Table of Contents
Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

Commission file number 001-15062

 

 

TIME WARNER INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   13-4099534
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

One Time Warner Center

New York, NY 10019-8016

(Address of Principal Executive Offices)(Zip Code)

(212) 484-8000

(Registrant’s Telephone Number, Including Area Code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer þ

  

Accelerated filer ¨

Non-accelerated filer ¨

  

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of the close of business on February 19, 2015, there were 830,521,982 shares of the registrant’s Common Stock outstanding. The aggregate market value of the registrant’s voting and non-voting common equity securities held by non-affiliates of the registrant (based upon the closing price of such shares on the New York Stock Exchange on June 30, 2014) was approximately $58.28 billion.

Documents Incorporated by Reference:

 

Description of document

  

Part of the Form 10-K

Portions of the definitive Proxy Statement to be used in connection with the registrant’s 2015 Annual Meeting of Stockholders

  

Part III (Item 10 through Item 14)

(Portions of Items 10 and 12 are not incorporated by reference and are provided herein)

 

 

 


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

PART I

  1   

Item 1. Business.

  1   

Item 1A. Risk Factors.

  17   

Item 1B. Unresolved Staff Comments.

  24   

Item 2. Properties.

  24   

Item 3. Legal Proceedings.

  26   

Item 4. Mine Safety Disclosures.

  27   

PART II

  29   

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

  29   

Item 6. Selected Financial Data.

  30   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  30   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

  30   

Item 8. Financial Statements and Supplementary Data.

  30   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

  30   

Item 9A. Controls and Procedures.

  30   

Item 9B. Other Information.

  31   

PART III

  31   

Items  10, 11, 12, 13 and 14. Directors, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Director Independence; Principal Accounting Fees and Services.

  31   

PART IV

  32   

Item 15. Exhibits and Financial Statement Schedules.

  32   


Table of Contents
Index to Financial Statements

PART I

 

Item 1. Business.

Time Warner Inc. (the “Company” or “Time Warner”), a Delaware corporation, is a leading media and entertainment company. The Company classifies its businesses into the following three reportable segments:

 

   

Turner, consisting principally of cable networks and digital media properties;

 

   

Home Box Office, consisting principally of premium pay television services domestically and premium pay and basic tier television services internationally; and

 

   

Warner Bros., consisting principally of television, feature film, home video and videogame production and distribution.

For more information about the Company’s reportable segments, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Overview.”

At December 31, 2014, the Company had a total of approximately 25,600 employees.

For convenience, the terms the “Company,” “Time Warner” and the “Registrant” are used in this report to refer to both the parent company alone and collectively to the parent company and the subsidiaries through which its various businesses are conducted, unless the context requires otherwise. In addition, the term “Home Box Office” is used to refer to Home Box Office, Inc., a subsidiary of Time Warner, the term “Turner” is used to refer to Turner Broadcasting System, Inc., a subsidiary of Time Warner and the term “Warner Bros.” is used to refer to Warner Bros. Entertainment Inc., a subsidiary of Time Warner.

On June 6, 2014, the Company completed the legal and structural separation of Time Inc. from the Company (the “Time Separation”). With the completion of the Time Separation, the Company disposed of the Time Inc. segment in its entirety. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for additional information.

Caution Concerning Forward-Looking Statements and Risk Factors

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and beliefs. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, and the Company is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. Time Warner’s actual results may vary materially from those expressed or implied by the statements in this report due to changes in economic, business, competitive, technological, strategic and/or regulatory factors and other factors affecting the operation of Time Warner’s businesses. For more detailed information about these factors and risk factors with respect to the Company’s operations, see Item 1A, “Risk Factors,” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Caution Concerning Forward-Looking Statements.”

Available Information and Website

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge on the Company’s website at www.timewarner.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The Company is providing the address to its website solely for the information of investors. The Company does not intend the address to be an active link or to incorporate any information included on or accessible through its website into this report.

TURNER

Turner owns and operates a leading portfolio of domestic and international cable television networks and related properties that offer entertainment, sports, kids and news programming on television and digital platforms for consumers

 

1


Table of Contents
Index to Financial Statements

around the world. Turner operates more than 165 channels globally. In the U.S., its networks and related properties include TNT, TBS, Adult Swim, truTV, Turner Classic Movies, Turner Sports, Cartoon Network, Boomerang, CNN and HLN. Outside the U.S., Turner’s broad portfolio of brands and digital businesses reaches consumers in more than 200 countries.

Turner’s programming is distributed by cable system operators, satellite service distributors, telephone companies and other distributors (known as affiliates) and is available to subscribers of the affiliates for viewing (i) on television, (ii) via streaming online and on mobile devices through Turner’s digital properties and services provided by affiliates and (iii) on demand on television through Turner’s digital properties and affiliates’ digital VOD services. Some of Turner’s programming is also available through SVOD services. Turner has been expanding the amount of programming available to subscribers on demand on television and digital properties to include complete current seasons of popular programming from Turner’s portfolio of networks. As of December 31, 2014, Turner’s programming was available on demand and for streaming to approximately 87 million U.S. television households that subscribed to multichannel video services (as reported by Nielsen Media Research).

Turner is continuing to increase its scale and strengthen its competitive position internationally through strategic regional channel launches, partnerships and acquisitions in key territories. In addition, Turner is placing greater emphasis on creating local programming to strengthen its brands internationally. Historically, Turner has managed its international entertainment and kids networks separately from its domestic networks, but it is transitioning its kids businesses to a more globally managed operation, similar to its news business.

Turner’s digital properties consist of its own websites and websites that Turner manages and/or operates for others. Turner’s CNN digital network is a leading digital news destination, and Turner’s bleacherreport.com is the number two digital sports destination, in each case, based on the number of average monthly domestic multi-platform unique visitors for the year ended December 31, 2014. Turner’s other websites include tntdrama.com , TBS.com , adultswim.com and cartoonnetwork.com . Digital properties that Turner manages and/or operates for others include NBA.com , NBA Mobile , NCAA.com and PGA.com . Turner’s digital properties collectively averaged approximately 124 million average monthly domestic multi-platform unique visitors (based on data sourced from comScore Media Metrix) during the year ended December 31, 2014.

Turner’s businesses consist of entertainment, sports, kids and news programming on television and digital platforms, which are described below.

Domestic Entertainment

Turner’s domestic entertainment networks collectively provide a blend of original series, acquired series and movies, sports, classic film and reality programming. For the year ended December 31, 2014, Turner’s TNT and TBS were two of the top five primetime advertising-supported cable networks among adults 18-49 in the U.S., and Adult Swim was the top total day advertising-supported cable network among adults 18-34 in the U.S. Turner is focused on optimizing the mix of original series and acquired programming on its domestic entertainment networks to strengthen its brands with its audiences, advertisers and affiliates. In addition, Turner is investing in distinctive original programming for its TNT, TBS and truTV networks that will appeal to younger audiences. Turner also plans to increase the amount of original programming on TNT and TBS over the next several years. Ownership of a larger portion of its content will enable Turner to take advantage of increasing licensing opportunities for that content and distribute the content across international territories. Turner’s digital properties in entertainment include tntdrama.com , TBS.com and adultswim.com .

TNT

TNT focuses on drama and is home to syndicated series and a growing roster of original series (including unscripted series), as well as sports and network premiere motion pictures. For the 2014-2015 season, TNT’s returning original series include Cold Justice , Falling Skies , Major Crimes and Rizzoli & Isles , and its new original series include The Last Ship , Legends , The Librarians , Murder in the First , On the Menu , Proof , Public Morals , Transporter: The Series and Wake Up Call . For the 2014-2015 season, TNT’s syndicated series include Bones , Castle and Grimm .

 

2


Table of Contents
Index to Financial Statements

TBS

TBS focuses on contemporary comedies, as well as a growing roster of original series, sports and acquired television series and motion pictures. For the 2014-2015 season, TBS’ returning original series include American Dad! , Deal With It and King of the Nerds , and its new original series include Angie Tribeca , Buzzy’s and Your Family or Mine . Syndicated series for the 2014-2015 season include The Big Bang Theory , Family Guy and The Office . TBS is also the home of the late night talk show Conan.

Adult Swim

Adult Swim is an evening and overnight block of programming airing on Turner’s Cartoon Network. Adult Swim targets young adults and offers original and syndicated animated and live-action comedy programming. For the 2014-2015 season, Adult Swim’s original series include Aqua Teen Hunger Force , Black Jesus , Childrens Hospital , The Eric Andre Show , The Jack and Triumph Show , Mike Tyson Mysteries , Rick & Morty and Squidbillies .

truTV

truTV focuses on series that feature real-life situations, in particular comedic reality programs. For the 2014-2015 season, truTV’s returning original series include Hardcore Pawn , Impractical Jokers , South Beach Tow and truTV Top Funniest , and its new original series include Barmageddon , The Carbonaro Effect , Fake Off , Friends of the People , Hack My Life , Hair Jacked and How to Be a Grown Up . During the fourth quarter of 2014, Turner launched a rebrand of truTV to focus on entertainment programming targeted to adults with the tag line “Way More Fun”.

Turner Classic Movies

Turner Classic Movies is a commercial-free network that presents classic films from some of the largest film libraries in the world. Turner Classic Movies also offers interviews, original documentaries, specials and regular programming events that include “The Essentials,” “31 Days of Oscar” and “Summer Under the Stars.”

International Entertainment

Outside the U.S., Turner owns and/or operates regional entertainment networks providing a variety of programming, such as motion pictures and series, documentaries, fashion and lifestyle content, music videos, sports and travel. In Latin America, Turner is the number one provider of multichannel television in the region, and it owns and operates regional entertainment networks, including Glitz*, HTV, I-Sat, Infinito, MuchMusic and Space. Turner also owns and operates Chilevisión, a free-to-air television broadcaster in Chile. In January 2015, Turner acquired the remaining shares in Esporte Interativo, a Brazilian television channel that airs sports programming, including programming from South American and European soccer leagues, so that it is now wholly owned by Turner. Turner also operates several regional entertainment networks in Europe and the Middle East, including TCM, TNT and TNT Glitz. In Asia, Turner operates several regional entertainment networks, including TCM, truTV, HBO Basic, WarnerTV and WB in India, Oh!K in Singapore, and MondoTV and Tabi Channel in Japan.

Sports

Turner Sports produces award-winning sports programming and content for Turner’s TNT, TBS and truTV networks and related digital properties. Turner’s sports programming helps drive value across its networks in the form of higher affiliate fees, ratings, advertising and promotional opportunities.

Turner’s sports programming features licensed programming from the National Basketball Association (“NBA”) through the 2024-2025 season, Major League Baseball (“MLB”) through 2021, The National Collegiate Athletic Association (the “NCAA”) for the Men’s Division I Basketball Tournament through 2024, and the Professional Golfers’ Association (“PGA”) through 2019. NBA games and PGA tournaments air on the TNT network, and MLB games air on the TBS network. Turner also operates NBA TV, an advertising-supported cable network owned by the NBA that features NBA exhibition, regular season and playoff games and related programming. The NCAA Men’s Division I Basketball Tournament games air on the TNT, TBS and truTV networks and on the CBS network under an agreement among Turner, CBS Broadcasting, Inc. and the

 

3


Table of Contents
Index to Financial Statements

NCAA. Turner’s networks will carry the NCAA Final Four semifinal games in 2015 and, in 2016, Turner’s networks will carry the NCAA Final Four semifinal games and championship game. After 2016, Turner’s networks and CBS will carry the NCAA Final Four semifinal games and championship game in alternate years.

Turner Sports operates bleacherreport.com , a leading online and mobile sports property that provides team-specific sports content and real-time event coverage and provides Turner with cross platform programming and marketing opportunities. For the year ended December 31, 2014, bleacherreport.com reached approximately 40 million average monthly domestic multi-platform unique visitors. Turner also manages and operates NCAA.com , NCAA March Madness Live , which provides live and on-demand streaming video of games, NBA.com , which provides live streaming of games, and PGA.com .

Kids

Cartoon Network and Boomerang offer original, acquired and classic animated and live-action entertainment targeted at kids in the U.S. and in international territories. Turner plans to significantly expand its global kids business, increase its collaboration with Warner Bros. on television programming that is based on Warner Bros.’ brands and characters (such as DC Entertainment and Looney Tunes) and grow its consumer products business. As part of that initiative, for the 2014-2015 season, Boomerang will offer both classic Warner Bros. animation programming and exclusive new original content.

Cartoon Network

Cartoon Network offers original and syndicated animated and live-action series and motion pictures for youth and families. For the 2014-2015 season, Cartoon Network’s original animated series include Adventure Time , The Amazing World of Gumball , Clarence , Steven Universe, Teen Titans Go! and Uncle Grandpa .

Boomerang

Boomerang offers classic animated entertainment from the Warner Bros., Hanna-Barbera, MGM and Cartoon Network libraries, such as The Flintstones , The Jetsons , Pink Panther , Tom and Jerry and Yogi Bear , and for the 2014-2015 season will offer exclusive new original series, such as Inspector Gadget and Mr. Bean . In 2014, Boomerang began airing advertising for the first time in the U.S. and some international territories, with plans to air advertising in its other international territories in 2015.

Turner’s kids business is a key part of its international operations, and Cartoon Network is the number one kids network in several territories outside the U.S. Turner’s kids networks outside the U.S. include Cartoon Network, Boomerang and Tooncast in Latin America; BOING, Boomerang, Cartoon Network and Cartoonito in Europe and the Middle East; and Boomerang, Cartoon Network, POGO and Toonami in Asia.

News

CNN

CNN is the original cable television news service. As of December 31, 2014, CNN managed 40 news bureaus and editorial operations, 31 of which are located outside the U.S. Turner is focused on maintaining CNN’s leadership in worldwide breaking-news and political coverage while broadening the scope of its programming to include compelling storytelling about important events, people and places through original programming and long-form documentaries. CNN’s original programming for the 2014-2015 season includes Anthony Bourdain: Parts Unknown ; Inside Man , hosted by documentary filmmaker Morgan Spurlock; Somebody’s Gotta Do It , hosted by Mike Rowe; and This is Life with Lisa Ling . CNN plans to increase the amount of original programming on CNN over time. For the 2014-2015 season, CNN’s other programs include Anderson Cooper 360 o New Day , and  The Situation Room . For the year ended December 31, 2014, CNN.com had 39 million average monthly domestic unique visitors. In September 2014, CNN expanded its multi-platform capabilities with the nationwide rollout of CNNGo, which allows subscribers to watch CNN’s news and original programming live and on demand.

 

4


Table of Contents
Index to Financial Statements

Internationally, CNN is the most widely distributed news network reaching almost 300 million households outside the U.S. as of December 31, 2014. CNN Worldwide is a portfolio of more than 20 news and information services across cable, satellite, radio, wireless devices and the Internet in more than 200 countries as of December 31, 2014. CNN Worldwide’s networks and businesses include CNN U.S., CNN International, CNN en Español, CNNj, CNN.com, CNN Airport Network, CNN Radio, CNN Newsource and HLN.

HLN

HLN is a CNN Worldwide network that focuses on news, information, videos and other content curated from multiple social media platforms. For the 2014-2015 season, HLN’s programs include Dr. Drew On Call , Morning Express with Robin Meade and Nancy Grace .

How Turner Generates Revenues

Turner generates revenues principally from fees received from affiliates that distribute Turner’s programming to subscribers, the sale of advertising on its networks and the digital properties it owns or manages for other companies and the license of its original programming to SVOD services and its brands and characters for consumer products. Turner’s agreements with its affiliates are typically multi-year arrangements that provide for annual service fee increases and have fee arrangements that are generally related to the number of subscribers served by the affiliate, the package of programming provided to the affiliate by each network and the competitive environment. Turner’s advertising revenues are generated from a wide variety of advertiser categories, and the advertising arrangements for its networks generally have terms of one year or less. In the U.S., the advertising revenues generated by Turner are a function of the size and demographics of the audience delivered, the number of units of time sold and the price per unit. Turner sells some of its advertising inventory in the “upfront” market in advance each year and other inventory in the “scatter” market closer to the time a program airs. Outside the U.S., advertising is generally sold at a fixed rate for the unit of time sold, determined by the time of day and network.

HOME BOX OFFICE

Home Box Office owns and operates leading multichannel premium pay television services, HBO and Cinemax. Its businesses consist principally of premium pay television services domestically and premium pay and basic tier television services internationally, as well as home entertainment and content licensing. At December 31, 2014, Home Box Office had approximately 138 million worldwide subscribers, which consisted of approximately 46 million domestic premium pay subscribers and approximately 92 million international premium pay and basic tier television service subscribers, including subscribers through international unconsolidated joint ventures. Home Box Office provides HBO and Cinemax subscribers in the U.S. with subscription video-on-demand products, HBO On Demand and Cinemax On Demand as well as HBO GO and MAX GO. Home Box Office plans to launch a “stand-alone” streaming service in the U.S. in 2015. Home Box Office also sells its original programming via DVDs, Blu-ray Discs and electronic sell-through (“EST”). In 2014, Home Box Office also licensed for the first time some of its programming to an SVOD service in the U.S.

Internationally, Home Box Office tailors the distribution of its programming for each territory using one or more of the following distribution models: premium pay and basic tier television services licensing and/or sale of programming, and direct-to-consumer streaming services. HBO and Cinemax-branded premium pay and basic tier television services are distributed in over 60 countries in Latin America, Asia and Europe. Home Box Office’s original programming is also available to consumers in over 150 countries, both via licenses to international television networks and SVOD services and through sales of DVDs, Blu-ray Discs and EST. Home Box Office operates a direct-to-consumer streaming service in the Nordic region.

Home Box Office Programming

Domestic Original Programming

HBO’s original programming features award-winning and critically acclaimed dramatic and comedy series, such as Game of Thrones ,  Girls The Leftovers , The Newsroom , Silicon Valley True Blood , True Detective and  VEEP , as well as HBO films and mini-series, such as The Normal Heart and Olive Kitteridge , boxing matches and other sports programming, documentaries and comedy and music specials. The quality and diversity of HBO’s original programming differentiates

 

5


Table of Contents
Index to Financial Statements

HBO from other premium pay television services, basic television networks and SVOD services and enhances the value of the HBO brand both domestically and internationally. This programming also continues to build the value of Home Box Office’s content library while increasing the value of HBO across its businesses.

In 2014, HBO received 19 Primetime Emmy Awards, the most of any network for the 13th year in a row, with True Detective winning five awards. In 2014, HBO also won two Golden Globe Awards for Behind the Candelabra , and in January 2015, HBO won one Golden Globe Award for The Normal Heart . In addition, HBO won three George Foster Peabody Awards for documentaries and five Sports Emmy Awards in 2014.

Home Box Office continues to expand HBO’s roster of original series and to work closely with Warner Bros. on original programming. Home Box Office premiered new series True Detective in January 2014, Silicon Valley in April 2014 and The Leftovers (produced by Warner Bros.) in June 2014. Home Box Office premiered its new series Togetherness in January 2015 and plans to premiere three additional new series, Ballers , The Brink and Westworld (produced by Warner Bros.), later in 2015.

In recent years, Cinemax has begun investing in original programming to enhance its brand. Cinemax’s original primetime series in 2014 included Banshee and The Knick . In 2015 Cinemax will air new seasons of these shows and the final season of Strike Back .

Domestic Licensed Programming

Domestically, a significant portion of the programming on HBO and Cinemax consists of uncut and uncensored feature films, including recently-released feature films. Due to the importance of feature films to HBO and Cinemax subscribers, Home Box Office has long-term licensing agreements of varying duration with major film studios and independent producers and distributors. Home Box Office has agreements with Warner Bros., Twentieth Century Fox (“Fox”), Universal Pictures (“Universal”) and Summit Entertainment. The agreements provide Home Box Office the exclusive right to exhibit and distribute on its premium pay television services and digital platforms all of the feature films theatrically released in the U.S. each year by these studios during the applicable license period (other than certain animated films and other certain other specified films). More than half of the top 25 feature films theatrically released in 2014 (as determined based on domestic box office receipts) will be exhibited exclusively on the HBO and Cinemax premium pay television services during the applicable license periods. Home Box Office also has agreements to license older films with Fox, Universal, Warner Bros. and a number of other major studios and independent distributors. Expirations of these agreements are staggered, and Home Box Office’s rights to some of the films licensed under these agreements extend into the next decade.

International Programming

A substantial portion of the programming on Home Box Office’s international premium pay and basic tier television services consists of feature films licensed from major studios in the U.S. Home Box Office also has agreements to license older films from a number of major U.S. studios and other domestic and international independent distributors. In addition to films, the content offerings on these international programming services may feature licensed HBO- and Cinemax-branded television programming, local language original programming and/or U.S. television programming produced by other production studios. For example, in 2014, HBO Latin America (Home Box Office’s largest joint venture) exhibited and distributed recently-released feature films licensed from four major U.S. studios, HBO- and Cinemax-branded programming and over 100 hours of locally-produced Spanish and Portuguese language original programming.

Home Box Office’s Businesses and Revenues

Domestic Premium Pay Television Services

Home Box Office generates revenues principally from providing its programming to domestic affiliates. The HBO and Cinemax services are distributed by Home Box Office’s domestic affiliates that have contracted to receive and distribute Home Box Office’s programming to their customers who subscribe to the HBO and Cinemax services. At December 31, 2014, Home Box Office had approximately 46 million domestic subscribers and HBO was the most widely distributed domestic multi-channel premium pay television service. Home Box Office’s agreements with its domestic affiliates are

 

6


Table of Contents
Index to Financial Statements

typically long-term arrangements that provide for annual service fee increases and marketing support. While fees to Home Box Office under affiliate agreements are generally based on the number of subscribers served by the affiliates, the relationship between subscriber totals and the amount of revenues earned depends on the specific terms of the applicable agreement, which may include basic and/or pay television subscriber thresholds, volume discounts and other performance-based discounts. Marketing and promotional activities intended to retain existing subscribers and acquire new subscribers may also impact revenue earned. In addition to offering HBO as part of their multichannel video subscription packages, some affiliates have created smaller bundled channel offerings that include a “light” subscription package (i.e., broadcast and/or select basic cable networks, broadband service and HBO).

In addition to viewing HBO and Cinemax programming on an HBO or Cinemax multiplex television channel, subscribers can also view HBO and Cinemax programming whenever they want through Home Box Office’s on demand services, HBO On Demand and Cinemax on Demand. Home Box Office also provides HBO and Cinemax subscribers with unlimited access to programming through its HBO GO and MAX GO streaming video-on-demand platforms. HBO GO and MAX GO enable HBO and Cinemax subscribers to watch programming whenever they want on a variety of digital platforms, including various mobile devices, gaming consoles and Internet streaming devices and connected televisions. The programming on HBO GO and MAX GO includes most seasons of HBO’s and Cinemax’s original series, as well as feature films, HBO mini-series and films, sports programming, documentaries, comedy and music specials, bonus features and behind-the-scenes extras.

Home Box Office plans to launch a “stand-alone” streaming service in the U.S. in 2015 to target homes that do not subscribe to HBO, including those homes that do not subscribe to a multichannel video service. Home Box Office plans to work with its current domestic affiliates and explore other distribution models for this service.

International Premium Pay and Basic Tier Television Services

Unique, country-specific HBO and Cinemax-branded premium pay and basic tier television services are distributed in more than 60 countries in Latin America, Asia and Europe by international affiliates that have contracted to receive and distribute Home Box Office’s programming to the affiliates’ customers who subscribe to the HBO and Cinemax services. In Asia and Europe (excluding the Netherlands), Home Box Office operates through consolidated, wholly-owned subsidiaries. In Latin America and the Netherlands, Home Box Office operates through unconsolidated joint ventures. Home Box Office had approximately 92 million international subscribers at December 31, 2014, including subscribers through Home Box Office’s unconsolidated joint ventures. Home Box Office transferred the operation and certain contracts of an HBO-branded basic tier television service in India to Turner effective January 2015. The service, which had approximately 15.8 million subscribers at December 31, 2014, will continue to use the HBO brand under Turner’s operation. As a result, the subscribers of this service will no longer be included as Home Box Office subscribers. HBO GO was available to HBO premium pay television subscribers in over 20 countries at December 31, 2014, and Home Box Office plans to make HBO GO available to HBO premium pay television subscribers in additional countries and territories in 2015. Home Box Office generates revenues from providing its programming to international affiliates. The terms of Home Box Office’s agreements with its international affiliates vary from country to country, and the amount of revenues attributable to such agreements can be based on a number of factors such as basic and/or pay television subscriber thresholds, performance-based or volume discounts, negotiated minimum guarantees or flat-fee arrangements.

Home Box Office also operates a direct-to-consumer on demand streaming service in the Nordic region.

Home Entertainment and Content Licensing

Home Box Office also generates revenues from the exploitation of its original programming through multiple other distribution outlets. Home Box Office’s original programming is sold via DVDs, Blu-ray Discs and EST in the U.S. and various international regions through a wide variety of digital storefronts. Significant home entertainment releases in 2014 included Game of Thrones: The Complete Third Season , True Detective: The Complete First Season and True Blood: The Complete Sixth Season, The Complete Seventh Season and The Complete Series . In 2014, Home Box Office also licensed for the first time some of its programming to the Amazon Prime SVOD service. Finally, Home Box Office has also licensed certain of its original programming, such as Curb Your Enthusiasm , Entourage and Sex and the City , as well as Everybody Loves Raymond , which was produced by Home Box Office but aired on broadcast television, to domestic basic cable networks and local television stations.

 

7


Table of Contents
Index to Financial Statements

Home Box Office also licenses both individual programs and packages of programs to television networks and SVOD services in over 150 countries, including arrangements under which it licenses programming to television networks that are branded as the “Home of HBO” in countries such as the U.K., Australia, France, Germany and Israel and as “HBO Canada” in Canada. In the fourth quarter of 2014, Home Box Office also entered into a license agreement, under which it will license for the first time beginning in 2015 some of its current original series and library content to an SVOD service in China.

WARNER BROS.

Warner Bros. is the largest television and film studio in the world based on total studio revenues as of December 31, 2014. Its businesses consist principally of the production, distribution and licensing of television programming and feature films and the distribution of digital and physical home entertainment products, as well as the production and distribution of videogames and consumer product and brand licensing.

In television, Warner Bros. has been the leading producer of primetime series for U.S. broadcast networks for 11 of the last 12 television seasons. For the 2014/2015 television season, Warner Bros. is producing over 60 television series in the U.S., including over 30 series for U.S. broadcast networks. In addition, Warner Bros. licenses its U.S. programming in over 175 countries at December 31, 2014 and is also focused on expanding its international television production business through its global network of wholly-owned local production companies in 16 international territories.

In film, Warner Bros. has been the #1 or #2 film studio in domestic box office receipts for 9 of the past 11 years and the #1 or #2 film studio in global box office receipts for 10 of the last 11 years. In 2014 Warner Bros.’ films generated over $4 billion at the global box office for the sixth year in a row. In October 2014, Warner Bros. announced an expansion of its film slate built around Warner Bros.’ strongest global franchises.

Warner Bros. is focusing on increasing the digital sales and rentals of its film and television content and is a leader in a variety of digital initiatives designed to make digital ownership more compelling for consumers, including UltraViolet. In addition, Warner Bros. has led the home entertainment industry in sales of DVDs and Blu-Ray Discs for 18 years. At December 31, 2014, Warner Bros.’ vast content library consists of more than 75,000 hours of programming, including over 7,000 feature films and 5,000 television programs comprised of tens of thousands of individual episodes.

Warner Bros. is focused on maximizing across all of its businesses the value of its portfolio of leading brands and characters. These brands include DC Entertainment’s brands (DC Comics, Vertigo and MAD Magazine) as well as the Looney Tunes and Hanna-Barbera brands. DC Comics’ characters include such iconic characters as Batman, the Flash, Green Arrow, Superman and Wonder Woman. Warner Bros.’ other characters include Harry Potter, Bugs Bunny, Scooby-Doo and Tom and Jerry, among many others. Warner Bros.’ television and film businesses also benefit from a shared infrastructure, including shared production, distribution, marketing and administrative functions and resources.

Warner Bros. has developed strong global franchise properties from its portfolio of brands and characters, including film franchises such as the Batman and Harry Potter series and The Hobbit and The Lord of the Rings trilogies, and it is focused on extending its existing global film franchises and expanding the brands and characters from its film franchises and its leading portfolio of brands and characters across all its businesses. For example, during the 2014-2015 television season, five series based on DC Entertainment characters (including Arrow , The Flash and Gotham ) are airing on broadcast television, and in 2014 Warner Bros. announced the release of at least 10 films based on the DC Entertainment universe of characters from 2016 through 2020. In addition, in 2014, Warner Bros. extended its successful LEGO relationship to feature films with the release of The LEGO Movie , the first of several planned LEGO-branded films, and it released the third LEGO Batman videogame, LEGO Batman 3: Beyond Gotham . Also in 2014, Warner Bros. announced the release of three films based on the world of Harry Potter from 2016 through 2020. Warner Bros. is also focused on creating new global film franchises.

Television

Warner Bros. is a leader in the television production and distribution business. Warner Bros. is focused on maintaining its leadership position in producing primetime series for the U.S. broadcast networks (including The CW broadcast network (“The CW”)) while expanding and diversifying its production slate across new buyers and genres. This includes increasing

 

8


Table of Contents
Index to Financial Statements

production for basic cable networks (including expanding its collaboration with Turner), premium pay television services (including HBO), and SVOD services. Warner Bros. also plans to expand its international local television production business by using its global network of wholly-owned local production companies in 16 international territories. Warner Bros. is actively collaborating with Turner as Turner and Warner Bros. move to significantly expand their global kids businesses and maximize the related consumer product opportunities. Warner Bros. is providing Turner with more animation programming based on Warner Bros.’ intellectual property (such as DC Entertainment and Looney Tunes) to obtain broader global exposure for existing franchises and develop a platform to launch new franchises.

Domestic Business

Warner Bros. produces and distributes its television programming for initial airing on broadcast and basic cable television networks, premium pay television and SVOD services and local television stations in the U.S. Warner Bros. also produces and distributes short-form live-action series and animated programming for initial viewing on digital platforms. Warner Bros.’ programming includes the following:

 

   

scripted television series produced by Warner Bros. Television and Warner Horizon Television Inc., including 2 Broke Girls , Arrow , The Big Bang Theory , The Flash , The Following , Gotham , The Middle , Mike & Molly , Person of Interest , and Supernatural for broadcast networks (including The CW); Childrens Hospital , Major Crimes , Pretty Little Liars , Rizzoli & Isles and Sullivan & Son for basic cable networks (including TNT, TBS and Adult Swim); and scripted series for premium pay television services (including The Leftovers for HBO and Shameless );

 

   

reality-based non-scripted television series produced by Warner Horizon Television Inc., including The Bachelor and The Voice ;

 

   

first-run syndication series produced by Telepictures Productions Inc., including The Ellen DeGeneres Show , Extra and TMZ ;

 

   

animated television programming and original made-for-home entertainment animated releases produced by Warner Bros. Animation Inc., including programming based on characters from DC Entertainment, Looney Tunes and Hanna-Barbera. Programs include Be Cool Scooby Doo , Mike Tyson Mysteries and Wabbit , all of which aired on Turner’s Cartoon Network or Adult Swim networks in the 2014-2015 television season; and

 

   

short-form live-action series and animated programming for digital platforms produced by Blue Ribbon Content, including original concepts as well as content based on characters from Warner Bros.’ intellectual property, including the Alloy Entertainment, DC Entertainment and New Line Cinema brands.

After the initial domestic airing, Warner Bros. licenses its television programming for subsequent airing on basic cable networks, local television stations and SVOD services and through other off-network distribution channels in the U.S. These licenses enable Warner Bros. to generate significant revenues from hit television series for years beyond their initial airing on television. For example, Warner Bros. has licensed local station and basic cable off-network rights to various series, including 2 Broke Girls , The Big Bang Theory , The Middle , Mike & Molly , Person of Interest and Two and a Half Men . Warner Bros. also has license agreements with an SVOD service for the exclusive SVOD rights to all episodes of Friends and to each season of Gotham following its initial airing on broadcast television. In addition, Warner Bros. has a licensing agreement with an SVOD service, which extends through the 2014/2015 season (and for the life of any series created during the 2014/2015 season), for the exclusive, out-of-season, domestic SVOD rights to all scripted primetime series produced for The CW.

Warner Bros. also licenses its feature films to broadcast and cable networks, SVOD services and premium pay television services (including HBO) starting approximately eight to eleven months following their theatrical release. During 2014, Warner Bros. licensed more than 1,000 feature films and over 3,500 hours of feature film programming to television networks, premium pay television services and SVOD services.

 

9


Table of Contents
Index to Financial Statements

International Business

Warner Bros. licenses rights to exhibit feature films and original television series in international territories through agreements with television networks, premium pay and basic tier television services, SVOD services, free video on demand services and other digital services. During 2014, Warner Bros. licensed thousands of hours of programming, dubbed or subtitled in more than 60 languages, to international distributors in more than 175 countries. In 2014, Warner Bros. entered into significant international SVOD arrangements in Canada, France, Germany and the Nordic region and a multi-territory SVOD arrangement for the series, Gotham .

As the worldwide demand for locally produced, local language programming increases, Warner Bros. is focused on expanding its international local production business. With its acquisition of the remaining ownership interests in the Shed Media Group and its acquisition of the non-U.S. operations of the Eyeworks Group, Warner Bros. has a global network of wholly-owned production companies in 16 international territories, which will allow Warner Bros. to develop programming specifically tailored for the audiences in these territories. Warner Bros. is also focusing on adapting international local programming into formats that can be produced by its local production companies in additional territories, including the U.S. For example, The Bachelor (a format owned by Warner Bros. that originated in the U.S.) is being adapted and produced in multiple international territories, including Australia, Germany, New Zealand, Sweden and Switzerland, and Date Night (a format owned by Warner Bros. that originated in the U.K.) is being adapted and produced in Belgium, the Netherlands and the U.S.

Television Business Revenues

The revenues generated by Warner Bros.’ television business consist of (1) fees for the initial broadcast of Warner Bros.’ television programming on U.S. broadcast and cable television networks and premium pay television and SVOD services, (2) fees for the airing or other distribution of its television programming after its initial broadcast in secondary U.S. distribution channels (such as basic cable networks, local television stations and SVOD services) and in international territories, (3) fees for the international distribution of Warner Bros.’ television programming for free-to-air television, basic tier and premium pay television services, SVOD services and free VOD and (4) revenues from the sale of the television programming of Warner Bros. and other companies in digital formats and on physical discs. Warner Bros.’ television programming also supports Warner Bros.’ key franchises, which helps generate consumer product revenues based on the programming for years beyond the initial airing of such programming on television.

Feature Films

Warner Bros. is a leader in the feature film business and produces feature films under its Warner Bros. and New Line Cinema banners. Warner Bros. also enters into arrangements with others to co-produce and co-finance feature films. Warner Bros. produces and distributes a wide-ranging slate of films, and it is focused on expanding its film slate, built around its strongest franchises with global appeal.

During 2014, Warner Bros. released 21 original feature films for distribution in the U.S., including Annabelle , Edge of Tomorrow Godzilla The Hobbit: The Battle of the Five Armies , The LEGO Movie and Tammy . Of the films released during 2014, five were released in 3D format, including Godzilla and The LEGO Movie , and five were formatted for viewing on IMAX screens, including Edge of Tomorrow and The Hobbit: The Battle of the Five Armies . In January 2015, Warner Bros. widely released American Sniper , and in February 2015, Warner Bros. released Jupiter Ascending. Warner Bros. plans to release an additional 21 films during 2015, including Entourage , Mad Max: Fury Road , Get Hard , Magic Mike XXL , Pan and San Andreas .

In October 2014, Warner Bros. announced the expansion of its feature film slate built around its strongest global franchises. Warner Bros.’ film slate of between 21 to 23 films per year will include at least 10 films based on the DC Entertainment universe of characters such as Aquaman , Batman v Superman: Dawn of Justice , The Flash , Green Lantern , Justice League Part One , Shazam , Suicide Squad and Wonder Woman , as well as three LEGO-branded films and three films in partnership with J.K. Rowling inspired by Harry Potter’s Hogwart’s textbook, Fantastic Beasts and Where to Find Them , that build on Warner Bros.’ successful Harry Potter film franchise.

 

10


Table of Contents
Index to Financial Statements

Internationally, Warner Bros. produces and distributes both English language as well as local language films for theatrical exhibition in more than 170 territories outside the U.S. Warner Bros. uses both day and date and a staggered release schedule for its international releases. In 2014, Warner Bros. released internationally 20 English-language films and 29 local-language films that it either produced itself or acquired from other companies.

After the theatrical exhibition of its feature films, Warner Bros. releases them both domestically and internationally for distribution in various time periods through a variety of distribution channels, including through EST and VOD, on DVD and Blu-ray Discs, to premium pay television services, broadcast and basic cable networks, SVOD services and other exhibitors such as airlines and hotels. Feature films are released for sale through EST and on DVDs and Blu-ray Discs approximately three to six months following their release in theaters, and the date for that release is influenced by seasonality, competitive conditions, film attributes and expected performance. After that, Warner Bros. licenses the feature films for domestic and international distribution to premium pay television services (including HBO and Cinemax), broadcast and basic cable networks, (including Turner’s cable networks) and SVOD and other digital services and, in most cases, other exhibitors such as airlines and hotels. Warner Bros. also licenses its recent theatrical releases for viewing online in the U.S. as described in “Home Entertainment” below.

Warner Bros. produces most of its films under co-financing arrangements, which give Warner Bros. a greater ability to manage the financial risks of its film slate and offset some of the significant costs involved in the production, marketing and distribution of feature films, particularly event films. In most cases, Warner Bros. maintains worldwide distribution rights for the films it co-finances with others. Warner Bros. has co-financing arrangements with Village Roadshow Pictures and RatPac-Dune Entertainment (“RatPac-Dune”). Under Warner Bros.’ multi-year agreement with RatPac-Dune, RatPac-Dune has agreed to co-finance as many as 75 of Warner Bros.’ films by contributing capital for and receiving equity in such films. Warner Bros. also monetizes its distribution and marketing operations by distributing films that are totally financed and produced by others, and it has an exclusive distribution arrangement with Alcon Entertainment.

Feature Film Business Revenues

The revenues generated by Warner Bros.’ feature film business primarily consist of (1) rental fees paid by theaters for the theatrical exhibition of feature films produced (or co-produced) and/or distributed by Warner Bros., (2) licensing fees paid by television networks, premium pay television services and SVOD services for the exhibition of feature films produced or co-produced by Warner Bros. and (3) revenues from the distribution of Warner Bros.’ and other companies’ feature films on physical discs and in digital formats.

Home Entertainment

Warner Bros. also generates revenues through the home entertainment distribution of its film and television content on DVDs and Blu-ray Discs and various digital formats. Warner Bros. continues to be a leader in the home entertainment industry, and its significant home entertainment releases during 2014 include Gravity , The Hobbit: The Desolation of Smaug and The LEGO Movie .

The home entertainment industry has been undergoing significant changes as it transitions from the physical distribution of film and television content via DVDs and Blu-ray Discs to the digital delivery of such content. In recent years, consumer spending on physical discs has declined as a result of several factors, including consumers shifting to subscription rental services and discount rental kiosks; increasing competition for consumer discretionary time and spending; and piracy. Consumer spending on the digital delivery of film and television content has been increasing in recent years, but that growth has not fully offset declines in consumer spending on physical discs.

In response to these dynamics, Warner Bros. has been focusing on increasing digital sales and rentals of its film and television content through more profitable channels such as EST and transactional VOD, and is a leader in a variety of digital initiatives designed to make digital ownership more compelling for consumers. Warner Bros. licenses its newly released feature films as well as films from its library and its television content for viewing digitally online and on mobile platforms in the U.S. and internationally to EST and transactional VOD services, such as Amazon, iTunes and Google Play. In the U.S. and most major international markets, Warner Bros.’ recent theatrical releases are generally released for sale in EST at least two weeks before their release on DVD, Blu-ray Disc and VOD.

 

11


Table of Contents
Index to Financial Statements

In addition, Warner Bros. participates in a variety of digital initiatives, including UltraViolet, the home entertainment industry standard that allows consumers who have purchased film and television content to access their content at any time by downloading or streaming it from the cloud to various devices supported by participating UltraViolet retailers, and the Disc to Digital service, which allows consumers to obtain digital copies of their previously purchased physical DVD and Blu-ray collections. In addition, Warner Bros.’ Flixster app is a video collection platform that enables consumers to watch and manage their UltraViolet film and television content on multiple digital platforms, including mobile devices, connected televisions and Internet streaming platforms.

Although consumer spending on physical discs has declined in recent years, the distribution of DVDs and Blu-ray Discs still generates significant revenues for Warner Bros. The DVDs and Blu-ray Discs it distributes contain its own feature films and television content, including library content, as well as content acquired from others. In the U.S. and other major territories, physical disc sales of new feature film releases include an Ultraviolet digital copy. Warner Bros. generally releases newly produced films on DVD and Blu-ray Disc to by-mail and kiosk rental services 28 days following their release to online and brick and mortar retailers. Warner Bros. also distributes content on DVDs and Blu-ray Discs for others, such as HBO, Turner, BBC, Paramount and Sesame Street in the U.S. and content producers outside the U.S.

Videogames

Warner Bros. develops, publishes and distributes videogames, including mobile and console games. Its videogames are based on intellectual property owned by Warner Bros. (including DC Entertainment) as well as other companies. In 2014, Warner Bros. released 11 videogames, including LEGO Batman 3: Beyond Gotham , The LEGO Movie Videogame and Middle Earth: Shadow of Mordor , and it plans to release 13 videogames in 2015. In recent years, Warner Bros.’ videogame releases have included multiple games based on DC Entertainment characters, Harry Potter , The Hobbit and The Lord of the Rings trilogies, LEGO and Mortal Kombat, and Warner Bros. is focused on increasing its monetization of its franchises in its videogames business in the future. Warner Bros. also licenses Warner Bros. and DC Entertainment properties for videogames to other companies. Warner Bros.’ videogames revenues consist of revenues from the development and distribution of the videogames of Warner Bros. and other companies.

OTHER TELEVISION NETWORK ASSETS

The Company also holds interests in companies that operate broadcast networks.

Central European Media Enterprises Ltd.

As of December 31, 2014, Time Warner held an approximate 49% voting interest and an approximate 75% economic interest in the equity interests of Central European Media Enterprises Ltd. (“CME”), a publicly-traded broadcasting company that operates leading television networks in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia. Time Warner’s investment consists of (i) common stock, (ii) convertible preferred stock that has voting rights, (iii) convertible redeemable preferred shares that do not have voting rights and (iv) warrants to purchase common stock of CME. Time Warner accounts for its investment in CME’s common stock and convertible preferred stock under the equity method of accounting, and it accounts for its investment in CME’s convertible redeemable preferred shares under the cost method of accounting. Time Warner also guarantees or holds a significant portion of CME’s outstanding indebtedness and provides financing to CME under a revolving credit facility and term loan. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Recent Developments” for additional information regarding Time Warner’s guarantees, the debt held by Time Warner and the credit facility and term loan provided by Time Warner.

The CW

The CW is a 50-50 joint venture between Warner Bros. and CBS Corporation. The CW’s 2014-2015 schedule includes a 5-night, 10-hour primetime lineup of advertising-supported original programming such as America’s Next Top Model , Arrow , Beauty and the Beast , The Flash , Heart of Dixie , iZombie , Jane the Virgin , The Originals , Reign , Supernatural and The Vampire Diaries , as well as a five-hour block of advertising-supported programming on Saturday mornings. In 2015, The CW’s Jane the Virgin won one Golden Globe Award. Advertising-supported full episodes of The CW’s original series are also available on cwtv.com . The CW programming is also available for streaming through Netflix and Hulu. The Company accounts for its investment in The CW under the equity method of accounting.

 

12


Table of Contents
Index to Financial Statements

COMPETITION

The Company’s businesses operate in highly competitive industries. Competition in these industries has intensified as leisure and entertainment options have proliferated and audience fragmentation has increased. The Company’s businesses compete for consumers’ entertainment and leisure time and spending with each other, as well as other forms of entertainment, including other television networks, premium pay television services, local over-the-air television stations, motion pictures, home entertainment products and services (including SVOD services), VOD services and videogames, as well as pirated content, websites providing social networking and user-generated content, online activities, print media, live events, radio broadcasts and other forms of news, information and entertainment.

The Company’s competitive position is greatly affected by the quality of, and public response to, its content. The Company’s businesses compete with other production companies and studios for the services of producers, directors, writers, actors and others and for the acquisition of literary properties. The Company’s television networks compete for programming with television networks, premium pay television services, local television stations and SVOD services, and competition for programming, particularly licensed and sports programming, is intense.

The Company faces competition for the licensing and distribution of its programming. As a producer and distributor of programming, the Company competes with other studios and television production groups, and independent producers to produce and sell programming. Many television networks have affiliated production companies from which they are increasingly obtaining their programming, which has reduced the demand for programming from non-affiliated production companies. The Company also faces competition from other television networks and premium pay television services for distribution and marketing of its television networks and premium pay and basic tier television services by affiliates.

The Company’s businesses face significant competition in other areas as well. For example, Company’s television networks and websites compete for advertising with networks, websites, print, radio, outdoor display and other media, and the Company’s businesses compete in their character and brand merchandising and other licensing activities with other licensors of characters and brands.

REGULATORY MATTERS

The Company’s businesses are subject to and affected by laws and regulations of U.S. federal, state and local governmental authorities as well as the laws and regulations of international countries and bodies such as the European Union (the “EU”), and these laws and regulations are subject to change. The following descriptions of significant U.S. federal, state, local and international laws, regulations, regulatory agency inquiries, rulemaking proceedings and other developments should be read in conjunction with the texts of the respective laws and regulations and other related materials.

Intellectual Property Laws

Time Warner is one of the world’s leading creators, owners and distributors of intellectual property. The Company’s vast intellectual property assets include copyrights in films, television programs, software, comic books and mobile apps; trademarks in names, logos and characters; patents or patent applications for inventions related to products and services; and licenses of intellectual property rights of various kinds. The Company derives value from these assets through its business activities.

To protect the Company’s assets, the Company relies on a combination of copyright, trademark, unfair competition, patent and trade secret laws and license agreements. The duration of the protection afforded to the Company’s intellectual property depends on the type of property, the laws and regulations of the relevant jurisdiction and the terms of its license agreements. With respect to the Company’s trademarks and trade names, trademark laws and rights are generally territorial in scope and limited to those countries where a mark has been registered or otherwise protected. While trademark registrations may generally be maintained in effect for as long as the mark is in use in the respective jurisdictions, there may be occasions where a mark or title is not registrable or protectable or cannot be used in a particular country. In addition, a trademark registration may be cancelled or invalidated if challenged by others based on certain use requirements or other limited grounds. In the U.S., the usual copyright term for authored works is the life of the author plus 70 years, and the copyright term for “works made for hire” is the shorter of 95 years from the first publication or 120 years from the date

 

13


Table of Contents
Index to Financial Statements

the work was created. The Company also relies on laws that prohibit the circumvention of technological protection measures and trafficking in circumvention devices. The extent of copyright protection and benefit from laws prohibiting the circumvention of technological protection measures vary in different countries.

Piracy, particularly of digital content, continues to present a threat to revenues from products and services based on intellectual property. The Company seeks to limit that threat through a combination of approaches, including working with cross-industry groups, trade associations and strategic partners to develop and implement technological solutions to control piracy, promoting legitimate market alternatives, applying technological protection measures, engaging in efforts to ensure effective and appropriately tailored legal remedies for infringement, enhancing public awareness of the meaning and value of intellectual property and promoting and advocating for appropriate legislative and policy initiatives both in the U.S. and internationally. The Company vigorously pursues appropriate avenues to protect its intellectual property, including sending takedown notices in appropriate circumstances and pursuing litigation and referrals to law enforcement against websites that distribute or facilitate the unauthorized distribution of the Company’s content. The volume of actions against websites dedicated to copyright theft is increasing internationally, and certain countries have implemented or are considering implementing programs or remedies designed to address and deter widespread infringement.

Outside the U.S., laws and regulations relating to intellectual property protection and the effective enforcement of these laws and regulations vary greatly from country to country and continue to evolve. Judicial, legislative and administrative developments are taking place in certain jurisdictions that may limit the ability of rights holders to exploit and enforce certain of their exclusive intellectual property rights outside the U.S. For example, in October 2011, the European Court of Justice held, in the context of satellite broadcasts of live soccer matches, that it was an unlawful restriction on competition for England’s Football Association Premier League to prohibit broadcasting licensees from distributing satellite decoder cards outside the territory for which the broadcasts were licensed for reception. As a result of that decision, in January 2014, the European Commission began an antitrust investigation of the cross-border provision of pay TV services, and is examining certain provisions in licensing agreements between a number of U.S. film studios, including Warner Bros., and several large European satellite pay TV broadcasters. The European Commission has stated that its investigation is focusing on contractual restrictions that prevent broadcasters in one country from selling subscriptions in response to unsolicited requests from viewers in other EU countries. In addition, in 2014, the European Commission announced that one of its priorities is the creation of a single digital market, which is intended to reduce the barriers to the unrestricted flow of online services and entertainment content across national borders. The European Commission also announced that it intends to propose legislation to modernize copyright laws to support a single digital market. It is not possible at this time to predict the impact that this investigation or potential legislation could have on the Company’s businesses.

Regulation Relating to Data Privacy, Data Security and Cybersecurity

The Company’s businesses are subject to laws and regulations governing data privacy, data security and cybersecurity. For example, in the U.S., the Company is subject to: (1) the Children’s Online Privacy Protection Act (“COPPA”), which affects certain of the Company’s websites, mobile apps and other online business activities and restricts the collection, maintenance and use of personal information regarding children; (2) the Privacy and Security Rules under the Health Insurance Portability and Accountability Act, which imposes privacy and security requirements on the Company’s health plans for its employees and on service providers under those plans; (3) the Video Privacy Protection Act, which restricts disclosure of video viewing information; (4) state statutes requiring notice to individuals when a data breach results in the unauthorized release of personally identifiable information; and (5) privacy and security rules imposed by the payment card industry, as well as regulations designed to protect against identity theft and fraud in connection with the collection of credit and debit card payments from consumers.

Moreover, new laws and regulations that could affect how the Company collects, uses and protects data have been adopted or are being considered in the U.S. and internationally. In the U.S., for example, the Federal Trade Commission (the “FTC”) issued a report on consumer privacy protection in March 2012 that sets forth best practices for businesses to build privacy protections into their products and provide consumers with greater control over the collection and use of their personal information. The FTC report also calls for the widespread adoption and strengthening of self-regulatory measures, such as a standard “Do Not Track” mechanism and a limitation on data tracking with respect to mobile devices. In addition, effective July 1, 2013, the FTC updated its regulations implementing COPPA by expanding the categories of data that are considered personal information, such as IP addresses, geolocation data and screen names. The FTC also updated the requirements for notice, parental consent, confidentiality and security in the regulations implementing COPPA.

 

14


Table of Contents
Index to Financial Statements

Following the Department of Commerce (the “DOC”) report on cybersecurity and the White House report on consumer privacy in 2012, the U.S. General Accounting Office issued a report in September 2013 encouraging Congress to consider strengthening the U.S. consumer privacy framework to reflect the effects of changes in technology and the increased market for consumer information. In 2014, Congress held hearings on privacy, data security and cybersecurity, and these hearings are expected to continue in 2015. Other activities in this area could include changes to the DOC’s Safe Harbor program, which offers a framework for companies to import personal information from the EU in compliance with the European Data Protection Directive (95/46/EC) (the “Directive), as well as the potential for new or expanded laws and regulations regarding information security, online and behavioral advertising, geolocation tracking, cloud computing and other forms of data collection, sharing and use. To the extent any of these developments results in the adoption of new laws or regulations, it could increase the Company’s compliance costs.

Several state legislatures have also adopted legislation that regulates how businesses operate online, including measures relating to privacy, data security and data breaches. For example, laws in numerous states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. In addition, California’s “Do Not Track” legislation requires websites (including mobile apps) that collect personal information about a person’s online activities to disclose how the site responds to “do not track” signals or other mechanisms that enable consumers to opt out of the collection of such information.

Foreign governments are also focusing on data privacy and security concerns. For example, a 2012 report by the European Commission proposed a comprehensive review of privacy protection in the EU. The regulation proposed in the report includes rules that broaden the definition of personal data, strengthen the rights of data subjects, enhance penalties for non-compliance and continue to restrict the transfer of personal data to countries outside the EU.

Regulation of Television Networks, Internet/Broadband Services, Programming and Advertising

The Company’s businesses are also subject to a number of laws and regulations relating to the distribution and licensing of television programming, the content of that programming, and advertising and marketing. In the U.S., cable networks and premium pay television services, either directly or indirectly through their distribution partners, are subject to various obligations under the Communications Act of 1934, as amended (the “Communications Act”), and related regulations issued by the Federal Communications Commission (the “FCC”). These obligations and regulations, among other things, require closed captioning of programming for the hearing impaired, limit the amount and content of commercial matter that may be shown during programming aimed primarily at an audience of children aged 12 and under, and require the identification of (or the maintenance of lists of) sponsors of political advertising.

In addition, in May 2014, the FCC proposed new “net neutrality” regulations based on Section 706 of the Telecommunications Act of 1996, that, subject to certain exceptions, would prohibit Internet Service Providers or ISPs from blocking lawful content, applications, services and devices as well as certain kinds of commercially unreasonable practices, including some discriminatory behavior. In November 2014, President Obama encouraged the FCC to base its “net neutrality” regulations on Title II of the Communications Act, thereby reclassifying consumer broadband service as a telecommunications service subject to potentially greater regulation. In February 2015, the FCC Chairman announced his proposal for “net neutrality” regulations. While the proposed regulations are not publicly available, they would reportedly subject ISPs to the requirements of Title II of the Communications Act, including imposing limitations on unjust and unreasonable practices and obligations regarding customer privacy and protections for people with disabilities and authorize the FCC to investigate and act on consumer complaints. In addition, the proposed regulations would reportedly prohibit ISPs from: (i) blocking access to legal content, applications or services or to devices that do not harm the network, (ii) impairing or degrading lawful Internet content and (iii) implementing paid prioritization or “fast lanes” for content or applications. ISPs would reportedly be allowed to engage in reasonable network management (other than paid prioritization), but only if the purpose of their actions is related to managing their network. The FCC is expected to act on this proposal at its open meeting scheduled for February 26, 2015; if adopted, the proposed regulations would then be made public and could be subject to legal challenge.

 

15


Table of Contents
Index to Financial Statements

From time to time, the FCC also conducts inquiries and rulemaking proceedings, which could lead to additional regulations that could have a material effect on the Company’s businesses. The FCC has also initiated the following proceedings:

 

   

The FCC is engaged in a number of proceedings designed to make more of the electromagnetic spectrum that is currently used for broadcast television and satellites available for wireless broadband. These proceedings include conducting voluntary incentive auctions, which are expected to begin in 2016, for portions of the spectrum used by television broadcasters to provide additional spectrum for wireless broadband, and evaluating the potential use of certain portions of the satellite spectrum for wireless broadband. The potential changes to the satellite spectrum could negatively impact the Company’s ability to deliver linear network feeds of its domestic basic cable networks to its affiliates. It may take several years for these proceedings and any related spectrum reallocation to be completed, and it is not possible to predict the impact that any such proceedings and reallocation could have on the Company.

 

   

The FCC has initiated several rulemaking proceedings to implement the 21st Century Communications and Video Accessibility Act of 2010 (the “Accessibility Act”). In February 2014, the FCC changed its television closed captioning rules to, among other things, extend certain obligations regarding the quality of closed captioning of television programming to companies that produce video programming. These new quality rules are scheduled to become effective in March 2015 and are subject to ongoing FCC proceedings that may impose additional obligations on programming producers.

 

   

In addition, pursuant to the Accessibility Act, in July 2014, the FCC issued an order requiring closed captioning for clips of video programming that previously aired on television and are posted online or available through online applications in certain circumstances, which will go into effect in 2016. These rules could increase the costs of making video clips available online. The FCC also has issued a notice of further rulemaking regarding extending the scope of the video-clip-captioning rules.

 

   

In December 2014, the FCC proposed rules to expand its interpretation of “multichannel video programming distributor” under the Communications Act to include over-the-top providers of multiple streams of linear programming (i.e., television programming that is delivered via the Internet in a regularly scheduled, continuous manner, either live or on a delayed basis), which would give them rights to distribute broadcast network television programming and cable-operator affiliated programming, while also subjecting them to various obligations such a retransmission fees. Depending on the scope and specific provisions of any final rules, they could affect the Company’s negotiations regarding, and provision of, online linear video.

Various other federal laws also contain provisions that place restrictions on violent and sexually explicit programming. Regulators, legislatures and policymakers have also become increasingly interested in laws and regulations intended to protect the interests of children by placing limitations on food and beverage marketing in media popular with children and teens.

In addition, in international territories, there are various laws and regulations relating to the distribution or licensing of television programming and other products. These include television licensing requirements relating to closed captioning of programming for the hearing impaired, descriptive audio versions for the visually impaired and mandatory local language dubbed and/or subtitled versions of programming, laws providing for minimum percentages of local content and maximum percentages of foreign content on television, local language advertising requirements, laws and regulations imposing pricing, exclusivity and importing restrictions, editorial control, translation or local editing requirements and other nationality-based restrictions. There are also a number of laws and regulations in these international territories relating to the nature of content and advertising and marketing efforts, including content codes and laws requiring government approval of certain content prior to exhibition, consumer protection laws (particularly those relating to advertisements and programming aimed at children) and laws restricting the amount of advertising permitted on television networks. For example, the EU Audio Visual Media Services directive, which allows EU member states to adopt more restrictive regimes and applies to all programs produced after December 2009, obligates broadcasters to notify viewers if an audiovisual program contains paid product placement, bans any form of product placement in children’s and news programming and prohibits product placement of tobacco products and prescription medication. The directive also imposes an obligation on EU member states and the

 

16


Table of Contents
Index to Financial Statements

European Commission to encourage broadcasters and channel providers to develop codes of conduct regarding advertising for foods high in fat, salt and sugar in or around children’s programming. Accordingly, in the U.K., the Office of Communications has restricted such television advertising, and other EU jurisdictions have required that nutritional information be included in food advertisements. Outside the EU, other governments are considering or have already implemented food advertising restrictions similar to those in the U.K., including in Australia, Brazil, Colombia, Chile, Mexico, Norway, Peru, Singapore and Uruguay. Finally, several governments, including in Argentina, Brazil, India, Mexico and Uruguay, have recently proposed, enacted or more strictly enforced regulations that limit the amount of advertising content that can be aired on television networks.

Regulation of the Distribution and Licensing of Feature Films

In countries outside the U.S., there are a variety of laws and regulations relating to the distribution or licensing of feature films for exhibition in theaters and on broadcast and cable networks. These include copyright laws and regulations, television licensing requirements similar to those applicable to made-for-television programming, trade and customs regulations, laws providing for minimum percentages of local content in theaters and on broadcast television and maximum percentages of foreign content on television and laws that limit increases in prices paid by distributors to content providers. In certain countries, other laws and regulations, some of which are under review by local government ministries, provide for limits on the number of foreign films that may be exhibited in such countries in a calendar year.

Marketing Regulation

The Company’s marketing and advertising sales activities are subject to regulation by the FTC and each of the states under general consumer protection statutes prohibiting unfair or deceptive acts or practices. Certain marketing activities are also subject to specific federal statutes and rules, such as COPPA.

FINANCIAL INFORMATION ABOUT SEGMENTS, GEOGRAPHIC AREAS AND BACKLOG

Financial and other information by segment and revenues by geographic area for each year in the three-year period ended December 31, 2014 are set forth in Note 15 to the Company’s consolidated financial statements, “Segment Information.” Information with respect to the Company’s backlog, representing future revenue not yet recorded from cash contracts for the worldwide licensing of theatrical and television product for premium pay television services, basic cable and network and syndicated television exhibition, at December 31, 2014 and December 31, 2013, is set forth in Note 16 to the Company’s consolidated financial statements, “Commitments and Contingencies — Commitments — Programming Licensing Backlog.”

 

Item 1A. Risk Factors.

The Company must respond successfully to changes in technology and consumer behavior to remain competitive. The Company derives a substantial portion of its revenues and profits from its cable networks, its premium pay television services and its production and licensing of television programming. Technological changes have driven and reinforced changes in consumer behavior as consumers seek more control over when, where and how they consume content. These changes pose long-term risks to the traditional television industry and many of the Company’s historical business models. These risks include: (i) the disruption of the traditional television content delivery model by over-the-top aggregators of content if they are successful in drawing large audiences and significant revenues away from, or further discouraging younger audiences from subscribing to, multichannel video services; (ii) the disruption of the advertising-supported television model due to increased online video consumption, time-shifted viewing of television programs and the use of digital video recorders to skip advertisements; (iii) the decline in the value of a network’s acquired programming if it does not obtain the exclusive right to distribute that programming on both television and digital platforms and that programming becomes readily available to consumers on other companies’ platforms; (iv) an increase in Turner’s and Home Box Office’s costs to produce or acquire high-quality, must-watch programming due to heightened competition, including from SVOD services. The Company’s responses to mitigate the risks from these changes, including the adoption of new business models and enhancing TV Everywhere, may not be embraced by consumers, advertisers, affiliates or others in the media and entertainment industry, which could have a significant adverse effect on the Company’s competitive position and its businesses. In addition, the Company may incur significant costs to respond to, and mitigate the risks from, these changes.

 

17


Table of Contents
Index to Financial Statements

The popularity of content is difficult to predict and can change rapidly, and low public acceptance of the Company’s content will adversely affect its results of operations.  The revenues derived from the sale, distribution and licensing of television programming, feature films, videogames and other content depend primarily on widespread public acceptance of that content, which is difficult to predict and can change rapidly. The Company must invest substantial amounts in the production and marketing of its content before it learns whether such content will reach anticipated levels of popularity with consumers. The popularity of the Company’s content depends on many factors, only some of which are within the Company’s control. Examples include the popularity of competing content (including locally produced content internationally), the availability of alternative forms of leisure and entertainment activities, the Company’s ability to maintain or develop strong brand awareness and target key audiences, and the Company’s ability to successfully anticipate (and timely adapt its content to) changes in consumer tastes and behavior in the many countries and territories in which the Company operates. Low public acceptance of the Company’s content will adversely affect its results of operations.

Generally, feature films that perform well at the box office also have commercial success in subsequent distribution channels. Therefore, the underperformance of a feature film, especially an “event” film, at the box office can result in lower than expected revenues for the Company from the license of the film to broadcast and cable networks and SVOD services, sales of the film via EST and physical discs, and from the sale of videogames or licenses for consumer products based on such film. There is also a risk that a new “event” film that fails to achieve commercial success at the box office, which would limit the Company’s ability to create a new theatrical franchise based on the film or characters featured in such film. The failure to develop successful new theatrical franchises could have an adverse effect on the Company’s results of operations.

With respect to television programming produced by the Company, low ratings for such programming may lead to the cancellation of a program and can negatively affect future license fees for the cancelled program. A decline in the ratings or popularity of the television programming aired on Turner’s cable networks can negatively affect advertising revenues for Turner’s cable networks in the near term and, over a longer period of time, could adversely affect subscription revenues and the distribution potential of a Turner network. A decline in the popularity of HBO and Cinemax’s programming could, over a period of time, cause subscribers to cancel their subscriptions, which in turn could adversely affect both the Company’s subscription and content licensing revenues. In addition, if the Company decides to no longer air programming due to low ratings or other factors, the Company could incur significant programming impairments, which could have a material adverse effect on the Company’s results of operations in a given period.

The failure to renew affiliate agreements on favorable terms or at all could cause the Company’s subscription and advertising revenues to decline.  The Company depends on agreements with affiliates for the distribution of Turner’s cable networks and HBO and Cinemax. Competition from SVOD services and new distribution platforms is increasing the pressure on affiliates to control their programming costs in order to continue to attract and retain subscribers. As affiliates continue to try to control their programming costs, it may be more difficult for the Company to renew its affiliate agreements on terms, including those related to pricing, packaging and positioning, that are acceptable to the Company. In addition, due to consolidation among affiliates in the U.S. and consolidation and growth of large multi-territory distribution companies internationally, these companies are gaining scale and negotiating power. If the Company is not able to renew its affiliate agreements on acceptable terms, its subscription revenues may not increase as much as the Company expects or could decline. In addition, the inability to renew one or more of the Company’s larger affiliate arrangements would reduce the Company’s subscription revenues and the reach of the Company’s programming, which could make Turner’s cable networks less attractive to advertisers and result in a decline in advertising revenues.

A decline in the number of multichannel video service subscribers could cause the Company’s subscription revenues to decline.  If multichannel video service rates charged by affiliates continue to increase or economic conditions worsen, subscribers may (i) cancel their multichannel video service subscriptions, (ii) cancel their subscriptions to HBO and Cinemax or (iii) elect to subscribe to lower-priced programming packages that may not include HBO, Cinemax or all of Turner’s cable networks. In addition, consumers, particularly younger consumers, may choose to subscribe to SVOD services as an alternative to multichannel video services provided by affiliates. The number of HBO and Cinemax subscribers could also decline if affiliates choose not to market, or reduce their marketing of, HBO and Cinemax. A decline in the number of subscribers to multichannel video services or HBO or Cinemax could result in a decrease in the Company’s subscription revenues.

A decrease in demand for the television programming produced by Warner Bros. could adversely affect the Company’s revenues.  Warner Bros. is a leading producer of high-quality television programming, as well as a leader in the international

 

18


Table of Contents
Index to Financial Statements

distribution of U.S.-produced television programming. Despite its strong competitive position, Warner Bros.’ television production business, is largely dependent on the strength of the U.S. broadcast networks, basic cable networks and local television stations, and their demand for Warner Bros.’ television programming. If there is a decrease in such demand, it could decrease the overall scale of Warner Bros.’ television production business, reduce the aggregate license fees for its television programming in the short-term and reduce the aggregate syndication revenues for its television programming in the long-term. The following factors could increase the likelihood of a decrease in such demand in the U.S.: (i) consolidation among television station groups and vertical integration between station groups and broadcast networks, thereby reducing the number of buyers for Warner Bros.’ programming; (ii) vertical integration between television production studios and broadcast networks, resulting in increased reliance by networks on their in-house and affiliated television production studios; and (iii) emergence of technological advances and alternative viewing options that could reduce the lifetime value of television programming. In international territories, the increasing popularity of locally produced television content could result in decreased demand and lower license fees for the Company’s U.S.-produced television programming.

An increase in the costs incurred by Turner and Home Box Office to acquire or produce popular programming could adversely affect the Company’s operating results.  Competition to acquire popular programming is intense, and the growing number of SVOD services has increased competition in the U.S. and internationally. Turner may have to increase the price it is willing to pay for acquired and sports programming, including the renewal of programming it currently licenses. Acquired and sports programming costs may also increase if Turner seeks the right to distribute the programming on digital platforms and the right to exhibit programming exclusively during the applicable license period. In addition, the increased amount of original programming aired by cable networks, premium pay television services and SVOD services could drive up talent and production costs. If increases in Turner’s and Home Box Office’s costs to produce or acquire popular programming are not offset by increases in advertising rates and affiliate fees when affiliate agreements are renewed, the Company’s results of operations could be adversely affected.

The Company’s results of operations could be adversely affected if there is a decline in advertising spending, which could be caused by a number of factors.  A decline in the economic prospects of advertisers or the economy in general could cause current or prospective advertisers to spend less on television advertising or spend their advertising dollars in other media. Television advertising expenditures also could be negatively affected by (i) increasing audience fragmentation caused by increased availability of alternative forms of leisure and entertainment activities; (ii) the increased use of digital video recorders to skip advertisements; (iii) pressure from public interest groups to reduce or eliminate advertising of certain products on television; (iv) new laws and regulations that prohibit or restrict certain types of advertisements; and (v) natural disasters, extreme weather, acts of terrorism, political uncertainty or hostilities, because there may be uninterrupted news coverage of such events that disrupts regular television programming. In addition, advertisers’ willingness to purchase advertising time from the Company may be adversely affected by a decline in audience ratings for the programming aired on Turner’s cable networks. If ratings decline significantly, Turner’s cable networks generally will be required to provide additional advertising time to advertisers to reach agreed-on audience delivery thresholds. This may result in Turner’s cable networks having less advertising time available to sell or to use to promote their own programming. Finally, if the television ratings system is not changed so that it captures the viewership of Turner’s programming through digital video recorders, VOD and mobile devices, advertisers may not be willing to pay advertising rates based on the increasing viewership that occurs after the initial airing of a program and on digital platforms.

The Company’s results of operations may be adversely affected if the growth in digital sales of television content and feature films do not exceed and offset the decline in physical disc sales. Several factors have contributed to an industry-wide decline in sales of physical discs in recent years, including consumers shifting to SVOD services; consumers electing to rent films using discount rental kiosks, which generate significantly less profit per transaction for the Company than the sale of physical discs; changing retailer strategies and initiatives ( e.g. , reduction in floor space devoted to physical discs); retail store closures; weak economic conditions; increasing competition for consumer discretionary time and spending; and piracy. The Company’s efforts to offset the decline in sales of physical discs and to make digital ownership of content more compelling to consumers ( e.g. , UltraViolet and EST) may not be successful or may take several more years to become successful.

If the Company fails to compete successfully against alternative sources of entertainment and news, there may be an adverse effect on the Company’s results of operations.  The Company competes with all other sources of entertainment and news, including television, premium pay television services, SVOD services, feature films, the Internet, home entertainment

 

19


Table of Contents
Index to Financial Statements

products, videogames, social networking, print media, pirated content, live sports and other events, for consumers’ leisure and entertainment time and discretionary spending. The number of media and entertainment choices available to consumers has made it much more difficult to attract and obtain their attention and time. There can be no assurance that the Company will be able to compete successfully in the future against existing or new competitors.

The Company is exposed to risks associated with weak domestic and global economic conditions and increased volatility and disruption in the financial markets.  The Company’s financial condition and results of operations may be adversely affected by weak domestic and global economic conditions and the impact of those conditions on advertisers, affiliates, suppliers, retailers, insurers, theater operators and others with which it does business. The global economy continues to be volatile, with particular regions and countries, such as Argentina, Brazil, the Eurozone, India, Russia and Venezuela, facing uncertain or slow economic growth. These conditions could lead to lower consumer spending for the Company’s content and products in these regions and countries, particularly if advertisers, licensees, retailers, theater operators and consumers reduce their demand for the Company’s content and products due to the negative impact of these conditions on them. Consumer spending in these regions and countries may be further negatively impacted by governmental actions to manage national economic matters, whether through austerity or stimulus measures or initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers.

Increased volatility and disruptions in the financial markets could make it more difficult and more expensive for the Company to refinance outstanding indebtedness and obtain new financing. In addition, the adoption of new statutes and regulations, new interpretations of existing statutes and regulations or the enforcement of laws and regulations applicable to the financial markets or the financial services industry could result in a reduction in the amount of available credit or an increase in the cost of credit. Disruptions in the financial markets can also adversely affect the Company’s lenders, insurers and counterparties, including vendors, retailers and film co-financing partners. The inability of the Company’s counterparties to obtain capital on acceptable terms could impair their ability to perform under agreements with the Company and lead to negative effects on the Company, including business disruptions, decreased revenues, increases in bad debt expenses and, in the case of film co-financing partners, greater risk to the Company with respect to the performance of its feature films.

The Company faces risks relating to conducting business internationally that could adversely affect its businesses and operating results.  It is important for the Company to achieve sufficient scale in key international territories in a cost-effective manner to be able to compete successfully in those territories. Failure to achieve sufficient scale could adversely affect the Company’s results of operations. In addition, there are risks inherent in international business operations, including:

 

   

issues related to integrating and managing international operations and investments;

 

   

potentially adverse tax developments;

 

   

lack of sufficient protection for intellectual property in some countries;

 

   

territorial restrictions on content licensing;

 

   

currency exchange restrictions, export controls and currency devaluation risks in some foreign countries, including, but not limited to, Argentina and Venezuela;

 

   

the existence in some countries of statutory shareholder minority rights and restrictions on foreign direct ownership;

 

   

the existence of quotas and other content-related limitations or restrictions (e.g., government censorship);

 

   

restrictions on television advertising, marketing and network packaging;

 

   

issues related to occupational safety and adherence to local labor laws and regulations;

 

20


Table of Contents
Index to Financial Statements
   

political or social unrest;

 

   

higher than anticipated costs of entry;

 

   

the presence of corruption in certain countries;

 

   

the absence of good diplomatic relations between the U.S. and certain countries; and

 

   

the potential for government appropriation of the Company’s assets.

One or more of these factors could harm the Company’s international operations or investments and its operating results.

In addition, some of the Company’s operations are conducted in foreign currencies, and the value of these currencies fluctuates in relation to the U.S. dollar. The Company is exposed to foreign currency exchange rate fluctuations. Although the Company hedges a portion of its foreign currency exposures, significant fluctuations in exchange rates in the past have had, and in the future could have, an adverse effect on the Company’s results of operations in a given period.

Some of the Company’s businesses generate cash receipts in Venezuela. The Venezuelan government has imposed significant limits on the exchange of local currency into U.S. dollars in recent years. Although Venezuela implemented changes during 2014 that increase the potential to convert Venezuelan Bolivars Fuertes (“VEF”) to U.S. dollars, the Company has been unable to exchange its VEF to U.S. dollars, and there can be no assurance as to when or if or the rate at which the Company will be able to exchange its VEF to U.S. dollars.

Increased piracy of the Company’s content, products and other intellectual property may further decrease the revenues received from the legitimate sale, licensing and distribution of its content and adversely affect its business and profitability. The Company continues to be negatively affected by piracy, and an increase in the piracy of the Company’s content, products and other intellectual property could reduce the revenues the Company earns from the legitimate sale, licensing and distribution of its content, products and other intellectual property. The risks relating to piracy have increased in recent years due to technological developments that have made it easier to create, distribute and store high-quality unauthorized copies of content, such as the proliferation of cloud-based storage and streaming services, increased broadband Internet speeds and penetration rates, and increased speed of mobile data transmission. Piracy is particularly prevalent in countries that lack effective copyright and technical legal protections or enforcement measures, and illegitimate operators based in those parts of the world can attract viewers from anywhere in the world. The Company devotes substantial resources to protecting its content, products and intellectual property, but the Company’s efforts to enforce its rights and combat piracy may not be successful.

The Company’s operating results may suffer if it cannot continue to license and exploit its intellectual property rights.  The Company relies on a combination of patents, copyrights, trademarks, tradenames and other proprietary rights, as well as contractual arrangements, including licenses, to establish, maintain and protect its intellectual property rights. Effective intellectual property protection may not be available in every country in which the Company does business. The Company may not be able to acquire or maintain appropriate domain names in all countries in which it does business or prevent others from acquiring domain names that are similar to, infringe on, or diminish the value of, the Company’s trademarks and other proprietary rights. Companies that license the Company’s intellectual property also may take actions that diminish the value of the Company’s intellectual property or harm the Company’s reputation.

The Company’s intellectual property rights may not be sufficient to permit it to take advantage of business opportunities, such as new distribution platforms. As a result, the Company may be required to change its plans or acquire the necessary intellectual property rights, which could be costly.

The protection of the Company’s intellectual property may require the Company to spend significant amounts of money. Further, the steps the Company takes to protect its intellectual property may not adequately protect its rights or prevent others from infringing or misappropriating its intellectual proprietary rights. Any impairment of the Company’s intellectual property rights, including due to changes in U.S. or foreign intellectual property laws or the absence of effective

 

21


Table of Contents
Index to Financial Statements

legal protections or enforcement measures, could adversely impact the Company’s businesses, financial condition and results of operations.

The Company has been, and may be in the future, subject to claims that it infringed intellectual property rights of others, which could require the Company to change its business practices.  Successful claims that the Company infringes on the intellectual property rights of others could require the Company to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability, be prohibited preliminarily or permanently from further use of the intellectual property in question or require the Company to change its business practices to stop the infringing use, which could limit its ability to compete effectively. Even if the Company believes a claim of intellectual property infringement is without merit, defending against the claim can be time-consuming and costly and divert management’s attention and resources away from its businesses.

The Company’s businesses are subject to labor interruption.  The Company and some of its suppliers and business partners retain the services of writers, directors, actors, athletes, technicians, trade employees and others involved in the development and production of its television programming and feature films who are covered by collective bargaining agreements. If negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the affected unions could take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns or work stoppages or the possibility of such actions could result in delays in the production of the Company’s television programming and feature films. The Company could also incur higher costs from such actions, new collective bargaining agreements or the renewal of collective bargaining agreements on less favorable terms. Many of the collective bargaining agreements that cover individuals providing services to the Company are industry-wide agreements, and the Company may lack practical control over the negotiations and terms of these agreements. Union or labor disputes or player lock-outs relating to certain professional sports leagues may preclude the Company from producing and telecasting scheduled games or events and could negatively impact the Company’s promotional and marketing opportunities. Depending on their duration, such union or labor disputes or player lock-outs could have an adverse effect on the Company’s results of operations.

Service disruptions or failures of the Company’s or its vendors’ information systems and networks as a result of computer viruses, misappropriation of data or other bad acts, natural disasters, extreme weather, accidental releases of information or other similar events, may disrupt the Company’s businesses, damage its reputation or have a negative impact on its results of operations.  Shutdowns or service disruptions of information systems or networks at the Company or vendors that provide information systems, networks or other services to the Company pose increasing risks. Such disruptions may be caused by third-party hacking of computers and systems; dissemination of computer viruses, worms and other destructive or disruptive software; denial of service attacks and other bad acts, as well as power outages, natural disasters, extreme weather, terrorist attacks, or other similar events. Shutdowns or disruption from such events could have an adverse impact on the Company and its customers, including degradation or disruption of service, loss of data and damage to equipment and data. In addition, system redundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient to cover everything that could happen. Significant events could result in a disruption of the Company’s operations, reduced revenues, the loss of or damage to the integrity of data used by management to make decisions and operate the Company’s business, customer or advertiser dissatisfaction, damage to the Company’s reputation or brands or a loss of customers. In addition, the Company may not have adequate insurance coverage to compensate it for any losses associated with such events.

The Company is also subject to risks caused by the misappropriation, misuse, falsification or intentional or accidental release or loss of data maintained in the information systems and networks of the Company and its vendors, including confidential personnel, customer or vendor data. Outside parties may attempt to penetrate the Company’s systems or those of its vendors or fraudulently induce employees or customers of the Company or employees of its vendors to disclose sensitive information to obtain or gain access to the Company’s data. If a material breach of the Company’s information systems or that of its vendors occurs, the market perception of the effectiveness of the Company’s information security measures could be harmed, the Company could lose customers and advertisers, and its reputation, brands and credibility could be damaged. In addition, if a material breach of its information systems occurs, the Company could be required to expend significant amounts of money and other resources to repair or replace information systems or networks or to comply with notification requirements. The Company also could be subject to actions by regulatory authorities and claims asserted in private litigation in the event of a breach of the information systems of the Company or its vendors.

 

22


Table of Contents
Index to Financial Statements

Although the Company develops and maintains information security practices and systems designed to prevent these events from occurring, the development and maintenance of these systems are costly and require ongoing monitoring and updating as technologies change and tactics to overcome information security measures become more sophisticated. Moreover, despite the Company’s efforts, the possibility of these events occurring cannot be eliminated entirely. As the Company distributes more of its content digitally, engages in more electronic transactions with consumers, increases the number of information technology systems used in its business operations, relies more on cloud-based services and information systems and increases its use of third-party service providers to perform information technology services, the related information security risks will continue to increase and the Company will need to expend additional resources to protect its information systems, networks and data.

Service disruptions or the failure of communications satellites or transmitter facilities relied on by HBO, Cinemax and Turner’s cable networks could have a negative impact on the Company’s revenues.  HBO, Cinemax and Turner’s cable networks rely on communications satellites and transmitter facilities to transmit their programming to affiliates. Shutdowns of satellites and transmitter facilities or service disruptions pose significant risks to the Company’s operations. Such disruptions may be caused by power outages, natural disasters, extreme weather, terrorist attacks, failures or impairments of communications satellites or on-ground uplinks or downlinks used to transmit programming, or other similar events. If a satellite is not able to transmit the Company’s programming, the Company may not be able to secure an alternative communication satellite in a timely manner, because there are a limited number of communications satellites available for the transmission of programming. If such an event were to occur, there could be a disruption in the delivery of the Company’s programming, which could harm the Company’s reputation and adversely affect the Company’s results of operations.

The Company’s businesses are subject to regulation in the U.S. and internationally, which could cause the Company to incur additional costs or liabilities or disrupt its business practices.  The Company’s businesses are subject to a variety of U.S. and international laws and regulations. See Item 1, “Business — Regulatory Matters,” for a description of significant U.S. federal, state, local and international laws, regulations, regulatory agency inquiries, rulemaking proceedings and other developments affecting the Company and its businesses. The Company could incur significant costs to comply with new laws or regulations or changes in interpretations of laws or regulations or substantial penalties or other liabilities if it fails to comply with them. Compliance with new laws or regulations also could cause the Company to change or limit its business practices in a manner that is adverse to its businesses. In addition, if there are changes in laws or regulations that provide protections that the Company relies on in conducting its businesses, these changes could subject the Company to greater risk of liability and could increase compliance costs or limit the Company’s ability to operate certain lines of business.

The Company’s cost reduction initiatives present various risks, including the risk that the Company may not realize the financial and strategic goals relating to the initiatives.  During the third and fourth quarters of 2014, the Company incurred significant restructuring and severance costs related to restructuring activities designed to position the Company for the current and future operating environment and reallocate resources to the Company’s growth initiatives. The reductions in the Company’s workforce from these restructuring activities could cause disruptions to the Company’s operations, and the Company’s anticipated cost savings from the workforce reductions may be less than initially expected. The Company has also launched multi-year enterprise efficiency initiatives to deliver certain business support services ( e.g. , real estate and certain information technology functions) centrally to the Company’s divisions. In connection with these initiatives, the Company may incur greater than anticipated expenses, fail to realize anticipated benefits, experience business disruptions or have difficulty executing the initiatives.

If the separation of any of Time Inc., AOL Inc. (“AOL”) or Time Warner Cable Inc. (“TWC”) is determined to be taxable for income tax purposes, Time Warner and/or Time Warner’s shareholders who received shares of Time Inc., AOL or TWC (as applicable) in connection with the respective spin-off of those companies could incur significant income tax liabilities.  In connection with the legal and structural separation from the Company of (i) Time Inc. in June 2014 and (ii) AOL in December 2009, Time Warner received an opinion of counsel confirming that the applicable separation transaction should not result in the recognition, for U.S. Federal income tax purposes, of gain or loss to Time Warner or its shareholders, except to the extent of cash received in lieu of fractional shares in such transaction. In connection with the legal and structural separation of TWC from the Company in March 2009, Time Warner received a private letter ruling from the Internal Revenue Service (“IRS”) and opinions of counsel confirming that the TWC separation should not result in the recognition, for U.S. Federal income tax purposes, of gain or loss to Time Warner or its shareholders, except to the extent of

 

23


Table of Contents
Index to Financial Statements

cash received in lieu of fractional shares. The IRS ruling and the opinions of counsel in connection with these transactions were based on, among other things, certain facts, assumptions, representations and undertakings that were made by Time Warner and Time Inc., AOL or TWC, as applicable, in connection with the applicable separation transaction. If any of these facts, assumptions, representations or undertakings is incorrect or not otherwise satisfied, Time Warner and its shareholders may not be able to rely on the IRS ruling (in the case of the TWC separation transaction) or opinion and could be subject to significant tax liabilities. Furthermore, opinions of counsel are not binding on the IRS or state or local tax authorities or the courts, and a tax authority or court could determine that one or more of the separation transactions should be treated as a taxable transaction. Under the tax matters agreement Time Warner entered into with each of Time Inc., AOL and TWC in connection with the respective separation transactions, Time Warner is entitled to indemnification from the applicable former subsidiary for taxes resulting from the failure of the applicable separation transaction to qualify as tax-free as a result of (i) certain actions or failures to act by the former subsidiary or (ii) the failure of certain representations made by the former subsidiary to be true. However, if transaction taxes are incurred for other reasons, Time Warner would not be entitled to indemnification.

 

Item 1B. Unresolved Staff Comments.

Not applicable.

 

Item 2. Properties.

Time Warner’s headquarters are located in New York City at One Time Warner Center. The Company also owns or leases offices; studios; technical, production and warehouse spaces; satellite transmission facilities; and other properties in numerous locations in the United States and around the world for its businesses. The Company considers its properties adequate for its current needs. The following table sets forth information as of December 31, 2014 with respect to the Company’s principal properties:

 

Location

 

Principal Use

   Approximate Square
Feet Floor Space
   

Type of Ownership;

Expiration Date of Lease

New York, NY

One Time Warner Center

  Executive, business and administrative offices, studios, technical space and screening room (Corporate HQ and Turner)      940,000     Leased by the Company. Lease expires in 2019. (a)

Hong Kong

979 King’s Rd.

Oxford House

  Executive, business and administrative offices, a studio, technical space and screening room (Corporate, Turner and Warner Bros.)      110,000     Leased by the Company. Lease expires in 2018. Approx. 22,000 sq. ft. is sublet to unaffiliated third-party tenants.

London, England

Turner House

16 Great Marlborough St.

  Executive, business and administrative offices, studios and technical space (Corporate, Turner and Home Box Office)      100,000     Leased by the Company. Lease expires in 2019.

Atlanta, GA

One CNN Center

  Executive, business and administrative offices, studios and technical and retail space (Turner)      1,280,000     Owned by the Company. Approx. 68,000 sq. ft. is leased to unaffiliated third-party tenants.

Atlanta, GA

1050 Techwood Dr.

  Executive, business and administrative offices, studios and technical space (Turner)      1,170,000     Owned by the Company.

Santiago, Chile

Pedro Montt 2354

  Business offices, studios and technical space (Turner)      254,000     Owned by the Company.

Buenos Aires, Argentina

599 & 533 Defensa St.

  Business offices, studios and technical space (Turner)      129,000     Owned by the Company.

 

24


Table of Contents
Index to Financial Statements

Location

 

Principal Use

   Approximate Square
Feet Floor Space
   

Type of Ownership;

Expiration Date of Lease

Washington, DC

820 First St.

  Business offices, studios and technical space (Turner)      102,000     Leased by the Company. Lease expires in 2020.

Santiago, Chile

Ines Matte Urrejola #0890

Provencia - Central

  Business offices, studios and technical space (Turner)      90,000     Leased by the Company. Lease expires in 2016.

Los Angeles, CA

6430 Sunset Blvd.

  Business offices, studios and technical space (Turner)      37,000     Leased by the Company. Lease expires in 2022.

New York, NY

1100 and 1114

Ave. of the Americas

  Executive, business and administrative offices and technical space (Home Box Office)      673,000     Leased by the Company under two leases expiring in 2018.

Santa Monica, CA

2500 Broadway

  Executive, business and administrative offices and technical space (Home Box Office)      128,000    

Leased by the Company.

Lease expires in 2019.

Hauppauge, NY

300 New Highway

  Business offices, communications center, production facility and technical space (Home Box Office)      115,000     Owned by the Company.

New York, NY

120A East 23 rd Street

  Business and administrative offices, studios and technical space (Home Box Office)      82,000    

Leased by the Company.

Lease expires in 2018.

Burbank, CA

The Warner Bros.

Studio

  Executive, business and administrative offices, sound stages, administrative, technical and dressing room structures, screening theaters, machinery and equipment facilities, tour operations, back lot and parking lot/structures (Warner Bros.)      4,677,000 (b)     Owned by the Company.

Leavesden, UK

Leavesden Studios

  Business and administrative offices, sound stages, technical and dressing room structures, machinery and equipment facilities, tour operations, back lot and parking lots (Warner Bros.)      727,000     Owned by the Company.

Burbank, CA

3400 Riverside Dr.

  Executive, business and administrative offices (Warner Bros.)      421,000     Leased by the Company. Lease expires in 2019.

Burbank, CA

3300 W. Olive Ave.

  Executive, business and administrative offices and technical space (Warner Bros.)      231,000     Leased by the Company. Lease expires in 2021.

London, England

98 Theobald Rd.

  Business and administrative offices and screening room (Warner Bros.)      135,000     Leased by the Company. Lease expires in 2019.

 

 

  (a)   The Company plans to move to a new corporate headquarters in early 2019.
  (b)   Represents 4,677,000 sq. ft. of improved space on 158 acres. Ten acres consist of various parcels adjoining The Warner Bros. Studio with mixed commercial and office uses.

 

25


Table of Contents
Index to Financial Statements
Item 3. Legal Proceedings.

In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to various legal claims, actions and proceedings. These claims, actions and proceedings are at varying stages of investigation, arbitration or adjudication, and involve a variety of areas of law.

On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman” character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the U.S. District Court for the Central District of California. Plaintiffs’ complaint alleged, among other things, that plaintiffs terminated Siegel’s grants of one-half the rights in the Superman character as of April 16, 1999, and plaintiffs were entitled to up to one-half of the profits made on Superman since that date. On March 26, 2008, the court entered summary judgment, finding that plaintiffs’ termination notices were valid and recaptured a one-half interest in the Superman character as of April 16, 1999. On January 10, 2013, the U.S. Court of Appeals for the Ninth Circuit reversed the March 2008 summary judgment decision, holding that the parties reached a binding settlement agreement in 2001. By orders dated March 20, 2013, April 18, 2013, and June 18, 2013, the district court entered final judgment in this lawsuit and the related Superboy lawsuit, described below, in DC Comics’ favor, ruling that the plaintiffs had transferred any and all rights in the Superman and Superboy properties to DC Comics in 2001 pursuant to a binding settlement agreement. On July 16, 2013, the plaintiffs filed an appeal from the final judgment to the U.S. Court of Appeals for the Ninth Circuit.

On October 22, 2004, the same Siegel heirs filed a related lawsuit against the same defendants, as well as Warner Communications Inc. (now known as Warner Communications LLC) and Warner Bros. Television Production Inc. (now known as WB Studio Enterprises Inc.), in the U.S. District Court for the Central District of California. Plaintiffs claimed that Siegel was the sole creator of the character Superboy and, as such, DC Comics has had no right to create new Superboy works since plaintiffs’ alleged October 17, 2004 termination of Siegel’s grants of rights to the Superboy character. Plaintiffs sought a declaration regarding the validity of the alleged termination and an injunction against future use of the Superboy character. As described in the paragraph above regarding the Superman lawsuit, by orders dated March 20, 2013, April 18, 2013 and June 18, 2013, the district court entered final judgment in DC Comics’ favor, ruling that the plaintiffs had transferred any and all rights in the Superman and Superboy properties to DC Comics in 2001 pursuant to a binding settlement agreement. On July 16, 2013, the plaintiffs filed an appeal from the final judgment to the U.S. Court of Appeals for the Ninth Circuit.

On May 14, 2010, DC Comics filed a related lawsuit in the U.S. District Court for the Central District of California against the heirs of Superman co-creator Joseph Shuster, the Siegel heirs, their attorney Marc Toberoff and certain companies that Mr. Toberoff controls. The lawsuit asserted, among other things, a claim for declaratory relief concerning the validity of the copyright termination notice served by the Shuster heirs, who purported to reclaim their rights to the Superman character from DC Comics with the termination notice. The lawsuit also asserted state law based claims, including seeking declaratory relief challenging the validity of various agreements between Mr. Toberoff, certain companies that he controls and the Shuster and Siegel heirs, as well as claims for intentional interference by Mr. Toberoff with DC Comics’ contracts and prospective economic advantage with the Shuster and Siegel heirs for which DC Comics sought monetary damages. On October 17, 2012, the district court granted summary judgment in favor of DC Comics, holding that the copyright termination notice served by the Shuster heirs was invalid and that the Shuster heirs had transferred any and all rights in the Superman properties to DC Comics in 1992 pursuant to a binding agreement with DC Comics. On November 21, 2013, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s October 2012 decision. On October 6, 2014, the U.S. Supreme Court denied the Shuster heirs’ petition for writ of certiorari. DC Comics’ other claims against the Siegel heirs, Mr. Toberoff and certain companies that Mr. Toberoff controls were either dismissed by the district court or deemed moot following the U.S. Supreme Court’s denial of the Shuster heirs’ petition for writ of certiorari . On December 9, 2014, DC Comics appealed the dismissal of its claims against Mr. Toberoff and his companies, and on December 23, 2014, Mr. Toberoff and his companies filed a cross-appeal with the U.S. Court of Appeals for the Ninth Circuit.

The Company has prevailed on the primary issues regarding its rights to the “Superman” and “Superboy” properties in the matters described above and believes the claims that remain within the scope of the appeals pending before the U.S. Court of Appeals for the Ninth Circuit are not material to the Company’s results of operations or cash flows. Accordingly, the Company does not intend to include disclosure regarding these matters in its future periodic reports.

 

26


Table of Contents
Index to Financial Statements

On April 4, 2007, the National Labor Relations Board (“NLRB”) issued a complaint against CNN America Inc. (“CNN America”) and Team Video Services, LLC (“Team Video”). This administrative proceeding relates to CNN America’s December 2003 and January 2004 terminations of its contractual relationships with Team Video, under which Team Video had provided electronic newsgathering services in Washington, DC and New York, NY. The National Association of Broadcast Employees and Technicians, under which Team Video’s employees were unionized, initially filed charges of unfair labor practices with the NLRB in February 2004, alleging that CNN America and Team Video were joint employers, that CNN America was a successor employer to Team Video, and/or that CNN America discriminated in its hiring practices to avoid becoming a successor employer or due to specific individuals’ union affiliation or activities. The NLRB complaint seeks, among other things, the reinstatement of certain union members and monetary damages. On November 19, 2008, the presiding NLRB Administrative Law Judge (“ALJ”) issued a non-binding recommended decision and order, finding CNN America liable. On September 15, 2014, a three-member panel of the NLRB affirmed the ALJ’s decision and adopted the ALJ’s order with certain modifications. On September 16, 2014, CNN America filed a notice of appeal with the U.S. Court of Appeals for the D.C. Circuit. On November 12, 2014, both CNN America and the General Counsel of the NLRB filed motions with the NLRB for reconsideration of the panel’s decision. On December 17, 2014, CNN America’s appeal to the U.S. Court of Appeals was placed on hold pending resolution of the motions for reconsideration.

In April 2013, the Internal Revenue Service (the “IRS”) Appeals Division issued a notice of deficiency to the Company relating to the appropriate tax characterization of stock warrants received from Google Inc. in 2002. On May 6, 2013, the Company filed a petition with the United States Tax Court seeking a redetermination of the deficiency set forth in the notice. The Company’s petition asserts that the IRS erred in determining that the stock warrants were taxable upon exercise (in 2004) rather than at the date of grant based on, among other things, a misapplication of Section 83 of the Internal Revenue Code. In December 2014, the Company reached a preliminary agreement with the IRS to resolve the issues raised in the notice of deficiency. Final resolution of these issues is subject to agreement regarding certain necessary computations and the preparation and execution of definitive documentation.

The Company intends to vigorously defend against or prosecute, as applicable, the matters described above.

The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.

For matters disclosed above for which a loss is probable or reasonably possible, whether in excess of an accrued liability or where there is no accrued liability, the Company has estimated a range of possible loss. The Company believes the estimate of the aggregate range of possible loss in excess of accrued liabilities for such matters is between $0 and $130 million at December 31, 2014. The estimated aggregate range of possible loss is subject to significant judgment and a variety of assumptions. The matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate.

In view of the inherent difficulty of predicting the outcome of litigation and claims, the Company often cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be. An adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

 

Item 4. Mine Safety Disclosures.

Not applicable.

EXECUTIVE OFFICERS OF THE COMPANY

Pursuant to General Instruction G(3) to Form 10-K, 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.

 

27


Table of Contents
Index to Financial Statements

The following table sets forth the name of each executive officer of the Company, the office held by such officer and the age of such officer as of February 1, 2015.

 

Name

     Age       

Office

Jeffrey L. Bewkes

     62       Chairman and Chief Executive Officer

Howard M. Averill

     51       Executive Vice President and Chief Financial Officer

Paul T. Cappuccio

     53       Executive Vice President and General Counsel

Gary Ginsberg

     52       Executive Vice President, Corporate Marketing & Communications

Karen Magee

     53       Executive Vice President and Chief Human Resources Officer

Carol A. Melton

     60       Executive Vice President, Global Public Policy

Olaf Olafsson

     52       Executive Vice President, International & Corporate Strategy

Set forth below are the principal positions held by each of the executive officers named above:

 

Mr. Bewkes

  

Chairman and Chief Executive Officer since January 2009; prior to that, Mr. Bewkes served as President and Chief Executive Officer from January 2008 and President and Chief Operating Officer from January 2006. Mr. Bewkes has been a Director of the Company since January 2007. Prior to January 2006, Mr. Bewkes served as Chairman, Entertainment & Networks Group from July 2002 and, prior to that, Mr. Bewkes served as Chairman and Chief Executive Officer of HBO from May 1995, having served as President and Chief Operating Officer from 1991.

Mr. Averill

  

Executive Vice President and Chief Financial Officer since January 2014; prior to that, Mr. Averill served as Senior Vice President & Deputy Chief Financial Officer from September 2013 through December 2013. Mr. Averill served as Executive Vice President & Chief Financial Officer of Time Inc. from 2007 to September 2013. Prior to that, Mr. Averill was Executive Vice President and Chief Financial Officer at NBC Universal Television from 2005 to 2007 and held other executive positions at NBC Universal, Inc. from 1997 to 2005. Prior to these positions, he held positions with ITT/Sheraton Corporation, Pepsi-Cola Company and Arthur Andersen & Co.

Mr. Cappuccio

  

Executive Vice President and General Counsel since January 2001; prior to that, Mr. Cappuccio served as Senior Vice President and General Counsel of AOL from August 1999. From 1993 to 1999, Mr. Cappuccio was a partner at the Washington, D.C. office of the law firm of Kirkland & Ellis. Mr. Cappuccio was an Associate Deputy Attorney General at the U.S. Department of Justice from 1991 to 1993.

Mr. Ginsberg

  

Executive Vice President, Corporate Marketing & Communications since April 2010; prior to that, Mr. Ginsberg served as an Executive Vice President at News Corporation from January 1999 to December 2009, most recently serving as Executive Vice President of Global Marketing and Corporate Affairs. Prior to that, Mr. Ginsberg served as Managing Director at the strategic consulting firm Clark & Weinstock from November 1996 to December 1998, Senior Editor and Counsel of George magazine from March 1995 to November 1996, and Assistant Counsel to President Clinton and Senior Counsel at the U.S. Department of Justice from January 1993 to November 1994.

Ms. Magee

  

Executive Vice President and Chief Human Resources Officer since January 2014; prior to that, Ms. Magee served as Senior Vice President and Chief Human Resources Officer from January 2011 through December 2013 and as Senior Vice President, Administration, Shared Services from March 2010 to January 2011. Prior to that, Ms. Magee served as the Chief Executive Officer of PlanetOut Inc. from 2006 to 2009. Prior to that, Ms. Magee served as Senior Vice President of Strategic Planning at the Company from 2004 to 2006, as Vice President and then Senior Vice President of Strategic Planning at Time Inc. from 2001 to 2004. Prior to these positions, Ms. Magee served in various roles at Time Inc.

 

28


Table of Contents
Index to Financial Statements

Ms. Melton

Executive Vice President, Global Public Policy since June 2005; prior to that, Ms. Melton worked for eight years at Viacom Inc., serving as Executive Vice President, Government Relations at the time she left to rejoin Time Warner. Prior to that, Ms. Melton served as Vice President in Time Warner’s Public Policy Office until 1997, having joined the Company in 1987 after having served as Legal Advisor to the Chairman of the FCC.

Mr. Olafsson

Executive Vice President, International & Corporate Strategy since March 2003. During 2002, Mr. Olafsson pursued personal interests, including working on a novel that was published in the fall of 2003. Prior to that, he was Vice Chairman of Time Warner Digital Media from November 1999 through December 2001 and, prior to that, Mr. Olafsson served as President of Advanta Corp. from March of 1998 until November 1999.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company is a corporation organized under the laws of Delaware, and was formed on February 4, 2000 in connection with the Company’s January 2001 merger with America Online, Inc. The principal market for the Company’s Common Stock is the NYSE. For quarterly price information with respect to the Company’s Common Stock for the two years ended December 31, 2014, see “Quarterly Financial Information” at pages 128 through 129 herein, which information is incorporated herein by reference. The number of holders of record of the Company’s Common Stock as of February 19, 2015 was 16,495.

The Company paid a cash dividend of $0.2875 per share in each quarter of 2013 and a cash dividend of $0.3175 per share in each quarter of 2014.

On February 10, 2015, the Company’s Board of Directors approved an increase in the quarterly cash dividend to $0.35 per share and declared the next regular quarterly cash dividend to be paid on March 15, 2015 to stockholders of record on February 28, 2015. The Company currently expects to continue to pay comparable cash dividends in the future. Changes to the Company’s dividend policy will depend on the Company’s earnings, investment opportunities, capital requirements, financial condition, economic conditions and other factors considered relevant by the Company’s Board of Directors.

Company Purchases of Equity Securities

The following table provides information about the Company’s purchases of equity securities registered by the Company pursuant to Section 12 of the Exchange Act, as amended, during the quarter ended December 31, 2014.

Issuer Purchases of Equity Securities

 

                                                                                                   

Period

   Total Number of
Shares Purchased
     Average Price
Paid Per Share (1)
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
     Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (1)
 

October 1, 2014 -
October 31, 2014

     4,753,846        $ 75.61          4,753,846        $ 5,141,540,405    

November 1, 2014 -
November 30, 2014

     3,731,801        $ 79.52          3,731,801        $ 4,844,769,676    

December 1, 2014 -
December 31, 2014

     4,079,778        $ 84.22          4,079,778        $ 4,501,187,486    
  

 

 

       

 

 

    

Total

             12,565,425     $                   79.57                  12,565,425     $     4,501,187,486    

 

  (1)   These amounts do not give effect to any fees, commissions or other costs associated with the share repurchases.

 

29


Table of Contents
Index to Financial Statements
  (2)  

On February 5, 2014, the Company announced that its Board of Directors had authorized a total of $5.0 billion in share repurchases beginning January 1, 2014, including the approximately $301 million remaining at December 31, 2013 from the prior $4.0 billion authorization. On August 6, 2014, the Company announced that its Board of Directors had authorized an additional $5.0 billion of share repurchases. Purchases under the stock repurchase program may be made, from time to time, on the open market and in privately negotiated transactions. The size and timing of these purchases will be based on a number of factors, including price and business and market conditions. In the past, the Company has repurchased shares of its common stock pursuant to trading plans under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended, and it may repurchase shares of its common stock utilizing such trading plans in the future.

Item 6. Selected Financial Data.

The selected financial information of the Company for the five years ended December 31, 2014 is set forth at page 127 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 of Results of Operations and Financial Condition” at pages 36 through 65 herein is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The information set forth under the caption “Market Risk Management” at pages 63 through 64 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 registered public accounting firm thereon set forth at pages 66 through 123, 130 through 138 and 125 herein, respectively, are incorporated herein by reference.

Quarterly Financial Information set forth at pages 128 through 129 herein is incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management’s report on internal control over financial reporting and the report of independent registered public accounting firm thereon set forth at pages 124 and 126 herein are incorporated herein by reference.

 

30


Table of Contents
Index to Financial Statements

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the quarter ended December  31, 2014 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Item 9B. Other Information.

On February 24, 2015, the Company entered into an amended and restated employment agreement (the “Employment Agreement”) with Howard Averill, Executive Vice President and Chief Financial Officer of the Company, that extends his term of employment through December 31, 2017. Pursuant to the Employment Agreement, Mr. Averill’s compensation has been increased effective January 1, 2015 to $1.4 million in annual salary, a target annual cash bonus equal to 250% of base salary and long-term incentive compensation with an annual target of $4.6 million.

The terms of the Employment Agreement are substantially the same as in the agreement it replaced, except as described above.

The Compensation and Human Development Committee of the Board of Directors of the Company approved the Employment Agreement to secure the benefit of Mr. Averill’s service through December 31, 2017 and in recognition of his performance as Chief Financial Officer.

PART III

 

Items 10, 11, 12, 13 and 14. Directors, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Director Independence; Principal Accounting Fees and Services.

Information called for by Items 10, 11, 12, 13 and 14 of Part III is incorporated by reference from the Company’s definitive Proxy Statement to be filed in connection with its 2015 Annual Meeting of Stockholders pursuant to Regulation 14A, except that (i) 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 (ii) the information regarding certain Company equity compensation plans called for by Item 201(d) of Regulation S-K is set forth below.

The Company has adopted a Code of Ethics for its Senior Executive and Senior Financial Officers. A copy of the Code is publicly available on the Company’s website at http://www.timewarner.com/our-company/corporate-governance/codes-of-conduct . Amendments to the Code or any grant of a waiver from a provision of the Code requiring disclosure under applicable SEC rules will also be disclosed on the Company’s website.

 

31


Table of Contents
Index to Financial Statements

Equity Compensation Plan Information

The following table summarizes information as of December 31, 2014 about the Company’s outstanding equity compensation awards and shares of Common Stock reserved for future issuance under the Company’s equity compensation plans.

 

Plan Category

   Number of Securities
to be Issued Upon
Exercise of Outstanding
Options, Warrants
and Rights (2) (3)
     Weighted-Average
Exercise
Price of Outstanding
Options, Warrants
and Rights (2) (3)
     Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in Column (a)) (3) (4)
 
     (a)      (b)      (c)  

Equity compensation plans approved by security holders (1)

     41,509,497       $ 36.27         30,185,137   

Equity compensation plans not approved by security holders

     --       $ --       $ --   
  

 

 

    

 

 

    

 

 

 

Total (2)

      41,509,497    $             36.27          30,185,137   

 

  (1)  

Equity compensation plans approved by security holders are the (i) Time Warner Inc. 2013 Stock Incentive Plan (will expire on August 31, 2017), (ii) Time Warner Inc. 2010 Stock Incentive Plan (terminated effective August 8, 2013), (iii) Time Warner Inc. 2006 Stock Incentive Plan (terminated effective September 16, 2010), (iv) Time Warner Inc. 2003 Stock Incentive Plan (expired on May 16, 2008), (v) Time Warner Inc. 1999 Stock Plan (expired on October 28, 2009) and (vi) Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors (expired on May 19, 2009). The Time Warner Inc. 1999 Stock Plan and the Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors were approved in 1999 by the stockholders of America Online, Inc. and Historic TW Inc., respectively, and were assumed by the Company in connection with the merger of America Online, Inc. and Time Warner Inc. (now known as Historic TW Inc.), which was approved by the stockholders of both America Online, Inc. and Historic TW Inc. on June 23, 2000.

  (2)  

Column (a) includes 10,528,377 shares of Common Stock underlying outstanding restricted stock units (“RSUs”) and 1,159,676 shares of Common Stock underlying outstanding performance stock units (“PSUs”), assuming a maximum payout of 200% of the target number of PSUs at the end of the applicable performance period. Because there is no exercise price associated with RSUs or PSUs, these stock awards are not included in the weighted-average exercise price calculation presented in column (b).

  (3)  

Reflects adjustments made due to the Time Separation. See Note 12, “Equity-Based Compensation,” to the accompanying consolidated financial statements for more information.

  (4)  

Of the shares available for future issuance under the Time Warner Inc. 2013 Stock Incentive Plan, a maximum of 28,173,246 shares may be issued in connection with awards of restricted stock, RSUs or PSUs as of December 31, 2014.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(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 35 herein is incorporated herein by reference. Such consolidated financial statements and schedules are filed as part of this report.

(ii) All other financial statement schedules are omitted because the required information is not applicable, or because the information required is included in the consolidated financial statements and notes thereto.

(3)  Exhibits:

The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report and such Exhibit Index is incorporated herein by reference.

 

32


Table of Contents
Index to Financial Statements

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TIME WARNER INC.
By:   

/s/ Howard M. Averill

  Name:   Howard M. Averill
  Title:  

Executive Vice President and

Chief Financial Officer

Date: February 26, 2015

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/ Jeffrey L. Bewkes

Jeffrey L. Bewkes

 

  

Director, Chairman of the Board

and Chief Executive Officer

(principal executive officer)

  February 26, 2015

/s/ Howard M. Averill

Howard M. Averill

 

  

Executive Vice President and

Chief Financial Officer

(principal financial officer)

  February 26, 2015

/s/ Douglas E. Horne

Douglas E. Horne

 

  

Senior Vice President & Controller

(principal accounting officer)

  February 26, 2015

/s/ James L. Barksdale

James L. Barksdale

 

   Director   February 26, 2015

/s/ William P. Barr

William P. Barr

 

   Director   February 26, 2015

/s/ Stephen F. Bollenbach

Stephen F. Bollenbach

 

   Director   February 26, 2015

/s/ Robert C. Clark

Robert C. Clark

 

   Director   February 26, 2015

 

33


Table of Contents
Index to Financial Statements

Signature

  

Title

 

Date

/s/ Mathias Döpfner

Mathias Döpfner

 

   Director   February 26, 2015

/s/ Jessica P. Einhorn

Jessica P. Einhorn

 

   Director   February 26, 2015

/s/ Carlos M. Gutierrez

Carlos M. Gutierrez

 

   Director   February 26, 2015

/s/ Fred Hassan

Fred Hassan

 

   Director   February 26, 2015

/s/ Kenneth J. Novack

Kenneth J. Novack

 

   Director   February 26, 2015

/s/ Paul D. Wachter

Paul D. Wachter

 

   Director   February 26, 2015

/s/ Deborah C. Wright

Deborah C. Wright

 

   Director   February 26, 2015

 

34


Table of Contents
Index to Financial Statements

TIME WARNER INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER FINANCIAL INFORMATION

 

     Page

Management’s Discussion and Analysis of Results of Operations and Financial Condition

   36

Consolidated Financial Statements:

  

Consolidated Balance Sheet

   66

Consolidated Statement of Operations

   67

Consolidated Statement of Comprehensive Income

   68

Consolidated Statement of Cash Flows

   69

Consolidated Statement of Equity

   70

Notes to Consolidated Financial Statements

   71

Management’s Report on Internal Control Over Financial Reporting

   124

Reports of Independent Registered Public Accounting Firm

   125

Selected Financial Information

   127

Quarterly Financial Information

   128

Supplementary Information

   130

Financial Statement Schedule II – Valuation and Qualifying Accounts

   139

 

35


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Inc.’s (“Time Warner” or the “Company”) businesses, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

 

   

Overview .    This section provides a general description of Time Warner’s business segments, as well as recent developments the Company believes are important in understanding the results of its operations and financial condition or in understanding anticipated future trends.

 

   

Results of operations .    This section provides an analysis of the Company’s results of operations for the three years ended December 31, 2014. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description of transactions and other items that affect the comparability of the results being analyzed is provided.

 

   

Financial condition and liquidity .    This section provides an analysis of the Company’s cash flows for the three years ended December 31, 2014 and the Company’s outstanding debt and commitments as of December 31, 2014. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund the Company’s ongoing operations and future commitments, as well as a discussion of other financing arrangements.

 

   

Market risk management .    This section discusses how the Company monitors and manages exposure to potential gains and losses arising from changes in market rates and prices, such as interest rates, foreign currency exchange rates and changes in the market value of financial instruments.

 

   

Critical accounting policies .    This section identifies those accounting policies that are considered important to the Company’s results of operations and financial condition, require significant judgment and involve significant management estimates. The Company’s significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements.

 

   

Caution concerning forward-looking statements .    This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Refer to Item 1A, “Risk Factors,” in Part I of this report for a discussion of the risk factors applicable to the Company.

Separation of Time Inc.

On June 6, 2014, the Company completed the legal and structural separation of the Company’s Time Inc. segment from the Company (the “Time Separation”). With the completion of the Time Separation, the Company disposed of the Time Inc. segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in the Company’s consolidated financial statements. Accordingly, the Company has recast its financial information to present the financial position and results of operations of its former Time Inc. segment as discontinued operations in the accompanying consolidated financial statements for all periods presented. See Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements. In connection with the Time Separation, the Company received $1.4 billion from Time Inc. consisting of proceeds from Time Inc.’s acquisition of the IPC publishing business in the U.K. from a wholly-owned subsidiary of Time Warner and a special dividend.

 

36


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

OVERVIEW

Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. Among the Company’s brands are TNT, TBS, Adult Swim, Cartoon Network, CNN, HBO, Cinemax, Warner Bros. and New Line Cinema. During the year ended December 31, 2014, the Company generated Revenues of $27.359 billion (up 3% from $26.461 billion in 2013), Operating Income of $5.975 billion (down 5% from $6.268 billion in 2013), Income from continuing operations of $3.894 billion (up 16% from $3.354 billion in 2013), Net Income attributable to Time Warner shareholders of $3.827 billion (up 4% from $3.691 billion in 2013) and Cash provided by operations from continuing operations of $3.681 billion (up 13% from $3.258 billion in 2013).

Time Warner Businesses

Time Warner classifies its operations into three reportable segments: Turner, Home Box Office and Warner Bros. For additional information regarding Time Warner’s segments, refer to Note 15, “Segment Information,” to the accompanying consolidated financial statements.

Turner.     Time Warner’s Turner segment consists of businesses managed by Turner Broadcasting System, Inc. (“Turner”). During the year ended December 31, 2014, the Turner segment recorded Revenues of $10.396 billion (38% of the Company’s total Revenues) and Operating Income of $2.954 billion.

Turner operates domestic and international television networks and related properties that offer entertainment, sports, kids and news programming on television and digital platforms for consumers around the world. The Turner networks and related properties include TNT, TBS, Adult Swim, truTV, Turner Classic Movies, Turner Sports, Cartoon Network, Boomerang, CNN and HLN. The Turner networks generate revenues principally from providing programming to affiliates that have contracted to receive and distribute this programming to subscribers, from the sale of advertising and from licensing its original programming, including to subscription-video-on-demand (“SVOD”) services, and its brands and characters for consumer products. Turner’s programming is available to subscribers of affiliates for viewing on television; on demand on television; and via streaming online and on mobile devices through Turner’s digital properties and services provided by affiliates. Turner also manages and operates various digital media properties that primarily consist of websites, including bleacherreport.com , cartoonnetwork.com , CNN.com , CNNMoney.com , NBA.com and NCAA.com , which generate revenues principally from the sale of advertising and sponsorships.

Home Box Office.     Time Warner’s Home Box Office segment consists of businesses managed by Home Box Office, Inc. (“Home Box Office”). During the year ended December 31, 2014, the Home Box Office segment recorded Revenues of $5.398 billion (19% of the Company’s total Revenues) and Operating Income of $1.786 billion.

Home Box Office operates the HBO and Cinemax multi-channel premium pay television services, with the HBO service ranking as the most widely distributed multi-channel premium pay television service. HBO- and Cinemax-branded premium pay and basic tier television services are distributed in over 60 countries in Latin America, Asia and Europe. In the U.S., Home Box Office generates revenues principally from providing programming to affiliates that have contracted to receive and distribute such programming to their customers who subscribe to the HBO or Cinemax services. HBO and Cinemax programming is available in the U.S. to subscribers of affiliates for viewing on its main HBO and Cinemax channels and its multiplex channels, through Home Box Office’s on demand services, HBO On Demand and Cinemax On Demand, and through Home Box Office’s streaming video-on-demand services, HBO GO and MAX GO. HBO GO and MAX GO are available on a variety of digital platforms, including mobile devices, gaming consoles and Internet connected streaming devices and televisions. Home Box Office’s agreements with its domestic affiliates are typically long-term arrangements that provide for annual service fee increases and marketing support. While fees to Home Box Office under affiliate agreements are generally based on the number of subscribers served by the affiliates, the relationship between subscriber totals and the amount of revenues earned depends on the specific terms of the applicable agreement, which may include basic and/or pay television subscriber thresholds, volume discounts and other performance-based discounts. Marketing and promotional

 

37


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

activities intended to retain existing subscribers and acquire new subscribers may also impact revenue earned. Home Box Office also derives subscription revenues from the distribution by international affiliates of country-specific HBO and Cinemax premium pay and basic tier television services to their local subscribers. HBO GO is available to HBO premium pay television subscribers in a number of countries outside the U.S. Additional sources of revenues for Home Box Office are (i) the home entertainment sales of its original programming, including Game of Thrones , True Blood , True Detective and Boardwalk Empire , on DVDs and Blu-ray Discs and via electronic sell-through (“EST”) and (ii) the licensing of its original programming to international and domestic television networks and SVOD services.

Warner Bros.     Time Warner’s Warner Bros. segment consists of businesses managed by Warner Bros. Entertainment Inc. (“Warner Bros.”) that principally produce and distribute television shows, feature films and videogames. During the year ended December 31, 2014, the Warner Bros. segment recorded Revenues of $12.526 billion (43% of the Company’s total Revenues) and Operating Income of $1.159 billion.

Warner Bros. is a leader in the television content industry. For the 2014/2015 season, Warner Bros. has produced over 60 series in the U.S., including (i) at least two series for each of the five broadcast networks (including 2 Broke Girls , Arrow , The Bachelor , The Big Bang Theory , The Flash , The Following , Forever , Gotham, The Middle , Mike & Molly , Mom , Person of Interest , Stalker , Vampire Diaries and The Voice ), (ii) original series for cable television networks (including Major Crimes , Pretty Little Liars and Rizzoli & Isles ), (iii) series for premium pay television services ( The Leftovers and Shameless ), (iv) series for first-run syndication (including The Ellen DeGeneres Show , Extra and TMZ ) and (v) animated series for cable television networks. Warner Bros. also licenses many of its series internationally. In 16 countries (located across Europe and South America and in Australia and New Zealand), Warner Bros. operates a group of local television production companies that focus on developing non-scripted programs and formats that can be sold internationally and adapted for sale in the U.S. In addition, Warner Bros. produces local versions of programs it created in the U.S. as well as original local television programming for international territories.

Warner Bros. is also a leader in the feature film industry and produces feature films under its Warner Bros. and New Line Cinema banners. The Warner Bros. segment’s theatrical product revenues are generated principally through rental fees from theatrical exhibition of feature films, including the following recently released films: Annabelle , American Sniper, Edge of Tomorrow , Godzilla , The Hobbit: The Battle of the Five Armies , Interstellar , The LEGO Movie and Tammy , and subsequently through licensing fees received from the distribution of films on premium pay television, television broadcast and cable networks and SVOD services. Television product revenues are generated principally from the licensing of programs to broadcast and cable television networks and premium pay television and SVOD services.

The segment also generates television and theatrical product revenues from the distribution of television and theatrical product in various digital formats (e.g., EST and video-on-demand) and on DVDs and Blu-ray Discs for home entertainment. In addition, the segment generates revenues through the development and distribution of videogames. Warner Bros.’ television and film businesses benefit from a shared infrastructure, including shared production, distribution, marketing and administrative functions and resources.

The distribution and sale of physical discs is one of the largest contributors to the segment’s revenues and profits. In recent years, sales of physical discs have declined as the home entertainment industry has been undergoing significant changes as it transitions from the physical distribution of film and television content via DVDs and Blu-ray Discs to the electronic delivery of such content. Several factors have contributed to this decline, including consumers shifting to subscription rental services and discount rental kiosks, which generate significantly less revenue per transaction for the Company than physical disc sales; changing retailer initiatives and strategies (e.g., reduction of floor space devoted to physical discs); retail store closures; increasing competition for consumer discretionary time and spending; and piracy. The electronic delivery of film and television content is growing and becoming more important to the Warner Bros. segment, which has helped to offset some of the decline in sales of physical discs. During 2014, across the home entertainment industry, consumer spending on physical discs continued to decline and consumer spending on electronic delivery continued to increase.

 

38


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Recent Developments

Venezuela Currency

Certain of the Company’s divisions conduct business with third parties located in Venezuela and, as a result, the Company holds net monetary assets denominated in Venezuelan Bolivares Fuertes (“VEF”) that primarily consist of cash and accounts receivable. As of December 31, 2014, there were three legal foreign currency exchange systems administered by the Venezuelan government, each with a different exchange rate: (i) the fixed official government rate as published by the Central Bank of Venezuela, which as of December 31, 2014 was 6.3 VEF to each U.S. Dollar, (ii) the variable, auction-based SICAD 1 rate, which as of December 31, 2014 was 12 VEF to each U.S. Dollar and (iii) the variable, transaction-based SICAD 2 rate, which as of December 31, 2014 was approximately 50 VEF to each U.S. Dollar. Because of Venezuelan government-imposed restrictions on the exchange of VEF into foreign currency in Venezuela, the Company has not been able to convert VEF earned in Venezuela into U.S. Dollars through the official government rate. Further, the Company has not been able to access the SICAD 1 and SICAD 2 exchanges due to government requirements and restrictions on participation in the exchanges, including a requirement that an entity be domiciled in Venezuela to participate.

Prior to December 31, 2014, the Company used the official government exchange rate to remeasure its VEF-denominated transactions and balances. This was principally due to the Company’s inability to access the SICAD 1 and SICAD 2 exchange systems, as noted above, as well as a lack of clarity about those exchange systems’ stability and transaction volume. During the fourth quarter of 2014, the Company considered information about the companies that were able to access the three exchange systems during 2014 and the fact that the SICAD 1 and SICAD 2 exchanges continued to operate, as well as the state of the Venezuelan economy, which has been negatively impacted by significantly lower oil prices and which the Venezuela Central Bank confirmed in late December 2014 had entered a recession. Based on these factors, as of December 31, 2014, the Company concluded that the SICAD 2 exchange rate was the most appropriate legal exchange rate for the Company’s business activities conducted in VEF. Accordingly, beginning on December 31, 2014, the Company began using the SICAD 2 rate to remeasure its VEF-denominated transactions and balances and, for the three months and year ended December 31, 2014, recognized a pretax foreign exchange loss of $173 million in the Consolidated Statement of Operations.

On February 10, 2015, Venezuelan government officials announced changes to Venezuela’s current foreign currency exchange system. Those changes include a merger of the SICAD I and SICAD 2 exchanges into a single SICAD exchange whose rate was initially set at 12 VEF to each U.S. Dollar as well as the creation of a new free market foreign currency exchange that is referred to as the Simadi exchange. On the initial date of activity, the Simadi exchange rate published by the Central Bank of Venezuela was 170 VEF to each U.S. Dollar. Given the restrictions associated with the official government rate and the SICAD exchange, the Company currently expects to use the Simadi exchange rates to remeasure its VEF-denominated transactions and balances. However, the Company will continue to evaluate developments in Venezuela and finalize its assessment of the most appropriate legal exchange rate for the Company’s business activities during the first quarter of 2015. At December 31, 2014, the Company had $25 million of net VEF-denominated consolidated monetary assets.

Revolving Credit Facilities Maturity Date Extension

On December 18, 2014, Time Warner amended its $5.0 billion of senior unsecured credit facilities (the “Revolving Credit Facilities”), which consist of two $2.5 billion revolving credit facilities, to extend the maturity dates of both facilities from December 18, 2018 to December 18, 2019. See “Financial Condition and Liquidity – Outstanding Debt and Other Financing Arrangements” for more information.

 

39


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Restructuring Activities

During 2014, the Company incurred $512 million of Restructuring and severance costs primarily related to headcount reductions associated with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. The Restructuring and severance costs by operating segment and at Corporate are as follows: $249 million at Turner, $63 million at Home Box Office, $169 million at Warner Bros. and $31 million at Corporate. Headcount reductions associated with these restructuring activities were approximately 4,000.

In addition to the restructuring activities noted above, during 2014, Turner conducted a strategic evaluation of its programming, and, as a result of such evaluation decided to no longer air certain programming, which consisted principally of licensed programming. In connection with that decision, the Company incurred $388 million of programming impairments related to programming that will no longer be aired, reflecting $526 million of charges at the Turner segment, partially offset by $138 million of intercompany eliminations primarily related to intercompany profits on programming licensed by the Warner Bros. segment to the Turner segment. Such charges have been classified as Costs of revenues in the Consolidated Statement of Operations.

Tax Matter

During the third quarter of 2014, the Company recognized a tax benefit of $687 million primarily related to the reversal of certain tax reserves, including related interest accruals, in connection with a Federal tax settlement on the examination of the Company’s 2005-2007 tax returns. Certain matters addressed in the examination were not resolved and, accordingly, the Company is pursuing resolution of such matters through the Internal Revenue Service’s administrative appeals process.

NBA Agreement

On October 3, 2014, Turner entered into a nine-year agreement with the National Basketball Association (“NBA”), which extends Turner’s relationship with the NBA through the 2024/2025 season and increases TNT’s regular season coverage from 52 live games annually to 64 live games annually beginning with the 2016/2017 season. The agreement also provides Turner with enhanced digital rights during the extension period. The aggregate cash commitment for the programming rights under the new agreement is approximately $10.5 billion.

2014 Debt Offering

On May 20, 2014, Time Warner issued $2.0 billion aggregate principal amount of debt securities in a public offering. See “Financial Condition and Liquidity – Outstanding Debt and Other Financing Arrangements” for more information.

Central European Media Enterprises Ltd.

On May 2, 2014, pursuant to a rights offering by Central European Media Enterprises Ltd. (“CME”), Time Warner acquired approximately 2.8 million units, each consisting of $100 principal amount of 15% senior secured notes due 2017 and 21 unit warrants, with each unit warrant entitling the Company to purchase one share of CME Class A common stock. In addition, Time Warner acquired 581,533 units in a private offering, and CME issued warrants to Time Warner to purchase an additional 30 million shares of Class A common stock. The warrants issued to Time Warner, including the unit warrants in connection with the rights offering and the private offering, have a four-year term and an exercise price of $1.00 per share, do not contain any voting rights and are not exercisable until the second anniversary of their issuance. The warrants are subject to a limited right whereby the Company can exercise any of its warrants earlier solely to own up to 49.9% of CME’s Class A common stock.

Additionally, Time Warner provided CME a $115 million revolving credit facility and a $30 million term loan that mature on December 1, 2017. Following an amendment in connection with the November 2014 transactions described below,

 

40


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

amounts outstanding under the revolving credit facility bear interest at a rate per annum based on LIBOR (subject to a minimum rate of 1.00%) plus 9%. CME can pay accrued interest for an applicable quarterly interest period either fully in cash or by adding such amount to the outstanding principal amount of the revolving credit facility. The revolving credit facility also contains a commitment fee on the average daily unused amount under the facility of 0.50% per annum. As of December 31, 2014, $25 million was outstanding under the revolving credit facility. The $30 million term loan bears interest at a rate of 15.0% per annum, paid semi-annually either fully in cash or by adding such amount to the principal amount of the loan.

These transactions did not change the Company’s approximate 49% voting interest, but resulted in the Company holding an approximate 75% economic interest in CME on a diluted basis.

On November 14, 2014, Time Warner and CME entered into an agreement pursuant to which Time Warner agreed to assist CME in refinancing $261 million aggregate principal amount of its Senior Convertible Notes due 2015 (“2015 Notes”) and €240 million aggregate principal amount of its Senior Notes due 2017 (“2017 Notes”). In connection with this agreement, CME entered into a €251 million senior unsecured term loan that matures on November 1, 2017 (the “2017 Term Loan”) with third-party financial institutions the same day. Time Warner has guaranteed CME’s obligations under the 2017 Term Loan for a fee equal to 8.5% less the interest rate on the 2017 Term Loan. The fee is payable to Time Warner in cash or in kind at CME’s option. CME used the proceeds of the 2017 Term Loan to redeem the 2017 Notes. CME also entered into unsecured interest rate hedge arrangements to protect against changes in the applicable interest rate on the 2017 Term Loan during its term. Time Warner has also guaranteed CME’s obligations under the hedge arrangements.

Upon maturity of the 2015 Notes in November 2015, Time Warner will, at its option, either (i) guarantee a $261 million unsecured term loan due November 1, 2019 (the “2015 Term Loan”) obtained by CME from one or more third-party financial institutions, for a fee equal to 8.5% less the interest rate on the 2015 Term Loan or (ii) provide a $261 million senior secured term loan that matures on November 1, 2019 directly to CME, with an 8.5% interest rate (the “Time Warner Loan”). The guarantee fee or interest payments, as applicable, will be paid to Time Warner in cash or in kind at CME’s option. Not later than the maturity of the 2015 Term Loan or the Time Warner Loan, as applicable, Time Warner also will earn a commitment fee of $9 million, which will accrue interest at 8.5% from the date of the 2015 Term Loan or Time Warner Loan, as applicable, until paid.

Eyeworks

On June 2, 2014, Warner Bros. acquired the operations outside the U.S. of Eyeworks Group, a television production and distribution company, which are located in 15 countries (across Europe and South America and in Australia and New Zealand) for approximately $267 million, net of cash acquired (the “Eyeworks Acquisition”).

Sale and Leaseback of Time Warner Center

On January 16, 2014, Time Warner sold the space it owned in Time Warner Center for approximately $1.3 billion and agreed to lease space in Time Warner Center from the buyer until early 2019. In connection with these transactions, the Company recognized a pretax gain of $441 million and a tax benefit of $58 million during 2014. Additionally, a pretax gain of approximately $325 million has been deferred and is being recognized ratably over the lease period. In February 2015, the Company entered into agreements relating to the construction and development of office and studio space in the Hudson Yards development on the west side of Manhattan in order to consolidate its Corporate headquarters and its New York City-based employees. Based on current construction cost and space projections, the Company expects to invest approximately $1.7 billion in the Hudson Yards development project over the next five years.

RESULTS OF OPERATIONS

Changes in Basis of Presentation

As discussed more fully in Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements, the 2013 and 2012 financial information has been recast so that the basis of presentation is consistent with that of the 2014 financial information. This recast reflects the financial position and results of operations of the Company’s former Time Inc. segment as discontinued operations for all periods presented.

 

41


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Recent Accounting Guidance

See Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements for a discussion of recent accounting guidance.

Transactions and Other Items Affecting Comparability

As more fully described herein and in the related notes to the accompanying consolidated financial statements, the comparability of Time Warner’s results from continuing operations has been affected by transactions and certain other items in each period as follows (millions):

                                            
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Asset impairments

   $ (69)       $ (61)       $ (180)   

Gain on operating assets, net

     464         129         45   

Venezuelan foreign currency loss

     (173)                 

Other

     (80)                (30)   
  

 

 

    

 

 

    

 

 

 

Impact on Operating Income

  142      73      (165)   

Investment gains (losses), net

  30      61      (30)   

Amounts related to the separation of Time Warner Cable Inc.

  (11)           

Amounts related to the disposition of Warner Music Group

      (1)      (7)   

Amounts related to the separation of Time Inc.

           

Items affecting comparability relating to equity method investments

  (97)      (30)      (94)   
  

 

 

    

 

 

    

 

 

 

Pretax impact

  69      106      (292)   

Income tax impact of above items

  165      (59)                    86   
  

 

 

    

 

 

    

 

 

 

Impact of items affecting comparability on income from continuing
operations attributable to Time Warner Inc. shareholders

$             234    $               47    $ (206)   
  

 

 

    

 

 

    

 

 

 

In addition to the items affecting comparability described above, the Company incurred Restructuring and severance costs of $512 million, $183 million and $92 million for the years ended December 31, 2014, 2013 and 2012, respectively. For the year ended December 31, 2014, the Company also incurred $388 million of programming impairments, reflecting $526 million of charges at the Turner segment, partially offset by $138 million of intercompany eliminations. For further discussion of Restructuring and severance costs and the programming impairments, see “Overview,” “Consolidated Results” and “Business Segment Results.”

Asset Impairments

During the year ended December 31, 2014, the Company recognized asset impairments of $17 million at the Turner segment related to miscellaneous assets, $4 million at the Home Box Office segment related to an international tradename and $41 million at the Warner Bros. segment, including $12 million related to a tradename and the remaining amount primarily related to various fixed assets and certain internally developed software, and $7 million at Corporate related to certain internally developed software.

During the year ended December 31, 2013, the Company recorded noncash impairments of $47 million at the Turner segment, of which $18 million related to certain of Turner’s international intangible assets, $18 million related to a building, $10 million related to programming assets resulting from Turner’s decision to shut down certain of its entertainment networks in Spain and Belgium and $1 million related to miscellaneous assets, $7 million at the Warner Bros. segment related to miscellaneous assets and $7 million at Corporate related to certain internally developed software.

During the year ended December 31, 2012, the Company recognized $174 million of charges at the Turner segment in connection with the shutdown of Turner’s general entertainment network, Imagine, in India and its TNT television operations in Turkey (the “Imagine and TNT Turkey Shutdowns”) primarily related to certain receivables, including value added tax receivables, inventories and long-lived assets, including Goodwill. For the year ended December 31, 2012, the Company also recognized $6 million of other miscellaneous noncash asset impairments consisting of $2 million at the Turner segment and $4 million at the Warner Bros. segment.

 

42


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Gain (Loss) on Operating Assets, Net

For the year ended December 31, 2014, the Company recognized net gains on operating assets of $464 million, including $16 million of net gains at the Turner segment, consisting of a $13 million gain related to the sale of Zite, Inc., a news content aggregation and recommendation platform, a $4 million gain related to the sale of certain fixed assets, a $3 million loss related to the shutdown of a business and a $2 million gain primarily related to the sale of a building in South America, a $7 million gain at the Warner Bros. segment primarily related to the sale of certain fixed assets and a $441 million gain at Corporate in connection with the sale and leaseback of the Company’s space in Time Warner Center.

For the year ended December 31, 2013, the Company recognized net gains on operating assets of $129 million, including a $2 million gain at the Turner segment on the sale of a building, a $104 million gain at the Home Box Office segment upon Home Box Office’s acquisition of its former partner’s interests in HBO Asia and HBO South Asia (collectively, “HBO Asia”), a $9 million gain at the Home Box Office segment upon Home Box Office’s acquisition of its former partner’s interest in HBO Nordic, a $6 million gain at the Warner Bros. segment related to miscellaneous operating assets and an $8 million gain at Corporate on the disposal of certain corporate assets.

For the year ended December 31, 2012, the Company recognized net gains on operating assets of $45 million, including a $34 million gain at the Turner segment on the settlement of an indemnification obligation related to the Company’s 2007 sale of the Atlanta Braves baseball franchise, $1 million of noncash income at the Warner Bros. segment related to a fair value adjustment on certain contingent consideration arrangements and a $10 million gain at Corporate on the disposal of certain corporate assets.

Venezuelan Foreign Currency Loss

For the year ended December 31, 2014, the Company recognized a pretax foreign exchange loss of $173 million, consisting of $137 million at the Turner segment and $36 million at the Warner Bros. segment, related to the remeasurement of the Company’s net monetary assets denominated in Venezuelan currency resulting from a change in the foreign currency exchange rate used by the Company from the official rate to the SICAD 2 exchange rate. See “Recent Developments” for more information.

Other

Other reflects external costs related to mergers, acquisitions or dispositions of $80 million, $33 million and $27 million for the years ended December 31, 2014, 2013 and 2012 respectively. External costs related to mergers, acquisitions or dispositions for the year ended December 31, 2014 consisted of $14 million at the Turner segment primarily related to exit costs in connection with the shutdown of CNN Latino, $19 million at the Warner Bros. segment primarily related to the Eyeworks Acquisition and $47 million at Corporate primarily related to the Time Separation. External costs related to mergers, acquisitions or dispositions for the year ended December 31, 2013 were primarily related to the Time Separation. External costs related to mergers, acquisitions or dispositions for the year ended December 31, 2012 included $18 million related to the Imagine and TNT Turkey Shutdowns.

For the year ended December 31, 2013, other includes a gain of $38 million related to the curtailment of post-retirement benefits (the “Curtailment”).

For the year ended December 31, 2012, other includes legal and other professional fees related to the defense of securities litigation matters for former employees of $3 million.

External costs related to mergers, acquisitions or dispositions, the gain related to the Curtailment and the amounts related to securities litigation and government investigations are included in Selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.

 

43


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Investment Gains (Losses), Net

For the year ended December 31, 2014, the Company recognized $30 million of investment gains, net, consisting of $29 million of gains related to fair value adjustments to warrants to purchase common stock of CME held by the Company and $1 million of net miscellaneous investment gains.

For the year ended December 31, 2013, the Company recognized $61 million of investment gains, net, consisting of a $65 million gain on the sale of the Company’s investment in a theater venture in Japan, which included a $10 million gain related to a foreign currency contract, $6 million of net miscellaneous losses and a net noncash gain of $2 million associated with an option to acquire securities that was terminated during the third quarter of 2013.

For the year ended December 31, 2012, the Company recognized $30 million of investment losses, net, consisting of $19 million of net miscellaneous losses, a $16 million loss on an investment in a network in Turkey recognized as part of the Imagine and TNT Turkey Shutdowns and noncash income of $5 million associated with a fair value adjustment on certain options to redeem securities.

Amounts Related to the Separation of Time Warner Cable Inc.

For the years ended December 31, 2014, 2013 and 2012, the Company recognized $1 million of other expense, $10 million of other income and $9 million of other income, respectively, related to the expiration, exercise and net change in the estimated fair value of Time Warner equity awards held by Time Warner Cable Inc. (“TWC”) employees, which has been reflected in Other loss, net in the accompanying Consolidated Statement of Operations. For the years ended December 31, 2014, 2013 and 2012, the Company also recognized $10 million, $7 million and $5 million, respectively, of other loss related to changes in the value of a TWC tax indemnification receivable, which has also been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Disposition of Warner Music Group

For the years ended December 31, 2014, 2013 and 2012, the Company recognized $2 million of other income, $1 million of losses and $7 million of losses, respectively, primarily related to a tax indemnification obligation associated with the disposition of Warner Music Group (“WMG”) in 2004. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Time Separation

For the year ended December 31, 2014, the Company recognized $3 million of other income related to the expiration, exercise and net change in the estimated fair value of Time Warner equity awards held by certain Time Inc. employees.

Items Affecting Comparability Relating to Equity Method Investments

For the year ended December 31, 2014, the Company recognized $70 million as its share of discontinued operations recorded by an equity method investee and $27 million as its share of a loss on the extinguishment of debt recorded by an equity method investee. For the years ended December 31, 2013 and 2012, the Company recognized $18 million and $94 million, respectively, as its share of noncash impairments recorded by an equity method investee. In addition, for the year ended December 31, 2013, the Company recognized $12 million as its share of a noncash loss on the extinguishment of debt recorded by the equity method investee. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Income Tax Impact

The income tax impact reflects the estimated tax provision or tax benefit associated with each item affecting comparability. The estimated tax provision or tax benefit can vary based on certain factors, including the taxability or deductibility of the items and foreign tax on certain items. The gain on the sale and leaseback of the Company’s space in Time Warner Center was offset by the utilization of tax attributes.

 

44


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Consolidated Results

The following discussion provides an analysis of the Company’s results of operations and should be read in conjunction with the accompanying Consolidated Statement of Operations.

Revenues.   The components of Revenues are as follows (millions):

 

                                                                          
     Year Ended December 31,      % Change  
     2014      2013      2012      2014 vs. 2013      2013 vs. 2012  
            (recast)      (recast)                

Turner

   $ 10,396       $ 9,983       $ 9,527         4%         5%   

Home Box Office

     5,398         4,890         4,686         10%         4%   

Warner Bros.

     12,526         12,312         12,018         2%         2%   

Intersegment eliminations

     (961)         (724)         (906)         33%         (20%)   
  

 

 

    

 

 

    

 

 

       

Total revenues

$             27,359    $             26,461    $             25,325      3%      4%   
  

 

 

    

 

 

    

 

 

       

For the year ended December 31, 2014, Revenues at the Turner segment increased primarily driven by higher Subscription and Advertising revenues. Revenues at the Home Box Office segment increased for the year ended December 31, 2014 due to higher Subscription and Content and other revenues. For the year ended December 31, 2014, Revenues at the Warner Bros. segment increased driven by higher Television product and Videogames and other revenues, partly offset by lower Theatrical product revenues.

For the year ended December 31, 2013, Revenues at the Turner segment increased primarily driven by higher Subscription and Advertising revenues. Revenues at the Home Box Office segment increased for the year ended December 31, 2013 due to higher Subscription revenues, partially offset by lower Content and other revenues. For the year ended December 31, 2013, Revenues at the Warner Bros. segment increased driven by higher Videogames and other and Theatrical product revenues, partially offset by lower Television product revenues.

Each of the segment’s revenue categories are discussed in greater detail in “Business Segment Results.”

Costs of Revenues.   Costs of revenues were $15.875 billion, $14.935 billion and $14.575 billion for the years ended December 31, 2014, 2013 and 2012, respectively. The increase for the year ended December 31, 2014 reflected increases across all of the segments. The increase for the year ended December 31, 2013 reflected increases at the Turner and Warner Bros. segments, partially offset by a decline at the Home Box Office segment.

Selling, General and Administrative Expenses.   Selling, general and administrative expenses were $5.190 billion, $4.934 billion and $4.813 billion for the years ended December 31, 2014, 2013 and 2012, respectively. The increase for the year ended December 31, 2014 primarily related to increases at the Turner segment and Corporate. In addition, for the year ended December 31, 2014, Selling, general and administrative expenses included a $173 million foreign currency charge related to the remeasurement of the Company’s net monetary assets denominated in Venezuelan currency resulting from a change in the foreign currency exchange rate used by the Company from the official rate to the SICAD 2 exchange rate. See “Recent Developments” for more information. The increase for the year ended December 31, 2013 primarily related to increases at the Home Box Office segment and Corporate.

Included in Costs of revenues and Selling, general and administrative expenses was depreciation expense of $531 million, $550 million and $553 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Amortization Expense.   Amortization expense was $202 million, $209 million and $212 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

45


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Restructuring and Severance Costs.   For the years ended December 31, 2014, 2013 and 2012, the Company incurred Restructuring and severance costs primarily related to employee terminations and other exit activities. Restructuring and severance costs are as follows (millions):

 

                                                        
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Turner

   $ 249       $ 93       $ 52   

Home Box Office

     63         39         15   

Warner Bros.

     169         49         23   

Corporate

     31                 
  

 

 

    

 

 

    

 

 

 

Total restructuring and severance costs

$ 512    $ 183    $ 92   
  

 

 

    

 

 

    

 

 

 

The total number of employees terminated across the segments for the years ended December 31, 2014, 2013 and 2012 was approximately 4,000, 1,000 and 1,000, respectively.

Operating Income.   Operating Income was $5.975 billion, $6.268 billion and $5.498 billion for the years ended December 31, 2014, 2013 and 2012, respectively. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $142 million of income, $73 million of income and $165 million of expense for the years ended December 31, 2014, 2013 and 2012, respectively, Operating Income decreased $362 million and increased $532 million in 2014 and 2013, respectively. The decrease in 2014 reflected decreases at the Turner and Warner Bros. segments and Corporate, partially offset by an increase at Home Box Office. The increase in 2013 reflected increases at the Turner, Home Box Office and Warner Bros. segments, partially offset by a decrease at Corporate. The segment variations are discussed under “Business Segment Results.”

Interest Expense, Net.   Interest expense, net was $1.169 billion, $1.189 billion and $1.251 billion for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease for the year ended December 31, 2014 reflected higher interest income of $92 million mainly related to a note receivable that was collected in March 2014 and the CME transactions in the second quarter of 2014 as well as lower average interest rates, partially offset by higher average debt balances. The decrease for the year ended December 31, 2013 reflected lower average interest rates and lower average debt balances as well as a reduction of $15 million of accrued interest related to legal contingencies.

Other Loss, Net.   Other loss, net detail is shown in the table below (millions):

 

                                                        
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Investment gains (losses), net

   $ 30       $ 61       $ (30)   

Amounts related to the separation of TWC

     (11)                 

Amounts related to the disposition of WMG

            (1)         (7)   

Amounts related to the separation of Time Inc.

                    

Items affecting comparability relating to equity method
investments

     (97)         (30)         (94)   

Loss from equity method investees

     (56)         (120)         (86)   

Other

            (24)         (1)   
  

 

 

    

 

 

    

 

 

 

Other loss, net

$ (127)    $ (111)    $ (214)   
  

 

 

    

 

 

    

 

 

 

Investment gains (losses), net, amounts related to the separation of TWC, amounts related to the disposition of WMG, amounts related to the separation of Time Inc. and items affecting comparability relating to equity method investments are discussed under “Transactions and Other Items Affecting Comparability.”

 

46


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

The remaining changes in Other loss, net for the year ended December 31, 2014 included lower net losses from equity method investees. The remaining changes in Other loss, net for the year ended December 31, 2013 reflected the absence of the 2012 adjustment to reduce a liability for deferred compensation and higher net losses from equity method investees.

Income Tax Provision.     Income tax provision was $785 million, $1.614 billion and $1.370 billion for the years ended December 31, 2014, 2013 and 2012, respectively. The Company’s effective tax rate was 17%, 32% and 34% for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in the effective tax rate in 2014 was primarily due to the recognition of a tax benefit attributable to the reversal of tax reserves in connection with a Federal tax settlement, which decreased the effective tax rate by 15% for the year ended December 31, 2014. The decrease in the effective tax rate in 2013 was primarily due to a decrease in tax reserves and the recognition of additional foreign tax credit carryovers, partially offset by additional U.S. tax on unremitted foreign earnings.

Income from Continuing Operations.     Income from continuing operations was $3.894 billion, $3.354 billion and $2.663 billion for the years ended December 31, 2014, 2013 and 2012, respectively. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $234 million of income, $47 million of income and $206 million of expense for the years ended December 31, 2014, 2013 and 2012, respectively, Income from continuing operations increased $353 million and $438 million in 2014 and 2013, respectively. The increase in 2014 primarily reflected lower income tax expense, partially offset by lower Operating Income. The increase in 2013 primarily reflected higher Operating Income, partially offset by higher income tax expense. Basic and diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders were $4.49 and $4.41, respectively, for the year ended December 31, 2014, $3.63 and $3.56, respectively, for the year ended December 31, 2013 and $2.77 and $2.73, respectively, for the year ended December 31, 2012.

Discontinued Operations, Net of Tax.     Discontinued operations, net of tax was $67 million of losses, $337 million of income and $259 million of income for the years ended December 31, 2014, 2013 and 2012, respectively. Basic and diluted loss per common share from discontinued operations attributable to Time Warner Inc. common shareholders were both $0.07 for the year ended December 31, 2014. Basic and diluted income per common share were both $0.36 for the year ended December 31, 2013 and $0.28 and $0.27, respectively, for the year ended December 31, 2012.

Net Loss Attributable to Noncontrolling Interests.     For the year ended December 31, 2012, Net loss attributable to noncontrolling interests was $3 million.

Net Income Attributable to Time Warner Inc. Shareholders.     Net income attributable to Time Warner Inc. shareholders was $3.827 billion, $3.691 billion and $2.925 billion for the years ended December 31, 2014, 2013 and 2012, respectively. Basic and Diluted net income per common share attributable to Time Warner Inc. common shareholders were $4.42 and $4.34, respectively, for the year ended December 31, 2014, $3.99 and $3.92, respectively, for the year ended December 31, 2013 and $3.05 and $3.00, respectively, for the year ended December 31, 2012.

 

47


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Business Segment Results

Turner.   Revenues and Operating Income of the Turner segment for the years ended December 31, 2014, 2013 and 2012 are as follows (millions):

 

                                                                                              
     Year Ended December 31,      % Change
     2014      2013      2012      2014 vs. 2013    2013 vs. 2012

Revenues:

              

Subscription

   $ 5,263       $ 4,896       $ 4,660       7%    5%

Advertising

     4,568         4,534         4,315       1%    5%

Content and other

     565         553         552       2%    -
  

 

 

    

 

 

    

 

 

       

Total revenues

  10,396      9,983      9,527    4% 5%

Costs of revenues (a)

  (5,102)      (4,382)      (4,168)    16% 5%

Selling, general and
administrative (a)

  (1,728)      (1,725)      (1,730)    - -

Gain on operating assets

  16          34    NM (94%)

Asset impairments

  (17)      (47)      (176)    (64%) (73%)

Venezuelan foreign currency
loss

  (137)            NM NM

Restructuring and severance
costs

  (249)      (93)      (52)    168% 79%

Depreciation

  (209)      (231)      (238)    (10%) (3%)

Amortization

  (16)      (21)      (25)    (24%) (16%)
  

 

 

    

 

 

    

 

 

       

Operating Income

$             2,954    $             3,486    $             3,172    (15%) 10%
  

 

 

    

 

 

    

 

 

       

 

 

(a)     Costs of revenues and Selling, general and administrative expenses exclude depreciation.

The components of Costs of revenues for the Turner segment are as follows (millions):

     Year Ended December 31,      % Change
     2014      2013      2012      2014 vs. 2013    2013 vs. 2012

Programming costs:

              

Originals and sports

   $ 3,069       $ 2,647       $ 2,498       16%    6%

Acquired films and
syndicated series

     1,213         946         890       28%    6%
  

 

 

    

 

 

    

 

 

       

Total programming costs

  4,282      3,593      3,388    19% 6%

Other direct operating costs

  820      789      780    4% 1%
  

 

 

    

 

 

    

 

 

       

Costs of revenues (a)

$             5,102    $             4,382    $             4,168    16% 5%
  

 

 

    

 

 

    

 

 

       

 

 

(a)     Costs of revenues exclude depreciation.

2014 vs. 2013

The increase in Subscription revenues for the year ended December 31, 2014 reflected higher domestic revenues of $298 million primarily due to higher rates, partially offset by lower subscribers and higher international revenues of $69 million mainly driven by growth in Latin America and the unfavorable impact of foreign exchange rates of approximately $50 million.

The increase in Advertising revenues for the year ended December 31, 2014 reflected domestic growth of $34 million, mainly driven by Turner’s domestic news business, partially offset by lower audience delivery and demand at its domestic entertainment networks. International advertising revenues were flat as growth was offset by the unfavorable impact of foreign exchange rates of approximately $25 million.

 

48


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

For the year ended December 31, 2014, Costs of revenues increased primarily due to programming charges of $526 million related to Turner’s decision following its strategic evaluation of its programming to no longer air certain programming. Excluding these charges, programming costs increased primarily due to higher originals and sports programming costs reflecting higher costs related to both the National Collegiate Athletic Association Division I Men’s Basketball Championship tournament (the “NCAA Tournament”) and the first year of a new agreement with Major League Baseball.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets, Venezuelan foreign currency loss and external costs related to mergers, acquisitions and dispositions for the year ended December 31, 2014 and 2013, which affected the comparability of the Turner segment’s results.

The results for the year ended December 31, 2014 included $249 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. The results for the year ended December 31, 2013 included $93 million of Restructuring and severance costs primarily related to employee severance actions.

The decrease in Operating Income for the year ended December 31, 2014 was primarily due to higher Costs of revenues, higher Restructuring and severance costs and the Venezuela foreign currency loss, partially offset by higher Revenues.

2013 vs. 2012

The increase in Subscription revenues for the year ended December 31, 2013 was primarily due to an increase in domestic subscription revenues of $197 million driven primarily by higher domestic rates as well as an increase in international subscription revenues of $39 million reflecting subscriber growth and the unfavorable impact of foreign exchange rates of approximately $50 million.

The increase in Advertising revenues for the year ended December 31, 2013 reflected domestic growth of $219 million driven by an increase at Turner’s domestic entertainment networks due to higher pricing and demand, which included higher demand for sports programming, primarily the NBA and the NCAA Tournament, partially offset by a decline at Turner’s domestic news networks primarily due to an unfavorable comparison to the 2012 U.S. presidential election.

Content and other revenues were flat primarily due to the absence of revenues from Turner’s TNT television operations in Turkey, which were shut down in the second quarter of 2012, offset by higher revenues from availabilities to SVOD services.

The increase in Costs of revenues for the year ended December 31, 2013 was primarily due to higher originals and sports programming costs, mainly due to higher costs for original series, as well as higher costs for acquired films and syndicated series. Programming costs for the year ended December 31, 2013 included $73 million of impairments related to certain programs, primarily syndicated series, that management has concluded will no longer be aired.

For the year ended December 31, 2013, Selling, general and administrative expenses were essentially flat mainly due to the absence of $18 million of exit and other costs related to the Imagine and TNT Turkey Shutdowns, partially offset by higher marketing expenses.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets and external costs related to mergers, acquisitions and dispositions for the years ended December 31, 2013 and 2012, which affected the comparability of the Turner segment’s results.

 

49


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

For the year ended December 31, 2013, Restructuring and severance costs increased due largely to higher severance costs.

The increase in Operating Income for the year ended December 31, 2013 was primarily due to higher Revenues and lower asset impairments, partially offset by higher Costs of revenues, higher Restructuring and severance costs and lower Gains on operating assets.

Home Box Office. Revenues and Operating Income of the Home Box Office segment for the years ended December 31, 2014, 2013 and 2012 are as follows (millions):

 

                                                                          
     Year Ended December 31,      % Change
     2014      2013      2012      2014 vs. 2013    2013 vs. 2012

Revenues:

              

Subscription

   $ 4,578       $ 4,231       $ 4,010       8%    6%

Content and other

     820         659         676       24%    (3%)
  

 

 

    

 

 

    

 

 

       

Total revenues

  5,398      4,890      4,686    10% 4%

Costs of revenues (a)

  (2,708)      (2,368)      (2,400)    14% (1%)

Selling, general and
administrative (a)

  (746)      (705)      (632)    6% 12%

Gain on operating assets

      113        (100%) NM

Asset impairments

  (4)            NM NM

Restructuring and severance
costs

  (63)      (39)      (15)    62% 160%

Depreciation

  (77)      (91)      (85)    (15%) 7%

Amortization

  (14)      (9)      (7)    56% 29%
  

 

 

    

 

 

    

 

 

       

Operating Income

$         1,786    $         1,791    $         1,547    16%
  

 

 

    

 

 

    

 

 

       

 

 

(a)     Costs of revenues and Selling, general and administrative expenses exclude depreciation.

The components of Costs of revenues for the Home Box Office segment are as follows (millions):

     Year Ended December 31,      % Change
     2014      2013      2012      2014 vs. 2013    2013 vs. 2012

Programming costs:

              

Acquired films and
syndicated series

   $ 1,007       $ 894       $ 885       13%    1%

Originals and sports

     960         856         856       12%   
  

 

 

    

 

 

    

 

 

       

Total programming costs

  1,967      1,750      1,741    12% 1%

Other direct operating costs

  741      618      659    20% (6%)
  

 

 

    

 

 

    

 

 

       

Costs of revenues (a)

$ 2,708    $ 2,368    $ 2,400    14% (1%)
  

 

 

    

 

 

    

 

 

       

 

 

(a)     Costs of revenues exclude depreciation.

2014 vs. 2013

The increase in Subscription revenues for the year ended December 31, 2014 was primarily due to higher domestic subscription revenues of $198 million driven mainly by higher contractual rates and higher revenues of $146 million at HBO Asia and HBO Nordic primarily due to their consolidations in September 2013 and June 2013, respectively.

The increase in Content and other revenues for the year ended December 31, 2014 was primarily due to higher worldwide licensing revenues from original programming of $116 million, primarily relating to the licensing of select original programming to an SVOD service, and higher home entertainment revenues of $71 million.

 

50


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

The increase in Costs of revenues for the year ended December 31, 2014 reflected higher programming and other direct operating costs. The increase in programming costs for the year ended December 31, 2014 was primarily due to higher acquired films and syndicated series programming costs, which included the consolidations of both HBO Asia and HBO Nordic, as well as higher originals and sports programming costs, reflecting higher costs for original series. The increase in other direct operating costs for the year ended December 31, 2014 was mainly due to higher participation expenses and the absence of a $31 million reduction to a receivable allowance recorded in 2013.

For the year ended December 31, 2014, Selling, general and administrative expenses increased due to higher expenses of $36 million at HBO Asia and HBO Nordic primarily due to their consolidations in 2013.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments and Gain (loss) on operating assets for the years ended December 31, 2014 and 2013, which affected the comparability of the Home Box Office segment’s results.

The results for the year ended December 31, 2014 included $63 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. The results for the year ended December 31, 2013 included $39 million of Restructuring and severance costs primarily related to executive severance costs.

The decrease in Operating Income for the year ended December 31, 2014 was primarily due to higher Costs of revenues, the impact of the $113 million gain on operating assets on the 2013 results and higher Selling, general and administrative expenses, partially offset by higher Revenues.

2013 vs. 2012

The increase in Subscription revenues for the year ended December 31, 2013 was primarily due to an increase in domestic subscription revenues of $165 million driven primarily by higher rates. In addition, the 2013 consolidations of HBO Asia and HBO Nordic contributed $48 million of Subscription revenues for the year ended December 31, 2013.

The decrease in Content and other revenues for the year ended December 31, 2013 was primarily due to lower home entertainment revenues mainly as a result of lower library sales.

The decrease in Costs of revenues for the year ended December 31, 2013 was primarily due to lower other direct operating costs mainly as a result of a reduction of a receivable allowance. Originals and sports programming costs for the year ended December 31, 2013 were flat as lower programming impairments were offset by higher costs for originals and sports programming. In addition, acquired films and syndicated series programming costs were essentially flat as costs associated with the consolidations of HBO Asia and HBO Nordic were largely offset by lower costs for acquired films.

For the year ended December 31, 2013, Selling, general and administrative expenses increased mainly due to higher domestic marketing expenses of $29 million, higher domestic employee-related costs of $17 million and $15 million of costs associated with the consolidations of HBO Asia and HBO Nordic.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Gain (loss) on operating assets for the years ended December 31, 2013 and 2012, which affected the comparability of the Home Box Office segment’s results.

For the year ended December 31, 2013, Restructuring and severance costs increased due largely to higher executive severance costs.

The increase in Operating Income for the year ended December 31, 2013 was primarily due to higher Revenues and Gains on operating assets, partially offset by higher Selling, general and administrative expenses.

 

51


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Warner Bros.   Revenues and Operating Income of the Warner Bros. segment for the years ended December 31, 2014, 2013 and 2012 are as follows (millions):

 

     Year Ended December 31,      % Change
     2014      2013      2012      2014 vs. 2013    2013 vs. 2012

Revenues:

              

Theatrical product

   $ 5,839       $ 6,119       $ 6,042       (5%)    1%

Television product

     5,099         4,690         4,832       9%    (3%)

Videogames and other

     1,588         1,503         1,144       6%    31%
  

 

 

    

 

 

    

 

 

       

Total revenues

  12,526      12,312      12,018    2% 2%

Costs of revenues (a)

  (8,906)      (8,674)      (8,503)    3% 2%

Selling, general and
administrative (a)

  (1,832)      (1,885)      (1,879)    (3%) -

Gain on operating assets

            17% NM

Asset impairments

  (41)      (7)      (4)    NM 75%

Venezuelan foreign currency
loss

  (36)            NM NM

Restructuring and severance
costs

  (169)      (49)      (23)    245% 113%

Depreciation

  (218)      (200)      (202)    9% (1%)

Amortization

  (172)      (179)      (180)    (4%) (1%)
  

 

 

    

 

 

    

 

 

       

Operating Income

$         1,159    $         1,324    $         1,228    (12%) 8%
  

 

 

    

 

 

    

 

 

       

 

 

 

(a)

Costs of revenues and Selling, general and administrative expenses exclude depreciation.

The components of theatrical product revenues (which is content made available for initial exhibition in theaters) and television product revenues (which is content made available for initial airing on television) for the years ended December 31, 2014, 2013 and 2012 are as follows (millions):

 

     Year Ended December 31,      % Change
     2014      2013      2012      2014 vs. 2013    2013 vs. 2012

Theatrical product:

              

Film rentals

   $ 1,969       $ 2,158       $ 1,894       (9%)    14%

Home video and electronic
delivery

     1,913         2,118         2,175       (10%)    (3%)

Television licensing

     1,686         1,652         1,746       2%    (5%)

Consumer products and other

     271         191         227       42%    (16%)
  

 

 

    

 

 

    

 

 

       

Total theatrical product

$ 5,839    $ 6,119    $ 6,042    (5%) 1%
  

 

 

    

 

 

    

 

 

       

Television product:

Television licensing

  4,121      3,628      3,652      14% (1%)

Home video and electronic
delivery

  584      719      787    (19%) (9%)

Consumer products and other

  394      343      393    15% (13%)
  

 

 

    

 

 

    

 

 

       

Total television product

$         5,099    $         4,690    $         4,832    9% (3%)
  

 

 

    

 

 

    

 

 

       

 

52


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

The components of Costs of revenues for the Warner Bros. segment are as follows (millions):

 

                                                      
     Year Ended December 31,      % Change
     2014      2013      2012        2014 vs. 2013        2013 vs. 2012  

Film and television production
costs

   $ 5,924       $ 5,620       $ 5,598        5%    

Print and advertising costs

     1,907         1,935         1,854       (1%)    4%

Other costs, including
merchandise and related costs

     1,075         1,119         1,051       (4%)    6%
  

 

 

    

 

 

    

 

 

       

Costs of revenues (a)

$         8,906    $         8,674    $         8,503     3%  2%
  

 

 

    

 

 

    

 

 

       

 

 

 

(a)

Costs of revenues exclude depreciation.

2014 vs. 2013

The increase in Revenues for the year ended December 31, 2014 included the net unfavorable impact of foreign exchange rates of approximately $100 million.

Theatrical product revenues from film rentals decreased for the year ended December 31, 2014, reflecting lower revenues of $215 million from theatrical films released during 2014 compared to 2013, partially offset by higher carryover revenues of $26 million from prior period releases. The Company released 22 and 18 theatrical films in 2014 and 2013, respectively.

For the year ended December 31, 2014, theatrical product revenues from home video and electronic delivery decreased due to lower revenues of $127 million from releases during 2014 compared to 2013 and lower revenues of $78 million from prior period releases, including catalog titles. There were 18 and 17 home video and electronic delivery releases in 2014 and 2013, respectively.

The increase in theatrical product revenues from consumer products and other reflected higher intellectual property licensing, including theme park licensing of the Harry Potter brands and characters.

Television product revenues from television licensing for the year ended December 31, 2014 increased primarily due to growth in television production reflecting additional series produced, including series produced by Eyeworks, as well as higher license fees from SVOD services, primarily internationally.

The decrease in television product revenues from home video and electronic delivery for the year ended December 31, 2014 was primarily due to continued declines in sales of DVDs and Blu-ray discs.

Television product revenues from consumer products and other increased for the year ended December 31, 2014 primarily due to an increase in Warner Bros.’ share of revenues from television series produced by third parties as well as an increase in the production of television series by Warner Bros. on behalf of third parties.

Videogames and other revenues increased for the year ended December 31, 2014 primarily due to $75 million of revenues from a patent license and settlement agreement.

Included in film and television production costs are production costs related to videogames, as well as theatrical film and videogame valuation adjustments resulting primarily from revisions to estimates of ultimate revenue and/or costs for certain theatrical films and videogames. Theatrical film valuation adjustments for the year ended December 31, 2014 and 2013 were $86 million and $51 million, respectively. Videogame valuation adjustments for the year ended December 31, 2014 and 2013 were $51 million and $53 million, respectively. The increase in film and television production costs for the year ended December 31, 2014 was primarily due to the performance and mix of product released.

 

53


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets, Venezuelan foreign currency loss and external costs related to mergers, acquisitions and dispositions for the years ended December 31, 2014 and 2013, which affected the comparability of the Warner Bros. segment’s results.

The results for the year ended December 31, 2014 included $169 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. The results for the year ended December 31, 2013 included $49 million of Restructuring and severance costs primarily related to executive severance costs.

The decrease in Operating Income for the year ended December 31, 2014 was primarily due to higher Costs of revenues and higher Restructuring and severance costs, partially offset by higher Revenues.

2013 vs. 2012

The increase in Revenues for the year ended December 31, 2013 included the net unfavorable impact of foreign exchange rates of approximately $110 million.

Theatrical product revenues from film rentals increased for the year ended December 31, 2013, reflecting higher revenues of $315 million from theatrical films released during 2013, partially offset by lower carryover revenues of $51 million from prior period releases. The Company released 18 and 17 theatrical films during 2013 and 2012, respectively.

For the year ended December 31, 2013, theatrical product revenues from home video and electronic delivery decreased due to lower revenues of $120 million from prior period releases, which include catalog titles, partially offset by higher revenues of $63 million from releases in 2013. There were 17 and 21 home video and electronic delivery releases in 2013 and 2012, respectively.

Theatrical product revenues from television licensing decreased for the year ended December 31, 2013 primarily due to fewer availabilities in 2013 as compared to 2012.

Television product revenues from television licensing for the year ended December 31, 2013 decreased due to the timing of worldwide television availabilities, partially offset by higher revenues from availabilities of television product to SVOD services.

The decrease in television product revenues from home video and electronic delivery for the year ended December 31, 2013 was primarily due to lower revenues from consumer packaged goods.

Videogames and other revenues increased for the year ended December 31, 2013 primarily due to higher revenues of $297 million from videogames released in 2013, partially offset by lower carryover revenues of $76 million from videogames released in prior periods. The Company released 10 videogames in both 2013 and 2012. In addition, the increase in Videogames and other revenues for the year ended December 31, 2013 reflected higher publishing and consumer products revenues.

Included in film and television production costs are production costs related to videogames, as well as theatrical film valuation adjustments resulting from revisions to estimates of ultimate revenue for certain theatrical films. Theatrical film valuation adjustments for the years ended December 31, 2013 and 2012 were $51 million and $92 million, respectively. Film and television production costs were essentially flat as higher costs for videogames, including impairments for certain videogame production costs, which were $53 million in 2013 and $7 million in 2012, were offset by lower theatrical film valuation adjustments and lower amortization costs for theatrical films. The increase in print and advertising costs was primarily due to the mix and quantity of theatrical films and videogames released. Other costs, including merchandise and related costs, increased primarily due to higher distribution costs associated with videogames and home video sales.

 

54


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets and external costs related to mergers, acquisitions and dispositions for the years ended December 31, 2013 and 2012, which affected the comparability of the Warner Bros. segment’s results.

The increase in Restructuring and severance costs for the year ended December 31, 2013 was primarily related to executive severance costs.

The increase in Operating Income for the year ended December 31, 2013 was primarily due to higher Revenues, partially offset by higher Costs of revenues and higher Restructuring and severance costs.

Corporate.     Operating Loss at Corporate for the years ended December 31, 2014, 2013 and 2012 was as follows (millions):

 

     Year Ended December 31,      % Change
     2014      2013      2012      2014 vs. 2013    2013 vs. 2012

Selling, general and
administrative (a)

   $ (449)       $ (403)       $ (332)       11%    21%

Curtailment

            38              (100%)   

Gain on operating assets

     441                10       NM    (20%)

Asset impairments

     (7)         (7)                

Restructuring and severance
costs

     (31)         (2)         (2)       NM   

Depreciation

     (27)         (28)         (28)       (4%)   
  

 

 

    

 

 

    

 

 

       

Operating Loss

$           (73)    $         (394)    $         (352)    (81%) 12%
  

 

 

    

 

 

    

 

 

       

 

 

 

(a)

Selling, general and administrative expenses exclude depreciation.

2014 vs. 2013

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain on operating assets, the Curtailment and external costs related to mergers, acquisitions and dispositions for the years ended December 31, 2014 and 2013, which affected the comparability of Corporate’s results.

The results for the year ended December 31, 2014 included $31 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives.

Excluding the transactions noted above, Operating Loss for the year ended December 31, 2014 increased primarily due to the absence of a benefit associated with a reduction in certain accrued employee benefit plan liabilities in 2013.

Selling, general and administrative expenses included costs related to enterprise efficiency initiatives of $43 million and $49 million for the years ended December 31, 2014 and 2013, respectively. The enterprise efficiency initiatives involve the centralization of certain administrative functions to generate cost savings or other benefits for the Company.

2013 vs. 2012

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets, the Curtailment and external costs related to mergers, acquisitions and dispositions for the years ended December 31, 2013 and 2012, which affected the comparability of Corporate’s results.

For the year ended December 31, 2013, Operating Loss increased due primarily to higher equity-based compensation expense of $26 million, which mainly reflected higher expenses for performance stock units due to an increase in the Company’s stock price and the Company’s expected performance relative to the award performance targets, higher external

 

55


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

costs related to mergers, acquisitions or dispositions of $25 million related to the separation of Time Inc. from Time Warner, higher compensation expense of $22 million and Asset impairments of $7 million, partially offset by the $38 million gain related to the Curtailment.

Selling, general and administrative expenses included costs related to the enterprise efficiency initiatives described above of $49 million and $48 million for the years ended December 31, 2013 and 2012, respectively.

FINANCIAL CONDITION AND LIQUIDITY

Management believes that cash generated by or available to the Company should be sufficient to fund its capital and liquidity needs for the foreseeable future, including scheduled debt repayments, quarterly dividend payments and the purchase of common stock under the Company’s stock repurchase program. Time Warner’s sources of cash include Cash provided by operations, Cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper program and access to capital markets. Time Warner’s unused committed capacity at December 31, 2014 was $7.637 billion, which included $2.618 billion of Cash and equivalents.

Current Financial Condition

At December 31, 2014, Time Warner had net debt of $19.876 billion ($22.494 billion of debt less $2.618 billion of Cash and equivalents) and $24.476 billion of Shareholders’ equity, compared to net debt of $18.311 billion ($20.127 billion of debt less $1.816 billion of Cash and equivalents) and $29.904 billion of Shareholders’ equity at December 31, 2013.

The following table shows the significant items contributing to the increase in net debt from December 31, 2013 to December 31, 2014 (millions):

 

Balance at December 31, 2013 (recast)

$ 18,311   

Cash provided by operations from continuing operations

  (3,681)   

Capital expenditures

  474   

Repurchases of common stock

  5,504   

Dividends paid to common stockholders

  1,109   

Investments and acquisitions, net of cash acquired

  980   

Proceeds from Time Inc. in the Time Separation

  (1,400)   

Proceeds from the sale of the Time Warner Center

  (1,264)   

Proceeds from the exercise of stock options

  (338)   

Other investment and sale proceeds

  (173)   

All other, net

  354   
  

 

 

 

Balance at December 31, 2014

$             19,876   
  

 

 

 

In connection with the Time Separation, the Company received $1.4 billion from Time Inc. consisting of proceeds from Time Inc.’s acquisition of the IPC publishing business in the U.K. from a wholly-owned subsidiary of Time Warner and a special dividend.

On June 13, 2014, Time Warner’s Board of Directors authorized up to $5.0 billion of share repurchases in addition to the $5.0 billion it had previously authorized for share repurchases beginning January 1, 2014. Purchases under the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions. From January 1, 2014 through February 20, 2015, the Company repurchased 82 million shares of common stock for $5.918 billion pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

 

56


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

On January 16, 2014, Time Warner sold the space it owned in Time Warner Center for approximately $1.3 billion and agreed to lease space in Time Warner Center from the buyer until early 2019. In connection with these transactions, the Company recognized a pretax gain of $441 million and a tax benefit of $58 million during 2014. Additionally, a pretax gain of approximately $325 million has been deferred and is being recognized ratably over the lease period. In February 2015, the Company entered into agreements relating to the construction and development of office and studio space in the Hudson Yards development on the west side of Manhattan in order to consolidate its Corporate headquarters and its New York City-based employees. Based on current construction cost and space projections, the Company expects to invest approximately $1.7 billion in the Hudson Yards development project over the next five years.

Cash Flows

Cash and equivalents increased by $802 million, including $190 million of Cash used by discontinued operations, for the year ended December 31, 2014. Cash and equivalents decreased by $944 million, including $468 million of Cash provided by discontinued operations for the year ended December 31, 2013. Components of these changes are discussed below in more detail.

Operating Activities from Continuing Operations

Details of Cash provided by operations from continuing operations are as follows (millions):

 

                                            
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Operating Income

   $ 5,975       $ 6,268       $ 5,498   

Depreciation and amortization

     733         759         765   

Venezuela foreign currency loss

     173                 

Net interest payments (a)

     (1,224)         (1,158)         (1,220)   

Net income taxes paid (b)

     (1,494)         (1,087)         (1,189)   

All other, net, including working capital changes

     (482)         (1,524)         (867)   
  

 

 

    

 

 

    

 

 

 

Cash provided by operations from continuing operations

$             3,681    $             3,258    $             2,987   
  

 

 

    

 

 

    

 

 

 

 

 

 

(a)

Includes interest income received of $50 million, $44 million and $42 million in 2014, 2013 and 2012, respectively.

(b)

Includes income tax refunds received of $108 million, $87 million and $78 million in 2014, 2013 and 2012, respectively, and income tax sharing payments to TWC of $6 million in 2012.

Cash provided by operations from continuing operations for the year ended December 31, 2014 increased primarily due to lower cash used by working capital, partially offset by higher net income taxes paid and lower Operating Income. Cash used by working capital decreased primarily due to the timing of restructuring and severance payments and lower participation payments.

Cash provided by operations for the year ended December 31, 2013 increased primarily due to higher Operating Income, lower net income taxes paid and lower net interest payments, partially offset by higher cash used by working capital, which primarily reflected higher participation payments and advances.

 

57


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Investing Activities from Continuing Operations

Details of Cash provided (used) by investing activities from continuing operations are as follows (millions):

 

                                                  
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Investments in available-for-sale securities

   $ (30)       $ (27)       $ (37)   

Investments and acquisitions, net of cash acquired:

        

CME

     (396)         (288)         (171)   

Eyeworks

     (267)                 

Bleacher Report

                   (170)   

All other

     (287)         (207)         (319)   

Capital expenditures

     (474)         (568)         (609)   

Proceeds from available-for-sale securities

     25         33          

Proceeds from Time Inc. in the Time Separation

     1,400                 

Proceeds from the sale of Time Warner Center

     1,264                 

Other investment proceeds

     148                        170                          85   
  

 

 

    

 

 

    

 

 

 

Cash provided (used) by investing activities

$             1,383    $ (887)    $ (1,220)   
  

 

 

    

 

 

    

 

 

 

The change in Cash provided (used) by investing activities from continuing operations for the year ended December 31, 2014 was primarily due to cash received in connection with the Time Separation and proceeds from the sale of space in Time Warner Center, partially offset by higher investments and acquisition spending. Included in Investments and acquisitions, net for the year ended December 31, 2014 is $102 million of payments related to the Company’s plan to move its Corporate headquarters and its New York City-based employees to the Hudson Yards development on the west side of Manhattan.

Cash used by investing activities for the year ended December 31, 2013 decreased primarily due to lower investments and acquisitions spending and higher other investment and sale proceeds, including the sale of the Company’s investment in a theater joint venture in Japan.

Financing Activities from Continuing Operations

Details of Cash used by financing activities from continuing operations are as follows (millions):

 

                                                  
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Borrowings

   $             2,409       $             1,028       $             1,039   

Debt repayments

     (72)         (762)         (686)   

Proceeds from the exercise of stock options

     338         674         1,107   

Excess tax benefit from equity instruments

     179         179         83   

Principal payments on capital leases

     (11)         (9)         (11)   

Repurchases of common stock

     (5,504)         (3,708)         (3,272)   

Dividends paid

     (1,109)         (1,074)         (1,011)   

Other financing activities

     (173)         (111)         (80)   
  

 

 

    

 

 

    

 

 

 

Cash used by financing activities

$ (3,943)    $ (3,783)    $ (2,831)   
  

 

 

    

 

 

    

 

 

 

Cash used by financing activities from continuing operations for the year ended December 31, 2014 increased primarily due to higher Repurchases of common stock and lower Proceeds from the exercise of stock options, partially offset by an increase in Borrowings and lower Debt repayments. During the year ended December 31, 2014, the Company issued

 

58


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

approximately 10 million shares of common stock and received $338 million in connection with the exercise of stock options. At December 31, 2014, all of the approximately 22 million exercisable stock options outstanding on such date had exercise prices below the closing price of the Company’s common stock on the New York Stock Exchange.

Cash used by financing activities for the year ended December 31, 2013 increased primarily due to higher Repurchases of common stock and lower Proceeds from the exercise of stock options. During the year ended December 31, 2013, the Company issued approximately 20 million shares of common stock and received $674 million in connection with the exercise of stock options.

Cash Flows from Discontinued Operations

Details of Cash provided (used) by discontinued operations are as follows (millions):

 

                                                  
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Cash provided (used) by operations from discontinued operations

   $ (16)       $ 456       $ 455   

Cash used by investing activities from discontinued operations

     (51)         (23)         (26)   

Cash used by financing activities from discontinued operations

     (36)                  

Effect of change in cash and equivalents of discontinued operations

     (87)         35         14   
  

 

 

    

 

 

    

 

 

 

Cash provided (used) by discontinued operations

$ (190)    $ 468    $ 443   
  

 

 

    

 

 

    

 

 

 

Outstanding Debt and Other Financing Arrangements

Outstanding Debt and Committed Financial Capacity

At December 31, 2014, Time Warner had total committed capacity, defined as maximum available borrowings under various existing debt arrangements and cash and short-term investments, of $30.159 billion. Of this committed capacity, $7.637 billion was unused and $22.494 billion was outstanding as debt. At December 31, 2014, total committed capacity, outstanding letters of credit, outstanding debt and total unused committed capacity were as follows (millions):

 

                                                                   
     Committed
Capacity  (a)
     Letters of
Credit (b)
     Outstanding
Debt (c)
     Unused
Committed
Capacity
 

Cash and equivalents

   $ 2,618       $      $      $ 2,618   

Revolving credit facilities and commercial
paper program (d)

     5,000                         5,000   

Fixed-rate public debt

     21,920                 21,920           

Other obligations (e)

     621         28         574         19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 30,159    $ 28    $ 22,494    $ 7,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(a)  

The revolving credit facilities, commercial paper program and public debt of the Company rank pari passu with the senior debt of the respective obligors thereon. The weighted average maturity of the Company’s outstanding debt and other financing arrangements was 13.2 years as of December 31, 2014.

(b)  

Represents the portion of committed capacity, including from bilateral letter of credit facilities, reserved for outstanding and undrawn letters of credit.

(c)  

Represents principal amounts adjusted for premiums and discounts. At December 31, 2014, the principal amounts of the Company’s publicly issued debt mature as follows: $1.000 billion in 2015, $1.150 billion in 2016, $500 million in 2017, $600 million in 2018, $650 million in 2019 and $18.131 billion thereafter. In the period after 2019, no more than $2.0 billion will mature in any given year.

(d)  

The revolving credit facilities consist of two $2.5 billion revolving credit facilities. The Company may issue unsecured commercial paper notes up to the amount of the unused committed capacity under the revolving credit facilities.

(e)  

Unused committed capacity includes committed financings of subsidiaries under local bank credit agreements. Other debt obligations totaling $118 million are due within the next twelve months.

 

59


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

2014 Debt Offering

On May 20, 2014, Time Warner issued $2.0 billion aggregate principal amount of debt securities from its shelf registration statement, consisting of $650 million aggregate principal amount of 2.10% Notes due 2019, $750 million aggregate principal amount of 3.55% Notes due 2024 and $600 million aggregate principal amount of 4.65% Debentures due 2044.

Revolving Credit Facilities

On December 18, 2014, Time Warner amended its $5.0 billion of senior unsecured credit facilities (the “Revolving Credit Facilities”), which consist of two $2.5 billion revolving credit facilities, to extend the maturity dates of both from December 18, 2018 to December 18, 2019 pursuant to a First Amendment, dated as of December 18, 2014, to the amended and restated credit agreement, dated as of January 19, 2011, as amended and restated as of December 18, 2013.

The funding commitments under the Revolving Credit Facilities are provided by a geographically diverse group of 19 major financial institutions based in countries including Canada, France, Germany, Japan, Spain, Switzerland, the United Kingdom and the U.S. In addition, 17 of these financial institutions have been identified by international regulators as among the 30 financial institutions that they deem to be systemically important. None of the financial institutions in the Revolving Credit Facilities account for more than 8% of the aggregate undrawn loan commitments.

Commercial Paper Program

The Company has a commercial paper program, which was established on February 16, 2011 on a private placement basis, under which Time Warner may issue unsecured commercial paper notes up to a maximum aggregate amount not to exceed the unused committed capacity under the Revolving Credit Facilities, which support the commercial paper program.

Additional Information

The obligations of each of the borrowers under the Revolving Credit Facilities and the obligations of Time Warner under the commercial paper program and the Company’s outstanding publicly issued debt are directly or indirectly guaranteed on an unsecured basis by Historic TW Inc., Home Box Office and Turner (other than $2 billion of debt publicly issued by Time Warner in 2006, which is not guaranteed by Home Box Office). See Note 8, “Long-Term Debt and Other Financing Arrangements,” to the accompanying consolidated financial statements for additional information regarding the Company’s outstanding debt and other financing arrangements, including certain information about maturities, interest rates, covenants, rating triggers and bank credit agreement leverage ratios relating to such debt and financing arrangements.

Contractual and Other Obligations

Contractual Obligations

In addition to the financing arrangements discussed above, the Company has obligations under certain contractual arrangements to make future payments for goods and services. These contractual obligations secure the future rights to various assets and services to be used in the normal course of operations. For example, the Company is contractually committed to make certain minimum lease payments for the use of property under operating lease agreements. In accordance with applicable accounting rules, the future rights and obligations pertaining to certain firm commitments, such as operating lease obligations and certain purchase obligations under contracts, are not reflected as assets or liabilities in the accompanying Consolidated Balance Sheet.

 

60


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

The following table summarizes the Company’s aggregate contractual obligations at December 31, 2014, and the estimated timing and effect that such obligations are expected to have on the Company’s liquidity and cash flows in future periods (millions):

 

                                                                          
Contractual Obligations (a)(b)(c)                                   
     Total      2015      2016-2017      2018-2019      Thereafter  

Purchase obligations:

              

Network programming obligations (d)

   $ 24,982       $ 2,675       $ 5,054       $ 5,094       $ 12,159   

Creative talent and employment agreements (e)

     1,874         1,211         626         31          

Other purchase obligations (f)

     1,324         591         351         182         200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchase obligations

  28,180      4,477      6,031      5,307      12,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding debt obligations (Note 8)

  22,553      1,108      1,689      1,625      18,131   

Interest (Note 8)

  18,756      1,270      2,426      2,228      12,832   

Capital lease obligations (Note 8)

  62      13      20      17      12   

Operating lease obligations (Note 16)

  1,480      317      593      384      186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

$     71,031    $       7,185    $     10,759    $       9,561    $     43,526   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(a)  

The table does not include the effects of arrangements that are contingent in nature such as guarantees and other contingent commitments (Note 16).

(b)  

The table does not include the Company’s reserve for uncertain tax positions and related accrued interest and penalties, which at December 31, 2014 totaled $1.663 billion, as the specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty.

(c)  

The references to Note 8 and Note 16 refer to the notes to the accompanying consolidated financial statements.

(d)  

The Turner segment enters into contracts to license sports programming to carry on its television networks. The amounts in the table include minimum payment obligations to sports leagues and organizations (e.g., NBA, NCAA, MLB) to air the programming over the contract period. Included in the table is $11.1 billion payable to the NBA over the 10 years remaining on its agreements, $7.9 billion payable to the NCAA over the 10 years remaining on the agreement, which does not include amounts recoupable from CBS, and $2.3 billion payable to MLB over the 7 years remaining on the agreement. The Turner and Home Box Office segments also enter into licensing agreements with certain production studios to acquire the rights to air motion pictures and television series. The pricing structures in these contracts differ in that some agreements require a fixed amount per film or television series and others are based on a percentage of the film’s box office receipts (with license fees generally capped at specified amounts), or a combination of both. The amounts included in the table represent obligations for television series and films that had been released theatrically as of December 31, 2014 and are calculated using the actual or estimated box office performance or fixed amounts, based on the applicable agreement.

(e)  

The Company’s commitments under creative talent and employment agreements include obligations to executives, actors, producers, writers, and other talent under contractual arrangements, including union contracts and contracts with other organizations that represent such creative talent.

(f)  

Other purchase obligations principally include: (1) advertising, marketing, distribution and sponsorship obligations, including minimum guaranteed royalty and marketing payments to vendors and content providers; (2) obligations related to the Company’s postretirement and unfunded defined benefit pension plans; (3) purchases of DVD and Blu-ray Discs pursuant to a duplication and replication agreement; (4) obligations to purchase information technology licenses and services; (5) obligations related to payments to the NCAA for Basketball Fan Festival rights at the Turner segment; and (6) obligations to purchase general and administrative items and services.

The Company’s material contractual obligations at December 31, 2014 include:

 

   

Purchase obligations — represents an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts do not represent all anticipated purchases, but represent only those purchases the Company is contractually obligated to make. The Company also purchases products and services as needed, with no firm commitment. For this reason, the amounts presented in the table alone do not provide a reliable indication of all of the Company’s expected future cash outflows. For purposes of identifying and accumulating purchase obligations, all material contracts meeting the definition of a purchase obligation have been included. For those contracts involving a fixed or minimum quantity, but with variable pricing terms, the Company has estimated the contractual obligation based on its best estimate of the pricing that will be in effect at the time the obligation is incurred. Additionally, the Company has included only the obligations under the contracts as they existed at December 31, 2014, and has not assumed that the

 

61


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

 

contracts will be renewed or replaced at the end of their respective terms. If a contract includes a penalty for non-renewal, the Company has included that penalty, assuming it will be paid in the period after the contract expires. If Time Warner can unilaterally terminate an agreement simply by providing a certain number of days notice or by paying a termination fee, the Company has included the amount of the termination fee or the amount that would be paid over the “notice period.” Contracts that can be unilaterally terminated without incurring a penalty have not been included.

 

   

Outstanding debt obligations — represents the principal amounts due on outstanding debt obligations as of December 31, 2014. Amounts do not include any fair value adjustments, bond premiums, discounts, interest payments or dividends.

 

   

Interest — represents amounts due based on the outstanding debt balances, interest rates and maturity schedules of the respective instruments as of December 31, 2014. The amount of interest ultimately paid on these instruments may differ based on changes in interest rates.

 

   

Capital lease obligations — represents the minimum lease payments under noncancelable capital leases, primarily for certain transponder leases at the Home Box Office and Turner segments.

 

   

Operating lease obligations — represents the minimum lease payments under noncancelable operating leases, primarily for the Company’s real estate and operating equipment.

Most of the Company’s other long-term liabilities reflected in the accompanying Consolidated Balance Sheet have been included in Network programming obligations in the contractual obligations table above, the most significant of which is an approximate $960 million liability for film licensing obligations. However, certain long-term liabilities and deferred credits have been excluded from the table because there are no cash outflows associated with them (e.g., deferred revenue) or because the cash outflows associated with them are uncertain or do not meet the definition of a purchase obligation (e.g., deferred taxes and tax reserves, participations and royalties, deferred compensation and other miscellaneous items).

Contingent Commitments

The Company has certain contractual arrangements that require it to make payments or provide funding if certain circumstances occur. See Note 16, “Commitments and Contingencies,” to the accompanying consolidated financial statements for further discussion.

Customer Credit Risk

Customer credit risk represents the potential for financial loss if a customer is unwilling or unable to meet its agreed upon contractual payment obligations. Credit risk in the Company’s businesses originates from sales of various products or services and is dispersed among many different counterparties. At December 31, 2014, no single customer had a receivable balance greater than 5% of total Receivables. The Company’s exposure to customer credit risk is largely concentrated in the following categories (amounts presented below are net of reserves and allowances):

 

   

Various retailers for home entertainment product of approximately $0.7 billion;

   

Various television network operators for licensed TV and film product of approximately $4.3 billion;

   

Various cable system operators, satellite service distributors, telephone companies and other distributors for the distribution of television programming services of approximately $1.7 billion; and

   

Various advertisers and advertising agencies related to advertising services of approximately $1.0 billion.

For additional information regarding Time Warner’s accounting policies relating to customer credit risk, refer to Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements.

 

62


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

MARKET RISK MANAGEMENT

Market risk is the potential gain/loss arising from changes in market rates and prices, such as interest rates, foreign currency exchange rates and changes in the market value of financial instruments.

Interest Rate Risk

Time Warner has issued fixed-rate debt that at December 31, 2014 and 2013 had an outstanding balance of $21.920 billion and $19.905 billion, respectively, and an estimated fair value of $26.171 billion and $22.659 billion, respectively. Based on Time Warner’s fixed-rate debt obligations outstanding at December 31, 2014, a 25 basis point increase or decrease in the level of interest rates would decrease or increase, respectively, the fair value of the fixed-rate debt by approximately $580 million. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of fixed-rate debt and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period.

At December 31, 2014 and 2013, the Company had a cash balance of $2.618 billion and $1.816 billion, respectively, which is primarily invested in short-term variable-rate interest-earning assets. Based on Time Warner’s short-term variable-rate interest-earning assets outstanding at December 31, 2014, a 25 basis point increase or decrease in the level of interest rates would have an insignificant impact on pretax income.

Foreign Currency Risk

Time Warner principally uses foreign exchange contracts to hedge the risk related to unremitted or forecasted royalties and license fees owed to Time Warner domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad because such amounts may be adversely affected by changes in foreign currency exchange rates. Similarly, the Company enters into foreign exchange contracts to hedge certain film production costs denominated in foreign currencies as well as other transactions, assets and liabilities denominated in foreign currencies. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a portion of its foreign currency exposures anticipated over a rolling twelve-month period. The hedging period for royalties and license fees covers revenues expected to be recognized during the calendar year; however, there is often a lag between the time that revenue is recognized and the transfer of foreign-denominated cash to U.S. dollars. To hedge this exposure, Time Warner uses foreign exchange contracts that generally have maturities of three months to eighteen months and provide continuing coverage throughout the hedging period. At December 31, 2014 and 2013, Time Warner had contracts for the sale and the purchase of foreign currencies at fixed rates as summarized below by currency (millions):

 

                                                           
     December 31, 2014      December 31, 2013  
     Sales      Purchases      Sales      Purchases  

British pound

   $ 1,115       $ 920       $ 1,013       $ 580   

Euro

     738         466         481         468   

Canadian dollar

     651         350         569         332   

Australian dollar

     355         211         410         178   

Other

     481         187         591         253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$             3,340    $             2,134    $             3,064    $             1,811   
  

 

 

    

 

 

    

 

 

    

 

 

 

Based on the foreign exchange contracts outstanding at December 31, 2014, a 10% devaluation of the U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at December 31, 2014 would result in a decrease of approximately $121 million in the value of such contracts. Conversely, a 10% appreciation of the U.S. dollar would result in an increase of approximately $121 million in the value of such contracts. For a hedge of forecasted royalty or license fees denominated in a foreign currency, consistent with the nature of the economic hedge provided by such foreign

 

63


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

exchange contracts, unrealized gains or losses largely would be offset by corresponding decreases or increases, respectively, in the dollar value of future foreign currency royalty and license fee payments. See Note 7, “Derivative Instruments,” to the accompanying consolidated financial statements for additional information.

Equity Risk

The Company is exposed to market risk as it relates to changes in the market value of its investments. The Company invests in equity instruments of public and private companies for operational and strategic business purposes. These securities are subject to significant fluctuations in fair market value due to the volatility of the stock markets and the industries in which the companies operate. At December 31, 2014 and 2013, these securities, which are classified in Investments, including available-for-sale securities in the accompanying Consolidated Balance Sheet, included $898 million and $936 million, respectively, of investments accounted for using the equity method of accounting, $263 million and $332 million, respectively, of cost-method investments, $605 million and $645 million, respectively, of investments related to the Company’s deferred compensation program, $79 million and $96 million, respectively, of investments in available-for-sale securities and $242 million and $0, respectively, of investments in warrants to purchase common stock of CME.

The potential loss in fair value resulting from a 10% adverse change in the prices of the Company’s equity-method investments, cost-method investments, available-for-sale securities and investments in warrants would be approximately $150 million. The potential loss in fair value resulting from a 10% adverse change in the prices of certain of the Company’s deferred compensation investments accounted for as trading securities would be approximately $25 million. While Time Warner has recognized all declines that are believed to be other-than-temporary, it is reasonably possible that individual investments in the Company’s portfolio may experience an other-than-temporary decline in value in the future if the underlying investee company experiences poor operating results or the U.S. or certain foreign equity markets experience declines in value.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management considers an accounting policy to be critical if it is important to the Company’s financial condition and results of operations and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by the management of Time Warner, and the related disclosures have been reviewed with the Audit and Finance Committee of the Board of Directors of the Company. The Company considers policies relating to the following matters to be critical accounting policies:

 

   

Impairment of Goodwill and Intangible Assets;

   

Film and Television Production Cost Recognition, Participations and Residuals and Impairments;

   

Gross versus Net Revenue Recognition;

   

Sales Returns and Pricing Rebates; and

   

Income Taxes.

For a discussion of each of the Company’s critical accounting policies, including information and analysis of estimates and assumptions involved in their application, and other significant accounting policies, see Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial

 

64


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

performance. Examples of forward-looking statements in this report include, but are not limited to, statements regarding (i) the adequacy of the Company’s liquidity to meet its needs for the foreseeable future and (ii) the Company’s expected investment in the Hudson Yards development over the next five years.

The Company’s forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:

 

   

recent and future changes in technology, services and standards, including, but not limited to, alternative methods for the delivery, storage and consumption of digital media and evolving home entertainment formats;

   

changes in consumer behavior, including changes in spending behavior and changes in when, where and how digital content is consumed;

   

the popularity of the Company’s content;

   

changes in the Company’s plans, initiatives and strategies, and consumer acceptance thereof;

   

changes in the plans, initiatives and strategies of the third parties that distribute, license and/or sell Time Warner’s content;

   

competitive pressures, including as a result of audience fragmentation and changes in technology;

   

the Company’s ability to deal effectively with economic slowdowns or other economic or market difficulties;

   

changes in advertising market conditions or advertising expenditures due to, among other things, economic conditions, changes in consumer behavior, pressure from public interest groups, changes in laws and regulations and other societal or political developments;

   

piracy and the Company’s ability to exploit and protect its intellectual property rights in and to its content and other products;

   

lower than expected valuations associated with the cash flows and revenues at Time Warner’s reporting units, which could result in Time Warner’s inability to realize the value recorded for intangible assets and goodwill at those reporting units;

   

increased volatility or decreased liquidity in the capital markets, including any limitation on the Company’s ability to access the capital markets for debt securities, refinance its outstanding indebtedness or obtain bank financings on acceptable terms;

   

the effects of any significant acquisitions, dispositions and other similar transactions by the Company;

   

the failure to achieve the anticipated benefits of the Company’s cost reduction initiatives;

   

the failure to meet earnings expectations;

   

the adequacy of the Company’s risk management framework;

   

changes in U.S. GAAP or other applicable accounting policies;

   

the impact of terrorist acts, hostilities, natural disasters (including extreme weather) and pandemic viruses;

   

a disruption or failure of the Company’s or its vendors’ network and information systems or other technology relied on by the Company;

   

the effect of union or labor disputes or professional sports league player lockouts;

   

changes in tax, federal communication and other laws and regulations;

   

currency exchange restrictions and currency devaluation risks in some foreign countries;

   

changes in foreign exchange rates; and

   

the other risks and uncertainties detailed in Part I, Item 1A. “Risk Factors,” in this report.

Any forward-looking statement made by the Company in this report speaks only as of the date on which it is made. The Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

65


Table of Contents
Index to Financial Statements

TIME WARNER INC.

CONSOLIDATED BALANCE SHEET

(millions, except share amounts)

 

                             
     December 31,
2014
     December 31,
2013
 
            (recast)  

ASSETS

     

Current assets

     

Cash and equivalents

   $ 2,618       $ 1,816   

Receivables, less allowances of $1,152 and $1,383

     7,720         7,305   

Inventories

     1,700         1,648   

Deferred income taxes

     184         369   

Prepaid expenses and other current assets

     958         559   

Current assets of discontinued operations

             834   
  

 

 

    

 

 

 

Total current assets

  13,180      12,531   

Noncurrent inventories and theatrical film and television production costs

  6,841      7,016   

Investments, including available-for-sale securities

  2,326      2,009   

Property, plant and equipment, net

  2,655      3,291   

Intangible assets subject to amortization, net

  1,141      1,338   

Intangible assets not subject to amortization

  7,032      7,043   

Goodwill

  27,565      27,401   

Other assets

  2,519      2,458   

Noncurrent assets of discontinued operations

       4,912   
  

 

 

    

 

 

 

Total assets

$ 63,259    $ 67,999   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

Current liabilities

Accounts payable and accrued liabilities

$ 7,507    $ 6,754   

Deferred revenue

  579      542   

Debt due within one year

  1,118      66   

Current liabilities of discontinued operations

       1,026   
  

 

 

    

 

 

 

Total current liabilities

  9,204      8,388   

Long-term debt

  21,376      20,061   

Deferred income taxes

  2,204      2,287   

Deferred revenue

  315      351   

Other noncurrent liabilities

  5,684      6,324   

Noncurrent liabilities of discontinued operations

       684   

Commitments and Contingencies (Note 16)

Equity

Common stock, $0.01 par value, 1.652 billion and 1.652 billion shares
issued and 832 million and 895 million shares outstanding

  17      17   

Additional paid-in capital

  149,282      153,410   

Treasury stock, at cost (820 million and 757 million shares)

  (42,445)      (37,630)   

Accumulated other comprehensive loss, net

  (1,164)      (852)   

Accumulated deficit

  (81,214)      (85,041)   
  

 

 

    

 

 

 

Total Time Warner Inc. shareholders’ equity

  24,476      29,904   

Noncontrolling interests

         
  

 

 

    

 

 

 

Total equity

  24,476      29,904   
  

 

 

    

 

 

 

Total liabilities and equity

$             63,259    $             67,999   
  

 

 

    

 

 

 

See accompanying notes.

 

66


Table of Contents
Index to Financial Statements

TIME WARNER INC.

CONSOLIDATED STATEMENT OF OPERATIONS

Year Ended December 31,

(millions, except per share amounts)

 

                                            
     2014      2013      2012  
            (recast)      (recast)  

Revenues

     27,359         26,461         25,325   

Costs of revenues

     (15,875)         (14,935)         (14,575)   

Selling, general and administrative

     (5,190)         (4,934)         (4,813)   

Amortization of intangible assets

     (202)         (209)         (212)   

Restructuring and severance costs

     (512)         (183)         (92)   

Asset impairments

     (69)         (61)         (180)   

Gain on operating assets, net

     464         129         45   
  

 

 

    

 

 

    

 

 

 

Operating income

  5,975      6,268      5,498   

Interest expense, net

  (1,169)      (1,189)      (1,251)   

Other loss, net

  (127)      (111)      (214)   
  

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

  4,679      4,968      4,033   

Income tax provision

  (785)      (1,614)      (1,370)   
  

 

 

    

 

 

    

 

 

 

Income from continuing operations

  3,894      3,354      2,663   

Discontinued operations, net of tax

  (67)      337      259   
  

 

 

    

 

 

    

 

 

 

Net income

  3,827      3,691      2,922   

Less Net loss attributable to noncontrolling interests

             
  

 

 

    

 

 

    

 

 

 

Net income attributable to Time Warner Inc. shareholders

$ 3,827    $ 3,691    $ 2,925   
  

 

 

    

 

 

    

 

 

 

Amounts attributable to Time Warner Inc. shareholders:

Income from continuing operations

$ 3,894    $ 3,354    $ 2,666   

Discontinued operations, net of tax

  (67)      337      259   
  

 

 

    

 

 

    

 

 

 

Net income

$ 3,827    $ 3,691    $ 2,925   
  

 

 

    

 

 

    

 

 

 

Per share information attributable to Time Warner Inc.
common shareholders:

Basic income per common share from continuing operations

$ 4.49    $ 3.63    $ 2.77   

Discontinued operations

  (0.07)      0.36      0.28   
  

 

 

    

 

 

    

 

 

 

Basic net income per common share

$ 4.42    $ 3.99    $ 3.05   
  

 

 

    

 

 

    

 

 

 

Average basic common shares outstanding

  863.3      920.0      954.4   
  

 

 

    

 

 

    

 

 

 

Diluted income per common share from continuing operations

$ 4.41    $ 3.56    $ 2.73   

Discontinued operations

  (0.07)      0.36      0.27   
  

 

 

    

 

 

    

 

 

 

Diluted net income per common share

$ 4.34    $ 3.92    $ 3.00   
  

 

 

    

 

 

    

 

 

 

Average diluted common shares outstanding

  882.6      942.6      976.3   
  

 

 

    

 

 

    

 

 

 

Cash dividends declared per share of common stock

$ 1.27    $ 1.15    $ 1.04   
  

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

67


Table of Contents
Index to Financial Statements

TIME WARNER INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year Ended December 31,

(millions)

 

                                            
     2014      2013      2012  

Net income

   $ 3,827       $ 3,691       $ 2,922   

Other comprehensive income, net of tax:

        

Foreign currency translation:

        

Unrealized gains (losses) occurring during the period

     (228)         (22)         51   

Reclassification adjustment for (gains) losses realized in
net income

             (6)         10   
  

 

 

    

 

 

    

 

 

 

Change in foreign currency translation

  (228)      (28)      61   
  

 

 

    

 

 

    

 

 

 

Securities:

Unrealized gains (losses) occurring during the period

  (4)      13       

Reclassification adjustment for gains realized in net income

  (10)             
  

 

 

    

 

 

    

 

 

 

Change in securities

  (14)      13       

Benefit obligations:

Unrealized gains (losses) occurring during the period

  (187)      124      (206)   

Reclassification adjustment for losses realized in net income

  19      22      18   
  

 

 

    

 

 

    

 

 

 

Change in benefit obligations

  (168)      146      (188)   
  

 

 

    

 

 

    

 

 

 

Derivative financial instruments:

Unrealized gains occurring during the period

      27       

Reclassification adjustment for gains realized in
net income

  (14)      (21)      (1)   
  

 

 

    

 

 

    

 

 

 

Change in derivative financial instruments

  (6)           
  

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

  (416)      137      (124)   
  

 

 

    

 

 

    

 

 

 

Comprehensive income

  3,411      3,828      2,798   

Less Comprehensive loss attributable to noncontrolling interests

             
  

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to Time Warner Inc. shareholders

$         3,411    $         3,828    $         2,801   
  

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

68


Table of Contents
Index to Financial Statements

TIME WARNER INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31,

(millions)

                                      
     2014      2013      2012  
            (recast)      (recast)  

OPERATIONS

        

Net income

   $ 3,827       $ 3,691       $ 2,922   

Less Discontinued operations, net of tax

     67         (337)         (259)   
  

 

 

    

 

 

    

 

 

 

Net income from continuing operations

  3,894      3,354      2,663   

Adjustments for noncash and nonoperating items:

Depreciation and amortization

  733      759      765   

Amortization of film and television costs

  8,040      7,262      7,210   

Asset impairments

  69      61      180   

Venezuelan foreign currency loss

  173             

Gain on investments and other assets, net

  (464)      (65)      (10)   

Equity in losses of investee companies, net of cash distributions

  232      216      221   

Equity-based compensation

  219      238      195   

Deferred income taxes

  166      759      (161)   

Changes in operating assets and liabilities, net of acquisitions:

Receivables

  (403)      (434)      (433)   

Inventories and film costs

  (7,789)      (7,226)      (7,564)   

Accounts payable and other liabilities

  592      (416)      58   

Other changes

  (1,781)      (1,250)      (137)   
  

 

 

    

 

 

    

 

 

 

Cash provided by operations from continuing operations

  3,681      3,258      2,987   
  

 

 

    

 

 

    

 

 

 

INVESTING ACTIVITIES

Investments in available-for-sale securities

  (30)      (27)      (37)   

Investments and acquisitions, net of cash acquired

  (950)      (495)      (660)   

Capital expenditures

  (474)      (568)      (609)   

Investment proceeds from available-for-sale securities

  25      33       

Proceeds from Time Inc. in the Time Separation

  1,400             

Proceeds from the sale of Time Warner Center

  1,264             

Other investment proceeds

  148      170      85   
  

 

 

    

 

 

    

 

 

 

Cash provided (used) by investing activities from continuing operations

  1,383      (887)      (1,220)   
  

 

 

    

 

 

    

 

 

 

FINANCING ACTIVITIES

Borrowings

  2,409      1,028      1,039   

Debt repayments

  (72)      (762)      (686)   

Proceeds from exercise of stock options

  338      674      1,107   

Excess tax benefit from equity instruments

  179      179      83   

Principal payments on capital leases

  (11)      (9)      (11)   

Repurchases of common stock

  (5,504)      (3,708)      (3,272)   

Dividends paid

  (1,109)      (1,074)      (1,011)   

Other financing activities

  (173)      (111)      (80)   
  

 

 

    

 

 

    

 

 

 

Cash used by financing activities from continuing operations

  (3,943)      (3,783)      (2,831)   
  

 

 

    

 

 

    

 

 

 

Cash provided (used) by continuing operations

  1,121      (1,412)      (1,064)   
  

 

 

    

 

 

    

 

 

 

Cash provided (used) by operations from discontinued operations

  (16)      456      455   

Cash used by investing activities from discontinued operations

  (51)      (23)      (26)   

Cash used by financing activities from discontinued operations

  (36)             

Effect of change in cash and equivalents of discontinued operations

  (87)      35      14   
  

 

 

    

 

 

    

 

 

 

Cash provided (used) by discontinued operations

  (190)      468      443   

Effect of Venezuelan exchange rate changes on cash and equivalents

  (129)             
  

 

 

    

 

 

    

 

 

 

INCREASE (DECREASE) IN CASH AND EQUIVALENTS

  802      (944)      (621)   

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

  1,816      2,760      3,381   
  

 

 

    

 

 

    

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

$             2,618    $             1,816    $             2,760   
  

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

69


Table of Contents
Index to Financial Statements

TIME WARNER INC.

CONSOLIDATED STATEMENT OF EQUITY

(millions)

 

  Time Warner Shareholders’          
  Common
Stock
  Additional
Paid-In
Capital
  Treasury
Stock
  Retained
Earnings
(Accumulated
Deficit) (a)
  Total   Noncontrolling
Interests
  Total
Equity
 

BALANCE AT DECEMBER 31, 2011

  $                17      $       156,113      $        (33,651)      $        (92,522)      $         29,957      $                     (3)      $         29,954   

Net income

    -          -          -          2,925        2,925        (3)        2,922   

Other comprehensive loss attributable to Continuing Operations

    -          -          -          (139)        (139)        -          (139)   

Other comprehensive income attributable to Discontinued Operations

    -          -          -          15        15        -          15   

Cash dividends

    -          (1,011)        -          -          (1,011)        -          (1,011)   

Common stock repurchases

    -          -          (3,302)        -          (3,302)        -          (3,302)   

Noncontrolling interests of acquired businesses

    -          -          -          -          -                 

Amounts related primarily to stock options and restricted stock

    -          (525)        1,876        -          1,351        -          1,351   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2012

  $ 17      $ 154,577      $ (35,077)      $ (89,721)      $ 29,796      $     $ 29,797   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    -          -          -          3,691        3,691        -          3,691   

Other comprehensive income attributable to Continuing Operations

    -          -          -          109        109        -          109   

Other comprehensive income attributable to Discontinued Operations

    -          -          -          28        28        -          28   

Cash dividends

    -          (1,074)        -          -          (1,074)        -          (1,074)   

Common stock repurchases

    -          -          (3,700)        -          (3,700)        -          (3,700)   

Noncontrolling interests of acquired businesses

    -          -          -          -          -          (1)        (1)   

Amounts related primarily to stock options and restricted stock

    -          (93)        1,147        -          1,054        -          1,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2013

  $ 17      $ 153,410      $ (37,630)      $ (85,893)      $ 29,904      $ -        $ 29,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    -          -          -          3,827        3,827        -          3,827   

Other comprehensive loss attributable to Continuing Operations

    -          -          -          (438)        (438)        -          (438)   

Other comprehensive income attributable to Discontinued Operations

    -          -          -          22        22        -          22   

Amounts related to the Time Separation

    -          (2,918)        -          104        (2,814)        -          (2,814)   

Cash dividends

    -          (1,109)        -          -          (1,109)        -          (1,109)   

Common stock repurchases

    -          -          (5,500)        -          (5,500)        -          (5,500)   

Noncontrolling interests of acquired businesses

    -          -          -          -          -          -          -     

Amounts related primarily to stock options and restricted stock

    -          (101)        685        -          584        -          584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2014

  $ 17      $ 149,282      $ (42,445)      $ (82,378)      $ 24,476      $ -        $ 24,476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Includes Accumulated other comprehensive loss, net.

See accompanying notes.

 

70


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment company, whose businesses include television networks, and film and TV entertainment. Time Warner classifies its operations into three reportable segments: Turner : consisting principally of cable networks and digital media properties; Home Box Office : consisting principally of premium pay television services domestically and premium pay and basic tier television services internationally; and Warner Bros. : consisting principally of television, feature film, home video and videogame production and distribution.

Separation of Time Inc.

On June 6, 2014 (the “Distribution Date”), the Company completed the legal and structural separation of the Company’s Time Inc. segment from the Company (the “Time Separation”). The Time Separation was effected as a pro rata dividend of all shares of Time Inc. common stock held by Time Warner in a spin-off to Time Warner stockholders. With the completion of the Time Separation, the Company disposed of the Time Inc. segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in the Company’s consolidated financial statements. Accordingly, the Company has recast its financial information to present the financial position and results of operations of its former Time Inc. segment as discontinued operations in the consolidated financial statements for all periods presented. For a summary of discontinued operations, see Note 3.

In connection with the Time Separation, the Company received $1.4 billion from Time Inc., consisting of proceeds relating to Time Inc.’s acquisition of the IPC publishing business in the U.K. from a wholly-owned subsidiary of Time Warner and a special dividend.

Basis of Presentation

Basis of Consolidation

The consolidated financial statements include all of the assets, liabilities, revenues, expenses and cash flows of entities in which Time Warner has a controlling interest (“subsidiaries”). Intercompany accounts and transactions between consolidated entities have been eliminated in consolidation.

Changes in Basis of Presentation

The 2013 and 2012 financial information has been recast so that the basis of presentation is consistent with that of the 2014 financial information. This recast reflects the financial position and results of operations of the Company’s former Time Inc. segment as discontinued operations for all periods presented.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could differ from those estimates.

Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, multiple-element transactions, allowances for doubtful accounts, depreciation and amortization, the determination of ultimate revenues as it relates to amortization of capitalized film and programming costs and participations and residuals, home video and videogames product returns, business combinations, pension and other postretirement benefits, equity-based compensation, income taxes, contingencies, litigation matters, reporting revenue for certain transactions on a gross versus net basis, and the determination of whether the Company should consolidate certain entities.

 

71


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Venezuela Currency

Certain of the Company’s divisions conduct business with third parties located in Venezuela and, as a result, the Company holds net monetary assets denominated in Venezuelan Bolivares Fuertes (“VEF”) that primarily consist of cash and accounts receivable. As of December 31, 2014, there were three legal foreign currency exchange systems administered by the Venezuelan government, each with a different exchange rate: (i) the fixed official government rate as published by the Central Bank of Venezuela, which as of December 31, 2014 was 6.3 VEF to each U.S. Dollar, (ii) the variable, auction-based SICAD 1 rate, which as of December 31, 2014 was 12 VEF to each U.S. Dollar and (iii) the variable, transaction-based SICAD 2 rate, which as of December 31, 2014 was approximately 50 VEF to each U.S. Dollar. Because of Venezuelan government-imposed restrictions on the exchange of VEF into foreign currency in Venezuela, the Company has not been able to convert VEF earned in Venezuela into U.S. Dollars through the official government rate. Further, the Company has not been able to access the SICAD 1 and SICAD 2 exchanges due to government requirements and restrictions on participation in the exchanges, including a requirement that an entity be domiciled in Venezuela to participate.

Prior to December 31, 2014, the Company used the official government exchange rate to remeasure its VEF-denominated transactions and balances. This was principally due to the Company’s inability to access the SICAD 1 and SICAD 2 exchange systems, as noted above, as well as a lack of clarity about those exchange systems’ stability and transaction volume. During the fourth quarter of 2014, the Company considered information about the companies that were able to access the three exchange systems during 2014 and the fact that the SICAD 1 and SICAD 2 exchanges continued to operate, as well as the state of the Venezuelan economy, which has been negatively impacted by significantly lower oil prices and which the Venezuela Central Bank confirmed in late December 2014 had entered a recession. Based on these factors, as of December 31, 2014, the Company concluded that the SICAD 2 exchange rate was the most appropriate legal exchange rate for the Company’s business activities conducted in VEF. Accordingly, beginning on December 31, 2014, the Company began using the SICAD 2 rate to remeasure its VEF-denominated transactions and balances and, for the three months and year ended December 31, 2014, recognized a pretax foreign exchange loss of $173 million in the Consolidated Statement of Operations.

Accounting Guidance Adopted in 2014

Share-Based Payment Awards with Performance Targets Attainable After the Requisite Service Period

On July 1, 2014, the Company early adopted guidance that clarifies that a performance target that affects the vesting of an award payable in shares and that can be met after the requisite service period is a performance condition. Therefore, compensation expense related to such awards should only be recognized when it becomes probable that the performance target will be met, which could occur after the requisite service period has been satisfied. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

Presentation of Unrecognized Tax Benefits

On January 1, 2014, the Company adopted on a prospective basis guidance requiring a liability related to an unrecognized tax benefit to be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of a jurisdiction or the tax law of a jurisdiction does not require it, and the Company does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit would be presented in the financial statements as a liability and will not be combined with deferred tax assets. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Accounting Guidance Not Yet Adopted

Revenue Recognition

In May 2014, guidance was issued that establishes a new revenue recognition framework in U.S. GAAP for all companies and industries. The core principle of the guidance is that an entity should recognize revenue from the transfer of

 

72


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

promised goods or services to customers in an amount that reflects the consideration the entity expects to receive for those goods or services. The guidance includes a five-step framework to determine the timing and amount of revenue to recognize related to contracts with customers. In addition, this guidance requires new or expanded disclosures related to the judgments made by companies when following this framework. The guidance will become effective on either a full or modified retrospective basis for the Company on January 1, 2017. The Company is evaluating the impact the guidance will have on its consolidated financial statements.

Discontinued Operations

In April 2014, guidance was issued that changes the requirements for reporting discontinued operations. Under this new guidance, a discontinued operation is (i) a component of an entity or group of components that has been disposed of or is classified as held for sale and represents a strategic shift that has had or will have a major effect on an entity’s operations and financial results or (ii) an acquired business that is classified as held for sale on the acquisition date. This guidance also requires expanded or new disclosures for discontinued operations, individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following disposal and retained equity method investments in a discontinued operation. This guidance became effective on a prospective basis for the Company on January 1, 2015 and is not expected to have a material impact on the Company’s consolidated financial statements.

Summary of Critical and Significant Accounting Policies

The following is a discussion of each of the Company’s critical accounting policies, including information and analysis of estimates and assumptions involved in their application, and other significant accounting policies.

The Securities and Exchange Commission (“SEC”) considers an accounting policy to be critical if it is important to the Company’s financial condition and results of operations and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by Time Warner’s management and the related disclosures have been reviewed with the Audit and Finance Committee of the Board of Directors of the Company. Due to the significant judgment involved in selecting certain of the assumptions used in these areas, it is possible that different parties could choose different assumptions and reach different conclusions. The Company considers the policies relating to the following matters to be critical accounting policies:

 

   

Impairment of Goodwill and Intangible Assets (see pages 76 to 77);

 

   

Film and Television Production Cost Recognition, Participations and Residuals and Impairments (see pages 81 to 82);

 

   

Gross versus Net Revenue Recognition (see pages 80 to 81);

 

   

Sales Returns and Pricing Rebates (see page 80); and

 

   

Income Taxes (see page 84).

Cash and Equivalents

Cash equivalents consist of investments that are readily convertible into cash and have original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. The Company monitors concentrations of credit risk with respect to Cash and equivalents by placing such balances with higher quality financial institutions or investing such amounts in liquid, short-term, highly-rated instruments or investment funds holding similar instruments. As of December 31, 2014, the majority of the Company’s Cash and equivalents were invested with banks with a credit rating of at least A and in Rule 2a-7 money market mutual funds. At December 31, 2014, the Company did not have more than $500 million invested in any single bank or money market mutual fund.

 

73


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Allowance for Doubtful Accounts

The Company monitors customer credit risk related to accounts receivable, including unbilled trade receivables primarily related to the distribution of television product. Significant judgments and estimates are involved in evaluating if such amounts will ultimately be fully collected. Each of the Company’s businesses maintains a comprehensive approval process prior to issuing credit to third-party customers. Counterparties that are determined to be of a higher risk are evaluated to assess whether the credit terms previously granted to them should be modified. The Company monitors customers’ accounts receivable aging, and a provision for estimated uncollectible amounts is maintained based on customer payment levels, historical experience and management’s views on trends in the overall receivable agings at the Company’s businesses. In addition, for larger accounts, the Company performs analyses of risks on a customer-specific basis. At December 31, 2014 and 2013, total reserves for doubtful accounts were approximately $152 million and $191 million, respectively. For the year ended December 31, 2014, the Company recognized $20 million of income related to bad debt primarily due to the reversal of a reserve related to a Warner Bros. receivable. Bad debt expense recognized during the years ended December 31, 2013 and 2012 totaled $28 million and $37 million, respectively.

Consolidation

Time Warner consolidates all entities in which it has a controlling voting interest and all variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary. Entities determined to be VIEs primarily consist of HBO Latin America Group (“HBO LAG”) because the Company’s ownership and voting rights in this entity are disproportionate. HBO LAG operates multi-channel premium pay and basic tier television services in Latin America and is accounted for using the equity method. See Note 4 for additional information.

Investments

Investments in companies in which Time Warner has significant influence, but less than a controlling voting interest, are accounted for using the equity method. Significant influence is generally presumed to exist when Time Warner owns between 20% and 50% of the voting interests in the investee, holds substantial management rights or holds an interest of less than 20% in an investee that is a limited liability partnership or limited liability corporation that is treated as a flow-through entity.

Under the equity method of accounting, 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 (losses) is included in the Consolidated Statement of Operations; and only the dividends, cash distributions, loans or other cash received from the investee, additional cash investments, loan repayments or other cash paid to the investee are included in the Consolidated Statement of Cash Flows.

Investments in companies in which Time Warner does not have a controlling voting interest or over which it is unable to exert significant influence are generally accounted for at fair value if the investments are publicly traded. If the investment or security is not publicly traded, the investment is accounted for at cost. Unrealized gains and losses on investments accounted for at fair value are reported, net of tax, in Accumulated other comprehensive loss, net. Dividends and other distributions of earnings from investments in companies in which Time Warner does not have a controlling voting interest or over which it is unable to exert significant influence are included in Other loss, net, when declared. For more information, see Notes 3 and 4.

The company regularly reviews its investments for impairment. See “Asset Impairments” below for additional information.

Foreign Currency Translation

Financial statements of subsidiaries operating outside the United States whose functional currency is not the U.S. Dollar are translated at the rates of exchange on the balance sheet date for assets and liabilities and at average rates of exchange for revenues and expenses during the period. Translation gains or losses on assets and liabilities are included as a component of Accumulated other comprehensive loss, net.

 

74


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Derivative Instruments

The Company uses derivative instruments principally to manage the risk associated with movements in foreign currency exchange rates, and recognizes all derivative instruments on the Consolidated Balance Sheet at fair value. Changes in fair value of derivative instruments that qualify for hedge accounting will either be offset against the change in fair value of the hedged assets or liabilities through earnings or recognized in shareholders’ equity as a component of Accumulated other comprehensive loss, net, until the hedged item is recognized in earnings, depending on whether the derivative instrument is being used to hedge changes in fair value or cash flows. For qualifying hedge relationships, the Company excludes the impact of forward points or option premiums from its assessment of hedge effectiveness and recognizes changes in the fair value of a derivative instrument due to forward points or option premiums in Other income (loss), net each quarter. The ineffective portion of a derivative instrument’s change in fair value is immediately recognized in earnings. For those derivative instruments that do not qualify for hedge accounting, changes in fair value are recognized immediately in earnings. See Note 7 for additional information regarding derivative instruments held by the Company and risk management strategies.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Additions to property, plant and equipment generally include material, labor and overhead. Time Warner also capitalizes certain costs associated with coding, software configuration, upgrades and enhancements incurred for the development of internal use software. Depreciation is recorded on a straight-line basis over estimated useful lives. Leasehold improvements are depreciated over the lesser of the estimated useful life of the improvement or the term of the applicable lease. Time Warner periodically evaluates the depreciation periods of property, plant and equipment to determine whether a revision to its estimates of useful lives is warranted. Property, plant and equipment, including capital leases, consist of (millions):

 

     December 31,      Estimated
Useful Lives
     2014      2013     
            (recast)       

Land (a)

   $ 274       $ 431       n/a

Buildings and improvements

     1,549         2,287        7 to 30 years

Capitalized software costs

     1,868         1,636        3 to 7 years

Furniture, fixtures and other equipment (b)

     3,102         3,236        3 to 10 years
  

 

 

    

 

 

    
  6,793      7,590   

Accumulated depreciation

  (4,138)      (4,299)   
  

 

 

    

 

 

    

Total

$             2,655    $             3,291   
  

 

 

    

 

 

    

 

 

(a)  

Land is not depreciated.

(b)  

Includes $223 million and $327 million of construction in progress as of December 31, 2014 and 2013, respectively.

Intangible Assets

Time Warner has a significant number of intangible assets, including acquired film and television libraries and other copyrighted products and tradenames. Time Warner does not recognize the fair value of internally generated intangible assets. Intangible assets acquired in business combinations are recorded at the acquisition date fair value in the Company’s Consolidated Balance Sheet. Acquired film libraries are amortized using the film forecast computation model. For more information, see “Film and Television Production Cost Recognition, Participations and Residuals and Impairments” and Note 2.

Asset Impairments

Investments

The Company’s investments consist of (i) investments carried at fair value, including available-for-sale securities and certain deferred compensation-related investments, (ii) investments accounted for using the cost method of accounting, (iii) investments accounted for using the equity method of accounting and (iv) held-to-maturity debt securities. The Company

 

75


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

regularly reviews its investments for impairment, including when the carrying value of an investment exceeds its related market value. If the Company determines that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings that is included in Other loss, net. Factors that are considered by the Company in determining whether an other-than-temporary decline in value has occurred include (i) the market value of the security in relation to its cost basis, (ii) the financial condition of the investee and (iii) the Company’s intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment.

In evaluating the factors described above for available-for-sale securities and held-to-maturity debt securities, the Company presumes a decline in value to be other-than-temporary if the quoted market price of the security is 20% or more below the investment’s cost basis for a period of six months or more (the “20% criterion”) or the quoted market price of the security is 50% or more below the security’s cost basis at any quarter end (the “50% criterion”). However, the presumption of an other-than-temporary decline in these instances may be overcome if there is persuasive evidence indicating that the decline is temporary in nature (e.g., the investee’s operating performance is strong, the market price of the investee’s security is historically volatile, etc.). Additionally, there may be instances in which impairment losses are recognized even if the 20% and 50% criteria are not satisfied (e.g., if there is a plan to sell the security in the near term and the fair value is below the Company’s cost basis).

For investments accounted for using the cost or equity method of accounting, the Company evaluates information available (e.g., budgets, business plans, financial statements, etc.) in addition to quoted market prices, if any, in determining whether an other-than-temporary decline in value exists. Factors indicative of an other-than-temporary decline include recurring operating losses, credit defaults and subsequent rounds of financing at an amount below the cost basis of the Company’s investment. For more information, see Note 4.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets, primarily tradenames, are tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Goodwill is tested for impairment at the reporting unit level. A reporting unit is either the “operating segment level,” such as Warner Bros. Entertainment Inc. (“Warner Bros.”), Home Box Office, Inc. (“Home Box Office”) and Turner Broadcasting System, Inc. (“Turner”), or one level below, which is referred to as a “component” (e.g., Warner Bros. Theatrical, Warner Bros. Television). The level at which the impairment test is performed requires judgment as to whether the operations below the operating segment constitute a self-sustaining business or whether the operations are similar such that they should be aggregated for purposes of the impairment test. For purposes of the goodwill impairment test, management has concluded that the operations below the operating segment level are not self-sustaining businesses or the operations are similar and therefore has determined that its reporting units are the same as its operating segments.

In assessing Goodwill for impairment, the Company has the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is not required to perform any additional tests in assessing Goodwill for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform the first step of a two-step impairment review process. The first step of the two-step process involves a comparison of the estimated fair value of a reporting unit to its carrying amount. In performing the first step, the Company determines the fair value of a reporting unit using a discounted cash flow (“DCF”) analysis and, in certain cases, a combination of a DCF analysis and a market-based approach. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable public company earnings multiples. The cash flows employed in the DCF analyses are based on the Company’s most recent budgets and long range plans and perpetual growth rates are assumed for years beyond the current long range plan period. Discount rate assumptions are based on an assessment of market rates, capital structures and the risk inherent in the future cash flows included in the budgets and long range plans.

 

76


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In 2014, the Company did not elect to perform a qualitative assessment of Goodwill and instead performed a quantitative impairment test. The results of the quantitative test did not result in any impairments of Goodwill because the fair values of each of the Company’s reporting units exceeded their respective carrying values. None of the carrying values of the Company’s reporting units were within 30% of their respective fair values as of December 31, 2014. If the carrying value of a reporting unit exceeded its fair value, the second step of the impairment review process would need to be performed to determine the ultimate amount of impairment loss to record. Significant assumptions utilized in the DCF analysis included discount rates that ranged from 9.0% to 9.5% and a terminal revenue growth rate of 3.25%. Significant assumptions utilized in the market-based approach were market multiples ranging from 9.5x to 12.0x for the Company’s reporting units where a market-based approach was performed.

In assessing other intangible assets not subject to amortization for impairment, the Company also has the option to perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of such an intangible asset is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of such an intangible asset is less than its carrying amount, then the Company is not required to perform any additional tests for assessing those intangible assets for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform a quantitative impairment test that involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

In 2014, the Company did not elect to perform a qualitative assessment for intangible assets not subject to amortization. The estimates of fair value of intangible assets not subject to amortization are determined using a DCF valuation analysis, which is based on the “relief from royalty” methodology. Discount rate assumptions are based on an assessment of the risk inherent in the projected future cash flows generated by the respective intangible assets. Also subject to judgment are assumptions about royalty rates, which are based on the estimated rates at which similar tradenames are being licensed in the marketplace.

The performance of the Company’s 2014 annual impairment test for other intangible assets not subject to amortization did not result in any impairments since the fair value of each of the Company’s intangible assets not subject to amortization exceeded its respective carrying value. No intangible asset not subject to amortization’s fair value was within 30% of its carrying value. The significant assumptions utilized in the 2014 DCF analysis of other intangible assets not subject to amortization were discount rates that ranged from 9.5% to 10.0% and a terminal revenue growth rate of 3.25%.

Long-Lived Assets

Long-lived assets, including finite-lived intangible assets (e.g., tradenames, customer lists, film libraries and property, plant and equipment), do not require that an annual impairment test be performed; instead, long-lived assets are tested for impairment upon the occurrence of a triggering event. Triggering events include the more likely than not disposal of a portion of such assets or the occurrence of an adverse change in the market involving the business employing the related assets. Once a triggering event has occurred, the impairment test is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for continued use requires a comparison of cash flows expected to be generated over the useful life of an asset or group of assets (“asset group”) against the carrying value of the asset group. An asset group is established by identifying the lowest level of cash flows generated by the asset or group of assets that are largely independent of the cash flows of other assets. If the intent is to hold the asset group for continued use, the impairment test first requires a comparison of estimated undiscounted future cash flows generated by the asset group against its carrying value. If the carrying value exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the estimated fair value of the asset group and its carrying value. Fair value is generally determined by discounting the future cash flows associated with that asset group. If the intent is to hold the asset group for sale and certain other criteria are met (e.g., the asset can be disposed of currently, appropriate levels of authority have approved the sale, and there is an active program to locate a buyer), the impairment test involves comparing the asset group’s carrying value to its estimated fair value. To the extent the carrying value is greater than the estimated fair

 

77


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

value, an impairment loss is recognized for the difference. Significant judgments in this area involve determining the appropriate asset group level at which to test, determining whether a triggering event has occurred, determining the future cash flows for the assets involved and selecting the appropriate discount rate to be applied in determining estimated fair value. For more information, see Note 2.

Accounting for Pension Plans

The Company and certain of its subsidiaries have both funded and unfunded defined benefit pension plans, the substantial majority of which are noncontributory, covering a majority of domestic employees and, to a lesser extent, have various defined benefit plans, primarily noncontributory, covering certain international employees. Pension benefits are based on formulas that reflect the participating employees’ years of service and compensation. Time Warner’s largest defined benefit pension plan is closed for new employees and frozen to future benefit accruals. Time Warner uses a December 31 st measurement date for its plans. The pension expense recognized by the Company is determined using certain assumptions, including the expected long-term rate of return on plan assets, the interest factor implied by the discount rate and the rate of compensation increases. For more information, see Note 13.

Equity-Based Compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in Costs of revenues or Selling, general and administrative expenses depending on the job function of the grantee on a straight-line basis (net of estimated forfeitures) from the date of grant over the period during which an employee is required to provide services in exchange for the award. The total grant-date fair value of an equity award granted to an employee who has reached a specified age and years of service as of the grant date is recognized as compensation expense immediately upon grant as there is no required service period.

The grant-date fair value of a restricted stock unit (“RSU”) is determined based on the closing sale price of the Company’s common stock on the NYSE Composite Tape on the date of grant.

Performance stock units (“PSUs”) are subject to a performance condition such that the number of PSUs that ultimately vest generally depends on the adjusted earnings per share (“Adjusted EPS”) achieved by the Company during a three-year performance period compared to targets established at the beginning of the period. The PSUs are also subject to a market condition and the number of PSUs that vest can be increased or decreased based on the Company’s cumulative total shareholder return (“TSR”) relative to the TSR of the other companies in the S&P 500 Index for the performance period. Because the terms of the PSUs provide discretion to make certain adjustments to the performance calculation, the service inception date of these awards precedes the grant date. Accordingly, the Company recognizes compensation expense beginning on the service inception date and remeasures the fair value of the PSU until a grant date occurs, which is typically after the completion of the required service period. PSUs, as well as RSUs granted to certain senior executives beginning in 2012, also are subject to a performance condition based on an adjusted net income target for a one-year period that, if not achieved, will result in the forfeiture of the awards.

The grant-date fair value of a stock option is estimated using the Black-Scholes option-pricing model . Because the Black-Scholes option-pricing model requires the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the stock options. The Company determines the volatility assumption for these stock options using implied volatilities data from its traded options. The expected term, which represents the period of time that stock options granted are expected to be outstanding, is estimated based on the historical exercise behavior of Time Warner employees. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate assumed in valuing the options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. The Company determines the expected dividend yield percentage by dividing the expected annual dividend by the market price of Time Warner common stock at the date of grant. For more information, see Note 12.

 

78


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Revenue

The Company generates revenue primarily from content production and distribution (i.e., Content Revenue), providing programming to cable system operators, satellite distribution services, telephone companies and other distributors (collectively, “affiliates”) that have contracted to receive and distribute this programming to their subscribers (i.e., Subscription Revenue) and the sale of advertising on the Company’s television networks and websites and the websites it manages and/or operates for others (i.e., Advertising Revenue).

Content Revenue

Feature films typically are produced or acquired for initial exhibition in theaters, followed by distribution, generally commencing within three years of such initial exhibition, through home video, electronic sell-through, video-on-demand, subscription video-on-demand services, premium cable, basic cable and broadcast networks. Revenues from film rentals by theaters are recognized as the films are exhibited. Revenues from home video sales are recognized at the later of the delivery date or the date that the DVDs or Blu-ray Discs are made widely available for sale or rental by retailers based on gross sales less a provision for estimated returns. Revenues from the licensing of feature films for electronic sell-through or video-on-demand are recognized when the product has been purchased by and made available to the consumer to either download or stream. Revenues from the distribution of theatrical product through subscription video-on-demand services, premium cable, basic cable and broadcast networks are recognized when the films are available to the licensee.

Television programs and series are initially produced for broadcast networks, cable networks or first-run television syndication and may be subsequently licensed for international or domestic cable, syndicated television and subscription video-on-demand services, as well as sold on home video and via electronic delivery. Revenues from the distribution of television programming through broadcast networks, cable networks, first-run syndication and subscription video-on-demand services are recognized when the programs or series are available to the licensee, except for advertising barter agreements, where the revenue is valued and recognized when the related advertisements are exhibited. In certain circumstances, pursuant to the terms of the applicable contractual arrangements, the availability dates granted to customers may precede the date the Company may bill the customers for these sales. Unbilled accounts receivable, which primarily relate to the distribution of television product at Warner Bros., totaled $3.780 billion and $3.418 billion at December 31, 2014 and December 31, 2013, respectively. Included in the unbilled accounts receivable at December 31, 2014 was $2.462 billion that is to be billed in the next twelve months. Similar to theatrical home video sales, revenues from home video sales of television programming are recognized at the later of the delivery date or the date that the DVDs or Blu-ray Discs are made widely available for sale or rental by retailers based on gross sales less a provision for estimated returns. Revenues from the licensing of television programs and series for electronic sell-through or video-on-demand are recognized when the product has been purchased by and made available to the consumer to either download or stream. Revenues from the distribution of television programming through subscription video-on-demand services are recognized when the television programs or series are available to the licensee.

Upfront or guaranteed payments for the licensing of intellectual property are recognized as revenue when (i) an arrangement has been signed with a customer, (ii) the customer’s right to use or otherwise exploit the intellectual property has commenced and there is no requirement for significant continued performance by the Company, (iii) licensing fees are either fixed or determinable and (iv) collectability of the fees is reasonably assured. In the event any significant continued performance is required in these arrangements, revenue is allocated to each applicable element and recognized when the related services are performed.

Revenues from the sales of videogames are recognized at the later of the delivery date or the date that the product is made widely available for sale or rental by retailers based on gross sales less a provision for estimated returns.

Subscription Revenue

Subscription revenues are recognized as programming services are provided to affiliates based on negotiated contractual programming rates. When a distribution contract with an affiliate has expired and a new distribution contract has not been

 

79


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

executed, revenues are based on estimated rates, giving consideration to factors including the previous contractual rates, inflation, current payments by the affiliate and the status of the negotiations on a new contract. When the new distribution contract terms are finalized, an adjustment to Subscription revenues is recorded, if necessary, to reflect the new terms. Such adjustments historically have not been significant.

Advertising Revenue

Advertising revenues are recognized, net of agency commissions, in the period that the advertisements are aired. If there is a targeted audience guarantee, revenues are recognized for the actual audience delivery and revenues are deferred for any shortfall until the guaranteed audience delivery is met, typically by providing additional advertisements. Advertising revenues from websites are recognized as impressions are delivered or the services are performed.

Sales Returns and Pricing Rebates

Management’s estimate of product sales that will be returned and pricing rebates to grant is an area of judgment affecting Revenues and Net income. In estimating product sales that will be returned, management analyzes vendor sales of the Company’s product, historical return trends, current economic conditions, and changes in customer demand. Based on this information, management reserves a percentage of any product sales that provide the customer with the right of return. The provision for such sales returns is reflected as a reduction in the revenues from the related sale. In estimating the reserve for pricing rebates, management considers the terms of the Company’s agreements with its customers that contain targets which, if met, would entitle the customer to a rebate. In those instances, management evaluates the customer’s actual and forecasted purchases to determine the appropriate reserve. At December 31, 2014 and 2013, total reserves for sales returns (which also reflects reserves for certain pricing allowances provided to customers) primarily related to home entertainment products (e.g., DVDs, Blu-ray Discs and videogames) were $1.000 billion and $1.192 billion, respectively. An incremental change of 1% in the Company’s estimated sales returns rate (i.e., provisions for returns divided by gross sales of related product) would have resulted in an approximate $44 million impact on the Company’s total Revenues for the year ended December 31, 2014. This revenue impact would have been partially offset by a corresponding impact on related expenses depending on the margin associated with a specific film or videogame and other factors.

Gross versus Net Revenue Recognition

In the normal course of business, the Company acts as or uses an intermediary in executing transactions with third parties. In connection with these arrangements, the Company must determine whether to report revenue based on the gross amount billed to the ultimate customer or on the net amount received from the customer after commissions and other payments to third parties. To the extent revenues are recorded on a gross basis, any commissions or other payments to third parties are recorded as expense so that the net amount (gross revenues less expense) is reflected in Operating Income. Accordingly, the impact on Operating Income is the same whether the Company records revenue on a gross or net basis.

The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as a principal in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of an arrangement. The Company serves as the principal in transactions in which it has substantial risks and rewards of ownership.

The following are examples of arrangements where the Company is an intermediary or uses an intermediary:

 

   

Warner Bros. provides distribution services to third-party companies.     Warner Bros. may provide distribution services for an independent third-party company for the worldwide distribution of theatrical films, home video, television programs and/or videogames. The independent third-party company may retain final approval over the distribution, marketing, advertising and publicity for each film or videogame in all media, including the timing and

 

80


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

extent of the releases, the pricing and packaging of packaged goods units and approval of all television licenses. Warner Bros. records revenue generated in these distribution arrangements on a gross basis when it (i) is the merchant of record for the licensing arrangements, (ii) is the licensor/contracting party, (iii) provides the materials to licensees, (iv) handles the billing and collection of all amounts due under such arrangements and (v) bears the risk of loss related to distribution advances and/or the packaged goods inventory. If Warner Bros. does not bear the risk of loss as described in the previous sentence, the arrangements are accounted for on a net basis.

 

   

Turner provides advertising sales services to third-party companies.     From time to time, Turner contracts with third parties, or in certain instances a related party such as a joint venture, to perform television or website advertising sales services. While terms of these agreements can vary, Turner generally records advertising revenue on a gross basis when it acts as the primary obligor (i.e., Turner is the contracting party) in the arrangement because in those cases it is the face to the advertiser and is responsible for fulfillment of the advertising sold.

Film and Television Production Cost Recognition, Participations and Residuals and Impairments

Film and television production costs include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value. The amount of capitalized film and television production costs recognized as Costs of revenues for a given period is determined using the film forecast computation method. Under this method, the amortization of capitalized costs and the accrual of participations and residuals is based on the proportion of the film’s revenues recognized for such period to the film’s estimated remaining ultimate revenues (i.e., the total revenue to be received throughout a film’s life cycle).

The process of estimating a film’s ultimate revenues requires the Company to make a series of significant judgments relating to future revenue generating activities associated with a particular film and is important for two reasons. First, while a film or television series is being produced and the related costs are being capitalized, as well as at the time the film or television series is released, it is necessary for management to estimate the ultimate revenues, less additional costs to be incurred (including exploitation and participation costs), in order to determine whether the value of a film or television series is impaired and requires an immediate write-off of unrecoverable film and television production costs down to fair value. Second, it is necessary for management to determine, using the film forecast computation method, the amount of capitalized film and television production costs and the amount of participations and residuals to be recognized as Costs of revenues for a given film or television series in a particular period. To the extent that the ultimate revenues are adjusted, the resulting gross margin reported on the exploitation of that film or television series in a period is also adjusted.

Prior to the theatrical release of a film, management bases its estimates of ultimate revenues for each film on factors such as the historical performance of similar films, the star power of the lead actors, the rating and genre of the film, pre-release market research (including test market screenings) and the expected number of theaters in which the film will be released. In the absence of revenues directly related to the exhibition of a film or television program that is owned by the Company on the Company’s television networks or premium pay television services, management estimates a portion of the unamortized costs that are representative of the utilization of that film or television program in that exhibition and expenses such costs as the film or television program is exhibited. The period over which ultimate revenues are estimated is generally not to exceed ten years from the initial release of a motion picture or from the date of delivery of the first episode of an episodic television series. For an episodic television series still in production, the period over which ultimate revenues are estimated cannot exceed five years from the date of delivery of the most recent episode. Management updates such estimates based on information available during the film’s production and, upon release, the actual results of each film. Changes in estimates of ultimate revenues from period to period affect the amount of production costs amortized in a given period and, therefore, could have an impact on the segment’s financial results for that period. For example, prior to a film’s release, the Company often will test market the film to the film’s targeted demographic. If the film is not received favorably, the Company may (i) reduce the film’s estimated ultimate revenues, (ii) revise the film, which could cause the production costs to increase, or (iii) perform a combination of both. Similarly, a film that generates lower-than-expected theatrical revenues in its initial weeks of release would have its theatrical, home video and television distribution ultimate revenues adjusted downward. A

 

81


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

failure to adjust for a downward change in estimates of ultimate revenues would result in the understatement of production costs amortization for the period. The Company recorded production cost amortization of $4.229 billion, $3.873 billion and $4.092 billion in 2014, 2013 and 2012, respectively. Included in production cost amortization are film impairments primarily related to pre-release theatrical films of $86 million, $51 million and $92 million in 2014, 2013 and 2012, respectively.

Licensed Programming Inventory

In the normal course of business, the Company’s Turner and Home Box Office segments enter into agreements to license programming exhibition rights from licensors. A programming inventory asset related to these rights and a corresponding liability to the licensor are recorded (on a discounted basis if the license agreements are long-term) when (i) the cost of the programming is reasonably determined, (ii) the programming material has been accepted in accordance with the terms of the agreement, (iii) the programming is available for its first showing or telecast, and (iv) the license period has commenced. There are variations in the amortization methods of these rights, depending on whether the network is advertising-supported (e.g., TNT and TBS) or not advertising-supported (e.g., HBO and Turner Classic Movies).

For the Company’s advertising-supported networks, the Company’s general policy is to amortize each program’s costs on a straight-line basis (or per-play basis, if greater) over its license period. However, for certain types of programming, the initial airing has more value than subsequent airings. In these circumstances, the Company will use an accelerated method of amortization. For example, if the Company is licensing the right to air a movie multiple times over a certain period, the movie is being shown for the first time on a Company network (a “Network Movie Premiere”) and the Network Movie Premiere advertising is sold at a premium rate, a larger portion of the movie’s programming inventory cost is amortized upon the initial airing of the movie, with the remaining cost amortized on a straight-line basis (or per-play basis, if greater) over the remaining license period. The accelerated amortization upon the first airing versus subsequent airings is determined based on a study of historical and estimated future advertising sales for similar programming. For rights fees paid for sports programming arrangements (e.g., National Basketball Association, The National Collegiate Athletic Association (“NCAA”) Men’s Division I Basketball championship events (the “NCAA Tournament”) and Major League Baseball), such rights fees are amortized using a revenue-forecast model, in which the rights fees are amortized using the ratio of current period advertising revenue to total estimated remaining advertising revenue over the term of the arrangement.

For premium pay television services that are not advertising-supported, each licensed program’s costs are amortized on a straight-line basis over its license period or estimated period of use, beginning with the month of initial exhibition. When the Company has the right to exhibit feature theatrical programming in multiple windows over a number of years, the Company uses historical audience viewership as its basis for determining the amount of programming amortization attributable to each window.

The Company carries its licensed programming inventory at the lower of unamortized cost or estimated net realizable value. For networks that generate both Advertising and Subscription revenues (e.g., TBS and TNT), the Company generally evaluates the net realizable value of unamortized programming costs based on the network’s programming taken as a whole. In assessing whether the programming inventory for a particular advertising-supported network is impaired, the Company determines the net realizable value for all of the network’s programming inventory based on a projection of the network’s estimated combined Subscription revenues and Advertising revenues less certain direct costs of delivering the programming. Similarly, for premium pay television services that are not advertising-supported, the Company performs its evaluation of the net realizable value of unamortized programming costs based on the premium pay television services’ licensed programming taken as a whole. Specifically, the Company determines the net realizable value for all of its premium pay television service licensed programming based on projections of estimated Subscription revenues less certain costs of delivering and distributing the licensed programming. However, changes in management’s intended usage of a specific program, such as a decision to no longer exhibit that program and forego the use of the rights associated with the program license, would result in a reassessment of that program’s net realizable value, which could result in an impairment.

 

82


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Other Inventory

Inventories other than film and television production costs and licensed programming inventory consist primarily of DVDs, Blu-ray Discs and videogame development costs and are stated at the lower of cost or net realizable value. Cost is determined using the average cost method. Returned goods included in Inventory are valued at estimated realizable value, but not in excess of cost. For more information, see Note 6.

Videogame development costs are expensed as incurred before the applicable videogames reach technological feasibility. Unamortized capitalized videogame production and development costs are stated at the lower of cost, less accumulated amortization, or net realizable value and reported in Other assets on the Consolidated Balance Sheet. At December 31, 2014 and 2013, there were $277 million and $243 million, respectively, of unamortized computer software costs related to videogames. Amortization of such costs was $115 million, $180 million and $182 million for the years ended December 31, 2014, 2013 and 2012, respectively. Included in such amortization are writedowns to net realizable value of certain videogame production costs of $51 million, $53 million and $7 million in 2014, 2013 and 2012, respectively.

Barter Transactions

Time Warner enters into transactions that involve the exchange of advertising, in part, for other products and services, such as a license for programming. Such transactions are recognized by the programming licensee (e.g., a television network) as programming inventory and deferred advertising revenue at the estimated fair value when the product is available for telecast. Barter programming inventory is amortized in the same manner as the non-barter component of the licensed programming, and Advertising revenue is recognized when advertising spots are delivered. From the perspective of the programming licensor (e.g., a film studio), incremental licensing revenue is recognized when the barter advertising spots received are either used or sold to third parties.

Multiple-Element Transactions

In the normal course of business, the Company enters into multiple-element transactions that involve making judgments about allocating the consideration to the various elements of the transactions. While the more common type of multiple-element transactions encountered by the Company involve the sale or purchase of multiple products or services (e.g., licensing multiple film titles in a single arrangement), multiple-element transactions can also involve contemporaneous purchase and sales transactions, the settlement of an outstanding dispute contemporaneous with the purchase of a product or service, as well as investing in an investee while at the same time entering into an operating agreement. In accounting for multiple-element transactions, judgment must be exercised in identifying the separate elements in a bundled transaction as well as determining the values of these elements. These judgments can impact the amount of revenues, expenses and net income recognized over the term of the contract, as well as the period in which they are recognized.

In determining the value of the respective elements, the Company refers to quoted market prices (where available), independent appraisals (where available), historical and comparable cash transactions or its best estimate of selling price. Other indicators of value include the existence of price protection in the form of “most-favored-nation” clauses or similar contractual provisions and individual elements whose values are dependent on future performance (and based on independent factors). Further, in such transactions, evidence of value for one element of a transaction may provide support that value was not transferred from one element in a transaction to another element in a transaction.

Accounting for Collaborative Arrangements

The Company’s collaborative arrangements primarily relate to co-financing arrangements to jointly finance and distribute theatrical productions and an arrangement entered into with CBS Broadcasting, Inc. (“CBS”) and the NCAA that provides Turner and CBS with exclusive television, Internet and wireless rights to the NCAA Tournament in the U.S. and its territories and possessions from 2011 through 2024.

 

83


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In most cases, the form of the co-financing arrangement is the sale of an interest in a film to an investor. Warner Bros. generally records the amounts received for the sale of an interest as a reduction of the costs of the film, as the investor assumes full risk for that share of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, therefore, in each period the Company reflects in the Consolidated Statement of Operations either a charge or benefit to Costs of revenues to reflect the estimate of the third-party investor’s interest in the profits or losses incurred on the film. The estimate of the third-party investor’s interest in profits or losses incurred on the film is determined using the film forecast computation method. For the years ended December 31, 2014, 2013 and 2012, net participation costs related to third party investors of $580 million, $522 million and $444 million, respectively, were recorded in Costs of revenues.

The aggregate programming rights fee, production costs, advertising revenues and sponsorship revenues related to the NCAA Tournament and related programming are equally shared by Turner and CBS. However, if the amount paid for the programming rights fee and production costs in any given year exceeds advertising and sponsorship revenues for that year, CBS’ share of such shortfall is limited to specified annual amounts (the “loss cap”), ranging from approximately $90 million to $30 million. The amounts incurred by the Company pursuant to the loss cap during the years ended December 31, 2014 and 2013 were not significant. In accounting for this arrangement, the Company records Advertising revenues for the advertisements aired on Turner’s networks and amortizes Turner’s share of the programming rights fee based on the ratio of current period advertising revenues to its estimate of total advertising revenues over the term of the arrangement.

Advertising Costs

Time Warner expenses advertising costs as they are incurred, which generally is when the advertising is exhibited or aired. Advertising expense to third parties was $2.430 billion in 2014, $2.447 billion in 2013 and $2.314 billion in 2012.

Income Taxes

Income taxes are provided using the asset and liability method, such that income taxes (i.e., deferred tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the current year and include the results of any difference between GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating losses, capital losses and tax credit 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 tax laws and rates. Valuation allowances are established when management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. The subsequent realization of net operating loss and general business credit carryforwards acquired in acquisitions accounted for using the purchase method of accounting is recognized in the Consolidated Statement of Operations. Tax credits received for the production of a film or program are offset against the cost of inventory capitalized.

From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include business acquisitions and dispositions, including dispositions designed to be tax free, and certain financing transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on their technical merits. There is considerable judgment involved in determining whether positions taken on the Company’s tax returns are more likely than not of being sustained.

The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The Company’s policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense. For further information, see Note 9.

 

84


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Discontinued Operations

In determining whether a group of assets disposed (or to be disposed) of should be presented as a discontinued operation, for periods prior to January 1, 2015 the Company made a determination of whether the group of assets being disposed of comprised a component of the entity; that is, whether it had historic operations and cash flows that were clearly distinguished (both operationally and for financial reporting purposes). The Company also determined whether the cash flows associated with the group of assets had been significantly (or will be significantly) eliminated from the ongoing operations of the Company as a result of the disposal transaction and whether the Company had no significant continuing involvement in the operations of the group of assets after the disposal transaction. If so, the results of operations of the group of assets disposed of (as well as any gain or loss on the disposal transaction) were aggregated for separate presentation, if material, apart from continuing operating results of the Company in the consolidated financial statements.

In connection with the Time Separation, the Company has recast its financial information to present the financial position and results of operations of its former Time Inc. segment as discontinued operations in the accompanying consolidated financial statements for all periods presented. For more information on the Time Separation, see Note 3.

 

2.

GOODWILL AND INTANGIBLE ASSETS

Time Warner has a significant number of intangible assets, acquired film and television libraries and other copyrighted products and tradenames. Certain intangible assets are deemed to have finite lives and, accordingly, are amortized over their estimated useful lives, while others are deemed to be indefinite-lived and therefore are not amortized. Goodwill and indefinite-lived intangible assets, primarily certain tradenames, are tested annually for impairment during the fourth quarter, or earlier upon the occurrence of certain events or substantive changes in circumstances.

Goodwill

The following summary of changes in the Company’s Goodwill during the years ended December 31, 2014 and 2013, by reportable segment, is as follows (millions):

 

                                                   
     Turner      Home Box Office      Warner Bros.      Total  

Balance at December 31, 2012 (recast)

   $ 13,991       $ 7,309       $ 5,996       $ 27,296   

Acquisitions, dispositions and
adjustments

            122         (9)         120   

Translation adjustments

     (18)                       (15)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013 (recast)

$ 13,980    $ 7,431    $ 5,990    $ 27,401   

Acquisitions, dispositions and
adjustments

  (6)          206      202   

Translation adjustments

  (18)          (20)      (38)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

$           13,956    $             7,433    $             6,176    $           27,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying amount of goodwill for all periods presented was net of accumulated impairments of $13.338 billion and $4.091 billion at the Turner segment and the Warner Bros. segment, respectively.

The performance of the Company’s annual impairment analysis did not result in any impairments of Goodwill for any of the years in the three-year period ended December 31, 2014. Refer to Note 1 for a discussion of the 2014 annual impairment test.

The increase in Goodwill at the Warner Bros. segment for the year ended December 31, 2014 is primarily related to the acquisition of the operations outside the U.S. of Eyeworks Group and the increase at the Home Box Office segment for the year ended December 31, 2013 is primarily related to the acquisition of its former partner’s interests in HBO Asia and HBO South Asia (see Note 3 for additional information).

 

85


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Intangible Assets

The Company recorded noncash impairments of intangible assets during the years ended December 31, 2014, 2013 and 2012 by reportable segment, as follows (millions):

 

                Year Ended December 31,  
                2014     2013     2012  
                      (recast)     (recast)  

Turner

  $     $ 18      $ 79   

Home Box Office

                 

Warner Bros.

    13               
       

 

 

   

 

 

   

 

 

 

Time Warner

$               18    $               19    $               80   
       

 

 

   

 

 

   

 

 

 

The Company’s intangible assets subject to amortization and related accumulated amortization consisted of the following (millions):

 

    December 31, 2014     December 31, 2013  
    Gross     Accumulated
Amortization (a)
    Net     Gross     Accumulated
Amortization (a)
    Net  
                            (recast)        

Intangible assets subject to
amortization:

           

Film library

  $ 3,432      $ (2,635)      $ 797      $ 3,452      $ (2,494)      $ 958   

Brands, tradenames and other intangible assets

    710        (366)        344        686        (306)        380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$          4,142    $         (3,001)    $          1,141    $          4,138    $         (2,800)    $          1,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (a)  

The film library has a weighted-average remaining life of approximately 6 years and is amortized using a film forecast computation methodology. Amortization of brands, tradenames and other intangible assets subject to amortization is provided generally on a straight-line basis over their respective useful lives.

The Company recorded amortization expense of $202 million in 2014 compared to $209 million in 2013 and $212 million in 2012. Amortization expense may vary in the future as acquisitions, dispositions and impairments, if any, occur and as purchase price allocations are finalized. The Company’s estimated amortization expense for the succeeding five years ended December 31 is as follows (millions):

 

        2015     2016     2017     2018     2019  

Estimated amortization expense

  $             191      $             186      $             176      $             170      $             166   

 

3.

DISPOSITIONS AND ACQUISITIONS

Dispositions

Separation of Time Inc.

As discussed in Note 1, on June 6, 2014, the Company completed the legal and structural separation of the Company’s Time Inc. segment from the Company. With the completion of the Time Separation, the Company disposed of the Time Inc. segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in the Company’s consolidated financial statements. Accordingly, the Company has recast its financial information to present the financial position and results of operations of its former Time Inc. segment as discontinued operations in the consolidated financial statements for all periods presented.

 

86


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Imagine

In 2012, Turner shut down its general entertainment network, Imagine, in India and recognized $123 million of charges related to the shutdown. These charges consisted of $117 million primarily related to certain receivables, including value added tax receivables, inventories and long-lived assets, including Goodwill, and $6 million related to exit and other transaction costs.

TNT Turkey

In 2012, Turner shut down its TNT television operations in Turkey and recognized charges of $85 million, consisting of $57 million primarily related to certain receivables, including value added tax receivables, inventories and other assets; $12 million related to exit and other transaction costs; and $16 million related to an investment.

Acquisitions

Eyeworks

On June 2, 2014, Warner Bros. acquired the operations outside the U.S. of Eyeworks Group, a television production and distribution company, which are located in 15 countries (across Europe and South America and in Australia and New Zealand) for approximately $267 million, net of cash acquired.

CME

Central European Media Enterprises Ltd. (“CME”) is a publicly-traded broadcasting company operating leading networks in six Central and Eastern European countries. During 2014, 2013 and 2012, the Company acquired additional interests in CME for $396 million, $288 million and $171 million, respectively. For more information about the Company’s investments in and transactions with CME, see Note 4.

HBO Asia and HBO South Asia

In September 2013, Home Box Office purchased its partner’s interests in HBO Asia and HBO South Asia (collectively, “HBO Asia”) for $37 million in cash, net of cash acquired. HBO Asia operates HBO- and Cinemax- branded premium pay and basic tier television services serving over 15 countries in Asia. As a result of this acquisition, Home Box Office owns 100% of HBO Asia and has consolidated its results of operations and financial condition effective September 30, 2013. For the year ended December 31, 2013, Home Box Office recognized a $104 million gain upon Home Box Office’s acquisition of its former partner’s interests in HBO Asia.

Bleacher Report

In 2012, Turner acquired Bleacher Report, a leading online and mobile sports property, for $170 million, net of cash acquired.

 

87


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Summary of Discontinued Operations

Discontinued operations primarily reflects the Company’s former Time Inc. segment. In addition, during 2013, the Company recognized additional net tax benefits of $137 million associated with certain foreign tax attributes of the Warner Music Group, which the Company disposed of in 2004.

Discontinued operations for the years ended December 31, 2014, 2013 and 2012 is as follows (millions, except per share amounts):

 

                                      
     Year Ended December 31,  
     2014      2013      2012  

Total revenues

   $             1,415       $             3,334       $             3,404   

Pretax income (loss)

     (98)         335         415   

Income tax benefit (provision)

     31                (156)   
  

 

 

    

 

 

    

 

 

 

Net income (loss)

$ (67)    $ 337    $ 259   
  

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Time Warner Inc. shareholders

$ (67)    $ 337    $ 259   
  

 

 

    

 

 

    

 

 

 

Per share information attributable to Time Warner Inc.
common shareholders:

Basic net income (loss) per common share

$ (0.07)    $ 0.36    $ 0.28   
  

 

 

    

 

 

    

 

 

 

Average common shares outstanding — basic

  863.3      920.0      954.4   
  

 

 

    

 

 

    

 

 

 

Diluted net income (loss) per common share

$ (0.07)    $ 0.36    $ 0.27   
  

 

 

    

 

 

    

 

 

 

Average common shares outstanding — diluted

  882.6      942.6      976.3   
  

 

 

    

 

 

    

 

 

 

 

4.

INVESTMENTS

Time Warner’s investments, by category, consist of (millions):

 

                         
     December 31,  
     2014      2013  
            (recast)  

Equity-method investments

   $ 898       $ 936   

Fair-value and other investments:

     

Deferred compensation investments, recorded at fair value

     195         248   

Deferred compensation insurance-related investments, recorded at cash
surrender value

     410         397   

Available-for-sale securities

     79         96   

Equity Warrants

     242          
  

 

 

    

 

 

 

Total fair-value and other investments

  926      741   

Held-to-maturity securities

  239       

Cost-method investments

  263      332   
  

 

 

    

 

 

 

Total

$             2,326    $             2,009   
  

 

 

    

 

 

 

 

88


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Available-for-sale securities are recorded at fair value in the Consolidated Balance Sheet, and the realized gains and losses are included as a component of Other loss, net in the Consolidated Statement of Operations. The cost basis, unrealized gains and fair market value of available-for-sale securities are set forth below (millions):

 

                                 
     December 31,  
     2014      2013  
            (recast)  

Cost basis

   $ 59       $ 53   

Gross unrealized gain

     22         46   

Gross unrealized loss

     (2)         (3)   
  

 

 

    

 

 

 

Fair value

$                 79    $                 96   
  

 

 

    

 

 

 

Gains and losses reclassified from Accumulated other comprehensive loss, net to Other loss, net in the Consolidated Statement of Operations are determined based on the specific identification method.

CME

As of December 31, 2014, the Company owned 61.4 million shares of CME’s Class A common stock and 1 share of Series A convertible preferred stock, which is convertible into 11.2 million shares of CME’s Class A common stock and votes with the Class A common stock on an as-converted basis. The Company accounts for its investment in CME’s Class A common stock and Series A convertible preferred stock under the equity method of accounting.

As of December 31, 2014, the Company owned 92.4 million shares of CME’s Series B convertible redeemable preferred shares. The Company accounts for its investment in CME’s Series B convertible redeemable preferred shares under the cost method of accounting. See below for more information.

As of December 31, 2014, the Company has an approximate 49% voting interest in CME’s common stock and an approximate 75% economic interest in CME on a diluted basis.

2014 Transactions

On May 2, 2014, pursuant to a rights offering by CME, Time Warner acquired approximately 2.8 million units, each consisting of $100 principal amount of 15% senior secured notes due 2017 (the “Senior Secured Notes”) and 21 unit warrants, with each unit warrant entitling the Company to purchase one share of CME Class A common stock. In addition, Time Warner acquired 581,533 units in a private offering, and CME issued warrants to Time Warner to purchase an additional 30 million shares of Class A common stock. The warrants issued to Time Warner, including the unit warrants in connection with the rights offering and the private offering, have a four-year term and an exercise price of $1.00 per share, do not contain any voting rights and are not exercisable until the second anniversary of their issuance. The warrants are subject to a limited right whereby the Company can exercise any of its warrants earlier solely to own up to 49.9% of CME’s Class A common stock. The initial value of the warrants was recognized as a discount to the Senior Secured Notes and the term loan provided by the Company to CME (as described below) and a deferred gain related to the revolving credit facility provided by the Company to CME (as described below). The Senior Secured Notes are accounted for at their amortized cost and classified as held-to-maturity in the Consolidated Balance Sheet. At December 31, 2014, the carrying value of the warrants and Senior Secured Notes were $242 million and $239 million, respectively.

Additionally, Time Warner provided CME a $115 million revolving credit facility and a $30 million term loan that mature on December 1, 2017. Following an amendment in connection with the November 2014 transactions described below, amounts outstanding under the revolving credit facility bear interest at a rate per annum based on LIBOR (subject to a minimum rate of 1.00%) plus 9%. CME can pay accrued interest for an applicable quarterly interest period either fully in cash or by adding such amount to the outstanding principal amount of the revolving credit facility. The revolving credit

 

89


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

facility also contains a commitment fee on the average daily unused amount under the facility of 0.50% per annum. As of December 31, 2014, $25 million was outstanding under the revolving credit facility, which is classified as an other asset in the Consolidated Balance Sheet. The $30 million term loan bears interest at a rate of 15.0% per annum, paid semi-annually either fully in cash or by adding such amount to the principal amount of the loan. The term loan is classified as an other asset in the Consolidated Balance Sheet.

On November 14, 2014, Time Warner and CME entered into an agreement pursuant to which Time Warner agreed to assist CME in refinancing $261 million aggregate principal amount of its Senior Convertible Notes due 2015 (“2015 Notes”) and €240 million aggregate principal amount of its Senior Notes due 2017 (“2017 Notes”). In connection with this agreement, CME entered into a €251 million senior unsecured term loan that matures on November 1, 2017 (the “2017 Term Loan”) with third-party financial institutions the same day. Time Warner has guaranteed CME’s obligations under the 2017 Term Loan for a fee equal to 8.5% less the interest rate on the 2017 Term Loan. The fee is payable to Time Warner in cash or in kind at CME’s option. CME used the proceeds of the 2017 Term Loan to redeem the 2017 Notes. CME also entered into unsecured interest rate hedge arrangements to protect against changes in the applicable interest rate on the 2017 Term Loan during its term. Time Warner has also guaranteed CME’s obligations under the hedge arrangements.

Upon maturity of the 2015 Notes in November 2015, Time Warner will, at its option, either (i) guarantee a $261 million unsecured term loan due November 1, 2019 (the “2015 Term Loan”) obtained by CME from one or more third-party financial institutions, for a fee equal to 8.5% less the interest rate on the 2015 Term Loan or (ii) provide a $261 million senior secured term loan that matures on November 1, 2019 directly to CME, with an 8.5% interest rate (the “Time Warner Loan”). The guarantee fee or interest payments, as applicable, will be paid to Time Warner in cash or in kind at CME’s option. Not later than the maturity of the 2015 Term Loan or the Time Warner Loan, as applicable, Time Warner also will earn a commitment fee of $9 million, which will accrue interest at 8.5% from the date of the 2015 Term Loan or Time Warner Loan, as applicable, until paid.

2013 Transactions

During the second quarter of 2013, CME conducted a public offering of shares of its Class A common stock in which the Company purchased approximately 28.5 million shares for approximately $78 million in cash. On June 25, 2013, the Company purchased $200 million of CME’s newly-issued, non-voting Series B convertible redeemable preferred shares. The Series B convertible redeemable preferred shares will accrete in value through the third anniversary of closing at an annual rate of 7.5% compounded quarterly and from the third anniversary to the fifth anniversary of closing at an annual rate of 3.75% compounded quarterly. Thereafter, the Series B convertible redeemable preferred shares will no longer accrete in value. CME has the right from the third anniversary to pay a cash dividend to the Company in lieu of further accretion. Each Series B convertible redeemable preferred share may be converted into shares of Class A common stock at the Company’s option at any time after the third anniversary of the closing. The number of shares of Class A common stock received upon conversion would be determined by dividing the accreted value of the Series B convertible redeemable preferred shares (including any accrued but unpaid dividends) by the conversion price. In connection with the May 2014 transactions described above, the conversion price was adjusted from $3.1625 to $2.4167. The Series B convertible redeemable preferred shares will also be redeemable at the option of CME at any time after the third anniversary of the closing; however, upon notice from CME of a proposed redemption, the Company may elect to receive cash or shares of Class A common stock.

2012 Transactions

In 2012, the Company acquired approximately 10.8 million shares of Class A common stock and 1 share of Series A convertible preferred stock for $165 million.

 

90


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Equity-Method Investments

At December 31, 2014, investments accounted for using the equity method included the Company’s investments in the Class A common stock and Series A convertible preferred stock of CME, HBO LAG (88% owned) and certain other ventures that are generally 20% to 50% owned.

HBO LAG is a VIE and, because voting control of this entity is shared equally with the other investor in HBO LAG, the Company has determined that it is not the primary beneficiary of this VIE. As of December 31, 2014 and December 31, 2013, the Company’s aggregate investment in HBO LAG was $568 million and $580 million, respectively, and was recorded in Investments, including available-for-sale securities, in the Consolidated Balance Sheet. The investment in HBO LAG is intended to enable the Company to more broadly leverage its programming and digital strategy in the territories served and to capitalize on growing multi-channel television opportunities in such territories. The Company provides programming as well as certain services, including distribution, licensing and technological and administrative support, to HBO LAG. HBO LAG is financed through cash flows from its operations, and the Company is not obligated to provide HBO LAG with any additional financial support. In addition, the assets of HBO LAG are not available to settle the Company’s obligations.

Cost-Method Investments

The Company’s cost-method investments include its investment in the Series B convertible redeemable preferred shares of CME as well as its investments in entities such as non-public start-up companies and investment funds. The Company uses available qualitative and quantitative information to evaluate all cost-method investments for impairment at least quarterly.

Gain on Sale of Investments

For the year ended December 31, 2014, the Company recognized net gains of $36 million, primarily related to miscellaneous investments sold during the year. For the year ended December 31, 2013, the Company recognized net gains of $76 million, primarily related to a gain on the sale of the Company’s investment in a theater venture in Japan. For the year ended December 31, 2012, the Company recognized net gains of $11 million related to the sale of various investments.

Investment Writedowns

For the years ended December 31, 2014, 2013 and 2012, the Company incurred writedowns to reduce the carrying value of certain investments that experienced other-than-temporary impairments, as set forth below (millions):

 

                                                        
     December 31,  
     2014      2013      2012  

Equity-method investments

   $ 21       $      $ 25   

Cost-method investments

                   14   

Available-for-sale securities

                    
  

 

 

    

 

 

    

 

 

 

Total

$                 35    $                 17    $                 46   
  

 

 

    

 

 

    

 

 

 

The impairment of equity-method investments incurred during the year ended December 31, 2012 is primarily related to the shutdown of TNT television operations in Turkey. For more information on this investment, see Note 3. While Time Warner has recognized all declines that are believed to be other-than-temporary as of December 31, 2014, it is reasonably possible that individual investments in the Company’s portfolio may experience other-than-temporary declines in value in the future if the underlying investees experience poor operating results or the U.S. or certain foreign equity markets experience declines in value.

 

91


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

5.

FAIR VALUE MEASUREMENTS

A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis as of December 31, 2014 and December 31, 2013, respectively (millions):

 

    December 31, 2014     December 31, 2013  
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
                            (recast)  

Assets:

               

Trading securities:

               

Diversified equity securities (a)

  $     232      $     $     $     237      $     254      $     $     $     259   

Available-for-sale securities:

               

Equity securities

    19                    19        56                    56   

Debt securities

          60              60              40              40   

Derivatives:

               

Foreign exchange contracts

          61              61              10              10   

Other

                    247        247                            8        14   

Liabilities:

               

Derivatives:

               

Foreign exchange contracts

          (3)              (3)              (17)              (17)   

Other

                (6)        (6)                    (7)        (7)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 251    $     123    $ 241    $ 615    $ 316    $       38    $   $ 355   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(a)  

Consists of investments related to deferred compensation.

The Company primarily applies the market approach for valuing recurring fair value measurements. As of December 31, 2014, assets and liabilities valued using significant unobservable inputs (Level 3) primarily related to an asset of $242 million related to warrants to purchase shares of CME Class A common stock. The Company estimates the fair value of these warrants using a Monte Carlo Simulation model. Significant unobservable inputs used in the fair value measurement at December 31, 2014 are an expected term of 2.59 years and an expected volatility of approximately 82%. As of both December 31, 2014 and 2013, the other Level 3 assets and liabilities consisted of assets related to equity instruments held by employees of former subsidiaries of the Company, liabilities for contingent consideration and options to redeem securities.

 

92


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table reconciles the beginning and ending balances of net derivative assets and liabilities classified as Level 3 and identifies the total gains (losses) the Company recognized during the year ended December 31, 2014 and 2013 on such assets and liabilities that were included in the Consolidated Balance Sheet as of December 31, 2014 and 2013 (millions):

 

                                 
     December 31,
2014
     December 31,
2013
 

Balance as of the beginning of the period

   $      $  

Total gains (losses), net:

     

Included in operating income

            (1)   

Included in other loss, net

     31         12   

Included in other comprehensive income (loss)

             

Purchases

     213          

Settlements

     (20)         (15)   

Issuances

     16         (2)   

Transfers in and/or out of Level 3

             
  

 

 

    

 

 

 

Balance as of the end of the period

$ 241    $  
  

 

 

    

 

 

 

Net gain for the period included in net income related to assets and liabilities
still held as of the end of the period

$               32    $                 9   
  

 

 

    

 

 

 

Other Financial Instruments

The Company’s other financial instruments, including debt, are not required to be carried at fair value. Based on the interest rates prevailing at December 31, 2014, the fair value of Time Warner’s debt exceeded its carrying value by approximately $4.251 billion and, based on interest rates prevailing at December 31, 2013, the fair value of Time Warner’s debt exceeded its carrying value by approximately $2.754 billion. The fair value of Time Warner’s debt was considered a Level 2 measurement as it was based on observable market inputs such as current interest rates and, where available, actual sales transactions. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized in the consolidated financial statements unless the debt is retired prior to its maturity.

Information about the Company’s investments in CME that are not required to be carried at fair value on a recurring basis is as follows (millions):

 

         Carrying Value              Fair Value            Fair Value Hierarchy  

Class A common stock (a)

   $      $                        233       Level 1

Series B convertible redeemable preferred shares

                            148         297       Level 2

Senior secured notes

     239         408       Level 2

 

 

 

(a)  

Includes one share of Series A convertible preferred stock.

The fair values of the Company’s investments in CME’s Class A common stock (including Series A convertible preferred stock) and Series B convertible redeemable preferred shares are primarily determined by reference to the December 31, 2014 closing price of CME’s common stock. The fair value of the Company’s investment in CME’s Senior Secured Notes is primarily determined by reference to observable sales transactions.

The carrying value for the majority of the Company’s other financial instruments approximates fair value due to the short-term nature of the financial instruments or because the financial instruments are of a longer-term nature and are recorded on a discounted basis.

 

93


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Non-Financial Instruments

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value.

During the year ended December 31, 2014, the Company performed impairment reviews of a tradename at Warner Bros., as well as certain intangible assets at international subsidiaries of Turner and Home Box Office. As a result, the Company recorded noncash impairments of $17 million to write down the value of these assets to $12 million. During the year ended December 31, 2013, the Company performed impairment reviews of certain intangible assets at international subsidiaries of Turner. As a result, the Company recorded noncash impairments of $18 million to write down the value of these assets to $3 million. These fair value measurements were considered to be Level 3 measurements and were determined using a discounted cash flow (“DCF”) methodology with assumptions for cash flows associated with the use and eventual disposition of the assets.

During the years ended December 31, 2014 and December 31, 2013, the Company also made fair value measurements related to certain theatrical films and television programs. In determining the fair value of its theatrical films, the Company employs a DCF methodology that includes cash flow estimates of a film’s ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on the weighted average cost of capital of the respective business (e.g., Warner Bros.) plus a risk premium representing the risk associated with producing a particular theatrical film. The fair value of any theatrical film and television production that management plans to abandon is zero. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement. The following table presents certain theatrical film and television production costs, which were recorded as inventory in the Consolidated Balance Sheet, that were written down to fair value (millions):

 

                                         
     Carrying value
before write down
     Carrying value
after write down
 

Fair value measurements made during the year ended December 31,:

     

2014

   $                     331      $                     201  

2013

     289        206  

 

94


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

6.

INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS

Inventories and theatrical film and television production costs consist of (millions):

 

                             
     December 31,
2014
     December 31,
2013
 
            (recast)  

Inventories:

     

Programming costs, less amortization

   $ 3,251       $ 3,416   

Other inventory, primarily DVDs and Blu-ray Discs

     228         269   
  

 

 

    

 

 

 

Total inventories

  3,479      3,685   

Less: current portion of inventory

  (1,700)      (1,648)   
  

 

 

    

 

 

 

Total noncurrent inventories

  1,779      2,037   
  

 

 

    

 

 

 

Theatrical film production costs: (a)

Released, less amortization

  641      660   

Completed and not released

  379      246   

In production

  1,266      1,480   

Development and pre-production

  105      107   

Television production costs: (a)

Released, less amortization

  1,251      1,249   

Completed and not released

  521      536   

In production

  889      694   

Development and pre-production

  10       
  

 

 

    

 

 

 

Total theatrical film and television production costs

  5,062      4,979   
  

 

 

    

 

 

 

Total noncurrent inventories and theatrical film and television production costs

$             6,841    $             7,016   
  

 

 

    

 

 

 

 

 

 

(a)

Does not include $797 million and $958 million of acquired film library intangible assets as of December 31, 2014 and December 31, 2013, respectively, which are included in Intangible assets subject to amortization, net in the Consolidated Balance Sheet.

Approximately 89% of unamortized film costs for released theatrical and television content are expected to be amortized within three years from December 31, 2014. In addition, approximately $1.9 billion or 68% of the film costs of released and completed and not released theatrical and television product are expected to be amortized during the twelve-month period ending December 31, 2015.

 

7.

DERIVATIVE INSTRUMENTS

Time Warner uses derivative instruments, primarily forward contracts, to manage the risk associated with the volatility of future cash flows denominated in foreign currencies and changes in fair value resulting from changes in foreign currency exchange rates. The principal currencies being hedged include the British Pound, Euro, Australian Dollar and Canadian Dollar. Time Warner uses foreign exchange contracts that generally have maturities of three to 18 months to hedge various foreign exchange exposures, including the following: (i) variability in foreign-currency-denominated cash flows, such as the hedges of unremitted or forecasted royalty and license fees owed to Time Warner’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency (i.e., cash flow hedges), and (ii) currency risk associated with foreign-currency-denominated operating assets and liabilities (i.e., fair value hedges).

The Company also enters into derivative contracts that economically hedge certain of its foreign currency risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. These economic hedges are used primarily to offset the change in certain foreign currency denominated long-term receivables and certain foreign-currency-denominated debt due to changes in the underlying foreign exchange rates.

 

95


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Gains and losses from hedging activities recognized in the Consolidated Statement of Operations, including hedge ineffectiveness, were not material for the years ended December 31, 2014, 2013 and 2012. In addition, such gains and losses were largely offset by corresponding economic gains or losses from the respective transactions that were hedged.

The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions and has entered into collateral agreements with certain of these counterparties to further protect the Company in the event of deterioration of the credit quality of such counterparties on outstanding transactions. Additionally, netting provisions are included in agreements in situations where the Company executes multiple contracts with the same counterparty. For such foreign exchange contracts, the Company offsets the fair values of the amounts owed to or due from the same counterparty and classifies the net amount as a net asset or net liability within Prepaid expenses and other current assets or Accounts payable and accrued liabilities, respectively, in the Consolidated Balance Sheet. The following is a summary of amounts recorded in the Consolidated Balance Sheet pertaining to Time Warner’s use of foreign currency derivatives at December 31, 2014 and December 31, 2013 (millions):

 

                                         
     December 31,
2014 (a)
     December 31,
2013 (b)
 

Prepaid expenses and other current assets

   $                    61       $                    10   

Accounts payable and accrued liabilities

     (3)         (17)   

 

 

 

(a)

Includes $139 million ($92 million of qualifying hedges and $47 million of economic hedges) and $81 million ($65 million of qualifying hedges and $16 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively.

(b)  

Includes $77 million ($64 million of qualifying hedges and $13 million of economic hedges) and $84 million ($53 million of qualifying hedges and $31 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively.

At December 31, 2014 and December 31, 2013, $20 million and $28 million of gains, respectively, related to cash flow hedges are recorded in Accumulated other comprehensive loss, net and are expected to be recognized in earnings at the same time the hedged items affect earnings. Included in Accumulated other comprehensive loss, net at December 31, 2014 and December 31, 2013 are net losses of $5 million and net gains $21 million, respectively, related to hedges of cash flows associated with films that are not expected to be released within the next twelve months.

 

8.

LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

The Company’s long-term debt and other financing arrangements consist of revolving bank credit facilities, a commercial paper program, fixed-rate public debt and other obligations. The principal amounts of long-term debt adjusted for premiums and discounts consist of (millions):

 

                                         
     December 31,  
     2014      2013  
            (recast)  

Fixed-rate public debt

   $ 21,920       $ 19,905   

Other obligations

     574         222   
  

 

 

    

 

 

 

Subtotal

  22,494      20,127   

Debt due within one year

  (1,118)      (66)   
  

 

 

    

 

 

 

Total long-term debt

$             21,376    $             20,061   
  

 

 

    

 

 

 

The Company’s unused committed capacity as of December 31, 2014 was $7.637 billion, including $2.618 billion of Cash and equivalents. At December 31, 2014, there were no borrowings outstanding under the Revolving Credit Facilities, as defined below, and no commercial paper was outstanding under the commercial paper program. The Revolving Credit Facilities, commercial paper program and public debt of the Company rank pari passu with the senior debt of the respective obligors thereon. The weighted-average interest rate on Time Warner’s total debt was 5.80% and 6.11% at December 31, 2014 and 2013, respectively.

 

96


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Revolving Credit Facilities and Commercial Paper Program

Revolving Credit Facilities

On December 18, 2014, Time Warner amended its $5.0 billion of senior unsecured credit facilities (the “Revolving Credit Facilities”), which consist of two $2.5 billion revolving credit facilities, to extend the maturity dates of both from December 18, 2018 to December 18, 2019 pursuant to a First Amendment, dated as of December 18, 2014, to the amended and restated credit agreement, dated as of January 19, 2011, as amended and restated as of December 18, 2013 (the “Credit Agreement”).

The permitted borrowers under the Revolving Credit Facilities are Time Warner and Time Warner International Finance Limited (“TWIFL” and, together with Time Warner, the “Borrowers”). The interest rate on borrowings and facility fees under the Revolving Credit Facilities are the same for both revolving credit facilities and are based on the credit rating for Time Warner’s senior unsecured long-term debt. Based on the credit rating as of December 31, 2014, the interest rate on borrowings under the Revolving Credit Facilities would be LIBOR plus 1.10% per annum and the facility fee was 0.15% per annum.

The Revolving Credit Facilities provide same-day funding and multi-currency capability, and a portion of the commitment, not to exceed $500 million at any time, may be used for the issuance of letters of credit. The covenants in the Revolving Credit Facilities include a maximum consolidated leverage ratio covenant of 4.5 times the consolidated EBITDA, as defined in the Revolving Credit Facilities, of Time Warner, but exclude any credit ratings-based defaults or covenants or any ongoing covenant or representations specifically relating to a material adverse change in Time Warner’s financial condition or results of operations. The terms and related financial metrics associated with the leverage ratio are defined in the Revolving Credit Facilities. At December 31, 2014, the Company was in compliance with the leverage covenant, with a consolidated leverage ratio of approximately 3.1 times. Borrowings under the Revolving Credit Facilities may be used for general corporate purposes, and unused credit is available to support borrowings by Time Warner under its commercial paper program. The Revolving Credit Facilities also contain certain events of default customary for credit facilities of this type (with customary grace periods, as applicable). The Borrowers may from time to time, so long as no default or event of default has occurred and is continuing, increase the commitments under either or both of the Revolving Credit Facilities by up to $500 million per facility by adding new commitments or increasing the commitments of willing lenders. The obligations of each of the Borrowers under the Revolving Credit Facilities are directly or indirectly guaranteed, on an unsecured basis, by Historic TW Inc. (“Historic TW”), Home Box Office and Turner. The obligations of TWIFL under the Revolving Credit Facilities are also guaranteed by Time Warner.

Commercial Paper Program

The Company has a commercial paper program, which was established on February 16, 2011 on a private placement basis, under which Time Warner may issue unsecured commercial paper notes up to a maximum aggregate amount not to exceed the unused committed capacity under the $5.0 billion Revolving Credit Facilities, which support the commercial paper program. Proceeds from the commercial paper program may be used for general corporate purposes. The obligations of the Company under the commercial paper program are directly or indirectly guaranteed, on an unsecured basis, by Historic TW, Home Box Office and Turner.

Public Debt

Time Warner and one of its subsidiaries have various public debt issuances outstanding. At issuance, the maturities of these outstanding series of debt ranged from five to 40 years and the interest rates on debt with fixed interest rates ranged from 2.10% to 9.15%. At December 31, 2014 and 2013, the weighted average interest rate on the Company’s outstanding fixed-rate public debt was 5.89% and 6.13%, respectively. At December 31, 2014, the Company’s fixed-rate public debt had maturities ranging from 2015 to 2044.

 

97


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Debt Offering

On May 20, 2014, Time Warner issued $650 million aggregate principal amount of 2.10% Notes due 2019, $750 million aggregate principal amount of 3.55% Notes due 2024 and $600 million aggregate principal amount of 4.65% Debentures due 2044 in a public offering. The securities issued pursuant to the offering are directly or indirectly guaranteed, on an unsecured basis, by Historic TW, Home Box Office and Turner.

Maturities of Public Debt

The Company’s public debt matures as follows (millions):

 

                                                                                                                 
     2015      2016      2017      2018      2019      Thereafter  

Debt

   $           1,000       $           1,150       $              500       $              600       $              650       $         18,131   

Covenants and Credit Rating Triggers

Each of the Company’s Credit Agreement and public debt indentures contain customary covenants. A breach of such covenants in the Credit Agreement that continues beyond any grace period constitutes a default, which can limit the Company’s ability to borrow and can give rise to a right of the lenders to terminate the Revolving Credit Facilities and/or require immediate payment of any outstanding debt. A breach of such covenants in the public debt indentures beyond any grace period constitutes a default, which can require immediate payment of the outstanding debt. There are no credit ratings-based defaults or covenants in the Credit Agreement or public debt indentures.

The interest rate on borrowings under the Revolving Credit Facilities and the facility fee are based in part on the Company’s credit ratings. Therefore, if the Company’s credit ratings are lowered, the cost of maintaining the Revolving Credit Facilities and the cost of borrowing increase and, conversely, if the ratings improve, such costs decrease. As of December 31, 2014, the Company’s investment grade debt ratings were as follows: Fitch BBB+, Moody’s Baa2, and S&P BBB.

As of December 31, 2014, the Company was in compliance with all covenants in the Credit Agreement and its public debt indentures. The Company does not anticipate that it will have any difficulty in the foreseeable future complying with the covenants in its Credit Agreement or public debt indentures.

Other Obligations

Other long-term debt obligations consist of capital lease and other obligations, including committed financings by subsidiaries under local bank credit agreements. At December 31, 2014 and 2013, the weighted average interest rate for other long-term debt obligations was 2.58% and 3.98%, respectively. Significant maturities of other long-term debt obligations are as follows: $100 million in 2015, $125 million in 2018 and $250 million in 2019.

 

98


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Capital Leases

The Company has entered into various leases primarily related to network equipment that qualify as capital lease obligations. As a result, the present value of the remaining future minimum lease payments is recorded as a capitalized lease asset and related capital lease obligation in the Consolidated Balance Sheet. Assets recorded under capital lease obligations totaled $113 million and $115 million as of December 31, 2014 and 2013, respectively. Related accumulated amortization totaled $69 million and $59 million as of December 31, 2014 and 2013, respectively.

Future minimum capital lease payments at December 31, 2014 are as follows (millions):

 

              

2015

$ 13   

2016

  11   

2017

   

2018

   

2019

   

Thereafter

  12   
  

 

 

 

Total

  62   

Amount representing interest

  (10)   
  

 

 

 

Present value of minimum lease payments

  52   

Current portion

  (10)   
  

 

 

 

Total long-term portion

$                 42   
  

 

 

 

Film Tax-Advantaged Arrangements

The Company’s film and TV production businesses, on occasion, enter into tax-advantaged transactions with foreign investors that are thought to generate tax benefits for such investors. The Company believes that its tax profile is not affected by its participation in these arrangements in any jurisdiction. The foreign investors provide consideration to the Company for entering into these arrangements.

Although these transactions often differ in form, they generally involve circumstances in which the Company enters into a sale-leaseback arrangement involving its film product with third-party special purpose entities (“SPEs”) owned by the foreign investors. The Company maintains its rights and control over the use of its film product. The Company evaluates these SPEs for consolidation in accordance with its policy. Because the Company generally does not have a controlling interest in the SPEs, it generally does not consolidate them. In addition, the Company does not guarantee and is not otherwise responsible for the equity and debt in these SPEs and does not participate in the profits or losses of these SPEs. The Company accounts for these arrangements based on their substance, and the Company records the costs of producing the films as an asset and records the net benefit received from the investors as a reduction of film and television production costs resulting in lower film and television production cost amortization for the films involved in the arrangement. At December 31, 2014, such SPEs were capitalized with approximately $2.9 billion of debt and equity from the third-party investors. These transactions resulted in reductions of film and television production cost amortization totaling $1 million, $1 million and $10 million during the years ended December 31, 2014, 2013 and 2012, respectively.

 

99


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

9.

INCOME TAXES

Domestic and foreign income before income taxes and discontinued operations are as follows (millions):

 

                                                  
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Domestic

   $ 4,296       $ 4,836       $ 4,097   

Foreign

     383         132         (64)   
  

 

 

    

 

 

    

 

 

 

Total

$             4,679    $             4,968    $             4,033   
  

 

 

    

 

 

    

 

 

 

Current and Deferred income taxes (tax benefits) provided on Income from continuing operations are as follows (millions):

 

                                            
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Federal:

        

Current

   $ 128       $ 494       $ 1,066   

Deferred

     152         802         (147)   

Foreign:

        

Current (a)

     466         348         350   

Deferred

            (21)          

State and Local:

        

Current

     25         13         115   

Deferred

     14         (22)         (20)   
  

 

 

    

 

 

    

 

 

 

Total (b)

$                785    $             1,614    $             1,370   
  

 

 

    

 

 

    

 

 

 

 

 

 

(a)  

Includes foreign withholding taxes of $279 million in 2014, $273 million in 2013 and $244 million in 2012.

(b)  

Excludes excess tax benefits from equity awards allocated directly to contributed capital of $179 million in 2014, $179 million in 2013 and $83 million in 2012.

The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and income taxes provided are as set forth below (millions):

 

                                            
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Taxes on income at U.S. federal statutory rate

   $ 1,638       $ 1,739       $ 1,412   

State and local taxes, net of federal tax effects

     64         72         43   

Domestic production activities deduction

     (114)         (133)         (152)   

Federal Tax Settlement

     (687)                 

Valuation Allowances

     (226)                (6)   

Other

     110         (67)         73   
  

 

 

    

 

 

    

 

 

 

Total

$                785    $             1,614    $             1,370   
  

 

 

    

 

 

    

 

 

 

 

100


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Significant components of Time Warner’s net deferred tax liabilities are as follows (millions):

 

                             
     December 31,  
     2014      2013  
            (recast)  

Deferred tax assets:

     

Tax attribute carryforwards (a)

   $ 305       $ 999   

Receivable allowances and return reserves

     168         199   

Royalties, participations and residuals

     429         444   

Investments

     62         180   

Equity-based compensation

     218         239   

Amortization

     231         184   

Other

     1,345         1,169   

Valuation allowances (a)

     (275)         (504)   
  

 

 

    

 

 

 

Total deferred tax assets

$ 2,483    $ 2,910   
  

 

 

    

 

 

 

Deferred tax liabilities:

Assets acquired in business combinations

$ 2,874    $ 2,939   

Unbilled television receivables

  998      933   

Unremitted earnings of foreign subsidiaries

  41      241   

Depreciation

  264      220   

Other

  326      495   
  

 

 

    

 

 

 

Total deferred tax liabilities

  4,503      4,828   
  

 

 

    

 

 

 

Net deferred tax liability

$             2,020    $             1,918   
  

 

 

    

 

 

 

 

 

 

(a)  

The Company has recorded valuation allowances for certain tax attribute carryforwards and other deferred tax assets due to uncertainty that exists regarding future realizability. The tax attribute carryforwards consist of $21 million of tax credits, $58 million of capital losses and $226 million of net operating losses that expire in varying amounts from 2015 through 2034. If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the majority of the valuation allowances will be recognized in the Consolidated Statement of Operations.

U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of certain foreign subsidiaries aggregating approximately $1.1 billion at December 31, 2014. Determination of the amount of unrecognized deferred U.S. income tax liability with respect to such earnings is not practicable.

For accounting purposes, the Company records equity-based compensation expense and a related deferred tax asset for the future tax deductions it may receive. For income tax purposes, the Company receives a tax deduction equal to the stock price on the date that a restricted stock unit (or performance share unit) vests or the excess of the stock price over the exercise price of an option upon exercise. The deferred tax asset consists of amounts relating to individual unvested and/or unexercised equity-based compensation awards; accordingly, deferred tax assets related to certain equity awards may currently be in excess of the tax benefit ultimately received. The applicable accounting rules require that the deferred tax asset related to an equity-based compensation award be reduced only at the time the award vests (in the case of a restricted stock unit or performance share unit), is exercised (in the case of a stock option) or otherwise expires or is cancelled. This reduction is recorded as an adjustment to Additional paid-in capital (“APIC”), to the extent that the realization of excess tax deductions on prior equity-based compensation awards were recorded directly to APIC. The cumulative amount of such excess tax deductions is referred to as the Company’s “APIC Pool.” Any shortfall balance recognized in excess of the Company’s APIC Pool is charged to Income tax provision in the Consolidated Statement of Operations. The Company’s APIC Pool was sufficient to absorb any shortfalls such that no shortfalls were charged to the Income tax provision during the years ended December 31, 2014, 2013 and 2012.

 

101


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Accounting for Uncertainty in Income Taxes

The Company recognizes income tax benefits for tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the positions.

Changes in the Company’s uncertain income tax positions, excluding the related accrual for interest and penalties, from January 1 through December 31 are set forth below (millions):

 

                                                  
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Beginning balance

   $ 2,169       $ 2,203       $ 2,106   

Additions for prior year tax positions

     87         124         97   

Additions for current year tax positions

     69         76         94   

Reductions for prior year tax positions

     (968)         (140)         (60)   

Settlements

     (8)         (84)         (26)   

Lapses in statute of limitations

     (22)         (10)         (8)   
  

 

 

    

 

 

    

 

 

 

Ending balance

$             1,327    $             2,169    $             2,203   
  

 

 

    

 

 

    

 

 

 

Should the Company’s position with respect to these uncertain tax positions be upheld, the significant majority of the effect would be recorded in the Consolidated Statement of Operations as part of the Income tax provision.

During the year ended December 31, 2014, the Company recorded a decrease to interest reserves in the Consolidated Statement of Operations of approximately $62 million and made interest payments in connection with settlements reached during 2014 of approximately $12 million. During the year ended December 31, 2013, the Company recorded interest reserves in the Consolidated Statement of Operations of approximately $35 million and made interest payments in connection with settlements reached during 2013 of approximately $38 million. The amount accrued for interest and penalties as of December 31, 2014 and 2013 was $346 million and $418 million, respectively. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.

In the Company’s judgment, uncertainties related to certain tax matters are reasonably possible of being resolved during the next twelve months. The effect of the resolutions of these matters, a portion of which could vary based on the final terms and timing of actual settlements with taxing authorities, is estimated to be a reduction of recorded unrecognized tax benefits ranging from $0 to $80 million, most of which would lower the Company’s effective tax rate. The Company does not otherwise currently anticipate that its reserves related to uncertain income tax positions as of December 31, 2014 will significantly increase or decrease during the twelve-month period ended December 31, 2015; however, various events could cause the Company’s current expectations to change in the future.

During the year ended December 31, 2014, the Company recognized a tax benefit of $687 million primarily related to the reversal of certain tax reserves, including related interest accruals, in connection with a Federal tax settlement on the examination of the Company’s 2005 – 2007 tax returns. Certain matters involving the Company’s capital loss carryforward and research and development tax credits were not resolved as part of the settlement and, accordingly, the Company is pursuing resolution of such matters through the Internal Revenue Service’s (“IRS”) administrative appeals process.

The Company and its subsidiaries file income tax returns in the U.S. and various state and local and foreign jurisdictions. The IRS is currently conducting an examination of the Company’s U.S. income tax returns for the 2008 through 2010 period.

The Company has filed a petition with the United States Tax Court on a matter relating to the appropriate tax characterization of stock warrants received from Google Inc. in 2002. In December 2014, the Company reached a preliminary agreement with the IRS to resolve this matter. Final resolution of this matter is subject to agreement regarding certain necessary computations and the preparation and execution of definitive documentation.

 

102


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As of December 31, 2014, the tax years that remain subject to examination by significant jurisdiction are as follows:

 

U.S. federal

   2002 and 2004 through 2014

California

   2007 through 2014

New York State

   2009 through 2014

New York City

   2009 through 2014

 

10. 

SHAREHOLDERS’ EQUITY

Common Stock Repurchase Program

For the years ended December 31, 2014, 2013 and 2012, the number of shares repurchased pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, and their cost are as follows (millions):

 

                                                   
     Shares
Repurchased
     Cost of Shares  

2014

     77       $ 5,500   

2013

     60       $ 3,700   

2012

     80       $ 3,302   

In January 2014, Time Warner’s Board of Directors authorized up to $5.0 billion of share repurchases beginning January 1, 2014, including amounts available under the Company’s prior stock repurchase program as of December 31, 2013. In June 2014, Time Warner’s Board of Directors authorized an additional $5.0 billion of share repurchases. Purchases under the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions. As of December 31, 2014, $4.500 billion remained available for purchases under the stock repurchase program.

Shares Authorized and Outstanding

At December 31, 2014, shareholders’ equity of Time Warner included 832 million shares of common stock (net of 820 million shares of common stock held in treasury). As of December 31, 2014, Time Warner is authorized to issue up to 750 million shares of preferred stock, up to 8.33 billion shares of common stock and up to 600 million shares of additional series of common stock. At December 31, 2013, shareholders’ equity of Time Warner included 895 million shares of common stock (net of 757 million shares of common stock held in treasury).

Comprehensive Income (Loss)

Comprehensive income (loss) is reported in the Consolidated Statement of Comprehensive Income and consists of Net income and other gains and losses affecting shareholders’ equity that, under GAAP, are excluded from Net income. For Time Warner, such items consist primarily of foreign currency translation gains (losses), unrealized gains and losses on certain derivative financial instruments and equity securities, and changes in benefit plan obligations.

 

103


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following summary sets forth the activity within Other comprehensive income (loss) (millions):

 

                                                                 
     Pretax      Tax
(provision)
benefit
     Net of tax  

Year Ended December 31, 2012

        

Unrealized gains on foreign currency translation

   $ 59       $ (8)       $ 51   

Reclassification adjustment for losses on foreign currency translation realized in
net income (a)

     10         -           10   

Unrealized gains on securities

            -            

Unrealized losses on benefit obligation

     (312)         106         (206)   

Reclassification adjustment for losses on benefit obligation realized in
net income (b)

     28         (10)         18   

Unrealized gains on derivative financial instruments

            (2)          

Reclassification adjustment for derivative financial instrument gains realized
in net income (c)

     (2)                (1)   
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

$ (211)    $ 87    $ (124)   
  

 

 

    

 

 

    

 

 

 

Year Ended December 31, 2013

Unrealized losses on foreign currency translation

$ (38)    $ 16    $ (22)   

Reclassification adjustment for gains on foreign currency translation realized in
net income (a)

  (9)          (6)   

Unrealized gains on securities

  22      (9)      13   

Unrealized gains on benefit obligation

  203      (79)      124   

Reclassification adjustment for losses on benefit obligation realized in
net income (b)

  33      (11)      22   

Unrealized gains on derivative financial instruments

  45      (18)      27   

Reclassification adjustment for derivative financial instrument gains realized
in net income (c)

  (35)      14      (21)   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

$ 221    $ (84)    $ 137   
  

 

 

    

 

 

    

 

 

 

Year Ended December 31, 2014

Unrealized losses on foreign currency translation

$ (243)    $ 15    $ (228)   

Unrealized losses on securities

  (6)          (4)   

Reclassification adjustment for gains on securities realized in net income (a)

  (16)          (10)   

Unrealized losses on benefit obligation

  (282)      95      (187)   

Reclassification adjustment for losses on benefit obligation realized in
net income (b)

  30      (11)      19   

Unrealized gains on derivative financial instruments

  13      (5)       

Reclassification adjustment for derivative financial instrument gains realized
in net income (c)

  (22)          (14)   
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

$ (526)    $ 110    $ (416)   
  

 

 

    

 

 

    

 

 

 

 

 

 

(a)  

Pretax (gains) losses included in Other income (loss), net.

(b)  

Pretax (gains) losses included in Selling, general and administrative expenses.

(c)  

Pretax (gains) losses included in Selling, general and administrative expenses, Costs of revenues and Other income (loss), net are as follows (millions):

 

                                                                 
     Year Ended December 31,  
     2014      2013      2012  

Selling, general and administrative expenses

   $ (5)       $ (5)       $ (12)   

Costs of revenues

     (18)         (27)         10   

Other loss, net

            (3)         -     

 

104


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following summary sets forth the components of Accumulated other comprehensive loss, net of tax (millions):

 

     December 31,
2014
     December 31,
2013
 

Foreign currency translation losses

   $ (299)       $ (26)   

Net unrealized gains on securities

     12         26   

Net derivative financial instruments gains

     12         18   

Net unfunded/underfunded benefit obligation

     (889)         (870)   
  

 

 

    

 

 

 

Accumulated other comprehensive loss, net

$         (1,164)    $            (852)   
  

 

 

    

 

 

 

 

11.

INCOME PER COMMON SHARE

Set forth below is a reconciliation of Basic and Diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders (millions, except per share amounts):

 

     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Income from continuing operations attributable to Time Warner Inc. shareholders:

   $          3,894       $          3,354       $          2,666   

Income allocated to participating securities

     (14)         (16)         (18)   
  

 

 

    

 

 

    

 

 

 

Income from continuing operations attributable to Time Warner Inc.
common shareholders — basic

$ 3,880    $ 3,338    $ 2,648   
  

 

 

    

 

 

    

 

 

 

Average basic common shares outstanding

  863.3      920.0      954.4   

Dilutive effect of equity awards

  19.3      22.6      21.9   
  

 

 

    

 

 

    

 

 

 

Average diluted common shares outstanding

  882.6      942.6      976.3   
  

 

 

    

 

 

    

 

 

 

Antidilutive common share equivalents excluded from computation

  1.0          25.0   
  

 

 

    

 

 

    

 

 

 

Income per common share from continuing operations attributable to
Time Warner Inc. common shareholders:

Basic

$ 4.49    $ 3.63    $ 2.77   

Diluted

$ 4.41    $ 3.56    $ 2.73   

 

12.

EQUITY-BASED COMPENSATION

Equity Plans

The Company has one active equity plan, the Time Warner Inc. 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”), which was approved by the Company’s stockholders on May 23, 2013. Under the 2013 Stock Incentive Plan, the Company is authorized to grant equity awards to employees and non-employee directors covering an aggregate of approximately 36 million shares of the Company’s common stock. Stock options and RSUs have been granted to employees and non-employee directors of the Company. Generally, stock options are granted with exercise prices equal to the fair market value on the date of grant, vest in four equal annual installments, and expire ten years from the date of grant. RSUs granted under the 2013 Stock Incentive Plan generally vest in four equal annual installments, while RSUs granted under the Company’s prior stock incentive plans generally vest 50% in each of the third and fourth anniversaries of the date of grant. The Company also has a PSU program for executive officers who are awarded a target number of PSUs that represent the

 

105


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

contingent (unfunded) right to receive shares of Company common stock at the end of a performance period of three years based on the actual performance level achieved by the Company. Stock options and RSUs generally provide for accelerated vesting upon an election to retire after reaching a specified age and years of service, as well as in certain additional circumstances for non-employee directors.

Holders of RSUs are generally entitled to receive cash dividend equivalents based on the regular quarterly cash dividends declared and paid by the Company during the period that the RSUs are outstanding. Beginning with RSU grants made in 2013, the dividend equivalent payment for holders of RSUs subject to a performance condition is made in cash following the satisfaction of the performance condition. Holders of PSUs also are entitled to receive dividend equivalents based on the regular quarterly cash dividends declared and paid by the Company during the period that the PSUs are outstanding. The dividend equivalent payment is made in cash following the vesting of the PSUs (generally following the end of the applicable performance period) and is based on the number of shares that vest and are paid out. Holders of stock options do not receive dividends or dividend equivalent payments.

Upon the (i) exercise of a stock option, (ii) vesting of an RSU, (iii) vesting of a PSU or (iv) grant of restricted stock, shares of Time Warner common stock may be issued either from authorized but unissued shares or from treasury stock.

In connection with the Time Separation and in accordance with existing antidilution provisions in the Company’s equity plans, the number of stock options, RSUs and target PSUs outstanding at the Distribution Date and the exercise prices of such stock options were prospectively adjusted to maintain the value of those awards subsequent to the Time Separation (the “Adjustment”). The changes in the number of shares subject to outstanding equity awards and the exercise prices were determined by comparing the value of such awards immediately prior to the Time Separation to the value of such awards immediately after the Time Separation. Accordingly, the number of shares subject to each equity award outstanding as of the Distribution Date was increased by multiplying such number of shares by a factor of approximately 1.04, while the per share exercise price of each stock option was decreased by dividing such exercise price by a factor of approximately 1.04. The adjustments resulted in an increase of approximately 2 million shares subject to outstanding equity awards following the Time Separation. The adjustments to the outstanding equity awards did not result in any additional compensation expense.

Other information pertaining to each category of equity-based compensation appears below.

Stock Options

The table below summarizes the weighted-average assumptions used to value stock options at their grant date and the weighted-average grant date fair value per share:

 

                                                                    
     Year Ended December 31,  
     2014      2013      2012  

Expected volatility

     26.6%         29.6%         31.2%   

Expected term to exercise from grant date

     5.85 years         6.27 years         6.50 years   

Risk-free rate

     1.9%         1.3%         1.3%   

Expected dividend yield

     1.7%         2.1%         2.8%   

Weighted average grant date fair value per option

   $           16.94      $           13.48      $             8.69  

 

106


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table summarizes information about stock options outstanding as of December 31, 2014:

 

     Number
of Options
     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic
Value
 
     (thousands)             (in years)      (thousands)  

Outstanding as of December 31, 2013

               36,493       $            33.41         

Granted

     3,129         76.96         

Exercised

     (10,214)         32.99         

Forfeited or expired

     (947)         43.75         

Adjustment due to the Time Separation (a)

     1,360            
  

 

 

          

Outstanding as of December 31, 2014 (a)

  29,821      36.27                    4.88    $ 1,470,001   
  

 

 

          

Exercisable as of December 31, 2014 (a)

  22,454      30.22      3.83    $     1,239,551   
  

 

 

          

 

 

(a)  

The weighted-average exercise price of the stock options included in the line item “Adjustment due to the Time Separation” is equal to the weighted-average exercise price of the stock options at their grant date divided by a factor of approximately 1.04. The weighted-average exercise price of the stock options outstanding and exercisable as of December 31, 2014 reflect the Adjustment.

As of December 31, 2014, the number, weighted-average exercise price, aggregate intrinsic value and weighted-average remaining contractual term of the aggregate Time Warner stock options that either had vested or are expected to vest approximate the corresponding amounts for options outstanding. As of December 31, 2014, approximately 30 million shares of Time Warner common stock were available for future grants of stock options under the Company’s equity plan.

The following table summarizes information about stock options exercised (millions):

 

     Year Ended December 31,  
     2014      2013      2012  

Total intrinsic value

   $               402       $               491       $               342   

Cash received

     338         674         1,107   

Tax benefits realized

     143         178         127   

Restricted Stock Units and Target Performance Stock Units

The following table sets forth the weighted-average grant date fair value of RSUs and target PSUs. For certain PSUs, the service inception date precedes the grant date and requires the Company to apply mark-to-market accounting that is reflected in the grant date fair values presented:

 

     Year Ended December 31,  
     2014      2013      2012  

RSUs

   $            65.56       $            54.04       $            37.52   

PSUs

     93.45         101.14         85.42   

 

107


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table summarizes information about unvested RSUs and target PSUs as of December 31, 2014:

 

     Number of
Shares/Units
     Weighted-
Average
Grant Date
Fair Value
     Aggregate
Intrinsic
Value
 
     (thousands)             (thousands)  

Unvested as of December 31, 2013

     14,566       $             40.31      

Granted (a)

     2,960         66.44      

Vested

     (5,882)         34.82      

Forfeited

     (1,035)         42.96      

Adjustment due to the Time Separation (b)

     500         
  

 

 

       

Unvested as of December 31, 2014 (b)

             11,109      48.68    $         948,897   
  

 

 

       

 

 

 

(a)  

Includes 2.7 million RSUs and 0.2 million target PSUs granted during 2014 and a payout adjustment of 0.1 million PSUs due to the actual performance level achieved for PSUs granted in 2011 that vested during 2014.

(b)  

The weighted-average grant date fair value of the RSUs and target PSUs included in the line item “Adjustment due to the Time Separation” is equal to the weighted-average grant date fair value of the awards at their respective grant date divided by a factor of approximately 1.04. The weighted-average grant date fair value of the unvested RSUs and target PSUs as of December 31, 2014 reflect the Adjustment.

The following table sets forth the total intrinsic value of RSUs and target PSUs that vested during the following years (millions):

 

     Year Ended December 31,  
     2014      2013      2012  

RSUs

   $                366       $                291       $                177   

PSUs

     17         27         11   

Equity-Based Compensation Expense

The impact on Operating income for equity-based compensation awards is as follows (millions):

 

     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Stock options

   $                  26       $                  33       $                  45   

RSUs and PSUs

     193         205         150   
  

 

 

    

 

 

    

 

 

 

Total impact on operating income

$ 219    $ 238    $ 195   
  

 

 

    

 

 

    

 

 

 

Tax benefit recognized

$ 76    $ 78    $ 66   
  

 

 

    

 

 

    

 

 

 

Total unrecognized compensation cost related to unvested Time Warner stock option awards as of December 31, 2014, without taking into account expected forfeitures, is $47 million and is expected to be recognized over a weighted-average period between one and two years. Total unrecognized compensation cost related to unvested RSUs and target PSUs as of December 31, 2014, without taking into account expected forfeitures, is $182 million and is expected to be recognized over a weighted-average period between one and two years.

13. BENEFIT PLANS

Retirement Plan Amendments

Effective after June 30, 2010, the Company’s domestic defined benefit pension plans were closed to new hires and employees with less than one year of service, and participating employees stopped accruing additional years of service for purposes of determining the benefits provided by the plans (though crediting years of service for purposes of vesting and

 

108


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

eligibility for early retirement benefits continues). Effective December 31, 2013, pay increases are no longer taken into consideration when determining a participating employee’s benefits under the plans.

In July 2013, the Company’s Board of Directors approved amendments to the Time Warner Group Health Plan. Pursuant to the amendments, (i) subsidized medical benefits provided to eligible retired employees (and their eligible dependents) were discontinued for all future retirees who were employed on December 31, 2013 and who will not meet the eligibility criteria by December 31, 2015 and (ii) effective January 1, 2014, post-65 retiree medical coverage was discontinued and eligible retirees (and their eligible dependents) were moved to coverage provided in the individual health insurance market.

Defined Benefit Pension Plans

A summary of activity for substantially all of Time Warner’s domestic and international defined benefit pension plans is as follows:

Benefit Obligation (millions)

 

                 
     December 31,  
     2014      2013  
            (recast)  

Change in benefit obligation:

     

Projected benefit obligation, beginning of year

   $ 3,311       $ 3,615   

Service cost

             

Interest cost

     153         143   

Actuarial loss (gain)

     484         (307)   

Benefits paid

     (192)         (153)   

Curtailments/Special termination benefit

     (8)         -     

Transfer out due to the Time Separation

     (29)         -     

Foreign currency exchange rates

     (28)         10   
  

 

 

    

 

 

 

Projected benefit obligation, end of year

$ 3,694    $ 3,311   
  

 

 

    

 

 

 

Accumulated benefit obligation, end of year

$             3,660    $             3,280   
  

 

 

    

 

 

 

Plan Assets (millions)

 

                 
     December 31,  
     2014      2013  
            (recast)  

Change in plan assets:

     

Fair value of plan assets, beginning of year

   $ 2,766       $ 2,808   

Actual return on plan assets

     333         46   

Employer contributions

     51         51   

Benefits paid

     (192)         (153)   

Foreign currency exchange rates

     (26)         14   
  

 

 

    

 

 

 

Fair value of plan assets, end of year

$             2,932    $             2,766   
  

 

 

    

 

 

 

As of December 31, 2014 and December 31, 2013, the funded status recognized in the Consolidated Balance Sheet reflected a net liability position of $762 million and $545 million, respectively, primarily consisting of noncurrent liabilities of $808 million and $580 million, respectively. As of December 31, 2014 and December 31, 2013, amounts included in Accumulated other comprehensive loss, net were $1.400 billion and $1.149 billion, respectively, primarily consisting of net actuarial losses.

 

109


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Certain defined benefit pension plans have projected benefit obligations and accumulated benefit obligations in excess of their plan assets. These plans are primarily unfunded. As of December 31, 2014 and December 31, 2013, the projected benefit obligations for unfunded plans were $449 million and $439 million, respectively, and the accumulated benefit obligations for unfunded plans were $442 million and $433 million, respectively. In addition, as of December 31, 2014, the projected benefit obligation and accumulated benefit obligation for certain funded plans exceeded the fair value of their assets by $390 million and $388 million, respectively.

Components of Net Periodic Benefit Costs from Continuing Operations (millions)

 

                                
     December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Service cost

   $      $      $  

Interest cost

     91         79         84   

Expected return on plan assets

     (95)         (85)         (82)   

Amortization of prior service cost

                    

Amortization of net loss

     14         16         12   
  

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

$            14    $            14    $            18   
  

 

 

    

 

 

    

 

 

 

Assumptions

Weighted-average assumptions used to determine benefit obligations and net periodic benefit costs for the years ended December 31:

 

     Benefit Obligations      Net Periodic Benefit Costs  
     2014      2013      2012      2014      2013      2012  
            (recast)      (recast)             (recast)      (recast)  

Discount rate

             4.10%                 4.90%                 4.06%                 4.89%                 4.07%                 4.89%   

Rate of compensation increase

     5.34%         5.60%         4.59%         5.59%         3.98%         4.66%   

Expected long-term return on
plan assets

     n/a         n/a         n/a         6.01%         5.95%         6.14%   

The discount rates were determined by matching the plan’s liability cash flows to rates derived from high-quality corporate bonds available at the measurement date.

In developing the expected long-term rate of return on plan assets, the Company considered long-term historical rates of return, the Company’s plan asset allocations as well as the opinions and outlooks of investment professionals and consulting firms.

During 2014, the Company adopted a new mortality table released by the Society of Actuaries that increased the projected benefit obligation at December 31, 2014 by $86 million.

 

110


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Fair Value of Plan Assets

The following table sets forth by level, within the fair value hierarchy described in Note 5, the assets held by the Company’s defined benefit pension plans, including those assets related to The CW sub-plan, which were approximately $20 million and $18 million, respectively, as of December 31, 2014 and December 31, 2013 (millions):

 

    December 31, 2014     December 31, 2013  

Asset Category

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
                            (recast)  

Cash and cash equivalents (a)

  $ 133      $ -        $ -        $ 133      $ 155      $ -        $ -        $ 155   

Insurance contracts

    -          14        -          14        -                -           

Equity securities:

               

Domestic equities

    157        -          -          157        204        -          -          204   

International equities

          -          -                56        -          -          56   

Fixed income securities:

               

U.S. government and
agency securities (a)

    259        70        -          329        239        19        -          258   

Non-U.S. government and
agency securities

    112        -          -          112        61        -          -          61   

Municipal bonds

    -          23        -          23        -          23        -          23   

Investment grade
corporate bonds (b)

    -          1,187        -          1,187        -          1,048        -          1,048   

Non-investment grade
corporate bonds (b)

    -          20        -          20        -          23        -          23   

Other investments:

               

Pooled investments (c)

    -          400        -          400        -          457        -          457   

Commingled trust funds (a)

    -          486        -          486        -          391        -          391   

Hedge funds

    -          -          30        30        -          -          36        36   

Other (d)

    30              77        109        15        10        40        65   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (e)

$        699    $     2,202    $        107    $     3,008    $        730    $     1,978    $          76    $     2,784   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(a)  

As of December 31, 2014, cash and cash equivalents include $10 million of cash collateral for securities on loan and U.S. government and agency securities include $70 million of securities collateral for securities on loan. As of December 31, 2013, commingled trust funds included $11 million of cash collateral for securities on loan, and U.S. government and agency securities included $5 million of securities collateral for securities on loan.

(b)  

Investment grade corporate bonds have an S&P rating of BBB- or higher and non-investment grade corporate bonds have an S&P rating of BB+ or below.

(c)  

Pooled investments primarily consist of interests in unitized investment pools of which underlying securities primarily consist of equity and fixed income securities.

(d)  

Other investments primarily include limited partnerships, 103-12 investments, derivative contracts, exchange-traded funds and mutual funds.

(e)  

At December 31, 2014 and December 31, 2013, total assets include $78 million and $15 million, respectively, of securities on loan.

 

111


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The table below sets forth a summary of changes in the fair value of the defined benefit pension plans’ Level 3 assets for the years ended December 31, 2014 and December 31, 2013 (millions):

 

     December 31, 2014      December 31, 2013  
     Hedge Funds      Other      Total      Hedge Funds      Other      Total  

Balance at beginning of period

   $ 36       $ 40       $ 76       $ 63       $ 41       $ 104   

Actual return on plan assets and liabilities:

                 

Relating to securities still held at
end of period

     -           31         31         (5)                (4)   

Relating to securities disposed
of during the period

                          10                14   

Purchases

                   10                       10   

Sales

     (8)         (15)         (23)         (33)         (15)         (48)   

Settlements

     -           (2)         (2)         -           -           -     

Transfers in and/or out of Level 3

     -                         -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

$            30    $            77    $          107    $            36    $            40    $            76   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company primarily utilizes the market approach for determining recurring fair value measurements.

The Company’s defined benefit pension plans’ investment policy is to minimize the volatility of the plans’ funded status and to achieve and maintain fully funded status in order to pay current and future participant benefits from plan assets. The Company periodically reviews asset allocation policies consistent with its investment policy. In addition, the Company continuously monitors the performance of its pension assets, the performance of its investment advisers, sub-advisers and asset managers thereof, and makes adjustments and changes as required. The Company does not manage any pension assets internally. The investment guidelines set by the Company for the investment advisers, sub-advisers and asset managers permit the use of index funds, derivative contracts and other hedging strategies as components of portfolio management strategies.

Under the Company’s investment policy, the asset allocation target for the domestic defined benefit pension plans is 35% equity investments and 65% fixed income investments. As and when funded status and market conditions permit, the Company intends to transition this asset allocation target toward a target of 20% equity investments and 80% fixed income investments to further minimize funded status volatility. Target asset allocations for the international defined benefit pension plans as of December 31, 2014 are approximately 45% equity investments, 20% fixed income investments and 35% other investments.

At both December 31, 2014 and December 31, 2013, the defined benefit pension plans’ assets did not include any securities issued by Time Warner.

Expected cash flows

After considering the funded status of the Company’s defined benefit pension plans, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make contributions to its pension plans in any given year. The Company made discretionary cash contributions totaling approximately $20 million to its funded defined benefit pension plans during the year ended December 31, 2014. For the Company’s unfunded plans, contributions will continue to be made to the extent benefits are paid.

Information about the expected benefit payments for the Company’s defined benefit plans is as follows (millions):

 

     2015      2016      2017      2018      2019      2020-2024  

Expected benefit payments

   $          188       $          195       $          197       $          196       $          191       $          992   

 

112


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Defined Contribution Plans

Time Warner has certain domestic and international defined contribution plans, including savings and profit sharing plans, for which the expense amounted to $160 million in 2014, $153 million in 2013 and $144 million in 2012. The Company’s contributions to the savings plans are primarily based on a percentage of the employees’ elected contributions and are subject to plan provisions.

Other Postretirement Benefit Plans

Time Warner also sponsors several unfunded domestic postretirement benefit plans covering certain retirees and their dependents. As described above, during 2013, the Company’s Board of Directors approved amendments to the Time Warner Group Health Plan. In connection with these amendments, the Company recognized a curtailment gain of $38 million in 2013. For substantially all of Time Warner’s domestic postretirement benefit plans, the unfunded benefit obligation as of December 31, 2014 and December 31, 2013 was $104 million and $126 million, respectively, and the amount recognized in Accumulated other comprehensive income, net was a gain of $17 million and $3 million, respectively. For the years ended December 31, 2014, 2013 and 2012, the net periodic benefit costs/(income) were $2 million, $(32) million and $6 million, respectively.

Multiemployer Benefit Plans

The Company contributes to various multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of its union-represented employees, primarily at the Warner Bros. segment. The risks of participating in these multiemployer pension plans are different from single-employer pension plans in that (i) contributions made by the Company to the multiemployer pension plans may be used to provide benefits to employees of other participating employers; (ii) if the Company chooses to stop participating in certain of these multiemployer pension plans, it may be required to pay those plans an amount based on the underfunded status of the plan, which is referred to as a withdrawal liability; and (iii) actions taken by a participating employer that lead to a deterioration of the financial health of a multiemployer pension plan may result in the unfunded obligations of the multiemployer pension plan to be borne by its remaining participating employers. While no multiemployer pension plan contributed to by the Company is individually significant, the Pension Protection Act of 2006 zone status as of December 31, 2014 (i.e., for the multiemployer pension plan’s 2013 plan year) of all of the largest multiemployer pension plans in which the Company participates was green, which implies that such plans are funded at a level of 80 percent or greater. Total contributions made by the Company to multiemployer pension plans for the years ended December 31, 2014, 2013 and 2012 were $125 million, $113 million and $93 million, respectively. Included in these amounts are contributions that Home Box Office periodically makes to the Radio Television & Recording Artists Pension Plan (“RT&RA Plan”) under a collective bargaining agreement that expires in October 2015. The RT&RA Plan is not one of the five largest multiemployer pension plans in which the Company participates. The RT&RA Plan’s most recently filed Form 5500 was for its plan year ended December 31, 2013. Pursuant to that filing, Home Box Office is one of eight employers obligated to contribute to the RT&RA Plan. The RT&RA Plan is operating under a rehabilitation plan, the Pension Protection Act of 2006 zone status for this plan as of December 31, 2013 was red (i.e., critical) and it was less than 65% funded. Home Box Office’s contributions to this plan were less than $1 million in each of the years ended December 31, 2014, 2013 and 2012. Based on contributions reported in the most recent Form 5500 for this plan, Home Box Office’s contributions represented greater than 5% of the plan’s total contributions. Home Box Office’s future contributions to this plan are determined pursuant to the collective bargaining agreement, which imposes no minimum contributions requirement, but incorporates a contribution surcharge for years the plan is in critical status. If Home Box Office had elected to withdraw from the RT&RA Plan during the 2014 plan year, its estimated withdrawal liability would have been approximately $25 million.

The Company also contributes to various other multiemployer benefit plans that provide health and welfare benefits to active and retired participants, primarily at the Warner Bros. segment. Total contributions made by the Company to these other multiemployer benefit plans for the years ended December 31, 2014, 2013 and 2012 were $213 million, $193 million and $167 million, respectively.

 

113


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

14.

 RESTRUCTURING AND SEVERANCE COSTS

The Company’s Restructuring and severance costs primarily related to employee termination costs, ranging from senior executives to line personnel, and other exit costs, including lease terminations and real estate consolidations. For the year ended December 31, 2014, the Company incurred $512 million of Restructuring and severance costs related to restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. The restructuring activities and related costs primarily relate to headcount reductions. Restructuring and severance costs expensed as incurred for the years ended December 31, 2014, 2013 and 2012 are as follows (millions):

 

                                
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Turner

   $ 249       $ 93       $ 52   

Home Box Office

     63         39         15   

Warner Bros.

     169         49         23   

Corporate

     31                 
  

 

 

    

 

 

    

 

 

 

Total restructuring and severance costs

$             512    $             183    $               92   
  

 

 

    

 

 

    

 

 

 

 

                                
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

2014 activity

   $ 506       $ -         $ -     

2013 activity

            173         -     

2012 and prior activity

            10         92   
  

 

 

    

 

 

    

 

 

 

Total restructuring and severance costs

$             512    $             183    $               92   
  

 

 

    

 

 

    

 

 

 

2014 Initiatives

For the year ended December 31, 2014, the Company incurred $506 million in Restructuring and severance costs primarily related to various employee terminations and other exit activities, including $246 million at the Turner segment, $64 million at the Home Box Office segment, $165 million at the Warner Bros. segment and $31 million at Corporate.

2013 Initiatives

For the year ended December 31, 2013, the Company incurred $173 million in Restructuring and severance costs primarily related to various employee terminations and other exit activities, including $87 million at the Turner segment, $39 million at the Home Box Office segment, $42 million at the Warner Bros. segment and $5 million at Corporate.

During the year ended December 31, 2014, the Company incurred Restructuring and severance costs of $2 million at the Turner segment and $2 million at the Warner Bros. segment relating to the 2013 restructuring initiatives.

2012 and Prior Year Initiatives

For the year ended December 31, 2012, the Company incurred $92 million in Restructuring and severance costs primarily related to various employee terminations and other exit activities, including $52 million at the Turner segment, $15 million at the Home Box Office segment, $23 million at the Warner Bros. segment and $2 million at Corporate.

During the years ended December 31, 2014 and December 31, 2013, the Company also adjusted certain charges related to the restructuring initiatives that were undertaken in 2012 and prior years as a result of changes in estimates of previously established accruals. During the year ended December 31, 2014, the Company incurred $1 million at the Turner segment and $2 million at the Warner Bros. segment and reversed $1 million at the Home Box Office segment related to the 2012 and prior year initiatives. During the year ended December 31, 2013, the Company incurred $6 million at the Turner segment and $7 million at the Warner Bros. segment and reversed $3 million at Corporate related to the 2012 and prior year initiatives.

 

114


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Selected Information

Selected information relating to accrued restructuring and severance costs is as follows (millions):

 

                                                                                      
     Employee
Terminations
     Other Exit Costs      Total  

Remaining liability as of December 31, 2011 (recast)

   $ 84       $      $ 92   

Net accruals

     84                92   

Noncash reductions (a)

     (1)         -           (1)   

Cash paid

     (74)         (10)         (84)   
  

 

 

    

 

 

    

 

 

 

Remaining liability as of December 31, 2012 (recast)

  93          99   

Net accruals

  174          183   

Noncash reductions (a)

  (1)      -        (1)   

Cash paid

  (86)      (9)      (95)   
  

 

 

    

 

 

    

 

 

 

Remaining liability as of December 31, 2013 (recast)

  180          186   

Net accruals

  499      13      512   

Noncash reductions (a)

  (3)      -        (3)   

Cash paid

  (151)      (10)      (161)   
  

 

 

    

 

 

    

 

 

 

Remaining liability as of December 31, 2014

$ 525    $   $ 534   
  

 

 

    

 

 

    

 

 

 

 

 

 

  (a)   Noncash reductions relate to the settlement of certain employee-related liabilities with equity instruments.

As of December 31, 2014, of the remaining liability of $534 million, $392 million was classified as a current liability in the Consolidated Balance Sheet, with the remaining $142 million classified as a long-term liability. Amounts classified as long-term are expected to be paid through 2018.

15. SEGMENT INFORMATION

Time Warner classifies its operations into three reportable segments: Turner : consisting principally of cable networks and digital media properties; Home Box Office : consisting principally of premium pay television services domestically and premium pay and basic tier television services internationally; and Warner Bros. : consisting principally of television, feature film, home video and videogame production and distribution. Time Warner’s reportable segments have been determined in accordance with its internal management structure and the financial information that is evaluated regularly by the Company’s chief operating decision maker.

In the ordinary course of business, Time Warner’s reportable segments enter into transactions with one another. The most common types of intersegment transactions include the Warner Bros. segment generating revenues by licensing television and theatrical programming to the Turner and Home Box Office segments. These intersegment transactions are recorded by each segment at estimated fair value as if the transactions were with third parties and, therefore, affect segment performance. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses or assets recognized by the segment that is counterparty to the transaction) are eliminated in consolidation and, therefore, do not affect consolidated results.

 

115


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Information as to the Revenues, intersegment revenues, depreciation of property, plant, and equipment, Amortization of intangible assets, Operating Income (Loss), Assets and Capital expenditures for each of Time Warner’s reportable segments is set forth below (millions):

 

                                                                                      
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Revenues

        

Turner

   $ 10,396       $ 9,983       $ 9,527   

Home Box Office

     5,398         4,890         4,686   

Warner Bros.

     12,526         12,312         12,018   

Intersegment eliminations

     (961)         (724)         (906)   
  

 

 

    

 

 

    

 

 

 

Total revenues

$ 27,359    $ 26,461    $ 25,325   
  

 

 

    

 

 

    

 

 

 
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Intersegment Revenues

        

Turner

   $ 101       $ 85       $ 80   

Home Box Office

     36         14         14   

Warner Bros.

     824         625         812   
  

 

 

    

 

 

    

 

 

 

Total intersegment revenues

$                  961    $                  724    $                  906   
  

 

 

    

 

 

    

 

 

 
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Supplemental Revenue Data

        

Subscription

   $ 9,945       $ 9,250       $ 8,787   

Advertising

     4,502         4,530         4,316   

Content

     12,350         12,154         11,741   

Other

     562         527         481   
  

 

 

    

 

 

    

 

 

 

Total revenues

$             27,359    $             26,461    $             25,325   
  

 

 

    

 

 

    

 

 

 
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Depreciation of Property, Plant and Equipment

        

Turner

   $ (209)       $ (231)       $ (238)   

Home Box Office

     (77)         (91)         (85)   

Warner Bros.

     (218)         (200)         (202)   

Corporate

     (27)         (28)         (28)   
  

 

 

    

 

 

    

 

 

 

Total depreciation of property, plant and equipment

$ (531)    $ (550)    $ (553)   
  

 

 

    

 

 

    

 

 

 
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Amortization of Intangible Assets

        

Turner

   $ (16)       $ (21)       $ (25)   

Home Box Office

     (14)         (9)         (7)   

Warner Bros.

     (172)         (179)         (180)   
  

 

 

    

 

 

    

 

 

 

Total amortization of intangible assets

$ (202)    $ (209)    $ (212)   
  

 

 

    

 

 

    

 

 

 

 

116


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Operating Income (Loss)

        

Turner

   $ 2,954       $ 3,486       $ 3,172   

Home Box Office

     1,786         1,791         1,547   

Warner Bros.

     1,159         1,324         1,228   

Corporate

     (73)         (394)         (352)   

Intersegment eliminations

     149         61         (97)   
  

 

 

    

 

 

    

 

 

 

Total operating income

$               5,975    $               6,268    $               5,498   
  

 

 

    

 

 

    

 

 

 
            December 31,
2014
     December 31,
2013
 
                   (recast)  

Assets

        

Turner

  

   $ 25,271       $ 26,067   

Home Box Office

  

     13,869         13,687   

Warner Bros.

  

     20,559         20,066   

Corporate

  

     3,560         2,433   

Assets of discontinued operations

  

            5,746   
     

 

 

    

 

 

 

Total assets

  

$             63,259    $             67,999   
     

 

 

    

 

 

 
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Capital Expenditures

        

Turner

   $ 173       $ 210       $ 229   

Home Box Office

     58         45         65   

Warner Bros.

     206         236         270   

Corporate

     37         77         45   
  

 

 

    

 

 

    

 

 

 

Total capital expenditures

$                  474    $                  568    $                  609   
  

 

 

    

 

 

    

 

 

 

Long-lived hard assets located outside the United States, which represent approximately 1% of total assets at December 31, 2014, are not material. Revenues in different geographical areas are as follows (millions):

 

                                
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Revenues (a)

        

United States and Canada

   $ 19,102       $ 18,642       $ 17,936   

Europe (b)

     4,684         4,494         4,250   

Asia/Pacific Rim

     1,711         1,629         1,605   

Latin America

     1,575         1,475         1,288   

All Other

     287         221         246   
  

 

 

    

 

 

    

 

 

 

Total revenues

$             27,359    $             26,461    $             25,325   
  

 

 

    

 

 

    

 

 

 

 

 

(a)  

Revenues are attributed to region based on location of customer.

(b)  

Revenues in EuroZone countries comprise approximately 48%, 48% and 49% of Revenues in Europe for the years ended 2014, 2013 and 2012, respectively.

 

117


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

16. COMMITMENTS AND CONTINGENCIES

Commitments

Time Warner has commitments under certain network programming, film licensing, creative talent, employment and other agreements aggregating $33.577 billion at December 31, 2014.

The Company also has commitments for office space, studio facilities and operating equipment. Time Warner’s net rent expense was $358 million in 2014, $316 million in 2013 and $319 million in 2012. Included in such amounts was sublease income of $33 million for 2014, $41 million for 2013 and $40 million for 2012.

The commitments under certain programming, film licensing, talent and other agreements (“Programming and Other”) and minimum rental commitments under noncancelable long-term operating leases (“Operating Leases”) payable during the next five years and thereafter are as follows (millions):

 

                                           
     Programming
and Other
     Operating
Leases
 

2015

   $ 5,207       $ 317   

2016

     3,660         309   

2017

     3,626         284   

2018

     3,379         259   

2019

     3,148         125   

Thereafter

     14,557         186   
  

 

 

    

 

 

 

Total

$ 33,577    $ 1,480   
  

 

 

    

 

 

 

Additionally, as of December 31, 2014, the Company has future sublease income arrangements of $29 million, which are not included in Operating Leases in the table above.

Contingent Commitments

The Company also has certain contractual arrangements that would require it to make payments or provide funding if certain circumstances occur (“contingent commitments”). Contingent commitments principally include amounts to be paid in connection with acquisitions, dispositions and post-production term advance obligations on certain co-financing arrangements.

The following table summarizes the Company’s contingent commitments at December 31, 2014. For post-production term advances where payment obligations are outside the Company’s control, the timing of amounts presented in the table represents the earliest period in which the payment could be requested. For other contingent commitments, the timing of amounts presented in the table represents when the maximum contingent commitment will expire, but does not mean that the Company expects to incur an obligation to make any payments within that time period. In addition, amounts presented do not reflect the effects of any indemnification rights the Company might possess (millions).

 

                                                                                                             

Nature of Contingent Commitments

   Total      2015      2016-2017      2018-2019      Thereafter  

Guarantees

   $ 1,536       $ 131       $ 589       $        85       $ 731   

Letters of credit and other contingent commitments

     817         37         201         12         567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contingent commitments

$ 2,353    $ 168    $ 790    $ 97    $ 1,298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

118


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following is a description of the Company’s contingent commitments at December 31, 2014:

 

   

Guarantees consist of guarantees the Company has provided on certain operating commitments entered into by entities formerly owned by the Company, including Time Inc., as well as the Six Flags arrangement described below, and a guarantee of certain debt issued by CME, an equity method investee.

Six Flags

In connection with the Company’s former investment in the Six Flags theme parks located in Georgia and Texas (collectively, the “Parks”), in 1997, certain subsidiaries of the Company (including Historic TW and, in connection with the separation of Time Warner Cable Inc. in 2009, Warner Bros. Entertainment Inc.) agreed to guarantee (the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the “Partnerships”) for the benefit of the limited partners in such Partnerships, including: annual payments made at the Parks or to the limited partners and additional obligations at the end of the respective terms for the Partnerships in 2027 and 2028 (the “Guaranteed Obligations”). The aggregate undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through 2028) are $935 million (for a net present value of $418 million). To date, no payments have been made by the Company pursuant to the Six Flags Guarantee.

Six Flags Entertainment Corporation (formerly known as Six Flags, Inc. and Premier Parks Inc.) (“Six Flags”), which has the controlling interest in the Parks, has agreed, pursuant to a subordinated indemnity agreement (the “Subordinated Indemnity Agreement”), to guarantee the performance of the Guaranteed Obligations when due and to indemnify Historic TW, among others, if the Six Flags Guarantee is called upon. If Six Flags defaults in its indemnification obligations, Historic TW has the right to acquire control of the managing partner of the Parks. Six Flags’ obligations to Historic TW are further secured by its interest in all limited partnership units held by Six Flags.

Because the Six Flags Guarantee existed prior to December 31, 2002 and no modifications to the arrangements have been made since the date the guarantee came into existence, the Company is required to continue to account for the Guaranteed Obligations as a contingent liability. Based on its evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and the Subordinated Indemnity Agreement, the Company is unable to predict the loss, if any, that may be incurred under the Guaranteed Obligations, and no liability for the arrangements has been recognized at December 31, 2014. Because of the specific circumstances surrounding the arrangements and the fact that no active or observable market exists for this type of financial guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations and related Subordinated Indemnity Agreement.

 

   

Other contingent commitments primarily include contingent payments for post-production term advance obligations on certain co-financing arrangements, as well as letters of credit, bank guarantees and surety bonds, which generally support performance and payments for a wide range of global contingent and firm obligations, including insurance, litigation appeals, real estate leases and other operational needs.

Programming Licensing Backlog

Programming licensing backlog represents the amount of future revenues not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition. Because backlog generally relates to contracts for the licensing of theatrical and television product that have already been produced, the recognition of revenue for such completed product is principally dependent on the commencement of the availability period for telecast under the terms of the related licensing agreement. Cash licensing fees are collected periodically over the term of the related licensing agreements. Backlog was approximately $6.5 billion and $5.5 billion at December 31, 2014 and 2013, respectively. Included in these amounts is licensing of film product from the Warner Bros. segment to the Home Box Office segment in the amount of $788 million and $749 million at December 31, 2014 and 2013, respectively, and to the Turner segment in the amount of $700 million and $477 million at December 31, 2014 and 2013,

 

119


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

respectively. Backlog excludes filmed entertainment advertising barter contracts, which are expected to result in the future realization of revenues and cash through the sale of the advertising spots received under such contracts to third parties.

Contingencies

In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to various legal claims, actions and proceedings. These claims, actions and proceedings are at varying stages of investigation, arbitration or adjudication, and involve a variety of areas of law.

On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman” character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the U.S. District Court for the Central District of California. Plaintiffs’ complaint alleged, among other things, that plaintiffs terminated Siegel’s grants of one-half the rights in the Superman character as of April 16, 1999, and plaintiffs were entitled to up to one-half of the profits made on Superman since that date. On March 26, 2008, the court entered summary judgment, finding that plaintiffs’ termination notices were valid and recaptured a one-half interest in the Superman character as of April 16, 1999. On January 10, 2013, the U.S. Court of Appeals for the Ninth Circuit reversed the March 2008 summary judgment decision, holding that the parties reached a binding settlement agreement in 2001. By orders dated March 20, 2013, April 18, 2013, and June 18, 2013, the district court entered final judgment in this lawsuit and the related Superboy lawsuit, described below, in DC Comics’ favor, ruling that the plaintiffs had transferred any and all rights in the Superman and Superboy properties to DC Comics in 2001 pursuant to a binding settlement agreement. On July 16, 2013, the plaintiffs filed an appeal from the final judgment to the U.S. Court of Appeals for the Ninth Circuit.

On October 22, 2004, the same Siegel heirs filed a related lawsuit against the same defendants, as well as Warner Communications Inc. (now known as Warner Communications LLC) and Warner Bros. Television Production Inc. (now known as WB Studio Enterprises Inc.), in the U.S. District Court for the Central District of California. Plaintiffs claimed that Siegel was the sole creator of the character Superboy and, as such, DC Comics has had no right to create new Superboy works since plaintiffs’ alleged October 17, 2004 termination of Siegel’s grants of rights to the Superboy character. Plaintiffs sought a declaration regarding the validity of the alleged termination and an injunction against future use of the Superboy character. As described in the paragraph above regarding the Superman lawsuit, by orders dated March 20, 2013, April 18, 2013 and June 18, 2013, the district court entered final judgment in DC Comics’ favor, ruling that the plaintiffs had transferred any and all rights in the Superman and Superboy properties to DC Comics in 2001 pursuant to a binding settlement agreement. On July 16, 2013, the plaintiffs filed an appeal from the final judgment to the U.S. Court of Appeals for the Ninth Circuit.

On May 14, 2010, DC Comics filed a related lawsuit in the U.S. District Court for the Central District of California against the heirs of Superman co-creator Joseph Shuster, the Siegel heirs, their attorney Marc Toberoff and certain companies that Mr. Toberoff controls. The lawsuit asserted, among other things, a claim for declaratory relief concerning the validity of the copyright termination notice served by the Shuster heirs, who purported to reclaim their rights to the Superman character from DC Comics with the termination notice. The lawsuit also asserted state law based claims, including seeking declaratory relief challenging the validity of various agreements between Mr. Toberoff, certain companies that he controls and the Shuster and Siegel heirs, as well as claims for intentional interference by Mr. Toberoff with DC Comics’ contracts and prospective economic advantage with the Shuster and Siegel heirs for which DC Comics sought monetary damages. On October 17, 2012, the district court granted summary judgment in favor of DC Comics, holding that the copyright termination notice served by the Shuster heirs was invalid and that the Shuster heirs had transferred any and all rights in the Superman properties to DC Comics in 1992 pursuant to a binding agreement with DC Comics. On November 21, 2013, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s October 2012 decision. On October 6, 2014, the U.S. Supreme Court denied the Shuster heirs’ petition for writ of certiorari. DC Comics’ other claims against the Siegel heirs, Mr. Toberoff and certain companies that Mr. Toberoff controls were either dismissed by the district court or deemed moot following the U.S. Supreme Court’s denial of the Shuster heirs’ petition for writ of certiorari . On December 9, 2014, DC Comics appealed the dismissal of its claims against Mr. Toberoff and his companies, and on December 23, 2014, Mr. Toberoff and his companies filed a cross-appeal with the U.S. Court of Appeals for the Ninth Circuit.

 

120


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company has prevailed on the primary issues regarding its rights to the “Superman” and “Superboy” properties in the matters described above and believes the claims that remain within the scope of the appeals pending before the U.S. Court of Appeals for the Ninth Circuit are not material to the Company’s results of operations or cash flows. Accordingly, the Company does not intend to include disclosure regarding these matters in its future periodic reports.

On April 4, 2007, the National Labor Relations Board (“NLRB”) issued a complaint against CNN America Inc. (“CNN America”) and Team Video Services, LLC (“Team Video”). This administrative proceeding relates to CNN America’s December 2003 and January 2004 terminations of its contractual relationships with Team Video, under which Team Video had provided electronic newsgathering services in Washington, DC and New York, NY. The National Association of Broadcast Employees and Technicians, under which Team Video’s employees were unionized, initially filed charges of unfair labor practices with the NLRB in February 2004, alleging that CNN America and Team Video were joint employers, that CNN America was a successor employer to Team Video, and/or that CNN America discriminated in its hiring practices to avoid becoming a successor employer or due to specific individuals’ union affiliation or activities. The NLRB complaint seeks, among other things, the reinstatement of certain union members and monetary damages. On November 19, 2008, the presiding NLRB Administrative Law Judge (“ALJ”) issued a non-binding recommended decision and order, finding CNN America liable. On September 15, 2014, a three-member panel of the NLRB affirmed the ALJ’s decision and adopted the ALJ’s order with certain modifications. On September 16, 2014, CNN America filed a notice of appeal with the U.S. Court of Appeals for the D.C. Circuit. On November 12, 2014, both CNN America and the General Counsel of the NLRB filed motions with the NLRB for reconsideration of the panel’s decision. On December 17, 2014, CNN America’s appeal to the U.S. Court of Appeals was placed on hold pending resolution of the motions for reconsideration.

In April 2013, the Internal Revenue Service (the “IRS”) Appeals Division issued a notice of deficiency to the Company relating to the appropriate tax characterization of stock warrants received from Google Inc. in 2002. On May 6, 2013, the Company filed a petition with the United States Tax Court seeking a redetermination of the deficiency set forth in the notice. The Company’s petition asserts that the IRS erred in determining that the stock warrants were taxable upon exercise (in 2004) rather than at the date of grant based on, among other things, a misapplication of Section 83 of the Internal Revenue Code. In December 2014, the Company reached a preliminary agreement with the IRS to resolve the issues raised in the notice of deficiency. Final resolution of these issues is subject to agreement regarding certain necessary computations and the preparation and execution of definitive documentation.

The Company intends to vigorously defend against or prosecute, as applicable, the matters described above.

The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.

For matters disclosed above for which a loss is probable or reasonably possible, whether in excess of an accrued liability or where there is no accrued liability, the Company has estimated a range of possible loss. The Company believes the estimate of the aggregate range of possible loss in excess of accrued liabilities for such matters is between $0 and $130 million at December 31, 2014. The estimated aggregate range of possible loss is subject to significant judgment and a variety of assumptions. The matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate.

In view of the inherent difficulty of predicting the outcome of litigation and claims, the Company often cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be. An adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

 

121


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

17. RELATED PARTY TRANSACTIONS

The Company has entered into certain transactions in the ordinary course of business with unconsolidated investees accounted for under the equity method of accounting. These transactions have been executed on terms comparable to the terms of transactions with unrelated third parties. The revenue and expense transactions primarily relate to the licensing of television programming to The CW broadcast network and certain international networks, including networks owned by CME, by the Warner Bros. segment. Interest income and other, net relate to transactions with CME. Receivables due from related parties were $166 million and $185 million at December 31, 2014 and 2013, respectively. Payables due to related parties were immaterial at December 31, 2014 and 2013, respectively. Revenues and expenses resulting from transactions with related parties consist of (millions):

 

     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Revenues

   $                 404       $                 464       $                 498   

Expenses

     (8)         (35)         (60)   

Interest income

     51         -           -     

Other, net

     16                -     

18. ADDITIONAL FINANCIAL INFORMATION

Additional financial information with respect to cash payments and receipts, Interest expense, net, Other loss, net, Accounts payable and accrued liabilities and Other noncurrent liabilities is as follows (millions):

 

     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Cash Flows

        

Cash payments made for interest

   $ (1,274)       $ (1,202)       $ (1,262)   

Interest income received

     50         44         42   
  

 

 

    

 

 

    

 

 

 

Cash interest payments, net

$ (1,224)    $ (1,158)    $ (1,220)   
  

 

 

    

 

 

    

 

 

 

Cash payments made for income taxes

$ (1,602)    $ (1,174)    $ (1,261)   

Income tax refunds received

  108      87      78   

TWC tax sharing payments (a)

          (6)   
  

 

 

    

 

 

    

 

 

 

Cash tax payments, net

$             (1,494)    $             (1,087)    $             (1,189)   
  

 

 

    

 

 

    

 

 

 

 

 

 

(a)  

Represents net amounts paid to TWC in accordance with a tax sharing agreement with TWC.

 

122


Table of Contents
Index to Financial Statements

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Interest Expense, Net

        

Interest income

   $ 184       $ 92       $ 107   

Interest expense

     (1,353)         (1,281)         (1,358)   
  

 

 

    

 

 

    

 

 

 

Total interest expense, net

$ (1,169)    $ (1,189)    $ (1,251)   
  

 

 

    

 

 

    

 

 

 
     Year Ended December 31,  
     2014      2013      2012  
            (recast)      (recast)  

Other Loss, Net

        

Investment gains (losses), net

   $ 30       $ 61       $ (30)   

Loss on equity method investees

     (153)         (150)         (180)   

Other

     (4)         (22)         (4)   
  

 

 

    

 

 

    

 

 

 

Total other loss, net

$                (127)    $                (111)    $                (214)   
  

 

 

    

 

 

    

 

 

 
            December 31,
2014
     December 31,
2013
 
                   (recast)  

Accounts Payable and Accrued Liabilities

        

Accounts payable

  

   $ 574       $ 505   

Accrued expenses

  

     2,173         1,724   

Participations payable

  

     2,551         2,302   

Programming costs payable

  

     722         705   

Accrued compensation

  

     1,034         1,047   

Accrued interest

  

     303         313   

Accrued income taxes

  

     150         158   
     

 

 

    

 

 

 

Total accounts payable and accrued liabilities

  

$             7,507    $             6,754   
     

 

 

    

 

 

 

 

          December 31,
2014
     December 31,
2013
 
                 (recast)  

Other Noncurrent Liabilities

        

Noncurrent tax and interest reserves

   $ 1,520       $ 2,540   

Participations payable

     1,076         1,078   

Programming costs payable

     959         1,076   

Noncurrent pension and post-retirement liabilities

     928         696   

Deferred compensation

     491         542   

Other noncurrent liabilities

     710         392   
     

 

 

    

 

 

 

Total other noncurrent liabilities

$              5,684    $              6,324   
     

 

 

    

 

 

 

 

123


Table of Contents
Index to Financial Statements

TIME WARNER INC.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes self-monitoring mechanisms and actions taken to correct deficiencies as they are identified. Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.

Management conducted an evaluation of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2014 based on the framework set forth in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on its evaluation, management concluded that, as of December 31, 2014, the Company’s internal control over financial reporting is effective based on the specified criteria.

The effectiveness of the Company’s internal control over financial reporting has been audited by the Company’s independent auditor, Ernst & Young LLP, a registered public accounting firm, as stated in their report at page 126 herein.

 

124


Table of Contents
Index to Financial Statements

TIME WARNER INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Time Warner Inc.

We have audited the accompanying consolidated balance sheets of Time Warner Inc. (“Time Warner”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2014. Our audits also included the Supplementary Information and Financial Statement Schedule II listed in the Index at Item 15(a). These financial statements, supplementary information and schedule are the responsibility of Time Warner’s management. Our responsibility is to express an opinion on these financial statements, supplementary information and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Time Warner at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related Supplementary Information and Financial Statement Schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Time Warner’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New York, NY

February 26, 2015

 

125


Table of Contents
Index to Financial Statements

TIME WARNER INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Time Warner Inc.

We have audited Time Warner Inc.’s (“Time Warner”) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). Time Warner’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Time Warner’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Time Warner maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Time Warner as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2014 of Time Warner and our report dated February 26, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New York, NY

February 26, 2015

 

126


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SELECTED FINANCIAL INFORMATION

The selected financial information set forth below for each of the three years in the period ended December 31, 2014 has been derived from and should be read in conjunction with the audited financial statements and other financial information presented elsewhere herein. The selected financial information set forth below for the years ended December 31, 2011 and December 31, 2010 has been derived from audited financial statements not included herein. Capitalized terms are as defined and described in the consolidated financial statements or elsewhere herein.

 

  Year Ended December 31,  
  2014   2013   2012   2011   2010  
      (recast)   (recast)   (recast)   (recast)  
  (millions, except per share amounts)  

Selected Operating Statement Information:

Total revenues

$         27,359    $         26,461    $         25,325    $         25,364    $         23,250   

Operating income

  5,975      6,268      5,498      5,242      4,913   

Net income

  3,827      3,691      2,922      2,882      2,596   

Amounts attributable to Time Warner Inc.

shareholders:

Income from continuing operations

$ 3,894    $ 3,354    $ 2,666    $ 2,521    $ 2,281   

Discontinued operations, net of tax

  (67)      337      259      365      322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

$ 3,827    $ 3,691    $ 2,925    $ 2,886    $ 2,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Per share information attributable to
Time Warner Inc. common shareholders:

Basic income per common share from
continuing operations

$ 4.49    $ 3.63    $ 2.77    $ 2.40    $ 2.01   

Discontinued operations

  (0.07)      0.36      0.28      0.34      0.29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per common share

$ 4.42    $ 3.99    $ 3.05    $ 2.74    $ 2.30   

Diluted income per common share
from continuing operations

$ 4.41    $ 3.56    $ 2.73    $ 2.37    $ 1.99   

Discontinued operations

  (0.07)      0.36      0.27      0.34      0.28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per common share

$ 4.34    $ 3.92    $ 3.00    $ 2.71    $ 2.27   

Average common shares:

Basic

  863.3      920.0      954.4      1,046.2      1,128.4   

Diluted

  882.6      942.6      976.3      1,064.5      1,145.3   

Selected Balance Sheet Information:

Cash and equivalents

$ 2,618    $ 1,816    $ 2,760    $ 3,381    $ 3,591   

Total assets

  63,259      67,999      68,095      67,811      66,743   

Debt due within one year

  1,118      66      749      23      26   

Long-term debt

  21,376      20,061      19,086      19,467      16,491   

Time Warner Inc. shareholders’ equity

  24,476      29,904      29,796      29,957      32,958   

Total capitalization at book value

  46,970      50,031      49,631      49,447      49,475   

Cash dividends declared per share of
common stock

  1.27      1.15      1.04      0.94      0.85   

 

127


Table of Contents
Index to Financial Statements

TIME WARNER INC.

QUARTERLY FINANCIAL INFORMATION

(Unaudited)

The following table sets forth the quarterly information for Time Warner:

 

     Quarter Ended  
     March 31,      June 30,      September 30,      December 31,  
     (recast)                       
     (millions, except per share amounts)  

2014 (a)

           

Total revenues

   $           6,803       $           6,788       $           6,243       $           7,525   

Operating income

     2,048         1,567         971         1,389   

Income from continuing operations

     1,365         843         966         720   

Discontinued operations, net of tax

     (73)                       (2)   

Net income

     1,292         850         967         718   

Net income attributable to Time Warner Inc.

shareholders

     1,292         850         967         718   

Per share information attributable to Time
Warner Inc. common shareholders:

           

Basic income per common share from continuing

operations

     1.53         0.96         1.13         0.86   

Diluted income per common share from continuing

operations

     1.50         0.94         1.11         0.84   

Basic net income per common share

     1.45         0.97         1.13         0.85   

Diluted net income per common share

     1.42         0.95         1.11         0.84   

Cash provided by operations from continuing
operations

     1,733         324         617         1,007   

Common stock — high (b)

     68.93         71.08         87.36         86.71   

Common stock — low (b)

     61.52         62.76         70.57         70.64   

Cash dividends declared per share of common stock

     0.3175         0.3175         0.3175         0.3175   

 

 

 

(a)

As a result of the legal and structural separation of Time Inc., the Company has presented the financial position and results of operations of its former Time Inc. segment as discontinued operations for all periods presented. In the first quarter of 2014, this resulted in a reduction of Revenues of $742 million, an increase in Operating income of $116 million; and an increase in Income from continuing operations attributable to Time Warner Inc. common shareholders of $73 million.

(b)

The common stock prices on or prior to June 6, 2014, the date of the legal and structural separation of Time Inc., have not been adjusted for the legal and structural separation of Time Inc.

 

128


Table of Contents
Index to Financial Statements

TIME WARNER INC.

QUARTERLY FINANCIAL INFORMATION

(Unaudited)

 

     Quarter Ended  
     March 31,      June 30,      September 30,      December 31,  
     (recast, millions, except per share amounts)  

2013 (a)

           

Total revenues

   $           6,207       $           6,608       $           6,042       $           7,604   

Operating income

     1,419         1,387         1,729         1,733   

Income from continuing operations

     764         698         958         934   

Discontinued operations, net of tax

     (10)         73         225         49   

Net income

     754         771         1,183         983   

Net income attributable to Time Warner Inc.

shareholders

     754         771         1,183         983   

Per share information attributable to Time
Warner Inc. common shareholders:

           

Basic income per common share from continuing

operations

     0.81         0.75         1.04         1.03   

Diluted income per common share from continuing

operations

     0.80         0.73         1.02         1.01   

Basic net income per common share

     0.80         0.83         1.29         1.09   

Diluted net income per common share

     0.79         0.81         1.26         1.06   

Cash provided by operations from continuing operations

     747         778         1,043         690   

Common stock — high (b)

     57.62         61.52         66.20         70.31   

Common stock — low (b)

     49.12         56.16         58.30         64.61   

Cash dividends declared per share of common stock

     0.2875         0.2875         0.2875         0.2875   

 

 

 

(a)

As a result of the legal and structural separation of Time Inc., the Company has presented the financial position and results of operations of its former Time Inc. segment as discontinued operations for all periods presented. In 2013, this resulted in (i) a reduction of Revenues of $732 million in the first quarter, $827 million in the second quarter, $814 million in the third quarter and $961 million in the fourth quarter; (ii) an increase in Operating income of $9 million in the first quarter and decreases in Operating income of $124 million in the second quarter, $115 million in the third quarter and $107 million in the fourth quarter; and (iii) an increase in Income from continuing operations attributable to Time Warner Inc. common shareholders of $10 million in the first quarter and decreases in Income from continuing operations attributable to Time Warner Inc. common shareholders of $73 million in the second quarter, $88 million in the third quarter and $49 million in the fourth quarter.

(b)

The common stock prices have not been adjusted for the legal and structural separation of Time Inc.

 

129


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Overview

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations and cash flows of (i) Time Warner Inc. (the “Parent Company”), (ii) Historic TW Inc. (in its own capacity and as successor by merger to Time Warner Companies, Inc.), Home Box Office, Inc., and Turner Broadcasting System, Inc., each a wholly owned subsidiary of the Parent Company (collectively, the “Guarantor Subsidiaries”), on a combined basis, (iii) the direct and indirect non-guarantor subsidiaries of the Parent Company (the “Non-Guarantor Subsidiaries”), on a combined basis, and (iv) the eliminations necessary to arrive at the information for Time Warner Inc. on a consolidated basis. The Guarantor Subsidiaries fully and unconditionally, jointly and severally guarantee securities issued under certain of the Company’s indentures on an unsecured basis.

There are no legal or regulatory restrictions on the Parent Company’s ability to obtain funds from any of its wholly owned subsidiaries through dividends, loans or advances.

Basis of Presentation

The Company’s financial information has been recast to reflect the financial position and results of operations of the Company’s former Time Inc. segment as discontinued operations for all periods presented. Amounts presented in the Consolidating Balance Sheet at December 31, 2013 related to discontinued operations of the Parent Company and the Guarantor Subsidiaries principally relate to the impact of the Time Separation on the Parent Company’s and the Guarantor Subsidiaries’ deferred income taxes.

In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Parent Company’s interests in the Guarantor Subsidiaries and (ii) the Guarantor Subsidiaries’ interests in the Non-Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All intercompany balances and transactions between the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”

The Parent Company’s accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries. Corporate overhead expenses have been reflected as expenses of the Parent Company and have not been allocated to the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries. Interest income (expense) is determined based on outstanding debt and the relevant intercompany amounts at the respective subsidiary.

All direct and indirect domestic subsidiaries are included in Time Warner Inc.’s consolidated U.S. tax return. In the condensed consolidating financial statements, tax (provision) benefit has been allocated based on each such subsidiary’s relative pretax income to the consolidated pretax income. With respect to the use of certain consolidated tax attributes (principally operating and capital loss carryforwards), such benefits have been allocated to the respective subsidiary that generated the taxable income permitting such use (i.e., pro-rata based on where the income was generated). For example, to the extent a Non-Guarantor Subsidiary generated a gain on the sale of a business for which the Parent Company utilized tax attributes to offset such gain, the tax attribute benefit would be allocated to that Non-Guarantor Subsidiary. Deferred taxes of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been determined based on the temporary differences between the book and tax basis of the respective assets and liabilities of the applicable entities.

Certain transfers of cash between subsidiaries and their parent companies and intercompany dividends are reflected as cash flows from investing and financing activities in the accompanying Condensed Consolidating Statements of Cash Flows. All other intercompany activity is reflected in cash flows from operations.

Management believes that the allocations and adjustments noted above are reasonable. However, such allocations and adjustments may not be indicative of the actual amounts that would have been incurred had the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries operated independently.

 

130


Table of Contents
Index to Financial Statements

   TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Balance Sheet

December 31, 2014

(millions)

 

                                                                                                                                           
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Time
Warner
Consolidated
 

ASSETS

         

Current assets

         

Cash and equivalents

  $              1,623      $                 290      $              705      $                  -        $              2,618   

Receivables, net

    93        996        6,638        (7)        7,720   

Inventories

    -          453        1,247        -          1,700   

Deferred income taxes

    184        42              (49)        184   

Prepaid expenses and other current assets

    360        120        478        -          958   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    2,260        1,901        9,075        (56)        13,180   

Noncurrent inventories and theatrical film and television production costs

    -          1,744        5,182        (85)        6,841   

Investments in amounts due to and from consolidated subsidiaries

    44,407        11,333        12,369        (68,109)        -     

Investments, including available-for-sale securities

    186        417        1,723        -          2,326   

Property, plant and equipment, net

    73        377        2,205        -          2,655   

Intangible assets subject to amortization, net

    -          -          1,141        -          1,141   

Intangible assets not subject to amortization

    -          2,007        5,025        -          7,032   

Goodwill

    -          9,880        17,685        -          27,565   

Other assets

    429        156        1,934        -          2,519   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 47,355      $ 27,815      $ 56,339      $ (68,250)      $ 63,259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

Current liabilities

         

Accounts payable and accrued liabilities

  $ 744      $ 953      $ 5,990      $ (180)      $ 7,507   

Deferred revenue

    -          57        549        (27)        579   

Debt due within one year

    1,100                    -          1,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    1,844        1,019        6,548        (207)        9,204   

Long-term debt

    17,108        4,006        262        -          21,376   

Deferred income taxes

    2,204        2,443        1,840        (4,283)        2,204   

Deferred revenue

    -          17        322        (24)        315   

Other noncurrent liabilities

    1,723        1,844        3,179        (1,062)        5,684   

Equity

         

Due to (from) Time Warner Inc. and subsidiaries

    -          (43,026)        6,668        36,358        -     

Other shareholders’ equity

    24,476        61,512        37,520        (99,032)        24,476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Time Warner Inc. shareholders’ equity

    24,476        18,486        44,188        (62,674)        24,476   

Noncontrolling interests

    -          -          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    24,476        18,486        44,188        (62,674)        24,476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 47,355      $ 27,815      $ 56,339      $ (68,250)      $ 63,259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

131


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Balance Sheet

December 31, 2013

(recast; millions)

 

                                                                                                                                           
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Time
Warner
Consolidated
 

ASSETS

         

Current assets

         

Cash and equivalents

  $              1,039      $                 148      $              629      $                   -        $              1,816   

Receivables, net

    73        901        6,341        (10)        7,305   

Inventories

    -          383        1,265        -          1,648   

Deferred income taxes

    369        50        (52)              369   

Prepaid expenses and other current assets

    103        84        372        -          559   

Current assets of discontinued operations

    79        78        832        (155)        834   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,663        1,644        9,387        (163)        12,531   

Noncurrent inventories and theatrical film and television production costs

    -          1,726        5,371        (81)        7,016   

Investments in amounts due to and from consolidated subsidiaries

    48,549        21,248        12,288        (82,085)        -     

Investments, including available-for-sale securities

    130        460        1,419        -          2,009   

Property, plant and equipment, net

    373        377        2,541        -          3,291   

Intangible assets subject to amortization, net

    -          -          1,338        -          1,338   

Intangible assets not subject to amortization

    -          2,007        5,036        -          7,043   

Goodwill

    -          9,879        17,522        -          27,401   

Other assets

    322        194        1,942        -          2,458   

Noncurrent assets of discontinued operations

    -          -          4,912        -          4,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 51,037      $ 37,535      $ 61,756      $ (82,329)      $ 67,999   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

Current liabilities

         

Accounts payable and accrued liabilities

  $ 618      $ 770      $ 5,425      $ (59)      $ 6,754   

Deferred revenue

    -          28        524        (10)        542   

Debt due within one year

    48                    -          66   

Current liabilities of discontinued operations

          -          1,026        (1)        1,026   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    667        807        6,984        (70)        8,388   

Long-term debt

    16,046        4,001        14        -          20,061   

Due to (from) affiliates

    (900)        -          900        -          -     

Deferred income taxes

    2,287        2,666        2,016        (4,682)        2,287   

Deferred revenue

    -          36        348        (33)        351   

Other noncurrent liabilities

    2,657        1,939        3,352        (1,624)        6,324   

Noncurrent liabilities of discontinued operations

    376        411        713        (816)        684   

Equity

         

Due to (from) Time Warner Inc. and subsidiaries

    -          (33,497)        6,155        27,342        -     

Other shareholders’ equity

    29,904        61,172        41,274        (102,446)        29,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Time Warner Inc. shareholders’ equity

    29,904        27,675        47,429        (75,104)        29,904   

Noncontrolling interests

    -          -          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    29,904        27,675        47,429        (75,104)        29,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 51,037      $ 37,535      $ 61,756      $ (82,329)      $ 67,999   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

132


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Year Ended December 31, 2014

(millions)

 

     Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations      Time
Warner
Consolidated
 

Revenues

   $ -         $ 6,820       $ 21,273       $ (734)       $ 27,359   

Costs of revenues

     -           (3,471)         (13,047)         643         (15,875)   

Selling, general and administrative

     (442)         (982)         (3,856)         90         (5,190)   

Amortization of intangible assets

     -           -           (202)         -           (202)   

Restructuring and severance costs

     (21)         (173)         (318)         -           (512)   

Asset impairments

     (7)         (1)         (61)         -           (69)   

Gain on operating assets, net

     -           -           464         -           464   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     (470)         2,193         4,253         (1)         5,975   

Equity in pretax income (loss) of consolidated subsidiaries

     6,131         3,831         1,759         (11,721)         -     

Interest expense, net

     (961)         (274)         57                (1,169)   

Other loss, net

     (21)         15         (119)         (2)         (127)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income
taxes

     4,679         5,765         5,950         (11,715)         4,679   

Income tax provision

     (785)         (1,793)         (1,736)         3,529         (785)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations

     3,894         3,972         4,214         (8,186)         3,894   

Discontinued operations, net of tax

     (67)         (42)         (61)         103         (67)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     3,827         3,930         4,153         (8,083)         3,827   

Less Net loss attributable to noncontrolling interests

     -           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Time Warner Inc.
shareholders

   $ 3,827       $ 3,930       $ 4,153       $ (8,083)       $ 3,827   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     3,411         3,612         3,890         (7,502)         3,411   

Less Comprehensive loss attributable to
noncontrolling interests

     -           -           -           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to
Time Warner Inc. shareholders

   $               3,411       $               3,612       $               3,890       $              (7,502)       $               3,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

133


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Year Ended December 31, 2013

(recast; millions)

 

                                                                                                                                           
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Time
Warner
Consolidated
 

Revenues

  $                  -        $             6,380      $           20,632      $                (551)      $           26,461   

Costs of revenues

    -          (3,032)        (12,344)        441        (14,935)   

Selling, general and administrative

    (406)        (956)        (3,676)        104        (4,934)   

Amortization of intangible assets

    -          -          (209)        -          (209)   

Restructuring and severance costs

    (5)        (67)        (111)        -          (183)   

Asset impairments

    (7)        -          (54)        -          (61)   

Gain on operating assets, net

          -          121        -          129   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    (410)        2,325        4,359        (6)        6,268   

Equity in pretax income (loss) of consolidated subsidiaries

    6,319        4,428        1,664        (12,411)        -     

Interest expense, net

    (885)        (325)        11        10        (1,189)   

Other loss, net

    (56)              (57)              (111)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income
taxes

    4,968        6,429        5,977        (12,406)        4,968   

Income tax provision

    (1,614)        (2,095)        (2,026)        4,121        (1,614)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    3,354        4,334        3,951        (8,285)        3,354   

Discontinued operations, net of tax

    337        333        334        (667)        337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    3,691        4,667        4,285        (8,952)        3,691   

Less Net loss attributable to noncontrolling interests

    -          -          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Time Warner Inc.
shareholders

  $ 3,691      $ 4,667      $ 4,285      $ (8,952)      $ 3,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    3,828        4,774        4,231        (9,005)        3,828   

Less Comprehensive loss attributable to
noncontrolling interests

    -          -          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to
Time Warner Inc. shareholders

  $ 3,828      $ 4,774      $ 4,231      $ (9,005)      $ 3,828   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

134


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Year Ended December 31, 2012

(recast; millions)

 

                                                                                                                                           
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Time
Warner
Consolidated
 

Revenues

  $                   -        $              6,107      $           19,766      $                (548)      $           25,325   

Costs of revenues

    -          (3,002)        (12,022)        449        (14,575)   

Selling, general and administrative

    (341)        (935)        (3,626)        89        (4,813)   

Amortization of intangible assets

    -          -          (212)        -          (212)   

Restructuring and severance costs

    (2)        (34)        (56)        -          (92)   

Asset impairments

    -                (181)        -          (180)   

Gain on operating assets, net

    10        34              -          45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    (333)        2,171        3,670        (10)        5,498   

Equity in pretax income (loss) of consolidated subsidiaries

    5,272        3,597        1,509        (10,378)        -     

Interest expense, net

    (888)        (371)        (3)        11        (1,251)   

Other loss, net

    (18)        14        (208)        (2)        (214)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income
taxes

    4,033        5,411        4,968        (10,379)        4,033   

Income tax provision

    (1,370)        (1,740)        (1,721)        3,461       (1,370)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    2,663        3,671        3,247        (6,918)        2,663   

Discontinued operations, net of tax

    259        254        254        (508)        259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    2,922        3,925        3,501        (7,426)        2,922   

Less Net loss attributable to noncontrolling interests

                      (5)         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Time Warner Inc.
shareholders

  $ 2,925      $ 3,928      $ 3,503      $ (7,431)      $ 2,925   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    2,798        3,753        3,471        (7,224)        2,798   

Less Comprehensive loss attributable to
noncontrolling interests

                      (5)         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to
Time Warner Inc. shareholders

  $ 2,801      $ 3,756      $ 3,473      $ (7,229)      $ 2,801   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

135


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Cash Flows

For The Year Ended December 31, 2014

(millions)

 

                                                                                                                                           
    Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Time Warner
Consolidated
 

OPERATIONS

         

Net income

  $             3,827      $             3,930      $             4,153      $             (8,083)      $             3,827   

Less Discontinued operations, net of tax

    67        42        61        (103)        67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    3,894        3,972        4,214        (8,186)        3,894   

Adjustments for noncash and nonoperating items:

         

Depreciation and amortization

    17        116        600        -          733   

Amortization of film and television costs

    -          2,747        5,336        (43)        8,040   

Asset impairments

                61        -          69   

Venezuelan foreign currency loss

    -          -          173        -          173   

Gain on investments and other assets, net

    (14)        (6)        (444)        -          (464)   

Excess (deficiency) of distributions over equity in pretax
income of consolidated subsidiaries, net of cash distributions

    (6,131)        (3,831)        (1,759)        11,721        -     

Equity in losses of investee companies, net of cash distributions

          (7)        236        -          232   

Equity-based compensation

    81        63        75        -          219   

Deferred income taxes

    166        (105)        (154)        259        166   

Changes in operating assets and liabilities, net of acquisitions

    (739)        (1,016)        (3,858)        (3,768)        (9,381)   

Intercompany

    -          2,871        (2,871)        -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by operations from continuing operations

    (2,716)        4,805        1,609        (17)        3,681   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

         

Investments in available-for-sale securities

    (5)        -          (25)        -          (30)   

Investments and acquisitions, net of cash acquired

    (64)        (2)        (884)        -          (950)   

Capital expenditures

    (22)        (73)        (379)        -          (474)   

Investment proceeds from available-for-sale securities

    13                    -          25   

Proceeds from Time Inc. in the Time Separation

    590        -          810        -          1,400   

Proceeds from the sale of Time Warner Center

    -          -          1,264        -          1,264   

Advances to (from) parent and consolidated subsidiaries

    6,365        4,464        -          (10,829)        -     

Other investment proceeds

    44        86        35        (17)        148   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by investing activities from
continuing operations

    6,921        4,483        825        (10,846)        1,383   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

         

Borrowings

    2,118        -          291        -          2,409   

Debt repayments

    (48)        -          (24)        -          (72)   

Proceeds from exercise of stock options

    338        -          -          -          338   

Excess tax benefit from equity instruments

    179        -          -          -          179   

Principal payments on capital leases

    -          (10)        (1)        -          (11)   

Repurchases of common stock

    (5,504)        -          -          -          (5,504)   

Dividends paid

    (1,109)        -          -          -          (1,109)   

Other financing activities

    88        (45)        (251)        35        (173)   

Change in due to/from parent and investment in segment

    -          (9,109)        (1,719)        10,828        -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used by financing activities from continuing operations

    (3,938)        (9,164)        (1,704)        10,863        (3,943)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by continuing operations

    267        124        730        -          1,121   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by operations from discontinued operations

    (1)        -          (15)        -          (16)   

Cash used by investing activities from discontinued operations

    318        18        (51)        (336)        (51)   

Cash used by financing activities from discontinued operations

    -          -          (372)        336        (36)   

Effect of change in cash and equivalents of discontinued operations

    -          -          (87)        -          (87)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by discontinued operations

    317        18        (525)        -          (190)   

Effect of Venezuelan exchange rate changes on
cash and equivalents

    -          -          (129)        -          (129)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH AND EQUIVALENTS

    584        142        76        -          802   

CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD

    1,039        148        629        -          1,816   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

  $ 1,623      $ 290      $ 705      $ -        $ 2,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

136


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Cash Flows

For The Year Ended December 31, 2013

(recast; millions)

 

    Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Time Warner
Consolidated
 

OPERATIONS

         

Net income

  $           3,691      $           4,667      $           4,285      $          (8,952)      $           3,691   

Less Discontinued operations, net of tax

    (337)        (333)        (334)        667        (337)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    3,354        4,334        3,951        (8,285)        3,354   

Adjustments for noncash and nonoperating items:

         

Depreciation and amortization

    24        126        609        -          759   

Amortization of film and television costs

    -          2,453        4,846        (37)        7,262   

Asset impairments

          -          54        -          61   

Gain on investments and other assets, net

    (3)              (63)        -          (65)   

Excess (deficiency) of distributions over equity in pretax
income of consolidated subsidiaries, net of cash distributions

    (6,319)        (4,428)        (1,664)        12,411        -     

Equity in losses of investee companies, net of cash distributions

                212        -          216   

Equity-based compensation

    74        58        106        -          238   

Deferred income taxes

    759        589        320        (909)        759   

Changes in operating assets and liabilities, net of acquisitions

    (329)        (228)        (5,631)        (3,138)        (9,326)   

Intercompany

    -          1,390        (1,390)        -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by operations from continuing operations

    (2,431)        4,297        1,350        42        3,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

         

Investments in available-for-sale securities

    (4)        -          (23)        -          (27)   

Investments and acquisitions, net of cash acquired

    (11)        (1)        (483)        -          (495)   

Capital expenditures

    (66)        (86)        (416)        -          (568)   

Investment proceeds from available-for-sale securities

          -          25        -          33   

Advances to (from) parent and consolidated subsidiaries

    4,433        21        -          (4,454)        -     

Other investment proceeds

    15        157        114        (116)        170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by investing activities from
continuing operations

    4,375        91        (783)        (4,570)        (887)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

         

Borrowings

    998        -          30        -          1,028   

Debt repayments

    -          (732)        (30)        -          (762)   

Proceeds from exercise of stock options

    674        -          -          -          674   

Excess tax benefit from equity instruments

    179        -          -          -          179   

Principal payments on capital leases

    -          (9)        -          -          (9)   

Repurchases of common stock

    (3,708)        -          -          -          (3,708)   

Dividends paid

    (1,074)        -          -          -          (1,074)   

Other financing activities

    25        (38)        (172)        74        (111)   

Change in due to/from parent and investment in segment

    -          (4,101)        (353)        4,454        -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used by financing activities from continuing operations

    (2,906)        (4,880)        (525)        4,528        (3,783)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by continuing operations

    (962)        (492)        42        -          (1,412)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by operations from discontinued
operations

    (2)        -          458        -          456   

Cash used by investing activities from discontinued operations

    142        345        (23)        (487)        (23)   

Cash used by financing activities from discontinued operations

    -          -          (487)        487        -     

Effect of change in cash and equivalents of discontinued operations

    -          -          35        -          35   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by discontinued operations

    140        345        (17)        -          468   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH AND
EQUIVALENTS

    (822)        (147)        25        -          (944)   

CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD

    1,861        295        604        -          2,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

  $ 1,039      $ 148      $ 629      $ -        $ 1,816   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

137


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Cash Flows

For The Year Ended December 31, 2012

(recast; millions)

 

                                                                                                                                 
    Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Time Warner
Consolidated
 

OPERATIONS

         

Net income

  $            2,922      $            3,925      $            3,501      $            (7,426)      $            2,922   

Less Discontinued operations, net of tax

    (259)       (254)       (254)       508         (259)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    2,663        3,671        3,247        (6,918)        2,663   

Adjustments for noncash and nonoperating items:

         

Depreciation and amortization

    25        142        598        -          765   

Amortization of film and television costs

    -          2,403        4,834        (27)        7,210   

Asset impairments

    -          (1)        181        -          180   

Gain on investments and other assets, net

          (37)        25        -          (10)   

Excess (deficiency) of distributions over equity in pretax
income of consolidated subsidiaries, net of cash distributions

    (5,272)        (3,597)        (1,509)        10,378        -     

Equity in losses of investee companies, net of cash distributions

          -          219        -          221   

Equity-based compensation

    48        53        94        -          195   

Deferred income taxes

    (161)        (257)        (252)        509        (161)   

Changes in operating assets and liabilities, net of acquisitions

    479        (551)        (4,092)        (3,912)        (8,076)   

Intercompany

    -          2,132        (2,132)        -          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by operations from continuing operations

    (2,214)        3,958        1,213        30        2,987   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

         

Investments in available-for-sale securities

    (11)        (11)        (15)        -          (37)   

Investments and acquisitions, net of cash acquired

    (39)        (25)        (596)        -          (660)   

Capital expenditures

    (38)        (100)        (471)        -          (609)   

Investment proceeds from available-for-sale securities

          -          -          -           

Advances to (from) parent and consolidated subsidiaries

    4,024        261              (4,286)        -     

Other investment proceeds

    26        52        19        (12)        85   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by investing activities from
continuing operations

    3,963        177        (1,062)        (4,298)        (1,220)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

         

Borrowings

    994        -          45        -          1,039   

Debt repayments

    (638)        -          (48)        -          (686)   

Proceeds from exercise of stock options

    1,107        -          -          -          1,107  

Excess tax benefit from equity instruments

    83        -          -          -          83   

Principal payments on capital leases

    -          (10)        (1)        -          (11)   

Repurchases of common stock

    (3,272)        -          -          -          (3,272)   

Dividends paid

    (1,011)        -                (7)        (1,011)   

Other financing activities

    66        (12)        (118)        (16)        (80)   

Change in due to/from parent and investment in segment

    -          (4,178)        (113)        4,291        -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used by financing activities from continuing operations

    (2,671)        (4,200)        (228)        4,268        (2,831)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by continuing operations

    (922)        (65)        (77)        -          (1,064)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by operations from discontinued
operations

    (9)        (25)        489        -          455   

Cash used by investing activities from discontinued operations

    214        221        (26)        (435)        (26)   

Cash used by financing activities from discontinued operations

    -          -          (435)        435        -     

Effect of change in cash and equivalents of discontinued operations

    -          -          14        -          14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided (used) by discontinued operations

    205        196        42        -          443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH AND EQUIVALENTS

    (717)        131        (35)        -          (621)   

CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD

    2,578        164        639        -          3,381   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

  $ 1,861      $ 295      $ 604      $ -        $ 2,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

138


Table of Contents
Index to Financial Statements

TIME WARNER INC.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2014, 2013 and 2012

(millions)

 

                                                                                                                                               

Description

   Balance at
Beginning of
Period
     Additions Charged
(Credited) to Costs
and Expenses
     Deductions      Balance at
End of
Period
 

2014

           

Reserves deducted from accounts receivable:

           

Allowance for doubtful accounts

   $                     191       $                     (20)       $                      (19)       $                     152   

Reserves for sales returns and allowances

     1,192         1,867         (2,059)         1,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,383    $ 1,847    $ (2,078)    $ 1,152   
  

 

 

    

 

 

    

 

 

    

 

 

 

2013 (recast)

Reserves deducted from accounts receivable:

Allowance for doubtful accounts

$ 209    $ 28    $ (46)    $ 191   

Reserves for sales returns and allowances

  1,198      2,066      (2,072)      1,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,407    $ 2,094    $ (2,118)    $ 1,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

2012 (recast)

Reserves deducted from accounts receivable:

Allowance for doubtful accounts

$ 206    $ 37    $ (34)    $ 209   

Reserves for sales returns and allowances

  1,381      1,874      (2,057)      1,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,587    $ 1,911    $ (2,091)    $ 1,407   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

139


Table of Contents
Index to Financial Statements

EXHIBIT INDEX

 

Exhibit

Number

  

Description

   Sequential
Page Number
  2.1   

Separation and Distribution Agreement by and between the Registrant and AOL Inc., dated November 16, 2009 (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated November 16, 2009 (the “November 2009 Form 8-K”)).

   *
  2.2   

Separation Agreement, dated as of May 20, 2008, among the Registrant, Time Warner Cable Inc. (“Time Warner Cable”), Time Warner Entertainment Company, L.P. (“TWE”), TW NY Cable Holding Inc., Warner Communications Inc. (“WCI”), Historic TW Inc. (“Historic TW”) and American Television and Communications Corporation (“ATC”) (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated May 20, 2008 (the “May 2008 Form 8-K”)).

   *
  3.1   

Restated Certificate of Incorporation of the Registrant as filed with the Secretary of State of the State of Delaware on July 27, 2007 (incorporated herein by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).

   *
  3.2   

Certificate of Amendment, dated June 4, 2008, to the Restated Certificate of Incorporation of the Registrant as filed with the Secretary of State of the State of Delaware on June 4, 2008 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated June 4, 2008).

   *
  3.3   

Certificate of Amendment, dated March 27, 2009, to the Restated Certificate of Incorporation of the Registrant as filed with the Secretary of State of the State of Delaware on March 27, 2009 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated March 27, 2009).

   *
  3.4   

Certificate of Amendment, dated May 24, 2011, to the Restated Certificate of Incorporation of the Registrant as filed with the Secretary of State of the State of Delaware on May 24, 2011 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated May 20, 2011).

   *
  3.5   

By-laws of the Registrant, as amended through July 21, 2014 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated July 21, 2014).

   *
  4.1   

Indenture dated as of June 1, 1998 among Historic TW (including in its capacity as successor to Time Warner Companies, Inc. (“TWCI”)), Turner Broadcasting System, Inc. (“TBS”) and The Bank of New York Mellon (as successor trustee to JPMorgan Chase Bank) (“BNY Mellon”), as Trustee (incorporated herein by reference to Exhibit 4 to Historic TW’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-12259)).

   *
  4.2   

First Supplemental Indenture dated as of January 11, 2001 among the Registrant, Historic TW (including in its capacity as successor to TWCI), Historic AOL LLC (“Historic AOL”), TBS, BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Transition Report on Form 10-K for the period July 1, 2000 to December 31, 2000 (the “2000 Form 10-K”)).

   *
  4.3   

Second Supplemental Indenture, dated as of April 16, 2009, among Historic TW (including in its capacity as successor to TWCI), the Registrant, Historic AOL, TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated April 16, 2009 (the “April 2009 Form 8-K”)).

   *
  4.4   

Third Supplemental Indenture, dated as of December 3, 2009, among Historic TW (including in its capacity as successor to TWCI), the Registrant, Historic AOL, TBS, Home Box Office, Inc. (“HBO”) and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated December 3, 2009 (the “December 2009 Form 8-K”)).

   *
  4.5   

Indenture dated as of January 15, 1993 between Historic TW (in its capacity as successor to TWCI) and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.11 to TWCI’s Annual Report on Form 10-K for the year ended December 31, 1992).

   *

 

140


Table of Contents
Index to Financial Statements
  4.6

First Supplemental Indenture dated as of June 15, 1993 between Historic TW (in its capacity as successor to TWCI) and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4 to TWCI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-8637)).

*
  4.7

Second Supplemental Indenture dated as of October 10, 1996 among Historic TW (including in its capacity as successor to TWCI) and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.1 to TWCI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).

*
  4.8

Third Supplemental Indenture dated as of December 31, 1996 among Historic TW (including in its capacity as successor to TWCI) and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.10 to Historic TW’s Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-12259)).

*
  4.9

Fourth Supplemental Indenture dated as of December 17, 1997 among Historic TW (including in its capacity as successor to TWCI), TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.4 to Historic TW’s, TWCI’s and TBS’ Registration Statement on Form S-4 (Registration Nos. 333-45703, 333-45703-02 and 333-45703-01) filed with the Commission on February 5, 1998 (the “1998 Form S-4”)).

*
  4.10

Fifth Supplemental Indenture dated as of January 12, 1998 among Historic TW (including in its capacity as successor to TWCI), TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.5 to the 1998 Form S-4).

*
  4.11

Sixth Supplemental Indenture dated as of March 17, 1998 among Historic TW (including in its capacity as successor to TWCI), TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.15 to Historic TW’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12259) (the “Historic TW 1997 Form 10-K”)).

*
  4.12

Seventh Supplemental Indenture dated as of January 11, 2001 among the Registrant, Historic TW (including in its capacity as successor to TWCI), Historic AOL, TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.17 to the 2000 Form 10-K).

*
  4.13

Eighth Supplemental Indenture dated as of February 23, 2009, among Historic TW (including in its capacity as successor to TWCI), the Registrant, Historic AOL, TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated February 23, 2009).

*
  4.14

Ninth Supplemental Indenture, dated as of April 16, 2009, among Historic TW (including in its capacity as successor to TWCI), the Registrant, Historic AOL, TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.3 to the April 2009 Form 8-K).

*
  4.15

Tenth Supplemental Indenture, dated as of December 3, 2009, among Historic TW (including in its capacity as successor to TWCI), the Registrant, Historic AOL, TBS, HBO and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.3 to the December 2009 Form 8-K).

*
  4.16

Trust Agreement dated as of April 1, 1998 (the “Historic TW Trust Agreement”) among Historic TW, as Grantor, and U.S. Trust Company of California, N.A., as Trustee (“US Trust Company”) (incorporated herein by reference to Exhibit 4.16 to the Historic TW 1997 Form 10-K). (WCI, as grantor, has entered into a Trust Agreement dated March 31, 2003, with US Trust Company that is substantially identical in all material respects to the Historic TW Trust Agreement.)

*
  4.17

Indenture dated as of April 19, 2001 among the Registrant, Historic AOL, Historic TW (including in its capacity as successor to TWCI), TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001).

*
  4.18

First Supplemental Indenture, dated as of April 16, 2009, among the Registrant, Historic AOL, Historic TW (including in its capacity as successor to TWCI), TBS, and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.1 to the April 2009 Form 8-K).

*
  4.19

Second Supplemental Indenture, dated as of December 3, 2009, among the Registrant, Historic TW (including in its capacity as successor to TWCI), Historic AOL, TBS, HBO, and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 99.1 to the December 2009 Form 8-K).

*

 

141


Table of Contents
Index to Financial Statements
  4.20

Indenture dated as of November 13, 2006 among the Registrant, TW AOL Holdings LLC (in its capacity as successor to TW AOL Holdings Inc.), Historic TW (including in its capacity as successor to TWCI), TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.27 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006).

*
  4.21

Indenture dated as of March 11, 2010 among the Registrant, Historic TW, HBO, TBS and BNY Mellon, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).

*
  10.1

Time Warner Inc. 1999 Stock Plan, as amended through March 27, 2009 (the “1999 Stock Plan”) (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009).

*  +
  10.2

Form of Non-Qualified Stock Option Agreement, Directors Version 4 (for awards of stock options to non-employee directors under the 1999 Stock Plan) (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated January 21, 2005 (the “January 2005 Form 8-K”)).

*  +
  10.3

Form of Non-Qualified Stock Option Agreement, Directors Version 5 (for awards of stock options to non-employee directors under the 1999 Stock Plan) (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).

*  +
  10.4

Time Warner Inc. 2003 Stock Incentive Plan, as amended through October 25, 2007 (the “2003 Stock Incentive Plan”) (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (the “September 2007 Form 10-Q”)).

*  +
  10.5

Amendment to the 2003 Stock Incentive Plan, dated September 10, 2008 and effective October 1, 2008 (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008).

*  +
  10.6

Form of Notice of Grant of Stock Options (for awards of stock options under the 2003 Stock Incentive Plan and the 1999 Stock Plan) (incorporated herein by reference to Exhibit 10.12 to the January 2005 Form 8-K).

*  +
  10.7

Form of Non-Qualified Stock Option Agreement, Share Retention, Version 2 (for awards of stock options to executive officers of the Registrant under the 2003 Stock Incentive Plan and the Time Warner Inc. 2006 Stock Incentive Plan (the “2006 Stock Incentive Plan”) (incorporated herein by reference to Exhibit 10.13 to the January 2005 Form 8-K)).

*  +
  10.8

Form of Non-Qualified Stock Option Agreement, Share Retention, Version 3 (for award of 950,000 stock options to Jeffrey Bewkes under the 2003 Stock Incentive Plan on December 17, 2007) (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).

*  +
  10.9

2006 Stock Incentive Plan, as amended through December 16, 2009 (incorporated herein by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009).

*  +
  10.10

Form of Non-Qualified Stock Option Agreement, Directors Version 8 (for awards of stock options to non-employee directors under the 2006 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (the “September 2009 Form 10-Q”)).

*  +
  10.11

Form of Notice of Grant of Stock Options to Non-Employee Director (for awards of stock options to non-employee directors under the 2006 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the September 2009 Form 10-Q)).

*  +
  10.12

Time Warner Inc. 2010 Stock Incentive Plan (the “2010 Stock Incentive Plan”) (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 21, 2010).

*  +

 

142


Table of Contents
Index to Financial Statements
  10.13

Form of Restricted Stock Units Agreement, RSU Executive Agreement, Version 1 (for awards to executive officers under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”)).

*  +
  10.14

Form of Restricted Stock Units Agreement, RSU Executive Agreement, Version 2 (for awards to executive officers under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”)).

*  +
  10.15

Form of Non-Qualified Stock Option Agreement, Share Retention, Version 1 (for awards of stock options to executive officers under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (the “September 2010 Form 10-Q”)).

*  +
  10.16

Form of Performance Stock Units Agreement, PSU Agreement, Version 2 (for awards of performance stock units under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.30 to the 2011 Form 10-K).

*  +
  10.17

Form of Performance Stock Units Agreement, PSU Agreement, Version Bewkes 2 (for awards of performance stock units to Jeffrey Bewkes under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.32 to the 2011 Form 10-K).

*  +
  10.18

Form of Non-Qualified Stock Option Agreement, Directors Version 1 (for awards of stock options to non-employee directors under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.6 to the September 2010 Form 10-Q).

*  +
  10.19

Form of Notice of Grant of Stock Options to Non-Employee Director (for awards of stock options to non-employee directors under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.7 to the September 2010 Form 10-Q).

*  +
  10.20

Form of Non-Qualified Stock Option Agreement, Share Retention, Version Bewkes 1 (for awards of stock options to Jeffrey Bewkes under the 2010 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.31 to the 2012 Form 10-K).

*  +
  10.21

Time Warner Inc. 1988 Restricted Stock and Restricted Stock Unit Plan for Non-Employee Directors, as amended through October 25, 2007 (incorporated herein by reference to Exhibit 10.5 to the September 2007 Form 10-Q).

*  +
  10.22

Time Warner Inc. 2013 Stock Incentive Plan as amended through June 11, 2014 (the “2013 Stock Incentive Plan”).

+
  10.23

Form of Restricted Stock Units Agreement, RSU Executive Agreement, Version 1 (for use from August 2013 for awards to executive officers under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (the “June 2013 Form 10-Q”)).

*  +
  10.24

Form of Restricted Stock Units Agreement, RSU Executive Agreement, Version 2 (for use from February 2015 for awards to executive officers under the 2013 Stock Incentive Plan).

+
  10.25

Form of Restricted Stock Units Agreement, RSU Director Agreement, Version 1 (for awards of restricted stock units to non-employee directors under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.3 to the June 2013 Form 10-Q).

*  +
  10.26

Form of Notice of Grant of Restricted Stock Units to Non-Employee Director (for awards of restricted stock units to non-employee directors under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.4 to the June 2013 Form 10-Q).

*  +
  10.27

Form of Performance Stock Units Agreement, PSU Agreement, Version 1 (for use from August 2013 for awards of performance stock units under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.5 to the June 2013 Form 10-Q).

*  +
  10.28

Form of Performance Stock Units Agreement, PSU Agreement, Version 2 (for use from February 2015 for awards of performance stock units under the 2013 Stock Incentive Plan).

+

 

143


Table of Contents
Index to Financial Statements
  10.29

Form of Performance Stock Units Agreement, PSU Agreement, Version Bewkes 1 (for use from August 2013 for awards of performance stock units to Jeffrey Bewkes under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.6 to the June 2013 Form 10-Q).

*  +
  10.30

Form of Performance Stock Units Agreement, PSU Agreement, Version Bewkes 2 (for use from February 2015 for awards of performance stock units to Jeffrey Bewkes under the 2013 Stock Incentive Plan).

+
  10.31

Form of Non-Qualified Stock Option Agreement, Directors Version 1 (for awards of stock options to non-employee directors under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.7 to the June 2013 Form 10-Q).

*  +
  10.32

Form of Notice of Grant of Stock Options to Non-Employee Director (for awards of stock options to non-employee directors under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.8 to the June 2013 Form 10-Q).

*  +
  10.33

Form of Non-Qualified Stock Option Agreement, Share Retention Version 1 (for use from August 2013 for awards of stock options to executive officers under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.9 to the June 2013 Form 10-Q).

*  +
  10.34

Form of Non-Qualified Stock Option Agreement, Share Retention Version 2 (for use from February 2015 for awards of stock options to executive officers under the 2013 Stock Incentive Plan).

+
  10.35

Form of Non-Qualified Stock Option Agreement, Share Retention Incentive Version 2 (for use from February 2015 for awards of stock options with special vesting provisions to executive officers under the 2013 Stock Incentive Plan).

+
  10.36

Form of Non-Qualified Stock Option Agreement, Share Retention Version Bewkes 1 (for use from August 2013 for awards of stock options to Jeffrey Bewkes under the 2013 Stock Incentive Plan) (incorporated herein by reference to Exhibit 10.10 to the June 2013 Form 10-Q).

*  +
  10.37

Form of Non-Qualified Stock Option Agreement, Share Retention Version Bewkes 2 (for use from February 2015 for awards of stock options to Jeffrey Bewkes under the 2013 Stock Incentive Plan).

+
  10.38

Deferred Compensation Plan for Directors of Time Warner, as amended through November 18, 1993 (incorporated herein by reference to Exhibit 10.9 to TWCI’s Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-8637)).

*  +
  10.39

Time Warner Inc. Non-Employee Directors’ Deferred Compensation Plan, as amended October 25, 2007, effective as of January 1, 2005 (incorporated herein by reference to Exhibit 10.8 to the September 2007 Form 10-Q).

*  +
  10.40

Description of Director Compensation (incorporated herein by reference to the section titled “Director Compensation” in the Registrant’s Proxy Statement for the 2014 Annual Meeting of Stockholders).

*  +
  10.41

Time Warner Inc. Annual Incentive Plan for Executive Officers (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 28, 2009).

*  +
  10.42

Time Warner Inc. Deferred Compensation Plan (amended and restated as of August 1, 2001) (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).

*  +
  10.43

Amendment No. 1 to the Time Warner Inc. Deferred Compensation Plan (amended and restated as of August 1, 2001) effective October 15, 2001 (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).

*  +
  10.44

Amendment No. 2 to the Time Warner Inc. Deferred Compensation Plan (amended and restated as of August 1, 2001) effective August 1, 2002 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).

*  +
  10.45

Amendment No. 3 to the Time Warner Inc. Deferred Compensation Plan (amended and restated as of August 1, 2001) effective January 1, 2004 (incorporated herein by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003).

*  +

 

144


Table of Contents
Index to Financial Statements
  10.46

Amendment No. 4 to the Time Warner Inc. Deferred Compensation Plan (amended and restated as of August 1, 2001) effective January 1, 2005 (incorporated herein by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).

*  +
  10.47

Time Warner Inc. Deferred Compensation Plan (amended and restated as of January 1, 2005) (incorporated herein by reference to Exhibit 10.7 to the September 2007 Form 10-Q).

*  +
  10.48

Amendment No. 1 to the Time Warner Inc. Deferred Compensation Plan (amended and restated as of January 1, 2005) effective January 1, 2005 (incorporated herein by reference to Exhibit 10.47 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

*  +
  10.49

Time Warner Supplemental Savings Plan (incorporated herein by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”)).

*  +
  10.50

Amendment No. 1 to the Time Warner Supplemental Savings Plan effective June 1, 2012 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).

*  +
  10.51

Amendment No. 2 to the Time Warner Supplemental Savings Plan effective December 1, 2013 (incorporated herein by reference to Exhibit 10.48 to the 2013 Form 10-K (the “2013 Form 10-K”)).

*  +
  10.52

Time Warner Excess Benefit Pension Plan (as amended through July 28, 2010) (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).

*  +
  10.53

Amendment No. 2 to the Time Warner Excess Benefit Pension Plan (as amended through July 28, 2010) effective as of June 7, 2014 following the separation of Time Inc. from the Registrant (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

*  +
  10.54

Amended and Restated Employment Agreement made November 20, 2012, effective as of January 1, 2013, between the Registrant and Jeffrey Bewkes (incorporated herein by reference to Exhibit 10.42 to the 2012 Form 10-K).

*  +
  10.55

Amended and Restated Employment Agreement made February 24, 2015, effective as of January 1, 2015, between the Registrant and Howard M. Averill.

 +
  10.56

Amended and Restated Employment Agreement made November 3, 2014, effective as of January 1, 2014, between the Registrant and Paul T. Cappuccio (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (the “September 2014 Form 10-Q”)).

*  +
  10.57

Amended and Restated Employment Agreement made October 31, 2014, effective as of August 1, 2014, between the Registrant and Olaf Olafsson (incorporated herein by reference to Exhibit 10.2 to the September 2014 Form 10-Q).

*  +
  10.58

Amended and Restated Employment Agreement made April 14, 2014, effective as of January 1, 2014, between the Registrant and Gary Ginsberg (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated April 14, 2014).

*  +
  10.59

Amendment and Restatement Agreement, dated as of December 18, 2013, relating to the Credit Agreement, dated as of January 19, 2011, as amended and restated as of December 14, 2012, among the Registrant, Time Warner International Finance Limited, the Lenders from time to time party thereto, and Citibank, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 18, 2013 (the “December 2013 Form 8-K”)).

*
  10.60

Amended and Restated Credit Agreement, dated as of January 19, 2011, as amended and restated as of December 18, 2013, among the Registrant, Time Warner International Finance Limited, the Lenders from time to time party thereto, and Citibank, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.2 to the December 2013 Form 8-K).

*

 

145


Table of Contents
Index to Financial Statements
  10.61

First Amendment, dated as of December 18, 2014, to the Amended and Restated Credit Agreement, dated as of January 19, 2011, as amended and restated as of December 18, 2013, among the Registrant and Time Warner International Finance Limited, as borrowers, the Lenders from time to time party thereto and Citibank, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 18, 2014).

*
  10.62

Form of Commercial Paper Dealer Agreement 4(2) Program (the “Commercial Paper Dealer Agreement”) among the Registrant, as Issuer, Historic TW, as Note Guarantor, HBO and TBS, as Supplemental Guarantors, and Dealer (incorporated herein by reference to Exhibit 10.53 to the 2010 Form 10-K).

*
  10.63

Form of Letter Agreement among the Registrant, as Issuer, Historic TW, as Note Guarantor, HBO and TBS, as Supplemental Guarantors, and Dealer, amending the Commercial Paper Dealer Agreement.

  10.64

Second Amended and Restated Tax Matters Agreement, dated as of May 20, 2008, between the Registrant and Time Warner Cable (incorporated herein by reference to Exhibit 99.2 to the May 2008 Form 8-K).

*
  10.65

Second Tax Matters Agreement, dated as of November 16, 2009, by and between the Registrant and AOL Inc. (incorporated herein by reference to Exhibit 99.2 to the November 2009 Form 8-K).

*
  10.66

Reimbursement Agreement, dated as of March 31, 2003, by and among Time Warner Cable, the Registrant, WCI, ATC and TWE (“Reimbursement Agreement”) (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K dated March 28, 2003).

*
  10.67

Amendment No. 1 to Reimbursement Agreement made by and among Time Warner Cable and the Registrant, dated as of May 20, 2008 (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).

*
  21

Subsidiaries of the Registrant.

  23

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.

  31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014.

  31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014.

  32

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014.

  101

The following financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in extensible Business Reporting Language:

 

(i) Consolidated Balance Sheet at December 31, 2014 and 2013, (ii) Consolidated Statement of Operations for the years ended December 31, 2014, 2013 and 2012, (iii) Consolidated Statement of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012, (iv) Consolidated Statement of Cash Flows for the years ended December 31, 2014, 2013 and 2012, (v) Consolidated Statement of Equity for the years ended December 31, 2014, 2013 and 2012, (vi) Notes to Consolidated Financial Statements (tagged as a block of text) and (vii) Supplementary Information – Condensed Consolidating Financial Statements (tagged as a block of text).

 

*

Incorporated by reference.

 

+  

This exhibit is a management contract or compensation plan or arrangement.

 

This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities and Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

 

 

The Registrant hereby agrees to furnish to the Securities and Exchange Commission at its request copies of long-term debt instruments defining the rights of holders of outstanding long-term debt that are not required to be filed herewith.

 

146

Exhibit 10.22

TIME WARNER INC.

2013 STOCK INCENTIVE PLAN

As Amended Through June 11, 2014

 

1. Purpose of the Plan

The purpose of the Plan is to aid the Company and its Affiliates in recruiting and retaining employees, directors and advisors and to motivate such employees, directors and advisors to exert their best efforts on behalf of the Company and its Affiliates by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such employees, directors and advisors will have in the welfare of the Company as a result of their proprietary interest in the Company’s success.

 

2. Definitions

The following capitalized terms used in the Plan have the respective meanings set forth in this Section:

(a)         “Act” means the Securities Exchange Act of 1934, as amended, or any successor thereto.

(b)         “Affiliate” means any entity that is consolidated with the Company for financial reporting purposes or any other entity designated by the Board in which the Company or an Affiliate has a direct or indirect equity interest of at least 20%, measured by reference to vote or value.

(c)         “Award” means an Option, SAR, award of Restricted Stock, or Other Stock-Based Award granted pursuant to the Plan.

(d)         “Board” means the Board of Directors of the Company.

(e)         “Change in Control” means the occurrence of any of the following events:

(i)         any “Person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (other than the Company or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes the “Beneficial Owner” within the meaning of Rule 13d-3 promulgated under the Act of 30% or more of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors; excluding, however, any circumstance in which such beneficial ownership resulted from any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or by any corporation controlling, controlled by, or under common control with, the Company;

(ii)         a change in the composition of the Board since the Effective Date, such that the individuals who, as of such date, constituted the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-12 of Regulation 14A promulgated under the Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person or entity other than the Board shall not be deemed a member of the Incumbent Board;

(iii)         a reorganization, recapitalization, merger, consolidation or similar form of corporate transaction, or the sale, transfer, or other disposition of all or substantially all of the assets of the Company to an entity that is not an Affiliate (each of the foregoing events, a “Corporate Transaction”) involving the Company, unless securities representing 60% or more of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Company or the corporation resulting from such Corporate Transaction,


including a corporation that, as a result of such transaction owns all or substantially all of the Company’s assets (or the direct or indirect parent of such corporation), are held immediately subsequent to such transaction by the person or persons who were the beneficial holders of the outstanding voting securities entitled to vote generally in the election of directors of the Company immediately prior to such Corporate Transaction, in substantially the same proportions as their ownership immediately prior to such Corporate Transaction; or

(iv)         the liquidation or dissolution of the Company, unless such liquidation or dissolution is part of a transaction or series of transactions described in clause (iii) above that does not otherwise constitute a Change in Control.

(f)         “Code” means the Internal Revenue Code of 1986, as amended, or any successor thereto.

(g)         “Committee” means the Compensation and Human Development Committee of the Board or its successor, or such other committee of the Board to which the Board has delegated power to act under or pursuant to the provisions of the Plan or a subcommittee of the Compensation and Human Development Committee (or such other committee) established by the Compensation and Human Development Committee (or such other committee).

(h)         “Company” means Time Warner Inc., a Delaware corporation.

(i)         “Effective Date” means the date the Board approves the Plan.

(j)         “Employment” means (i) a Participant’s employment if the Participant is an employee of the Company or any of its Affiliates or (ii) a Participant’s services as a non-employee director, if the Participant is a non-employee member of the Board or the board of directors of an Affiliate; provided, however that unless otherwise determined by the Committee, a change in a Participant’s status from employee to non-employee (other than a director of the Company or an Affiliate) shall constitute a termination of employment hereunder.

(k)         “Fair Market Value” means, on a given date, (i) if there is a public market for the Shares and the Shares are listed on the New York Stock Exchange (“NYSE”), the closing sale price of the Shares on such date as reported on the NYSE Composite Tape, or, if the Shares are no longer listed on the NYSE, then the closing price of the Shares on such date as reported by such other national securities exchange or quotation system on which the Shares then have their primary listing or quotation; provided that, if no sale of Shares shall have been reported on such date, then the immediately preceding date on which sales of the Shares have been so reported shall be used, and (ii) if there is no public market for the Shares on such date, the Fair Market Value shall be the value established by the Committee in good faith.

(l)         “ISO” means an Option that is also an incentive stock option granted pursuant to Section 6(d).

(m)         “Option” means a stock option granted pursuant to Section 6.

(n)         “ Option Price ” means the price for which a Share can be purchased upon exercise of an Option, as determined pursuant to Section 6(a).

(o)         “Other Stock-Based Awards” means awards granted pursuant to Section 9.

(p)         “Participant” means an employee, prospective employee, director or advisor of the Company or an Affiliate who is selected by the Committee to participate in the Plan.

(q)         “Performance-Based Awards” means certain Other Stock-Based Awards granted pursuant to Section 9(b).

(r)         “Plan” means the Time Warner Inc. 2013 Stock Incentive Plan, as amended from time to time.

 

2


(s)         “Plan Share Limit” has the meaning set forth in Section 3.

(t)         “Restricted Stock” means any Share granted under Section 8.

(u)         “Section 162(m)” means Section 162(m) of the Code and the Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date.

(v)         “Section 409A” means Section 409A of the Code and the Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date.

(w)         “Shares” means shares of common stock of the Company, $.01 par value per share.

(x)         “SAR” means a stock appreciation right granted pursuant to Section 7.

(y)         “Subsidiary” means a subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto), of the Company.

(z)         “Substitute Awards” has the meaning set forth in Section 4(c).

(aa)       “Unrestricted Pool” means a number of Shares equal to 5% of the Plan Share Limit.

 

3. Shares Subject to the Plan

Subject to adjustment as provided in Section 10, the total number of Shares available for issuance under the Plan (the “Plan Share Limit”) shall be equal to 36,507,447, of which, no more than 31,292,097 may be issued in the form of Restricted Stock or Other Stock-Based Awards payable in Shares and no more than 3,129,209 may be issued with respect to ISOs. The maximum aggregate number of Shares with respect to which Awards may be granted during a calendar year, net of any Shares which are subject to Awards (or portions thereof) which, during such year, terminate or lapse without payment of consideration, shall be equal to 1.5% of the number of Shares outstanding on December 31 of the preceding calendar year. The maximum number of Shares with respect to which Awards may be granted during a calendar year to any Participant shall be 2,607,674 in the case of Options or SARs, 1,043,069 in the case of Restricted Stock and 1,043,069 in the case of Other Stock-Based Awards; provided that the maximum number of Shares with respect to which Awards may be granted during a calendar year to any Participant shall be 2,607,674. In the case of Awards that are settled in cash based on the Fair Market Value of a Share, the maximum aggregate amount of cash that may be paid pursuant to Awards granted in a calendar year to any Participant shall be equal to the Fair Market Value of a Share as of the relevant grant date multiplied by the maximum number of Shares with respect to which Awards may be granted during a calendar year to any Participant.

The number of Shares available for issuance under the Plan shall be reduced by the full number of Shares covered by Awards granted under the Plan (including, without limitation, the full number of Shares covered by any SAR, regardless of whether any such SAR or other Award covering Shares under the Plan is ultimately settled in cash or by delivery of Shares); provided, however, that the number of Shares covered by Awards (or portions thereof) that are forfeited or that otherwise terminate or lapse without the payment of consideration in respect thereof shall again become available for issuance under the Plan; and provided further that any Shares that are forfeited after the actual issuance of such Shares to a Participant under the Plan shall not become available for re-issuance under the Plan.

 

4. Administration

(a)         The Plan shall be administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are intended to qualify as “independent directors” within the meaning of the rules of the NYSE or, if the Shares are no longer listed on the NYSE, the rules of such other national securities exchange or quotation system

 

3


on which the Shares then have their primary listing or quotation, “non-employee directors” within the meaning of Rule 16b-3 under the Act and, to the extent required by Section 162(m), “outside directors” within the meaning thereof. In addition, to the extent permitted or not prohibited by the Delaware General Corporation Law, the Committee may delegate the authority to grant Awards under the Plan to any employee or group of employees of the Company or an Affiliate; provided that such delegated authority shall not include the authority to grant Awards to any individual who is subject to Section 16 of the Act and any grants made pursuant to such delegated authority are consistent with guidelines established by the Committee from time to time.

(b)         The Committee shall have the full power and authority to make, and establish the terms and conditions of, any Award to any person eligible to be a Participant, consistent with the provisions of the Plan, and to waive any such terms and conditions at any time (including, without limitation, accelerating or waiving any vesting conditions, subject to Sections 8(a) and 9(a)).

(c)         Subject to the restrictions on “repricing” of Options and SARs as set forth in Section 5(b), Awards may, in the discretion of the Committee, be granted under the Plan in assumption of, or in substitution for, outstanding awards previously granted by the Company or any of its Affiliates or a company acquired by the Company or any of its Affiliates or with which the Company or any of its Affiliates combines (“Substitute Awards”). The number of Shares underlying any Substitute Awards shall be counted against the Plan Share Limit; provided , however , that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding awards previously granted by an entity that is acquired by the Company or any of its Affiliates or with which the Company or any of its Affiliates combines shall not be counted against the Plan Share Limit; provided further , however , that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding stock options intended to qualify for special tax treatment under Sections 421 and 422 of the Code that were previously granted by an entity that is acquired by the Company or any of its Affiliates or with which the Company or any of its Affiliates combines shall be counted against the maximum aggregate number of Shares available for ISOs under the Plan.

(d)         The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan, and may delegate such authority, as it deems appropriate. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their successors).

(e)         The Committee shall require payment of any amount it may determine to be necessary to withhold for federal, state, local or other taxes as a result of the exercise, grant, vesting or payout of an Award. Unless the Committee specifies otherwise, the Participant may elect to pay a portion or all of such withholding taxes by (a) delivery of Shares or (b) having Shares withheld by the Company with a Fair Market Value equal to the minimum statutory withholding rate from any Shares that would have otherwise been received by the Participant.

 

5. Limitations

(a)         No Award may be granted under the Plan after August 31, 2017, but Awards granted prior to such date may extend beyond that date.

(b)         Notwithstanding any provision herein to the contrary, the repricing of an Option or SAR, once granted hereunder, is prohibited without the prior approval of the Company’s stockholders. For this purpose, a “repricing” means any of the following (or any other action that has the same effect as any of the following): (i) changing the terms of an Option or SAR to lower its exercise price other than a decrease in exercise price that occurs as a result of an adjustment made in connection with a change in capitalization or similar change in the outstanding Shares pursuant to Section 10(a) below; (ii) any other action that is treated as a “repricing” under U.S. generally accepted accounting principles; and (iii) repurchasing for cash or canceling an Option or SAR at a time when its exercise price is greater than the Fair Market Value of the

 

4


underlying Shares in exchange for another Award, unless the cancellation and exchange occurs in connection with a change in capitalization or similar change in the outstanding Shares permitted under Section 10(a) below. Any such cancellation and exchange described in clause (iii) (other than in connection with a change permitted under Sections 10(a) and 10(b) below) will be considered a “repricing” regardless of whether it is treated as a “repricing” under U.S. generally accepted accounting principles and regardless of whether it is voluntary on the part of the Participant.

(c)         With respect to any Awards granted to a Participant who is a non-employee member of the Board at the time of grant, such Awards shall be made pursuant to formulas established by the Board in advance of such grant. Any such Awards shall be made at the time such a Participant first becomes a member of the Board and, thereafter, on an annual basis at or following the annual meeting of stockholders. Such formulas may include any one or more of the following: (i) a fixed number of Options or SARs or a number of Options determined by reference to a fixed dollar amount (calculated based on the Fair Market Value of a Share on the date of grant and the Black-Scholes methodology for valuing Options and SARs), (ii) a fixed number of Shares of Restricted Stock or a number of Shares of Restricted Stock determined by reference to a fixed dollar amount (calculated based on the Fair Market Value of a Share on the date of grant), and (iii) Other Stock-Based Awards determined either by reference to a fixed number of Shares or to a fixed dollar amount (calculated based on the Fair Market Value of a Share on the date of grant).

 

6. Terms and Conditions of Options

Options granted under the Plan shall be, as determined by the Committee, nonqualified or incentive stock options for federal income tax purposes, as evidenced by the related Award agreements, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine, and as evidenced by the related Award agreement:

(a)         Option Price. The Option Price per Share shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of a Share on the date an Option is granted.

(b)         Exercisability. Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Committee, but in no event shall an Option be exercisable more than ten years after the date it is granted, except as may be provided pursuant to Section 15.

(c)         Exercise of Options. Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the Shares for which it is then exercisable. For purposes of this Section 6, the exercise date of an Option shall be the date a notice of exercise is received by the Company, together with provision for payment of the full purchase price in accordance with this Section 6(c). The purchase price for the Shares as to which an Option is exercised shall be paid to the Company, as designated by the Committee, pursuant to one or more of the following methods: (i) in cash or its equivalent (e.g., by check); (ii) in Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee; (iii) partly in cash and partly in such Shares or (iv) if there is a public market for the Shares at such time, through the delivery of irrevocable instructions to a broker to sell Shares obtained upon the exercise of the Option and to deliver promptly to the Company an amount out of the proceeds of such sale equal to the aggregate Option Price for the Shares being purchased. No Participant shall have any rights to dividends or other rights of a stockholder with respect to Shares subject to an Option until the Shares are issued to the Participant.

(d)         ISOs. The Committee may grant Options under the Plan that are intended to be ISOs. Such ISOs shall comply with the requirements of Section 422 of the Code (or any successor section thereto). No ISO may be granted to any Participant who, at the time of such grant, owns more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless (i) the Option Price for such ISO is at least 110% of the Fair Market Value of a Share on the date the ISO is granted and (ii) the date on which such ISO terminates is a date not later than the day preceding the fifth anniversary of the date on which the ISO is granted. ISOs may be granted only to employees of the

 

5


Company or any Subsidiary. Any Participant who disposes of Shares acquired upon the exercise of an ISO either (i) within two years after the date of grant of such ISO or (ii) within one year after the transfer of such Shares to the Participant, shall notify the Company of such disposition and of the amount realized upon such disposition. All Options granted under the Plan are intended to be nonqualified stock options, unless the applicable Award agreement expressly states that the Option is intended to be an ISO. If an Option is intended to be an ISO, and if for any reason such Option (or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such Option (or portion thereof) shall be regarded as a nonqualified stock option granted under the Plan; provided that such Option (or portion thereof) otherwise complies with the Plan’s requirements relating to nonqualified stock options. In no event shall any member of the Committee, the Company or any of its Affiliates (or their respective employees, officers or directors) have any liability to any Participant (or any other person) due to the failure of an Option to qualify for any reason as an ISO.

(e)         Attestation. Wherever in the Plan or any agreement evidencing an Award a Participant is permitted to pay the exercise price of an Option or taxes relating to the exercise of an Option by delivering Shares, the Participant may, subject to procedures satisfactory to the Committee, satisfy such delivery requirement by presenting proof of beneficial ownership of such Shares, in which case the Company shall treat the Option as exercised without further payment and/or shall withhold such number of Shares from the Shares acquired by the exercise of the Option, as appropriate.

 

7. Terms and Conditions of SARs

(a)         Grants. The Committee may grant (i) a SAR independent of an Option or (ii) a SAR in connection with an Option, or a portion thereof. A SAR granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same number of Shares covered by the Option (or such lesser number of Shares as the Committee may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 7 (or such additional limitations as may be included in an Award agreement).

(b)         Terms. The exercise price per Share of a SAR shall be an amount determined by the Committee but in no event shall such amount be less than 100% of the Fair Market Value of a Share on the date the SAR is granted; provided, however, that notwithstanding the foregoing in the case of a SAR granted in conjunction with an Option, or a portion thereof, the exercise price may not be less than the Option Price of the related Option. Each SAR granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the exercise price per Share, times (ii) the number of Shares covered by the SAR. Each SAR granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Company the unexercised Option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the Option Price per Share, times (ii) the number of Shares covered by the Option, or portion thereof, which is surrendered. Payment shall be made in Shares or in cash, or partly in Shares and partly in cash (any such Shares valued at such Fair Market Value), all as shall be determined by the Committee. SARs may be exercised from time to time upon actual receipt by the Company of written notice of exercise stating the number of Shares with respect to which the SAR is being exercised. The date a notice of exercise is received by the Company shall be the exercise date. No fractional Shares will be issued in payment for SARs, but instead cash will be paid for a fraction or, if the Committee should so determine, the number of Shares will be rounded downward to the next whole Share. No Participant shall have any rights to dividends or other rights of a stockholder with respect to Shares covered by SARs until the Shares are issued to the Participant.

(c)         Limitations. The Committee may impose, in its discretion, such conditions upon the exercisability of SARs as it may deem fit, but in no event shall a SAR be exercisable more than ten years after the date it is granted, except as may be provided pursuant to Section 15.

 

6


8. Restricted Stock

(a)         Grant. Subject to the provisions of the Plan, the Committee shall determine the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions, if any, under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. Notwithstanding any other provision of the Plan, (i) Awards of Restricted Stock that are subject to time-based vesting, but not performance-based vesting (other than an Award of Restricted Stock relating to Shares in the Unrestricted Pool) shall not fully vest until the completion of a vesting period of at least three years from the date of grant, subject to earlier vesting in whole or in part in the event of a Change in Control or the death, disability or other termination of the Participant’s Employment, and (ii) Awards of Restricted Stock that are subject to vesting upon the attainment of performance objectives shall have a minimum performance period of one year. An Award of Restricted Stock that relates to Shares in the Unrestricted Pool shall be subject to vesting over such period as the Committee shall specify.

(b)         Transfer Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award agreement. Shares of Restricted Stock may be evidenced in such manner as the Committee shall determine in its sole discretion. If certificates representing Shares of Restricted Stock are registered in the name of the applicable Participant, the Company may, at its discretion, retain physical possession of such certificates until such time as all applicable restrictions have lapsed. After the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver a certificate or other evidence of ownership of the Shares to the Participant.

(c)         Dividends. Dividends paid on any Shares of Restricted Stock may be paid directly to the Participant, withheld by the Company subject to vesting of the Shares of Restricted Stock pursuant to the terms of the applicable Award agreement, or may be reinvested in additional Shares of Restricted Stock, as determined by the Committee in its sole discretion; provided that, for Shares of Restricted Stock that are subject to vesting upon the attainment of a performance goal, dividends may be withheld and paid only with respect to those Shares of Restricted Stock for which the Committee certifies that the performance goal has been met and the Restricted Stock vests. Unless the applicable Award agreement provides otherwise and subject to Section 19, dividends that have been withheld until the Shares of Restricted Stock have vested shall be paid within 60 days after the certification is made by the Committee.

(d)         Performance-Based Grants. Notwithstanding anything to the contrary herein, certain Shares of Restricted Stock granted under this Section 8 may, at the discretion of the Committee, be granted in a manner that is intended to be deductible by the Company under Section 162(m). The restrictions applicable to such Restricted Stock shall lapse based wholly or partially on the attainment of written performance goals approved by the Committee for a performance period of not less than one year established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates. The performance goals, which must be objective, shall be based on one or more of the criteria set forth in Section 9(b) below. The criteria may relate to the Company, one or more of its Affiliates or one or more of its or their divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the extent consistent with Section 162(m), the performance goals may be calculated with such adjustments as the Committee deems appropriate in its sole discretion to exclude the effects of extraordinary, unusual or nonrecurring items and to reflect other factors that the Committee deems appropriate, including without limitation, (i) gains or losses on the disposition of a business, (ii) changes in tax or accounting regulations or laws, (iii) the effects of a merger or acquisition, (iv) asset write-downs, (v) litigation judgments or settlements, and (vi) restructuring or severance charges. The Committee shall determine whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant and, if they have, shall so certify prior to the release of the restrictions on the Shares. No such restrictions shall lapse for such performance period until such certification is made by the Committee. Unless the Committee otherwise provides in an Award agreement, any related dividend equivalents that have vested shall be paid within 60 days after such certification is made by the Committee.

 

7


9. Other Stock-Based Awards

(a)         Generally. The Committee, in its sole discretion, may grant or sell Awards of Shares and Awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of, Shares (“Other Stock-Based Awards”), including, but not limited to, Shares awarded as a bonus and not subject to any restrictions or conditions, Shares in payment of the amounts due under an incentive or performance plan sponsored or maintained by the Company or an Affiliate, restricted stock units, performance stock units, dividend equivalent units, stock equivalent units, and deferred stock units. Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive, or vest with respect to, one or more Shares (or the equivalent cash value of such Shares) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine the number of Shares to be awarded to a Participant under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Shares or a combination of cash and Shares; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof and provisions ensuring that all Shares so awarded and issued shall be fully paid and non-assessable). Notwithstanding any other provision of the Plan, (i) Other Stock-Based Awards settled in Shares that are subject to time-based vesting, but not performance-based vesting (other than an Award that relates to Shares in the Unrestricted Pool), shall not fully vest until the completion of a vesting period of at least three years from the date of grant, subject to earlier vesting in whole or in part in the event of a Change in Control or the death, disability or other termination of the Participant’s Employment, and (ii) Other Stock-Based Awards settled in Shares that are subject to vesting upon the attainment of performance objectives shall have a minimum performance period of one year, and dividend equivalents for such Other Stock-Based Awards that are subject to the attainment of performance objectives may be accrued and paid only with respect to the Shares for which the performance objective is certified by the Committee as having been achieved. Other Stock-Based Awards that are subject to time-based vesting, but not performance-based vesting, and that relate to Shares in the Unrestricted Pool shall be subject to vesting over such period as the Committee shall specify. Unless the applicable Award agreement provides otherwise and subject to Section 19, Other Stock-Based Awards shall be settled within 60 days following the end of the year in which such Awards vest.

(b)         Performance-Based Awards. Notwithstanding anything to the contrary herein, certain Other Stock-Based Awards granted under this Section 9 may be granted in a manner which is intended to be deductible by the Company under Section 162(m) (“Performance-Based Awards”). A Participant’s Performance-Based Award shall be determined based on the attainment of written performance goals approved by the Committee for a performance period of not less than one year established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates. The performance goals, which must be objective, shall be based on one or more of the following criteria: (i) operating income before depreciation and amortization (“OIBDA”), including adjusted OIBDA; (ii) operating income, including adjusted operating income; (iii) net income, including adjusted net income; (iv) earnings per share, including adjusted earnings per share; (v) return on stockholders’ equity; (vi) revenues or sales; (vii) free cash flow; (viii) return on invested capital, including adjusted return on invested capital; (ix) total stockholder return; (x) cash flow from operations; (xi) stock price; (xii) margins; (xiii) reductions in expenses; and (xiv) completion or progress on the achievement of significant transactions, acquisitions, divestitures, and/or projects or processes. The foregoing criteria may relate to the Company, one or more of its Affiliates or one or more of its or their divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the extent consistent with Section 162(m), the performance goals may be calculated with such adjustments as the Committee deems appropriate in its sole discretion to exclude the effects of extraordinary, unusual or nonrecurring items and to reflect other factors that the Committee deems appropriate, including without limitation, (i) gains or losses on the disposition of a business, (ii) changes in tax or accounting regulations or laws, (iii) the effects of a merger or acquisition, (iv) asset write-downs, (v) litigation judgments or settlements, and (vi) restructuring or severance charges. The Committee shall determine whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant

 

8


and, if they have, shall so certify and ascertain the amount of the applicable Performance-Based Award. No Performance-Based Awards will be paid for such performance period until such certification is made by the Committee. The amount of the Performance-Based Award actually paid to a given Participant may be less than the amount determined by the applicable performance goal formula, at the discretion of the Committee. Except as otherwise provided in an Award agreement and subject to Section 19, the amount of the Performance-Based Award determined by the Committee for a performance period shall be paid to the Participant within 60 days following such determination by the Committee.

 

10. Adjustments Upon Certain Events

Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan:

(a)         Generally. In the event of any change in the outstanding Shares (including, without limitation, the value thereof) after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, combination, spin-off, combination or exchange of Shares or other corporate exchange, or any distribution to holders of Shares other than regular cash dividends, or any transaction similar to the foregoing, the Committee in its sole discretion and without liability to any person shall make such substitution or adjustment, if any, as it deems to be equitable (subject to Section 19), as to (i) the number or kind of Shares or other securities issued or reserved for issuance pursuant to the Plan or pursuant to outstanding Awards, (ii) the maximum number of Shares for which Awards (including limits established for Options or SARs, Restricted Stock or Other Stock-Based Awards) may be granted during a calendar year to any Participant, (iii) the Option Price of any Option or exercise price of any SAR and/or (iv) any other affected terms of such Awards.

(b)         Change in Control. In the event of a Change in Control after the Effective Date, the Committee may (subject to Section 19), but shall not be obligated to, (A) accelerate, vest or cause the restrictions to lapse with respect to, all or any portion of an Award, (B) cancel Awards for fair value (as determined in the sole discretion of the Committee) which, in the case of Options and SARs, may equal the excess, if any, of the value of the consideration to be paid in the Change in Control transaction to holders of the same number of Shares subject to such Options or SARs (or, if no consideration is paid in any such transaction, the Fair Market Value of the Shares subject to such Options or SARs) over the aggregate Option Price of such Options or exercise price of such SARs, (C) provide for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted hereunder as determined by the Committee in its sole discretion, (D) provide that for a period of at least 30 days prior to the Change in Control, Options shall be exercisable as to all Shares subject thereto and that upon the occurrence of the Change in Control, such Options shall terminate and be of no further force and effect or (E) take such other action with respect to Awards as the Committee shall determine to be appropriate in its discretion.

 

11. No Right to Employment or Awards

The granting of an Award under the Plan shall impose no obligation on the Company or any Affiliate to continue the Employment of a Participant and shall not lessen or affect the Company’s or any Affiliate’s right to terminate the Employment of such Participant. No Participant or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants, or holders of Awards. The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated).

 

9


12. Successors and Assigns

The Plan shall be binding on all successors and assigns of the Company and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.

 

13. Nontransferability of Awards

Unless otherwise determined by the Committee (and subject to the limitation that in no circumstances may an Award may be transferred by the Participant for consideration or value), an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. An Award exercisable after the death of a Participant may be exercised by the legatees, personal representatives or distributees of the Participant.

 

14. Amendments or Termination

The Board or the Committee may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made (a) without the approval of the stockholders of the Company, (i) if such action would (except as is provided in Section 10(a) of the Plan) increase the total number of Shares reserved for the purposes of the Plan or increase the maximum number of Shares of Restricted Stock or Other Stock-Based Awards that may be awarded hereunder, or the maximum number of Shares for which Awards may be granted to any Participant, (ii) if stockholder approval for such action is otherwise required by (A) any applicable law or regulation, (B) the rules of the NYSE or, if the Shares are not then listed on the NYSE, the rules of such other national securities exchange or quotation system on which the Shares then have their primary listing or quotation or (C) Section 162(m) (taking into consideration the exception provided by Treas. Reg. § 1.162-27(f)(iii)(4)), or (iii) to change the class of individuals eligible to receive ISOs; (b) without the consent of a Participant, if such action would diminish any of the rights of the Participant under any Award theretofore granted to such Participant under the Plan; or (c) to Section 5(b) of the Plan, relating to repricing of Options or SARs, to permit such repricing, without the prior approval of the Company’s stockholders; provided, however, that the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws.

 

15. International Participants

With respect to Participants who reside or work outside the United States of America and who are not (and who are not expected to be) “covered employees” within the meaning of Section 162(m) of the Code, the Committee may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to address differences in local law or tax policies or to obtain more favorable tax or other treatment for a Participant, the Company or an Affiliate.

 

16. Other Benefit Plans

All Awards shall constitute a special incentive payment to the Participant and shall not be taken into account in computing the amount of salary or compensation of the Participant for the purpose of determining any benefits under any pension, retirement, profit sharing, bonus, life insurance or other benefit plan of the Company or under any agreement between the Company and the Participant, unless such plan or agreement specifically provides otherwise.

 

10


17. Choice of Law

The Plan shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws and, except as otherwise provided in the pertinent Award agreement, any and all disputes between a Participant and the Company or any Affiliate relating to an Award shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York.

 

18. Effectiveness of the Plan

The Plan shall be effective as of the Effective Date, subject to the approval of the stockholders of the Company.

 

19. Section 409A

It is intended that the provisions of the Plan comply with Section 409A, and all provisions of the Plan shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A.

No Participant or the creditors of a Participant shall have the right to subject any deferred compensation (within the meaning of Section 409A) payable under the Plan to any anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment. Except as permitted under Section 409A, any deferred compensation (within the meaning of Section 409A) payable to any Participant or for the benefit of any Participant under the Plan may not be reduced by, or offset against, any amount owing by any such Participant to the Company or any of its Affiliates.

Notwithstanding any other provisions in the Plan or any Award agreement to the contrary, in the event that it is reasonably determined by the Company that, as a result of Section 409A, payments in respect of any Award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant Award agreement, as the case may be, without causing the Participant holding such Award to be subject to taxation under Section 409A, the Company will make such payment on the first day that would not result in the Participant incurring any tax liability under Section 409A. If, at the time of a Participant’s separation from service (within the meaning of Section 409A), (A) such Participant shall be a specified employee (within the meaning of Section 409A and using the identification methodology selected by the Company from time to time) and (B) the Company shall make a good faith determination that an amount payable pursuant to an Award constitutes deferred compensation (within the meaning of Section 409A), the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to avoid taxes or penalties under Section 409A, then the Company shall not pay such amount on the otherwise scheduled payment date but shall instead pay it on the first business day after such six-month period. Such amount shall be paid without interest, unless otherwise determined by the Committee, in its sole discretion, or as otherwise provided in any applicable employment agreement between the Company and the relevant Participant. To the extent any amount made under the Plan to which Section 409A applies is payable in two or more installments, each installment payment shall be treated as a separate and distinct payment for purposes of Section 409A.

Notwithstanding any provision of the Plan to the contrary, in light of the uncertainty with respect to the proper application of Section 409A, the Company reserves the right to make amendments to any Award as the Company deems necessary or desirable to avoid the imposition of taxes or penalties under Section 409A. In any case, a Participant shall be solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on such Participant or for such Participant’s account in connection with an Award (including any taxes and penalties under Section 409A), and neither the Company nor any of its Affiliates shall have any obligation to indemnify or otherwise hold such Participant harmless from any or all of such taxes or penalties.

 

11

Exhibit 10.24

Time Warner Inc. 2013 Stock Incentive Plan

RSU Executive Agreement, Version 2 (2013RUEXCV2)]

For Use from February 2015

Restricted Stock Units Agreement

General Terms and Conditions

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the restricted stock units (the “ RSUs ”) provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1. Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

 

  a) Cause means “Cause” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Cause” means (i) the Participant’s continued failure substantially to perform such Participant’s duties (other than as a result of total or partial incapacity due to physical or mental illness) for a period of ten (10) days following written notice by the Company or any of its Affiliates to the Participant of such failure, (ii) dishonesty in the performance of the Participant’s duties, (iii) the Participant’s conviction of, or plea of nolo contendere to, a crime constituting (A) a felony under the laws of the United States or any state thereof or (B) a misdemeanor involving moral turpitude, (iv) the Participant’s insubordination, willful malfeasance or willful misconduct in connection with the Participant’s duties or any act or omission which is injurious to the financial condition or business reputation of the Company or any of its Affiliates, or (v) the Participant’s breach of any non-competition, non-solicitation or confidentiality provisions to which the Participant is subject. The determination of the Committee as to the existence of “Cause” will be conclusive on the Participant and the Company.

 

  b) Disability means “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s long-term disability plan or policy, as in effect from time to time, to the extent that such definition also constitutes such Participant being considered “disabled” under Section 409A(a)(2)(C) of the Code.


  c) Good Reason ” means “Good Reason” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Good Reason” means (i) the failure of the Company to pay or cause to be paid the Participant’s base salary or annual bonus when due, (ii) any substantial and sustained diminution in the Participant’s authority or responsibilities materially inconsistent with the Participant’s position, (iii) a reduction in such Participant’s annual base salary or target annual bonus in effect as of the date of this Award without the Participant’s written consent or (iv) without the Participant’s written consent, any requirement that the Participant’s principal place of employment be relocated to a location that increases such Participant’s commute from his or her primary residence by more than thirty-five (35) miles; provided that any of the events described in clauses (i), (ii), (iii) and (iv) will constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from the Participant of written notice of the event which constitutes Good Reason; provided , further , that “Good Reason” will cease to exist for an event on the sixtieth (60 th ) day following the later of its occurrence or the Participant’s knowledge thereof, unless the Participant has given the Company written notice of his or her termination of employment for Good Reason prior to such date.

 

  d) Notice ” means (i) the Notice of Grant of Restricted Stock Units that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

 

  e) Participant ” means an individual to whom RSUs have been awarded pursuant to the Plan and shall have the same meaning as may be assigned to the terms “Holder” or “Participant” in the Plan.

 

  f) Performance Period ” means the year with respect to which the Performance Target is set by the Committee pursuant to Section 4(b).

 

  g) Performance Target ” means the specific written objective goal or goals based on the criteria set forth in Section 9(b) of the Plan and that are timely approved by the Committee pursuant to Section 9(b) of the Plan for the Participant for the applicable Performance Period.

 

  h) Plan means the equity plan maintained by the Company that is specified in the Notice, which equity plan has been provided to the Participant separately and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

 

  i) Retirement ” means a voluntary termination of employment by the Participant following the attainment of age 55 with ten (10) or more years of service as an employee or a director with the Company or any Affiliate.

 

2


  j) Severance Period ” means the period of time following a termination of Employment during which a Participant is entitled to receive both salary continuation payments and continued participation under the health benefit plans of the Company or any of its Affiliates, whether pursuant to an employment contract with, or a severance plan or other arrangement maintained by, the Company or any Affiliate.

 

  k) Shares ” means shares of Common Stock of the Company.

 

  l) Vesting Date ” means each vesting date set forth in the Notice.

 

2. Grant of Restricted Stock Units . The Company hereby grants to the Participant (the “ Award ”), on the terms and conditions hereinafter set forth, the number of RSUs set forth on the Notice. Each RSU represents the unfunded, unsecured right of the Participant to receive a Share on the Vesting Date(s) specified herein, subject to the terms, conditions and Section 162(m) performance-based vesting requirements set forth herein. RSUs do not constitute issued and outstanding shares of Common Stock for any corporate purposes and do not confer on the Participant any right to vote on matters that are submitted to a vote of holders of Shares.

 

3.

Dividend Equivalents, Retained Dividend Equivalents and Retained Distributions . If on any date while RSUs are outstanding hereunder the Company shall pay any regular cash dividend on the Shares, (i) if the Committee has certified that the Performance Target has been satisfied, in accordance with Section 9(b) of the Plan, then, for each RSU held by the Participant on the record date, the Participant shall be paid an amount of cash equal to the dividend paid on a Share (the “ Dividend Equivalents ”) or (ii) if the Committee has not yet certified that the Performance Target has been satisfied, in accordance with Section 9(b) of the Plan, then, for each RSU held by the Participant on the record date, the Participant shall be credited with a bookkeeping entry in an amount equal to the dividend paid on a Share (the “ Retained Dividend Equivalents ”), with such payment or crediting, as applicable, made at the time that such dividends are paid to holders of Shares. If on any date while RSUs are outstanding hereunder the Company shall pay any dividend other than a regular cash dividend or make any other distribution on the Shares, the Participant shall be credited with a bookkeeping entry equivalent to such dividend or distribution for each RSU held by the Participant on the record date for such dividend or distribution, but the Company shall retain custody of all such dividends and distributions unless the Board has in its sole discretion determined that an amount equivalent to such dividend or distribution shall be paid currently to the Participant (the “ Retained Distributions ”); provided , however , that if the Retained Distribution relates to a dividend paid in Shares, the Participant shall receive an additional amount of RSUs equal to the product of (I) the aggregate number of RSUs held by the Participant pursuant to this Agreement through the related dividend record date, multiplied by (II) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Retained Distributions and Retained Dividend Equivalents will not bear interest and will be subject to the same restrictions as the RSUs to which they relate. Unless they are forfeited pursuant to Section 4(b), the Retained Dividend Equivalents will be paid to the Participant promptly, but not more than 60 days, after the Committee certifies that the Performance Target for such RSUs has been achieved, in accordance with Section 9(b) of

 

3


 

the Plan. Notwithstanding anything else contained in this paragraph 3, no payment of Dividend Equivalents, Retained Dividend Equivalents or Retained Distributions shall occur before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

4. Vesting and Delivery of Vested Securities .

 

  a) Except as otherwise provided in paragraphs 5, 6 and 7, the vesting of the RSUs in the Award and any Retained Distributions relating thereto shall occur only if (i) the Participant has continued in Employment of the Company or any of its Affiliates on the Vesting Date and has continuously been so employed since the Date of Grant (as defined in the Notice) and (ii) the Performance Target for the Performance Period has been achieved, as certified by the Committee in accordance with Section 9(b) of the Plan. Subject to the requirements and limitations in the immediately preceding sentence and the other terms and provisions of this Agreement and the Plan, no later than 60 days after the later of (x) each Vesting Date with respect to the Award and (y) the certification by the Committee of the achievement of the Performance Target, the Company shall issue or transfer to the Participant the number of Shares corresponding to such Vesting Date and the Retained Dividend Equivalents and Retained Distributions, if any, covered by that portion of the Award.

 

  b) Section 162(m) Vesting Requirement. The Award is subject to performance vesting requirements based on the achievement of the Performance Target for the Performance Period and the certification of achievement of such Performance Target by the Committee pursuant to Section 9(b) of the Plan. The Performance Target shall be established by the Committee for the Award no later than 90 days following the beginning of the Performance Period that applies to the Award. If the Performance Target for the Award is not satisfied, all of the RSUs in the Award and any Retained Dividend Equivalents and Retained Distributions will be forfeited immediately, including any RSUs in the Award and any Retained Dividend Equivalents and Retained Distributions related thereto with respect to which a Vesting Date occurred on or before the date the Committee determined the Performance Target was not satisfied. The Performance Period shall be (i) the calendar year in which the Award is granted if the Award is granted prior to April 1 or (ii) the first full calendar year ending after the grant of the Award if the Award is granted on or after April 1.

 

  c) RSUs Extinguished . Upon each issuance or transfer of Shares in accordance with this Agreement, a number of RSUs equal to the number of Shares issued or transferred to the Participant shall be extinguished and such number of RSUs will not be considered to be held by the Participant for any purpose.

 

  d) Final Issuance . Upon the final issuance or transfer of Shares, Retained Dividend Equivalents and Retained Distributions, if any, to the Participant pursuant to this Agreement, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share.

 

4


  e) Section 409A . Notwithstanding anything else contained in this Agreement, no Shares shall be issued or transferred to a Participant before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Code.

 

5. Termination of Employment .

 

  a) If the Participant’s Employment with the Company and its Affiliates is terminated by the Participant for any reason other than those described in clauses (b), (c) and (d) below prior to the Vesting Date with respect to any portion of the Award, then the RSUs covered by any such portion of the Award and all Retained Dividend Equivalents and Retained Distributions relating thereto shall be completely forfeited on the date of any such termination, unless otherwise provided in an employment agreement between the Participant and the Company or an Affiliate.

 

  b) If the Participant’s Employment terminates as a result of his or her death or Disability, then, to the extent the RSUs were not extinguished or forfeited prior to such termination of Employment, the RSUs and all Retained Dividend Equivalents and Retained Distributions relating thereto shall fully vest on the date of any such termination, and Shares subject to the RSUs shall be issued or transferred to the Participant (along with the Retained Dividend Equivalents and Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment.

 

  c) If the Participant’s Employment (i) terminates as a result of his or her Retirement or (ii) is terminated by the Company and its Affiliates for any reason other than for Cause (x) on a date when the Participant satisfies the requirements for Retirement or (y) on a date when the Participant does not satisfy the requirements for Retirement, but the Participant would satisfy the requirements for Retirement during a Severance Period, then the RSUs and all Retained Dividend Equivalents and Retained Distributions relating thereto shall, to the extent the RSUs were not extinguished or forfeited prior to such termination of Employment, fully vest on the later of (A) the date of such termination of Employment and (B) the certification by the Committee of the achievement of the Performance Target; and Shares subject to the RSUs shall be issued or transferred to the Participant (along with the Retained Dividend Equivalents and Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following such termination of Employment or Committee certification, whichever is applicable. If the Participant’s Employment terminates prior to the certification of achievement of the Performance Target by the Committee and the Performance Target is not satisfied, then the RSUs and any Retained Dividend Equivalents and Retained Distributions related thereto shall be forfeited immediately upon the Committee’s determination.

 

  d)

If the Participant’s Employment is terminated by the Company and its Affiliates for any reason other than for Cause (unless such termination is due to death or Disability) on a date when the Participant does not satisfy the requirements for

 

5


 

Retirement and the Participant would not satisfy the requirements for Retirement by the end of a Severance Period, then, subject to achievement of the Performance Target, the RSUs that were scheduled to vest on any Vesting Dates that occur before the end of a Severance Period, and any Retained Dividend Equivalents and Retained Distributions relating thereto, shall, to the extent the RSUs were not extinguished or forfeited prior to such termination of Employment, become vested, and Shares subject to such RSUs shall be issued or transferred to the Participant (along with the Retained Dividend Equivalents and Retained Distributions relating thereto) as soon as practicable, but no later than 60 days, following the later of (x) such termination of Employment and (y) the certification by the Committee of the achievement of the Performance Target. The portion of the RSUs that have a Vesting Date after the end of a Severance Period and any Retained Dividend Equivalents and Retained Distributions related thereto shall be completely forfeited on the date of any such termination. If the Participant’s Employment is terminated prior to the certification of achievement of the Performance Target by the Committee and the Performance Target is not satisfied, then the RSUs and any Retained Dividend Equivalents and Retained Distributions related thereto shall be forfeited immediately upon the Committee’s determination.

For purposes of this paragraph 5, a temporary leave of absence shall not constitute a termination of Employment or a failure to be continuously employed by the Company or any Affiliate regardless of the Participant’s payroll status during such leave of absence if such leave of absence is approved in writing by the Company or any Affiliate; provided, that such leave of absence constitutes a bona fide leave of absence and not a Separation From Service under Treas. Reg. 1.409A-1(h)(1)(i). Notice of any such approved leave of absence should be sent to the Company at One Time Warner Center, New York, New York 10019, attention: Director, Global Stock Plans Administration, but such notice shall not be required for the leave of absence to be considered approved.

In the event the Participant’s Employment with the Company or any of its Affiliates is terminated, the Participant shall have no claim against the Company with respect to the RSUs and related Retained Dividend Equivalents and Retained Distributions, if any, other than as set forth in this paragraph 5, the provisions of this paragraph 5 being the sole remedy of the Participant with respect thereto.

 

6.

Acceleration of Vesting Date . In the event a Change in Control, subject to paragraph 7, has occurred, to the extent that any such occurrence also constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, within the meaning of Section 409A(a)(2)(A)(v) of the Code (a “ 409A Change of Control Event ”), (A) the Award will vest in full upon the earlier of (i) the expiration of the one-year period immediately following the Change in Control, provided the Participant’s Employment with the Company and its Affiliates has not terminated, (ii) the original Vesting Date with respect to each portion of the Award, or (iii) the termination of the Participant’s Employment by the Company or any of its Affiliates (I) by the Company other than for Cause (unless such termination is due to death or Disability) or (II) by the Participant for Good Reason and (B) Shares subject to the RSUs shall be issued or transferred to the Participant, as soon as practicable, but in no

 

6


 

event later than 60 days following such Vesting Date, along with the Retained Dividend Equivalents and Retained Distributions related thereto; provided , however , that notwithstanding the foregoing, to the extent that any such occurrence does not constitute a 409A Change of Control Event, if the Award constitutes “deferred compensation” under Section 409A of the Code, then the RSUs shall vest as described under this paragraph 6, but the issuance of Shares shall be made at the times otherwise provided hereunder as if no Change of Control had occurred. In the event of any such vesting as described in clauses (i) and (iii) of the preceding sentence, the date described in such clauses shall be treated as the Vesting Date.

 

7. Limitation on Acceleration .

 

  a) Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this paragraph 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this paragraph 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

7


  b) If the determination made pursuant to this paragraph 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this paragraph 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

  c) As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit shall be repaid by such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this paragraph 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this paragraph 7.

 

8


8. Withholding Taxes .

 

  a) Obligation to Pay Withholding Taxes . The Participant acknowledges and agrees that, regardless of any action the Company or the Participant’s employer takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (the “ Tax-Related Items ”), the ultimate liability for all Tax-Related Items legally due by the Participant (i) is and remains the Participant’s responsibility and (ii) may exceed the amount actually withheld by the Company or the Participant’s employer. The Participant further agrees and acknowledges that the Company and the Participant’s employer (x) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the Award, the vesting of the RSUs or the subsequent sale of any Shares acquired from vesting of the RSUs, and the receipt of any Dividend Equivalents, Retained Dividend Equivalents or Retained Distributions; and (y) do not commit to and are under no obligation to structure the terms of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, the Participant understands and acknowledges that if the Participant has become subject to tax in more than one jurisdiction between the Date of Grant and the date of any relevant taxable event, the Company and/or the Participant’s employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Company’s obligation to deliver the Shares subject to the RSUs or to pay any Dividend Equivalents, Retained Dividend Equivalents or Retained Distributions shall be subject to payment of all Tax-Related Items by the Participant.

 

  b) Satisfaction of Company’s Withholding Obligations . At the time any portion of an Award of RSUs, Dividend Equivalent, Retained Dividend Equivalents or Retained Distribution relating thereto, becomes taxable to the Participant, he or she will be required to pay to the Company or the Participant’s employer, as applicable, any Tax-Related Items due as a result of such taxable event. The Company or the Participant’s employer shall have the right to withhold from any payment in respect of RSUs, transfer of Shares acquired at vesting, or payment made to the Participant or to any person hereunder, whether such payment is to be made in cash or in Shares, all Tax-Related Items as shall be required, in the determination of the Company, pursuant to any statute or governmental regulation or ruling. The Participant acknowledges and agrees that the Company or the Participant’s employer, in their sole discretion, may satisfy such withholding obligation by any one or a combination of the following methods:

 

  (i) by requiring the Participant to deliver a properly executed notice together with irrevocable instructions to a broker approved by the Company to sell a sufficient number of Shares to generate net proceeds (after commission and fees) equal to the amount required to be withheld and promptly deliver such amount to the Company;

 

9


  (ii) by requiring or allowing the Participant to pay the amount required to be withheld in cash or by check;

 

  (iii) by deducting the amount required to be withheld from the Participant’s current compensation or other amounts payable to the Participant;

 

  (iv) by allowing the Participant to surrender other Shares that (A) in the case of Shares initially acquired from the Company (upon exercise of a stock option or otherwise), have been owned by the Participant for such period (if any) as may be required to avoid a charge to the Company’s earnings, and (B) have a fair market value on the date of surrender equal to the amount required to be withheld;

 

  (v) by withholding a number of Shares to be issued upon delivery of Shares that have a fair market value equal to the minimum statutory amount required to be withheld;

 

  (vi) by selling any Shares to the extent required to pay the amount required to be withheld; or

 

  (vii) by such other means or method as the Committee in its sole discretion and without notice to the Participant deems appropriate.

The Company may satisfy its obligation to withhold the Tax-Related Items on Dividend Equivalents, Retained Dividend Equivalents and Retained Distributions payable in cash by withholding a sufficient amount from the payment or by such other means as the Committee in its sole discretion and without notice to the Participant deems appropriate, including withholding from salary or other amounts payable to the Participant, Shares or cash having a value sufficient to satisfy the withholding obligation for Tax-Related Items.

The Company will not issue any Shares to the Participant until the Participant satisfies the withholding obligation for Tax-Related Items. If the withholding obligation for Tax-Related Items is satisfied by withholding in Shares, for tax purposes, the Participant shall be deemed to have been issued the full number of Shares subject to the vested RSUs, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Participant’s participation in the Plan.

 

  c) Compliance with Applicable Laws . The Committee may also require the Participant to acknowledge that he or she shall not sell or transfer Shares except in compliance with all applicable laws, and may apply such other restrictions on the sale or transfer of the Shares as it deems appropriate.

 

9. Changes in Capitalization and Government and Other Regulations . The Award shall be subject to all of the terms and provisions as provided in this Agreement and in the Plan, which are incorporated by reference herein and made a part hereof, including, without limitation, the provisions of Section 10 of the Plan (generally relating to adjustments to the number of Shares subject to the Award, upon certain changes in capitalization and certain reorganizations and other transactions).

 

10


10. Forfeiture . A breach of any of the foregoing restrictions or a breach of any of the other restrictions, terms and conditions of the Plan or this Agreement, with respect to any of the RSUs or any Dividend Equivalents, Retained Dividend Equivalents and Retained Distributions relating thereto, except as waived by the Board or the Committee, will cause a forfeiture of such RSUs, Retained Dividend Equivalents and any Dividend Equivalents or Retained Distributions relating thereto.

 

11. Right of Company to Terminate Employment . Nothing contained in the Plan or this Agreement shall confer on any Participant any right to continue in the employ of the Company or any of its Affiliates and the Company and any such Affiliate shall have the right to terminate the Employment of the Participant at any such time, with or without cause, notwithstanding the fact that some or all of the RSUs and related Retained Dividend Equivalents and Retained Distributions covered by this Agreement may be forfeited as a result of such termination. The granting of the RSUs under this Agreement shall not confer on the Participant any right to any future Awards under the Plan.

 

12. Notices . Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to Time Warner Inc., at One Time Warner Center, New York, NY 10019, attention Director, Global Stock Plans Administration, and to the Participant at his or her address, as it is shown on the records of the Company or its Affiliate, or in either case to such other address as the Company or the Participant, as the case may be, by notice to the other may designate in writing from time to time.

 

13. Interpretation and Amendments . The Board and the Committee (to the extent delegated by the Board) have plenary authority to interpret this Agreement and the Plan, to prescribe, amend and rescind rules relating thereto and to make all other determinations in connection with the administration of the Plan. The Board or the Committee may from time to time modify or amend this Agreement in accordance with the provisions of the Plan, provided that no such amendment shall adversely affect the rights of the Participant under this Agreement without his or her consent.

 

14. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon and inure to the benefit of the Participant and his or her legatees, distributees and personal representatives.

 

15. Copy of the Plan and Documents . By entering into the Agreement, the Participant agrees and acknowledges that he or she has received and read a copy of the Plan. The Participant acknowledges and agrees that the Participant may be entitled from time to time to receive certain other documents related to the Company, including the Company’s annual report to stockholders and proxy statement related to its annual meeting of stockholders (which become available each year approximately three months after the end of the calendar year), and the Participant consents to receive such documents electronically through the Internet or as the Company otherwise directs.

 

11


16. Governing Law . The Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to any choice of law rules thereof which might apply the laws of any other jurisdiction.

 

17. Waiver of Jury Trial . To the extent not prohibited by applicable law which cannot be waived, each party hereto hereby waives, and covenants that it will not assert (whether as plaintiff, defendant or otherwise), any right to trial by jury in any forum in respect of any suit, action, or other proceeding arising out of or based upon this Agreement.

 

18. Submission to Jurisdiction; Service of Process . Each of the parties hereto hereby irrevocably submits to the jurisdiction of the state courts of the State of New York located in the County of New York and the jurisdiction of the United States District Court for the Southern District of New York for the purposes of any suit, action or other proceeding arising out of or based upon this Agreement. Each of the parties hereto to the extent permitted by applicable law hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding brought in such courts, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that such suit, action or proceeding in the above-referenced courts is brought in an inconvenient forum, that the venue of such suit, action or proceedings, is improper or that this Agreement may not be enforced in or by such court. Each of the parties hereto hereby consents to service of process by mail at its address to which notices are to be given pursuant to paragraph 12 hereof.

 

19.

Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all grants of RSUs (including number of grants, grant dates, vesting type, vesting dates, and any other information regarding RSUs that have been granted, canceled, vested, or forfeited) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). The Participant understands that Data may be collected from the Participant directly or, on Company’s request, from the Participant’s local employer. The Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data

 

12


 

Recipients ”). The Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. The Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any Shares acquired pursuant to the Plan. The Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. The Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, the Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. The Participant understands that such objection may affect his/her ability to participate in the Plan. The Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

 

13

Exhibit 10.28

Time Warner Inc. 2013 Stock Incentive Plan

PSU Agreement, Version 2 (13PSUSV2)

For Use from February 2015

Performance Stock Units Agreement

General Terms and Conditions

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the performance stock units (the “ PSUs ”) provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1. Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

 

  a) Adjusted EPS ” means the Diluted Net Income per Common Share attributable to the Company’s common shareholders excluding noncash impairments of goodwill, intangible and fixed assets and investments; gains and losses on operating assets, liabilities and investments; external costs related to mergers, acquisitions, investments or dispositions, as well as contingent consideration related to such transactions, to the extent such costs are expensed; amounts related to securities litigation and government investigations; and amounts attributable to businesses classified as discontinued operations, as well as the impact of taxes and noncontrolling interests on the above items. Adjusted EPS shall have such further adjustments as the Committee deems appropriate in its sole discretion to exclude the effects of extraordinary, unusual or nonrecurring items and to reflect other factors that the Committee deems appropriate. Adjusted EPS is measured over a designated period, generally the Measurement Period.

 

  b) Budgeted Adjusted EPS ” means the amount of Adjusted EPS with respect to a fiscal year and included in the budget and long range plan approved by the Board for the year in which the Target Adjusted EPS is established by the Committee with respect to an award of PSUs.

 

  c)

Cause ” means “Cause” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there is no such agreement, “Cause” means (i) the Participant’s continued failure substantially to perform such Participant’s duties (other than as a result of total or partial incapacity due to physical or mental illness) for a period of ten (10) days following written notice by the Company or any of its Affiliates to the Participant


 

of such failure, (ii) dishonesty in the performance of the Participant’s duties, (iii) the Participant’s conviction of, or plea of nolo contendere to, a crime constituting (A) a felony under the laws of the United States or any state thereof or (B) a misdemeanor involving moral turpitude, (iv) the Participant’s insubordination, willful malfeasance or willful misconduct in connection with the Participant’s duties or any act or omission which is injurious to the financial condition or business reputation of the Company or any of its Affiliates, or (v) the Participant’s breach of any non-competition, non-solicitation or confidentiality provisions to which the Participant is subject. The determination of the Committee as to the existence of “Cause” will be conclusive on the Participant and the Company.

 

  d) Competitive Activity ” means business activities within the lines of business of the Company, including without limitation, the following:

 

  (i) The operation of domestic and international networks and premium pay television services (including the production, provision and/or delivery of programming to cable system operators, satellite distribution services, telephone companies, Internet Protocol Television systems, mobile operators, broadband and other distribution platforms and outlets) and websites and digital applications associated with such networks and pay television services;

 

  (ii) The sale, licensing and/or distribution of content on DVD and Blu-ray discs, video on demand, electronic sell-through, applications for mobile devices, the Internet or other digital services; and

 

  (iii) The production, distribution and licensing of motion pictures and other entertainment assets, television programming, animation, interactive games (whether distributed in physical form or digitally) and other video products and the operation of websites and digital applications associated with the foregoing.

 

  e) Competitive Entity ” means “Competitive Entity” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein, “Competitive Entity” means a business (whether conducted through an entity or by individuals including the Participant in self-employment) that is engaged in any business that competes, directly or indirectly through any parent, subsidiary, affiliate, joint venture, partnership or otherwise, with (x) any of the business activities carried on by the Company in any geographic location where the Company conducts business (including without limitation a Competitive Activity as defined herein), (y) any business activities being planned by the Company or in the process of development at the time of the termination of the Participant’s Employment (as evidenced by written proposals, market research, RFPs and similar materials) or (z) any business activity that the Company has covenanted, in writing, not to compete with in connection with the disposition of such a business.

 

2


  f) Disability ” means “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s long-term disability plan or policy, as in effect from time to time.

 

  g) Division Change in Control ” means (i) a transfer by the Company or any Affiliate of the Participant’s Employment to a corporation, company or other entity whose financial results are not consolidated with those of the Company or (ii) a change in the ownership structure of the Affiliate with which the Participant has Employment such that the Affiliate’s financial results are no longer consolidated with those of the Company.

 

  h) Good Reason ” means “Good Reason” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein, “Good Reason” means the termination of the Participant’s Employment by the Participant because of a breach by the Company or any Affiliate of any employment agreement to which the Participant is a party; provided , that “Good Reason” will cease to exist for an event on the sixtieth (60 th ) day following the later of its occurrence or the Participant’s knowledge thereof, unless the Participant has given the Company written notice of his or her termination of employment for Good Reason prior to such date.

 

  i) Measurement Period ” means the three-year period ending on the December 31 prior to the regularly scheduled Vesting Date.

 

  j) Notice of Grant of Performance Stock Units ” means (i) the Notice of Grant of Performance Stock Units that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

 

  k) Participant ” means an individual to whom PSUs have been awarded pursuant to the Plan and shall have the same meaning as may be assigned to the terms “Holder” or “Participant” in the Plan.

 

  l) Performance Level ” means the level of performance achieved by the Company during a measurement period (generally, the Measurement Period) based on the Adjusted EPS achieved as compared to the Target Adjusted EPS and the TSR Percentile for such period, which is used to determine the percentage of Target PSUs that will vest, as set forth in paragraph 4.

 

3


  m) Performance Period ” means the year with respect to which the Section 162(m) Performance Target is set by the Committee.

 

  n) Plan ” means the equity plan maintained by the Company that is specified in the Notice of Grant of Performance Stock Units, which has been provided to the Participant separately and which accompanies and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

 

  o) Prohibited Action ” means (x) rendering any services to, managing, operating, controlling, or acting in any capacity (whether as a principal, partner, director, officer, member, agent, employee, consultant, owner, independent contractor or otherwise and whether or not for compensation) for, any person or entity that is a Competitive Entity, or (y) acquiring any interest of any type in any Competitive Entity, including without limitation as an owner, holder or beneficiary of any stock, stock options or other equity interest (except as permitted by the next sentence). The following items shall not be considered a “Prohibited Action:” acquiring solely as an investment and through market purchases (i) securities of any Competitive Entity that are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) and that are publicly traded, so the Participant or any entity under the Participant’s control are not part of any control group of such Competitive Entity and such securities, including converted or convertible securities, do not constitute more than one percent (1%) of the outstanding voting power of that entity and (ii) securities of any Competitive Entity that are not registered under Section 12(b) or 12(g) of the Exchange Act and are not publicly traded, so long as the Participant or any entity under the Participant’s control is not part of any control group of such Competitive Entity and such securities, including converted securities, do not constitute more than three percent (3%) of the outstanding voting power of that entity, provided that in each case the Participant has no active participation in the business of such entity.

 

  p) Retirement ” means a termination of employment by the Participant (i) following the attainment of age 55 with ten (10) or more years of service as an employee or a director with the Company or any Affiliate or (ii) pursuant to a retirement plan or early retirement program of the Company or any Affiliate.

 

  q) Section 162(m) Performance Target ” means the specific written objective goal or goals based on the criteria set forth in Section 9(b) of the Plan and that are timely approved by the Committee pursuant to Section 9(b) of the Plan for the Participant for the applicable Performance Period.

 

  r) Shares ” means shares of Common Stock of the Company.

 

  s) Target Adjusted EPS ” means the cumulative amount of Adjusted EPS for the Measurement Period established by the Committee at the time it approves the grant of PSUs, together with a range of amounts of cumulative Adjusted EPS above and below the Target Adjusted EPS that correlate to percentages of the target PSUs that range from 0% to 200% of such target PSUs.

 

4


  t) Total Shareholder Return ” or “ TSR ” means a company’s total shareholder return, calculated based on stock price appreciation during a specified period plus the value of dividends paid on such stock during the period (which shall be deemed to have been reinvested in the underlying company’s stock effective the “ex-dividend” date based on the closing price for such company for purposes of measuring TSR).

 

  u) TSR Percentile ” means the percentile rank of the TSR for the Shares during a specified period (generally the Measurement Period) relative to the TSR for each of the companies in the S&P 500 Index (the “ Index ”) at the beginning and throughout such period; provided, however , that for purposes of measuring the TSR Percentile, (i) the Index shall be deemed to include companies that were removed from the S&P 500 Index during the period but that continued during the entire period to have their shares listed on at least one of the NYSE, NASDAQ, American Stock Exchange, Boston Stock Exchange, Chicago Stock Exchange, National Stock Exchange (formerly Cincinnati Stock Exchange), NYSE Arca (formerly known as the Pacific Stock Exchange) or Philadelphia Stock Exchange; and (ii) the beginning and ending TSR values shall be calculated based on the average of the closing prices of the applicable company’s stock on the composite tape for the 30 trading days prior to and including the beginning or ending date, as applicable, of the period.

 

  v) Vesting Date ” means the vesting date set forth in the Notice of Grant of Performance Stock Units.

 

2. Grant of Performance Stock Units . The Company hereby grants to the Participant (the “ Award ”), on the terms and conditions hereinafter set forth, the target number of PSUs (the “ Target PSUs ”) set forth in the Notice. Each PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein, subject to achievement of the relevant performance criteria. The Target PSUs represent the number of PSUs that will vest on the Vesting Date if the Company achieves (a) the Section 162(m) Performance Target and (b) the “Target” Performance Level for the Measurement Period, and the Participant remains in Employment through the Vesting Date. PSUs do not constitute issued and outstanding shares of Common Stock for any corporate purposes and do not confer on the Participant any right to vote on matters that are submitted to a vote of holders of Shares.

 

3.

Dividend Equivalents and Retained Distributions . If on any date while PSUs are outstanding hereunder the Company shall pay any regular cash dividend on the Shares, the Participant shall not be entitled to receive the amount of cash equal to the dividend paid on a Share as a dividend equivalent payment (the “ Dividend Equivalents ”) at the time the regular cash dividend is paid to holders of Shares. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend (including a regular cash dividend) or make any other distribution on the Shares, then, the Participant shall be

 

5


 

credited with a bookkeeping entry equivalent to such dividend or distribution for each Target PSU held by the Participant on the record date for such dividend or distribution, but the Company shall retain custody of all such dividends and distributions (the “ Retained Distributions ”) unless the Board has in its sole discretion (and in a manner consistent with Section 19 of the Plan) determined that an amount equivalent to such dividend other than a regular cash dividend or distribution shall be paid currently to the Participant; provided , however , that if the Retained Distribution relates to a dividend paid in Shares, the Participant shall receive an additional amount of PSUs (i.e., by increasing the number of Target PSUs) equal to the product of (I) the aggregate number of Target PSUs held by the Participant pursuant to this Agreement through the related dividend record date, multiplied by (II) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Retained Distributions will not bear interest and will be subject to the same restrictions as the PSUs to which they relate. Retained Distributions will be paid only with respect to the number of Shares that vest pursuant to paragraphs 4, 5 or 6 and will be paid in cash at the same time that Shares are issued to the Participant pursuant to paragraphs 4, 5 or 6, applicable. Notwithstanding anything else contained in this paragraph 3, no payment of Retained Distributions shall occur before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

4. Vesting and Delivery of Vested Securities .

 

  a) Section 162(m) Vesting Requirement . The Award is subject to performance vesting requirements based on the achievement of the Section 162(m) Performance Target for the Performance Period and the certification of achievement of such Section 162(m) Performance Target by the Committee pursuant to Section 9(b) of the Plan. The Section 162(m) Performance Target shall be established by the Committee for the Award no later than 90 days following the beginning of the Performance Period that applies to the Award. If the Section 162(m) Performance Target for the Award is not satisfied, all of the PSUs in the Award and any Retained Distributions will be forfeited immediately, other than in the event of the Participant’s death or a Change in Control or Division Change in Control prior to the end of the Performance Period.

 

  b) If the Section 162(m) Performance Target for the Award is satisfied as certified by the Committee, then, subject to the terms and provisions of the Plan and this Agreement, on the Vesting Date, the Company shall issue or transfer to the Participant the number of Shares corresponding to the Performance Level achieved during the Measurement Period and the Retained Distributions, if any, relating to such Shares. Except as otherwise provided in paragraphs 5, 6 and 7, the vesting of such PSUs and any Retained Distributions relating thereto shall occur only if the Participant has continued in Employment of the Company or any of its Affiliates on the Vesting Date and has continuously been so employed since the Date of Grant (as defined in the Notice of Grant of Performance Stock Units). The Performance Level achieved shall be determined as described below and approved by the Committee following the conclusion of the Measurement Period, and, as of the Vesting Date, a percentage (between 0% and 200%) of the target number of PSUs shall vest, as follows:

 

6


  (i) The Committee shall determine a percentage (between 0% and 200%) of the target number of PSUs based on the cumulative Adjusted EPS of the Company achieved for the Measurement Period compared to the Target Adjusted EPS for the Measurement Period (the “ Base Percentage ”).

 

  (ii) The Base Percentage will be multiplied by a factor ranging from 80% to 120%, depending on the Company’s TSR Percentile for the Measurement Period (the “ TSR Factor ”). If the Company’s TSR Percentile for the Measurement Period is ranked at or below the 25 th percentile, the TSR Factor shall be 80%. If the Company’s TSR Percentile for the Measurement Period is ranked at or above the 75 th percentile, the TSR Factor shall be 120%. If the Company’s TSR Percentile for the Measurement Period is ranked above the 25 th percentile but below the 75 th percentile, the TSR Factor shall be a percentage between 80% and 120% determined by linear interpolation, with a TSR Percentile of 50% resulting in a TSR Factor of 100%.

 

  (iii) The Performance Level achieved and the percentage of the target number of PSUs that shall vest is equal to the Base Percentage multiplied by the TSR Factor, provided that the final percentage shall not be greater than 200%.

 

  c) PSUs Extinguished . Upon each issuance or transfer of Shares in accordance with this Agreement, a number of PSUs equal to the number of Shares issued or transferred to the Participant shall be extinguished and such number of PSUs will not be considered to be held by the Participant for any purpose.

 

  d) Final Issuance . Upon the final issuance or transfer of Shares and Retained Distributions, if any, to the Participant pursuant to this Agreement, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share.

 

  e) Section 409A . Notwithstanding anything else contained in this Agreement, no Shares or Retained Distributions shall be issued or transferred to a Participant before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Code.

 

5. Termination of Employment .

 

  (a) If the Participant’s Employment with the Company and its Affiliates is terminated by the Participant for any reason other than those described in clauses (b), (c) and (d) below prior to the Vesting Date, then the PSUs covered by the Award and all Retained Distributions relating thereto shall be completely forfeited on the date of any such termination, unless otherwise provided in an employment agreement between the Participant and the Company or an Affiliate.

 

7


  (b) If the Participant’s Employment terminates as a result of his or her death prior to the end of the Measurement Period, then the Company shall issue or transfer to the Participant’s estate as soon as practicable a pro rata portion of the number of Shares underlying the PSUs determined as follows, plus all related Retained Distributions:

 

  (x) Multiplying the full number of PSUs covered by the Award that would vest based on the Performance Level that would result from (a) a Base Percentage determined from the sum of (i) the Adjusted EPS achieved for each completed fiscal year from the beginning of the Measurement Period through the date of the Participant’s death plus (ii) the amount of Budgeted Adjusted EPS for each fiscal year in the Measurement Period that was not completed on or before the date of the Participant’s death (provided that, in the case of death prior to the first anniversary of the Date of Grant, the Base Percentage would be 100%); and (b) a TSR Factor based on the Company’s TSR Percentile for the period from the beginning of the Measurement Period through the end of the last fiscal quarter completed on or before the Participant’s death;

 

  (y) By a fraction, the numerator of which shall be the number of days from the Date of Grant through the date of the Participant’s death, and the denominator of which shall be the number of days from the Date of Grant through the last day of the Measurement Period.

If the product of (x) and (y) results in a fractional share, such fractional share shall be rounded to the next higher whole share.

The PSUs and any Retained Distributions related thereto that do not vest as described above shall be completely forfeited.

 

  (c) If the Participant’s Employment is terminated by the Company and its Affiliates for any reason other than for Cause on a date when the Participant does not satisfy the requirements for Retirement or if the Participant terminates Employment due to Good Reason or Disability, then, subject to the Section 162(m) Performance Target being satisfied as certified by the Committee, the Participant shall remain entitled to receive a pro rata portion of the PSUs that would otherwise vest (if any) on the Vesting Date based on the actual Performance Level achieved for the full Measurement Period, and any Retained Distributions relating thereto, and such pro rata portion of the PSUs shall become vested, and Shares subject to such PSUs and any Retained Distributions relating thereto shall be issued or transferred to the Participant on the Vesting Date, determined as follows:

 

8


  (x) the number of PSUs covered by the Award that would vest on the Vesting Date (based on the actual Performance Level achieved for the full Measurement Period) multiplied by;

 

  (y) a fraction, the numerator of which shall be the number of days from the Date of Grant through the date of such termination, and the denominator of which shall be the number of days from the Date of Grant through the last day of the Measurement Period.

If the product of (x) and (y) results in a fractional share, such fractional share shall be rounded to the next higher whole share.

The PSUs and any Retained Distributions related thereto that do not vest as described above shall be completely forfeited following the end of the Measurement Period.

 

  (d) If the Participant’s Employment is terminated by the Participant due to Retirement or by the Company and its Affiliates for any reason other than Cause on a date when the Participant satisfies the requirements for Retirement, then, subject to the Section 162(m) Performance Target being satisfied as certified by the Committee, the Participant shall receive the number of Shares, and any Retained Distributions related thereto, that would have vested if the Participant’s Employment had continued through the Vesting Date based on the actual Performance Level achieved for the Measurement Period determined in accordance with Section 4 above, and such Shares and Retained Distributions, if any, shall be issued or transferred to the Participant on the Vesting Date. The PSUs and any Retained Distributions related thereto that do not vest as described above shall be completely forfeited. Notwithstanding the foregoing provisions of this Section 5(d), if the Committee determines in its discretion (though subject to the limitations in the following sentence) that the Participant has engaged in a Prohibited Action prior to the end of the Measurement Period, the Participant shall not receive a number of Shares based on the full Measurement Period as described in this Section 5(d) and instead shall receive a pro-rated number of Shares, and any Retained Distributions related thereto, determined as set forth in Section 5(c). If the Participant is a licensed or registered attorney in the State of New York or another U.S. jurisdiction, the non-compete provisions contained in the definition of Prohibited Action shall be interpreted and the Committee’s determination of whether the Participant has engaged in a Prohibited Action shall be made in a manner consistent with, and applied only to the extent permissible under, the applicable rules of professional conduct (such as Rule 5.6 in the State of New York or its equivalent in other jurisdictions).

For purposes of this Section 5, a temporary leave of absence shall not constitute a termination of Employment or a failure to be continuously employed by the Company or any Affiliate regardless of the Participant’s payroll status during such leave of absence if

 

9


such leave of absence is approved in writing by the Company or any Affiliate. Notice of any such approved leave of absence should be sent to the Company at One Time Warner Center, New York, New York 10019, attention: Director, Global Stock Plans Administration, but such notice shall not be required for the leave of absence to be considered approved.

In the event the Participant’s Employment with the Company or any of its Affiliates is terminated, the Participant shall have no claim against the Company with respect to the PSUs and related Retained Distributions, if any, other than as set forth in this Section 5, the provisions of this Section 5 being the sole remedy of the Participant with respect thereto.

 

6. Acceleration of Vesting Date . Subject to Sections 4(d) and 7, in the event a Change in Control or a Division Change in Control occurs prior to the end of the Measurement Period, the PSUs shall immediately vest and the Participant shall receive immediate payment in respect thereof determined as follows:

(x) if the Change in Control or Division Change in Control occurs prior to the end of the Performance Period, the number of Target PSUs shall be the number of PSUs that vest; or

(y) if the Change in Control or Division Change in Control occurs after the end of the Performance Period, but prior to the end of the Measurement Period, the number of PSUs that vest will be determined based on the Performance Level that would result from (a) a Base Percentage determined from the sum of (i) the Adjusted EPS achieved for each completed fiscal year from the beginning of the Measurement Period through the date of the Change in Control or Division Change in Control plus (ii) the amount of Budgeted Adjusted EPS for each fiscal year in the Measurement Period that was not completed on or before the date of the Change in Control or Division Change in Control; and (b) a TSR Factor based on the Company’s TSR Percentile for the period from the beginning of the Measurement Period through the end of the last fiscal quarter completed on or before the Change in Control or Division Change in Control;

(z) plus all related Retained Distributions.

If the amounts of PSUs determined above would result in a fractional share, such fractional share shall be rounded to the next higher whole share.

 

7. Limitation on Acceleration .

 

  a)

Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of

 

10


 

any transaction constituting a Change in Control (which for purposes of this paragraph 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this paragraph 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

  b) If the determination made pursuant to this paragraph 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this paragraph 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

11


  c) As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit shall be repaid by such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this paragraph 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this paragraph 7.

 

8. Withholding Taxes .

 

  a)

Obligation to Pay Withholding Taxes . The Participant acknowledges and agrees that, regardless of any action the Company or the Participant’s employer takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (the “ Tax-Related Items ”), the ultimate liability for all Tax-Related Items legally due by the Participant (i) is and remains the Participant’s responsibility and (ii) may exceed the amount actually withheld by the Company or the Participant’s employer. The Participant further agrees and acknowledges that the Company and the Participant’s employer (x) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the Award, the vesting of the PSUs or the subsequent sale of any Shares acquired

 

12


 

from vesting of the PSUs, and the receipt of any Dividend Equivalents or Retained Distributions; and (y) do not commit to and are under no obligation to structure the terms of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, the Participant understands and acknowledges that if the Participant has become subject to tax in more than one jurisdiction between the Date of Grant and the date of any relevant taxable event, the Company and/or the Participant’s employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Company’s obligation to deliver the Shares subject to the PSUs or to pay any Dividend Equivalents or Retained Distributions shall be subject to payment of all Tax-Related Items by the Participant.

 

  b) Satisfaction of Company’s Withholding Obligations . At the time any portion of an Award of PSUs, Dividend Equivalent or Retained Distribution relating thereto, becomes taxable to the Participant, he or she will be required to pay to the Company or the Participant’s employer, as applicable, any Tax-Related Items due as a result of such taxable event. The Company or the Participant’s employer shall have the right to withhold from any payment in respect of PSUs, transfer of Shares acquired at vesting, or payment made to the Participant or to any person hereunder, whether such payment is to be made in cash or in Shares, all Tax-Related Items as shall be required, in the determination of the Company, pursuant to any statute or governmental regulation or ruling. The Participant acknowledges and agrees that the Company or the Participant’s employer, in their sole discretion, may satisfy such withholding obligation by any one or a combination of the following methods:

 

  (i) by requiring the Participant to deliver a properly executed notice together with irrevocable instructions to a broker approved by the Company to sell a sufficient number of Shares to generate net proceeds (after commission and fees) equal to the amount required to be withheld and promptly deliver such amount to the Company;

 

  (ii) by requiring or allowing the Participant to pay the amount required to be withheld in cash or by check;

 

  (iii) by deducting the amount required to be withheld from the Participant’s current compensation or other amounts payable to the Participant;

 

  (iv) by allowing the Participant to surrender other Shares that (A) in the case of Shares initially acquired from the Company (upon exercise of a stock option or otherwise), have been owned by the Participant for such period (if any) as may be required to avoid a charge to the Company’s earnings, and (B) have a fair market value on the date of surrender equal to the amount required to be withheld;

 

13


  (v) by withholding a number of Shares to be issued upon delivery of Shares that have a fair market value equal to the minimum statutory amount required to be withheld;

 

  (vi) by selling any Shares to the extent required to pay the amount required to be withheld; or

 

  (vii) by such other means or method as the Committee in its sole discretion and without notice to the Participant deems appropriate.

The Company may satisfy its obligation to withhold the Tax-Related Items on Dividend Equivalents and Retained Distributions payable in cash by withholding a sufficient amount from the payment or by such other means as the Committee in its sole discretion and without notice to the Participant deems appropriate, including withholding from salary or other amounts payable to the Participant, Shares or cash having a value sufficient to satisfy the withholding obligation for Tax-Related Items.

The Company will not issue any Shares to the Participant until the Participant satisfies the withholding obligation for Tax-Related Items. If the withholding obligation for Tax-Related Items is satisfied by withholding in Shares, for tax purposes, the Participant shall be deemed to have been issued the full number of Shares subject to the vested PSUs, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Participant’s participation in the Plan.

 

  c) Compliance with Applicable Laws . The Committee may also require the Participant to acknowledge that he or she shall not sell or transfer Shares except in compliance with all applicable laws, and may apply such other restrictions on the sale or transfer of the Shares as it deems appropriate.

 

9. Changes in Capitalization and Government and Other Regulations . The Award shall be subject to all of the terms and provisions as provided in this Agreement and in the Plan, which are incorporated by reference herein and made a part hereof, including, without limitation, the provisions of Section 10 of the Plan (generally relating to adjustments to the number of Shares subject to the Award, upon certain changes in capitalization and certain reorganizations and other transactions).

 

10. Forfeiture . A breach of any of the foregoing restrictions or a breach of any of the other restrictions, terms and conditions of the Plan or this Agreement, with respect to any of the PSUs or any Retained Distributions relating thereto, except as waived by the Board or the Committee, will cause a forfeiture of such PSUs and any Retained Distributions relating thereto.

 

11.

Right of Company to Terminate Employment . Nothing contained in the Plan or this Agreement shall confer on any Participant any right to continue in the employ of the Company or any of its Affiliates and the Company and any such Affiliate shall have the

 

14


 

right to terminate the Employment of the Participant at any such time, with or without Cause, notwithstanding the fact that some or all of the PSUs and related Retained Distributions covered by this Agreement may be forfeited as a result of such termination. The granting of the PSUs under this Agreement shall not confer on the Participant any right to any future Awards under the Plan.

 

12. Notices . Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to Time Warner Inc., at One Time Warner Center, New York, NY 10019, Attention: Director, Global Stock Plans Administration, and to the Participant at his or her address, as it is shown on the records of the Company or its Affiliate, or in either case to such other address as the Company or the Participant, as the case may be, by notice to the other may designate in writing from time to time.

 

13. Interpretation and Amendments . The Board and the Committee (to the extent delegated by the Board) have plenary authority to interpret this Agreement and the Plan, to prescribe, amend and rescind rules relating thereto and to make all other determinations in connection with the administration of the Plan. The Board or the Committee may from time to time modify or amend this Agreement in accordance with the provisions of the Plan, provided that no such amendment shall adversely affect the rights of the Participant under this Agreement without his or her consent.

 

14. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon and inure to the benefit of the Participant and his or her legatees, distributees and personal representatives.

 

15. Copy of the Plan . By entering into the Agreement, the Participant agrees and acknowledges that he or she has received and read a copy of the Plan.

 

16. Governing Law . The Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to any choice of law rules thereof which might apply the laws of any other jurisdiction.

 

17. Waiver of Jury Trial . To the extent not prohibited by applicable law which cannot be waived, each party hereto hereby waives, and covenants that it will not assert (whether as plaintiff, defendant or otherwise), any right to trial by jury in any forum in respect of any suit, action, or other proceeding arising out of or based upon this Agreement.

 

18.

Submission to Jurisdiction; Service of Process . Each of the parties hereto hereby irrevocably submits to the jurisdiction of the state courts of the State of New York located in the County of New York and the jurisdiction of the United States District Court for the Southern District of New York for the purposes of any suit, action or other proceeding arising out of or based upon this Agreement. Each of the parties hereto to the extent permitted by applicable law hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding brought in such

 

15


 

courts, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that such suit, action or proceeding in the above-referenced courts is brought in an inconvenient forum, that the venue of such suit, action or proceedings, is improper or that this Agreement may not be enforced in or by such court. Each of the parties hereto hereby consents to service of process by mail at its address to which notices are to be given pursuant to paragraph 12 hereof.

 

19.

Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all grants of PSUs (including number of grants, grant dates, vesting type, vesting dates, and any other information regarding PSUs that have been granted, canceled, vested, or forfeited) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). The Participant understands that Data may be collected from the Participant directly or, on Company’s request, from the Participant’s local employer. The Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). The Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. The Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any Shares acquired pursuant to the Plan. The Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. The Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the

 

16


 

collection, use, processing or transfer of Data is required by law, the Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. The Participant understands that such objection may affect his/her ability to participate in the Plan. The Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

 

17

Exhibit 10.30

Time Warner Inc. 2013 Stock Incentive Plan

PSU Agreement, Version Bewkes 2 (13PUBEW2)

For Use from February 2015

Performance Stock Units Agreement

General Terms and Conditions

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the performance stock units (the “ PSUs ”) provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

 

1. Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

 

  a) Adjusted EPS ” means the Diluted Net Income per Common Share attributable to the Company’s common shareholders excluding noncash impairments of goodwill, intangible and fixed assets and investments; gains and losses on operating assets, liabilities and investments; external costs related to mergers, acquisitions, investments or dispositions, as well as contingent consideration related to such transactions, to the extent such costs are expensed; amounts related to securities litigation and government investigations; and amounts attributable to businesses classified as discontinued operations, as well as the impact of taxes and noncontrolling interests on the above items. Adjusted EPS shall have such further adjustments as the Committee deems appropriate in its sole discretion to exclude the effects of extraordinary, unusual or nonrecurring items and to reflect other factors that the Committee deems appropriate. Adjusted EPS is measured over a designated period, generally the Measurement Period.

 

  b) Budgeted Adjusted EPS ” means the amount of Adjusted EPS with respect to a fiscal year and included in the budget and long range plan approved by the Board for the year in which the Target Adjusted EPS is established by the Committee with respect to an award of PSUs.

 

  c) Cause means “Cause” as defined in the Employment Agreement.

 

  d) Competitive Activity ” means business activities within the lines of business of the Company, including without limitation, the following:


  (i) The operation of domestic and international networks and premium pay television services (including the production, provision and/or delivery of programming to cable system operators, satellite distribution services, telephone companies, Internet Protocol Television systems, mobile operators, broadband and other distribution platforms and outlets) and websites and digital applications associated with such networks and pay television services;

 

  (ii) The sale, licensing and/or distribution of content on DVD and Blu-ray discs, video on demand, electronic sell-through, applications for mobile devices, the Internet or other digital services; and

 

  (iii) The production, distribution and licensing of motion pictures and other entertainment assets, television programming, animation, interactive games (whether distributed in physical form or digitally) and other video products and the operation of websites and digital applications associated with the foregoing.

 

  e) Competitive Entity ” means “Competitive Entity” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein, “Competitive Entity” means a business (whether conducted through an entity or by individuals including the Participant in self-employment) that is engaged in any business that competes, directly or indirectly through any parent, subsidiary, affiliate, joint venture, partnership or otherwise, with (x) any of the business activities carried on by the Company in any geographic location where the Company conducts business (including without limitation a Competitive Activity as defined herein), (y) any business activities being planned by the Company or in the process of development at the time of the termination of the Participant’s Employment (as evidenced by written proposals, market research, RFPs and similar materials) or (z) any business activity that the Company has covenanted, in writing, not to compete with in connection with the disposition of such a business.

 

  f) Disability means “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s long-term disability plan or policy, as in effect from time to time.

 

  g) Division Change in Control ” means (i) a transfer by the Company or any Affiliate of the Participant’s Employment to a corporation, company or other entity whose financial results are not consolidated with those of the Company or (ii) a change in the ownership structure of the Affiliate with which the Participant has Employment such that the Affiliate’s financial results are no longer consolidated with those of the Company.

 

2


  h) Employment Agreement ” means the Amended and Restated Employment Agreement dated November 20, 2012 between the Participant and the Company, as such employment agreement may be amended, superseded or replaced.

 

  i) Measurement Period ” means the three-year period ending on the December 31 prior to the regularly scheduled Vesting Date.

 

  j) Notice of Grant of Performance Stock Units ” means (i) the Notice of Grant of Performance Stock Units that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

 

  k) Participant ” means an individual to whom PSUs have been awarded pursuant to the Plan and shall have the same meaning as may be assigned to the terms “Holder” or “Participant” in the Plan.

 

  l) Performance Level ” means the level of performance achieved by the Company during a measurement period (generally, the Measurement Period) based on the Adjusted EPS achieved as compared to the Target Adjusted EPS and the TSR Percentile for such period, which is used to determine the percentage of Target PSUs that will vest, as set forth in paragraph 4.

 

  m) Performance Period ” means the year with respect to which the Section 162(m) Performance Target is set by the Committee.

 

  n) Plan means the equity plan maintained by the Company that is specified in the Notice of Grant of Performance Stock Units, which has been provided to the Participant separately and which accompanies and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

 

  o)

Prohibited Action ” means (x) rendering any services to, managing, operating, controlling, or acting in any capacity (whether as a principal, partner, director, officer, member, agent, employee, consultant, owner, independent contractor or otherwise and whether or not for compensation) for, any person or entity that is a Competitive Entity, or (y) acquiring any interest of any type in any Competitive Entity, including without limitation as an owner, holder or beneficiary of any stock, stock options or other equity interest (except as permitted by the next sentence). The following items shall not be considered a “Prohibited Action:” acquiring solely as an investment and through market purchases (i) securities of any Competitive Entity that are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) and that are publicly traded, so the Participant or any entity under the Participant’s control are not part of any control group of such Competitive Entity and such securities, including converted or convertible securities, do not constitute more than one percent (1%) of the outstanding voting power of that entity and (ii) securities of any

 

3


 

Competitive Entity that are not registered under Section 12(b) or 12(g) of the Exchange Act and are not publicly traded, so long as the Participant or any entity under the Participant’s control is not part of any control group of such Competitive Entity and such securities, including converted securities, do not constitute more than three percent (3%) of the outstanding voting power of that entity, provided that in each case the Participant has no active participation in the business of such entity.

 

  p) Retirement ” means a termination of employment by the Participant (i) following the attainment of age 55 with ten (10) or more years of service as an employee or a director with the Company or any Affiliate or (ii) pursuant to a retirement plan or early retirement program of the Company or any Affiliate.

 

  q) Section 162(m) Performance Target ” means the specific written objective goal or goals based on the criteria set forth in Section 9(b) of the Plan and that are timely approved by the Committee pursuant to Section 9(b) of the Plan for the Participant for the applicable Performance Period.

 

  r) Shares ” means shares of Common Stock of the Company.

 

  s) Target Adjusted EPS ” means the cumulative amount of Adjusted EPS for the Measurement Period established by the Committee at the time it approves the grant of PSUs, together with a range of amounts of cumulative Adjusted EPS above and below the Target Adjusted EPS that correlate to percentages of the target PSUs that range from 0% to 200% of such target PSUs.

 

  t) Total Shareholder Return ” or “ TSR ” means a company’s total shareholder return, calculated based on stock price appreciation during a specified period plus the value of dividends paid on such stock during the period (which shall be deemed to have been reinvested in the underlying company’s stock effective the “ex-dividend” date based on the closing price for such company for purposes of measuring TSR).

 

  u) TSR Percentile ” means the percentile rank of the TSR for the Shares during a specified period (generally the Measurement Period) relative to the TSR for each of the companies in the S&P 500 Index (the “ Index ”) at the beginning and throughout such period; provided, however , that for purposes of measuring the TSR Percentile, (i) the Index shall be deemed to include companies that were removed from the S&P 500 Index during the period but that continued during the entire period to have their shares listed on at least one of the NYSE, NASDAQ, American Stock Exchange, Boston Stock Exchange, Chicago Stock Exchange, National Stock Exchange (formerly Cincinnati Stock Exchange), NYSE Arca (formerly known as the Pacific Stock Exchange) or Philadelphia Stock Exchange; and (ii) the beginning and ending TSR values shall be calculated based on the average of the closing prices of the applicable company’s stock on the composite tape for the 30 trading days prior to and including the beginning or ending date, as applicable, of the period.

 

4


  v) Vesting Date ” means the vesting date set forth in the Notice of Grant of Performance Stock Units.

 

2. Grant of Performance Stock Units . The Company hereby grants to the Participant (the “ Award ”), on the terms and conditions hereinafter set forth, the target number of PSUs (the “ Target PSUs ”) set forth in the Notice. Each PSU represents the unfunded, unsecured right of the Participant to receive a Share on the date(s) specified herein, subject to achievement of the relevant performance criteria. The Target PSUs represent the number of PSUs that will vest on the Vesting Date if the Company achieves (a) the Section 162(m) Performance Target and (b) the “Target” Performance Level for the Measurement Period, and the Participant remains in Employment through the Vesting Date. PSUs do not constitute issued and outstanding shares of Common Stock for any corporate purposes and do not confer on the Participant any right to vote on matters that are submitted to a vote of holders of Shares.

 

3. Dividend Equivalents and Retained Distributions . If on any date while PSUs are outstanding hereunder the Company shall pay any regular cash dividend on the Shares, the Participant shall not be entitled to receive the amount of cash equal to the dividend paid on a Share as a dividend equivalent payment (the “ Dividend Equivalents ”) at the time the regular cash dividend is paid to holders of Shares. If on any date while PSUs are outstanding hereunder the Company shall pay any dividend (including a regular cash dividend) or make any other distribution on the Shares, then, the Participant shall be credited with a bookkeeping entry equivalent to such dividend or distribution for each Target PSU held by the Participant on the record date for such dividend or distribution, but the Company shall retain custody of all such dividends and distributions (the “ Retained Distributions ) unless the Board has in its sole discretion (and in a manner consistent with Section 19 of the Plan) determined that an amount equivalent to such dividend other than a regular cash dividend or distribution shall be paid currently to the Participant; provided , however , that if the Retained Distribution relates to a dividend paid in Shares, the Participant shall receive an additional amount of PSUs (i.e., by increasing the number of Target PSUs) equal to the product of (I) the aggregate number of Target PSUs held by the Participant pursuant to this Agreement through the related dividend record date, multiplied by (II) the number of Shares (including any fraction thereof) payable as a dividend on a Share. Retained Distributions will not bear interest and will be subject to the same restrictions as the PSUs to which they relate. Retained Distributions will be paid only with respect to the number of Shares that vest pursuant to paragraphs 4, 5 or 6 and will be paid in cash at the same time that Shares are issued to the Participant pursuant to paragraphs 4, 5 or 6, applicable. Notwithstanding anything else contained in this paragraph 3, no payment of Retained Distributions shall occur before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

5


4. Vesting and Delivery of Vested Securities .

 

  a) Section 162(m) Vesting Requirement . The Award is subject to performance vesting requirements based on the achievement of the Section 162(m) Performance Target for the Performance Period and the certification of achievement of such Section 162(m) Performance Target by the Committee pursuant to Section 9(b) of the Plan. The Section 162(m) Performance Target shall be established by the Committee for the Award no later than 90 days following the beginning of the Performance Period that applies to the Award. If the Section 162(m) Performance Target for the Award is not satisfied, all of the PSUs in the Award and any Retained Distributions will be forfeited immediately, other than in the event of the Participant’s death or a Change in Control or Division Change in Control prior to the end of the Performance Period.

 

  b) If the Section 162(m) Performance Target for the Award is satisfied as certified by the Committee, then, subject to the terms and provisions of the Plan and this Agreement, on the Vesting Date, the Company shall issue or transfer to the Participant the number of Shares corresponding to the Performance Level achieved during the Measurement Period and the Retained Distributions, if any, relating to such Shares. Except as otherwise provided in paragraphs 5, 6 and 7, the vesting of such PSUs and any Retained Distributions relating thereto shall occur only if the Participant has continued in Employment of the Company or any of its Affiliates on the Vesting Date and has continuously been so employed since the Date of Grant (as defined in the Notice of Grant of Performance Stock Units). The Performance Level achieved shall be determined as described below and approved by the Committee following the conclusion of the Measurement Period, and, as of the Vesting Date, a percentage (between 0% and 200%) of the target number of PSUs shall vest, as follows:

 

  (i) The Committee shall determine a percentage (between 0% and 200%) of the target number of PSUs based on the cumulative Adjusted EPS of the Company achieved for the Measurement Period compared to the Target Adjusted EPS for the Measurement Period (the “ Base Percentage ”).

 

  (ii) The Base Percentage will be multiplied by a factor ranging from 80% to 120%, depending on the Company’s TSR Percentile for the Measurement Period (the “ TSR Factor ”). If the Company’s TSR Percentile for the Measurement Period is ranked at or below the 25 th percentile, the TSR Factor shall be 80%. If the Company’s TSR Percentile for the Measurement Period is ranked at or above the 75 th percentile, the TSR Factor shall be 120%. If the Company’s TSR Percentile for the Measurement Period is ranked above the 25 th percentile but below the 75 th percentile, the TSR Factor shall be a percentage between 80% and 120% determined by linear interpolation, with a TSR Percentile of 50% resulting in a TSR Factor of 100%.

 

  (iii) The Performance Level achieved and the percentage of the target number of PSUs that shall vest is equal to the Base Percentage multiplied by the TSR Factor, provided that the final percentage shall not be greater than 200%.

 

6


  c) PSUs Extinguished . Upon each issuance or transfer of Shares in accordance with this Agreement, a number of PSUs equal to the number of Shares issued or transferred to the Participant shall be extinguished and such number of PSUs will not be considered to be held by the Participant for any purpose.

 

  d) Final Issuance . Upon the final issuance or transfer of Shares and Retained Distributions, if any, to the Participant pursuant to this Agreement, in lieu of a fractional Share, the Participant shall receive a cash payment equal to the Fair Market Value of such fractional Share.

 

  e) Section 409A . Notwithstanding anything else contained in this Agreement, no Shares or Retained Distributions shall be issued or transferred to a Participant before the first date on which a payment could be made without subjecting the Participant to tax under the provisions of Section 409A of the Code.

 

5. Termination of Employment .

 

  (a) If the Participant’s Employment with the Company and its Affiliates is terminated by the Participant for any reason other than those described in clauses (b), (c), (d) and (e) below prior to the Vesting Date, then the PSUs covered by the Award and all Retained Distributions relating thereto shall be completely forfeited on the date of any such termination, unless otherwise provided in an employment agreement between the Participant and the Company or an Affiliate.

 

  (b) If the Participant’s Employment is terminated pursuant to Section 4.2 of the Employment Agreement, then, subject to the Section 162(m) Performance Target being satisfied as certified by the Committee, the Participant shall remain entitled to receive the PSUs that would otherwise vest (if any) on the Vesting Date based on the actual Performance Level achieved for the full Measurement Period, and any Retained Distributions relating thereto, and such PSUs shall become vested, and Shares subject to such PSUs shall be issued or transferred to the Participant on the Vesting Date.

 

  (c) If the Participant’s Employment terminates as a result of his or her death prior to the end of the Measurement Period, then the Company shall issue or transfer to the Participant’s estate as soon as practicable a pro rata portion of the number of Shares underlying the PSUs determined as follows, plus all related Retained Distributions:

 

  (x)

Multiplying the full number of PSUs covered by the Award that would vest based on the Performance Level that would result from (a) a Base Percentage determined from the sum of (i) the Adjusted EPS achieved for each completed fiscal year from the beginning of

 

7


 

the Measurement Period through the date of the Participant’s death plus (ii) the amount of Budgeted Adjusted EPS for each fiscal year in the Measurement Period that was not completed on or before the date of the Participant’s death (provided that, in the case of death prior to the first anniversary of the Date of Grant, the Base Percentage would be 100%); and (b) a TSR Factor based on the Company’s TSR Percentile for the period from the beginning of the Measurement Period through the end of the last fiscal quarter completed on or before the Participant’s death;

 

  (y) By a fraction, the numerator of which shall be the number of days from the Date of Grant through the date of the Participant’s death, and the denominator of which shall be the number of days from the Date of Grant through the last day of the Measurement Period.

If the product of (x) and (y) results in a fractional share, such fractional share shall be rounded to the next higher whole share.

The PSUs and any Retained Distributions related thereto that do not vest as described above shall be completely forfeited.

 

  (d) If the Participant terminates Employment due to Disability, then, subject to the Section 162(m) Performance Target being satisfied as certified by the Committee, the Participant shall remain entitled to receive a pro rata portion of the PSUs that would otherwise vest (if any) on the Vesting Date based on the actual Performance Level achieved for the full Measurement Period, and any Retained Distributions relating thereto, and such pro rata portion of the PSUs shall become vested, and Shares subject to such PSUs and any Retained Distributions relating thereto shall be issued or transferred to the Participant on the Vesting Date, determined as follows:

 

  (x) the number of PSUs covered by the Award that would vest on the Vesting Date (based on the actual Performance Level achieved for the full Measurement Period) multiplied by;

 

  (y) a fraction, the numerator of which shall be the number of days from the Date of Grant through the date of such termination, and the denominator of which shall be the number of days from the Date of Grant through the last day of the Measurement Period.

If the product of (x) and (y) results in a fractional share, such fractional share shall be rounded to the next higher whole share.

The PSUs and any Retained Distributions related thereto that do not vest as described above shall be completely forfeited following the end of the Measurement Period.

 

8


  (e) If the Participant’s Employment is terminated by the Participant due to Retirement, then, subject to the Section 162(m) Performance Target being satisfied as certified by the Committee, the Participant shall receive the number of Shares, and any Retained Distributions related thereto, that would have vested if the Participant’s Employment had continued through the Vesting Date based on the actual Performance Level achieved for the Measurement Period determined in accordance with Section 4 above, and such Shares and Retained Distributions, if any, shall be issued or transferred to the Participant on the Vesting Date. The PSUs and any Retained Distributions related thereto that do not vest as described above shall be completely forfeited. Notwithstanding the foregoing provisions of this Section 5(d), if the Committee determines in its discretion (though subject to the limitations in the following sentence) that the Participant has engaged in a Prohibited Action prior to the end of the Measurement Period, the Participant shall not receive a number of Shares based on the full Measurement Period as described in this Section 5(d) and instead shall receive a pro-rated number of Shares, and any Retained Distributions related thereto, determined as set forth in Section 5(c). If the Participant is a licensed or registered attorney in the State of New York or another U.S. jurisdiction, the non-compete provisions contained in the definition of Prohibited Action shall be interpreted and the Committee’s determination of whether the Participant has engaged in a Prohibited Action shall be made in a manner consistent with, and applied only to the extent permissible under, the applicable rules of professional conduct (such as Rule 5.6 in the State of New York or its equivalent in other jurisdictions).

For purposes of this Section 5, a temporary leave of absence shall not constitute a termination of Employment or a failure to be continuously employed by the Company or any Affiliate regardless of the Participant’s payroll status during such leave of absence if such leave of absence is approved in writing by the Company or any Affiliate. Notice of any such approved leave of absence should be sent to the Company at One Time Warner Center, New York, New York 10019, attention: Director, Global Stock Plans Administration, but such notice shall not be required for the leave of absence to be considered approved.

In the event the Participant’s Employment with the Company or any of its Affiliates is terminated, the Participant shall have no claim against the Company with respect to the PSUs and related Retained Distributions, if any, other than as set forth in this Section 5, the provisions of this Section 5 being the sole remedy of the Participant with respect thereto.

 

6. Acceleration of Vesting Date . Subject to Sections 4(d) and 7, in the event a Change in Control or a Division Change in Control occurs prior to the end of the Measurement Period, the PSUs shall immediately vest and the Participant shall receive immediate payment in respect thereof determined as follows:

 

9


(x) if the Change in Control or Division Change in Control occurs prior to the end of the Performance Period, the number of Target PSUs shall be the number of PSUs that vest; or

(y) if the Change in Control or Division Change in Control occurs after the end of the Performance Period, but prior to the end of the Measurement Period, the number of PSUs that vest will be determined based on the Performance Level that would result from (a) a Base Percentage determined from the sum of (i) the Adjusted EPS achieved for each completed fiscal year from the beginning of the Measurement Period through the date of the Change in Control or Division Change in Control plus (ii) the amount of Budgeted Adjusted EPS for each fiscal year in the Measurement Period that was not completed on or before the date of the Change in Control or Division Change in Control; and (b) a TSR Factor based on the Company’s TSR Percentile for the period from the beginning of the Measurement Period through the end of the last fiscal quarter completed on or before the Change in Control or Division Change in Control;

(z) plus all related Retained Distributions.

If the amounts of PSUs determined above would result in a fractional share, such fractional share shall be rounded to the next higher whole share.

 

7. Limitation on Acceleration .

 

  a)

Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this paragraph 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability

 

10


 

under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this paragraph 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

  b) If the determination made pursuant to this paragraph 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this paragraph 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

  c)

As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit shall be repaid by such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and to the

 

11


 

extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this paragraph 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this paragraph 7.

 

8. Withholding Taxes .

 

  a) Obligation to Pay Withholding Taxes . The Participant acknowledges and agrees that, regardless of any action the Company or the Participant’s employer takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (the “ Tax-Related Items ”), the ultimate liability for all Tax-Related Items legally due by the Participant (i) is and remains the Participant’s responsibility and (ii) may exceed the amount actually withheld by the Company or the Participant’s employer. The Participant further agrees and acknowledges that the Company and the Participant’s employer (x) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant of the Award, the vesting of the PSUs or the subsequent sale of any Shares acquired from vesting of the PSUs, and the receipt of any Dividend Equivalents or Retained Distributions; and (y) do not commit to and are under no obligation to structure the terms of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, the Participant understands and acknowledges that if the Participant has become subject to tax in more than one jurisdiction between the Date of Grant and the date of any relevant taxable event, the Company and/or the Participant’s employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction. The Company’s obligation to deliver the Shares subject to the PSUs or to pay any Dividend Equivalents or Retained Distributions shall be subject to payment of all Tax-Related Items by the Participant.

 

  b)

Satisfaction of Company’s Withholding Obligations . At the time any portion of an Award of PSUs, Dividend Equivalent or Retained Distribution relating thereto, becomes taxable to the Participant, he or she will be required to pay to the

 

12


 

Company or the Participant’s employer, as applicable, any Tax-Related Items due as a result of such taxable event. The Company or the Participant’s employer shall have the right to withhold from any payment in respect of PSUs, transfer of Shares acquired at vesting, or payment made to the Participant or to any person hereunder, whether such payment is to be made in cash or in Shares, all Tax-Related Items as shall be required, in the determination of the Company, pursuant to any statute or governmental regulation or ruling. The Participant acknowledges and agrees that the Company or the Participant’s employer, in their sole discretion, may satisfy such withholding obligation by any one or a combination of the following methods:

 

  (i) by requiring the Participant to deliver a properly executed notice together with irrevocable instructions to a broker approved by the Company to sell a sufficient number of Shares to generate net proceeds (after commission and fees) equal to the amount required to be withheld and promptly deliver such amount to the Company;

 

  (ii) by requiring or allowing the Participant to pay the amount required to be withheld in cash or by check;

 

  (iii) by deducting the amount required to be withheld from the Participant’s current compensation or other amounts payable to the Participant;

 

  (iv) by allowing the Participant to surrender other Shares that (A) in the case of Shares initially acquired from the Company (upon exercise of a stock option or otherwise), have been owned by the Participant for such period (if any) as may be required to avoid a charge to the Company’s earnings, and (B) have a fair market value on the date of surrender equal to the amount required to be withheld;

 

  (v) by withholding a number of Shares to be issued upon delivery of Shares that have a fair market value equal to the minimum statutory amount required to be withheld;

 

  (vi) by selling any Shares to the extent required to pay the amount required to be withheld; or

 

  (vii) by such other means or method as the Committee in its sole discretion and without notice to the Participant deems appropriate.

The Company may satisfy its obligation to withhold the Tax-Related Items on Dividend Equivalents and Retained Distributions payable in cash by withholding a sufficient amount from the payment or by such other means as the Committee in its sole discretion and without notice to the Participant deems appropriate, including withholding from salary or other amounts payable to the Participant, Shares or cash having a value sufficient to satisfy the withholding obligation for Tax-Related Items.

 

13


The Company will not issue any Shares to the Participant until the Participant satisfies the withholding obligation for Tax-Related Items. If the withholding obligation for Tax-Related Items is satisfied by withholding in Shares, for tax purposes, the Participant shall be deemed to have been issued the full number of Shares subject to the vested PSUs, notwithstanding that a number of Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Participant’s participation in the Plan.

 

  c) Compliance with Applicable Laws . The Committee may also require the Participant to acknowledge that he or she shall not sell or transfer Shares except in compliance with all applicable laws, and may apply such other restrictions on the sale or transfer of the Shares as it deems appropriate.

 

9. Changes in Capitalization and Government and Other Regulations . The Award shall be subject to all of the terms and provisions as provided in this Agreement and in the Plan, which are incorporated by reference herein and made a part hereof, including, without limitation, the provisions of Section 10 of the Plan (generally relating to adjustments to the number of Shares subject to the Award, upon certain changes in capitalization and certain reorganizations and other transactions).

 

10. Forfeiture . A breach of any of the foregoing restrictions or a breach of any of the other restrictions, terms and conditions of the Plan or this Agreement, with respect to any of the PSUs or any Retained Distributions relating thereto, except as waived by the Board or the Committee, will cause a forfeiture of such PSUs and any Retained Distributions relating thereto.

 

11. Right of Company to Terminate Employment . Nothing contained in the Plan or this Agreement shall confer on any Participant any right to continue in the employ of the Company or any of its Affiliates and the Company and any such Affiliate shall have the right to terminate the Employment of the Participant at any such time, with or without Cause, notwithstanding the fact that some or all of the PSUs and related Retained Distributions covered by this Agreement may be forfeited as a result of such termination. The granting of the PSUs under this Agreement shall not confer on the Participant any right to any future Awards under the Plan.

 

12. Notices . Any notice which either party hereto may be required or permitted to give the other shall be in writing and may be delivered personally or by mail, postage prepaid, addressed to Time Warner Inc., at One Time Warner Center, New York, NY 10019, Attention: Director, Global Stock Plans Administration, and to the Participant at his or her address, as it is shown on the records of the Company or its Affiliate, or in either case to such other address as the Company or the Participant, as the case may be, by notice to the other may designate in writing from time to time.

 

13.

Interpretation and Amendments . The Board and the Committee (to the extent delegated by the Board) have plenary authority to interpret this Agreement and the Plan,

 

14


 

to prescribe, amend and rescind rules relating thereto and to make all other determinations in connection with the administration of the Plan. The Board or the Committee may from time to time modify or amend this Agreement in accordance with the provisions of the Plan, provided that no such amendment shall adversely affect the rights of the Participant under this Agreement without his or her consent.

 

14. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon and inure to the benefit of the Participant and his or her legatees, distributees and personal representatives.

 

15. Copy of the Plan . By entering into the Agreement, the Participant agrees and acknowledges that he or she has received and read a copy of the Plan.

 

16. Governing Law . The Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to any choice of law rules thereof which might apply the laws of any other jurisdiction.

 

17. Waiver of Jury Trial . To the extent not prohibited by applicable law which cannot be waived, each party hereto hereby waives, and covenants that it will not assert (whether as plaintiff, defendant or otherwise), any right to trial by jury in any forum in respect of any suit, action, or other proceeding arising out of or based upon this Agreement.

 

18. Submission to Jurisdiction; Service of Process . Each of the parties hereto hereby irrevocably submits to the jurisdiction of the state courts of the State of New York located in the County of New York and the jurisdiction of the United States District Court for the Southern District of New York for the purposes of any suit, action or other proceeding arising out of or based upon this Agreement. Each of the parties hereto to the extent permitted by applicable law hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding brought in such courts, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that such suit, action or proceeding in the above-referenced courts is brought in an inconvenient forum, that the venue of such suit, action or proceedings, is improper or that this Agreement may not be enforced in or by such court. Each of the parties hereto hereby consents to service of process by mail at its address to which notices are to be given pursuant to paragraph 12 hereof.

 

19.

Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location

 

15


 

country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all grants of PSUs (including number of grants, grant dates, vesting type, vesting dates, and any other information regarding PSUs that have been granted, canceled, vested, or forfeited) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). The Participant understands that Data may be collected from the Participant directly or, on Company’s request, from the Participant’s local employer. The Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). The Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. The Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of Shares on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any Shares acquired pursuant to the Plan. The Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. The Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, the Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. The Participant understands that such objection may affect his/her ability to participate in the Plan. The Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

 

16

Exhibit 10.34

Time Warner Inc. 2013 Stock Incentive Plan

Share Retention Version 2 (2013SOSRV2)

For Use from February 2015

TIME WARNER INC.

NON-QUALIFIED STOCK OPTION AGREEMENT

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the Option provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

1.         Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

(a) Cause includes (and is not limited to) dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Committee as to the existence of “Cause” will be conclusive on the Participant and the Company.

(b) Disability means, “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s long-term disability plan or policy, as in effect from time to time.

(c) “ Expiration Date ” means the date set forth on the Notice (as defined below).

(d) “ Good Reason ” means (i) a breach by the Company or any Affiliate of an employment agreement between the Company or any of its Affiliates and the Participant and (ii) following a Change in Control, (w) the failure of the Company to pay or cause to be paid the Participant’s base salary or annual bonus when due, (x) any substantial and sustained diminution in the Participant’s authority or responsibilities materially inconsistent with the Participant’s position, (y) a reduction in such Participant’s annual base salary or target annual bonus in effect as of the date of this Award without the Participant’s written consent or (z) without the Participant’s written consent, any requirement that the Participant’s principal place of employment be relocated to a location that increases such Participant’s commute from his or her primary residence by more than thirty-five (35) miles; provided that any of the events described in clauses (w), (x), (y) and (z) will constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from the Participant of written notice of the event which constitutes Good Reason; provided , further , that “Good Reason” will cease to exist for an event on the sixtieth (60 th ) day following the later of its occurrence or the Participant’s knowledge thereof, unless the Participant has given the Company written notice of his or her termination of employment for Good Reason prior to such date.


(e) “ Notice ” means (i) the Notice of Grant of Stock Option that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

(f) Plan means the equity plan maintained by the Company that is specified in the Notice, which equity plan has been provided to the Participant separately and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

(g) “ Retirement ” means a termination of employment by the Participant (i) following the attainment of age 55 with ten (10) or more years of service with the Company or any Affiliate or (ii) pursuant to a retirement plan or early retirement program of the Company or any Affiliate.

(h) “ Vested Portion ” means, at any time, the portion of an Option which has become vested, as described in Section 3 of this Agreement.

2.         Grant of Option . The Company hereby grants to the Participant the right and option (the “ Option ”) to purchase, on the terms and conditions hereinafter set forth, the number of Shares set forth on the Notice, subject to adjustment as set forth in the Plan. The purchase price of the Shares subject to the Option (the Option Price ) shall be as set forth on the Notice. The Option is intended to be a non-qualified stock option, and as such is not intended to be treated as an option that complies with Section 422 of the Internal Revenue Code of 1986, as amended.

3.         Vesting of the Option .

(a) In General . Subject to Sections 3(b) and 3(c), the Option shall vest and become exercisable at such times as are set forth in the Notice.

(b) Change in Control . Notwithstanding the foregoing, in the event of a Change in Control, the unvested portion of the Option, to the extent not previously cancelled or forfeited, shall immediately become vested and exercisable upon the earlier of (i) the first anniversary of the Change in Control or (ii) the termination of the Participant’s Employment (A) by the Company other than for Cause (unless such termination is due to death or Disability) or (B) by the Participant for Good Reason.

(c) Termination of Employment . If the Participant’s Employment with the Company and its Affiliates terminates for any reason (including, unless otherwise determined by the Committee, a Participant’s change in status from an employee to a non-employee (other than director of the Company or any Affiliate)), the Option, to the extent not then vested, shall be immediately canceled by the Company without consideration; provided , however , that if the Participant’s Employment terminates due to death, Disability or Retirement, the unvested portion of the Option, to the extent not previously cancelled or forfeited, shall immediately become

 

2


vested and exercisable. The Vested Portion of the Option shall remain exercisable for the period set forth in Section 4(a) of this Agreement. If the Participant is absent from work with the Company or with an Affiliate because of a temporary disability (any disability other than a Disability), or on an approved leave of absence for any purpose, the Participant shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated Employment, except to the extent that the Committee so determines.

4.         Exercise of Option .

(a) Period of Exercise . Subject to the provisions of the Plan and this Agreement, and the terms of any employment agreement entered into by the Participant and the Company or an Affiliate that provides for treatment of Options that is more favorable to the Participant than clauses (i) – (vii) of this Section 4(a), the Participant may exercise all or any part of the Vested Portion of the Option at any time prior to the closing time of trading on the Expiration Date (or 5:00 p.m. Eastern time on the Expiration Date, if earlier). Notwithstanding the foregoing, if the Participant’s Employment terminates prior to the Expiration Date, the Vested Portion of the Option shall remain exercisable for the period set forth below. If the last day on which the Option may be exercised, whether the Expiration Date or due to a termination of the Optionee’s Employment prior to the Expiration Date, is a Saturday, Sunday or other day that is not a trading day on the New York Stock Exchange (the “NYSE”) or, if the Company’s Shares are not then listed on the NYSE, such other stock exchange or trading system that is the primary exchange on which the Company’s Shares are then traded, then the last day on which the Option may be exercised shall be the preceding trading day on the NYSE or such other stock exchange or trading system.

(i)         Death or Disability . If the Participant’s Employment with the Company and its Affiliates terminates due to the Participant’s death or Disability, the Participant (or his or her representative) may exercise the Vested Portion of the Option for a period ending on the earlier of (A) three (3) years following the date of such termination and (B) the Expiration Date;

(ii)         Retirement . If the Participant’s Employment with the Company and its Affiliates terminates due to the Participant’s Retirement, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) five (5) years following the date of such termination and (B) the Expiration Date; provided , that if the Company or any Affiliate has given the Participant notice that the Participant’s Employment is being terminated for Cause prior to the Participant’s election to terminate due to the Participant’s Retirement, then the provisions of Section 4(a)(v) shall control;

(iii)         Unsatisfactory Performance; Voluntary Termination without Good Reason . If the Participant’s Employment with the Company and its Affiliates is terminated by the Company or an Affiliate (other than after a Change in Control as set forth in Section 4(a)(vi)) for unsatisfactory performance, but not for Cause (as determined in its sole discretion by the Company or any Affiliate), or the Participant voluntarily terminates Employment at any time without Good Reason, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) three months following the date of such termination and (B) the Expiration Date;

 

3


provided , that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control; provided further, that if the Company or any Affiliate has given the Participant notice that the Participant’s Employment is being terminated for Cause prior to the Participant’s election to voluntarily terminate Employment without Good Reason, then the provisions of Section 4(a)(v) shall control;

(iv)         Termination other than for Cause . Subject to the provision of Section 4(a)(vi), if the Participant’s Employment with the Company and its Affiliates is terminated by the Company or an Affiliate for any reason other than by the Company or its Affiliates for Cause, unsatisfactory performance or due to the Participant’s death or Disability, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one year following the date of such termination and (B) the Expiration Date; provided that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control;

(v)         Termination by the Company for Cause . If the Participant’s Employment with the Company and its Affiliates is terminated by the Company or an Affiliate for Cause, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one month following the date of such termination and (B) the Expiration Date; provided , however , that if the Participant is terminated by the Company or an Affiliate for Cause on account of one or more acts of fraud, embezzlement or misappropriation committed by the Participant, the Vested Portion of the Option shall immediately terminate in full and cease to be exercisable;

(vi)         After a Change in Control . If the Participant’s Employment with the Company and its Affiliates terminates after a Change in Control due to a termination by the Company other than for Cause or due to the Participant’s resignation for Good Reason, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one year following the date of such termination and (B) the Expiration Date; provided that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control; and

(vii)         Transfers of Employment . If (i) the Company or any Affiliate transfers the Participant’s Employment to a corporation, company or other entity that is not an Affiliate or (ii) the Affiliate with which the Participant has a service relationship ceases to be an Affiliate due to a sale or other disposition by the Company or an Affiliate, the Option, to the extent not then vested, shall be immediately canceled by the Company without consideration and the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one year following the date of such transfer, sale or other disposition and (B) the Expiration Date; provided that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control.

 

4


(b) Method of Exercise .

(i)        Subject to Section 4(a) of this Agreement, the Vested Portion of an Option may be exercised by delivering to the Company at its principal office written notice of intent to so exercise; provided that the Option may be exercised with respect to whole Shares only. Such notice shall specify the number of Shares for which the Option is being exercised, shall be signed (whether or not in electronic form) by the person exercising the Option and shall make provision for the payment of the Option Price. Payment of the aggregate Option Price shall be paid to the Company, at the election of the Committee, pursuant to one or more of the following methods: (A) in cash, or its equivalent; (B) by transferring Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased to the Company and satisfying such other requirements as may be imposed by the Committee; (C) partly in cash and partly in Shares; or (D) if there is a public market for the Shares at such time, subject to such rules as may be established by the Committee, through delivery of irrevocable instructions to a broker to sell the Shares otherwise deliverable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the aggregate Option Price. No Participant shall have any rights to dividends or other rights of a stockholder with respect to the Shares subject to the Option until the issuance of the Shares.

(ii)        Notwithstanding any other provision of the Plan or this Agreement to the contrary, absent an available exemption to registration or qualification, the Option may not be exercised prior to the completion of any registration or qualification of the Option or the Shares under applicable state and federal securities or other laws, or under any ruling or regulation of any governmental body or national securities exchange that the Committee shall in its sole reasonable discretion determine to be necessary or advisable.

(iii)        Upon the Company’s determination that the Option has been validly exercised as to any of the Shares, the Company shall issue certificates in the Participant’s name for such Shares or register the Participant’s ownership of such Shares electronically. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the Shares to the Participant, any loss by the Participant of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves.

(iv)        In the event of the Participant’s death, the Vested Portion of an Option shall remain vested and exercisable by the Participant’s executor or administrator, or the person or persons to whom the Participant’s rights under this Agreement shall pass by will or by the laws of descent and distribution as the case may be, to the extent set forth in Section 4(a) of this Agreement. Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions hereof.

(v)        As a condition to the exercise of any Option evidenced by this Agreement, the Participant agrees to hold, for a period of twelve (12) months following the date of such exercise, a number of Shares issued pursuant to such exercise, equal to 75% (rounded down to the nearest whole Share) of the quotient of (A) and (B), where

 

5


(A) is the product of (1) the number of Shares exercised by the Participant multiplied by (2) fifty percent (50%) of the excess of the Fair Market Value of a Share on the date of exercise over the exercise price and (B) is the Fair Market Value of a Share on the date of exercise. The holding requirement related to Shares that is established in this Section 4(b)(v) shall terminate with respect to the Options evidenced by this Agreement (as well as any Shares issued pursuant to exercise of such Options) on the first anniversary of the date of termination of the Participant’s Employment with the Company or its Affiliates.

5.         No Right to Continued Employment or Future Grants of Options . The Participant understands that nothing contained herein constitutes an employment contract and neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the Employment of the Company or any Affiliate. Further, the Company or its Affiliate may at any time dismiss the Participant or discontinue any other relationship, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein. The Participant also agrees and acknowledges that grants of Options under the Plan are discretionary and any grant of Options under the Plan does not imply or create any obligation on the part of the Company to make any future grants of Options to the Participant.

6.         Legend on Certificates . The certificates representing the Shares purchased by exercise of an Option shall be subject to such stop transfer orders and other restrictions as the Committee may deem reasonably advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, any applicable federal or state laws and the Company’s Articles of Incorporation and Bylaws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

7.         Limitation on Acceleration of Vesting Following Change in Control .

 

  a)

Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this paragraph 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments”

 

6


 

(collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this paragraph 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

  b) If the determination made pursuant to this paragraph 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this paragraph 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

  c)

As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit shall be repaid by

 

7


 

such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this paragraph 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this paragraph 7.

8.         Transferability . Unless otherwise determined by the Committee, an Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.

9.         Withholding . The Participant may be required to pay to the Company or its Affiliate and the Company or its Affiliate shall have the right and is hereby authorized to withhold from any payment due or transfer made under the Option or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of the Option, its exercise, or any payment or transfer under the Option or under the Plan and to take such action as may be necessary in the option of the Company to satisfy all obligations for the payment of such taxes.

10.         Securities Laws . Upon the acquisition of any Shares pursuant to the exercise of an Option, the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Agreement.

11.         Notices . Any notice under this Agreement shall be addressed to the Company in care of its General Counsel at the principal executive office of the Company, with a copy to the Director, Global Stock Plans Administration, at the principal executive office of the Company, and to the Participant at the address appearing in the personnel records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

 

8


12.         Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all stock option grants (including number of grants, grant dates, exercise price, vesting type, vesting dates, expiration dates, and any other information regarding options that have been granted, canceled, vested, unvested, exercisable, exercised or outstanding) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). Participant understands that Data may be collected from the Participant directly or, on Company’s request, from Participant’s local employer. Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of common stock on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired pursuant to the Plan. Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. Participant understands that such objection may affect his/her ability to participate in the Plan. Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

13.         Governing Law; Submission to Jurisdiction . This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws, and any and all disputes between the Participant and the Company or any Affiliate relating to the Option shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York, and the Participant and the Company and any Affiliate hereby irrevocably submit to the jurisdiction of any such court and irrevocably agree that venue for any such action shall be only in any such court.

 

9


14.         Entire Agreement . This Agreement, together with the Notice and the Plan, embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty, covenant or agreement not expressly set forth in this Agreement or the Notice shall affect or be used to interpret, change or restrict, the express terms and provisions of this Agreement or the Notice; provided , that this Agreement and the Notice shall be subject to and governed by the Plan, and in the event of any inconsistency between the provisions of this Agreement or the Notice and the provisions of the Plan, the provisions of the Plan shall govern.

15.         Modifications And Amendments . The terms and provisions of this Agreement and the Notice may be modified or amended as provided in the Plan.

16.         Waivers And Consents . Except as provided in the Plan, the terms and provisions of this Agreement and the Notice may be waived, or consent for the departure therefrom granted, only by a written document executed by the party entitled to the benefits of such terms or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement or the Notice, whether or not similar. Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent.

17.         Reformation; Severability. If any provision of this Agreement or the Notice (including any provision of the Plan that is incorporated herein by reference) shall hereafter be held to be invalid, unenforceable or illegal, in whole or in part, in any jurisdiction under any circumstances for any reason, (i) such provision shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal while preserving the intent of the parties as expressed in, and the benefits of the parties provided by, this Agreement, the Notice and the Plan or (ii) if such provision cannot be so reformed, such provision shall be severed from this Agreement or the Notice and an equitable adjustment shall be made to this Agreement or the Notice (including, without limitation, addition of necessary further provisions) so as to give effect to the intent as so expressed and the benefits so provided. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect the legality, validity or enforceability of any other provision of this Agreement, the Notice or the Plan.

18.         Entry into Force . By entering into this Agreement, the Participant agrees and acknowledges that (i) the Participant has received and read a copy of the Plan and (ii) the Option is granted pursuant to the Plan and is therefore subject to all of the terms of the Plan. The Participant acknowledges and agrees that the Participant may be entitled from time to time to receive certain other documents related to the Company, including the Company’s annual report to stockholders and proxy statement related to its annual meeting of stockholders (which become available each year approximately three months after the end of the calendar year), and the Participant consents to receive such documents electronically through the Internet or as the Company otherwise directs.

 

10

Exhibit 10.35

Time Warner Inc. 2013 Stock Incentive Plan

Share Retention Incentive Version 2

(13SOESP2)

For Use from February 2015

TIME WARNER INC.

NON-QUALIFIED STOCK OPTION AGREEMENT

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the Option provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

1.         Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

(a) Cause includes (and is not limited to) dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Committee as to the existence of “Cause” will be conclusive on the Participant and the Company.

(b) Disability means, “Disability” as defined in an employment agreement between the Company or any of its Affiliates and the Participant or, if not defined therein or if there shall be no such agreement, “disability” of the Participant shall have the meaning ascribed to such term in the Company’s long-term disability plan or policy, as in effect from time to time.

(c) “ Expiration Date ” means the date set forth on the Notice (as defined below).

(d) “ Good Reason ” means (i) a breach by the Company or any Affiliate of an employment agreement between the Company or any of its Affiliates and the Participant and (ii) following a Change in Control, (w) the failure of the Company to pay or cause to be paid the Participant’s base salary or annual bonus when due, (x) any substantial and sustained diminution in the Participant’s authority or responsibilities materially inconsistent with the Participant’s position, (y) a reduction in such Participant’s annual base salary or target annual bonus in effect as of the date of this Award without the Participant’s written consent or (z) without the Participant’s written consent, any requirement that the Participant’s principal place of employment be relocated to a location that increases such Participant’s commute from his or her primary residence by more than thirty-five (35) miles; provided that any of the events described in clauses (w), (x), (y) and (z) will constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from the Participant of written notice of the event which constitutes Good Reason; provided , further , that “Good Reason” will cease to exist for an event on the sixtieth (60 th ) day following the later of its occurrence or the Participant’s knowledge thereof, unless the Participant has given the Company written notice of his or her termination of employment for Good Reason prior to such date.


(e) “ Notice ” means (i) the Notice of Grant of Stock Option that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

(f) Plan means the equity plan maintained by the Company that is specified in the Notice, which equity plan has been provided to the Participant separately and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

(g) “ Retirement ” means a termination of employment by the Participant (i) following the attainment of age 55 with ten (10) or more years of service with the Company or any Affiliate or (ii) pursuant to a retirement plan or early retirement program of the Company or any Affiliate.

(h) “ Vested Portion ” means, at any time, the portion of an Option which has become vested, as described in Section 3 of this Agreement.

2.         Grant of Option . The Company hereby grants to the Participant the right and option (the “ Option ”) to purchase, on the terms and conditions hereinafter set forth, the number of Shares set forth on the Notice, subject to adjustment as set forth in the Plan. The purchase price of the Shares subject to the Option (the Option Price ) shall be as set forth on the Notice. The Option is intended to be a non-qualified stock option, and as such is not intended to be treated as an option that complies with Section 422 of the Internal Revenue Code of 1986, as amended.

3.         Vesting of the Option .

(a) In General . Subject to Sections 3(b) and 3(c), the Option shall vest and become exercisable at such times as are set forth in the Notice.

(b) Change in Control . Notwithstanding the foregoing, in the event of a Change in Control, the unvested portion of the Option, to the extent not previously cancelled or forfeited, shall immediately become vested and exercisable upon the termination of the Participant’s Employment within two years following a Change in Control either (A) by the Company other than for Cause (unless such termination is due to death or Disability) or (B) by the Participant for Good Reason.

(c) Termination of Employment . If the Participant’s Employment with the Company and its Affiliates terminates for any reason (including, unless otherwise determined by the Committee, a Participant’s change in status from an employee to a non-employee (other than director of the Company or any Affiliate)), the Option, to the extent not then vested, shall be immediately canceled by the Company without consideration; provided , however , that if the Participant’s Employment terminates due to death or Disability, the unvested portion of the Option, to the extent not previously cancelled or forfeited, shall immediately become vested and

 

2


exercisable. The Vested Portion of the Option shall remain exercisable for the period set forth in Section 4(a) of this Agreement. If the Participant is absent from work with the Company or with an Affiliate because of a temporary disability (any disability other than a Disability), or on an approved leave of absence for any purpose, the Participant shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated Employment, except to the extent that the Committee so determines.

4.         Exercise of Option .

(a) Period of Exercise . Subject to the provisions of the Plan and this Agreement, and the terms of any employment agreement entered into by the Participant and the Company or an Affiliate that provides for treatment of Options that is more favorable to the Participant than clauses (i) – (vii) of this Section 4(a), the Participant may exercise all or any part of the Vested Portion of the Option at any time prior to the closing time of trading on the Expiration Date (or 5:00 p.m. Eastern time on the Expiration Date, if earlier). Notwithstanding the foregoing, if the Participant’s Employment terminates prior to the Expiration Date, the Vested Portion of the Option shall remain exercisable for the period set forth below. If the last day on which the Option may be exercised, whether the Expiration Date or due to a termination of the Optionee’s Employment prior to the Expiration Date, is a Saturday, Sunday or other day that is not a trading day on the New York Stock Exchange (the “NYSE”) or, if the Company’s Shares are not then listed on the NYSE, such other stock exchange or trading system that is the primary exchange on which the Company’s Shares are then traded, then the last day on which the Option may be exercised shall be the preceding trading day on the NYSE or such other stock exchange or trading system.

(i)         Death or Disability . If the Participant’s Employment with the Company and its Affiliates terminates due to the Participant’s death or Disability, the Participant (or his or her representative) may exercise the Vested Portion of the Option for a period ending on the earlier of (A) three (3) years following the date of such termination and (B) the Expiration Date;

(ii)         Retirement . If the Participant’s Employment with the Company and its Affiliates terminates due to the Participant’s Retirement, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) five (5) years following the date of such termination and (B) the Expiration Date; provided , that if the Company or any Affiliate has given the Participant notice that the Participant’s Employment is being terminated for Cause prior to the Participant’s election to terminate due to the Participant’s Retirement, then the provisions of Section 4(a)(v) shall control;

(iii)         Unsatisfactory Performance; Voluntary Termination without Good Reason . If the Participant’s Employment with the Company and its Affiliates is terminated by the Company or an Affiliate (other than after a Change in Control as set forth in Section 4(a)(vi)) for unsatisfactory performance, but not for Cause (as determined in its sole discretion by the Company or any Affiliate), or the Participant voluntarily terminates Employment at any time without Good Reason, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) three months following the date of such termination and (B) the Expiration Date;

 

3


provided , that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control; provided further, that if the Company or any Affiliate has given the Participant notice that the Participant’s Employment is being terminated for Cause prior to the Participant’s election to voluntarily terminate Employment without Good Reason, then the provisions of Section 4(a)(v) shall control;

(iv)         Termination other than for Cause . Subject to the provision of Section 4(a)(vi), if the Participant’s Employment with the Company and its Affiliates is terminated by the Company or an Affiliate for any reason other than by the Company or its Affiliates for Cause, unsatisfactory performance or due to the Participant’s death or Disability, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one year following the date of such termination and (B) the Expiration Date; provided that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control;

(v)         Termination by the Company for Cause . If the Participant’s Employment with the Company and its Affiliates is terminated by the Company or an Affiliate for Cause, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one month following the date of such termination and (B) the Expiration Date; provided , however , that if the Participant is terminated by the Company or an Affiliate for Cause on account of one or more acts of fraud, embezzlement or misappropriation committed by the Participant, the Vested Portion of the Option shall immediately terminate in full and cease to be exercisable;

(vi)         After a Change in Control . If the Participant’s Employment with the Company and its Affiliates terminates within two years after a Change in Control (i) due to a termination by the Company other than for Cause or (ii) due to the Participant’s resignation for Good Reason, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one year following the date of such termination and (B) the Expiration Date; provided that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control; and

(vii)         Transfers of Employment . If (i) the Company or any Affiliate transfers the Participant’s Employment to a corporation, company or other entity that is not an Affiliate or (ii) the Affiliate with which the Participant has a service relationship ceases to be an Affiliate due to a sale or other disposition by the Company or an Affiliate, the Option, to the extent not then vested, shall be immediately canceled by the Company without consideration and the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one year following the date of such transfer, sale or other disposition and (B) the Expiration Date; provided that if Participant satisfies the age and service requirements described in the definition of “Retirement,” then the provisions of Section 4(a)(ii) shall control.

 

4


(b) Method of Exercise .

(i)        Subject to Section 4(a) of this Agreement, the Vested Portion of an Option may be exercised by delivering to the Company at its principal office written notice of intent to so exercise; provided that the Option may be exercised with respect to whole Shares only. Such notice shall specify the number of Shares for which the Option is being exercised, shall be signed (whether or not in electronic form) by the person exercising the Option and shall make provision for the payment of the Option Price. Payment of the aggregate Option Price shall be paid to the Company, at the election of the Committee, pursuant to one or more of the following methods: (A) in cash, or its equivalent; (B) by transferring Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased to the Company and satisfying such other requirements as may be imposed by the Committee; (C) partly in cash and partly in Shares; or (D) if there is a public market for the Shares at such time, subject to such rules as may be established by the Committee, through delivery of irrevocable instructions to a broker to sell the Shares otherwise deliverable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the aggregate Option Price. No Participant shall have any rights to dividends or other rights of a stockholder with respect to the Shares subject to the Option until the issuance of the Shares.

(ii)        Notwithstanding any other provision of the Plan or this Agreement to the contrary, absent an available exemption to registration or qualification, the Option may not be exercised prior to the completion of any registration or qualification of the Option or the Shares under applicable state and federal securities or other laws, or under any ruling or regulation of any governmental body or national securities exchange that the Committee shall in its sole reasonable discretion determine to be necessary or advisable.

(iii)        Upon the Company’s determination that the Option has been validly exercised as to any of the Shares, the Company shall issue certificates in the Participant’s name for such Shares or register the Participant’s ownership of such Shares electronically. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the Shares to the Participant, any loss by the Participant of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves.

(iv)        In the event of the Participant’s death, the Vested Portion of an Option shall remain vested and exercisable by the Participant’s executor or administrator, or the person or persons to whom the Participant’s rights under this Agreement shall pass by will or by the laws of descent and distribution as the case may be, to the extent set forth in Section 4(a) of this Agreement. Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions hereof.

(v)        As a condition to the exercise of any Option evidenced by this Agreement, the Participant agrees to hold, for a period of twelve (12) months following the date of such exercise, a number of Shares issued pursuant to such exercise, equal to 75% (rounded down to the nearest whole Share) of the quotient of (A) and (B), where

 

5


(A) is the product of (1) the number of Shares exercised by the Participant multiplied by (2) fifty percent (50%) of the excess of the Fair Market Value of a Share on the date of exercise over the exercise price and (B) is the Fair Market Value of a Share on the date of exercise. The holding requirement related to Shares that is established in this Section 4(b)(v) shall terminate with respect to the Options evidenced by this Agreement (as well as any Shares issued pursuant to exercise of such Options) on the first anniversary of the date of termination of the Participant’s Employment with the Company or its Affiliates.

5.         No Right to Continued Employment or Future Grants of Options . The Participant understands that nothing contained herein constitutes an employment contract and neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the Employment of the Company or any Affiliate. Further, the Company or its Affiliate may at any time dismiss the Participant or discontinue any other relationship, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein. The Participant also agrees and acknowledges that grants of Options under the Plan are discretionary and any grant of Options under the Plan does not imply or create any obligation on the part of the Company to make any future grants of Options to the Participant.

6.         Legend on Certificates . The certificates representing the Shares purchased by exercise of an Option shall be subject to such stop transfer orders and other restrictions as the Committee may deem reasonably advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, any applicable federal or state laws and the Company’s Articles of Incorporation and Bylaws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

7.         Limitation on Acceleration of Vesting Following Change in Control .

 

  a)

Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this paragraph 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments”

 

6


 

(collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this paragraph 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

  b) If the determination made pursuant to this paragraph 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this paragraph 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

  c)

As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit shall be repaid by

 

7


 

such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this paragraph 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this paragraph 7.

8.         Transferability . Unless otherwise determined by the Committee, an Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.

9.         Withholding . The Participant may be required to pay to the Company or its Affiliate and the Company or its Affiliate shall have the right and is hereby authorized to withhold from any payment due or transfer made under the Option or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of the Option, its exercise, or any payment or transfer under the Option or under the Plan and to take such action as may be necessary in the option of the Company to satisfy all obligations for the payment of such taxes.

10.         Securities Laws . Upon the acquisition of any Shares pursuant to the exercise of an Option, the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Agreement.

11.         Notices . Any notice under this Agreement shall be addressed to the Company in care of its General Counsel at the principal executive office of the Company, with a copy to the Director, Global Stock Plans Administration, at the principal executive office of the Company, and to the Participant at the address appearing in the personnel records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

 

8


12.         Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all stock option grants (including number of grants, grant dates, exercise price, vesting type, vesting dates, expiration dates, and any other information regarding options that have been granted, canceled, vested, unvested, exercisable, exercised or outstanding) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). Participant understands that Data may be collected from the Participant directly or, on Company’s request, from Participant’s local employer. Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of common stock on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired pursuant to the Plan. Participant understands that Data will be held only as long as necessary to implement, administer and manage the Participant’s participation in the Plan. Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. Participant understands that such objection may affect his/her ability to participate in the Plan. Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

13.         Governing Law; Submission to Jurisdiction . This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws, and any and all disputes between the Participant and the Company or any Affiliate relating to the Option shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York, and the Participant and the Company and any Affiliate hereby irrevocably submit to the jurisdiction of any such court and irrevocably agree that venue for any such action shall be only in any such court.

 

9


14.         Entire Agreement . This Agreement, together with the Notice and the Plan, embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty, covenant or agreement not expressly set forth in this Agreement or the Notice shall affect or be used to interpret, change or restrict, the express terms and provisions of this Agreement or the Notice; provided , that this Agreement and the Notice shall be subject to and governed by the Plan, and in the event of any inconsistency between the provisions of this Agreement or the Notice and the provisions of the Plan, the provisions of the Plan shall govern.

15.         Modifications And Amendments . The terms and provisions of this Agreement and the Notice may be modified or amended as provided in the Plan.

16.         Waivers And Consents . Except as provided in the Plan, the terms and provisions of this Agreement and the Notice may be waived, or consent for the departure therefrom granted, only by a written document executed by the party entitled to the benefits of such terms or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement or the Notice, whether or not similar. Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent.

17.         Reformation; Severability. If any provision of this Agreement or the Notice (including any provision of the Plan that is incorporated herein by reference) shall hereafter be held to be invalid, unenforceable or illegal, in whole or in part, in any jurisdiction under any circumstances for any reason, (i) such provision shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal while preserving the intent of the parties as expressed in, and the benefits of the parties provided by, this Agreement, the Notice and the Plan or (ii) if such provision cannot be so reformed, such provision shall be severed from this Agreement or the Notice and an equitable adjustment shall be made to this Agreement or the Notice (including, without limitation, addition of necessary further provisions) so as to give effect to the intent as so expressed and the benefits so provided. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect the legality, validity or enforceability of any other provision of this Agreement, the Notice or the Plan.

18.         Entry into Force . By entering into this Agreement, the Participant agrees and acknowledges that (i) the Participant has received and read a copy of the Plan and (ii) the Option is granted pursuant to the Plan and is therefore subject to all of the terms of the Plan. The Participant acknowledges and agrees that the Participant may be entitled from time to time to receive certain other documents related to the Company, including the Company’s annual report to stockholders and proxy statement related to its annual meeting of stockholders (which become available each year approximately three months after the end of the calendar year), and the Participant consents to receive such documents electronically through the Internet or as the Company otherwise directs.

 

10

Exhibit 10.37

Time Warner Inc. 2013 Stock Incentive Plan

Share Retention Version Bewkes 2 (13SOSRB2)

For Use from February 2015

TIME WARNER INC.

NON-QUALIFIED STOCK OPTION AGREEMENT

WHEREAS, the Company has adopted the Plan (as defined below), the terms of which are hereby incorporated by reference and made a part of this Agreement; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the Option provided for herein to the Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

1.         Definitions . Whenever the following terms are used in this Agreement, they shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan.

(a)        “ Benefits Cessation Date ” means “Benefits Cessation Date” as defined in the Employment Agreement.

(b)         Cause means “Cause” as defined in the Employment Agreement.

(c)         Disability means “Disability” as defined in the Employment Agreement.

(d)         Employment Agreement means the Employment Agreement dated November 20, 2012 between the Participant and the Company, as such employment agreement may be amended, superseded or replaced.

(e)         Expiration Date means the date set forth on the Notice (as defined below).

(f)        “ Notice ” means (i) the Notice of Grant of Stock Option that accompanies this Agreement, if this Agreement is delivered to the Participant in “hard copy,” and (ii) the screen of the website for the stock plan administration with the heading “Vesting Schedule and Details,” which contains the details of the grant governed by this Agreement, if this Agreement is delivered electronically to the Participant.

(g)         Plan means the equity plan maintained by the Company that is specified in the Notice, which equity plan has been provided to the Participant separately and forms a part of this Agreement, as such plan may be amended, supplemented or modified from time to time.

 

1


(h)        “ Severance Term Date ” means “Severance Term Date” as defined in the Employment Agreement.

(i)         Vested Portion means, at any time, the portion of an Option which has become vested, as described in Section 3 of this Agreement.

2.         Grant of Option . The Company hereby grants to the Participant the right and option (the “ Option ”) to purchase, on the terms and conditions hereinafter set forth, the number of Shares set forth on the Notice, subject to adjustment as set forth in the Plan. The purchase price of the Shares subject to the Option (the Option Price ) shall be as set forth on the Notice. The Option is intended to be a non-qualified stock option, and as such is not intended to be treated as an option that complies with Section 422 of the Internal Revenue Code of 1986, as amended.

3.         Vesting of the Option .

(a)         In General . Subject to Sections 3(b) and 3(c), the Option shall vest and become exercisable at such times as are set forth in the Notice.

(b)         Change in Control . Notwithstanding the foregoing, in the event of a Change in Control, the unvested portion of the Option, to the extent not previously cancelled or forfeited, shall immediately become vested and exercisable upon the earlier of (i) the first anniversary of the Change in Control or (ii) the termination of the Participant’s Employment (A) by the Company other than pursuant to Section 4.1 of the Employment Agreement or (B) by the Participant pursuant to Section 4.2 of the Employment Agreement.

(c)         Termination of Employment . If the Participant’s Employment with the Company and its Affiliates terminates for any reason (including, unless otherwise determined by the Committee, a Participant’s change in status from an employee to a non-employee (other than director of the Company or any Affiliate)), the Option, to the extent not then vested, shall be immediately canceled by the Company without consideration; provided, however, that (i) if the Participant’s Employment terminates due to death, Disability, a voluntary termination by the Participant (other than pursuant to Section 4.2 of the Employment Agreement) or a termination by the Company pursuant to Section 4.3 of the Employment Agreement, the unvested portion of the Option, to the extent not previously cancelled or forfeited, shall immediately become vested and exercisable, and (ii) if the Participant’s Employment terminates pursuant to Section 4.2 of the Employment Agreement, the unvested portion of the Option, to the extent not previously cancelled or forfeited, shall vest and become exercisable upon the earlier of the Severance Term Date and the Benefits Cessation Date. If the Participant is absent from work with the Company or with an Affiliate because of a temporary disability (any disability other than a Disability), or on an approved leave of absence for any purpose, the Participant shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated Employment, except to the extent that the Committee so determines (any such determination shall be made pursuant to and consistent with the Employment Agreement).

 

2


4.        Exercise of Option.

(a)         Period of Exercise . Subject to the provisions of the Plan and this Agreement, and the terms of the Employment Agreement (to the extent such agreement provides for treatment of Options that is more favorable to the Participant than clauses (i) – (v) of this Section 4(a)), the Participant may exercise all or any part of the Vested Portion of the Option at any time prior to the closing time of trading on the Expiration Date (or 5:00 p.m. Eastern time on the Expiration Date, if earlier). Notwithstanding the foregoing, if the Participant’s Employment terminates prior to the Expiration Date, the Vested Portion of the Option shall remain exercisable for the period set forth below. If the last day on which the Option may be exercised, whether the Expiration Date or due to a termination of the Optionee’s Employment prior to the Expiration Date, is a Saturday, Sunday or other day that is not a trading day on the New York Stock Exchange (the “NYSE”) or, if the Company’s Shares are not then listed on the NYSE, such other stock exchange or trading system that is the primary exchange on which the Company’s Shares are then traded, then the last day on which the Option may be exercised shall be the preceding trading day on the NYSE or such other stock exchange or trading system.

(i)     Death or Disability . If the Participant’s Employment with the Company and its Affiliates terminates due to the Participant’s death or Disability, the Participant (or his or her representative) may exercise the Vested Portion of the Option for a period ending on the Expiration Date;

(ii)     Retirement . If the Participant voluntarily terminates his Employment with the Company and its Affiliates (other than pursuant to Section 4.2 of the Employment Agreement) (A) prior to December 31, 2017, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (x) five (5) years following the date of such termination and (y) the Expiration Date, or (B) on or after December 31, 2017, the Participant may exercise the Vested Portion of the Option for a period ending on the Expiration Date; provided, however, that if the Company or any Affiliate has given the Participant notice that the Participant’s Employment is being terminated pursuant to Section 4.1 of the Employment Agreement prior to the Participant’s election to voluntarily terminate his Employment with the Company and its Affiliates, then the provisions of Section 4(a)(iv) shall control;

(iii) Termination of Employment Pursuant to Sections 4.2 or 4.3 of the Employment Agreement . If the Participant’s Employment with the Company and its Affiliates is terminated by either the Company or the Participant pursuant to Section 4.2 of the Employment Agreement or is terminated by the Company pursuant to Section 4.3 of the Employment Agreement, the Participant may exercise the Vested Portion of the Option for a period ending on the Expiration Date;

(iv) Termination by the Company for Cause . If the Participant’s Employment with the Company and its Affiliates is terminated pursuant to Section 4.1 of the

 

3


Employment Agreement, the Participant may exercise the Vested Portion of the Option for a period ending on the earlier of (A) one month following the date of such termination and (B) the Expiration Date; provided, however, that if the Participant is terminated by the Company or an Affiliate for Cause on account of one or more acts of fraud, embezzlement or misappropriation committed by the Participant, the Vested Portion of the Option shall immediately terminate in full and cease to be exercisable; and

(v) Transfers of Employment . If the Participant’s Employment is transferred to a corporation, company or other entity that is not an Affiliate, the transfer shall be treated like a termination by the Company pursuant to Section 4.3 of the Employment Agreement.

(b)         Method of Exercise .

(i) Subject to Section 4(a) of this Agreement, the Vested Portion of an Option may be exercised by delivering to the Company at its principal office written notice of intent to so exercise; provided that the Option may be exercised with respect to whole Shares only. Such notice shall specify the number of Shares for which the Option is being exercised, shall be signed (whether or not in electronic form) by the person exercising the Option and shall make provision for the payment of the Option Price. Payment of the aggregate Option Price shall be paid to the Company, at the election of the Committee, pursuant to one or more of the following methods: (A) in cash, or its equivalent; (B) by transferring Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased to the Company and satisfying such other requirements as may be imposed by the Committee; (C) partly in cash and partly in Shares; or (D) if there is a public market for the Shares at such time, subject to such rules as may be established by the Committee, through delivery of irrevocable instructions to a broker to sell the Shares otherwise deliverable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the aggregate Option Price. No Participant shall have any rights to dividends or other rights of a stockholder with respect to the Shares subject to the Option until the issuance of the Shares.

(ii) Notwithstanding any other provision of the Plan or this Agreement to the contrary, absent an available exemption to registration or qualification, the Option may not be exercised prior to the completion of any registration or qualification of the Option or the Shares under applicable state and federal securities or other laws, or under any ruling or regulation of any governmental body or national securities exchange that the Committee shall in its sole reasonable discretion determine to be necessary or advisable.

(iii) Upon the Company’s determination that the Option has been validly exercised as to any of the Shares, the Company shall issue certificates in the Participant’s name for such Shares or register the Participant’s ownership of such Shares electronically. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the Shares to the Participant, any loss by the Participant of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves.

 

4


(iv) In the event of the Participant’s death, the Vested Portion of an Option shall remain vested and exercisable by the Participant’s executor or administrator, or the person or persons to whom the Participant’s rights under this Agreement shall pass by will or by the laws of descent and distribution as the case may be, to the extent set forth in Section 4(a) of this Agreement. Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions hereof.

(v) As a condition to the exercise of any Option evidenced by this Agreement, the Participant agrees to hold, for a period of twelve (12) months following the date of such exercise, a number of Shares issued pursuant to such exercise, equal to 75% rounded down to the nearest whole Share) of the quotient of (A) and (B), where (A) is the product of (1) the number of Shares exercised by the Participant multiplied by (2) fifty percent (50%) of the excess of the Fair Market Value of a Share on the date of exercise over the exercise price and (B) is the Fair Market Value of a Share on the date of exercise. The holding requirement related to Shares that is established in this Section 4(b)(v) shall terminate with respect to the Options evidenced by this Agreement (as well as any Shares issued pursuant to exercise of such Options) on the first anniversary of the date of termination of the Participant’s Employment with the Company or its Affiliates.

5.         No Right to Continued Employment or Future Grants of Options . The Participant understands that nothing contained herein constitutes an employment contract and neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the Employment of the Company or any Affiliate. Further, the Company or its Affiliate may at any time dismiss the Participant or discontinue any other relationship, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein. The Participant also agrees and acknowledges that grants of Options under the Plan are discretionary and any grant of Options under the Plan does not imply or create any obligation on the part of the Company to make any future grants of Options to the Participant.

6.         Legend on Certificates . The certificates representing the Shares purchased by exercise of an Option shall be subject to such stop transfer orders and other restrictions as the Committee may deem reasonably advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, any applicable federal or state laws and the Company’s Articles of Incorporation and Bylaws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

7.         Transferability . Unless otherwise determined by the Committee, an Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.

 

5


8.         Limitation on Acceleration of Vesting Following Change in Control .

 

  a) Notwithstanding any provision to the contrary in the Plan or this Agreement, in the event it is determined by an independent nationally recognized public accounting firm, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this paragraph 7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the “ Accountant ”), which determination shall be certified by the Accountant and set forth in a certificate delivered to the Participant not less than ten (10) business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to such Participant under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to such Participant under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “ Parachute Amount ”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to such Participant or for such Participant’s benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “ Reduced Amount ”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction such Participant would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that such Participant would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this paragraph 7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by the Participant before or after the Change in Control, including any amounts payable to such Participant following such Participant’s termination of employment hereunder with respect to any non-competition provisions that may apply to such Participant, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

 

  b)

If the determination made pursuant to this paragraph 7 results in a reduction of the payments that would otherwise be paid to the Participant except for the application of this paragraph 7, the Company shall promptly give such Participant notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that such Participant would otherwise be entitled to receive under this Agreement or otherwise and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of

 

6


 

such determination, unless, to the extent permitted by Section 409A of the Code, such Participant elects to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting such Participant to additional taxation under Section 409A of the Code.

 

  c) As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “ Overpayment ”) or that additional amounts which will have not been paid or distributed by the Company to or for the Participant’s benefit pursuant to this Agreement could have been so paid or distributed (each, an “ Underpayment ”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for such Participant’s benefit shall be repaid by such Participant to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided , however , that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which such Participant is subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for such Participant’s benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

 

  d) In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this paragraph 7, the Participant shall control the issues involved in such dispute and make all final determinations with regard to such issues. The Company shall promptly pay, upon demand by such Participant, all legal fees, court costs, fees of experts and other costs and expenses which such Participant incurs in any actual, threatened or contemplated contest of such Participant’s interpretation of, or determination under, the provisions of this paragraph 7.

9.         Withholding . The Participant may be required to pay to the Company or its Affiliate and the Company or its Affiliate shall have the right and is hereby authorized to withhold from any payment due or transfer made under the Option or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of the Option, its exercise, or any payment or transfer under the Option or under the Plan and to take such action as may be necessary in the option of the Company to satisfy all obligations for the payment of such taxes.

 

7


10.         Securities Laws . Upon the acquisition of any Shares pursuant to the exercise of an Option, the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Agreement.

11.         Notices . Any notice under this Agreement shall be addressed to the Company in care of its General Counsel at the principal executive office of the Company, with a copy to the Director, Global Stock Plans Administration, at the principal executive office of the Company, and to the Participant at the address appearing in the personnel records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

12.         Personal Data . The Company, the Participant’s local employer and the local employer’s parent company or companies may hold, collect, use, process and transfer, in electronic or other form, certain personal information about the Participant for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Participant understands that the following personal information is required for the above named purposes: his/her name, home address and telephone number, office address (including department and employing entity) and telephone number, e-mail address, date of birth, citizenship, country of residence at the time of grant, work location country, system employee ID, employee local ID, employment status (including international status code), supervisor (if applicable), job code, title, salary, bonus target and bonuses paid (if applicable), termination date and reason, tax payer’s identification number, tax equalization code, US Green Card holder status, contract type (single/dual/multi), any shares of stock or directorships held in the Company, details of all stock option grants (including number of grants, grant dates, exercise price, vesting type, vesting dates, expiration dates, and any other information regarding options that have been granted, canceled, vested, unvested, exercisable, exercised or outstanding) with respect to the Participant, estimated tax withholding rate, brokerage account number (if applicable), and brokerage fees (the “ Data ”). Participant understands that Data may be collected from the Participant directly or, on Company’s request, from Participant’s local employer. Participant understands that Data may be transferred to third parties assisting the Company in the implementation, administration and management of the Plan, including the brokers approved by the Company, the broker selected by the Participant from among such Company-approved brokers (if applicable), tax consultants and the Company’s software providers (the “ Data Recipients ”). Participant understands that some of these Data Recipients may be located outside the Participant’s country of residence, and that the Data Recipient’s country may have different data privacy laws and protections than the Participant’s country of residence. Participant understands that the Data Recipients will receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of common stock on the Participant’s behalf by a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired pursuant to the Plan. Participant understands that Data will be held only as long as necessary to implement, administer and

 

8


manage the Participant’s participation in the Plan. Participant understands that Data may also be made available to public authorities as required by law, e.g., to the U.S. government. Participant understands that the Participant may, at any time, review Data and may provide updated Data or corrections to the Data by written notice to the Company. Except to the extent the collection, use, processing or transfer of Data is required by law, Participant may object to the collection, use, processing or transfer of Data by contacting the Company in writing. Participant understands that such objection may affect his/her ability to participate in the Plan. Participant understands that he/she may contact the Company’s Stock Plan Administration to obtain more information on the consequences of such objection.

13.         Governing Law; Submission to Jurisdiction . This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws, and any and all disputes between the Participant and the Company or any Affiliate relating to the Option shall be brought only in a state or federal court of competent jurisdiction sitting in Manhattan, New York, and the Participant and the Company and any Affiliate hereby irrevocably submit to the jurisdiction of any such court and irrevocably agree that venue for any such action shall be only in any such court.

14.         Entire Agreement . This Agreement, together with the Notice, the Plan and the applicable provisions of the Employment Agreement, embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty, covenant or agreement not expressly set forth in this Agreement or the Notice shall affect or be used to interpret, change or restrict, the express terms and provisions of this Agreement or the Notice; provided, that this Agreement and the Notice shall be subject to and governed by the Plan, and in the event of any inconsistency between the provisions of this Agreement or the Notice and the provisions of the Plan, the provisions of the Plan shall govern; provided , that the provisions of the Employment Agreement shall govern to the extent set forth above.

15.         Modifications And Amendments . The terms and provisions of this Agreement and the Notice may be modified or amended as provided in the Plan.

16.         Waivers And Consents . Except as provided in the Plan, the terms and provisions of this Agreement and the Notice may be waived, or consent for the departure therefrom granted, only by a written document executed by the party entitled to the benefits of such terms or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement or the Notice, whether or not similar. Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent.

17.         Reformation; Severability . If any provision of this Agreement or the Notice (including any provision of the Plan or the Employment Agreement that is incorporated herein by reference) shall hereafter be held to be invalid, unenforceable or illegal, in whole or in part, in any jurisdiction under any circumstances for any reason, (i) such provision shall be

 

9


reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal while preserving the intent of the parties as expressed in, and the benefits of the parties provided by, this Agreement, the Notice, and the Plan or (ii) if such provision cannot be so reformed, such provision shall be severed from this Agreement or the Notice and an equitable adjustment shall be made to this Agreement or the Notice (including, without limitation, addition of necessary further provisions) so as to give effect to the intent as so expressed and the benefits so provided. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect the legality, validity or enforceability of any other provision of this Agreement, the Notice or the Plan.

18.         Entry into Force . By entering into this Agreement, the Participant agrees and acknowledges that (i) the Participant has received and read a copy of the Plan and (ii) the Option is granted pursuant to the Plan and is therefore subject to all of the terms of the Plan. The Participant acknowledges and agrees that the Participant may be entitled from time to time to receive certain other documents related to the Company, including the Company’s annual report to stockholders and proxy statement related to its annual meeting of stockholders (which become available each year approximately three months after the end of the calendar year), and the Participant consents to receive such documents electronically through the Internet or as the Company otherwise directs.

 

10

Exhibit 10.55

AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”) made February 24, 2015 effective as of January 1, 2015 (the “Effective Date”) between TIME WARNER INC., a Delaware corporation (the “Company”), and HOWARD AVERILL (“You”).

You are currently employed by the Company pursuant to an Employment Agreement made December 6, 2013, effective as of September 30, 2013 (the “Prior Agreement”). The Company wishes to amend and restate the terms of your employment with the Company and to secure your services on a full-time basis for the period through, December 31, 2017 on and subject to the terms and conditions set forth in this Agreement, and you are willing to provide such services on and subject to the terms and conditions set forth in this Agreement. You and the Company therefore agree as follows:

1.    Term of Employment .   Your “term of employment” as this phrase is used throughout this Agreement shall be for the period beginning on the Effective Date and ending on December 31, 2017 (the “Term Date”), subject, however, to earlier termination as set forth in this Agreement.

2.    Employment .   During the term of employment, you shall serve as the Executive Vice President and Chief Financial Officer of the Company or in such other senior position as the Company may determine and you shall have the authority, functions, duties, powers and responsibilities normally associated with such position and such additional authority, functions, duties, powers and responsibilities as may be assigned to you from time to time by the Company consistent with your senior position with the Company. As the Chief Financial Officer you will act as the principal financial officer of the Company and oversee the financial affairs of the Company. During the term of employment, (i) your services shall be rendered on a substantially full-time, exclusive basis and you will apply on a full-time basis all of your skill and experience to the performance of your duties, (ii) you shall have no other employment and, without the prior written consent of your manager or other more senior officer of the Company in your reporting line, no outside business activities which require the devotion of substantial amounts of your time, (iii) you shall report to the Chief Executive Officer of the Company, and (iv) the place for the performance of your 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 required in the performance of your duties. The foregoing shall be subject to the Company’s written policies, as in effect from time to time, regarding vacations, holidays, illness and the like.


3.    Compensation .

3.1       Base Salary .   The Company shall pay you a base salary at the rate of not less than $1,400,000 per annum during the term of employment (“Base Salary”). The Company may increase, but not decrease, your Base Salary during the term of employment. Base Salary shall be paid in accordance with the Company’s customary payroll practices.

3.2       Bonus . In addition to Base Salary, the Company typically pays its executives an annual cash bonus (“Bonus”). Although your Bonus is fully discretionary, your target annual Bonus as a percentage of Base Salary is 250%. The Company may increase, but not decrease without your consent, your target annual Bonus during the term of employment. Each year, your personal performance will be considered in the context of your executive duties and any individual goals set for you, and your actual Bonus will be determined based on your personal performance and the Company’s performance. Your Bonus amount, if any, will be paid to you between January 1 and March 15 of the calendar year immediately following the performance year in respect of which such Bonus is earned.

3.3       Long Term Incentive Compensation .   So long as the term of employment has not terminated, you shall be eligible to receive annually from the Company long term incentive compensation with a target value of $4,600,000 (based on the valuation method used by the Company for its senior executives) through a combination of stock option grants, restricted stock units, performance shares or other equity-based awards, cash-based long-term plans or other components as may be determined by the Compensation and Human Development Committee of the Company’s Board of Directors from time to time in its sole discretion.

3.4       Indemnification .   You shall be entitled throughout the term of employment (and after the end of the term of employment, to the extent relating to service during the term of employment) to the benefit of the indemnification provisions contained on the Effective Date in the Restated Certificate of Incorporation and By-laws of the Company (not including any amendments or additions after the Effective Date that limit or narrow, but including any that add to or broaden, the protection afforded to you by those provisions).

 

2


4.    Termination .

4.1    Termination for Cause .   The Company may terminate the term of employment and all of the Company’s obligations under this Agreement, other than its obligations set forth below in this Section 4.1, for “cause”. Termination by the Company for “cause” shall mean termination because of your (a) 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), (b) willful failure or refusal without proper cause to perform your duties with the Company, including your obligations under this Agreement (other than any such failure resulting from your incapacity due to physical or mental impairment), (c) misappropriation, embezzlement or reckless or willful destruction of Company property, (d) breach of any statutory or common law duty of loyalty to the Company, (e) intentional and improper conduct materially prejudicial to the business of the Company or any of its affiliates, or (f) breach of any of the covenants provided for in Section 8 hereof. Such termination shall be effected by written notice thereof delivered by the Company to you and shall be effective as of the date of such notice; provided, however, that if (i) such termination is because of your willful failure or refusal without proper cause to perform any one or more of your obligations under this Agreement, (ii) such notice is the first such notice of termination for any reason delivered by the Company to you under this Section 4.1, and (iii) within 15 days following the date of such notice you shall cease your refusal and shall use your best efforts to perform such obligations, the termination shall not be effective.

In the event of termination by the Company for cause, without prejudice to any other rights or remedies that the Company may have at law or in equity, the Company shall have no further obligation to you other than (i) to pay Base Salary through the effective date of the termination of employment (the “Effective Termination Date”), (ii) to pay any Bonus for any year prior to the year in which such termination occurs that has been determined but not yet paid as of the Effective Termination Date, (iii) to pay any unpaid Life Insurance Premium (as defined in Section 7.4) for any year prior to the year in which such termination occurs, and (iv) with respect to any rights you have pursuant to any insurance or other benefit plans or arrangements of the Company (the items described in clauses (i), (ii), (iii) and (iv) collectively, the “Accrued Obligations”). You hereby disclaim any right to receive a pro-rata portion of any Bonus with respect to the year in which such termination occurs.

 

3


4.2    Termination by You for Material Breach by the Company and Termination by the Company Without Cause .   Unless previously terminated pursuant to any other provision of this Agreement and unless a Disability Period shall be in effect, you shall have the right, exercisable by written notice to the Company, to terminate the term of employment under this Agreement with an Effective Termination Date 30 days after the giving of such notice, if, at the time of the giving of such notice, the Company is in material breach of its obligations under this Agreement; provided, however, that, with the exception of clause (i) below, this Agreement shall not so terminate if such notice is the first such notice of termination delivered by you pursuant to this Section 4.2 and within such 30-day period the Company shall have cured all such material breaches; and provided further, that such notice is provided to the Company within 90 days after the occurrence of such material breach. A material breach by the Company shall include, but not be limited to (i) the Company violating Section 2 with respect to authority, reporting lines, duties, or place of employment and (ii) the Company failing to cause any successor to all or substantially all of the business and assets of the Company expressly to assume the obligations of the Company under this Agreement.

The Company shall have the right, exercisable by written notice to you delivered at least 60 days prior to the Effective Termination Date, to terminate your employment under this Agreement without cause, which notice shall specify the Effective Termination Date. If such notice is delivered on or after the date which is 60 days prior to the Term Date, the provisions of Section 4.3 shall apply.

4.2.1   In the event of a termination of employment pursuant to this Section 4.2 (a “termination without cause”), you shall receive Base Salary and a pro rata portion of your Average Annual Bonus (as defined below) through the Effective Termination Date plus any unpaid Life Insurance (as defined in Section 7.4) for any year prior to the year in which such termination occurs. In addition, you shall be entitled to the Life Insurance Premium for the year in which the Effective Termination Date occurs (and any prior year), to the extent unpaid as of the Effective Termination Date. Your Average Annual Bonus shall be equal to the average of the regular annual Bonus amounts (including any such amounts that have been deferred under any plan or arrangement of the Company, but excluding the amount of any special or spot bonuses) (the “Regular Bonus”)

 

4


in respect of the two calendar years during the most recent three calendar years for which the Regular Bonus received by you from the Company was the greatest; provided, however, if the Company has paid you no annual Bonus for a calendar year ending after the Effective Date, then your Average Annual Bonus shall equal your target Bonus and if the Company has paid you one annual Bonus for a calendar year ending after the Effective Date, then your Average Annual Bonus shall equal the average of such Regular Bonus and your target Bonus. In addition, if the Effective Termination Date occurs on December 31 of any performance year or following the end of a performance year but prior to the date that the Bonus amount in respect of such year has been paid to you pursuant to Section 3.2, then for purposes of calculating your Average Annual Bonus, the unpaid Regular Bonus in respect of such year will be taken into account Your pro rata Average Annual Bonus pursuant to this Section 4.2.1 shall be paid to you at the times set forth in Section 4.6.

4.2.2   After the Effective Termination Date, you shall continue to be treated like an employee of the Company for a period ending on the date which is twenty-four months after the Effective Termination Date if the Effective Termination Date occurs prior to the Term Date and twelve months after the Effective Termination Date if the Effective Termination Date occurs on or after the Term Date (such date, the “Severance Term Date”); and during such period you shall be entitled to receive, whether or not you become disabled during such period but subject to Section 6, (a) Base Salary (on the Company’s normal payroll payment dates as in effect immediately prior to the Effective Termination Date) at an annual rate equal to your Base Salary in effect immediately prior to the notice of termination, (b) an annual Bonus in respect of each calendar year or portion thereof (in which case a pro rata portion of such Bonus will be payable) during such period equal to your Average Annual Bonus and (c) payment of the Life Insurance Premium for each full or partial calendar year during the Severance Period (with respect to the calendar year in which the Effective Termination Date occurs, to the extent not otherwise paid under Section 4.2.1 or Section 7, and with respect to the calendar year in which the Severance Term Date occurs, with the amount of such payment prorated to reflect the number of days during such calendar year that will elapse prior to the Severance Term Date). Except as provided in the next sentence, if you accept other full-time employment during such period or notify the Company in writing of your intention to terminate your status of being treated like an employee during such period, you shall cease to be treated like an employee of the Company for purposes of your rights to receive certain post-termination benefits under Section 7.2 effective upon the

 

5


commencement of such other employment or the date specified by you in such notice, whichever is applicable (the “Equity Cessation Date”), and you shall receive the remaining payments of Base Salary, Bonus and Life Insurance Premium pursuant to this Section 4.2.2 at the times specified in Section 4.6 of the Agreement. Notwithstanding the foregoing, if you accept employment with any not-for-profit entity or governmental entity, then you may continue to be treated like an employee of the Company for purposes of your rights to receive certain post-termination benefits pursuant to Section 7.2 and you will continue to receive the payments as provided in the first sentence of this Section 4.2.2; and if you accept full-time employment with any affiliate of the Company, then the payments provided for in this Section 4.2.2 shall immediately cease and you shall not be entitled to any further payments. 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 on a month-to-month basis and you shall continue to be employed by the Company pursuant to the terms of this Agreement, subject to termination by either party hereto on 60 days written notice delivered to the other party (which notice may be delivered by either party at any time on or after the date which is 60 days prior to the Term Date). If the Company shall terminate the term of employment on or after the Term Date for any reason (other than for cause as defined in Section 4.1, in which case Section 4.1 shall apply), which the Company shall have the right to do so long as no Disability Date (as defined in Section 5) has occurred prior to the delivery by the Company of written notice of termination, then such termination shall be deemed for all purposes of this Agreement to be a “termination without cause” under Section 4.2 and the provisions of Sections 4.2.1 and 4.2.2 shall apply. ]

4.4    Release .   A condition precedent to the Company’s obligation with respect to the payments associated with a termination without cause shall be your execution and delivery of a release in the form attached hereto as Annex A, as such form may be revised as required by law, within 60 days following your Effective Termination Date. If you shall fail to timely execute and deliver such release, or if you revoke such release as provided therein, then in lieu of continuing to receive the payments provided for

 

6


herein, you shall receive a severance payment determined in accordance with the Company’s policies relating to notice and severance reduced by the aggregate amount of severance payments paid pursuant to this Agreement, if any, prior to the date of your refusal to deliver, or revocation of, such release. Any such severance payments shall be paid in the form of Base Salary continuation payments at the annual rate equal to your Base Salary in effect immediately prior to your notice of termination, with such amounts paid until your severance benefit has been exhausted.

4.5    Mitigation . In the event of a termination without cause under this Agreement, you shall not be required to take actions in order to mitigate your damages hereunder, unless Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), would apply to any payments to you by the Company and your failure to mitigate would result in the Company losing tax deductions to which it would otherwise have been entitled. In such an event, Section 4.7.1 shall govern. With respect to the preceding sentences, any payments or rights to which you are entitled by reason of the termination of employment without cause shall be considered as damages hereunder. Any obligation to mitigate your damages pursuant to this Section 4.5 shall not be a defense or offset to the Company’s obligation to pay you in full the amounts provided in this Agreement upon the occurrence of a termination without cause, at the time provided herein, or the timely and full performance of any of the Company’s other obligations under this Agreement.]

4.6    Payments .   Payments of Base Salary, Bonus and Life Insurance Premium required to be made to you after any termination shall be made at the same times as such payments otherwise would have been paid to you pursuant to Sections 3.1 , 3.2 and 7 if you had not been terminated, subject to Section 11.17.

4.7      Limitation on Certain Payments .   Notwithstanding any other provision of this Agreement:

4.7.1.   In the event it is determined by an independent nationally recognized public accounting firm that is reasonably acceptable to you, which is engaged and paid for by the Company prior to the consummation of any transaction constituting a Change in Control (which for purposes of this Section 4.7 shall mean a change in ownership or control as determined in accordance with the regulations promulgated under Section 280G of the Code), which accounting firm shall in no event be the accounting firm for the entity seeking to effectuate the Change in Control (the

 

7


“Accountant”), which determination shall be certified by the Accountant and set forth in a certificate delivered to you not less than ten business days prior to the Change in Control setting forth in reasonable detail the basis of the Accountant’s calculations (including any assumptions that the Accountant made in performing the calculations), that part or all of the consideration, compensation or benefits to be paid to you under this Agreement constitute “parachute payments” under Section 280G(b)(2) of the Code, then, if the aggregate present value of such parachute payments, singularly or together with the aggregate present value of any consideration, compensation or benefits to be paid to you under any other plan, arrangement or agreement which constitute “parachute payments” (collectively, the “Parachute Amount”) exceeds the maximum amount that would not give rise to any liability under Section 4999 of the Code, the amounts constituting “parachute payments” which would otherwise be payable to you or for your benefit shall be reduced to the maximum amount that would not give rise to any liability under Section 4999 of the Code (the “Reduced Amount”); provided that such amounts shall not be so reduced if the Accountant determines that without such reduction you would be entitled to receive and retain, on a net after-tax basis (including, without limitation, any excise taxes payable under Section 4999 of the Code), an amount which is greater than the amount, on a net after-tax basis, that you would be entitled to retain upon receipt of the Reduced Amount. In connection with making determinations under this Section 4.7, the Accountant shall take into account any positions to mitigate any excise taxes payable under Section 4999 of the Code, such as the value of any reasonable compensation for services to be rendered by you before or after the Change in Control, including any amounts payable to you following your termination of employment hereunder with respect to any non-competition provisions that may apply to you, and the Company shall cooperate in the valuation of any such services, including any non-competition provisions.

4.7.2.   If the determination made pursuant to Section 4.7.1 results in a reduction of the payments that would otherwise be paid to you except for the application of Section 4.7.1, the Company shall promptly give you notice of such determination. Such reduction in payments shall be first applied to reduce any cash payments that you would otherwise be entitled to receive (whether pursuant to this Agreement or otherwise) and shall thereafter be applied to reduce other payments and benefits, in each case, in reverse order beginning with the payments or benefits that are to be paid the furthest in time from the date of such determination, unless, to the extent permitted by Section 409A of the Code, you elect to have the reduction in payments applied in a different order; provided that, in no event may such payments be reduced in a manner that would result in subjecting you to additional taxation under Section 409A of the Code.

 

8


4.7.3.   As a result of the uncertainty in the application of Sections 280G and 4999 of the Code at the time of a determination hereunder, it is possible that amounts will have been paid or distributed by the Company to or for your benefit pursuant to this Agreement which should not have been so paid or distributed (each, an “Overpayment”) or that additional amounts which will have not been paid or distributed by the Company to or for your benefit pursuant to this Agreement could have been so paid or distributed (each, an “Underpayment”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accountant, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or you which the Accountant believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for your benefit shall be repaid by you to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that no such repayment shall be required if and to the extent such deemed repayment would not either reduce the amount on which you are subject to tax under Sections 1 and 4999 of the Code or generate a refund of such taxes. In the event that the Accountant, based on controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for your benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.

4.7.4.   In the event of any dispute with the Internal Revenue Service (or other taxing authority) with respect to the application of this Section 4.7, you shall control the issues involved in such dispute and make all final determinations with regard to such issues. Notwithstanding any provision of Section 12.8 to the contrary, the Company shall promptly pay, upon demand by you, all legal fees, court costs, fees of experts and other costs and expenses which you incur no later than 10 years following your death in any actual, threatened or contemplated contest of your interpretation of, or determination under, the provisions of this Section 4.7.

4.8    Retirement .   Notwithstanding the provisions of this Agreement relating to a termination without cause and Disability, on the date you reach age 65 (the “Retirement Date”), then this Agreement shall terminate automatically on such date and

 

9


your employment with the Company shall thereafter be governed by the policies generally applicable to employees of the Company, and you shall not thereafter be entitled to the payments provided in this Agreement to the extent not received by you on or prior to the Retirement Date. In addition, no benefits or payments provided in this Agreement relating to termination without cause and Disability shall include any period after the Retirement Date and if the provision of benefits or calculation of payments provided in this Agreement with respect thereto would include any period subsequent to the Retirement Date, such provision of benefits shall end on the Retirement Date and the calculation of payments shall cover only the period ending on the Retirement Date.

5.    Disability .

5.1    Disability Payments .   If during the term of employment and prior to the delivery of any notice of termination without cause, you become physically or mentally disabled, whether totally or partially, so that you are prevented from performing your usual duties for a period of six consecutive months, or for shorter periods aggregating six months in any twelve-month period, the Company shall, nevertheless, continue to pay your full compensation through the last day of the sixth consecutive month of disability or the date on which the shorter periods of disability shall have equaled a total of six months in any twelve-month period (such last day or date being referred to herein as the “Disability Date”), subject to Section 11.17. If you have not resumed your usual duties on or prior to the Disability Date, the Company shall pay you a pro rata Bonus (based on your Average Annual Bonus) for the year in which the Disability Date occurs and thereafter shall pay you disability benefits for the period ending on the later of (i) the Term Date or (ii) the date which is twelve months after the Disability Date (in the case of either (i) or (ii), the “Disability Period”), in an annual amount equal to 75% of (a) your Base Salary at the time you become disabled and (b) the Average Annual Bonus, in each case, subject to Section 11.17.

5.2    Recovery from Disability .   If during the Disability Period you shall fully recover from your disability, the Company shall have the right (exercisable within 60 days after notice from you of such recovery), but not the obligation, to restore you to full-time service at full compensation. If the Company elects to restore you to full-time service, then this Agreement shall continue in full force and effect in all respects and the Term Date shall not be extended by virtue of the occurrence of the Disability Period. If

 

10


the Company elects not to restore you to full-time service, you shall be entitled to obtain other employment, subject, however, to the following: (i) you shall perform advisory services during any balance of the Disability Period; and (ii) you shall comply with the provisions of Sections 8 and 9 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 other senior officer of the Company but you shall not be required to devote more than five days (up to eight hours per day) each month to such services, which shall be performed at a time and place mutually convenient to both parties. Any income from such other employment shall not be applied to reduce the Company’s obligations under this Agreement.

5.3    Other Disability Provisions .   The Company shall be entitled to deduct from all payments to be made to you during the Disability Period pursuant to this Section 5 an amount equal to all disability payments received by you during the Disability Period from Worker’s Compensation, Social Security and disability insurance policies maintained by the Company; provided, however, that for so long as, and to the extent that, proceeds paid to you from such disability insurance policies are not includible in your income for federal income tax purposes, the Company’s deduction with respect to such payments shall be equal to the product of (i) such payments and (ii) a fraction, the numerator of which is one and the denominator of which is one less the maximum marginal rate of federal income taxes applicable to individuals at the time of receipt of such payments. All payments made under this Section 5 after the Disability Date are intended to be disability payments, regardless of the manner in which they are computed. Except as otherwise provided in this Section 5, the term of employment shall continue during the Disability Period and you shall be entitled to all of the rights and benefits provided for in this Agreement, except that Sections 4.2 and 4.3 shall not apply during the Disability Period, and unless the Company has restored you to full-time service at full compensation prior to the end of the Disability Period, the term of employment shall end and you shall cease to be an employee of the Company at the end of the Disability Period and shall not be entitled to notice and severance or to receive or be paid for any accrued vacation time or unused sabbatical.

6.    Death .   If you die during the term of employment, this Agreement and all obligations of the Company to make any payments hereunder shall terminate except that your estate (or a designated beneficiary) shall be entitled to receive Base Salary to the

 

11


last day of the month in which your death occurs and Bonus compensation (at the time bonuses are normally paid) based on the Average Annual Bonus, but prorated according to the number of whole or partial months you were employed by the Company in such calendar year.

7.    Other Benefits .

7.1    General Availability .   To the extent that (a) you are eligible under the general provisions thereof (including without limitation, any plan provision providing for participation to be limited to persons who were employees of the Company or certain of its subsidiaries prior to a specific point in time) and (b) the Company maintains such plan or program for the benefit of its executives, during the term of your employment with the Company, you shall be eligible to participate in any savings plan, or similar plan or program and in any group life insurance, hospitalization, medical, dental, accident, disability or similar plan or program of the Company now existing or established hereafter.

7.2    Benefits After a Termination or Disability .   After the Effective Termination Date of a termination of employment pursuant to Section 4.2 and prior to the Severance Term Date or during the Disability Period, you shall continue to be treated like an employee of the Company for purposes of eligibility to participate in the Company’s health and welfare benefit plans other than disability programs and to receive the health and welfare benefits (other than disability programs) required to be provided to you under this Agreement to the extent such health and welfare benefits are maintained in effect by the Company for its executives. After the Effective Termination Date of a termination of employment pursuant to Section 4.2 and prior to the Severance Term Date, you will continue to receive all other benefits maintained in effect by the Company for its senior executives, such as financial services reimbursement. After the Effective Termination Date of a termination of employment pursuant to Section 4 or during a Disability Period, you shall not be entitled to any additional awards or grants under any stock option, restricted stock or other stock-based incentive plan and you shall not be entitled to continue elective deferrals in or accrue additional benefits under any qualified or nonqualified retirement programs maintained by the Company. At the Severance Term Date, your rights to benefits and payments under any health and welfare benefit plans or any insurance or other death benefit plans or arrangements of the Company shall be determined in accordance with the terms and provisions of such plans. At the Severance

 

12


Term Date or, if earlier, the Equity Cessation Date, your rights to benefits and payments under any stock option, restricted stock, stock appreciation right, bonus unit, management incentive or other long-term incentive plan of the Company shall be determined in accordance with the terms and provisions of such plans and any agreements under which such stock options, restricted stock or other awards were granted. However, consistent with the terms of the Prior Agreement, notwithstanding the foregoing or any more restrictive provisions of any such plan or agreement, if your employment with the Company is terminated as a result of a termination pursuant to Section 4.2, then (i) all stock options to purchase shares of Time Warner Common Stock shall continue to vest through the earlier of the Severance Term Date or the Equity Cessation Date; (ii) except if you shall then qualify for retirement under the terms of the applicable stock option agreement and would receive more favorable treatment under the terms of the stock option agreement, (x) all stock options to purchase shares of Time Warner Common Stock granted to you on or after December 6, 2013 (the “Term Options”) that would have vested on or before the Severance Term Date (or the comparable date under any employment agreement that amends, replaces or supersedes this Agreement) shall vest and become immediately exercisable on the earlier of the Severance Term Date or the Equity Cessation Date, and (y) all your vested Term Options shall remain exercisable for a period of three years after the earlier of the Severance Term Date or the Equity Cessation Date (but not beyond the term of such stock options); and (iii) the Company shall not be permitted to determine that your employment was terminated for “unsatisfactory performance” within the meaning of any stock option agreement between you and the Company. With respect to awards of restricted stock units (“RSUs”) held at the Effective Termination Date of a termination of employment pursuant to Section 4.2, subject to potential further delay in payment pursuant to Section 11.17, the treatment of the RSUs will be determined in accordance with the terms of the applicable award agreement(s).

7.3    Payments in Lieu of Other Benefits .   In the event the term of employment and your employment with the Company is terminated pursuant to any section of this Agreement, you shall not be entitled to notice and severance under the Company’s general employee policies or to be paid for any accrued vacation time or unused sabbatical, the payments provided for in such sections being in lieu thereof.

7.4    Life Insurance .   During your employment with the Company, the Company shall (i) provide you with $50,000 of group life insurance and (ii) pay you annually an amount equal to two times the premium you would have to pay to obtain life

 

13


insurance under a standard group universal life insurance program in an amount equal to $3,000,000 ( “Life Insurance Premium”). The Company shall pay you such amount no earlier than January 1 and no later than December 31 of the calendar year in which you are entitled to this amount. You shall be under no obligation to use the payments made by the Company pursuant to the preceding sentence to purchase any additional life insurance. The payments made to you hereunder shall not be considered as “salary” or “compensation” or “bonus” in determining the amount of any payment under any retirement, profit-sharing or other benefit plan of the Company or any subsidiary of the Company.

8.    Protection of Confidential Information; Non-Compete .

8.1    Confidentiality Covenant .   You acknowledge that your employment by the Company (which, for purposes of this Section 8 shall mean Time Warner Inc. and its affiliates) will, throughout your employment, bring you into close contact with many confidential affairs of the Company, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes, trade secrets, plans for future development, strategic plans of the most valuable nature and other business affairs and methods and other information not readily available to the public. You further acknowledge that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. You further acknowledge that the business of the Company is global in scope, that its products and services are marketed throughout the world, that the Company competes in nearly all of its business activities with other entities that are or could be located in nearly any part of the world and that the nature of your services, position and expertise are such that you are capable of competing with the Company from nearly any location in the world. In recognition of the foregoing, you covenant and agree:

8.1.1   You shall keep secret all confidential matters of the Company and shall not disclose such matters to anyone outside of the Company, or to anyone inside the Company who does not have a need to know or use such information, and shall not use such information for personal benefit or the benefit of a third party, either during or after the term of employment, except with the Company’s written consent, provided that (i) you shall have no such obligation to the extent such matters are or become publicly known other than as a result of your breach of your obligations hereunder and (ii) you may, after giving prior notice to the Company to the extent practicable under the circumstances, disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process;

 

14


8.1.2   You shall deliver promptly to the Company on termination of your employment, or at any other time the Company may so request, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company’s business, which you obtained while employed by, or otherwise serving or acting on behalf of, the Company and which you may then possess or have under your control; and

8.1.3   For a period of one year after the effective date of your retirement or other termination by you of your employment with the Company or for one year after the Effective Termination Date of a termination of employment pursuant to Section 4, without the prior written consent of the Company, you shall not employ, and shall not cause any entity of which you are an affiliate to employ, any person who was a full-time employee of the Company at the date of such termination of employment or within six months prior thereto, but such prohibition shall not apply to your secretary or executive assistant or to any other employee eligible to receive overtime pay.

8.2.          Non-Compete Covenant .

8.2.1     During the term of employment and for the twelve-month period after (i) the effective date of your retirement or other termination by you of your employment or (ii) the Effective Termination Date of a termination of employment pursuant to Section 4, you shall not, directly or indirectly, without the prior written consent of the Chairman, Chief Executive Officer of the Company: (x) render any services to, manage, operate, control, or act in any capacity (whether as a principal, partner, director, officer, member, agent, employee, consultant, owner, independent contractor or otherwise and whether or not for compensation) for, any person or entity that is a Competitive Entity, or (y) acquire any interest of any type in any Competitive Entity, including without limitation as an owner, holder or beneficiary of any stock, stock options or other equity interest (except as permitted by the next sentence). Nothing herein shall prohibit you from acquiring solely as an investment and through market purchases (i) securities of any Competitive Entity that are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) and that are publicly traded, so long as you or any entity under your control are not part of any control group of such Competitive Entity

 

15


and such securities, including converted or convertible securities, do not constitute more than one percent (1%) of the outstanding voting power of that entity and (ii) securities of any Competitive Entity that are not registered under Section 12(b) or 12(g) of the Exchange Act and are not publicly traded, so long as you or any entity under your control is not part of any control group of such Competitive Entity and such securities, including converted securities, do not constitute more than three percent (3%) of the outstanding voting power of that entity, provided that in each case you have no active participation in the business of such entity.

8.2.2    “Competitive Entity” shall be defined as a business (whether conducted through an entity (including its parent, subsidiary, affiliate, joint venture, partnership or otherwise) or by individuals including employee in self-employment) that is engaged in any business activities that directly compete with (x) any of the business activities carried on by the Company in any geographic location where the Company conducts business (including without limitation a Competitive Activity as defined below), (y) any business activities being planned by the Company or in the process of development at the time of your termination of employment (as evidenced by written proposals, market research, RFPs and similar materials) or (z) any business activity that the Company has covenanted, in writing, not to compete with in connection with the disposition of such a business.

8.2.3    “Competitive Activity” refers to business activities within the lines of business of the Company, including without limitation, the following:

 

  (a) The operation of domestic and international networks and premium pay television services (including the production, provision and/or delivery of programming to cable system operators, satellite distribution services, telephone companies, Internet Protocol Television systems, mobile operators, broadband and other distribution platforms and outlets) and websites and digital applications associated with such networks and pay television services;

 

  (b) The sale, licensing and/or distribution of content on DVD and Blu-ray discs, video on demand, electronic sell-through, applications for mobile devices, the Internet or other digital services;

 

16


  (c) The production, distribution and licensing of motion pictures and other entertainment assets, television programming, animation, interactive games (whether distributed in physical form or digitally) and other video products and the operation of websites and digital applications associated with the foregoing.

8.3.       Injunctive Relief .  You acknowledge that your services are of a special, unique and extraordinary value to the Company and that you develop goodwill on behalf of Time Warner. Because your services are unique and because you have access to confidential information and strategic plans of the Company of the most valuable nature and will help the Company develop goodwill, the parties agree that the covenants contained in this Section 8 are necessary to protect the value of the business of the Company and that a breach of any such non-competition covenant would result in irreparable and continuing damage for which there would be no adequate remedy at law. The parties agree therefore that in the event of a breach or threatened breach of this Section 8, the Company may, in addition to other rights and remedies existing in its favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof. The parties further agree that in the event the Company is granted any such injunctive or other relief, the Company shall not be required to post any bond or security that may otherwise normally be associated with such relief.

 

9.    Ownership of Work Product .   You acknowledge that during the term of employment, you may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not (all of the foregoing being collectively referred to herein as “Work Product”), and that various business opportunities shall be presented to you by reason of your employment by the Company. You acknowledge that all of the foregoing shall be owned by and belong exclusively to the Company and that you shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experimental) of the Company, or are, in the case of Work Product, conceived or made on the Company’s time or with the use of the Company’s facilities or

 

17


materials, or, in the case of business opportunities, are presented to you for the possible interest or participation of the Company. You shall (i) promptly disclose any such Work Product and business opportunities to the Company; (ii) assign to the Company, upon request and without additional compensation, the entire rights to such Work Product and business opportunities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of your inventorship or creation in any appropriate case. You agree that you will not assert any rights to any Work Product or business opportunity as having been made or acquired by you prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Company in writing prior to the date hereof.

10.     Notices .    All notices, requests, consents and other communications required or permitted to be given under this Agreement shall be effective only if given in writing and shall be deemed to have been duly given if delivered personally or sent by a nationally recognized overnight delivery service, or mailed first-class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith):

10.1    If to the Company:

Time Warner Inc.

One Time Warner Center

New York, New York 10019

Attention: Senior Vice President - Global

Compensation and Benefits

(with a copy, similarly addressed

but Attention: General Counsel)

10.2    If to you, to your residence address set forth on the records of the Company.

11.     General .

11.1      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.

 

18


11.2   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.

11.3   Entire Agreement .   This Agreement, including Annexes A and B, set 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.

11.4   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.

11.5   Assignability .   This Agreement and your rights and obligations hereunder may not be assigned by you and except as specifically contemplated in this Agreement, neither you, your legal representative nor any beneficiary designated by you shall have any right, without the prior written consent of the Company, to assign, transfer, pledge, hypothecate, anticipate or commute to any person or entity any payment due in the future pursuant to any provision of this Agreement, and any attempt to do so shall be void and shall not be recognized by the Company. The Company shall assign its rights together with its obligations hereunder in connection with any sale, transfer or other disposition of all or substantially all of the Company’s business and assets, whether by merger, purchase of stock or assets or otherwise, as the case may be. Upon any such assignment, the Company shall cause any such successor expressly to assume such obligations, and such rights and obligations shall inure to and be binding upon any such successor.

11.6   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.

 

19


11.7   Specific Remedy .   In addition to such other rights and remedies as the Company may have at equity or in law with respect to any breach of this Agreement, if you commit a material breach of any of the provisions of Sections 8.1, 8.2, or 9, 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.

11.8   Resolution of Disputes .   Except as provided in the preceding Section 11.7, any dispute or controversy arising with respect to this Agreement and your employment hereunder (whether based on contract or tort or upon any federal, state or local statute, including but not limited to claims asserted under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, any state Fair Employment Practices Act and/or the Americans with Disability Act) shall, at the election of either you or the Company, be submitted to JAMS for resolution in arbitration in accordance with the rules and procedures of JAMS. Either party shall make such election by delivering written notice thereof to the other party at any time (but not later than 45 days after such party receives notice of the commencement of any administrative or regulatory proceeding or the filing of any lawsuit relating to any such dispute or controversy) and thereupon any such dispute or controversy shall be resolved only in accordance with the provisions of this Section 11.8. 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 non-judicial (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 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 is not in business or is no longer providing arbitration services, then the American Arbitration Association shall be substituted for JAMS for the purposes of the foregoing

 

20


provisions of this Section 11.8. If you shall be the prevailing party in such arbitration, the Company shall promptly pay, upon your demand, all legal fees, court costs and other costs and expenses incurred by you in any legal action seeking to enforce the award in any court.

11.9   Beneficiaries .   Whenever this Agreement provides for any payment to your estate, such payment may be made instead to such beneficiary or beneficiaries as you may designate by written notice to the Company. You shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to the Company (and to any applicable insurance company) to such effect.

11.10   No Conflict .   You represent and warrant to the Company that this Agreement is legal, valid and binding upon you and the execution of this Agreement and the performance of your obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which you are a party (including, without limitation, any other employment agreement). The Company represents and warrants to you that this Agreement is legal, valid and binding upon the Company and the execution of this Agreement and the performance of the Company’s obligations hereunder does not and will not constitute a breach of, or conflict with the terms or provisions of, any agreement or understanding to which the Company is a party.

11.11   Conflict of Interest.    Attached as Annex B and made part of this Agreement is the Time Warner Corporate Standards of Business Conduct. You confirm that you have read, understand and will comply with the terms thereof and any reasonable amendments thereto. In addition, as a condition of your employment under this Agreement, you understand that you may be required periodically to confirm that you have read, understand and will comply with the Standards of Business Conduct as the same may be revised from time to time.

11.12   Withholding Taxes .   Payments made to you pursuant to this Agreement shall be subject to withholding and social security taxes and other ordinary and customary payroll deductions.

11.13   No Offset .   Neither you nor the Company shall have any right to offset any amounts owed by one party hereunder against amounts owed or claimed to be owed to such party, whether pursuant to this Agreement or otherwise, and you and the Company shall make all the payments provided for in this Agreement in a timely manner.

 

21


11.14   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.

11.15   Survival .    Sections 3.4, 7.3 and 8 through 11 shall survive any termination of the term of employment by the Company for cause pursuant to Section 4.1. Sections 3.4, 4.4, 4.5, 4.6, 4.7 and 7 through 11 shall survive any termination of the term of employment pursuant to Sections 4.2, 4.3, 5 or 6. Sections 3.4, 4.6 and Sections 8 through 11 shall survive any termination of employment due to resignation.

11.16   Definitions .   The following terms are defined in this Agreement in the places indicated:

Accountant – Section 4.7.1

affiliate - Section 4.2.2

Average Annual Bonus – Section 4.2.1

Base Salary - Section 3.1

Bonus – Section 3.2

cause - Section 4.1

Code - Section 4.5

Company - the first paragraph on page 1 and Section 8.1

Competitive Entity – Section 8.2

Disability Date - Section 5

Disability Period - Section 5

Effective Date - the first paragraph on page 1

Effective Termination Date – Section 4.1

Equity Cessation Date – Section 4.2.2

Life Insurance Premium – Section 7

Overpayment - Section 4.7.3

Parachute Amount - Section 4.7.1

Reduced Amount - Section 4.7.1

 

22


Regular Bonus – Section 4.2.1

Severance Term Date – Section 4.2.2

Term Date – Section 1

term of employment - Section 1

termination without cause – Section 4.2.1

Underpayment, Section 4.7.3

Work Product - Section 9

 

23


11.17               Compliance with IRC Section 409A . This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and will be interpreted in a manner intended to comply with Section 409A of the Code. Notwithstanding anything herein to the contrary, (i) if at the time of your termination of employment with the Company you are a “specified employee” as defined in Section 409A of the Code (and any related regulations or other pronouncements thereunder) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to you) until the date that is six months following your termination of employment with the Company (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments of money or other benefits due to you hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by the Company, that does not cause such an accelerated or additional tax. To the extent any reimbursements or in-kind benefits due to you under this Agreement constitutes “deferred compensation” under Section 409A of the Code, any such reimbursements or in-kind benefits shall be paid to you in a manner consistent with Treas. Reg. Section 1.409A-3(i)(1)(iv). Each payment made under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A of the Code. References in this Agreement to your termination of active employment or your Effective Termination Date shall be deemed to refer to the date upon which you have a “separation from service” with the Company and its affiliates within the meaning of Section 409A of the Code. The Company shall consult with you in good faith regarding the implementation of the provisions of this Section 11.17; provided that neither the Company nor any of its employees or representatives shall have any liability to you with respect to thereto.

 

24


IN WITNESS WHEREOF, the parties have duly executed this Agreement the date first above written.

 

 

TIME WARNER INC.
By:     /s/ James Cummings                         
Name:  James Cummings                             
Title:   Senior Vice President, Global         
     Compensation & Benefits                
        /s/ Howard M. Averill                
HOWARD AVERILL

 

25


ANNEX A

RELEASE

This Release is made by and among                              (“You” or “Your”) and TIME WARNER INC. (the “Company”), One Time Warner Center, New York, New York 10019, as of the date set forth below in connection with the Employment Agreement dated                      , and effective as of                          , and the letter agreement (the “Letter Agreement” between You and the Company dated as of                          (as so amended, the “Employment Agreement”), and in association with the termination of your employment with the Company.

In consideration of payments made to You and other benefits to be received by You by the Company and other benefits to be received by You pursuant to the Employment Agreement, as further reflected in the Letter Agreement, You, being of lawful age, do hereby release and forever discharge the Company, its successors, related companies, Affiliates, officers, directors, shareholders, subsidiaries, agents, employees, heirs, executors, administrators, assigns, benefit plans (including but not limited to the Time Warner Inc. Severance Pay Plan For Regular Employees), benefit plan sponsors and benefit plan administrators of and from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney’s fees, expenses, or other compensation or damages (collectively, “Claims”), whether known or unknown, which in any way relate to or arise out of your employment with the Company or the termination of Your employment, which You may now have under any federal, state or local law, regulation or order, including without limitation, Claims related to any stock options held by You or granted to You by the Company that are scheduled to vest subsequent to the Severance Term Date that applies to Your termination of employment and Claims under the Age Discrimination in Employment Act (with the exception of Claims that may arise after the date You sign this Release), Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, as amended, the Family and Medical Leave Act and the Employee Retirement Income Security Act of 1974, as amended, through and including the date of this Release; provided, however, that the execution of this Release shall not prevent You from bringing a lawsuit against the Company to enforce its obligations under the Employment Agreement and this Release.

Notwithstanding anything to the contrary, nothing in this Release shall prohibit or restrict You from (i) making any disclosure of information required by law; (ii) filing a charge with, providing information to, or testifying or otherwise assisting in any investigation or proceeding brought by, any federal regulatory or law enforcement agency or legislative body, any self-regulatory organization, or the Company’s legal, compliance or human resources officers; (iii) filing, testifying or participating in or otherwise assisting in a proceeding relating to an alleged violation of any federal, state or municipal law relating to fraud or any rule or regulation of the Securities and Exchange Commission or any self-regulatory organization; or (iv) challenging the validity of my release of claims under the Age Discrimination in Employment Act. Provided, however, You acknowledge that You cannot recover any monetary damages or equitable relief in connection with a charge


brought by You or through any action brought by a third party with respect to the Claims released and waived in the Agreement. Further, notwithstanding the above, You are not waiving or releasing: (i) any claims arising after the Effective Date of this Agreement; (iii) any claims for enforcement of this Agreement; (iii) any rights or claims You may have to workers compensation or unemployment benefits; (iv) claims for accrued, vested benefits under any employee benefit plan of the Company in accordance with the terms of such plans and applicable law; and/or (v) any claims or rights which cannot be waived by law.

You further state that You have reviewed this Release, that You know and understand its contents, and that You have executed it voluntarily.

You acknowledge that You have been given              days to review this Release and to sign it. You also acknowledge that by signing this Release You may be giving up valuable legal rights and that You have been advised to consult with an attorney. You understand that You have the right to revoke Your consent to the Release for seven days following Your signing of the Release. You further understand that You will cease to receive any payments or benefits under this Agreement (except as set forth in Section 4.4 of the Agreement) if You do not sign this Release or if You revoke Your consent to the Release within seven days after signing the Release. The Release shall not become effective or enforceable with respect to claims under the Age Discrimination Act until the expiration of the seven-day period following Your signing of this Release. To revoke, You send a written statement of revocation by certified mail, return receipt requested, or by hand delivery. If You do not revoke, the Release shall become effective on the eighth day after You sign it.

 

Accepted and Agreed to:

 

 

 

Dated:

 

 


ANNEX B

TIME WARNER CORPORATE

STANDARDS OF BUSINESS CONDUCT

Exhibit 10.63

FORM OF LETTER AGREEMENT

November 20, 2014

Time Warner Inc.

One Time Warner Center

New York, NY 10019

Attention: Edward B. Ruggiero
     Senior Vice President & Treasurer

Ladies and Gentlemen:

Reference is made to that certain Commercial Paper Dealer Agreement, dated as of February 16, 2011 (the “ Dealer Agreement ”), among Time Warner Inc., a Delaware corporation (the “ Issuer ”), Historic TW Inc. (the “ Note Guarantor ”), Home Box Office, Inc. and Turner Broadcasting System, Inc. (together with Home Box Office, Inc., the “ Supplemental Guarantors ”) and [ ] (the “ Dealer ”). Capitalized terms used in this letter agreement (this “ Agreement ”) and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Dealer Agreement.

In consideration of the agreements contained herein and for other good and valuable consideration, and intending to be legally bound hereby, the parties hereto hereby agree as follows:

1.        The cover page of the Dealer Agreement is hereby replaced in its entirety with Exhibit 1 attached hereto.

2.        The second paragraph of the preamble to the Dealer Agreement is hereby amended by replacing references to “February 16, 2011” with “November 20, 2014”.

3.        Section 1.6(a) is hereby amended and restated in its entirety as follows:

“Offers and sales of Notes shall be made only to investors reasonably believed by the Dealer to be: (i) Qualified Institutional Buyers (“QIBs”) or Institutional Accredited Investors and (ii) non-bank fiduciaries or agents that will be purchasing Notes for one or more accounts, each of which is reasonably believed by the Dealer to be an Institutional Accredited Investor.”

4.        Section 1.6(e) is hereby amended and restated in its entirety as follows:

“Offers and sales of the Notes shall be made in accordance with Section 4(a)(2) of the Securities Act, and shall be subject to the restrictions described in the legend appearing on Exhibit A hereto. A legend substantially to the effect of such Exhibit A shall appear as part of the Private Placement Memorandum used in connection with offers and sales of Notes hereunder, as well as on each Note offered and sold pursuant to this Agreement.”


5.        All references to “4(2)” in the Dealer Agreement are hereby replaced with “4(a)(2)”.

6.        Sections 1.7(a) is hereby amended by deleting the words “and Rule 506 thereunder”.

7.        Section 6.10 is hereby amended and restated in its entirety as follows:

““Issuing and Paying Agency Agreement” shall mean the issuing and paying agency agreement described on the cover page of this Agreement, as such agreement may be amended, supplemented or modified from time to time or replaced pursuant to Section 7.11.”

8.        Section 6.11 is hereby amended and restated in its entirety as follows:

““Issuing and Paying Agent” shall mean the party designated as such on the cover page of this Agreement, as issuing and paying agent under the Issuing and Paying Agency Agreement, or any successor thereto designated in accordance with Section 7.11.”

9.        Section 6.19 is hereby deleted in its entirety.

10.      A new Section 7.11 is hereby added at the end of Section 7 as follows:

7.11      “(a) The parties hereto agree that the Issuer may, in accordance with the terms of this Section 7.11, from time to time replace the party which is then acting as Issuing and Paying Agent (the “Current Issuing and Paying Agent”) with another party (such other party, the “Replacement Issuing and Paying Agent”), and enter into an agreement with the Replacement Issuing and Paying Agent covering the provision of issuing and paying agency functions in respect of the Notes by the Replacement Issuing and Paying Agent (the “Replacement Issuing and Paying Agency Agreement”) (any such replacement, a “Replacement”).

(b) From and after the effective date of any Replacement, (i) to the extent that the Issuing and Paying Agency Agreement provides that the Current Issuing and Paying Agent will continue to act in respect of Notes outstanding as of the effective date of such Replacement (the “Outstanding Notes”), then (1) the “Issuing and Paying Agent” for the Notes shall be deemed to be the Current Issuing and Paying Agent, in respect of the Outstanding Notes, and the Replacement Issuing and Paying Agent, in respect of Notes issued on or after the Replacement, (2) all references to the “Issuing and Paying Agent” hereunder shall be deemed to refer to the Current Issuing and Paying Agent in respect of the Outstanding Notes, and the Replacement Issuing and Paying Agent in respect of Notes issued on or after the Replacement, and (3) all references to the “Issuing and Paying Agency Agreement” hereunder shall be deemed to refer to the existing Issuing and Paying Agency Agreement, in respect of the Outstanding Notes, and the Replacement Issuing and Paying Agency Agreement, in respect of Notes issued on or after the Replacement; and (ii) to the extent that the Issuing and Paying Agency Agreement does not provide that the Current Issuing and Paying Agent will continue to act in respect of the Outstanding Notes, then

 

2


(1) the “Issuing and Paying Agent” for the Notes shall be deemed to be the Replacement Issuing and Paying Agent, (2) all references to the “Issuing and Paying Agent” hereunder shall be deemed to refer to the Replacement Issuing and Paying Agent, and (3) all references to the “Issuing and Paying Agency Agreement” hereunder shall be deemed to refer to the Replacement Issuing and Paying Agency Agreement.

(c) From and after the effective date of any Replacement, the Issuer shall not issue any Notes hereunder unless and until the Dealer shall have received: (i) a copy of the executed Replacement Issuing and Paying Agency Agreement, (ii) a copy of the executed master note authenticated by the Replacement Issuing and Paying Agent and registered in the name of DTC or its nominee, (iii) an amendment or supplement to the Private Placement Memorandum describing the Replacement Issuing and Paying Agent as the Issuing and Paying Agent for the Notes, and reflecting any other changes thereto necessary in light of the Replacement so that the Private Placement Memorandum, as amended or supplemented, satisfies the requirements of this Agreement, and (iv) to the extent requested by the Dealer, a legal opinion of counsel to the Issuer, addressed to the Dealer, in form and substance reasonably satisfactory to the Dealer.”

11.      Exhibit A to the Dealer Agreement is hereby replaced in its entirety with Exhibit 2 attached hereto.

12.      The Dealer acknowledges and agrees that the provisions of Section 3.5 have been satisfied as of the date hereof.

13.      Except as expressly set forth herein, this Agreement shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of any of the parties hereto under the Dealer Agreement, and shall not alter, modify, amend or in any way affect any of the terms, conditions or agreements contained in the Dealer Agreement.

14.      This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions.

15.      The Issuer, each Guarantor and the Dealer agree that any suit, action or proceeding brought by any of them against another in connection with or arising out of this Agreement shall be brought solely in the United States federal courts located in the Borough of Manhattan or the courts of the State of New York located in the Borough of Manhattan. EACH OF THE DEALER, THE ISSUER AND EACH GUARANTOR WAIVES ITS RIGHT TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

16.      This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

 

3


 

Very truly yours,

[ ], as Dealer

By: _____________________

      Name:

      Title:

 

 

[ Signature Page to Dealer Agreement Amendment ]


 

 

Accepted and agreed as of the date hereof:

TIME WARNER INC., as Issuer

By:_______________________

     Name: Edward B. Ruggiero

     Title:   Senior Vice President & Treasurer

HISTORIC TW INC., as Guarantor

By:_______________________

     Name: Edward B. Ruggiero

     Title:   Senior Vice President & Treasurer

HOME BOX OFFICE, INC., as Supplemental Guarantor

By:_______________________

     Name: Edward B. Ruggiero

     Title:   Senior Vice President & Assistant Treasurer

TURNER BROADCASTING SYSTEM, INC., as

Supplemental Guarantor

By:_______________________

     Name: Edward B. Ruggiero

     Title:   Senior Vice President & Assistant Treasurer

[ Signature Page to Dealer Agreement Amendment ]


EXHIBIT 1

 

COMMERCIAL PAPER DEALER AGREEMENT

4(a)(2) PROGRAM

among

Time Warner Inc.,

as Issuer

Historic TW Inc.,

as Note Guarantor

Home Box Office, Inc. and Turner Broadcasting System, Inc.,

as Supplemental Guarantors

and

[ ] ,

as Dealer

 

Concerning Notes to be issued pursuant to an Issuing and Paying Agency Agreement dated as of November 20, 2014, among the Issuer, the Note Guarantor and [ ] , as Issuing and Paying Agent

Dated as of

November 20, 2014


EXHIBIT 2

THE COMMERCIAL PAPER NOTES (THE “NOTES”) AND THE GUARANTEES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY OTHER APPLICABLE SECURITIES LAW, AND OFFERS AND SALES THEREOF MAY BE MADE ONLY IN COMPLIANCE WITH AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. BY ITS ACCEPTANCE OF A NOTE, THE PURCHASER WILL BE DEEMED TO REPRESENT (I) THAT IT HAS BEEN AFFORDED AN OPPORTUNITY TO INVESTIGATE MATTERS RELATING TO THE ISSUER AND THE NOTES AND THE GUARANTEES AND THE GUARANTORS, (II) THAT IT IS NOT ACQUIRING SUCH NOTE WITH A VIEW TO ANY DISTRIBUTION THEREOF AND (III) THAT IT IS EITHER (A) AN INSTITUTIONAL INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(a) UNDER THE ACT (AN “INSTITUTIONAL ACCREDITED INVESTOR”) AND THAT EITHER (1) IS PURCHASING NOTES FOR ITS OWN ACCOUNT, (2) IS A U.S. BANK (AS DEFINED IN SECTION 3(a)(2) OF THE ACT) OR A SAVINGS AND LOAN ASSOCIATION OR OTHER INSTITUTION (AS DEFINED IN SECTION 3(a)(5)(A) OF THE ACT) ACTING IN ITS INDIVIDUAL OR FIDUCIARY CAPACITY OR (3) IS A FIDUCIARY OR AGENT (OTHER THAN SUCH A BANK OR SAVINGS AND LOAN ASSOCIATION OR OTHER INSTITUTION) PURCHASING NOTES FOR ONE OR MORE ACCOUNTS EACH OF WHICH IS SUCH AN INSTITUTIONAL ACCREDITED INVESTOR; OR (B) A QUALIFIED INSTITUTIONAL BUYER (“QIB”) WITHIN THE MEANING OF RULE 144A UNDER THE ACT THAT IS ACQUIRING NOTES FOR ITS OWN ACCOUNT OR FOR ONE OR MORE ACCOUNTS, EACH OF WHICH IS A QIB AND WITH RESPECT TO EACH OF WHICH THE PURCHASER HAS SOLE INVESTMENT DISCRETION; AND THE PURCHASER ACKNOWLEDGES THAT IT IS AWARE THAT THE SELLER MAY RELY UPON THE EXEMPTION FROM THE REGISTRATION PROVISIONS OF SECTION 5 OF THE ACT PROVIDED BY RULE 144A. BY ITS ACCEPTANCE OF A NOTE, THE PURCHASER THEREOF SHALL ALSO BE DEEMED TO AGREE THAT ANY RESALE OR OTHER TRANSFER THEREOF WILL BE MADE ONLY (I) IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE ACT, EITHER (A) TO THE ISSUER OR TO ANOTHER PERSON DESIGNATED BY THE ISSUER AS A PLACEMENT AGENT FOR THE NOTES (COLLECTIVELY, THE “PLACEMENT AGENTS”), NONE OF WHICH SHALL HAVE ANY OBLIGATION TO ACQUIRE SUCH NOTE, (B) THROUGH A PLACEMENT AGENT TO AN INSTITUTIONAL ACCREDITED INVESTOR OR A QIB OR (C) TO A QIB IN A TRANSACTION THAT MEETS THE REQUIREMENTS OF RULE 144A AND (II) IN MINIMUM AMOUNTS OF $250,000.

EXHIBIT 21

SUBSIDIARIES OF TIME WARNER INC.

Time Warner Inc. (“Time Warner”) maintains approximately 900 subsidiaries. Set forth below are the names of certain controlled subsidiaries, at least 50% owned, directly or indirectly, of Time Warner as of December 31, 2014, that carry on a substantial portion of Time Warner’s lines of business. The names of various consolidated wholly owned subsidiaries have been omitted. The omitted subsidiaries, when considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 2014.

 

Name

State or Other

Jurisdiction of

Incorporation

Time Warner Inc. (Registrant)

Delaware

Historic AOL LLC

Delaware

Historic TW Inc.

Delaware

Turner Broadcasting System, Inc.

Georgia

Bleacher Report, Inc.

Delaware

Cable News Network, Inc.

Delaware

Cable News International, Inc.

Delaware

CNN America, Inc.

Delaware

CNN Interactive Group, Inc.

Delaware

CNN Newsource Sales, Inc.

Georgia

Imagen Satelital S.A.

Argentina

Red de Television Chilevision S.A.

Chile

Turner Broadcasting Sales, Inc. (dba Turner

  Entertainment New Media)

Georgia

Turner Broadcasting System International, Inc.

Georgia

Turner Broadcasting System Latin America, Inc.

Georgia

Turner Entertainment Networks, Inc.

Georgia

Courtroom Television Network LLC

  (dba truTV).

New York

Superstation, Inc.

Georgia

TEN Network Holding, Inc.

Delaware

The Cartoon Network, Inc.

Delaware

Turner Classic Movies, Inc.

Delaware

Turner Network Television, Inc.

Delaware

Turner Broadcasting System Asia Pacific, Inc.

Georgia

Turner International India Private Limited.

India

Turner Network Sales, Inc.

Georgia

Turner Sports, Inc.

Georgia

Time Warner Business Services LLC

Delaware

Time Warner Enterprise Infrastructure Services LLC

Delaware

Time Warner Media Holdings B.V.

Netherlands

Warner Communications LLC

Delaware

DC Comics (partnership)

New York

E.C. Publications, Inc.

New York


Name

State or Other

Jurisdiction of

Incorporation

Home Box Office, Inc.

Delaware

HBO Code Labs, Inc.

Delaware

HBO Europe Holdings, Inc.

Delaware

HBO Pacific Partners V.O.F.

Netherlands

HBO Services, Inc.

Delaware

TW UK Holdings Inc.

Delaware

Time Warner Limited

United Kingdom

Time Warner Entertainment Limited

United Kingdom

Warner Bros. International Television

  Production Limited

United Kingdom

Warner Bros. Television

Production UK Limited (formerly

named Shed Media Group Limited)

United Kingdom

Warner Bros. Entertainment UK Limited.

United Kingdom

Warner Bros. Studios Leavesden Limited

United Kingdom

TT Games Ltd.

United Kingdom

Turner Entertainment Networks International

  Limited

United Kingdom

Turner Broadcasting System Europe

  Limited

United Kingdom

TW Ventures Inc.

Delaware

Castle Rock Entertainment

California

Warner Bros. (F.E.) Inc.

Delaware

Warner Bros. (South) Inc.

Delaware

Warner Bros. Entertainment Inc.

Delaware

Burbank Television Enterprises LLC

Delaware

Alloy Media Holdings, L.L.C.

Delaware

Alloy Entertainment, LLC

Delaware

Shed Media US Inc.

Delaware

Telepictures Productions Inc.

Delaware

Warner Bros. International Television

  Distribution Inc.

Delaware

Warner Bros. Worldwide Television

  Distribution Inc.

Delaware

Warner Horizon Television Inc.

Delaware

WBTV Distribution Inc.

Delaware

Flixster, Inc.

Delaware

New Line Cinema LLC

Delaware

New Line Distribution, Inc.

California

New Line Productions, Inc.

California

New Line Theatricals, Inc.

New York

Time Warner C.V.

Netherlands

Warner Bros. Animation Inc.

Delaware

Warner Bros. Consumer Products Inc.

Delaware

Warner Bros. Master Distributor Inc.

Delaware

Warner Bros. Enterprises LLC

Delaware


Name

State or Other

Jurisdiction of

Incorporation

Warner Bros. Distributing Inc.

Delaware

Warner Bros. Technical Operations Inc.

Delaware

Warner Specialty Films Inc.

Delaware

WB Studio Enterprises Inc.

Delaware

Warner Bros. Entertainment Australia Pty Limited

Australia

Warner Bros. Entertainment Canada Inc.

Canada

Warner Bros. Entertainment Espana SRLU

Spain

Warner Bros. Entertainment France S.A.S.

France

Warner Bros. Entertainment GmbH

Germany

Warner Bros. Entertainment Italia S.p.A.

Italy

Warner Bros. Entertainment Nederland B.V.

Netherlands

Eyeworks Holding B.V.

Netherlands

Eyeworks Belgium N.V.

Belgium

Eyeworks Germany Holding GmbH

Germany

Eyeworks Netherlands B.V.

Netherlands

Eyeworks Scandinavia A.B.

Sweden

Warner Bros. Entertainment Switzerland

  GmbH

Switzerland

Warner Bros. Home Entertainment Inc.

Delaware

WB Games Inc.

Washington

Turbine, Inc.

Delaware

Warner Bros. (Korea) Inc.

Korea

Warner Bros. Singapore PTE Ltd.

Singapore

Warner Bros. Theatrical Enterprises II LLC

Delaware

Warner Home Video Mexico S.A. de C.V.

Mexico

WB Communications LLC.

Delaware

WTTA Incorporated

Delaware

Hanna-Barbera Entertainment Co., Inc.

California

Hanna-Barbera, Inc.

Georgia

Turner Entertainment Co.

Delaware

Warner Entertainment Japan Inc.

Japan

Time Warner International Finance Limited

United Kingdom

Time Warner Realty Inc.

Delaware

TW AOL Holdings LLC

Virginia

Japan Entertainment Network KK (dba Cartoon

  Network Japan (CNJ))

Japan

Japan Image Communications Company Ltd.

Japan

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of Time Warner Inc. (“Time Warner”):

 

1) No. 333-53572 7) No. 333-104134 13) No. 333-157446 19) No. 333-186798
2) No. 333-53574 8) No. 333-104135 14) No. 333-165156 20) No. 333-190439
3) No. 333-53578 9) No. 333-105384 15) No. 333-166599 21) No. 333-199872
4) No. 333-53580 10) No. 333-137291 16) No. 333-168551
5) No. 333-54518 11) No. 333-137292 17) No. 333-172376
6) No. 333-102787 12) No. 333-142536 18) No. 333-177660

of our reports dated February 26, 2015, with respect to the consolidated financial statements, supplementary information and financial statement schedule of Time Warner and the effectiveness of internal control over financial reporting of Time Warner, included in its Annual Report on Form 10-K for the year ended December 31, 2014.

/s/ Ernst & Young LLP

New York, NY

February 26, 2015

EXHIBIT 31.1

CERTIFICATIONS

I, Jeffrey L. Bewkes, certify that:

 

  1.

I have reviewed this annual report on Form 10-K of Time Warner Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)         Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 26, 2015     By:       /s/ Jeffrey L. Bewkes  
       

Name:

   Jeffrey L. Bewkes  
        Title:  

 Chief Executive Officer

 Time Warner Inc.

 

EXHIBIT 31.2

CERTIFICATIONS

I, Howard M. Averill, certify that:

 

  1.

I have reviewed this annual report on Form 10-K of Time Warner Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)         Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 26, 2015     By:       /s/ Howard M. Averill  
       

Name:

   Howard M. Averill  
        Title:  

 Chief Financial Officer

 Time Warner Inc.

 

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Time Warner Inc., a Delaware corporation (the “Company”), for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his respective knowledge:

1.     the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.     the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:   February 26, 2015     /s/ Jeffrey L. Bewkes  
    Jeffrey L. Bewkes  
   

Chief Executive Officer

Time Warner Inc.

 

 

Date:   February 26, 2015     /s/ Howard M. Averill  
    Howard M. Averill  
   

Chief Financial Officer

Time Warner Inc.