs and Limited SARs. (bb) "SEC" means the Securities and Exchange Commission. (cc) "Subsidiary" of a person means any present or future subsidiary of such person as such term is defined in section 425 of the Code and any present or future trade or business, whether or not incorporated, controlled by or under common control with such person. An entity shall be deemed a Subsidiary of a person only for such periods as the -4- requisite ownership or control relationship is maintained. (dd) "Time Warner" means Time Warner Inc., a Delaware corporation, and any successor thereto. (ee) "Total Disability" means a permanent and total disability as defined in section 22(e)(3) of the Code. (ff) "Valuation Date" with respect to any Restricted Shares awarded hereunder means the date designated as such in the Agreement with respect to such award of Restricted Shares pursuant to Section 7. 3. STOCK SUBJECT TO THE PLAN 3.1. Number of Shares. Subject to the provisions of Section 13 and this ---------------- Section 3, the maximum number of shares of Common Stock in respect of which Awards may be granted is 325,000. If and to the extent that an Option shall expire, terminate or be cancelled for any reason without having been exercised (or without having been considered to have been exercised as provided in Section 6.5(a)), the shares of Common Stock subject to such expired, terminated or cancelled portion of the Option shall again become available for purposes of the Plan. In addition, any Restricted Shares which are forfeited under the terms of the Plan or any Agreement shall again become available for purposes of the Plan. 3.2. Character of Shares. Shares of Common Stock deliverable under the ------------------- terms of the Plan may be, in whole or in part, authorized and unissued shares of Common Stock or issued shares of Common Stock held in Time Warner's treasury, or both. 3.3. Reservation of Shares. Time Warner shall at all times reserve a --------------------- number of shares of Common Stock (authorized and unissued Common Stock, issued Common Stock held in Time Warner's treasury, or both) equal to the maximum number of shares that may be subject to outstanding Awards and future Awards under the Plan. 4. ADMINISTRATION 4.1. Powers. The Plan shall be administered by the Board. Subject to the ------ express provisions of the Plan, the Board shall have plenary authority, in its discretion, to grant Awards under -5- the Plan and to determine the terms and conditions (which need not be identical) of all Awards so granted, including without limitation, (a) the purchase price, if any, of each Restricted Share, (b) the individuals to whom, and the time or times at which, Awards shall be granted or awarded, (c) the number of shares to be subject to each Award, (d) whether an Option shall be an ISO or a Nonqualified Stock Option, (e) when an Option or SAR can be exercised and whether in whole or in installments, (f) the time or times and the conditions subject to which Restricted Shares shall become vested and any Cash Awards shall become payable, and (g) the form, terms and provisions of any Agreement (which terms may be amended, subject to Section 15). 4.2. Factors to Consider. In making determinations hereunder, the Board ------------------- may take into account the nature of the services rendered by the respective employees, their dedication and past contributions to Time Warner and its Subsidiaries, their present and potential contributions to the success of Time Warner and its Subsidiaries and such other factors as the Board in its discretion shall deem relevant. 4.3. Interpretation. Subject to the express provisions of the Plan, the -------------- Board shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the Plan. The determinations of the Board on the matters referred to in this Section 4 shall be conclusive. 4.4. Delegation to Committee. Notwithstanding anything to the contrary ----------------------- contained herein, the Board may at any time, or from time to time, appoint a Committee and delegate to such Committee the authority of the Board to administer the Plan, including to the extent provided by the Board, the power to further delegate such authority. Upon such appointment and delegation, any such Committee shall have all the powers, privileges and duties of the Board, and shall be substituted for the Board, in the administration of the Plan to the extent provided in such delegation, except for the power to appoint members of the Committee and to terminate, modify or amend the Plan. The Board may from time to time appoint members of any such Committee in substitution for or in addition to members previously appointed, may fill vacancies in such Committee and may discharge such Committee. Any such Committee shall select one of its members as its chairman and shall hold its meeting at such times and places as -6- it shall deem advisable. A majority of members shall constitute a quorum and all determinations shall be made by a majority of such quorum. Any determination reduced to writing and signed by all of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. 5. ELIGIBILITY 5.1. General. Awards may be made only to (a) employees of Time Warner or ------- any of its Subsidiaries (including officers and directors of any of Time Warner's Subsidiaries), other than officers or directors of Time Warner who are subject to Section 16 of the Exchange Act, and (b) prospective employees of Time Warner or any of its Subsidiaries. The exercise of Options and SARs and the vesting of Restricted Shares granted to a prospective employee shall be conditioned upon such person becoming an employee of Time Warner or any of its Subsidiaries. For purposes of the Plan, the term "prospective employee" shall mean any person who holds an outstanding offer of employment on specific terms from Time Warner or any of its Subsidiaries. Awards may be made to employees who hold or have held Awards under this Plan or any similar or other awards under any other plan of Time Warner or its Subsidiaries. 5.2. Special ISO Rule. No ISO shall be granted to an employee who, at the ---------------- time the ISO is granted, owns (or is considered as owning within the meaning of section 425(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of Time Warner or any of its Subsidiaries, unless at the time the ISO is granted the option price is at least 110% of the Fair Market Value of the Common Stock subject to the ISO and the ISO by its terms is not exercisable after the expiration of five years from the date it is granted. 6. OPTIONS AND SARS 6.1. Option Prices. Subject to Section 5.2, the purchase price of the ------------- Common Stock under each Option shall be determined by the Board and set forth in the applicable Agreement, but shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. 6.2. Term of Options. The term of each Option shall be for such period as --------------- the Board shall determine, as set forth in the -7- applicable Agreement, but not more than 10 years from the date of grant in the case of an ISO (except as provided in Section 5.2). 6.3. Exercise of Options. An Option granted under the Plan shall become ------------------- (and remain) exercisable during the term of the Option to the extent provided in the applicable Agreement and this Plan and, unless the Agreement otherwise provides, may be exercised to the extent exercisable, in whole or in part, at any time and from time to time during such term; provided, however, that subsequent to the grant of an Option, the Board, at any time before complete termination of such Option, may accelerate the time or times at which such Option may be exercised in whole or in part (without reducing the term of such Option). The Agreement may contain conditions precedent to the exercisability of Options, including without limitation, the achievement of minimum performance criteria. 6.4. Manner of Exercise. Payment of the Option purchase price shall be ------------------ made in cash or in whole shares of Common Stock already owned by the Holder or, partly in cash and partly in such Common Stock; provided, however, that such payment may be made in whole or in part in shares of Common Stock only if and to the extent permitted by the applicable Agreement. An Option shall be exercised by written notice to Time Warner upon such terms and conditions as provided in the Agreement. Time Warner shall effect the transfer of the shares of Common Stock purchased under the Option as soon as practicable, and within a reasonable time thereafter such transfer shall be evidenced on the books of Time Warner. No Holder or other person exercising an Option shall have any of the rights of a stockholder of Time Warner with respect to shares of Common Stock subject to an Option granted under the Plan until due exercise and full payment has been made. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such due exercise and full payment. 6.5. SARS. (a) General Conditions. The Board may (but shall not be obligated to) grant General SARs and/or Limited SARs pursuant to the provisions of this Section 6.5 to a Holder of any Option (hereinafter called a "related Option"), with respect to all or a portion of the shares of Common Stock subject to the related Option. A SAR may be granted either concurrently with the grant of the related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such related Option. Subject to the terms and provisions of this -8- Section 6.5, each SAR shall be exercisable to the extent the related Option is then exercisable (and may be subject to such additional limitations on exercisability as the Agreement may provide), and in no event after the complete termination or full exercise of the related Option. SARs shall be exercisable in whole or in part upon notice to Time Warner upon such terms and conditions as provided in the Agreement. Upon the exercise of SARs, the related Option shall be considered to have been exercised to the extent of the number of shares of Common Stock with respect to which such SARs are exercised and shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock in respect of which other Awards may be granted. Upon the exercise or termination of the related Option, the SARs with respect thereto shall be considered to have been exercised or terminated to the extent of the number of shares of Common Stock with respect to which the related Option was so exercised or terminated. The provisions of Sections 4, 6 and 8 through 22 (to the extent that such provisions are applicable to Options) shall also be applicable to SARs unless the context otherwise requires. (b) General SARs. General SARs shall be exercisable only at the time the related Option is exercisable and subject to the terms and provisions of this Section 6.5, upon the exercise of General SARs, the Holder thereof shall be entitled to receive consideration (in the form hereinafter provided) equal in value to the excess of the Fair Market Value on the date of exercise of the shares of Common Stock with respect to which such General SARs have been exercised over the aggregate related Option purchase price for such shares; provided, however, that the Board may, in any Agreement granting General SARs provide that the appreciation realizable upon exercise thereof shall be measured from a base higher than the related Option purchase price. Upon the exercise of a General SAR, the Holder may specify the form of consideration to be received by such Holder, which shall be in shares of Common Stock (valued at Fair Market Value on the date of exercise of such General SAR), or in cash, or partly in cash and partly in shares of Common Stock. Any election by the Holder of a General SAR to receive cash in full or partial settlement of such General SAR shall comply with all applicable laws. Unless otherwise specified in the applicable Agreement, the number of General SARs which may be exercised for cash, or partly for cash and partly for shares of Common Stock, -9- during any calendar quarter, may not exceed 20% of the aggregate number of shares of Common Stock originally subject to the related Option (as such original number, without giving effect to the exercise of any portion of the related Option, shall have been retroactively adjusted in accordance with Section 13 or any corresponding provisions of an applicable Agreement). For purposes of this Section 6.5, the date of exercise of a General SAR shall mean the date on which Time Warner shall have received notice from the Holder of the General SAR of the exercise of such General SAR. (c) Limited SARs. Limited SARs may be exercised only during the period (a) beginning on the first day following either (i) the date of an Approved Transaction, (ii) the date of a Control Purchase, or (iii) the date of a Board Change, and (b) ending on the ninetieth day (or such other date specified in the Agreement) following such date. The effective date of exercise of a Limited SAR shall be deemed to be the date on which Time Warner shall have received notice from the Holder of the exercise thereof. Upon the exercise of Limited SARs granted in connection with an ISO, except as otherwise provided in the Agreement, the Holder thereof shall receive in cash an amount equal to the excess of the Fair Market Value on the date of exercise of such Limited SARs of the shares of Common Stock with respect to which such Limited SARs shall have been exercised over the aggregate related Option purchase price for such shares. Upon the exercise of Limited SARs granted in connection with a Nonqualified Stock Option, except as otherwise provided in the Agreement, the Holder thereof shall receive in cash an amount equal to the product computed by multiplying (a) the excess of (i) the higher of (A) the Minimum Price Per Share, or (B) the highest reported closing sales price of a share of Common Stock as reported on the Composite Tape at any time during the period beginning on the sixtieth day prior to the date on which such Limited SARs are exercised and ending on the date on which such Limited SARs are exercised over (ii) the per share Option price of the related Nonqualified Stock Option, by (b) the number of shares of Common Stock with respect to which such Limited SARs are being exercised. 6.6. Nontransferability of Options and SARs. Options and SARs shall not -------------------------------------- be transferable other than by will or the laws of descent and distribution, and Options and SARs may be exercised -10- during the lifetime of the Holder thereof only by such Holder (or his or her court appointed legal representative). 7. RESTRICTED SHARES 7.1. Valuation Date, Issuance and Price. The Board shall determine ---------------------------------- whether shares of Common Stock covered by awards of Restricted Shares will be issued at the beginning or the end of the Restriction Period, whether Dividend Equivalents will be paid during the Restriction Period in the event shares of the Common Stock are to be issued at the end of the Restriction Period and shall designate a Valuation Date with respect to each award of Restricted Shares and may prescribe other restrictions, terms and conditions applicable to the vesting of such Restricted Shares in addition to those provided in the Plan. The Board shall determine the price, if any, to be paid by the Holder for the Restricted Shares; provided, however, that the issuance of Restricted Shares shall be made for at least the minimum consideration necessary to permit such Restricted Shares to be deemed fully paid and nonassessable. All determinations made by the Board pursuant to this Section 7.1 shall be specified in the Agreement. 7.2. Issuance of Restricted Shares at Beginning of the Restriction Period. -------------------------------------------------------------------- If shares of Common Stock are issued at the beginning of the Restriction Period, the stock certificate or certificates representing such Restricted Shares shall be registered in the name of the Holder to whom such Restricted Shares shall have been awarded. During the Restriction Period, certificates representing the Restricted Shares and any securities constituting Retained Distributions shall bear a restrictive legend to the effect that ownership of the Restricted Shares (and such Retained Distributions), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan and the applicable Agreement. Such certificates shall remain in the custody of Time Warner and the Holder shall deposit with Time Warner stock powers or other instruments of assignment, each endorsed in blank, so as to permit retransfer to Time Warner of all or any portion of the Restricted Shares and any securities constituting Retained Distributions that shall be forfeited or otherwise not become vested in accordance with the Plan and the applicable Agreement. 7.3. Restrictions. Restricted Shares issued at the beginning of the ------------ Restriction Period shall constitute issued and outstanding shares of Common Stock for all corporate purposes. -11- The Holder will have the right to vote such Restricted Shares, to receive and retain all regular cash dividends and such other distributions, as the Board may in its sole discretion designate, paid or distributed on such Restricted Shares and to exercise all other rights, powers and privileges of a Holder of Common Stock with respect to such Restricted Shares; except, that, (a) the Holder will not be entitled to delivery of the stock certificate or certificates representing such Restricted Shares until the Restriction Period shall have expired and unless all other vesting requirements with respect thereto shall have been fulfilled or waived; (b) Time Warner will retain custody of the stock certificate or certificates representing the Restricted Shares during the Restriction Period as provided in Section 7.2; (c) other than regular cash dividends and such other distributions as the Board may in its sole discretion designate, Time Warner will retain custody of all distributions ("Retained Distributions") made or declared with respect to the Restricted Shares (and such Retained Distributions will be subject to the same restrictions, terms and vesting and other conditions as are applicable to the Restricted Shares) until such time, if ever, as the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested, and such Retained Distributions shall not bear interest or be segregated in a separate account; (d) the Holder may not sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Shares or any Retained Distributions or his interest in any of them during the Restriction Period; and (e) a breach of any restrictions, terms or conditions provided in the Plan or established by the Board with respect to any Restricted Shares or Retained Distributions will cause a forfeiture of such Restricted Shares and any Retained Distributions with respect thereto. 7.4. Issuance of Stock at End of the Restriction Period. Restricted -------------------------------------------------- Shares issued at the end of the Restriction Period shall not constitute issued and outstanding shares of Common Stock and the Holder shall not have any of the rights of a stockholder with respect to the shares of Common Stock covered by such an award of Restricted Shares, in each case, until such shares shall have been transferred to the Holder at the end of the Restriction Period. If and to the extent that shares of Common Stock are to be issued at the end of the Restriction Period, the Holder shall be entitled to receive Dividend Equivalents with respect to the shares of Common Stock covered thereby either (a) during the Restriction Period or (b) in accordance with the rules applicable to Retained Distributions, as the Board may specify in the Agreement. -12- 7.5. Cash Awards. In connection with any award of Restricted Shares, an ----------- Agreement may provide for the payment of a cash amount to the Holder of such Restricted Shares at any time after such Restricted Shares shall have become vested. Such Cash Awards shall be payable in accordance with such additional restrictions, terms and conditions as shall be prescribed by the Board in the Agreement and shall be in addition to any other salary, incentive, bonus or other compensation payments which such Holder shall be otherwise entitled or eligible to receive from Time Warner or any of its Subsidiaries. 7.6. Completion of Restriction Period. On the Valuation Date with respect -------------------------------- to each award of Restricted Shares, and the satisfaction of any other applicable restrictions, terms and conditions (a) all or part of such Restricted Shares shall become vested, (b) any Retained Distributions and any unpaid Dividend Equivalents with respect to such Restricted Shares shall become vested to the extent that the Restricted Shares related thereto shall have become vested and (c) any Cash Award to be received by the Holder with respect to such Restricted Shares shall become payable, all in accordance with the terms of the applicable Agreement. Any such Restricted Shares, Retained Distributions and any unpaid Dividend Equivalents that shall not become vested shall be forfeited to Time Warner and the Holder shall not thereafter have any rights (including dividend and voting rights) with respect to such Restricted Shares, Retained Distributions and any unpaid Dividend Equivalents that shall have been so forfeited. 8. ACCELERATION OF OPTIONS, SARS AND RESTRICTED SHARES If a Holder's employment shall terminate by reason of death or Total Disability, notwithstanding any contrary waiting period or installment period or Restriction Period in any Agreement or in the Plan or in the event of any Approved Transaction, Board Change or Control Purchase, unless the applicable Agreement provides otherwise: (a) in the case of an Option or SAR, each such outstanding Option or SAR granted under the Plan shall immediately become exercisable in full in respect of the aggregate number of shares covered thereby; and (b) in the case of Restricted Shares, the Restriction Period applicable to each such award of Restricted Shares shall be deemed to have expired and all such Restricted Shares, any related Retained Distributions and any unpaid Dividend Equivalents shall become vested and any Cash Award payable pursuant to the applicable Agreement shall be adjusted in such manner as provided in the -13- Agreement. 9. TERMINATION OF EMPLOYMENT 9.1. General. If a Holder's employment shall terminate prior to the ------- complete exercise of an Option (or deemed exercise thereof, as provided in Section 6.5(a)), then such Option shall thereafter be exercisable solely to the extent provided in the applicable Agreement; provided, however, that (a) no Option may be exercised after the scheduled expiration date of such Option; (b) if the Holder's employment terminates by reason of death or Total Disability, the Option shall remain exercisable for a period of at least one year following such termination (but not later than the scheduled expiration of such Option); and (c) any termination by the employing company for cause will be treated in accordance with the provisions of Section 9.2. 9.2. Termination for Cause. If a Holder's employment with Time Warner or --------------------- any of its Subsidiaries shall be terminated by Time Warner or such Subsidiary during the Restriction Period with respect to any Restricted Shares or prior to the exercise of any Option for cause (for these purposes, cause shall have the meaning ascribed thereto in any employment agreement to which such Holder is a party or, in the absence thereof, shall include but not be limited to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind and the refusal to perform his duties and responsibilities for any reason other than illness or incapacity; provided, however, that if such termination occurs within 12 months after an Approved Transaction, Control Purchase or Board Change, termination for cause shall mean only a felony conviction for fraud, misappropriation or embezzlement), then (a) all Options held by such Holder shall immediately terminate and (b) such Holder's rights to all Restricted Shares, Retained Distributions, any unpaid Dividend Equivalents and any Cash Awards shall be forfeited immediately. 9.3. Special Rule. Notwithstanding any other provision of the Plan, the ------------ Board may provide in the applicable Agreement that the Award shall become and/or remain exercisable at rates and times at variance with the rules otherwise herein set forth; provided, however, that any such Agreement provisions at variance with the exercisability rules otherwise set forth herein shall be effective only if reflected in the terms of an employment agreement approved or ratified by the Board. -14- 9.4. Miscellaneous. The Board may determine whether any given leave of ------------- absence constitutes a termination of employment. Awards made under the Plan shall not be affected by any change of employment so long as the Holder continues to be an employee of Time Warner or any of its Subsidiaries. 10. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT Nothing contained in the Plan or in any Award shall confer on any Holder any right to continue in the employ of Time Warner or any of its Subsidiaries or interfere in any way with the right of Time Warner or a Subsidiary to terminate the employment of the Holder at any time, with or without cause; subject, however, to the provisions of any employment agreement between the Holder and Time Warner or any of its Subsidiaries. 11. NONALIENATION OF BENEFITS No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits. 12. WRITTEN AGREEMENT Each award of Restricted Shares and any right to a Cash Award hereunder shall be evidenced by a restricted shares agreement; each grant of an Option shall be evidenced by a stock option agreement which shall designate the Options granted thereunder as ISOs or Nonqualified Stock Options; and each SAR shall be evidenced by a stock appreciation rights agreement, each in such form and containing such terms and provisions not inconsistent with the provisions of the Plan as the Board from time to time shall approve; provided, however, that such Awards may be evidenced by a single agreement. The effective date of the granting of an Award shall be the date on which the Board approves such grant. Each grantee of an Option, SAR or Restricted Shares shall be notified promptly of such grant and a written Agreement shall be promptly executed and delivered by Time Warner and the grantee, provided that such grant of Options, -15- SARs or Restricted Shares shall terminate if such written Agreement is not signed by such grantee (or his attorney) and delivered to Time Warner within 60 days after the date the Board approved such grant or if the effectiveness of such grant is conditioned upon the grantee becoming an employee of Time Warner or one of its Subsidiaries, the execution by the grantee of an employment agreement with Time Warner or one of its subsidiaries or any other similar condition, within 60 days after the occurrence of such condition, if later. Any such written Agreement may contain (but shall not be required to contain) such provisions as the Board deems appropriate to ensure that the penalty provisions of section 4999 of the Code will not apply to any stock or cash received by the Holder from Time Warner or any of its Subsidiaries. 13. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC. In the event of any stock split, dividend, distribution, combination, reclassification or recapitalization that changes the character or amount of the Common Stock while any portion of any Award theretofore granted under the Plan is outstanding but unexercised or unvested, the Board shall make such adjustments in the character and number of shares subject to such Award, in the option price, in the relevant appreciation base and in the Cash Awards, as shall be applicable, equitable and appropriate in order to make such Award, immediately after any such change, as nearly as may be practicable, equivalent to such Award, immediately prior to any such change. If any merger, consolidation or similar transaction affects the Common Stock subject to any unexercised or unvested Award theretofore granted under the Plan, the Board or any surviving or acquiring corporation shall take such action as is equitable and appropriate to substitute a new award for such Award or to assume such Award in order to make such new or assumed Award, as nearly as may be practicable, equivalent to the old Award. If any such change or transaction shall occur, the number and kind of shares for which Awards may thereafter be granted under the Plan shall be adjusted to give effect thereto. 14. RIGHT OF FIRST REFUSAL The Agreements may contain such provisions as the Board shall determine to the effect that if a Holder elects to sell all or any shares of Common Stock that such Holder acquired upon the exercise of an Option or upon the vesting of Restricted Shares -16- awarded under the Plan, then such Holder shall not sell such shares unless such Holder shall have first offered in writing to sell such shares to Time Warner at Fair Market Value on a date specified in such offer (which date shall be at least three business days and not more than 10 business days following the date of such offer). In any such event, certificates representing shares issued upon exercise of Options and the vesting of Restricted Shares shall bear a restrictive legend to the effect that transferability of such shares are subject to the restrictions contained in the Plan and the applicable Agreement and Time Warner may cause the registrar of its Common Stock to place a stop transfer order with respect to such shares. 15. TERMINATION AND AMENDMENT 15.1. General. Unless the Plan shall theretofore have been terminated as ------- hereinafter provided, no Awards may be made under the Plan on or after the tenth anniversary of the Effective Date. The Board may at any time prior to the tenth anniversary of the Effective Date terminate the Plan, and the Board may at any time modify or amend the Plan in such respects as it shall deem advisable; provided, however, that any such modification or amendment shall comply with all applicable laws and stock exchange listing requirements. 15.2. Modification. No termination, modification or amendment of the Plan ------------ may, without the consent of the person to whom any Award shall theretofore have been granted, adversely affect the rights of such person with respect to such Award. No modification, extension, renewal or other change in any Award granted under the Plan shall be made after the grant of such Award, unless the same is consistent with the provisions of the Plan. With the consent of the Holder and subject to the terms and conditions of the Plan (including Section 15.1), the Board may amend outstanding Agreements with any Holder, including, without limitation, any amendment which would (a) accelerate the time or times at which the Award may be exercised and/or (b) extend the scheduled expiration date of the Award. Without limiting the generality of the foregoing, the Board may but solely with the Holder's consent, agree to cancel any Award under the Plan and issue a new Award in substitution therefor, provided that the Award so substituted shall satisfy all of the requirements of the Plan as of the date such new Award is made. -17- 16. EFFECTIVENESS OF THE PLAN The Plan shall become effective upon approval by the Board of Directors of Time Warner. 17. GOVERNMENT AND OTHER REGULATIONS The obligation of Time Warner with respect to Awards shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of any registration statement required under the Securities Act of 1933, and the rules and regulations of any securities exchange on which the Common Stock may be listed. For so long as the Common Stock is registered under the Exchange Act, Time Warner shall use its reasonable efforts to comply with any legal requirements (a) to maintain a registration statement in effect under the Securities Act of 1933 with respect to all shares of Common Stock that may be issued to Holders under the Plan, and (b) to file in a timely manner all reports required to be filed by it under the Exchange Act. 18. WITHHOLDING Time Warner's obligation to deliver shares of Common Stock or pay cash in respect of any Award or Cash Award under the Plan shall be subject to applicable federal, state and local tax withholding requirements. Federal, state and local withholding taxes paid by a Holder upon the exercise of any Option and upon the vesting of Restricted Shares may be paid in shares of Common Stock upon such terms and conditions as the Board shall determine; provided, however, that the Board in its sole discretion may disapprove such payment and require that such taxes be paid in cash. 19. SEPARABILITY If any of the terms or provisions of this Plan conflict with the requirements of section 422A of the Code, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of section 422A of the Code. If this Plan does not contain any provision required to be included herein under section 422A of the Code, such provision shall be deemed to be incorporated herein with the same force and effect -18- as if such provision had been set out at length herein; provided, however, that to the extent any Option which is intended to qualify as an ISO cannot so qualify, such Option, to that extent, shall be deemed to be a Nonqualified Stock Option for all purposes of the Plan. 20. NON-EXCLUSIVITY OF THE PLAN The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION By acceptance of an Award or Cash Award, as applicable, each Holder shall be deemed to have agreed that such Award or Cash Award, as applicable, is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment under any pension, retirement or other employee benefit plan of Time Warner or any of its Subsidiaries. In addition, each beneficiary of a deceased Holder shall be deemed to have agreed that such Award or Cash Award, as applicable, will not affect the amount of any life insurance coverage, if any, provided by Time Warner or any of its Subsidiaries on the life of the Holder which is payable to such beneficiary under any life insurance plan covering employees of Time Warner or any of its Subsidiaries. 22. GOVERNING LAW The Plan shall be governed by, and construed in accordance with, the laws of the State of New York. -19- EX-10.17 5 EMPLOYMENT AGREEMENT EXHIBIT 10.17 EMPLOYMENT AGREEMENT made as of November 2, 1994 between TIME WARNER INC., a Delaware corporation (the "Company"), and Richard D. Parsons (the "Executive"). The Company wishes to secure the services of the Executive on a full-time basis for the period to and including December 31, 1999 (the "Term Date") on and subject to the terms and conditions set forth in this Agreement, and the Executive is willing to provide such services on and subject to the terms and conditions set forth in this Agreement. The parties therefore agree as follows: 1. Term of Employment. The Executive's "term of employment", as this ------------------ phrase is used throughout this Agreement, shall be for the period beginning on the Effective Date and ending on the Term Date, subject, however, to the terms and conditions set forth in this Agreement. The "Effective Date" shall mean February 1, 1995; provided that, if the mergers of Dime Bancorp, Inc. and Anchor Bancorp, Inc. and of their bank subsidiaries (collectively, the "Merger") shall not have taken place by January 16, 1995, then the Executive may postpone the Effective Date to a date not later than fifteen days following completion of the Merger; provided further, that no such postponement shall extend the Effective Date beyond April 1, 1995 without the consent of the Company. 2. Employment. The Company shall employ the Executive, and the Executive ---------- shall serve, as the President of the Company, commencing on the Effective Date and continuing thereafter during the term of employment. The Executive shall have responsibility for the direction and supervision of the following functions of the Company, with the authority, duties and powers appropriate and customary to discharge such responsibility: all corporate staff functions, including without limitation, legal, finance, communications and public affairs and administration, and each of the Executive Vice Presidents or Senior Vice Presidents in charge of each such function shall report to the Executive. In addition, the Executive shall have such other authority, functions, duties 2 and responsibilities as the Board of Directors or the Chief Executive Officer of the Company may from time to time delegate to the Executive in addition thereto, consistent with his stature as the President of the Company. The Executive shall, subject to his election as such from time to time and without additional compensation, serve during the term of employment in such additional offices of comparable or greater stature and responsibility in the Company and its subsidiaries and as a director and as a member of any committee of the Board of Directors of the Company and its subsidiaries, to which he may be elected from time to time. During the term of employment, (i) the Executive's services shall be rendered on a substantially full-time, exclusive basis and he will apply on a full-time basis all of his skill and experience to the performance of his duties in such employment, (ii) the Executive shall report only to the Company's Board of Directors and to the Company's Chief Executive Officer, (iii) the Executive shall have no other employment and, without the prior written consent of the Chief Executive Officer of the Company, no outside business activities which require the devotion of substantial amounts of the Executive's time and (iv) the place for the performance of the Executive's services shall be the Company's principal executive offices in the New York City metropolitan area, subject to such reasonable travel as may be appropriate or required in the performance of the Executive's duties in the business of the Company. The foregoing shall be subject to the policies of the Company, as in effect from time to time, regarding vacations, holidays, illness and the like and shall not prevent the Executive from devoting such time to his personal affairs as shall not interfere with the performance of his duties hereunder; provided, however, that the Executive shall in any event comply with the provisions of Sections 9 and 10 and any generally applicable Company policies on conflicts of interest and service as a director of another corporation, partnership, trust or other entity ("Entity"). The Company shall use its best efforts to cause the Executive to be a member of its Board of Directors throughout the term of employment and shall include him in the management slate for election as a director at every stockholders' meeting at which his term as a director would otherwise expire. 3 3. Compensation. ------------ 3.1 Base Salary. The Company shall pay or cause to be paid to the ----------- Executive a base salary of not less than $600,000 per annum during the term of employment (the "Base Salary"). The Company may increase, but not decrease, the Base Salary at any time and from time to time during the term of employment and upon each such increase the term "Base Salary" shall mean such increased amount, (subject to Section 5). Base Salary shall be payable in monthly or more frequent installments in accordance with the Company's then current practices and policies with respect to senior executives. For the purposes of this Agreement, "senior executives" shall mean the executive officers of the Company. 3.2 Bonus. In addition to Base Salary, the Executive shall be eligible to ----- receive during the term of employment an annual cash bonus based on the performance of the Company and of the Executive in an amount commensurate with the position and duties of the Executive relative to other senior executives of the Company. The actual amount of any such annual cash bonus to be paid to the Executive will be determined by the Compensation Committee of the Company's Board of Directors based upon a recommendation of the Company's Chief Executive Officer. Such determination with respect to the amount, if any, of annual cash bonuses to be paid to the Executive under this Agreement shall be final and conclusive except as specifically provided otherwise in this Agreement. Payments of any bonus compensation under this Section 3.2 shall be made in accordance with the Company's then current practices and policies with respect to senior executives. Notwithstanding the foregoing, determination and payment of any bonus compensation under this Section 3.2 may be made pursuant to a plan intended to assure the deductibility of such bonus compensation pursuant to Section 162(m) of the Internal Revenue Code of 1986 (the "Code"). 3.3 Conditional Deferred Compensation. In addition to Base Salary and --------------------------------- annual bonus as set forth in Sections 3.1 and 3.2, the Executive shall be credited with 4 deferred compensation which shall be determined and paid out as provided in this Agreement, including Annex A attached hereto. 3.3.1 Subject to the provisions of Section A.7 of Annex A, during the term of employment, the Company shall credit to a special account maintained on the Company's books for the Executive (the "Account"), monthly, an amount equal to 50% of one-twelfth of the Base Salary. If a lump sum payment is made pursuant to Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, the Company shall credit to the Account at the time of such payment an amount equal to 50% of the Base Salary portion of such lump sum payment. The Account shall be maintained by the Company in accordance with the terms of this Agreement, including Annex A, until the full amount which the Executive is entitled to receive therefrom has been paid in full. 3.3.2 The amounts credited to the Account pursuant to Section 3.3.1 and the earnings, if any, on such amounts in accordance with Annex A shall be deemed earned by the Executive only if the Executive fulfills the Executive's obligations under Section 9.2 of this Agreement. If the Executive breaches the provisions of said Section 9.2 whether during or after the termination of the Executive's employment with the Company, then the Company shall calculate the portion of the Account attributable to credits made to the Account during the last sixty months that the Company made credits to the Account pursuant to Section 3.3.1 and the earnings, if any, on such amounts and no payments from the Account shall be made to the Executive in respect of that portion of the Account and the Company shall be entitled to retain that portion of the Account. If the Executive has elected pursuant to Section A.7 of Annex A not to defer some or all of the amounts provided in Section 3.3.1 during the sixty month period referred to in the preceding sentence, then the amounts that would have been deferred during such period but for such election will be added to the amount calculated pursuant to the preceding sentence and the Company shall be entitled to retain that amount as well, but only out of, and up to the maximum of, amounts, if any, credited to the Account pursuant to Section 3.3.1 and the earnings, if any, thereon. The remainder of the Account, if any, after deduction of the amount calculated pursuant to the 5 preceding two sentences, and the earnings, if any, thereon shall be paid to the Executive in accordance with Annex A. Notwithstanding the foregoing, amounts credited to the Account pursuant to Section 3.4 and the earnings, if any, on such amounts shall be paid to the Executive in accordance with Annex A, irrespective of any breach by the Executive of any of the provisions of this Agreement, and except as set forth in Annex A, no deductions shall be made therefrom. 3.4 Deferred Bonus. In addition to any other deferred bonus plan in which -------------- the Executive may be entitled to participate, the Executive may elect by written notice delivered to the Company at least 15 days prior to the commencement of any calendar year during the term of employment during which an annual cash bonus would otherwise accrue or to which it would relate, to defer payment of and to have the Company credit to the Account all or any portion of the Executive's bonus for such year. Any such election shall only apply to the calendar year during the term of employment with respect to which such election is made and a new election shall be required with respect to each successive calendar year during the term of employment. 3.5 Reimbursement. The Company shall pay or reimburse the Executive for ------------- all reasonable travel, entertainment and other business expenses actually incurred or paid by the Executive during the term of employment in the performance of his services under this Agreement provided such expenses are incurred or paid in accordance with the Company's then current practices and policies with respect to senior executives of the Company and upon presentation of expense statements or vouchers or such other supporting information as the Company may customarily require of its senior executives. 3.6 No Anticipatory Assignments. Except as specifically contemplated in --------------------------- Section 12.8 or under the life insurance policies and benefit plans referred to in Sections 7 and 8, respectively, neither the Executive, his legal representative nor any beneficiary designated by him shall have any right, without the prior written consent of the Company, to assign, transfer, pledge, hypothecate, anticipate or commute to 6 any person or Entity any payment due in the future pursuant to any provision of this Agreement, and any attempt to do so shall be void and shall not be recognized by the Company. 3.7 Indemnification. The Executive shall be entitled throughout the term --------------- of employment in his capacity as an officer or director of the Company or any of its subsidiaries or a member of the board of representatives or other governing body of any partnership or joint venture in which the Company has an equity interest or as a trustee or fiduciary of any plan, program, trust or other entity established for the benefit of the Company, its subsidiaries or any of their respective employees in connection with the business of the Company (and after the term of employment, to the extent relating to his service as such officer, director,member, trustee or fiduciary) to the benefit of the indemnification provisions contained on the date hereof in the Certificate of Incorporation and By-Laws of the Company (not including any amendments or additions after the date of execution hereof that limit or narrow, but including any that add to or broaden, the protection afforded to the Executive by those provisions), to the extent not prohibited by applicable law at the time of the assertion of any liability against the Executive. 4. Termination. ----------- 4.1 Termination for Cause. The Company may terminate the term of --------------------- employment and all of the Company's obligations hereunder, other than its obligations set forth below in this Section 4.1, only for "cause" and only if the term of employment has not previously been terminated pursuant to any other provision of this Agreement. Termination by the Company for "cause" shall mean termination by action of the Company's Board of Directors, or a committee thereof, after a hearing in which the Executive has had the opportunity to address the Board, because of the Executive's conviction (treating a nolo contendere plea as a conviction) of a felony (whether or not any right to appeal has been or may be exercised) or willful refusal without proper cause to perform his obligations under this Agreement or because of the Execu- 7 tive's material breach of any of the covenants provided for in Section 9. Such termination shall be effected by written notice thereof delivered by the Company to the Executive and shall be effective as of the date of such notice; provided, however, that if (i) such termination is because of the Executive's willful refusal without proper cause to perform any one or more of his obligations under this Agreement, (ii) such notice is the first such notice of termination for any reason delivered by the Company to the Executive under this Section 4.1, and (iii) within 15 days following the date of such notice the Executive shall cease his refusal and shall use his best efforts to perform such obligations, the termination shall not be effective. In the event of such termination by the Company for cause, without prejudice to any other rights or remedies that the Company may have at law or in equity, the Company shall have no further obligations to the Executive other than (i) to pay Base Salary and make credits of deferred compensation to the Account accrued through the effective date of termination, (ii) to pay any annual bonus pursuant to Section 3.2 to the Executive in respect of the calendar year prior to the calendar year in which such termination is effective, in the event such annual bonus has been determined but not yet paid as of the date of such termination, and (iii) with respect to any rights the Executive has in respect of amounts credited to the Account through the effective date of termination (provided that amounts referred to in the second sentence of Section 3.3.1 and the earnings thereon, if any, shall remain in the Account and continue to be invested in accordance with Annex A and be paid to the Executive in accordance with Annex A, except as otherwise provided in Section 3.3.2, if applicable) or pursuant to any insurance or other benefit plans or arrangements of the Company maintained for the benefit of its senior executives. The last sentence of Section 3.3.1 and the provisions of Sections 3.3.2, 3.7, 8.2, 8.3 and 9 through 12 and Annex A shall survive any termination pursuant to this Section 4.1. 4.2 Termination by Executive for Material Breach by the Company and --------------------------------------------------------------- Wrongful Termination by the Company. ----------------------------------- 8 Unless previously terminated pursuant to any other provision of this Agreement and unless a Disability Period shall be in effect, the Executive shall have the right, exercisable by written notice to the Company, to terminate the term of employment and this Agreement (other than those provisions that specifically survive such termination) effective 15 days after the giving of such notice, if, at the time of the giving of such notice, the Company shall be in material breach of its obligations under this Agreement; provided, however, that, with the exception of clause (i) below, this Agreement shall not so terminate if such notice is the first such notice of termination delivered by the Executive pursuant to this Section 4.2 and within such 15-day period the Company shall have cured all such material breaches of its obligations under this Agreement. A material breach by the Company shall include, but not be limited to, (i) the Company failing to cause the Executive to retain the title specified in the first sentence of Section 2; (ii) the Executive being required to report to persons other than those specified in Section 2; (iii) the Company violating the provisions of Section 2 or any written delegation from the Chief Executive Officer with respect to the Executive's authority, functions, duties, powers or responsibilities (whether or not accompanied by a change in title); (iv) the Company requiring the Executive's primary services to be rendered at a place other than at the Company's principal executive offices in the New York City metropolitan area; (v) the Company breaching its obligations under the last paragraph of Section 2; and (vi) the Company failing to cause the successor to all or substantially all of the business and assets of the Company expressly to assume the obligations of the Company under this Agreement. In the event of a termination pursuant to the preceding paragraph of this Section 4.2, or in the event of a termination of this Agreement or the term of employment by the Company in breach of this Agreement, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after written notice of such termination is given by the Company or by the Executive pursuant to the preceding paragraph of this Section 4.2, either (A) to cease being an employee of the Company and receive the lump sum 9 payment (and credits) as provided in Section 4.2.2 or (B) to remain an employee of the Company as provided in Section 4.2.3. After the Executive makes such election, the following provisions shall apply: 4.2.1 Regardless of the election made by the Executive, (i) after the effective date of such termination, the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 3.3.2, 3.7, 4.6 and 4.8 and Sections 6 through 12 and Annex A shall survive such termination, and (ii) the Executive shall be entitled to receive any earned and unpaid Base Salary and deferred compensation accrued through the effective date of such termination and a pro rata portion of the Executive's "Average Annual Bonus" (as determined pursuant to Section 4.4) for the year in which such termination occurs through the date of such termination, provided that all or a portion of such pro rata Average Annual Bonus will be credited to the Account in accordance with any timely deferral election the Executive may previously have made pursuant to Section 3.4. 4.2.2 In the event the Executive shall make the election provided in clause (A) of Section 4.2 above, the Company shall pay the Executive (or credit to the Account with respect to Section 3.3) as damages in a lump sum within 30 days thereafter (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such notice of termination is given) an amount (discounted as provided in the immediately following sentence) equal to the greater of (i) all amounts otherwise payable (or to be credited) pursuant to Sections 3.1, 3.2 and 3.3 for the year in which such termination occurs and for each subsequent year through and including the Term Date, and (ii) all amounts that would be payable (or credited) pursuant to Sections 3.1, 3.2 and 3.3 if the Term Date had been a date one year after the date of such notice of termination (assuming, in the case of either (i) or (ii) above, that annual bonuses are required to be paid for each such year in an amount equal to the Average Annual Bonus, with the bonus for any partial calendar year appropriately pro 10 rated according to the number of whole or partial months the Executive was employed by the Company in such calendar year). Any payments required to be made to the Executive pursuant to this Section 4.2.2 upon such termination in respect of Sections 3.1 and 3.2 and the credit to the Account provided for in the penultimate sentence of Section 3.3.1 shall be discounted to present value as of the date of payment from the times at which such amounts would have become payable absent any such termination at an annual discount rate for the relevant periods equal to 120% of the "applicable Federal rate" (within the meaning of Section 1274(d) of the Code), in effect on the date of such termination, compounded semi-annually. 4.2.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company for the period ending on the later of (i) the Term Date, and (ii) the date which is one year after the date notice of termination is given under this Section 4.2, and during such period the Executive shall be entitled to receive, whether or not he thereafter becomes disabled during such period but subject to Section 6, (a) salary at an annual rate equal to the Base Salary, (b) deferred compensation as provided in Section 3.3, and (c) an annual bonus (all or a portion of which may be deferred by the Executive pursuant to Section 3.4) in respect of each calendar year or portion thereof (in which case a pro rata portion of such annual bonus will be payable) during such period equal to the Average Annual Bonus (with any partial calendar year bonus appropriately pro rated according to the number of whole or partial months the Executive was employed by the Company in such calendar year). Except as provided in the next sentence, if the Executive accepts full-time employment with any other Entity during such period or notifies the Company in writing of his intention to terminate his status as an employee of the Company during such period, then the term of employment shall cease and the Executive shall cease to be an employee of the Company effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and the Executive shall be entitled to receive as damages in a lump sum 11 within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) equal to the balance of the Base Salary, deferred compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3.1) and regular annual bonuses (each equal to the Average Annual Bonus, with the bonus for any partial calendar year appropriately pro rated according to the number of whole or partial months the Executive was employed by the Company in such calendar year) that the Executive would have been entitled pursuant to this Section 4.2.3 had the Executive remained on the Company's payroll until the end of the period described in the first sentence of this Section 4.2.3. Notwithstanding the preceding sentence, if the Executive accepts employment with any not-for-profit Entity, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.2.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the payments (and credits) provided for in this Section 4.2.3 and the term of employment shall cease and the Executive shall not be entitled to any such lump sum payment. For purposes of this Agreement, the term "affiliate" shall mean any Entity which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. 4.3 After the Term Date. If at the Term Date, the term of employment ------------------- shall not have been previously terminated pursuant to the provisions of this Agreement, no Disability Period is then in effect and the parties shall not have agreed in writing to an extension or renewal of this Agreement or on the terms of a new written employment agreement, then the term of employment shall continue and the Executive shall continue to be employed by the Company pursuant to the terms of this Agreement, subject to termination by either party hereto on 90 days written notice delivered to the other party. Such 90-day notice may be given by either party on or after October 1, 1999 so that the term of employment may 12 end on the Term Date or any date thereafter. If the Executive shall terminate this Agreement on or after the Term Date, then the Executive shall receive Base Salary, deferred compensation and a pro rata annual bonus through the effective date of termination with the pro rata annual bonus being equal to a portion of the Average Annual Bonus based on the number of whole or partial months in such year prior to the date of termination. If the Company shall terminate the term of employment and this Agreement (other than those provisions that specifically survive such termination) on or after the Term Date for any reason (other than cause as defined in Section 4.1, in which case Section 4.1 shall apply, and disregarding any termination occurring pursuant to Section 5), then in lieu of the provisions of Section 4.2, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after such notice of termination is given, either (A) to cease being an employee of the Company and receive a lump sum payment (and credits) as provided in Section 4.3.2 or (B) remain an employee of the Company for a period of twelve months pursuant to Section 4.3.3 and receive the payments (and credits) provided in Section 4.3.3. After the Executive makes such election, the following provisions shall apply: 4.3.1 Regardless of the election made by the Executive, at the end of the 90-day notice period provided for in the first sentence of Section 4.3 the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 3.3.2, 3.7, 4.6 and 4.8 and Sections 6 through 12 and Annex A shall survive such termination. 4.3.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay the Executive (or credit to the Account with respect to Section 3.3) in a lump sum at the end of the 90-day notice period provided for in the first sentence of Section 4.3 (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the year in which such notice of termination is given) an 13 amount (discounted as provided in the second sentence of Section 4.2.2) equal to the sum of (i) one year's Base Salary, (ii) the annual amount of deferred compensation to be credited to the Account pursuant to Section 3.3.1 (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3.1), and (iii) an amount equal to the Average Annual Bonus plus a pro rata portion of the Average Annual Bonus for any elapsed portion of the calendar year preceding such notice of termination. 4.3.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company until the date which is twelve months after the end of the 90-day period referred to in the first sentence of Section 4.3 and during such period the Executive shall be entitled to receive, whether or not he thereafter becomes disabled during such period but subject to Section 6, (i) salary at an annual rate equal to the Base Salary, (ii) credits to the Account of deferred compensation as provided in Section 3.3.1, and (iii) an annual bonus (all or any portion of which may be deferred by the Executive pursuant to Section 3.4) equal to the Average Annual Bonus for the year in which such notice of termination is given plus a pro rata portion of the Average Annual bonus for any portion of such twelve month period included in the succeeding calendar year. 4.4 Determination of Average Annual Bonus. For purposes of this ------------------------------------- Agreement, the term "Average Annual Bonus" means the amount, determined as of the applicable "Determination Date", that is equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) paid to the Executive under Section 3.2 (assuming no portion of such bonus is deferred pursuant to Section 3.4) with respect to the two calendar years immediately preceding the calendar year in which such Determination Date occurs; provided, however, that if no such annual bonuses shall have been determined prior to such Determination Date then the Average Annual Bonus shall be an amount equal to 150% of the Base Salary and if one such annual bonus shall have been determined prior to the Determination Date, the Average Annual 14 Bonus shall be the average of 150% of the Base Salary and such one annual bonus. For purposes of determining the Average Annual Bonus, the "Determination Date": (i) Under Section 4.2, shall be the date notice of termination is given by the Executive or the Company as described in such Section 4.2 (disregarding any notice that becomes ineffective because the Company cures its breach, as provided in Section 4.2); (ii) Under Section 4.3, shall be the date notice of termination is given by the Company or the Executive pursuant to such Section 4.3; (iii) Under Section 5, shall be the Disability Date; and (iv) Under Section 6, shall be the date of the Executive's death. 4.5 Office Facilities. In the event the Executive shall make the election ----------------- provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on the day the Executive makes such election and ending one year thereafter, the Company shall, without charge to the Executive, make available to the Executive office space at the Executive's principal job location immediately prior to his termination of employment, or other location reasonably close to such location, together with secretarial services, office facilities, services and furnishings, in each case reasonably appropriate to an employee of the Executive's position and responsibilities prior to such termination of employment. 4.6 Release. In partial consideration for the Company's obligation to ------- make the payments described in Sections 4.2 and 4.3, the Company shall be entitled to require the Executive to execute and deliver to the Company a release in substantially the form attached hereto as Annex B. If the Company so elects, the Company shall deliver such release to 15 the Executive within 10 days after the written notice of termination is delivered pursuant to Section 4.2 or 4.3 and the Executive shall execute and deliver such release to the Company within 21 days after receipt thereof. Upon receipt by the Company of such release signed by the Executive, the Company shall deliver to the Executive a release substantially in the form attached hereto as Annex C, signed by the Company. If the Company shall request the Executive to execute an Annex B release and the Executive shall fail to execute and deliver such release to the Company within such 21 day period, or if the Executive shall revoke his consent to such release as provided therein, the Company shall have no obligation to deliver the Annex C release and the Executive's term of employment shall terminate as provided in Section 4.2 or 4.3, as applicable, but the Executive shall receive, in lieu of the payments provided for in said Section 4.2 or 4.3, a lump sum cash payment in an amount determined in accordance with the personnel policies of the Company relating to notice and severance then generally applicable to senior executives of the Company with length of service and compensation level of the Executive. 4.7 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5, ---------- if the term of employment is in effect and the Executive is still employed by the Company pursuant to this Agreement on the date the Executive first becomes eligible for normal retirement under any retirement plan of the Company or any subsidiary of the Company (the "Retirement Date"), then this Agreement shall terminate automatically on such date and the Executive's employment with the Company shall thereafter be governed by the policies generally applicable to employees of the Company and the Executive shall not thereafter be entitled to the payments provided in such Sections to the extent not received by or for the account of the Executive on or prior to the Retirement Date. In addition, no benefits or payments provided in Sections 4.2, 4.3 or 5 shall include any period after the Retirement Date and if the provision of benefits or calculation of payments provided in any such Section would include any period subsequent to the Retirement Date, such provision of benefits shall end on the Retirement Date and the calculation of payments shall cover only the 16 period ending on the Retirement Date. Notwithstanding the foregoing, the provisions of Annex A shall apply to the investment and payment of deferred compensation after any such termination, the provisions of Section 7 shall survive any such termination and the provisions of Sections 12.1 and 12.7 shall apply to any dispute with respect to this Agreement that arises after any such termination. 4.8 Mitigation. In the event of termination of the term of employment by ---------- the Executive pursuant to Section 4.2 as a result of a material breach by the Company of any of its obligations hereunder, or in the event of termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement, the Executive shall not be required to seek other employment in order to mitigate his damages hereunder; provided, however, that, notwithstanding the foregoing, if there are any damages hereunder by reason of the events of termination described above which are "contingent on a change" (within the meaning of Section 280G(b)(2)(A)(i) of the Code), the Executive shall be required to mitigate such damages hereunder, including any such damages theretofore paid, but not in excess of the extent, if any, necessary to prevent the Company from losing any tax deductions to which it otherwise would be entitled in connection with such damages if they were not so "contingent on a change". In addition to any obligation under the preceding sentence, and without duplication of any amounts required to be paid to the Company thereunder, if any such termination occurs and the Executive, whether or not required to mitigate his damages under the preceding sentence, thereafter obtains other employment with any Entity other than a not-for-profit organization or a governmental agency or body, the total cash salary and bonus received in connection with such other employment, whether paid to him or deferred for his benefit, for services through (i) in the case of a termination pursuant to Section 4.2, the later of (x) the Term Date or (y) one year after the date notice of termination is delivered pursuant to Section 4.2, and (ii) in the case of a termination pursuant to Section 4.3, the date which is one year after the end of the 90-day notice period referred to in the first sentence of Section 4.3, in either case up to an amount equal to (x) the discounted lump sum 17 payment and credit to the Account received by or for the account of the Executive with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such period, minus (y) the amount of severance the Executive would have received in accordance with the personnel policies of the Company if the Executive had been job eliminated, shall reduce, pro tanto, any amount which --- ----- the Company would otherwise be required to pay to the Executive as a result of such termination and, to the extent amounts have theretofore been paid to him as a result of such termination, such cash salary and bonus shall be paid over to the Company as received with respect to such period, but the provisions of this sentence shall not apply to any type of equity interest, bonus unit, phantom or restricted stock, stock option, stock appreciation right or similar benefit received as a result of such other employment. With respect to the preceding sentences, any payments or rights to which the Executive is entitled by reason of the termination of the term of employment by the Executive pursuant to Section 4.2 or in the event of the termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement shall be considered as damages hereunder. With respect to the second preceding sentence, the Executive shall in no event be required to pay the Company with respect to any calendar year more than the discounted amount received by him or credited to the Account with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such year. Any obligation of the Executive to mitigate his damages pursuant to this Section 4.8 shall not be a defense or offset to the Company's obligation to pay the Executive in full the amounts provided in Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, as the case may be, at the time provided therein or the timely and full performance of any of the Company's other obligations under this Agreement. 4.9 Payments. So long as the Executive remains on the payroll of the -------- Company, payments of salary, deferred compensation and bonus required to be made pursuant to Section 4.2 or 4.3 shall be made at the same times as such payments are made to senior executives of the Company. 18 5. Disability. If during the term of employment and prior to any ---------- termination of this Agreement under Section 4.2 or 4.3, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is prevented from performing his usual duties for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, the Company shall, nevertheless, continue to pay the Executive his full compensation and continue to credit to the Account, when otherwise due, as provided in Section 3 and Annex A, through the last day of the sixth consecutive month of disability or the date on which the shorter periods of disability shall have equalled a total of six months in any twelve-month period (such last day or date being referred to herein as the "Disability Date"). If the Executive has not resumed his usual duties on or prior to the Disability Date, the Company shall pay the Executive a pro rata bonus for the portion of the calendar year in which the Disability Date occurs that shall precede such date and shall pay the Executive disability benefits for the longer of (i) the period from the Disability Date through the Term Date or (ii) one year following the Disability Date (in the case of either (i) or (ii), the "Disability Period"), in an annual amount equal to 75% of (a) the Base Salary (and this reduced amount shall also be deemed to be the Base Salary for purposes of determining the amounts to be credited to his Account pursuant to Section 3.3 and Annex A as further disability benefits), and (b) the Average Annual Bonus (all or a portion of which may be deferred by the Executive pursuant to Section 3.4), with the bonus for any partial calendar year pro rated according to the number of whole or partial months the Executive was employed by the Company in such calendar year. If during the Disability Period the Executive shall fully recover from his disability, the Company shall have the right (exercisable within 60 days after notice from the Executive of such recovery), but not the obligation, to restore the Executive to full-time service at full compensation. The Disability Period shall continue during such 60-day period. If the Company elects to restore the Executive to full-time service, then this Agreement shall continue in full force and effect in all respects, including without limitation, the provisions of Section 3 which shall apply in lieu of the 19 Disability provisions of this Section 5, and the Term Date shall not be extended by virtue of the occurrence of the Disability Period. If the Company does not elect to restore the Executive to full-time service, the Executive may terminate this Agreement by written notice to the Company within 60 days after the termination of the sixty-day period provided for above, in which case neither party shall have any further obligations hereunder after the date of such termination. If the Company elects not to restore the Executive to full-time service and the Executive does not elect to terminate this Agreement, the Executive shall be entitled to obtain other employment, subject, however, to the following: (i) the Executive shall be obligated to perform advisory services during any balance of the Disability Period; and (ii) the provisions of Sections 9 and 10 shall continue to apply to the Executive during the Disability Period. The advisory services referred to in clause (i) of the immediately preceding sentence shall consist of rendering advice concerning the business, affairs and management of the Company as requested by the Board of Directors or the Chief Executive Officer of the Company but the Executive shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties. Any income from such other employment shall not be applied to reduce the Company's obligations under this Agreement. The Company shall be entitled to deduct from all payments to be made to the Executive during the Disability Period pursuant to this Section 5 an amount equal to all disability payments received by the Executive during the Disability Period from Workmen's Compensation, Social Security and disability insurance policies maintained by the Company; provided, however, that for so long as, and to the extent that, proceeds paid to the Executive from such disability insurance policies are not includible in his income for federal income tax purposes, the Company's deduction with respect to such payments shall be equal to the product of (i) such payments and (ii) a fraction, the numerator of which is one and the denominator of which is one less the maximum marginal rate of federal income taxes applicable to individuals at the time of receipt of such payments. All payments made under this Section 5 with respect to periods after the 20 Disability Date are intended to be disability payments, regardless of the manner in which they are computed. Except as otherwise provided in this Section 5, the term of employment shall continue during the Disability Period and the Executive shall be entitled to all of the rights and benefits provided for in this Agreement except that, Sections 4.2 and 4.3 shall not apply during the Disability Period (unless the Company terminates this Agreement in breach hereof in which case Section 4.2 shall apply) and unless the Company has restored the Executive to full-time service at full compensation prior to the end of the Disability Period, the term of employment shall end and the Executive shall cease to be an employee of the Company at the end of the Disability Period and shall not be entitled to notice and severance or to receive or be paid for any accrued vacation time or unused sabbatical. 6. Death. Upon the death of the Executive during the term of employment, ----- this Agreement and all obligations of the Company to make any payments under Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a designated beneficiary) shall be entitled to receive, to the extent being received by the Executive immediately prior to his death, Base Salary and deferred compensation to the last day of the month in which his death occurs and bonus compensation (at the time bonuses are normally paid) equal to the Average Annual Bonus, but prorated according to the number of whole or partial months the Executive was employed by the Company in such calendar year, and (ii) the Account shall be liquidated and revalued as provided in Annex A as of the date of the Executive's death (except that all taxes shall be computed and charged to the Account as of such date of death to the extent not theretofore so computed and charged) and the entire balance thereof (plus any amount due under the last paragraph of Section A.6 of Annex A) shall be paid to the Executive's estate (or a designated beneficiary) in a single payment not later than 75 days following such date of death. 7. Life Insurance. Subject to the Executive's satisfactory completion of -------------- any applications and other documentation and any physical examination that may be required 21 by the insurer and to the availability of insurance, the Company shall obtain $4,000,000 face amount of split ownership life insurance on the life of the Executive. The Company shall pay all premiums on such policy and shall maintain such policy (without reduction of the face amount of the coverage) for the life of the Executive notwithstanding any termination or expiration of the term of employment or this Agreement (other than a termination pursuant to Section 4.1). The Executive shall be entitled to designate the beneficiary or beneficiaries of such policy, which may include a trust. At the death of the Executive, the Executive's estate (or the owner of the policy if such owner is a trust as contemplated below) shall promptly pay to the Company an amount equal to the premiums on such policy paid by the Company (net of (i) tax benefits, if any, to the Company in respect of payments of such premiums, (ii) any amounts payable by the Company which had been paid by or on behalf of the Executive with respect to such insurance, (iii) dividends received by the Company in respect of such premiums, but only to the extent such dividends are not used to purchase additional insurance on the life of the Executive, and (iv) any unpaid borrowings by the Company on the policy), whether before, during or after the term of this Agreement but in no event shall such payment to the Company exceed the amount of the death benefit paid under the policy. Except as hereinafter provided, the Company shall own the policy and shall provide by endorsement or collateral assignment as it may deem appropriate for the payment of benefits on the death of the Executive. In the event that the Executive advises the Company in writing within 30 days of the date of this Agreement that the Executive desires to have such policy owned by the trustees of a trust for the benefit of the Executive's spouse and/or descendants, the Company shall permit such ownership provided the trustees of the trust enter into a split dollar insurance agreement and collateral assignment in favor of the Company which in the Company's reasonable judgment satisfactorily protects the Company's investment in such policy. The life insurance provided for in this Section 7 shall be in addition to any other insurance hereafter provided by the Company on the life of the Executive under any group or individual policy. 22 8. Other Benefits. -------------- 8.1 General Availability. To the extent that (a) the Executive is -------------------- eligible under the general provisions thereof and (b) the Company maintains such plan or program for the benefit of senior executives of the Company during the term of employment and so long as the Executive is an employee of the Company, the Executive shall be eligible to participate in any pension, profit-sharing, stock option or similar plan or program and in any group insurance, hospitalization, medical, dental, accident, disability or similar plan, program or practice of the Company now existing or established hereafter. In addition, the Executive shall be entitled during the term of employment and so long as the Executive is an employee of the Company, to receive other benefits generally available to all senior executives of the Company to the extent the Executive is eligible under the general provisions thereof, including, without limitation, to the extent maintained in effect by the Company for its senior executives, payment for financial services. In addition to any retirement benefits to which the Executive is entitled under the Time Warner Employees' Pension Plan, any supplemental retirement or excess benefit plan maintained by the Company or any of its affiliates or any successor plans thereto (hereinafter collectively referred to as the "Pension Plan"), the Company will, following the Executive's termination of employment for any reason, except by the Company for cause pursuant to Section 4.1 and except for a termination by the Executive in breach of this Agreement, pay or cause to be paid to the Executive or his beneficiary as the case may be, in accordance with the following provisions, an amount which is equivalent to the excess of (the "Excess Amount") (i) the amount such Executive or beneficiary would be entitled to receive under the Pension Plan assuming the Executive had five additional years of service (as such term is defined in the Pension Plan) taking into account all the provisions of the Pension Plan as are from time to time in effect and applicable to the Executive or his beneficiary over (ii) the amount such Executive or beneficiary would be entitled to receive under the Pension Plan based on actual years of 23 service taking into account all the provisions of the Pension Plan as are from time to time in effect and applicable to the Executive or his beneficiary. If the Executive or his beneficiary is entitled to an Excess Amount as described in the preceding paragraph, the Company shall pay the Excess Amount to the Executive or his beneficiary as follows. If the Executive is otherwise entitled to benefits under the Pension Plan, then the Excess Amount shall be paid at the same times and in the same manner as shall be elected by the Executive or his beneficiary for payment of amounts under the Pension Plan. If the Executive is not otherwise entitled to benefits under the Pension Plan, then the Excess Amount shall be paid at the time(s) and in one of the forms of payment permitted under the Pension Plan as elected by the Executive or his beneficiary. If the Executive or his beneficiary dies before any payments described above have been made, the payments shall be made to the beneficiary thereof at the same time and in the same manner as they would have been paid if the payments were to be made under the Pension Plan. 8.2 Benefits After a Termination or Disability. During the period the ------------------------------------------ Executive remains on the payroll of the Company after a termination pursuant to Section 4.2 or 4.3 and during the Disability Period the Executive shall continue to be eligible to receive the benefits required to be provided to the Executive under Section 8.1 to the extent such benefits are maintained in effect by the Company for its senior executives; provided, however, the Executive shall not be entitled to any additional awards or grants under any stock option, restricted stock or other stock based incentive plan; provided further, however, that if this Agreement is terminated pursuant to Section 4.2, the Executive shall be entitled to receive all of the stock options provided for in Annex D attached hereto. The Executive shall continue to be an employee of the Company for purposes of any stock option and restricted shares agreements and any other incentive plan awards during the term of employment and until such time as the Executive shall leave the payroll of the Company. At the time the Executive's term of employment terminates and he leaves the payroll of the Company pursuant to the provisions of Section 4.1, 4.2, 4.3, 5 or 6, 24 the Executive's rights to benefits and payments under any benefit plans, programs or practices or any insurance or other death benefit plans or arrangements of the Company or under any stock option, restricted stock, stock appreciation right, bonus unit, management incentive or other plan of the Company shall be determined, subject to the other terms and provisions of this Agreement, in accordance with the terms and provisions of such plans, programs or practices and any agreements under which such stock options, restricted stock or other awards were granted; provided, however, that notwithstanding the foregoing or any more restrictive provisions of any such plan or agreement, if the Executive leaves the payroll of the Company as a result of a termination pursuant to Section 4.2, then all stock options granted to the Executive by the Company shall become immediately exercisable at the time the Executive shall leave the Company's payroll pursuant to Section 4.2. 8.3 Payments in Lieu of Other Benefits. In the event the term of ---------------------------------- employment and the Executive's employment by the Company is terminated pursuant to Sections 4.1, 4.2, 4.3, 5 or 6 (and regardless of whether the Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), the Executive shall not be entitled to notice and severance or to be paid for any accrued vacation time or unused sabbatical, the payments provided for in such Sections being in lieu thereof. 8.4 Stock Options. Prior to or promptly after execution of this ------------- Agreement, the Company will recommend that the Compensation Committee of the Board of Directors (the "Committee") grant or undertake to grant the Executive options to purchase shares of the Company's Common Stock in accordance with Annex D attached hereto (the "Contract Options"). All Contract Options granted to the Executive shall be subject to substantially the same terms and conditions as options granted to other senior executives of the Company during 1994, except as otherwise provided in Annex D. The Executive shall be eligible to receive grants of stock options in addition to the Contract Options in the discretion of the Committee. 9. Protection of Confidential Information; Non-Compete. The Executive --------------------------------------------------- acknowledges that his employment by the 25 Company (which, for purposes of all of Section 9 shall mean Time Warner Inc. and its affiliates) will, throughout the term of employment, bring him into close contact with many confidential affairs of the Company, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods and other information not readily available to the public, and plans for future development. The Executive further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. The Executive further acknowledges that the business of the Company is international in scope, that its products are marketed throughout the world, that the Company competes in nearly all of its business activities with other Entities that are or could be located in nearly any part of the world and that the nature of the Executive's services, position and expertise are such that he is capable of competing with the Company from nearly any location in the world. In recognition of the foregoing, the Executive covenants and agrees as set forth below in this Section 9. 9.1 Confidentiality Covenant. The Executive covenants and agrees that (i) ------------------------ through the date he ceases to be an employee of the Company and leaves the payroll of the Company for any reason, and (ii) for twelve months after the effective date of termination of the Executive's employment and of the other provisions of this Agreement pursuant to Section 4.1, 4.2 or 4.3, and (iii) with respect to Sections 9.1.1. and 9.1.2, for an additional 36 months after the later of the dates described in clauses (i) and (ii) above: 9.1.1 The Executive shall keep secret all confidential matters of the Company and shall not intentionally disclose such matters to anyone outside of the Company, either during or after the term of employment, except during the term of employment, in connection with his duties hereunder, or except with the Company's written consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder, 26 and (ii) the Executive may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process. 9.1.2 The Executive shall deliver promptly to the Company on termination of his employment by the Company, or at any other time the Company may so request, at the Company's expense, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company's business, other than publicly available documents or documents relating to the terms and conditions of the Executive's employment, which he obtained while employed by, or otherwise serving or acting on behalf of, the Company and which he may then possess or have under his control; provided that if the Executive is to continue as a director, consultant or advisor to the Company after such termination, the Executive may retain such documents as are necessary or appropriate to the performance of his duties unless and until the Company requests that such documents be delivered to it; and 9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2 or 4.3, the Executive shall not employ, and shall not cause any Entity of which he is an affiliate to employ, without the prior written consent of Time Warner Inc., any person who was a full-time executive employee of the Company at the date of such termination or within six months prior thereto. 9.2 Non-Compete. The Executive covenants and agrees that (i) through the ----------- date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason, and (ii) with respect to an Entity that is engaged in competition with the Company and that had, or the parent Entity or predecessor Entity of which had, consolidated gross revenues from all sources, including non-competitive businesses, of $2 billion or more for the fiscal year preceding the Executive's commencement of service for such Entity, through the date that is twelve months after the effective date of any notice of termination of the Executive's employment with the Company pursuant to Section 4.1, 4.2 or 4.3, the Executive 27 shall not, directly or indirectly, without the prior written consent of the Chief Executive Officer of Time Warner Inc., render any services to any person or Entity or acquire any interest of any type in any Entity, that shall be deemed in competition with the Company; provided, however, that the foregoing shall not be deemed to prohibit the Executive from (a) acquiring, solely as an investment and through market purchases, securities of any Entity which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are publicly traded, so long as he is not part of any control group of such Entity and such securities, if converted, do not constitute more than one percent (1%) of the outstanding voting power of that Entity or (b) acquiring, solely as an investment, any securities of an Entity (other than an Entity that has outstanding securities covered by the preceding clause (a)) so long as he remains a passive investor in such Entity and does not become part of any control group thereof. For purposes of the foregoing, a person or Entity shall be deemed to be in competition with the Company if such person or it engages in any line of business that is substantially the same as either (i) any line of operating business which the Company engages in, conducts or, to the knowledge of the Executive, has definitive plans to engage in or conduct, or (ii) any operating business that then is or has been engaged in or conducted by the Company and as to which, to the knowledge of the Executive, the Company covenants or has covenanted in writing, in connection with the disposition of such business, not to compete therewith. 9.3 Specific Remedy. In addition to such other rights and remedies as the --------------- Company may have at equity or in law with respect to any breach of this Agreement, if the Executive commits a material breach of any of the provisions of Section 9.1 or 9.2, the Company shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 28 10. Ownership of Work Product. The Executive acknowledges that during the ------------------------- term of employment, he may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not (all of the foregoing being collectively referred to herein as "Work Product"), and that various business opportunities shall be presented to him by reason of his employment by the Company. The Executive acknowledges that all of the foregoing shall be owned by and belong exclusively to the Company and that he shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experimental) of the Company's, or are, in the case of Work Product, conceived or made on the Company's time or with the use of the Company's facilities or materials, or, in the case of business opportunities, are presented to him for the possible interest or participation of the Company. The Executive shall (i) promptly disclose any such Work Product and business opportunities to the Company; (ii) assign to the Company, upon request and without additional compensation, the entire rights to such Work Product and business opportunities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of his inventorship or creation in any appropriate case. The Executive agrees that he will not assert any rights to any Work Product or business opportunity as having been made or acquired by him prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Company in writing prior to the date hereof. Notwithstanding the foregoing, the Executive may, provided that Section 9.2 is complied with, acquire an interest in any business opportunity presented to the Company hereunder if the Company declines to pursue such business opportunity and if such investment is approved by the Chief Executive Officer of the Company in writing. 11. Notices. All notices, requests, consents and other communications ------- required or permitted to be given under this Agreement shall be effective only if given in writing and shall be deemed to have been duly given if delivered personally or sent by prepaid telegram, or mailed first-class, postage 29 prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith): 11.1 If to the Company: Time Warner Inc. 75 Rockefeller Plaza New York, New York 10019 Attention: Chief Executive Officer (with a copy, similarly addressed but Attention: General Counsel) 11.2 If to the Executive, to his residence address set forth on the records of the Company. 12. General. ------- 12.1 Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the substantive laws of the State of New York applicable to agreements made and to be performed entirely in New York. 12.2 Captions. The section headings contained herein are for -------- reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12.3 Entire Agreement. This Agreement, including Annexes A, B C, and ---------------- D sets forth the entire agreement and understanding of the parties relating to the subject matter of this Agreement and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties. 12.4 No Other Representations. No representation, promise or ------------------------ inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or be liable for any alleged representation, promise or inducement not so set forth. 30 12.5 Assignability. This Agreement and the Executive's rights and ------------- obligations hereunder may not be assigned by the Executive. The Company may assign its rights together with its obligations hereunder, in connection with any sale, transfer or other disposition of all or substantially all of the business and assets of the Company; and such rights and obligations shall inure to, and be binding upon, any successor to all or substantially all of the business and assets of the Company (as the case may be), whether by merger, purchase of stock or assets or otherwise. The Company shall cause such successor expressly to assume such obligations. 12.6 Amendments; Waivers. This Agreement may be amended, modified, ------------------- superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12.7 Resolution of Disputes. Any dispute or controversy arising with ---------------------- respect to this Agreement may be referred by either party to JAMS/ENDISPUTE for resolution in arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE. Any such proceedings shall take place in New York City before a single arbitrator (rather than a panel of arbitrators), pursuant to any streamlined or expedited (rather than a comprehensive) arbitration process, before a nonjudicial (rather than a judicial) arbitrator, and in accordance with an arbitration process which, in the judgment of such arbitrator, shall have the effect of reasonably limiting or reducing the cost of such arbitration. The resolution of any such dispute or controversy by the arbitrator appointed in accordance with the procedures of JAMS/ENDISPUTE shall be final and binding. Judgment upon the award rendered by such arbitrator may be 31 entered in any court having jurisdiction thereof, and the parties consent to the jurisdiction of the New York courts for this purpose. The prevailing party shall be entitled to recover the costs of arbitration (including reasonable attorneys fees and the fees of experts) from the losing party. If at the time any dispute or controversy arises with respect to this Agreement, JAMS/ENDISPUTE is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS/ENDISPUTE for the purposes of the foregoing provisions of this Section 12.7. If the Executive shall be the prevailing party in such arbitration, the Company shall promptly pay, upon demand of the Executive, all legal fees, court costs and other costs and expenses incurred by the Executive in any legal action seeking to enforce the award in any court. 12.8 Beneficiaries. Whenever this Agreement provides for any payment ------------- to the Executive's estate, such payment may be made instead to such beneficiary or beneficiaries as the Executive may designate by written notice to the Company. The Executive shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company (and to any applicable insurance company) to such effect. 12.9 No Conflict. The Executive represents and warrants to the ----------- Company that this Agreement is legal, valid and binding upon the Executive and the execution of this Agreement and the performance of the Executive's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Executive is a party (including, without limitation, any other employment agreement). The Company represents and warrants to the Executive that this Agreement is legal, valid and binding upon the Company and the execution of this Agreement and the performance of the Company's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Company is a party. 32 12.10 Withholding Taxes. Payments made to the Executive pursuant to ----------------- this Agreement shall be subject to withholding and social security taxes and other ordinary and customary payroll deductions. 12.11 No Offset. Neither the Company nor the Executive shall have --------- any right to offset any amounts owed by one party hereunder against amounts owed or claimed to be owed to such party, whether pursuant to this Agreement or otherwise, and the Company and the Executive shall make all the payments provided for in this Agreement in a timely manner. 12.12 Severability. If any provision of this Agreement shall be held ------------ invalid, the remainder of this Agreement shall not be affected thereby; provided, however, that the parties shall negotiate in good faith with respect to equitable modification of the provision or application thereof held to be invalid. To the extent that it may effectively do so under applicable law, each party hereby waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect. 12.13 Definitions. The following terms are defined in this ----------- Agreement in the places indicated: Account - Section 3.3.1 Account Retained Income - Section A.6 of Annex A affiliate - Section 4.2.3 applicable Federal rate - Section 4.2.2 Applicable Tax Law - Section A.5 of Annex A Average Annual Bonus - Section 4.4 Base Salary - Section 3.1 cause - Section 4.1 Code - Section 3.2 Company - the first paragraph on page 1 and Section 9.1 Contract Options - Section 8.4 Determination Date - Section 4.4 Disability Date - Section 5 Disability Period - Section 5 Effective Date - the first paragraph on page 1 eligible securities - Section A.1 of Annex A Entity - Section 2 33 Excess Amount - Section 8.1 Executive - the first paragraph on page 1 fair market value - Section A.1 of Annex A Investment Advisor - Section A.1 of Annex A Other Period Deferred Amount - Section A.6 of Annex A Pension Plan - Section 8.1 Pay-Out Period - Section A.6 of Annex A Retirement Date - Section 4.7 senior executives - Section 3.1 Term Date - the second paragraph on page 1 term of employment - Section 1 Valuation Date - Section A.6 of Annex A Work Product - Section 10 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. TIME WARNER INC. By /s/ Gerald M. Levin ------------------------ Gerald M. Levin Chairman and Chief Executive Officer /s/ Richard D. Parsons ------------------------- Richard D. Parsons 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 A-2 securities purchased or deemed to have been purchased multiplied by the fair market value of such securities on the date of reference and shall be credited with the quantity and kind of securities so purchased or deemed to have been purchased. In the case of any sale, the Account shall be charged with the quantity and kind of securities sold or deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities sold or deemed to have been sold multiplied by the fair market value of such securities on the date of reference. Such charges and credits to the Account shall take place immediately upon the consummation of the transactions to which they relate. As used herein "fair market value" means either (i) if the security is actually purchased or sold by the Company on the date of reference, the actual purchase or sale price per security to the Company or (ii) if the security is not purchased or sold on the date of reference, in the case of a listed security, the closing price per security on the date of reference, or if there were no sales on such date, then the closing price per security on the nearest preceding day on which there were such sales, and, in the case of an unlisted security, the mean between the bid and asked prices per security on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices per security on the nearest preceding day for which such prices are available. If no bid or asked price information is available with respect to a particular security, the price quoted to the Company as the value of such security on the date of reference (or the nearest preceding date for which such information is available) shall be used for purposes of administering the Account, including determining the fair market value of such security. The Account shall be charged currently with all interest paid or deemed payable by the Account with respect to any credit extended or deemed extended to the Account. Such interest shall be charged to the Account, for margin purchases actually made, at the rates and times actually paid by the Account and, for margin purchases deemed to have been made, at the rates and times then charged by an investment banking firm designated by the Company with which the Company does significant business. The Company may, in the Company's sole discretion, from time to time serve as the lender with respect to any margin A-3 transactions by notice to the then Investment Advisor and in such case interest shall be charged at the rate and times then charged by an investment banking firm designated by the Company with which the Company does significant business. Brokerage fees shall be charged to the Account, for transactions actually made, at the rates and times actually paid and, for transactions deemed to have been made, at the rates and times then charged for transactions of like size and kind by an investment banking firm designated by the Company with which the Company does significant business. A.2 Dividends and Interest. The Account shall be credited with ---------------------- dollar amounts equal to cash dividends paid from time to time upon the stocks held or deemed to be held therein. Dividends shall be credited as of the payment date. The Account shall similarly be credited with interest payable on interest bearing securities held or deemed to be held therein. Interest shall be credited as of the payment date, except that in the case of purchases of interest-bearing securities the Account shall be charged with the dollar amount of interest accrued to the date of purchase, and in the case of sales of such interest-bearing securities the Account shall be credited with the dollar amount of interest accrued to the date of sale. All dollar amounts of dividends or interest credited to the Account pursuant to this Section A.2 shall be charged with all taxes thereon deemed payable by the Company (as and when determined pursuant to Section A.5). The Investment Advisor shall have the same right with respect to the investment and reinvestment of net dividends and net interest as he has with respect to the balance of the Account. A.3 Adjustments. The Account shall be equitably adjusted to reflect ----------- stock dividends, stock splits, recapitalizations, mergers, consolidations, reorganizations and other changes affecting the securities held or deemed to be held therein. A.4 Obligation of the Company. The Company shall not be required to ------------------------- purchase, hold or dispose of any of the securities designated by the Investment Advisor; however, whether or not it elects to purchase or sell any such A-4 securities, such transactions shall be deemed to have been made and the Account shall be charged with all taxes (including stock transfer taxes), interest, brokerage fees and investment advisory fees, if any, deemed payable by the Company and attributable to such transactions (in all cases net after any tax benefits that the Company would be deemed to derive from the payment thereof, as and when determined pursuant to Section A.5), but no other costs of the Company. The only obligation of the Company is its contractual obligation to make payments to the Executive measured as set forth below. To the extent that the Company, in its discretion, purchases or holds any of the securities designated by the Investment Advisor, the same shall remain the sole property of the Company, subject to the claims of its general creditors, and shall not be deemed to form part of the Account. Neither the Executive nor his legal representative nor any beneficiary designated by him shall have any right, other than the right of an unsecured general creditor, against the Company in respect of any portion of the Account. A.5 Taxes. The Account shall be charged with all federal, state and ----- local taxes deemed payable by the Company with respect to income recognized upon the dividends and interest received or deemed to have been received by the Account pursuant to Section A.2 and gains recognized upon sales of any of the securities which are deemed to have been sold pursuant to Section A.1 or A.6. The Account shall be credited with the amount of the tax benefit received by the Company as a result of any payment of interest actually made or deemed to be made pursuant to Section A.1 or A.2 and as a result of any payment of brokerage fees and investment advisory fees made or deemed to be made pursuant to Section A.1. If any of the sales of the securities which are deemed to have been sold pursuant to Section A.1 or A.6 results in a loss to the Account, such net loss shall be deemed to offset the income and gains referred to in the second preceding sentence (and thus reduce the charge for taxes referred to therein) to the extent then permitted under the Internal Revenue Code of 1986, as amended from time to time, and under applicable state and local income and franchise tax laws (collectively referred to as "Applicable Tax Law"); provided, however, that for the purposes of this A-5 Section A.5 the Account shall, except as provided in the third following sentence, be deemed to be a separate corporate taxpayer and the losses referred to above shall be deemed to offset only the income and gains referred to in the second preceding sentence. Such losses shall be carried back and carried forward within the Account to the extent permitted by Applicable Tax Law in order to minimize the taxes deemed payable on such income and gains within the Account. For the purposes of this Section A.5, all charges and credits to the Account for taxes shall be deemed to be made as of the end of the Company's taxable year during which the transactions, from which the liabilities for such taxes are deemed to have arisen, are deemed to have occurred. Notwithstanding the foregoing, if and to the extent that in any year there is a net loss in the Account that cannot be offset against income and gains in any prior year, then an amount equal to the tax benefit to the Company of such net loss (after such net loss is reduced by the amount of any net capital loss of the Account for such year) shall be credited to the Account on the last day of such year. If and to the extent that any such net loss of the Account shall be utilized to determine a credit to the Account pursuant to the preceding sentence, it shall not thereafter be carried forward under this Section A.5. For purposes of determining taxes payable by the Company under any provision of this Annex A it shall be assumed that the Company is a taxpayer and pays all taxes at the maximum marginal rate of federal income taxes and state and local income and franchise taxes (net of assumed federal income tax benefits) applicable to business corporations and that all of such dividends, interest, gains and losses are allocable to its corporate headquarters, which are currently located in New York City. A.6 Payments. Subject to the provisions of Section A.7, payments of -------- deferred compensation shall be made as provided in this Section A.6. Deferred compensation shall be paid monthly for a period of 60 months (the "Pay-Out Period") commencing on the first day of the month after the later of (i) the Term Date and (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason, provided, however, that if the Executive was named in the compensation table in the Company's A-6 then most recent proxy statement, such payments shall commence on January 1st of the year following the year in which the latest of such events occurs. On each payment date, the Account shall be charged with the dollar amount of such payment. On each payment date, the amount of cash held or deemed to be held in the Account shall be not less than the payment then due and the Company may select the securities to be sold or deemed sold to provide such cash if the Investment Advisor shall fail to do so on a timely basis. The amount of any taxes payable with respect to any such sales shall be computed, as provided in Section A.5 above, and deducted from the Account, as of the end of the taxable year of the Company during which such sales are deemed to have occurred. Solely for the purpose of determining the amount of monthly payments during the Pay-Out Period, the Account shall be valued on the fifth trading day preceding the first monthly payment of each year of the Pay-Out Period, or more frequently at the Company's election (the "Valuation Date"), by adjusting all of the securities held or deemed to be held in the Account to their fair market value (net of the tax adjustment that would be made thereon if sold, as estimated by the Company) and by deducting from the Account the amount of all outstanding indebtedness and all amounts with respect to which the Executive has elected pursuant to clause (ii) of Section A.7 to receive payments at times different from the time provided in this Section A.6 (the "Other Period Deferred Amount"). The extent, if any, by which the Account, valued as provided in the immediately preceding sentence (but not reduced by the Other Period Deferred Amount to the extent not theretofore distributed), exceeds the aggregate amount of credits to the Account pursuant to Sections 3.3 and 3.4 of the Agreement as of each Valuation Date and not theretofore distributed or deemed distributed pursuant to this Section A.6 is herein called "Account Retained Income". The amount of each payment for the year, or such shorter period as may be determined by the Company, of the Pay-Out Period immediately succeeding such Valuation Date, including the payment then due, shall be determined by dividing the aggregate value of the Account, as valued and adjusted pursuant to the second preceding sentence, by the number of payments remaining to be paid in the Pay-Out Period, including the payment then due; provided that each payment made shall be deemed made first A-7 out of Account Retained Income (to the extent remaining after all prior distributions thereof since the last Valuation Date). The balance of the Account (excluding the Other Period Deferred Amount), after all the securities held or deemed to have been held therein have been sold or deemed to have been sold and all indebtedness liquidated, shall be paid to the Executive in the final payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. If this Agreement is terminated by the Company pursuant to Section 4.1 or if the Executive terminates this Agreement or the term of employment in breach of this Agreement, the Company shall calculate the portion of the Account attributable to credits made to the Account pursuant to Section 3.3 of the Agreement during the last sixty months that the Company made credits to the Account and the earnings thereon, if any, or if the Executive has elected pursuant to Section A.7 hereof not to defer some or all of the amounts provided in Section 3.3.1 during the sixty month period referred to in this sentence, then the amounts that would have been deferred during such period but for such election will be added to the amounts calculated pursuant to this sentence. The remaining portion of the Account, after excluding the amount calculated pursuant to the preceding sentence, shall be valued as of the date the Executive's employment terminates and, after the securities held or deemed to have been held therein have been sold or deemed to have been sold and all related indebtedness liquidated, shall be paid to the Executive as soon as practicable and in any event within 75 days following such date of termination in a final lump sum payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in that portion of the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. The portion of the Account calculated pursuant to the first sentence of this paragraph shall remain in the Account and continue to be invested in accordance with this Annex A and be paid to the A-8 Executive in one lump sum within 75 days after the expiration of twelve months from the date of such termination in accordance with the provisions of the preceding sentence; provided, however, if the Executive breaches the provisions of Section 9.2 of the Agreement at any time prior to the date of such payment, whether during or after the termination of his employment with the Company, then the Company shall be entitled to retain the portion of the Account determined in accordance with the first sentence of this paragraph and no payments of such portion of the Account shall be made to the Executive. Payments made pursuant to this paragraph shall be deemed made first out of Account Retained Income. If the Executive becomes disabled within the meaning of Section 5 of the Agreement and is not thereafter returned to full-time employment with the Company as provided in said Section 5, then deferred compensation shall be paid monthly during the Pay-Out Period commencing on the first day of the month following the end of the Disability Period in accordance with the provisions of the first paragraph of this Section A.6. If the Executive shall die at any time whether during or after the term of employment, the Account shall be valued as of the date of the Executive's death and the balance of the Account shall be paid to the Executive's estate or beneficiary within 75 days of such death in accordance with the provisions of the second preceding paragraph. At the time each payment is made from the Account, the Company shall compute and shall credit to the Account the amount of the tax benefit assumed to be received by it from the payment to the Executive of amounts of Account Retained Income included in any such payment. No additional credits shall be made to the Account pursuant to the preceding sentence in respect of the amounts credited to the Account pursuant to the preceding sentence. Notwithstanding any provision of this Section A.6, the Executive shall not be entitled to receive pursuant to this Annex A an aggregate amount that shall exceed the sum of (i) all credits made to the Account pursuant to Sections 3.3 and 3.4 of the Agreement to which this Annex is attached, (ii) the net cumulative amount (positive or negative) A-9 of all income, gains, losses, interest and expenses charged or credited to the Account pursuant to this Annex A (excluding credits made pursuant to the second preceding sentence), after all credits and charges to the Account with respect to the tax benefits or burdens thereof, and (iii) an amount equal to the tax benefit to the Company from the payment of the amount (if positive) determined under clause (ii) above; and the final payment(s) otherwise due may be adjusted or eliminated accordingly. In determining the tax benefit to the Company under clause (iii) above, the Company shall be deemed to have made the payments under clause (ii) above with respect to the same taxable years and in the same proportions as payments of Account Retained Income were actually made from the Account. Except as otherwise provided in this paragraph, the computation of all taxes and tax benefits referred to in this Section A.6 shall be determined in accordance with Section A.5 above. A.7 Other Payment Methods. Notwithstanding the foregoing provisions --------------------- of this Annex A, the Executive may, prior to the commencement of any calendar year elect by written notice to the Company to cause (i) all or any portion of the amounts otherwise to be credited to the Account in such year under Section 3.3 of the Agreement not to be so credited but to be paid to the Executive on the date(s) such credits otherwise would have been made thereunder and/or (ii) all or any portion of the amounts to be credited to the Account under Section 3.3 of the Agreement in such year (after giving effect to clause (i) above) to be payable from the Account at times different from those provided in Section A.6 above but not earlier than the dates on which such amounts were to be credited to the Account. ANNEX B RELEASE ------- Pursuant to the terms of the Employment Agreement made as of _____________, between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller Plaza, York, New York 10019 and the undersigned (the "Agreement"), and in consideration of the payments made to me and other benefits to be received by me pursuant thereto, I, [Name], being of lawful age, do hereby release and forever discharge the Company and its officers, shareholders, subsidiaries, agents, and employees, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of my employment with the Company or any of its subsidiaries or the termination of such employment, which I may now or hereafter have under any federal, state or local law, regulation or order, including without limitation, under the Age Discrimination in Employment Act, as amended, through and including the date of this Release; provided, however, that the execution of this Release shall not -------- ------- prevent the undersigned from bringing a lawsuit against the Company to enforce its obligations under the Agreement. I acknowledge that I have been given at least 21 days from the day I received a copy of this Release to sign it and that I have been advised to consult an attorney. I understand that I have the right to revoke my consent to this Release for seven days following my signing. This Release shall not become effective or enforceable until the expiration of the seven-day period following the date it is signed by me. I further state that I have read this document and the Agreement referred to herein, that I know the contents of both and that I have executed the same as my own free act. WITNESS my hand this ____ day of ___________ , ____. ___________________________ [Name] ANNEX C RELEASE ------- In connection with the Employment Agreement made as of ____________, between TIME WARNER INC., (the "Company"), and [TK] (the "Agreement"), the Company does hereby release and forever discharge [TK] and his estate, heirs, beneficiaries and representatives, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of his employment with the Company or any of its affiliates or the termination of such employment, which the Company may now or hereafter have under any federal, state or local law, regulation or order, through and including the date of this Release; provided, however, that the execution of this Release shall not prevent -------- ------- the Company from bringing a lawsuit against [TK] (x) to enforce his obligations under [Section 9] of the Agreement or (y) to seek damages or reimbursement for fraud or embezzlement committed by him during his employment with the Company. IN WITNESS WHEREOF the Company has caused this Release to be executed on its behalf by a duly authorized officer this __ day of ______, 199_. TIME WARNER INC. ___________________________ ANNEX D ------- CONTRACT OPTIONS ---------------- To be granted not later than February 28, 1995 or, if later, the Effective Date: ------------------------------------------------------------------------------- Not less than 300,000 shares of Common Stock, allocated as follows: No. of Shares Exercise Price ------------- -------------- 300,000 fair market value* To be granted not later than February 28, 1996: ---------------------------------------------- Not less than 300,000 shares of Common Stock, allocated as follows: No. of Shares Exercise Price ------------- -------------- 150,000 fair market value* 75,000 125% of fair market value* 75,000 150% of fair market value* All Contract Options shall have a term of 10 years from the date of grant and, upon becoming exercisable, shall remain exercisable by the Executive (or his estate or beneficiary) for the full 10 year term thereof, except in the event the Executive's employment with the Company pursuant to the Employment Agreement to which this Annex D is attached or any successor employment agreement between the Company and the Executive is terminated by the Company for "cause" or by the Executive in breach thereof, and in any such case, the Contract Options shall terminate and be null and void on the date of any such termination. * In each case, fair market value is determined at date of grant. EX-10.18 6 EMPLOYMENT AGREEMENT EXHIBIT 10.18 EMPLOYMENT AGREEMENT made as of December 1, 1994, effective as of January 1, 1995 (the "Effective Date"), between TIME WARNER INC., a Delaware corporation (the "Company"), and Richard J. Bressler (the "Executive"). The Executive is currently employed by the Company pursuant to an Employment Agreement dated as of January 1, 1992 (the "Prior Agreement"). Effective on the Effective Date, the Company wishes to restate the Prior Agreement and secure the services of the Executive on a full-time basis for the period to and including December 31, 1999 (the "Term Date") on and subject to the terms and conditions set forth in this Agreement, and the Executive is willing for the Prior Agreement to be so restated and to provide such services on and subject to the terms and conditions set forth in this Agreement. The parties therefore agree as follows: 1. Term of Employment. The Executive's "term of employment", as this ------------------ phrase is used throughout this Agreement, shall be for the period beginning on the Effective Date and ending on the Term Date, subject, however, to the terms and conditions set forth in this Agreement. 2. Employment. The Company shall employ the Executive, and the Executive ---------- shall serve, as Senior Vice President, Finance of the Company during the term of employment, and the Executive shall have the authority, functions, duties, powers and responsibilities normally associated with such position and as the Board of Directors, the Chief Executive Officer, the Chief Operating Officer or the President of the Company may from time to time delegate to the Executive in addition thereto. The Executive shall, subject to his election as such from time to time and without additional compensation, serve during the term of employment in such additional offices of comparable or greater stature and responsibility in the Company and its subsidiaries and as a director and as a member of any committee of the Board of Directors of the Company and its subsidiaries, to which he may be elected from time to time. During the term of employment, (i) the Executive's services shall be rendered on a 2 substantially full-time, exclusive basis and he will apply on a full-time basis all of his skill and experience to the performance of his duties in such employment, (ii) the Executive shall report only to the Company's Board of Directors, its Chief Executive Officer, its Chief Operating Officer or its President, (iii) the Executive shall have no other employment and, without the prior written consent of the Chief Executive Officer, the Chief Operating Officer, or the President of the Company, no outside business activities which require the devotion of substantial amounts of the Executive's time and (iv) the place for the performance of the Executive's services shall be the principal executive offices of the Company in the New York City metropolitan area, subject to such reasonable travel as may be appropriate or required in the performance of the Executive's duties in the business of the Company. The foregoing shall be subject to the Company's policies, as in effect from time to time, regarding vacations, holidays, illness and the like and shall not prevent the Executive from devoting such time to his personal affairs as shall not interfere with the performance of his duties hereunder, provided that the Executive complies with the provisions of Sections 9 and 10 and any Company policies on conflicts of interest and service as a director of another corporation, partnership, trust or other entity ("Entity"). 3. Compensation. ------------ 3.1 Base Salary. The Company shall pay or cause to be paid to the ----------- Executive a base salary of not less than $300,000 per annum during the term of employment (the "Base Salary"). The Company may increase, but not decrease, the Base Salary at any time and from time to time during the term of employment and upon each such increase the term "Base Salary" shall mean such increased amount. Base Salary shall be payable in monthly or more frequent installments in accordance with the Company's then current practices and policies with respect to senior executives. For the purposes of this Agreement "senior executives" shall mean executives of the Company at the same level as the Executive. 3 3.2 Bonus. In addition to Base Salary, the Executive may be entitled to ----- receive during the term of employment an annual cash bonus based on the performance of the Company and of the Executive. The Executive's target bonus shall be 100% of the Executive's Base Salary but the Executive acknowledges that his actual bonus will vary depending upon the performance of the Company and the Executive. Bonuses for senior executives may be determined by the Compensation Committee of the Company's Board of Directors or by the Chief Executive Officer, the Chief Operating Officer or the President of the Company. Such determination with respect to the amount, if any, of annual bonuses to be paid to the Executive under this Agreement shall be final and conclusive except as specifically provided otherwise in this Agreement. Payments of any bonus compensation under this Section 3.2 shall be made in accordance with the Company's then current practices and policies with respect to senior executives. 3.3 Deferred Compensation. In addition to Base Salary and bonus as set --------------------- forth in Sections 3.1 and 3.2, the Executive shall be credited with deferred compensation which shall be determined and paid out as provided in this Agreement, including Annex A hereto. Subject to the provisions of Section A.7 of Annex A, during the term of employment, the Company shall credit to a special account maintained on the Company's books for the Executive (the "Account"), monthly, an amount equal to 50% of one-twelfth of the Executive's then current Base Salary. If a lump sum payment is made pursuant to Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, the Company shall credit to the Account at the time of such payment an amount equal to 50% of the Base Salary portion of such lump sum payment. The Account shall be maintained by the Company in accordance with the terms of this Agreement, including Annex A, until the full amount which the Executive is entitled to receive therefrom has been paid in full. 3.4 Deferred Bonus. In addition to any other deferred bonus plan in which -------------- the Executive may be entitled to participate, the Executive may elect by written notice delivered to the Company at least 15 days prior to the commencement of any calendar year during the term of employment 4 during which an annual cash bonus would otherwise accrue or to which it would relate, to defer payment of and to have the Company credit to the Account all or any portion of the Executive's bonus for such year. Any such election shall only apply to the calendar year during the term of employment with respect to which such election is made and a new election shall be required with respect to each successive calendar year during the term of employment. 3.5 Prior Account. The parties confirm that the Company has maintained a ------------- deferred compensation account (the "Prior Account") for the Executive in accordance with the Prior Agreement. The Prior Account shall be promptly transferred to, and shall for all purposes be deemed part of, the Account and shall continue to be maintained by the Company in accordance with this Agreement. All prior credits to the Prior Account shall be deemed to be credits made under this Agreement, all "Account Retained Income" thereunder shall be deemed to be Account Retained Income under this Agreement and all increases or decreases to the Prior Account as a result of income, gains, losses and other changes shall be deemed to have been made under this Agreement. 3.6 Reimbursement. The Company shall pay or reimburse the Executive for ------------- all reasonable travel, entertainment and other business expenses actually incurred or paid by the Executive during the term of employment in the performance of his services under this Agreement provided such expenses are incurred or paid in accordance with the Company's then current practices and policies with respect to senior executives of the Company and upon presentation of expense statements or vouchers or such other supporting information as the Company may customarily require of its senior executives. 3.7 No Anticipatory Assignments. Except as specifically contemplated in --------------------------- Section 12.8 or under the life insurance policies and benefit plans referred to in Sections 7 and 8, respectively, neither the Executive, his legal representative nor any beneficiary designated by him shall have any right, without the prior written consent of the Company, to assign, transfer, pledge, hypothecate, anticipate or commute to 5 any person or Entity any payment due in the future pursuant to any provision of this Agreement, and any attempt to do so shall be void and shall not be recognized by the Company. 3.8 Indemnification. The Executive shall be entitled throughout the term --------------- of employment in his capacity as an officer or director of the Company or any of its subsidiaries or a member of the Board of Representatives or other governing body of any partnership or joint venture in which the Company has an equity interest (and after the term of employment, to the extent relating to his service as such officer, director or member) to the benefit of the indemnification provisions contained on the date hereof in the Certificate of Incorporation and By-Laws of the Company (not including any amendments or additions after the date of execution hereof that limit or narrow, but including any that add to or broaden, the protection afforded to the Executive by those provisions), to the extent not prohibited by applicable law at the time of the assertion of any liability against the Executive. 4. Termination. ----------- 4.1 Termination for Cause. The Company may terminate the term of --------------------- employment and all of the Company's obligations hereunder, other than its obligations set forth below in this Section 4.1, only for "cause" and only if the term of employment has not previously been terminated pursuant to any other provision of this Agreement. Termination by the Company for "cause" shall mean termination by action of the Company's Board of Directors, or a committee thereof, because of the Executive's conviction (treating a nolo contendere plea as a conviction) of a felony (whether or not any right to appeal has been or may be exercised) or willful refusal without proper cause to perform his obligations under this Agreement or because of the Executive's breach of any of the covenants provided for in Section 9. Such termination shall be effected by written notice thereof delivered by the Company to the Executive and shall be effective as of the date of such notice; provided, however, that if (i) such termination is because of the Executive's willful refusal without proper cause to perform 6 any one or more of his obligations under this Agreement, (ii) such notice is the first such notice of termination for any reason delivered by the Company to the Executive under this Section 4.1, and (iii) within 15 days following the date of such notice the Executive shall cease his refusal and shall use his best efforts to perform such obligations, the termination shall not be effective. In the event of such termination by the Company for cause, without prejudice to any other rights or remedies that the Company may have at law or in equity, the Company shall have no further obligations to the Executive other than (i) to pay Base Salary and make credits of deferred compensation to the Account accrued through the effective date of termination, (ii) to pay any annual bonus pursuant to Section 3.2 to the Executive in respect of the calendar year prior to the calendar year in which such termination is effective, in the event such annual bonus has been determined but not yet paid as of the date of such termination and (iii) with respect to any rights the Executive has in respect of amounts credited to the Account or pursuant to any insurance or other benefit plans or arrangements of the Company maintained for the benefit of its senior executives. The Executive hereby disclaims any right to receive a pro rata portion of the Executive's annual bonus with respect to the year in which such termination occurs. The last sentence of Section 3.3 and the provisions of Sections 3.8, 8.2, 8.3 and 9 through 12 and Annex A shall survive any termination pursuant to this Section 4.1. 4.2 Termination by Executive for Material Breach by the Company and --------------------------------------------------------------- Wrongful Termination by the Company. Unless previously terminated pursuant to ----------------------------------- any other provision of this Agreement and unless a Disability Period shall be in effect, the Executive shall have the right, exercisable by written notice to the Company, to terminate the term of employment effective 15 days after the giving of such notice, if, at the time of the giving of such notice, the Company shall be in material breach of its obligations under this Agreement; provided, however, that, with the exception of clause (i) below, this Agreement shall not so terminate if such notice is the first such notice of termination delivered by the Executive 7 pursuant to this Section 4.2 and within such 15-day period the Company shall have cured all such material breaches of its obligations under this Agreement. A material breach by the Company shall include, but not be limited to, (i) the Company failing to cause the Executive to retain the title specified in the first sentence of Section 2 or a more senior title; (ii) the Executive being required to report to persons other than those specified in Section 2; (iii) the Company violating the provisions of Section 2 with respect to the Executive's authority, functions, duties, powers or responsibilities (whether or not accompanied by a change in title); (iv) the Company requiring the Executive's primary services to be rendered at a place other than at the Company's principal executive offices in the New York City metropolitan area; and (v) the Company failing to cause the successor to all or substantially all of the business and assets of the Company expressly to assume the obligations of the Company under this Agreement. In the event of a termination pursuant to the preceding paragraph of this Section 4.2, or in the event of a termination of this Agreement or the term of employment by the Company in breach of this Agreement, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after written notice of such termination is given pursuant to the preceding paragraph of this Section 4.2, either (A) to cease being an employee of the Company and receive a lump sum payment as provided in Section 4.2.2 or (B) to remain an employee of the Company as provided in Section 4.2.3. After the Executive makes such election, the following provisions shall apply: 4.2.1 Regardless of the election made by the Executive, (i) after the effective date of such termination, the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 and Annex A shall survive such termination, and (ii) the Executive shall be entitled to receive any earned and unpaid Base Salary and deferred compensation accrued through the Termination Date and a pro rata portion of the Executive's annual bonus for the year in 8 which such termination occurs through the date of such termination based on the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest, provided that if such termination occurs prior to the determination of the Executive's annual bonus for 1995, the annual bonus used for such calculation shall not be less than the target annual bonus provided for in Section 3.2 and if such termination occurs after the determination of the Executive's annual bonus for 1995 but prior to the determination of the Executive's annual bonus for 1996, the annual bonus used for such calculation shall not be less than the average of the target annual bonus provided for in Section 3.2 and such 1995 annual bonus, all or a portion of which pro rata bonus will be credited to the Account if the Executive previously elected to defer all or any portion of the Executive's bonus for such year pursuant to Section 3.4. 4.2.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay to the Executive as damages in a lump sum within 30 days thereafter (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such notice of termination is given) an amount (discounted as provided in the immediately following sentence) equal to the greater of (i) all amounts otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year in which such termination occurs and for each subsequent year through and including the Term Date and (ii) all amounts that would be payable pursuant to Sections 3.1, 3.2 and 3.3 if the Term Date had been a date three years after the date of such notice of termination (assuming, in the case of either (i) or (ii) above, that annual bonuses are required to be paid for each such year, with each such annual bonus being equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest (assuming that no portion of such bonus is deferred 9 pursuant to Section 3.4), with the bonus for any partial calendar year appropriately pro rated; provided, however, that if such termination occurs prior to the determination of the Executive's annual bonus for 1995, then each such annual bonus shall not be less than the target annual bonus provided for in Section 3.2 and if such termination occurs after the determination of the Executive's annual bonus for 1995 but prior to the determination of the Executive's annual bonus for 1996, the annual bonus used for such calculation shall not be less than the average of the target annual bonus provided for in Section 3.2 and such 1995 annual bonus. Any payments required to be made to the Executive pursuant to this Section 4.2.2 upon such termination in respect of Sections 3.1 and 3.2 and the credit to the Account provided for in the penultimate sentence of Section 3.3 shall be discounted to present value as of the date of payment from the times at which such amounts would have become payable absent any such termination at an annual discount rate for the relevant periods equal to 120% of the "applicable Federal rate" (within the meaning of Section 1274(d) of the Internal Revenue Code of 1986 (the "Code")), in effect on the date of such termination, compounded semi-annually, the use of which rate is hereby elected by the parties hereto pursuant to Treas. Reg. (S)1.280G-1 Q/A 32 (provided that, in the event such election is not permitted under Section 280G of the Code and the regulations thereunder, such other rate determined as of such other date as is applicable for determining present value under Section 280G of the Code shall be used). 4.2.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company for the period ending on the later of (i) the Term Date and (ii) the date which is three years after the date notice of termination is given under this Section 4.2, and during such period the Executive shall be entitled to receive, whether or not he becomes disabled during such period but subject to Section 6, (a) Base Salary at an annual rate equal to his Base Salary in effect immediately prior to the notice of termination as provided in Section 3.1, (b) deferred compensation as provided in Section 3.3 and (c) an annual bonus 10 (all or a portion of which may be deferred by the Executive pursuant to Section 3.4) in respect of each calendar year or portion thereof (in which case a pro rata portion of such annual bonus will be payable) during such period equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest; provided, however, that if such termination occurs prior to the determination of the Executive's annual bonus for 1995, then each such annual bonus shall not be less than the target annual bonus provided for in Section 3.2 and if such termination occurs after the determination of the Executive's annual bonus for 1995 but prior to the determination of the Executive's annual bonus for 1996, the annual bonus used for such calculation shall not be less than the average of the target annual bonus provided for in Section 3.2 and such 1995 annual bonus. Except as provided in the next sentence, if the Executive accepts full-time employment with any other Entity during such period or notifies the Company in writing of his intention to terminate his status as an employee during such period, then the term of employment shall cease and the Executive shall cease to be an employee of the Company effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and the Executive shall be entitled to receive as damages in a lump sum within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) for the balance of the Base Salary, deferred compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3) and annual bonuses (assuming no deferral pursuant to Section 3.4) the Executive would have been entitled to receive pursuant to this Section 4.2.3 had the Executive remained on the Company's payroll until the end of the period described in the first sentence of this Section 4.2.3. Notwithstanding the preceding 11 sentence, if the Executive accepts employment with any not-for-profit Entity, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.2.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the payments provided for in this Section 4.2.3 and the term of employment shall cease and the Executive shall not be entitled to any such lump sum payment. For purposes of this Agreement, the term "affiliate" shall mean any Entity which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. 4.3 After the Term Date. If at the Term Date, the term of employment ------------------- shall not have been previously terminated pursuant to the provisions of this Agreement, no Disability Period is then in effect and the parties shall not have agreed to an extension or renewal of this Agreement or on the terms of a new employment agreement, then the term of employment shall continue and the Executive shall continue to be employed by the Company pursuant to the terms of this Agreement, subject to termination by either party hereto on 60 days written notice delivered to the other party. If the Company shall terminate the term of employment on or after the Term Date for any reason (other than cause as defined in Section 4.1, in which case Section 4.1 shall apply), which the Company shall have the right to do so long as no Disability Date (as defined in Section 5) has occurred prior to the delivery by the Company of written notice of termination, then in lieu of the provisions of Section 4.2, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after such notice of termination is given, either (A) to cease being an employee of the Company and receive a lump sum payment as provided in Section 4.3.2 or (B) remain an employee of the Company for a period of twelve months pursuant to Section 4.3.3 and receive the payments provided in Section 4.3.3. After the Executive makes such election, the following provisions shall apply: 4.3.1 Regardless of the election made by the Executive, at the end of the 60-day notice period provided for in the first sentence of Section 4.3 the Executive shall 12 have no further obligations or liabilities to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 shall survive such termination. 4.3.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay to the Executive in a lump sum at the end of the 60-day notice period provided for in the first sentence of Section 4.3 (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the year in which such notice of termination is given) an amount (discounted as provided in the second sentence of Section 4.2.2) equal to three times the sum of (i) the Executive's Base Salary as in effect immediately prior to such notice of termination, (ii) an amount equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) received by the Executive from the Company for the two calendar years immediately preceding the calendar year in which such notice of termination is given (assuming that no portion of such bonus is deferred pursuant to Section 3.4), and (iii) the annual amount of deferred compensation payable by the Company to the Account pursuant to Section 3.3 as in effect immediately prior to such notice of termination (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3). 4.3.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company until the date which is twelve months after the end of the 60-day period referred to in the first sentence of Section 4.3 and during such period the Executive shall be entitled to receive, whether or not he becomes disabled during such period but subject to Section 6, (i) the Executive's Base Salary as in effect immediately prior to such notice of termination, (ii) an annual bonus (all or any portion of which may be deferred by the Executive pursuant to Section 3.4) equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) received by the Executive from the Company for the two calendar years 13 immediately preceding the calendar year in which such notice of termination is given, and (iii) deferred compensation as provided in Section 3.3 of this Agreement. At the end of such twelve month period the term of employment shall cease, the Executive shall cease to be an employee of the Company and the Company shall pay to the Executive in a lump sum (discounted as provided in the second sentence of Section 4.2.2) an amount equal to two times the sum of the amounts described in clauses (i), (ii) and (iii) of Section 4.3.2. Except as provided in the next sentence, if the Executive accepts full-time employment with any other Entity during such twelve-month period or notifies the Company in writing of his intention to terminate his employment during such period, the Executive shall cease to be an employee of the Company and the term of employment shall cease effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and shall be entitled to receive a lump sum payment within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) for the balance of the Base Salary, deferred compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3) and regular annual bonuses the Executive would have been entitled to receive pursuant to this Section 4.3.3 (including the lump sum) had the Executive remained on the Company's payroll until the end of such twelve-month period. Notwithstanding the preceding sentence, if the Executive accepts employment with any not-for- profit Entity, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.3.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the term of employment and the payments provided for in this Section 4.3.3 shall cease and the Executive shall not be entitled to any such lump sum payment. 14 4.4 Office Facilities. In the event the Executive shall make the election ----------------- provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on the day the Executive makes such election and ending one year thereafter, the Company shall, without charge to the Executive, make available to the Executive office space at the Executive's principal job location immediately prior to his termination of employment, or other location reasonably close to such location, together with secretarial services, office facilities, services and furnishings, in each case reasonably appropriate to an employee of the Executive's position and responsibilities prior to such termination of employment. 4.5 Release. In partial consideration for the Company's obligation to ------- make the payments described in Sections 4.2 and 4.3, the Executive shall execute and deliver to the Company a release in substantially the form attached hereto as Annex B. The Company shall deliver such release to the Executive within 10 days after the written notice of termination is delivered pursuant to Section 4.2 or 4.3 and the Executive shall execute and deliver such release to the Company within 21 days after receipt thereof. If the Executive shall fail to execute and deliver such release to the Company within such 21 day period, or if the Executive shall revoke his consent to such release as provided therein, the Executive's term of employment shall terminate as provided in Section 4.2 or 4.3, as applicable, but the Executive shall receive, in lieu of the payments provided for in said Section 4.2 or 4.3, a lump sum cash payment in an amount determined in accordance with the personnel policies of the Company relating to notice and severance then generally applicable to employees with length of service and compensation level of the Executive. 4.6 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5, ---------- if the term of employment is in effect and the Executive is still employed by the Company pursuant to this Agreement on the date the Executive first becomes eligible for normal retirement under any retirement plan of the Company or any subsidiary of the Company (the "Retirement Date"), then this Agreement shall terminate automatically on such date and the Executive's employment with 15 the Company shall thereafter be governed by the policies generally applicable to employees of the Company, and the Executive shall not thereafter be entitled to the payments provided in such Sections to the extent not received by the Executive on or prior to the Retirement Date. In addition, no benefits or payments provided in Sections 4.2, 4.3 or 5 shall include any period after the Retirement Date and if the provision of benefits or calculation of payments provided in any such Section would include any period subsequent to the Retirement Date, such provision of benefits shall end on the Retirement Date and the calculation of payments shall cover only the period ending on the Retirement Date. Notwithstanding the foregoing, the Company's obligations under Section 7 of this Agreement shall continue after any such termination and the provisions of Sections 12.1 and 12.7 shall apply to any dispute with respect to this Agreement that arises after any such termination. 4.7 Mitigation. In the event of termination of the term of employment by ---------- the Executive pursuant to Section 4.2 as a result of a material breach by the Company of any of its obligations hereunder, or in the event of termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement, the Executive shall not be required to seek other employment in order to mitigate his damages hereunder; provided, however, that, notwithstanding the foregoing, if there are any damages hereunder by reason of the events of termination described above which are "contingent on a change" (within the meaning of Section 280G(b)(2)(A)(i) of the Code), the Executive shall be required to mitigate such damages hereunder, including any such damages theretofore paid, but not in excess of the extent, if any, necessary to prevent the Company from losing any tax deductions to which it otherwise would be entitled in connection with such damages if they were not so "contingent on a change". In addition to any obligation under the preceding sentence, and without duplication of any amounts required to be paid to the Company thereunder, if any such termination occurs and the Executive, whether or not required to mitigate his damages under the preceding sentence, thereafter obtains other employment, the total cash salary and bonus received in connection with such 16 other employment, whether paid to him or deferred for his benefit, for services through (i) in the case of a termination pursuant to Section 4.2, the later of (x) the Term Date or (y) three years after the date notice of termination is delivered pursuant to Section 4.2, and (ii) in the case of a termination pursuant to Section 4.3, the date which is three years after the end of the 60- day notice period referred to in the first sentence of Section 4.3, in either case up to an amount equal to (x) the discounted lump sum payment received by or for the account of the Executive with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such period, minus (y) the amount of severance the Executive would have received in accordance with the personnel policies of the Company if the Executive had been job eliminated, shall reduce, pro tanto, any amount which the Company would otherwise be required to pay to --- ----- the Executive as a result of such termination and, to the extent amounts have theretofore been paid to him as a result of such termination, such cash salary and bonus shall be paid over to the Company as received with respect to such period, but the provisions of this sentence shall not apply to any type of equity interest, bonus unit, phantom or restricted stock, stock option, stock appreciation right or similar benefit received as a result of such other employment. With respect to the preceding sentences, any payments or rights to which the Executive is entitled by reason of the termination of the term of employment by the Executive pursuant to Section 4.2 or in the event of the termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement shall be considered as damages hereunder. With respect to the second preceding sentence, the Executive shall in no event be required to pay the Company with respect to any calendar year more than the discounted amount received by him or credited to the Account with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such year. Any obligation of the Executive to mitigate his damages pursuant to this Section 4.7 shall not be a defense or offset to the Company's obligation to pay the Executive in full the amounts provided in Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, as the case may be, at the time provided therein or the timely and full performance of any of the Company's other obligations under this Agreement. 17 4.8 Payments. So long as the Executive remains on the payroll of the -------- Company or any subsidiary of the Company, payments of salary, deferred compensation and bonus required to be made pursuant to Section 4.2 or 4.3 shall be made at the same times as such payments are made to senior executives of the Company or such subsidiary. 5. Disability. If during the term of employment and prior to any ---------- termination of this Agreement under Section 4.2 or 4.3, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is prevented from performing his usual duties for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, the Company shall, nevertheless, continue to pay the Executive his full compensation and continue to credit the Account, when otherwise due, as provided in Section 3 and Annex A, through the last day of the sixth consecutive month of disability or the date on which the shorter periods of disability shall have equalled a total of six months in any twelve-month period (such last day or date being referred to herein as the "Disability Date"). If the Executive has not resumed his usual duties on or prior to the Disability Date, the Company shall pay the Executive a pro rata bonus for the year in which the Disability Date occurs and shall pay the Executive disability benefits for the longer of (i) the period ending on the Term Date or (ii) three years (in the case of either (i) or (ii), the "Disability Period"), in an amount equal to 75% of (a) the Executive's Base Salary at the time the Executive becomes disabled (and this reduced amount shall also be deemed to be the Base Salary for purposes of determining the amounts to be credited to his Account pursuant to Section 3.3 and Annex A as further disability benefits) and (b) the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest (all or a portion of which may be deferred by the Executive pursuant to Section 3.4); provided, however, that if such disability occurs prior to the determination of the Executive's annual bonus for 1995, then each such annual bonus shall not be less than the target annual bonus provided for in Section 3.2 and if such disability 18 occurs after the determination of the Executive's annual bonus for 1995 but prior to the determination of the Executive's annual bonus for 1996, then each such annual bonus shall not be less than the average of the target annual bonus provided for in Section 3.2 and such 1995 annual bonus. If during the Disability Period the Executive shall fully recover from his disability, the Company shall have the right (exercisable within 60 days after notice from the Executive of such recovery), but not the obligation, to restore the Executive to full-time service at full compensation. If the Company elects to restore the Executive to full-time service, then this Agreement shall continue in full force and effect in all respects and the Term Date shall not be extended by virtue of the occurrence of the Disability Period. If the Company elects not to restore the Executive to full-time service, the Executive shall be entitled to obtain other employment, subject, however, to the following: (i) the Executive shall be obligated to perform advisory services during any balance of the Disability Period; and (ii) the provisions of Sections 9 and 10 shall continue to apply to the Executive during the Disability Period. The advisory services referred to in clause (i) of the immediately preceding sentence shall consist of rendering advice concerning the business, affairs and management of the Company as requested by the Chief Executive Officer or the Chief Operating Officer of the Company but the Executive shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties. Any income from such other employment shall not be applied to reduce the Company's obligations under this Agreement. The Company shall be entitled to deduct from all payments to be made to the Executive during the Disability Period pursuant to this Section 5 an amount equal to all disability payments received by the Executive during the Disability Period from Workmen's Compensation, Social Security and disability insurance policies maintained by the Company; provided, however, that for so long as, and to the extent that, proceeds paid to the Executive from such disability insurance policies are not includible in his income for federal income tax purposes, the Company's deduction with respect to such payments shall be equal to the product of (i) such payments and 19 (ii) a fraction, the numerator of which is one and the denominator of which is one less the maximum marginal rate of federal income taxes applicable to individuals at the time of receipt of such payments. All payments made under this Section 5 after the Disability Date are intended to be disability payments, regardless of the manner in which they are computed. Except as otherwise provided in this Section 5, the term of employment shall continue during the Disability Period and the Executive shall be entitled to all of the rights and benefits provided for in this Agreement except that, Sections 4.2 and 4.3 shall not apply during the Disability Period and unless the Company has restored the Executive to fill-time service at full compensation prior to the end of the Disability Period, the term of employment shall end and the Executive shall cease to be an employee of the Company at the end of the Disability Period and shall not be entitled to notice and severance or to receive or be paid for any accrued vacation time or unused sabbatical. 6. Death. Upon the death of the Executive during the term of employment, ----- this Agreement and all obligations of the Company to make any payments under Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a designated beneficiary) shall be entitled to receive, to the extent being received by the Executive immediately prior to his death, Base Salary and deferred compensation to the last day of the month in which his death occurs and bonus compensation (at the time bonuses are normally paid) based on the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest, provided that if such death occurs prior to the determination of the Executive's annual bonus for 1995, the annual bonus used for such calculation shall not be less than the target annual bonus provided for in Section 3.2 and if such death occurs after the determination of the Executive's annual bonus for 1995 but prior to the determination of the Executive's annual bonus for 1996, the annual bonus used for such calculation shall not be less than the average of the target annual bonus provided for in Section 3.2 and such 1995 annual bonus, but in any event, prorated according to the 20 number of whole or partial months the Executive was employed by the Company in such calendar year, and (ii) the Account shall be liquidated and revalued as provided in Annex A as of the date of the Executive's death (except that all taxes shall be computed and charged to the Account as of such date of death to the extent not theretofore so computed and charged) and the entire balance thereof (plus any amount due under the last paragraph of Section A.6 of Annex A) shall be paid to the Executive's estate (or a designated beneficiary) in a single payment not later than 75 days following such date of death. 7. Life Insurance. Subject to the Executive's satisfactory completion of -------------- any applications and other documentation and any physical examination that may be required by the insurer and to the availability of insurance, the Company shall obtain $2,000,000 face amount of split ownership life insurance on the life of the Executive, to be owned by the Executive or the trustees of a trust for the benefit of the Executive's spouse and/or descendants. Until the death of the Executive, and irrespective of any termination of this Agreement except pursuant to Section 4.1, the Company shall pay all premiums on such policy and shall maintain such policy (without reduction of the face amount of the coverage). At the death of the Executive, or on the earlier surrender of such policy by the owner, the Executive agrees that the owner of the policy shall promptly pay to the Company an amount equal to the premiums on such policy paid by the Company (net of (i) tax benefits, if any, to the Company in respect of payments of such premiums, (ii) any amounts payable by the Company which had been paid by or on behalf of the Executive with respect to such insurance, (iii) dividends received by the Company in respect of such premiums, but only to the extent such dividends are not used to purchase additional insurance on the life of the Executive, and (iv) any unpaid borrowings by the Company on the policy), whether before, during or after the term of this Agreement. The owner of the policy from time to time shall execute, deliver and maintain a customary split dollar insurance and collateral assignment form, assigning to the Company the proceeds of such policy but only to the extent necessary to secure the reimbursement obligation contained in the preceding sentence. The life insurance provided for in 21 this Section 7 shall be in addition to any other insurance hereafter provided by the Company on the life of the Executive under any group or individual policy. 8. Other Benefits. -------------- 8.1 General Availability. To the extent that (a) the Executive is -------------------- eligible under the general provisions thereof and (b) the Company maintains such plan or program for the benefit of its senior executives, during the term of employment and so long as the Executive is an employee of the Company, the Executive shall be eligible to participate in any pension, profit-sharing, stock option or similar plan or program and in any group insurance, hospitalization, medical, dental, accident, disability or similar plan or program of the Company now existing or established hereafter. In addition, the Executive shall be entitled during the term of employment and so long as the Executive is an employee of the Company, to receive other benefits generally available to all senior executives of the Company to the extent the Executive is eligible under the general provisions thereof, including, without limitation, to the extent maintained in effect by the Company for its senior executives, an automobile allowance and financial services. 8.2 Benefits After a Termination or Disability. During the period the ------------------------------------------ Executive remains on the payroll of the Company after a termination pursuant to Section 4.2 or 4.3 and during the Disability Period the Executive shall continue to be eligible to receive the benefits required to be provided to the Executive under Section 8.1 to the extent such benefits are maintained in effect by the Company for its senior executives; provided, however, the Executive shall not be entitled to any additional awards or grants under any stock option, restricted stock or other stock based incentive plan. The Executive shall continue to be an employee of the Company for purposes of any stock option and restricted shares agreements and any other incentive plan awards during the term of employment and until such time as the Executive shall leave the payroll of the Company. At the time the Executive's term of employment with the Company terminates and he leaves the payroll of the Company 22 pursuant to the provisions of Section 4.1, 4.2, 4.3, 5 or 6, the Executive's rights to benefits and payments under any benefit plans or any insurance or other death benefit plans or arrangements of the Company or under any stock option, restricted stock, stock appreciation right, bonus unit, management incentive or other plan of the Company shall be determined, subject to the other terms and provisions of this Agreement, in accordance with the terms and provisions of such plans and any agreements under which such stock options, restricted stock or other awards were granted; provided, however, that notwithstanding the foregoing or any more restrictive provisions of any such plan or agreement, if the Executive leaves the payroll of the Company as a result of a termination pursuant to Section 4.2, then all stock options granted to the Executive by the Company shall (i) become immediately exercisable at the time the Executive shall leave the payroll of the Company pursuant to Section 4.2 and (ii) shall remain exercisable (but not beyond the term thereof) during the remainder of the term of employment and for a period of three months thereafter. 8.3 Payments in Lieu of Other Benefits. In the event the term of ---------------------------------- employment and the Executive's employment with the Company is terminated pursuant to Sections 4.1, 4.2, 4.3, 5 or 6 (and regardless of whether the Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), the Executive shall not be entitled to notice and severance or to be paid for any accrued vacation time or unused sabbatical, the payments provided for in such Sections being in lieu thereof. 9. Protection of Confidential Information; Non-Compete. The provisions of --------------------------------------------------- Section 9.2 shall continue to apply through the latest of (i) the Term Date, (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason and (iii) twelve months after the termination of the Executive's employment with the Company pursuant to Section 4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue to apply until three years after the latest of the events described in the preceding sentence. 23 9.1 Confidentiality Covenant. The Executive acknowledges that his ------------------------ employment by the Company (which, for purposes of this Section 9 shall mean Time Warner Inc. and its affiliates) will, throughout the term of employment, bring him into close contact with many confidential affairs of the Company, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods and other information not readily available to the public, and plans for future development. The Executive further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. The Executive further acknowledges that the business of the Company is international in scope, that its products are marketed throughout the world, that the Company competes in nearly all of its business activities with other Entities that are or could be located in nearly any part of the world and that the nature of the Executive's services, position and expertise are such that he is capable of competing with the Company from nearly any location in the world. In recognition of the foregoing, the Executive covenants and agrees: 9.1.1 The Executive shall keep secret all confidential matters of the Company and shall not intentionally disclose such matters to anyone outside of the Company, either during or after the term of employment, except with the Company's written consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder and (ii) the Executive may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; 9.1.2 The Executive shall deliver promptly to the Company on termination of his employment by the Company, or at any other time the Company may so request, at the Company's expense, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the 24 Company's business, which he obtained while employed by, or otherwise serving or acting on behalf of, the Company and which he may then possess or have under his control; and 9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2 or 4.3, for a period of one year after such termination, without the prior written consent of the Company, the Executive shall not employ, and shall not cause any Entity of which he is an affiliate to employ, any person who was a full-time executive employee of the Company at the date of such termination or within six months prior thereto. 9.2 Non-Compete. The Executive shall not, directly or indirectly, without ----------- the prior written consent of the Chief Executive Officer or the Chief Operating Officer of the Company, render any services to any person or Entity or acquire any interest of any type in any Entity, that might be deemed in competition with the Company; provided, however, that the foregoing shall not be deemed to prohibit the Executive from (a) acquiring, solely as an investment and through market purchases, securities of any Entity which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are publicly traded, so long as he is not part of any control group of such Entity and such securities, if converted, do not constitute more than one percent (1%) of the outstanding voting power of that Entity, (b) acquiring, solely as an investment, any securities of an Entity (other than an Entity that has outstanding securities covered by the preceding clause (a)) so long as he remains a passive investor in such Entity and does not become part of any control group thereof and so long as such Entity is not, directly or indirectly, in competition with the Company, or (c) serving as a director of any Entity that is not in competition with the Company. For purposes of the foregoing, a person or Entity shall be deemed to be in competition with the Company if such person or it engages in any line of business that is substantially the same as either (i) any line of operating business which the Company engages in, conducts or, to the knowledge of the Executive, has definitive plans to engage in or conduct, or (ii) any operating business that is engaged in or conducted by the Company and as 25 to which, to the knowledge of the Executive, the Company covenants in writing, in connection with the disposition of such business, not to compete therewith. 9.3 Specific Remedy. In addition to such other rights and remedies as the --------------- Company may have at equity or in law with respect to any breach of this Agreement, if the Executive commits a material breach of any of the provisions of Section 9.1, the Company shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 9.4 Liquidated Damages. If the Executive commits a material breach of the ------------------ provisions of Section 9.2, the Executive shall pay to the Company as liquidated damages an amount equal to two and one-half times the Executive's then current Base Salary, or if the Executive is not employed by the Company at the time of such breach, an amount equal to two and one-half times the most recent Base Salary paid to the Executive by the Company. The Company shall be entitled to offset any amounts owed by the Executive to the Company under this Section 9.4 against any amounts owed by the Company to the Executive under any provision of this Agreement or otherwise, including without limitation, amounts payable to the Executive under Sections 4.2 or 4.3. The Company and the Executive agree that it is impossible to determine with any reasonable accuracy the amount of prospective damages to the Company upon a breach of Section 9.2 by the Executive and further agree that the damages set forth in this Section 9.4 are reasonable, and not a penalty, based upon the facts and circumstances of the parties and with due regard to future expectations. 10. Ownership of Work Product. The Executive acknowledges that during the ------------------------- term of employment, he may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not (all of the foregoing being collectively referred to herein as 26 "Work Product"), and that various business opportunities shall be presented to him by reason of his employment by the Company. The Executive acknowledges that all of the foregoing shall be owned by and belong exclusively to the Company and that he shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experimental) of the Company, or are, in the case of Work Product, conceived or made on the Company's time or with the use of the Company's facilities or materials, or, in the case of business opportunities, are presented to him for the possible interest or participation of the Company. The Executive shall (i) promptly disclose any such Work Product and business opportunities to the Company; (ii) assign to the Company, upon request and without additional compensation, the entire rights to such Work Product and business opportunities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of his inventorship or creation in any appropriate case. The Executive agrees that he will not assert any rights to any Work Product or business opportunity as having been made or acquired by him prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Company in writing prior to the date hereof. 11. Notices. All notices, requests, consents and other communications ------- required or permitted to be given under this Agreement shall be effective only if given in writing and shall be deemed to have been duly given if delivered personally or sent by prepaid telegram, or mailed first-class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith): 11.1 If to the Company: Time Warner Inc. 75 Rockefeller Plaza New York, New York 10019 Attention: Chief Executive Officer (with a copy, similarly addressed 27 but Attention: General Counsel) 11.2 If to the Executive, to his residence address set forth on the records of the Company. 12. General. ------- 12.1 Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the substantive laws of the State of New York applicable to agreements made and to be performed entirely in New York. 12.2 Captions. The section headings contained herein are for -------- reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12.3 Entire Agreement. This Agreement, including Annexes A and B, ---------------- sets forth the entire agreement and understanding of the parties relating to the subject matter of this Agreement and at the Effective Date, supersedes all prior agreements, arrangements and understandings, written or oral, between the parties, including without limitation, the Prior Agreement. The Prior Agreement shall remain in full force and effect until the Effective Date. 12.4 No Other Representations. No representation, promise or ------------------------ inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or be liable for any alleged representation, promise or inducement not so set forth. 12.5 Assignability. This Agreement and the Executive's rights and ------------- obligations hereunder may not be assigned by the Executive. The Company may assign its rights together with its obligations hereunder, in connection with any sale, transfer or other disposition of all or substantially all of its business and assets; and such rights and obligations shall inure to, and be binding upon, any successor to all or substantially all of the business and assets of the Company, whether by merger, purchase of stock or assets or otherwise. 28 The Company shall cause such successor expressly to assume such obligations. 12.6 Amendments; Waivers. This Agreement may be amended, modified, ------------------- superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived only by written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12.7 Resolution of Disputes. Any dispute or controversy arising with ---------------------- respect to this Agreement may be referred by either party to JAMS/ENDISPUTE for resolution in arbitration in accordance with the rules and procedures of JAMS/ENDISPUTE. Any such proceedings shall take place in New York City before a single arbitrator (rather than a panel of arbitrators), pursuant to any streamlined or expedited (rather than a comprehensive) arbitration process, before a nonjudicial (rather than a judicial) arbitrator, and in accordance with an arbitration process which, in the judgment of such arbitrator, shall have the effect of reasonably limiting or reducing the cost of such arbitration. The resolution of any such dispute or controversy by the arbitrator appointed in accordance with the procedures of JAMS/ENDISPUTE shall be final and binding. Judgment upon the award rendered by such arbitrator may be entered in any court having jurisdiction thereof, and the parties consent to the jurisdiction of the New York courts for this purpose. The prevailing party shall be entitled to recover the costs of arbitration (including reasonable attorneys fees and the fees of experts) from the losing party. If at the time any dispute or controversy arises with respect to this Agreement, JAMS/ENDISPUTE is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS/ENDISPUTE 29 for the purposes of the foregoing provisions of this Section 12.7. If the Executive shall be the prevailing party in such arbitration, the Company shall promptly pay, upon demand of the Executive, all legal fees, court costs and other costs and expenses incurred by the Executive in any legal action seeking to enforce the award in any court. 12.8 Beneficiaries. Whenever this Agreement provides for any payment ------------- to the Executive's estate, such payment may be made instead to such beneficiary or beneficiaries as the Executive may designate by written notice to the Company. The Executive shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company (and to any applicable insurance company) to such effect. 12.9 No Conflict. The Executive represents and warrants to the ----------- Company that this Agreement is legal, valid and binding upon the Executive and the execution of this Agreement and the performance of the Executive's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Executive is a party (including, without limitation, any other employment agreement). The Company represents and warrants to the Executive that this Agreement is legal, valid and binding upon the Company and the execution of this Agreement and the performance of the Company's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Company is a party. 12.10 Withholding Taxes. Payments made to the Executive pursuant to ----------------- this Agreement shall be subject to withholding and social security taxes and other ordinary and customary payroll deductions. 12.11 No Offset. Except as provided in Section 9.4 of this --------- Agreement, neither the Company nor the Executive shall have any right to offset any amounts owed by one party hereunder against amounts owed or claimed to be owed to such party, whether pursuant to this Agreement or otherwise, and the 30 Company and the Executive shall make all the payments provided for in this Agreement in a timely manner. 12.12 Severability. If any provision of this Agreement shall be held ------------ invalid, the remainder of this Agreement shall not be affected thereby; provided, however, that the parties shall negotiate in good faith with respect to equitable modification of the provision or application thereof held to be invalid. To the extent that it may effectively do so under applicable law, each party hereby waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect. 12.13 Definitions. The following terms are defined in this Agreement ----------- in the places indicated: Account - Section 3.3 Account Retained Income - Section A.6 of Annex A affiliate - Section 4.2.3 Applicable Tax Law - Section A.5 of Annex A Base Salary - Section 3.1 cause - Section 4.1 Code - Section 4.2.2 Company - the first paragraph on page 1 and Section 9.1 Disability Date - Section 5 Disability Period - Section 5 Effective Date - the first paragraph on page 1 eligible securities - Section A.1 of Annex A Entity - Section 2 Executive - the first paragraph in page 1 fair market value - Section A.1 of Annex A Investment Advisor - Section A.1 of Annex A Other Period Deferred Amount - Section A.6 of Annex A Pay-Out Period - Section A.6 of Annex A Prior Account - Section 3.5 Prior Agreement - the second paragraph on page 1 Retirement Date - Section 4.6 senior executives - Section 3.1 Term Date - the second paragraph on page 1 term of employment - Section 1 Valuation Date - Section A.6 of Annex A Work Product - Section 10 31 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. TIME WARNER INC. By /s/ Gerald M. Levin -------------------------- Gerald M. Levin Chairman and Chief Executive Officer /s/ Richard J. Bressler --------------------------- Richard J. Bressler 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 A-2 date of reference and shall be credited with the quantity and kind of securities so purchased or deemed to have been purchased. In the case of any sale, the Account shall be charged with the quantity and kind of securities sold or deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities sold or deemed to have been sold multiplied by the fair market value of such securities on the date of reference. Such charges and credits to the Account shall take place immediately upon the consummation of the transactions to which they relate. As used herein "fair market value" means either (i) if the security is actually purchased or sold by the Company on the date of reference, the actual purchase or sale price per security to the Company or (ii) if the security is not purchased or sold on the date of reference, in the case of a listed security, the closing price per security on the date of reference, or if there were no sales on such date, then the closing price per security on the nearest preceding day on which there were such sales, and, in the case of an unlisted security, the mean between the bid and asked prices per security on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices per security on the nearest preceding day for which such prices are available. If no bid or asked price information is available with respect to a particular security, the price quoted to the Company as the value of such security on the date of reference (or the nearest preceding date for which such information is available) shall be used for purposes of administering the Account, including determining the fair market value of such security. The Account shall be charged currently with all interest paid or deemed payable by the Account with respect to any credit extended or deemed extended to the Account. Such interest shall be charged to the Account, for margin purchases actually made, at the rates and times actually paid by the Account and, for margin purchases deemed to have been made, at the rates and times then charged by an investment banking firm designated by the Company with which the Company does significant business. The Company may, in the Company's sole discretion, from time to time serve as the lender with respect to any margin transactions by notice to the then Investment Advisor and in such case interest shall be charged at the rate and times then A-3 charged by an investment banking firm designated by the Company with which the Company does significant business. Brokerage fees shall be charged to the Account, for transactions actually made, at the rates and times actually paid and, for transactions deemed to have been made, at the rates and times then charged for transactions of like size and kind by an investment banking firm designated by the Company with which the Company does significant business. A.2 Dividends and Interest. The Account shall be credited with ---------------------- dollar amounts equal to cash dividends paid from time to time upon the stocks held or deemed to be held therein. Dividends shall be credited as of the payment date. The Account shall similarly be credited with interest payable on interest bearing securities held or deemed to be held therein. Interest shall be credited as of the payment date, except that in the case of purchases of interest-bearing securities the Account shall be charged with the dollar amount of interest accrued to the date of purchase, and in the case of sales of such interest-bearing securities the Account shall be credited with the dollar amount of interest accrued to the date of sale. All dollar amounts of dividends or interest credited to the Account pursuant to this Section A.2 shall be charged with all taxes thereon deemed payable by the Company (as and when determined pursuant to Section A.5). The Investment Advisor shall have the same right with respect to the investment and reinvestment of net dividends and net interest as he has with respect to the balance of the Account. A.3 Adjustments. The Account shall be equitably adjusted to reflect ----------- stock dividends, stock splits, recapitalizations, mergers, consolidations, reorganizations and other changes affecting the securities held or deemed to be held therein. A.4 Obligation of the Company. The Company shall not be required to ------------------------- purchase, hold or dispose of any of the securities designated by the Investment Advisor; however, whether or not it elects to purchase or sell any such securities, such transactions shall be deemed to have been made and the Account shall be charged with all taxes (including A-4 stock transfer taxes), interest, brokerage fees and investment advisory fees, if any, deemed payable by the Company and attributable to such transactions (in all cases net after any tax benefits that the Company would be deemed to derive from the payment thereof, as and when determined pursuant to Section A.5), but no other costs of the Company. The only obligation of the Company is its contractual obligation to make payments to the Executive measured as set forth below. To the extent that the Company, in its discretion, purchases or holds any of the securities designated by the Investment Advisor, the same shall remain the sole property of the Company, subject to the claims of its general creditors, and shall not be deemed to form part of the Account. Neither the Executive nor his legal representative nor any beneficiary designated by him shall have any right, other than the right of an unsecured general creditor, against the Company in respect of any portion of the Account. A.5 Taxes. The Account shall be charged with all federal, state and ----- local taxes deemed payable by the Company with respect to income recognized upon the dividends and interest received or deemed to have been received by the Account pursuant to Section A.2 and gains recognized upon sales of any of the securities which are deemed to have been sold pursuant to Section A.1 or A.6. The Account shall be credited with the amount of the tax benefit received by the Company as a result of any payment of interest actually made or deemed to be made pursuant to Section A.1 or A.2 and as a result of any payment of brokerage fees and investment advisory fees made or deemed to be made pursuant to Section A.1. If any of the sales of the securities which are deemed to have been sold pursuant to Section A.1 or A.6 results in a loss to the Account, such net loss shall be deemed to offset the income and gains referred to in the second preceding sentence (and thus reduce the charge for taxes referred to therein) to the extent then permitted under the Internal Revenue Code of 1986, as amended from time to time, and under applicable state and local income and franchise tax laws (collectively referred to as "Applicable Tax Law"); provided, however, that for the purposes of this Section A.5 the Account shall, except as provided in the third following sentence, be deemed to be a separate corporate A-5 taxpayer and the losses referred to above shall be deemed to offset only the income and gains referred to in the second preceding sentence. Such losses shall be carried back and carried forward within the Account to the extent permitted by Applicable Tax Law in order to minimize the taxes deemed payable on such income and gains within the Account. For the purposes of this Section A.5, all charges and credits to the Account for taxes shall be deemed to be made as of the end of the Company's taxable year during which the transactions, from which the liabilities for such taxes are deemed to have arisen, are deemed to have occurred. Notwithstanding the foregoing, if and to the extent that in any year there is a net loss in the Account that cannot be offset against income and gains in any prior year, then an amount equal to the tax benefit to the Company of such net loss (after such net loss is reduced by the amount of any net capital loss of the Account for such year) shall be credited to the Account on the last day of such year. If and to the extent that any such net loss of the Account shall be utilized to determine a credit to the Account pursuant to the preceding sentence, it shall not thereafter be carried forward under this Section A.5. For purposes of determining taxes payable by the Company under any provision of this Annex A it shall be assumed that the Company is a taxpayer and pays all taxes at the maximum marginal rate of federal income taxes and state and local income and franchise taxes (net of assumed federal income tax benefits) applicable to business corporations and that all of such dividends, interest, gains and losses are allocable to its corporate headquarters, which are currently located in New York City. A.6 Payments. Subject to the provisions of Section A.7, payments of -------- deferred compensation shall be made as provided in this Section A.6. Deferred compensation shall be paid monthly for a period of 60 months (the "Pay-Out Period") commencing on the first day of the month after the later of (i) the Term Date and (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason, provided, however, that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such payments shall commence on January 1st of the year following the year in which the A-6 latest of such events occurs. On each payment date, the Account shall be charged with the dollar amount of such payment. On each payment date, the amount of cash held or deemed to be held in the Account shall be not less than the payment then due and the Company may select the securities to be sold or deemed sold to provide such cash if the Investment Advisor shall fail to do so on a timely basis. The amount of any taxes payable with respect to any such sales shall be computed, as provided in Section A.5 above, and deducted from the Account, as of the end of the taxable year of the Company during which such sales are deemed to have occurred. Solely for the purpose of determining the amount of monthly payments during the Pay-Out Period, the Account shall be valued on the fifth trading day preceding the first monthly payment of each year of the Pay-Out Period, or more frequently at the Company's election (the "Valuation Date"), by adjusting all of the securities held or deemed to be held in the Account to their fair market value (net of the tax adjustment that would be made thereon if sold, as estimated by the Company) and by deducting from the Account the amount of all outstanding indebtedness and all amounts with respect to which the Executive has elected pursuant to clause (ii) of Section A.7 to receive payments at times different from the time provided in this Section A.6 (the "Other Period Deferred Amount"). The extent, if any, by which the Account, valued as provided in the immediately preceding sentence (but not reduced by the Other Period Deferred Amount to the extent not theretofore distributed), exceeds the aggregate amount of credits to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement as of each Valuation Date and not theretofore distributed or deemed distributed pursuant to this Section A.6 is herein called "Account Retained Income". The amount of each payment for the year, or such shorter period as may be determined by the Company, of the Pay-Out Period immediately succeeding such Valuation Date, including the payment then due, shall be determined by dividing the aggregate value of the Account, as valued and adjusted pursuant to the second preceding sentence, by the number of payments remaining to be paid in the Pay-Out Period, including the payment then due; provided that each payment made shall be deemed made first out of Account Retained Income (to the extent remaining after all prior distributions thereof since the last Valuation Date). A-7 The balance of the Account (excluding the Other Period Deferred Amount), after all the securities held or deemed to have been held therein have been sold or deemed to have been sold and all indebtedness liquidated, shall be paid to the Executive in the final payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. If this Agreement is terminated by the Company pursuant to Section 4.1 or if the Executive terminates this Agreement or the term of employment in breach of this Agreement, the Account shall be valued as of the later of (i) the Term Date or (ii) twelve months after termination of the Executive's employment with the Company, and the balance of the Account, after the securities held or deemed to have been held therein have been sold or deemed to have been sold and all related indebtedness liquidated, shall be paid to the Executive as soon as practicable and in any event within 75 days following the later of such dates in a final lump sum payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. Payments made pursuant to this paragraph shall be deemed made first out of Account Retained Income. If the Executive becomes disabled within the meaning of Section 5 of the Agreement and is not thereafter returned to full-time employment with the Company as provided in said Section 5, then deferred compensation shall be paid monthly during the Pay-Out Period commencing on the first day of the month following the end of the Disability Period in accordance with the provisions of the first paragraph of this Section A.6. If the Executive shall die at any time whether during or after the term of employment, the Account shall be valued as of the date of the Executive's death and the balance of the Account shall be paid to the Executive's estate or beneficiary A-8 within 75 days of such death in accordance with the provisions of the second preceding paragraph. Within 90 days after the end of each taxable year of the Company in which payments have been made from the Account and at the time of the final payment from the Account, the Company shall compute and shall credit to the Account, the amount of the tax benefit assumed to be received by it from the payment to the Executive of amounts of Account Retained Income included in any such payment. No additional credits shall be made to the Account pursuant to the preceding sentence in respect of the amounts credited to the Account pursuant to the preceding sentence. Notwithstanding any provision of this Section A.6, the Executive shall not be entitled to receive pursuant to this Annex A an aggregate amount that shall exceed the sum of (i) all credits made to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement to which this Annex is attached, (ii) the net cumulative amount (positive or negative) of all income, gains, losses, interest and expenses charged or credited to the Account pursuant to this Annex A (excluding credits made pursuant to the second preceding sentence), after all credits and charges to the Account with respect to the tax benefits or burdens thereof, and (iii) an amount equal to the tax benefit to the Company from the payment of the amount (if positive) determined under clause (ii) above; and the final payment(s) otherwise due may be adjusted or eliminated accordingly. In determining the tax benefit to the Company under clause (iii) above, the Company shall be deemed to have made the payments under clause (ii) above with respect to the same taxable years and in the same proportions as payments of Account Retained Income were actually made from the Account. Except as otherwise provided in this paragraph, the computation of all taxes and tax benefits referred to in this Section A.6 shall be determined in accordance with Section A.5 above. A.7 Other Payment Methods. Notwithstanding the foregoing provisions --------------------- of this Annex A, the Executive may, prior to the commencement of any calendar year elect by written notice to the Company to cause (i) all or any portion of the amounts otherwise to be credited to the Account in such year A-9 under Section 3.3 of the Agreement not to be so credited but to be paid to the Executive on the date(s) such credits otherwise would have been made thereunder and/or (ii) all or any portion of the amounts to be credited to the Account under Section 3.3 of the Agreement in such year (after giving effect to clause (i) above) to be payable from the Account at times different from those provided in Section A.6 above but not earlier than the dates on which such amounts were to be credited to the Account. ANNEX B RELEASE ------- Pursuant to the terms of the Employment Agreement made as of _____________, between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller Plaza, York, New York 10019 and the undersigned (the "Agreement"), and in consideration of the payments made to me and other benefits to be received by me pursuant thereto, I, [Name], being of lawful age, do hereby release and forever discharge the Company and its officers, shareholders, subsidiaries, agents, and employees, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of my employment with the Company or any of its subsidiaries or the termination of such employment, which I may now or hereafter have under any federal, state or local law, regulation or order, including without limitation, under the Age Discrimination in Employment Act, as amended, through and including the date of this Release; provided, however, that the execution of this Release shall not -------- ------- prevent the undersigned from bringing a lawsuit against the Company to enforce its obligations under the Agreement. I acknowledge that I have been given at least 21 days from the day I received a copy of this Release to sign it and that I have been advised to consult an attorney. I understand that I have the right to revoke my consent to this Release for seven days following my signing. This Release shall not become effective or enforceable until the expiration of the seven-day period following the date it is signed by me. I further state that I have read this document and the Agreement referred to herein, that I know the contents of both and that I have executed the same as my own free act. WITNESS my hand this ____ day of ___________ , ____. ___________________________ [Name] EX-10.19 7 AMENDED EMPLOYMENT AGREEMENT EXHIBIT 10.19 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of February 15, 1994, effective as of January 1, 1994 (the "Effective Date"), as amended on October 11, 1994 and March 15, 1995, between TIME WARNER INC., a Delaware corporation (the "Company"), and Tod R. Hullin (the "Executive"). The Executive is currently employed by the Company pursuant to an Employment Agreement dated as of January 17, 1991 (the "Prior Agreement"). The Company wishes to restate the Prior Agreement and secure the services of the Executive on a full-time basis for the period to and including December 31, 1998 (the "Term Date") on and subject to the terms and conditions set forth in this Agreement, and the Executive is willing for the Prior Agreement to be so restated and to provide such services on and subject to the terms and conditions set forth in this Agreement. The parties therefore agree as follows: 1. Term of Employment. The Executive's "term of employment", as this ------------------ phrase is used throughout this Agreement, shall be for the period beginning on the Effective Date and ending on the Term Date, subject, however, to the terms and conditions set forth in this Agreement. 2. Employment. The Company shall employ the Executive, and the Executive ---------- shall serve, as Senior Vice President - Communications and Public Affairs of the Company during the term of employment, and the Executive shall have the authority, functions, duties, powers and responsibilities normally associated with such position and as the Board of Directors, the Chief Executive Officer or the Chief Operating Officer of the Company may from time to time delegate to the Executive in addition thereto. The Executive shall, subject to his election as such from time to time and without additional compensation, serve during the term of employment in such additional offices of comparable or greater stature and responsibility in the Company and its subsidiaries and as a director and as a member of any committee of the Board of Directors of the Company and its subsidiaries, to which he may be elected from time to time. During the term of employment, (i) the Executive's services shall be rendered on a substantially full-time, exclusive basis and he will apply on a 2 full-time basis all of his skill and experience to the performance of his duties in such employment, (ii) the Executive shall report only to the Company's Board of Directors, its Chief Executive Officer or its Chief Operating Officer, (iii) the Executive shall have no other employment and, without the prior written consent of the Chief Executive Officer or the Chief Operating Officer of the Company, no outside business activities which require the devotion of substantial amounts of the Executive's time and (iv) the place for the performance of the Executive's services shall be the principal executive offices of the Company in the New York City metropolitan area, subject to such reasonable travel as may be appropriate or required in the performance of the Executive's duties in the business of the Company. The foregoing shall be subject to the Company's policies, as in effect from time to time, regarding vacations, holidays, illness and the like and shall not prevent the Executive from devoting such time to his personal affairs as shall not interfere with the performance of his duties hereunder, provided that the Executive complies with the provisions of Sections 9 and 10 and any Company policies on conflicts of interest and service as a director of another corporation, partnership, trust or other entity ("Entity"). 3. Compensation. ------------ 3.1 Base Salary. The Company shall pay or cause to be paid to the ----------- Executive a base salary of not less than $325,000 per annum during the term of employment (the "Base Salary"). The Company may increase, but not decrease, the Base Salary at any time and from time to time during the term of employment and upon each such increase the term "Base Salary" shall mean such increased amount. Base Salary shall be payable in monthly or more frequent installments in accordance with the Company's then current practices and policies with respect to senior executives. For the purposes of this Agreement "senior executives" shall mean executives of the Company at the same level as the Executive. 3.2 Bonus. In addition to Base Salary, the Executive may be entitled to ----- receive during the term of employment an annual cash bonus based on the performance of the Company and of the Executive. The Executive's target bonus shall be 100% of the Executive's Base Salary but the Executive acknowledges that his actual bonus will vary depending upon the 3 performance of the Company and the Executive. Bonuses for senior executives may be determined by the Compensation Committee of the Company's Board of Directors or by the Chief Executive Officer of the Company. Such determination with respect to the amount, if any, of annual bonuses to be paid to the Executive under this Agreement shall be final and conclusive except as specifically provided otherwise in this Agreement. Payments of any bonus compensation under this Section 3.2 shall be made in accordance with the Company's then current practices and policies with respect to senior executives. 3.3 Deferred Compensation. In addition to Base Salary and bonus as set --------------------- forth in Sections 3.1 and 3.2, the Executive shall be credited with deferred compensation which shall be determined and paid out as provided in this Agreement, including Annex A hereto. Subject to the provisions of Section A.7 of Annex A, during the term of employment, the Company shall credit to a special account maintained on the Company's books for the Executive (the "Account"), monthly, an amount equal to 50% of one-twelfth of the Executive's then current Base Salary. If a lump sum payment is made pursuant to Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, the Company shall credit to the Account at the time of such payment an amount equal to 50% of the Base Salary portion of such lump sum payment. The Account shall be maintained by the Company in accordance with the terms of this Agreement, including Annex A, until the full amount which the Executive is entitled to receive therefrom has been paid in full. 3.4 Deferred Bonus. In addition to any other deferred bonus plan in which -------------- the Executive may be entitled to participate, the Executive may elect by written notice delivered to the Company at least 15 days prior to the commencement of any calendar year during the term of employment during which an annual cash bonus would otherwise accrue or to which it would relate, to defer payment of and to have the Company credit to the Account all or any portion of the Executive's bonus for such year. Any such election shall only apply to the calendar year during the term of employment with respect to which such election is made and a new election shall be required with respect to each successive calendar year during the term of employment. 4 3.5 Prior Account. The parties confirm that the Company has maintained a ------------- deferred compensation account (the "Prior Account") for the Executive in accordance with the Prior Agreement. The Prior Account shall be promptly transferred to, and shall for all purposes be deemed part of, the Account and shall continue to be maintained by the Company in accordance with this Agreement. All prior credits to the Prior Account shall be deemed to be credits made under this Agreement, all "Account Retained Income" thereunder shall be deemed to be Account Retained Income under this Agreement and all increases or decreases to the Prior Account as a result of income, gains, losses and other changes shall be deemed to have been made under this Agreement. 3.6 Reimbursement. The Company shall pay or reimburse the Executive for ------------- all reasonable travel, entertainment and other business expenses actually incurred or paid by the Executive during the term of employment in the performance of his services under this Agreement provided such expenses are incurred or paid in accordance with the Company's then current practices and policies with respect to senior executives of the Company and upon presentation of expense statements or vouchers or such other supporting information as the Company may customarily require of its senior executives. 3.7 No Anticipatory Assignments. Except as specifically contemplated in --------------------------- Section 12.8 or under the life insurance policies and benefit plans referred to in Sections 7 and 8, respectively, neither the Executive, his legal representative nor any beneficiary designated by him shall have any right, without the prior written consent of the Company, to assign, transfer, pledge, hypothecate, anticipate or commute to any person or Entity any payment due in the future pursuant to any provision of this Agreement, and any attempt to do so shall be void and shall not be recognized by the Company. 3.8 Indemnification. The Executive shall be entitled throughout the term --------------- of employment in his capacity as an officer or director of the Company or any of its subsidiaries or a member of the Board of Representatives or other governing body of any partnership or joint venture in which the Company has an equity interest (and after the term of employment, to the extent relating to his service as such officer, director or member) to the benefit of the indemnification provisions contained on the date hereof in the 5 Certificate of Incorporation and By-Laws of the Company (not including any amendments or additions after the date of execution hereof that limit or narrow, but including any that add to or broaden, the protection afforded to the Executive by those provisions), to the extent not prohibited by applicable law at the time of the assertion of any liability against the Executive. 4. Termination. ----------- 4.1 Termination for Cause. The Company may terminate the term of --------------------- employment and all of the Company's obligations hereunder, other than its obligations set forth below in this Section 4.1, only for "cause" and only if the term of employment has not previously been terminated pursuant to any other provision of this Agreement. Termination by the Company for "cause" shall mean termination by action of the Company's Board of Directors, or a committee thereof, because of the Executive's conviction (treating a nolo contendere plea as a conviction) of a felony (whether or not any right to appeal has been or may be exercised) or willful refusal without proper cause to perform his obligations under this Agreement or because of the Executive's breach of any of the covenants provided for in Section 9. Such termination shall be effected by written notice thereof delivered by the Company to the Executive and shall be effective as of the date of such notice; provided, however, that if (i) such termination is because of the Executive's willful refusal without proper cause to perform any one or more of his obligations under this Agreement, (ii) such notice is the first such notice of termination for any reason delivered by the Company to the Executive under this Section 4.1, and (iii) within 15 days following the date of such notice the Executive shall cease his refusal and shall use his best efforts to perform such obligations, the termination shall not be effective. In the event of such termination by the Company for cause, without prejudice to any other rights or remedies that the Company may have at law or in equity, the Company shall have no further obligations to the Executive other than (i) to pay Base Salary and make credits of deferred compensation to the Account accrued through the effective date of termination, (ii) to pay any annual bonus pursuant to Section 3.2 to the Executive in respect of the calendar year prior to the calendar 6 year in which such termination is effective, in the event such annual bonus has been determined but not yet paid as of the date of such termination and (iii) with respect to any rights the Executive has in respect of amounts credited to the Account or pursuant to any insurance or other benefit plans or arrangements of the Company maintained for the benefit of its senior executives. The Executive hereby disclaims any right to receive a pro rata portion of the Executive's annual bonus with respect to the year in which such termination occurs. The last sentence of Section 3.3 and the provisions of Sections 3.8, 8.2, 8.3 and 9 through 12 and Annex A shall survive any termination pursuant to this Section 4.1. 4.2 Termination by Executive for Material Breach by the Company and --------------------------------------------------------------- Wrongful Termination by the Company. Unless previously terminated pursuant to ----------------------------------- any other provision of this Agreement and unless a Disability Period shall be in effect, the Executive shall have the right, exercisable by written notice to the Company, to terminate the term of employment effective 15 days after the giving of such notice, if, at the time of the giving of such notice, the Company shall be in material breach of its obligations under this Agreement; provided, however, that, with the exception of clause (i) below, this Agreement shall not so terminate if such notice is the first such notice of termination delivered by the Executive pursuant to this Section 4.2 and within such 15-day period the Company shall have cured all such material breaches of its obligations under this Agreement. A material breach by the Company shall include, but not be limited to, (i) the Company failing to cause the Executive to retain the title specified in the first sentence of Section 2 or a more senior title; (ii) the Executive being required to report to persons other than those specified in Section 2; (iii) the Company violating the provisions of Section 2 with respect to the Executive's authority, functions, duties, powers or responsibilities (whether or not accompanied by a change in title); (iv) the Company requiring the Executive's primary services to be rendered at a place other than at the Company's principal executive offices in the New York City metropolitan area; and (v) the Company failing to cause the successor to all or substantially all of the business and assets of the Company expressly to assume the obligations of the Company under this Agreement. 7 In the event of a termination pursuant to the preceding paragraph of this Section 4.2, or in the event of a termination of this Agreement or the term of employment by the Company in breach of this Agreement, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after written notice of such termination is given pursuant to the preceding paragraph of this Section 4.2, either (A) to cease being an employee of the Company and receive a lump sum payment as provided in Section 4.2.2 or (B) to remain an employee of the Company as provided in Section 4.2.3. After the Executive makes such election, the following provisions shall apply: 4.2.1 Regardless of the election made by the Executive, (i) after the effective date of such termination, the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 shall survive such termination, and (ii) the Executive shall be entitled to receive any earned and unpaid Base Salary and deferred compensation accrued through the Termination Date and a pro rata portion of the Executive's annual bonus for the year in which such termination occurs through the date of such termination based on the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest, all or a portion of which pro rata bonus will be credited to the Account if the Executive previously elected to defer all or any portion of the Executive's bonus for such year pursuant to Section 3.4. 4.2.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay to the Executive as damages in a lump sum within 30 days thereafter (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such notice of termination is given) an amount (discounted as provided in the immediately following sentence) equal to the greater of (i) all amounts otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year in which such termination occurs and for each subsequent year through and including the Term Date and (ii) all amounts that would be payable pursuant to Sections 3.1, 3.2 8 and 3.3 if the Term Date had been a date three years after the date of such notice of termination (assuming, in the case of either (i) or (ii) above, that annual bonuses are required to be paid for each such year, with each such annual bonus being equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest (assuming that no portion of such bonus is deferred pursuant to Section 3.4), with the bonus for any partial calendar year appropriately annualized). Any payments required to be made to the Executive pursuant to this Section 4.2.2 upon such termination in respect of Sections 3.1 and 3.2 and the credit to the Account provided for in the penultimate sentence of Section 3.3 shall be discounted to present value as of the date of payment from the times at which such amounts would have become payable absent any such termination at an annual discount rate for the relevant periods equal to 120% of the "applicable Federal rate" (within the meaning of Section 1274(d) of the Internal Revenue Code of 1986 (the "Code")), in effect on the date of such termination, compounded semi-annually, the use of which rate is hereby elected by the parties hereto pursuant to Treas. Reg. (S)1.280G-1 Q/A 32 (provided that, in the event such election is not permitted under Section 280G of the Code and the regulations thereunder, such other rate determined as of such other date as is applicable for determining present value under Section 280G of the Code shall be used). 4.2.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company for the period ending on the later of (i) the Term Date and (ii) the date which is three years after the date notice of termination is given under this Section 4.2, and during such period the Executive shall be entitled to receive, whether or not he becomes disabled during such period but subject to Section 6, (a) Base Salary at an annual rate equal to his Base Salary in effect immediately prior to the notice of termination as provided in Section 3.1, (b) an annual bonus (all or a portion of which may be deferred by the Executive pursuant to Section 3.4) in respect of each calendar year or portion thereof (in which case a pro rata portion of such annual bonus will be payable) during such period equal to the average of the regular annual bonus amounts (excluding the 9 amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest (with any partial calendar year bonus appropriately annualized) as provided in Section 3.2 and (c) deferred compensation as provided in Section 3.3. Except as provided in the next sentence, if the Executive accepts full- time employment with any other Entity during such period or notifies the Company in writing of his intention to terminate his status as an employee during such period, then the term of employment shall cease and the Executive shall cease to be an employee of the Company effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and the Executive shall be entitled to receive as damages in a lump sum within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) for the balance of the Base Salary, deferred compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3) and regular annual bonuses (assuming no deferral pursuant to Section 3.4) the Executive would have been entitled to receive pursuant to this Section 4.2.3 had the Executive remained on the Company's payroll until the end of the period described in the first sentence of this Section 4.2.3. Notwithstanding the preceding sentence, if the Executive accepts employment with any not-for-profit Entity, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.2.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the payments provided for in this Section 4.2.3 and the term of employment shall cease and the Executive shall not be entitled to any such lump sum payment. For purposes of this Agreement, the term "affiliate" shall mean any Entity which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. 4.3 After the Term Date. If at the Term Date, the term of employment ------------------- shall not have been previously terminated pursuant to the provisions of this Agreement, no Disability Period is then in effect and the parties shall not 10 have agreed to an extension or renewal of this Agreement or on the terms of a new employment agreement, then the term of employment shall continue and the Executive shall continue to be employed by the Company pursuant to the terms of this Agreement, subject to termination by either party hereto on 60 days written notice delivered to the other party. If the Company shall terminate the term of employment on or after the Term Date for any reason (other than cause as defined in Section 4.1, in which case Section 4.1 shall apply), which the Company shall have the right to do so long as no Disability Date (as defined in Section 5) has occurred prior to the delivery by the Company of written notice of termination, then in lieu of the provisions of Section 4.2, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after such notice of termination is given, either (A) to cease being an employee of the Company and receive a lump sum payment as provided in Section 4.3.2 or (B) remain an employee of the Company for a period of twelve months pursuant to Section 4.3.3 and receive the payments provided in Section 4.3.3. After the Executive makes such election, the following provisions shall apply: 4.3.1 Regardless of the election made by the Executive, at the end of the 60-day notice period provided for in the first sentence of Section 4.3 the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 shall survive such termination. 4.3.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay to the Executive in a lump sum at the end of the 60-day notice period provided for in the first sentence of Section 4.3 (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the year in which such notice of termination is given) an amount (discounted as provided in the second sentence of Section 4.2.2) equal to three times the sum of (i) the Executive's Base Salary as in effect immediately prior to such notice of termination, (ii) an amount equal to the average regular annual bonus amounts (excluding the amount of any special or spot bonuses) received by the Executive from the Company for the two calendar years immediately preceding the calendar year in which such notice of termination is given 11 (assuming that no portion of such bonus is deferred pursuant to Section 3.4), with the bonus for any partial calendar year appropriately annualized and (iii) the annual amount of deferred compensation payable by the Company to the Account pursuant to Section 3.3 as in effect immediately prior to such notice of termination (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3). 4.3.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company until the date which is twelve months after the end of the 60-day period referred to in the first sentence of Section 4.3 and during such period the Executive shall be entitled to receive, whether or not he becomes disabled during such period but subject to Section 6, (i) the Executive's Base Salary as in effect immediately prior to such notice of termination, (ii) an annual bonus (all or any portion of which may be deferred by the Executive pursuant to Section 3.4) equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) received by the Executive from the Company for the two calendar years immediately preceding the calendar year in which such notice of termination is given (with the bonus for any partial calendar year appropriately annualized) and (iii) deferred compensation as provided in Section 3.3 of this Agreement. At the end of such twelve month period the term of employment shall cease, the Executive shall cease to be an employee of the Company and the Company shall pay to the Executive in a lump sum (discounted as provided in the second sentence of Section 4.2.2) an amount equal to two times the sum of the amounts described in clauses (i), (ii) and (iii) of Section 4.3.2. Except as provided in the next sentence, if the Executive accepts full-time employment with any other Entity during such twelve-month period or notifies the Company in writing of his intention to terminate his employment during such period, the Executive shall cease to be an employee of the Company and the term of employment shall cease effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and shall be entitled to receive a lump sum payment within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of 12 the year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) for the balance of the Base Salary, deferred compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3) and regular annual bonuses the Executive would have been entitled to receive pursuant to this Section 4.3.3 (including the lump sum) had the Executive remained on the Company's payroll until the end of such twelve-month period. Notwithstanding the preceding sentence, if the Executive accepts employment with any not-for- profit Entity, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.3.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the term of employment and the payments provided for in this Section 4.3.3 shall cease and the Executive shall not be entitled to any such lump sum payment. 4.4 Office Facilities. In the event the Executive shall make the election ----------------- provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on the day the Executive makes such election and ending one year thereafter, the Company shall, without charge to the Executive, make available to the Executive office space at the Executive's principal job location immediately prior to his termination of employment, or other location reasonably close to such location, together with secretarial services, office facilities, services and furnishings, in each case reasonably appropriate to an employee of the Executive's position and responsibilities prior to such termination of employment. 4.5 Release. In partial consideration for the Company's obligation to ------- make the payments described in Sections 4.2 and 4.3, the Executive shall execute and deliver to the Company a release in substantially the form attached hereto as Annex B. The Company shall deliver such release to the Executive within 10 days after the written notice of termination is delivered pursuant to Section 4.2 or 4.3 and the Executive shall execute and deliver such release to the Company within 21 days after receipt thereof. If the Executive shall fail to execute and deliver such release to the Company within such 21 day period, or if the Executive shall revoke his consent to such release as provided therein, the Executive's term of employment shall terminate as provided in Section 4.2 or 4.3, as applicable, but the Executive shall receive, in lieu 13 of the payments provided for in said Section 4.2 or 4.3, a lump sum cash payment in an amount determined in accordance with the personnel policies of the Company relating to notice and severance then generally applicable to employees with length of service and compensation level of the Executive. 4.6 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5, ---------- if the term of employment is in effect and the Executive is still employed by the Company pursuant to this Agreement on the date the Executive first becomes eligible for normal retirement under any retirement plan of the Company or any subsidiary of the Company (the "Retirement Date"), then this Agreement shall terminate automatically on such date and the Executive's employment with the Company shall thereafter be governed by the policies generally applicable to employees of the Company, and the Executive shall not thereafter be entitled to the payments provided in such Sections to the extent not received by the Executive on or prior to the Retirement Date. In addition, no benefits or payments provided in Sections 4.2, 4.3 or 5 shall include any period after the Retirement Date and if the provision of benefits or calculation of payments provided in any such Section would include any period subsequent to the Retirement Date, such provision of benefits shall end on the Retirement Date and the calculation of payments shall cover only the period ending on the Retirement Date. Notwithstanding the foregoing, the Company's obligations under Section 7 of this Agreement shall continue after any such termination and the provisions of Sections 12.1 and 12.7 shall apply to any dispute with respect to this Agreement that arises after any such termination. 4.7 Mitigation. In the event of termination of the term of employment by ---------- the Executive pursuant to Section 4.2 as a result of a material breach by the Company of any of its obligations hereunder, or in the event of termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement, the Executive shall not be required to seek other employment in order to mitigate his damages hereunder; provided, however, that, notwithstanding the foregoing, if there are any damages hereunder by reason of the events of termination described above which are "contingent on a change" (within the meaning of Section 280G(b)(2)(A)(i) of the Code), the Executive shall be required to mitigate such damages hereunder, including any such damages theretofore paid, 14 but not in excess of the extent, if any, necessary to prevent the Company from losing any tax deductions to which it otherwise would be entitled in connection with such damages if they were not so "contingent on a change". In addition to any obligation under the preceding sentence, and without duplication of any amounts required to be paid to the Company thereunder, if any such termination occurs and the Executive, whether or not required to mitigate his damages under the preceding sentence, thereafter obtains other employment, the total cash salary and bonus received in connection with such other employment, whether paid to him or deferred for his benefit, for services through (i) in the case of a termination pursuant to Section 4.2, the later of (x) the Term Date or (y) three years after the date notice of termination is delivered pursuant to Section 4.2, and (ii) in the case of a termination pursuant to Section 4.3, the date which is three years after the end of the 60-day notice period referred to in the first sentence of Section 4.3, in either case up to an amount equal to (x) the discounted lump sum payment received by or for the account of the Executive with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such period, minus (y) the amount of severance the Executive would have received in accordance with the personnel policies of the Company if the Executive had been job eliminated, shall reduce, pro tanto, any amount which the --- ----- Company would otherwise be required to pay to the Executive as a result of such termination and, to the extent amounts have theretofore been paid to him as a result of such termination, such cash salary and bonus shall be paid over to the Company as received with respect to such period, but the provisions of this sentence shall not apply to any type of equity interest, bonus unit, phantom or restricted stock, stock option, stock appreciation right or similar benefit received as a result of such other employment. With respect to the preceding sentences, any payments or rights to which the Executive is entitled by reason of the termination of the term of employment by the Executive pursuant to Section 4.2 or in the event of the termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement shall be considered as damages hereunder. With respect to the second preceding sentence, the Executive shall in no event be required to pay the Company with respect to any calendar year more than the discounted amount received by him or credited to the Account with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such year. Any obligation of the Executive to mitigate his 15 damages pursuant to this Section 4.7 shall not be a defense or offset to the Company's obligation to pay the Executive in full the amounts provided in Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, as the case may be, at the time provided therein or the timely and full performance of any of the Company's other obligations under this Agreement. 4.8 Payments. So long as the Executive remains on the payroll of the -------- Company or any subsidiary of the Company, payments of salary, deferred compensation and bonus required to be made pursuant to Section 4.2 or 4.3 shall be made at the same times as such payments are made to senior executives of the Company or such subsidiary. 5. Disability. If during the term of employment and prior to any ---------- termination of this Agreement under Section 4.2 or 4.3, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is prevented from performing his usual duties for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, the Company shall, nevertheless, continue to pay the Executive his full compensation and continue to credit the Account, when otherwise due, as provided in Section 3 and Annex A, through the last day of the sixth consecutive month of disability or the date on which the shorter periods of disability shall have equalled a total of six months in any twelve-month period (such last day or date being referred to herein as the "Disability Date"). If the Executive has not resumed his usual duties on or prior to the Disability Date, the Company shall pay the Executive a pro rata bonus for the year in which the Disability Date occurs and shall pay the Executive disability benefits for the longer of (i) the period ending on the Term Date or (ii) three years (in the case of either (i) or (ii), the "Disability Period"), in an amount equal to 75% of (a) the Executive's Base Salary at the time the Executive becomes disabled (and this reduced amount shall also be deemed to be the Base Salary for purposes of determining the amounts to be credited to his Account pursuant to Section 3.3 and Annex A as further disability benefits) and (b) the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest (all or a portion of which may be deferred by the Executive pursuant to Section 16 3.4). If during the Disability Period the Executive shall fully recover from his disability, the Company shall have the right (exercisable within 60 days after notice from the Executive of such recovery), but not the obligation, to restore the Executive to full-time service at full compensation. If the Company elects to restore the Executive to full-time service, then this Agreement shall continue in full force and effect in all respects and the Term Date shall not be extended by virtue of the occurrence of the Disability Period. If the Company elects not to restore the Executive to full-time service, the Executive shall be entitled to obtain other employment, subject, however, to the following: (i) the Executive shall be obligated to perform advisory services during any balance of the Disability Period; and (ii) the provisions of Sections 9 and 10 shall continue to apply to the Executive during the Disability Period. The advisory services referred to in clause (i) of the immediately preceding sentence shall consist of rendering advice concerning the business, affairs and management of the Company as requested by the Chief Executive Officer or the Chief Operating Officer of the Company but the Executive shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties. Any income from such other employment shall not be applied to reduce the Company's obligations under this Agreement. The Company shall be entitled to deduct from all payments to be made to the Executive during the Disability Period pursuant to this Section 5 an amount equal to all disability payments received by the Executive during the Disability Period from Workmen's Compensation, Social Security and disability insurance policies maintained by the Company; provided, however, that for so long as, and to the extent that, proceeds paid to the Executive from such disability insurance policies are not includible in his income for federal income tax purposes, the Company's deduction with respect to such payments shall be equal to the product of (i) such payments and (ii) a fraction, the numerator of which is one and the denominator of which is one less the maximum marginal rate of federal income taxes applicable to individuals at the time of receipt of such payments. All payments made under this Section 5 after the Disability Date are intended to be disability payments, regardless of the manner in which they are computed. Except as otherwise provided in this Section 5, the term of employment shall continue during the Disability Period and the Executive shall be entitled to all of the rights 17 and benefits provided for in this Agreement except that, Sections 4.2 and 4.3 shall not apply during the Disability Period and unless the Company has restored the Executive to fill-time service at full compensation prior to the end of the Disability Period, the term of employment shall end and the Executive shall cease to be an employee of the Company at the end of the Disability Period and shall not be entitled to notice and severance or to receive or be paid for any accrued vacation time or unused sabbatical. 6. Death. Upon the death of the Executive during the term of employment, ----- this Agreement and all obligations of the Company to make any payments under Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a designated beneficiary) shall be entitled to receive, to the extent being received by the Executive immediately prior to his death, Base Salary and deferred compensation to the last day of the month in which his death occurs and bonus compensation (at the time bonuses are normally paid) based on the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest, but prorated according to the number of whole or partial months the Executive was employed by the Company in such calendar year, and (ii) the Account shall be liquidated and revalued as provided in Annex A as of the date of the Executive's death (except that all taxes shall be computed and charged to the Account as of such date of death to the extent not theretofore so computed and charged) and the entire balance thereof (plus any amount due under the last paragraph of Section A.6 of Annex A) shall be paid to the Executive's estate (or a designated beneficiary) in a single payment not later than 75 days following such date of death. 7. Life Insurance. Subject to the Executive's satisfactory completion of -------------- any applications and other documentation and any physical examination that may be required by the insurer and to the availability of insurance, the Company shall obtain $2,000,000 face amount of split ownership life insurance on the life of the Executive, to be owned by the Executive or the trustees of a trust for the benefit of the Executive's spouse and/or descendants. Until the death of the Executive, and irrespective of any termination of this 18 Agreement except pursuant to Section 4.1, the Company shall pay all premiums on such policy and shall maintain such policy (without reduction of the face amount of the coverage). At the death of the Executive, or on the earlier surrender of such policy by the owner, the Executive agrees that the owner of the policy shall promptly pay to the Company an amount equal to the premiums on such policy paid by the Company (net of (i) tax benefits, if any, to the Company in respect of payments of such premiums, (ii) any amounts payable by the Company which had been paid by or on behalf of the Executive with respect to such insurance, (iii) dividends received by the Company in respect of such premiums, but only to the extent such dividends are not used to purchase additional insurance on the life of the Executive, and (iv) any unpaid borrowings by the Company on the policy), whether before, during or after the term of this Agreement. The owner of the policy from time to time shall execute, deliver and maintain a customary split dollar insurance and collateral assignment form, assigning to the Company the proceeds of such policy but only to the extent necessary to secure the reimbursement obligation contained in the preceding sentence. The life insurance provided for in this Section 7 shall be in addition to any other insurance hereafter provided by the Company on the life of the Executive under any group or individual policy. 8. Other Benefits. -------------- 8.1 General Availability. To the extent that (a) the Executive is -------------------- eligible under the general provisions thereof and (b) the Company maintains such plan or program for the benefit of its senior executives, during the term of employment and so long as the Executive is an employee of the Company, the Executive shall be eligible to participate in any pension, profit-sharing, stock option or similar plan or program and in any group insurance, hospitalization, medical, dental, accident, disability or similar plan or program of the Company now existing or established hereafter. In addition, the Executive shall be entitled during the term of employment and so long as the Executive is an employee of the Company, to receive other benefits generally available to all senior executives of the Company to the extent the Executive is eligible under the general provisions thereof, including, without limitation, to the extent maintained in effect by the Company 19 for its senior executives, an automobile allowance and financial services. In addition to any retirement benefits to which the Executive is entitled under the Time Warner Employees' Pension Plan, any supplemental retirement or excess benefit plan maintained by the Company or any of its affiliates or any successor plans thereto (hereinafter collectively referred to as the "Pension Plan"), the Company will, following the Executive's termination of employment for any reason, except by the Company for cause pursuant to Section 4.1 and except for a termination by the Executive in breach of this Agreement, pay or cause to be paid to the Executive or his beneficiary as the case may be, in accordance with the following provisions, an amount which is equivalent to the excess of (the "Excess Amount") (i) the amount such Executive or beneficiary would be entitled to receive under the Pension Plan assuming the Executive had five additional years of service (as such term is defined in the Pension Plan) taking into account all the provisions of the Pension Plan as are from time to time in effect and applicable to the Executive or his beneficiary over (ii) the amount such Executive or beneficiary would be entitled to receive under the Pension Plan based on actual years of service taking into account all the provisions of the Pension Plan as are from time to time in effect and applicable to the Executive or his beneficiary. If the Executive or his beneficiary is entitled to an Excess Amount as described in the preceding paragraph, the Company shall pay the Excess Amount to the Executive or his beneficiary as follows. If the Executive is otherwise entitled to benefits under the Pension Plan, then the Excess Amount shall be paid at the same times and in the same manner as shall be elected by the Executive or his beneficiary for payment of amounts under the Pension Plan. If the Executive is not otherwise entitled to benefits under the Pension Plan, then the Excess Amount shall be paid at the time(s) and in one of the forms of payment permitted under the Pension Plan as elected by the Executive or his beneficiary. If the Executive or his beneficiary dies before any payments described above have been made, the payments shall be made to the beneficiary thereof at the same time and in the same manner as they would have been paid if the payments were to be made under the Pension Plan. 20 8.2 Benefits After a Termination or Disability. During the period the ------------------------------------------ Executive remains on the payroll of the Company after a termination pursuant to Section 4.2 or 4.3 and during the Disability Period the Executive shall continue to be eligible to receive the benefits required to be provided to the Executive under Section 8.1 to the extent such benefits are maintained in effect by the Company for its senior executives; provided, however, the Executive shall not be entitled to any additional awards or grants under any stock option, restricted stock or other stock based incentive plan. The Executive shall continue to be an employee of the Company for purposes of any stock option and restricted shares agreements and any other incentive plan awards during the term of employment and until such time as the Executive shall leave the payroll of the Company. At the time the Executive's term of employment with the Company terminates and he leaves the payroll of the Company pursuant to the provisions of Section 4.1, 4.2, 4.3, 5 or 6, the Executive's rights to benefits and payments under any benefit plans or any insurance or other death benefit plans or arrangements of the Company or under any stock option, restricted stock, stock appreciation right, bonus unit, management incentive or other plan of the Company shall be determined, subject to the other terms and provisions of this Agreement, in accordance with the terms and provisions of such plans and any agreements under which such stock options, restricted stock or other awards were granted; provided, however, that notwithstanding the foregoing or any more restrictive provisions of any such plan or agreement, if the Executive leaves the payroll of the Company as a result of a termination pursuant to Section 4.2, then all stock options granted to the Executive by the Company shall (i) become immediately exercisable at the time the Executive shall leave the payroll of the Company pursuant to Section 4.2 and (ii) shall remain exercisable (but not beyond the term thereof) during the remainder of the term of employment and for a period of three months thereafter. 8.3 Payments in Lieu of Other Benefits. In the event the term of ---------------------------------- employment and the Executive's employment with the Company is terminated pursuant to Sections 4.1, 4.2, 4.3, 5 or 6 (and regardless of whether the Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), the Executive shall not be entitled to notice and severance or to be paid for any accrued vacation time or unused sabbatical, the payments provided for in such Sections being in lieu thereof. 21 9. Protection of Confidential Information; Non-Compete. The provisions of --------------------------------------------------- Section 9.2 shall continue to apply through the latest of (i) the Term Date, (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason and (iii) twelve months after the termination of the Executive's employment with the Company pursuant to Section 4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue to apply until three years after the latest of the events described in the preceding sentence. 9.1 Confidentiality Covenant. The Executive acknowledges that his ------------------------ employment by the Company (which, for purposes of this Section 9 shall mean Time Warner Inc. and its affiliates) will, throughout the term of employment, bring him into close contact with many confidential affairs of the Company, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods and other information not readily available to the public, and plans for future development. The Executive further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. The Executive further acknowledges that the business of the Company is international in scope, that its products are marketed throughout the world, that the Company competes in nearly all of its business activities with other Entities that are or could be located in nearly any part of the world and that the nature of the Executive's services, position and expertise are such that he is capable of competing with the Company from nearly any location in the world. In recognition of the foregoing, the Executive covenants and agrees: 9.1.1 The Executive shall keep secret all confidential matters of the Company and shall not intentionally disclose such matters to anyone outside of the Company, either during or after the term of employment, except with the Company's written consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder and (ii) the Executive may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such matters to 22 the extent required by applicable laws or governmental regulations or judicial or regulatory process; 9.1.2 The Executive shall deliver promptly to the Company on termination of his employment by the Company, or at any other time the Company may so request, at the Company's expense, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company's business, which he obtained while employed by, or otherwise serving or acting on behalf of, the Company and which he may then possess or have under his control; and 9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2 or 4.3, for a period of one year after such termination, without the prior written consent of the Company, the Executive shall not employ, and shall not cause any Entity of which he is an affiliate to employ, any person who was a full-time executive employee of the Company at the date of such termination or within six months prior thereto. 9.2 Non-Compete. The Executive shall not, directly or indirectly, without ----------- the prior written consent of the Chief Executive Officer or the Chief Operating Officer of the Company, render any services to any person or Entity or acquire any interest of any type in any Entity, that might be deemed in competition with the Company; provided, however, that the foregoing shall not be deemed to prohibit the Executive from (a) acquiring, solely as an investment and through market purchases, securities of any Entity which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are publicly traded, so long as he is not part of any control group of such Entity and such securities, if converted, do not constitute more than one percent (1%) of the outstanding voting power of that Entity, (b) acquiring, solely as an investment, any securities of an Entity (other than an Entity that has outstanding securities covered by the preceding clause (a)) so long as he remains a passive investor in such Entity and does not become part of any control group thereof and so long as such Entity is not, directly or indirectly, in competition with the Company, or (c) serving as a director of any Entity that is not in competition with the Company. For purposes of the foregoing, a person or Entity shall be deemed to be in competition with the Company if such person or it engages in any line of business that is substantially the same 23 as either (i) any line of operating business which the Company engages in, conducts or, to the knowledge of the Executive, has definitive plans to engage in or conduct, or (ii) any operating business that is engaged in or conducted by the Company and as to which, to the knowledge of the Executive, the Company covenants in writing, in connection with the disposition of such business, not to compete therewith. 9.3 Specific Remedy. In addition to such other rights and remedies as the --------------- Company may have at equity or in law with respect to any breach of this Agreement, if the Executive commits a material breach of any of the provisions of Section 9.1, the Company shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 9.4 Liquidated Damages. If the Executive commits a material breach of the ------------------ provisions of Section 9.2, the Executive shall pay to the Company as liquidated damages an amount equal to two and one-half times the Executive's then current Base Salary, or if the Executive is not employed by the Company at the time of such breach, an amount equal to two and one-half times the most recent Base Salary paid to the Executive by the Company. The Company shall be entitled to offset any amounts owed by the Executive to the Company under this Section 9.4 against any amounts owed by the Company to the Executive under any provision of this Agreement or otherwise, including without limitation, amounts payable to the Executive under Sections 4.2 or 4.3. The Company and the Executive agree that it is impossible to determine with any reasonable accuracy the amount of prospective damages to the Company upon a breach of Section 9.2 by the Executive and further agree that the damages set forth in this Section 9.4 are reasonable, and not a penalty, based upon the facts and circumstances of the parties and with due regard to future expectations. 10. Ownership of Work Product. The Executive acknowledges that during the ------------------------- term of employment, he may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not 24 (all of the foregoing being collectively referred to herein as "Work Product"), and that various business opportunities shall be presented to him by reason of his employment by the Company. The Executive acknowledges that all of the foregoing shall be owned by and belong exclusively to the Company and that he shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experimental) of the Company, or are, in the case of Work Product, conceived or made on the Company's time or with the use of the Company's facilities or materials, or, in the case of business opportunities, are presented to him for the possible interest or participation of the Company. The Executive shall (i) promptly disclose any such Work Product and business opportunities to the Company; (ii) assign to the Company, upon request and without additional compensation, the entire rights to such Work Product and business opportunities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of his inventorship or creation in any appropriate case. The Executive agrees that he will not assert any rights to any Work Product or business opportunity as having been made or acquired by him prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Company in writing prior to the date hereof. 11. Notices. All notices, requests, consents and other communications ------- required or permitted to be given under this Agreement shall be effective only if given in writing and shall be deemed to have been duly given if delivered personally or sent by prepaid telegram, or mailed first-class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith): 11.1 If to the Company: Time Warner Inc. 75 Rockefeller Plaza New York, New York 10019 Attention: Chief Executive Officer (with a copy, similarly addressed but Attention: General Counsel) 25 11.2 If to the Executive, to his residence address set forth on the records of the Company. 12. General. ------- 12.1 Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the substantive laws of the State of New York applicable to agreements made and to be performed entirely in New York. 12.2 Captions. The section headings contained herein are for -------- reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12.3 Entire Agreement. This Agreement, including Annexes A and B, ---------------- sets forth the entire agreement and understanding of the parties relating to the subject matter of this Agreement and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties, including without limitation, the Prior Agreement. 12.4 No Other Representations. No representation, promise or ------------------------ inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or be liable for any alleged representation, promise or inducement not so set forth. 12.5 Assignability. This Agreement and the Executive's rights and ------------- obligations hereunder may not be assigned by the Executive. The Company may assign its rights together with its obligations hereunder, in connection with any sale, transfer or other disposition of all or substantially all of its business and assets; and such rights and obligations shall inure to, and be binding upon, any successor to all or substantially all of the business and assets of the Company, whether by merger, purchase of stock or assets or otherwise. The Company shall cause such successor expressly to assume such obligations. 12.6 Amendments; Waivers. This Agreement may be amended, modified, ------------------- superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived only by written instrument executed by both of the parties hereto, 26 or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12.7 Resolution of Disputes. Any dispute or controversy arising with ---------------------- respect to this Agreement may be referred by either party to ENDISPUTE for resolution in arbitration in accordance with the rules and procedures of ENDISPUTE. Any such proceedings shall take place in New York City before a single arbitrator (rather than a panel of arbitrators), pursuant to any streamlined or expedited (rather than a comprehensive) arbitration process, before a nonjudicial (rather than a judicial) arbitrator, and in accordance with an arbitration process which, in the judgment of such arbitrator, shall have the effect of reasonably limiting or reducing the cost of such arbitration. The resolution of any such dispute or controversy by the arbitrator appointed in accordance with the procedures of ENDISPUTE shall be final and binding. Judgment upon the award rendered by such arbitrator may be entered in any court having jurisdiction thereof, and the parties consent to the jurisdiction of the New York courts for this purpose. The prevailing party shall be entitled to recover the costs of arbitration (including reasonable attorneys fees and the fees of experts) from the losing party. If at the time any dispute or controversy arises with respect to this Agreement, ENDISPUTE is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for ENDISPUTE for the purposes of the foregoing provisions of this Section 12.7. If the Executive shall be the prevailing party in such arbitration, the Company shall promptly pay, upon demand of the Executive, all legal fees, court costs and other costs and expenses incurred by the Executive in any legal action seeking to enforce the award in any court. 12.8 Beneficiaries. Whenever this Agreement provides for any payment ------------- to the Executive's estate, such payment may be made instead to such beneficiary or beneficiaries as the Executive may designate by written notice 27 to the Company. The Executive shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company (and to any applicable insurance company) to such effect. 12.9 No Conflict. The Executive represents and warrants to the ----------- Company that this Agreement is legal, valid and binding upon the Executive and the execution of this Agreement and the performance of the Executive's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Executive is a party (including, without limitation, any other employment agreement). The Company represents and warrants to the Executive that this Agreement is legal, valid and binding upon the Company and the execution of this Agreement and the performance of the Company's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Company is a party. 12.10 Withholding Taxes. Payments made to the Executive pursuant to ----------------- this Agreement shall be subject to withholding and social security taxes and other ordinary and customary payroll deductions. 12.11 No Offset. Except as provided in Section 9.4 of this --------- Agreement, neither the Company nor the Executive shall have any right to offset any amounts owed by one party hereunder against amounts owed or claimed to be owed to such party, whether pursuant to this Agreement or otherwise, and the Company and the Executive shall make all the payments provided for in this Agreement in a timely manner. 12.12 Severability. If any provision of this Agreement shall be held ------------ invalid, the remainder of this Agreement shall not be affected thereby; provided, however, that the parties shall negotiate in good faith with respect to equitable modification of the provision or application thereof held to be invalid. To the extent that it may effectively do so under applicable law, each party hereby waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect. 12.13 Definitions. The following terms are defined in this ----------- Agreement in the places indicated: 28 Account - Section 3.3 Account Retained Income - Section A.6 of Annex A affiliate - Section 4.2.3 Applicable Tax Law - Section A.5 of Annex A Base Salary - Section 3.1 cause - Section 4.1 Code - Section 4.2.2 Company - the first paragraph on page 1 and Section 9.1 Disability Date - Section 5 Disability Period - Section 5 Effective Date - the first paragraph on page 1 eligible securities - Section A.1 of Annex A Entity - Section 2 Executive - the first paragraph in page 1 fair market value - Section A.1 of Annex A Investment Advisor - Section A.1 of Annex A Other Period Deferred Amount - Section A.6 of Annex A Pay-Out Period - Section A.6 of Annex A Prior Account - Section 3.5 Prior Agreement - the second paragraph on page 1 Retirement Date - Section 4.6 senior executives - Section 3.1 Term Date - the second paragraph on page 1 term of employment - Section 1 Valuation Date - Section A.6 of Annex A Work Product - Section 10 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. TIME WARNER INC. By /s/ Gerald M. Levin -------------------------- Gerald M. Levin Chairman and Chief Executive Officer /s/ Tod R. Hullin ------------------------ Tod R. Hullin 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 A-2 charged with the quantity and kind of securities sold or deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities sold or deemed to have been sold multiplied by the fair market value of such securities on the date of reference. Such charges and credits to the Account shall take place immediately upon the consummation of the transactions to which they relate. As used herein "fair market value" means either (i) if the security is actually purchased or sold by the Company on the date of reference, the actual purchase or sale price per security to the Company or (ii) if the security is not purchased or sold on the date of reference, in the case of a listed security, the closing price per security on the date of reference, or if there were no sales on such date, then the closing price per security on the nearest preceding day on which there were such sales, and, in the case of an unlisted security, the mean between the bid and asked prices per security on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices per security on the nearest preceding day for which such prices are available. If no bid or asked price information is available with respect to a particular security, the price quoted to the Company as the value of such security on the date of reference (or the nearest preceding date for which such information is available) shall be used for purposes of administering the Account, including determining the fair market value of such security. The Account shall be charged currently with all interest paid or deemed payable by the Account with respect to any credit extended or deemed extended to the Account. Such interest shall be charged to the Account, for margin purchases actually made, at the rates and times actually paid by the Account and, for margin purchases deemed to have been made, at the rates and times then charged by an investment banking firm designated by the Company with which the Company does significant business. The Company may, in the Company's sole discretion, from time to time serve as the lender with respect to any margin transactions by notice to the then Investment Advisor and in such case interest shall be charged at the rate and times then charged by an investment banking firm designated by the Company with which the Company does significant business. Brokerage fees shall be charged to the Account, for transactions actually made, at the rates and times actually paid and, for transactions deemed to have been made, at the rates and times then charged for transactions of like size and kind by an A-3 investment banking firm designated by the Company with which the Company does significant business. A.2 Dividends and Interest. The Account shall be credited with ---------------------- dollar amounts equal to cash dividends paid from time to time upon the stocks held or deemed to be held therein. Dividends shall be credited as of the payment date. The Account shall similarly be credited with interest payable on interest bearing securities held or deemed to be held therein. Interest shall be credited as of the payment date, except that in the case of purchases of interest-bearing securities the Account shall be charged with the dollar amount of interest accrued to the date of purchase, and in the case of sales of such interest-bearing securities the Account shall be credited with the dollar amount of interest accrued to the date of sale. All dollar amounts of dividends or interest credited to the Account pursuant to this Section A.2 shall be charged with all taxes thereon deemed payable by the Company (as and when determined pursuant to Section A.5). The Investment Advisor shall have the same right with respect to the investment and reinvestment of net dividends and net interest as he has with respect to the balance of the Account. A.3 Adjustments. The Account shall be equitably adjusted to reflect ----------- stock dividends, stock splits, recapitalizations, mergers, consolidations, reorganizations and other changes affecting the securities held or deemed to be held therein. A.4 Obligation of the Company. The Company shall not be required to ------------------------- purchase, hold or dispose of any of the securities designated by the Investment Advisor; however, whether or not it elects to purchase or sell any such securities, such transactions shall be deemed to have been made and the Account shall be charged with all taxes (including stock transfer taxes), interest, brokerage fees and investment advisory fees, if any, deemed payable by the Company and attributable to such transactions (in all cases net after any tax benefits that the Company would be deemed to derive from the payment thereof, as and when determined pursuant to Section A.5), but no other costs of the Company. The only obligation of the Company is its contractual obligation to make payments to the Executive measured as set forth below. To the extent that the Company, in its discretion, purchases or holds any of the securities designated by the Investment Advisor, the same A-4 shall remain the sole property of the Company, subject to the claims of its general creditors, and shall not be deemed to form part of the Account. Neither the Executive nor his legal representative nor any beneficiary designated by him shall have any right, other than the right of an unsecured general creditor, against the Company in respect of any portion of the Account. A.5 Taxes. The Account shall be charged with all federal, state and ----- local taxes deemed payable by the Company with respect to income recognized upon the dividends and interest received or deemed to have been received by the Account pursuant to Section A.2 and gains recognized upon sales of any of the securities which are deemed to have been sold pursuant to Section A.1 or A.6. The Account shall be credited with the amount of the tax benefit received by the Company as a result of any payment of interest actually made or deemed to be made pursuant to Section A.1 or A.2 and as a result of any payment of brokerage fees and investment advisory fees made or deemed to be made pursuant to Section A.1. If any of the sales of the securities which are deemed to have been sold pursuant to Section A.1 or A.6 results in a loss to the Account, such net loss shall be deemed to offset the income and gains referred to in the second preceding sentence (and thus reduce the charge for taxes referred to therein) to the extent then permitted under the Internal Revenue Code of 1986, as amended from time to time, and under applicable state and local income and franchise tax laws (collectively referred to as "Applicable Tax Law"); provided, however, that for the purposes of this Section A.5 the Account shall, except as provided in the third following sentence, be deemed to be a separate corporate taxpayer and the losses referred to above shall be deemed to offset only the income and gains referred to in the second preceding sentence. Such losses shall be carried back and carried forward within the Account to the extent permitted by Applicable Tax Law in order to minimize the taxes deemed payable on such income and gains within the Account. For the purposes of this Section A.5, all charges and credits to the Account for taxes shall be deemed to be made as of the end of the Company's taxable year during which the transactions, from which the liabilities for such taxes are deemed to have arisen, are deemed to have occurred. Notwithstanding the foregoing, if and to the extent that in any year there is a net loss in the Account that cannot be offset against income and gains in any prior year, then an amount equal to the tax benefit to the A-5 Company of such net loss (after such net loss is reduced by the amount of any net capital loss of the Account for such year) shall be credited to the Account on the last day of such year. If and to the extent that any such net loss of the Account shall be utilized to determine a credit to the Account pursuant to the preceding sentence, it shall not thereafter be carried forward under this Section A.5. For purposes of determining taxes payable by the Company under any provision of this Annex A it shall be assumed that the Company is a taxpayer and pays all taxes at the maximum marginal rate of federal income taxes and state and local income and franchise taxes (net of assumed federal income tax benefits) applicable to business corporations and that all of such dividends, interest, gains and losses are allocable to its corporate headquarters, which are currently located in New York City. A.6 Payments. Subject to the provisions of Section A.7, payments of -------- deferred compensation shall be made as provided in this Section A.6. Deferred compensation shall be paid monthly for a period of 60 months (the "Pay-Out Period") commencing on the first day of the month after the later of (i) the Term Date and (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason, provided, however, that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such payments shall commence on January 1st of the year following the year in which the latest of such events occurs. On each payment date, the Account shall be charged with the dollar amount of such payment. On each payment date, the amount of cash held or deemed to be held in the Account shall be not less than the payment then due and the Company may select the securities to be sold or deemed sold to provide such cash if the Investment Advisor shall fail to do so on a timely basis. The amount of any taxes payable with respect to any such sales shall be computed, as provided in Section A.5 above, and deducted from the Account, as of the end of the taxable year of the Company during which such sales are deemed to have occurred. Solely for the purpose of determining the amount of monthly payments during the Pay-Out Period, the Account shall be valued on the fifth trading day preceding the first monthly payment of each year of the Pay-Out Period, or more frequently at the Company's election (the "Valuation Date"), by adjusting all of the securities held or deemed to be held in the Account to their fair market value (net of the tax adjustment that would be made A-6 thereon if sold, as estimated by the Company) and by deducting from the Account the amount of all outstanding indebtedness and all amounts with respect to which the Executive has elected pursuant to clause (ii) of Section A.7 to receive payments at times different from the time provided in this Section A.6 (the "Other Period Deferred Amount"). The extent, if any, by which the Account, valued as provided in the immediately preceding sentence (but not reduced by the Other Period Deferred Amount to the extent not theretofore distributed), exceeds the aggregate amount of credits to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement as of each Valuation Date and not theretofore distributed or deemed distributed pursuant to this Section A.6 is herein called "Account Retained Income". The amount of each payment for the year, or such shorter period as may be determined by the Company, of the Pay-Out Period immediately succeeding such Valuation Date, including the payment then due, shall be determined by dividing the aggregate value of the Account, as valued and adjusted pursuant to the second preceding sentence, by the number of payments remaining to be paid in the Pay-Out Period, including the payment then due; provided that each payment made shall be deemed made first out of Account Retained Income (to the extent remaining after all prior distributions thereof since the last Valuation Date). The balance of the Account (excluding the Other Period Deferred Amount), after all the securities held or deemed to have been held therein have been sold or deemed to have been sold and all indebtedness liquidated, shall be paid to the Executive in the final payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. If this Agreement is terminated by the Company pursuant to Section 4.1 or if the Executive terminates this Agreement or the term of employment in breach of this Agreement, the Account shall be valued as of the later of (i) the Term Date or (ii) twelve months after termination of the Executive's employment with the Company, and the balance of the Account, after the securities held or deemed to have been held therein have been sold or deemed to have been sold and all related indebtedness liquidated, shall be paid to the Executive as soon as practicable and in any event within 75 days following the later of such dates in a final lump sum payment, which shall be decreased by deducting therefrom the amount of A-7 all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. Payments made pursuant to this paragraph shall be deemed made first out of Account Retained Income. If the Executive becomes disabled within the meaning of Section 5 of the Agreement and is not thereafter returned to full-time employment with the Company as provided in said Section 5, then deferred compensation shall be paid monthly during the Pay-Out Period commencing on the first day of the month following the end of the Disability Period in accordance with the provisions of the first paragraph of this Section A.6. If the Executive shall die at any time whether during or after the term of employment, the Account shall be valued as of the date of the Executive's death and the balance of the Account shall be paid to the Executive's estate or beneficiary within 75 days of such death in accordance with the provisions of the second preceding paragraph. Within 90 days after the end of the taxable year of the Company in which payments have been made from the Account and at the time of the final payment from the Account, the Company shall compute and shall credit to the Account, the amount of the tax benefit assumed to be received by it from the payment to the Executive of amounts of Account Retained Income included in any such payment. No additional credits shall be made to the Account pursuant to the preceding sentence in respect of the amounts credited to the Account pursuant to the preceding sentence. Notwithstanding any provision of this Section A.6, the Executive shall not be entitled to receive pursuant to this Annex A an aggregate amount that shall exceed the sum of (i) all credits made to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement to which this Annex is attached, (ii) the net cumulative amount (positive or negative) of all income, gains, losses, interest and expenses charged or credited to the Account pursuant to this Annex A (excluding credits made pursuant to the second preceding sentence), after all credits and charges to the Account with respect to the tax benefits or burdens thereof, and (iii) an amount equal to the tax benefit to the Company from the payment of the amount (if positive) determined under clause (ii) above; A-8 and the final payment(s) otherwise due may be adjusted or eliminated accordingly. In determining the tax benefit to the Company under clause (iii) above, the Company shall be deemed to have made the payments under clause (ii) above with respect to the same taxable years and in the same proportions as payments of Account Retained Income were actually made from the Account. Except as otherwise provided in this paragraph, the computation of all taxes and tax benefits referred to in this Section A.6 shall be determined in accordance with Section A.5 above. A.7 Other Payment Methods. Notwithstanding the foregoing provisions --------------------- of this Annex A, the Executive may, prior to the commencement of any calendar year elect by written notice to the Company to cause (i) all or any portion of the amounts otherwise to be credited to the Account in such year under Section 3.3 of the Agreement not to be so credited but to be paid to the Executive on the date(s) such credits otherwise would have been made thereunder and/or (ii) all or any portion of the amounts to be credited to the Account under Section 3.3 of the Agreement in such year (after giving effect to clause (i) above) to be payable from the Account at times different from those provided in Section A.6 above but not earlier than the dates on which such amounts were to be credited to the Account. ANNEX B RELEASE ------- Pursuant to the terms of the Employment Agreement made as of _____________, between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller Plaza, York, New York 10019 and the undersigned (the "Agreement"), and in consideration of the payments made to me and other benefits to be received by me pursuant thereto, I, [Name], being of lawful age, do hereby release and forever discharge the Company and its officers, shareholders, subsidiaries, agents, and employees, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of my employment with the Company or any of its subsidiaries or the termination of such employment, which I may now or hereafter have under any federal, state or local law, regulation or order, including without limitation, under the Age Discrimination in Employment Act, as amended, through and including the date of this Release; provided, however, that the execution of this Release shall not -------- ------- prevent the undersigned from bringing a lawsuit against the Company to enforce its obligations under the Agreement. I acknowledge that I have been given at least 21 days from the day I received a copy of this Release to sign it and that I have been advised to consult an attorney. I understand that I have the right to revoke my consent to this Release for seven days following my signing. This Release shall not become effective or enforceable until the expiration of the seven-day period following the date it is signed by me. I further state that I have read this document and the Agreement referred to herein, that I know the contents of both and that I have executed the same as my own free act. WITNESS my hand this ____ day of ___________ , ____. ___________________________ [Name] EX-10.20 8 AMENDED EMPLOYMENT AGREEMENT EXHIBIT 10.20 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of February 15, 1994, effective as of January 1, 1994 (the "Effective Date"), as amended on October 11, 1994 and March 15, 1995, between TIME WARNER INC., a Delaware corporation (the "Company"), and Philip R. Lochner, Jr. (the "Executive"). The Executive is currently employed by the Company pursuant to an Employment Agreement dated as of July 18, 1991 (the "Prior Agreement"). The Company wishes to restate the Prior Agreement and secure the services of the Executive on a full-time basis for the period to and including December 31, 1998 (the "Term Date") on and subject to the terms and conditions set forth in this Agreement, and the Executive is willing for the Prior Agreement to be so restated and to provide such services on and subject to the terms and conditions set forth in this Agreement. The parties therefore agree as follows: 1. Term of Employment. The Executive's "term of employment", as this ------------------ phrase is used throughout this Agreement, shall be for the period beginning on the Effective Date and ending on the Term Date, subject, however, to the terms and conditions set forth in this Agreement. 2. Employment. The Company shall employ the Executive, and the Executive ---------- shall serve, as Senior Vice President - Administration of the Company during the term of employment, and the Executive shall have the authority, functions, duties, powers and responsibilities normally associated with such position and as the Board of Directors, the Chief Executive Officer or the Chief Operating Officer of the Company may from time to time delegate to the Executive in addition thereto. The Executive shall, subject to his election as such from time to time and without additional compensation, serve during the term of employment in such additional offices of comparable or greater stature and responsibility in the Company and its subsidiaries and as a director and as a member of any committee of the Board of Directors of the Company and its subsidiaries, to which he may be elected from time to time. During the term of employment, (i) the Executive's services shall be rendered on a substantially full-time, exclusive basis and he will apply on a full-time basis all of his skill and 2 experience to the performance of his duties in such employment, (ii) the Executive shall report only to the Company's Board of Directors, its Chief Executive Officer or its Chief Operating Officer, (iii) the Executive shall have no other employment and, without the prior written consent of the Chief Executive Officer or the Chief Operating Officer of the Company, no outside business activities which require the devotion of substantial amounts of the Executive's time and (iv) the place for the performance of the Executive's services shall be the principal executive offices of the Company in the New York City metropolitan area, subject to such reasonable travel as may be appropriate or required in the performance of the Executive's duties in the business of the Company. The foregoing shall be subject to the Company's policies, as in effect from time to time, regarding vacations, holidays, illness and the like and shall not prevent the Executive from devoting such time to his personal affairs as shall not interfere with the performance of his duties hereunder, provided that the Executive complies with the provisions of Sections 9 and 10 and any Company policies on conflicts of interest and service as a director of another corporation, partnership, trust or other entity ("Entity"). 3. Compensation. ------------ 3.1 Base Salary. The Company shall pay or cause to be paid to the ----------- Executive a base salary of not less than $325,000 per annum during the term of employment (the "Base Salary"). The Company may increase, but not decrease, the Base Salary at any time and from time to time during the term of employment and upon each such increase the term "Base Salary" shall mean such increased amount. Base Salary shall be payable in monthly or more frequent installments in accordance with the Company's then current practices and policies with respect to senior executives. For the purposes of this Agreement "senior executives" shall mean executives of the Company at the same level as the Executive. 3.2 Bonus. In addition to Base Salary, the Executive may be entitled to ----- receive during the term of employment an annual cash bonus based on the performance of the Company and of the Executive. The Executive's target bonus shall be 100% of the Executive's Base Salary but the Executive acknowledges that his actual bonus will vary depending upon the performance of the Company and the Executive. Bonuses for 3 senior executives may be determined by the Compensation Committee of the Company's Board of Directors or by the Chief Executive Officer of the Company. Such determination with respect to the amount, if any, of annual bonuses to be paid to the Executive under this Agreement shall be final and conclusive except as specifically provided otherwise in this Agreement. Payments of any bonus compensation under this Section 3.2 shall be made in accordance with the Company's then current practices and policies with respect to senior executives. 3.3 Deferred Compensation. In addition to Base Salary and bonus as --------------------- set forth in Sections 3.1 and 3.2, the Executive shall be credited with deferred compensation which shall be determined and paid out as provided in this Agreement, including Annex A hereto. Subject to the provisions of Section A.7 of Annex A, during the term of employment, the Company shall credit to a special account maintained on the Company's books for the Executive (the "Account"), monthly, an amount equal to 50% of one-twelfth of the Executive's then current Base Salary. If a lump sum payment is made pursuant to Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, the Company shall credit to the Account at the time of such payment an amount equal to 50% of the Base Salary portion of such lump sum payment. The Account shall be maintained by the Company in accordance with the terms of this Agreement, including Annex A, until the full amount which the Executive is entitled to receive therefrom has been paid in full. 3.4 Deferred Bonus. In addition to any other deferred bonus plan in -------------- which the Executive may be entitled to participate, the Executive may elect by written notice delivered to the Company at least 15 days prior to the commencement of any calendar year during the term of employment during which an annual cash bonus would otherwise accrue or to which it would relate, to defer payment of and to have the Company credit to the Account all or any portion of the Executive's bonus for such year. Any such election shall only apply to the calendar year during the term of employment with respect to which such election is made and a new election shall be required with respect to each successive calendar year during the term of employment. 3.5 Prior Account. The parties confirm that the Company has ------------- maintained a deferred compensation account (the 4 "Prior Account") for the Executive in accordance with the Prior Agreement. The Prior Account shall be promptly transferred to, and shall for all purposes be deemed part of, the Account and shall continue to be maintained by the Company in accordance with this Agreement. All prior credits to the Prior Account shall be deemed to be credits made under this Agreement, all "Account Retained Income" thereunder shall be deemed to be Account Retained Income under this Agreement and all increases or decreases to the Prior Account as a result of income, gains, losses and other changes shall be deemed to have been made under this Agreement. 3.6 Reimbursement. The Company shall pay or reimburse the Executive for ------------- all reasonable travel, entertainment and other business expenses actually incurred or paid by the Executive during the term of employment in the performance of his services under this Agreement provided such expenses are incurred or paid in accordance with the Company's then current practices and policies with respect to senior executives of the Company and upon presentation of expense statements or vouchers or such other supporting information as the Company may customarily require of its senior executives. 3.7 No Anticipatory Assignments. Except as specifically contemplated in --------------------------- Section 12.8 or under the life insurance policies and benefit plans referred to in Sections 7 and 8, respectively, neither the Executive, his legal representative nor any beneficiary designated by him shall have any right, without the prior written consent of the Company, to assign, transfer, pledge, hypothecate, anticipate or commute to any person or Entity any payment due in the future pursuant to any provision of this Agreement, and any attempt to do so shall be void and shall not be recognized by the Company. 3.8 Indemnification. The Executive shall be entitled throughout the term --------------- of employment in his capacity as an officer or director of the Company or any of its subsidiaries or a member of the Board of Representatives or other governing body of any partnership or joint venture in which the Company has an equity interest (and after the term of employment, to the extent relating to his service as such officer, director or member) to the benefit of the indemnification provisions contained on the date hereof in the Certificate of Incorporation and By-Laws of the Company (not including any amendments or additions after the date of 5 execution hereof that limit or narrow, but including any that add to or broaden, the protection afforded to the Executive by those provisions), to the extent not prohibited by applicable law at the time of the assertion of any liability against the Executive. 4. Termination. ----------- 4.1 Termination for Cause. The Company may terminate the term of --------------------- employment and all of the Company's obligations hereunder, other than its obligations set forth below in this Section 4.1, only for "cause" and only if the term of employment has not previously been terminated pursuant to any other provision of this Agreement. Termination by the Company for "cause" shall mean termination by action of the Company's Board of Directors, or a committee thereof, because of the Executive's conviction (treating a nolo contendere plea as a conviction) of a felony (whether or not any right to appeal has been or may be exercised) or willful refusal without proper cause to perform his obligations under this Agreement or because of the Executive's breach of any of the covenants provided for in Section 9. Such termination shall be effected by written notice thereof delivered by the Company to the Executive and shall be effective as of the date of such notice; provided, however, that if (i) such termination is because of the Executive's willful refusal without proper cause to perform any one or more of his obligations under this Agreement, (ii) such notice is the first such notice of termination for any reason delivered by the Company to the Executive under this Section 4.1, and (iii) within 15 days following the date of such notice the Executive shall cease his refusal and shall use his best efforts to perform such obligations, the termination shall not be effective. In the event of such termination by the Company for cause, without prejudice to any other rights or remedies that the Company may have at law or in equity, the Company shall have no further obligations to the Executive other than (i) to pay Base Salary and make credits of deferred compensation to the Account accrued through the effective date of termination, (ii) to pay any annual bonus pursuant to Section 3.2 to the Executive in respect of the calendar year prior to the calendar year in which such termination is effective, in the event such annual bonus has been determined but not yet paid as of the 6 date of such termination and (iii) with respect to any rights the Executive has in respect of amounts credited to the Account or pursuant to any insurance or other benefit plans or arrangements of the Company maintained for the benefit of its senior executives. The Executive hereby disclaims any right to receive a pro rata portion of the Executive's annual bonus with respect to the year in which such termination occurs. The last sentence of Section 3.3 and the provisions of Sections 3.8, 8.2, 8.3 and 9 through 12 and Annex A shall survive any termination pursuant to this Section 4.1. 4.2 Termination by Executive for Material Breach by the Company and --------------------------------------------------------------- Wrongful Termination by the Company. Unless previously terminated pursuant to ----------------------------------- any other provision of this Agreement and unless a Disability Period shall be in effect, the Executive shall have the right, exercisable by written notice to the Company, to terminate the term of employment effective 15 days after the giving of such notice, if, at the time of the giving of such notice, the Company shall be in material breach of its obligations under this Agreement; provided, however, that, with the exception of clause (i) below, this Agreement shall not so terminate if such notice is the first such notice of termination delivered by the Executive pursuant to this Section 4.2 and within such 15-day period the Company shall have cured all such material breaches of its obligations under this Agreement. A material breach by the Company shall include, but not be limited to, (i) the Company failing to cause the Executive to retain the title specified in the first sentence of Section 2 or a more senior title; (ii) the Executive being required to report to persons other than those specified in Section 2; (iii) the Company violating the provisions of Section 2 with respect to the Executive's authority, functions, duties, powers or responsibilities (whether or not accompanied by a change in title); (iv) the Company requiring the Executive's primary services to be rendered at a place other than at the Company's principal executive offices in the New York City metropolitan area; and (v) the Company failing to cause the successor to all or substantially all of the business and assets of the Company expressly to assume the obligations of the Company under this Agreement. In the event of a termination pursuant to the preceding paragraph of this Section 4.2, or in the event of a termination of this Agreement or the term of employment by the 7 Company in breach of this Agreement, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after written notice of such termination is given pursuant to the preceding paragraph of this Section 4.2, either (A) to cease being an employee of the Company and receive a lump sum payment as provided in Section 4.2.2 or (B) to remain an employee of the Company as provided in Section 4.2.3. After the Executive makes such election, the following provisions shall apply: 4.2.1 Regardless of the election made by the Executive, (i) after the effective date of such termination, the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 shall survive such termination, and (ii) the Executive shall be entitled to receive any earned and unpaid Base Salary and deferred compensation accrued through the Termination Date and a pro rata portion of the Executive's annual bonus for the year in which such termination occurs through the date of such termination based on the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest, all or a portion of which pro rata bonus will be credited to the Account if the Executive previously elected to defer all or any portion of the Executive's bonus for such year pursuant to Section 3.4. 4.2.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay to the Executive as damages in a lump sum within 30 days thereafter (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such notice of termination is given) an amount (discounted as provided in the immediately following sentence) equal to the greater of (i) all amounts otherwise payable pursuant to Sections 3.1, 3.2 and 3.3 for the year in which such termination occurs and for each subsequent year through and including the Term Date and (ii) all amounts that would be payable pursuant to Sections 3.1, 3.2 and 3.3 if the Term Date had been a date three years after the date of such notice of termination (assuming, in the case of either (i) or (ii) above, that annual bonuses are required to 8 be paid for each such year, with each such annual bonus being equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest (assuming that no portion of such bonus is deferred pursuant to Section 3.4), with the bonus for any partial calendar year appropriately annualized). Any payments required to be made to the Executive pursuant to this Section 4.2.2 upon such termination in respect of Sections 3.1 and 3.2 and the credit to the Account provided for in the penultimate sentence of Section 3.3 shall be discounted to present value as of the date of payment from the times at which such amounts would have become payable absent any such termination at an annual discount rate for the relevant periods equal to 120% of the "applicable Federal rate" (within the meaning of Section 1274(d) of the Internal Revenue Code of 1986 (the "Code")), in effect on the date of such termination, compounded semi- annually, the use of which rate is hereby elected by the parties hereto pursuant to Treas. Reg. (S)1.280G-1 Q/A 32 (provided that, in the event such election is not permitted under Section 280G of the Code and the regulations thereunder, such other rate determined as of such other date as is applicable for determining present value under Section 280G of the Code shall be used). 4.2.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company for the period ending on the later of (i) the Term Date and (ii) the date which is three years after the date notice of termination is given under this Section 4.2, and during such period the Executive shall be entitled to receive, whether or not he becomes disabled during such period but subject to Section 6, (a) Base Salary at an annual rate equal to his Base Salary in effect immediately prior to the notice of termination as provided in Section 3.1, (b) an annual bonus (all or a portion of which may be deferred by the Executive pursuant to Section 3.4) in respect of each calendar year or portion thereof (in which case a pro rata portion of such annual bonus will be payable) during such period equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the regular annual bonus received by the Executive from the Company was the greatest (with any 9 partial calendar year bonus appropriately annualized) as provided in Section 3.2 and (c) deferred compensation as provided in Section 3.3. Except as provided in the next sentence, if the Executive accepts full-time employment with any other Entity during such period or notifies the Company in writing of his intention to terminate his status as an employee during such period, then the term of employment shall cease and the Executive shall cease to be an employee of the Company effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and the Executive shall be entitled to receive as damages in a lump sum within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the calendar year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) for the balance of the Base Salary, deferred compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3) and regular annual bonuses (assuming no deferral pursuant to Section 3.4) the Executive would have been entitled to receive pursuant to this Section 4.2.3 had the Executive remained on the Company's payroll until the end of the period described in the first sentence of this Section 4.2.3. Notwithstanding the preceding sentence, if the Executive accepts employment with any not-for-profit Entity, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.2.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the payments provided for in this Section 4.2.3 and the term of employment shall cease and the Executive shall not be entitled to any such lump sum payment. For purposes of this Agreement, the term "affiliate" shall mean any Entity which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. 4.3 After the Term Date. If at the Term Date, the term of employment ------------------- shall not have been previously terminated pursuant to the provisions of this Agreement, no Disability Period is then in effect and the parties shall not have agreed to an extension or renewal of this Agreement or on the terms of a new employment agreement, then the term of employment shall continue and the Executive shall continue to 10 be employed by the Company pursuant to the terms of this Agreement, subject to termination by either party hereto on 60 days written notice delivered to the other party. If the Company shall terminate the term of employment on or after the Term Date for any reason (other than cause as defined in Section 4.1, in which case Section 4.1 shall apply), which the Company shall have the right to do so long as no Disability Date (as defined in Section 5) has occurred prior to the delivery by the Company of written notice of termination, then in lieu of the provisions of Section 4.2, the Executive shall be entitled to elect by delivery of written notice to the Company, within 30 days after such notice of termination is given, either (A) to cease being an employee of the Company and receive a lump sum payment as provided in Section 4.3.2 or (B) remain an employee of the Company for a period of twelve months pursuant to Section 4.3.3 and receive the payments provided in Section 4.3.3. After the Executive makes such election, the following provisions shall apply: 4.3.1 Regardless of the election made by the Executive, at the end of the 60-day notice period provided for in the first sentence of Section 4.3 the Executive shall have no further obligations or liabilities to the Company whatsoever, except that Sections 4.5 and 4.7 and Sections 6 through 12 shall survive such termination. 4.3.2 In the event the Executive shall make the election provided in clause (A) above, the Company shall pay to the Executive in a lump sum at the end of the 60-day notice period provided for in the first sentence of Section 4.3 (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the year in which such notice of termination is given) an amount (discounted as provided in the second sentence of Section 4.2.2) equal to three times the sum of (i) the Executive's Base Salary as in effect immediately prior to such notice of termination, (ii) an amount equal to the average regular annual bonus amounts (excluding the amount of any special or spot bonuses) received by the Executive from the Company for the two calendar years immediately preceding the calendar year in which such notice of termination is given (assuming that no portion of such bonus is deferred pursuant to Section 3.4), with the bonus for any partial calendar year appropriately annualized and (iii) the annual amount of 11 deferred compensation payable by the Company to the Account pursuant to Section 3.3 as in effect immediately prior to such notice of termination (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3). 4.3.3 In the event the Executive shall make the election provided in clause (B) above, the term of employment shall continue and the Executive shall remain an employee of the Company until the date which is twelve months after the end of the 60-day period referred to in the first sentence of Section 4.3 and during such period the Executive shall be entitled to receive, whether or not he becomes disabled during such period but subject to Section 6, (i) the Executive's Base Salary as in effect immediately prior to such notice of termination, (ii) an annual bonus (all or any portion of which may be deferred by the Executive pursuant to Section 3.4) equal to the average of the regular annual bonus amounts (excluding the amount of any special or spot bonuses) received by the Executive from the Company for the two calendar years immediately preceding the calendar year in which such notice of termination is given (with the bonus for any partial calendar year appropriately annualized) and (iii) deferred compensation as provided in Section 3.3 of this Agreement. At the end of such twelve month period the term of employment shall cease, the Executive shall cease to be an employee of the Company and the Company shall pay to the Executive in a lump sum (discounted as provided in the second sentence of Section 4.2.2) an amount equal to two times the sum of the amounts described in clauses (i), (ii) and (iii) of Section 4.3.2. Except as provided in the next sentence, if the Executive accepts full-time employment with any other Entity during such twelve-month period or notifies the Company in writing of his intention to terminate his employment during such period, the Executive shall cease to be an employee of the Company and the term of employment shall cease effective upon the commencement of such employment or the effective date of such termination as specified by the Executive in such notice, whichever is applicable, and shall be entitled to receive a lump sum payment within 30 days after such commencement or such effective date (provided that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such lump sum payment shall be made within 30 days after the end of the year in which such commencement or effective date occurred) an amount (discounted as provided in the second sentence of Section 4.2.2) for the balance of the Base Salary, deferred 12 compensation (which shall be credited to the Account as provided in the penultimate sentence of Section 3.3) and regular annual bonuses the Executive would have been entitled to receive pursuant to this Section 4.3.3 (including the lump sum) had the Executive remained on the Company's payroll until the end of such twelve-month period. Notwithstanding the preceding sentence, if the Executive accepts employment with any not-for-profit Entity, then the Executive shall be entitled to remain an employee of the Company and receive the payments as provided in the first sentence of this Section 4.3.3; and if the Executive accepts full-time employment with any affiliate of the Company, then the term of employment and the payments provided for in this Section 4.3.3 shall cease and the Executive shall not be entitled to any such lump sum payment. 4.4 Office Facilities. In the event the Executive shall make the election ----------------- provided in clause (B) of Section 4.2 or 4.3, then for the period beginning on the day the Executive makes such election and ending one year thereafter, the Company shall, without charge to the Executive, make available to the Executive office space at the Executive's principal job location immediately prior to his termination of employment, or other location reasonably close to such location, together with secretarial services, office facilities, services and furnishings, in each case reasonably appropriate to an employee of the Executive's position and responsibilities prior to such termination of employment. 4.5 Release. In partial consideration for the Company's obligation to ------- make the payments described in Sections 4.2 and 4.3, the Executive shall execute and deliver to the Company a release in substantially the form attached hereto as Annex B. The Company shall deliver such release to the Executive within 10 days after the written notice of termination is delivered pursuant to Section 4.2 or 4.3 and the Executive shall execute and deliver such release to the Company within 21 days after receipt thereof. If the Executive shall fail to execute and deliver such release to the Company within such 21 day period, or if the Executive shall revoke his consent to such release as provided therein, the Executive's term of employment shall terminate as provided in Section 4.2 or 4.3, as applicable, but the Executive shall receive, in lieu of the payments provided for in said Section 4.2 or 4.3, a lump sum cash payment in an amount determined in accordance with the personnel policies of the Company relating to notice and 13 severance then generally applicable to employees with length of service and compensation level of the Executive. 4.6 Retirement. Notwithstanding the provisions of Sections 4.2, 4.3 or 5, ---------- if the term of employment is in effect and the Executive is still employed by the Company pursuant to this Agreement on the date the Executive first becomes eligible for normal retirement under any retirement plan of the Company or any subsidiary of the Company (the "Retirement Date"), then this Agreement shall terminate automatically on such date and the Executive's employment with the Company shall thereafter be governed by the policies generally applicable to employees of the Company, and the Executive shall not thereafter be entitled to the payments provided in such Sections to the extent not received by the Executive on or prior to the Retirement Date. In addition, no benefits or payments provided in Sections 4.2, 4.3 or 5 shall include any period after the Retirement Date and if the provision of benefits or calculation of payments provided in any such Section would include any period subsequent to the Retirement Date, such provision of benefits shall end on the Retirement Date and the calculation of payments shall cover only the period ending on the Retirement Date. Notwithstanding the foregoing, the Company's obligations under Section 7 of this Agreement shall continue after any such termination and the provisions of Sections 12.1 and 12.7 shall apply to any dispute with respect to this Agreement that arises after any such termination. 4.7 Mitigation. In the event of termination of the term of employment by ---------- the Executive pursuant to Section 4.2 as a result of a material breach by the Company of any of its obligations hereunder, or in the event of termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement, the Executive shall not be required to seek other employment in order to mitigate his damages hereunder; provided, however, that, notwithstanding the foregoing, if there are any damages hereunder by reason of the events of termination described above which are "contingent on a change" (within the meaning of Section 280G(b)(2)(A)(i) of the Code), the Executive shall be required to mitigate such damages hereunder, including any such damages theretofore paid, but not in excess of the extent, if any, necessary to prevent the Company from losing any tax deductions to which it otherwise would be entitled in connection with such damages if 14 they were not so "contingent on a change". In addition to any obligation under the preceding sentence, and without duplication of any amounts required to be paid to the Company thereunder, if any such termination occurs and the Executive, whether or not required to mitigate his damages under the preceding sentence, thereafter obtains other employment, the total cash salary and bonus received in connection with such other employment, whether paid to him or deferred for his benefit, for services through (i) in the case of a termination pursuant to Section 4.2, the later of (x) the Term Date or (y) three years after the date notice of termination is delivered pursuant to Section 4.2, and (ii) in the case of a termination pursuant to Section 4.3, the date which is three years after the end of the 60-day notice period referred to in the first sentence of Section 4.3, in either case up to an amount equal to (x) the discounted lump sum payment received by or for the account of the Executive with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such period, minus (y) the amount of severance the Executive would have received in accordance with the personnel policies of the Company if the Executive had been job eliminated, shall reduce, pro tanto, any amount which the Company would --- ----- otherwise be required to pay to the Executive as a result of such termination and, to the extent amounts have theretofore been paid to him as a result of such termination, such cash salary and bonus shall be paid over to the Company as received with respect to such period, but the provisions of this sentence shall not apply to any type of equity interest, bonus unit, phantom or restricted stock, stock option, stock appreciation right or similar benefit received as a result of such other employment. With respect to the preceding sentences, any payments or rights to which the Executive is entitled by reason of the termination of the term of employment by the Executive pursuant to Section 4.2 or in the event of the termination of the term of employment by the Company pursuant to Section 4.3 or in breach of this Agreement shall be considered as damages hereunder. With respect to the second preceding sentence, the Executive shall in no event be required to pay the Company with respect to any calendar year more than the discounted amount received by him or credited to the Account with respect to Base Salary, annual bonus and deferred compensation under Section 3 for such year. Any obligation of the Executive to mitigate his damages pursuant to this Section 4.7 shall not be a defense or offset to the Company's obligation to pay the Executive in full the amounts provided in Section 4.2.2, 4.2.3, 4.3.2 or 4.3.3, 15 as the case may be, at the time provided therein or the timely and full performance of any of the Company's other obligations under this Agreement. 4.8 Payments. So long as the Executive remains on the payroll of the -------- Company or any subsidiary of the Company, payments of salary, deferred compensation and bonus required to be made pursuant to Section 4.2 or 4.3 shall be made at the same times as such payments are made to senior executives of the Company or such subsidiary. 5. Disability. If during the term of employment and prior to any ---------- termination of this Agreement under Section 4.2 or 4.3, the Executive shall become physically or mentally disabled, whether totally or partially, so that he is prevented from performing his usual duties for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, the Company shall, nevertheless, continue to pay the Executive his full compensation and continue to credit the Account, when otherwise due, as provided in Section 3 and Annex A, through the last day of the sixth consecutive month of disability or the date on which the shorter periods of disability shall have equalled a total of six months in any twelve-month period (such last day or date being referred to herein as the "Disability Date"). If the Executive has not resumed his usual duties on or prior to the Disability Date, the Company shall pay the Executive a pro rata bonus for the year in which the Disability Date occurs and shall pay the Executive disability benefits for the longer of (i) the period ending on the Term Date or (ii) three years (in the case of either (i) or (ii), the "Disability Period"), in an amount equal to 75% of (a) the Executive's Base Salary at the time the Executive becomes disabled (and this reduced amount shall also be deemed to be the Base Salary for purposes of determining the amounts to be credited to his Account pursuant to Section 3.3 and Annex A as further disability benefits) and (b) the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest (all or a portion of which may be deferred by the Executive pursuant to Section 3.4). If during the Disability Period the Executive shall fully recover from his disability, the Company shall have the right (exercisable within 60 days after notice from the 16 Executive of such recovery), but not the obligation, to restore the Executive to full-time service at full compensation. If the Company elects to restore the Executive to full-time service, then this Agreement shall continue in full force and effect in all respects and the Term Date shall not be extended by virtue of the occurrence of the Disability Period. If the Company elects not to restore the Executive to full-time service, the Executive shall be entitled to obtain other employment, subject, however, to the following: (i) the Executive shall be obligated to perform advisory services during any balance of the Disability Period; and (ii) the provisions of Sections 9 and 10 shall continue to apply to the Executive during the Disability Period. The advisory services referred to in clause (i) of the immediately preceding sentence shall consist of rendering advice concerning the business, affairs and management of the Company as requested by the Chief Executive Officer or the Chief Operating Officer of the Company but the Executive shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties. Any income from such other employment shall not be applied to reduce the Company's obligations under this Agreement. The Company shall be entitled to deduct from all payments to be made to the Executive during the Disability Period pursuant to this Section 5 an amount equal to all disability payments received by the Executive during the Disability Period from Workmen's Compensation, Social Security and disability insurance policies maintained by the Company; provided, however, that for so long as, and to the extent that, proceeds paid to the Executive from such disability insurance policies are not includible in his income for federal income tax purposes, the Company's deduction with respect to such payments shall be equal to the product of (i) such payments and (ii) a fraction, the numerator of which is one and the denominator of which is one less the maximum marginal rate of federal income taxes applicable to individuals at the time of receipt of such payments. All payments made under this Section 5 after the Disability Date are intended to be disability payments, regardless of the manner in which they are computed. Except as otherwise provided in this Section 5, the term of employment shall continue during the Disability Period and the Executive shall be entitled to all of the rights and benefits provided for in this Agreement except that, Sections 4.2 and 4.3 shall not apply during the Disability Period and unless the Company has restored the Executive to 17 fill-time service at full compensation prior to the end of the Disability Period, the term of employment shall end and the Executive shall cease to be an employee of the Company at the end of the Disability Period and shall not be entitled to notice and severance or to receive or be paid for any accrued vacation time or unused sabbatical. 6. Death. Upon the death of the Executive during the term of employment, ----- this Agreement and all obligations of the Company to make any payments under Sections 3, 4 and 5 shall terminate except that (i) the Executive's estate (or a designated beneficiary) shall be entitled to receive, to the extent being received by the Executive immediately prior to his death, Base Salary and deferred compensation to the last day of the month in which his death occurs and bonus compensation (at the time bonuses are normally paid) based on the average of the regular annual bonuses (excluding the amount of any special or spot bonuses) in respect of the two calendar years for which the annual bonus received by the Executive from the Company was the greatest, but prorated according to the number of whole or partial months the Executive was employed by the Company in such calendar year, and (ii) the Account shall be liquidated and revalued as provided in Annex A as of the date of the Executive's death (except that all taxes shall be computed and charged to the Account as of such date of death to the extent not theretofore so computed and charged) and the entire balance thereof (plus any amount due under the last paragraph of Section A.6 of Annex A) shall be paid to the Executive's estate (or a designated beneficiary) in a single payment not later than 75 days following such date of death. 7. Life Insurance. Subject to the Executive's satisfactory completion of -------------- any applications and other documentation and any physical examination that may be required by the insurer and to the availability of insurance, the Company shall obtain $2,000,000 face amount of split ownership life insurance on the life of the Executive, to be owned by the Executive or the trustees of a trust for the benefit of the Executive's spouse and/or descendants. Until the death of the Executive, and irrespective of any termination of this Agreement except pursuant to Section 4.1, the Company shall pay all premiums on such policy and shall maintain such policy (without reduction of the face amount of the coverage). At the 18 death of the Executive, or on the earlier surrender of such policy by the owner, the Executive agrees that the owner of the policy shall promptly pay to the Company an amount equal to the premiums on such policy paid by the Company (net of (i) tax benefits, if any, to the Company in respect of payments of such premiums, (ii) any amounts payable by the Company which had been paid by or on behalf of the Executive with respect to such insurance, (iii) dividends received by the Company in respect of such premiums, but only to the extent such dividends are not used to purchase additional insurance on the life of the Executive, and (iv) any unpaid borrowings by the Company on the policy), whether before, during or after the term of this Agreement. The owner of the policy from time to time shall execute, deliver and maintain a customary split dollar insurance and collateral assignment form, assigning to the Company the proceeds of such policy but only to the extent necessary to secure the reimbursement obligation contained in the preceding sentence. The life insurance provided for in this Section 7 shall be in addition to any other insurance hereafter provided by the Company on the life of the Executive under any group or individual policy. 8. Other Benefits. -------------- 8.1 General Availability. To the extent that (a) the Executive is -------------------- eligible under the general provisions thereof and (b) the Company maintains such plan or program for the benefit of its senior executives, during the term of employment and so long as the Executive is an employee of the Company, the Executive shall be eligible to participate in any pension, profit-sharing, stock option or similar plan or program and in any group insurance, hospitalization, medical, dental, accident, disability or similar plan or program of the Company now existing or established hereafter. In addition, the Executive shall be entitled during the term of employment and so long as the Executive is an employee of the Company, to receive other benefits generally available to all senior executives of the Company to the extent the Executive is eligible under the general provisions thereof, including, without limitation, to the extent maintained in effect by the Company for its senior executives, an automobile allowance and financial services. 19 8.2 Benefits After a Termination or Disability. During the period the ------------------------------------------ Executive remains on the payroll of the Company after a termination pursuant to Section 4.2 or 4.3 and during the Disability Period the Executive shall continue to be eligible to receive the benefits required to be provided to the Executive under Section 8.1 to the extent such benefits are maintained in effect by the Company for its senior executives; provided, however, the Executive shall not be entitled to any additional awards or grants under any stock option, restricted stock or other stock based incentive plan. The Executive shall continue to be an employee of the Company for purposes of any stock option and restricted shares agreements and any other incentive plan awards during the term of employment and until such time as the Executive shall leave the payroll of the Company. At the time the Executive's term of employment with the Company terminates and he leaves the payroll of the Company pursuant to the provisions of Section 4.1, 4.2, 4.3, 5 or 6, the Executive's rights to benefits and payments under any benefit plans or any insurance or other death benefit plans or arrangements of the Company or under any stock option, restricted stock, stock appreciation right, bonus unit, management incentive or other plan of the Company shall be determined, subject to the other terms and provisions of this Agreement, in accordance with the terms and provisions of such plans and any agreements under which such stock options, restricted stock or other awards were granted; provided, however, that notwithstanding the foregoing or any more restrictive provisions of any such plan or agreement, if the Executive leaves the payroll of the Company as a result of a termination pursuant to Section 4.2, then all stock options granted to the Executive by the Company shall (i) become immediately exercisable at the time the Executive shall leave the payroll of the Company pursuant to Section 4.2 and (ii) shall remain exercisable (but not beyond the term thereof) during the remainder of the term of employment and for a period of three months thereafter. 8.3 Payments in Lieu of Other Benefits. In the event the term of ---------------------------------- employment and the Executive's employment with the Company is terminated pursuant to Sections 4.1, 4.2, 4.3, 5 or 6 (and regardless of whether the Executive elects clause (A) or (B) as provided in Section 4.2 and 4.3), the Executive shall not be entitled to notice and severance or to be paid for any accrued vacation time or unused sabbatical, the payments provided for in such Sections being in lieu thereof. 20 9. Protection of Confidential Information; Non-Compete. The provisions of --------------------------------------------------- Section 9.2 shall continue to apply through the latest of (i) the Term Date, (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason and (iii) twelve months after the termination of the Executive's employment with the Company pursuant to Section 4.1, 4.2 or 4.3. The provisions of Sections 9.1 and 9.3 shall continue to apply until three years after the latest of the events described in the preceding sentence. 9.1 Confidentiality Covenant. The Executive acknowledges that his ------------------------ employment by the Company (which, for purposes of this Section 9 shall mean Time Warner Inc. and its affiliates) will, throughout the term of employment, bring him into close contact with many confidential affairs of the Company, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods and other information not readily available to the public, and plans for future development. The Executive further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. The Executive further acknowledges that the business of the Company is international in scope, that its products are marketed throughout the world, that the Company competes in nearly all of its business activities with other Entities that are or could be located in nearly any part of the world and that the nature of the Executive's services, position and expertise are such that he is capable of competing with the Company from nearly any location in the world. In recognition of the foregoing, the Executive covenants and agrees: 9.1.1 The Executive shall keep secret all confidential matters of the Company and shall not intentionally disclose such matters to anyone outside of the Company, either during or after the term of employment, except with the Company's written consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder and (ii) the Executive may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such matters to 21 the extent required by applicable laws or governmental regulations or judicial or regulatory process; 9.1.2 The Executive shall deliver promptly to the Company on termination of his employment by the Company, or at any other time the Company may so request, at the Company's expense, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company's business, which he obtained while employed by, or otherwise serving or acting on behalf of, the Company and which he may then possess or have under his control; and 9.1.3 If the term of employment is terminated pursuant to Section 4.1, 4.2 or 4.3, for a period of one year after such termination, without the prior written consent of the Company, the Executive shall not employ, and shall not cause any Entity of which he is an affiliate to employ, any person who was a full-time executive employee of the Company at the date of such termination or within six months prior thereto. 9.2 Non-Compete. The Executive shall not, directly or indirectly, without ----------- the prior written consent of the Chief Executive Officer or the Chief Operating Officer of the Company, render any services to any person or Entity or acquire any interest of any type in any Entity, that might be deemed in competition with the Company; provided, however, that the foregoing shall not be deemed to prohibit the Executive from (a) acquiring, solely as an investment and through market purchases, securities of any Entity which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are publicly traded, so long as he is not part of any control group of such Entity and such securities, if converted, do not constitute more than one percent (1%) of the outstanding voting power of that Entity, (b) acquiring, solely as an investment, any securities of an Entity (other than an Entity that has outstanding securities covered by the preceding clause (a)) so long as he remains a passive investor in such Entity and does not become part of any control group thereof and so long as such Entity is not, directly or indirectly, in competition with the Company, or (c) serving as a director of any Entity that is not in competition with the Company. For purposes of the foregoing, a person or Entity shall be deemed to be in competition with the Company if such person or it engages in any line of business that is substantially the same 22 as either (i) any line of operating business which the Company engages in, conducts or, to the knowledge of the Executive, has definitive plans to engage in or conduct, or (ii) any operating business that is engaged in or conducted by the Company and as to which, to the knowledge of the Executive, the Company covenants in writing, in connection with the disposition of such business, not to compete therewith. 9.3 Specific Remedy. In addition to such other rights and remedies as the --------------- Company may have at equity or in law with respect to any breach of this Agreement, if the Executive commits a material breach of any of the provisions of Section 9.1, the Company shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 9.4 Liquidated Damages. If the Executive commits a material breach of the ------------------ provisions of Section 9.2, the Executive shall pay to the Company as liquidated damages an amount equal to two and one-half times the Executive's then current Base Salary, or if the Executive is not employed by the Company at the time of such breach, an amount equal to two and one-half times the most recent Base Salary paid to the Executive by the Company. The Company shall be entitled to offset any amounts owed by the Executive to the Company under this Section 9.4 against any amounts owed by the Company to the Executive under any provision of this Agreement or otherwise, including without limitation, amounts payable to the Executive under Sections 4.2 or 4.3. The Company and the Executive agree that it is impossible to determine with any reasonable accuracy the amount of prospective damages to the Company upon a breach of Section 9.2 by the Executive and further agree that the damages set forth in this Section 9.4 are reasonable, and not a penalty, based upon the facts and circumstances of the parties and with due regard to future expectations. 10. Ownership of Work Product. The Executive acknowledges that during the ------------------------- term of employment, he may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not 23 (all of the foregoing being collectively referred to herein as "Work Product"), and that various business opportunities shall be presented to him by reason of his employment by the Company. The Executive acknowledges that all of the foregoing shall be owned by and belong exclusively to the Company and that he shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experimental) of the Company, or are, in the case of Work Product, conceived or made on the Company's time or with the use of the Company's facilities or materials, or, in the case of business opportunities, are presented to him for the possible interest or participation of the Company. The Executive shall (i) promptly disclose any such Work Product and business opportunities to the Company; (ii) assign to the Company, upon request and without additional compensation, the entire rights to such Work Product and business opportunities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of his inventorship or creation in any appropriate case. The Executive agrees that he will not assert any rights to any Work Product or business opportunity as having been made or acquired by him prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Company in writing prior to the date hereof. 11. Notices. All notices, requests, consents and other communications ------- required or permitted to be given under this Agreement shall be effective only if given in writing and shall be deemed to have been duly given if delivered personally or sent by prepaid telegram, or mailed first-class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith): 11.1 If to the Company: Time Warner Inc. 75 Rockefeller Plaza New York, New York 10019 Attention: Chief Executive Officer (with a copy, similarly addressed but Attention: General Counsel) 24 11.2 If to the Executive, to his residence address set forth on the records of the Company. 12. General. ------- 12.1 Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the substantive laws of the State of New York applicable to agreements made and to be performed entirely in New York. 12.2 Captions. The section headings contained herein are for -------- reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12.3 Entire Agreement. This Agreement, including Annexes A and B, ---------------- sets forth the entire agreement and understanding of the parties relating to the subject matter of this Agreement and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties, including without limitation, the Prior Agreement. 12.4 No Other Representations. No representation, promise or ------------------------ inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or be liable for any alleged representation, promise or inducement not so set forth. 12.5 Assignability. This Agreement and the Executive's rights and ------------- obligations hereunder may not be assigned by the Executive. The Company may assign its rights together with its obligations hereunder, in connection with any sale, transfer or other disposition of all or substantially all of its business and assets; and such rights and obligations shall inure to, and be binding upon, any successor to all or substantially all of the business and assets of the Company, whether by merger, purchase of stock or assets or otherwise. The Company shall cause such successor expressly to assume such obligations. 12.6 Amendments; Waivers. This Agreement may be amended, modified, ------------------- superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived only by written instrument executed by both of the parties hereto, 25 or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12.7 Resolution of Disputes. Any dispute or controversy arising with ---------------------- respect to this Agreement may be referred by either party to ENDISPUTE for resolution in arbitration in accordance with the rules and procedures of ENDISPUTE. Any such proceedings shall take place in New York City before a single arbitrator (rather than a panel of arbitrators), pursuant to any streamlined or expedited (rather than a comprehensive) arbitration process, before a nonjudicial (rather than a judicial) arbitrator, and in accordance with an arbitration process which, in the judgment of such arbitrator, shall have the effect of reasonably limiting or reducing the cost of such arbitration. The resolution of any such dispute or controversy by the arbitrator appointed in accordance with the procedures of ENDISPUTE shall be final and binding. Judgment upon the award rendered by such arbitrator may be entered in any court having jurisdiction thereof, and the parties consent to the jurisdiction of the New York courts for this purpose. The prevailing party shall be entitled to recover the costs of arbitration (including reasonable attorneys fees and the fees of experts) from the losing party. If at the time any dispute or controversy arises with respect to this Agreement, ENDISPUTE is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for ENDISPUTE for the purposes of the foregoing provisions of this Section 12.7. If the Executive shall be the prevailing party in such arbitration, the Company shall promptly pay, upon demand of the Executive, all legal fees, court costs and other costs and expenses incurred by the Executive in any legal action seeking to enforce the award in any court. 12.8 Beneficiaries. Whenever this Agreement provides for any payment ------------- to the Executive's estate, such payment may be made instead to such beneficiary or beneficiaries as the Executive may designate by written notice 26 to the Company. The Executive shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company (and to any applicable insurance company) to such effect. 12.9 No Conflict. The Executive represents and warrants to the ----------- Company that this Agreement is legal, valid and binding upon the Executive and the execution of this Agreement and the performance of the Executive's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Executive is a party (including, without limitation, any other employment agreement). The Company represents and warrants to the Executive that this Agreement is legal, valid and binding upon the Company and the execution of this Agreement and the performance of the Company's obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Company is a party. 12.10 Withholding Taxes. Payments made to the Executive pursuant to ----------------- this Agreement shall be subject to withholding and social security taxes and other ordinary and customary payroll deductions. 12.11 No Offset. Except as provided in Section 9.4 of this --------- Agreement, neither the Company nor the Executive shall have any right to offset any amounts owed by one party hereunder against amounts owed or claimed to be owed to such party, whether pursuant to this Agreement or otherwise, and the Company and the Executive shall make all the payments provided for in this Agreement in a timely manner. 12.12 Severability. If any provision of this Agreement shall be held ------------ invalid, the remainder of this Agreement shall not be affected thereby; provided, however, that the parties shall negotiate in good faith with respect to equitable modification of the provision or application thereof held to be invalid. To the extent that it may effectively do so under applicable law, each party hereby waives any provision of law which renders any provision of this Agreement invalid, illegal or unenforceable in any respect. 12.13 Definitions. The following terms are defined in this ----------- Agreement in the places indicated: 27 Account - Section 3.3 Account Retained Income - Section A.6 of Annex A affiliate - Section 4.2.3 Applicable Tax Law - Section A.5 of Annex A Base Salary - Section 3.1 cause - Section 4.1 Code - Section 4.2.2 Company - the first paragraph on page 1 and Section 9.1 Disability Date - Section 5 Disability Period - Section 5 Effective Date - the first paragraph on page 1 eligible securities - Section A.1 of Annex A Entity - Section 2 Executive - the first paragraph in page 1 fair market value - Section A.1 of Annex A Investment Advisor - Section A.1 of Annex A Other Period Deferred Amount - Section A.6 of Annex A Pay-Out Period - Section A.6 of Annex A Prior Account - Section 3.5 Prior Agreement - the second paragraph on page 1 Retirement Date - Section 4.6 senior executives - Section 3.1 Term Date - the second paragraph on page 1 term of employment - Section 1 Valuation Date - Section A.6 of Annex A Work Product - Section 10 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. TIME WARNER INC. By /s/ Gerald M. Levin ------------------------- Gerald M. Levin Chairman and Chief Executive Officer /s/ Philip R. Lochner, Jr. ----------------------------- Philip R. Lochner, Jr. 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 A-2 charged with the quantity and kind of securities sold or deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities sold or deemed to have been sold multiplied by the fair market value of such securities on the date of reference. Such charges and credits to the Account shall take place immediately upon the consummation of the transactions to which they relate. As used herein "fair market value" means either (i) if the security is actually purchased or sold by the Company on the date of reference, the actual purchase or sale price per security to the Company or (ii) if the security is not purchased or sold on the date of reference, in the case of a listed security, the closing price per security on the date of reference, or if there were no sales on such date, then the closing price per security on the nearest preceding day on which there were such sales, and, in the case of an unlisted security, the mean between the bid and asked prices per security on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices per security on the nearest preceding day for which such prices are available. If no bid or asked price information is available with respect to a particular security, the price quoted to the Company as the value of such security on the date of reference (or the nearest preceding date for which such information is available) shall be used for purposes of administering the Account, including determining the fair market value of such security. The Account shall be charged currently with all interest paid or deemed payable by the Account with respect to any credit extended or deemed extended to the Account. Such interest shall be charged to the Account, for margin purchases actually made, at the rates and times actually paid by the Account and, for margin purchases deemed to have been made, at the rates and times then charged by an investment banking firm designated by the Company with which the Company does significant business. The Company may, in the Company's sole discretion, from time to time serve as the lender with respect to any margin transactions by notice to the then Investment Advisor and in such case interest shall be charged at the rate and times then charged by an investment banking firm designated by the Company with which the Company does significant business. Brokerage fees shall be charged to the Account, for transactions actually made, at the rates and times actually paid and, for transactions deemed to have been made, at the rates and times then charged for transactions of like size and kind by an A-3 investment banking firm designated by the Company with which the Company does significant business. A.2 Dividends and Interest. The Account shall be credited with ---------------------- dollar amounts equal to cash dividends paid from time to time upon the stocks held or deemed to be held therein. Dividends shall be credited as of the payment date. The Account shall similarly be credited with interest payable on interest bearing securities held or deemed to be held therein. Interest shall be credited as of the payment date, except that in the case of purchases of interest-bearing securities the Account shall be charged with the dollar amount of interest accrued to the date of purchase, and in the case of sales of such interest-bearing securities the Account shall be credited with the dollar amount of interest accrued to the date of sale. All dollar amounts of dividends or interest credited to the Account pursuant to this Section A.2 shall be charged with all taxes thereon deemed payable by the Company (as and when determined pursuant to Section A.5). The Investment Advisor shall have the same right with respect to the investment and reinvestment of net dividends and net interest as he has with respect to the balance of the Account. A.3 Adjustments. The Account shall be equitably adjusted to reflect ----------- stock dividends, stock splits, recapitalizations, mergers, consolidations, reorganizations and other changes affecting the securities held or deemed to be held therein. A.4 Obligation of the Company. The Company shall not be required to ------------------------- purchase, hold or dispose of any of the securities designated by the Investment Advisor; however, whether or not it elects to purchase or sell any such securities, such transactions shall be deemed to have been made and the Account shall be charged with all taxes (including stock transfer taxes), interest, brokerage fees and investment advisory fees, if any, deemed payable by the Company and attributable to such transactions (in all cases net after any tax benefits that the Company would be deemed to derive from the payment thereof, as and when determined pursuant to Section A.5), but no other costs of the Company. The only obligation of the Company is its contractual obligation to make payments to the Executive measured as set forth below. To the extent that the Company, in its discretion, purchases or holds any of the securities designated by the Investment Advisor, the same A-4 shall remain the sole property of the Company, subject to the claims of its general creditors, and shall not be deemed to form part of the Account. Neither the Executive nor his legal representative nor any beneficiary designated by him shall have any right, other than the right of an unsecured general creditor, against the Company in respect of any portion of the Account. A.5 Taxes. The Account shall be charged with all federal, state and ----- local taxes deemed payable by the Company with respect to income recognized upon the dividends and interest received or deemed to have been received by the Account pursuant to Section A.2 and gains recognized upon sales of any of the securities which are deemed to have been sold pursuant to Section A.1 or A.6. The Account shall be credited with the amount of the tax benefit received by the Company as a result of any payment of interest actually made or deemed to be made pursuant to Section A.1 or A.2 and as a result of any payment of brokerage fees and investment advisory fees made or deemed to be made pursuant to Section A.1. If any of the sales of the securities which are deemed to have been sold pursuant to Section A.1 or A.6 results in a loss to the Account, such net loss shall be deemed to offset the income and gains referred to in the second preceding sentence (and thus reduce the charge for taxes referred to therein) to the extent then permitted under the Internal Revenue Code of 1986, as amended from time to time, and under applicable state and local income and franchise tax laws (collectively referred to as "Applicable Tax Law"); provided, however, that for the purposes of this Section A.5 the Account shall, except as provided in the third following sentence, be deemed to be a separate corporate taxpayer and the losses referred to above shall be deemed to offset only the income and gains referred to in the second preceding sentence. Such losses shall be carried back and carried forward within the Account to the extent permitted by Applicable Tax Law in order to minimize the taxes deemed payable on such income and gains within the Account. For the purposes of this Section A.5, all charges and credits to the Account for taxes shall be deemed to be made as of the end of the Company's taxable year during which the transactions, from which the liabilities for such taxes are deemed to have arisen, are deemed to have occurred. Notwithstanding the foregoing, if and to the extent that in any year there is a net loss in the Account that cannot be offset against income and gains in any prior year, then an amount equal to the tax benefit to the A-5 Company of such net loss (after such net loss is reduced by the amount of any net capital loss of the Account for such year) shall be credited to the Account on the last day of such year. If and to the extent that any such net loss of the Account shall be utilized to determine a credit to the Account pursuant to the preceding sentence, it shall not thereafter be carried forward under this Section A.5. For purposes of determining taxes payable by the Company under any provision of this Annex A it shall be assumed that the Company is a taxpayer and pays all taxes at the maximum marginal rate of federal income taxes and state and local income and franchise taxes (net of assumed federal income tax benefits) applicable to business corporations and that all of such dividends, interest, gains and losses are allocable to its corporate headquarters, which are currently located in New York City. A.6 Payments. Subject to the provisions of Section A.7, payments of -------- deferred compensation shall be made as provided in this Section A.6. Deferred compensation shall be paid monthly for a period of 60 months (the "Pay-Out Period") commencing on the first day of the month after the later of (i) the Term Date and (ii) the date the Executive ceases to be an employee of the Company and leaves the payroll of the Company for any reason, provided, however, that if the Executive was named in the compensation table in the Company's then most recent proxy statement, such payments shall commence on January 1st of the year following the year in which the latest of such events occurs. On each payment date, the Account shall be charged with the dollar amount of such payment. On each payment date, the amount of cash held or deemed to be held in the Account shall be not less than the payment then due and the Company may select the securities to be sold or deemed sold to provide such cash if the Investment Advisor shall fail to do so on a timely basis. The amount of any taxes payable with respect to any such sales shall be computed, as provided in Section A.5 above, and deducted from the Account, as of the end of the taxable year of the Company during which such sales are deemed to have occurred. Solely for the purpose of determining the amount of monthly payments during the Pay-Out Period, the Account shall be valued on the fifth trading day preceding the first monthly payment of each year of the Pay-Out Period, or more frequently at the Company's election (the "Valuation Date"), by adjusting all of the securities held or deemed to be held in the Account to their fair market value (net of the tax adjustment that would be made A-6 thereon if sold, as estimated by the Company) and by deducting from the Account the amount of all outstanding indebtedness and all amounts with respect to which the Executive has elected pursuant to clause (ii) of Section A.7 to receive payments at times different from the time provided in this Section A.6 (the "Other Period Deferred Amount"). The extent, if any, by which the Account, valued as provided in the immediately preceding sentence (but not reduced by the Other Period Deferred Amount to the extent not theretofore distributed), exceeds the aggregate amount of credits to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement as of each Valuation Date and not theretofore distributed or deemed distributed pursuant to this Section A.6 is herein called "Account Retained Income". The amount of each payment for the year, or such shorter period as may be determined by the Company, of the Pay-Out Period immediately succeeding such Valuation Date, including the payment then due, shall be determined by dividing the aggregate value of the Account, as valued and adjusted pursuant to the second preceding sentence, by the number of payments remaining to be paid in the Pay-Out Period, including the payment then due; provided that each payment made shall be deemed made first out of Account Retained Income (to the extent remaining after all prior distributions thereof since the last Valuation Date). The balance of the Account (excluding the Other Period Deferred Amount), after all the securities held or deemed to have been held therein have been sold or deemed to have been sold and all indebtedness liquidated, shall be paid to the Executive in the final payment, which shall be decreased by deducting therefrom the amount of all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. If this Agreement is terminated by the Company pursuant to Section 4.1 or if the Executive terminates this Agreement or the term of employment in breach of this Agreement, the Account shall be valued as of the later of (i) the Term Date or (ii) twelve months after termination of the Executive's employment with the Company, and the balance of the Account, after the securities held or deemed to have been held therein have been sold or deemed to have been sold and all related indebtedness liquidated, shall be paid to the Executive as soon as practicable and in any event within 75 days following the later of such dates in a final lump sum payment, which shall be decreased by deducting therefrom the amount of A-7 all taxes attributable to the sale of any securities held or deemed to have been held in the Account since the end of the preceding taxable year of the Company, which taxes shall be computed as of the date of such payment. Payments made pursuant to this paragraph shall be deemed made first out of Account Retained Income. If the Executive becomes disabled within the meaning of Section 5 of the Agreement and is not thereafter returned to full-time employment with the Company as provided in said Section 5, then deferred compensation shall be paid monthly during the Pay-Out Period commencing on the first day of the month following the end of the Disability Period in accordance with the provisions of the first paragraph of this Section A.6. If the Executive shall die at any time whether during or after the term of employment, the Account shall be valued as of the date of the Executive's death and the balance of the Account shall be paid to the Executive's estate or beneficiary within 75 days of such death in accordance with the provisions of the second preceding paragraph. Within 90 days after the end of the taxable year of the Company in which payments have been made from the Account and at the time of the final payment from the Account, the Company shall compute and shall credit to the Account, the amount of the tax benefit assumed to be received by it from the payment to the Executive of amounts of Account Retained Income included in any such payment. No additional credits shall be made to the Account pursuant to the preceding sentence in respect of the amounts credited to the Account pursuant to the preceding sentence. Notwithstanding any provision of this Section A.6, the Executive shall not be entitled to receive pursuant to this Annex A an aggregate amount that shall exceed the sum of (i) all credits made to the Account pursuant to Sections 3.3, 3.4 and 3.5 of the Agreement to which this Annex is attached, (ii) the net cumulative amount (positive or negative) of all income, gains, losses, interest and expenses charged or credited to the Account pursuant to this Annex A (excluding credits made pursuant to the second preceding sentence), after all credits and charges to the Account with respect to the tax benefits or burdens thereof, and (iii) an amount equal to the tax benefit to the Company from the payment of the amount (if positive) determined under clause (ii) above; A-8 and the final payment(s) otherwise due may be adjusted or eliminated accordingly. In determining the tax benefit to the Company under clause (iii) above, the Company shall be deemed to have made the payments under clause (ii) above with respect to the same taxable years and in the same proportions as payments of Account Retained Income were actually made from the Account. Except as otherwise provided in this paragraph, the computation of all taxes and tax benefits referred to in this Section A.6 shall be determined in accordance with Section A.5 above. A.7 Other Payment Methods. Notwithstanding the foregoing provisions --------------------- of this Annex A, the Executive may, prior to the commencement of any calendar year elect by written notice to the Company to cause (i) all or any portion of the amounts otherwise to be credited to the Account in such year under Section 3.3 of the Agreement not to be so credited but to be paid to the Executive on the date(s) such credits otherwise would have been made thereunder and/or (ii) all or any portion of the amounts to be credited to the Account under Section 3.3 of the Agreement in such year (after giving effect to clause (i) above) to be payable from the Account at times different from those provided in Section A.6 above but not earlier than the dates on which such amounts were to be credited to the Account. ANNEX B RELEASE ------- Pursuant to the terms of the Employment Agreement made as of _____________, between TIME WARNER INC., a Delaware corporation (the "Company"), 75 Rockefeller Plaza, York, New York 10019 and the undersigned (the "Agreement"), and in consideration of the payments made to me and other benefits to be received by me pursuant thereto, I, [Name], being of lawful age, do hereby release and forever discharge the Company and its officers, shareholders, subsidiaries, agents, and employees, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of my employment with the Company or any of its subsidiaries or the termination of such employment, which I may now or hereafter have under any federal, state or local law, regulation or order, including without limitation, under the Age Discrimination in Employment Act, as amended, through and including the date of this Release; provided, however, that the execution of this Release shall not -------- ------- prevent the undersigned from bringing a lawsuit against the Company to enforce its obligations under the Agreement. I acknowledge that I have been given at least 21 days from the day I received a copy of this Release to sign it and that I have been advised to consult an attorney. I understand that I have the right to revoke my consent to this Release for seven days following my signing. This Release shall not become effective or enforceable until the expiration of the seven-day period following the date it is signed by me. I further state that I have read this document and the Agreement referred to herein, that I know the contents of both and that I have executed the same as my own free act. WITNESS my hand this ____ day of ___________ , ____. ___________________________ [Name] EX-10.23 9 AMENDED TIME WARNER DEFERED COMPENSATION PLAN EXHIBIT 10.23 TIME WARNER DEFERRED COMPENSATION PLAN (AMENDED AND RESTATED AS OF NOVEMBER 1, 1994) ARTICLE I ESTABLISHMENT OF THE PLAN 1.1 ESTABLISHMENT OF PLAN. Time Warner Inc. (the "Company") has established this plan for certain Employees effective as of September 15, 1993, known as the Time Warner Deferred Compensation Plan (the "Plan"). The purposes of the Plan are to provide Eligible Employees a means of irrevocably deferring to a future year the receipt of certain compensation and to enable Employing Companies that participate in certain qualified defined contribution plans to provide benefits under this Plan to certain Employees with respect to certain compensation in excess of the Compensation Limit. 1.2 APPLICABILITY OF PLAN. The provisions of the Plan are applicable only to Employees of Employing Companies employed on or after the effective date of the Plan. The Plan is intended to be an unfunded, non-qualified deferred compensation plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. ARTICLE II DEFINITIONS 2.1 DEFINITIONS. Whenever used in the Plan, the following terms shall have the respective meanings set forth below unless otherwise expressly provided, and when the defined meaning is intended, the term is capitalized. 2.2 "CODE" means the Internal Revenue Code of 1986, as amended. 2.3 "COMMITTEE" means the committee appointed by the Company as provided in Section 7.1. 2.4 "COMPANY" means Time Warner Inc. 2.5 "COMPENSATION LIMIT" means the compensation limit of Section 401(a)(17) of the Code, as adjusted under Section 401(a)(17)(B) of the Code for increases in the cost of living. 2.6 "DEFERRED COMPENSATION ACCOUNT" means the separate account established under Article V of the Plan for each Participant representing amounts deferred by a Participant pursuant to Article III and Employing Company Allocations credited to a Participant pursuant to Article IV. 2.7 "DISABILITY" means permanent and total disability as determined by the Social Security Administration or any disability which qualifies a Participant for benefits under the provisions of the Time Warner Inc. Long Term Disability Plan or, in the case of an employee covered by a long term disability plan of TWE or a Related Company, under the provisions of such plan, whichever shall occur first. 2.8 "ELIGIBLE EMPLOYEE" means an individual who meets the eligibility requirements of Section 3.1. 2.9 "EMPLOYEE" means an individual employed by an Employing Company. 2.10 "EMPLOYING COMPANY" means: (a) the Company, (b) TWE and (c) each Related Company which has been authorized by the Committee to participate in the Plan and has adopted the Plan. 2.11 "EMPLOYING COMPANY ALLOCATIONS" means the allocations made under the Plan pursuant to Article IV. 2.12 "INACTIVE PARTICIPANT" means a Participant whose employment has terminated and whose Deferred Compensation Account has not been fully distributed. 2.13 "PARTICIPANT" means each Employee who participates in the Plan in accordance with the terms and conditions of the Plan. 2.14 "PLAN" means this plan, the Time Warner Deferred Compensation Plan as set forth herein and as it may be amended from time to time. 2.15 "RELATED COMPANY" means any entity of which, as of the time of computation, at least 50% of the outstanding voting stock or ownership interest is owned, either directly or indirectly, by the Company or TWE. 2.16 "RETIREMENT" means that a Participant, as of the date his or her employment terminates, is eligible for retirement under the then current qualified defined benefit plan of the Company, TWE or the Related Company from which he or she is terminating employment. If such company does not have a qualified defined benefit plan, eligibility for retirement shall be determined by the applicable provision in the qualified defined contribution plan of such company for which the Participant is eligible, and, if more than one, the plan which would result in the earliest distribution under this Plan. 2.17 "TWE" means Time Warner Entertainment Company, L.P. 2 2.18 "VALUATION DATE" means the last day of each calendar month. On and after December 1, 1994, Valuation Date means each day of each calendar month. ARTICLE III PARTICIPANT DEFERRALS 3.1 ELIGIBILITY. The Employees who shall be eligible to make deferral elections under the Plan are those salaried officers and other key employees of an Employing Company who at the time of a deferral election pursuant to Section 3.3 below: (i) are on the U.S. payroll of the Employing Company; and (ii) have a current base salary plus bonus in excess of the Compensation Limit or are otherwise designated as eligible by the Committee. For purposes of this subsection 3.1(ii), "bonus" means any annual bonus paid pursuant to a regular program (but excluding long-term cash incentive plan payments and commission, spot and similar bonuses) for the year preceding the current calendar year, except that, in the case of a deferral election to be made by a newly hired Employee, with respect to a bonus to be earned in (A) the current year, "bonus" means the target or otherwise estimated bonus for that portion of the current calendar year after the date of his or her hire, and (B) the year following hire, "bonus" means the target or otherwise estimated bonus for the current calendar year. The Committee may from time to time, in its sole and absolute discretion, modify the above eligibility requirements and make such additional or other requirements for eligibility as it may determine. 3.2 COMPENSATION ELIGIBLE FOR DEFERRAL. An Eligible Employee may elect to defer receipt of all or a specified portion of any bonus, but only to the extent the receipt thereof would cause the Eligible Employee's compensation to exceed the Compensation Limit. Each such deferral shall be expressed as a percentage, in 10% increments only, but in no event shall any election result in a deferral of less than $5,000. In the case of a deferral election made on or after November 1, 1994, the Eligible Employee may elect to have the designated percentage apply only to that portion of the bonus in excess of a certain dollar amount that he or she specifies when making the election. For purposes of this Section 3.2, "bonus" means any annual bonus paid pursuant to a regular program (but excluding long-term cash incentive plan payments and commission, spot and similar bonuses) and which would otherwise be payable in cash to an Eligible Employee for services as an Employee. 3 3.3 DEFERRAL ELECTIONS. An Eligible Employee with the consent of the Committee may annually make an irrevocable election to defer certain compensation described in Section 3.2 and participate herein by timely delivering a properly executed election to the Committee on a form prescribed by the Committee. The election form shall specify with respect to the compensation to be deferred for the year, pursuant to the provisions of Section 3.2 and Article VI: (i) the percentage of the regular bonus to be deferred, or, for elections made on or after November 1, 1994, the certain dollar amount of such bonus in excess of which the deferral has been elected, if applicable; and (ii) the time for the commencement of payment of the deferred compensation, which must be either on account of retirement or at an in-service year to be specified by the Eligible Employee. Compensation which is to be deferred to an in- service payment date must be deferred for no fewer than three calendar years following the year in which it was earned. 3.4 EFFECTIVE DATE OF ELECTION. (a) An election to defer compensation must be received by the Committee prior to the beginning of the calendar year in which such compensation is earned. Such an election shall become irrevocable as of the last day of the calendar year prior to the calendar year in which such compensation is earned. (b) Notwithstanding the date specified in subsection (a) above, the Committee may prescribe an earlier or later date by which time an Eligible Employee must elect to defer such compensation. (c) Under no circumstances may an Eligible Employee at any time defer compensation to which he or she has attained a legally enforceable right to receive currently. ARTICLE IV EMPLOYING COMPANY ALLOCATIONS 4.1 EMPLOYING COMPANY ALLOCATIONS. (a) Subject to the right of the Company or the Committee to modify, amend or terminate the Plan, and to modify, suspend or discontinue the respective Employing Company Allocations under the Plan, each Employing Company may make Employing Company Allocations with respect to a designated year, on behalf of the employees of such Employing Company who are eligible as provided in this Article IV to have Employing Company Allocations allocated to their Deferred Compensation Accounts under the Plan for such year. (b) All Employing Company Allocations shall be allocated and credited to each such Deferred Compensation Account as provided in Section 5.3(a) in an amount equal to the 4 allocation under such qualified defined contribution plan the Employee would have received if his or her Compensation in excess of the Compensation Limit were included, or such other amount determined by the Committee, in its sole and absolute discretion, under the applicable provisions of this Plan. (c) An Employee is eligible to have an Employing Company Allocation credited to his or her Deferred Compensation Account under the Plan for any year only if the Employee's Compensation exceeds the Compensation Limit in effect for such plan year. (d) Employing Company Allocations shall be credited only with respect to an Employee's Compensation in excess of the Compensation Limit in effect for the year for which such allocations are credited, up to a maximum Compensation of $250,000 for 1994. The maximum Compensation shall be increased by 5% annually for each year after 1994, but shall in no event exceed $350,000. (e) All Employing Company Allocations shall be distributed in accordance with the provisions of Article VI, provided however, that the provisions in Sections 6.1(e) and 6.3 for in-service payments shall not apply to such amounts. 4.2 COMPENSATION. For purposes of this Article, "Compensation" for any Employee shall have the same meaning as defined in the qualified defined contribution plan of the Employing Company with respect to which it is making an Employing Company Allocation on behalf of the Employee, provided however, that the Compensation Limit in such qualified defined contribution plan's definition shall be disregarded and any bonuses deferred under this Plan shall be included in this definition of Compensation unless any such bonus would be excluded under the definition of compensation in such qualified defined contribution plan, regardless of the Compensation Limit. The Committee, in its sole and absolute discretion, may make such modifications to such definition with respect to the Plan as it considers necessary or desirable. 4.3 ELIGIBILITY, PARTICIPATION AND VESTING. As to any Employee, the rules regarding eligibility, participation and vesting of the qualified defined contribution plan of the Employing Company with respect to which it is making an Employing Company Allocation on behalf of the Employee shall also apply to this Plan, but only as to such Employing Company Allocation. The Committee, in its sole and absolute discretion, may make such modifications to such rules with respect to the Plan as it considers necessary or desirable. Any such Employing Company Allocations for eligible employees of Time Warner Inc. participating in the Time Warner Employees' Stock Ownership Plan ("TESOP") and for eligible employees participating in the Warner Music Group Inc. Profit Sharing Plan (the "Profit Sharing Plan"), shall become vested, in the case of the TESOP participants, only after four Periods of Service or Years of Service, and in the case of the Profit Sharing Plan participants, only after five Years of Service. "Period of Service" or "Year of Service" shall be as determined under each such respective qualified plan. ARTICLE V 5 DEFERRED COMPENSATION ACCOUNT 5.1 DEFERRED COMPENSATION ACCOUNT. (a) A Deferred Compensation Account shall be established for each Participant who makes a deferral election pursuant to Article III or for whom an Employing Company Allocation is credited pursuant to Article IV. Compensation deferred by a Participant in any year under the Plan and Employing Company Allocations, along with the hypothetical income on such amounts, shall be credited to the Participant's Deferred Compensation Account. (b) The Company shall maintain the Deferred Compensation Accounts of all Participants who are employed, at the time a deferred amount would otherwise be payable or an Employing Company Allocation is credited, by an Employing Company other than TWE or an Employing Company owned primarily through TWE. TWE shall maintain the Deferred Compensation Accounts of all Participants who are employed, at such times, by TWE or any Employing Company owned primarily through TWE. (c) All payments made under the Plan shall be made directly by the Company or TWE, as applicable pursuant to subsection (b) above, from the respective company's general assets and no deferred compensation or Employing Company Allocations shall be segregated or earmarked or held in trust. 5.2 HYPOTHETICAL INVESTMENT. (a) Amounts credited to a Participant's Deferred Compensation Account shall be deemed to be invested in the following deemed investment vehicle: A hypothetical fixed income fund which shall be deemed to accrue interest, compounded monthly on each Valuation Date, for each month of the deferral period, at a deemed rate which shall be equal to the long- term applicable federal rate for each such month as announced by the Internal Revenue Service. On and after December 1, 1994, such interest shall be compounded daily on each Valuation Date. (b) If the Committee shall determine in good faith that it is impossible or impractical to maintain the deemed investment vehicle described in subsection (a) above, the Committee may, in its sole and absolute discretion, replace such investment vehicle with a deemed investment vehicle which the Committee has determined, in its sole and absolute discretion, to be substantially similar thereto. 5.3 MANNER OF HYPOTHETICAL INVESTMENT. (a) For purposes of the hypothetical investment under Section 5.2, deferred compensation, including any Employing Company Allocations, shall be considered to be invested on the date the recordkeeper of the Plan records the deferral amount. For amounts deferred pursuant to deferral elections made prior to November 1, 1994, deferred compensation shall be considered to be invested as of the first day of the month in which the compensation would otherwise have been payable. 6 (b) Distributions from Deferred Compensation Accounts pursuant to Article VI shall accrue interest only through the Valuation Date immediately prior to the commencement of processing of any such distribution. (c) As of each Valuation Date, the value of a Participant's or Inactive Participant's Deferred Compensation Account shall be equal to the sum of: (i) the amounts, if any, deferred by the Participant pursuant to Article III; (ii) the amounts, if any, of Employing Company Allocations credited pursuant to Article IV; and (iii) interest which has accrued pursuant to this Article V; reduced by: (iv) any amounts distributed pursuant to Article VI. 5.4 STATEMENT OF ACCOUNT. As soon as practicable after the end of each calendar quarter, a statement shall be sent to each Participant and Inactive Participant with respect to the value of his or her Deferred Compensation Account as of the end of such quarter. ARTICLE VI PAYMENT OF DEFERRED COMPENSATION ACCOUNT 6.1 PAYMENT ON ACCOUNT OF RETIREMENT. (a) In the event of the termination of the Participant's employment with the Company, TWE or a Related Company on account of his or her Retirement, the Participant's Deferred Compensation Account shall be distributed to him or her in five annual installment payments. (b) Notwithstanding subsection (a) above, if the value of the Participant's Deferred Compensation Account is less than $50,000 as of the Valuation Date immediately prior to the date of Retirement, payment shall be made in a lump sum. (c) Notwithstanding subsection (a) above, if the value of the Participant's Deferred Compensation Account is $50,000 or more and such Participant has requested a lump sum payment, by delivering written notice to the Committee on a form prescribed by it, at least one calendar year prior to his or her Retirement date, the Committee may, in its sole and absolute discretion, make payment in a lump sum. 7 (d) The first installment, or lump sum, as the case may be, shall be distributed as soon as practicable after the January 1 immediately following the date of Retirement. Subsequent annual installment payments shall be distributed as soon as practicable after each following January 1. (e) Notwithstanding the payment provisions in subsections (a), (b), (c) and (d) above, the Committee may instead, in its sole and absolute discretion, prior to a Participant's actual Retirement date, make one special in-service payment in a lump sum of all or any portion of the Participant's Deferred Compensation Account (but not less than $5,000), to be distributed as soon as practicable after the expiration of 36 months following the month in which the Participant has requested such special in-service payment by delivering written notice to the Committee on a form prescribed by it. (i) The value of any such special in-service payment shall not include amounts payable under existing in-service payment elections or amounts attributable to Employing Company Allocations. (ii) Interest which has accrued with respect to any special in- service payment shall be payable at the time of such payment and shall be calculated pursuant to Section 5.2. (iii) In the event of the termination of the Participant's employment with the Company, TWE or a Related Company for any reason, prior to the payment of any such special in- service payment, any such amount shall be paid in the same manner and at the same time or times as any other payments of the Participant's account due under this Article. Interest on such in-service payment shall be paid at the time of such payment and shall be calculated pursuant to Section 5.2. In the event of death, payment shall be made as provided for in Section 6.5. 6.2 PAYMENT ON ACCOUNT OF DISABILITY. (a) In the event a Participant meets the definition of Disability, the value of the Participant's Deferred Compensation Account shall be distributed to him or her in five annual installment payments. (b) Notwithstanding subsection (a) above, if the value of the Participant's Deferred Compensation Account is less than $50,000 as of the Valuation Date immediately prior to the date the definition of Disability is met, payment shall be made in a lump sum. (c) The first installment, or lump sum, as the case may be, shall be distributed as soon as practicable after the January 1 immediately following the date the Participant has met the definition of Disability. Subsequent annual installment payments shall be distributed as soon as practicable after each following January 1. 8 (d) If a Participant or Inactive Participant no longer meets the definition of Disability and returns to work with the Company, TWE or a Related Company, no further payments shall be made on account of the prior Disability and distribution of his or her remaining Deferred Compensation Account shall be made as otherwise provided in this Article VI. 6.3 IN-SERVICE PAYMENTS (a) An in-service payment elected by a Participant pursuant to Section 3.3(ii) shall be distributed in a lump sum as soon as practicable after January 1 in the year specified by the Participant. (b) Notwithstanding subsection (a) above, if the Participant has requested, by delivering written notice to the Committee prior to January 1 of the year preceding that in which the in-service payment is to be made, the Committee may, in its sole and absolute discretion, defer such payment until such later year as the Participant may request. Any such additional deferral (i) must be for full calendar years, and for no fewer than three calendar years following the year in which payment would have been made but for the additional deferral, (ii) must be for the whole amount originally deferred, (iii) can only be made once with respect to any in-service payment, and (iv) shall be distributed in a lump sum as soon as practicable after January 1 in the year specified by the Participant. (c) Interest which has accrued with respect to the amount of any in- service payment shall be payable at the time of such payment and shall be calculated pursuant to Section 5.2. (d) In the event of the termination of a Participant's employment for any reason prior to the time any in-service payment under this Section 6.3 would have been made, distribution of such payment shall be made according to the manner of payment specified in Section 6.1, 6.2, 6.4 or 6.5, based on the Participant's actual reason for termination of employment. (e) The Committee may, in its sole and absolute discretion, defer any in-service payment previously elected by any officer of the Company or TWE who at the time of the designated in-service payment date is at or above the level of a senior vice president. In the event of any such deferral by the Committee, payment shall be made under this Article VI as if such officer had made a deferral election for payment on account of Retirement. 6.4 PAYMENT ON ACCOUNT OF TERMINATION OF EMPLOYMENT OTHER THAN ON ACCOUNT OF DEATH, DISABILITY OR RETIREMENT. (a) In the event of the termination of employment with the Company, TWE or a Related Company for reasons other than death, Disability or Retirement, the value of the Participant's Deferred Compensation Account shall be distributed to him or her in five annual installment payments. A Participant shall not be considered to have terminated employment for purposes of the Plan if he or she transfers directly to the Company, TWE or a Related Company. 9 (b) Notwithstanding subsection (a) above, if the value of the Participant's Deferred Compensation Account is less than $50,000 as of the Valuation Date immediately prior to the date of such termination, payment shall be made in a lump sum. (c) The first installment, or lump sum, as the case may be, shall be distributed as soon as practicable after the January 1 immediately following the date the Participant has terminated employment. Subsequent annual installment payments shall be distributed as soon as practicable after each following January 1. 6.5 PAYMENT TO BENEFICIARY OR ESTATE IN THE EVENT OF DEATH. Notwithstanding the provisions for payment described in Sections 6.1, 6.2, 6.3 and 6.4 above, in the event of the death of a Participant or Inactive Participant before the distribution of his or her Deferred Compensation Account has commenced, or before such account has been fully distributed, such account shall be determined as of the Valuation Date coincident with or immediately prior to the date that the Committee commences the processing of the distribution, after both a written notice of his or her death and a death certificate have been received by the Committee. Such account shall be distributed in a lump sum to the person or persons designated from time to time by a Participant or Inactive Participant by written notice to the Committee as beneficiary or beneficiaries to receive payments under the Plan after his or her death, which designation has not been revoked by notice to the Committee at the date of such death. Any such notice shall be in such form as required by the Committee or acceptable to it which is properly completed and delivered to the Committee, any member thereof or its designee and shall be deemed to have been given when it is actually received by any such individual. If no person has been designated as beneficiary, or if no person so designated survives the Participant or Inactive Participant, such account shall be distributed in a lump sum as soon as practicable thereafter to his or her estate. 6.6 SEVERE UNFORESEEABLE FINANCIAL EMERGENCY PAYMENTS. Notwithstanding any other provisions of the Plan, if the Committee determines, after consideration of an application of a Participant or Inactive Participant, that such individual has a severe unforeseeable financial emergency of such a substantial nature and beyond the individual's control that a payment of compensation previously deferred under the Plan is warranted, the Committee may, in its sole and absolute discretion, direct that all or a portion of the balance of his or her Deferred Compensation Account be paid to such individual in such manner and at such time as the Committee shall specify, but only to the extent reasonably required to satisfy the emergency need. 6.7 INCAPACITY. The Committee may direct that any amounts distributable under the Plan to a person under a legal disability be made to (and be withheld until the appointment of) a representative qualified pursuant to law to receive such payment on such person's behalf. 6.8 VALUATION OF DISTRIBUTIONS. For purposes of distribution pursuant to this Article VI, the balance of each Deferred Compensation Account shall be valued as of the Valuation Date immediately preceding the date that the Committee commences the processing of the 10 distribution of the balance of such account, or the particular installment thereof. 6.9 METHOD OF PAYING INSTALLMENTS. Installment payments as provided for in this Article VI shall be paid as follows: 20% of the value of the Deferred Compensation Account subject to installment payments shall be paid in the first installment; 25% of the remaining value shall be paid in the second installment; 33.3% of the remaining value shall be paid in the third installment; 50% of the remaining value shall be paid in the fourth installment; and all of the remaining value in the account shall be paid in the fifth and final installment. ARTICLE VII ADMINISTRATION 7.1 THE COMMITTEE. The Plan shall be administered by a Committee, consisting of not less than three members to be appointed by the Company and to serve at the pleasure of the Company. Any member of the Committee may resign at any time by giving notice to the Company. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. No member of the Committee shall receive any compensation for his or her services as such. Participants and Inactive Participants may be members of the Committee but may not participate in any decision affecting their own account in any case where the Committee may take discretionary action under Article VI. A majority of the members of the Committee shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Committee shall be by a vote of a majority of its members present at any meeting or, without a meeting, by instrument in writing signed by all its members. Members of the Committee may participate in a meeting of such Committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other, and such participation in a meeting shall constitute presence in person at the meeting. The Committee shall be the administrator of the Plan and shall have all powers necessary to administer the Plan, including discretionary authority to determine eligibility for benefits and to decide claims under the terms of the Plan, except to the extent that any such powers are vested in any other fiduciary by the Plan or by the Committee. The Committee may from time to time establish rules for the administration of the Plan, and it shall have the exclusive right to interpret the Plan to decide any matters arising in connection with the administration and operation of the Plan. All its rules, interpretations and decisions shall be conclusive and binding on the Employing Companies and on Eligible Employees, Participants and Inactive Participants. The Committee may delegate any of its powers or duties to others as it shall determine and may retain counsel, agents and such clerical and accounting services as it may require in carrying out the provisions of the Plan. 11 The Committee may rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person who is employed or engaged for any purpose in connection with the administration of the Plan. Neither the Committee nor a member of the board of directors of the Company or the board of directors (or governing body) of TWE or a Related Company and no employee of the Company, TWE or any Related Company shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or for anything done or omitted to be done in connection with the Plan. The Committee shall keep a record of all its proceedings and of all payments directed by it to be made to Participants or Inactive Participants or payments made by it for expenses or otherwise. 7.2 INDEMNIFICATION. The Company and TWE shall, to the fullest extent permitted by law, indemnify each director, officer or employee of the Company, TWE or any Related Company (including the heirs, executors, administrators and other personal representatives of such person) and each member of the Committee against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or actual suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was serving any employee benefit plans of the Company, TWE or any Related Company in any capacity at the request of such company. 7.3 EXPENSES OF ADMINISTRATION. Any expense incurred by the Company or the Committee relative to the administration of the Plan shall be paid by the Employing Companies in such proportions as the Company may direct. 7.4 BENEFIT CLAIMS. All claims for benefits under the Plan by a Participant or beneficiary shall be made in writing to a person designated by the Committee for such purpose. If the designated person receiving a claim for benefits believes that the claim should be denied, he or she shall notify the claimant in writing of the denial of the claim within ninety (90) days after his or her receipt thereof. Such notice shall (a) set forth the specific reason or reasons for the denial, making reference to the pertinent provisions of the Plan or the Plan documents, if applicable, on which the denial is based, (b) describe any additional material or information that should be received before the claim request may be acted upon favorably, and explain why such material or information, if any, is needed and (c) inform the person making the claim of his or her right pursuant to this Article to request review of the decision by the Committee. Any such person who believes that he or she has submitted all available and relevant information may appeal the denial of a claim to the Committee by submitting a written request for review to the Committee within sixty (60) days after the date on which such denial is received. Such period may be extended by the Committee for good cause shown. The person making the request for review may examine pertinent Plan documents. The request for review 12 may discuss any issues relevant to the claim. The Committee shall decide whether or not to grant the claim within sixty (60) days after receipt of the request for review, but this period may be extended by the Committee for up to an additional sixty (60) days in special circumstances. If such an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. The Committee's decision shall be in writing, shall include specific reasons for the decision and shall refer to pertinent provisions of the Plan or of Plan documents, if applicable, on which the decision is based. ARTICLE VIII AMENDMENT AND TERMINATION 8.1 AMENDMENTS. The Company (by action of its board of directors) or the Committee (for the Company, TWE and the other Employing Companies) may at any time amend the Plan by an instrument in writing. 8.2 TERMINATION OR SUSPENSION. The continuance of the Plan and the ability of an Eligible Employee to make a deferral for any year are not assumed as contractual obligations of the Company, TWE or any other Employing Company. The Company reserves the right (for itself, TWE and the other Employing Companies) by action of its board of directors or the Committee, to terminate or suspend the Plan, or to terminate or suspend the Plan with respect to itself, TWE or an Employing Company. TWE or any Employing Company may terminate or suspend the Plan with respect to itself by executing and delivering to the Company or the Committee such documents as the Company or Committee shall deem necessary or desirable. 8.3 PARTICIPANTS' RIGHTS TO PAYMENT. No termination of the Plan or amendment thereto shall deprive a Participant or Inactive Participant of the right to payment of deferred compensation credited as of the date of termination or amendment, in accordance with the terms of the Plan as of the date of such termination or amendment; provided, however, that in the event of termination of the Plan, or termination of the Plan with respect to the Company, TWE or one or more other Employing Companies, the Committee may, in its sole and absolute discretion, accelerate the payment of all such credited deferred compensation on a uniform basis for all Participants and Inactive Participants or, in the case of termination of the Plan with respect to TWE or one or more other Employing Companies, for all Participants and Inactive Participants of TWE or such other Employing Companies only. ARTICLE IX PARTICIPATING COMPANIES 9.1 ADOPTION BY OTHER ENTITIES. Upon the approval of the Company or the Committee, the Plan may be adopted by TWE or any Related Company by executing and delivering to the Company or the Committee such documents as the Company or Committee 13 shall deem necessary or desirable. The provisions of the Plan shall be fully applicable to such entity except as may otherwise be agreed to by such adopting company and the Company or Committee. ARTICLE X GENERAL PROVISIONS 10.1 PARTICIPANTS' RIGHTS UNSECURED. The right of any Participant or Inactive Participant to receive future payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Employing Company employing the Participant at the time that his or her compensation is deferred. The Company, TWE (except for their respective obligations under Section 5.1(b) and (c)) and any other Employing Company or former Employing Company shall not guarantee or be liable for payment of benefits to the employees of any other Employing Company or former Employing Company under the Plan. 10.2 NON-ASSIGNABILITY. No right to receive any payment hereunder shall be transferrable or assignable by a Participant or Inactive Participant other than by will or by the laws of descent and distribution or by a court of competent jurisdiction. Any other attempted assignment or alienation of any payment hereunder shall be void and of no force or effect. 10.3 RELATED COMPANY CEASING TO BE SUCH. (a) In the event that a corporation or unincorporated entity ceases at any time to meet the definition of a Related Company, such corporation or entity shall cease as of such time to be an Employing Company, if it had been such, and those of its Employees who would have been Eligible Employees under the Plan shall cease to be such. (b) Payments to Participants employed by any Related Company which ceases to be such shall be made pursuant to Article VI unless prior to the end of the year in which such company ceases to be a Related Company, it adopts a non-qualified deferred compensation plan and agrees to the transfer of the Deferred Compensation Accounts of all such Participants to its plan and to assume all obligations accrued under the Plan as of the date of such transfer with respect to such accounts and subsequent distributions thereof. 10.4 LEGAL FEES. All expenses (including legal fees, court costs and fees of experts) incurred or expected to be incurred by a Participant or Inactive Participant in connection with any actual, threatened or contemplated legal, administrative or other proceeding (whether brought against the Company, TWE, any Employing Company or former Employing Company or Related Company by a Participant or Inactive Participant or otherwise)with respect to the individual's rights (i) to payment, as provided for in Article VI, for all compensation deferred hereunder pursuant to Articles III or IV, (ii) to the appropriate investment of all such deferred compensation as provided for in Article V, or (iii) otherwise relating to Participants' or Inactive Participants' rights hereunder shall be paid or reimbursed to such Participant or Inactive Participant by the Company, TWE, Employing Company or former Employing Company or Related 14 Company within 20 days after the receipt by the Company, TWE or Related Company, as the case may be, of a statement or statements from such Participant or Inactive Participant requesting such payment or reimbursement or such payment from time to time, whether prior to, delivering or after final disposition thereof. Such statement or statements shall evidence the expenses incurred by such Participant or Inactive Participant and shall include or be accompanied by an undertaking by such Participant or Inactive Participant to repay the amounts paid or reimbursed, without interest, if ultimately such Participant or Inactive Participant shall wholly fail on his or her claim, but in no other case. 10.5 NO RIGHTS AGAINST THE COMPANY. The establishment of the Plan, any amendment or other modification thereof, or any payments hereunder, shall not be construed as giving to any Employee, Eligible Employee, Participant or Inactive Participant any legal or equitable rights against the Company, TWE or any other Employing Company or former Employing Company, its shareholders, directors, officers or other employees, except as may be contemplated by or under the Plan including, without limitation, the right of any Participant or Inactive Participant to be paid as provided under the Plan. Participation in the Plan does not give rise to any actual or implied contract of employment. A Participant may be terminated at any time for any reason in accordance with the procedures of the Employing Company. 10.6 WITHHOLDING. Each Employing Company or former Employing Company shall withhold any federal, state and local income or employment tax (including F.I.C.A. obligations for both social security and medicare) which by any present or future law it is, or may be, required to withhold with respect to any deferral of compensation pursuant to the Plan, any Employing Company Allocation, any income deemed accrued or any distribution under the Plan, with respect to any of its former or present Employees. The Committee shall provide or direct the provision of information necessary or appropriate to enable each such company to so withhold. 10.7 NO GUARANTEE OF TAX CONSEQUENCES. The Committee, the Company, TWE and any Employing Company or former Employing Company do not make any commitment or guarantee that any amounts deferred for the benefit of a Participant or Inactive Participant will be excludible from the gross income of the Participant or Inactive Participant in the year of deferral for federal, state or local income or employment tax purposes, or that any other federal, state or local tax treatment will apply to or be available to any Participant or Inactive Participant. It shall be the obligation of each Eligible Employee, Participant or Inactive Participant to determine whether any deferral under the Plan is excludible from his or her gross income for federal, state and local income or employment tax purposes, and to take appropriate action if he or she has reason to believe that any such deferral is not so excludible. 10.8 SEVERABILITY. If a provision of the Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included in the Plan. 10.9 GOVERNING LAW. The provisions of the Plan shall be governed by and construed 15 in accordance with the laws of the State of New York. 16 AMENDMENT NO. 1 TO TIME WARNER DEFERRED COMPENSATION PLAN STATEMENT OF AMENDMENTS 1. Article III is hereby amended by adding the following new Section 3.5 to the end thereof: "3.5 CERTAIN INCENTIVE PLANS. Notwithstanding anything to the contrary herein, the term "bonus" wherever used in this Article III shall include any amounts paid to eligible employees of the following divisions of TWE: Home Box Office and Home Box Office Communications, who participate in the 1993-1995 Cash Flow Incentive Plan, the 1996-1999 Cash Flow Incentive Plan, and any successor plan, with respect to amounts they may earn under such incentive plans, provided, however, that any such elections shall be made irrevocably either before the beginning of the term of the applicable plan or within 30 days after the signing of an eligible employee's renegotiated or newly negotiated employment contract." 2. Section 6.3(b) is hereby amended by adding the following new sentence to the end thereof: "In lieu of specifying the year in which the payment is to be made, the Participant may specify that payment of the deferral shall be made on account of retirement, in which case it shall be distributed in a lump sum as soon as practicable after the January 1 immediately following the date of Retirement." 3. Item Numbers 1 and 2 are effective as of December 7, 1994. AMENDMENT NO. 2 TO TIME WARNER DEFERRED COMPENSATION PLAN STATEMENT OF AMENDMENTS 1. The third sentence of Section 4.3 is hereby amended to read in its entirety as follows: "Any such Employing Company Allocations for (i) eligible employees participating in the Time Warner Employees' Savings Plan (the "Savings Plan"), (ii) eligible employees participating in the Time Warner Employees' Stock Ownership Plan ("TESOP"), (iii) eligible employees participating in the Time Warner Thrift Plan (the "Thrift Plan"), and (iv) eligible employees participating in the Warner Music Group Inc. Profit Sharing Plan (the "Profit Sharing Plan"), shall become vested, in the case of the (i) Savings Plan or TESOP participants, only after four Periods of Service or Years of Service, (ii) Thrift Plan participants, only after five Periods of Service or Years of Service, and (iii) Profit Sharing Plan participants, only after five Years of Service." 2. Item Number 1 is effective as of January 1, 1994. EX-21 10 LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF TIME WARNER INC. Set forth below are the names of certain subsidiaries, at least 50% owned, directly or indirectly, of Time Warner and TWE as of December 31, 1994. Certain subsidiaries which when considered in the aggregate would not constitute a significant subsidiary, are omitted from the list below. Indented subsidiaries are direct subsidiaries of the company under which they are indented.
PERCENTAGE STATE OR OTHER OWNED BY JURISDICTION OF IMMEDIATE INCORPORATION OR NAME PARENT ORGANIZATION ---- ---------- ---------------- TIME WARNER INC. (Registrant): Delaware Asiaweek Limited................................... 80 Hong Kong Sunset Publishing Corporation...................... 100 Delaware Time International Inc. ........................... 100 Delaware Time Inc.(1)....................................... 100 Delaware American Family Publishers (partnership).......... 50 New York Book-of-the-Month Club, Inc. ..................... 100 New York Entertainment Weekly, Inc. ....................... 100 Delaware Little, Brown and Company (Inc.).................. 100 Massachusetts TDS Ventures, Inc. ............................... 100 Delaware Time Distribution Services (partnership).......... 63 New York Time Customer Service, Inc. ...................... 100 Delaware Time Publishing Ventures, Inc. ................... 100 Delaware Southern Progress Corporation(2)................. 100 Delaware Time Inc. Ventures................................ 100 Delaware Health Publications, Inc. ....................... 100 Delaware Hippocrates Partners (partnership).............. 50 California TWC Ventures Inc. ................................ 100 Delaware Time Life Inc. ................................... 100 Delaware Time-Life Customer Service, Inc. ................ 100 Delaware Warner Books, Inc. ............................... 100 New York Warner Publisher Services Inc. ................... 100 New York Time TBS Holdings, Inc. ........................... 100 Delaware TW Service Holding I, L.P. (partnership)........... (3) Delaware TW Service Holding II, L.P. (partnership).......... (3) Delaware TW Programming Co. (partnership).................. (4) New York TW Transmission Co. (partnership)................. (4) New York TW Cable Service Co. (partnership)................ (4) New York E/Court Holdings Co. (partnership)................ (4) New York TW/BET Holding Co. (partnership).................. (4) New York TW/Three D Holding Co. (partnership).............. (4) New York TWQ II Co. (partnership).......................... (4) New York TWQ I Co., L.P. (partnership)..................... (5) Delaware WCI Record Club Inc. .............................. 100(6) Delaware The Columbia House Company (partnership).......... 50 New York Warner Communications Inc. ........................ 100 Delaware Time Warner Interactive Inc. ..................... 100 Delaware Atari Games Corporation........................... 100 California DC Comics (partnership)........................... 50(7) New York Warner Bros. Music International Inc. ............ 100 Delaware Warner-Tamerlane Publishing Corp. ................ 100 California
1
PERCENTAGE STATE OR OTHER OWNED BY JURISDICTION OF IMMEDIATE INCORPORATION OR NAME PARENT ORGANIZATION ---- ---------- ---------------- WB Music Corp. .................................. 100 California W Cinemas Holding Inc. .......................... 100 Delaware W Cinemas Inc. ................................. 100 Delaware Alpha Theatres Inc. ............................ 100 Delaware NPP Music Corp. ................................. 100 Delaware Warner/Chappell Music, Inc. ..................... 100 Delaware New Chappell Inc.(8)............................ 100 Delaware Super Hype Publishing, Inc. .................... 100 New York Cotillion Music, Inc. .......................... 100 Delaware Walden Music, Inc. ............................. 100 New York Summy-Birchard, Inc. ........................... 100 Wyoming Warner Bros. Publications Inc. ................. 100 New York CPP/Belwin, Inc. ............................... 100 Delaware Lorimar Motion Picture Management, Inc. ......... 100 California E.C. Publications, Inc. ......................... 100 New York WCI/Am Law Inc. ................................. 100 Delaware American Lawyer Media, L.P. .................... 83.25 Delaware Warner Music Group Inc. ......................... 100 Delaware Warner Bros. Records Inc. ....................... 100 Delaware Atlantic Recording Corporation.................. 100 Delaware Warner-Elektra-Atlantic Corporation............. 100 New York WEA International Inc.(9)........................ 100 Delaware Warner Music Canada Ltd. ....................... 100 Canada The Columbia House Company (Canada) (partner- ship)......................................... 50 Canada Warner Special Products Inc. .................... 100 Delaware Warner Custom Music Corp. ...................... 100 California WEA Manufacturing Inc. .......................... 100 Delaware Allied Record Company........................... 100 California Time Warner Limited.............................. 100 U.K. Warner Music International Services Ltd. ....... 100 U.K. Time Warner UK Limited......................... 100 U.K. Warner Chappell Music Group (UK) Ltd. ......... 100 U.K. Warner Chappell Music Limited................. 100 U.K. Magnet Music Ltd. ........................... 100 U.K. Warner Music (U.K.) Limited.................... 100 U.K. Ivy Hill Corporation............................. 100 Delaware Warner Cable Communications Inc.(10)............. 100 Delaware TWI Ventures Ltd. ............................... 100 Delaware American Television and Communications Corpora- tion............................................. 100(11) Delaware American Communications Corporation.............. 100 Indiana American Digital Communications, Inc. ........... 100 Delaware ATC Cablevision of San Marino, Inc. ............. 100 California ATC Cablevision of South Pasadena, Inc. ......... 100 California ATC Holdings II, Inc. ........................... 100 Delaware ARP 113, Inc. .................................. 100 Delaware Paragon Communications (partnership)............ 50(12) Colorado ATC/PPV, Inc. ................................... 100 Delaware Carolina Network Corporation..................... 100 Delaware Philadelphia Community Antenna Television Compa- ny.............................................. 100 Pennsylvania
2
PERCENTAGE STATE OR OTHER OWNED BY JURISDICTION OF IMMEDIATE INCORPORATION OR NAME PARENT ORGANIZATION ---- ---------- ---------------- Lower Bucks Cablevision, Inc. .................. 100 Pennsylvania Tri-County Cable Television Company............. 100 New Jersey Public Cable Company............................. 100 Maine Public Cable Company (partnership).............. 77 Maine Time Warner Operations Inc. ...................... 100(13) Delaware HBO Film Management, Inc. ...................... 100 Delaware Kremlin Productions, Inc. ...................... 100 Delaware Simba Productions, Inc. ........................ 100 Delaware WAC Productions, Inc. .......................... 100 Delaware Running Mates, Inc. ............................ 100 Delaware SUBSIDIARIES OF TIME WARNER ENTERTAINMENT COMPANY, L.P. PERCENTAGE STATE OR OTHER OWNED BY JURISDICTION OF IMMEDIATE INCORPORATION OR NAME PARENT ORGANIZATION ---- ---------- ---------------- Century Venture Corporation........................ 50 Delaware CV of Viera Joint Venture (partnership)............ 50 Florida Erie Telecommunications, Inc. ..................... 54.19 Pennsylvania Kansas City Cable Partners......................... 50 Colorado Time Warner Cable New Zealand Holdings Ltd. ....... 100(14) New Zealand Queens Inner Unity Cable System.................... 50 New York Comedy Partners, L.P. (partnership)................ 50 New York Warner Cable of New Jersey Inc. ................... 100 Delaware Warner Cable of Vermont Inc. ...................... 100 Delaware HBO Direct, Inc. .................................. 100 Delaware HBO Turkey Holdings I Inc. ....................... 100 Delaware HBO Turkey Holdings II Inc. ...................... 100 Delaware TW Buffer Inc. ................................... 100 Delaware Warner Bros. (F.E.) Inc. ........................ 100 Delaware Warner Bros. (Japan) Inc. ....................... 100 Delaware Warner Bros. (South) Inc. ....................... 100 Delaware Warner Bros. (Transatlantic) Inc. ............... 100 Delaware Bethel Productions Inc. ........................ 100 Delaware Warner Films Consolidated Inc. .................. 100 Delaware Exeter Distributing Inc. ....................... 100 Delaware Riverside Avenue Distributing Inc. ............. 100 Delaware HBO Asia Holdings, L.P. (partnership).............. 99 Delaware HBO Pacific Partners, C.V. ....................... 83.33 Neth. Antiles Home Box Office (Singapore) Pty. Ltd. ........... 100 Singapore Turner/HBO Ltd. Purpose Joint Venture (partner- ship)............................................. 50 New York Acapulco 37 S.A. de C.V. .......................... 100 Mexico Warner Bros. Gesellschaft mbH...................... 100 Austria Time Warner Entertainment Limited.................. 100 U.K. The Bountiful Company Limited..................... 50 U.K. Warner Bros. Studio Stores Ltd. .................. 100 U.K. Warner Bros. Consumer Products (UK) Ltd. ......... 100 U.K. TWE Finance Limited............................... 100 U.K.
3
PERCENTAGE STATE OR OTHER OWNED BY JURISDICTION OF IMMEDIATE INCORPORATION OR NAME PARENT ORGANIZATION ---- ---------- ---------------- Warner Bros. Theatres Ltd. ..................... 100 U.K. Warner Bros. Distributors Ltd. ................. 100 U.K. Lorimar Telepictures International Ltd. ....... 100 U.K. Warner Bros. International Television Distribution Italia S.p.A. .................. 100 Italy Torremodo Ltd. ............................... 100 U.K. Victory Film Production, Ltd. ................ 100 U.K. Warner Bros. Theatres (U.K.) Limited............ 100 U.K. Warner Bros. Investments (Pilsworth) Ltd. ..... 100 U.K. Warner Bros. Theatres Advertising Agency Limit- ed............................................ 100 U.K. Warner Bros. Productions Limited................ 100 U.K. Warner Home Video (U.K.) Limited................ 100 U.K. Metro Color Laboratories (U.K.) Ltd. ............. 100 U.K. Kay Holdings Ltd. .............................. 100 U.K. Metrocolor (London) Limited.................... 100 U.K. Geffen Pictures (partnership)..................... 50 New York Lorimar Distribution International (Canada) Corp. ........................................... 100 Canada Lorimar Canada Inc. .............................. 100 Canada Productions et Editions Cinematographiques Francaises SARL (PECF)........................... 100 France Warner Home Video France S.A. .................. 100 France Time Warner Entertainment Australia Pty. Ltd. .... 100 Australia Lorimar Telepictures Pty. Limited............... 100 Australia Warner Bros. (Australia) Pty. Ltd. ............. 100 Australia Warner Holdings Australia Pty. Limited.......... 100 Australia Warner Bros. Properties (Australia) Pty. Ltd. . 100 Australia Warner Bros. Theatres (Australia) Pty. Limited. 100 Australia Warner World Australia Pty. Limited............ 100 Australia Movie World Enterprises Partnership (partner- ship)........................................ 50 Australia Warner Home Video Pty. Limited.................. 100 Australia Warner Bros. Video Pty. Ltd. .................. 100 Australia Warner Sea World Aviation Pty. Ltd. ............ 100 Australia Sea World Aviation Partnership (partnership)... 50 Australia Warner Sea World Investments Pty. Limited....... 100 Australia Sari Lodge Pty. Limited........................ 50 Australia Sea World Management Pty. Ltd................. 100 Australia Warner Sea World Operations Pty. Ltd............ 100 Australia Sea World Enterprises Partnership (partner- ship)......................................... 50 Australia Warner Sea World Units Pty. Ltd................. 100 Australia Time Warner Germany Holding GmbH.................. 100(15) Germany Time Warner Entertainment Germany GmbH.......... 100 Germany Time Warner Entertainment Germany GmbH and Co. OHG........................................... 100(16) Germany Warner Bros. Movie World GmbH & Co. KG........ 60 Germany Warner Bros. Deutschland Pay TV GmbH........... 100 Germany Warner Home Video GmbH......................... 100 Germany Warner Home Video Spol SRO.................... 100 Czech Republic GWHS Grundstrucks Verwaltungs GmbH............. 100 Germany Warner Bros. Film GmbH ........................ 100 Germany Warner Bros. Film GmbH Kinobetriebe........... 100 Germany Warner Bros. Film GmbH Multiplex Cinemas Mulheim...................................... 100 Germany
4
PERCENTAGE STATE OR OTHER OWNED BY JURISDICTION OF IMMEDIATE INCORPORATION OR NAME PARENT ORGANIZATION ---- ---------- ---------------- Time Warner Merchandising Canada Inc. ............ 100 Canada Warner Bros. Canada Inc. ......................... 100 Canada Warner Bros. Distributing (Canada) Limited........ 100 Canada Warner Home Video (Canada) Ltd.................... 100 Canada Warner Bros. (Africa) (Pty) Ltd................... 100 So. Africa Warner Bros. Belgium SA/NV........................ 100 Belgium Warner Bros. (D) A/S.............................. 100 Denmark Warner & Metronome Films A/S.................... 50 Denmark Warner Bros. Theatres Denmark A/S............... 100 Denmark Scala Biografome I/S (partnership)............. 50 Denmark Dagmar Teatret I/S (partnership)............... 50 Denmark Warner Bros. Film Ve Video Sanayi Ve Ticaret A.S. ............................................ 100 Turkey Warner Bros. Finland OY........................... 100 Finland Warner Bros. (Holland) B.V........................ 100 Netherlands Warner Home Video (Nederland) B.V............... 100 Netherlands Warner Bros. Theatres (Holland) B.V............. 100 Netherlands Warner Bros. Holdings Sweden AB................... 100 Sweden Warner Bros. (Sweden) AB........................ 100 Sweden Warner Home Video (Sweden) AB................... 100 Sweden Warner Bros. Italia S.p.A. ....................... 100 Italy Cinema Data Service S.r.L. ..................... 100 Italy Warner Entertainment Italia S.r.L............... 100 Italy Warner Bros. (Korea) Inc.......................... 100 Korea Warner Bros. (Mexico) S.A......................... 100 Mexico Warner Bros. (N.Z.) Limited....................... 100 New Zealand Warner Home Video (N.Z.) Limited................ 100 New Zealand Warner Bros. Norway A/S........................... 100 Norway Warner Bros. Singapore Pte. Ltd. ................. 100 Singapore Warner Home Video (Ireland) Ltd. ................. 100 Ireland Warner Home Video Portugal Lda.................... 100 Portugal Warner-Lusomundo Sociedade Iberica de Cinemas Lda. ............................................ 50 Portugal Warner Home Video Espanola S.A.................... 100 Spain Warner Bros. Consumer Products S.A.............. 100 Spain Warner Mycal Corporation.......................... 50 Japan Kabelkom Management Co. (partnership) (17)........ 50 Delaware Kabelkom Holding Co. (partnership) (17)........... 50 Delaware Quincy Jones Entertainment Company L.P. (partner- ship)............................................ 50 Delaware Six Flags Entertainment Corporation............... 100 Delaware SF Holdings Inc. ................................ 100 Delaware Six Flags Theme Parks Inc. ..................... 100 Delaware DC Comics (partnership)........................... 50(7) New York
-------- (1) The names of five subsidiaries of Time Inc. carrying on the magazine publishing business are omitted. (2) The names of nine subsidiaries of Southern Progress Corporation carrying on the magazine or book publishing business are omitted. (3) The General Partners of TWE own 87.5%, Toshiba America Entertainment, Inc. owns 6.25% and Itochu Entertainment Inc. owns 6.25%. (4) TW Service Holding I, L.P. owns 99% and TW Service Holding II, L.P. owns 1%. 5 (5) American Television and Communications Corporation, Warner Cable Communications Inc. and Warner Communications Inc. are the General Partners and TW Service Holding I, L.P. and TW Service Holding II, L.P. are the Limited Partners. (6) Time Warner Inc. owns 80% and Warner Communications Inc. owns 20%. (7) Warner Communications Inc. owns 50% and TWE owns 50%. (8) The names of 16 subsidiaries of New Chappell Inc. carrying on substantially the same music publishing operations in foreign countries are omitted. (9) The names of 34 subsidiaries of WEA International Inc. carrying on substantially the same record, tape and video cassette distribution operations in foreign countries are omitted. (10) The names of six subsidiaries of Warner Cable Communications Inc. carrying on the cable television business are omitted. (11) Time Warner Inc. owns 86.34%, Warner Communications Inc. owns 7.8% and Time TBS Holdings, Inc. owns 5.86%. (12) American Television and Communications Corporation owns 50% of Paragon Communications through two indirectly owned subsidiaries--31.09% through ATC Holdings II, Inc. and 18.91% through ARP 113, Inc. (13) Time Warner Inc. owns 87.21% and Warner Communications Inc. owns 12.79%. (14) TWE owns 99% and Time Warner Inc. owns 1%. (15) TWE owns 99% and HBO Direct, Inc. owns 1%. (16) Time Warner Entertainment Germany GmbH owns 85% and Time Warner Germany Holding GmbH owns 15%. (17) The names of 13 subsidiaries of Kabelkom Management Co. and Kabelkom Holding Co. carrying on substantially the same cable television operations in Hungary are omitted. 6 EX-23.1 11 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our reports dated February 7, 1995, with respect to the consolidated financial statements and schedule of Time Warner Inc. and Time Warner Entertainment Company, L.P. ("TWE") included in this Annual Report on Form 10-K for the year ended December 31, 1994, and our report dated March 3, 1995, with respect to the combined financial statements of the Time Warner Service Partnerships included in TWE's Annual Report on Form 10-K for the year ended December 31, 1994, incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1994, in each of the following: 1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031 and No. 2-76753 on Form S-8; 2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 33- 58262 on Form S-3; 3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8; 4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477 and No. 2-67216 on Form S-8; 5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8; 6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507 on Form S-8 and Registration Statement No. 33-48381 on Form S-8; 7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247 on Form S-8; 8. Registration Statement No. 33-33076 (the Prospectus constituting a part thereof also applies to Registration Statements No. 33-29029 and No. 33-29030) on Form S-8; 9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and Registration Statement No. 33-51471 on Form S-8; 10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on Form S-3; 11. Registration Statement No. 33-35317 on Form S-8; 12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8; 13. Registration Statement No. 33-47151 on Form S-8; 14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 33-47705 on Form S-4; 15. Registration Statement No. 33-57812 on Form S-3; 16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8; 17. Registration Statement No. 33-50237 on Form S-3; and 18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8.
Ernst & Young LLP New York, New York March 30, 1995 EX-23.2 12 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference of our report dated January 19, 1995, except as to Note 6, which is as of January 27, 1995, with respect to the financial statements and schedule of Paragon Communications which are incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1994, in each of the following: 1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031 and No. 2-76753 on Form S-8; 2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 33-58262 on Form S-3; 3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8; 4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477 and No. 2-67216 on Form S-8; 5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8; 6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507 on Form S-8 and Registration Statement No. 33-48381 on Form S-8; 7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247 on Form S-8; 8. Registration Statement No. 33-33076 (the Prospectus constituting a part thereof also applies to Registration Statements No. 33-29029 and No. 33- 29030) on Form S-8; 9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8; 10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031 on Form S-3; 11. Registration Statement No. 33-35317 on Form S-8; 12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8; 13. Registration Statement No. 33-47151 on Form S-8; 14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 33-47705 on Form S-4; 15. Registration Statement No. 33-62774 on Form S-8; 16. Registration Statement No. 33-51015 on Form S-8; 17. Registration Statement No. 33-50237 on Form S-3; 18. Registration Statement No. 33-51471 on Form S-8; 19. Registration Statement No. 33-57812 on Form S-3; 20. Registration Statement No. 33-75144 on Form S-3; and 21. Registration Statements No. 33-53213 and No. 33-57667 on Form S-8 and Post-Effective Amendment No. 1 to Registration Statement No. 33-57667. PRICE WATERHOUSE LLP Denver, Colorado March 30, 1995 EX-24 13 POWERS OF ATTORNEY Exhibit 24 ---------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of TIME WARNER INC., a Delaware Corporation (the "Corporation"), hereby constitutes and appoints RICHARD J. BRESSLER, PETER R. HAJE, GERALD M. LEVIN, PHILIP R. LOCHNER, JR., AND RICHARD D. PARSONS each of them, his or her true and lawful attorneys-in-fact and agents, with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and to sign any and all amendments to said Annual Report on Form 10-K, and to file such Annual Report on Form 10-K, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, under the provisions of the Exchange Act, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has hereunto set his or her name as of the 30th day of March, 1995. (i) Principal Executive Officer: /s/ Gerald M. Levin ---------------------------- Gerald M. Levin Chairman of the Board, President and Chief Executive Officer (ii) Principal Financial Officer: /s/ Richard J. Bressler ----------------------------- Richard J. Bressler Senior Vice President and Chief Financial Officer (iii) Principal Accounting Officer: /s/ John A. LaBarca ----------------------------- John A. LaBarca Vice President and Controller (iv) Directors: /s/ Merv Adelson ----------------------------- Merv Adelson /s/ Lawrence B. Buttenwieser ---------------------------- Lawrence B. Buttenwieser /s/ Edward S. Finkelstein ----------------------------- Edward S. Finkelstein /s/ Beverly Sills Greenough ----------------------------- Beverly Sills Greenough /s/ Carla A. Hills ---------------------------- Carla A. Hills /s/ David T. Kearns ---------------------------- David T. Kearns /s/ Henry Luce III ---------------------------- Henry Luce III -2- /s/ Reuben Mark ---------------------------- Reuben Mark /s/ Michael A. Miles ---------------------------- Michael A. Miles /s/ J. Richard Munro ---------------------------- J. Richard Munro /s/ Richard D. Parsons ---------------------------- Richard D. Parsons /s/ Donald S. Perkins ---------------------------- Donald S. Perkins /s/ Raymond S. Troubh ---------------------------- Raymond S. Troubh /s/ Francis T. Vincent, Jr. ---------------------------- Francis T. Vincent, Jr. -3- EX-27 14 ARTICLE 5 FDS
5 This schedule contains summary financial information extracted from the financial statements of Time Warner Inc. for the year ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 282 0 2,207 768 370 2,817 1,410 657 16,716 2,972 8,839 379 0 1 768 16,716 7,396 7,396 4,307 4,307 0 0 769 89 180 (91) 0 0 0 (91) (.27) (.27)
EX-99.1 15 1994 FINANCIAL STATEMENTS OF TIME WARNER EXHIBIT 99.1 TIME WARNER SERVICE PARTNERSHIPS COMBINED BALANCE SHEET (THOUSANDS)
DECEMBER 31, ------------------ 1994 1993 -------- -------- ASSETS CURRENT ASSETS Receivables, less allowances of $176 and $156.............. $ 3,150 $ 3,800 Prepaid expenses........................................... 429 198 -------- -------- Total current assets....................................... 3,579 3,998 Investments and advances................................... 155,522 149,605 Cable television equipment................................. 105,155 34,362 Furniture, fixtures and other equipment.................... 44,739 18,648 -------- -------- 149,894 53,010 Less accumulated depreciation.............................. (29,559) (20,950) -------- -------- Property, plant and equipment.............................. 120,335 32,060 -------- -------- Total assets............................................... $279,436 $185,663 ======== ======== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Accounts payable........................................... $ 29,649 $ 3,541 Debt due to Time Warner.................................... 32,320 17,036 Other current liabilities, including $5,877 due to Time Warner in 1994............................................ 24,926 1,277 -------- -------- Total current liabilities.................................. 86,895 21,854 Capital lease obligations.................................. 14,113 -- Partners' capital.......................................... 178,428 163,809 -------- -------- Total liabilities and partners' capital.................... $279,436 $185,663 ======== ========
See accompanying notes. 1 TIME WARNER SERVICE PARTNERSHIPS COMBINED STATEMENT OF OPERATIONS (THOUSANDS)
SEPTEMBER 15, 1993 (INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ---------------- Revenues......................................... $ 49,940 $ 7,735 -------- -------- Cost of revenues (a)............................. 61,948 8,428 Selling, general and administrative (a).......... 23,389 1,310 -------- -------- Operating expenses............................... 85,337 9,738 -------- -------- Operating loss................................... (35,397) (2,003) Equity in losses of investee companies........... (14,706) (12,026) Gain on investments.............................. 9,314 10,019 Interest expense................................. (2,714) (93) -------- -------- Net loss......................................... $(43,503) $ (4,103) ======== ======== -------- (a)Includes depreciation and amortization expense of: ............................................ $ 13,033 $ 1,443 ======== ========
See accompanying notes. 2 TIME WARNER SERVICE PARTNERSHIPS COMBINED STATEMENT OF CASH FLOWS (THOUSANDS)
SEPTEMBER 15, 1993 (INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1994 1993 ------------ ---------------- OPERATIONS Net loss.......................................... $(43,503) $ (4,103) Adjustments for noncash and nonoperating items: Depreciation and amortization..................... 13,033 1,443 Equity in losses of investee companies............ 14,706 12,026 Gain on investments............................... (9,314) (10,019) Changes in operating assets and liabilities: Receivables....................................... 1,327 (3,800) Accounts payable and other current liabilities.... 44,551 4,589 Other balance sheet changes....................... 465 (198) -------- -------- Cash provided (used) by operations................ 21,265 (62) -------- -------- INVESTING ACTIVITIES Investments and acquisitions...................... (22,722) (32,780) Capital expenditures.............................. (81,668) (432) Investment proceeds............................... 19,105 3,738 -------- -------- Cash used by investing activities................. (85,285) (29,474) -------- -------- FINANCING ACTIVITIES Increase in debt due to Time Warner............... 15,284 17,036 Repayments of capital lease obligations........... (1,264) -- Capital contributions from General Partners....... 50,000 12,500 -------- -------- Cash provided by financing activities............. 64,020 29,536 -------- -------- CHANGE IN CASH.................................... $ -- $ -- ======== ========
See accompanying notes. 3 TIME WARNER SERVICE PARTNERSHIPS COMBINED STATEMENT OF PARTNERS' CAPITAL (THOUSANDS)
TOTAL PARTNERS' CAPITAL --------- INITIAL CAPITALIZATION AT SEPTEMBER 15, 1993......................... $ 94,575 Net loss............................................................. (4,103) Capital contributions................................................ 12,500 Unrealized gains on certain marketable equity investments at adoption of FAS 115.......................................................... 60,837 -------- BALANCE AT DECEMBER 31, 1993......................................... 163,809 Net loss............................................................. (43,503) Capital contributions................................................ 50,726 Increase in unrealized gains on certain marketable equity invest- ments............................................................... 7,396 -------- BALANCE AT DECEMBER 31, 1994......................................... $178,428 ========
See accompanying notes. 4 TIME WARNER SERVICE PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On September 15, 1993, a wholly-owned subsidiary of U S WEST, Inc. ("US WEST") was admitted as an additional limited partner of Time Warner Entertainment Company, L.P. ("TWE") (the "US WEST Transaction"). The Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia (the "MFJ") prohibits regional Bell operating companies such as U S WEST, and their affiliates, which may include TWE, from engaging in certain business activities and practices. Accordingly, certain assets of TWE (the "Time Warner Service Partnership Assets") were distributed to the general partners of TWE prior to the U S WEST Transaction, and then were contributed to three limited partnerships (TW Service Holding I, L.P., TW Service Holding II, L.P. and TWQ I Co., L.P.) and seven general partnerships owned by certain of the limited partnerships (TW Cable Service Co., TW Transmission Co., E/Court Holdings Co., TW Programming Co., TWQ II Co., TW/BET Holding Co. and TW/Three D Holding Co.). Such limited and general partnerships are collectively referred to as the "Time Warner Service Partnerships." The general partners of TWE, which are direct or indirect wholly-owned subsidiaries of Time Warner Inc. ("Time Warner"), are the general partners of the Time Warner Service Partnerships (the "General Partners") and collectively hold a 100% priority capital interest and 87.5% residual equity interest in the Time Warner Service Partnerships. Subsidiaries of Toshiba Corporation and ITOCHU Corporation are the limited partners of the Time Warner Service Partnerships and each holds a 6.25% residual equity interest (Note 4). The Time Warner Service Partnership Assets principally included the satellite receiving dishes and broadcast antennas used by TWE's Cable division, the transponders and other transmission equipment employed by TWE's Programming-HBO and Filmed Entertainment divisions and TWE's equity interests in certain programming entities. The Time Warner Service Partnership Assets are reflected in the accompanying combined financial statements at TWE's historical cost. Pursuant to a series of agreements with TWE, if TWE is clearly not prohibited from owning or operating the Time Warner Service Partnership Assets, they will be recontributed to TWE on September 15, 1995 (or September 15, 1997 in the case of its interests in Courtroom Television Network and E! Entertainment Television, Inc.), or earlier under certain circumstances, at their then fair market value in exchange for partnership interests in TWE. As a result of a judicial order issued to U S WEST on October 24, 1994, TWE is no longer prohibited from owning or operating the Time Warner Service Partnership Assets, except for certain equity interests in companies in which the Time Warner Service Partnerships do not have the controlling interest or an ownership and voting interest so large as to exert significant influence. Unless amended by the mutual consent of the partners of TWE, TWE is required to make quarterly cash distributions of capital in the amount of $12.5 million to the General Partners through September 30, 1998; such amounts are then required to be contributed to the Time Warner Service Partnerships in exchange for additional General Partners' priority capital interests ("Time Warner Service Partnership Contributions"). The Time Warner Service Partnership Contributions were $50 million in 1994 and $12.5 million in 1993. As U.S. partnerships, the Time Warner Service Partnerships are not subject to U.S. federal, state or local income taxation. 5 TIME WARNER SERVICE PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) BASIS OF COMBINATION AND ACCOUNTING FOR INVESTMENTS The combined financial statements include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of the Time Warner Service Partnerships and all companies in which the Time Warner Service Partnerships have a controlling voting interest ("subsidiaries"), as if the Time Warner Service Partnerships and their subsidiaries were a single company. Significant intercompany accounts and transactions between the combined companies are eliminated. Significant accounts and transactions between the Time Warner Service Partnerships and its partners and affiliates are disclosed as related party transactions (Note 6). Investments in companies in which the Time Warner Service Partnerships have significant influence but less than a controlling voting interest are accounted for using the equity method. Under the equity method, only the Time Warner Service Partnerships' investment in and amounts due to and from the equity investee are included in the combined balance sheet, only the Time Warner Service Partnerships' share of the investee's losses is included in the combined net loss, and only the dividends, cash distributions, loans or other cash received from the investee, less any additional cash investment, loan repayments or other cash paid to the investee are included in the combined cash flows. In accordance with Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in companies in which the Time Warner Service Partnerships do not have the controlling interest or an ownership and voting interest so large as to exert significant influence are accounted for at market value if the investments are publicly traded and there are no resale restrictions, or at cost, if the sale of a publicly-traded investment is restricted or if the investment is not publicly traded. Unrealized gains and losses on investments accounted for at market value are reported in partners' capital until the investment is sold, at which time, the realized gain or loss is included in income. Dividends and other distributions of earnings from both market value and cost method investments are included in income when declared. The Time Warner Service Partnerships consolidated their interest in Courtroom Television Network ("Court TV") effective January 1, 1994, because of their increased investment in the partnership relative to the other unaffiliated partners. Certain reclassifications have been made to the prior period's financial statements to conform to the 1994 presentation. REVENUES Subscriber fees and fees received from services provided to TWE are recorded as revenue in the period the service is provided. Advertising revenue is recognized when the advertisement is aired. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment principally consist of cable television and transmission equipment and are stated at cost. Depreciation is provided generally on the straight-line method over useful lives ranging up to fifteen years. 2.INVESTMENTS AND ADVANCES The Time Warner Service Partnerships' investments consist of:
DECEMBER 31, ----------------- 1994 1993 -------- -------- (THOUSANDS) Equity method investments.................................... $ 26,547 $ 33,704 Market value method investments.............................. 112,197 96,301 Cost method investments...................................... 16,778 19,600 -------- -------- Total........................................................ $155,522 $149,605 ======== ========
6 TIME WARNER SERVICE PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Investments accounted for using the equity method include E! Entertainment Television, Inc. (49% owned), Primestar Partners, L.P. (21% owned, "Primestar") and, in 1993 only, Court TV, which was consolidated effective January 1, 1994. Equity method investments at December 31, 1993 include advances of approximately $17 million that were repaid to the Time Warner Service Partnerships in March 1994. A summary of financial information as reported by the equity investees of the Time Warner Service Partnerships on a 100% basis for the years ended December 31, 1994 and 1993 is set forth below:
YEARS ENDED DECEMBER 31, -------------------------- 1994 1993 ------------ ------------ (THOUSANDS) Revenues............................................ $ 67,720 $ 46,806 Operating loss...................................... (61,950) (60,357) Net loss............................................ (64,125) (67,544) Current assets...................................... 34,391 27,564 Total assets........................................ 324,853 144,262 Current liabilities................................. 23,338 16,308 Long-term debt...................................... 262,000 71,567 Total liabilities................................... 368,598 220,901
Equity interests in QVC, Inc. (8% owned, "QVC"), The 3DO Company (13% owned) and Black Entertainment Television (15% owned) are accounted for at market value. The interest in QVC was sold in February 1995 to a group that had tendered for all of that company's capital stock. Proceeds of approximately $200 million were received, which will be paid, loaned, distributed or otherwise transferred to Time Warner. 3.DEBT DUE TO TIME WARNER The Time Warner Service Partnerships can borrow up to a maximum of $125 million from Time Warner through January 1, 1998. Each borrowing is at the discretion of Time Warner. Interest on outstanding borrowings is payable quarterly at a per annum rate equal to the weighted average interest rate applicable to borrowings by TWE under its bank credit agreement, which was 6.5% and 4.2% at December 31, 1994 and 1993, respectively. Outstanding borrowings are payable on January 1, 1998 or on earlier demand. Outstanding borrowings were approximately $32 million and $17 million at December 31, 1994 and 1993, respectively. 4.PARTNERS' CAPITAL The partnership agreements provide for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation or dissolution. Capital amounts assigned to each partner are based on the fair value of the assets each contributed to the partnership plus Time Warner Service Partnership Contributions funded by TWE distributions (Note 1). Partnership income, to the extent earned, is first allocated to the partners so that the economic burden of the income tax consequences of partnership operations is borne as though the partnership were taxed as a corporation ("special tax allocations"), then to the General Partners' priority capital interest in the initial capital amount of $337 million plus Time Warner Service Partnership Contributions at rates of return of up to 13.25% per annum (11.25% to the extent concurrently distributed) from the date such contributions are made, and finally to the residual equity interests. For the purpose of the foregoing allocations, partnership income or loss is based on the fair value of the Time Warner Service Partnership Assets and differs from net income or loss of the Time Warner Service Partnerships, which is based on the historical cost of the Time Warner Service Partnership Assets. Partnership losses generally are allocated first to eliminate prior allocations of partnership income to, and then to reduce the initial capital amounts of, the residual equity and General Partners' priority capital interest, in that order, and then to reduce any special tax allocations. To the extent partnership income 7 TIME WARNER SERVICE PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) is insufficient to satisfy all special allocations in a particular accounting period, the unearned portion is carried over until satisfied out of future partnership income. The Time Warner Service Partnerships may make quarterly cash distributions to its partners to the extent of excess cash, as defined, subject to certain limitations contained in the Time Warner Service Partnerships and TWE partnership agreements. 5.COMMITMENTS AND CONTINGENCIES Total rent expense was $7 million for the year ended December 31, 1994 and $2.9 million for the period from September 15, 1993 (inception) through December 31, 1993. The minimum rental commitments under noncancellable long- term operating and capital leases are: 1995-$3.3 million; 1996-$3.2 million; 1997-$2.8 million; 1998-$2.4 million; 1999-$2.2 million and after 1999-$10.8 million. Minimum commitments under contracts related to the operation of certain satellites and the purchase of certain equipment at December 31, 1994 were approximately $122 million, which are payable principally over a five-year period. On March 9, 1994, TW Programming Co. entered into an agreement with certain other partners in Primestar, pursuant to which it is obligated to provide letters of credit to support a portion of the indebtedness incurred under a $565 million satellite construction credit facility entered into by Primestar as of March 9, 1994. Time Warner has delivered its letter of credit for the account of TW Programming Co. in the amount of $69 million. Under the credit facility, TW Programming Co. is obligated to renew and increase the amount of the letters of credit provided by it to a minimum of $102 million on March 9, 1995; a minimum of $127 million on March 9, 1996; and a minimum of $131 million on March 9, 1997. The bank lenders may draw on the letters of credit provided by the partners of Primestar, on a pro rata basis, in the event any amount is due and payable under the facility or if any letter of credit is not renewed or increased as required, and in certain other circumstances. Under the agreement, if TW Programming Co. or any other partner of Primestar fails to satisfy its obligation to provide letters of credit as required, its partnership interest in Primestar and any claims for repayment of any drawings under its letters of credit are subject to forfeiture. Time Warner has no obligation to TW Programming Co. to continue to renew or increase letters of credit which TW Programming Co. is required to provide under its agreement. 6.RELATED PARTY TRANSACTIONS The Time Warner Service Partnerships have entered into various service agreements with TWE pursuant to which, among other things, the Time Warner Service Partnerships have provided program signal delivery services to TWE's cable systems and transmission services to TWE's Programming-HBO and Filmed Entertainment divisions, and TWE has provided billing, collection and marketing services to the Time Warner Service Partnerships. In the normal course of conducting their businesses, the Time Warner Service Partnerships have had various other transactions with Time Warner and TWE, generally on terms resulting from a negotiation among the affected operating units that in management's view results in reasonable allocations. Employees of the Time Warner Service Partnerships participated in various Time Warner pension, medical, stock and other benefit plans for which the Time Warner Service Partnerships were charged their allocable share of plan expenses, including administrative costs. Time Warner's corporate group provides various other services to the Time Warner Service Partnerships. 8 TIME WARNER SERVICE PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Court TV has affiliation agreements with its partners, including certain cable systems owned directly or indirectly by TWE, that provide for the delivery of minimum subscriber levels by the cable systems. Effective January 1, 1995, Court TV will begin to charge TWE for services provided under such agreements. Income (expenses) recorded by the Time Warner Service Partnerships resulting from transactions with related parties are as follows:
SEPTEMBER 15, 1993 YEAR ENDED (INCEPTION) THROUGH DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ------------------- (THOUSANDS) Revenues.................................. $ 2,991 $ 806 Cost of revenues.......................... (6,779) (739) Selling, general and administrative....... (2,523) (398) Interest expense.......................... (319) (93)
The Time Warner Service Partnerships have funding arrangements with Time Warner that provide for additional borrowings and capital contributions, as described in Notes 3 and 4, respectively. 7.SUPPLEMENTAL INFORMATION Supplemental information with respect to cash flows is as follows:
SEPTEMBER 15, 1993 YEAR ENDED (INCEPTION) THROUGH DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ------------------- (THOUSANDS) Cash payments made for interest........... $ 2,581 $ -- Borrowings................................ 23,111 17,036 Repayments................................ 7,827 -- Noncash capital contributions............. 726 --
The principal balance sheet effects of the consolidation of Court TV in 1994 were to increase cash by $.296 million; receivables by $.677 million; prepaid expenses by $.696 million; property, plant and equipment by $18.914 million; accounts payable by $1.311 million; other current liabilities by $3.709 million; and capital lease obligations by $15.563 million. The principal balance sheet effects of the capitalization of the Time Warner Service Partnerships on September 15, 1993 were to increase investments by $61.733 million; property, plant and equipment by $33.071 million; accounts payable and other current liabilities by $.229 million; and partners' capital by $94.575 million. Other current liabilities consist of:
DECEMBER 31, -------------- 1994 1993 ------- ------ (THOUSANDS) Accrued expenses................................................ $14,862 $ 971 Programming costs............................................... 2,737 306 Due to Time Warner.............................................. 5,877 -- Capital lease obligations....................................... 1,450 -- ------- ------ $24,926 $1,277 ======= ======
9 REPORT OF INDEPENDENT AUDITORS THE PARTNERS OF TIME WARNER SERVICE PARTNERSHIPS We have audited the accompanying combined balance sheet of the Time Warner Service Partnerships as of December 31, 1994 and 1993, and the related combined statements of operations, cash flows and partners' capital for the year ended December 31, 1994 and the period from September 15, 1993 (Inception) through December 31, 1993. These financial statements are the responsibility of the Time Warner Service Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Time Warner Service Partnerships at December 31, 1994 and 1993, and the combined results of their operations and their cash flows for the year ended December 31, 1994 and the period from September 15, 1993 (Inception) through December 31, 1993, in conformity with generally accepted accounting principles. Ernst & Young LLP New York, New York March 3, 1995 10 EX-99.2 16 1994 FINANCIAL STATEMENTS OF PARAGON COMMUNICATIONS EXHIBIT 99.2 PARAGON COMMUNICATIONS (A PARTNERSHIP) BALANCE SHEET DECEMBER 31, (THOUSANDS)
1994 1993 --------- --------- ASSETS Cash and equivalents, including restricted cash of $5,010 in 1994 and $4,887 in 1993.............................. $ 9,114 $ 7,187 Receivables, net of allowances for doubtful accounts of $2,265 in 1994 and $1,824 in 1993....................... 14,980 13,364 Prepaid expenses......................................... 1,333 1,164 Property, plant and equipment............................ 660,842 611,365 Less accumulated depreciation............................ (269,116) (226,496) --------- --------- Property, plant and equipment, net....................... 391,726 384,869 Cable television franchises, less accumulated amortiza- tion of $94,315 in 1994 and $84,110 in 1993............. 205,773 215,809 Other assets, less accumulated amortization of $2,611 in 1994 and $2,401 in 1993................................. 4,901 5,014 --------- --------- Total assets............................................. $ 627,827 $ 627,407 ========= ========= LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses.................... $ 74,105 $ 69,468 Debt..................................................... 249,000 320,317 --------- --------- Total liabilities........................................ 323,105 389,785 Partners' capital: Partners' contribution................................... 143,904 143,904 Accumulated income....................................... 160,818 93,718 --------- --------- Total partners' capital.................................. 304,722 237,622 --------- --------- Total liabilities and partners' capital.................. $ 627,827 $ 627,407 ========= =========
The accompanying notes are an integral part of these financial statements. 1 PARAGON COMMUNICATIONS (A PARTNERSHIP) STATEMENT OF OPERATIONS AND ACCUMULATED INCOME YEARS ENDED DECEMBER 31, (THOUSANDS)
1994 1993 1992 -------- -------- -------- Revenues......................................... $348,323 $338,200 $315,999 Costs and expenses: Operating and programming*....................... 140,549 133,183 123,682 Selling, general, and administrative*............ 59,582 60,211 58,457 Depreciation and amortization.................... 62,883 59,669 58,439 -------- -------- -------- Total costs and expenses......................... 263,014 253,063 240,578 -------- -------- -------- Operating income................................. 85,309 85,137 75,421 Other income..................................... 18 999 2,528 Interest expense, net............................ (18,227) (21,654) (28,127) -------- -------- -------- Net income....................................... 67,100 64,482 49,822 Accumulated income (deficit) at beginning of the year............................................ 93,718 29,410 (20,412) Adjustment for pension liability................. -- (174) -- -------- -------- -------- Accumulated income at end of the year............ $160,818 $ 93,718 $ 29,410 ======== ======== ======== -------- * Includes the following expenses resulting from transactions with the partners or their affiliates (Note 3):............................ $ 24,900 $ 25,200 $ 23,900 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 2 PARAGON COMMUNICATIONS (A PARTNERSHIP) STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, (THOUSANDS)
1994 1993 1992 -------- -------- -------- CASH FLOW FROM OPERATING ACTIVITIES Net income....................................... $ 67,100 $ 64,482 $ 49,822 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 62,883 59,669 58,439 (Increase) decrease in accounts receivable and prepaid expenses................................ (1,785) (2,703) 171 Increase (decrease) in accounts payable and ac- crued expenses.................................. 4,637 (3,293) (1,236) Other............................................ 210 (720) 2,903 -------- -------- -------- Net cash provided by operating activities........ 133,045 117,435 110,099 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Property, plant and equipment additions.......... (59,694) (53,771) (65,666) Other............................................ (107) 664 (5,435) -------- -------- -------- Net cash used in investing activities............ (59,801) (53,107) (71,101) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Changes in commercial paper and revolving credit facility, net................................... (21,317) (15,101) 10,711 Payments on senior institutional notes........... (50,000) (50,000) (50,000) -------- -------- -------- Net cash used in financing activities............ (71,317) (65,101) (39,289) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS........................................... 1,927 (773) (291) Cash and equivalents at beginning of the year.... 7,187 7,960 8,251 -------- -------- -------- Cash and equivalents at end of the year.......... $ 9,114 $ 7,187 $ 7,960 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest (net of amounts capitalized)............................ $ 19,660 $ 22,756 $ 29,802 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 3 PARAGON COMMUNICATIONS (A PARTNERSHIP) STATEMENT OF PARTNERS' CAPITAL (THOUSANDS)
TOTAL PARTNERS' ATC KBLCOM CAPITAL -------- -------- --------- BALANCE AT DECEMBER 31, 1991..................... $ 61,746 $ 61,746 $123,492 Net income for the year ended December 31, 1992.. 24,911 24,911 49,822 -------- -------- -------- BALANCE AT DECEMBER 31, 1992..................... 86,657 86,657 173,314 Net income for the year ended December 31, 1993.. 32,241 32,241 64,482 Adjustment for pension liability................. (87) (87) (174) -------- -------- -------- BALANCE AT DECEMBER 31, 1993..................... 118,811 118,811 237,622 Net income for the year ended December 31, 1994.. 33,550 33,550 67,100 -------- -------- -------- BALANCE AT DECEMBER 31, 1994..................... $152,361 $152,361 $304,722 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 4 PARAGON COMMUNICATIONS (A PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS 1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Paragon Communications ("Paragon") is a Colorado general partnership owned equally by subsidiaries of American Television and Communications Corporation ("ATC") and by KBLCOM Incorporated ("KBLCOM"). ATC is an indirect, wholly-owned subsidiary of Time Warner Inc. ("Time Warner"). KBLCOM is a wholly-owned subsidiary of Houston Industries Incorporated. The operations consist primarily of selling video programming, which is distributed to subscribers for a monthly fee through communication networks of coaxial and fiber-optic cables. In October 1991, Time Warner entered into an agreement to form a limited partnership, Time Warner Entertainment Company, L.P. ("TWE"), with subsidiaries of Toshiba Corporation ("Toshiba") and ITOCHU Corporation ("ITOCHU"). On June 30, 1992, Time Warner subsidiaries contributed substantially all assets of the filmed entertainment, HBO programming, and cable businesses and certain other assets to TWE, subject to certain liabilities. In lieu of contributing certain assets to TWE, including ATC's interest in Paragon, certain Time Warner subsidiaries agreed to pay TWE an amount equal to the net cash flow generated by such assets. On September 15, 1993, a wholly-owned subsidiary of U S WEST, Inc. ("USW") was admitted as an additional limited partner. As a result of the USW transaction, the subsidiaries of USW, Toshiba, and ITOCHU hold pro-rata priority capital and residual equity partnership interests of 25.51%, 5.61%, and 5.61%, respectively, in TWE. The subsidiaries of Time Warner in the aggregate hold pro-rata priority capital and residual equity partnership interests of 63.27% in TWE. REVENUE AND PROGRAMMING Subscriber fees are recorded as revenue in the period the service is provided. Subscriber fees for regulated services and equipment are based upon rates that management believes are determined in accordance with the guidelines of the Cable Television Consumer Protection Act of 1992 (the "Cable Act"). The cost to acquire the rights to the programming ("programming costs") generally is recorded when the product is initially available for exhibition. CASH AND CASH EQUIVALENTS Cash equivalents consist of investments which are readily convertible into cash and have original maturities of three months or less. Restricted cash includes converter deposits held by Paragon which are refundable to customers. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Additions to cable property, plant and equipment generally include materials, applicable labor, overhead, and interest. Depreciation is computed generally by the straight-line method over estimated useful lives ranging up to twenty years for buildings and improvements and up to fifteen years for furniture, fixtures, and other equipment. Expenditures for improvements and repairs are expensed as incurred. Expenditures for major improvements and upgrades are capitalized and included in property, plant and equipment. CABLE TELEVISION FRANCHISES Cable television franchises are stated at cost. Amortization is computed using the straight-line method over periods ranging up to forty years. 5 PARAGON COMMUNICATIONS (A PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) INCOME TAXES Paragon is not an income tax paying entity. Accordingly, no provision is made for income taxes since Paragon's operations are reportable by its partners on their income tax returns. 2.DEBT Debt consisted of the following:
DECEMBER 31, ----------------- 1994 1993 -------- -------- (THOUSANDS) Short term commercial paper, face amounts of $221,073, less unamortized discount of $756, and weighted average interest rate of 3.48% at December 31, 1993(/1/).................... $ -- $220,317 Revolving Credit Agreement, unsecured, which provides for an aggregate of $225 million in revolving credit facilities, with an average interest rate of 6.7% at December 31, 1994....................................................... 199,000 -- Senior institutional notes dated July 12, 1988, unsecured, at a fixed rate of 9.56% per annum, due in annual installments of $50 million commencing July 1992 through July 1995.................................................. 50,000 100,000 -------- -------- Total debt.................................................. $249,000 $320,317 ======== ========
-------- (1)Short term commercial paper was supported by Paragon's revolving credit agreement under which Paragon maintained unused availability at least to the extent of the outstanding commercial paper. The commercial paper program was discontinued effective September 1, 1994. The aforementioned Revolving Credit Agreement contains certain covenants which restrict merger or sale of assets, the amount of debt, distributions to partners, certain investments and requires the maintenance of certain ratios, including cash flow (operating income before depreciation and amortization) to interest, debt to cash flow and debt service ratios. Based on the borrowing rates currently available to the partnership for loans with similar terms and maturities, the carrying value is a reasonable estimate of the fair value of the debt at December 31, 1994. The Revolving Credit Agreement will be terminated when the expected acquisition of KBLCOM by Time Warner is consummated. It is anticipated that the senior institutional notes will mature prior to the completion of the acquisition (See Note 6). 3.RELATED PARTY TRANSACTIONS ATC and KBLCOM receive management fees for various services equal to a total of two and one-half percent of Paragon's gross receipts. Paragon paid management fees of $6.8 million, $6.6 million, and $6.2 million to ATC and $1.7 million, $1.7 million, and $1.5 million to KBLCOM for the years ended December 31, 1994, 1993 and 1992, respectively. 6 PARAGON COMMUNICATIONS (A PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Additionally, Paragon has various transactions with ATC in the normal course of conducting its business. ATC charges Paragon for certain expenses incurred on the behalf of Paragon. Advances to or from ATC fluctuate daily and are settled on a monthly basis. The statement of operations includes charges for programming, construction and design services provided by TWE. The total of these charges was $16.4 million, $16.9 million, and $16.2 million in 1994, 1993 and 1992, respectively. Management believes that these charges were based on customary rates. 4.COMMITMENTS Paragon presently has certain cable television franchises containing provisions for construction of cable plant and services to customers according to various requirements within the franchise areas. In connection with certain obligations under existing franchise agreements, Paragon obtains surety bonds or letters of credit guaranteeing performance to municipalities and public utilities. Payment is required only in the event of nonperformance and no such payments have been made. Paragon is committed under non-cancelable operating leases involving certain real and personal property. Net rent expense, primarily office facilities and pole attachment and conduit usage agreements with utilities, was $5.4 million, $5.1 million, and $4.8 million for the years ended December 31, 1994, 1993, and 1992, respectively. Future minimum lease payments under non-cancelable operating leases as of December 31, 1994 are: $2.7 million in 1995; $2.5 million in 1996; $2.1 million in 1997; $1.6 million in 1998; $1.4 million in 1999; and $7.0 million thereafter, totaling $17.3 million. 5.PENSION PLAN AND OTHER BENEFIT PLANS Paragon has a non-contributory defined benefit pension plan (the "Pension Plan") covering the majority of its employees. The benefits under the Pension Plan are determined based on formulas which reflect employees' years of service and compensation levels during their employment period. The projected unit credit method is used to determine pension costs of the Pension Plan. Paragon's funding policy is to contribute amounts to the plan sufficient to meet minimum funding requirements set forth in the Employment Retirement Income Security Act of 1974, plus such additional amounts as Paragon may determine to be appropriate. At December 31, 1994, the assets of the Pension Plan were invested primarily in short term, interest bearing securities. Paragon also sponsors an unfunded excess benefit plan, a non-qualified plan that provides defined pension benefits in excess of certain qualified plan limits imposed by federal tax law. Paragon also participates in a non-contributory multi-employer plan for union employees of one of its divisions. Contributions are made based on a specified percentage of an employee's compensation.
YEARS ENDED DECEMBER 31, -------------------------- 1994 1993 1992 -------- -------- -------- (THOUSANDS) Total net pension cost: Defined benefit plans................................ $ 1,785 $ 1,142 $ 988 Multi-employer plan.................................. 907 950 734 -------- -------- -------- Total net pension cost............................... $ 2,692 $ 2,092 $ 1,722 ======== ======== ========
7 PARAGON COMMUNICATIONS (A PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, ---------------------------- 1994 1993 1992 -------- -------- -------- (THOUSANDS) Components of net pension cost for Paragon's de- fined benefit plans: Service cost...................................... $ 1,308 $ 874 $ 769 Interest cost on projected benefit obligation..... 696 488 378 Actual return on plan assets...................... (178) (108) (100) Net amortization and deferral..................... (41) (112) (59) -------- -------- ------ Net pension cost.................................. $ 1,785 $ 1,142 $ 988 ======== ======== ======
Funding Status of Paragon's Defined Benefit Plans:
DECEMBER 31, ------------- 1994 1993 ------ ------ (THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $5,274 and $4,632 at December 31, 1994 and 1993, respectively... $5,800 $5,343 ====== ====== Projected benefit obligation..................................... $7,923 $7,486 Less: Plan assets at fair value.................................. 5,423 4,054 ------ ------ Projected benefit obligation in excess of fair value of plan as- sets............................................................ 2,500 3,432 Less: Unrecognized net loss (gain) from experience different from that assumed and effect of changes in assumptions............... 983 2,316 Unrecognized prior service cost.................................. 119 152 Unrecognized net obligation...................................... 342 380 Plus: Additional minimum liability............................... -- 706 ------ ------ Accrued pension cost included in accounts payable and accrued expenses............................................ $1,056 $1,290 ====== ======
The projected benefit obligation was determined using an assumed discount rate of eight and one-half percent in 1994 and seven and one-half percent in 1993. An increase in future compensation rates of six percent was assumed in both years. The expected long-term rate of return on assets was nine percent in 1994 and ten percent in 1993. Paragon also maintains a defined contribution plan, the Paragon Employees Stock Savings Plan (the "ESSP"), covering substantially all of its employees, whereby two dollars are contributed by Paragon to a participant's account for each three dollars contributed by a participant through payroll deductions. The Paragon management committee has the right in any year to set the maximum amount of Paragon's contribution. Paragon's defined contribution plan expense for the ESSP was $983,000, $938,000, and $790,000 in the years ended December 31, 1994, 1993 and 1992, respectively. 6.SUBSEQUENT EVENT On January 27, 1995, Time Warner and Houston Industries Incorporated announced an agreement under which Time Warner expects to acquire KBLCOM. Closing of the acquisition, which is subject to franchise transfers and other approvals, is expected to take place in the second half of 1995. 8 REPORT OF INDEPENDENT ACCOUNTANTS TO THE PARTNERS OF PARAGON COMMUNICATIONS In our opinion, the accompanying balance sheet and the related statements of operations and accumulated income (deficit), of partners' capital and of cash flows present fairly, in all material respects, the financial position of Paragon Communications (a Partnership) at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Our audits also included the Financial Statement Schedule VIII. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. Price Waterhouse LLP Denver, Colorado January 19, 1995, except as to Note 6, which is as of January 27, 1995. 9 PARAGON COMMUNICATIONS (A PARTNERSHIP) SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR ----------- ---------- ---------- ---------- ---------- (THOUSANDS) 1994: Deducted from asset accounts: Allowance for doubtful ac- counts........................ $ 1,824 $ 7,320 $(6,879)(a) $ 2,265 Accumulated amortization re- lated to: Cable franchises............... 84,110 10,205 -- 94,315 Other assets................... 2,401 210 -- 2,611 1993: Deducted from asset accounts: Allowance for doubtful ac- counts........................ $ 1,545 $ 6,218 $(5,939)(a) $ 1,824 Accumulated amortization re- lated to: Cable television franchises.... 73,539 10,851 (280) 84,110 Other assets................... 1,977 424 -- 2,401 1992: Deducted from asset accounts: Allowance for doubtful ac- counts........................ $ 1,822 $ 5,439 $(5,716)(a) $ 1,545 Accumulated amortization re- lated to: Cable television franchises.... 62,405 11,134 -- 73,539 Other assets................... 1,530 447 -- 1,977
-------- (a) Uncollectible accounts written off, net of recoveries. 10