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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
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                                   FORM 10-K
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
               THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993.
                         COMMISSION FILE NUMBER 1-8637
 
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                                TIME WARNER INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                DELAWARE                               13-1388520
    (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
  75 ROCKEFELLER PLAZA, NEW YORK, N.Y.                   10019
    (ADDRESS OF PRINCIPAL EXECUTIVE                    (ZIP CODE)
                OFFICES)
 
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000
 
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 


                                                          NAME OF EACH EXCHANGE
                TITLE OF EACH CLASS                        ON WHICH REGISTERED
                -------------------                       ---------------------
                                                   
Common Stock, $1.00 par value                         New York Stock Exchange
                                                      Pacific Stock Exchange
Rights to Purchase Series A Participating Cumulative  New York Stock Exchange
 Preferred Stock                                      Pacific Stock Exchange
7.45% Notes due 1998                                  New York Stock Exchange
7.95% Notes due 2000                                  New York Stock Exchange
8 3/4% Debentures due 2017                            New York Stock Exchange
8 3/4% Convertible Subordinated Debentures due 2015   New York Stock Exchange
9 1/8% Debentures due 2013                            New York Stock Exchange
9.15% Debentures due 2023                             New York Stock Exchange
Redeemable Reset Notes due 2002                       New York Stock Exchange
Liquid Yield Option(TM) Notes due 2012                American Stock Exchange
Liquid Yield Option(TM) Notes due 2013                New York Stock Exchange

 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                                      NONE
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X  No
                                      ---   --- 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  As of March 28, 1994, there were 378,694,562 shares of registrant's Common
Stock outstanding and the aggregate market value of such shares held by non-
affiliates of the registrant (based upon the closing price of such shares on
the New York Stock Exchange Composite Tape on March 28, 1994) was approximately
$15.2 billion.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 


         DESCRIPTION OF DOCUMENT                  PART OF THE FORM 10-K
         -----------------------                  ---------------------
                                         
Portions of the Definitive Proxy Statement  Part III (Item 10 through Item 13)
 to be used in connection with the
 registrant's 1994 Annual Meeting of
 Stockholders.

 
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                                [TWI STRUCTURE]

 
                                     PART I
 
ITEM 1. BUSINESS
 
  Time Warner Inc. (the "Company") was incorporated in the State of Delaware in
August 1983 and is the successor to a New York corporation originally organized
in 1922. The Company changed its name from Time Incorporated following its
acquisition of 59.3% of the common stock of Warner Communications Inc. ("WCI")
in July 1989. WCI became a wholly owned subsidiary of the Company in January
1990 upon the completion of the merger of WCI and a subsidiary of the Company
(the "Merger"). As used in this report, the terms "Registrant," the "Company"
and "Time Warner" refer to Time Warner Inc. and its subsidiaries and divisions,
and includes Time Warner Entertainment Company, L.P. ("TWE"), which conducts
substantially all of the Entertainment businesses of the Company, unless the
context otherwise requires.
 
  The Company is the largest media and entertainment company in the world. Its
businesses are carried on in three principal groups: Publishing, Music and
Entertainment. The Publishing group consists principally of the publication and
distribution of magazines and books; the Music group consists principally of
the production and distribution of recorded music and the ownership and
administration of music copyrights; and the Entertainment group consists
principally of the production and distribution of motion pictures and
television programming, the distribution of videocassettes, the ownership and
operation of retail stores and theme parks, the production and distribution of
pay television and cable programming, and the operation of cable television
systems. These businesses are conducted throughout the world through numerous
wholly owned, and in certain cases less than wholly owned, subsidiaries and
affiliates.
 
  TWE was formed as a Delaware limited partnership in February 1992 pursuant to
an Agreement of Limited Partnership, dated as of October 29, 1991, as amended
(the "TWE Partnership Agreement"), and has, since its capitalization on June
30, 1992 (the "TWE Capitalization"), owned and operated substantially all of
the Entertainment group businesses, and certain other businesses, previously
owned and operated by the Company. Upon the TWE Capitalization, certain wholly
owned subsidiaries of the Company (the "TW Partners" or the "General
Partners"), contributed such businesses, or assigned the net cash flow derived
therefrom (or an amount equal to the net cash flow derived therefrom), to TWE
and became general partners of TWE. Also upon the TWE Capitalization, wholly
owned subsidiaries of ITOCHU Corporation (formerly C. Itoh & Co., Ltd.), a
corporation organized under the laws of Japan ("ITOCHU"), and Toshiba
Corporation, a corporation organized under the laws of Japan ("Toshiba"),
collectively contributed $1 billion to TWE and became limited partners of TWE.
On September 15, 1993, TWE consummated the transactions contemplated by the
Admission Agreement, dated as of May 16, 1993, as amended (the "Admission
Agreement"), between TWE and U S WEST, Inc., a Colorado corporation ("USW").
Pursuant to the Admission Agreement, a wholly owned subsidiary of USW made a
capital contribution of $2.553 billion and became a limited partner of TWE (the
"USW Transaction"). As a result of the USW Transaction, the TW Partners
collectively own 63.27% pro rata priority capital and residual equity interests
in TWE and wholly owned subsidiaries of ITOCHU, Toshiba and USW (the "Class A
Partners" or the "Limited Partners") own pro rata priority capital and residual
equity interests in TWE of 5.61%, 5.61% and 25.51%, respectively. Each of
ITOCHU and Toshiba has the right to maintain its original 6.25% pro rata
priority capital and residual equity interests by acquiring additional
partnership interests. In addition, the TW Partners own priority capital
interests senior and junior to the pro rata priority capital interests.
 
  The Admission Agreement provides that TWE will use its best efforts to
upgrade a substantial portion of its cable systems to "Full Service
Network(TM)" capacity over the next five years. As systems are designated for
such upgrade and after any required approvals are obtained, USW and TWE will
share joint control of those systems through a 50-50 management committee. The
"Full Service Network" business is expected to include substantially all of
TWE's cable systems, subject to obtaining necessary regulatory consents and
approvals. See "Entertainment--Description of Certain Provisions of the TWE
Partnership Agreement."
 
                                      I-1

 
  For financial information about the Company's industry segments and
operations in different geographical areas with respect to each of the years in
the three-year period ended December 31, 1993, see Note 10, "Segment
Information," to the Company's consolidated financial statements at pages F-18
through F-20 herein.
 
  The Company's Entertainment Group, consisting of the Company's interests in
certain entertainment companies, principally TWE, was deconsolidated effective
January 1, 1993 as a result of the USW Transaction. The TWE Partnership
Agreement and the TWE credit agreement impose restrictions on the ability of
TWE to make distributions to the Company and the TW Partners. See Note 1,
"Summary of Significant Accounting Policies," and Note 2, "Entertainment
Group," to the Company's consolidated financial statements at pages F-6 through
F-11 herein.
 
                                   PUBLISHING
 
  The Company's wholly owned publishing division, Time Inc., publishes
magazines and books and develops products for the multimedia and television
markets. It conducts these activities through wholly owned subsidiaries, joint
ventures, equity investments and partnerships.
 
MAGAZINES
 
 General
 
  Time Inc. publishes TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, LIFE,
SPORTS ILLUSTRATED FOR KIDS and ENTERTAINMENT WEEKLY. In March 1994, Time Inc.
announced the launch of IN STYLE, a monthly celebrity life style publication,
which will have an initial rate base of 500,000.
 
  Time Publishing Ventures, Inc. ("TPV"), a subsidiary of Time Inc. Ventures
("TIV") and an indirect subsidiary of Time Inc., is responsible for
international, regional and special interest publishing and development
activities, including Southern Progress Corporation ("Southern Progress"),
Sunset Publishing Corporation ("Sunset Publishing"), PARENTING, BABY TALK,
HEALTH, HIPPOCRATES, MARTHA STEWART LIVING and WHO WEEKLY magazines and various
joint ventures. In September 1993, a joint venture between a subsidiary of TPV
and affiliates of Quincy Jones Entertainment Company began publication of VIBE,
a magazine that covers rap, rhythm and blues, reggae and dance music, as well
as politics and fashion.
 
  Southern Progress publishes SOUTHERN LIVING, PROGRESSIVE FARMER, SOUTHERN
ACCENTS, COOKING LIGHT and TRAVEL GUIDE magazines.
 
  Time Inc., either directly or through subsidiaries, has equity interests in
ASIAWEEK, ELLE JAPON, PRESIDENT, American Family Publishers, Time Distribution
Services and Publishers Express. In 1993, Time Inc. sold its interest in
WORKING WOMAN and WORKING MOTHER, and in March 1994, it sold its interest in
the magazine, YAZHOU ZHOUKAN, but retained the right to reacquire 25% of the
magazine in the future.
 
  TIV has management responsibility for most of the American Express Publishing
Corporation's operations, including TRAVEL & LEISURE and FOOD & WINE magazines.
TIV also operates an in-store advertising and demonstration business, Time Inc.
In-Store Marketing.
 
  Each magazine published by the Company has an editorial staff under the
general supervision of a managing editor and a business staff under the
management of a president or publisher. Magazine manufacturing and distribution
activities are generally managed by centralized staffs at Time Inc. Fulfillment
activities for Time Inc.'s magazines are generally administered from a
centralized facility in Tampa, Florida.
 
                                      I-2

 
PARENTING, SUNSET, BABY TALK, HEALTH, HIPPOCRATES, MARTHA STEWART LIVING and
Time Inc.'s overseas operations employ independent fulfillment services and
undertake their own manufacturing and distribution.
 
  Magazine publishing follows a seasonal pattern with revenues being generally
higher in the second and fourth quarters and lower in the first and third
quarters.
 
  The individual magazines of the Company are summarized below:
 
  TIME, a weekly magazine, summarizes the news and brings original
interpretation and insight to the week's events. The domestic advertising rate
base of TIME as of January 1994 was 4,000,000, which is unchanged from January
1993.
 
  TIME Asia, TIME Atlantic, TIME Canada, TIME Latin America and TIME South
Pacific are weekly English-language editions of TIME which circulate outside
the United States. These editions had an aggregate worldwide advertising rate
base of 1,480,000 as of January 1994, compared to 1,510,000 in January 1993.
 
  SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and
is designed to appeal to, spectators and participants in virtually all forms of
recreation and competitive sports. In 1993, Time Canada Ltd. tested a Canadian
version of the magazine which provides expanded coverage of Canada's teams and
athletes. The advertising rate base as of January 1994 was 3,150,000, the same
as in January 1993. SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented
magazine geared to children ages eight through 14. Its advertising rate base as
of January 1994 was 900,000, compared to 800,000 in January 1993, including
250,000 copies distributed free to over 1,400 schools.
 
  PEOPLE, a weekly magazine, focuses on celebrities and other notable
personalities. The advertising rate base as of January 1994 was 3,150,000, the
same as in January 1993.
 
  ENTERTAINMENT WEEKLY is a weekly magazine which includes reviews and reports
on television, movies, video, music and books. The advertising rate base as of
January 1994 was 1,075,000, compared to 800,000 in January 1993 and 1,000,000
in February 1993.
 
  FORTUNE, a biweekly magazine, reports on worldwide economic and business
developments. FORTUNE International, an overseas English-language edition,
contains most of the articles in the domestic edition. The combined worldwide
advertising rate base was 870,000 as of January 1994, which is unchanged from
January 1993.
 
  MONEY is a monthly magazine which reports on personal finance. The
advertising rate base as of January 1994 was 1,900,000, the same as in January
1993.
 
  LIFE is a monthly magazine which features photographic essays. The
advertising rate base as of January 1994 was 1,500,000 as compared to 1,700,000
in January 1993. The rate base was reduced in May 1993 as the magazine sought
to redefine its publishing niche for the 1990's.
 
  SOUTHERN LIVING is a monthly regional home, garden, food and travel magazine
focused on the South with an advertising rate base of 2,300,000 as of January
1994, which is the same as in January 1993.
 
  PROGRESSIVE FARMER is a monthly regional farming magazine with an advertising
rate base of 415,000 as of January 1994, compared to 425,000 in January 1993.
 
  SOUTHERN ACCENTS, published six times a year, features architecture, fine
homes and gardens, arts and travel and is targeted to affluent Southerners. Its
advertising rate base as of January 1994 was 250,000, which is unchanged from
January 1993.
 
 
                                      I-3

 
  COOKING LIGHT is published seven times a year and features health and fitness
through active lifestyles and good nutrition. The advertising rate base as of
January 1994 was 1,100,000, compared to 1,000,000 in January 1993.
 
  TRAVEL GUIDE, formerly TRAVEL SOUTH, is a seasonal, regional travel magazine
focused on the South with an average circulation of 200,000 as of January 1994,
the same as in January 1993.
 
  PARENTING is published ten times per year and is aimed at parents of children
under the age of ten. The advertising rate base increased as of January 1994 to
925,000, compared to 875,000 in January 1993.
 
  SUNSET, The Magazine of Western Living, is a monthly regional magazine
focused on lifestyles in the West. The advertising rate base increased to
1,400,000 in January 1994 compared to 1,375,000 in January 1993.
 
  HEALTH is a consumer health magazine published seven times a year, and
HIPPOCRATES is published ten times a year. Although similar in editorial
content, HEALTH is targeted at the consumer market, while HIPPOCRATES is a
trade magazine targeted at physicians and carries primarily trade advertising.
HEALTH had an advertising rate base of 900,000 in January 1994, the same as in
January 1993. HIPPOCRATES had a controlled circulation of 125,000 primary care
physicians in January 1994, the same as in January 1993.
 
  MARTHA STEWART LIVING presents Martha Stewart's personal perspective on
entertaining, cooking, decorating and gardening. Published bimonthly in 1993,
it will expand to eight issues in 1994. Its advertising rate base as of January
1994 was 725,000, compared to 575,000 in January 1993. In 1993, a TIV
subsidiary developed a weekly one-half hour syndicated television show
featuring Martha Stewart which began airing on broadcast television to a
nationwide audience in September 1993.
 
  BABY TALK is a monthly magazine targeted at expectant and new mothers. Its
rate base as of January 1994 was 1,125,000, the same as in January 1993. BABY
TALK's ancillary publications are BABY ON THE WAY (published semi-annually) and
BABY ON THE WAY BASICS (published annually).
 
  WHO WEEKLY is an Australian version of PEOPLE which focuses on celebrities
and other notable personalities. The advertising rate base as of January 1994
was 200,000, compared to 180,000 in January 1993.
 
  VIBE was launched in September 1993 and covers rap, rhythm and blues, reggae
and dance music, as well as politics and fashion. Four issues of VIBE were
published in 1993 and it is expected that 10 issues will be published in 1994.
The advertising rate base as of January 1994 was 200,000.
 
 Circulation
 
  The Company's publications are sold primarily by subscription. Subscription
copies are delivered to subscribers through the mail. Subscriptions are sold by
direct-mail solicitation, subscription sales agencies, television and telephone
solicitation and insert cards in the Company's magazines and other
publications. Single copies of magazines are sold through retail news dealers
who are supplied in turn by regional wholesalers.
 
 Advertising
 
  Advertising carried in the Company's magazines is predominantly consumer
advertising. Eleven of the Company's magazines have numerous regional and
demographic editions which contain the same basic editorial material but permit
advertisers to concentrate their advertising in specific markets. Through the
use of selective binding and ink-jet technology, the Company creates special
custom editions targeted towards specific groups. This allows the Company to
deliver advertisers a more highly targeted audience by
 
                                      I-4

 
segmenting subscriber lists to identify those subscribers advertisers desire
most, as well as providing the opportunity to personalize advertising messages.
 
 Paper and Printing
 
  Lightweight coated paper, which for certain magazines is recycled,
constitutes a significant component of physical costs in the production of
magazines. Time Inc. has contractual commitments to ensure an adequate supply
of paper, but periodic shortages may occur in the event of strikes or other
unexpected disruptions in the paper industry. During 1993, a year in which
paper prices generally increased, Time Inc. purchased paper principally from
four independent manufacturers, in each case under contracts that, for the most
part, are either fixed-term or open-ended at prices determined on a market
price or formula price basis.
 
  Printing and binding for the Company's magazines are accomplished primarily
by major domestic and international printing concerns in 21 locations. Magazine
printing contracts are either fixed-term or open-ended at fixed prices with, in
some cases, adjustments based on certain criteria.
 
BOOKS
 
 General
 
  The Company's book operations include Time Life Inc.; Book-of-the-Month Club
Inc.; Time Warner Trade Publishing which operates Warner Books, Warner
Publisher Services and Little, Brown and Company, each of which is a wholly
owned subsidiary of Time Inc.; and the Oxmoor House and Sunset Books divisions
of Southern Progress and Sunset Publishing, respectively. In 1993, the book
operations distributed, in aggregate, approximately 142 million gross units.
 
 Time Life Inc.
 
  Time Life Inc. is composed of five divisions: Books, Music, Video and
Television, Education, and International. Time Life Inc. is one of the nation's
largest direct marketers of books, music and videos. The products are sold by
direct response, including mail order, television and telephone, through
retail, institutional and license channels, and by door-to-door independent
distributors in some foreign markets. Editions of the books are currently sold
in 22 languages worldwide and approximately 42% of Time Life Inc.'s revenues
are generated outside the United States. In 1993, Time Life Inc. created Time
Life Education, a division designed to enter the school and library market.
 
  Editorial material is created by in-house staffs as well as through outside
book packagers. The most significant new product launched in 1993 was Time Life
Music's new series "The Rolling Stone Collection: 25 Years of Essential Rock."
Other 1993 best sellers included the series "Barney & Friends" at Time Life
Video and Television. In 1993, Time Life began the development of two ten-hour
television documentary series, "Lost Civilizations" and "The History of Rock
'n' Roll," each of which draw on Time Life's existing editorial resources.
First-run television rights to "Lost Civilizations" have been pre-sold to one
of the three major networks, and "The History of Rock 'n' Roll" is being co-
produced with TWE's Telepictures Productions.
 
  Manufacturing for Time Life Books is done by several independent companies.
Manufacturing contracts are entered into on a series rather than a single title
basis and are fixed-price with provisions for cost of labor, material and
specification adjustments. These contracts, subject to certain limitations, may
be terminated by Time Life Inc. or the manufacturer. Time Life Inc.'s
fulfillment activities, excluding international operations, are conducted from
a centralized facility in Richmond, Virginia.
 
 Book-of-the-Month Club
 
  Book-of-the-Month Club operates seven book clubs and two continuity
businesses with combined membership in excess of 3.1 million. Two of the clubs,
Book-of-the-Month Club and Quality Paperback Book
 
                                      I-5

 
Club, are general interest clubs and the remaining clubs specialize in history,
cooking and crafts, business, children's books and the books of a particular
author. In addition, audio and video products are offered through the clubs. In
1993, Book-of-the-Month Club launched its businesses internationally in over 20
countries primarily in Europe and Asia.
 
  Book-of-the-Month Club buys the rights from publishers to manufacture and
distribute books and then has them printed by independent printing concerns.
Book-of-the-Month Club runs its own fulfillment and warehousing operations in
Mechanicsburg, Pennsylvania.
 
 Time Warner Trade Publishing
 
 Warner Books
 
  Warner Books publishes hardcover, mass market and trade paperback books.
Among the best selling hardcover books published in 1993 were Robert James
Waller's "Slow Waltz in Cedar Bend," and Sandra Brown's "Where There's Smoke."
Robert James Waller's "The Bridges of Madison County," published in 1992, was
the number one selling hardcover title of 1993. Mass market paperback books
published in 1993 included "The General's Daughter" by Nelson DeMille, "The
Star Shines Down" by Sidney Sheldon, "Decked: A Regan Reilly Mystery" by Carol
Higgins Clark, "Along Came a Spider" by James Patterson, "French Silk" by
Sandra Brown, and "Double Cross" by Sam and Chuck Giancana. The major trade
paperback book published by Warner Books in 1993 was: "Bottoms Up!" by Joyce L.
Vedral, Ph.D.
 
 Little, Brown
 
  Little, Brown publishes general and children's trade books, legal and medical
reference books and textbooks. Through its subsidiary, Little, Brown (U.K.), it
also publishes general hardcover and mass market paperback books in the United
Kingdom. Among the trade hardcover books published by Little, Brown in 1993
were "The Hope" by Herman Wouk and "The Best Cat Ever" by Cleveland Amory. The
major trade paperback book published by Little, Brown in 1993 was "Revolution
From Within" by Gloria Steinem.
 
  Little, Brown handles book distribution for itself and Warner Books. The
marketing of trade books is primarily to retail stores and wholesalers
throughout the United States, Canada and the United Kingdom.
Law and medical textbooks are sold primarily to university retail stores.
Professional reference books are sold to practitioners through retail stores
and direct marketing. Through their combined U.S. and U.K. operations, Little,
Brown and Warner Books have the ability to acquire English-language publishing
rights for the distribution of hard and softcover books throughout the world.
 
  In July 1993, the trade publishing group and Warner Music Group's Atlantic
Records formed a joint venture, Time Warner AudioBooks, to develop and market
audio versions of books and other materials published by Warner Books, Little,
Brown and other outside publishers.
 
 Oxmoor House and Leisure Arts
 
  Oxmoor House, the book publishing division of Southern Progress, markets how-
to books on a wide variety of topics including food and crafts, as well as
illustrated volumes on art and other subjects. Acquired in 1992 and integrated
into Oxmoor House, Leisure Arts is a well-established publisher and distributor
of instructional leaflets, continuity books series and magazines for the
needlework and craft market.
 
 Sunset Books
 
  Sunset Books, the book publishing division of Sunset Publishing, markets
books on topics such as building and decorating, cooking, gardening and
landscaping, and travel. Sunset Books' unique marketing formula includes an
extensive network of home repair and garden centers.
 
 
                                      I-6

 
OTHER PUBLISHING OPERATIONS
 
 Multimedia and Other Television Development
 
  Time Inc. is actively developing products for emerging technologies such as
on-line computer networks, the Full Service Network, and the CD ROM market.
These efforts include alliances with leading worldwide consumer on-line
computer services to provide interactive entertainment and information to the
home computer market, the development of an interactive news-on-demand service
for the Full Service Network, as well as the creation of CD ROM versions of
original and existing Time Inc. editorial products.
 
  Time Inc. has also undertaken development efforts in various television
ventures, both in combination with other divisions of the Company and
independently. The most significant of these activities is an entertainment
news show, "Entertainment News Television," produced in conjunction with the
Telepictures division of TWE, which will be a six-day-a-week program utilizing
the editorial resources of Time Inc. to break exclusive stories. The first
episode of this show is planned for the autumn of 1994.
 
 Time Inc. In-Store Marketing
 
  In June 1993, Time Inc. formed, as part of TIV, Time Inc. In-store Marketing,
an umbrella organization to operate all of the company's in-store advertising
and demonstration businesses, including Media One, Inc. ("Media One") and
SmartDemo Inc. ("SmartDemo"). Media One's primary product is a two-sided
backlit advertising display unit that is installed in supermarket checkout
lanes. SmartDemo, an in-store demonstration, couponing, sampling and
merchandising business, was acquired by TIV in June 1993.
 
 American Express Publishing
 
  In March 1993, Time Inc., through its TIV subsidiary, entered into an
agreement to assume management responsibility for most of American Express
Publishing Corporation's operations, including its core lifestyle magazines,
TRAVEL & LEISURE and FOOD & WINE. Under the terms of the agreement, TIV
receives a fee for managing these properties, as well as incentives for
improving profitability.
 
 American Family Publishers
 
  Time Inc. is a 50% partner in American Family Publishers ("AFP"), a direct
mail magazine subscription sales agency. AFP sells magazine subscriptions for
approximately 200 major magazines in the United States, including many of the
Company's publications. AFP sells primarily through two heavily promoted
nationwide sweepstakes mailings conducted each year.
 
 Time Distribution Services
 
  Time Inc. owns approximately a 63% interest in Time Distribution Services
("TDS"), a joint venture with the New York Times Company. TDS markets and
distributes magazines published by both companies, and also certain other
publishers in the United States and Canada, through wholesalers to retail
outlets such as newsstands and directly to supermarkets and drugstore chains.
 
 Warner Publisher Services
 
  Warner Publisher Services ("WPS") is a major distributor of magazines and
paperback books sold through wholesalers in the United States and Canada. WPS
is the sole national distributor for MAD magazine, the publications of DC
Comics and certain publications owned by other publishers, including TEEN,
VOGUE, WOMAN'S DAY, and the Dell Puzzle Books. WPS also distributes the
paperback books published by Warner Books as well as the full paperback lines
of the Berkley Group and St. Martin's Press/Tor Books. WPS is wholly owned by
the Company.
 
 
                                      I-7

 
 Publishers Express
 
  Time Inc. owns 25% of Publishers Express Inc., a corporation whose
shareholders consist of eleven other publishers, printers, paper companies and
direct mailers established to deliver second- and third-class mail and
advertising material in competition with the U.S. Postal Service. As of January
1994, the corporation was delivering in 30 cities throughout the United States.
 
POSTAL RATES
 
  Postal costs represent a significant operating expense for the Company's
publishing activities. There were no general postal rate increases in 1993 and
none will occur in 1994. A general increase of approximately 10% has been
proposed for 1995 by the Postal Service. Some relatively small savings will be
realized by the Company through the adoption by the Postal Board of Governors
of a special discount for certain types of barcoded postal material.
 
  Publishing operations continue to minimize postal expense through the use of
certain cost-saving measures, including the utilization of contract carriers to
transport books and magazines to central postal centers. It has been the
Company's practice in selling books and other products by mail to include a
charge for postage and handling, which is adjusted from time to time to
partially offset any increased postage or handling costs.
 
COMPETITION
 
  The Company's magazine operations compete for sales with numerous other
publishers and retailers, as well as other media. The general circulation
magazine industry is highly competitive both within itself and with other
advertising media which compete with the Company's magazines for audience and
advertising revenue.
 
  The Company's book publishing operations compete for sales with numerous
other publishers and retailers as well as other media. In addition, the
acquisition of publication rights to important book titles is highly
competitive, and Warner Books and Little, Brown compete with numerous other
book publishers. WPS and TDS meet with direct competition from other
distributors operating throughout the United States and Canada in the
distribution of magazines and paperback books.
 
                                     MUSIC
 
GENERAL
 
  The Company's music business, conducted under the umbrella name Warner Music
Group ("WMG"), consists of a vertically integrated worldwide recorded music
business and a worldwide music publishing business.
 
  The Company's domestic recorded music business is conducted principally
through WCI's wholly owned subsidiaries Warner Bros. Records Inc. ("WBR"),
Atlantic Recording Corporation ("Atlantic"), WEA Manufacturing Inc. ("WEA
Mfg.") and Warner-Elektra-Atlantic Corporation ("WEA"), and a division of WCI,
Elektra Entertainment ("Elektra"). Outside of the United States, the recorded
music business is conducted in 72 countries through WEA International Inc. and
a division of WCI, Warner Music International, and their subsidiaries and
affiliates ("WMI"), as well as through non-affiliated licensees.
 
  The Company's music publishing business is conducted principally through
wholly owned subsidiaries of WCI (collectively, "Warner/Chappell").
 
  In 1993, approximately 52% of WMG's revenues were derived from sources
outside of the United States.
 
 
                                      I-8

 
RECORDED MUSIC
 
  WMI, WBR, Atlantic and Elektra produce, sell and license compact discs,
cassette tapes and music videos (in both videocassette and video laserdisc
configurations) of the performances of recording artists under contract to them
or for whose recordings they have acquired rights. WMG's recorded music and
video product is marketed under various labels, including the proprietary
labels "Warner Bros.," "Reprise," "Sire," "Tommy Boy," "Warner Nashville,"
"Elektra," "Asylum," "Nonesuch," "Atlantic," "A*Vision," "EastWest America,"
"Big Beat," "Atlantic Nashville," "WEA," "EastWest," "Teldec," "CGD,"
"Carrere," "Erato," "MMG," "DRO," "Telegram," "D-Day" and "Muser."
 
  In addition, WMG has entered into joint venture agreements pursuant to which
WMG companies manufacture, distribute and market (both domestically and, in
most cases, internationally) recordings owned by such joint ventures. The terms
of such agreements vary widely, but each agreement typically provides the WMG
record company with an equity interest and a profit participation in the
venture, with financing furnished either solely by WMG or by both parties.
Included among these arrangements are the labels "American Recordings,"
"Giant," "Interscope," "Maverick," "Quest" and "Rhino."
 
  WMG's record companies also acquire rights pursuant to agreements to
manufacture and distribute certain recordings that are marketed under the
licensor's proprietary label. Included among the labels distributed under such
arrangements are "Slash," which is distributed by WBR; "Hollywood" and "Mute,"
which are distributed by Elektra; and "Beggars Banquet," "Delicious Vinyl" and
"Matador," which are distributed by Atlantic.
 
  Recording artists are engaged under arrangements that generally provide that
the artist is to receive a percentage of the suggested retail selling price of
compact discs, cassette tapes and music videos sold. Most artists receive non-
returnable advance payments against future royalties.
 
  Among the artists whose albums resulted in significant record sales for WMG's
record companies during 1993 were: Eric Clapton, Rod Stewart, the artist
formerly known as Prince, Neil Young, Silk, Metallica, 10,000 Maniacs, Stone
Temple Pilots, 4 Non Blondes, John Michael Montgomery, Tracy Lawrence, Luis
Miguel, Noriyuki Mikihara, Leandro e Leonardo and Mana. In 1994, WMG's record
companies expect to release albums by the following artists: Madonna, R.E.M.,
Travis Tritt, Philip Glass, Motley Crue, Keith Sweat, Tori Amos, Stevie Nicks,
Confederate Railroad, Clawfinger, Enya, Gilberto Gil and Inner Circle, among
others.
 
  WEA Mfg. is engaged in the domestic manufacturing of audio and ROM compact
discs, cassette tapes, vinyl records and videocassettes. WEA Mfg. conducts its
operations from facilities situated in Olyphant, Pennsylvania and in the
greater Los Angeles area. WMI also operates two plants in Germany that
manufacture compact discs, cassette tapes and vinyl records for WMI's European
affiliates and licensees and for WMI companies outside Europe, as well as for
unrelated parties.
 
  Ivy Hill Corporation ("Ivy Hill") is engaged in the offset lithography and
packaging business through facilities situated in four states. Ivy Hill is a
major supplier of packaging to the recorded music industry (including WMG's
record companies) and also supplies packaging for a wide variety of other
consumer products.
 
  Warner Special Products produces, primarily for telemarketers, compilations
of music for which it has obtained rights from WMG's recorded music companies
as well as third parties.
 
  WMG's recorded music product is marketed and distributed in the continental
United States by WEA, which supplies, directly or indirectly through sub-
distributors and wholesalers, thousands of record stores, department stores,
discount centers and other retail outlets across the country. Alternative
Distribution Alliance, a music distribution company specializing in alternative
rock music, with a focus on new artists, was formed in 1993 as a joint venture
of Warner Music Group, its labels, Restless Records and Sub-Pop.
 
                                      I-9

 
  In foreign markets, WMI produces, distributes, promotes and sells recordings
of local artists and, in most cases, distributes the recordings of those
artists for whom WMG's domestic recording companies have international rights.
In certain countries, WMI licenses to non-affiliated parties rights to
distribute recordings of WMG's labels.
 
  Warner Music Enterprises, a direct marketing company, entered into an
agreement in 1993 with the BBC to launch the BBC Music Service, a subscription
program specializing in classical music, announced the launch of New Country
Music Service, another subscription service, in the first quarter of 1994 and
announced the addition of a new rock music magazine to the existing Rock Video
Monthly Service for the third quarter of 1994.
 
  Through partnerships with Sony Music Entertainment Inc., Time Warner owns a
50% interest in the music and video clubs of The Columbia House Company. The
Columbia House Company, consisting of a U.S. partnership and a Canadian
partnership, is the leading direct marketer of compact discs, cassette tapes
and videocassettes in the United States and Canada. WCI owns a minority portion
of Time Warner's 50% interest in the U.S. partnership and all of Time Warner's
50% interest in the Canadian partnership. WMG and Sony Music Entertainment are
also partners in Music Sound Exchange, a direct marketing catalog launched in
1993 that is primarily geared to selling music and related product to consumers
age 35 and over.
 
  A 1993 joint venture between WMG and Sony Software Corporation became an
equity partner with TWE's Time Warner Cable in Music Choice, an audio
programming service that delivers multiple channels of CD-quality stereo music
via cable television. In Europe, where the service is known as Music Choice
Europe, it is delivered via cable television and direct-to-home satellite.
 
  In December 1993, a joint venture among WMG, Sony, PolyGram, EMI and Hamburg
radio executive Frank Otto, launched VIVA, a 24-hour German language music
video channel carried on cable television in Germany. In January 1994, WMG,
EMI, PolyGram, Sony and Ticketmaster announced plans to form a partnership that
will operate an advertiser-supported, 24-hour music video channel to be offered
as a basic cable television service in the United States and Puerto Rico.
 
MUSIC PUBLISHING
 
  Time Warner's music publishing companies own or control the rights to over
900,000 standard and contemporary compositions, including numerous popular
hits, folk songs and music from the stage and motion pictures. Certain works of
the following artists, authors and composers are included in Warner/Chappell's
catalogues: John Bettis, Michael Bolton, The Black Crowes, Phil Collins, Comden
& Green, Dubin & Warren, Genesis, George and Ira Gershwin, Gin Blossoms, Victor
Herbert, Michael Jackson, Elton John, Leiber & Stoller, Lerner & Lowe, Madonna,
Henry Mancini, Johnny Mercer, George Michael, Midnight Oil, Cole Porter, the
artist formerly known as Prince, R.E.M., Rodgers & Hart, Soul Asylum, Jule
Styne, Bernie Taupin, Van Halen, John Williams and the foreign administration
of the works of Irving Berlin.
 
  Warner/Chappell also administers the film music of Lucasfilm, Ltd., Viacom
Enterprises, Samuel Goldwyn Productions, Famous Music (the music publishing
division of Paramount Communications Inc.) outside the United States and Japan,
and several other television and motion picture companies.
 
  Warner/Chappell's printed music division markets publications throughout the
world containing the works of Alabama, Phil Collins, Bon Jovi, The Eagles, The
Grateful Dead, Michael Jackson, Led Zeppelin, Madonna, John Mellencamp, the
artist formerly known as Prince, Rush, Bob Seger and many others.
 
  Principal sources of revenues to Warner/Chappell are license fees for use of
its music copyrights on radio and television, in motion pictures and in other
public performances; royalties for use of its music copyrights on compact
discs, cassette tapes, vinyl records, music videos and in commercials; and
sales of published sheet
 
                                      I-10

 
music and song books for the home musician as well as the professional and
school markets, including methods for teaching musical instruments.
 
LEGISLATION
 
  The Audio Home Recording Act, enacted in 1992, establishes the right of
individuals to copy pre-recorded music for private non-commercial use and
grants to copyright owners, including music publishers and record companies, a
royalty in connection with the sale of new digital audio recording equipment
and blank digital audio recording media. The statute also requires
manufacturers of digital audio recording equipment to utilize technology that
would prevent subsequent copying from copied audio recordings. In 1993,
Congress began considering bills to provide royalties to performers and
producers of digitized music. The legislation is prompted by the improved
reception and the potential for recording that digitization of broadcast, cable
and other means of music distribution is expected to provide. Passage of this
legislation could be favorable to WMG's interests.
 
COMPETITION
 
  The recorded music business is highly competitive. The revenues and income of
a company in the recording industry depend upon the public acceptance of the
company's recording artists and the recordings released in a particular year.
Although WMG is one of the largest recorded music companies in the world, its
competitive position is dependent upon its continuing ability to attract and
develop talent that can achieve a high degree of public acceptance. The
recorded music business continues to be adversely affected by counterfeiting,
piracy, parallel imports and, in particular, the home taping of recorded music.
In addition, the recorded music business also meets with competition from other
forms of entertainment, such as television, pre-recorded videocassettes and
video games.
 
  Competition in the music publishing business is intense. Although WMG's music
publishing business is the largest on a worldwide basis, it competes with every
other music publishing company in acquiring musical compositions and in having
them recorded and performed.
 
                                 ENTERTAINMENT
 
  The Company's Entertainment Group consists of TWE's Filmed Entertainment,
Programming--HBO and Cable businesses, and also the Company's interests in
certain other businesses. Each of the three principal businesses is operated as
a separate division of TWE and, except as described below, in the same manner
as it was operated by the Company at the time of the TWE Capitalization. See
"--Description of Certain Provisions of the TWE Partnership Agreement--
Management and Operations of TWE."
 
  In order to ensure compliance with the Modification of Final Judgment entered
on August 24, 1982 by the United States District Court for the District of
Columbia applicable to USW and its affiliated enterprises, which may include
TWE (the "Modification of Final Judgment"), prior to USW's investment in TWE,
TWE distributed to the TW Partners certain assets, including the satellite
receiving dishes and broadcast antennae used by TWE's cable division, the
transponders and other transmission equipment used by TWE's cable television
programming and filmed entertainment divisions and equity interests in certain
programming entities (collectively, the "TW Service Partnership Assets"). Such
partners then contributed such assets to newly formed sister partnerships in
which the TW Partners and subsidiaries of ITOCHU and Toshiba are the partners
(the "Time Warner Service Partnerships"). Upon the distribution of the TW
Service Partnership Assets to the TW Partners, the TW Partners' junior priority
capital interests were reduced by approximately $300 million. See "--Other
Entertainment Group Assets--Time Warner Service Partnerships."
 
  Generally, the Modification of Final Judgment prohibits the seven Regional
Bell Operating Companies ("RBOCs") including USW, and any of their "affiliated
enterprises," which, as a result of the USW
 
                                      I-11

 
Transaction, may include TWE, from among other things, (i) providing long
distance telecommunications services, which may include operating or providing
long distance services using TVROs or satellites, or coaxial cable, fiber or
microwave facilities, (ii) manufacturing or providing telecommunications
equipment and (iii) manufacturing "customer premises equipment," which may
include cable television converter or multimedia boxes. In addition, the
Modification of Final Judgment may prohibit the RBOCs and their "affiliated
enterprises" from holding certain financial interests in ventures that engage
in the foregoing activities. Several bills that would alleviate many of the
restrictions contained in the Modification of Final Judgment are under active
consideration in the Congress. See "--Other Entertainment Group Assets--Time
Warner Service Partnerships."
 
FILMED ENTERTAINMENT DIVISION
 
 General
 
  TWE's principal operations in the fields of motion pictures and television
are conducted by its Warner Bros. division ("WB"). The filmed entertainment
business includes the production, financing and distribution of feature motion
pictures, television series, made-for-television movies, mini-series for
television, first-run syndication programming, and animated programming for
theatrical and television exhibition; and the distribution of pre-recorded
videocassettes and videodiscs. TWE also is engaged in product licensing and the
ownership and operation of retail stores, movie theaters and theme parks.
 
  Feature motion pictures and television programs are produced at various
locations throughout the world, including The Warner Bros. Studio in Burbank,
California and The Warner Hollywood Studio in West Hollywood, California. For
additional information, see Item 2 "Properties."
 
 Feature Films
 
  WB produces feature films either solely or under arrangements with other
producers, and is generally the principal source of financing for such films.
In addition, WB purchases outright, or licenses for distribution, completed
films produced by others. Acquired distribution rights may be limited to
specified territories, specified media and/or particular periods of time. The
terms of WB's agreements with independent motion picture producers and other
entities result from negotiations and vary depending upon the production, the
amount and type of financing by WB, the media covered, the territories covered,
the period of distribution and other factors. In some cases, producers,
directors, actors, writers and others participate in the proceeds generated by
the motion pictures in which they are involved.
 
  As of December 31, 1993, there were 19 feature films scheduled for future
release by WB in various stages of production (as to six of which principal
photography had been completed). In addition, numerous other features were in
various stages of pre-production.
 
  WB operates a worldwide theatrical distribution organization through which it
distributes its own films, as well as films produced by others. During 1993,
for the first time, more film rentals from WB theatrical distribution were
generated in international territories (52%) than in the United States and
Canada (48%).
 
  Feature films are licensed to exhibitors under contracts that provide for the
length of the engagement, rental fees, which may be either a percentage of box
office receipts, with or without a guarantee of a fixed minimum, or a flat sum,
and other relevant terms. The number of feature films that a particular theater
exhibits depends upon its policy of program changes, the competitive conditions
in its area and the quality and appeal of the feature films available to it. WB
competes with all other distributors for playing time in theaters.
 
  Geffen Films Inc. produces feature films through Geffen Pictures ("Geffen"),
a joint venture with TWE, which arranges for financing of the venture. Geffen
operates autonomously. The pictures produced by Geffen
 
                                      I-12

 
are released worldwide by WB. As of December 31, 1993, one Geffen film was in
production: "Interview With the Vampire," starring Tom Cruise, and numerous
other film projects were in development.
 
  WB has entered into distribution servicing agreements with Morgan Creek
Productions Inc. or one of its affiliates ("Morgan Creek"), pursuant to which,
among other things, WB provides domestic distribution services for certain
Morgan Creek pictures. The domestic services agreement has been recently
extended through June 1998.
 
  In September 1993, an affiliate of WB entered into a long-term arrangement
with Monarchy Enterprises C.V. ("Monarchy"), Le Studio Canal Plus and Alcor
Film for the financing, production and distribution of no fewer than 10 major
motion pictures involving an expected total production outlay in excess of $200
million. Arnon Milchan will produce the pictures for Monarchy, with funding
provided primarily by Monarchy and Alcor Film. The WB affiliate will advance
(and have the right to recoup, together with a distribution fee) a portion of
the production budget of each film and all necessary marketing and distribution
costs for the films. WB has acquired all distribution rights in the United
States and Canada, as well as all international theatrical and home video
rights to these motion pictures. Among the initial releases planned under the
arrangement is "Boys on the Side," starring Whoopi Goldberg and directed by
Herb Ross. The above arrangement replaces a 1991 agreement between WB, on the
one hand, and Regency V.O.F., Le Studio Canal Plus and Alcor Film, on the
other.
 
  During 1993, WB released 34 motion pictures for theatrical exhibition, of
which 17 were produced by others. Among these 34 motion pictures, the following
have produced substantial gross receipts: "The Fugitive," "Free Willy," "Dave,"
"Dennis The Menace," "Made in America," "Sommersby" and "Falling Down."
Significant revenues were also generated in 1993 by pictures originally
released in 1992, including "Unforgiven," "The Bodyguard," "Under Siege" and
"Forever Young."
 
  During 1994, WB is distributing or expects to distribute 34 motion pictures,
of which 18 will be produced by others. Among such 34 pictures are: "Ace
Ventura: Pet Detective," starring Jim Carrey, "On Deadly Ground," starring
Steven Seagal, "Maverick," starring Mel Gibson and Jodie Foster, "The Client,"
starring Susan Sarandon and Tommy Lee Jones, "Wyatt Earp," starring Kevin
Costner and Gene Hackman, and "Love Affair," starring Warren Beatty and Annette
Benning.
 
 Television
 
  WB, through its television production and distribution divisions and various
contractual arrangements, is the leading supplier of television programming in
the world. These WB divisions and suppliers produce and distribute filmed
entertainment for television (including comedy and drama series, animation
shows, made-for-television movies, mini-series and first-run syndication
programming) for initial exhibition on networks, local stations or cable
systems. They include the wholly owned Warner Bros. Television Production,
Telepictures Productions ("Telepictures"), Warner Bros. Animation, Warner Bros.
Domestic Television Distribution ("WBDTD") and Warner Bros. International
Television Distribution ("WBITD") divisions, the joint ventures Time
Telepictures Television and Quincy Jones/David Salzman Entertainment Company
("QDE"), and contractual arrangements with the Prime Time Entertainment Network
("PTEN") and Witt-Thomas-Harris Productions ("Witt-Thomas-Harris").
 
  In August 1993, Warner Bros. Television Production (formerly known as Lorimar
Television) assumed all responsibility for WB's prime time network television
production. For the 1993-94 broadcast season, Warner Bros. Television
Production is currently producing 16 prime time series: "Full House" (in its
seventh year), "Murphy Brown" (in its sixth year), "Family Matters" (in its
fifth year), "Sisters" (in its fourth year), "Step by Step" (in its third
year), "Getting By," "Hangin' with Mr. Cooper," "How'd They Do That?," "Kung
Fu: The Legend Continues," "Time Trax" (each in its second year), and the
following new series: "The Adventures of Brisco County, Jr.," "Cafe Americain,"
"Living Single," "Lois & Clark: The New Adventures of Superman," "Tom" and "The
George Carlin Show." Warner Bros. Television Production is
 
                                      I-13

 
currently producing two mini-series: "Heaven and Hell" (Book III of the "North
& South" saga) and "The Thorn Birds: The Missing Years." In addition, Warner
Bros. Television Production has produced several made-for-television movies for
the 1993-94 broadcast season.
 
  The Telepictures division, while continuing to specialize in reality and
reality-based series and specials for the first-run syndication market, is
expanding its activities into all media (network, first-run syndication and
cable) and all segments of the daily television schedule (daytime, prime time,
access and late-night). Telepictures currently produces two nationally
syndicated first-run talk shows, "Jenny Jones" (in its third season) and "The
Jane Whitney Show" (which had its network debut in January 1994 on NBC daytime
after two seasons in national syndication), and, in association with Warner
Bros. Television Production, is delivering a second season of the network
series "How'd They Do That?" Telepictures is co-producing with Time Life Video
and Television and QDE a new ten-hour mini-series, "The History of Rock 'n'
Roll," for broadcast by PTEN in September 1994.
 
  Warner Bros. Animation is responsible for the creation, development and
production of contemporary animation as well as for the creative use and
production of WB's classic animated properties. In 1991, Warner Bros. Animation
signed a long-term development and production agreement to supply the Fox
Children's Network with the following series: "Steven Spielberg Presents Tiny
Toon Adventures," the classic "Merrie Melodies," "Alvin & The Chipmunks" and
"Beetlejuice." Subsequently, Warner Bros. Animation has added "Taz-Mania,"
"Batman: The Animated Series" and "Steven Spielberg Presents Animaniacs" to the
series produced under this arrangement. In addition, this division will supply
two new one-hour prime time animated specials of "Steven Spielberg Presents
Tiny Toon Adventures" for broadcast on the Fox Network in the spring and on
Halloween in 1994. Currently, Warner Bros. Animation supplies 75% of the Fox
Children's Network's Monday to Friday afternoon programming and 25% of its
Saturday lineup.
 
  PTEN is a consortium of 177 television stations launched in 1993 and covering
93% of the country. The consortium offers prime time, first-run programs which
are exclusively supplied by WBDTD. For its second season, beginning in January
1994, PTEN has expanded its programming by 50%, renewing the two original
series, "Kung Fu: The Legend Continues" and "Time Trax," and adding "Babylon 5"
as a third series.
 
  In 1992, Telepictures and TIV formed Time Telepictures Television, a venture
which is designed to bring together the information resources of Time Inc. with
the production and programming expertise of Telepictures. In this connection,
Time Telepictures Television has announced the launch of a six-day-a-week
entertainment news magazine, "Entertainment News Television," which is
scheduled to debut in the fall of 1994. In addition, this venture has entered
into an exclusive, multi-year agreement with ABC Entertainment to develop and
produce a series of up to seven prime time specials to be derived from Time
Inc. magazines.
 
  In June 1993, TWE and QDE formed a long-term joint venture to engage in
television production as well as projects, investments and other businesses in
the entertainment and communications industry. Numerous television projects are
currently in development.
 
  In 1992, WB and Witt-Thomas-Harris entered into an exclusive, long-term
feature film and television production and distribution agreement. The
agreement provides for Witt-Thomas-Harris to exclusively create, develop and
produce all forms of television for all media. For the 1993-94 season, Witt-
Thomas-Harris produced its first network programs for WB--two new half-hour
comedies: "The John Larroquette Show" and the mid-season "My Kind of Town."
 
  WBDTD is one of the industry's leading distributors of television programming
for exhibition on local television stations and both basic cable and pay
television systems, either on a first-run basis or for subsequent broadcast.
The division distributes over 5,800 hours in full syndication and an additional
1,800 hours in limited markets. WBDTD distributes programming produced by the
WB television divisions as well as Warner Bros. Pictures, Quincy Jones/David
Salzman Entertainment ("Fresh Prince of Bel-Air"), HBO Independent Productions
(including "Roc," "Martin" and "HBO Comedy Showcase") and post-1992 Witt-
 
                                      I-14

 
Thomas-Harris programming ("The John Larroquette Show" and "My Kind of Town").
Among WBDTD's first-run programs are the talk show "Jenny Jones," the 11th
season of "Love Connection" and the PTEN programming. Among the list of "off-
network" comedies (produced initially for network distribution) currently
distributed by WBDTD are "Murphy Brown," "Full House," "Night Court" and
"Family Matters," with "The Fresh Prince of Bel-Air" to debut in 1994.
Additionally, WBDTD distributes Warner Bros. Animation programs, made-for-
television movies, mini-series and feature film packages.
 
  WBITD is the world's largest distributor of television programming. It
licenses more than 20,000 hours of television programming and movies in over 40
languages to broadcasters in more than 150 countries, serving an audience of
more than 700 million television households and 5.1 billion people. This
division handles the distribution to the international marketplace for all of
the product produced by the WB television divisions.
 
  WB's library of films for television distribution is comprised of films
produced by WB since 1949, as well as films produced by others and licensed to
WB for television exhibition in either selected markets or on a worldwide
basis. WB also owns a library of television series previously shown on network
television, including all shows produced by Warner Bros. Television Production
which are not subject to pre-existing distribution agreements with third
parties. Television distribution agreements generally provide for a fixed
number of telecasts over a period of time for a license fee to be paid in
periodic installments.
 
  WB's backlog, representing the amount of future revenue not yet recorded from
cash contracts for the licensing of films for pay and basic cable, network and
syndicated television exhibition, amounted to $724 million at December 31, 1993
compared to $674 million at December 31, 1992 (including amounts relating to
Programming--HBO of $178 million at December 31, 1993 and $161 million at
December 31, 1992). The backlog excludes advertising barter contracts.
 
  During 1993, the Federal Communications Commission ("FCC") revised its rules
to allow the three major television networks to acquire financial interests and
syndication rights in programs produced for a network by outside producers such
as WB and to engage in the syndication of such programs abroad. Under the new
rules, the networks remain barred from actively syndicating any programs
domestically--both "off-network" (produced initially for network distribution)
and "first-run" (produced directly for syndication). With respect to first-run
syndicated programs, the networks remain barred from acquiring financial
interests if the program is not solely produced by the network. The new rules
also require the networks to release "off-network" programs into syndication no
later than four years after the program's network debut. The FCC rules are
before the U.S. Court of Appeals for the Seventh Circuit for review.
 
  Until November 1993 the television networks, as a practical matter, continued
to be barred from acquiring financial interests and syndication rights in
outside-produced programs and from syndicating programs domestically or abroad
by consent decrees that each network entered into with the Department of
Justice over a decade ago. On November 8, however, the U.S. District Court in
Los Angeles issued a decision that eliminated those portions of the consent
decrees that restricted the networks' ability to obtain financial interests and
syndication rights and to distribute syndicated programs. With these changes to
the consent decrees, the above FCC rules are now the only remaining
restrictions on the networks' ability to acquire financial interests and
syndication rights in programs and to syndicate programs domestically.
 
  The District Court's decision could adversely affect the revenues WB derives
from its off-network television syndication operations. In addition, the FCC
has stated that it will review the remaining rules 18 months after the date of
the District Court order, and if proponents of the rules do not convince the
FCC to retain the rules, the rules will automatically expire two years after
the District Court decision (November 1995). If the remaining prohibitions on
first-run syndication are permitted to expire at that time, or if the Seventh
Circuit grants the networks' requests to vacate the remaining FCC rules prior
to the two-year period, the revenues WB derives from its first-run syndication
operations also could be adversely affected.
 
 
                                      I-15

 
  FCC regulations also limit to three the number of hours of network (including
off-network) programs that television stations that are affiliated with the
networks and located in the top 50 markets may broadcast during the four-hour
prime time period. In such markets, the fourth hour of prime time programming
currently consists of first-run syndication programming. Petitions to relax or
eliminate this rule have been pending for some time at the FCC. In the light of
recent court orders, it is likely that the FCC will consider these petitions
during 1994. Modification of the rule might have an advantageous impact on WB's
sales of off-network syndicated programs, but could adversely affect WB's sales
of first-run syndication programming.
 
  Certain activities relating to the transmission of television programming
previously performed by a division of WB are now performed by the Time Warner
Service Partnerships pursuant to an agreement with TWE. See "Other
Entertainment Group Assets--Time Warner Service Partnerships."
 
 WB Network
 
  WB intends to create and launch WB Network, a new broadcast television
network, in affiliation with Tribune Broadcasting Corporation. The launch of WB
Network is currently planned for the first quarter of 1995 and initially would
feature one night per week of prime time programming with a second night
commencing in the summer of 1995 and children's morning programming commencing
in September 1995. A full roll-out of WB Network programming is planned to
occur over a five-year period. WB Network currently has affiliation commitments
from broadcast stations in most of the major U.S. television markets, including
the Tribune stations in New York City, Chicago and Los Angeles. It is currently
contemplated that areas not reached by affiliated broadcast stations will be
reached by channels on cable systems, including Tribune's WGN superstation.
Paramount Communications Inc. and Chris Craft Industries Inc. have also
announced an intention to form a new broadcast television network to be
launched in January 1995. It is anticipated that there will be intense
competition between WB Network and the Paramount network to obtain broadcast
stations as network affiliates.
 
 Home Video
 
  Through its Warner Home Video division ("WHV"), WB distributes for home video
use pre-recorded videocasettes and laser optical videodiscs containing the
filmed entertainment product of WB. In addition, WHV distributes (or services
the distribution of) the entertainment product of other companies from which it
has acquired home video distribution or servicing rights. Such companies
include Metro Goldwyn Mayer/United Artists ("MGM/UA"), Turner, Cannon and
Morgan Creek Productions (in the United States and in selected international
markets).
 
  During 1993, WHV released nine titles into the North American rental market
whose sales exceeded 300,000 units each: "The Bodyguard," "Under Siege,"
"Unforgiven," "Dave," "Passenger 57," "Forever Young," "Made in America,"
"Sommersby" and "Falling Down." Internationally, the following titles generated
substantial home video revenue in 1993: "The Bodyguard," "Lethal Weapon 3,"
"Under Siege" and "Forever Young." Additionally, the Warner Bros. Family
Entertainment label was launched in North America in 1993 with the affordably-
priced video releases of "Free Willy" and "Dennis the Menace," which generated
videocassette sales of over 7 million and 3 million units, respectively. Based
on this experience in 1993, WHV is contemplating the video release of certain
"blockbuster" theatrical releases on a direct to sell through basis.
 
  WHV sells its product in the United States and in major international
territories through its own sales force, with warehousing and fulfillment
handled by divisions of the Warner Music Group and third parties. In some
international markets, WHV's product is distributed through licensees. All
product is manufactured under contract with independent laboratories.
 
 
                                      I-16

 
 Competition
 
  The production and distribution of theatrical motion pictures, television
product and videocassettes/ videodiscs are highly competitive businesses, as
each competes with the other as well as with other forms of entertainment.
Furthermore, there is increased competition in the television industry
evidenced by the increasing number and variety of basic cable and pay
television services now available. There is active competition among all
production companies in these industries for the services of producers,
directors, actors and others and for the acquisition of literary properties.
With respect to the distribution of television product, there is significant
competition from independent producers and distributors as well as major
studios. Revenues for filmed entertainment product depend in part upon general
economic conditions, but the competitive position of a producer or distributor
is still greatly affected by the quality of, and public response to, the
entertainment product it makes available to the marketplace. There is strong
competition throughout the home video industry, both from home video
subsidiaries of several major motion picture studios and from independent
companies.
 
 Consumer Products
 
  Warner Bros. Consumer Products, another division of WB, through its licensing
division ("WBCP Licensing"), acts as an agent for owners of copyrights and
trademarks in the consumer products marketplace. WBCP Licensing licenses rights
to names, photographs, likenesses, logos and similar representations or
endorsements with respect to the theatrical motion pictures and television
series produced or distributed by WB, including those featuring the cartoon
characters owned by DC Comics. WBCP Licensing operates in both domestic and
international markets, and meets with active competition in all phases of its
activities. In 1993, WBCP Licensing continued its major licensing programs for
"Looney Tunes," Steven Spielberg's "Tiny Toon Adventures," the theatrical
motion picture "Batman Returns" and the animated television series "Batman: The
Series."
 
 Warner Bros. Studio Stores
 
  By the end of 1993, the retail division of Warner Bros. Consumer Products
("WBCP Retail") had opened a total of 60 Warner Bros. Studio Stores, 54 of
which are located in select shopping locations throughout the United States and
six of which are located in the United Kingdom. In 1993, WBCP Retail opened a
New York flagship store containing 30,000 square feet of retail space as well
as stores in the Water Tower Place in Chicago, Illinois, Stamford Town Center
in Stamford, Connecticut and the Prudential Center in Boston, Massachusetts,
among other locations. WBCP Retail plans to open 45 additional stores in 1994,
including five additional stores in Europe.
 
 Theaters
 
  Since WB, through its Warner Bros. International Theatres division, began its
program in 1987 to construct and operate new multiplex cinemas, it has opened
30 complexes with 250 screens in six foreign countries. WB operates nine
theaters in the United Kingdom, two in Germany and, through joint ventures, 13
theaters in Australia, two in Denmark, one in Portugal and three in Japan.
During 1994, WB plans, directly and through joint ventures, to construct
additional theaters in each of these countries as well as in Spain and Holland.
WB's flagship theater in the West End of London, which has undergone
reconstruction, houses nine screens and reopened in September 1993.
 
 Warner Bros. Theme Parks
 
  WB, through joint ventures with certain Australian entities (including one
which is 34.25% owned by WB), owns and operates Sea World of Australia and a
400-acre movie studio and movie-related theme park named "Warner Bros. Movie
World" as well as a water park complex, all near Brisbane, Australia. In
addition, WB and a German partner have agreed to develop a new regional theme
park and studio complex
 
                                      I-17

 
in Bottrop-Kirchhellen, Germany. The park and studio complex will be modeled
after Warner Bros. Movie World in Australia.
 
 Six Flags Theme Parks
 
  On September 17, 1993, TWE provided Six Flags Entertainment Corporation ("Six
Flags") with $136 million to repurchase the 50% common stock interest held by
other stockholders and preferred stock of certain subsidiaries. As a result,
Six Flags and its wholly owned subsidiary, Six Flags Theme Parks Inc., became
wholly owned subsidiaries of TWE. In the 1993 financial statements of TWE, Six
Flags is consolidated effective as of January 1, 1993.
 
  Six Flags is the second largest theme park operator in the United States. Six
Flags owns or operates seven major theme parks: Six Flags Great Adventure (New
York-Philadelphia), Six Flags Great America (Chicago-Milwaukee), Six Flags
Magic Mountain (Los Angeles), Astroworld/Waterworld (Houston), Six Flags Over
Mid-America (St. Louis), Six Flags Over Texas (Dallas-Ft. Worth) and Six Flags
Over Georgia (Atlanta).
 
  Six Flags' co-venture parks, Six Flags Over Texas and Six Flags Over Georgia,
are owned by limited partnerships, the limited partners of which are
unaffiliated limited partnerships and the general partners of which are wholly
owned subsidiaries of Six Flags (the "Managing Subsidiaries"). The Managing
Subsidiaries have sole responsibility for the operation and management of the
co-venture parks. The co-venture partnerships are scheduled to liquidate
(subject to extension by the limited partners) on December 31, 1997.
 
  Six Flags' theme parks are generally similar in design and operating
characteristics. Each park is divided into a number of contiguous entertainment
areas featuring different historical, geographic or other entertainment-related
themes. The design and operation of the theme parks are intended to provide a
full day of family entertainment. Admission is based on the concept of a one-
price ticket, which entitles a guest to virtually unlimited access to all
rides, shows, and attractions during a visit to the parks. Each park generally
has from 40 to 60 rides, including five to ten major attractions. These rides
generally include thrill rides, such as roller coasters, mine-train rides,
river-rapids rides, and log flumes, as well as rides for young children. The
theme parks also have a number of indoor and outdoor theaters that offer
entertainment at various times throughout the day and evening. In addition,
from time to time during the season, each of the theme parks offers special
concerts featuring well-known entertainers for which an additional admission
price may be charged.
 
  Competition within the theme park industry exists on a regional rather than a
national basis. Principal factors relating to competition within the theme park
industry generally include the uniqueness and perceived quality of the rides
and attractions in a particular park, the proximity of a park to densely
populated areas, the atmosphere and cleanliness of a park, and the quality of
food and entertainment available. There are no major parks located within Six
Flags' core market areas (within a 50-mile radius) with the exception of Los
Angeles, where Six Flags Magic Mountain is near Disneyland and other
attractions. Six Flags' theme parks also compete with other recreational
facilities and forms of entertainment within their market areas.
 
  For additional information, see Item 2 "Properties."
 
PROGRAMMING--HBO DIVISION
 
 General
 
  TWE's programming business is principally conducted by its Home Box Office
division ("Home Box Office"). The principal businesses of Home Box Office are
the programming and marketing of two pay television programming services, HBO
and Cinemax. HBO's programming includes commercial-free, uncut feature motion
pictures, sporting events, special entertainment events (such as concerts,
comedy shows and
 
                                      I-18

 
documentaries) and motion pictures produced by or for HBO. Cinemax offers a
broad range of motion pictures, including classic, family, action-adventure,
foreign and recently released feature films.
 
  At December 31, 1993, HBO had approximately 18.0 million subscribers,
compared to 17.4 million subscribers at year-end 1992, and Cinemax had
approximately 6.7 million subscribers, compared to 6.3 million subscribers at
year-end 1992.
 
 Affiliates
 
  Home Box Office's pay television services are principally distributed through
cable television systems with which Home Box Office has a contractual
relationship ("affiliates"). The HBO and Cinemax services are transmitted via
communications satellites to these affiliates, which are generally charged a
monthly fee on a per subscriber basis for each of the services carried,
together with a per subscriber fee for satellite transmission services payable
to one of the Time Warner Service Partnerships. Subscribers to HBO and Cinemax
are then billed monthly by their local affiliate for each service purchased and
are free to cancel a service at any time.
 
  Home Box Office began scrambling its satellite-TV signals in 1986 in response
to signal piracy. As a result, owners of television satellite dishes do not
have unrestricted access to the HBO and Cinemax services; individual dish
owners wishing to subscribe must purchase a consumer decoder from a local
source and arrange for its activation. Subscriptions for direct-by-satellite to
the home ("DTH") viewing are available through cable television system
operators, HBO Direct Inc., a subsidiary of TWE, satellite equipment dealers or
unaffiliated program packagers. In an effort further to discourage signal
piracy, during 1992, Home Box Office arranged to have the descramblers
previously used by its DTH subscribers replaced with more advanced descrambling
technology which is less susceptible to tampering. The commercial descramblers
used by its cable affiliates were similarly upgraded in 1993. As a result of
these upgrades in signal security, the number of DTH subscribers to the HBO and
Cinemax services has increased significantly. In February 1993, Home Box Office
entered into an agreement which allows United States Satellite Broadcasting,
Inc. ("USSB") to distribute the HBO and Cinemax programming services to DTH
subscribers by high-powered, Ku-Band frequency satellite commencing with the
start up of USSB's business in 1994.
 
  Certain activities relating to the transmission of HBO and Cinemax services
previously conducted by Home Box Office are now conducted by the Time Warner
Service Partnerships pursuant to agreements with TWE. Under such agreements,
the HBO and Cinemax services are delivered to Home Box Office's affiliates and
DTH subscribers via C-band satellite transponders. See "Other Entertainment
Group Assets--Time Warner Service Partnerships."
 
  Home Box Office formally introduced in 1993 a new "multi-channel" format for
the delivery of HBO and Cinemax over multiple channels providing differing
schedules of HBO and Cinemax programming. Response to the new format has been
positive, as reflected in increased viewership and installations in
participating systems. As of year-end 1993, the new multi-channel format was
received by approximately 3.6 million HBO subscribers and 1.9 million Cinemax
subscribers, including all DTH subscribers.
 
  As a result of acquisitions and mergers in the cable television industry in
recent years, the percentage of Home Box Office's revenue from affiliates that
are large multiple system cable operators has increased. The
largest single multiple system cable operator with which Home Box Office does
business is Tele- Communications, Inc. ("TCI"). Home Box Office's affiliation
with TCI accounts for 21% of HBO and Cinemax combined subscribers. Time Warner
Cable (see "--Cable Division") accounts for an additional 12%. Home Box Office
attempts to assure itself of continuity in its relationships with affiliates
and has entered into multi-year contracts with certain of such operators,
including TCI. HBO's agreements with its cable affiliates are typically for
terms of five years. Affiliation agreements with some larger multiple system
operators, including TCI, are for terms in excess of five years. Although Home
Box Office believes the prospects of continued carriage of its pay programming
services by the large cable operators are good, the
 
                                      I-19

 
loss of one or more of them as distributors of Home Box Office's pay cable
television services could have a material adverse effect on Home Box Office's
business.
 
 Programming
 
  A majority of HBO's programming and a large portion of that on Cinemax
consists of recently released, uncut and uncensored feature motion pictures.
Home Box Office's practice has been to negotiate licensing agreements of
varying duration for such programming with major motion picture studios and
independent producers and distributors. These agreements typically grant pay
television exhibition rights to recently released and certain older films owned
by the particular studio, producer or distributor in exchange for a negotiated
fee which is a function of, among other things, HBO and Cinemax subscriber
levels and the films' box office performances. Home Box Office competes with
other pay cable, basic cable and broadcast networks, among others, for the
acquisition of programming product.
 
  Home Box Office attempts to ensure access to future movies in a number of
ways. In addition to its exhibition of movies distributed by WB and its regular
licensing agreements with numerous distributors, it has entered into agreements
with Sony Pictures Entertainment, Inc. ("Sony"), Paramount Pictures Corporation
("Paramount"), Savoy Pictures Entertainment, Inc. ("Savoy") and Twentieth
Century Fox Film Corporation ("Fox") pursuant to which Home Box Office has
acquired exclusive and non-exclusive rights to exhibit on its pay television
services all or a substantial portion of the films produced, acquired and/or
released by these entities during the term of each agreement. Home Box Office
has also entered into non-exclusive license agreements with Fox, Paramount,
Sony and MGM/UA for library films.
 
  HBO also exhibits a number of made-for-pay television motion pictures that
are produced by or for a division of Home Box Office or by outside production
companies from which Home Box Office licenses certain exclusive pay television
and other rights (frequently including domestic home video) for a negotiated
fee.
 
  Besides motion pictures, a significant portion of HBO's programming consists
of dramatic and comedy specials, family shows, documentaries and other programs
that are produced specifically for HBO. Home Box Office either negotiates a
license to these programs with an outside production company or produces the
programs itself, or through a production services entity, in which case all
rights are generally retained and exploited by Home Box Office. Home Box Office
also acquires exclusive pay television rights to show certain live and delayed
sporting events, such as boxing matches and Wimbledon, and may also acquire
additional rights to these programs.
 
 Other Interests
 
  Home Box Office acquires home videocassette distribution rights for the
United States and Canada for a number of theatrical and made-for-pay television
motion pictures, concerts and comedy shows that it has produced or licensed for
pay television, including theatrical motion pictures distributed by Savoy. HBO
Video, a division of Home Box Office, exploits these rights. Certain aspects of
the distribution of videocassettes by HBO Video are carried out pursuant to a
service arrangement with WHV.
 
  Time Warner Sports ("TWS"), a division of Home Box Office, operates TVKO, an
entity that presents pay-per-view prize fights and telecasts other pay-per-view
programming. TWS also undertakes sports merchandising through a licensing
division that represents, among others, the United States Soccer Federation and
is worldwide licensing representative for the 1994 World Cup Soccer competition
to be held in the United States.
 
  In 1993, HBO Independent Productions, a division of Home Box Office, produced
three series for broadcast by the Fox network, "Roc," "Martin" and "Daddy
Dearest." A division of Home Box Office owns a 50% interest in, and is the
managing general partner of, a limited partnership that indirectly acquired the
 
                                      I-20

 
assets of Citadel Entertainment, Inc. and its affiliates. The limited
partnership produces motion pictures and other programs for broadcast, basic
cable and pay television networks, including HBO.
 
  In March 1993, Home Box Office and Anglia Television Group PLC ("Anglia"), a
UK television production and distribution company, entered into various
agreements resulting in the creation of a UK production company to develop and
produce television programming principally designed for the UK market, and a
joint venture, ITEL, for the foreign distribution of programming produced by
Home Box Office and Anglia.
 
  HBO Enterprises, a division of Home Box Office, distributes certain feature
length theatrical films and made-for-pay programming to other cable television
or pay-per-view services. In addition, HBO Enterprises distributes Home Box
Office original programming in domestic syndication and foreign television when
it controls such rights. WBITD distributes in foreign markets certain
television programming of HBO.
 
  In September 1991, a subsidiary of Home Box Office and a Venezuelan company
launched HBO Ole, a Spanish-language pay television service, to serve Central
and South America and the Caribbean. The launch of a second service, Cinemax,
occurred in February 1994. In June 1992, a Singapore subsidiary of the Company
launched a new English-language, movie-based HBO service in Singapore. In 1993,
this service was launched in Thailand and the Philippines. Home Box Office,
together with its partner in the Asian venture, a subsidiary of Paramount,
plans to expand this HBO service into other countries in Southeast Asia. In
addition to its Latin American and Asian ventures, Home Box Office has
investments and/or licensing arrangements with pay television services in
Hungary, Scandinavia and New Zealand.
 
  In July 1993, TWE acquired a 10% interest in Crystal Dynamics, Inc., a
developer and distributor of video games.
 
  TWE holds a 50% interest in Comedy Central, an advertiser-supported basic
cable television comedy service. The channel launched in April 1991 and had 30
million reported viewers at year-end 1993, according to A.C. Nielsen Company.
 
 Competition
 
  Home Box Office's businesses face strong competition. HBO and Cinemax compete
both for programming product and for the attention of television viewers with
commercial television networks and independent commercial television stations,
pay-per-view services and home video, as well as other basic and pay cable
television services, some of which have exclusive contracts with motion picture
studios and independent motion picture distributors.
 
  In 1993, an entity affiliated with TCI, the multiple system cable operator
accounting for 21% of HBO and Cinemax combined subscribers, launched STARZ!, a
pay cable television service having exclusive contracts with several motion
picture studios. In February 1994, Viacom Inc., the parent company of the pay
cable television movie services Showtime and The Movie Channel, acquired a
controlling interest in the parent company of Paramount, with which Home Box
Office currently has an exclusive license agreement covering Paramount
theatrical releases through December 31, 1997.
 
  Home Box Office's production divisions compete with other producers of
programs for broadcast networks, independent commercial television stations,
and basic cable and pay television networks. Home Box Office also competes with
other companies engaged in the distribution or exhibition of motion pictures
and with other communications media and entertainment and information sources.
 
 Legislation
 
  The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"), among other things, imposes certain requirements concerning
the wholesale rates that Home Box Office may charge
 
                                      I-21

 
its affiliates and the means by which Home Box Office may make its programming
services available to subscribers through distribution technologies other than
cable television. In April 1993, the FCC released regulations designed to
implement these provisions of the 1992 Cable Act, generally prohibiting
vertically integrated programmers in which cable companies hold a 5% or greater
attributable interest, which include the program services owned by Home Box
Office, from offering different price, terms, or conditions to competing
multichannel video programming distributors (which includes cable, multi-
channel microwave distribution services ("MMDS"), DTH and home satellite
distributors) in the geographic areas in which they compete, unless the
differential is justified by certain permissible factors set forth in the
regulations. These permissible justifications include the different costs of
delivering the programming to the distributor, creditworthiness, financial
stability, character, technical factors, differences related to volume,
penetration, channel positioning, promotional advertising, prepayment
discounts, retail pricing, and contract duration. The rules also place certain
restrictions on the ability of vertically integrated programmers such as Home
Box Office to enter into exclusive distribution arrangements with cable
operators. Although the HBO and Cinemax services are currently provided to
subscribers by means of a number of different technologies including cable,
MMDS and DTH, this legislation and the FCC's implementing regulations could
have a material adverse effect on Home Box Office's business. See "Cable
Division--Regulation and Legislation."
 
CABLE DIVISION
 
 General
 
  TWE's cable television operations are conducted through its Time Warner Cable
division ("Time Warner Cable") with headquarters in Stamford, Connecticut.
 
  As of December 31, 1993, Time Warner Cable's wholly and partially owned cable
systems served a total of 7.2 million cable subscribers located in 34 states,
of which cable systems serving 5.8 million subscribers were wholly owned or
otherwise consolidated. Time Warner Cable is the second-largest multiple system
cable operator in the United States, owning or operating 22 of the top 100 U.S.
cable systems, including Time Warner Cable of New York City, the largest
cluster of cable systems in the country. As of December 31, 1993, cable
television systems serving 941,000 subscribers (adjusted to reflect the partial
ownership of certain of such cable systems by the TW Partners and their
subsidiaries) were held by the TW Partners or their subsidiaries as beneficial
assets for TWE, pending completion of the transfer of these cable systems to
TWE.
 
  Through a network of coaxial and fiber-optic cables, TWE's cable television
system subscribers generally receive 36 or more channels of video programming,
including local broadcast television signals, locally produced or originated
video programming, distant broadcast television signals (such as WTBS, WWOR or
WGN), advertiser-supported video programming (such as ESPN and CNN) and premium
programming services (such as HBO, Cinemax, Showtime and The Movie Channel). In
some systems, Time Warner Cable also offers audio and other entertainment and
information services.
 
  In January 1993, Time Warner Cable announced the building of a "Full Service
Network(TM)" system for customers in its suburban Orlando, Florida system. The
Full Service Network system is expected to be connected to 4,000 customers by
the end of 1994. Pursuant to the Admission Agreement, TWE has agreed to use its
best efforts to upgrade a substantial portion of its cable systems to Full
Service Network capacity by the end of 1998. The Full Service Network systems
will utilize fiber optics, digital compression, digital switching and storage
devices, and will be capable of providing the consumer with video-on-demand,
interactive games, distance learning, full-motion video, interactive shopping
and access to long distance telephone service. Full implementation of the Full
Service Network system will require changes in current government regulation.
 
  In September 1992, Time Warner Cable launched a 24-hour basic cable news
channel, New York 1 News, which utilizes state-of-the-art technology to provide
on-site coverage of breaking local news events and to produce local specials
and sports features from around the five boroughs of New York City.
 
                                      I-22

 
  In recent years, Time Warner Cable has grown primarily as a result of
increases in the number of subscribers to its existing cable television systems
and the development of geographically-clustered systems through the exchange or
purchase of existing cable television systems. Future growth in subscribers is
expected to come from acquisitions, increased penetration of existing homes
passed (through rebuilds and the introduction of new services), population
growth, and extensions of existing systems. During 1993, Time Warner Cable
acquired systems serving Milwaukee, Wisconsin, Memphis, Tennessee, Austin,
Texas and Titusville, Florida. These acquisitions were generally funded with
the proceeds from Time Warner Cable's disposition of systems near Denver,
Colorado and three separate communities in Arizona and California, and the sale
of its 42.5% interest in a Denver, Colorado system. These transactions resulted
in a net decline of 61,000 in Time Warner Cable's reported basic subscribers.
 
  Commencing international expansion during 1991, Time Warner Cable entered
into a venture in New Zealand to operate Sky Network Television Limited, an
existing over-the-air subscription television service in Auckland, and to begin
development of multichannel distribution in other parts of the country. TWE has
a 13% interest in this venture. In June 1991, Time Warner Cable acquired an
interest in Kabelvision KB, Sweden's second largest cable television company.
 
  Most of TWE's cable television revenue is derived from monthly fees paid by
subscribers for cable programming services. Additional revenue is generated by
selling time on cable television systems for commercial advertisements to
local, regional and, in some cases, national advertisers. Advertising time is
sold as inserts into certain non-broadcast cable programming and local
origination programming shown on TWE's cable television systems. In addition,
pay-per-view service is offered in certain cable television systems, which
allows subscribers to choose to view specific movies and events, such as
concerts and sporting events, and to pay on a per-event basis. On a limited
basis, Time Warner Cable also offers communications services in competition
with local telephone companies, such as access to long distance telephone
service and data communication links for business.
 
  Certain activities relating to the transmission of programming signals to
each of TWE's cable systems previously performed by the Cable division are now
performed by the Time Warner Service Partnerships pursuant to agreements with
TWE. See "Other Entertainment Group Assets--Time Warner Service Partnerships."
 
 Programming
 
  Time Warner Cable provides certain video programming to its subscribers
pursuant to multi-year contracts with program suppliers who are paid a monthly
fee per subscriber. Many of these contracts contain price escalation
provisions; however, in most cases the cable operator has a right to cancel the
contract if the supplier raises its price beyond agreed limits. The loss of any
one supplier would not have a material adverse effect on TWE.
 
 Service Charges
 
  Subscribers to Time Warner Cable systems generally are charged monthly fees
based on the level of service selected. The monthly prices for various levels
of cable television services (excluding services offered on a per-channel or
per program basis) range generally from $5 to $25 for residential customers.
Other services offered include equipment rentals, usually for an additional
monthly fee. Systems offering pay-per-view movies generally charge between $3
and $5 per movie and systems offering pay-per-view events generally charge
between $10 and $50, depending on the event. A one-time installation fee is
generally charged for connecting subscribers to the cable television system.
 
  Subscribers may purchase premium programming services, and in certain systems
other per-channel services, for an additional monthly fee for each such
service, with discounts generally available for the purchase of more than one
service.
 
                                      I-23

 
  Commercial subscribers are charged rates for cable programming services that
vary depending on the nature of the contract.
 
 Franchises
 
  In general, Time Warner Cable operates its cable television systems pursuant
to non-exclusive franchises granted by franchising authorities for specified
periods of time, generally ranging from eight to 25 years and averaging
approximately 15 years. These franchise agreements typically specify the design
of the cable system that must be constructed and cover such matters as total
channel capacity; access by local governments, schools and non-profit and
community groups to public, educational and governmental channels; and
franchise fees to be paid to the franchising authority. The terms of a
franchise may also require improved facilities, increased channel capacity or
enhanced services. As a consequence, Time Warner Cable may make significant
additional investments in its cable television systems as part of the franchise
renewal process. Some franchises are nontransferable without prior approval of
the franchising authorities and may prohibit a material change in ownership or
control of the cable operator without prior approval. Although it has not
previously occurred with respect to a Time Warner Cable franchise, many
franchises may be terminated in the event of a breach by the cable operator of
a material term of the franchise agreement.
 
  Of Time Warner Cable's franchises, as of January 1, 1994, 402 franchises
serving approximately 1,690,000 subscribers expire during the period ending
December 31, 1996. Although Time Warner Cable has been successful in the past
in negotiating new franchise agreements, there can be no assurance as to the
renewal of franchises in the future.
 
 Regulation and Legislation
 
  The cable television industry is regulated by the federal government, some
state governments and most local governments. The following discussion
summarizes certain federal, state and local laws and regulations affecting the
cable television industry.
 
  The 1992 Cable Act amended the Cable Communications Policy Act of 1984 (the
"1984 Cable Act") in many respects and added several new provisions. The 1992
Cable Act became effective on December 4, 1992, although certain provisions,
most notably those dealing with rate regulation and retransmission consent,
became effective at later dates. The 1992 Cable Act requires the FCC to
implement regulations covering, among other things, cable rates, signal
carriage, consumer protection and customer service standards, leased access,
indecent programming on commercial leased and public, educational and
governmental channels, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of direct broadcast satellite system ownership and
operation. The implementation of the 1992 Cable Act will have an adverse effect
on the operations of TWE, as discussed below.
 
  The 1992 Cable Act replaced the FCC's previous standard governing the
designation of cable systems subject to rate regulation with a statutory
provision that subjects nearly all cable systems in the United States to local
rate regulation of basic service. Additionally, the legislation eliminates the
5% annual basic rate increase previously allowed without local approval;
requires the FCC to adopt a formula, for franchising authorities to enforce, to
assure that basic cable rates are "reasonable"; allows the FCC to review rates
for non-basic service tiers other than services offered on a per-channel or
per-program basis in response to complaints filed by franchising authorities
and/or cable subscribers; prohibits cable systems from requiring subscribers to
purchase service tiers above basic service in order to purchase services
offered on a per-channel or per-program basis if the system is technically
capable of doing so; and requires the FCC to adopt regulations to establish, on
the basis of actual costs, charges for installation and certain equipment.
 
  The FCC released rules, which became effective on September 1, 1993, to
implement rate regulations under the 1992 Cable Act that establish maximum
allowable rates for certain equipment and cable services
 
                                      I-24

 
other than programming offered on a per-channel or per-program basis. The rules
also require rates for certain equipment to be established based on a cost-of-
service standard, and rates for regulated cable services to be established
based on either a per-channel benchmark or cost-of-service standard at the
election of the cable operator. Time Warner Cable elected to establish rates
based on the per-channel benchmarks, which the FCC had set at 10% below the
average level of rates prevailing nationwide in September 1992.
 
  On February 22, 1994, the FCC adopted revised rules regarding the calculation
of applicable benchmarks. The FCC also announced that it had adopted interim
cost-of-service rules as well as "going forward" pricing rules. The text of the
new rules, however, is not expected to be available until the end of March
1994, with an effective date of May 15, 1994. The FCC's announcement lowered
the per-channel benchmark from 10% to 17% below the average level of rates
prevailing in September 1992 based on a finding that "competitive" cable
systems (as defined by the 1992 Cable Act) charged an average of 17% less than
"non-competitive" systems as of September 1992, compared to a differential of
10% under the earlier announced rules. Under the earlier rules, Time Warner
Cable had expected a revenue decline of $90 to $100 million on an annualized
basis on revenues from regulated services and equipment. Time Warner Cable also
expected that the overall reduction would have been partially offset by
revenues from other activities, including optional services, advertising sales
and subscriber growth. However, because the FCC's February 22 announcement
indicated that the new rules will significantly alter the number and type of
factors cable operators must use to calculate the benchmarks applicable to
their systems but did not describe those changes and because the new cost-of-
service rules have not yet been released, it is not yet possible for Time
Warner Cable to estimate the effect of the new rules on its revenues or net
income, although those effects are expected to be more adverse than under the
prior rules.
 
  Under the original benchmark rules, if a franchising authority (in the case
of basic rates) or the FCC (in the case of a complaint filed against a non-
basic rate other than for programming offered on a per-channel or per-program
basis) finds that a particular rate is above the applicable benchmark, the
rates can be ordered to be reduced to a level 17% below the rate in effect on
September 30, 1992 (but not below the applicable benchmark). With respect to
basic rates currently in effect which are found to be unreasonable, it is the
FCC's position that franchising authorities may order refunds (including
interest) dating back to September 1, 1993, or one year, whichever is shorter.
With respect to non-basic rates found to be unreasonable, the FCC may order
refunds (including interest) dating back to the date of any complaint filed on
or after September 1, 1993 challenging that rate. However, in the case of basic
as well as non-basic rates, cable operators will have an opportunity to justify
their rates through cost-of-service showings made to the franchising authority
or to the FCC, as appropriate.
 
  On October 29, 1993, TWE filed a petition for review of the FCC's rate
regulation rules with the United States Court of Appeals for the D.C. Circuit.
Such petition contends, among other things, that the rate regulation rules are
contrary to the 1992 Cable Act, arbitrary and capricious and unconstitutional.
 
  Two purported class-action lawsuits and one action by a state attorney
general have been brought alleging that re-tiering and a la carte pricing
implemented by Time Warner Cable in response to the FCC's new rate regulation
rules violate those rules and/or state consumer protection laws. TWE has filed
or will file motions to dismiss these claims on the ground that they are
preempted by the 1992 Cable Act and rules, and/or on the ground that such
complaints must be made before the FCC in the first instance. On March 18,
1994, a U.S. district court ruled that Wisconsin's consumer protection law is
not preempted, thereby allowing a state administrative claim brought by the
Wisconsin Attorney General against Time Warner Cable to proceed. Time Warner
Cable intends to appeal this ruling.
 
  The FCC has "frozen" at April 5, 1993 levels, rates for regulated cable
services and associated equipment, other than for systems in which local
franchising authorities regulate rates. The current expiration date of the
freeze is May 15, 1994. The FCC may investigate particular systems with non-
basic rates still substantially above the benchmarks (after the 17% decrease)
to determine if such rates are cost justified and, if not, the FCC may order
further reductions as appropriate.
 
                                      I-25

 
  The 1992 Cable Act contains new requirements mandating the carriage of
certain "local" television broadcast stations by cable systems. These new
provisions allow commercial television broadcast stations which are "local" to
a cable system, to elect whether to require the cable system to carry the
station ("must carry"), subject to certain exceptions, or whether the cable
system will have to negotiate for "retransmission consent" to carry the station.
Local, noncommercial television stations are given mandatory carriage rights
only, subject to certain exceptions. In addition, cable systems will have to
obtain retransmission consent for the carriage of all "distant" commercial
broadcast stations, except for certain "superstations." The must-carry
provisions for non-commercial stations became effective on December 4, 1992
(although a standstill agreement in effect until April 8, 1993 precluded
enforcement of these provisions) and cable operators were required to carry all
local commercial stations commencing June 2, 1993. Under the must-carry and
retransmission consent rules for local commercial television broadcast stations,
such stations had until June 17, 1993 to elect "must-carry" or "retransmission
consent" status. Many stations, including the majority of affiliates of the
major broadcast networks, elected to negotiate for retransmission consent. As of
February 15, 1994, for all such stations that TWE desires to carry, carriage
agreements or temporary arrangements have been effected except for one station.
 
  After enactment of the 1992 Cable Act, TWE and other cable operators and
programmers filed federal lawsuits seeking to overturn certain major
provisions, primarily on First Amendment grounds. TWE's complaint challenges
provisions relating to rate regulation, must carry, retransmission consent,
terms of dealing by vertically integrated programmers, uniform pricing,
operation of cable systems by municipal authorities, the number of subscribers
that a cable operator could serve nationwide, free previews of certain premium
channels and educational channel set-aside requirements for direct broadcast
satellite service. In addition, the complaint seeks to overturn several parts
of the 1984 Cable Act relating to public, educational and government access
requirements and commercial leased channels. The complaint seeks injunctions
against the enforcement or implementation of these provisions. On April 8,
1993, in a 2-1 decision, the District Court for the District of Columbia upheld
the constitutionality of the "must carry" provisions of the 1992 Cable Act. The
U.S. Supreme Court heard plantiffs' appeals from this decision in January 1994.
On September 16, 1993, a one-judge District Court upheld the constitutionality
on First Amendment grounds of all the other challenged provisions, except
restrictions on the number of subscribers that a cable operator could serve
nationwide, free pay TV previews and direct broadcast channel usage. The
principal parties have appealed this decision to the U.S. Court of Appeals for
the D.C. Circuit.
 
  Cable systems that have 1,000 or more subscribers must, upon the appropriate
request of a local television station, delete the simultaneous or non-
simultaneous network programming of a distant station when such programming is
under exclusive contract to the local station for its area.
 
  FCC regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of such
deletions will vary from area to area. The FCC has commenced a proceeding to
determine whether to relax or abolish the geographic limitations on program
exclusivity contained in its rules, which would allow parties to set the
geographic scope of exclusive distribution rights entirely by contract. It is
possible that the outcome of these proceedings will increase the amount of
programming that cable operators are requested to black out.
 
  Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services and franchise renewal.
 
  Although franchising authorities may impose franchise fees, under the 1984
Cable Act such payments cannot exceed 5% of a cable system's annual gross
revenues. Franchising authorities are also empowered in
 
                                      I-26

 
awarding new franchises or renewing existing franchises to require cable
operators in certain circumstances to provide cable-related facilities and
equipment and to enforce compliance with service commitments.
 
  The 1984 Cable Act established renewal procedures and criteria designed to
protect incumbent franchisees against arbitrary denials of renewal. While these
formal procedures are not mandatory unless timely invoked by either the cable
operator or the franchising authority, they can provide substantial protection
to incumbent franchisees. Nevertheless, renewal is by no means assured, as the
franchisee must meet certain statutory standards. Even if a franchise is
renewed, a franchising authority may impose new and more onerous requirements
such as upgrading facilities and equipment, although the municipality must take
into account the cost of meeting such requirements.
 
  Questions concerning the ability of municipalities to impose certain
franchise restrictions upon cable television companies have been considered in
several recent federal appellate and district court decisions. These decisions
have been somewhat inconsistent and, until the U.S. Supreme Court rules
definitively on the scope of cable television's First Amendment protections,
the legality of the franchising process and of various specific franchise
requirements is likely to be in a state of uncertainty. However, the 1992 Cable
Act, among other things, prohibits franchising authorities from unreasonably
refusing to grant a franchise to a competing cable system and permits
franchising authorities to operate their own cable systems without franchises.
 
  While the 1984 Cable Act exempted cable television systems from state utility
or common carrier regulation solely by reason of providing cable service, the
states continue to have authority to regulate cable operators to the extent
they provide other communications services. Certain states have adopted
legislation and regulations imposing additional requirements on cable
television operators.
 
  The 1984 Cable Act codified existing FCC cross-ownership regulations, which,
in part, prohibit local exchange telephone companies ("LECs"), including the
Regional Bell Operating Companies, from providing video programming directly to
subscribers within their local exchange telephone service areas, except in
rural areas or by specific waiver of FCC rules. This statutory provision has
recently been held unconstitutional by a U.S. District Court in Virginia in a
lawsuit brought by subsidiaries of Bell Atlantic Corp. The U.S. Justice
Department has appealed this ruling. Other Regional Bell Operating Companies
have brought similar actions challenging the cross-ownership regulations. The
FCC has concluded that where an LEC makes its facilities available on a common
carrier basis for the provision of video programming to the public, the 1984
Cable Act does not require either the LEC or the entity which contracts with
the LEC to deliver programming to obtain a franchise to provide such service.
This FCC decision could place cable operators at a competitive disadvantage
vis-a-vis local telephone companies seeking to offer competing services on a
common carrier basis without local franchise obligations. The cable industry is
challenging the FCC's conclusion that neither an LEC nor its programmer would
be required to obtain a local franchise.
 
  The FCC has recommended that Congress amend the Communications Act of 1934 to
allow LECs to directly own and operate cable television systems. Legislation
has been introduced in Congress that would permit LECs to provide video
programming directly to consumers under certain circumstances, remove certain
restrictions on cable operators and others in the provision of telephone
service in competition with the LECs, and require cable systems employing
technology as is contemplated for Time Warner Cable's Full Service Network, to
be available for use by unrelated persons on a common carrier regulated basis.
The outcome of these FCC, legislative or court proceedings and proposals or the
effect of such outcome on cable system operations cannot be predicted.
 
  The 1984 Cable Act and the FCC's rules also prohibit the common ownership,
operation, control or interest in a cable system and a television broadcast
station in the same area. The FCC has recommended to Congress that this
restriction be repealed. The FCC has relaxed its existing network/cable cross-
ownership prohibition subject to certain national and local ownership caps.
Pursuant to the 1992 Cable Act, the FCC on September 23, 1993 announced rules
that set a limit of 40 percent of cable system channel capacity that can carry
programming of video programmers that are vertically integrated with the cable
system. The FCC
 
                                      I-27

 
also set a limit of 30 percent of total nationwide cable homes that can be
served by any multiple cable system operator, although this rule has been
stayed pending resolution of litigation in which the provision of the 1992
Cable Act requiring the FCC to establish limits on horizontal concentration,
was declared unconstitutional on First Amendment grounds by a U.S. District
Court.
 
  FCC regulations and federal statutory provisions also include matters
relating to restrictions on the sale of cable systems held for less than three
years, equal employment opportunity requirements, cable system technical
standards, subscriber privacy requirements, customer service obligations,
carriage of local sports programming, application of the fairness doctrine and
rules governing political broadcasts, and limitations on advertising contained
in non-broadcast children's programming.
 
  Cable television systems are also subject to federal copyright licensing with
respect to carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals, subject to the retransmission consent provision of the 1992 Cable Act
described above. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations.
 
  The U.S. Copyright Office has adopted regulations, which became effective
January 1, 1994, declaring that certain microwave video service providers, such
as MMDS operators, do not qualify for the compulsory copyright license
available to cable systems under the Copyright Act of 1976. The compulsory
license status of satellite master antenna systems ("SMATV") is not covered by
these regulations. The availability of the compulsory license to other
multichannel video service providers would enhance their competitiveness with
traditional cable systems.
 
  Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory license. The FCC
has recommended to Congress that it repeal the cable industry's compulsory
copyright license. No action has been taken with respect to this matter.
 
  Time Warner Cable generally places its cable on poles or in conduits owned by
utility companies that control access to the poles and conduits and charge fees
for their use. The FCC is required by statute to regulate the rates certain
utilities may charge for cable pole attachments and conduit usage and the terms
and conditions they may impose. States can supplant the FCC regulations by
regulating such matters themselves; however, the majority of states have not
done so.
 
  The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry or Time Warner Cable can be predicted at this time.
 
Competition
 
  Cable television systems generally compete for viewer attention with
programming from a variety of sources, including the direct reception of
broadcast television signals by the viewer's own antenna, subscription and low
power television stations, multipoint distribution systems ("MDS"), SMATV,
satellite service and other cable companies within an operating area, as
described in greater detail below. The extent of such competition in any
franchise area is dependent, in part, upon the quality, variety and price of
the programming provided by these technologies. These competitive technologies
are generally not subject to the same local government regulation that affects
cable television. Cable television systems are also in competition
 
                                      I-28

 
for both viewers and advertising in varying degrees with other communications
and entertainment media, and such competition may increase with the development
and growth of new technologies.
 
  MDS. Some of Time Warner Cable's systems compete in the distribution of
programming services with similar services transmitted over the air by single
channel MDS facilities or multichannel microwave transmission technology known
as MMDS or "wireless cable" that requires special equipment for reception. The
FCC has adopted rules that are intended to facilitate the successful
development of MMDS systems as a source of video programming, particularly in
major metropolitan areas.
 
  SMATV. In addition, many of Time Warner Cable's systems compete with master
antenna television systems and SMATV systems, which receive broadcast
television signals and satellite-delivered video programming, respectively, and
transmit them to units within multiple unit buildings.
 
  Satellite Service. Television receive-only satellite dishes ("TVROs") used by
individuals and commercial establishments to receive video programming
delivered by satellite constitute an alternative way to receive a significant
portion of the video programming shown on cable television systems as well as
other programming. Many TVROs are capable of receiving C-Band, medium-powered
Ku-Band, or high-powered Ku-Band satellite transmissions. Most video
programming is currently transmitted to cable operators and owners of TVROs by
means of C-Band satellite transmissions.
 
  Many major cable program suppliers scramble their signals and sell their
services directly to TVRO owners who must have a descrambler and must subscribe
to the services, typically on an individual basis, in order to receive them.
These services currently are offered over C-Band satellites which require a
relatively large and expensive receiving dish. The FCC, however, is considering
changes in the spacing of C-Band satellites that would allow reception of C-
Band signals by smaller dishes.
 
  Pre-packaged satellite-delivered programming that is offered on the higher
frequency Ku-Band and received by even smaller, less expensive receiving dishes
is sometimes referred to as "DBS" service. Many existing and planned medium-
power Ku-Band satellites are capable of providing DBS services. In addition,
the FCC has awarded conditional permits to several companies for orbital slots
from which higher-power Ku-Band DBS service can be provided. To date, no
satellites have been placed in these slots other than by Hughes Aerospace to
provide a DBS service called DirecTV. Transponder space on this satellite also
has been acquired by USSB to provide another DBS service.
 
  Other Cable Companies. Time Warner Cable's cable television systems generally
are franchised on a non-exclusive basis by local government authorities, and,
accordingly, other applicants may obtain franchises in franchise areas granted
to Time Warner Cable, although other cable operators currently operate cable
systems in only a few of Time Warner Cable's franchise areas. Time Warner Cable
in the past experienced strong competition from other companies when applying
for franchises in new areas of service. Since most areas in the U.S. already
are franchised for cable television service, there have been few applications
for franchises in new areas of service during the past several years. In
addition, certain municipal franchising authorities have themselves proposed
building municipally owned cable systems in competition with privately operated
systems.
 
  Under the 1992 Cable Act, municipalities may operate cable systems without
obtaining a franchise. It is impossible at this time to predict whether this
legislation will encourage the building of municipally owned cable systems. To
date, no municipally owned cable systems have been built in areas where Time
Warner Cable provides cable television service, although several municipalities
have indicated an interest in doing so. The construction of such systems would
result in additional competition to the Company's cable systems. TWE's lawsuit
challenging the provisions of the 1992 Cable Act also attacks certain
provisions regarding municipal cable systems. See Item 3 "Legal Proceedings."
 
  Video Cassettes. Cable television systems also compete with home
videocassettes, in that owners of videocassette recorders are able to rent or
buy many of the same movies, special events and other programs
 
                                      I-29

 
that are shown on cable television systems, often earlier than such movies,
events or programs become available on the cable systems. To some extent,
however, the use of home video recorders supplements the cable services offered
by Time Warner Cable because subscribers may record video programming available
on the cable service for later viewing.
 
  Telephone Companies. The FCC in July 1992 recommended that Congress eliminate
the present statutory bar prohibiting telephone companies from engaging
directly in the cable television business within their local exchange areas.
Legislation to that effect has been introduced in Congress. On August 24, 1993,
the U.S. District Court in Virginia held the bar to be unconstitutional on
First Amendment grounds in a lawsuit brought by subsidiaries of Bell Atlantic
in December 1992. The U.S. Justice Department has appealed this ruling. Other
Regional Bell Operating Companies have brought similar actions challenging the
cross-ownership regulations. In 1992, the FCC also adopted a "video dial tone"
policy that allows telephone companies to offer broadband channel capacity for
delivery of video programming by unaffiliated parties. In offering video dial
tone services, neither the telephone company nor the programming retailer would
be required to obtain a local cable franchise. As of February 1, 1994, the FCC
has authorized construction of facilities to conduct a limited test of video
dial tone service for locations in which Time Warner Cable provides franchised
cable television service to approximately 2,500 subscribers, and the FCC has
received applications for video dial tone authorizations in locations in which
Time Warner Cable provides franchised cable television service to approximately
469,000 subscribers. The foregoing developments could result in additional
direct competition to Time Warner Cable's cable systems.
 
Other Interests
 
  TWE has a 50% interest in a joint venture established in 1991 to invest in,
and further develop, cable television systems in Hungary. TWE has also acquired
a 37 1/2% interest in TV-1000, a pay television service operating in
Scandinavia, and a 20% interest in N-TV, a recently launched German language
news and information channel distributed in Germany in which Turner
Broadcasting System, Inc. ("TBS") also has a 28% interest.
 
DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT
 
  The following description summarizes certain provisions of the TWE
Partnership Agreement relating to the ongoing operations of TWE. Such
description does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the TWE Partnership
Agreement.
 
Management and Operations of TWE
 
  Board of Representatives. Subject to certain authority of the Management
Committee (as described below) with respect to the Cable division, the business
and affairs of TWE are managed under the direction of a board of
representatives (the "Board of Representatives" or the "Board") that is
comprised of representatives appointed by the General Partners (the "Class B
Representatives") and representatives appointed by the Limited Partners (the
"Class A Representatives").
 
  The Class B Representatives control all Board decisions except for certain
matters including (i) the merger or consolidation of TWE; (ii) the sale or
other disposition of assets of TWE generating in excess of 10% of the
consolidated revenues of TWE during the previous fiscal year or representing in
excess of 10% of the fair market value of the total assets of TWE (in each
case, other than in connection with certain joint ventures and "cable asset
swaps" as to which the thresholds are greater); (iii) any acquisition by TWE,
other than in the ordinary course of business, if the consideration paid by TWE
in connection with such acquisition would exceed the greater of (1) $750
million and (2) 10% of the consolidated revenues of TWE for the most recently
ended fiscal year of TWE; (iv) the engagement by TWE in any business other than
the businesses then being conducted by TWE, as they may evolve from time to
time and any business related to such businesses (provided that TWE may not
engage in the manufacturing, sale or servicing of hardware, other
 
                                      I-30

 
than as may be incidental to TWE's businesses); (v) the incurrence by TWE of
indebtedness for money borrowed if, after giving effect to such incurrence, the
ratio of total indebtedness for money borrowed to cash flow would exceed the
greater of (x) 5.00 to 1.00 and (y) .5 over the analogous ratio in the TWE
credit agreement as in effect from time to time; (vi) cash distributions other
than as provided in the TWE Partnership Agreement; (vii) the dissolution or
voluntary bankruptcy of TWE; and (viii) any amendment to the TWE Partnership
Agreement.
 
  Each of the matters described in clauses (i) through (v) requires the
approval of a majority vote of the Class A Representatives who were appointed
by partners that have a residual equity interest of at least 5% and a majority
vote of the Class B Representatives; and each of the matters described in
clauses (vi) through (viii) requires the unanimous approval of all
representatives. Each partner's representatives collectively have voting power
in proportion to the residual equity interest of the partner that designated
such representative.
 
  The managing general partners, both of which are wholly owned subsidiaries of
the Company, may take any action without the approval or consent of the Board
if such action may be authorized by the Class B Representatives without the
approval of the Class A Representatives.
 
  Full Service Network Management Committee. In connection with the USW
Transaction, the Board established the Full Service Network business, which,
subject to obtaining necessary franchise and other approvals, will be comprised
of the businesses and operations of the cable television systems of TWE that
are from time to time designated to become a part thereof. Subject to obtaining
necessary franchise and other approvals relating to the designated systems, the
business and affairs of the Full Service Network business will be governed by a
Full Service Network Management Committee (the "Management Committee"). The
Management Committee is comprised of six voting members, three designated by
USW and three designated by TWE. Each of the other Limited Partners has the
right to designate non-voting members to the Management Committee. If USW at
any time owns less than 50% of the partnership interest which it owned,
directly or indirectly, as of September 15, 1993 or if a "change in control" of
USW occurs, USW's right to designate any members of the Management Committee
shall terminate. The Full Service Network business is managed on a day-to-day
basis by the officers of the cable division. The approval of a majority of the
members of the Management Committee is required for certain significant
transactions relating to the Full Service Network business, including, among
other things, the sale, pledge or encumbrance of assets of the Full Service
Network business, the acquisition of cable assets, the making of commitments or
expenditures relating to the Full Service Network business, in each case
subject to agreed upon thresholds, certain decisions with respect to design,
architecture and designation of cable systems for upgrade and the adoption of
the annual business plan.
 
  Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's three principal partnership divisions is managed on a
day-to-day basis by the officers of such division. Upon the TWE Capitalization,
the officers of the Company also became officers of TWE and the officers of the
General Partners became the officers of the corresponding partnership divisions
and the subdivisions thereof.
 
Certain Covenants
 
  Covenant Not to Compete. For so long as any partner (or affiliate of any
partner) owns in excess of 5% of TWE or 15% of TWE Japan and in the case of any
General Partner, for one year thereafter, such partner (including its
affiliates) is generally prohibited from competing or owning an interest in the
three principal lines of business of TWE--cable, cable programming and filmed
entertainment (including the ownership and operation of theme parks)--as such
businesses may evolve, subject to certain agreed upon exceptions, limited
passive investments and inadvertent violations. The covenant not to compete
does not prohibit (i) USW from conducting cable and certain regional
programming businesses in the 14-state region in which it provides telephone
service, (ii) any party from engaging in the cable business in a region in
which TWE is not then
 
                                      I-31

 
engaging in the cable business, subject to TWE's right of first refusal with
respect to such cable business, or (iii) any party from engaging in the
telephone or information services business.
 
  Transactions with Affiliates. Subject to agreed upon exceptions for existing
arrangements, TWE will not enter into any transaction with any partner or any
of its affiliates other than on an arm's-length basis.
 
Registration Rights
 
  Beginning on June 30, 2002 (or as early as June 30, 1999 if certain threshold
cash distributions are not made to the Limited Partners), the Limited Partners
holding, individually or in the aggregate, at least 10% of the residual equity
of TWE shall have the right to request that TWE reconstitute itself as a
corporation and register for sale in a public offering an amount of partnership
interests held by such Limited Partners determined by an investment banking
firm so as to maximize trading liquidity and minimize the initial public
offering discount, if any. Upon any such request, the parties will cause an
investment banker to determine the price at which the interests sought to be
registered could be sold in a public offering (the "Appraised Value"). Upon
determination of the Appraised Value, TWE may elect either to register such
interests or purchase such interests at the Appraised Value, subject to certain
adjustments. If TWE elects to register the interests and the proposed public
offering price (as determined immediately prior to the time the public offering
is to be declared effective) is less than 92.5% of the Appraised Value, TWE
will have a second option to purchase such interests immediately prior to the
time such public offering would otherwise have been declared effective by the
Securities and Exchange Commission at the proposed public offering price less
underwriting fees and discounts. If TWE exercises its purchase option, it will
be required to pay the fees and expenses of the underwriters. Upon exercise of
either purchase option, TWE may also elect to purchase the entire partnership
interests of the Limited Partners requesting registration at the relevant
price, subject to certain adjustments.
 
  In addition to the foregoing, USW will have the right to exercise an
additional demand registration right (in which the other Limited Partners would
be entitled to participate) beginning 18 months following the date on which TWE
reconstitutes itself as a corporation and registers the sale of securities
pursuant to a previously exercised demand registration right.
 
  Beginning on June 30, 1995, at the request of any General Partner, TWE will
effect a public offering of the partnership interests of the General Partners
or reconstitute TWE as a corporation and register the shares held by the
General Partners. In any such case, the Limited Partners will have standard
"piggy-back" registration rights.
 
  Upon any reconstitution of TWE into a corporation, each partner will acquire
preferred and common equity in the corporation corresponding in both relative
value, rate of return and priority to the partnership interests it held prior
to such reconstitution, subject to certain adjustments to compensate the
partners for the effects of converting their partnership interests into capital
stock.
 
Certain Put Rights of the Limited Partners
 
  Change in Control Put. Upon the occurrence of a change in control of the
Company, at the request of any Limited Partner, TWE will be required to elect
either to liquidate TWE within a two-year period or to purchase the interest of
such partner at fair market value (without any minority discount) as determined
by investment bankers. A "change in control" of the Company shall be deemed to
have occurred:
 
    (x) whenever, in any three-year period, a majority of the members of the
  Board of Directors of the Company elected during such three-year period
  shall have been so elected against the recommendation of the management of
  the Company or the Board of Directors shall be deemed to have been elected
  against the recommendation of such Board of Directors of the Company in
  office immediately prior to such election; provided, however, that for
  purposes of this clause (x) a member of such Board of
 
                                      I-32

 
  Directors shall be deemed to have been elected against the recommendation
  of such Board of Directors if his or her initial election occurs as a
  result of either an actual or threatened election contest (as such terms
  are used in Rule 14a-11 of Regulation 14A promulgated under the Securities
  Exchange Act of 1934, as amended) or other actual or threatened
  solicitation of proxies or consents by or on behalf of a person other than
  such Board of Directors; or
 
    (y) whenever any person shall acquire (whether by merger, consolidation,
  sale, assignment, lease, transfer or otherwise, in one transaction or any
  related series of transactions, or otherwise beneficially own voting
  securities of the Company that represent in excess of 50% of the voting
  power of all outstanding voting securities of the Company generally
  entitled to vote for the election of directors, if such person acquires or
  publicly announces its intention to initially acquire ten percent or more
  of such voting securities in a transaction that has not been approved by the
  management of the Company within 30 days after the date of such acquisition or
  public announcement.
 
  Change in Government Regulation Put. Upon a change in any applicable federal
or state law or regulation that would prohibit ITOCHU or Toshiba from
continuing to own all or any part of its partnership interest in TWE, or would
materially adversely affect the value of ITOCHU's or Toshiba's partnership
interest relative to the value of the partnership interests held by all other
partners, TWE will be required to elect either to purchase that portion of such
partner's partnership interest required to enable such partner to continue to
own its partnership interest at fair market value (giving effect to the
minority discount) as determined by investment bankers or to take reasonable
actions to remedy the effect of such change in law or regulation.
 
  Assignment of Put Rights, etc. TWE, with the consent of such assignee, may
assign to the Company, any general partner or any third party, the obligation
to pay the applicable put price in connection with the exercise of a change in
control or change in government regulation put right by a Limited Partner and
the right to receive the partnership interests in payment therefor.
 
  With respect to any of the put rights of the Limited Partners, TWE may pay
the applicable put price in cash or Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or
quoted on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the
put price to the Company by the Company). The amount of any Marketable
Securities comprising the applicable put price shall be determined based on the
market price of such securities during the seven months following the closing
of such put transaction. In the case of a change in government regulation put,
up to 33% of the applicable put price may be paid in notes issued by TWE (or if
TWE assigns its obligations to pay the put price to the Company by the
Company).
 
 USW Change in Government Regulation Remedies
 
  USW is not entitled to the benefit of the put right upon a change in law or
government regulation to which ITOCHU and Toshiba are entitled. See "--Certain
Put Rights of the Limited Partners--Change in Government Regulation Put."
However, upon a change in law or government regulation prior to September 15,
1996 that prohibits USW from owning, or materially adversely affects the value
(relative to the value of the interests of all other partners) of, USW's
partnership interest, USW will have the right to request that TWE either remedy
such problem (provided such remedy would not have a significant impact on the
business and operation of TWE or any of its divisions) or assist USW in selling
its interest to a third party. Upon any such sale to a third party, TWE will
share 20% of the loss or gain experienced by USW upon such sale.
 
 Restrictions on Transfer by General Partners
 
  General Partners. Any General Partner is permitted to dispose of any
partnership interest (and any General Partner and any parent of any General
Partner may issue or sell equity) at any time so long as, immediately after
giving effect thereto, (i) the Company would not own, directly or indirectly,
less than
 
                                      I-33

 
(a) 43.75% of the residual equity of TWE, if such disposition occurs prior to
the later of December 31, 1997 and the date on which the Limited Partners have
received cash distributions of $500 million per $1 billion of investment, and
(b) 35% of the residual equity of TWE if such disposition occurs after such
date, (ii) no person or entity would own, directly or indirectly, a partnership
interest greater than that owned, directly or indirectly, by the Company, and
(iii) a subsidiary of the Company would be a managing general partner of TWE.
 
  No other dispositions are permitted, except that the Company may sell its
entire partnership interest subject to the Limited Partners' rights of first
refusal and "tag-along" rights pursuant to which the Company must provide for
the concurrent sale of the partnership interests of the Limited Partners so
requesting.
 
OTHER ENTERTAINMENT GROUP ASSETS
 
Time Warner Service Partnerships
 
  Concurrently with the closing of the USW Transaction, TWE and the Time Warner
Service Partnerships entered into various agreements pursuant to which, among
other things, the Time Warner Service Partnerships provide program signal
delivery services to TWE's cable systems and transmission services to the
Programming--HBO and Filmed Entertainment divisions and TWE provides billing,
collection and marketing services to the Time Warner Service Partnerships. The
Time Warner Service Partnerships receive commercially reasonable fees for the
provision of such services. The Time Warner Service Partnerships own the TVROs
and broadcast antennae used to transmit programming signals to each of TWE's
cable systems, and the satellite transponders and other transmission equipment
used to transmit the HBO and Cinemax services to Home Box Office affiliates and
DTH subscribers.
 
  In addition, TWE and the Time Warner Service Partnerships have entered into a
series of agreements pursuant to which the Time Warner Service Partnerships are
required to recontribute the TW Service Partnership Assets to TWE at their then
fair market value in exchange for partnership interests in TWE on September 15,
1995 (or September 15, 1997 in the case of its interests in Court TV and E!
Entertainment Television), but only to the extent that at such time such assets
are then owned by the Time Warner Service Partnerships and TWE is clearly not
prohibited from owning or operating such assets.
 
  The TW Service Partnership Assets also include various equity investments,
including, among others, an interest of approximately 50% in E! Entertainment
Television, a Los Angeles-based basic cable channel specializing in promoting
the entertainment industry and serving 25.8 million viewers as of year-end
1993; an interest of approximately 15% in Black Entertainment Television, a
basic cable television service providing entertainment programming directed
primarily to African-American audiences; an interest of approximately 20% in
Primestar Partners L.P., a joint venture with several other cable operators and
a subsidiary of General Electric Company that has developed the delivery of a
package of programming services to TVRO owners; a majority interest in Court
TV, a 24-hour basic cable television service launched in the summer of 1991
featuring live and taped trial coverage, plus commentary by prominent lawyers,
which is managed through the Company's American Lawyer Media affiliate; an 8%
interest in QVC Inc., one of the largest televised home-shopping retailers in
the United States; and a 15% interest in The 3DO Company, a company engaged in
the development of multimedia technology.
 
TWE Japan
 
  The Company owns a 37.25% interest in, USW owns a 12.75% interest in, and
each of Toshiba and ITOCHU owns a 25% interest in, Time Warner Entertainment
Japan Inc. ("TWE Japan"). TWE Japan was organized to conduct TWE's businesses
in Japan, including home video distribution, theatrical film and television
distribution and merchandising businesses, and to expand and develop new
business opportunities. Pursuant to distribution and merchandising agreements
entered into between TWE and TWE Japan, TWE
 
                                      I-34

 
Japan receives distribution fees generally comparable to those currently
received by TWE for performing distribution services for unaffiliated third
parties.
 
DC Comics
 
  TWE and WCI each owns a 50% interest in DC Comics, a New York general
partnership, formed effective June 30, 1992 to continue the business previously
conducted by DC Comics Inc., a New York corporation. DC Comics publishes more
than 60 regularly issued comics magazines, among the most popular of which are
"Superman," "Batman," "Wonder Woman," "Teen Titans" and "The Sandman," as well
as story collections sold as books. DC Comics also derives revenues from motion
pictures, television syndication, product licensing, books for juvenile and
adult markets and foreign publishing. Trademarks in DC Comics' principal
characters have been registered in the United States Patent and Trademark
Office and in certain foreign countries.
 
Cinamerica Theatres, L.P.
 
  WCI owns a 50% interest in Cinamerica Theatres, L.P., an unconsolidated joint
venture with Paramount Communications Inc., which owns and operates two theater
circuits: Mann Theatres and Festival Cinemas. The joint venture operates 341
screens in 66 theaters, principally located in California and Colorado.
 
E.C. Publications
 
  E.C. Publications, Inc. is the publisher of MAD, a magazine featuring
articles of humorous and satirical interest, which is regularly published eight
times a year and also in periodic special editions. E.C. Publications is wholly
owned by the Company.
 
 
                                OTHER INTERESTS
 
TURNER BROADCASTING SYSTEM, INC.
 
  The Company purchased equity securities of TBS as part of a private placement
of securities by TBS in 1987 to a consortium of cable television operators and
individual investors. The Company has acquired additional securities in TBS
from time to time and, at January 31, 1994, it had economic and voting
interests in TBS of 19.4% and 10.1%, respectively. TBS's business includes the
ownership of basic cable television services (CNN, TNT, Headline News), a
broadcast television station (WTBS) widely distributed over cable television
systems, The Cartoon Network, and two professional sports teams (the Atlanta
Braves and the Atlanta Hawks).
 
AMERICAN LAWYER MEDIA
 
  American Lawyer Media, L.P. ("ALM"), which is majority-owned by the Company,
operates a chain of metropolitan and regional legal and business newspapers and
also publishes THE AMERICAN LAWYER, a national monthly magazine with a
subscription-only readership among lawyers across the United States, and
COUNSEL CONNECT, an on-line service connecting lawyers in law firms and
corporate legal departments worldwide. As of February 25, 1994, Mead Data
Central became a minority partner in COUNSEL CONNECT, and the name was changed
to "LEXIS COUNSEL CONNECT." ALM also publishes four weekly and five daily
newspapers, which in most cases enjoy local official status for the publication
of court opinions, legal notices, and/or official court notices; one monthly
newsletter and a monthly law firm management information service. ALM also
provides certain services to Court TV, a basic cable television service
launched in 1991 in which the Company has an indirect majority interest.
 
 
                                      I-35

 
HASBRO, INC.
 
  The Company owns approximately 14% of the outstanding common stock of Hasbro,
Inc., one of the world's largest toy companies. For a description of the
issuance by the Company of zero coupon exchangeable notes due 2012 that are
exchangeable for shares of Hasbro common stock owned by the Company, see Note 5
"Long-Term Debt" to the Company's consolidated financial statements at pages F-
12 through F-14 herein.
 
ATARI CORPORATION
 
  The Company owns approximately 25% of Atari Corporation, which is engaged in
the design, manufacture and sale of personal computer and video game systems.
 
ATARI GAMES CORPORATION
 
  The Company owns approximately 79% of Atari Games Corporation, which is
engaged in the design, manufacture and sale of video games for arcades and home
systems.
 
WHITTLE COMMUNICATIONS
 
   Time Inc. owns an interest of approximately 33% in Whittle Communications
L.P. ("Whittle"). Whittle specializes in creating and distributing specifically
targeted advertising-supported media products.
 
                         CURRENCY RATES AND REGULATIONS
 
  The Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict
the extent to which such controls and fluctuations in currency exchange rates
may affect its operations in the future or its ability to remit dollars from
abroad. See Note 1 "Summary of Significant Accounting Policies--Foreign
Currency Translation" to the consolidated financial statements set forth at
page F-6 herein. For the revenues, operating income from and identifiable
assets of foreign operations, see Note 10 "Segment Information" to the
consolidated financial statements set forth at pages F-18 through F-20 herein.
 
                                   EMPLOYEES
 
  At December 31, 1993, the Company employed a total of approximately 50,000
persons. This number includes approximately 20,000 persons employed by TWE.
 
                                      I-36

 
ITEM 2. PROPERTIES
 
PUBLISHING, MUSIC AND CORPORATE
 
  The following table sets forth certain information as of December 31, 1993
with respect to the Company's principal properties (over 250,000 square feet in
area) that are used primarily by its publishing and music divisions or occupied
for corporate offices, all of which the Company considers adequate for its
present needs, and all of which were substantially used by the Company or were
leased to outside tenants:
 


                                                 APPROXIMATE
                                                 SQUARE FEET     TYPE OF OWNERSHIP;
       LOCATION              PRINCIPAL USE       FLOOR SPACE  EXPIRATION DATE OF LEASE
       --------              -------------       -----------  ------------------------
                                                    
New York, New York     Executive and                560,000  Leased by the Company.
 75 Rockefeller Plaza  administrative offices                Lease expires in 2014.
 Rockefeller Center    (Corporate, Music and                 Approximately 142,000 sq.
                       Filmed Entertainment)                 ft. are sublet to outside
                                                             tenants.
New York, New York     Business and editorial     1,481,000  Leased by the Company.
 Time & Life Bldg.     offices (Publishing and               Most leases expire in
 Rockefeller Center    Corporate)                            2007. Approximately
                                                             64,000 sq. ft. are sublet
                                                             to outside tenants.
Mechanicsburg,         Office and warehouse         358,000  Owned and occupied by the
 Pennsylvania          space (Publishing)                    Company.
 1225 S. Market St.
Olyphant,              Manufacturing,             1,058,000  Owned and occupied by the
 Pennsylvania          warehouses, distribution              Company.
 1400 and 1444 East    and office space (Music)
 Lackawanna Avenue
Indianapolis, Indiana  Warehouse space              252,000  Owned by the Company.
 4200 N. Industrial    (Publishing)                          Approximately 168,000 sq.
 Street                                                      ft. are leased to outside
                                                             tenants.
Nortorf,               Manufacturing,               334,000  Owned and occupied by the
 Germany               distribution and office               Company.
 Niedernstrasse 3-7    space (Music)
Alsdorf,               Manufacturing,               269,000  Owned and occupied by the
 Germany               distribution and office               Company.
 Max-Planck Strasse 1- space (Music)
 9
Terre Haute,           Manufacturing and office     269,000  Leased by the Company.
 Indiana               space (Music)                         Lease expires in 2001.
 Bldg. 102, Fort Har-
 rison
 Industrial Park
Other:                 Office bldgs., plants and  1,605,000  Owned by the Company.
 U.S. and abroad,      warehouses (Publishing,               Approximately 25,000
 including locations   Music and Corporate)                  sq. ft. are leased to
 in                                                          outside tenants.
 Europe, Asia, Latin
 America, Australia
 and New Zealand.
                                                  4,165,000  Leased by the Company.
                                                             Approximately 32,000 sq.
                                                             ft. are sublet to outside
                                                             tenants.
                                                 ----------
Total                                            10,351,000
                                                 ==========

 
                                      I-37

 
ENTERTAINMENT
 
  The following table sets forth certain information as of December 31, 1993
with respect to TWE's principal properties (over 125,000 square feet in area),
all of which TWE considers adequate for its present needs, and all of which
were substantially used by TWE or were leased to outside tenants.
 


                                                    APPROXIMATE
                                                    SQUARE FEET
                                                    FLOOR               TYPE OF OWNERSHIP;
        LOCATION         PRINCIPAL USE              SPACE/ACRES      EXPIRATION DATE OF LEASE
        --------         -------------              -----------      ------------------------
                                                           
 New York, New York      Business offices           335,000 sq. ft. Leased by TWE.
  HBO Building, 1100     (Programming--HBO)                         Lease expires in 2004.
  Avenue of the
  Americas
 New York, New York      Business offices           139,000 sq. ft. Leased by TWE.
  1325 Avenue of the     (Filmed Entertainment)                     Lease expires in 2010.
  Americas
 Burbank, California     General offices            207,000 sq. ft. Leased by TWE.
  3900 Alameda           (Filmed Entertainment)                     Lease expires in 1994.
 Los Angeles, Califor-   Warehouse                  182,000 sq. ft. Leased by TWE.
  nia                    (Filmed Entertainment)                     Lease expires in 1997.
  9210 San Fernando
 Burbank, California     Sound stages,              2,375,000       Owned by TWE.
  The Warner Bros.       administrative,            sq. ft. of
  Studio                 technical and dressing     improved
                         room                       space on 143
                         structures, screening      acres (a)
                         theaters,
                         machinery and equipment
                         facilities, back lot and
                         parking lot and other
                         Burbank properties
                         (Filmed
                         Entertainment)
 West Hollywood,         Sound stages,              337,000         Owned by TWE.
  California             administrative,            sq. ft. of      Approx. 20,000 sq. ft. are
  The Warner             technical and dressing     improved        leased to outside tenants.
  Hollywood Studio       room                       space on 11
                         structures, screening      acres
                         theaters,
                         machinery and equipment
                         facilities (Filmed
                         Entertainment)
 Valencia, California    Location filming (Filmed   225 acres       Owned by TWE.
  Undeveloped Land       Entertainment)
 Atlanta, Georgia        Theme park                 270 acres       Owned by limited
  Six Flags Over Geor-   (Filmed Entertainment)                     partners of Six Flags
  gia                                                               Over Georgia
                                                                    partnership.
 Dallas-Fort Worth,      Theme park                 200 acres       Owned by limited
  Texas                  (Filmed Entertainment)                     partners of Six Flags
  Six Flags Over Texas                                              Over Texas
                                                                    partnership.
 St. Louis, Missouri     Theme park                 500 acres       Owned by Six Flags.
  Six Flags Over Mid-    (Filmed Entertainment)
  America

 
                                      I-38

 


                                                    APPROXIMATE
                                                    SQUARE FEET
                                                    FLOOR                         TYPE OF OWNERSHIP;
        LOCATION         PRINCIPAL USE              SPACE/ACRES                EXPIRATION DATE OF LEASE
        --------         -------------              -----------                ------------------------
                                                                     
 Houston, Texas          Theme park                 90 acres                  Owned by Six Flags.
  Astroworld             (Filmed Entertainment)
 Houston, Texas          Theme park                 15 acres                  Owned by Six Flags.
  Waterworld             (Filmed Entertainment)
 Jackson, New Jersey     Theme park                 2,200 acres(b)            Owned by Six Flags.
  Six Flags Great        (Filmed Entertainment)
  Adventure
 Los Angeles, Califor-   Theme park                 260 acres                 Owned by Six Flags.
  nia                    (Filmed Entertainment)
  Six Flags Magic
  Mountain
 Gurnee, Illinois        Theme park                 300 acres                 Owned by Six Flags.
  Six Flags Great        (Filmed Entertainment)
  America
 Other, in the U.S. and  Office buildings, retail    1,888,000 sq. ft. (c)    Owned by TWE.
  abroad, including      stores, plants and                                   Approx. 7,000 sq. ft. are
  locations in Europe,   warehouses (Filmed                                   leased to outside tenants.
  Asia, Latin America,   Entertainment,              4,283,000 sq. ft. (c)(d) Leased by TWE.
  Australia and New      Programming--HBO,                                    Approx. 110,000 sq. ft. are
  Zealand                Cable)                                               sublet to outside tenants.
                                                    -------------------------
 Totals                                              9,746,000 sq. ft.
                                                         4,214 acres
                                                    =========================

- --------
(a) Ten acres consist of various parcels adjoining The Warner Bros. Studio,
    with mixed commercial, office and residential uses.
(b) 1,640 acres of which are undeveloped land available for expansion.
(c) Excludes 8,817,000 sq. ft. of owned and 2,024,000 sq. ft. of leased
    properties used by the Cable division for headend, hub, and tower sites.
(d) Includes 108,000 sq. ft. of office space occupied by Time Warner corporate
    staff who provide services to TWE pursuant to arrangements set forth in the
    TWE Partnership Agreement.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company and its subsidiaries are parties, in the ordinary course of
business, to litigations involving property, personal injury and contract
claims. The amounts that the Company believes may be recoverable in these
matters are either covered by insurance or are not material.
 
  In June 1989, a stockholder class action was filed in the Court of Chancery
for the State of Delaware, in and for New Castle County ("Delaware Chancery
Court"), entitled In re Time Incorporated Shareholder Litigation, Consol. Civ.
Action No. 10670 (the "Time Warner Stockholder Litigation"), against the
Company, its Board of Directors, WCI and the Company's financial advisors,
Wasserstein Perella & Co., Inc. ("Wasserstein Perella") and Shearson Lehman
Hutton Inc. ("Shearson Lehman"), in which plaintiffs seek, among other things,
judgment declaring that the defendant directors breached their fiduciary duties
by entering into the Share Exchange Agreement dated as of March 3, 1989, as
amended, between the Company and WCI (the "Share Exchange Agreement") and the
Agreement and Plan of Merger (as amended, the "Merger Agreement") among the
Company, TW Sub Inc., then a wholly owned subsidiary of the Company, and WCI,
as in effect on March 3, 1989, and that WCI, Shearson Lehman and Wasserstein
Perella aided and
 
                                      I-39

 
abetted those breaches; an order requiring redemption of the Rights issued
pursuant to the Company's Stockholder Rights Plan; and judgment rescinding
consummation of the Share Exchange Agreement and enjoining the Company's
acquisition of WCI pursuant to the tender offer (the "Tender Offer") pursuant
to which the Company purchased 100 million shares of WCI common stock for $70
per share on July 24, 1989 and the Merger Agreement. Plaintiffs' motion
preliminarily to enjoin the Tender Offer was denied in July 1989 and that
decision was affirmed on appeal. In July 1993, the action was dismissed without
prejudice and without the payment of any compensation to the plaintiffs by the
defendants.
 
  Two other purported stockholder class actions, Greenberg v. Time, et al., and
Northern Laminating, Inc. Retirement Fund v. Munro, et al., Index No. 12653-89,
were filed in June 1989 in the Supreme Court of the State of New York, County
of New York ("New York Supreme Court") and make substantially similar
allegations against most of the same defendants, plus an alleged violation of
New York antitrust law. Defendants have not yet been required to respond to the
amended complaint in the Northern Laminating case. The Greenberg action had
been consolidated with the Time Warner Stockholder Litigation, which was
dismissed in July 1993.
 
  Also pending in the Delaware Chancery Court is another consolidated
stockholder litigation, In re Warner Communications Inc. Shareholders
Litigation, Consol. Civ. Action No. 10671 (the "Warner Stockholder
Litigation"), commenced in 1989 against WCI, its Board of Directors and the
Company, alleging that WCI's Board of Directors breached their fiduciary duties
to WCI's stockholders, and the Company aided and abetted such alleged breach,
by not ensuring that the securities distributed to WCI stockholders in the
Merger contained certain protective covenants and redemption provisions. The
amended complaint seeks, among other things, to enjoin the consummation of the
Tender Offer and the Merger, or to rescind the Tender Offer and the Merger. The
defendants have not yet been required to respond to the amended complaint. The
action has been stayed pending resolution of the Berger action described below.
 
  Another 1989 purported stockholder class action, Berger, et al. v. Warner
Communications Inc., et al., Index No. 91-3735, filed in the New York Supreme
Court against WCI, certain of WCI's directors, the Company, Wasserstein
Perella, Shearson Lehman and Lazard Freres & Co. ("Lazard") alleges, among
other things, that WCI's directors and the Company breached their fiduciary
duties to WCI's stockholders by structuring the Merger as a freezeout of WCI's
minority stockholders, and by failing to ensure that the securities to be
distributed to stockholders in the Merger would in fact trade at the value
imputed to those securities, and that Wasserstein Perella, Shearson Lehman and
Lazard aided and abetted those breaches of fiduciary duty. The complaint seeks,
among other things, a declaratory judgment that defendants have breached their
fiduciary duties, compensatory damages and a judgment declaring the Merger a
nullity. On April 9, 1991, a court order effected defendants' stipulation to
the certification of a plaintiff class consisting of those persons who held
shares of WCI common stock on August 23, 1989 and before the effective date of
the Merger, except defendants in this litigation and any person or entity
related to or affiliated with any defendants. Argument on both sides' motions
for partial summary judgment on plaintiffs' contract claim for additional
interest of approximately $20 million in connection with the consideration paid
in the merger transaction was heard on February 22, 1994.
 
  Another purported stockholder class action, Silverstein v. Warner
Communications Inc., et al., Civ. Action No. 11285, was filed in 1989 in the
Delaware Chancery Court against WCI, members of its Board of Directors and the
Company. The complaint alleges, among other things, violations of fiduciary
duties to WCI stockholders by allegedly "forcing out" WCI's stockholders upon
consummation of the Merger at an unfair price without according them a
meaningful vote or the right to an appraisal proceeding. The complaint seeks
rescission or rescissory and other damages in an unspecified amount. In August
1991, the court signed a stipulation of the parties staying the Silverstein
action and the Warner Stockholder Litigation pending resolution of the Berger
action. The parties have agreed to dismiss this action without prejudice and
without compensation to the plaintiffs or their attorneys. An order
effectuating that agreement was approved by the court on March 28, 1994.
 
 
                                      I-40

 
  Two class actions consolidated under the caption In re Time Warner Inc.
Securities Litigation, Master Case No. 91 Civ. 4081, brought purportedly on
behalf of holders of the Company's Common Stock, were filed in June 1991 in the
United States District Court for the Southern District of New York against the
Company and several of its directors. Plaintiffs allege that defendants issued
materially false and misleading statements regarding possible strategic
alliances and failed to disclose the Company's intention to make the Rights
Offering Proposal of June 5, 1991, whereby each holder of the Company's Common
Stock was granted a specific number of transferable subscription rights to
purchase additional shares of the Company's Common Stock that could be
exercised or sold under certain specified terms and conditions, in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
and the state common law of fraud and negligent misrepresentation. Plaintiffs
in both actions seek unspecified monetary damages. On May 29, 1992, the
defendants' motion to dismiss these actions with prejudice was granted. On
November 30, 1993, a panel of the United States Court of Appeals for the Second
Circuit, with one judge dissenting, reversed the dismissal and remanded the
case to the District Court for further proceedings. On January 24, 1994,
defendants filed a petition for a writ of certiorari in the U.S. Supreme Court.
Plaintiffs filed briefs in opposition to the petition and in support of a
conditional cross-petition on or about February 23, 1994, and defendants have
filed reply papers. On March 3, 1994, defendants also filed a motion for
summary judgment in the District Court. The District Court has stayed all
proceedings pending a determination by the Supreme Court on the certiorari
petitions.
 
  Two identical lawsuits under the name of Ferne Glanzrock, Bernice Berger,
Charles Elder and Arthur Schecter v. Steven J. Ross et al., that were filed in
March 1992, in the New York Supreme Court and in the Delaware Chancery Court
against the Company's Board of Directors relating to certain payments to the
Company's former President and Co-Chief Executive Officer N.J. Nicholas Jr. in
connection with his termination of employment were dismissed without prejudice
by Court order on January 26, 1994 pursuant to a stipulation of the parties.
 
  On January 24, 1994, a purported class action entitled Dr. Arun Shingala v.
Gerald M. Levin, et al., Civil Action No. 13356, was filed against the Company
and its directors in the Court of Chancery of the State of Delaware, New Castle
County, on behalf of all stockholders of the Company, other than defendants and
their related or affiliated entities. The complaint alleges that the defendant
directors acting on behalf of the Company have adopted a plan ("rights plan")
to thwart any attempt to take over control of the Company which the defendants
find unfavorable to their personal interests. Plaintiff contends that
defendants' actions are in violation of their fiduciary duties and seeks a
judgment rescinding the adoption of the rights plan and ordering the director
defendants jointly and severally to account for all damages which reasonably
flow from the actions and transactions alleged.
 
  In November 1992, TWE filed a federal lawsuit seeking to overturn major
provisions of the 1992 Cable Act primarily on First Amendment grounds. The
complaint, filed in the U.S. District Court for the District of Columbia
against the FCC and the United States of America, challenges the provisions of
the 1992 Cable Act relating to rate regulation, must carry, retransmission
consent, terms of dealing by vertically integrated programmers, uniform pricing
and operation of cable systems by municipal authorities, the number of
subscribers that a cable operator could serve nationwide, free previews of
certain premium channels and educational channel set-aside requirements for
direct broadcast satellite service. In addition, the complaint seeks to
overturn several parts of the 1984 Cable Act relating to public, educational
and government access requirements and commercial leased channels. The
complaint seeks injunctions against the enforcement or implementation of these
provisions. Several other parties have also filed similar lawsuits and these
actions have been at least partially consolidated with the action filed by TWE.
Hearings on the plaintiffs' motions for summary judgment and the defendants'
motions to dismiss or for summary judgment were held in March 1993. On April 8,
1993, in a 2-1 decision, the District Court upheld the constitutionality of the
must carry provisions of the 1992 Cable Act. On May 3, 1993, TWE filed an
appeal from this decision directly to the U.S. Supreme Court. The U.S. Supreme
Court heard argument on that appeal in January 1994. On September
16, 1993, a one-judge District Court upheld the constitutionality on First
Amendment grounds of all the other challenged provisions except restrictions on
the number of subscribers that a cable operator could serve
 
                                      I-41

 
nationwide, free pay TV previews and direct broadcast channel usage. TWE
appealed this decision to the U.S. Court of Appeals for the D.C. Circuit on
November 12, 1993. For a description of the 1984 Cable Act and the 1992 Cable
Act, see Item 1 "Business--Cable Division--Regulation and Legislation."
 
  By letters dated July 15, 1993 and September 21, 1993 (the "Access Letters"),
the Dallas Regional Office of the Federal Trade Commission (the "FTC") informed
WEA that it is conducting a preliminary investigation to determine whether WEA
is "unreasonably restricting the resale of previously-owned compact discs" and
"unreasonably restricting the sale of new compact discs." The Access Letters
allege that WEA's conduct may violate Section 5 of the Federal Trade Commission
Act, but also say that neither the Access Letters nor the existence of the
investigation "should be viewed as an accusation by the FTC or its staff of any
wrongdoing by [WEA]." The Access Letters request that WEA voluntarily submit
the documents and information requested therein. The FTC investigation also
includes other major distributors of recorded music. WEA is cooperating with
the investigation.
 
  On July 19, 1993, Wherehouse Entertainment, Inc., a California corporation
engaged in the retail sale of music cassettes and compact discs ("CDs"), filed
an action in the United States District Court for the Central District of
California entitled Wherehouse Entertainment, Inc. v. CEMA Distribution, Sony
Music Distribution, UNI Distribution Corporation and Warner Elektra Atlantic
Corporation, No. 93-4253 SVW, alleging that, by implementing policies
restricting the advertising allowances of customers that sell used CDs, the
defendants have violated Section 1 of the Sherman Act, Sections 2(d) and 2(e)
of the Robinson-Patman Act and Section 17200 of the California Business &
Professions Code. Plaintiff sought injunctive relief, treble damages pursuant
to Section 4 of the Clayton Act, attorneys' fees and costs of suit. On October
20, 1993, plaintiff and WEA settled this case on terms not material to the
business of either WEA or WCI.
 
  Also in July 1993, two purported class actions against the same defendants in
the Wherehouse litigation were filed in the United States District Court for
the Northern District of Ohio and in the United States District Court for the
Central District of California, containing substantially the same allegations
and seeking substantially the same relief as the complaint in the Wherehouse
case. Both class action suits have been settled by agreements that are
currently before the courts for approval.
 
  In October 1993, a purported class action was filed in the United States
District Court for the Northern District of Georgia entitled Samuel B. Moore,
et al. v. American Federation of Television and Radio Artists, et al., No. 93-
CV-2358. The action was brought by fifteen named music performers or
representatives of deceased performers on behalf of an alleged class of
performers who participated in the creation or production of phonograph
recordings for one or more of the defendant recording companies. The named
defendants include the American Federation of Television and Radio Artists
("AFTRA"), the AFTRA Health and Retirement Fund ("Fund"), each present trustee
of the Fund and fifty named recording companies, including four WCI
subsidiaries. The named defendant recording companies comprise substantially
all of the domestic recording industry and the complaint seeks to establish a
defendant class for purposes of the litigation. The complaint seeks recovery
against the recording companies for, among other things, breach of contract,
breach of fiduciary duty, fraud, embezzlement and RICO violations, all growing
out of alleged failure by the recording companies to make proper contributions
to the Fund pursuant to the Phono Code, which is negotiated by AFTRA and most
of the domestic recording companies, and other alleged failures to meet the
terms of the Phono Code and individual contracts. Plaintiffs seek from the
defendant record companies substantial monetary damages, treble damages,
attorneys' fees and costs and the imposition of a constructive trust over the
master recordings created from recorded performances of the plaintiffs. In
March 1994, plaintiffs filed an amended complaint. Plaintiffs also have filed a
motion for a preliminary injunction against AFTRA and the Fund's trustees
seeking, among other things, to enjoin the completion of audits of the amount
of contributions to be made to the Fund and ongoing collective bargaining
negotiations between AFTRA and the record companies, as well as the removal of
the Fund's present trustees. The defendant record companies, along with AFTRA
and the Fund, have filed papers in opposition to the motion for a preliminary
injunction. The time for the record companies to respond to plaintiffs' amended
complaint has not yet expired.
 
 
                                      I-42

 
  The Company and its subsidiaries are also subject to industry investigations
by certain government agencies and/or proceedings under the antitrust laws that
have been filed by private parties in which, in some cases, other companies in
the same or related industries are also defendants. The Company and its
subsidiaries have denied or will deny liability in all of these actions. In all
but a few similar past actions, the damages, if any, recovered from the Company
or the amounts, if any, for which the actions were settled were small or
nominal in relation to the damages sought; and it is the opinion of the
management of the Company that any settlements or adverse judgments in the
similar actions currently pending will not involve the payment of amounts or
have other results that would have a material adverse effect on the financial
condition of the Company.
 
  In addition, WCI and certain of its current and former directors are parties
to lawsuits previously disclosed in WCI's annual reports or other filings
which, among other things, challenge as excessive certain executive
compensation arrangements between WCI and, among others, Steven J. Ross,
formerly Chairman of the Board of WCI. The parties have executed a stipulation
of settlement of these actions and on March 15, 1994 the New York Supreme Court
approved a Notice of Proposed Settlement to be sent to shareholders and set May
13, 1994 as the date for the settlement hearing.
 
ITEM 4. Submission of Matters to a Vote of Security Holders
 
  Not Applicable.
 
                                      I-43

 
                       EXECUTIVE OFFICERS OF THE COMPANY
 
  Pursuant to General Instruction G (3), the information regarding the
Company's executive officers required by Item 401(b) of Regulation S-K is
hereby included in Part I of this report.
 
  The following table sets forth the name of each executive officer of the
Company, the office held by such officer and the age, as of February 28, 1994,
of such officer:
 


       NAME              AGE                            OFFICE
       ----              ---                            ------
                       
Gerald M. Levin.........  54 Chairman of the Board, President and Chief Executive Officer
J. Richard Munro........  63 Chairman of the Executive/Finance Committee
Bert W. Wasserman.......  61 Executive Vice President and Chief Financial Officer
Peter R. Haje...........  59 Executive Vice President and General Counsel
Timothy A. Boggs........  43 Senior Vice President, Public Policy
David R. Haas...........  52 Senior Vice President and Controller
Geoffrey W. Holmes......  47 Senior Vice President, Technology
Tod R. Hullin...........  50 Senior Vice President, Communications and Public Affairs
Philip R. Lochner, Jr...  50 Senior Vice President

 
  Set forth below are the positions held by each of the executive officers
named above since March 1, 1989:
 
Mr. Levin..................  Chairman of the Board of Directors, President and
                             Chief Executive Officer since January 21, 1993.
                             Prior to that he served as President and Co-Chief
                             Executive Officer from February 20, 1992; Vice
                             Chairman and Chief Operating Officer from May
                             1991; and Vice Chairman of the Board prior to
                             that.
 
Mr. Munro..................  Chairman of the Executive/Finance Committee of
                             the Board of Directors since January 1993 (at
                             which time the functions of the Executive
                             Committee and the Finance Committee were merged),
                             having served as Chairman of the Executive
                             Committee since May 8, 1990. Prior to that, he
                             was Co-Chairman of the Board and Co-Chief
                             Executive Officer from July 1989 and he served as
                             Chairman and Chief Executive Officer prior to
                             that.
 
Mr. Wasserman..............  Executive Vice President and Chief Financial
                             Officer since January 10, 1990. Prior to that, he
                             was a member of the Office of the President and
                             Chief Financial Officer of WCI.
 
Mr. Haje...................  Executive Vice President and General Counsel
                             since October 1, 1990. Prior to that, he was a
                             member of the law firm of Paul, Weiss, Rifkind,
                             Wharton & Garrison.
 
Mr. Boggs..................  Senior Vice President, Public Policy since
                             November 19, 1992. Prior to that he served as
                             Vice President of Public Affairs from January
                             1990 and Vice President of Public Affairs of WCI
                             prior to that.
 
Mr. Haas...................  Senior Vice President and Controller since
                             January 18, 1990. Prior to that, he served as
                             Senior Vice President and Controller of WCI.
 
Mr. Holmes.................
                             Senior Vice President, Technology since January
                             21, 1993. Prior to that, he served as Senior Vice
                             President from January 10, 1990 and as Senior
                             Vice President of WCI prior to that.
 
 
                                      I-44

 
Mr. Hullin.................  Senior Vice President, Communications and Public
                             Affairs since February 7, 1991. Prior to that, he
                             served as Senior Vice President, Corporate
                             Affairs of SmithKline Beecham (diversified health
                             care company) from July 1989 and as Vice
                             President, Communications and Public Affairs
                             prior to that.
 
Mr. Lochner................  Senior Vice President since July 18, 1991. Prior
                             to that, he was a Commissioner of the Securities
                             and Exchange Commission from March 1990 to June
                             1991. Prior to his tenure with the SEC, Mr.
                             Lochner served as Deputy General Counsel and
                             Senior Vice President of Time Warner from January
                             to March 1990 and General Counsel, Senior Vice
                             President and Secretary prior to that.
 
                                      I-45

 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The principal market for the Company's Common Stock is the New York Stock
Exchange. The Common Stock is also listed on the Pacific Stock Exchange and the
London Stock Exchange. For quarterly price information with respect to the
Company's Common Stock for the two years ended December 31, 1993, see
"Quarterly Financial Information" at page F-26 herein, which information is
incorporated herein by reference.
 
  The approximate number of holders of record of the Company's Common Stock as
of March 1, 1994 was 23,000.
 
  For information on the frequency and amount of dividends paid with respect to
the Company's Common Stock during the two years ended December 31, 1993, see
"Quarterly Financial Information" at page F-26 herein, which information is
incorporated herein by reference.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The selected financial information of the Company for the five years ended
December 31, 1993 is set forth at pages F-24 and F-25 herein and is
incorporated herein by reference.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
  The information set forth under the caption "Management's Discussion and
Analysis" at pages F-27 through F-34 herein is incorporated herein by
reference.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The consolidated financial statements and supplementary data of the Company
and the report of independent auditors thereon set forth at pages F-2 through
F-21 and F-23 herein are incorporated herein by reference.
 
  Quarterly Financial Information set forth at page F-26 herein is incorporated
herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  Not Applicable.
 
                                      II-1

 
                                    PART III
 
ITEMS 10, 11, 12 AND 13.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
                             EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF
                             CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN
                             RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Information called for by PART III (Items 10, 11, 12 and 13) is incorporated
by reference from the Company's definitive Proxy Statement to be filed in
connection with its 1994 Annual Meeting of Stockholders pursuant to Regulation
14A, except that the information regarding the Company's executive officers
called for by Item 401(b) of Regulation S-K has been included in PART I of this
report and the information called for by Items 402(k) and 402(l) of Regulation
S-K is not incorporated by reference.
 
                                     III-1

 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) (1)-(2) Financial Statements and Schedules:
 
    (i) The list of consolidated financial statements and schedules set forth
  in the accompanying Index to Consolidated Financial Statements and Other
  Financial Information at page F-1 herein is incorporated herein by
  reference. Such consolidated financial statements and schedules are filed
  as part of this report.
 
    (ii) The financial statements and financial statement schedules of
  Paragon Communications and the report of independent accountants thereon,
  set forth at pages F-70 through F-83 in the 1993 Annual Report on Form 10-K
  of Time Warner Entertainment Company, L.P. (Reg. No. 33-53742) are
  incorporated herein by reference and are filed as an exhibit to this
  report.
 
    (3) Exhibits:
 
    The exhibits listed on the accompanying Exhibit Index are filed or
  incorporated by reference as part of this report and such Exhibit Index is
  incorporated herein by reference. Exhibits 10.1 through 10.20 listed on the
  accompanying Exhibit Index identify management contracts or compensatory
  plans or arrangements required to be filed as exhibits to this report, and
  such listing is incorporated herein by reference.
 
  (b) No reports on Form 8-K were filed by Time Warner during the quarter
  ended December 31, 1993.
 
                                      IV-1

 
                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                         Time Warner Inc.
 
                                                 /s/ Bert W. Wasserman
                                         By ...................................
                                                     BERT W. WASSERMAN 
                                               EXECUTIVE VICE PRESIDENT AND
                                                  CHIEF FINANCIAL OFFICER
 
Date: March 30, 1994
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
         SIGNATURE                        TITLE                      DATE
 
    /s/ Gerald M. Levin       Director, Chairman of the         March 30, 1994
............................   Board, President and Chief
     (GERALD M. LEVIN)         Executive Officer
 

   /s/ Bert W. Wasserman      Executive Vice President and      March 30, 1994
............................   Chief Financial Officer
    (BERT W. WASSERMAN)        (principal financial
                               officer)
 
     /s/ David R. Haas        Senior Vice President and         March 30, 1994
............................   Controller (principal
      (DAVID R. HAAS)          accounting officer)
 
             *                Director                          March 30, 1994
............................
       (MERV ADELSON)
 
             *                Director                          March 30, 1994
............................
 (LAWRENCE B. BUTTENWIESER)
 
             *                Director                          March 30, 1994
............................
   (HUGH F. CULVERHOUSE)
 
             *                Director                          March 30, 1994
............................
  (EDWARD S. FINKELSTEIN)
 
             *
 
 
............................  Director                          March 30, 1994
 (BEVERLY SILLS GREENOUGH)
 
                                      IV-2

 
          SIGNATURE                         TITLE               DATE
          ---------                         -----               ----
              *                                             
                                                            
                                                            
.............................             Director           March 30, 1994 
      (CARLA A. HILLS)                                          
                                                            
              *                                             
                                                            
                                                            
.............................             Director           March 30, 1994
      (DAVID T. KEARNS)                                                     
                                                                            
              *                                                             
                                                                            
                                                                             
.............................             Director           March 30, 1994 
      (HENRY LUCE III)                                                      
                                                                            
              *                                                             
                                                                            
                                                                             
.............................             Director           March 30, 1994 
        (REUBEN MARK)                                                       
                                                                            
              *                                                             
                                                                            
                                                                             
.............................             Director           March 30, 1994 
     (J. RICHARD MUNRO)                                                     
                                                                            
              *                                                             
                                                                            
                                                                             
.............................             Director           March 30, 1994 
    (RICHARD D. PARSONS)                                                    
                                                                            
              *                                                             
                                                                            
                                                                             
.............................             Director           March 30, 1994 
     (DONALD S. PERKINS)                                                    
                                                                            
              *                                                             
                                                                            
                                                                             
.............................             Director           March 30, 1994 
     (RAYMOND S. TROUBH)                                                    
                                                                            
              *                                                             
                                                                            
                                                                             
.............................             Director           March 30, 1994 
  (FRANCIS T. VINCENT, JR.)                                                 
                                                                            

      /s/ David R. Haas                                                     
*By: ........................                                               
      ATTORNEY-IN-FACT                                                       
                                                                             
                                      IV-3                                  
                                                                            
                                                                            
                                                                            
                                                                             
                                                                             

 
          TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND OTHER FINANCIAL INFORMATION
 


                                                                       PAGE
                                                                    -----------
                                                                     TIME
                                                                    WARNER TWE
                                                                    ------ ----
                                                                     
Consolidated Financial Statements:
 Balance Sheet....................................................   F-2   F-39
 Statement of Operations..........................................   F-3   F-40
 Statement of Cash Flows..........................................   F-4   F-41
 Statement of Shareholders' Equity and Partnership Capital........   F-5   F-42
 Notes to Consolidated Financial Statements.......................   F-6   F-43
Report of Management..............................................   F-22
Report of Independent Auditors....................................   F-23  F-57
Selected Financial Information....................................   F-24  F-58
Quarterly Financial Information...................................   F-26  F-59
Management's Discussion and Analysis:
 Results of Operations............................................   F-27  F-60
 Financial Condition and Liquidity................................   F-32  F-63
Supplementary Information.........................................         F-66
Schedules as of or for each of the three years in the period ended
 December 31, 1993:
 II -- Amounts Receivable from Related Parties and Underwriters,
       Promoters and
       Employees other than Related Parties.......................   F-35  F-67
VIII-- Valuation and Qualifying Accounts..........................   F-37  F-68
  X -- Supplementary Operating Statement Information..............   F-38  F-69

 
All other financial statements and schedules are omitted because the required
information is not present, or is not present in amounts sufficient to require
submission of the financial statements or schedules, or because the information
required is included in the consolidated financial statements and notes
thereto.
 
                                      F-1

 
                               TIME WARNER INC.
                          CONSOLIDATED BALANCE SHEET
                                 DECEMBER 31,
                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 


                                                  HISTORICAL RESTATED  HISTORICAL
                                                   1993 (A)  1992 (A)   1992 (A)
                                                  ---------- --------  ----------
                                                              
ASSETS
CURRENT ASSETS
Cash and equivalents............................   $   200   $   906    $   942
Receivables, less allowances of $676, $644 and
 $884...........................................     1,400     1,238      2,298
Inventories.....................................       321       339      1,260
Prepaid expenses................................       613       521        617
                                                   -------   -------    -------
Total current assets............................     2,534     3,004      5,117
Investments in and amounts due to and from
 Entertainment Group............................     5,627     5,392         --
Investments, other..............................     1,613     1,518      2,208
Land and buildings..............................       393       394        813
Cable television equipment......................        --        --      2,951
Furniture, fixtures and other equipment.........       878       726      1,587
                                                   -------   -------    -------
                                                     1,271     1,120      5,351
Less accumulated depreciation...................      (505)     (402)    (2,085)
                                                   -------   -------    -------
Property, plant and equipment...................       766       718      3,266
Music catalogues, contracts and copyrights......     1,309     1,413      1,413
Noncurrent inventories..........................        --        --      1,711
Cable television franchises.....................        --        --      3,660
Excess of cost over net assets acquired.........     4,691     4,749      9,105
Other assets....................................       352       249        886
                                                   -------   -------    -------
Total assets....................................   $16,892   $17,043    $27,366
                                                   =======   =======    =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................   $   532   $   607    $   929
Participations, royalties and programming costs.       567       534      1,202
Debt due within one year........................       120       164        171
Other current liabilities.......................     1,006       784      1,610
                                                   -------   -------    -------
Total current liabilities.......................     2,225     2,089      3,912
Long-term debt (b)..............................     9,291     2,897     10,068
Deferred income taxes...........................     2,998     2,822      2,829
Unearned portion of paid subscriptions..........       633       624        624
Other liabilities...............................       375       444        805
Minority interests..............................        --        --        961
SHAREHOLDERS' EQUITY (B)
Preferred stock, $1 par value, 250 million
 shares authorized,
 962 thousand and 128.8 million shares
 outstanding, $140 million
 and $6.532 billion liquidation preference (b)..         1       129        129
Common stock, $1 par value, 750 million shares
 authorized,
 378.3 million and 372.0 million shares
 outstanding
 (excluding 45.2 million and 44.5 million
 treasury shares)...............................       378       372        372
Paid-in capital.................................     2,537     8,606      8,606
Unrealized appreciation of certain marketable
 securities.....................................       205        --         --
Accumulated deficit.............................    (1,751)     (940)      (940)
                                                   -------   -------    -------
Total shareholders' equity......................     1,370     8,167      8,167
                                                   -------   -------    -------
Total liabilities and shareholders' equity......   $16,892   $17,043    $27,366
                                                   =======   =======    =======

- --------
(a)The 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The
historical financial statements for periods prior to such date have not been
changed; however, financial statements for the year ended December 31, 1992
retroactively reflecting the deconsolidation are presented as supplementary
information under the column heading "restated" to facilitate comparative
analysis (Note 1).
 
(b)Time Warner issued $6.1 billion of long-term debt and used $.5 billion of
cash and equivalents in 1993 in exchange for or to redeem preferred stock
having an aggregate liquidation preference of $6.4 billion (Notes 5 and 7).
 
See accompanying notes.
 
                                      F-2

 
                               TIME WARNER INC.
                     CONSOLIDATED STATEMENT OF OPERATIONS
                           YEARS ENDED DECEMBER 31,
                     (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 


                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                        1993(A)   1992(A)   1992(A)    1991(A)
                                       ---------- -------- ---------- ----------
                                                          
Revenues (b).........................    $6,581    $6,309   $13,070    $12,021
                                         ------    ------   -------    -------
Cost of revenues (b) (c).............     3,780     3,633     8,451      7,769
Selling, general and administrative
 (b) (c).............................     2,210     2,147     3,276      3,098
                                         ------    ------   -------    -------
Operating expenses...................     5,990     5,780    11,727     10,867
                                         ------    ------   -------    -------
Business segment operating income....       591       529     1,343      1,154
Equity in pretax income of Entertain-
 ment Group (b)......................       281       226        --         --
Interest and other, net (b)..........      (718)     (351)     (882)      (966)
Corporate expenses (b)...............       (73)      (81)     (141)      (136)
                                         ------    ------   -------    -------
Income before income taxes...........        81       323       320         52
Income taxes (d).....................      (245)     (237)     (234)      (151)
                                         ------    ------   -------    -------
Income (loss) before extraordinary
 item................................      (164)       86        86        (99)
Extraordinary loss on retirement of
 debt, net of $37 million income tax
 benefit.............................       (57)       --        --         --
                                         ------    ------   -------    -------
Net income (loss)....................      (221)       86        86        (99)
Preferred dividend requirements (e)..      (118)     (628)     (628)      (593)
                                         ------    ------   -------    -------
Net loss applicable to common shares.    $ (339)   $ (542)  $  (542)   $  (692)
                                         ======    ======   =======    =======
Loss per common share:
Loss before extraordinary item.......    $ (.75)   $(1.46)  $ (1.46)   $ (2.40)
                                         ======    ======   =======    =======
Net loss.............................    $ (.90)   $(1.46)  $ (1.46)   $ (2.40)
                                         ======    ======   =======    =======
Average common shares................     374.7     371.0     371.0      288.2
                                         ======    ======   =======    =======
- --------
(a)The 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The
historical financial statements for periods prior to such date have not been
changed; however, financial statements for the year ended December 31, 1992
retroactively reflecting the deconsolidation are presented as supplementary
information under the column heading "restated" to facilitate comparative
analysis (Note 1).
 
(b)Includes the following income (expenses) in 1993 resulting from
transactions with the Entertainment Group and other related companies:
revenues-$170 million; cost of revenues-$(87) million; selling, general and
administrative-$59 million; equity in pretax income of Entertainment Group-
$(115) million; interest and other, net-$(4) million; and corporate expenses-
$60 million.
 
(c) Includes depreciation and amortization expense of:
                                         $  424    $  384   $ 1,172    $ 1,109
                                         ======    ======   =======    =======

 
(d)Includes $70 million unusual charge for increase in deferred income tax
liability as a result of new tax law.
 
(e)Time Warner issued $6.1 billion of long-term debt and used $.5 billion of
available cash and equivalents in 1993 in exchange for or to redeem preferred
stock having an aggregate liquidation preference of $6.4 billion (Notes 5 and
7).
 
See accompanying notes.
 
                                      F-3

 
                               TIME WARNER INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                           YEARS ENDED DECEMBER 31,
                                  (MILLIONS)
 


                                      HISTORICAL RESTATED HISTORICAL HISTORICAL
                                       1993(A)    1992(A)   1992(A)    1991(A)
                                      ---------- -------- ---------- ----------
                                                         
OPERATIONS
Net income (loss)...................    $ (221)    $ 86     $   86     $  (99)
Adjustments for noncash and nonoper-
 ating items:
Depreciation and amortization.......       424      384      1,172      1,109
Noncash interest expense............       185       64         64         --
Unusual tax charge and extraordinary
 loss (b)...........................       127       --         --         --
Equity in pretax income of Enter-
 tainment Group, less distributions.      (261)     (43)        --         --
Equity in other investments.........        --        7         45         70
Changes in operating assets and lia-
 bilities:
 Receivables........................       (71)      37       (235)      (138)
 Inventories........................        20      (16)      (120)        18
 Accounts payable and other liabili-
  ties..............................       213       (7)       109         71
 Other balance sheet changes........      (159)      50         39         66
                                        ------     ----     ------     ------
Cash provided by operations.........       257      562      1,160      1,097
                                        ------     ----     ------     ------
INVESTING ACTIVITIES
Investments and acquisitions........      (175)    (122)      (389)      (478)
Capital expenditures................      (198)    (172)      (574)      (527)
Investment proceeds.................       103      913         88        186
                                        ------     ----     ------     ------
Cash provided (used) by investing
 activities.........................      (270)     619       (875)      (819)
                                        ------     ----     ------     ------
FINANCING ACTIVITIES
Increase (decrease) in debt.........     3,115      (42)        20     (2,454)
Redemption of Series D preferred
 stock..............................    (3,494)      --         --         --
Dividends paid......................      (299)    (386)      (386)      (363)
TWE capital contribution............        --       --      1,000         --
Proceeds from rights offering.......        --       --         --      2,558
Stock option and dividend reinvest-
 ment plans.........................        92       23         23         --
Other, principally financing costs..      (143)     (69)      (199)         8
                                        ------     ----     ------     ------
Cash provided (used) by financing
 activities.........................      (729)    (474)       458       (251)
                                        ------     ----     ------     ------
INCREASE (DECREASE) IN CASH AND
 EQUIVALENTS........................    $ (742)    $707     $  743     $   27
                                        ======     ====     ======     ======

- --------
(a)The 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The
historical financial statements for periods prior to such date have not been
changed; however, financial statements for the year ended December 31, 1992
retroactively reflecting the deconsolidation are presented as supplementary
information under the column heading "restated" to facilitate comparative
analysis (Note 1).
 
(b)Includes $70 million increase in deferred income tax liability as a result
of new tax law and $57 million extraordinary loss on the retirement of debt.
 
See accompanying notes.
 
                                      F-4

 
                                TIME WARNER INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                      (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 


                                                                    RETAINED
                                                                    EARNINGS
                          PREFERRED COMMON  PAID-IN   UNREALIZED  (ACCUMULATED
                            STOCK    STOCK  CAPITAL  APPRECIATION   DEFICIT)    TOTAL
                          --------- ------- -------  ------------ ------------ -------
                                                             
BALANCE AT DECEMBER 31,
 1990...................   $   117  $   230 $ 5,468    $    --      $   499    $ 6,314
Net loss................                                                (99)       (99)
Dividends on common
 stock--$.25 per share..                                                (75)       (75)
Dividends on Series B, C
 and D preferred stock--
 $9.28, $4.375 and $5.50
 (in kind) per share,
 respectively...........         6              299                    (593)      (288)
Common stock issued in
 rights offering........                138   2,420                              2,558
Shares issued pursuant
 to stock option and
 dividend reinvestment
 plans..................                  1      15                                 16
Other...................                  1      67                       4         72
                           -------  ------- -------    -------      -------    -------
BALANCE AT DECEMBER 31,
 1991...................       123      370   8,269         --         (264)     8,498
Net income..............                                                 86         86
Dividends on common
 stock--$.265 per share.                                                (98)       (98)
Dividends on Series B, C
 and D preferred stock--
 $9.28, $4.375 and $5.50
 (in kind) per share,
 respectively...........         7              333                    (628)      (288)
Purchase of stock.......        (1)             (61)                               (62)
Shares issued pursuant
 to stock option and
 dividend reinvestment
 plans..................                  1      28                                 29
Other...................                  1      37                     (36)         2
                           -------  ------- -------    -------      -------    -------
BALANCE AT DECEMBER 31,
 1992...................       129      372   8,606         --         (940)     8,167
Net loss................                                               (221)      (221)
Dividends on common
 stock--$.31 per share
 ($.08 per share per
 quarter effective for
 the second quarter of
 1993)..................                                               (116)      (116)
Dividends on Series B
 preferred stock--$9.28
 per share..............                          4                     (13)        (9)
Dividends on Series C
 and D preferred stock
 to dates of redemption
 or exchange............                                               (106)      (106)
Exchange of Series C
 preferred stock and
 redemption
 of Series D preferred
 stock (Notes 5 and 7)..      (128)          (6,240)                   (311)    (6,679)
Unrealized appreciation
 of certain marketable
 equity investments at
 adoption of FAS 115....                                   205                     205
Shares issued pursuant
 to stock option and
 dividend reinvestment
 plans..................                  4     116                                120
Other...................                  2      51                     (44)         9
                           -------  ------- -------    -------      -------    -------
BALANCE AT DECEMBER 31,
 1993...................   $     1  $   378 $ 2,537    $   205      $(1,751)   $ 1,370
                           =======  ======= =======    =======      =======    =======

 
See accompanying notes.
 
                                      F-5

 
                                TIME WARNER INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF CONSOLIDATION AND ACCOUNTING
FOR INVESTMENTS IN AFFILIATED COMPANIES
 
  The consolidated financial statements include the accounts of Time Warner
Inc. and its subsidiaries ("Time Warner"). Significant intercompany accounts
and transactions are eliminated. Interests in consolidated subsidiaries not
owned by Time Warner are eliminated from operating results and reflected in the
balance sheet as minority interests.
 
  Investments in companies in which Time Warner has significant influence but
less than controlling financial interest are stated at cost plus equity in the
affiliates' undistributed earnings. The excess of cost over the underlying net
equity of investments in affiliated companies is attributed to the underlying
net assets based on their respective fair values and amortized over their
respective economic lives.
 
  Time Warner Entertainment Group ("Entertainment Group"), consisting of Time
Warner's interests in certain entertainment companies, principally Time Warner
Entertainment Company, L.P. ("TWE"), was deconsolidated effective January 1,
1993 as a result of an agreement between TWE and U S WEST, Inc. ("USW") to co-
manage TWE Cable's Full Service Networks(TM), subject to franchise and
regulatory approvals, and certain other changes to the partnership agreement
relating to the general governance of TWE (Note 2). The historical financial
statements of Time Warner for periods prior to January 1, 1993 have not been
changed; accordingly, they include TWE and other Entertainment Group interests
on a consolidated basis. However, financial statements for the year ended
December 31, 1992 retroactively reflecting the deconsolidation of the
Entertainment Group also are presented under the caption "restated" to
facilitate comparative analysis.
 
  The effect of changes in Time Warner's ownership interests resulting from the
issuance of equity capital to third parties by consolidated subsidiaries or
affiliates accounted for on the equity basis is included in income.
 
  Time Warner's $14 billion cost to acquire Warner Communications Inc. ("WCI")
was allocated to the net assets acquired as of December 31, 1989 in accordance
with the purchase method of accounting for business combinations. The
acquisition was financed principally by $8.3 billion of long-term debt and $5.6
billion of Series C and Series D preferred stock, which was redeemed or
exchanged for debt in 1993 (Notes 5 and 7).
 
  The effect of the four-for-one common stock split on September 10, 1992 has
been reflected retroactively.
 
REVENUES AND COSTS
 
  The unearned portion of paid subscriptions is deferred until magazines are
delivered to subscribers. Upon each delivery, a proportionate share of the
gross subscription price is included in revenues.
 
  Inventories of magazines, books, cassettes and compact discs are stated at
the lower of cost or estimated realizable value. Cost is determined using
first-in, first-out; last-in, first-out; and average cost methods. In
accordance with industry practice, certain products are sold to customers with
the right to return unsold items. Revenues from such sales represent gross
sales less a provision for future returns. Returned goods included in inventory
are valued at estimated realizable value but not in excess of cost.
 
PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment are stated at cost. Depreciation is provided
generally on the straight-line method over useful lives ranging up to twenty-
five years for buildings and improvements and up to fifteen years for
furniture, fixtures and equipment.
 
                                      F-6

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
INTANGIBLE ASSETS
 
  Intangible assets are amortized over periods up to forty years using the
straight-line method. Amortization of the excess of cost over net assets
acquired amounted to $148 million, $257 million ($142 million on a restated
basis) and $246 million in 1993, 1992 and 1991, respectively, and amortization
of music copyrights, artists' contracts and record catalogues amounted to $113
million in all years. Amortization of cable television franchises in 1992 and
1991, years in which the Entertainment Group was consolidated, amounted to $194
million and $171 million, respectively. Accumulated amortization of intangible
assets at December 31, 1993 and 1992 amounted to $1.245 billion and $2.021
billion ($943 million on a restated basis), respectively.
 
FOREIGN CURRENCY TRANSLATION
 
  The financial position and operating results of substantially all foreign
operations are consolidated using the local currency as the functional
currency. Local currency assets and liabilities are translated at the rates of
exchange on the balance sheet date, and local currency revenues and expenses
are translated at average rates of exchange during the period. Resulting
translation gains or losses, which have not been material, are included in
retained earnings (accumulated deficit). Foreign currency transaction gains and
losses, which have not been material, are included in operating results.
 
INCOME TAXES
 
  Income taxes are provided in 1993 and 1992 using the liability method
prescribed by Financial Accounting Standards Board ("FASB") Statement No. 109,
"Accounting for Income Taxes," which Time Warner adopted as of January 1, 1992.
Income taxes provided in 1991 using the liability method prescribed by FASB
Statement No. 96 were not restated. The effect of the change in accounting
method was not material.
 
  Under the liability method, deferred income taxes reflect tax carryforwards
and the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement and income tax purposes, as
determined under enacted tax laws and rates. The financial effect of changes in
tax laws or rates is accounted for in the period of enactment.
 
  Realization of the net operating loss and investment tax credit
carryforwards, which were acquired in acquisitions, are accounted for as a
reduction of the excess of cost over net assets acquired.
 
  The principal operations of the Entertainment Group are conducted by
partnerships. Income tax expense includes all income taxes related to Time
Warner's allocable share of partnership income and its equity in the income tax
expense of corporate subsidiaries of the partnerships.
 
FINANCIAL INSTRUMENTS
 
  Investments in unrestricted marketable equity securities not accounted for on
the equity basis are stated at fair value. Unrealized appreciation is reported
net-of-tax in a separate component of shareholders' equity in accordance with
FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which Time Warner adopted as of December 31, 1993.
 
  Foreign exchange contracts are used to reduce exchange rate exposure on
future cash flows and earnings denominated in foreign currencies. Contract
gains and losses generally are included in income. Time Warner had contracts
for the sale of $573 million of foreign currencies at fixed rates at December
31, 1993, primarily Japanese yen, German marks, Canadian dollars and French
francs. The fair value of foreign exchange contracts approximates carrying
value. Time Warner reimburses or is reimbursed by TWE for contract gains or
losses related to TWE's exposure.
 
                                      F-7

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Interest rate swap agreements are used to reduce exposure to interest rate
changes and to lower the overall costs of borrowing. The net amounts paid and
received under open contracts are included in interest expense. At December 31,
1993, Time Warner had contracts to pay floating rates of interest (average rate
of 3.7%) and receive fixed rates of interest (average rate of 5.4%) on $2.1
billion notional amount of indebtedness over an average remaining term of 4
years. The fair value of the Company's debt and related interest rate swap
agreements will fluctuate with changes in the credit markets, including changes
in the level of interest rates. At December 31, 1993, the fair value of Time
Warner's long-term debt was estimated to exceed its carrying value by $530
million. The fair value of the related interest rate swap agreements was not
material.
 
  Fair value is generally determined by reference to market values resulting
from trading on a national securities exchange or in an over-the-counter
market.
 
LOSS PER COMMON SHARE
 
  Loss per common share is based upon the net loss applicable to common shares
after preferred dividend requirements and upon the weighted average of common
shares outstanding during the period. The conversion of securities convertible
into common stock and the exercise of stock options were not assumed in the
calculations of loss per common share because the effect would have been
antidilutive.
 
2.ENTERTAINMENT GROUP
 
  Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1993 consists of the following (millions):
 

                                                                     
      Investment in TWE................................................ $ 5,085
      Due from TWE.....................................................     547
      Due to TWE.......................................................    (257)
                                                                        -------
      Investment in and amounts due to and from TWE....................   5,375
      Investment in other Entertainment Group companies................     252
                                                                        -------
      Total............................................................ $ 5,627
                                                                        =======

 
  TWE is a Delaware limited partnership that was capitalized on June 30, 1992
to own and operate substantially all of the Filmed Entertainment, Programming-
HBO and Cable businesses previously owned by subsidiaries of Time Warner. At
December 31, 1993, the Time Warner subsidiaries ("General Partners") held a
63.27% pro rata priority capital partnership interest in TWE in the initial
capital amount of $3.5 billion, plus partnership income allocated thereto; a
partnership capital interest senior to the pro rata priority capital interests
("General Partners' Senior Capital"), in the initial capital amount of $1.4
billion, plus partnership income allocated thereto; a partnership capital
interest junior to pro rata priority capital interests ("General Partners'
Junior Capital") in the initial capital amount of $2.7 billion, plus
partnership income allocated thereto; and a 63.27% residual equity partnership
interest. The limited partners, subsidiaries of USW, ITOCHU Corporation
("ITOCHU") and Toshiba Corporation ("Toshiba"), held 25.51%, 5.61% and 5.61%
pro rata priority capital partnership interests, respectively, in the initial
capital amounts of $1.4 billion, $313 million and $313 million, respectively,
plus partnership income allocated thereto; and residual equity partnership
interests of 25.51%, 5.61% and 5.61%, respectively. General Partners' Senior
Capital is required to be distributed no later than in three annual
installments beginning July 1, 1997; earlier distributions may be made under
certain circumstances. General Partners' Junior Capital may be increased if
certain performance targets are achieved between 1992 and 2001. Prior to the
admission of USW on September 15, 1993, the General Partners held 87.5% pro
rata priority capital and residual equity partnership interests in TWE, and the
General Partners' Junior Capital interest; and ITOCHU and Toshiba each held
6.25% pro rata priority capital and residual equity partnership interests.
 
                                      F-8

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  At the initial capitalization of TWE, the General Partners contributed the
assets and liabilities or the rights to the cash flow of substantially all of
Time Warner's Filmed Entertainment, Programming-HBO and Cable businesses, and
ITOCHU and Toshiba each contributed $500 million of cash. On September 15,
1993, USW contributed $1.532 billion of cash and a $1.021 billion 4.4% note
("USW Note") for its interests. USW has an option to increase its pro rata
priority capital and residual equity interests to as much as 31.84%, depending
on cable operating performance. The option is exercisable between January 1,
1999 and on or about May 31, 2005 at a maximum exercise price of $1.25 billion
to $1.8 billion, depending on the year of exercise. Either USW or TWE may elect
that the exercise price be paid with partnership interests rather than cash.
Each of ITOCHU and Toshiba have options to increase their interests to as much
as 6.25% in certain circumstances, payable in cash.
 
  Each General Partner has guaranteed a pro rata portion of $7 billion of TWE's
debt and accrued interest at December 31, 1993, based on the relative fair
value of the net assets each General Partner contributed to TWE. Such
indebtedness is recourse to each General Partner only to the extent of its
guarantee. In addition to their interests in TWE and the other Entertainment
Group companies, the assets of the General Partners include the equivalent of
29.6 million common shares of Turner Broadcasting System, Inc., 12.1 million
common shares of Hasbro, Inc., 43.7 million common shares of Time Warner, and
substantially all the assets of Time Warner's music business. There are no
restrictions on the ability of the General Partner guarantors to transfer
assets, other than TWE assets, to parties that are not guarantors.
 
  The summarized financial information for the Entertainment Group set forth
below reflects the consolidation of Six Flags Entertainment Corporation ("Six
Flags") as of January 1, 1993 as a result of the increase in TWE's ownership
from 50% to 100% in September 1993. The historical financial information for
periods prior to such date has not been changed; however, financial information
for the year ended December 31, 1992 retroactively reflecting the consolidation
is presented as supplementary information under the column heading "restated"
to facilitate comparative analysis.
 
TIME WARNER ENTERTAINMENT GROUP
 


                                              YEARS ENDED DECEMBER 31,
                                      -----------------------------------------
                                      HISTORICAL RESTATED HISTORICAL HISTORICAL
                                         1993      1992      1992       1991
                                      ---------- -------- ---------- ----------
OPERATING STATEMENT INFORMATION                      (MILLIONS)
                                                         
Revenues.............................   $7,963    $7,251    $6,761    $ 6,068
Depreciation and amortization........      909       857       788        733
Business segment operating income....      905       855       814        724
Interest and other, net..............      564       569       531        526
Income before income taxes...........      281       226       223        138
Income before extraordinary item.....      217       173       173        103
Net income...........................      207       173       173        103

                                              YEARS ENDED DECEMBER 31,
                                      -----------------------------------------
                                      HISTORICAL RESTATED HISTORICAL HISTORICAL
                                         1993      1992      1992       1991
                                      ---------- -------- ---------- ----------
CASH FLOW INFORMATION                                (MILLIONS)
                                                         
Cash provided by operations..........   $1,276    $  864    $  781    $   715
Capital expenditures.................     (613)     (423)     (402)      (370)
Investments and acquisitions.........     (368)     (383)     (279)      (187)
Decrease in debt.....................     (659)     (791)     (837)    (1,074)
Capital contributions................    1,548     1,012     1,012        816
Increase (decrease) in cash and
 equivalents.........................    1,302        24        13         (4)

 
                                      F-9

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 


                                                         DECEMBER 31,
                                              ----------------------------------
                                              HISTORICAL RESTATED HISTORICAL
                                                 1993      1992      1992
                                              ---------- -------- ----------
BALANCE SHEET INFORMATION                               (MILLIONS)
                                                                
Cash and equivalents.........................  $ 1,338   $    47   $    36
Total current assets.........................    3,766     2,342     2,285
Total assets.................................   18,202    16,733    15,886
Total current liabilities....................    2,301     1,971     1,823
Long-term debt...............................    7,125     7,684     7,171
TWE General Partners' Senior Capital.........    1,536        --        --
TWE partners' capital........................    6,000     6,437     6,437

 
  Pursuant to the TWE partnership agreement, partnership income, to the extent
earned, is first allocated to the partners so that the economic burden of the
income tax consequences of partnership operations is borne as though the
partnership were taxed as a corporation ("special tax allocations"), then to
the priority capital interests, in order of priority, at rates of return
ranging from 8% to 13.25% per annum, and finally to the residual equity
interests. For the purpose of the foregoing allocations, partnership income is
based on the fair value of assets contributed to the partnership, and differs
from net income of TWE, which is based on the historical cost of contributed
assets. Partnership losses generally are allocated first to eliminate prior
allocations of partnership income to, and then to reduce the initial capital
amounts of, the residual equity, General Partners' Junior Capital and pro rata
priority capital interests, in that order, then to reduce General Partners'
Senior Capital, including partnership income allocated thereto, and finally to
reduce any special tax allocations.
 
  TWE reported net income of $198 million and $160 million in 1993 and 1992,
respectively, no portion of which was allocated to the limited partners. Time
Warner did not recognize a gain when TWE was capitalized. The excess of the
General Partners' interest in the net assets of TWE over the net book value of
their investment in TWE is being amortized to income over a twenty year period
at the rate of $17 million per year prior to the admission of USW, and $72
million per year thereafter.
 
  The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. At December 31, 1993, the General Partners
had recorded $276 million of tax related distributions due from TWE, $108
million of which is receivable on or after July 1, 1994, and $271 million of
stock option related distributions due from TWE, based on a closing price of
$44.25, receivable when the options are exercised. In addition to the tax,
stock option and General Partners' Senior Capital distributions, TWE may make
other distributions, generally depending on excess cash and credit agreement
limitations. The General Partners' full share of such distributions may be
deferred if the limited partners do not receive certain threshold amounts by
certain dates. TWE may loan Time Warner up to $1.1 billion, increasing up to
$1.5 billion on July 1, 1995. Generally, TWE must be in compliance with its
credit agreement at the time distributions and loans are made.
 
  In the normal course of conducting their businesses, Time Warner and its
subsidiaries and affiliates have had various transactions with TWE and other
Entertainment Group companies, generally on terms resulting from a negotiation
between the affected units that in management's view results in reasonable
allocations. Time Warner provides TWE with certain corporate support services
for which it receives an annual fee of $60 million.
 
  Inventories of TWE at December 31, 1993 and 1992 include $821 million and
$879 million, respectively, of unamortized cost of the WCI acquisition
allocated to the film library, which is amortized on a straight-line basis over
twenty years, $1.085 billion and $982 million, respectively, of the unamortized
cost of completed films, more than 90% of which is expected to be amortized
within three years after release under the
 
                                      F-10

 
                               TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
individual film-forecast method prescribed by FASB Statement No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films,"
$347 million and $285 million, respectively, of theatrical films and
television programs in process, and $405 million and $457 million,
respectively, of unamortized programming acquired or produced for pay cable
television exhibition, which is allocated to availability periods and
amortized as the programming is exhibited.
 
  On June 26, 1992, Time Warner acquired the 18.7% minority interest in
American Television and Communications Corporation ("ATC") by issuing
redeemable reset notes due August 15, 2002 (Note 5), valued at such date at
$1.3 billion. The acquisition was accounted for by the purchase method of
accounting. ATC subsequently contributed its cable assets to TWE. The
Entertainment Group would have reported net income of $142 million and Time
Warner would have reported net income of $47 million (a loss of $1.57 per
common share after preferred dividends) in 1992 if the acquisition of the ATC
minority interest had occurred at the beginning of that year.
 
3. OTHER INVESTMENTS
 
  Time Warner's other investments consist of:
 


                                                           DECEMBER 31,
                                                  ------------------------------
                                                  HISTORICAL RESTATED HISTORICAL
                                                     1993      1992      1992
                                                  ---------- -------- ----------
                                                            (MILLIONS)
                                                             
Equity basis investments.........................   $  798    $  913    $1,511
Fair value basis investments(/1/)................      553        --        --
Cost basis investments...........................      262       605       697
                                                    ------    ------    ------
Total............................................   $1,613    $1,518    $2,208
                                                    ======    ======    ======

- --------
(1) Upon adoption of FASB Statement No. 115 at December 31, 1993, unrestricted
    marketable equity securities not accounted for on the equity basis are
    stated at fair value. The 1993 amount includes the market value of 12.058
    million shares of common stock of Hasbro, Inc., which can be used, at Time
    Warner's option, to satisfy its obligations with respect to the zero
    coupon exchangeable notes due 2012 (Note 5). Investments in unrestricted
    marketable equity securities not accounted for on the equity basis were
    carried at a cost of $297 million and had a market value of $481 million
    at December 31, 1992.
 
  Companies accounted for on the equity basis other than TWE and its equity
affiliates include Turner Broadcasting System, Inc. ("TBS") (19.4% owned);
Cinamerica Theatres, L.P. (50% owned) and The Columbia House Company
partnerships (50% owned) and other music joint ventures (generally 50% owned).
Equity affiliates of TWE include Paragon Communications (50% owned), certain
other cable system joint ventures (generally 50% owned) and Comedy Partners
(50% owned). A summary of financial information of equity affiliates (100%
basis) is set forth below.
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Revenues..............................   $3,363    $3,020    $4,102     $3,612
Operating income......................      450       433       555        544
Income before extraordinary
 items and cumulative effect of
 a change in accounting principle.....      201       162       168        118
Net income (loss).....................     (135)      207       212        161
Current assets........................    1,586     1,257     1,473      1,234
Total assets..........................    4,111     3,277     5,421      5,295
Current liabilities...................      755       589       951        852
Long-term debt........................    2,606     1,794     3,022      3,341
Total liabilities.....................    3,992     2,606     4,376      4,420

 
 
                                     F-11

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  The market value and cost of Time Warner's investment in TBS at December 31,
1993 was $1.484 billion and $493 million, respectively. The sale, transfer or
other disposition of substantially all of the shares of TBS capital stock is
restricted pursuant to shareholder agreements. The TBS securities also may be
considered restricted securities under the Securities Act of 1933 and, if so,
could only be sold pursuant to an effective registration statement or in a
transaction exempt from the registration requirements of the Securities Act of
1933.
 
4.INVENTORIES

  Time Warner's current inventories consist of:
 


                                                           DECEMBER 31,
                                                  ------------------------------
                                                  HISTORICAL RESTATED HISTORICAL
                                                     1993      1992      1992
                                                  ---------- -------- ----------
                                                            (MILLIONS)
                                                             
Magazines and books..............................    $186      $210     $  210
Recorded music...................................     135       129        129
Entertainment Group (Note 2).....................      --        --        921
                                                     ----      ----     ------
Total............................................    $321      $339     $1,260
                                                     ====      ====     ======

 
5.LONG-TERM DEBT
 
  Long-term debt consists of:


                                                           DECEMBER 31,
                                                  ------------------------------
                                                  HISTORICAL RESTATED HISTORICAL
                                                     1993      1992      1992
                                                  ---------- -------- ----------
                                                            (MILLIONS)
                                                             
9.50% Notes due November 1, 1994(/1/)...........    $  125    $  125   $   125
5.2% Notes due April 15, 1994(/1/)..............       250        --        --
6.05% Notes due July 1, 1995....................       300        --        --
7.45% Notes due February 1, 1998................       500        --        --
7.95% Notes due February 1, 2000................       500        --        --
Redeemable reset notes due August 15, 2002 (8.7%
 yield).........................................     1,572     1,438     1,438
Zero coupon exchangeable notes due December 17,
 2012 (6.25% yield).............................       514       483       483
Zero coupon convertible notes due June 22, 2013
 (5% yield).....................................       923        --        --
9.125% Debentures due January 15, 2013..........     1,000        --        --
8.75% Convertible subordinated debentures due
 January 10, 2015...............................     2,225        --        --
8.75% Debentures due April 1, 2017..............       248       248       248
9.15% Debentures due February 1, 2023...........     1,000        --        --
WCI senior and subordinated debentures..........        --       529       529
TWE credit agreement and commercial paper.......        --        --     5,954
TWE notes and debentures........................        --        --     1,197
Other...........................................       134        74        94
                                                    ------    ------   -------
Total...........................................    $9,291    $2,897   $10,068
                                                    ======    ======   =======

- --------
(1) Classified as long-term because of the intent and ability to refinance
    under a long-term financing arrangement with TWE.
 
  Time Warner issued $6.126 billion of long-term debt and used $494 million of
cash and equivalents in 1993 in connection with the redemption and exchange of
preferred stock having an aggregate liquidation value of $6.368 billion (Note
7).
 
                                      F-12

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The redeemable reset notes due August 15, 2002 do not pay interest prior to
August 15, 1995, the first redemption date, at which time an interest rate will
be set. The interest rate will be reset on August 15, 1998, the second
redemption date. The notes are redeemable at par on each redemption date,
payable in any combination of cash and debt securities, if Time Warner elects
to redeem the notes, or in any combination of cash or equity or debt securities
of Time Warner or any other entity, if the holders elect to have the notes
redeemed. Unamortized discount was $229 million and $358 million at December
31, 1993 and 1992, respectively.
 
  The zero coupon notes do not pay interest until maturity. The zero coupon
exchangeable notes due December 17, 2012 are exchangeable at any time by the
holder into 7.301 shares of common stock of Hasbro, Inc. ("Hasbro shares") per
$1,000 principal amount, subject to Time Warner's right to pay in whole or in
part with cash instead of Hasbro shares. Time Warner can elect to redeem the
notes any time after December 17, 1997, and holders can elect to have the notes
redeemed prior thereto in the event of a change of control, at the issue price
plus accrued interest. Holders also can elect to have the notes redeemed at the
issue price plus accrued interest on December 17, 1997, 2002 and 2007, subject
to Time Warner's right to pay in whole or in part with Hasbro shares instead of
cash. Unamortized discount was $1.137 billion and $1.168 billion at December
31, 1993 and 1992, respectively.
 
  The zero coupon convertible notes due June 22, 2013 are convertible at any
time by the holder into 7.759 shares of Time Warner common stock. Time Warner
can elect to redeem the notes any time after June 22, 1998, and holders can
elect to have the notes redeemed prior thereto in the event of a change in
control, at the issue price plus accrued interest. Holders also can elect to
have the notes redeemed at the issue price plus accrued interest on June 22,
1998, 2003 and 2008, subject to Time Warner's right to pay in whole or in part
with Time Warner common stock instead of cash. Unamortized discount was $1.492
billion at December 31, 1993.
 
  $3.125 billion of 8.75% convertible subordinated debentures due January 10,
2015 were issued in exchange for Series C convertible preferred stock in April
1993 (Note 7). $900 million of such debentures were redeemed in July 1993. The
$2.225 billion of 8.75% convertible subordinated debentures outstanding at
December 31, 1993 are convertible into 46.6 million shares of Time Warner
common stock at the rate of $47.73 principal amount of indebtedness per common
share and are redeemable at any time, in whole or in part, at Time Warner's
option, at 105.25% of par until January 9, 1995, decreasing ratably each year
thereafter to 100% of par on January 10, 2000.
 
  An after-tax cost of $57 million was incurred in connection with the
redemption of debt in 1993, principally the redemption of $900 million of 8.75%
convertible subordinated debentures and $529 million of WCI senior and
subordinated debentures.
 
  Each General Partner has guaranteed a pro rata portion of $7 billion of TWE's
debt and accrued interest at December 31, 1993, as more fully described in Note
2. When TWE was consolidated with Time Warner at December 31, 1992, TWE's debt
consisted of $5.507 billion borrowed under its credit agreement (4.5% interest
rate), $447 million of commercial paper (4.3% interest rate), $600 million of
9.625% senior notes due 2002, $350 million of 8.875% senior notes due 2012 and
$250 million of 10.15% senior notes due 2012. TWE's credit agreement contains
certain restrictive covenants relating to, among other things, additional
indebtedness; cash flow coverage and leverage ratios; and loans, advances,
distributions or other cash payments or transfers of assets to Time Warner and
its subsidiaries.
 
  Interest expense amounted to $698 million in 1993, $729 million ($287 million
on a restated basis) in 1992 and $912 million in 1991.
 
                                      F-13

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Annual repayments of long-term debt for the five years subsequent to December
31, 1993 are: 1994-$375 million; 1995-$300 million; and 1998-$500 million. Such
amounts exclude the aggregate repurchase or redemption prices of $1.801 billion
in 1995, $656 million in 1997 and $1.151 billion in 1998 relating to the
redeemable reset notes, zero coupon exchangeable notes and zero coupon
convertible notes, respectively, in the years in which the holders of such debt
may first exercise their redemption options.
 
6.INCOME TAXES
 
  Domestic and foreign pretax income (loss) are as follows:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Domestic..............................   $ (57)     $ 83      $ 80      $ (29)
Foreign...............................     138       240       240         81
                                         -----      ----      ----      -----
Total.................................   $  81      $323      $320      $  52
                                         =====      ====      ====      =====

 
  Current and deferred income taxes (tax benefits) provided are as follows:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Federal:
  Current(/1/)........................    $ 45      $  9      $  9       $ 29
  Deferred(/2/).......................      11        24        21        (38)
Foreign:
  Current(/3/)........................     168       159       159        103
  Deferred............................     (11)       14        14         20
State and Local:
  Current.............................      86        45        45         60
  Deferred............................     (54)      (14)      (14)       (23)
                                          ----      ----      ----       ----
Total.................................    $245      $237      $234       $151
                                          ====      ====      ====       ====

- --------
(1) Includes utilization of tax carryforwards of $136 million in 1993, $15
    million in 1992 and $120 million in 1991. Excludes $14 million of current
    tax benefits resulting from the exercise of stock options in 1993, which
    were credited directly to paid-in-capital, and $6 million of current tax
    benefits resulting from the retirement of debt, which reduced the
    extraordinary loss.
(2) Includes $70 million unusual charge in 1993 to increase deferred tax
    liability for increase in tax rate.
(3) Includes foreign withholding taxes of $79 million in 1993, $57 million in
    1992 and $43 million in 1991.
 
                                      F-14

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The differences between income taxes expected at the U.S. federal statutory
income tax rate and income taxes provided are as set forth below. The
relationship between income before income taxes and income tax expense is most
affected by the amortization of excess cost over net assets acquired and
certain other financial statement expenses that are not deductible for income
tax purposes and by a $70 million unusual charge ($.19 per common share) in
1993 to adjust the deferred income tax liability for the increase in the U.S.
federal statutory rate from 34% to 35% enacted into law during the year.
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Taxes on income at U.S. federal stat-
 utory rate..........................     $ 28      $110      $109       $ 18
State and local taxes, net...........       21        20        20         24
Nondeductible expenses...............      107        92        90         91
Charge to increase deferred tax lia-
 bility
 for increase in tax rate............       70        --        --         --
Foreign income taxed at different
 rates, net of U.S. foreign tax cred-
 its.................................       13        14        14         26
Minority interests...................       (2)        2         2         11
Dividend received deduction..........       (1)       (3)       (3)        (6)
Other................................        9         2         2        (13)
                                          ----      ----      ----       ----
Total................................     $245      $237      $234       $151
                                          ====      ====      ====       ====

 
  U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $575 million at December 31, 1993. Determination of the amount of
unrecognized deferred U.S. income tax liability with respect to such earnings
is not practicable. If such earnings are repatriated, additional U.S. income
and foreign withholding taxes are expected to be offset by the accompanying
foreign tax credits.
 
  U.S. federal tax carryforwards at December 31, 1993 consisted of $52 million
of net operating losses that expire from 1997 to 2003, $267 million of
investment tax credits that expire from 1996 to 2004, and $27 million of
alternative minimum tax credits that have no expiration dates. The utilization
of certain carryforwards is subject to limitations under U.S. federal income
tax laws.
 
  Significant components of Time Warner's net deferred tax liabilities are as
follows:
 


                                                          DECEMBER 31,
                                                 ------------------------------
                                                 HISTORICAL RESTATED HISTORICAL
                                                    1993      1992      1992
                                                 ---------- -------- ----------
                                                           (MILLIONS)
                                                            
Assets acquired in business combinations........   $2,146    $2,273    $2,273
Depreciation and amortization...................    1,204     1,122     1,122
Unrealized appreciation of certain marketable
 securities.....................................      142        --        --
Other...........................................      338       296       303
                                                   ------    ------    ------
Deferred tax liabilities........................    3,830     3,691     3,698
                                                   ------    ------    ------
Tax carryforwards...............................      312       448       448
Accrued liabilities.............................      137       162       162
Reserves for doubtful receivables and returns...      160       157       157
Other...........................................      223       102       102
                                                   ------    ------    ------
Deferred tax assets.............................      832       869       869
                                                   ------    ------    ------
Net deferred tax liabilities....................   $2,998    $2,822    $2,829
                                                   ======    ======    ======

 
                                      F-15

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7.  CAPITAL STOCK
 
  In 1993, Time Warner redeemed its Series D convertible preferred stock for
cash and exchanged its Series C convertible preferred stock for 8.75%
convertible subordinated debentures due January 10, 2015. The Series D
redemption was financed principally by the proceeds from the issuance of long-
term notes and debentures (Note 5).
 
  Pursuant to a shareholder rights plan adopted in January 1994, Time Warner
distributed one right per common share which becomes exercisable in certain
events involving the acquisition of 15% or more of Time Warner common stock.
Upon the occurrence of such an event, each right entitles its holder to
purchase for $150 the economic equivalent of common stock of Time Warner, or in
certain circumstances, of the acquiror, worth twice as much. In connection with
the plan, 4 million shares of preferred stock were reserved. The rights expire
on January 20, 2004.
 
  Time Warner issued 137.9 million shares of common stock at $20 per share at
the completion of its rights offering on August 5, 1991. Net proceeds of $2.558
billion, after expenses and a $70 million loan to the Time Warner Employee
Stock Ownership Plan, were used to reduce credit agreement debt. If the rights
offering had been completed on January 1, 1991, net loss for the year ended
December 31, 1991 would have been reduced to $33 million, or $1.70 per common
share after preferred dividends.
 
  At December 31, 1993, Time Warner had reserved 66.2 million shares of common
stock for the conversion of the 8.75% convertible subordinated debentures, zero
coupon convertible notes and other convertible securities, and 73 million
shares for the exercise of outstanding options to purchase shares of common
stock. There were 45.2 million shares of common stock in treasury at December
31, 1993, of which 43.7 million were held by subsidiaries who are the General
Partners of TWE. At January 31, 1994, there were approximately 23,000 holders
of record of Time Warner common stock.
 
8.  STOCK OPTION PLANS
 
  Options to purchase Time Warner common stock under various stock option plans
have been granted to employees of Time Warner and TWE, generally at fair market
value at the date of grant. Generally, the options become exercisable over a
three-year vesting period and expire ten years from the date of grant. A
summary of stock option activity under all plans is as follows:
 


                                                        THOUSANDS EXERCISE PRICE
                                                        OF SHARES   PER SHARE
                                                        --------- --------------
                                                            
      Balance at December 31, 1992.....................  67,386       $ 8-38
      Granted..........................................  10,564        32-48
      Exercised........................................  (4,754)        8-36
      Cancelled........................................    (242)       17-38
                                                         ------
      Balance at December 31, 1993.....................  72,954       $ 8-48
                                                         ======
      At December 31, 1993:
      Exercisable......................................  57,675
      Available for future grants......................   4,434

 
  For options granted to employees of TWE, Time Warner is reimbursed for the
amount by which the market value of Time Warner common stock on the exercise
date exceeds the exercise price, or the greater of the exercise price or $27.75
for options granted prior to the TWE capitalization. There were 26.8 million
options held by employees of TWE at December 31, 1993, 18.5 million of which
were exercisable (Note 2).
 
  There were 933,000 options exercised in 1992 at prices ranging from $8-$28
per share, 512,000 options exercised in 1991 at prices ranging from $6-$29 per
share, and 50.1 million options exercisable and 5.1 million options available
for grant at December 31, 1992.
 
                                      F-16

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
9.  BENEFIT PLANS
 
  Time Warner and its subsidiaries have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities.
 
  Pension expense included the following:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Service cost..........................    $ 25      $ 24      $ 37      $  29
Interest cost.........................      45        42        54         46
Actual return on plan assets..........     (52)      (34)      (44)      (118)
Net amortization and deferral.........      10        (9)      (13)        75
                                          ----      ----      ----      -----
Total.................................    $ 28      $ 23      $ 34      $  32
                                          ====      ====      ====      =====

 
  The status of funded pension plans is as follows:
 


                                                          DECEMBER 31,
                                                 ------------------------------
                                                 HISTORICAL RESTATED HISTORICAL
                                                    1993      1992      1992
                                                 ---------- -------- ----------
                                                           (MILLIONS)
                                                            
Accumulated benefit obligation (90% vested).....    $450      $333      $451
Effect of future salary increases...............     134       125       181
                                                    ----      ----      ----
Projected benefit obligation....................     584       458       632
Plan assets at fair value.......................     505       448       596
                                                    ----      ----      ----
Projected benefit obligation in excess of plan
 assets.........................................     (79)      (10)      (36)
Unamortized actuarial losses....................     120        32        31
Unamortized plan changes........................      (8)        6        32
Other...........................................      (9)      (11)      (17)
                                                    ----      ----      ----
Prepaid pension asset...........................    $ 24      $ 17      $ 10
                                                    ====      ====      ====
 
  The following assumptions were used in accounting for pension plans:
 

                                                    1993      1992      1991
                                                 ---------- -------- ----------
                                                            
Weighted average discount rate..................     7.5%      8.5%      8.5%
Return on plan assets...........................       9%       10%       10%
Rate of increase in compensation................       6%        6%        6%

 
  Employees of Time Warner's operations in foreign countries participate to
varying degrees in local pension plans, which in the aggregate are not
significant.
 
  Time Warner also has an employee stock ownership plan, 401(k) savings plans
and profit sharing plans as to which the expense amounted to $46 million in
1993, $57 million ($41 million on a restated basis) in 1992 and $53 million in
1991. Contributions to the 401(k) plans are based upon a percentage of the
employees' elected contributions. Contributions to the employee stock ownership
plan are determined by management and approved by the Board of Directors.
 
 
                                      F-17

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10.SEGMENT INFORMATION
 
  Information as to the operations of Time Warner and the Entertainment Group
in different business segments is set forth below:
 


                                           YEARS ENDED DECEMBER 31,
                                   -----------------------------------------
                                   HISTORICAL RESTATED HISTORICAL HISTORICAL
                                      1993      1992      1992       1991
                                   ---------- -------- ---------- ----------
                                                  (MILLIONS)
                                                      
REVENUES
Time Warner:
Publishing........................   $3,270    $3,123   $ 3,123    $ 3,021
Music.............................    3,334     3,214     3,214      2,960
Entertainment Group...............       --        --     6,761      6,068
Intersegment elimination..........      (23)      (28)      (28)       (28)
                                     ------    ------   -------    -------
Total.............................   $6,581    $6,309   $13,070    $12,021
                                     ======    ======   =======    =======
Entertainment Group:
Filmed Entertainment..............   $4,565    $3,945   $ 3,455    $ 3,065
Programming--HBO..................    1,441     1,444     1,444      1,366
Cable.............................    2,208     2,091     2,091      1,935
Intersegment elimination..........     (251)     (229)     (229)      (298)
                                     ------    ------   -------    -------
Total.............................   $7,963    $7,251   $ 6,761    $ 6,068
                                     ======    ======   =======    =======

                                           YEARS ENDED DECEMBER 31,
                                   -----------------------------------------
                                   HISTORICAL RESTATED HISTORICAL HISTORICAL
                                      1993      1992      1992       1991
                                   ---------- -------- ---------- ----------
                                                  (MILLIONS)
                                                      
OPERATING INCOME
Time Warner:
Publishing........................   $  295    $  254   $   254    $   174(/1/)
Music.............................      296       275       275        256
Entertainment Group...............       --        --       814        724
                                     ------    ------   -------    -------
Total.............................   $  591    $  529   $ 1,343    $ 1,154
                                     ======    ======   =======    =======
Entertainment Group:
Filmed Entertainment..............   $  286    $  254   $   213    $   207
Programming--HBO..................      213       201       201        183
Cable.............................      406       400       400        334
                                     ------    ------   -------    -------
Total.............................   $  905    $  855   $   814    $   724
                                     ======    ======   =======    =======

- --------
(1) Includes a $60 million restructuring charge ($36 million after taxes).
 
                                      F-18

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 


                                              YEARS ENDED DECEMBER 31,
                                      -----------------------------------------
                                      HISTORICAL RESTATED HISTORICAL HISTORICAL
                                         1993      1992      1992       1991
                                      ---------- -------- ---------- ----------
                                                     (MILLIONS)
                                                         
DEPRECIATION AND AMORTIZATION(/1/)
Time Warner:
Publishing...........................    $ 77      $ 74     $   74     $   72
Music................................     347       310        310        304
Entertainment Group..................      --        --        788        733
                                         ----      ----     ------     ------
Total................................    $424      $384     $1,172     $1,109
                                         ====      ====     ======     ======
Entertainment Group:
Filmed Entertainment.................    $263      $266     $  197     $  183
Programming--HBO.....................      17        14         14         12
Cable................................     629       577        577        538
                                         ----      ----     ------     ------
Total................................    $909      $857     $  788     $  733
                                         ====      ====     ======     ======

- --------
(1) Depreciation and amortization includes all amortization relating to the
    acquisition of WCI in 1989, the acquisition of the ATC minority interest in
    1992 and other business combinations accounted for by the purchase method.
 
  Information as to the assets and capital expenditures of Time Warner and its
Entertainment Group is as follows:
 


                                                     DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
ASSETS
Time Warner:
Publishing............................  $ 1,897   $ 1,886   $ 1,886    $ 2,015
Music.................................    7,401     7,418     7,418      7,339
Entertainment Group(/1/)..............    5,627     5,392    15,715     14,049
Corporate(/2/)........................    1,967     2,347     2,347      1,486
                                        -------   -------   -------    -------
Total.................................  $16,892   $17,043   $27,366    $24,889
                                        =======   =======   =======    =======
Entertainment Group:
Filmed Entertainment..................  $ 7,567   $ 7,381   $ 6,502    $ 6,389
Programming--HBO......................      875       936       936        878
Cable.................................    8,102     8,146     8,146      6,932
Corporate(/2/)........................    1,658       270       302         59
                                        -------   -------   -------    -------
Total.................................  $18,202   $16,733   $15,886    $14,258
                                        =======   =======   =======    =======

- --------
(1) At December 31, 1993 and December 31, 1992 on a restated basis,
    Entertainment Group assets represent Time Warner's investment in and
    amounts due to and from Entertainment Group. At December 31, 1992 and 1991
    on an historical basis, Entertainment Group assets represent total assets
    of the Entertainment Group, less certain assets related to transactions
    with other Time Warner companies.
(2) Consists principally of cash and investments.
 
                                      F-19

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
CAPITAL EXPENDITURES
Time Warner:
Publishing............................    $ 41      $ 40      $ 40       $ 56
Music.................................      91       124       124         88
Entertainment Group...................      --        --       402        370
Corporate.............................      66         8         8         13
                                          ----      ----      ----       ----
Total.................................    $198      $172      $574       $527
                                          ====      ====      ====       ====
Entertainment Group:
Filmed Entertainment..................    $244      $122      $101       $ 69
Programming--HBO......................      16        28        28         10
Cable.................................     353       273       273        291
                                          ----      ----      ----       ----
Total.................................    $613      $423      $402       $370
                                          ====      ====      ====       ====

 
  Information as to Time Warner's operations in different geographical areas is
as follows:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
REVENUES
United States(/1/)....................  $ 4,414   $ 4,220   $10,981    $10,167
Europe................................    1,296     1,411     1,411      1,283
Rest of World.........................      871       678       678        571
                                        -------   -------   -------    -------
Total.................................  $ 6,581   $ 6,309   $13,070    $12,021
                                        =======   =======   =======    =======
OPERATING INCOME
United States.........................  $   436   $   311   $ 1,143    $ 1,041
Europe................................      102       155       140         89
Rest of World.........................       53        63        60         24
                                        -------   -------   -------    -------
Total.................................  $   591   $   529   $ 1,343    $ 1,154
                                        =======   =======   =======    =======
ASSETS
United States.........................  $14,328   $14,581   $24,878    $22,131
Europe................................    1,635     1,608     1,626      1,887
Rest of World.........................      929       854       862        871
                                        -------   -------   -------    -------
Total.................................  $16,892   $17,043   $27,366    $24,889
                                        =======   =======   =======    =======

- --------
(/1/) Includes Filmed Entertainment export revenues of $1.379 billion and $1.133
      billion in 1992 and 1991, respectively.
 
                                      F-20

 
                                TIME WARNER INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
11.COMMITMENTS AND CONTINGENCIES
 
  Total rent expense amounted to $163 million in 1993, $258 million ($159
million on a restated basis) in 1992 and $236 million in 1991. The minimum
rental commitments under noncancellable long-term operating leases are: 1994-
$138 million; 1995-$125 million; 1996-$113 million; 1997-$104 million; 1998-
$102 million and after 1998-$954 million.
 
  Minimum commitments and guarantees under certain licensing, artists and other
agreements aggregated approximately $1.5 billion at December 31, 1993, which
are payable principally over a seven-year period. Such amounts do not include
the General Partner guarantees of approximately $7 billion of TWE debt.
 
  Pending legal proceedings are substantially limited to litigation incidental
to the businesses of Time Warner and alleged damages in connection with class
action lawsuits. In the opinion of counsel and management, the ultimate
resolution of these matters will not have a material effect on the financial
statements of Time Warner.
 
12.SUPPLEMENTAL INFORMATION
 
  Supplemental information with respect to cash flows is as follows:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Cash payments made for interest.......   $  330    $  260    $  651     $1,020
Cash payments made for income taxes...      234       207       247        254
Income tax refunds received...........       52        42        44        210
Borrowings............................    4,714     1,349     8,026        328
Repayments............................    1,599     1,391     8,006      2,782
Noncash Series D dividends declared...       --       337       337        302

 
  The noncash effects of the deconsolidation of the Entertainment Group are
reflected in the differences between the historical and restated balance sheet
amounts at December 31, 1992. Time Warner issued $3.125 billion of debentures
in a noncash exchange for Series C preferred stock on April 1, 1993 (Note 5 and
7). The principal noncash effects of the acquisition of the ATC minority
interest in 1992 were to increase investments by $156 million, cable television
franchise costs by $865 million, excess of cost over net assets acquired by
$410 million, deferred income taxes by $299 million and long-term debt by
$1.312 billion, and to eliminate the ATC minority interest of $180 million. On
a restated basis, the investments in and amounts due to and from Entertainment
Group were increased $1.431 billion. Investment proceeds in 1992 on a restated
basis include $875 million from the collection of a note receivable from TWE.
Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash, and have original maturities of three months or
less.
 
  Other current liabilities consist of:
 


                                                         DECEMBER 31,
                                              ----------------------------------
                                              HISTORICAL RESTATED HISTORICAL
                                                 1993      1992      1992
                                              ---------- -------- ----------
                                                        (MILLIONS)
                                                                 
Accrued expenses.............................   $  716     $550     $1,137
Accrued compensation.........................      228      178        254
Deferred revenues............................       62       56        219
                                                ------     ----     ------
Total........................................   $1,006     $784     $1,610
                                                ======     ====     ======

 
                                      F-21

 
                              REPORT OF MANAGEMENT
 
  The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles, and
necessarily include some amounts that are based on management's best estimates
and judgments.
 
  Time Warner maintains a system of internal accounting controls designed to
provide management with reasonable assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions are
executed in accordance with management's authorization and recorded properly.
The concept of reasonable assurance is based on the recognition that the cost
of a system of internal control should not exceed the benefits derived and that
the evaluation of those factors requires estimates and judgments by management.
Further, because of inherent limitations in any system of internal accounting
control, errors or irregularities may occur and not be detected. Nevertheless,
management believes that a high level of internal control is maintained by Time
Warner through the selection and training of qualified personnel, the
establishment and communication of accounting and business policies, and its
internal audit program.
 
  The Audit Committee of the Board of Directors, composed solely of directors
who are not employees of Time Warner, meets periodically with management and
with Time Warner's internal auditors and independent auditors to review matters
relating to the quality of financial reporting and internal accounting control,
and the nature, extent and results of their audits. Time Warner's internal
auditors and independent auditors have free access to the Audit Committee.
 
Gerald M. Levin                 Bert W. Wasserman
Chairman and                    Executive Vice President and
Chief Executive Officer         Chief Financial Officer
 
                                      F-22

 
                         REPORT OF INDEPENDENT AUDITORS
 
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TIME WARNER INC.
 
We have audited the accompanying consolidated balance sheet of Time Warner Inc.
("Time Warner") as of December 31, 1993 and 1992, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1993. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of Time Warner's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Time Warner at
December 31, 1993 and 1992, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
 
                                          ERNST & YOUNG
 
New York, New York
February 4, 1994
 
                                      F-23

 
                               TIME WARNER INC.
                        SELECTED FINANCIAL INFORMATION
 
  The selected financial information for each of the five years in the period
ended December 31, 1993 set forth below has been derived from and should be
read in conjunction with the financial statements and other financial
information presented elsewhere herein. The selected historical financial
information for 1993 reflects the deconsolidation of the Entertainment Group,
principally TWE, effective January 1, 1993. The selected historical financial
information for periods prior to such date have not been changed; however,
selected financial information for 1992 retroactively reflecting the
deconsolidation is presented as supplementary information under the column
heading "restated" to facilitate comparative analysis.
 
  The selected historical financial information for 1993 reflects the issuance
of $6.1 billion of long-term debt and the use of $.5 billion of cash and
equivalents in 1993 for the exchange or redemption of preferred stock having
an aggregate liquidation preference of $6.4 billion. The selected historical
financial information for 1992 reflects the capitalization of TWE on June 30,
1992 and associated refinancings, and the acquisition of the 18.7% minority
interest in American Television and Communications Corporation as of June 30,
1992, using the purchase method of accounting for business combinations. The
selected historical financial information for 1989 reflects the acquisition of
a 59.3% common stock interest in Warner Communications Inc. ("WCI") as of July
31, 1989, and the acquisition on January 10, 1990 of the remaining capital
stock of WCI as of December 31, 1989, using the purchase method of accounting
for business combinations.
 
  Per common share amounts and average common shares have been restated to
give effect to the four-for-one common stock split that occurred on September
10, 1992.
 


                                       YEARS ENDED DECEMBER 31,
                          -----------------------------------------------------
                                                        HISTORICAL
                          HISTORICAL RESTATED ---------------------------------
                             1993      1992    1992     1991     1990     1989
                          ---------- -------- -------  -------  -------  ------
SELECTED OPERATING               (MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT INFORMATION
                                                       
Revenues................    $6,581    $6,309  $13,070  $12,021  $11,517  $7,642
Depreciation and amorti-
 zation.................       424       384    1,172    1,109    1,138     531
Business segment operat-
 ing income.............       591       529    1,343    1,154    1,114     848
Equity in pretax income
 of Entertainment Group.       281       226       --       --       --      --
Interest and other, net.       718       351      882      966    1,133   1,005
Net income (loss)
 (a)(b)(c)..............      (221)       86       86      (99)    (227)   (256)
Net loss applicable to
 common shares(d).......      (339)     (542)    (542)    (692)    (786)   (256)
Per share of common
 stock:
 Net loss (a)(b)(c)(d)..    $(0.90)   $(1.46) $ (1.46) $ (2.40) $ (3.42) $(1.08)
 Dividends..............    $ 0.31    $0.265  $ 0.265  $  0.25  $  0.25  $ 0.25
Average common
 shares(c)..............     374.7     371.0    371.0    288.2    229.9   236.2

- --------
(a) The net loss for the year ended December 31, 1993 includes an
    extraordinary loss on the retirement of debt of $57 million ($.15 per
    common share) and an unusual charge of $70 million ($.19 per common share)
    from the effect of the new income tax law on Time Warner's deferred income
    tax liability.
(b) The net loss for the year ended December 31, 1991 includes a $36 million
    after-tax charge ($.12 per common share) relating to the restructuring of
    the Publishing division. The net loss in 1989 includes an after-tax gain
    of $42 million ($.18 per common share) resulting primarily from the sale
    of 3.125 million shares of Columbia Pictures Entertainment, Inc. common
    stock and an after-tax loss of $120 million ($.51 per common share) from
    the sale of Scott, Foresman and Company.
(c) In August 1991, Time Warner completed the sale of 137.9 million shares of
    common stock pursuant to a rights offering. Net proceeds of $2.558 billion
    from the rights offering were used to reduce indebtedness under Time
    Warner's bank credit agreement. If the rights offering had been completed
    at the beginning of 1991, net loss for the year would have been reduced to
    $33 million, or $1.70 per common share, and there would have been 369.3
    million shares of common stock outstanding during the year.
(d) After preferred dividend requirements.
 
                                     F-24

 
                                TIME WARNER INC.
                  SELECTED FINANCIAL INFORMATION--(CONTINUED)
 


                                                     DECEMBER 31,
                                    -----------------------------------------------
                                                                HISTORICAL
                                    HISTORICAL RESTATED ---------------------------
                                       1993      1992    1992   1991   1990   1989
SELECTED BALANCE SHEET INFORMATION  ---------- -------- ------ ------ ------ ------
                                                      (MILLIONS)
                                                           
Investments in and amounts due
 to and from Entertainment 
 Group..........................      $5,627    $5,392  $   -- $   -- $   -- $   --
Total assets....................      16,892    17,043  27,366 24,889 25,337 24,791
Long-term debt..................       9,291     2,897  10,068  8,716 11,184 10,838
Shareholders' equity:
 Preferred stock liquidation
  preference....................         140     6,532   6,532  6,256  5,954  5,584
 Equity applicable to common
  stock.........................       1,230     1,635   1,635  2,242    360  1,172
 Total shareholders' equity.....       1,370     8,167   8,167  8,498  6,314  6,756
Total capitalization (long-term
 debt plus shareholders'
 equity)........................      10,661    11,064  18,235 17,214 17,498 17,594

 
                                      F-25

 
                                TIME WARNER INC.
 
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 


                                  EQUITY                     NET      NET INCOME
                     OPERATING   IN PRETAX              INCOME (LOSS) (LOSS) PER DIVIDENDS
                     INCOME OF   INCOME OF               APPLICABLE     COMMON      PER    AVERAGE  COMMON STOCK
                     BUSINESS  ENTERTAINMENT NET INCOME   TO COMMON     SHARE     COMMON   COMMON  ---------------
 QUARTER  REVENUES   SEGMENTS      GROUP       (LOSS)     SHARES(C)      (C)       SHARE   SHARES   HIGH     LOW
 -------  ---------- --------- ------------- ---------- ------------- ---------- --------- ------- ------- -------
                                             (MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                                  
1993 HISTORICAL(A)
1st       $   1,519   $  112       $108        $ (15)       $(124)      $(0.33)   $0.0700   372.5  $37 1/4 $28 3/4
2nd (b)       1,567      135         53          (80)         (83)       (0.22)    0.0800   373.8   39 5/8  30 5/8
3rd (b)       1,535       91        118         (133)        (136)       (0.36)    0.0800   375.2   43 5/8  37 1/4
4th           1,960      253          2            7            4         0.01     0.0800   377.2   46 7/8  40 1/4
Year (b)      6,581      591        281         (221)        (339)       (0.90)    0.3100   374.7   46 7/8  28 3/4
1992 RESTATED(A)
1st       $   1,426   $   92       $ 61        $   3        $(150)      $(0.40)   $0.0625   370.4  $27     $21 5/8
2nd           1,502      118         54            9         (147)       (0.40)    0.0625   370.8   28      23 5/8
3rd           1,510       89         70            6         (152)       (0.41)    0.0700   371.1   29 1/4  24
4th           1,871      230         41           68          (93)       (0.25)    0.0700   371.6   29 3/4  22 1/4
Year          6,309      529        226           86         (542)       (1.46)    0.2650   371.0   29 3/4  21 5/8
1992 HISTORICAL(A)
1st       $   3,007   $  290       $ --        $   3        $(150)      $(0.40)   $0.0625   370.4  $27     $21 5/8
2nd           3,096      333         --            9         (147)       (0.40)    0.0625   370.8   28      23 5/8
3rd           3,246      303         --            6         (152)       (0.41)    0.0700   371.1   29 1/4  24
4th           3,721      417         --           68          (93)       (0.25)    0.0700   371.6   29 3/4  22 1/4
Year         13,070    1,343         --           86         (542)       (1.46)    0.2650   371.0   29 3/4  21 5/8

- --------
(a) The 1993 financial statements reflect the deconsolidation of the
    Entertainment Group, principally TWE, effective January 1, 1993. The
    historical financial statements for periods prior to such date have not
    been changed; however, financial statements for the year ended December 31,
    1992 retroactively reflecting the deconsolidation are presented as
    supplementary information under the heading "restated" to facilitate
    comparative analysis.
(b) The net loss for the second quarter of 1993 includes an extraordinary loss
    on the retirement of debt of $35 million ($.09 per common share). The net
    loss for the third quarter of 1993 includes an extraordinary loss on the
    retirement of debt of $22 million ($.06 per common share) and an unusual
    charge of $70 million ($.19 per common share) due to the effect of the new
    income tax law on Time Warner's deferred income tax liability.
(c) After preferred dividend requirements.
 
                                      F-26

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
 
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
 
  There have been a series of transactions during 1993 and 1992 resulting from
the restructuring of Time Warner's balance sheet that have affected the
comparability of the financial statements, including the following
(collectively, the "Time Warner Transactions"):
 
  . The USW Transaction: The admission of a subsidiary of USW as an
   additional limited partner of TWE on September 15, 1993, which resulted in
   the deconsolidation of the Entertainment Group effective as of January 1,
   1993. The historical financial statements of Time Warner for periods prior
   to 1993 have not been changed; however, financial statements retroactively
   reflecting the deconsolidation for 1992 also have been presented as
   supplementary information under the column heading "restated" in order to
   facilitate comparative analysis.
 
  . The Series C Exchange and Series D Redemption: The issuance of $3 billion
   of publicly held long-term debt early in 1993 and $.5 billion late in 1992
   in connection with the redemption of $3.3 billion aggregate liquidation
   value of Series D preferred stock and the exchange of $3.1 billion
   aggregate liquidation value of Series C preferred stock for $3.1 billion
   aggregate principal amount of 8-3/4% convertible subordinated debentures.
 
  . The 8-3/4% Partial Redemption: The issuance of zero coupon convertible
   notes in 1993 at an aggregate issue price of $900 million and the use of
   the proceeds therefrom and available cash and equivalents to redeem $900
   million aggregate principal amount of 8-3/4% convertible subordinated
   debentures.
 
  . The 1993 WCI Refinancings: The repurchase or redemption of all of WCI's
   outstanding senior and subordinated debentures in the aggregate principal
   amount of $570 million.
 
  The following transactions have affected the comparability of the financial
statements of both the Entertainment Group and Time Warner (collectively, and
together with the USW Transaction, the "Entertainment Group Transactions"):
 
  . The 1993 Six Flags Acquisition and Refinancing: The increase in TWE's
   ownership of Six Flags from 50% to 100% on September 17, 1993 and the
   retirement of outstanding debt and preferred stock of Six Flags and its
   subsidiaries, using Six Flags cash flow and $550 million of funds provided
   by TWE, which resulted in the consolidation of Six Flags effective as of
   January 1, 1993. The historical summarized financial information of the
   Entertainment Group for periods prior to January 1, 1993 has not been
   changed; however, summarized financial information retroactively
   reflecting the consolidation for 1992 also has been presented as
   supplementary information under the column heading "restated" in order to
   facilitate comparative analysis.
 
 
  . The 1993 TWE Refinancings: The issuance of $2.6 billion of TWE debentures
   in 1993 to reduce indebtedness under the TWE credit agreement.
 
  . The TWE Capitalization and Refinancing: The initial capitalization of TWE
   on June 30, 1992 and associated refinancings, including the repayment of
   the Time Warner and ATC credit agreements with $5.9 billion borrowed under
   a new TWE credit agreement and $1 billion of capital contributions; and
   the issuance of $1.2 billion of senior notes to reduce bank debt.
 
                                      F-27

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
 
  . The ATC Merger: The acquisition of the ATC minority interest on June 26,
   1992, in exchange for Time Warner notes then valued at $1.3 billion.
 
  . The 1992 Six Flags Recapitalization: The issuance of $192 million
   aggregate principal amount of zero coupon notes by Six Flags in December
   1992 to redeem or repurchase shares of common stock of Six Flags and its
   principal subsidiary.
 
  The impact of these transactions on the financial statements of Time Warner
and the Entertainment Group is reflected on a pro forma basis in the discussion
and analysis set forth below.
 
RESULTS OF OPERATIONS
1993 VS. 1992
 
  Time Warner had 1993 revenues of $6.581 billion, a loss of $94 million ($.56
per common share) before a one-time tax charge and an extraordinary loss, and a
net loss of $221 million ($.90 per common share), compared to 1992 revenues of
$13.070 billion ($6.309 billion on a restated basis) and net income of $86
million (a loss of $1.46 per common share after preferred dividends). The one-
time tax charge of $70 million ($.19 per common share) resulted from the effect
on the company's deferred income tax liability of the increase in the corporate
income tax rate enacted in August 1993; the extraordinary loss of $57 million
($.15 per common share) resulted from the retirement of debt in 1993. The
improvement in per share results in 1993 includes the after-tax benefits of
replacing preferred stock with debt in the first quarter. Preferred dividends
were $118 million in 1993, compared to $628 million in 1992. Only Series B
preferred stock is outstanding at December 31, 1993, as to which the annual
dividends on a financial statement basis are $13 million. On a pro forma basis,
giving effect to the Time Warner Transactions and the Entertainment Group
Transactions as if they had occurred at the beginning of the years, Time Warner
would have reported a net loss of $160 million ($.46 per common share) in 1993
and $247 million ($.70 per common share) in 1992.
 
  The relationship between income before income taxes and income tax expense of
Time Warner is principally affected by the amortization of excess cost over net
assets acquired and certain other financial statement expenses that are not
deductible for income tax purposes, and by the unusual tax charge in 1993. Time
Warner's income tax expense includes all income taxes related to its equity in
the pretax income of the Entertainment Group, including its equity in the
income tax expense of TWE.
 
  The Entertainment Group had revenues of $7.963 billion, income of $217
million before a $10 million extraordinary loss on the retirement of debt, and
net income of $207 million in 1993, compared to revenues of $6.761 billion
($7.251 billion on a restated basis) and net income of $173 million in 1992. On
a pro forma basis, giving effect to the Entertainment Group Transactions as if
they had occurred at the beginning of the year, the Entertainment Group would
have reported net income of $207 million in 1993 compared to $23 million in
1992.
 
  Other factors affecting comparative operating results are discussed below on
a business segment basis. That discussion includes, among other factors, an
analysis of changes in the operating income of the business segments before
depreciation and amortization ("EBITDA") in order to eliminate the effect on
the operating performance of the music, filmed entertainment and cable
businesses of significant amounts of purchase price amortization from the $14
billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC
minority interest in 1992 and other business combinations accounted for by the
purchase method.
 
                                      F-28

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
 
  EBITDA for Time Warner and the Entertainment Group in 1993 and 1992 was as
follows:
 


                                            YEARS ENDED DECEMBER 31,
                                        -------------------------------- 
                                        HISTORICAL  RESTATED  HISTORICAL
                                           1993       1992       1992
                                        ---------- ---------- ----------
                                                   (MILLIONS)
                                                             
   Time Warner:
   Publishing.........................    $  372     $  328     $  328
   Music..............................       643        585        585
   Entertainment Group................        --         --      1,602
                                          ------     ------     ------
   Total..............................    $1,015     $  913     $2,515
                                          ======     ======     ======
   Entertainment Group:
   Filmed Entertainment...............    $  549     $  520     $  410
   Programming--HBO...................       230        215        215
   Cable..............................     1,035        977        977
                                          ------     ------     ------
   Total..............................    $1,814     $1,712     $1,602
                                          ======     ======     ======

 
  While many financial analysts consider EBITDA to be an important measure of
comparative operating performance for the businesses of Time Warner and the
Entertainment Group, it should be considered in addition to, but not as a
substitute for, or superior to, operating income, net income, cash flow and
other measures of financial performance reported in accordance with generally
accepted accounting principles.
 
TIME WARNER
 
  Publishing. Revenues increased to $3.270 billion compared to $3.123 billion
in 1992. Operating income increased to $295 million from $254 million.
Depreciation and amortization amounted to $77 million in 1993 and $74 million
in 1992. EBITDA increased to $372 million from $328 million. Revenues benefited
from increased magazine circulation revenues, higher book publishing revenues
and the full year impact of the 1992 Leisure Arts acquisition. Magazine
circulation revenues reflected higher overall subscription and newsstand sales,
led by People, Time and Entertainment Weekly, as well as increases at American
Family Publishers, the subscription agency. Despite a difficult market,
advertising revenues were nearly flat. EBITDA increased as a result of the
revenue gains and improved operating margins achieved through continued cost
savings.
 
  Music. Revenues increased to $3.334 billion compared to $3.214 billion in
1992. Operating income increased to $296 million from $275 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $347 million in 1993 and $310 million in 1992. EBITDA
increased to $643 million from $585 million. The revenue gains primarily
reflected an increase in domestic recorded music sales and Warner/Chappell
Music Publishing revenues. An increase in unit volume was achieved
internationally, principally because of an increase in Pacific Rim sales.
International dollar-denominated revenues did not increase, however, because of
exchange rate fluctuations. Overall, revenues benefited from a broad range of
popular releases from both new and established artists, increased unit sales of
compact discs and higher average unit selling prices. The increase in EBITDA
reflects the revenue gains and improved margins, offset in part by start-up
costs for new business ventures.
 
  Interest and Other, Net. Interest and other, net, decreased to $718 million
in 1993 compared to $882 million ($351 million on a restated basis) in 1992.
Interest expense decreased to $698 million compared to $729 million ($287
million on a restated basis) in 1992. The decrease in interest and other, net,
on an historical basis resulted primarily from the exclusion in 1993 of the
expenses of the Entertainment Group, which was
 
                                      F-29

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
deconsolidated in 1993, offset in part by an increase in interest expense from
higher debt levels associated with the Series D Redemption and Series C
Exchange. Other expenses, net, in 1993 included reductions in the carrying
value of certain investments offset by investment-related income. Other
expenses, net, in 1992 included an expense in connection with the settlement of
senior management employment contracts, ATC minority interest expense and
litigation-related costs.
 
ENTERTAINMENT GROUP
 
  Filmed Entertainment. Revenues increased to $4.565 billion compared to $3.455
billion ($3.945 billion on a restated basis) in 1992. Operating income
increased to $286 million from $213 million ($254 million on a restated basis).
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $263 million in 1993 and $197 million ($266 million on a
restated basis) in 1992. EBITDA increased to $549 million from $410 million
($520 million on a restated basis). The increase in revenues, operating income
and EBITDA on an historical basis resulted primarily from the inclusion in 1993
of the operating results of Six Flags, which previously had been accounted for
using the equity method. Revenues at Warner Bros. increased during the period
primarily due to increases in international theatrical, international
syndication and domestic home video revenues, as well as increased revenues
from retail operations. Record international revenues of $1.650 billion would
have been greater but for unfavorable exchange rate fluctuations. Warner Bros.
ranked number one at both the domestic and international box office in 1993,
led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags
increased, benefiting from higher revenues per visitor. EBITDA benefited from
the revenue gains.
 
  Programming--HBO. Revenues decreased to $1.441 billion compared to $1.444
billion in 1992. Operating income increased to $213 million from $201 million.
Depreciation and amortization amounted to $17 million in 1993 and $14 million
in 1992. EBITDA increased to $230 million from $215 million. The decrease in
revenues reflects lower HBO Video sales, which in 1992 were favorably affected
by a children's sell-thru title, offset in part by higher subscriber revenues,
principally as a result of higher pay-TV rates at HBO and an increase in
subscribers. EBITDA benefited primarily from improved results from new
businesses, including Time Warner Sports and the Comedy Central joint venture.
 
  Cable. Revenues increased to $2.208 billion compared to $2.091 billion in
1992. Operating income increased to $406 million from $400 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the ATC Merger, amounted to $629 million in 1993 and $577 million in
1992. EBITDA increased to $1.035 billion from $977 million. Revenues increased
principally as a result of growth in the number of cable subscribers and
increases in advertising sales and pay-per-view. The increase in subscribers
accounted for approximately three quarters of the revenue increase. EBITDA
benefited from the revenue gains and increased income from cable joint
ventures, but was negatively affected in the fourth quarter by cable rate
regulation which went into effect on September 1, 1993. The negative effect of
rate regulation is expected to continue into 1994 (see "Financial Condition and
Liquidity" elsewhere herein).
 
  Interest and Other, Net. Interest and other, net, increased to $564 million
in 1993 compared to $531 million ($569 million on a restated basis) in 1992.
Interest expense increased to $580 million compared to $442 million ($491
million on a restated basis) in 1992. The increase in interest expense resulted
primarily from the higher average debt levels attributable to the TWE
capitalization, the higher interest cost of the TWE notes and debentures issued
to refinance TWE bank debt, and the consolidation of Six Flags' interest
expense in 1993. Other income, net, in 1993 included gains on the sale of
certain assets partially offset by losses from and reductions in the carrying
value of certain investments. Other expenses, net, on a restated basis in 1992
is principally attributable to losses on certain investments and litigation-
related costs.
 
 
                                      F-30

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
1992 VS. 1991
 
  Time Warner had revenues of $13.070 billion, net income of $86 million and a
$1.46 net loss per common share after preferred dividends in 1992, compared to
revenues of $12.021 billion, a net loss of $99 million and a net loss of $2.40
per common share in 1991. The 1991 results include a $60 million restructuring
charge in the Publishing division ($36 million after tax, or $.12 per common
share). Per common share amounts for 1991 have been restated to give effect to
the four-for-one common stock split that occurred on September 10, 1992.
 
  EBITDA for 1992 and 1991 on a historical consolidated basis was as follows:
 


                                                                    YEARS ENDED
                                                                   DECEMBER 31,
                                                                   -------------
                                                                    1992   1991
                                                                   ------ ------
                                                                    (MILLIONS)
                                                                    
      Publishing.................................................  $  328 $  246
      Music......................................................     585    560
      Entertainment Group:
      Filmed Entertainment.......................................     410    390
      Programming--HBO...........................................     215    195
      Cable......................................................     977    872
                                                                   ------ ------
      Total......................................................  $2,515 $2,263
                                                                   ====== ======

 
  Publishing. Revenues increased to $3.123 billion compared to $3.021 billion
in 1991. Operating income increased to $254 million from $174 million in 1991,
which included the $60 million restructuring charge. Depreciation and
amortization amounted to $74 million in 1992 and $72 million in 1991. EBITDA
increased to $328 million from $246 million in 1991. Magazine revenues
benefited from increases in both circulation and advertising revenues and the
inclusion in 1992 of the revenues of Leisure Arts, a crafts publisher acquired
in the third quarter of 1992. Circulation revenues reflected higher overall
subscription and newsstand sales. The revenue growth was led by People,
Entertainment Weekly and the regional and lifestyle magazines. Book revenues
benefited from higher direct marketing sales at Time Life Inc. Excluding the
restructuring charge in 1991, EBITDA improved in 1992 as a result of cost
savings and the revenue gains.
 
  Music. Revenues increased to $3.214 billion compared to $2.960 billion in
1991. Operating income increased to $275 million from $256 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $310 million in 1992 and $304 million in 1991. EBITDA
increased to $585 million from $560 million in 1991. Revenues benefited from
increases in both international and domestic recorded music sales. The strong
international revenue growth reflected Warner Music International's continued
success with local artist development and the continued popularity of the
domestic labels' artists outside the U.S. Overall, revenues benefited from a
broad range of popular releases, increased unit sales of compact discs and
higher average unit selling prices. Warner/Chappell Music Publishing revenues
increased, reflecting the continued popularity of its large worldwide catalogue
of music copyrights. The revenue gains and increased income from the Columbia
House partnerships contributed to the increase in EBITDA.
 
  Filmed Entertainment. Revenues increased to $3.455 billion compared to $3.065
billion in 1991, and operating income increased to $213 million from $207
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $197 million in 1992 and $183 million in 1991.
EBITDA increased to $410 million from $390 million in 1991. The revenue growth
resulted primarily from increased worldwide theatrical revenues, which
benefited from a number of very successful releases. Warner Bros. ranked number
one in domestic box office. Revenues from international home video and
syndication, sales to network television and retail operations also increased,
while revenue from pay-television sales declined. The increase in EBITDA
reflects the higher revenues, offset in part by lower margins.
 
                                      F-31

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
 
  Programming--HBO. Revenues increased to $1.444 billion from $1.366 billion in
1991, while operating income rose to $201 million from $183 million.
Depreciation and amortization amounted to $14 million in 1992 and $12 million
in 1991. EBITDA increased to $215 million from $195 million in 1991. The
revenue growth resulted from higher subscriber revenues and increased revenues
from ancillary businesses, particularly from television production. The
increase in subscriber revenues resulted from higher pay-TV rates at HBO and a
slight increase in the number of subscribers. EBITDA benefited from the revenue
gains, improved operating margins and a smaller loss from the Comedy Central
joint venture, offset in part by expenses associated with the start-up of
international pay-TV ventures.
 
  Cable. Revenues increased to $2.091 billion, compared to $1.935 billion in
1991, and operating income increased to $400 million from $334 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $577 million in 1992 and $538 million in 1991. EBITDA
increased to $977 million from $872 million in 1991. Revenues increased as a
result of growth in the number of cable customers and an increase in per
subscriber revenue. The increase in subscribers accounted for approximately 40%
of the revenue increase. EBITDA benefited from the revenue gains, continued
cost containment and increased income from domestic cable joint ventures,
partially offset by higher cable programming costs and expenses associated with
the start-up of international cable ventures. Operating income also was
affected by amortization related to the ATC Merger.
 
  Interest and Other, Net. Interest and other, net, decreased to $882 million
in 1992 from $966 million in 1991. Interest expense decreased to $729 million
in 1992 compared with $912 million in 1991. The decrease in interest expense,
which is attributable to lower interest rates and lower average debt levels,
was offset in part by increases in litigation-related costs and other expenses,
including expenses in connection with the settlement of senior management
employment contracts, and a decline in investment-related income.
 
  In August 1992, Time Warner and TWE settled the litigation brought by Viacom
International, Inc. in 1989 against Time Warner, ATC and HBO. The settlement
terminated with prejudice all claims and counterclaims raised in the
litigation. The effects of the settlement were not material to Time Warner or
TWE.
 
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1993
 
TIME WARNER
 
  Aided by favorable conditions in the credit markets, Time Warner continued to
restructure its balance sheet and reduce its after-tax financing cost. The
Series C Exchange, Series D Redemption and 8-3/4% Partial Redemption replaced
$6.4 billion of Series C and Series D preferred stock having an average after-
tax cost of 9.9% with $6.6 billion of long-term debt having an average after-
tax cost of 5%, resulting in annual savings of $300 million. In addition, the
new debt includes $1.4 billion of zero coupon exchangeable or convertible notes
that require no periodic payments of interest, resulting in annual deferrals of
$75 million. The deconsolidation of the Entertainment Group also had a
significant effect on the balance sheet by eliminating nearly $16 billion of
assets and over $7 billion of debt. Principally as a result of these factors,
Time Warner had $9.4 billion of debt and $1.4 billion of equity at December 31,
1993, compared to $10.2 billion of debt and $8.2 billion of equity at December
31, 1992. Cash and equivalents were $200 million at December 31, 1993, compared
to $942 million at December 31, 1992, resulting in debt-net-of-cash amounts of
$9.2 billion and $9.3 billion at such dates. Substantially all of Time Warner's
debt at December 31, 1993 consisted of long-term fixed-rate or zero coupon
obligations, approximately $2 billion of which was effectively converted to a
floating rate basis through the use of interest-rate swap agreements.
 
                                      F-32

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
 
  Cash provided by Time Warner's operations amounted to $257 million in 1993,
after $330 million of interest payments, $182 million of income taxes and
working capital requirements. Cash flows used in investing activities in 1993,
excluding investment proceeds, were $373 million. Of this amount, $198 million
was for capital expenditures, principally in the Music division. Cash dividends
of $125 million were paid on common and Series B preferred stock during 1993.
On a pro forma basis, giving retroactive effect to the beginning of the year to
the 1993 Time Warner Transactions, cash flow from operations would have been
$183 million, after $402 million of interest payments, $179 million of income
taxes and working capital requirements.
 
  Time Warner has no claim on the assets and cash flows of TWE except through
the payment of certain fees and reimbursements, such as the $60 million annual
charge for corporate services, and cash distributions to the General Partners,
which are limited by the TWE partnership and credit agreements. Distributions
from TWE of $20 million in 1993 are expected to increase to approximately $125
million in 1994, primarily because of tax-related distributions.
 
  TWE is permitted under its partnership and credit agreements to loan Time
Warner up to $1.1 billion, increasing up to $1.5 billion on July 1, 1995. Time
Warner has $375 million of debt maturing in 1994 that will be refinanced by
borrowings from TWE under a long-term arrangement. Management believes that
1994 operating cash flow, cash and marketable securities and additional
borrowing capacity are sufficient to meet Time Warner's liquidity needs without
distributions and loans from TWE above those permitted by existing agreements.
 
 
ENTERTAINMENT GROUP
 
  TWE continued its strategy of significantly lengthening debt maturities at
attractive fixed rates. Over the past two years, TWE reduced variable rate debt
by $3.8 billion with proceeds from the issuance of long-term notes and
debentures having an after-tax cost to Time Warner of 5.1%. An additional $2.5
billion of capital was raised by the USW Transaction, $1 billion of which,
presently in the form of the USW Note, has been earmarked for building cable
Full Service Networks(TM) ("FSN"). The Six Flags acquisition culminated a
series of transactions over a two-year period that resulted in it becoming a
wholly-owned subsidiary of TWE. Six Flags was consolidated by TWE effective as
of January 1, 1993. Primarily as a result of these transactions, the
Entertainment Group had $7.1 billion of long-term debt at December 31, 1993,
$1.5 billion of TWE General Partners' Senior Capital and $6 billion of TWE
partners' capital (net of the $1 billion uncollected amount of the USW Note),
compared to $7.2 billion of long-term debt ($7.7 billion restated for the Six
Flags consolidation) and $6.4 billion of TWE partners' capital at December 31,
1992. Cash and equivalents were $1.3 billion at December 31, 1993, reducing the
debt-net-of-cash amount to $5.8 billion. Cash and equivalents at December 31,
1992 were $47 million.
 
  Cash provided by the operations of the Entertainment Group in 1993 amounted
to $1.276 billion, after $450 million of interest payments, $70 million of
income taxes and working capital requirements. On a pro forma basis, giving
retroactive effect to the beginning of 1993 to the Entertainment Group
Transactions, cash flow from operations would have been $1.284 billion, after
$473 million of interest payments, $70 million of income taxes and working
capital requirements. Cash used in investing activities in 1993, excluding
investment proceeds, amounted to $981 million. Of this amount, $613 million was
spent on capital projects, including $352 million to upgrade cable systems and
$244 million to expand international theaters and Warner Bros. Studio Stores,
upgrade facilities at the Warner Bros. Studio and introduce new rides at Six
Flags.
 
  The Entertainment Group continues to expand its core businesses through
selective acquisitions and investments, which in 1993 resulted in payments of
$368 million, including $136 million for the purchase of common and preferred
stocks of Six Flags. The Milwaukee, Wisconsin cluster of cable systems was
 
                                      F-33

 
                                TIME WARNER INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
augmented by the purchase of a cable system from Viacom Inc. Several other
cable systems that did not fit into a cluster were disposed of in 1993 for
approximately $100 million.
 
  Capital spending is expected to increase significantly in 1994, principally
because of the plan to upgrade a significant percentage of cable systems to FSN
capacity over the next five years at an estimated cost of $5 billion, which is
about three times cable capital expenditures for the last five years. $1
billion of FSN capital expenditures will be funded by collections on the USW
Note.
 
  TWE is permitted under its partnership and credit agreements to loan up to
$1.1 billion to Time Warner. An additional $400 million of such loans are
permitted beginning July 1, 1995.
 
  There was $1.3 billion of cash and equivalents and $2 billion of available
credit under the TWE credit agreement at December 31, 1993. In early 1994, TWE
filed a shelf registration statement with the Securities and Exchange
Commission covering the issuance of up to $2 billion of debt securities. These
securities may be issued from time to time on terms determined at the time of
sale. Management believes that 1994 operating cash flow, cash and equivalents,
the USW Note, and additional borrowing capacity are sufficient to meet the
capital and liquidity needs of TWE, and to fund anticipated loans to Time
Warner.
 
  On October 5, 1992, Congress enacted the 1992 Cable Act, which among other
things reimposed rate regulation on most cable systems. The Federal
Communications Commission ("FCC") froze rates in April 1993 for regulated cable
services and associated equipment, other than for systems in which local
franchising authorities regulate rates. The current expiration date of the
freeze is May 15, 1994. On May 3, 1993, the FCC released rules implementing
rate regulation, which required that rates for certain equipment be established
based on a cost-of-service standard and rates for regulated cable services be
established based on either a per-channel benchmark or a cost-of-service
standard, at the election of the cable operator. TWE Cable elected to establish
rates based on the per-channel benchmarks, which the FCC had set at 10% below
the average level of rates prevailing nationwide in September of 1992.
 
  On February 22, 1994, the FCC announced the adoption of revised rules
lowering the per-channel benchmarks from 10% to 17% below the average level of
rates prevailing in September of 1992 and changing the factors cable operators
must use to calculate the benchmarks applicable to their systems. The text of
the new rules is expected to be released in late March, with an effective date
of May 15. Under the May 1993 rules, revenues from sales of regulated equipment
and services had been expected to decline by $90 to $100 million per year. That
decline was expected to be partially offset by increases in revenues from other
activities, including optional services, advertising sales and subscriber
growth, which could not be quantified. It is not yet possible to estimate the
effect of the new rules adopted in February 1994, although it is expected to be
more adverse than the effect of the earlier rules.
 
  On November 5, 1992, TWE filed a lawsuit seeking to overturn major provisions
of the 1992 Cable Act, primarily on First Amendment grounds. On April 8, 1993,
a three-judge District Court upheld the constitutionality of the "must carry"
provisions of the 1992 Cable Act. TWE's appeal from this decision was heard by
the U.S. Supreme Court in January 1994. On September 16, 1993, a one-judge
District Court upheld the constitutionality of a majority of the other
challenged provisions of the 1992 Cable Act. The Company and the federal
defendants have appealed this decision to the U.S. Court of Appeals for the
D.C. Circuit.
 
  Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition amounted to $724 million at
December 31, 1993 compared to $674 million at December 31, 1992 (including
amounts relating to HBO of $178 million at December 31, 1993 and $161 million
at December 31, 1992). The backlog excludes advertising barter contracts.
 
  The net impact of inflation on operations has not been significant in the
past three years.
 
                                      F-34

 
                                TIME WARNER INC.
     SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
               PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
                  YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
 


                               BALANCE AT                                 BALANCE AT
                            BEGINNING OF YEAR                             END OF YEAR
                          ---------------------                      ---------------------
     NAME OF DEBTOR        CURRENT   NONCURRENT ADDITIONS DEDUCTIONS  CURRENT   NONCURRENT
     --------------       ---------- ---------- --------- ---------- ---------- ----------
                                                              
1993(A):
 Morris Ostin (1).......    $     -- $  950,000  $    --    $     -- $  950,000 $       --
 Ahmet Ertegun (2)......          --    970,000       --          --         --    970,000
 Seymour Stein (3)......     431,746    950,000       --          --    431,746    950,000
 Russ Thyret (4)........          --    408,093   24,965     249,058    184,000         --
 Rick Dyess (5).........      26,378    230,000       --      16,378    240,000         --
                          ---------- ---------- --------  ---------- ---------- ----------
 Total..................    $458,124 $3,508,093  $24,965    $265,436 $1,805,746 $1,920,000
                          ========== ========== ========  ========== ========== ==========
1992:
Time Warner
 Morris Ostin...........    $     -- $  950,000 $     --    $     --   $     -- $  950,000
 Ahmet Ertegun..........          --    970,000       --          --         --    970,000
 Seymour Stein..........          --  1,414,915       --      33,169    431,746    950,000
 Russ Thyret............          --    490,285  200,000     282,192         --    408,093
 David Cator............          --    125,000       --     125,000         --         --
 Ron Kovas..............     153,109         --       --     153,109         --         --
 Rick Dyess.............     128,331    250,000       --     121,953     26,378    230,000
                          ---------- ---------- --------  ---------- ---------- ----------
 Subtotal...............     281,440  4,200,200  200,000     715,423    458,124  3,508,093
                          ---------- ---------- --------  ---------- ---------- ----------
Entertainment Group
 Robert Daly............   1,000,000  1,000,000       --          --  1,000,000  1,000,000
 Terry Semel............     975,000         --       --          --    975,000         --
 Charles Schreger.......          --         --  120,000          --     30,000     90,000
                          ---------- ---------- --------  ---------- ---------- ----------
 Subtotal...............   1,975,000  1,000,000  120,000          --  2,005,000  1,090,000
                          ---------- ---------- --------  ---------- ---------- ----------
 Total..................  $2,256,440 $5,200,200 $320,000    $715,423 $2,463,124 $4,598,093
                          ========== ========== ========  ========== ========== ==========
1991:
Time Warner
 Morris Ostin...........  $       -- $  950,000 $     --  $       -- $       -- $  950,000
 Ahmet Ertegun..........          --    970,000       --          --         --    970,000
 Seymour Stein..........          --  1,950,000       --     535,085         --  1,414,915
 Russ Thyret............          --    531,085  222,000     262,800         --    490,285
 David Cator............          --    125,000       --          --         --    125,000
 Ron Kovas..............   1,314,012         --    6,109   1,167,012    153,109         --
 Rick Dyess.............          --         --  378,331          --    128,331    250,000
                          ---------- ---------- --------  ---------- ---------- ----------
 Subtotal...............   1,314,012  4,526,085  606,440   1,964,897    281,440  4,200,200
                          ---------- ---------- --------  ---------- ---------- ----------
Entertainment Group
 Robert Daly............   1,000,000  1,000,000       --          --  1,000,000  1,000,000
 Terry Semel............     975,000         --       --          --    975,000         --
                          ---------- ---------- --------  ---------- ---------- ----------
 Subtotal...............   1,975,000  1,000,000       --          --  1,975,000  1,000,000
                          ---------- ---------- --------  ---------- ---------- ----------
 Total..................  $3,289,012 $5,526,085 $606,440  $1,964,897 $2,256,440 $5,200,200
                          ========== ========== ========  ========== ========== ==========

- --------
(a) The 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993.
 
                                      F-35

 
                                TIME WARNER INC.
     SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
               PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
                  YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
 
                              NOTES TO SCHEDULE II
 
(1) Note pursuant to an employment agreement bearing interest at 6% per annum,
    payable quarterly, due December 31, 1994. Secured by a mortgage on real
    estate.
(2) Note pursuant to an employment agreement bearing interest at 8% per annum,
    payable quarterly, until end of employment term at which time principal and
    interest are payable in 48 monthly installments, beginning on August 1,
    1996. Secured by a mortgage on real estate.
(3) Note in the amount of $950,000 bearing interest at 6% per annum payable on
    December 31, 1996. Note in the amount of $431,746 bearing interest at 7%
    per annum due on demand.
(4) Note bearing interest at 10% per annum due December 31, 1994.
(5) Non-interest bearing notes pursuant to an employment agreement due on
    demand.
 
                                      F-36

 
                               TIME WARNER INC.
               SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
                 YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
 


                                         ADDITIONS
                              BALANCE AT CHARGED TO                   BALANCE
                              BEGINNING  COSTS AND                    AT END
DESCRIPTION                   OF PERIOD   EXPENSES  DEDUCTIONS       OF PERIOD
- -----------                   ---------- ---------- ----------       ---------
                                              (MILLIONS)
                                                         
HISTORICAL 1993(A):
Reserves deducted from ac-
 counts receivable:
 Allowance for doubtful ac-
  counts.....................   $ 122      $  194    $  (185)(b)       $ 131
 Reserves for sales returns
  and allowances:
  Magazines and books........     336       1,265     (1,252)(c)(d)      349
  Recorded music.............     186         366       (356)(c)         196
                                -----      ------    -------           -----
   Total.....................   $ 644      $1,825    $(1,793)          $ 676
                                =====      ======    =======           =====
Reserves deducted from
 amounts due to publishers
 (accounts payable):
 Allowance for magazine and
  book returns...............   $(146)     $ (855)   $   847 (d)       $(154)
                                =====      ======    =======           =====
RESTATED 1992(A):
Reserves deducted from ac-
 counts receivable:
 Allowance for doubtful ac-
  counts.....................   $ 123      $  132    $  (133)(b)       $ 122
 Reserves for sales returns
  and allowances:
  Magazines and books........     314       1,109     (1,087)(c)(d)      336
  Recorded music.............     179         333       (326)(c)         186
                                -----      ------    -------           -----
   Total.....................   $ 616      $1,574    $(1,546)          $ 644
                                =====      ======    =======           =====
Reserves deducted from
 amounts due to publishers
 (accounts payable):
 Allowance for magazine and
  book returns...............   $(159)     $ (797)   $   810 (d)       $(146)
                                =====      ======    =======           =====
HISTORICAL 1992(A):
Reserves deducted from ac-
 counts receivable:
 Allowance for doubtful ac-
  counts.....................   $ 275      $  194    $  (181)(b)       $ 288
 Reserves for sales returns
  and allowances:
  Magazines and books........     314       1,109     (1,087)(c)(d)      336
  Recorded music and home
   video.....................     257         419       (416)(c)         260
                                -----      ------    -------           -----
   Total.....................   $ 846      $1,722    $(1,684)          $ 884
                                =====      ======    =======           =====
Reserves deducted from
 amounts due to publishers
 (accounts payable):
 Allowance for magazine and
  book returns...............   $(159)     $ (797)   $   810 (d)       $(146)
                                =====      ======    =======           =====
HISTORICAL 1991(A):
Reserves deducted from ac-
 count receivable:
 Allowance for doubtful ac-
  counts.....................   $ 256      $  215    $  (196)(b)       $ 275
 Reserves for sales returns
  and allowances:
  Magazines and books........     283       1,152     (1,121)(c)(d)      314
  Recorded music and home
   video.....................     222         366       (331)(c)         257
                                -----      ------    -------           -----
   Total.....................   $ 761      $1,733    $(1,648)          $ 846
                                =====      ======    =======           =====
Reserves deducted from
 amounts due to publishers
 (accounts payable):
 Allowance for magazine and
  book returns...............   $(146)     $ (812)   $   799 (d)       $(159)
                                =====      ======    =======           =====

- --------
(a) The 1993 financial statements reflect the deconsolidation of the
    Entertainment Group, principally TWE, effective January 1, 1993. The
    historical financial statements for periods prior to such date have not
    been changed; however, financial information for the year ended December
    31, 1992 retroactively reflecting the deconsolidation is presented as
    supplementary information under the column heading "restated" to
    facilitate comparative analysis.
(b) Represents uncollectible receivables charged against reserve.
(c) Represents returns or allowances applied against reserve.
(d) The distribution of magazines not owned by Time Warner results in a
    receivable recorded at the sales price and a corresponding liability to
    the publisher recorded at the sales price less the distribution commission
    recognized by Time Warner as revenue. Therefore, it would be misleading to
    compare magazine revenues to the provision charged to the reserve for
    magazine returns that is deducted from accounts receivable without also
    considering the related offsetting activity in the reserve for magazine
    returns that is deducted from the liability due to the publishers.
 
                                     F-37

 
                                TIME WARNER INC.
           SCHEDULE X--SUPPLEMENTARY OPERATING STATEMENT INFORMATION
                  YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
 


                                             CHARGES TO COSTS AND EXPENSES
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
ITEM                                    1993(A)   1992(A)   1992(A)    1991(A)
- ----                                   ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Royalties.............................   $1,068    $1,033    $1,668     $1,442
                                         ======    ======    ======     ======
Advertising costs.....................   $  248    $  281    $  924     $  734
                                         ======    ======    ======     ======

- --------
 
(a) The 1993 financial statements reflect the deconsolidation of the
  Entertainment Group, principally TWE, effective January 1, 1993. The
  historical financial statements for periods prior to such date have not been
  changed; however, financial information for the year ended December 31, 1992
  retroactively reflecting the deconsolidation is presented as supplementary
  information under the column heading "restated" to facilitate comparative
  analysis.
 
                                      F-38

 
  TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET DECEMBER
                                31, (MILLIONS)
 


                                                HISTORICAL RESTATED  HISTORICAL
                                                 1993 (A)  1992 (A)   1992 (A)
                                                ---------- --------  ----------
                                                            
ASSETS
CURRENT ASSETS
Cash and equivalents...........................  $ 1,338   $    47    $    36
Receivables, including $257, $166 and $166 due
 from Time Warner, less allowances of $257,
 $240 and $240.................................    1,313     1,239      1,232
Inventories....................................      980       921        921
Prepaid expenses...............................      114       135         96
                                                 -------   -------    -------
Total current assets...........................    3,745     2,342      2,285
Noncurrent inventories.........................    1,760     1,711      1,711
Investments....................................      540       626        658
Land and buildings.............................      680       627        415
Cable television equipment.....................    3,044     2,942      2,942
Furniture, fixtures and other equipment........    1,319     1,082        860
                                                 -------   -------    -------
                                                   5,043     4,651      4,217
Less accumulated depreciation..................   (1,943)   (1,712)    (1,676)
                                                 -------   -------    -------
Property, plant and equipment..................    3,100     2,939      2,541
Excess of cost over net assets acquired........    4,560     4,666      4,356
Cable television franchises....................    3,510     3,660      3,660
Other assets...................................      748       750        637
                                                 -------   -------    -------
Total assets...................................  $17,963   $16,694    $15,848
                                                 =======   =======    =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable...............................  $   366   $   328    $   320
Participations and programming costs...........      770       668        668
Debt due within one year.......................       24       102          7
Other current liabilities, including, in 1993, 
$108 of distributions due to Time Warner.......    1,105       870        825
                                                 -------   -------    -------
Total current liabilities......................    2,265     1,968      1,820
Long-term debt.................................    7,125     7,684      7,171
Other long-term liabilities, including $439,
 $41 and $41 of distributions due to Time
 Warner........................................    1,037       605        420
General Partners' Senior Capital...............    1,536        --         --
PARTNERS' CAPITAL
Contributed capital............................    7,398     6,451      6,451
Undistributed partnership earnings (deficit)...     (393)      (14)       (14)
Note receivable from USW.......................   (1,005)       --         --
                                                 -------   -------    -------
Total partners' capital........................    6,000     6,437      6,437
                                                 -------   -------    -------
Total liabilities and partners' capital........  $17,963   $16,694    $15,848
                                                 =======   =======    =======

- --------
(a) The 1993 financial statements reflect the consolidation of Six Flags
effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The
historical financial statements for periods prior to such date have not been
changed; however, financial statements for the year ended December 31, 1992
retroactively reflecting the consolidation are presented as supplementary
information under the column heading "restated" to facilitate comparative
analysis (Notes 1 and 2).
 
See accompanying notes.
 
                                     F-39

 
 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS
                      YEARS ENDED DECEMBER 31, (MILLIONS)
 


                                      HISTORICAL RESTATED HISTORICAL HISTORICAL
                                       1993 (A)  1992 (A)  1992 (A)   1991 (A)
                                      ---------- -------- ---------- ----------
                                                         
Revenues (b).........................   $7,946    $7,251    $6,761     $6,068
                                        ------    ------    ------     ------
Cost of revenues (b)(c)..............    5,679     5,274     4,837      4,343
Selling, general and administrative  
(b)(c)...............................    1,384     1,141     1,129      1,013
                                        ------    ------    ------     ------
Operating expenses...................    7,063     6,415     5,966      5,356
                                        ------    ------    ------     ------
Business segment operating income....      883       836       795        712
Interest and other, net (b)..........     (551)     (563)     (525)      (520)
Corporate services (b)...............      (60)      (60)      (60)       (60)
                                        ------    ------    ------     ------
Income before income taxes...........      272       213       210        132
Income taxes.........................      (64)      (53)      (50)       (35)
                                        ------    ------    ------     ------
Income before extraordinary item.....      208       160       160         97
Extraordinary loss on retirement of  
debt, net of $7 million income tax   
benefit..............................      (10)       --        --         --
                                        ------    ------    ------     ------
Net income...........................   $  198    $  160    $  160     $   97
                                        ======    ======    ======     ======
- --------
(a) The 1993 financial statements reflect the consolidation of Six Flags
effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The
historical financial statements for periods prior to such date have not been
changed; however, financial statements for the year ended December 31, 1992
retroactively reflecting the consolidation are presented as supplementary
information under the column heading "restated" to facilitate comparative
analysis (Notes 1 and 2).
 
(b) Includes the following income (expenses) resulting from transactions with
the partners of TWE (Note 11):
 
Selling, general and administrative..   $  (65)   $ (122)   $ (122)    $ (131)
Interest and other, net..............        2      (204)     (204)      (432)
Corporate services...................      (60)      (60)      (60)       (60)
 
In addition, includes the following income (expenses) resulting from
transactions with equity affiliates of TWE or Time Warner
(Note 11):
 
Revenues.............................   $   67    $   41    $   41     $   40
Cost of revenues.....................      (88)      (34)      (34)       (49)
Selling, general and administrative..       27        30        30         21
Interest and other, net..............        1         5         5         11
(c) Includes depreciation and           
amortization expense of:.............   $  902    $  851    $  782     $  733
                                        ======    ======    ======     ======

 
 
See accompanying notes.
 
                                     F-40

 
 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS
                      YEARS ENDED DECEMBER 31, (MILLIONS)
 


                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                        1993 (a)  1992 (a)  1992 (a)   1991 (a)
                                       ---------- -------- ---------- ----------
                                                          
OPERATIONS
Net income...........................    $  198    $  160    $  160     $   97
Adjustments for noncash and
nonoperating items:
Depreciation and amortization........       902       851       782        733
Equity in investments................       (21)       48        53         77
Changes in operating assets and
liabilities:
 Receivables.........................         1      (272)     (272)      (202)
 Inventories.........................      (158)     (105)     (104)        42
 Accounts payable and other          
 liabilities.........................       267       132       126        (40)
 Other balance sheet changes.........        82        50        36          8
                                         ------    ------    ------     ------
Cash provided by operations..........     1,271       864       781        715
                                         ------    ------    ------     ------
INVESTING ACTIVITIES
Investments and acquisitions.........      (347)     (382)     (279)      (187)
Capital expenditures.................      (613)     (423)     (402)      (370)
Investment proceeds..................       180        50        50         96
                                         ------    ------    ------     ------
Cash used by investing activities....      (780)     (755)     (631)      (461)
                                         ------    ------    ------     ------
FINANCING ACTIVITIES
Decrease in debt.....................      (659)     (791)     (837)    (1,074)
Capital contributions................     1,548     1,012     1,012        816
Capital distributions................       (33)     (183)     (183)        --
Other, principally financing costs...       (45)     (123)     (129)        --
                                         ------    ------    ------     ------
Cash provided (used) by financing           811       (85)     (137)      (258)
activities...........................
                                         ------    ------    ------     ------
INCREASE (DECREASE) IN CASH AND          
EQUIVALENTS..........................    $1,302    $   24    $   13     $   (4)
                                         ======    ======    ======     ======

- --------
(a) The 1993 financial statements reflect the consolidation of Six Flags
effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The
historical financial statements for periods prior to such date have not been
changed; however, financial statements for the year ended December 31, 1992
retroactively reflecting the consolidation are presented as supplementary
information under the column heading "restated" to facilitate comparative
analysis (Notes 1 and 2).
 
 
 
See accompanying notes.
 
 
                                     F-41

 
 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF PARTNERSHIP
                              CAPITAL (MILLIONS)
 


                                                PARTNERS' CAPITAL
                                   --------------------------------------------
                          GENERAL              UNDISTRIBUTED
                         PARTNERS'              PARTNERSHIP             TOTAL
                          SENIOR   CONTRIBUTED   EARNINGS      USW    PARTNERS'
                          CAPITAL    CAPITAL     (DEFICIT)    NOTE     CAPITAL
                         --------- ----------- ------------- -------  ---------
                                                       
BALANCE AT DECEMBER 31,   $   --     $ 5,809       $  --     $    --   $ 5,809
1990....................
Net income..............                  97                                97
Contributions...........                 816                               816
Other...................                  (5)                               (5)
                          ------     -------       -----     -------   -------
BALANCE AT DECEMBER 31,       
1991....................      --       6,717          --          --     6,717
Net income before TWE          
Capitalization..........                  97                                97
Distributions...........                (259)                             (259)
Pushdown of cost to
acquire ATC minority
interest................               1,431                             1,431
Other...................                   1                                 1
TWE Capitalization:
  Contributions.........               1,000                             1,000
  Assumption of         
additional debt.........              (2,545)                           (2,545)
                          ------     -------       -----     -------   -------
BALANCE AT JUNE 30,           
1992....................      --       6,442          --          --     6,442
Net income after TWE          
Capitalization..........                              63                    63
Contributions (a).......                  12                                12
Distributions (a).......                             (41)                  (41)
Other...................                  (3)        (36)                  (39)
                          ------     -------       -----     -------   -------
BALANCE AT DECEMBER 31,       
1992....................      --       6,451         (14)         --     6,437
Net income..............                             198                   198
Admission of USW:
  Contributions.........               2,553                  (1,021)    1,532
  General Partners'        
Senior Capital..........   1,501      (1,501)                           (1,501)
Distributions (a).......                 (95)       (539)                 (634)
Allocation of income....      35                     (35)                  (35)
Collections.............                                          16        16
Other...................                 (10)         (3)                  (13)
                          ------     -------       -----     -------   -------
BALANCE AT DECEMBER 31,   
1993....................  $1,536     $ 7,398       $(393)    $(1,005)  $ 6,000
                          ======     =======       =====     =======   =======

- --------
(a) Distributions in 1993 and 1992 included $252 million and $24 million,
respectively, of tax-related distributions, $274 million and $17 million,
respectively, of stock option distributions and in 1993 $13 million of
distributions to the Time Warner Service Partnerships. In addition, General
Partners' Junior Capital was reduced $95 million in 1993 for the distribution
of the Time Warner Service Partnership Assets. A $12 million contribution was
made by the General Partners in 1992 after the TWE Capitalization pursuant to
the net worth adjustment provision of the partnership agreement. (Note 6.)
 
See accompanying notes.
 
                                     F-42

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
  Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), was capitalized on June 30, 1992 (the "TWE Capitalization") to own and
operate substantially all of the Filmed Entertainment, Programming-HBO and
Cable businesses previously owned by subsidiaries of Time Warner Inc. ("Time
Warner"). At December 31, 1993, the general partners of TWE, subsidiaries of
Time Warner ("General Partners"), collectively held 63.27% pro rata priority
capital and residual equity partnership interests in TWE, and certain priority
capital interests senior and junior to the pro rata priority capital interests,
which they received for the net assets, or the rights to cash flows, they
contributed to the partnership at the TWE Capitalization; and the limited
partners, subsidiaries of U S WEST, Inc. ("USW"), ITOCHU Corporation ("ITOCHU")
and Toshiba Corporation ("Toshiba"), held 25.51%, 5.61% and 5.61% pro rata
priority capital and residual equity partnership interests, respectively.
ITOCHU and Toshiba each contributed $500 million of cash at the TWE
Capitalization for their limited partnership interests. USW contributed $1.532
billion of cash and a $1.021 billion 4.4% note ("USW Note") on September 15,
1993 for its limited partnership interests. Prior to the admission of USW, the
General Partners held 87.5% pro rata priority capital and residual equity
partnership interests, and a priority capital interest junior to the pro rata
priority capital interests, and ITOCHU and Toshiba each held 6.25% pro rata
priority capital and residual equity partnership interests (Note 6).
 
  In lieu of contributing certain assets (the "Beneficial Assets"), the General
Partners assigned to TWE the net cash flow generated by such assets or agreed
to pay an amount equal to the net cash flow generated by such assets. TWE has
the right to receive from the General Partners, at the limited partners'
option, an amount equal to the fair value of Beneficial Assets, net of
associated liabilities, that have not been contributed to TWE by June 30, 1996,
rather than continuing to receive the net cash flow, or an amount equal to the
net cash flow, generated by the Beneficial Assets. The consolidated financial
statements include the assets and liabilities of the businesses contributed by
the General Partners, including the Beneficial Assets and associated
liabilities, all at Time Warner's historical cost basis of accounting.
 
  Time Warner's $14 billion acquisition of Warner Communications Inc. ("WCI")
as of December 31, 1989, and $1.3 billion acquisition of the minority interest
in American Television and Communications Corporation ("ATC") on June 26, 1992
were accounted for by the purchase method of accounting. WCI subsequently
contributed filmed entertainment and cable assets to TWE, and ATC subsequently
contributed its cable assets. The financial statements of TWE reflect an
allocable portion of Time Warner's cost to acquire WCI and the ATC minority
interest in accordance with the pushdown method of accounting.
 
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS IN AFFILIATED COMPANIES
 
  The consolidated financial statements include the accounts of TWE and its
subsidiaries. Significant intercompany accounts and transactions are
eliminated. Significant accounts and transactions between TWE and its partners
and affiliates are disclosed as related party transactions (Note 11).
 
  Investments in companies in which TWE has significant influence but less than
controlling financial interest are stated at cost plus equity in the
affiliates' undistributed earnings. The excess of cost over the underlying net
equity of investments in affiliated companies is attributed to the underlying
net assets based on their respective fair values and amortized over their
respective economic lives.
 
  Six Flags Entertainment Corporation ("Six Flags") was consolidated effective
January 1, 1993 as a result of the increase of TWE's ownership in Six Flags
from 50% to 100% on September 17, 1993 (Note 2). The historical financial
statements for periods prior to such date have not been changed; however,
financial
 
                                      F-43

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
statements for the year ended December 31, 1992 retroactively reflecting the
consolidation of Six Flags are presented as supplementary information under the
column heading "restated" in order to facilitate comparative analysis. Certain
other prior year amounts have been reclassified to conform to the 1993
presentation.
 
REVENUES AND COSTS
 
  Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, basic cable, broadcast
network and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is completed
within eighteen months of initial release. Theatrical revenues are recognized
as the films are exhibited. Home video revenues, less a provision for returns,
are recognized when the home videos are sold. Revenues from cable and broadcast
television distribution are recognized when the films are available to
telecast. Television films and series are initially produced for the networks
or first-run television syndication (the primary markets) and may be
subsequently licensed to foreign or other domestic television markets. Revenues
from television license agreements are recognized when the films or series are
available to telecast, except for barter agreements where the recognition of
revenue is deferred until the related advertisements are telecast.
 
  Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost includes direct production and
acquisition costs, production overhead and capitalized interest. A portion of
the cost to acquire WCI was allocated to its theatrical and television product
as of December 31, 1989, including an allocation to product that had been
exhibited at least once in all markets ("Library"). Individual films and series
are amortized, and the related participations and residuals are accrued, based
on the proportion that current revenues from the film or series bear to an
estimate of total revenues anticipated from all markets. These estimates are
revised periodically and losses, if any, are provided in full. WCI acquisition
cost allocated to the Library is amortized on a straight-line basis over twenty
years. Current film inventories include the unamortized cost of completed
feature films allocated to the primary markets, television films and series in
production pursuant to a contract of sale, film rights acquired for the home
video market and advances pursuant to agreements to distribute third-party
films in the primary markets. Noncurrent film inventories include the
unamortized cost of completed theatrical and television films allocated to the
secondary markets, theatrical films in production and WCI acquisition cost
allocated to the Library.
 
  A significant portion of cable system and cable programming revenues are
derived from subscriber fees, which are recorded as revenue in the period the
service is provided. The right to exhibit feature films and other programming
on pay cable services during one or more availability periods ("programming
costs") generally is recorded when the programming is initially available for
exhibition, and is allocated to the appropriate availability periods and
amortized as the programming is exhibited.
 
PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead,
interest and certain start-up costs incurred in developing new franchises.
Depreciation is provided generally on the straight-line method over useful
lives ranging up to twenty-five years for buildings and improvements and up to
fifteen years for furniture, fixtures and cable television and other equipment.
 
INTANGIBLE ASSETS
 
  Intangible assets are amortized over periods up to forty years using the
straight-line method. Amortization of the excess of cost over net assets
acquired amounted to $132 million in 1993, $115 million
 
                                      F-44

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($124 million on a restated basis) in 1992 and $110 million in 1991, and
amortization of cable television franchises amounted to $222 million, $194
million, and $171 million, respectively. Accumulated amortization of intangible
assets at December 31, 1993 and 1992 amounted to $1.438 billion and $1.078
billion ($1.108 billion on a restated basis), respectively.
 
FOREIGN CURRENCY TRANSLATION
 
  The financial position and operating results of substantially all of the
foreign operations of TWE are consolidated using the local currency as the
functional currency. Accordingly, local currency assets and liabilities are
translated at the rates of exchange on the balance sheet date, and local
currency revenues and expenses are translated at average rates of exchange
during the period. Resulting translation gains or losses, which have not been
material, are included in partners' capital. Foreign currency transaction gains
and losses, which have not been material, are included in operating results.
 
INCOME TAXES
 
  As a Delaware limited partnership, TWE is not subject to U.S. federal and
state income taxation. However, certain of TWE's operations are conducted by
subsidiary corporations that are subject to domestic or foreign taxation.
Income taxes are provided on the income of such corporations using the
liability method of accounting for income taxes prescribed by Financial
Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income
Taxes." The consolidated financial statements for periods prior to the TWE
Capitalization include, for comparative purposes, the income and withholding
tax consequences of those TWE operations subject to domestic or foreign
taxation, as determined on a stand-alone basis consistent with the liability
method of accounting for income taxes.
 
FINANCIAL INSTRUMENTS
 
  Foreign exchange contracts are used to reduce exchange rate exposure on
future cash flows and earnings denominated in foreign currencies. Contract
gains and losses are included in income. TWE is reimbursed by or reimburses
Time Warner for Time Warner contract gains and losses related to TWE's
exposure. At December 31, 1993, Time Warner had contracts for the sale of $226
million of foreign currencies at fixed rates related to TWE's exposure,
primarily Japanese yen, German marks, Canadian dollars and French francs. The
fair value of foreign exchange contracts approximates carrying value.
 
  TWE has used interest rate swap agreements to reduce its exposure to interest
rate changes; however, there were no material amounts of contracts outstanding
at December 31, 1993. The net amounts paid and received under the contracts are
included in interest expense. The fair value of TWE's debt will fluctuate with
changes in the credit markets, including changes in the level of interest
rates. At December 31, 1993, the fair value of TWE's publicly-held long-term
debt was estimated to exceed its carrying value by approximately $290 million.
 
  Fair value is generally determined by reference to market values resulting
from trading on a national securities exchange or in an over-the-counter
market.
 
2.INVESTMENTS
 
  Investments accounted for on the equity basis include Paragon Communications
(50% owned), certain other cable system joint ventures (generally 50% owned),
Comedy Partners (50% owned), Six Flags (50% owned until 1993 when consolidated)
and E! Entertainment Corporation (50% owned until distributed in 1993). These
investments were carried at cost plus undistributed equity in the affiliates'
earnings of $517
 
                                      F-45

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million at December 31, 1993 and $594 million ($562 million on a restated
basis) at December 31, 1992. A summary of financial information of equity
affiliates (100% basis) is set forth below:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Revenues..............................   $  596    $  549    $1,039     $  916
Operating income......................      115        65       116         70
Net income (loss).....................       80        13         6        (80)
Current assets........................       72       125       182        100
Total assets..........................    1,054     1,033     1,896      1,983
Current liabilities...................      163       181       328        221
Long-term debt........................      613       632     1,147      1,107
Total liabilities.....................      794       869     1,670      1,470

 
  In September 1993, TWE provided Six Flags with $136 million to repurchase the
50% common stock interest held by other stockholders and preferred stock of
certain subsidiaries. TWE also provided $414 million to finance the repurchase
or retirement of all indebtedness of Six Flags and its subsidiaries, except for
the zero coupon notes due 1999. As a result, TWE has consolidated Six Flags
effective January 1, 1993.
 
  Certain investments included in the balance sheet at December 31, 1992 were
among the Time Warner Service Partnership Assets distributed to the General
Partners in 1993 (Note 6), including common and common equivalent stock of QVC
Inc., which was carried at a cost of $28 million and had a market value of $142
million at December 31, 1992, and common and common equivalent stock of E!
Entertainment Corporation, an equity affiliate. The remainder of TWE's
investments, none of which are individually significant, were carried at cost.
 
3.INVENTORIES
 
  TWE's inventories consist of:


                                                       DECEMBER 31,
                                           -------------------------------------
                                                  1993               1992
                                           ------------------ ------------------
                                           CURRENT NONCURRENT CURRENT NONCURRENT
                                           ------- ---------- ------- ----------
                                                        (MILLIONS)
                                                          
Film costs:
 Released, less amortization..............  $604     $  318    $503     $  284
 Completed and not released...............   140         23     169         26
 In process and other.....................     7        340      27        258
 Library, less amortization...............    --        821      --        879
Programming costs, less amortization......   147        258     193        264
Other.....................................    82         --      29         --
                                            ----     ------    ----     ------
Total.....................................  $980     $1,760    $921     $1,711
                                            ====     ======    ====     ======

 
  Excluding the Library, the unamortized cost of completed films at December
31, 1993 amounted to $1.085 billion, more than 90% of which is expected to be
amortized within three years after release. Excluding the effects of accounting
for the acquisition of WCI, the total cost incurred in the production of
theatrical and television films amounted to $1.784 billion in 1993, $1.652
billion in 1992 and $1.476 billion in 1991; and the total cost amortized
amounted to $1.619 billion, $1.535 billion and $1.494 billion, respectively.
 
 
                                      F-46

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4.  LONG-TERM DEBT
 
  Long-term debt consists of:
 


                                                          DECEMBER 31,
                                                 ------------------------------
                                                 HISTORICAL RESTATED HISTORICAL
                                                    1993      1992      1992
                                                 ---------- -------- ----------
                                                           (MILLIONS)
                                                            
TWE credit agreement, weighted average interest
 rates of 4.2% and 4.5%.........................   $2,425    $5,507    $5,507
TWE commercial paper, weighted average interest
 rates of 3.8% and 4.3%.........................      772       447       447
Six Flags 9.25% zero coupon notes due December
 15, 1999.......................................      112       102        --
TWE 9 5/8% notes due May 1, 2002................      600       600       600
TWE 7 1/4% debentures due September 1, 2008.....      599        --        --
TWE 10.15% notes due May 1, 2012................      250       250       250
TWE 8 7/8% notes due October 1, 2012............      347       347       347
TWE 8 3/8% debentures due March 15, 2023........      990        --        --
TWE 8 3/8% debentures due July 15, 2033.........      994        --        --
Six Flags credit agreement, weighted average
 interest rate of 5.9%, and 11.75% notes........       --       411        --
Other...........................................       36        20        20
                                                   ------    ------    ------
Total...........................................   $7,125    $7,684    $7,171
                                                   ======    ======    ======

 
  Each General Partner has guaranteed a pro rata portion of substantially all
of TWE's debt and accrued interest thereon based on the relative fair value of
the net assets each General Partner contributed to TWE (the "General Partner
Guarantees"). Such indebtedness is recourse to each General Partner only to the
extent of its guarantee. The indenture pursuant to which TWE's notes and
debentures have been issued (the "Indenture") requires the unanimous consent of
the holders of the notes and debentures to terminate the General Partner
Guarantees prior to June 30, 1997, and the consent of a majority of such
holders to effect a termination thereafter. There are no restrictions on the
ability of the General Partner guarantors to transfer material assets, other
than TWE assets, to parties who are not guarantors.
 
  As of December 31, 1993, the TWE credit agreement provided for up to $5.2
billion of borrowings and consisted of a $4.2 billion revolving credit facility
with available credit reducing at June 30, 1995 and thereafter by $200 million
per quarter through June 30, 1996, by $125 million per quarter from September
30, 1996 through September 30, 1999, and by $1.575 billion at final maturity on
December 31, 1999; and a $986 million term loan with repayments of $66 million
on June 30, 1995, $98 million per quarter beginning September 30, 1995 through
March 31, 1996, $27 million per quarter beginning June 30, 1996 through June
30, 1999, $20 million on September 30, 1999 and a final repayment of $255
million on December 31, 1999. Unused credit is available for general business
purposes and to support commercial paper borrowings. Outstanding borrowings
under the credit agreement generally bear interest at LIBOR plus 7/8% per
annum. The credit agreement contains covenants relating to, among other things,
additional indebtedness; liens on assets; acquisitions and investments; cash
flow coverage and leverage ratios; and loans, advances, distributions or other
cash payments or transfers of assets to its partners or their affiliates. TWE
is permitted under the credit agreement to loan Time Warner up to $1.1 billion,
increasing to up to $1.5 billion at July 1, 1995 (Note 6).
 
  In connection with and immediately prior to the TWE Capitalization,
indebtedness under the Time Warner and ATC credit agreements was assigned to
and assumed by the General Partners. Immediately
 
                                      F-47

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
thereafter and concurrently with the TWE Capitalization, such indebtedness was
assigned to and assumed by TWE. Proceeds from a $5.9 billion initial borrowing
under the TWE credit agreement, $1 billion of capital contributed to the
partnership by ITOCHU and Toshiba and $250 million of other loan proceeds were
used, directly or indirectly, to repay and terminate the credit agreements of
Time Warner and ATC and to pay certain transaction costs. In addition, $850
million of 9 5/8% and 10.15% long-term notes issued by Time Warner in April
1992 were assigned to and assumed by TWE.
 
  An after-tax cost of $10 million was incurred by Six Flags in 1993 in
connection with the retirement of its debt (Note 2). The Six Flags zero coupon
senior notes due 1999 are guaranteed by TWE.
 
  Interest expense was $573 million in 1993, $436 million ($486 million on a
restated basis) in 1992 and $479 million in 1991. Interest expense for all
periods prior to the TWE Capitalization includes interest expense related to
Time Warner's credit and interest rate swap agreements on a pushdown basis and
interest expense on $875 million of loans due to WCI, which were repaid at the
TWE Capitalization.
 
  Annual repayments of long-term debt for the five years subsequent to December
31, 1993 are: 1994-$0 million; 1995-$262 million; 1996-$179 million; 1997-$108
million and 1998-$372 million.
 
5.  INCOME TAXES
 
  Domestic and foreign pretax income are as follows:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Domestic pretax income................    $271      $168      $165       $124
Foreign pretax income.................       1        45        45          8
                                          ----      ----      ----       ----
Total pretax income...................    $272      $213      $210       $132
                                          ====      ====      ====       ====

 
  As a partnership, TWE is not subject to U.S. federal, state or local income
taxation (Note 1). Income taxes (benefits) of TWE and subsidiary corporations
are as set forth below:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Federal:
  Current (/1/) ......................    $ 10      $--       $--        $--
  Deferred............................     (12)       3        --         --
Foreign:
  Current (/2/) ......................      68       42        42         29
  Deferred............................      (4)       8         8          6
State and local:
  Current.............................      20       --        --         --
  Deferred............................     (18)      --        --         --
                                          ----      ---       ---        ---
Total income taxes....................    $ 64      $53       $50        $35
                                          ====      ===       ===        ===

- --------
(1) Includes utilization of $75 million of Six Flags tax carryforwards in 1993.
(2) Includes foreign withholding taxes of $59 million in 1993, $34 million in
    1992 and $19 million 1991.
 
 
                                      F-48

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
  The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $10 billion at December 31, 1993, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes. At December 31, 1993, Six Flags had $100
million of net operating loss carryforwards that expire from 2004 to 2007,
which are subject to limitations.
 
6.  TWE PARTNERS' CAPITAL
 
  The TWE partnership agreement provides for special allocations of income,
loss and distributions of partnership capital, including priority distributions
in the event of liquidation. Pursuant to the partnership agreement as amended
for the admission of USW on September 15, 1993, and assuming that no additional
partnership interests are issued to new partners, the relative priority of
initial partnership capital amounts and of partnership income and loss related
thereto is as follows, from most to least senior: (1) partnership income, to
the extent earned, allocated to the partners so that the economic burden of the
income tax consequences of partnership operations is borne as though the
partnership was taxed as a corporation, reduced by prior distributions and
allocations of partnership agreement losses ("special tax allocations"), (2) a
senior capital interest in the initial capital amount of $1.4 billion, plus
allocations of partnership income, to the extent earned, of up to 8% per annum,
compounded quarterly, of the initial capital amount, reduced by prior
distributions and allocations of partnership losses, allocated to the General
Partners ("General Partners' Senior Capital"), (3) pro rata priority capital
interests in the initial capital amounts of $3.5 billion allocated to the
General Partners, $1.4 billion allocated to USW and $313 million allocated to
each of ITOCHU and Toshiba, plus allocations of partnership income, to the
extent earned, of up to 13% per annum (11% to the extent concurrently
distributed), compounded quarterly, of the initial capital amounts, reduced by
prior distributions and allocations of partnership losses, allocated to all the
partners according to their residual equity partnership interests, (4) a junior
capital interest in the initial capital amount of $2.7 billion, plus
allocations of partnership income, to the extent earned, of up to 13.25% per
annum (11.25% to the extent concurrently distributed), compounded quarterly, of
the initial capital amount, reduced by prior distributions and allocations of
partnership losses, allocated to the General Partners ("General Partners'
Junior Capital") and (5) residual equity capital, plus allocations of
partnership income, to the extent earned, reduced by prior distributions and
allocations of partnership losses, allocated to all partners according to their
residual partnership interests. To the extent partnership income is
insufficient to satisfy all special allocations in a particular accounting
period, the unearned portion is carried over until satisfied out of future
partnership income.
 
  Partnership losses are allocated first to eliminate prior allocations of
partnership income to, and then to reduce the initial capital amounts of, the
residual equity, General Partners' Junior Capital and pro rata priority capital
interests, in that order, then to reduce General Partners' Senior Capital,
including partnership income allocated thereto, and finally to reduce special
tax allocations. Partnership income first earned following a period of
partnership losses will be allocated in reverse order so as to eliminate prior
allocations of loss. For the purpose of the foregoing allocations, partnership
income or loss is based on the fair value of the assets contributed to the
partnership, and differs from net income of TWE, which is based on the
historical cost of the contributed assets. General Partners' Senior Capital is
required to be distributed no later than in three annual installments beginning
July 1, 1997; earlier distributions may be made under certain circumstances
("Senior Capital Distributions"). General Partners' Junior Capital is subject
to retroactive adjustment, based on TWE's operating performance over five-and
ten-year periods, so as to result in an additional initial capital amount of up
to $4 billion, plus allocations of partnership income, to the extent earned, of
up to 13% per annum (11% per annum to the extent concurrently distributed),
compounded quarterly, reduced by prior distributions and allocations of
partnership losses.
 
  USW has an option to increase its pro rata priority capital and residual
equity interests to as much as 31.84%, depending on cable operating
performance. The option is exercisable between January 1, 1999 and on or about
May 31, 2005 at a maximum exercise price ranging from $1.25 billion to $1.8
billion, depending
 
                                      F-49

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on the year of exercise. USW or TWE may elect that the exercise price be paid
with partnership interests rather than cash. Prior to the exercise of the USW
option, each of ITOCHU and Toshiba has the right to maintain its original 6.25%
pro rata priority capital and residual equity interests by acquiring additional
partnership interests at fair market value; thereafter, each would have the
right to maintain the percentage of the pro rata priority capital and residual
equity interests it held immediately prior to USW's exercise.
 
  Distributions and loans to the partners are subject to partnership and credit
agreement limitations. Generally, TWE must be in compliance with the cash flow
coverage and leverage ratios, restricted payment limitations and other credit
agreement covenants in order to make such distributions or loans.
 
  Certain assets of TWE (the "Time Warner Service Partnership Assets") were
distributed to the General Partners prior to the admission of USW in order to
ensure compliance with the Modification of Final Judgment entered on August 24,
1982 by the United States District Court for the District of Columbia
applicable to USW and its affiliated companies, which may include TWE. The
distribution was recorded based on the $95 million historical cost of the Time
Warner Service Partnership Assets. For purposes of the partnership agreement,
the initial capital amount of General Partners' Junior Capital of $3 billion
was reduced by approximately $300 million to give effect to such distributions.
The General Partners contributed the Time Warner Service Partnership Assets to
newly formed partnerships (the "Time Warner Service Partnerships") in which the
General Partners and subsidiaries of ITOCHU and Toshiba are the partners. The
Time Warner Service Partnerships have entered into service agreements that make
certain Time Warner Service Partnership Assets and related services available
to TWE (Note 11). TWE is required to make quarterly distributions of $12.5
million with respect to General Partners' Junior Capital through September 30,
1998 ("TWSP Distributions"). The General Partners are required to contribute
such amounts to the Time Warner Service Partnerships.
 
  TWE reimburses Time Warner for the amount by which the market price on the
exercise date of Time Warner common stock options or options to purchase Time
Warner redeemable reset notes due 2002 granted to employees of TWE exceeds the
exercise price or, with respect to options granted prior to the TWE
Capitalization, the greater of the exercise price or the market price of such
securities at the TWE Capitalization ("Stock Option Distributions"). TWE paid
$20 million of Stock Option Distributions in 1993 for exercised options and had
a liability of $271 million and $17 million at December 31, 1993 and 1992,
respectively, for future Stock Option Distributions based on the unexercised
options and the market prices at such dates of $44.25 and $29.25, respectively,
per Time Warner common share and $908.75 and $807.50, respectively, per $1,000
principal amount of Time Warner redeemable reset note.
 
  Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income
from TWE ("Tax Distributions"), including any taxable income generated by the
Beneficial Assets, subject to limitations referred to herein. The aggregate
amount of such Tax Distributions is computed generally by reference to the
taxes that TWE would have been required to pay if it were a corporation. Tax
Distributions in the amount of $276 million and $24 million were payable to the
General Partners at December 31, 1993 and 1992, respectively.
 
  Other than the Stock Option Distributions and TWSP Distributions, under the
most restrictive limitations, no other cash distributions to partners are
permitted prior to July 1, 1994, at which time the payment of a Tax
Distribution, limited in amount, is permitted. Accordingly, a $108 million Tax
Distribution is classified as a current liability at December 31, 1993.
Additional Tax Distributions are permitted beginning July 1, 1995.
 
  In addition to Stock Option Distributions, Tax Distributions, Senior Capital
Distributions and TWSP Distributions, quarterly cash distributions may be made
to the partners to the extent of excess cash, as defined ("Excess Cash
Distribution"). Assuming that no additional partnership interests are issued to
new partners and that certain cash distribution thresholds are met, cash
distributions other than Stock Option
 
                                      F-50

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Distributions, Tax Distributions, Senior Capital Distributions and TWSP
distributions will in the aggregate be made 63.27% to the General Partners and
36.73% to the limited partners prior to June 30, 1998; thereafter, the General
Partners also will be entitled to additional distributions of General Partners'
Junior Capital. If aggregate distributions made to the limited partners,
generally from all sources, have not reached approximately $800 million by June
30, 1997, cash distributions to the General Partners with respect to the
General Partners' pro rata priority and residual equity capital, other than
Stock Option Distributions and Tax Distributions, will be deferred until such
threshold is met. Similarly, if such aggregate distributions to the limited
partners have not reached approximately $1.6 billion by June 30, 1998, cash
distributions with respect to General Partners' Junior Capital, other than TWSP
Distributions, will be deferred until such threshold is met. If any such
deferral occurs, a portion of the corresponding partnership income allocations
with respect to such deferred amounts will be made at a rate higher than
otherwise would have been the case. If a division of TWE or a substantial
portion thereof is sold, the net proceeds of such sale, less expenses and
proceeds used to repay outstanding debt, will be required to be distributed
with respect to the partners' partnership interests. Similar distributions are
required to be made in the event of a financing or refinancing of debt. Subject
to any limitations on the incurrence of additional debt contained in the TWE
partnership and credit agreements, and the Indenture, TWE may borrow funds to
make distributions.
 
7. STOCK OPTION PLANS
 
  Options to purchase Time Warner common stock under various stock option plans
have been granted to employees of TWE, generally at fair market value at the
date of grant. Generally, the options are exercisable over a three-year vesting
period and expire ten years from the date of grant. A summary of stock option
activity with respect to employees of TWE is as follows:
 


                                              THOUSANDS OF SHARES
                                                OF TIME WARNER    EXERCISE PRICE
                                                 COMMON STOCK       PER SHARE
                                              ------------------- --------------
                                                            
   Balance at December 31, 1992..............       22,563            $ 8-36
   Granted...................................        6,371             32-45
   Exercised.................................       (1,903)             8-36
   Cancelled.................................         (151)            23-36
                                                    ------
   Balance at December 31, 1993..............       26,880            $ 8-45
                                                    ======
   Exercisable at December 31, 1993..........       18,534
                                                    ======

 
  TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 6. There were 129,000 options exercised by employees of
TWE in 1992 at prices ranging from $8-$24 per share.
 
                                      F-51

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
8. BENEFIT PLANS
 
  TWE and its divisions have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities.
 
  Pension expense included the following:
 


                                             YEARS ENDED DECEMBER 31,
                                    -------------------------------------------
                                    HISTORICAL  RESTATED  HISTORICAL HISTORICAL
                                       1993       1992       1992       1991
                                    ---------- ---------- ---------- ----------
                                                    (MILLIONS)
                                                         
Service cost.......................    $ 21       $ 15       $ 13       $ 11
Interest cost......................      19         14         12          9
Actual return on plan assets.......     (21)       (12)       (10)       (27)
Net amortization and deferral......       5         (4)        (4)        16
                                       ----       ----       ----       ----
Total..............................    $ 24       $ 13       $ 11       $  9
                                       ====       ====       ====       ====
 
  The status of funded pension plans is as follows:
 

                                                         DECEMBER 31,
                                               --------------------------------
                                               HISTORICAL  RESTATED  HISTORICAL
                                                  1993       1992       1992
                                               ---------- ---------- ----------
                                                          (MILLIONS)
                                                            
Accumulated benefit obligation (92% vested)...    $189       $139       $118
Effect of future salary increases.............      94         68         55
                                                  ----       ----       ----
Projected benefit obligation..................     283        207        173
Plan assets at fair value.....................     221        178        148
                                                  ----       ----       ----
Projected benefit obligation in excess of plan     
assets........................................     (62)       (29)       (25)
Unamortized actuarial losses..................      53         --         --
Unamortized plan changes......................       9         26         26
Other.........................................      (7)        (4)        (5)
                                                  ----       ----       ----
Accrued pension liability.....................    $ (7)      $ (7)      $ (4)
                                                  ====       ====       ====
 
  The following assumptions were used in accounting for pension plans:
 

                                                  1993       1992       1991
                                                 ------     ------     ------
                                                            
Weighted average discount rate................    7.5%       8.5%       8.5%
Return on plan assets.........................      9%        10%        10%
Rate of increase in compensation levels.......      6%         6%         6%

 
  Certain domestic employees of TWE participate in defined contribution
multiemployer pension plans as to which the expense amounted to $19 million in
1993, $20 million in 1992 and $21 million in 1991. Employees in foreign
countries participate to varying degrees in local pension plans, which in the
aggregate are not significant.
 
  Certain domestic employees also participate in Time Warner's 401(k) savings
plans and profit sharing plans as to which the expense amounted to $20 million
in 1993, $16 million in 1992 and $18 million in 1991. Contributions to the
401(k) plans are based upon a percentage of the employees' elected
contributions.
 
 
                                      F-52

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SEGMENT INFORMATION
 
  Information as to the operations of TWE in different business segments is as
set forth below:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
REVENUES (/1/)
Filmed Entertainment..................   $4,557    $3,945    $3,455     $3,065
Programming--HBO......................    1,435     1,444     1,444      1,366
Cable.................................    2,205     2,091     2,091      1,935
Intersegment elimination..............     (251)     (229)     (229)      (298)
                                         ------    ------    ------     ------
Total.................................   $7,946    $7,251    $6,761     $6,068
                                         ======    ======    ======     ======
- --------
(/1/) Includes export revenues of:....   $1,650    $1,379    $1,379     $1,133
                                         ======    ======    ======     ======
OPERATING INCOME
Filmed Entertainment..................   $  263    $  235    $  194     $  195
Programming--HBO......................      213       201       201        183
Cable.................................      407       400       400        334
                                         ------    ------    ------     ------
Total.................................   $  883    $  836    $  795     $  712
                                         ======    ======    ======     ======
DEPRECIATION AND AMORTIZATION (/1/)
Filmed Entertainment..................   $  258    $  260    $  191     $  183
Programming--HBO......................       17        14        14         12
Cable.................................      627       577       577        538
                                         ------    ------    ------     ------
Total.................................   $  902    $  851    $  782     $  733
                                         ======    ======    ======     ======

- --------
(1) Depreciation and amortization includes amortization relating to the
    acquisitions of WCI in 1989 and the ATC minority interest in 1992 and to
    other business combinations accounted for by the purchase method.
 


                                                     DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
ASSETS                                                (MILLIONS)
                                                          
Filmed Entertainment..................  $ 7,525   $ 7,346   $ 6,468    $ 6,367
Programming--HBO......................      855       936       936        878
Cable.................................    8,041     8,142     8,142      6,926
Corporate(/1/)........................    1,542       270       302         59
                                        -------   -------   -------    -------
Total.................................  $17,963   $16,694   $15,848    $14,230
                                        =======   =======   =======    =======

- --------
(1)Consists principally of cash, cash equivalents and other investments.
 
 
                                      F-53

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  Information as to the capital expenditures of TWE is as follows:
 


                                               YEARS ENDED DECEMBER 31,
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
                                          1993      1992      1992       1991
                                       ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
CAPITAL EXPENDITURES
Filmed Entertainment..................    $244      $122      $101       $ 69
Programming--HBO......................      17        28        28         10
Cable.................................     352       273       273        291
                                          ----      ----      ----       ----
Total.................................    $613      $423      $402       $370
                                          ====      ====      ====       ====

 
  Substantially all operations outside of the United States support the export
of domestic products. Approximately 60% of export revenues are from sales to
European customers.
 
10. COMMITMENTS AND CONTINGENCIES
 
  Total rent expense amounted to $119 million in 1993, $99 million ($107
million on a restated basis) in 1992 and $83 million in 1991. The minimum
rental commitments under noncancellable long-term operating leases are: 1994--
$100 million; 1995--$97 million; 1996--$90 million; 1997--$76 million; 1998--
$71 million and after 1998--$453 million.
 
  Minimum commitments and guarantees under certain programming, licensing,
franchise and other agreements at December 31, 1993 aggregated approximately $3
billion, which are payable principally over a five-year period.
 
  Pending legal proceedings are substantially limited to litigation incidental
to the businesses of TWE. In the opinion of counsel and management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial statements.
 
11. RELATED PARTY TRANSACTIONS
 
  In the normal course of conducting their businesses, TWE units have had
various transactions with Time Warner units, generally on terms resulting from
a negotiation among the affected parties that in management's view results in
reasonable allocations. Employees of TWE participate in various Time Warner
medical, stock option (Note 7) and other benefit plans (Note 8) for which TWE
is charged its allocable share of plan expenses, including administrative
costs. Time Warner's corporate group provides various other services to TWE.
The Music division of WCI provides home videocassette distribution services to
certain TWE operations, and certain TWE units have placed advertising in
magazines published by Time Warner's Publishing division.
 
  TWE is required to pay a $130 million advisory fee to USW over a five-year
period ending September 15, 1997 for USW's expertise in telecommunications,
telephony and information technology, and its participation in the management
and upgrade of the cable systems to Full Service Network(TM) capacity.
 
  Time Warner provides TWE with certain corporate support services for which
Time Warner is paid $60 million per year, subject to adjustment for inflation
beginning in 1995. The corporate services agreement runs through June 30, 1997,
and may be extended by agreement of both parties. Management believes that the
corporate services fee is representative of the cost of corporate services that
would be necessary for the stand-alone operations of TWE.
 
                                      F-54

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  TWE has entered into service agreements with the Time Warner Service
Partnerships for program signal delivery and transmission services, and TWE
provides billing, collection and marketing services to the Time Warner Service
Partnerships. TWE also has distribution and merchandising agreements with Time
Warner Entertainment Japan Inc., a company owned by partners of TWE to conduct
TWE's businesses in Japan.
 
  In addition to transactions with its partners, TWE has had transactions with
Paragon Communications, L.P., Comedy Partners, L.P. and its other equity
affiliates, and with Turner Broadcasting System, Inc., The Columbia House
Company partnerships, Cinamerica Theatres, L.P. and other equity affiliates of
Time Warner, generally with respect to sales of product in the ordinary course
of business.
 
  Long-term debt and interest expense prior to the TWE Capitalization include
the effects of the pushdown of a portion of the Time Warner credit agreement
debt that was related to the WCI acquisition, based on the proportion that the
fair value of the WCI contributed businesses acquired bore to the fair value of
all of the WCI net assets acquired. Interest expense prior to the TWE
Capitalization also reflects interest on $875 million of loans due to WCI,
which were repaid at the TWE Capitalization, at a rate approximating the rate
applicable to borrowings under the Time Warner credit agreement.
 
12. SUPPLEMENTAL INFORMATION
 
  Supplemental information with respect to cash flows is as follows:
 


                                              YEARS ENDED DECEMBER 31,
                                      -----------------------------------------
                                      HISTORICAL RESTATED HISTORICAL HISTORICAL
                                         1993      1992      1992       1991
                                      ---------- -------- ---------- ----------
                                                     (MILLIONS)
 
                                                         
Cash payments made for interest......   $  450    $  418    $  391     $  477
Cash payments made for income taxes..       74        41        41         27
Income tax refunds received..........        4         2         2          7
Borrowings...........................    3,075     6,856     6,677         --
Repayments...........................    3,734     7,647     7,514      1,074
Noncash assumption of debt...........       --     2,545     2,545         --
Noncash pushdown of cost to acquire
 ATC minority interest...............       --     1,431     1,431         --
Noncash capital contributions              
(distributions), net.................      384      (117)     (117)        --   

 
  The noncash effects of the consolidation of Six Flags are reflected in the
difference between the historical and restated balance sheet amounts at
December 31, 1992. The noncash effect of the acquisition of the ATC minority
interest was to increase investments--$156 million; cable television
franchises--$865 million; excess of cost over net assets acquired--$410
million; and partners' capital--$1.431 billion. A noncash effect of the TWE
Capitalization was the assumption by TWE of $2.545 billion of Time Warner debt
in excess of the amount reflected as a liability prior to the TWE
Capitalization. Cash equivalents consist of commercial paper and other
investments that are readily convertible into cash, and have original
maturities of three months or less.
 
 
                                      F-55

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  Other current liabilities consist of:
 


                                                       DECEMBER 31,
                                              ------------------------------
                                              HISTORICAL RESTATED HISTORICAL
                                                 1993      1992      1992
                                              ---------- -------- ----------
                                                          (MILLIONS)
                                                            
Accrued expenses.............................   $  767     $625      $586
Accrued compensation.........................      101       81        76
Deferred revenues............................      129      164       163
Tax Distributions due to General Partners....      108       --        --
                                                ------     ----      ----
Total........................................   $1,105     $870      $825
                                                ======     ====      ====

 
                                      F-56

 
                         REPORT OF INDEPENDENT AUDITORS
 
TO THE PARTNERS OF TIME WARNER ENTERTAINMENT COMPANY, L.P.
 
We have audited the accompanying consolidated balance sheet of Time Warner
Entertainment Company, L.P. ("TWE") as of December 31, 1993 and 1992, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1993. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
TWE's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TWE at December
31, 1993 and 1992, and the consolidated results of its operations and cash
flows for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
 
                                          ERNST & YOUNG
 
New York, New York
February 4, 1994
 
                                      F-57

 
     TIME WARNER ENTERTAINMENT COMPANY, L.P. SELECTED FINANCIAL INFORMATION
 
  The selected financial information for each of the five years in the period
ended December 31, 1993 set forth below has been derived from and should be
read in conjunction with the consolidated financial statements and other
financial information presented elsewhere herein. Capitalized terms are as
defined and described in such consolidated financial statements, or elsewhere
herein. The selected historical financial information for 1993 gives effect to
the consolidation of Six Flags effective as of January 1, 1993, as a result of
the 1993 Six Flags acquisition. The selected historical financial information
for periods prior to such date has not been changed; however, selected
financial information for 1992 retroactively reflecting the consolidation is
presented as supplementary information under the column heading "restated" to
facilitate comparative analysis.
 
  The selected historical financial information for 1993 gives effect to the
USW Transaction as of September 15, 1993 and the 1993 TWE Refinancings, and for
1992 gives effect to the TWE Capitalization and Refinancing as of the dates
such transactions were consummated and the ATC Merger as of June 30, 1992,
using the purchase method of accounting and reflected in the consolidated
financial statements of TWE under the pushdown method of accounting. The
selected historical financial information for 1989 gives effect to the purchase
by Time Warner of 59.3% of the WCI contributed businesses (as part of Time
Warner's acquisition of 59.3% of WCI) as of July 31, 1989, and to the purchase
by Time Warner of the 40.7% minority interest in the WCI contributed businesses
(as part of Time Warner's acquisition on January 10, 1990 of the remaining
capital stock of WCI) as of December 31, 1989, using the purchase method of
accounting for business combinations and reflected in the consolidated
financial statements of TWE under the pushdown method of accounting.
 


                                        YEARS ENDED DECEMBER 31,
                           ----------------------------------------------------
                                                         HISTORICAL
                           HISTORICAL RESTATED --------------------------------
                              1993      1992    1992    1991    1990     1989
                           ---------- -------- ------- ------- -------  -------
                                               (MILLIONS)
                                                      
SELECTED OPERATING
STATEMENT INFORMATION
Revenues.................   $ 7,946   $ 7,251  $ 6,761 $ 6,068 $ 5,671  $ 3,577
Depreciation and                
amortization.............       902       851      782     733     775      360
Business segment                
operating income.........       883       836      795     712     549      493
Interest and other, net..       551       563      525     520     648      569
Income (loss) before
     extraordinary item..       208       160      160      97    (180)    (119)
Net income (loss)........       198       160      160      97    (180)    (119)

                                              DECEMBER 31,
                           ----------------------------------------------------
                                                         HISTORICAL
                           HISTORICAL RESTATED --------------------------------
                              1993      1992    1992    1991    1990     1989
                           ---------- -------- ------- ------- -------  -------
                                               (MILLIONS)
                                                      
SELECTED BALANCE SHEET
INFORMATION
Total assets.............   $17,963   $16,694  $15,848 $14,230 $14,415  $14,499
Debt due within one year.        24       102        7     878       7       14
Long-term debt...........     7,125     7,684    7,171   4,571   6,516    6,606
General Partners' Senior      
Capital..................     1,536        --       --      --      --       --
Partners' capital........     6,000     6,437    6,437   6,717   5,809    5,961

 
                                      F-58

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 


                                                               OPERATING
                                                               INCOME OF   NET
                                                                BUSINESS  INCOME
QUARTER                                               REVENUES  SEGMENTS  (LOSS)
- -------                                               -------- ---------- ------
                                                               (MILLIONS)
                                                                 
1993 HISTORICAL(A)
1st..................................................  $1,757     $208     $ 93
2nd (b)..............................................   1,865      235       40
3rd (b)..............................................   2,174      279       76
4th..................................................   2,150      161      (11)
Year (b).............................................   7,946      883      198
1992 RESTATED(A)
1st..................................................  $1,601     $192     $ 54
2nd..................................................   1,759      225       43
3rd..................................................   2,003      242       49
4th..................................................   1,888      177       14
Year.................................................   7,251      836      160
1992 HISTORICAL(A)
1st..................................................  $1,581     $195     $ 54
2nd..................................................   1,594      213       43
3rd..................................................   1,736      210       49
4th..................................................   1,850      177       14
Year.................................................   6,761      795      160

- --------
(a) The 1993 financial statements reflect the consolidation of Six Flags
   effective January 1, 1993 as a result of the 1993 Six Flags acquisition.
   The historical financial statements for periods prior to such date have not
   been changed; however, financial statements for the year ended December 31,
   1992 retroactively reflecting the consolidation are presented as
   supplementary information under the heading "restated" to facilitate
   comparative analysis.
 
(b) Net income for each of the second and third quarters of 1993 includes an
   extraordinary loss on the retirement of debt of $2 million and $8 million,
   respectively.
 
 
                                     F-59

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
 
  The following transactions that occurred in 1993 and 1992 have affected the
comparability of the financial statements of TWE (collectively, the "TWE
Transactions"):
 
  .  The 1993 Six Flags Acquisition and Refinancing: The increase in TWE's
     ownership of Six Flags from 50% to 100% on September 17, 1993 and the
     retirement of outstanding debt and preferred stock of Six Flags and its
     subsidiaries, using Six Flags cash flow and $550 million of funds provided
     by TWE, which resulted in the consolidation of Six Flags effective as of
     January 1, 1993. The historical financial information prior to 1993 has
     not been changed; however, financial statements retroactively reflecting
     the consolidation of Six Flags for 1992 also have been presented as
     supplementary information under the column heading "restated" in order to
     facilitate comparative analysis.
 
  .  The USW Transaction: The admission of a subsidiary of USW as an additional
     limited partner of TWE on September 15, 1993 for a capital contribution of
     $2.553 billion, consisting of $1.532 billion in cash and the $1.021
     billion USW Note, in exchange for 25.51% pro rata priority capital and
     residual equity interests.
 
  .  The 1993 TWE Refinancings: The issuance of $2.6 billion of TWE debentures
     in 1993 to reduce indebtedness under the TWE credit agreement.
 
  .  The TWE Capitalization and Refinancing: The initial capitalization of TWE
     on June 30, 1992 and associated refinancings, including the repayment of
     the Time Warner and ATC credit agreements with $5.9 billion borrowed under
     a new TWE credit agreement and $1 billion of capital contributions; and
     the issuance of $1.2 billion of senior notes to reduce bank debt.
 
  .  The ATC Merger: Time Warner's acquisition of the ATC minority interest on
     June 26, 1992, in exchange for Time Warner notes then valued at $1.3
     billion.
 
  .  The 1992 Six Flags Recapitalization: The issuance of $192 million
     aggregate principal amount of zero coupon notes by Six Flags in December
     1992 to redeem or repurchase shares of common stock of Six Flags and its
     principal subsidiary.
 
  The impact of these transactions on the financial statements of TWE is
reflected on a pro forma basis in the discussion and analysis set forth below.
 
RESULTS OF OPERATIONS
 
1993 VS. 1992
 
  TWE had 1993 revenues of $7.946 billion, income of $208 million before an
extraordinary loss of $10 million on the retirement of debt and net income of
$198 million, compared to 1992 revenues of $6.761 billion ($7.251 billion on a
restated basis) and net income of $160 million.
 
  On a pro forma basis, giving effect to the TWE Transactions as if such
transactions had occurred at the beginning of the year, TWE would have reported
net income of $198 million in 1993, compared to $208 million on an historical
basis. On the same pro forma basis, TWE would have reported net income of $10
million in 1992, compared to net income of $160 million on an historical basis.
 
 
                                      F-60

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
  As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $64 million and $50 million ($53
million on a restated basis) in the years ended December 31, 1993 and 1992,
respectively, have been provided in respect of the operations of TWE's domestic
and foreign subsidiary corporations, including Six Flags in 1993.
 
  Other factors affecting comparative operating results are discussed below on
a business segment basis. That discussion includes, among other factors, an
analysis of changes in the operating income of the business segments before
depreciation and amortization ("EBITDA"), because the operating income of
certain businesses has been affected by significant amounts of purchase price
amortization from Time Warner's $14 billion acquisition of WCI in 1989, the
$1.3 billion acquisition of the ATC minority interest in 1992 and other
business combinations accounted-for by the purchase method.
 
  EBITDA for 1993 and 1992 was as follows:
 


                                                     YEARS ENDED DECEMBER 31,
                                                  ------------------------------
                                                  HISTORICAL RESTATED HISTORICAL
                                                     1993      1992      1992
                                                  ---------- -------- ----------
                                                            (MILLIONS)
                                                             
   Filmed Entertainment..........................   $  521    $  495    $  385
   Programming--HBO..............................      230       215       215
   Cable.........................................    1,034       977       977
                                                    ------    ------    ------
   Total.........................................   $1,785    $1,687    $1,577
                                                    ======    ======    ======

 
  While many financial analysts consider EBITDA to be an important measure of
comparative operating performance for the businesses of TWE, it should be
considered in addition to, but not as a substitute for, or superior to,
operating income, net income, cash flow and other measures of financial
performance reported in accordance with generally accepted accounting
principles.
 
  Filmed Entertainment. Revenues increased to $4.557 billion compared to $3.455
billion ($3.945 billion on a restated basis) in 1992. Operating income
increased to $263 million from $194 million ($235 million on a restated basis).
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $258 million in 1993 and $191 million ($260 million on a
restated basis) in 1992. EBITDA increased to $521 million from $385 million
($495 million on a restated basis). The increase in revenues, operating income
and EBITDA on an historical basis resulted primarily from the inclusion in 1993
of the operating results of Six Flags, which previously had been accounted for
using the equity method. Revenues at Warner Bros. increased during the period
primarily due to increases in international theatrical, international
syndication and domestic home video revenues, as well as increased revenues
from retail operations. Record international revenues of $1.650 billion would
have been greater but for unfavorable exchange rate fluctuations. Warner Bros.
ranked number one at both the domestic and international box office in 1993,
led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags
increased, benefiting from higher revenues per visitor. EBITDA benefited from
the above gains.
 
  Programming--HBO. Revenues decreased to $1.435 billion compared to $1.444
billion in 1992. Operating income increased to $213 million from $201 million.
Depreciation and amortization amounted to $17 million in 1993 and $14 million
in 1992. EBITDA increased to $230 million from $215 million. The decrease in
revenues reflects lower HBO Video sales, which in 1992 were favorably affected
by a children's sell-thru title, offset in part by higher subscriber revenues,
principally as a result of higher pay-TV rates at
 
                                      F-61

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
HBO and an increase in subscribers. EBITDA benefited primarily from improved
results from new businesses, including Time Warner Sports and the Comedy
Central joint venture.
 
  Cable. Revenues increased to $2.205 billion compared to $2.091 billion in
1992. Operating income increased to $407 million from $400 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the ATC Merger, amounted to $627 million in 1993 and $577 million in
1992. EBITDA increased to $1.034 billion from $977 million. Revenues increased
principally as a result of growth in the number of cable subscribers and
increases in advertising sales and pay-per-view. The increase in subscribers
accounted for approximately three quarters of the revenue increase. EBITDA
benefited from the revenue gains and increased income from cable joint
ventures, but was negatively affected in the fourth quarter by cable rate
regulation which went into effect on September 1, 1993. The negative effect of
rate regulation is expected to continue into 1994 (see "Financial Condition and
Liquidity" elsewhere herein).
 
  Interest and Other, Net. Interest and other, net, increased to $551 million
in 1993 from $525 million ($563 million on a restated basis) in 1992. Interest
expense increased to $573 million compared with $436 million ($486 million on a
restated basis) in 1992. The increase in interest expense resulted primarily
from the higher average debt levels attributable to the TWE Capitalization, the
higher interest cost of the TWE notes and debentures issued to refinance TWE
bank debt, and the consolidation of Six Flags' interest expense in 1993. Other
income, net, in 1993 included gains on the sale of certain assets partially
offset by reductions in the carrying value of certain investments. Other
expenses, net, on a restated basis in 1992 is principally attributable to
losses on certain investments and litigation-related costs.
 
1992 VS. 1991
 
  TWE had revenues of $6.761 billion and net income of $160 million in 1992,
compared to revenues of $6.068 billion and net income of $97 million in 1991.
 
  EBITDA for 1992 and 1991 on a historical basis was as follows:
 


                                                                    YEARS ENDED
                                                                   DECEMBER 31,
                                                                   -------------
                                                                    1992   1991
                                                                   ------ ------
                                                                    (MILLIONS)
                                                                    
   Filmed Entertainment........................................... $  385 $  378
   Programming--HBO...............................................    215    195
   Cable..........................................................    977    872
                                                                   ------ ------
   Total.......................................................... $1,577 $1,445
                                                                   ====== ======

 
  Filmed Entertainment. Revenues increased to $3.455 billion compared to $3.065
billion in 1991, and operating income decreased to $194 million from $195
million. Depreciation and amortization, including amortization related to Time
Warner's purchase of WCI, amounted to $191 million in 1992 and $183 million in
1991. EBITDA increased to $385 million from $378 million in 1991. The revenue
growth resulted primarily from increased worldwide theatrical revenues, which
benefited from a number of very successful releases. Warner Bros. ranked number
one in domestic box office. Revenues from international home video and
syndication, sales to network television and retail operations also increased,
while revenue from pay-television sales declined. The increase in EBITDA
reflects the higher revenues, offset in part by lower margins.
 
  Programming--HBO. Revenues increased to $1.444 billion from $1.366 billion in
1991, while operating income rose to $201 million from $183 million.
Depreciation and amortization amounted to $14 million in 1992 and $12 million
in 1991. EBITDA increased to $215 million from $195 million in 1991. The
revenue
 
                                      F-62

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
growth resulted from higher subscriber revenues and increased revenues from
ancillary businesses, particularly from television production. The increase in
subscriber revenues resulted from higher pay-TV rates at HBO and a slight
increase in the number of subscribers. EBITDA benefited from the revenue gains,
improved operating margins and a smaller loss from the division's 50%
investment in Comedy Central, offset in part by expenses associated with the
start-up of international pay-TV ventures.
 
  Cable. Revenues increased to $2.091 billion, compared to $1.935 billion in
1991, and operating income increased to $400 million from $334 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $577 million in 1992 and $538 million in 1991. EBITDA
increased to $977 million from $872 million in 1991. Revenues increased as a
result of growth in the number of cable customers and an increase in per
subscriber revenue. The increase in subscribers accounted for approximately 40%
of the revenue increase. EBITDA benefited from the revenue gains, continued
cost containment and increased income from domestic cable joint ventures,
partially offset by higher cable programming costs and expenses associated with
the start-up of international cable ventures. Operating income also was
affected by amortization related to the ATC merger.
 
  Interest and Other, Net. Interest and other, net increased to $525 million in
1992 from $520 million in 1991. Interest expense decreased to $436 million in
1992 compared with $479 million in 1991. The decrease in interest expense,
which is attributable to lower interest rates and lower average debt levels,
was offset in part by increases in litigation-related costs and a decline in
investment-related income. In August 1992, Time Warner and TWE settled the
litigation brought by Viacom International, Inc. in 1989 against Time Warner,
ATC and HBO. The settlement terminated with prejudice all claims and
counterclaims raised in the litigation. The effects of the settlement were not
material to TWE.
 
FINANCIAL CONDITION AND LIQUIDITY
 
DECEMBER 31, 1993
 
  Aided by favorable conditions in the credit markets, TWE continued its
strategy of significantly lengthening debt maturities at attractive fixed
rates. Over the past two years, TWE reduced variable rate debt by $3.8 billion
with proceeds from the issuance of long-term notes and debentures having an
average fixed interest rate of 8.6%. An additional $2.5 billion of capital was
raised by the USW Transaction, $1 billion of which, presently in the form of
the USW Note, has been earmarked for building the Cable division's Full Service
Networks(TM) ("FSN"). The Six Flags acquisition culminated a series of
transactions over a two-year period that resulted in it becoming a wholly-owned
subsidiary of TWE. Six Flags was consolidated effective as of January 1, 1993.
Primarily as a result of these transactions, TWE had $7.1 billion of long-term
debt at December 31, 1993, and $1.5 billion of General Partners' Senior Capital
and $6 billion of partners' capital (net of the $1 billion uncollected portion
of the USW Note), compared to $7.2 billion of long-term debt ($7.7 billion on a
restated basis) and $6.4 billion of partners' capital at December 31, 1992.
Cash and equivalents were $1.3 billion at December 31, 1993, reducing the debt-
net-of-cash amount to $5.8 billion at such date. Cash and equivalents at
December 31, 1992 were $47 million on a restated basis.
 
  Cash provided by the operations of TWE in 1993 amounted to $1.271 billion,
after interest payments of $450 million, income taxes of $70 million and
working capital requirements. On a pro forma basis, giving retroactive effect
to the beginning of the year to the 1993 TWE Refinancings, the USW Transaction
and the 1993 Six Flags Acquisition and Refinancings, cash flow from operations
would have been $1.279 billion, after interest payments of $473 million, income
taxes of $70 million and working capital requirements. Cash used in investing
activities in 1993, excluding proceeds from investments, amounted to $960
million. Of this amount, $613 million was spent on capital projects, including
$352 million by the Cable division to upgrade its cable systems and $244
million by the Filmed Entertainment division, principally to continue the
expansion of international theaters and Warner Bros. Studio Stores, to upgrade
facilities at the Warner Bros. Studio, and to introduce new rides at Six Flags.
 
                                      F-63

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
 
  TWE continues to expand its core businesses through selective acquisitions
and investments, which in 1993 resulted in payments of $347 million, including
$136 million for the purchase of common and preferred stocks of Six Flags in
connection with the 1993 Six Flags Acquisition and Refinancing. The Milwaukee,
Wisconsin cluster of cable systems was augmented by the purchase of a cable
system from Viacom Inc. Several other cable systems that did not fit into a
cluster were disposed of in 1993 for approximately $100 million.
 
  Capital spending is expected to increase significantly in 1994, principally
because of the plan to upgrade a significant percentage of cable systems to FSN
capacity over the next five years at an estimated cost of $5 billion, which is
about three times cable capital expenditures for the last five years. $1
billion of FSN capital expenditures will be funded by collections on the USW
Note.
 
  TWE is permitted under its partnership and credit agreements to loan up to
$1.1 billion to Time Warner. An additional $400 million of such loans are
permitted beginning July 1, 1995.
 
  There was $1.3 billion of cash and equivalents and $2 billion of available
credit under the TWE credit agreement at December 31, 1993. In early 1994, TWE
filed a shelf registration statement with the Securities and Exchange
Commission covering the issuance of up to $2 billion of debt securities. These
securities may be issued from time to time on terms determined at the time of
sale. Management believes that 1994 operating cash flow, cash and equivalents,
the USW Note, and additional borrowing capacity are sufficient to meet the
capital and liquidity needs of TWE, and to fund anticipated loans to Time
Warner.
 
  On October 5, 1992, Congress enacted the 1992 Cable Act, which among other
things reimposed rate regulation on most cable systems. The Federal
Communications Commission ("FCC") froze rates in April 1993 for regulated cable
services and associated equipment, other than for systems in which local
franchising authorities regulate rates. The current expiration date of the
freeze is May 15, 1994. On May 3, 1993, the FCC released rules implementing
rate regulation, which required that rates for certain equipment be established
based on a cost-of-service standard and rates for regulated cable services be
established based on either a per-channel benchmark or a cost-of-service
standard, at the election of the cable operator. The Cable division elected to
establish rates based on the per-channel benchmarks, which the FCC had set at
10% below the average level of rates prevailing nationwide in September of
1992.
 
  On February 22, 1994, the FCC announced the adoption of revised rules setting
the benchmarks at an average of 17% below the level of rates prevailing in
September of 1992, compared with an average 10% rollback under the earlier
rules published in May 1993. The text of the new rules is expected to be
released in late March, with an effective date of May 15. Under the earlier
rules, revenues from sales of regulated equipment and services were expected to
decline $90 to $100 million per year. That decline was expected to be partially
offset by increases in revenues from other activities, including optional
services, advertising sales and subscriber growth that could not be quantified.
It is not yet possible to estimate the effect of the new rules although it is
expected to be more adverse than the effect of the earlier rules.
 
  On November 5, 1992, TWE filed a lawsuit seeking to overturn major provisions
of the 1992 Cable Act, primarily on First Amendment grounds. On April 8, 1993,
a three-judge District Court upheld the constitutionality of the "must carry"
provisions of the 1992 Cable Act. TWE's appeal from this decision was heard by
the U.S. Supreme Court in January 1994. On September 16, 1993, a one-judge
District Court upheld the constitutionality of a majority of the other
challenged provisions of the 1992 Cable Act. The Company and the federal
defendants have appealed this decision to the U.S. Court of Appeals for the
D.C. Circuit.
 
  Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition amounted to $724 million at
December 31, 1993 compared to $674 million at December 31, 1992 (including
amounts
 
                                      F-64

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
relating to HBO of $178 million at December 31, 1993 and $161 million at
December 31, 1992). The backlog excludes advertising barter contracts.
 
  The net impact of inflation on operations has not been significant in the
past three years.
 
                                      F-65

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
    SUPPLEMENTARY INFORMATION SUMMARIZED FINANCIAL INFORMATION OF SIX FLAGS
 
  Six Flags was formed by a group of companies, including a subsidiary of Time
Warner ("Enterprises") which owned 50% of Six Flags common stock, to effect
the acquisition on December 29, 1991 of Six Flags Theme Parks Inc. ("1991 SF
Acquisition"). Enterprises' interest in Six Flags was contributed to TWE at
the TWE capitalization. In December 1992, Six Flags redeemed certain of its
equity with $102 million of proceeds from the issuance of zero coupon senior
notes due 1999 and $12 million of proceeds from the issuance of additional
shares of Six Flags common stock ("1992 SF Recapitalization"). TWE continued
to own 50% of the common stock of Six Flags following the 1992 SF
Recapitalization, until September 17, 1993, when it provided Six Flags with
$136 million to repurchase all the common stock held by the other stockholders
and preferred stock of certain subsidiaries. TWE also provided $414 million to
finance the repurchase or retirement of all the indebtedness of Six Flags and
its subsidiaries, except for the zero coupon senior notes due 1999 ("1993 SF
Acquisition and Refinancing"). As a result of the 1993 SF Acquisition and
Refinancing, TWE has consolidated Six Flags effective January 1, 1993.
 
  Set forth below is summarized financial information of Six Flags for 1993
and 1992, and of the predecessor to Six Flags ("Predecessor Company") for
1991, the year preceding the 1991 SF Acquisition.
 
SIX FLAGS ENTERTAINMENT CORPORATION


                                                  YEARS ENDED IN DECEMBER
                                                  ------------------------------
                                                                    PREDECESSOR
                                                  1993     1992     COMPANY 1991
                                                  -------  -------  ------------
OPERATING STATEMENT INFORMATION                          (MILLIONS)
                                                           
Revenues........................................  $   533  $   490     $   436
Operating income................................       55       51          52
Income (loss) before extraordinary item (a).....        2       (6)        (41)
Net loss (a)....................................       (8)      (6)        (41)
 

                                                  YEARS ENDED
                                                  IN DECEMBER
                                                  ----------------
                                                  1993     1992
                                                  -------  -------
BALANCE SHEET INFORMATION                         (MILLIONS)
                                                           
Total assets....................................  $   900  $   864
Zero coupon senior notes due 1999 (9.25% yield).      112      102
6.3% capital lease obligation to TWE (b)........      301       --
Long-term notes due to TWE, weighted average          
 interest rate of 10%...........................      226       --
Other long-term debt............................       --      411
Minority interest...............................       --       51
Shareholders' equity............................       90       63

- --------
(a)The 1993 SF Acquisition and Refinancing, certain transactions with respect
to the 1992 SF Recapitalization, and the 1991 SF Acquisition were accounted
for using the purchase method of accounting for business combinations. If the
1993 SF Acquisition and Refinancing had occurred at the beginning of the year,
the 1993 income before extraordinary item would have been $7 million; if the
1992 SF Recapitalization had occurred at the beginning of the year, the 1992
net loss would have been $18 million; and if the 1991 SF Acquisition had
occurred at the beginning of the year, the 1991 net loss would have been $17
million.
 
(b)Six Flags entered into a sale and leaseback transaction with TWE with
respect to certain of its wholly-owned theme parks. Sale proceeds of $301
million were used to repay indebtedness to TWE incurred in connection with the
1993 SF Acquisition and Refinancing. The 15-year leases have been accounted
for as capital leases.
 
                                     F-66

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
    SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
              PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
                 YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
 


                         BALANCE AT BEGINNING                         BALANCE AT END OF
                                OF YEAR                                     YEAR
                         ---------------------                      ---------------------
     NAME OF DEBTOR       CURRENT   NONCURRENT ADDITIONS DEDUCTIONS  CURRENT   NONCURRENT
     --------------      ---------- ---------- --------- ---------- ---------- ----------
                                                             
1993:
  Robert Daly (1)....... $1,000,000 $1,000,000 $     --   $    --   $2,000,000 $       --
  Terry Semel (2).......    975,000         --       --        --      975,000         --
  Charles Schreger (3)..     30,000     90,000       --    18,000       50,000     52,000
                         ---------- ---------- --------   -------   ---------- ----------
    Total............... $2,005,000 $1,090,000 $     --   $18,000   $3,025,000 $   52,000
                         ========== ========== ========   =======   ========== ==========
1992:
  Robert Daly........... $1,000,000 $1,000,000 $     --   $    --   $1,000,000 $1,000,000
  Terry Semel...........    975,000         --       --        --      975,000         --
  Charles Schreger......         --         --  120,000        --       30,000     90,000
                         ---------- ---------- --------   -------   ---------- ----------
    Total............... $1,975,000 $1,000,000 $120,000   $    --   $2,005,000 $1,090,000
                         ========== ========== ========   =======   ========== ==========
1991:
  Robert Daly........... $1,000,000 $1,000,000 $     --   $    --   $1,000,000 $1,000,000
  Terry Semel...........    975,000         --       --        --      975,000         --
                         ---------- ---------- --------   -------   ---------- ----------
    Total............... $1,975,000 $1,000,000 $     --   $    --   $1,975,000 $1,000,000
                         ========== ========== ========   =======   ========== ==========

- --------
(1)Non-interest bearing note pursuant to an employment agreement for
$1,000,000 due on demand. Additional loan pursuant to the agreement of
$1,000,000 due December 31, 1994, bearing interest at 6%, payable quarterly.
 
(2)Note pursuant to an employment agreement due on demand bearing interest at
6% per annum, payable annually.
 
(3)Payment of $50,000 received in February 1994. Remaining balance of note due
on January 1, 1995, bearing interest at 10% per annum.
 
                                     F-67

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
                SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
 


                                          ADDITIONS
                               BALANCE AT CHARGED TO              BALANCE AT
                               BEGINNING  COSTS AND                 END OF
DESCRIPTION                    OF PERIOD   EXPENSES  DEDUCTIONS     PERIOD
- -----------                    ---------- ---------- ----------   ----------
                                                 (MILLIONS)
                                                             
1993:
Reserves deducted from
accounts receivable:
  Allowance for doubtful          
accounts......................    $166       $ 27      $ (32)(a)     $161 
  Reserves for sales returns        
and allowances................      74        131       (109)(b)       96
                                  ----       ----      -----         ----
    Total.....................    $240       $158      $(141)        $257
                                  ====       ====      =====         ====
1992:
Reserves deducted from
accounts receivable:
  Allowance for doubtful          
accounts......................    $152       $ 62      $ (48)(a)     $166
  Reserves for sales returns        
and allowances................      78         86        (90)(b)       74
                                  ----       ----      -----         ----
    Total.....................    $230       $148      $(138)        $240
                                  ====       ====      =====         ====
1991:
Reserves deducted from
accounts receivable:
  Allowance for doubtful          
accounts......................    $142       $ 45      $ (35)(a)     $152
  Reserves for sales returns        
and allowances................      49         90        (61)(b)       78
                                  ----       ----      -----         ----
    Total.....................    $191       $135      $ (96)        $230
                                  ====       ====      =====         ====

- --------
(a) Represents uncollectible receivables charged against the reserve.
 
(b) Represents returns or allowances applied against the reserve.
 
                                      F-68

 
                    TIME WARNER ENTERTAINMENT COMPANY, L.P.
           SCHEDULE X--SUPPLEMENTARY OPERATING STATEMENT INFORMATION
                 YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
 


                                             CHARGES TO COSTS AND EXPENSES
                                       -----------------------------------------
                                       HISTORICAL RESTATED HISTORICAL HISTORICAL
ITEM                                    1993(A)   1992(A)   1992(A)    1991(A)
- ----                                   ---------- -------- ---------- ----------
                                                      (MILLIONS)
                                                          
Royalties.............................    $707      $635      $635       $531
                                          ====      ====      ====       ====
Advertising costs.....................    $775      $681      $643       $487
                                          ====      ====      ====       ====

- --------
(a)The 1993 financial statements reflect the consolidation of Six Flags
effective January 1, 1993 as a result of the 1993 Six Flags acquisition. The
historical financial statements for periods prior to such date have not been
changed; however, financial information for the year ended December 31, 1992
retroactively reflecting the consolidation is presented as supplementary
information under the column heading "restated" to facilitate comparative
analysis.
 
                                     F-69

 
                    APPENDIX FOR GRAPHIC AND IMAGE MATERIAL



DESCRIPTION OF OMITTED                              LOCATION OF GRAPHIC
GRAPHIC OR IMAGE                                    OR IMAGE IN TEXT
- ---------------------                               -------------------

An organizational chart showing the 
Registrant's major business groups 
and its ownership interests therein.                IFC - 1



 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                               ----------------
 
                              EXHIBITS FILED WITH
 
                                   FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
                                      1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993        COMMISSION FILE NUMBER 1-8637
 
                                TIME WARNER INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

 
                                 EXHIBIT INDEX
 


                                                                                     SEQUENTIAL
 EXHIBIT                                                                                PAGE
  NUMBER                                  DESCRIPTION                                  NUMBER
 -------                                  -----------                                ----------
                                                                               
  3.(i)(a)  Restated Certificate of Incorporation of the Registrant as filed with        *
             the Secretary of State of the State of Delaware on May 26, 1993 (which
             is incorporated herein by reference to Exhibit 3 to the Registrant's
             Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (the
             "June 1993 Form 10-Q").
  3.(i)(b)  Certificate of Ownership and Merger merging TWE Holdings Inc. into Time
             Warner Inc. as filed with the Secretary of State of the State of
             Delaware on September 24, 1993.
  3.(i)(c)  Certificate of the Voting Powers, Designations, Preferences and Relative
             Participating, Optional and Other Rights and Qualifications of Series A
             Participating Cumulative Preferred Stock of the Registrant as filed
             with the Secretary of State of the State of Delaware on January 26,
             1994.
  3.(ii)    By-laws of the Registrant, as amended through March 18, 1993 (which is        *
             incorporated herein by reference to Exhibit 3.3 to the Registrant's
             Annual Report on Form 10-K for the year ended December 31, 1992 (the
             "Registrant's 1992 Form 10-K")).
  4.1       Specimen Certificate of the Registrant's Common Stock (which is              *
             incorporated herein by reference to Exhibit 4.1 to the Registrant's
             Annual Report on Form 10-K for the year ended December 31, 1991 (the
             "Registrant's 1991 Form 10-K")).
  4.2       Specimen Certificate of Series B 6.4% Preferred Stock of the Registrant      *
             (which is incorporated herein by reference to Exhibit 3.2 to the
             Registrant's Quarterly Report on Form 10-Q for the quarter ended June
             30, 1990).
  4.3       Indenture dated as of March 15, 1993 between the Registrant and Chemical      *
             Bank, as Trustee, relating to the 8 3/4% Convertible Subordinated
             Debentures due 2015 of the Registrant (which is incorporated herein by
             reference to Exhibit 4.4 to the Registrant's 1992 Form 10-K).
  4.4       Specimen Certificate of the Registrant's 8 3/4% Convertible Subordinated      *
             Debentures due 2015 (which is incorporated herein by reference to
             Exhibit 4.5 to the Registrant's 1992 Form 10-K).
  4.5       Rights Agreement dated as of January 20, 1994 between the Registrant and     *
             Chemical Bank, as Rights Agent (which is incorporated herein by
             reference to Exhibit 4(a) to the Registrant's Current Report on Form 8-
             K dated January 20, 1994).
  4.6       Indenture dated as of April 30, 1992, as amended by the First                *
             Supplemental Indenture, dated as of June 30, 1992, among Time Warner
             Entertainment Company, L.P. ("TWE"), the Registrant, certain of its
             subsidiaries party thereto and The Bank of New York, as Trustee (which
             is incorporated herein by reference to Exhibits 10(g) and 10(h) to the
             Registrant's Current Report on Form 8-K dated July 14, 1992).
  4.7       Second Supplemental Indenture, dated as of December 9, 1992, among TWE,      *
             the Registrant, certain of its subsidiaries party thereto and The Bank
             of New York, as Trustee (which is incorporated herein by reference to
             Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form S-
             4 Reg. No. 33-67688 of TWE filed with the Commission on October 25,
             1993 (the "1993 TWE S-4")).
  4.8       Third Supplemental Indenture, dated as of October 12, 1993, among TWE,       *
             the Registrant, certain of its subsidiaries party thereto and The Bank
             of New York, as Trustee (which is incorporated herein by reference to
             Exhibit 4.3 to the 1993 TWE S-4).

 
                                       i

 


                                                                                  SEQUENTIAL
EXHIBIT                                                                              PAGE
NUMBER                                 DESCRIPTION                                  NUMBER
- -------                                -----------                                ----------
                                                                            
  4.9    Fourth Supplemental Indenture, dated as of March 29, 1994, among TWE,        *
          the Registrant, certain of its subsidiaries party thereto and The Bank
          of New York, as Trustee (which is incorporated herein by reference to
          Exhibit 4.4 to TWE's Annual Report on Form 10-K for the year ended
          December 31, 1993 (the "TWE's 1993 Form 10-K")).
  4.10   Indenture, dated as of October 15, 1985, between the Registrant and          *
          Marine Midland Bank, N.A., as successor Trustee (which is incorporated
          herein by reference to Exhibit 4(a) to the Registrant's Registration
          Statement on Form S-3 Reg. No. 33-724 filed with the Commission on
          October 8, 1985).
  4.11   Indenture dated as of October 15, 1992, as amended by the First               *
          Supplemental Indenture dated as of December 15, 1992, as supplemented
          by the Second Supplemental Indenture dated as of January 15, 1993,
          between the Registrant and Chemical Bank, as Trustee (which is
          incorporated herein by reference to Exhibit 4.10 to the Registrant's
          1992 Form 10-K).
  4.12   Indenture dated as of January 15, 1993, between the Registrant and            *
          Chemical Bank, as Trustee (which is incorporated herein by reference to
          Exhibit 4.11 to the Registrant's 1992 Form 10-K).
  4.13   First Supplemental Indenture dated as of June 15, 1993, between the           *
          Registrant and Chemical Bank, as Trustee, to the Indenture dated as of
          January 15, 1993 between the Registrant and Chemical Bank, as Trustee,
          including as Exhibit A the Form of Liquid Yield Option Note due 2013
          (which is incorporated herein by reference to Exhibit 4 to the
          Registrant's June 1993 Form 10-Q).
 10.1    Time Warner 1981 Stock Option Plan, as amended through May 14, 1991          *
          (which is incorporated herein by reference to Exhibit 10.1 to the
          Registrant's 1991 Form 10-K).
 10.2    Time Warner 1986 Stock Option Plan, as amended through May 14, 1991          *
          (which is incorporated herein by reference to Exhibit 10.2 to the
          Registrant's 1991 Form 10-K).
 10.3    1988 Stock Incentive Plan of Time Warner Inc., as amended through May        *
          14, 1991 (which is incorporated herein by reference to Exhibit 10.3 to
          the Registrant's 1991 Form 10-K).
 10.4    Time Warner 1989 Stock Incentive Plan, as amended through May 14, 1991       *
          (which is incorporated herein by reference to Exhibit 10.4 to the
          Registrant's 1991 Form 10-K).
 10.5    Time Warner 1989 WCI Replacement Stock Option Plan, as amended through       *
          May 14, 1991 (which is incorporated herein by reference to Exhibit 10.5
          to the Registrant's 1991 Form 10-K).
 10.6    Time Warner 1989 Lorimar Non-Employee Replacement Stock Option Plan, as      *
          amended through May 14, 1991 (which is incorporated herein by reference
          to Exhibit 10.6 to the Registrant's 1991 Form 10-K).
 10.7    Time Warner 1987 Restricted Stock Plan, as amended through May 14, 1991      *
          (which is incorporated herein by reference to Exhibit 10.7 to the
          Registrant's 1991 Form 10-K).
 10.8    Time Warner 1988 Restricted Stock Plan for Non-Employee Directors, as
          amended through November 18, 1993.
 10.9    Deferred Compensation Plan for Directors of Time Warner, as amended
          through November 18, 1993.
 10.10   Time Warner Retirement Plan for Outside Directors, as amended through        *
          September 21, 1989 (which is incorporated herein by reference to
          Exhibit 10.10 to the Registrant's 1991 Form 10-K).

 
 
                                       ii

 


                                                                                  SEQUENTIAL
EXHIBIT                                                                              PAGE
NUMBER                                 DESCRIPTION                                  NUMBER
- -------                                -----------                                ----------
                                                                            
 10.11   Amended and Restated Employment and Termination Agreement dated as of        *
          March 3, 1989, as amended and restated as of January 10, 1990, between
          the Registrant and J. Richard Munro (which is incorporated herein by
          reference to Exhibit 10.26 to the Registrant's Annual Report on Form
          10-K for the year ended December 31, 1989 (the "Registrant's 1989 Form
          10-K")).
 10.12   Amended and Restated Employment Agreement dated as of November 15, 1990,     *
          between the Registrant and Gerald M. Levin (which is incorporated
          herein by reference to Exhibit 10.26 to the Registrant's Annual Report
          on Form 10-K for the year ended December 31, 1990 (the "Registrant's
          1990 Form 10-K")).
 10.13   Amended and Restated Employment Agreement made as of August 23, 1989, as     *
          amended on July 21, 1993, between WCI and the Registrant, on the one
          hand, and Bert W. Wasserman, on the other hand (which is incorporated
          herein by reference to Exhibit 10.1 to the Registrant's Quarterly
          Report on Form 10-Q for the quarter ended September 30, 1993).
 10.14   Employment Agreement made as of September 19, 1990, between the              *
          Registrant and Peter R. Haje (which is incorporated herein by reference
          to Exhibit 10.29 to the Registrant's 1990 Form 10-K).
 10.15   Employment Agreement effective as of January 1, 1994, between the
          Registrant and David R. Haas.
 10.16   Employment Agreement effective as of January 1, 1994, between the
          Registrant and Tod R. Hullin.
 10.17   Employment Agreement dated as of January 1, 1994, between the Registrant
          and Philip R. Lochner, Jr.
 10.18   Employment Agreement dated as July 1, 1992, between the Registrant and       *
          Geoffrey W. Holmes (which is incorporated herein by reference to
          Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the
          quarter ended September 30, 1992).
 10.19   Employment Agreement dated as of February 1, 1992, between the                *
          Registrant and Timothy A. Boggs (which is incorporated herein by
          reference to Exhibit 10.2 to the Registrant's 1992 Form 10-K).
 10.20   Travel and Accident Insurance Policy issued by INA Life Insurance            *
          Company of New York (which is incorporated herein by reference to
          Exhibit 10.44 to the Registrant's Annual Report on Form 10-K for the
          year ended December 31, 1988).
 10.21   Amended and Restated Credit Agreement, dated as of June 23, 1992, among      *
          TWE, Bankers Trust Company and Chemical Bank, as Managing Agents, the
          Co-Agents and Agents named therein and the banks named therein (which
          is incorporated herein by reference to Exhibit 10(f) to the
          Registrant's Current Report on Form 8-K dated July 14, 1992 (the "July
          Form 8-K")).
 10.22   Amendment No. 1 to the Amended and Restated Credit Agreement, dated as       *
          of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank,
          as Managing Agents, the Co-Agents and Agents named therein and the
          banks named therein (which is incorporated herein by reference to
          Exhibit 10.24 to the Registration Statement on Form S-4 Reg. No. 33-
          61338 of Six Flags Entertainment Corporation filed with the Commission
          on April 20, 1993).
 10.23   Amendment No. 2 to the Amended and Restated Credit Agreement, dated as       *
          of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank,
          as Managing Agents, the Co-Agents and Agents named therein and the
          banks named therein (which is incorporated herein by reference to
          Exhibit 10.3 to the 1993 TWE S-4).

 
 
                                      iii

 


                                                                                  SEQUENTIAL
EXHIBIT                                                                              PAGE
NUMBER                                 DESCRIPTION                                  NUMBER
- -------                                -----------                                ----------
                                                                            
 10.24   Amendment No. 3 to the Amended and Restated Credit Agreement, dated as       *
          of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank,
          as Managing Agents, the Agents and Co-Agents named therein and the
          banks named therein (which is incorporated herein by reference to
          Exhibit 10.4 to the 1993 TWE S-4).
 10.25   Amendment No. 4 to the Amended and Restated Credit Agreement, dated as       *
          of June 23, 1992, among TWE, Bankers Trust Company and Chemical Bank,
          as Managing Agents, the Agents and the Co-Agents named therein and the
          banks named therein (which is incorporated herein by reference to
          Exhibit 10.5 to TWE's 1993 Form 10-K).
 10.26   Agreement of Limited Partnership, dated as of October 29, 1992, as           *
          amended by the Letter Agreement, dated February 11, 1992, and the
          Letter Agreement dated June 23, 1992, among Time Warner and certain of
          its subsidiaries, ITOCHU Corporation and Toshiba Corporation (which is
          incorporated herein by reference to Exhibit (A) to the Registrant's
          Current Report on Form 8-K dated October 29, 1991 and Exhibits 10(b)
          and 10(c) to the Registrant's Current Report on Form 8-K dated July 14,
          1992).
 10.27   Admission Agreement, dated as of May 16, 1993, between TWE and U S WEST,     *
          Inc. (which is incorporated herein by reference to Exhibit 10(a) to
          TWE's Current Report on Form 8-K dated May 16, 1993).
 10.28   Amendment Agreement, dated as of September 14, 1993, amending the TWE        *
          Partnership Agreement, as amended (which is incorporated herein by
          reference to Exhibit 3.2 to TWE's 1993 Form 10-K).
 10.29   Letter Agreement, dated May 16, 1993, between Time Warner and ITOCHU         *
          Corporation (which is incorporated herein by reference to Exhibit 10(b)
          to TWE's Current Report on Form 8-K dated May 16, 1993).
 10.30   Letter Agreement, dated May 16, 1993, between Time Warner and Toshiba        *
          Corporation (which is incorporated herein by reference to Exhibit 10(c)
          to TWE's Current Report on Form 8-K dated May 16, 1993).
 10.31   Option Agreement, dated as of September 15, 1993, between TWE and U S        *
          WEST, Inc. (which is incorporated herein by reference to Exhibit 10.9
          to TWE's 1993 Form 10-K).
 10.32   Promissory Note of U S WEST Cable Corporation, dated September 15, 1993      *
          (which is incorporated herein by reference to Exhibit 10.10 to TWE's
          1993 Form 10-K).
 10.33   Guarantee, dated as of September 15, 1993, by U S WEST, Inc. of the          *
          Promissory Note of U S WEST Cable Corporation, dated September 15, 1993
          (which is incorporated herein by reference to Exhibit 10.11 to TWE's
          1993 Form 10-K).
 21      Subsidiaries of the Registrant.
 23.1    Consent of Ernst & Young, Independent Auditors.
 23.2    Consent of Price Waterhouse, Independent Accountants.
 24      Powers of Attorney, dated as of March 30, 1994.
 99.1    The 1993 financial statements and financial statement schedules of
          Paragon Communications and the report of independent accountants
          thereon.

- --------
* Incorporated by reference.
 
  The Registrant hereby agrees to furnish to the Securities and Exchange
Commission at its request copies of long-term debt instruments defining the
rights of holders of the Registrant's outstanding long-term debt that are not
required to be filed herewith.
 
                                       iv