UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14C

Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934

Check the appropriate box:

o Preliminary Information Statement

o Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))

þ Definitive Information Statement

TIME WARNER CABLE INC.

(Name of Registrant As Specified In Its Charter)

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(1) Title of each class of securities to which transaction applies: Class A Common Stock, $0.01 par value.

(2) Aggregate number of securities to which transaction applies: 901,982,094 shares of Class A Common Stock.

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December 8, 2008

 

Dear Stockholder:

 

On May 20, 2008, Time Warner Cable Inc. (“we,” “us,” “our,” “TWC” or the “Company”) and certain of our subsidiaries entered into a Separation Agreement (the “Separation Agreement”) with our parent, Time Warner Inc. (“Time Warner”), and certain of its subsidiaries, the terms of which will govern our complete legal and structural separation from Time Warner.

 

In connection with the execution of the Separation Agreement, a subsidiary of Time Warner, Warner Communications Inc. (“WCI”), in its capacity as the holder of a majority of the outstanding shares of our Class A common stock, par value $0.01 per share (the “TWC Class A common stock”), and all of the outstanding shares of our Class B common stock, par value $0.01 per share (the “TWC Class B common stock”), has, acting by written consent in lieu of a meeting, consented to the following:

 

 

On November 21, 2008, WCI consented to additional amendments to the 2006 equity plan that were approved by TWC’s board of directors (the “Board”) on August 1, 2008, with respect to the treatment of TWC’s restricted stock units (“RSUs”) in connection with the separation of TWC from Time Warner. These amendments, along with the amendments to the 2006 equity plan described above, are collectively referred to as the “2006 equity plan amendment.”

 

The accompanying Information Statement is being provided to you for your information to comply with the requirements of the Securities Exchange Act of 1934, as amended. A notice of corporate action without a meeting by less than unanimous consent of the Company’s stockholders pursuant to Section 228(e) of the Delaware General Corporation Law was previously sent to our stockholders covering the items to which WCI consented on May 20, 2008. This Information Statement constitutes notice of corporate action without a meeting by less than unanimous consent of the Company’s stockholders pursuant to Section 228(e) of the Delaware General Corporation Law covering the items to which WCI consented on November 21, 2008. You are urged to read the Information Statement carefully in its entirety. However, no action is required on your part in connection with this document, including with respect to the approval of (i) the issuance of shares of TWC Class A common stock in connection with the TW NY Exchange, (ii) the adoption of the Second Amended and Restated Certificate of Incorporation and (iii) the 2006 equity plan amendment. No meeting of our stockholders will be held or proxies requested for these matters since they have already been consented to by WCI, acting by written consent in lieu of a meeting, in its capacity as the holder of a majority of the outstanding shares of TWC Class A common stock and all of the outstanding shares of TWC Class B common stock.

 

Under the rules of the Securities and Exchange Commission, the corporate actions that are described above may be effected no earlier than 20 business days after we have mailed the accompanying Information Statement to our stockholders. In addition, the TW NY Exchange, the filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware and the effectiveness of the 2006 equity plan amendment will not occur or become effective until certain conditions set forth in the Separation Agreement have been satisfied or waived. This is expected to occur by early 2009.

 

Sincerely,

 

 

Marc Lawrence-Apfelbaum

Executive Vice President,

General Counsel and Secretary

TIME WARNER CABLE INC.
ONE TIME WARNER CENTER
NORTH TOWER
NEW YORK, NEW YORK 10019

INFORMATION STATEMENT PURSUANT TO SECTION 14C
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

 

THIS IS NOT A NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS AND NO STOCKHOLDER MEETING WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN. THE ACTIONS DESCRIBED IN THIS INFORMATION STATEMENT HAVE BEEN CONSENTED TO BY THE HOLDER OF A MAJORITY OF THE SHARES OF THE COMPANY’S CLASS A COMMON STOCK AND ALL OF ITS CLASS B COMMON STOCK. THE COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY. THERE ARE NO APPRAISAL RIGHTS WITH RESPECT TO THE ACTIONS DESCRIBED IN THIS INFORMATION STATEMENT.

 

 

About this Information Statement

 

This Information Statement is being mailed on or about December 8, 2008 to the holders of record at the close of business on November 21, 2008 of shares of Class A common stock, par value $0.01 per share (the “TWC Class A common stock”), of Time Warner Cable Inc., a Delaware corporation (“we,” “us,” “our,” “TWC” or the “Company”). On May 20, 2008, the Company and certain of its subsidiaries entered into a Separation Agreement (the “Separation Agreement”) with the Company’s parent, Time Warner Inc. (“Time Warner”), and certain of its subsidiaries, the terms of which will govern the Company’s complete legal and structural separation from Time Warner.

 

In connection with the execution of the Separation Agreement, a subsidiary of Time Warner, Warner Communications Inc. (“WCI”), in its capacity as the holder of a majority of the outstanding shares of TWC Class A common stock and all of the outstanding shares of TWC’s Class B common stock, par value $0.01 per share (the “TWC Class B common stock”), consented to:

 

 

On November 21, 2008, WCI consented to additional amendments to the 2006 equity plan that were approved by TWC’s board of directors (the “Board”) on August 1, 2008, with respect to the treatment of TWC’s restricted stock units (“RSUs”) in connection with the separation of TWC from Time Warner. These amendments, along with the amendments to the 2006 equity plan described above, are collectively referred to as the “2006 equity plan amendment.”

 

For further information about the Separation Agreement and the related transactions, including the TW NY Exchange, see the section entitled “Background” in this Information Statement.

Table of Contents

 

 

Time Warner currently owns, through WCI, its wholly owned subsidiary, approximately 82.7% of the outstanding shares of TWC Class A common stock and 100% of the outstanding shares of TWC Class B common stock, which together represent approximately 84% of TWC’s common stock and a 90.6% voting interest. Time Warner also indirectly owns a 12.43% non-voting common stock interest in one of TWC’s subsidiaries, TW NY Cable Holding Inc. (“TW NY”). Time Warner has held its interest in the TWC Class A common stock and TWC Class B common stock since March 2003 and has held its interest in TW NY since July 2006. The financial results of TWC’s operations are consolidated by Time Warner.

 

Separation from Time Warner

 

On May 20, 2008, TWC and its subsidiaries, Time Warner Entertainment Company, L.P. (“TWE”) and TW NY, entered into a Separation Agreement (the “Separation Agreement”) with Time Warner and its subsidiaries, WCI, Historic TW and American Television and Communications Corporation (“ATC”), the terms of which will govern TWC’s legal and structural separation from Time Warner. TWC’s separation from Time Warner will take place through a series of related transactions, the occurrence of each of which is a condition to the next. First, Time Warner will complete certain internal restructuring transactions. Next, following the satisfaction or waiver of certain conditions, including those described below, Historic TW will transfer its 12.43% non-voting common stock interest in TW NY to TWC in exchange for 80 million newly issued shares of TWC Class A common stock. Following the TW NY Exchange, Time Warner will complete certain additional restructuring steps that will make Time Warner the direct owner of all shares of TWC Class A common stock and TWC Class B common stock previously held by its subsidiaries (all of Time Warner’s restructuring transaction steps being referred to collectively as the “TW Internal Restructuring”). Upon completion of the TW Internal Restructuring, the Board or a committee thereof will declare a special cash dividend to holders of outstanding TWC Class A common stock and TWC Class B common stock, including Time Warner, in an amount equal to $10.27 per share (aggregating $10.855 billion) (the “Special Dividend”). The Special Dividend will be paid prior to the completion of TWC’s separation from Time Warner. Following the receipt by Time Warner of the Special Dividend, TWC will file with the Secretary of State of the State of Delaware the Second Amended and Restated Certificate of Incorporation, pursuant to which, among other things, each outstanding share of TWC Class A common stock (including any shares of TWC Class A common stock issued in the TW NY Exchange) and TWC Class B common stock will automatically be converted into one share of TWC common stock, par value $0.01 per share (the “TWC Common Stock”) (the “Recapitalization”). Once the TW NY Exchange, the TW Internal Restructuring, the payment of the Special Dividend and the Recapitalization have been completed, TWC’s separation from Time Warner (the “Separation”) will proceed in the form of either a pro rata dividend of all shares of TWC Common Stock held by Time Warner to holders of Time Warner common stock, par value $0.01 per share (“Time Warner Common Stock”), or through the consummation by Time Warner of an exchange offer of shares of TWC Common Stock for shares of Time Warner Common Stock. If the Separation is effected as an exchange offer, after consummation of the exchange offer, Time Warner will distribute to its stockholders, as a pro rata dividend, any TWC Common Stock that it continues to hold. The distribution by Time Warner of all shares of TWC Common Stock held by Time Warner to its stockholders as (a) a pro rata dividend, (b) an exchange offer or (c) a combination thereof is referred to as the “Distribution.” The Separation, the TW NY Exchange, the TW Internal Restructuring, the Special Dividend, the Recapitalization and the Distribution collectively are referred to as the “Separation Transactions.” Time Warner has the sole discretion, after consultation with TWC, to determine whether the Separation will be effected as a pro rata dividend or through an exchange offer with its stockholders, which decision has not been made as of the date of this Information Statement.

 

TWC intends to fund the Special Dividend with cash on hand, which it expects will include a portion of the net proceeds from the 2008 Bond Offerings (as defined below), borrowings under the 2008 Bridge Facility (as defined below), additional financing in the public debt market and/or borrowings under the Revolving Credit Facility (as defined below).

 

The Separation Agreement contains customary covenants, and consummation of the Separation Transactions is subject to customary closing conditions, including customary regulatory reviews and local

franchise approvals, the receipt by Time Warner of a private letter ruling from the Internal Revenue Service indicating that the Separation Transactions will generally qualify as tax-free for Time Warner and its stockholders for U.S. federal income tax purposes, the receipt of certain tax opinions and the entry into the 2008 Bridge Facility and the Supplemental Facility (each as defined below). The Company cannot assure you that the Separation will occur.

 

As a result of the Separation, Time Warner will no longer own securities of TWC. Time Warner has stated that it believes that the Separation will result in several benefits to Time Warner, including increased long-term strategic, financial, operational and regulatory flexibility, a more efficient capital structure, a corporate structure that will better enable Time Warner’s management to focus on its content and other businesses, and enhance the efficacy of equity incentives granted to management of these businesses. The Separation will also permit Time Warner’s management to focus more intently on realizing the full potential of these other businesses, including its AOL, filmed entertainment, publishing and networks businesses.

 

Similarly, TWC believes that the Separation will result in several benefits to TWC, including increased long-term strategic, operational and regulatory flexibility, and a more efficient capital structure. In particular, after the Separation, TWC will no longer be integrated with Time Warner’s other businesses for regulatory purposes, which will enable TWC’s management to focus more on the growth and development of TWC’s business.

 

Other Agreements Related to the Separation

 

In connection with the Separation Agreement, TWC entered into a number of other agreements with Time Warner and its affiliates and also amended certain existing arrangements to reflect the Separation and the terms of commercial arrangements between TWC and Time Warner after the Separation, including (i) a transition services agreement under which Time Warner will provide TWC with certain limited administrative services for no more than six months after the Separation, (ii) a Second Amended and Restated Tax Matters Agreement and (iii) license agreements providing TWC with the rights to continue to use the “Time Warner Cable,” “TWC,” “TW Cable” and “Road Runner” trademarks.

 

Bond Offerings

 

On June 19, 2008, TWC issued $5.0 billion in aggregate principal amount of senior unsecured notes and debentures (the “June 2008 Bond Offering”), consisting of $1.5 billion principal amount of 6.20% notes due 2013, $2.0 billion principal amount of 6.75% notes due 2018 and $1.5 billion principal amount of 7.30% debentures due 2038. On November 18, 2008, TWC issued $2.0 billion in aggregate principal amount of senior unsecured notes (the “November 2008 Bond Offering” and, together with the June 2008 Bond Offering, the “2008 Bond Offerings”), consisting of $750 million principal amount of 8.25% notes due 2014 and $1.25 billion principal amount of 8.75% notes due 2019. TWC expects to use the net proceeds from the 2008 Bond Offerings to finance, in part, the Special Dividend. Pending the payment of the Special Dividend, a portion of the net proceeds from the 2008 Bond Offerings was used to repay variable-rate debt with lower interest rates, and the remainder was invested in accordance with the Company’s investment policy. If the Separation is not consummated and the Special Dividend is not paid, TWC will use the remainder of the net proceeds from the 2008 Bond Offerings for general corporate purposes, including repayment of indebtedness.

 

Financing Commitments

 

In addition to issuing the debt securities in the 2008 Bond Offerings described above, on June 30, 2008, TWC entered into a credit agreement with a geographically diverse group of major financial institutions for a senior unsecured term loan facility in an aggregate principal amount of $9.0 billion (which was reduced as described below) with an initial maturity date that is 364 days after the borrowing date (the “2008 Bridge Facility”) in order to finance, in part, the Special Dividend. Subject to certain limited exceptions, to the extent TWC incurs debt (other than an incurrence of debt under its $6.0 billion revolving credit facility (the “Revolving Credit Facility”) and its existing commercial paper program), issues equity securities or completes asset sales prior to drawing on the 2008 Bridge Facility, the commitments of the lenders under the 2008

Bridge Facility will be reduced by an amount equal to the net cash proceeds from any such incurrence, issuance or sale. As a result of the 2008 Bond Offerings, the amount of the commitments of the lenders under the 2008 Bridge Facility was reduced to $2.070 billion. Lehman Brothers Holdings Inc., the parent company of Lehman Brothers Commercial Bank (“LBCB”), a lender under the 2008 Bridge Facility, filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York on September 15, 2008. While TWC believes that LBCB is contractually obligated under the 2008 Bridge Facility, it is uncertain whether LBCB would fund its portion of any future borrowing requests or whether another lender would assume such commitment. Excluding LBCB’s $138 million commitment, TWC’s unused committed capacity under the 2008 Bridge Facility following the completion of the 2008 Bond Offerings was $1.932 billion.

 

TWC may elect to extend the maturity date of the loans outstanding under the 2008 Bridge Facility for an additional year. In the event TWC borrows any amounts under the 2008 Bridge Facility, subject to certain limited exceptions, TWC is required to use the net cash proceeds from any subsequent incurrence of debt (other than an incurrence of debt under the Revolving Credit Facility and its existing commercial paper program), issuance of equity securities or asset sale to prepay amounts outstanding under the 2008 Bridge Facility. TWC may prepay amounts outstanding under the 2008 Bridge Facility at any time without penalty or premium, subject to minimum amounts. TWC may not borrow any amounts under the 2008 Bridge Facility unless and until the Special Dividend is declared.

 

Amounts outstanding under the 2008 Bridge Facility will bear interest at a rate equal to LIBOR plus an applicable margin based on TWC’s credit rating, which margin, at the time of the Separation, is expected to be 100 basis points. In addition, the per annum interest rate under the 2008 Bridge Facility will increase by 25 basis points every six months until all amounts outstanding under the 2008 Bridge Facility are repaid. The financial institutions’ commitments to fund borrowings under the 2008 Bridge Facility will expire upon the earliest of (i) May 19, 2009, (ii) the date on which the Separation Agreement is terminated in accordance with its terms or (iii) the completion of the Separation.

 

In May 2008, Time Warner (as lender) committed to lend TWC (as borrower) up to an aggregate principal amount of $3.5 billion under a two-year senior unsecured supplemental term loan facility (the “Supplemental Facility”). TWC may borrow under the Supplemental Facility at the final maturity of the 2008 Bridge Facility only to repay amounts then outstanding under the 2008 Bridge Facility, if any. As a result of the 2008 Bond Offerings, Time Warner’s original commitment under the Supplemental Facility was reduced by $1.965 billion to $1.535 billion. Time Warner’s commitment under the Supplemental Facility will be further reduced by (i) 50% of any additional amounts by which the commitments under the 2008 Bridge Facility are further reduced by the net cash proceeds of subsequent issuances of debt or equity or certain asset sales by TWC prior to TWC’s borrowing under the 2008 Bridge Facility and (ii) the amount by which borrowing availability under the Revolving Credit Facility exceeds $2.0 billion on the date of borrowing under the Supplemental Facility.

 

After the date of borrowing under the Supplemental Facility, subject to certain limited exceptions, TWC will be required to use the net cash proceeds from any incurrence of debt (other than an incurrence of debt under the Revolving Credit Facility and its existing commercial paper program), issuance of equity securities and asset sale to prepay amounts outstanding under the Supplemental Facility. In addition, (i) on any date on which the commitments under the Revolving Credit Facility are increased in excess of the current $6.0 billion amount or (ii) on the last day of each fiscal quarter on which availability under the Revolving Credit Facility exceeds $2.0 billion, TWC must use 100% of the excess amounts to prepay amounts outstanding under the Supplemental Facility. TWC may prepay amounts outstanding under the Supplemental Facility at any time without penalty or premium, subject to minimum amounts.

 

Other than the Supplemental Facility, after the Separation, the Company and Time Warner will not have continuing financing arrangements and neither company will provide the other with ongoing credit support.

 

TWC’s obligations under the debt securities issued in the 2008 Bond Offerings and under the 2008 Bridge Facility are, and under the Supplemental Facility will be, guaranteed by TWE and TW NY.

Management

 

On June 15, 2008, TWC disclosed that Jeffrey L. Bewkes, President and Chief Executive Officer of Time Warner, intends to resign from the TWC Board upon the consummation of the Separation. Other than Mr. Bewkes, TWC and Time Warner do not have any overlapping directors or executive officers, and it is anticipated that after the resignation of Mr. Bewkes and the consummation of the Separation, TWC and Time Warner will not have any overlapping directors or executive officers.

 

The Company has fixed the close of business on November 21, 2008 as the record date for determining stockholders entitled to receive copies of this Information Statement. As of the record date, there were 901,982,094 shares of TWC Class A common stock outstanding and 75,000,000 shares of TWC Class B common stock outstanding. Each issued and outstanding share of TWC Class B common stock has ten (10) votes and each issued and outstanding share of TWC Class A common stock has one (1) vote on any matter submitted to a vote of stockholders. The TWC Class A common stock and the TWC Class B common stock vote together as a single class on all matters submitted to a vote of stockholders, except with respect to the election of directors. Holders of the TWC Class A common stock vote, as a separate class, with respect to the election of the Class A directors, and holders of the TWC Class B common stock vote, as a separate class, with respect to the election of the Class B directors. Time Warner, through its wholly-owned subsidiary, WCI, controls approximately 90.6% of the vote on matters on which the holders of TWC Class A common stock and TWC Class B common stock vote together as a single class. This Information Statement is not a notice of a special meeting of stockholders and no stockholder meeting will be held to consider any matter described herein. The actions described in this Information Statement have been consented to by WCI, in its capacity as the holder of a majority of the outstanding shares of TWC Class A common stock and all of the outstanding shares of TWC Class B common stock. The Company is not asking you for a proxy and you are requested not to send the Company a proxy. There are no appraisal rights available to holders of TWC common stock with respect to the actions described in this Information Statement.

 

Security Ownership by the Board of Directors and Executive Officers

 

The following table sets forth information as of the close of business on September 30, 2008, as to the number of shares of TWC Class A common stock and shares of Time Warner Common Stock beneficially owned by:

 

 

The following table does not give effect to the Distribution, the Recapitalization or any adjustments by the Company or Time Warner to outstanding equity awards, the general impact of which is described below.

 

 

 

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth information as of September 30, 2008 as to the number of shares of TWC Class A common stock and TWC Class B common stock beneficially owned by each person known to TWC to be the beneficial owner of more than 5% of TWC’s common stock.

 

 

 

 

This table does not reflect the following Separation-related activities that have not yet been effected: (1) the issuance of 80 million shares of TWC Class A common stock to Historic TW, a subsidiary of Time Warner, in the TW NY Exchange; (2) the TW Internal Restructuring, pursuant to which Time Warner will become the direct owner of all of the TWC Class A common stock and TWC Class B common stock held by its

subsidiaries; (3) the Recapitalization, pursuant to which each outstanding share of TWC Class A common stock and TWC Class B common stock will be converted into one share of TWC Common Stock; and (4) the Distribution, pursuant to which Time Warner will distribute all shares of TWC Common Stock it holds to its stockholders.

 

On February 6, 2008, Time Warner announced that it had commenced a review of its ownership interest in TWC and had initiated discussions with TWC regarding a possible change in such ownership. In preparation for those discussions, the Board formed a special committee of independent directors (the “Special Committee”) to review, evaluate, participate in the negotiations concerning, and make a recommendation to the Board regarding the potential separation of Time Warner and TWC and any related transactions.

 

On May 20, 2008, following extensive negotiations, the Special Committee and the Board determined that the Separation Transactions (including the TW NY Exchange) were advisable and in the best interests of the Company and its stockholders. In making their decisions, the Special Committee and the Board considered, among other factors, the possible benefits that the Company and its stockholders may derive from the Separation, including increased long-term strategic, operational and regulatory flexibility and a more efficient capital structure. Subsequent to the recommendation of the Special Committee and the Board, WCI, in its capacity as the holder of a majority of the outstanding shares of TWC Class A common stock and all of the outstanding shares of TWC Class B common stock, acting by written consent in lieu of a meeting, consented to the issuance of shares of TWC Class A common stock in the TW NY Exchange, as required under the listing rules of the New York Stock Exchange (the “NYSE”), as more fully discussed below.

 

Under the terms of the Separation Agreement, Historic TW will transfer its 12.43% non-voting common stock interest in TW NY to the Company in exchange for 80 million newly issued shares of TWC Class A common stock. As described in the section entitled “Background,” the TW NY Exchange is subject to the satisfaction or waiver of certain conditions and is expected to occur by early 2009.

 

The TWC Class A common stock is listed on the NYSE. Under the listing rules of the NYSE, the Company is required to obtain approval from its stockholders before issuing shares of TWC Class A common stock in connection with the TW NY Exchange. This NYSE policy requires stockholder approval in circumstances where a listed company is issuing common stock in a transaction or series of related transactions to an affiliate or a substantial security holder of the Company if the number of shares of common stock to be issued exceeds 1% of the number of shares of common stock outstanding before the issuance. For these purposes, a stockholder beneficially owning 5% or more of a listed company’s outstanding shares (determined based on voting power or number of shares) may be deemed to be a substantial security holder. Historic TW is an affiliate of WCI, a substantial stockholder of the Company that beneficially owns approximately 82.7% of the outstanding shares of TWC Class A common stock and all of the outstanding shares of TWC Class B common stock. In accordance with the listing rules of the NYSE, WCI consented to the issuance of 80 million shares of TWC Class A common stock in connection with the TW NY Exchange.

 

The current holders of TWC Class A common stock and TWC Class B common stock do not have any pre-emptive rights with respect to the issuance of shares of TWC Class A common stock in connection with the TW NY Exchange. The shares of TWC Class A common stock to be issued in connection with the TW NY Exchange will be identical in all respects to the TWC Class A common stock currently issued and outstanding. On December 4, 2008, the closing price per share of the TWC Class A common stock on the NYSE was $20.60.

 

Use of Proceeds

 

Pursuant to the terms of the Separation Agreement, TWC will receive Historic TW’s 12.43% non-voting common stock interest in TW NY in exchange for 80 million newly issued shares of TWC Class A common stock and will receive no cash in consideration for such issuance.

 

Subsequent to the TW NY Exchange, the shares of TWC Class A common stock received by Historic TW will be distributed to Time Warner in connection with the TW Internal Restructuring and will be reclassified into TWC Common Stock in connection with the Recapitalization. These shares will be included in the shares distributed by Time Warner to its stockholders in the Distribution.

 

The accompanying unaudited pro forma consolidated balance sheet as of September 30, 2008 is presented as if the Separation Transactions had occurred on September 30, 2008. The accompanying unaudited pro forma consolidated statements of operations for the year ended December 31, 2007 and for the nine months ended September 30, 2008 are presented as if the Separation Transactions had occurred on January 1, 2007. The unaudited pro forma financial information is presented based on information available, is intended for informational purposes only and is not necessarily indicative of and does not purport to represent what the Company’s future financial condition or operating results will be after giving effect to the Separation Transactions.

 

The unaudited pro forma consolidated balance sheet and the unaudited pro forma consolidated statements of operations are presented on the following basis:

 

 

 

 

The Company’s independent registered public accounting firm has not examined, compiled or applied agreed upon procedures to the unaudited pro forma consolidated financial information presented herein and, accordingly, assumes no responsibility for it.

 

The unaudited pro forma consolidated financial information set forth below should be read in conjunction with the notes to these unaudited pro forma consolidated financial statements and “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and TWC’s consolidated financial statements and the notes thereto in TWC’s Annual Report on Form 10-K for the year ended December 31, 2007 and TWC’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, each of which is incorporated by reference into this Information Statement.

Unaudited Pro Forma Consolidated Balance Sheet

 

 

See accompanying notes.

Unaudited Pro Forma Consolidated Statement of Operations

 

 

See accompanying notes.

Unaudited Pro Forma Consolidated Statement of Operations

 

 

See accompanying notes.

Notes to Unaudited Pro Forma Consolidated Financial Statements

 

 

Time Warner currently owns, through a wholly-owned subsidiary, approximately 82.7% of the outstanding shares of TWC Class A common stock and 100% of the outstanding shares of TWC Class B common stock, which represents 84% of TWC’s common stock and a 90.6% voting interest. The financial results of the Company’s operations are consolidated by Time Warner. Time Warner also indirectly owns a 12.43% non-voting common stock interest in one of TWC’s subsidiaries, TW NY. On May 20, 2008, the Company and its subsidiaries, TWE and TW NY, entered into the Separation Agreement with Time Warner and its subsidiaries, WCI, Historic TW and ATC, the terms of which will govern the Separation. The Separation will be completed through the following steps, which are collectively referred to as the “Separation Transactions”:

 

(1) Time Warner will complete certain internal restructuring transactions.

 

(2) Following the satisfaction or waiver of certain conditions, Historic TW, a subsidiary of Time Warner, will transfer its 12.43% ownership interest in TW NY to the Company in exchange for 80 million newly issued shares of TWC Class A common stock in the TW NY Exchange.

 

(3) Time Warner will complete certain additional restructuring steps that will make Time Warner the direct owner of all shares of TWC Class A common stock and TWC Class B common stock previously held by its subsidiaries.

 

(4) TWC’s Board or a committee thereof will declare, and thereafter TWC will pay, the Special Dividend to holders of outstanding TWC Class A common stock and TWC Class B common stock of $10.27 per share, totaling $10.855 billion. Time Warner will receive approximately $9.25 billion of the proceeds from the Special Dividend and the remaining $1.61 billion will be distributed to TWC’s public stockholders. The Special Dividend distribution assumed in the pro forma presentation is calculated as follows (in millions, except per share data):

 

 

As a result of the Special Dividend, distributions with respect to RSUs based on shares of TWC Class A common stock issued under the 2006 equity plan are assumed to be retained by the Company and paid only upon vesting of the related RSUs. Management estimates that approximately 4.3 million RSUs will vest and, therefore, be entitled to payment of the retained distributions related to the Special Dividend. As a result, management expects to pay approximately $44 million associated with the RSUs.

 

(5) TWC will file the Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, pursuant to which, among other things, each outstanding share of TWC Class A common stock (including any shares of TWC Class A common stock issued in the TW NY Exchange) and TWC Class B common stock will automatically be converted into one share of TWC Common Stock.

 

(6) The Separation will proceed in the form of either a pro rata dividend of all shares of TWC Common Stock held by Time Warner to holders of Time Warner Common Stock or through the consummation by Time Warner of an exchange offer of shares of TWC Common Stock for shares of Time Warner Common Stock. If the Separation is effected as an exchange offer, after consummation of the exchange offer, Time Warner will distribute to its stockholders, as a pro rata dividend, any TWC Common Stock that it continues to hold. Time Warner has the sole discretion, after consultation

 

Notes to Unaudited Pro Forma Consolidated Financial Statements — (Continued)

 

with the Company, to determine whether the Separation will be effected as a pro rata dividend or through an exchange offer with its stockholders, which decision has not been made as of the date of this Information Statement.

 

In the June 2008 Bond Offering, TWC issued $5.0 billion in aggregate principal amount of senior unsecured notes and debentures, consisting of $1.5 billion principal amount of 6.20% notes due 2013, $2.0 billion principal amount of 6.75% notes due 2018 and $1.5 billion principal amount of 7.30% debentures due 2038. In the November 2008 Bond Offering, TWC issued $2.0 billion in aggregate principal amount of senior unsecured notes, consisting of $750 million principal amount of 8.25% notes due 2014 and $1.25 billion principal amount of 8.75% notes due 2019. The Company expects to use the net proceeds from the 2008 Bond Offerings to finance, in part, the Special Dividend. Pending the payment of the Special Dividend, a portion of the net proceeds from the 2008 Bond Offerings was used to repay variable-rate debt with lower interest rates, and the remainder was invested in accordance with the Company’s investment policy. If the Separation is not consummated and the Special Dividend is not paid, TWC will use the remainder of the net proceeds from the 2008 Bond Offerings for general corporate purposes, including repayment of indebtedness.

 

In addition to issuing the debt securities in the 2008 Bond Offerings described above, on June 30, 2008, the Company entered into the 2008 Bridge Facility in order to finance, in part, the Special Dividend. Subject to certain limited exceptions, to the extent the Company incurs debt (other than an incurrence of debt under the Revolving Credit Facility and its existing commercial paper program), issues equity securities or completes asset sales prior to drawing on the 2008 Bridge Facility, the commitments of the lenders under the 2008 Bridge Facility will be reduced by an amount equal to the net cash proceeds from any such incurrence, issuance or sale. As a result of the 2008 Bond Offerings, the amount of the commitments of the lenders under the 2008 Bridge Facility was reduced to $2.070 billion. Excluding LBCB’s $138 million commitment, TWC’s unused committed capacity under the 2008 Bridge Facility following the completion of the 2008 Bond Offerings was $1.932 billion. For additional information about the LBCB commitment, see “Background — Financing Commitments.”

 

The Company may elect to extend the maturity date of the loans outstanding under the 2008 Bridge Facility for an additional year. In the event TWC borrows any amounts under the 2008 Bridge Facility, subject to certain limited exceptions, TWC is required to use the net cash proceeds from any subsequent incurrence of debt (other than an incurrence of debt under the Revolving Credit Facility and its existing commercial paper program), issuance of equity securities or asset sale to prepay amounts outstanding under the 2008 Bridge Facility. TWC may prepay amounts outstanding under the 2008 Bridge Facility at any time without penalty or premium, subject to minimum amounts. TWC may not borrow any amounts under the 2008 Bridge Facility unless and until the Special Dividend is declared.

 

Amounts outstanding under the 2008 Bridge Facility will bear interest at a rate equal to LIBOR plus an applicable margin based on the Company’s credit rating, which margin, at the time of the Separation, is expected to be 100 basis points. In addition, the per annum interest rate under the 2008 Bridge Facility will increase by 25 basis points every six months until all amounts outstanding under the 2008 Bridge Facility are repaid. The financial institutions’ commitments to fund borrowings under the 2008 Bridge Facility will expire upon the earliest of (i) May 19, 2009, (ii) the date on which the Separation Agreement is terminated in accordance with its terms or (iii) the completion of the Separation.

 

In May 2008, Time Warner (as lender) committed to lend the Company (as borrower) up to an aggregate principal amount of $3.5 billion under the Supplemental Facility, a two-year senior unsecured supplemental term loan facility. The Company may borrow under the Supplemental Facility at the final maturity of the 2008 Bridge Facility only to repay amounts then outstanding under the 2008 Bridge Facility, if any. As a result of the 2008 Bond Offerings, Time Warner’s original commitment under the Supplemental Facility was reduced by $1.965 billion to $1.535 billion. Time Warner’s commitment under the Supplemental Facility will be further reduced by (i) 50% of any additional amounts by which the commitments under the 2008 Bridge Facility are further reduced by the net cash proceeds of subsequent issuances of debt or equity or certain asset

 

Notes to Unaudited Pro Forma Consolidated Financial Statements — (Continued)

 

sales by the Company prior to its borrowing under the 2008 Bridge Facility and (ii) the amount by which borrowing availability under the Revolving Credit Facility exceeds $2.0 billion on the date of borrowing under the Supplemental Facility.

 

After the date of borrowing under the Supplemental Facility, subject to certain limited exceptions, the Company will be required to use the net cash proceeds from any incurrence of debt (other than an incurrence of debt under the Revolving Credit Facility and its existing commercial paper program), issuance of equity securities and asset sale to prepay amounts outstanding under the Supplemental Facility. In addition, (i) on any date on which the commitments under the Revolving Credit Facility are increased in excess of the current $6.0 billion amount or (ii) on the last day of each fiscal quarter on which availability under the Revolving Credit Facility exceeds $2.0 billion, the Company must use 100% of the excess amounts to prepay amounts outstanding under the Supplemental Facility. The Company may prepay amounts outstanding under the Supplemental Facility at any time without penalty or premium, subject to minimum amounts.

 

The Company’s obligations under the debt securities issued in the 2008 Bond Offerings and under the 2008 Bridge Facility are, and under the Supplemental Facility will be, guaranteed by TWE and TW NY.

 

 

The Adjustments column represents the adjustments to reflect the consummation of the Separation Transactions.

 

The pro forma adjustments to the consolidated balance sheet related to the Separation Transactions are as follows:

 

(a) This adjustment reflects the use of cash to pay, in part, the Special Dividend, estimated debt issuance costs and one-time costs related to the Separation Transactions.

 

(b) This adjustment reflects the capitalization of the debt issuance costs incurred in connection with the November 2008 Bond Offering ($10 million) offset by the write-off of the portion of deferred financing fees associated with the 2008 Bridge Facility ($13 million) as a result of the November 2008 Bond Offering. The write-off of the deferred financing fees is not reflected in the unaudited consolidated statements of operation as they are considered nonrecurring in nature.

 

(c) This adjustment reflects the additional $7.815 billion of debt assumed to be incurred by the Company to finance the Special Dividend ($10.855 billion, which excludes retained distributions on RSUs), the debt issuance costs incurred in connection with the November 2008 Bond Offering ($10 million), and the estimated remaining one-time costs related to the Separation Transactions ($40 million) to be incurred subsequent to September 30, 2008. The remainder of the Special Dividend, estimated debt issuance costs and one-time costs related to the Separation Transactions is assumed to be paid with cash on hand ($3.090 billion).

 

(d) This adjustment reflects the estimated retained distributions related to the Special Dividend amount payable with respect to the RSUs outstanding on September 30, 2008, which will be paid only upon vesting of such RSUs.

 

(e) This adjustment reflects the impact of the TW NY Exchange including:

 

 

Notes to Unaudited Pro Forma Consolidated Financial Statements — (Continued)

 

 

(f) This adjustment reflects the conversion of all of the Company’s issued and outstanding shares of TWC Class A common stock and TWC Class B common stock into shares of TWC Common Stock in the Recapitalization.

 

(g) This adjustment reflects the payment of the Special Dividend of $10.855 billion, the accrual of the estimated future cash payment of $44 million in retained distributions with respect to unvested RSUs as a result of the Special Dividend, the write-off of $13 million of deferred financing fees associated with the 2008 Bridge Facility as a result of the November 2008 Bond Offering, and $40 million of estimated one-time expenses to be incurred subsequent to September 30, 2008 related to the Separation Transactions, which are reflected as a reduction in retained earnings until depleted, with the remainder of $4.674 billion reflected as a reduction in paid-in-capital.

 

 

The pro forma adjustments to the consolidated statement of operations related to the Separation Transactions are as follows:

 

(h) The increase in interest expense, net, reflects incremental borrowings to finance the Special Dividend and expenses associated with the Separation Transactions. The following table illustrates the allocation of borrowings to various financing arrangements and the computation of incremental net interest expense.

 

 

 

 

The table above assumes that the Company finances the Special Dividend with the net proceeds from the 2008 Bond Offerings, borrowings under the 2008 Bridge Facility and borrowings under the Revolving Credit Facility. Actual borrowings and interest rates may differ from the assumptions above.

 

The 2008 Bridge Facility and the Revolving Credit Facility have variable rates of interest. A change of 0.5%, or 50 basis points, in the interest rates on the 2008 Bridge Facility and the Revolving Credit

 

Notes to Unaudited Pro Forma Consolidated Financial Statements — (Continued)

 

Facility in the table above would change pro forma interest expense for the year ended December 31, 2007 by approximately $10 million for each facility.

 

(i) This adjustment eliminates the historical minority interest expense related to Time Warner’s indirect ownership interest in TW NY to reflect the TW NY Exchange.

 

(j) This adjustment is required to adjust historical income taxes using TWC’s marginal rate of 40.0%.

 

(k) This adjustment reflects the impact of the TW NY Exchange as of the beginning of the period.

 

 

The pro forma adjustments to the consolidated statement of operations related to the Separation Transactions are as follows:

 

(l) The increase in interest expense, net, reflects incremental borrowings to finance the Special Dividend and the expenses associated with the Separation Transactions. The following table illustrates the allocation of borrowings to various financing arrangements and the computation of incremental interest expense.

 

 

 

 

 

 

Notes to Unaudited Pro Forma Consolidated Financial Statements — (Continued)

 

 

The table above assumes that the Company finances the Special Dividend with the net proceeds from the 2008 Bond Offerings, borrowings under the 2008 Bridge Facility and borrowings under the Revolving Credit Facility. Actual borrowings and interest rates may differ from the assumptions above.

 

The 2008 Bridge Facility and the Revolving Credit Facility have variable rates of interest. A change of 0.5%, or 50 basis points, in the interest rates on the 2008 Bridge Facility and the Revolving Credit Facility in the table above would change pro forma interest expense for the nine months ended September 30, 2008 by approximately $7 million and $8 million, respectively.

 

(m) This adjustment eliminates the historical minority interest expense related to Time Warner’s indirect ownership interest in TW NY to reflect the TW NY Exchange.

 

(n) This adjustment is required to adjust the historical income taxes using the Company’s marginal rate of 40.0%.

 

(o) This adjustment reflects the impact of the TW NY Exchange as of the beginning of the period.

 

Amendments to the Company’s Amended and Restated Certificate of Incorporation

 

As part of the Separation, the Special Committee determined that the Recapitalization pursuant to the charter amendments in the Second Amended and Restated Certificate of Incorporation was fair to and in the best interests of the Company and its stockholders (other than WCI) and the Special Committee recommended to the Board adoption of the Second Amended and Restated Certificate of Incorporation. The Recapitalization and other charter amendments are reflected in the Second Amended and Restated Certificate of Incorporation, and the Board recommended that the stockholders of the Company adopt the Second Amended and Restated Certificate of Incorporation.

 

Subsequent to the Board’s and the Special Committee’s determinations and recommendations, WCI, in its capacity as the holder of a majority of the outstanding shares of TWC Class A common stock and all of the outstanding shares of TWC Class B common stock, acting by written consent in lieu of a meeting, consented to the adoption of the Second Amended and Restated Certificate of Incorporation. TWC will file the Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware following Time Warner’s receipt of the Special Dividend, at which time it will immediately become effective. This is expected to occur by early 2009.

 

A copy of the Second Amended and Restated Certificate of Incorporation is attached as Appendix A to this Information Statement. The discussion below regarding the Second Amended and Restated Certificate of Incorporation is only a summary of the material terms of the charter amendments and may not contain all of the information that is important to you. You should read the full text of Appendix A carefully.

 

Some of the amendments included in the Second Amended and Restated Certificate of Incorporation may make it more difficult than under TWC’s current charter for a potential acquiror to acquire control of the Company by means of a transaction that is not negotiated with the Board, as more fully discussed below.

 

Recapitalization

 

Effects of the Recapitalization

 

The Second Amended and Restated Certificate of Incorporation will provide for the Recapitalization, pursuant to which each outstanding share of TWC Class A common stock (including any shares of TWC Class A common stock issued to Historic TW in connection with the TW NY Exchange) and TWC Class B common stock will automatically be reclassified into one share of TWC Common Stock. The Recapitalization will have the following effects, among others, on the holders of TWC Class A common stock and TWC Class B common stock:

 

 

Under the Second Amended and Restated Certificate of Incorporation, each holder of TWC Common Stock will be entitled to one (1) vote for each share of TWC Common Stock held of record by such holder with respect to all matters on which such holder is entitled to vote.

 

 

Under the Second Amended and Restated Certificate of Incorporation, all holders of TWC Common Stock will have identical rights and vote together for the election of all of the members of the Board

and, effective as of the Recapitalization, all of the then-serving members of the Board will continue as directors of the Company. On June 15, 2008, TWC disclosed that Jeffrey L. Bewkes, President and Chief Executive Officer of Time Warner, intends to resign from the Board upon the consummation of the Separation.

 

 

Under the Second Amended and Restated Certificate of Incorporation, vacancies on the Board will be filled by a majority vote of the remaining director(s), whether or not they represent a quorum.

 

 

Under the Second Amended and Restated Certificate of Incorporation, there will be 25,000,000,000 shares of TWC Common Stock authorized and the number of shares of TWC Common Stock issued and outstanding will be equal to the aggregate number of shares of TWC Class A common stock and TWC Class B common stock issued and outstanding at the time of the Recapitalization. In addition, TWC will remain authorized to issue up to 1,000,000,000 shares of preferred stock.

 

 

 

 

The Company believes that as a result of the Recapitalization:

 

 

Reasons for Recapitalization

 

The discussion of information and factors considered by the Board and the Special Committee in approving the Second Amended and Restated Certificate of Incorporation and recommending its adoption set forth below is not intended to be exhaustive, but includes certain material factors considered by the Board and the Special Committee in making their respective recommendations. In view of the wide variety of factors considered by the Board and the Special Committee in connection with their respective evaluation of each amendment to the current charter and the complexity of these matters, the Board and the Special Committee did not consider it practicable to, nor did either attempt to quantify, rank or otherwise assign relative weights to the specific factors each considered in reaching their respective decision. In considering the factors described below, individual members of the Board and the Special Committee may have given different weight to different factors. The Company cannot assure you when or if any specific potential benefits considered by the Board and the Special Committee will be realized.

 

In determining to approve and recommend to the Company’s stockholders the Recapitalization pursuant to the charter amendments in the Second Amended and Restated Certificate of Incorporation and the elimination of the Company’s dual class structure, the Board and the Special Committee considered a number of factors, including the possible benefits that the Company and its stockholders may derive from each of the following after giving effect to the Recapitalization and the Separation:

 

 

Election to be Governed by Section 203 of the Delaware General Corporation Law

 

The Company’s current charter contains an express election not to be governed by Section 203 of the DGCL. The Second Amended and Restated Certificate of Incorporation will provide that the Company will elect to be governed by Section 203 of the DGCL.

 

Section 203 of the DGCL prohibits a Delaware corporation from engaging in a “business combination” with an “interested stockholder” for three years following the date that such person or entity becomes an interested stockholder. With certain exceptions, an interested stockholder is a person or entity which owns, individually or with or through certain other persons or entities, 15% or more of the corporation’s outstanding voting stock (including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement or understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the person has voting rights only), or is an affiliate or associate of the corporation and was the owner, individually or with or through certain other persons or entities, of 15% or more of such voting stock at any time within the previous three years, or is an affiliate or associate of any of the foregoing. For purposes of Section 203, the term “business combination” is defined broadly to include mergers with or caused by the interested stockholder; sales or other dispositions to the interested stockholder (except proportionately with the corporation’s other stockholders) of assets of the corporation or a direct or indirect majority-owned subsidiary equal in aggregate market value to ten percent or more of the aggregate market value of either the corporation’s consolidated assets or all of its outstanding stock; the issuance or transfer by the corporation or a direct or indirect majority-owned subsidiary of stock of the corporation or such subsidiary to the interested

stockholder (except for certain transfers in a conversion or exchange or a pro rata distribution or certain other transactions, none of which increase the interested stockholder’s proportionate ownership of any class or series of the corporation’s or such subsidiary’s stock or of the corporation’s voting stock); or receipt by the interested stockholder (except proportionately as a stockholder), directly or indirectly, of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation or a subsidiary. The three-year moratorium imposed on business combinations by Section 203 does not apply if:

 

 

Reasons for Election to be Governed by Section 203 of the DGCL

 

Because the Company has been and, until the completion of the Separation, will be controlled by Time Warner, the protections afforded by Section 203 of the DGCL were not necessary. Because Time Warner will cease to control the Company after the Separation, the Board and the Special Committee each believes it is in the Company’s best interest for Section 203 to apply to it because it will encourage any potential acquirer to negotiate with the Board and will reduce the likelihood of a hostile takeover of the Company. Section 203 also might have the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the Company in which all stockholders would not be treated equally. The application of Section 203 to the Company will confer upon the Board the power to reject a proposed business combination in certain circumstances, even though a potential acquirer may be offering a substantial premium for the Company’s capital stock or assets over the then-current market price. Section 203 may also discourage potential acquirers that are unwilling to comply with its provisions. Section 203 should not interfere with any merger or business combination approved by the Board. As of March 2008, over 90% of companies included in the S&P 500 index were governed by Section 203 of the DGCL, and the Company, the Board and the Special Committee each believes that such election is consistent with good principles of corporate governance and is appropriate for widely-held public companies incorporated in Delaware that do not have a controlling stockholder.

 

Prohibition of Stockholder Action by Written Consent

 

The Company’s current charter does not prohibit actions by written consent of the Company’s stockholders. Consequently, WCI, in its capacity as a holder of a majority of the Company’s outstanding voting securities, could take significant actions, such as removing members of the Board, approving a merger, or selling the Company’s assets, without giving prior notice to the Company’s other stockholders and without the formalities of a stockholder meeting. The Second Amended and Restated Certificate of Incorporation will permit the Company’s stockholders to act only at annual and special meetings of the Company’s stockholders and not by written consent.

 

Reasons for Prohibition of Stockholder Action by Written Consent

 

Under Delaware law, unless otherwise provided in a corporation’s certificate of incorporation, any action required or permitted to be taken by stockholders of a Delaware corporation may be taken without a meeting, without prior notice and without a stockholder vote, if a written consent setting forth the action to be taken, is signed by the holders of shares of outstanding stock having the requisite number of votes that would be necessary to authorize such action at a meeting of stockholders at which all shares entitled to vote thereon

were present and voted. However, sections of the DGCL explicitly permit the Company to limit the right of stockholders to take action by written consent.

 

The Board and the Special Committee each believes that it is inappropriate for stockholders of a widely-held public corporation (as the Company will be following the Separation) to take action affecting the Company and the Company’s stockholders without such action being fully considered by all of the Company’s stockholders at a formal stockholder meeting. The elimination of the ability of stockholders to take action by written consent requires that stockholder action be taken only at an annual or special meeting of the Company’s stockholders, thereby ensuring that all stockholders will have the opportunity to participate in determining any action proposed by the Company or the Company’s stockholders. The Board and Special Committee also believe that it is appropriate to eliminate the ability of stockholders to act by written consent because it reduces opportunities for potential coercive stockholder action. As of March 2008, over 60% of companies included in the S&P 500 index prohibited stockholder action by written consent and the Company, the Board and the Special Committee each believes the prohibition is consistent with good principles of corporate governance and is appropriate for widely-held public companies incorporated in Delaware that do not have a controlling stockholder.

 

Deletion of Corporate Opportunities Provisions

 

The Company’s current charter provides that Time Warner and its affiliates, other than the Company and its affiliates, also referred to as the “Time Warner Group,” and their respective officers, directors and employees do not have a fiduciary duty or any other obligation to share any business opportunities with the Company and releases all members of the Time Warner Group from any liability that would result from a breach of this kind of obligation. The Second Amended and Restated Certificate of Incorporation will not include such provisions.

 

Reasons for Deletion of Corporate Opportunities Provisions

 

The Board and the Special Committee each believes that the provisions in the Company’s current charter relating to corporate opportunities will not be appropriate after the Separation because Time Warner will no longer hold a controlling interest in the Company. The Company, the Board and the Special Committee each believes that deletion of these provisions is consistent with good principles of corporate governance and is appropriate for widely-held public companies incorporated in Delaware that do not have a controlling stockholder.

 

Background of and Reason for the 2006 Equity Plan Amendment

 

On May 20, 2008, the Compensation Committee of the Board (the “Compensation Committee”), subject to majority stockholder approval, approved and adopted certain amendments to the Company’s 2006 Stock Incentive Plan (the “2006 equity plan”) regarding certain aspects of the operation of the 2006 equity plan in connection with the Special Dividend and the Separation. Subsequent to the determination by the Board and the Special Committee that the adoption of each of the amendments was advisable and in the best interests of the Company and its stockholders and the recommendation of the Board and the Special Committee to the Company’s majority stockholder to adopt these amendments, WCI, in its capacity as the holder of a majority of the outstanding shares of TWC Class A common stock and all of the outstanding shares of the TWC Class B common stock, consented to the adoption of these amendments. On August 1, 2008, the Board approved and adopted additional amendments to the 2006 equity plan and on November 21, 2008, WCI consented to the adoption of such additional amendments. The 2006 equity plan amendment will not become effective unless and until the Separation occurs. The Separation is expected to occur by early 2009.

Description of the 2006 Equity Plan Amendment

 

The following summary of the 2006 equity plan amendment is qualified in its entirety by the specific language of the 2006 equity plan amendment, a composite copy of which is attached as Appendix B to this Information Statement. The complete text of the 2006 equity plan, as amended, is attached as Appendix C to this Information Statement. Effective on the date of the Separation, the 2006 equity plan amendment:

 

(1) increases the number of shares of TWC Common Stock reserved for issuance under the 2006 equity plan by the number that the committee of the Board administering the 2006 equity plan (the “2006 equity plan committee”) determines to be equitable to adjust stock options outstanding under the 2006 equity plan immediately prior to the Separation to account for any decrease in the value of TWC Common Stock resulting from the Special Dividend (“adjusted options”);

 

(2) increases the number of shares of TWC Common Stock reserved for issuance under the 2006 equity plan by the number of shares needed to grant additional RSUs to holders of TWC RSUs who elect to receive additional RSUs in lieu of any cash retained distribution that would otherwise be made in respect of their outstanding RSUs as a result of the Special Dividend under the terms of their applicable award agreement (“Special Dividend RSUs”);

 

(3) increases by an additional 25,000,000 the number of shares of TWC Common Stock authorized for issuance under the 2006 equity plan that are not subject to stock options or other awards outstanding immediately prior to the Separation in addition to the increase provided for in (1) and (2) above;

 

(4) increases the maximum aggregate number of shares of TWC Common Stock with respect to which awards under the 2006 equity plan may be granted during a calendar year (net of shares subject to awards which, during such year, terminate or lapse without payment of consideration) from 1.5% to 1.75% of the number of shares outstanding on December 31 of the previous year;

 

(5) provides that the following shall not be included in determining whether the yearly share limit discussed above is exceeded: (a) shares of TWC Common Stock underlying the adjusted options; (b) shares of TWC Common Stock underlying the Special Dividend RSUs; and (c) shares of TWC Common Stock underlying the grant of any “make-up” awards to TWC employees, which the 2006 equity plan committee in its discretion determines necessary or appropriate to compensate those employees for any lost or decreased value due to the forfeiture or reduction in time to exercise any equity compensation awards for Time Warner stock held by TWC employees immediately before the Separation; and

 

(6) provides that none of the following awards will be subject to plan requirements that certain percentages of “Other Stock-Based Awards” remain unvested for at least three years after grant: (a) “Other Stock-Based Awards” granted under the 2006 equity plan as “make-up” awards intended to compensate for any lost or decreased value of Time Warner restricted stock units or to make up for a loss or forfeiture of the intrinsic value of an option to purchase Time Warner stock; and (b) Special Dividend RSUs.

 

The 2006 equity plan amendment provides that the adjustments described in (1) through (5), above, are the only adjustments to the number of shares of TWC Common Stock or other securities authorized for issuance pursuant to the 2006 equity plan that the 2006 equity plan committee may make to the 2006 equity plan to reflect the Separation and Special Dividend. The 2006 equity plan amendment also acknowledges that the 2006 equity plan committee will exercise its power and obligation under the plan to equitably adjust the exercise price of the adjusted options to reflect the Special Dividend.

 

In addition, as a result of the Recapitalization, upon the filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, outstanding options to purchase TWC Class A common stock, RSUs and other awards with respect to TWC Class A common stock issued under the 2006 equity plan will be reclassified into options, RSUs and awards for the same number of shares of TWC Common Stock upon the same terms as in effect before the Recapitalization.

Description of 2006 Equity Plan

 

The description of the 2006 equity plan set forth below is a summary of the principal features of the 2006 equity plan and how it is amended by the 2006 equity plan amendment. This summary does not purport to be complete and is qualified in its entirety by the provisions of the 2006 equity plan itself, which is attached as Appendix C to this Information Statement.

 

Purpose

 

The purpose of the 2006 equity plan is to aid TWC in attracting, retaining and motivating employees, directors and advisors and to provide TWC with a stock plan providing incentives directly related to TWC’s success.

 

Eligibility

 

Awards may be made to any of TWC’s or TWC’s subsidiaries’ employees, prospective employees, directors, officers and advisors in the discretion of the 2006 equity plan committee.

 

Shares Subject to the Plan

 

The total number of shares of TWC Common Stock that may be issued under the 2006 equity plan is 100,000,000. As a result of the adoption of the 2006 equity plan amendment, effective as of the date of the Separation, the total number of shares of TWC Common Stock authorized for issuance under the 2006 equity plan will be increased by the sum of (i) 25,000,000, plus (ii) the number of shares the 2006 equity plan committee determines is necessary to equitably adjust the adjusted options, plus (iii) the number of shares underlying the Special Dividend RSUs. The maximum number of shares with respect to which awards may be granted during each calendar year to any given participant may not exceed 1,500,000 shares; however, the maximum number of shares that may be awarded in the form of restricted stock, RSUs or other stock-based awards payable in shares of TWC Common Stock will be equal to 1,500,000 divided by a ratio (the “full value award ratio”) that is the quotient that results from dividing the most recent fair value of a share of such stock or award, as determined for financial reporting purposes, by the most recent fair value of a stock option granted under the 2006 equity plan. The maximum aggregate number of shares with respect to which awards may be made during each calendar year is 1.5% of the number of shares of TWC Common Stock outstanding on December 31 of the preceding year. As described above, due to the adoption of the 2006 equity plan amendment, such percentage of shares will be increased to 1.75% on the date of the Separation. The 2006 equity plan amendment excludes from this calendar-year limit shares of TWC Common Stock (a) that the 2006 equity plan committee determines are necessary to equitably adjust the outstanding options, (b) underlying the Special Dividend RSUs and (c) underlying the grant of “make-up” awards to TWC’s employees which compensate them for any loss or decrease in value of their Time Warner equity awards as a result of the Separation. If any award under the 2006 equity plan is forfeited or otherwise terminates or lapses without payment of consideration, the shares subject to that award will again be available for future grant. In addition, any shares issued in connection with awards other than stock options or stock appreciation rights will be counted against the share authorization (as increased by the 2006 equity plan amendment on the date of the Separation) as the number of shares equal to the full value award ratio for every one share issued in connection with such award, or by which the award is valued.

 

Types of Awards

 

Under the 2006 equity plan, the 2006 equity plan committee may award stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards, as described below.

 

Stock Options and Stock Appreciation Rights

 

Stock options awarded under the 2006 equity plan may be nonqualified or incentive stock options. Stock appreciation rights may be granted independent of or in conjunction with stock options. The exercise price per share of TWC Common Stock for any nonqualified or incentive stock options or stock appreciation rights

cannot be less than the fair market value of a share of TWC Common Stock on the date the award is granted; except that, in the case of a stock appreciation right granted in conjunction with a stock option, the exercise price cannot be less than the exercise price of the related stock option. The 2006 equity plan committee is responsible for administering the 2006 equity plan and may impose the terms and conditions of stock options and stock appreciation rights as it deems fit, but the awards generally will not be exercisable for a period of more than ten years after they are granted. Participants in the 2006 equity plan will not receive dividends or dividend equivalents or have any voting rights with respect to shares underlying stock options or stock appreciation rights. Each stock appreciation right granted independent of a stock option will entitle a participant upon exercise to an amount equal to the product of (i) the excess of (A) the fair market value on the exercise date of one share of TWC Common Stock over (B) the exercise price, multiplied by (ii) the number of shares of TWC Common Stock covered by the stock appreciation right, and each unexercised stock appreciation right granted in conjunction with a stock option will entitle a participant to surrender the stock option and receive the amount described in the preceding formula. Payment of the exercise price is made in cash and/or shares of TWC Common Stock (valued at fair market value), as determined by the 2006 equity plan committee.

 

No Repricing

 

Once granted, no stock option or stock appreciation right may be repriced except in connection with adjustments made to reflect certain corporate events, as described below.

 

Restricted Stock and Restricted Stock Units

 

The 2006 equity plan committee determines the terms and conditions of restricted stock and RSU awards, including the number of shares of restricted stock to grant to a participant. The 2006 equity plan committee may also determine the period during which, and the conditions, if any, under which, the restricted stock and RSU awards may be forfeited; however, except with respect to awards to members of the Board, not less than 95% of the shares of restricted stock (and other stock-based awards, such as RSU awards, described below) will remain subject to forfeiture for at least three years after the date of grant, though such forfeiture condition may expire earlier, in whole or in part, in the event of a change in control of the Company or the death, disability or other termination of the award holder’s employment. Dividends on restricted stock may be paid directly to the participant, withheld by TWC subject to vesting, or reinvested in additional shares of restricted stock, as determined by the 2006 equity plan committee, in its sole discretion. Dividend equivalents with respect to RSUs are credited to the RSU holder’s account and paid out (without interest) in cash subject to vesting. The 2006 equity plan amendment contemplates that RSU holders as of the Special Dividend payment date may be given an election to receive Special Dividend RSUs in lieu of a cash credit in respect of the Special Dividend. Certain restricted stock or RSU awards may be granted in a manner designed to allow TWC to deduct their value under Section 162(m) of the Code; these awards will be based on one or more of the performance criteria set forth below.

 

Other Stock-Based Awards

 

The 2006 equity plan committee may grant stock awards, unrestricted stock and other awards that are valued in whole or in part by reference to, or are otherwise based on the fair market value of, TWC Common Stock (including RSUs and deferred stock units). Such stock-based awards may be in the form, and dependent on conditions, determined by the 2006 equity plan committee, including the right to receive, or vest with respect to, one or more shares of TWC Common Stock (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; however, except with respect to awards to members of the Board, not less than 95% of other stock-based awards that are denominated or payable in shares of TWC Common Stock that are subject to time-based vesting will vest at least three years after the date of grant, though such vesting may expire earlier, in whole or in part, in the event of a change in control of the Company or the death, disability or other termination of the award holder’s employment. As described above, as a result of the 2006 equity plan amendment, no “make-up” award for Time Warner forfeited restricted stock units or for a loss or forfeiture of value of Time

Warner options nor any Special Dividend RSU will be included in determining whether the required percentage of other stock-based awards is subject to this three year minimum vesting period. The maximum amount of other stock-based awards that may be granted during a calendar year to any participant is: (i) the number of shares equal to 1,500,000 divided by the full value award ratio, with respect to other stock-based awards that are denominated or payable in shares of TWC Common Stock, and (ii) $10 million, with respect to non-stock denominated awards.

 

Performance-Based Awards

 

Certain awards may be granted in a manner designed to allow TWC to deduct their value under Section 162(m) of the Code. These performance-based awards will be based on one or more of the following performance criteria: (i) operating income before depreciation and amortization, (ii) operating income, (iii) earnings per share, (iv) return on shareholders’ equity, (v) revenues or sales, (vi) free cash flow, (vii) return on invested capital, (viii) total shareholder return and (ix) revenue generating unit-based metrics. The 2006 equity plan committee establishes the performance goals for these performance-based awards and certifies that the goals have been met, in each case, in the manner required by Section 162(m) of the Code.

 

Adjustments Upon Certain Events

 

In the event of a change in the outstanding shares of TWC Common Stock due to a stock dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination, share exchange or any other similar transaction, the 2006 equity plan committee will, as it deems equitable, adjust (i) the number or kind of shares of TWC Common Stock or other securities issued or reserved for issuance pursuant to the 2006 equity plan or pursuant to outstanding awards, (ii) the maximum number of shares for which awards may be granted during a calendar year to any participant, (iii) the option price or exercise price of any stock appreciation right and/or (iv) any other affected terms of such awards. Upon the occurrence of a change in control of TWC (as defined in the 2006 equity plan), the 2006 equity plan committee may (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, (c) provide for the issuance of substitute awards that will substantially preserve the otherwise applicable terms of any affected awards previously granted under the 2006 equity plan, as determined by the 2006 equity plan committee in its sole discretion, or (d) provide that, for a period of at least 30 days prior to the change in control, such stock options will be exercisable as to all shares subject to the 2006 equity plan and that upon the occurrence of the change in control, such stock options will terminate. The 2006 equity plan amendment provides that the adjustments provided for in the 2006 equity plan amendment are the only adjustments to the number of shares of TWC Common Stock that the 2006 equity plan committee may make to the 2006 equity plan to reflect the Separation and the Special Dividend and further provides that the 2006 equity plan committee will exercise its power under the 2006 equity plan to equitably adjust the exercise price of the adjusted options to reflect the Special Dividend.

 

Administration

 

Under the 2006 equity plan, the plan may be administered by the Compensation Committee or its successor, any other committee of the Board to which the Board delegates such power or a subcommittee of the Compensation Committee. The 2006 equity plan is currently administered by the Compensation Committee, which has appointed a subcommittee that consists of two directors who are intended to qualify as “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act and “outside directors” within the meaning of Section 162(m) of the Code. The 2006 equity plan committee is authorized to interpret the 2006 equity plan, to establish, amend and rescind any rules and regulations relating to the 2006 equity plan, and to make any other determinations that it deems necessary or desirable for the administration of the 2006 equity plan.

 

Amendment and Termination

 

The Board or the 2006 equity plan committee may amend, alter or discontinue the 2006 equity plan, but no amendment, alteration or discontinuation will be made (i) without stockholder approval, if it would increase

the total number of shares of TWC Common Stock reserved under the plan or the maximum number of shares of restricted stock or other stock-based awards that may be awarded thereunder, or if it would increase the maximum number of shares for which awards may be granted to any participant, (ii) without the consent of a participant, if it would diminish any of the rights of the participant under any award previously granted to the participant or (iii) without stockholder approval, to permit repricing of options or stock appreciation rights. No new awards may be made under the 2006 equity plan after April 2, 2012, the fifth anniversary of the first grant of an award under the 2006 equity plan.

 

Transferability

 

Awards under the 2006 equity plan are not transferable or assignable by participants other than by will or the laws of descent and distribution, unless determined otherwise by the 2006 equity plan committee (but subject to the limitation that no award may be transferred for consideration or value). Awards may be exercised after the death of a participant by the legatees, personal representatives or distributees of such participant.

 

Successors and Assigns

 

The 2006 equity plan is binding on successors and assigns of the Company and participants; participants’ estates and the executors, administrators or trustees of such estates; and any receiver or trustee in bankruptcy or other representative of participants’ creditors.

 

Tax Status of 2006 Equity Plan Awards

 

The following discussion of the U.S. federal income tax status of awards under the 2006 equity plan is based on current U.S. federal tax laws and regulations and does not purport to be a complete description of the U.S. federal income tax laws. Participants may also be subject to certain state and local taxes or may be subject to taxes imposed by countries other than the U.S., none of which are described below.

 

Nonqualified Stock Options.  If the stock option is a nonqualified stock option, no income is realized by the participant at the time of grant of the stock option, and no deduction is available to the Company at such time. At the time of exercise (other than in cases of exercises by delivery of shares of TWC Common Stock to the Company), ordinary income is realized by the participant in an amount equal to the excess, if any, of the fair market value of the shares of TWC Common Stock on the date of exercise over the exercise price, and the Company receives a tax deduction for the same amount. If a stock option is exercised by delivering TWC Common Stock to the Company, a number of shares received by the optionee equal to the number of shares so delivered will be received free of tax and will have a tax basis and holding period equal to the shares so delivered. The fair market value of additional shares of TWC Common Stock received by the participant will be taxable to the participant as ordinary income, and the participant’s tax in such shares will be their fair market value on the date of exercise. Upon disposition, any difference between the participant’s tax basis in the shares of TWC Common Stock and the amount realized on disposition of the shares is treated as capital gain or loss.

 

Incentive Stock Options.  If the option is an incentive stock option, no income is realized by the participant upon award or exercise of the option, and no deduction is available to the Company at such times. If the TWC Common Stock purchased upon the exercise of an incentive stock option is held by a participant for at least two years from the date of the grant of such option and for at least one year after exercise, any resulting gain is taxed, upon disposition of the shares, at long-term capital gains rates. If the TWC Common Stock purchased pursuant to the option is disposed of before the expiration of that period, any gain on the disposition, up to the difference between the fair market value of the TWC Common Stock at the time of exercise and the exercise price, is taxed at ordinary rates as compensation paid to the participant, and the Company is entitled to a deduction for an equivalent amount. Any amount realized by the participant in excess of the fair market value of the stock at the time of exercise is taxed at capital gains rates.

 

Stock Appreciation Rights.  No income is realized by the participant at the time a stock appreciation right is granted, and no deduction is available to the Company at such time. When the right is exercised,

ordinary income is realized by the participant in the amount of the cash and/or the fair market value of the TWC Common Stock received by the participant, and the Company will be entitled to a deduction of equivalent value.

 

Restricted Stock; Stock Awards.  Subject to Section 162(m) of the Code, discussed below, the Company receives a deduction and the participant recognizes taxable income equal to the fair market value of the restricted stock at the time the restrictions on the shares awarded lapse, unless the participant elects to recognize such income immediately by so electing not later than 30 days after the date of grant as permitted under Section 83(b) of the Code, in which case both the Company’s deduction and the participant’s inclusion in income occur on the grant date. The tax value of any part of a stock award distributed to participants is taxable as ordinary income to such participant in the year in which such stock is received, and the Company will be entitled to a corresponding tax deduction, subject to Section 162(m) of the Code.

 

RSUs; Deferred Stock Units.  Subject to Section 162(m) of the Code, discussed below, the Company receives a deduction and the participant recognizes taxable income at the time RSUs vest and are settled, or deferred stock units are settled, equal to the fair market value of the shares of TWC Common Stock issued or other cash or property paid in settlement of the award. Section 83(b) of the Code is not applicable to RSUs or deferred stock units.

 

Section 162(m).  Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation over $1 million paid to the Chief Executive Officer and the three other most highly compensated executive officers in any taxable year of the Company (other than the Chief Financial Officer). Qualifying performance-based compensation is not subject to the deduction limit if certain requirements are met. One such requirement is that shareholders have approved (i) the performance criteria upon which performance-based awards may be based, (ii) the annual per-participant limits on grants and (iii) the class of employees eligible to receive awards. In the case of restricted stock and performance-based awards, a committee of at least two persons and comprised solely of outside directors, as defined under Section 162(m) of the Code, must establish objective performance goals and the amounts payable upon achievement of the goals, and no discretion may be retained to increase the amount payable under the awards. In the case of stock options and stock appreciation rights, the option or stock appreciation right must be granted by a committee of at least two outside directors and the exercise price of the stock option or stock appreciation right must be not less than the fair market value of the TWC Common Stock on the date of grant.

 

Section 409A.  Section 409A of the Code (“Section 409A”) generally establishes rules that must be followed with respect to certain deferred compensation arrangements in order to avoid the imposition of an additional 20% tax (plus interest) on the participant who is entitled to receive the deferred compensation. Certain awards that may be granted under the 2006 equity plan may constitute “deferred compensation” within the meaning of Section 409A. The 2006 equity plan is intended to be interpreted and operated in accordance with Section 409A, including any regulations or guidance issued by the Treasury Department, and contains a number of provisions intended to avoid the imposition of additional tax on the 2006 equity plan participants under Section 409A. No award under the 2006 equity plan can be granted, deferred, accelerated, extended, paid out or modified under the 2006 equity plan in a manner that would result in the imposition of an additional tax under Section 409A on a participant.

New Plan Benefits

 

The awards that will be granted in the future to eligible participants under the amended 2006 equity plan, are subject to the discretion of the 2006 equity plan committee and, therefore, are not determinable at this time. The following table sets forth information regarding awards of TWC Class A common stock that were made under the 2006 equity plan during 2007.

 

 

 

 

Equity Compensation Plan Information

 

The following table summarizes information as of December 31, 2007, about the Company’s outstanding equity compensation awards and shares of TWC Class A common stock reserved for future issuance under the Company’s equity compensation plans.

 

 

 

 

This table does not reflect: (i) the increase in the number of shares of TWC Common Stock authorized for issuance under the 2006 equity plan pursuant to the 2006 equity plan amendment; (ii) the grant of Special Dividend RSUs; (iii) the adjustments that are expected to be made to the adjusted options; or (iv) the grant of any make-up awards to eligible TWC employees to compensate them for lost or decreased value of their Time Warner equity compensation awards as a result of the Separation.

 

Compensation Discussion and Analysis for 2007 Compensation

 

2007 Executive Compensation

 

Oversight and Authority for Executive Compensation

 

Under its charter, the Compensation Committee has authority and oversight over all elements of the Company’s executive compensation program, including:

 

 

The Compensation Committee’s charter states that in determining compensation for each named executive officer, the Compensation Committee shall consider, among other factors, the Company’s overall performance, stockholder return, the achievement of specific performance objectives established by the Committee on an annual basis, compensation previously provided to the executive, and the competitiveness of the named executive officer’s compensation as compared with the compensation of executives in similar positions at peer companies.

 

Role of Compensation Consultants and Management

 

Members of management, including Glenn Britt, President and Chief Executive Officer, Robert Marcus, Senior Executive Vice President and Chief Financial Officer, and Tomas Mathews, Executive Vice President, Human Resources (collectively, “Management”), provide recommendations for the Compensation Committee’s consideration, and provide ongoing assistance to the Compensation Committee with respect to its review of the effectiveness of the Company’s executive compensation programs, including competitiveness and alignment with the Company’s objectives. TWC also from time to time engages consulting firms to assist Management in evaluating the Company’s compensation policies and practices.

 

In early 2007, the Compensation Committee retained Executive Compensation Advisors, a Korn/Ferry company (“ECA”), as its independent compensation consultant. ECA is paid an annual retainer by the Company and reports directly to the Compensation Committee. The firm provides assistance and advice to the Compensation Committee in carrying out its responsibilities with respect to executive compensation policies and programs. The Compensation Committee consults with ECA with respect to all significant decisions and determinations it makes regarding compensation and related matters. In connection with ECA’s role as advisor

to the Compensation Committee, Management may from time to time seek input from ECA about compensation proposals it is considering for presentation to the Compensation Committee.

 

2007 Compensation Philosophy

 

In 2006, TWC engaged Mercer Consulting to provide a comprehensive review of the Company’s existing executive compensation practices and programs, including total compensation structure and levels for each named executive officer, annual cash incentives (including performance metrics and relative performance payout levels), and long-term incentives (including the vehicles utilized and the mix of those vehicles). In light of this review, the Compensation Committee evaluated all elements of the Company’s executive compensation practices and programs and established its 2007 compensation philosophy as described in this Compensation Discussion and Analysis for 2007 Compensation.

 

The Company utilizes a competitive mix of base salary and short-term and long-term incentive compensation to attract, retain, motivate and reward its executives for achievement of Company and personal performance goals. The Company’s compensation philosophy is guided by the following key principles:

 

 

Application of Compensation Philosophy

 

The Compensation Committee reviews each named executive officer’s compensation annually, when the executive’s employment agreement is up for renewal and when the executive is promoted or his responsibilities change. Management conducts an initial review and makes recommendations to the Compensation Committee. A starting point for the review is the compensation previously provided to the executive. Generally, this is embodied in an employment agreement between the Company and the relevant executive that provides for a minimum annual salary and a target annual bonus stated as a percentage of annual salary. In connection with the review, each named executive officer’s performance, the importance of the executive officer’s position within the Company, the risk of losing (and the difficulty of replacing) the executive officer, the importance of retaining the executive officer in his role and his tenure in the role is considered. In addition, the 2007 compensation recommendations for the named executive officers were compared with the compensation for executive officers with similar roles and responsibilities at companies within the 2007 Peer Group, as discussed below.

 

Employment Agreements.  Each of Mr. Britt and the other named executive officers is employed pursuant to a multi-year employment agreement. The Company has long used such agreements to foster retention, to be competitive and to protect the business through the use of restrictive covenants, such as non-competition, non-solicitation and confidentiality provisions. The employment agreements with each of Messrs. Britt, Hobbs, Martin, Marcus and Rossetti in place in 2007 were negotiated individually with the relevant executive and were entered into prior to 2007. The employment agreement for each named executive officer is described in detail in this Information Statement under “— Employment Agreements” and “— Potential Payments Upon Termination or Change in Control.”

Competitive Comparisons.  As part of its 2007 review, the Compensation Committee considered the named executive officers’ compensation levels in light of the compensation levels of executives in positions of comparable scope and responsibility at other companies based upon (a) data published by 20 cable, communications and media companies (identified below) in proxy statements or other publicly available sources and (b) market survey data available through a number of nationally recognized compensation consulting firms based on information relating to several hundred companies roughly comparable in size to the Company (median annual revenues of $14 billion) in cable, communications, media and other industries. Where available, the Company supplemented its compensation review with compensation data for comparable positions within Time Warner, its parent company, as well as comparisons within its own executive group. These three comparative sources are referred to collectively as the “2007 Peer Group.”

 

As noted above, for 2007, the Company identified a group of 20 cable, communications and media companies with publicly available compensation information that are similar in size and focus to the Company and reflect the Company’s competitors for talent in the coming years. The companies in this group are: ALLTEL Corporation, AT&T Inc., Bell Canada Enterprises, BellSouth, Inc., Cablevision Systems Corporation, CBS Corporation, Charter Communications Inc., Clear Channel Communications, Inc., Comcast Corporation, DirecTV Group, Inc., Echostar Communications Corporation, Liberty Global Inc., News Corporation, QWEST Communications International, Inc., Rogers Communications Inc., Sprint Nextel Corporation, TELUS Corporation, The Walt Disney Company, Verizon Communications, Inc. and Viacom Inc.

 

Management’s recommended target compensation for each named executive officer during 2007 consisted of base salary and short-term and long-term incentives, which generally were intended to deliver total target compensation in an approximate range between the median and the 75th percentile of the 2007 Peer Group for such executive. The Company believes that targeting executive compensation at or above the median helps attract and retain highly qualified senior leaders, which the Company believes is necessary to its success in a competitive environment. The 2007 target compensation approved by the Compensation Committee for each named executive officer was generally consistent with this target range. Actual total cash compensation paid was dependent on the achievement of certain financial performance goals and an evaluation of the executive’s individual performance, as discussed in detail below, while the ultimate value of long-term equity awards will depend on future stock performance.

 

Compensation Elements.  The Company’s 2007 compensation program incorporated the following elements, which together were intended to “pay for performance” and encourage executives to focus on both the Company’s short-term and long-term objectives:

 

 

The Company’s short-term cash and long-term incentive programs support its “pay for performance” compensation philosophy. Generally, those executives with a high level of strategic impact on the Company’s success receive a greater proportion of variable compensation. For example, approximately 90% of Mr. Britt’s 2007 target compensation was variable, performance-based and/or equity-based with approximately 10% targeted as base salary. The other named executive officers’ target compensation was approximately 70-80% variable, performance-based and/or equity-based. The Company believes that placing heavier emphasis on “at risk” variable, performance-based and/or equity-based compensation focuses the named executive officers on achieving the Company’s strategic and performance objectives, since the executive officers will benefit from a resulting improvement in the Company’s stock price. In connection with the 2007 compensation review, Management determined that this mix of base salary and variable, performance-based and/or equity-based compensation was broadly consistent with the practices of companies within the 2007 Peer Group.

Another component of the Company’s compensation philosophy is that total compensation should be delivered in a form that focuses the executive on both the short-term and long-term strategic objectives of the Company. For 2007, the Company targeted slightly more compensation to the named executive officers through long-term (as compared with short-term) incentives. The Company believes that this mix focuses the named executive officers at least as much on achieving long-term strategic objectives as achieving shorter-term business objectives, as well as assisting in the retention of such executives. In connection with the 2007 compensation review, Management determined that this mix of short-term and long-term incentives was broadly consistent with the practices of companies within the 2007 Peer Group.

 

2007 Base Salary and Target Annual Bonus.  The basis for the determination of each named executive officer’s 2007 base salary and target annual bonus is described below:

 

Mr. Britt.  Under Mr. Britt’s employment agreement, he is entitled to a minimum annual salary of $1 million, which has been his base salary since 2001. As noted above, the Company believes that compensation for its more senior executives should be weighted toward variable, performance-based and/or equity-based compensation that focuses the executive on achieving the Company’s strategic and business objectives. As a result, Management did not recommend any increase in Mr. Britt’s base salary for 2007, and the Compensation Committee agreed with this recommendation. Mr. Britt’s target annual bonus had been reviewed in August 2006 in connection with the renewal of his employment agreement and was adjusted at that time (to 500% of his base salary ($5 million)) to reflect his increased responsibilities in light of the cable systems acquired in the Adelphia/Comcast Transactions, the Company’s anticipated emergence as a public company, as well as his performance, the importance of his position as President and Chief Executive Officer within the Company, and the importance of retaining him in that role during what could be expected to be a challenging period for the Company. Because this review occurred shortly before the 2007 compensation review, Management did not recommend any increase in Mr. Britt’s target annual bonus for 2007 and the Compensation Committee, after deliberation and discussion with Management, agreed with this recommendation.

 

Mr. Hobbs.  In connection with Mr. Hobbs’ promotion to Chief Operating Officer in August 2005, the Company agreed to undertake a further review of his compensation during 2006. As a result of this review, his base salary and target annual bonus were adjusted effective August 2006 to provide for a base salary of $850,000 per year and target annual bonus of two times base salary ($1.7 million). These adjustments were intended to reflect his increased responsibilities in light of the cable systems acquired in the Adelphia/Comcast Transactions and the Company’s anticipated emergence as a public company, as well as his performance, the importance of his position as Chief Operating Officer within the Company, and the importance of retaining him in that role during what could be expected to be a challenging period. Because this review occurred shortly before the 2007 compensation review, Management did not recommend any increase in Mr. Hobbs’ base salary or target annual bonus for 2007 and the Compensation Committee, after deliberation and discussion with Management, agreed with this recommendation.

 

Messrs. Marcus and Martin.  The Compensation Committee reviewed each of Mr. Marcus’ and Mr. Martin’s base salary and target annual bonus. Based upon the increase in the scope of each of these executives’ responsibilities in light of the cable systems acquired in the Adelphia/Comcast Transactions as well as each of their performances, the importance of each of their positions (as Senior Executive Vice President in the case of Mr. Marcus and as Chief Financial Officer in the case of Mr. Martin), and the importance of retaining each executive in that role during what could be expected to be a challenging period, Management (excluding Mr. Marcus in the case of his own compensation) recommended that each of their base salary be increased from $650,000 to $700,000 per year and that each of their target annual bonus be increased from 125% to 150% of base salary ($1.05 million). The Compensation Committee, after deliberation and discussion with Management, agreed with these recommendations.

 

Mr. Rossetti.  The Compensation Committee also reviewed Mr. Rossetti’s base salary and target annual bonus. Based upon an increased focus on new business opportunities (such as wireless and commercial services), for which Mr. Rossetti is responsible, his performance and the importance of retaining him in his role while the Company explored new business opportunities, Management

recommended that his base salary be increased from $456,894 to $480,000 per year and that his target annual bonus be increased from 75% to 100% of his base salary ($480,000). The Compensation Committee, after deliberation and discussion with Management, agreed with these recommendations.

 

In connection with the 2007 compensation review, Management determined that each of the named executive officers’ new base salary and target annual bonus were broadly consistent with base salaries and target annual bonuses of similarly situated executives within the 2007 Peer Group.

 

2007 Short-Term Incentives

 

2007 Annual Bonus Plan.  The Time Warner Cable Inc. 2007 Annual Bonus Plan (the “Bonus Plan”) for the named executive officers was approved by the Company’s stockholders in May 2007. Pursuant to the Bonus Plan, a subcommittee of the Compensation Committee whose members were “outside directors” as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Subcommittee”), established objective performance criteria that determined the maximum bonus pool from which the bonuses could be paid and a maximum allocation for each named executive officer. The pool was approximately $37 million, equal to 5% of the amount by which the Company’s Operating Income (Loss) before depreciation of tangible assets and amortization of intangible assets (“OIBDA”) for the year ended December 31, 2007 exceeded $5 billion. This pool was allocated to allow maximum awards of $16,695,000 (45%) for Mr. Britt, $5,565,000 (15%) for Mr. Hobbs, $3,710,000 (10%) for Mr. Marcus, $3,710,000 (10%) for Mr. Martin, and $1,855,000 (5%) for Mr. Rossetti. The remaining portion of the pool was allocated among the remaining executive officers.

 

In awarding 2007 bonuses to each named executive officer, the Subcommittee exercised discretion to reduce the maximum amount allocated to each named executive officer based on the criteria established under the 2007 Time Warner Cable Incentive Plan (“TWCIP”) (discussed below). The 2007 bonus payments to the named executive officers, as well as the other executive officers, which were determined in the manner discussed below, were below the permitted maximums under the Bonus Plan.

 

2007 Time Warner Cable Incentive Plan.  The TWCIP is a short-term annual cash incentive plan designed to motivate the Company’s approximately 3,900 TWCIP-eligible employees to help meet and exceed annual growth goals by giving them an opportunity to share in the Company’s financial success. The TWCIP also rewards executives for achieving specified individual and non-financial short-term goals. Each TWCIP participant is eligible to receive a target annual bonus calculated as a percentage of base salary. The percentage is generally determined based on the participant’s level of responsibility within the Company. With increasing levels of responsibility, a higher percentage of the executive’s total cash compensation comes from the performance-based annual cash bonus.

 

In early 2007, Management recommended that the Compensation Committee establish Company-wide financial and individual non-financial goals that would be used to determine payments under the 2007 TWCIP and to guide its determinations under the Bonus Plan. Management proposed that the TWCIP performance goals for the named executive officers be weighted 70% on Company-wide financial goals and 30% on individual non-financial goals. These weightings are the same as those used in the Company’s short-term annual cash incentive plans over the past several years. In light of discussions with Management and ECA, the Compensation Committee approved the TWCIP structure recommended by Management. In connection with its review, Management determined that the 2007 TWCIP structure was broadly consistent with the annual bonus programs of the 2007 Peer Group.

 

Financial Goals.  As adopted by the Compensation Committee, the financial performance goals were further weighted 70% based on 2007 OIBDA and 30% based on a 2007 cash flow measure (defined as OIBDA less capital expenditures plus or minus changes in working capital (“Cable Operations Cash Flow”)). Management and the Compensation Committee believe that OIBDA and Cable Operations Cash Flow are important indicators of the operational strength and performance of the business, including, in the case of OIBDA, the ability to provide cash flows to service debt and fund capital expenditures.

The Compensation Committee established a performance payout range of between 50% and 150% of the named executive officer’s target annual bonus determined based upon the Company’s 2007 OIBDA and 2007 Cable Operations Cash Flow performance: OIBDA of $5.285 billion and Cable Operations Cash Flow of $1.685 billion would yield a 50% payout; OIBDA of $5.745 billion and Cable Operations Cash Flow of $2.145 billion would yield a 100% payout; and OIBDA of $6.050 billion and Cable Operations Cash Flow of $2.400 billion would yield a 150% payout. If the 50% threshold was not met with respect to a TWCIP component, no payment would be made for that component. In connection with the 2007 TWCIP, Management recommended a 150% payout cap to motivate participants to exceed target (i.e., 100%) performance levels. A 50% threshold was recommended so poorer performance would not be rewarded.

 

While these goals and percentages were used by the Compensation Committee in determining the bonuses to be paid to the named executive officers (as discussed below) under the TWCIP, the Compensation Committee in the exercise of its discretion could have authorized the payment of bonuses greater or smaller than those that resulted from these calculations (but not greater than the maximum payments permitted under the Bonus Plan).

 

Individual Non-Financial Goals.  Individual non-financial goals were established by the Compensation Committee for Mr. Britt and by Mr. Britt for the other named executive officers. The individual non-financial goals for each of the other named executive officers were intended to support the Company’s strategic objectives as reflected in Mr. Britt’s goals, but were tailored to the executive’s particular role and areas of responsibility. Like the financial performance assessment, individual non-financial performance under the 2007 TWCIP was assessed against target using a range of between 50% and 150%. There was no weighting assigned to the individual non-financial goals relative to one another.

 

In connection with his recommendation to the Compensation Committee in respect of his individual non-financial performance, Mr. Britt completed a self-assessment of his performance and asked the Company’s other executive officers to assess his performance. Management shared these assessments with the Compensation Committee. Based in part on these assessments of his achievements relative to his goals, the Compensation Committee reached the following favorable assessment of Mr. Britt’s and the Company’s significant accomplishments in 2007, including:

 

 

In connection with the Compensation Committee’s annual bonus award determination, Mr. Britt reviewed with the Compensation Committee each named executive officer’s performance with respect to his individual non-financial goals and recommended a performance assessment score for each based on his views of how well or poorly each had performed against each of those goals.

 

2007 Awards.  In early 2008, the Compensation Committee reviewed the Company’s performance against the financial targets discussed above and, based on Management’s recommendations, assessed each named executive officer’s performance against his individual non-financial performance goals, taking into account each of their roles and responsibilities in supporting the Company’s strategic objectives, including the successful integration of the systems acquired from Adelphia and Comcast, the Company’s emergence as a public company, the introduction of new products and services and the level of achievement against their other individual non-financial goals, discussed above. Based on the Company’s 2007 OIBDA and Cable Operations Cash Flow performance against 2007 financial goals and the evaluation of each executive officer’s individual non-financial performance, the Subcommittee exercised its discretion under the Bonus Plan to award each named executive officer a 2007 bonus payout ranging from 115% to 119% of his target bonus (less than the maximums permitted under that Plan). Although the Compensation Committee, in its discretion, can establish a performance score higher or lower than that which results from the Company’s performance against its financial goals, the Compensation Committee did not do so in connection with the 2007 TWCIP.

 

Long-Term Incentives.  The Company’s 2007 long-term incentive compensation (“LTI”) program is designed to retain and motivate employees to meet and exceed the Company’s long-term growth goals and acts as a balance to the short-term incentive plan. Through the LTI program, the Company seeks to achieve the following goals:

 

 

Prior to 2007, the Company’s senior executives received equity grants from Time Warner based on Time Warner Common Stock as part of their long-term incentives. In anticipation of the Company’s stock being publicly traded, Management recommended that the Compensation Committee adopt a stock incentive program that would deliver long-term incentive compensation in the form of equity based on TWC Class A common stock. Based on discussions with Management and ECA, the Compensation Committee adopted an equity-based long-term incentive program, and LTI target awards were established for each named executive officer based on the importance of his position within the organization, the risk of losing (and the difficulty of replacing) the executive officer, the importance of retaining the executive in his role and his tenure in the role. Each named executive officer’s target LTI award value was established as a percentage of base salary and was delivered through a mix of stock options and restricted stock units. In connection with the establishment of the 2007 LTI program, Management determined that the program, each named executive officer’s target LTI award and the mix of stock options and restricted stock units delivered to each named executive officer was broadly consistent with the long-term incentive practices of companies within the 2007 Peer Group.

 

2007 Equity Awards.  The Company believes that awarding stock options and restricted stock units provides retention value and an opportunity to align the interests of executives with the interests of stockholders. TWC stock options and restricted stock units granted in 2007 to the named executive officers were based on the executives’ long-term incentive targets, which were reviewed and approved by the Compensation Committee.

 

For 2007, the Compensation Committee approved equity grants reflecting a mix of stock options and time-based restricted stock units of approximately one-third and two-thirds, respectively. Stock options are designed to reward executives for increases in the Company’s stock price as well as to align executives’ interests with stockholders. Restricted stock units are designed to enhance executive retention even when the

stock value is fluctuating and align executives’ interests with stockholders by rewarding stock price growth. At the time of the 2007 grants, TWC Class A common stock had only been trading on the NYSE for about a month. In light of anticipated volatility of the market price of the TWC Class A common stock (which was exacerbated by relatively light trading volumes), Management and the Compensation Committee determined that providing a significant percentage of LTI through time-based restricted stock units was important to executive retention, payment for performance and alignment with stockholders.

 

In February 2007, the Compensation Committee authorized 2007 equity awards to the named executive officers based on the recommendations of Management. The awards were made on April 2, 2007. Mr. Britt and the other named executive officers, along with all other employees eligible for equity-based compensation awards, were awarded both stock options and restricted stock units. The stock options were granted with an exercise price equal to the closing price of TWC Class A common stock on the grant date. The stock options vest in four equal installments on each of the first four anniversaries of the date of grant, and the restricted stock units awarded at the same time vest in two equal installments on the third and fourth anniversaries of the date of grant. The Company believes that the multi-year vesting schedule encourages executive retention and emphasizes a longer-term perspective.

 

2005-2007 Cash Long-Term Incentive Plan (“2005 Cash LTIP”).  In 2005, the Company granted performance-based long-term cash awards under the 2005 Cash LTIP. The Company established the 2005 Cash LTIP to complement awards of Time Warner stock options and restricted stock units. The cash component was intended to increase the tie between long-term compensation and the Company’s (as opposed to Time Warner’s) performance. The 2005 Cash LTIP provided a target cash award based on a three-year performance cycle. The 2005 Cash LTIP target awards were established for each eligible executive based on a competitive award level as compared against executives in comparable positions at that time, the importance of the executive’s position within the organization, the importance of retaining the executive in his role and the executive’s tenure in the role.

 

In February 2005, the Board established and approved the performance payout range for the 2005 Cash LTIP. In December 2006, pursuant to the terms of the 2005 Cash LTIP, the Compensation Committee approved certain adjustments to the performance payout ranges to account for the Adelphia/Comcast Transactions, which closed on July 31, 2006, and the distribution of assets by the Texas Kansas City Cable Partners. The resulting payout range of 50% to 200% of target was based on the Company’s cumulative OIBDA over the 2005-2007 performance period (“three-year OIBDA”). If the Company failed to achieve three-year OIBDA of $13.967 billion (the 50% target payout threshold), no payments would have been made under the 2005 Cash LTIP. If the Company achieved three-year OIBDA of $14.500 billion, the 2005 Cash LTIP would pay out at target, and if the Company achieved or exceeded three-year OIBDA of $15.193 billion, the plan would pay out at 200% of target.

 

In early 2008, the Compensation Committee reviewed the Company’s performance against the three-year OIBDA target to determine awards under the 2005 Cash LTIP. Consistent with the terms of the 2005 Cash LTIP, certain adjustments that were made in analyzing the Company’s performance under its 2005 and 2006 annual bonus programs were also made in analyzing the Company’s performance under the 2005 Cash LTIP.

 

The Company’s cumulative 2005-2007 OIBDA performance against the financial goal yielded a performance level of 141.7% of target payout. As a result, Messrs. Britt, Hobbs and Rossetti were each awarded 141.7% of their target award, which is included in the Summary Compensation Table below. Messrs. Martin and Marcus were not Company employees at the time of the 2005 Cash LTIP grant and did not receive an award under the plan. Because the 2005 Cash LTIP was delivered as target compensation in 2005 and provided a long-term incentive, the payout under the plan was not taken into account in determining other aspects of 2007 compensation for the named executive officers.

 

Total Compensation Review

 

The Company believes that the total target compensation for 2007, including base salary and short-term and long-term incentives, appropriately reflects individual and Company performance, stockholder alignment, the importance of each individual’s position within the Company, the importance of retaining the executive in

his role, his tenure in the role and competitive market levels. In consideration of these factors and pursuant to the compensation philosophy and practices discussed above, the Company targeted total direct compensation to executives to be between the 50th and 75th percentiles of the 2007 Peer Group.

 

Looking Forward

 

The Company’s Management and the Compensation Committee have evaluated the structure of the short-term and long-term incentive programs. The Company believes that the philosophy and compensation elements in place for 2007 are still generally appropriate for 2008. In connection with the Separation Transactions, the Compensation Committee has approved amendments to the Company’s 2006 equity plan, a methodology for adjusting and amending equity compensation awards, and the granting of new compensation awards to preserve award value and maintain compensation levels and structures.

 

Perquisites

 

As described below, the Company provides personal benefits, such as reimbursement for financial services, from time to time to the named executive officers under their employment agreements when such personal benefits are determined to be a useful part of a competitive compensation package. Mr. Britt was also provided with a car allowance in 2007. Additionally, the Company owns aircraft jointly with Time Warner and other Time Warner companies. Under the Company’s policy, including its review of appropriate security measures, Mr. Britt is authorized to use the corporate aircraft for domestic business travel and for personal use when circumstances warrant or when there is available space on a flight scheduled for a business purpose or in the event of a medical or family emergency. Other executives require various approvals for use of the corporate aircraft.

 

Deferred Compensation

 

Before 2003, the Company maintained a nonqualified deferred compensation plan that generally permitted employees whose annual cash compensation exceeded a designated threshold to defer receipt of all or a portion of their annual bonus until a specified future date. Since March 2003, deferrals may no longer be made but amounts previously credited under the deferred compensation plan continue to track crediting rate elections made by the employee from an array of third-party investment vehicles offered under the TWC Savings Plan. See “— Nonqualified Deferred Compensation.”

 

Tax Deductibility of Compensation

 

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), generally disallows a tax deduction to public corporations for compensation in excess of $1,000,000 in any one year with respect to each of its Chief Executive Officer and three most highly paid executive officers (other than the Chief Financial Officer) with the exception of compensation that qualifies as performance-based compensation. The Compensation Committee considers Section 162(m) implications in making compensation recommendations and in designing compensation programs for the executives. In this regard, the 2007 Annual Bonus Plan and the 2006 Stock Incentive Plan were submitted and approved by stockholders in May 2007 so that compensation paid under these plans may qualify as performance-based compensation under Section 162(m). However, the Compensation Committee reserves the right to pay compensation that is not deductible when it determines that to be in the Company’s best interest and the best interests of the stockholders.

Executive Compensation Summary Table

 

The following table presents information concerning total compensation paid to the Company’s Chief Executive Officer, Chief Financial Officer and each of its three other most highly compensated executive officers who served in such capacities on December 31, 2007 (collectively, the “named executive officers”).

 

SUMMARY COMPENSATION TABLE

 

 

 

 

 

 

(a) Pursuant to the TWC Savings Plan (the “Savings Plan”), a defined contribution plan available generally to TWC employees, for the 2007 plan year, each of the named executive officers deferred a portion of his annual compensation and TWC contributed $10,334 as a matching contribution on the amount deferred by each named executive officer.

 

(b) The Company maintains a program of life and disability insurance generally available to all salaried employees on the same basis. This group term life insurance coverage was reduced to $50,000 for each of Messrs. Britt, Hobbs, Marcus and Martin, who were each given a cash payment to cover the cost of specified coverage under a voluntary group program available to employees generally (“GUL insurance”). For 2007, this cash payment was $25,410 for Mr. Britt, $2,034 for Mr. Hobbs, $2,652 for Mr. Marcus and $936 for Mr. Martin. Mr. Rossetti elected not to receive a cash payment for life insurance over $50,000 and instead receives group term life insurance available generally as well as supplemental group term life insurance coverage provided by the Company and is taxed on the imputed income. For a description of life insurance coverage for certain executive officers provided pursuant to the terms of their employment agreements, see “— Compensation Discussion and Analysis for 2007 Compensation — Application of Compensation Philosophy — Employment Agreements.”

 

(c) The amounts of personal benefits shown in this column that aggregate $10,000 or more for 2007 consist of the aggregate incremental cost to the Company of: for Mr. Britt, financial services of $27,079 and transportation-related benefits covering an automobile allowance of $24,000 and $2,073 related to the incremental cost to the Company of a Company-provided car and specially trained driver provided for security reasons, based on the portion of usage that was personal; for Mr. Hobbs, financial services of $31,372 and transportation-related benefits; and for Mr. Rossetti, financial services and the supplemental life insurance discussed in note 7(b) above. Mr. Hobbs’ transportation-related benefits consist of the incremental cost to TWC of personal use of corporate aircraft (based on fuel, landing, repositioning and catering costs and crew travel expenses). Mr. Hobbs and members of his family flew, on several occasions, on corporate aircraft for personal reasons when there was available space on a flight that had been requested by others. There is no incremental cost to TWC for Mr. Hobbs’ use of the aircraft under these circumstances, except for catering and TWC’s portion of employment taxes attributable to the income imputed to Mr. Hobbs for tax purposes.

 

Grants of Plan-Based Awards

 

The following table presents information with respect to each award of plan-based compensation to each named executive officer in 2007, including (a) annual cash awards under the Bonus Plan and TWCIP and (b) awards of stock options to purchase TWC Class A common stock and TWC restricted stock units granted under the 2006 equity plan.

 

GRANTS OF PLAN-BASED AWARDS
DURING 2007

 

 

 

 

The TWC stock options granted in 2007 become exercisable, or vest, in installments of 25% over a four-year period, assuming continued employment, and expire ten years from the grant date. The stock options are

subject to accelerated vesting upon the occurrence of certain events such as retirement, death or disability. The exercise price of the stock options cannot be less than the fair market value of the TWC Class A common stock on the date of grant. In addition, holders of the stock options do not receive dividends or dividend equivalents or have any voting rights with respect to the shares of TWC Class A common stock underlying the stock options.

 

The awards of TWC restricted stock units granted in 2007 vest in equal installments on each of the third and fourth anniversaries of the date of grant, assuming continued employment and subject to accelerated vesting upon the occurrence of certain events such as retirement, death or disability. Holders of the restricted stock units are entitled to receive dividend equivalents on unvested restricted stock units, if and when regular cash dividends are paid on outstanding shares of TWC Class A common stock and at the same rate. The awards of restricted stock units confer no voting rights on holders and are subject to restrictions on transfer and forfeiture prior to vesting. See “— Compensation Discussion and Analysis for 2007 Compensation — 2007 Executive Compensation — Compensation Elements — 2007 Short-Term Incentives.”

 

Employment Agreements

 

The following is a description of the material terms of the compensation provided to the Company’s named executive officers during the term of their employment pursuant to employment agreements between the Company or TWE, and each executive. See “— Potential Payments Upon Termination or Change in Control” for a description of the payments and benefits that would be provided to the Company’s named executive officers in connection with a termination of their employment or a change in control of the Company.

 

Glenn A. Britt.  The Company entered into an employment agreement with Mr. Britt, effective as of August 1, 2006, which provides that Mr. Britt will serve as the Company’s Chief Executive Officer through December 31, 2009, subject to earlier termination as provided in the agreement. Mr. Britt’s agreement is automatically extended for consecutive one-month periods, unless terminated by either party upon 60 days’ notice, and terminates automatically on the date Mr. Britt becomes eligible for normal retirement at age 65. The agreement provides Mr. Britt with a minimum annual base salary of $1,000,000 and an annual discretionary target bonus of $5,000,000, which will vary subject to Mr. Britt’s and the Company’s performance from a minimum of $0 up to a maximum of $6,675,000. In addition, the agreement provides that, beginning in 2007, for each year of the agreement, the Company will provide Mr. Britt with long-term incentive compensation with a target value of approximately $6,000,000 (based on a valuation method established by the Company), which may be in the form of stock options, restricted stock units, other equity-based awards, cash or other components, or any combination of such forms, as may be determined by the Board or, if delegated by the Board, the Compensation Committee, in its sole discretion. Mr. Britt participates in the benefit plans and programs available to the Company’s other senior executive officers, including $50,000 of group life insurance. Mr. Britt also receives an annual payment equal to two times the premium cost of $4 million of life insurance as determined under the Company’s GUL insurance program.

 

John K. Martin, Jr.  The Company entered into an employment agreement with Mr. Martin, effective as of August 8, 2005, which provided that Mr. Martin would serve as the Company’s Executive Vice President and Chief Financial Officer through August 8, 2008, subject to earlier termination as provided in the agreement. Mr. Martin resigned from this position effective at the end of December 31, 2007. The agreement provided Mr. Martin with a minimum annual base salary of $650,000 (which was increased to $700,000 by the Compensation Committee as of January 1, 2007), an annual discretionary target bonus of 125% of his base salary (which was increased by the Compensation Committee to 150% as of January 1, 2007), subject to Mr. Martin’s and the Company’s performance, a one-time grant of options to purchase 30,000 shares of Time Warner Common Stock, a discretionary long-term incentive compensation award with a target value of $1,300,000 subject to Mr. Martin’s and the Company’s performance, and participation in the Company’s benefit plans and programs, including life insurance. Mr. Martin also received an annual payment equal to two times the premium cost of $1 million of life insurance as determined under the Company’s GUL insurance program.

 

Landel C. Hobbs.  The Company entered into an employment agreement with Mr. Hobbs, effective as of August 1, 2005, which provides that Mr. Hobbs will serve as the Company’s Chief Operating Officer through July 31, 2008, subject to earlier termination as provided in the agreement. Mr. Hobbs’ agreement is

automatically extended for consecutive one month periods, unless terminated by Mr. Hobbs upon 60 days’ written notice or by the Company upon written notice specifying the effective date of such termination. The agreement provides Mr. Hobbs with a minimum annual base salary of $700,000 (which was increased to $850,000 by the Compensation Committee as of August 1, 2006), an annual discretionary target bonus of 175% of his base salary (which was increased by the Compensation Committee to 200% as of August 1, 2006), subject to Mr. Hobbs’ and the Company’s performance, eligibility for annual grants of stock options, awards under the Company’s long-term incentive plan and participation in the Company’s benefit plans and programs, including life insurance. Mr. Hobbs also receives an annual payment equal to two times the premium cost of $1.5 million of life insurance as determined under the Company’s GUL insurance program. The Company entered into a new employment agreement with Mr. Hobbs, effective February 1, 2008, which extends the term of Mr. Hobbs’ employment as the Company’s Chief Operating Officer through January 31, 2011 on substantially the same terms as the previous agreement, except that it provides Mr. Hobbs with a minimum annual base salary of $900,000, an annual discretionary target bonus of 233% of his base salary, subject to Mr. Hobbs’ and the Company’s performance, and a discretionary annual equity and other long-term incentive compensation award for 2008 with a minimum target value of $3,000,000, subject to Mr. Hobbs’ and the Company’s performance.

 

Robert D. Marcus.  The Company entered into an employment agreement with Mr. Marcus, effective as of August 15, 2005, which provides that Mr. Marcus will serve as the Company’s Senior Executive Vice President through August 15, 2008, subject to earlier termination as provided in the agreement. Mr. Marcus was appointed Senior Executive Vice President and Chief Financial Officer effective January 1, 2008. Mr. Marcus’ agreement is automatically extended for consecutive one-month periods, unless terminated by Mr. Marcus upon 60 days’ written notice or by the Company upon written notice specifying the effective date of such termination. The agreement provides Mr. Marcus with a minimum annual base salary of $650,000 (which was increased to $700,000 by the Compensation Committee as of January 1, 2007), an annual discretionary target bonus of 125% of his base salary (which was increased by the Compensation Committee to 150% as of January 1, 2007), subject to Mr. Marcus’ and the Company’s performance, a one-time grant of options to purchase 25,000 shares of Time Warner Common Stock, a discretionary annual equity and other long-term incentive compensation award with a minimum target value of $1,300,000, subject to Mr. Marcus’ and the Company’s performance, and participation in the Company’s benefit plans and programs, including $50,000 of group life insurance. Mr. Marcus also receives an annual payment equal to two times the premium cost of $2 million of life insurance as determined under the Company’s GUL insurance program. Effective on August 5, 2008, the Company entered into a letter agreement with Mr. Marcus that clarifies that under his current employment agreement with the Company, (i) the Separation would not have an impact on the vesting or term of Mr. Marcus’ TWC equity awards and (ii) upon a termination without cause, unless he is then eligible for retirement, all of his vested TWC and Time Warner stock options (not only those that vest as a result of such termination) would remain exercisable for three years after he ceases to be considered an employee of the Company (but not beyond the original terms of the options).

 

Carl U.J. Rossetti.  The Company entered into an employment agreement with Mr. Rossetti, effective as of June 1, 2000, which provides that Mr. Rossetti will serve as an Executive Vice President of the Company for a term of three years from that date, subject to earlier termination as provided in the agreement. As of January 1 of each year, the Company may renew the term of Mr. Rossetti’s employment agreement for a term of three years from that date. Currently, Mr. Rossetti’s employment agreement has been extended through December 31, 2010. The agreement provides for a minimum annual base salary (which was increased to $480,000 by the Compensation Committee as of January 1, 2007), and an annual discretionary target bonus stated as a percentage of his base salary (which was increased by the Compensation Committee to 100% as of January 1, 2007), subject to Mr. Rossetti’s and the Company’s performance, and participation in the Company’s benefit plans and programs, including life insurance.

Outstanding Equity Awards

 

The following table provides information about each of the outstanding awards of options to purchase TWC Class A common stock and Time Warner Common Stock and the aggregate TWC and Time Warner restricted stock and restricted stock units held by each named executive officer at December 31, 2007. At December 31, 2007, none of the named executive officers held performance-based equity awards.

 

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007