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Turner Broadcasting System Inc – ‘DEFM14A’ on 9/17/96

As of:  Tuesday, 9/17/96   ·   Accession #:  950109-96-6042   ·   File #:  1-08911

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/17/96  Turner Broadcasting System Inc    DEFM14A                1:1.3M                                   Donnelley R R & S..01/FA

Definitive Proxy Solicitation Material — Merger or Acquisition   —   Schedule 14A
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: DEFM14A     Definitive Proxy Solicitation Material -- Merger     347   1.90M 
                          or Acquisition                                         


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
7Available Information
8Incorporation of Certain Documents By Reference
9Table of Contents
11Summary
19The Transaction
24TCI Arrangements
34The Special Meetings
"Times and Places; Purposes
"Voting Rights; Votes Required for Approval
"Time Warner
"Tbs
35Proxies
37Background
45Recommendation of the Time Warner Board; Time Warner's Reasons for the Transaction
48Recommendation of the TBS Board; TBS's Reasons for the Transaction
52Opinion of Time Warner's Financial Advisor
58Opinions of TBS's Financial Advisors
"Opinion of CS First Boston
61Opinion of Merrill Lynch
65Program Agreement
66PPV Output Agreement
"SSSI Agreement
67SportSouth Agreement
68Sunshine Option
69Purpose and Certain Effects of the Transaction
"Interests of Certain Persons in the Transaction
"Employment Agreement with R.E. Turner
73Federal Income Tax Consequences
"Time Warner Merger
74TBS Merger
75Cash in Lieu of Fractional Shares
76Accounting Treatment
"Certain Fees and Expenses
78Regulatory Approvals
"FCC Approval Process
79FTC Consent Decree
82Certain Litigation
"TBS Shareholder Litigation
85Stock Exchange Listing
"Federal Securities Laws Consequences
"Appraisal and Dissenters' Rights
91Effect of Transaction on the TBS LYONs
"Effect of Transaction on Certain Outstanding Time Warner Convertible Securities
"TW LYONs
"Hasbro LYONs
92The Merger Agreement
"The Mergers
"Conversion of Time Warner Capital Stock
93Conversion of TBS Capital Stock
"Treatment of Options and Warrants
"Representations and Warranties
94Certain Covenants
96Benefit Plans
97Conditions to the Mergers
"Termination of the Merger Agreement
99Effects of Termination
100LMC Agreement
"Covenants With Respect to the Mergers
104SSSI Agreement and the Distribution Contract
"General
"Distribution Contract
105Contribution and Exchange Agreement
107Certain Related Agreements
"Rights Amendment
108Support Agreement
109Investors' Agreements
"Investors' Agreement (No. 1)
111Investors' Agreement (No. 2)
112Right of First Refusal Agreement
"Registration Rights Agreements
"Turner Registration Rights Agreement
113LMC Registration Rights Agreement
114Unaudited Pro Forma Consolidated Condensed Financial Statements
117New Time Warner
121Business of Time Warner
123Business of TBS
124Business of New Time Warner
"Management of New Time Warner
"Directors
127Compensation of Directors
"Executive Officers
128Compensation of Executive Officers
129Description of New Time Warner Capital Stock
"Authorized Capital Stock
"New Time Warner Common Stock
130LMC Series Common Stock
"New Time Warner Rights Agreement; New Time Warner Series A Preferred Stock
131New Time Warner Rights Agreement
135New Time Warner Series A Preferred Stock
136New Time Warner Series D Preferred Stock
"Dividend Rights
137Conversion Provisions
139Adjustment of Series D Conversion Rate for Certain Actions or Events
141Adjustment of Series D Conversion Rate upon Consolidation, Merger or Sale of Assets
142Redemption or Exchange at New Time Warner's Option
144Pro Rata Repurchase
145Liquidation Rights
"Voting Rights
146New Time Warner Series E Preferred Stock
148New Time Warner Series F Preferred Stock
150New Time Warner Series G Preferred Stock
151New Time Warner Series H Preferred Stock
152New Time Warner Series I Preferred Stock
153New Time Warner Series J Preferred Stock
162New Time Warner Series M Preferred Stock
165Reorganization of TWE
"Change of Control
171New Time Warner Series L Preferred Stock
172Ownership of Time Warner and New Time Warner Capital Stock
"Security Ownership of Directors and Executive Officers
174Security Ownership of Certain Beneficial Owners
"Common Stock
177Ownership of TBS Capital Stock
180Comparison of Rights of Stockholders of New Time Warner and Time Warner
"Series Common Stock
181Comparison of Rights of Stockholders of New Time Warner and Shareholders of Tbs
183Certain Voting Rights
190Certain Business Relationships
191Significant Legislation and Regulation Applicable to Broadcasting and Cable Television Services
193Legal Matters
"Experts
194Stockholder Proposals
225Additional Agreements
230Section 1.01. The Mergers
231Section 1.02. Closing
"Section 1.03. Effective Time
"Section 1.04. Effects of the Mergers
"Section 1.05. Charter and By-Laws
232Section 1.06. Directors
"Section 1.07. Officers
"Section 2.01. Effect on Parent Capital Stock
235Section 2.02. Effect on Company Capital Stock
237Section 2.03. Exchange of Shares and Certificates
240Section 3.01. Representations and Warranties of the Company
246Section 3.02. Representations and Warranties of Parent
251Section 4.01. Conduct of Business
253Section 4.02. No Solicitation
254Section 5.01. Preparation of Form S-4 and the Proxy Statement; Shareholders Meeting and Parent's Stockholders Meeting
"Section 5.02. Letter of the Company's Accountants
255Section 5.03. Letter of Parent's Accountants
"Section 5.04. Access to Information; Confidentiality
"Section 5.05. Best Efforts; Notification
256Section 5.06. Board Authority
"Section 5.07. Public Announcements
"Section 5.08. Benefit Plans
257Section 5.09. Indemnification
"Section 5.10. Fees and Expenses
"Section 5.11. Affiliates
258Section 5.12. Stock Exchange Listing
"Section 5.13. Execution of the Registration Rights Agreement
"Section 5.14. Tax Treatment
"Section 5.15. Transfer and Real Property Transfer Gains Taxes
"Section 5.16. Material Transactions by Parent
259Section 6.01. Conditions to Each Party's Obligation To Effect the Mergers
260Section 6.02. Conditions to Obligations of Parent, Holdco, Delaware Sub and Georgia Sub
261Section 6.03. Conditions to Obligation of the Company
"Section 7.01. Termination
263Section 7.02. Effect of Termination
264Section 7.03. Amendment
"Section 7.04. Extension; Waiver
"Section 7.05. Procedure for Termination, Amendment, Extension or Waiver
"Section 8.01. Nonsurvival of Representations and Warranties
"Section 8.02. Notices
265Time Warner Inc
"Section 8.03. Definitions
"Section 8.04. Interpretation
"Section 8.05. Counterparts
"Section 8.06. Entire Agreement; No Third-Party Beneficiaries
266Section 8.07. Governing Law
"Section 8.08. Assignment
"Section 8.09. Enforcement
"Section 8.10. Waivers
278Section 1.1 Definitions
284Section 1.2 Terms Generally
"Section 2.1 Agreement to Vote; Related Matters
285Section 2.2 Reasonable Efforts
286Section 2.3 Agreement to Abandon
287Section 2.4 Closing Deliveries
"Section 2.5 Dissenters' Rights
"Section 2.6 Abandoned and Terminated Agreements
289Section 3.2 Representations and Warranties of Old TW
290Section 3.3 Representations and Warranties of Holdco
292Section 4.1 Share Exchange
"Section 4.2 No Redemption
293Section 4.3 Certain Post-Closing Compensation Obligations
295Section 4.4 Certain Post-Closing Covenants
296Section 5.1 Expenses
"Section 5.2 Specific Performance
"Section 5.3 Amendments; Termination
297Section 5.4 Successors and Assigns
"Section 5.5 Entire Agreement
"Section 5.6 Notices
298Section 5.7 Governing Law
"Section 5.8 Counterparts; Effectiveness
"Section 5.9 Descriptive Headings
"Section 5.10 Severability
"Section 5.11 Attorney's Fees
"Section 5.12 Obligations of Old TW and Holdco Joint and Several
299Subsidiaries of LMC Parent
319Morgan Stanley
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SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [x] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY [x] Definitive Proxy Statement RULE 14C-5(D)(2)) [_] Definitive Additional Materials [_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12 TURNER BROADCASTING SYSTEM, INC. ------------------------------------------------------------------------ (Name of Registrant as Specified In Its Charter) ------------------------------------------------------------------------ (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. [_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a- 6(i)(3). [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [x] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: Notes:
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TURNER BROADCASTING SYSTEM, INC. September 6, 1996 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders (the "TBS Meeting") of Turner Broadcasting System, Inc. ("TBS") to be held on October 10, 1996 at 2:00 p.m., local time, at the Time & Life Building, 1271 Avenue of the Americas, New York, New York 10020. At the TBS Meeting you will be considering and voting upon a matter of great importance to TBS: the combination of TBS and Time Warner Inc. ("Time Warner"), which will create the largest media and entertainment company in the world. In this merger, TBS and Time Warner will each become a wholly owned subsidiary of a new holding company that will be renamed "Time Warner Inc." ("New Time Warner"). If the transaction is approved by the shareholders of TBS and the stockholders of Time Warner, and is effected, each outstanding share of TBS Class A Common Stock and TBS Class B Common Stock will be converted into the right to receive 0.75 of a share of common stock of New Time Warner ("New Time Warner Common Stock") and each outstanding share of TBS Class C Convertible Preferred Stock (each of which is convertible into six shares of TBS Class B Common Stock) will be converted into the right to receive 4.80 shares of New Time Warner Common Stock. Each outstanding share of common stock of Time Warner will be converted into one share of New Time Warner Common Stock and each outstanding share of each series of preferred stock of Time Warner will be converted into one share of a substantially identical series of preferred stock of New Time Warner. The attached Joint Proxy Statement/Prospectus provides you with detailed information regarding the transaction. I urge you to read it carefully. Your Board of Directors (with certain directors not present or abstaining on the basis that they were interested directors with respect to the transaction) has unanimously approved the transaction and has determined that the transaction is fair to and in the best interests of TBS and its shareholders, and recommends that all TBS shareholders vote for the approval of the transaction. Whether or not you are personally able to attend the TBS Meeting, please complete, sign, date and return the enclosed proxy card as soon as possible. This action will not limit the right of any record holder who desires to attend the TBS Meeting to vote in person at the TBS Meeting. Very truly yours, R.E. Turner Chairman of the Board and President
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TURNER BROADCASTING SYSTEM, INC. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 10, 1996 A Special Meeting of Shareholders (the "TBS Meeting") of Turner Broadcasting System, Inc. ("TBS") will be held at the Time & Life Building, 1271 Avenue of the Americas, New York, New York 10020, on October 10, 1996, commencing at 2:00 p.m., local time, for the following purposes: 1. To consider and vote upon a proposal (the "TBS Merger Proposal") to approve an Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995, as amended as of August 8, 1996 (as so amended, the "Merger Agreement"), among Time Warner Inc. ("Time Warner"), TBS, TW Inc., currently a wholly owned subsidiary of Time Warner ("New Time Warner"), Time Warner Acquisition Corp., a wholly owned subsidiary of New Time Warner ("TW Merger Corp."), and TW Acquisition Corp., a wholly owned subsidiary of New Time Warner ("TBS Merger Corp."). The Merger Agreement provides, among other things, for the following transactions: (a) the merger of TBS Merger Corp. into TBS (the "TBS Merger"), in which each share of Class A Common Stock, par value $.0625 per share, of TBS ("TBS Class A Common Stock") and each share of Class B Common Stock, par value $.0625 per share, of TBS ("TBS Class B Common Stock" and, together with the TBS Class A Common Stock, "TBS Common Stock") outstanding immediately prior to the effective time of the TBS Merger, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised, will be converted into the right to receive 0.75 of a share of Common Stock, par value $.01 per share, of New Time Warner ("New Time Warner Common Stock"), and each share of Class C Convertible Preferred Stock, par value $.125 per share, of TBS ("TBS Class C Preferred Stock" and, together with TBS Common Stock, "TBS Capital Stock") outstanding immediately prior to the effective time of the TBS Merger, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised, will be converted into the right to receive 4.80 shares of New Time Warner Common Stock; and (b) the merger of TW Merger Corp. into Time Warner (the "Time Warner Merger" and, together with the TBS Merger, the "Mergers"), in which each share of Common Stock, par value $1.00 per share, of Time Warner outstanding immediately prior to the effective time of such merger, other than shares held directly or indirectly by Time Warner, will be converted into one share of New Time Warner Common Stock, and each outstanding share of each series of preferred stock of Time Warner, other than shares held directly or indirectly by Time Warner and shares with respect to which appraisal rights are properly exercised, will be converted into one share of a substantially identical series of preferred stock of New Time Warner. The transactions contemplated by the Merger Agreement are referred to herein as the "Transaction." As a result of the Transaction, Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner. Upon consummation of the Mergers, New Time Warner will be renamed "Time Warner Inc." 2. To consider and transact such other business as may properly come before the TBS Meeting or any adjournment or postponement thereof. Only holders of record of shares of TBS Class A Common Stock, TBS Class B Common Stock and TBS Class C Preferred Stock at the close of business on August 26, 1996, the record date for the TBS Meeting fixed by the TBS Board of Directors, are entitled to notice of and to vote at the TBS Meeting and any 1
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adjournment or postponement thereof. A list of such shareholders will be available for inspection by any shareholder of TBS at the TBS Meeting. Approval of the TBS Merger Proposal by the holders of TBS Capital Stock requires the affirmative vote of (a) a majority of the voting power of the outstanding shares of TBS Capital Stock, voting together as a single group, (b) a majority of the voting power of the outstanding shares of TBS Common Stock, voting together as a single group, and (c) a majority of the outstanding shares of TBS Class C Preferred Stock, voting as a separate class. MR. TURNER, TIME WARNER AND LIBERTY MEDIA CORPORATION HAVE AGREED, SUBJECT TO THE SATISFACTION OR WAIVER OF CERTAIN CONDITIONS, TO VOTE OR CAUSE TO BE VOTED ALL SHARES OF TBS CAPITAL STOCK OWNED BY THEM AND CERTAIN OF THEIR AFFILIATES IN FAVOR OF THE TBS MERGER PROPOSAL. ACCORDINGLY (ASSUMING THE SATISFACTION OR WAIVER OF SUCH CONDITIONS), APPROVAL OF THE TBS MERGER PROPOSAL BY TBS SHAREHOLDERS IS ASSURED, REGARDLESS OF THE VOTE OF ANY OTHER SHAREHOLDER OF TBS. Holders of TBS Capital Stock who do not vote in favor of the TBS Merger Proposal and who otherwise comply with the provisions of Article 13 of the Georgia Business Corporation Code (the "GBCC") are entitled to assert dissenters' rights and to obtain payment of the fair value of their shares if the Transaction is consummated. A summary of the provisions of Article 13 of the GBCC, including a summary of the requirements with which shareholders desiring to dissent must comply, is contained in the accompanying Joint Proxy Statement/Prospectus under the heading "The Transaction--Appraisal and Dissenters' Rights." The entire text of Article 13 of the GBCC is attached as Appendix D-2 to the Joint Proxy Statement/Prospectus. The Transaction is of great importance to TBS and its shareholders. The accompanying Joint Proxy Statement/Prospectus describes the Transaction in detail. Please read the Joint Proxy Statement/Prospectus carefully and then complete, sign and date the enclosed proxy card and return it in the enclosed envelope. Your prompt response will be appreciated. If you plan to attend the TBS Meeting and your shares are held in the name of a broker or other nominee, please bring a proxy or letter from the broker or nominee confirming your ownership of shares. Only TBS shareholders and their proxies and invited guests of TBS will be admitted to the TBS Meeting. By Order of the Board of Directors Steven W. Korn Secretary Atlanta, Georgia September 6, 1996 IMPORTANT WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE TBS MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENVELOPE WHICH HAS BEEN PROVIDED. IN THE EVENT YOU ARE ABLE TO ATTEND THE TBS MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON. DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD.
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TIME WARNER INC. TURNER BROADCASTING SYSTEM, INC. JOINT PROXY STATEMENT FOR A SPECIAL MEETING OF STOCKHOLDERS OF TIME WARNER INC. TO BE HELD ON OCTOBER 10, 1996 AND FOR A SPECIAL MEETING OF SHAREHOLDERS OF TURNER BROADCASTING SYSTEM, INC. TO BE HELD ON OCTOBER 10, 1996 --------------- TW INC. (TO BE RENAMED "TIME WARNER INC." UPON CONSUMMATION OF THE TRANSACTIONS DESCRIBED HEREIN) PROSPECTUS --------------- An index and glossary of capitalized terms used in this Joint Proxy Statement/Prospectus is attached hereto as Schedule 1. --------------- This Joint Proxy Statement/Prospectus is being furnished to holders of Common Stock, par value $1.00 per share ("Time Warner Common Stock"), and Preferred Stock, par value $1.00 per share ("Time Warner Preferred Stock" and, together with the Time Warner Common Stock, "Time Warner Capital Stock"), of Time Warner Inc., a Delaware corporation ("Time Warner"), in connection with the solicitation of proxies by the Board of Directors of Time Warner (the "Time Warner Board") for use at the Special Meeting of Stockholders of Time Warner to be held on October 10, 1996, or any adjournment or postponement thereof (the "Time Warner Meeting"). This Joint Proxy Statement/Prospectus is also being furnished to holders of Class A Common Stock, par value $.0625 per share ("TBS Class A Common Stock"), Class B Common Stock, par value $.0625 per share ("TBS Class B Common Stock" and, together with the TBS Class A Common Stock, "TBS Common Stock"), and Class C Convertible Preferred Stock, par value $.125 per share ("TBS Class C Preferred Stock" and, together with the TBS Common Stock, "TBS Capital Stock"), of Turner Broadcasting System, Inc., a Georgia corporation ("TBS"), in connection with the solicitation of proxies by the Board of Directors of TBS (the "TBS Board") for use at the Special Meeting of Shareholders of TBS to be held on October 10, 1996, or any adjournment or postponement thereof (the "TBS Meeting" and, together with the Time Warner Meeting, the "Special Meetings"). The Time Warner Meeting has been called to consider and vote upon a proposal (the "TW Merger Proposal") to approve and adopt an Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995, as amended as of August 8, 1996 (as so amended, the "Merger Agreement"), among Time Warner, TBS, TW Inc., a Delaware corporation and currently a wholly owned subsidiary of Time Warner ("New Time Warner"), Time Warner Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of New Time Warner ("TW Merger Corp."), and TW Acquisition Corp., a Georgia corporation and a wholly owned subsidiary of New Time Warner ("TBS Merger Corp."). The TBS Meeting has been called to consider and vote upon a proposal (the "TBS Merger Proposal") to approve the Merger Agreement. As a result of the transactions contemplated by the Merger Agreement, Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner. THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINALOFFENSE. This Joint Proxy Statement/Prospectus and accompanying forms of proxy and voting instructions are first being mailed to the stockholders of Time Warner and the shareholders of TBS on or about September 9, 1996. The date of this Joint Proxy Statement/Prospectus is September 6, 1996.
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The Merger Agreement contemplates, among other things, that TW Merger Corp. will be merged into Time Warner (the "Time Warner Merger") and TBS Merger Corp. will be merged into TBS (the "TBS Merger" and, together with the Time Warner Merger, the "Mergers"), with the result that (a) Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner, (b) each outstanding share of Time Warner Common Stock, other than shares held directly or indirectly by Time Warner, will be converted into one share of Common Stock, par value $.01 per share, of New Time Warner ("New Time Warner Common Stock"), (c) each outstanding share of each series of Time Warner Preferred Stock, other than shares held directly or indirectly by Time Warner and shares with respect to which appraisal rights are properly exercised, will be converted into one share of a substantially identical series of Preferred Stock, par value $.10 per share, of New Time Warner ("New Time Warner Preferred Stock"), (d) each outstanding share of TBS Common Stock, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised, will be converted into the right to receive 0.75 of a share of New Time Warner Common Stock and (e) each outstanding share of TBS Class C Preferred Stock, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised, will be converted into the right to receive 4.80 shares of New Time Warner Common Stock. Following consummation of the Mergers, New Time Warner will be renamed "Time Warner Inc." The transactions contemplated by the Merger Agreement are referred to herein as the "Transaction." It is currently expected that prior to the consummation of the Mergers, New Time Warner will adopt a stockholder rights agreement (the "New Time Warner Rights Agreement"), which will be the same as Time Warner's existing stockholder rights agreement (the "Existing Rights Agreement"), with the exception of certain amendments as described herein. See "Certain Related Agreements--Rights Amendment" and "Description of New Time Warner Capital Stock--New Time Warner Rights Agreement; New Time Warner Series A Preferred Stock." If New Time Warner adopts the New Time Warner Rights Agreement, each share of New Time Warner Common Stock issued in connection with the Mergers will be accompanied by one preferred stock purchase right (a "New Time Warner Right"). This Joint Proxy Statement/Prospectus constitutes the prospectus of New Time Warner with respect to (a) the shares of New Time Warner Common Stock (and any New Time Warner Rights) that will be issued to (i) holders of outstanding shares of Time Warner Common Stock upon consummation of the Time Warner Merger and (ii) holders of outstanding shares of TBS Capital Stock upon consummation of the TBS Merger, (b) the shares of New Time Warner Preferred Stock that will be issued to holders of outstanding shares of Time Warner Preferred Stock upon consummation of the Time Warner Merger and (c) the shares of New Time Warner Common Stock (and any New Time Warner Rights) issuable upon conversion of certain of such shares of New Time Warner Preferred Stock and conversion or exercise of certain convertible debt securities and options. See "The Merger Agreement--Conversion of Time Warner Capital Stock" and "--Conversion of TBS Capital Stock." The capital stock of New Time Warner is referred to collectively herein as "New Time Warner Capital Stock." NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR THE SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF TIME WARNER OR TBS SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. 2
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AVAILABLE INFORMATION Time Warner and TBS are each subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. The Time Warner Common Stock is listed on the New York Stock Exchange, Inc. (the "NYSE") and the Pacific Stock Exchange, Inc. (the "PSE"), and such material relating to Time Warner may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005, and at the offices of the PSE, 115 Sansome Street, 2nd Floor, San Francisco, California 94104. The TBS Common Stock is listed on the American Stock Exchange, Inc. (the "AMEX"), and such material relating to TBS may also be inspected at the offices of the AMEX, 86 Trinity Place, New York, New York 10006. After consummation of the Transaction, Time Warner and TBS may no longer file reports, proxy statements or other information with the Commission. Instead, such information would be provided, to the extent required, in filings made by New Time Warner. New Time Warner has filed with the Commission a registration statement on Form S-4 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), relating to (a) the shares of New Time Warner Common Stock (and any New Time Warner Rights) that will be issued to holders of Time Warner Common Stock and to holders of TBS Capital Stock in connection with the Transaction, (b) the shares of New Time Warner Preferred Stock that will be issued to holders of Time Warner Preferred Stock in connection with the Transaction and (c) the shares of New Time Warner Common Stock (and any New Time Warner Rights) issuable upon conversion of certain of such shares of New Time Warner Preferred Stock and conversion or exercise of certain convertible debt securities and options. See "The Merger Agreement--Conversion of Time Warner Capital Stock" and "--Conversion of TBS Capital Stock." This Joint Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement filed by New Time Warner with the Commission, certain portions of which are omitted in accordance with the rules and regulations of the Commission. Such additional information is available for inspection and copying at the offices of the Commission. Statements contained in this Joint Proxy Statement/Prospectus or in any document incorporated into this Joint Proxy Statement/Prospectus by reference as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. 3
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed by Time Warner with the Commission under the Exchange Act are incorporated herein by reference: (a) Time Warner's Annual Report on Form 10-K for the year ended December 31, 1995, as amended by Time Warner's Form 10-K/A, dated June 27, 1996 (the "Time Warner Form 10-K"); (b) Time Warner's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 (the "Time Warner Form 10-Qs"); and (c) Time Warner's Current Reports on Form 8-K dated January 4, 1996, March 22, 1996, March 25, 1996, April 2, 1996, April 4, 1996, April 11, 1996, May 15, 1996, August 6, 1996, August 14, 1996 and September 6, 1996 (the "Time Warner Form 8-Ks" and, collectively with the Time Warner Form 10-K and the Time Warner Form 10-Qs, the "Time Warner Reports"). The following documents previously filed by TBS with the Commission under the Exchange Act are incorporated herein by reference: (a) TBS's Annual Report on Form 10-K for the year ended December 31, 1995 (the "TBS Form 10-K"); (b) TBS's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 (the "TBS Form 10-Qs"); and (c) TBS's Current Reports on Form 8-K dated January 3, 1996, June 26, 1996 and September 6, 1996 (the "TBS Form 8-Ks" and, collectively with the TBS Form 10-K and the TBS Form 10-Qs, the "TBS Reports"). All documents filed by Time Warner or TBS pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy Statement/Prospectus and prior to the Special Meetings shall be deemed to be incorporated by reference into this Joint Proxy Statement/Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes hereof to the extent that a statement contained herein (or in any other subsequently filed document that is or is deemed to be incorporated by reference herein) modifies or supersedes such previous statement. Any statement so modified or superseded shall not be deemed to constitute a part hereof except as so modified or superseded. All information contained or incorporated by reference in this Joint Proxy Statement/Prospectus relating to Time Warner, New Time Warner, TW Merger Corp. and TBS Merger Corp. has been supplied by Time Warner, and all such information relating to TBS has been supplied by TBS. THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY PERSON TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED, IN THE CASE OF DOCUMENTS RELATING TO TIME WARNER, FROM TIME WARNER INC., 75 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10019, ATTENTION: SHAREHOLDER RELATIONS DEPARTMENT; TELEPHONE NUMBER (212) 484-6971, AND IN THE CASE OF DOCUMENTS RELATING TO TBS, FROM TURNER BROADCASTING SYSTEM, INC., ONE CNN CENTER, ATLANTA, GEORGIA 30303, ATTENTION: INVESTOR RELATIONS; TELEPHONE NUMBER (404) 827-1700. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY OCTOBER 3, 1996. 4
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TABLE OF CONTENTS [Download Table] PAGE ---- AVAILABLE INFORMATION..................................................... 3 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 4 TABLE OF CONTENTS......................................................... 5 SUMMARY................................................................... 7 THE SPECIAL MEETINGS...................................................... 30 Times and Places; Purposes............................................... 30 Voting Rights; Votes Required for Approval............................... 30 Proxies.................................................................. 31 THE TRANSACTION........................................................... 33 Background............................................................... 33 Recommendation of the Time Warner Board; Time Warner's Reasons for the Transaction............................................................. 41 Recommendation of the TBS Board; TBS's Reasons for the Transaction....... 44 Opinion of Time Warner's Financial Advisor............................... 48 Opinions of TBS's Financial Advisors..................................... 54 Opinion of CS First Boston............................................... 54 Opinion of Merrill Lynch................................................. 57 Purpose and Certain Effects of the Transaction........................... 65 Interests of Certain Persons in the Transaction.......................... 65 Federal Income Tax Consequences.......................................... 69 Accounting Treatment..................................................... 72 Certain Fees and Expenses................................................ 72 Regulatory Approvals..................................................... 74 Certain Litigation....................................................... 78 Stock Exchange Listing................................................... 81 Federal Securities Laws Consequences..................................... 81 Appraisal and Dissenters' Rights......................................... 81 Effect of Transaction on the TBS LYONs .............................................................. 87 Effect of Transaction on Certain Outstanding Time Warner Convertible Securities.............................................................. 87 THE MERGER AGREEMENT...................................................... 88 The Mergers.............................................................. 88 Conversion of Time Warner Capital Stock.................................. 88 Conversion of TBS Capital Stock.......................................... 89 Treatment of Options and Warrants........................................ 89 Representations and Warranties........................................... 89 Certain Covenants........................................................ 90 Conditions to the Mergers................................................ 93 [Download Table] PAGE ---- Termination of the Merger Agreement...................................... 93 Effects of Termination................................................... 95 TCI ARRANGEMENTS.......................................................... 96 LMC Agreement............................................................ 96 SSSI Agreement and the Distribution Contract............................. 100 Program Agreement........................................................ 101 Contribution and Exchange Agreement...................................... 101 SportSouth Agreement..................................................... 101 Sunshine Option.......................................................... 102 PPV Output Agreement..................................................... 102 CERTAIN RELATED AGREEMENTS................................................ 103 Rights Amendment......................................................... 103 Support Agreement ....................................................... 104 Investors' Agreements.................................................... 105 Right of First Refusal Agreement......................................... 108 Registration Rights Agreements........................................... 108 UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS........... 110 BUSINESS OF TIME WARNER................................................... 117 BUSINESS OF TBS........................................................... 119 BUSINESS OF NEW TIME WARNER............................................... 120 MANAGEMENT OF NEW TIME WARNER............................................. 120 Directors................................................................ 120 Compensation of Directors................................................ 123 Executive Officers....................................................... 123 Compensation of Executive Officers....................................... 124 DESCRIPTION OF NEW TIME WARNER CAPITAL STOCK.............................. 125 Authorized Capital Stock................................................. 125 New Time Warner Common Stock............................................. 125 LMC Series Common Stock.................................................. 126 New Time Warner Rights Agreement; New Time Warner Series A Preferred Stock................................................................... 126 New Time Warner Series D Preferred Stock................................. 132 New Time Warner Series E Preferred Stock................................. 142 New Time Warner Series F Preferred Stock................................. 144 New Time Warner Series G Preferred Stock................................. 146 New Time Warner Series H Preferred Stock................................. 147 New Time Warner Series I Preferred Stock................................. 148 5
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[Download Table] PAGE ---- New Time Warner Series J Preferred Stock................................ 149 New Time Warner Series M Preferred Stock................................ 158 New Time Warner Series L Preferred Stock................................ 167 OWNERSHIP OF TIME WARNER AND NEW TIME WARNER CAPITAL STOCK............... 168 Security Ownership of Directors and Executive Officers.................. 168 Security Ownership of Certain Beneficial Owners......................... 170 OWNERSHIP OF TBS CAPITAL STOCK........................................... 173 Security Ownership of Directors and Executive Officers.................. 173 Security Ownership of Certain Beneficial Owners......................... 174 COMPARISON OF RIGHTS OF STOCKHOLDERS OF NEW TIME WARNER AND TIME WARNER.. 176 COMPARISON OF RIGHTS OF STOCKHOLDERS OF NEW TIME WARNER AND SHAREHOLDERS OF TBS.................................................................. 177 CERTAIN BUSINESS RELATIONSHIPS........................................... 186 [Download Table] PAGE ---- SIGNIFICANT LEGISLATION AND REGULATION APPLICABLE TO BROADCASTING AND CABLE TELEVISION SERVICES............................................... 187 LEGAL MATTERS............................................................ 189 EXPERTS.................................................................. 189 STOCKHOLDER PROPOSALS.................................................... 190 Schedule 1--Index and Glossary of Defined Terms Appendix A-1(a)--Merger Agreement Appendix A-1(b)--Amendment No. 1 to Merger Agreement Appendix A-2--LMC Agreement Appendix A-3--Support Agreement Appendix B-1--Certificate of Incorporation of New Time Warner Appendix C-1--Opinion of Morgan Stanley & Co. Incorporated Appendix C-2--Opinion of CS First Boston Corporation Appendix C-3--Opinion of Merrill Lynch & Co. Appendix D-1--Section 262 of the General Corporation Law of the State of Delaware Appendix D-2--Article 13 of the Georgia Business Corporation Code 6
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SUMMARY The following summary is intended only to highlight certain information contained elsewhere in this Joint Proxy Statement/Prospectus. This summary is not intended to be complete and is qualified in its entirety by the more detailed information contained elsewhere in this Joint Proxy Statement/Prospectus, the Appendices hereto and the documents incorporated by reference or otherwise referred to herein. Stockholders of Time Warner and shareholders of TBS are urged to review this entire Joint Proxy Statement/Prospectus carefully, including such Appendices and such other documents. An index and glossary of capitalized terms used in this Joint Proxy Statement/Prospectus is attached hereto as Schedule 1. References herein to the Merger Agreement prior to its amendment and restatement in November 1995, as described herein, are references to the Merger Agreement as originally executed, and references herein to the Merger Agreement following its amendment and restatement in November 1995 but prior to its amendment in August 1996, are to the Merger Agreement as amended and restated in November 1995. INTRODUCTION AND OVERVIEW OF THE TRANSACTION As a result of the Mergers, Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner, which will be renamed "Time Warner Inc." Former stockholders of Time Warner and former shareholders of TBS will become stockholders of New Time Warner. In the Mergers, (a) each outstanding share of Time Warner Common Stock, other than shares held directly or indirectly by Time Warner, will be converted into one share of New Time Warner Common Stock and each share of each series of Time Warner Preferred Stock, other than shares held directly or indirectly by Time Warner and shares with respect to which appraisal rights are properly exercised, will be converted into one share of a substantially identical series of New Time Warner Preferred Stock and (b) each outstanding share of TBS Common Stock will be converted into the right to receive 0.75 of a share of New Time Warner Common Stock and each outstanding share of TBS Class C Preferred Stock will be converted into the right to receive 4.80 shares of New Time Warner Common Stock (equal to 0.80 of a share for each share of TBS Class B Common Stock into which the TBS Class C Preferred Stock is convertible), in each case other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised. Under the Restated Articles of Incorporation of TBS (the "TBS Articles") and the Georgia Business Corporation Code (the "GBCC"), in addition to the approval of the TBS Merger by a majority of the voting power of the outstanding shares of TBS Capital Stock, voting together as a single group, and a majority of the voting power of the outstanding shares of TBS Common Stock, voting together as a single group, the TBS Merger must be approved by a majority of the outstanding shares of TBS Class C Preferred Stock, voting as a separate class. Pursuant to a Shareholders' Agreement dated as of September 22, 1995 (the "Support Agreement"), among R. E. Turner, the Chairman and President of TBS, Turner Outdoor, Inc. ("Turner Outdoor" and, together with Mr. Turner, the "Turner Shareholders") and Time Warner, the Turner Shareholders have agreed, among other things, to vote all shares of TBS Capital Stock that they are entitled to vote at the TBS Meeting in favor of the TBS Merger Proposal. Pursuant to the Second Amended and Restated LMC Agreement dated as of September 22, 1995 (the "LMC Agreement"), among Time Warner, New Time Warner, Liberty Media Corporation ("LMC"), a wholly owned subsidiary of Tele-Communications, Inc. ("TCI"), and certain subsidiaries of LMC, LMC and such subsidiaries have agreed, subject to the conditions specified in the LMC Agreement and described herein, to vote all shares of TBS Capital Stock that they are entitled to vote at the TBS Meeting in favor of the TBS Merger Proposal. As of June 30, 1996, such shares represented, in the aggregate, 81.5% of the total combined voting power of the TBS Capital Stock entitled to vote at the TBS Meeting, 80.8% of the total combined voting power of the TBS Common Stock entitled to vote at the TBS Meeting, and 88.5% of the shares of TBS Class C Preferred Stock entitled to vote at the TBS Meeting. Accordingly (assuming the satisfaction or waiver by LMC of the conditions contained in the LMC Agreement), approval of the TBS Merger Proposal is assured, regardless of the vote of any other shareholder of TBS. 7
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As of June 30, 1996, TCI and Time Warner were entitled to vote shares of TBS Class C Preferred Stock representing approximately 49.1% and 39.4%, respectively, of the total number of shares of TBS Class C Preferred Stock outstanding as of such date. Although the shares of TBS Class C Preferred Stock that TCI is entitled to vote constitute less than a majority of the outstanding shares of TBS Class C Preferred Stock, under an agreement entered into in June 1987 between TCI and Time Warner (see "The Transaction--Background"), Time Warner and TCI must consult and agree with each other as to the voting of all TBS Capital Stock owned by them on all matters presented to a vote of holders of shares of TBS Capital Stock (other than the election of directors, which is separately addressed by such agreement), and Time Warner and TCI must vote their shares of TBS Capital Stock in accordance with any such agreement. However, if Time Warner and TCI are unable to reach agreement on any such matter submitted to a shareholder vote, each of Time Warner and TCI must vote all of their shares of TBS Capital Stock against the approval of such matter. As a result of TCI's ownership of shares of TBS Class C Preferred Stock and the terms of such agreement, the TBS Merger cannot be consummated without the approval of TCI. In the course of negotiations among Time Warner, TBS and TCI to secure such approval, Time Warner, New Time Warner, TBS and TCI entered into or agreed to enter into a number of agreements with or for the benefit of TCI and its affiliates. These agreements, as modified in light of the FTC Consent Decree (as defined below), are referred to herein collectively as the "TCI Arrangements." The TCI Arrangements are: (a) the LMC Agreement, a number of the provisions of which will survive the consummation of the Mergers and continue for the benefit of LMC and certain of its affiliates in their capacities as stockholders of New Time Warner, including (i) provisions relating to the exchange by LMC and such LMC affiliates of shares of New Time Warner Common Stock for shares of a new series of New Time Warner Series Common Stock, par value $.01 per share ("New Time Warner Series Common Stock"), exempt from the compulsory redemption provisions of the Certificate of Incorporation of New Time Warner (the "New Time Warner Charter"), such shares to be either Series LMCN-V Common Stock ("LMC Reduced Voting Common Stock"), which will be entitled to one one-hundredth (1/100th) of a vote per share with respect to the election of directors and will otherwise only be entitled to vote on limited matters (see "Description of New Time Warner Capital Stock--LMC Series Common Stock"), or, under very limited circumstances, Series LMC Common Stock ("LMC Common Stock" and, together with the LMC Reduced Voting Common Stock, "LMC Series Common Stock") and (ii) provisions that would require New Time Warner to indemnify LMC and certain of its affiliates against certain income tax liabilities that may be incurred in the event that certain actions taken by New Time Warner after the consummation of the Mergers (including certain actions amending the New Time Warner Rights Agreement) require LMC or such LMC affiliates to dispose of their shares of New Time Warner Capital Stock or have certain other adverse effects on LMC or such LMC affiliates, (b) an agreement (the "SSSI Agreement"), to be entered into upon consummation of the Mergers, among New Time Warner, LMC and Southern Satellite Systems, Inc. ("SSSI"), a subsidiary of LMC that currently uplinks and distributes the signal of WTBS, a broadcast television station owned by TBS, to cable systems and other video distribution systems, pursuant to which (i) New Time Warner will issue to SSSI 4,166,667 shares of LMC Reduced Voting Common Stock and SSSI will grant to New Time Warner an option (the "SSSI Option") to cause to become effective a distribution contract (the "Distribution Contract") pursuant to which SSSI will undertake specified uplinking and distribution activities for WTBS in the event WTBS acquires national broadcast rights to all of its programming and becomes a copyright-paid cable television programming service, enabling WTBS to charge a subscription fee to cable operators and to sell local advertising time without any obligation on the part of the cable operators to make cable compulsory license payments under the Copyright Act (the "WTBS Conversion") and (ii) New Time Warner will issue to LMC 833,333 shares of LMC Reduced Voting Common Stock and will pay to LMC approximately $67 million (payable, at New Time Warner's option, in cash or additional shares of LMC Reduced Voting Common Stock) and LMC and its affiliates will agree not to compete in the business of uplinking and distributing the WTBS signal (the "LMC Non-competition Covenant"), 8
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(c) a program services agreement (the "Program Agreement"), between TBS and a subsidiary of TCI, relating to the mandatory carriage after the consummation of the Mergers by TCI-affiliated cable systems of WTBS (once the WTBS Conversion has occurred) and Headline News, conditional rebates available to TCI- affiliated cable systems for carriage of TBS programming services and other related matters, (d) a stock purchase agreement dated as of September 22, 1995 (the "SportSouth Agreement"), between TBS and a subsidiary of TCI, pursuant to which, upon consummation of the Mergers, TBS will sell its interest in SportSouth Network, Ltd. ("SportSouth"), a regional sports cable network, to such TCI subsidiary for an amount (currently estimated at $65 million) determined in accordance with a formula set forth in the SportSouth Agreement, (e) an option agreement (the "Sunshine Option Agreement"), to be entered into upon consummation of the Mergers, between a subsidiary of TCI and Time Warner Entertainment Company, L.P. ("TWE"), pursuant to which TWE will grant to such TCI subsidiary an option (the "Sunshine Option") to purchase the interests of TWE and certain affiliates in the Sunshine Network, a Florida-based sports cable network, for approximately $14 million, and (f) the pay-per-view output agreements (collectively, the "PPV Output Agreement") between certain TBS subsidiaries, on the one hand, and certain affiliates of TCI, on the other hand, providing for the licensing of all motion pictures theatrically released during the term of the agreement by New Line Cinema Corporation ("New Line"), Castle Rock Entertainment ("Castle Rock") and Turner Pictures Worldwide, Inc. ("Turner Pictures") for exhibition, on a non- exclusive basis, on pay-per-view services owned by such TCI affiliates. After an extensive review of the Transaction by the staff of the Federal Trade Commission (the "FTC") and in order to eliminate concerns raised by the staff of the FTC regarding possible competitive effects of the Transaction, Time Warner, TBS, TCI and LMC have executed the Agreement Containing Consent Order (including the related Interim Agreement, the "FTC Consent Decree") dated August 14, 1996 and have submitted the FTC Consent Decree to the commissioners of the FTC. The FTC commissioners have not yet initially accepted the FTC Consent Decree, and the obligations of Time Warner, TBS and TCI to consummate the Transaction are conditioned upon such initial acceptance. The FTC Consent Decree contains provisions (a) restricting the amount and type of New Time Warner securities that TCI and its affiliates may hold after the consummation of the Mergers, (b) requiring that TCI, subject to receipt of a ruling from the Internal Revenue Service to the effect that the distribution can be effected on a tax-free basis, distribute (the "TCI Spin-off") the stock of SSSI, which will hold, directly and indirectly, substantially all the New Time Warner Capital Stock received by TCI and its affiliates pursuant to the Transaction, to holders of the Liberty Media Group Common Stock issued by TCI, (c) limiting the duration of agreements for mandatory analog carriage by TCI cable systems of TBS programming services, (d) prohibiting New Time Warner from conditioning the availability or terms of certain programming services to any multi-channel video programming distributor ("MVPD") on whether that MVPD or any other MVPD agrees to carry certain other programming services, (e) prohibiting New Time Warner from discriminating in certain respects against MVPDs having geographical overlap with New Time Warner's cable systems, in the terms upon which TBS programming services are made available to such MVPD in the relevant geographical overlap area, (f) prohibiting New Time Warner, in its capacity as a cable operator, from improperly discriminating against programmers in its purchase of programming based on their ownership and (g) requiring New Time Warner's cable systems to carry by a specified date and at specified penetration rates a non-affiliated advertiser-supported news and informational video programming service. If the FTC does not initially accept the FTC Consent Decree, the FTC may seek to enjoin the consummation of the Transaction. If the FTC does initially accept the FTC Consent Decree, the FTC will publish the FTC Consent Decree for public comment for a period of 60 days. If the FTC does not finally accept the FTC Consent Decree after the period for public comment, the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking divestiture of substantial assets of TBS or its subsidiaries or of Time Warner or its subsidiaries. If the FTC does finally accept the FTC Consent Decree, the 9
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FTC Consent Decree will terminate on the tenth anniversary of such final acceptance. See "The Transaction--Regulatory Approvals--FTC Consent Decree" for a further description of the FTC Consent Decree. Pursuant to the LMC Agreement, and in order to ensure compliance by TCI with the FTC Consent Decree, substantially all the shares of New Time Warner Common Stock received by TCI and its affiliates pursuant to the Mergers will immediately be exchanged on a one-for-one basis for shares of LMC Reduced Voting Common Stock. See "Description of New Time Warner Capital Stock--LMC Series Common Stock." In addition, if, as is currently contemplated, New Time Warner adopts the New Time Warner Rights Agreement, the New Time Warner Rights Agreement will be the same as the Existing Rights Agreement, with the exception of certain specified amendments (collectively, the "Rights Amendment") contemplated by the LMC Agreement. The principal effect of the Rights Amendment is to increase the amount of stock that may be acquired by a single person without resulting in such person becoming an "Acquiring Person" under the New Time Warner Rights Agreement. Upon consummation of the Mergers, certain subsidiaries of LMC, the Turner Shareholders and New Time Warner will enter into a stockholders' agreement (the "Right of First Refusal Agreement"), pursuant to which such LMC subsidiaries, on the one hand, and the Turner Shareholders, on the other hand, grant first to the other group and then to New Time Warner a right of first refusal with respect to dispositions of voting securities of New Time Warner beneficially owned by them, subject, in the case of purchases by such LMC subsidiaries, to the FTC Consent Decree. Upon consummation of the Mergers, New Time Warner, LMC and certain of its subsidiaries will enter into a registration rights agreement (the "LMC Registration Rights Agreement"), pursuant to which New Time Warner will grant to LMC, such LMC subsidiaries and specified transferees rights to require the registration under the Securities Act of resales of certain New Time Warner Common Stock held by LMC, such LMC subsidiaries and such transferees. In addition, Time Warner, New Time Warner, LMC and two subsidiaries of LMC have entered into a contribution and exchange agreement dated as of September 22, 1995 (the "Contribution and Exchange Agreement"), pursuant to which New Time Warner has granted to LMC the right to require New Time Warner to acquire approximately 5.8 million shares of TBS Class C Preferred Stock directly from LMC simultaneously with consummation of the TBS Merger for the same consideration payable for such shares in the TBS Merger. Upon consummation of the Mergers and the exchange of all shares of New Time Warner Common Stock received in the Mergers by TCI and its affiliates for LMC Reduced Voting Common Stock, the Turner Shareholders and certain associated holders are currently expected to own shares of New Time Warner Common Stock representing approximately 11% of the aggregate voting power of the outstanding New Time Warner Capital Stock (based on the holdings of such holders and the number of outstanding shares of Time Warner Capital Stock and TBS Capital Stock as of June 30, 1996). Upon consummation of the Mergers, New Time Warner, the Turner Shareholders and Turner Partners, L.P. ("Turner Partners") will enter into an investors' agreement ("Investors' Agreement (No. 1)"), pursuant to which the Turner Shareholders and Turner Partners will agree to certain restrictions on their activities as stockholders of New Time Warner and to certain restrictions on dispositions by them of shares of New Time Warner Capital Stock. In addition, New Time Warner will grant to Mr. Turner, subject to certain conditions, the right to designate two candidates to be nominated for election to the Board of Directors of New Time Warner (the "New Time Warner Board"). New Time Warner will also grant to the Turner Shareholders and certain associated holders of New Time Warner Common Stock rights to require the registration under the Securities Act of resales of certain New Time Warner Common Stock held by them (the "Turner Registration Rights Agreement"). In this Joint Proxy Statement/Prospectus, all the foregoing agreements, including the Merger Agreement, are referred to collectively as the "Transaction Agreements." STOCKHOLDERS OF TIME WARNER AND SHAREHOLDERS OF TBS ARE URGED TO REVIEW CAREFULLY THE DESCRIPTIONS OF THE TRANSACTION AGREEMENTS SET FORTH UNDER "THE MERGER AGREEMENT," "TCI ARRANGEMENTS" AND "CERTAIN RELATED AGREEMENTS." Copies of the Merger Agreement, the LMC Agreement and the Support Agreement are attached hereto as Appendices A-1(a) and A-1(b), A-2 and A-3, respectively, and are incorporated herein by reference. 10
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The diagrams set forth below illustrate the ownership of New Time Warner, Time Warner and TBS both prior to and following consummation of the Mergers. [Set forth below is a narrative description of a diagram contained in the Joint Proxy Statement/Prospectus that has been omitted from this electronically filed version thereof because such diagram cannot be reproduced in such electronic filing. The diagram illustrates (i) the ownership of each of Time Warner, New Time Warner, TW Merger Corp., TBS Merger Corp. and TBS prior to the consummation of the Mergers, (ii) that, in the Mergers, TW Merger Corp. will be merged into Time Warner and TBS Merger Corp. will be merged into TBS, (iii) the ratios for conversion of Time Warner Common Stock, TBS Common Stock and TBS Class C Preferred Stock into shares of New Time Warner Common Stock and for conversion of Time Warner Preferred Stock into shares of New Time Warner Preferred Stock, (iv) that, following consummation of the Merger, TCI and certain of its affiliates will hold LMC Reduced Voting Common Stock and (v) that, as a result of the Mergers, Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner.] 11
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THE COMPANIES Time Warner Inc. .... Time Warner is the world's leading media company, and 75 Rockefeller Plaza has interests in three fundamental areas of New York, New York 10019 business: Entertainment, consisting principally of (212) 484-8000 interests in recorded music and music publishing, filmed entertainment, broadcasting, theme parks and cable television programming; News and Information, consisting principally of interests in magazine publishing, book publishing and direct marketing; and Telecommunications, consisting principally of interests in cable television systems. TWE was formed as a Delaware limited partnership in 1992 and owns and operates substantially all of Time Warner's interests in filmed entertainment, broadcasting, theme parks, cable television programming and a majority of its interests in cable television systems. Time Warner and certain of its wholly-owned subsidiaries (the "Time Warner General Partners") collectively own general and limited partnership interests in 74.49% of the pro rata priority capital and residual equity capital of TWE, and 100% of the senior priority capital and junior priority capital of TWE. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by a wholly-owned subsidiary of U S WEST, Inc. ("U S WEST"). Turner Broadcasting System, Inc. ...... TBS is a diversified information and entertainment One CNN Center Atlanta, company. Through its subsidiaries, TBS owns and Georgia 30303 (404) operates four domestic entertainment networks--WTBS 827-1700 (commonly known as the "TBS Superstation"), Turner Network Television ("TNT"), the Cartoon Network and Turner Classic Movies ("TCM"); four international entertainment networks--TNT Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe, and TNT & Cartoon Network Asia; and four news networks--Cable News Network ("CNN"), Headline News, Cable News Network International ("CNNI") and CNN Financial News Network ("CNNfn"). TBS produces and distributes entertainment and news programming worldwide, with operations in motion picture, animation and television production, home video, television syndication, licensing and merchandising, and publishing. TW Inc......... New Time Warner is currently a wholly owned c/o Time Warner Inc. subsidiary of Time Warner that does not conduct any 75 Rockefeller Plaza substantial business activities. As a result of the New York, New York 10019 Transaction, Time Warner and TBS will each become a (212) 484-8000 wholly owned subsidiary of New Time Warner. Accordingly, after consummation of the Mergers the business of New Time Warner will be the businesses currently conducted by Time Warner and TBS. THE TIME WARNER MEETING Time, Place and Date.... The Time Warner Meeting will be held at the Time & Life Building, 1271 Avenue of the Americas, New York, New York 10020 on October 10, 1996, starting at 9:00 a.m., local time. Record Date, Shares Entitled to Vote....... Holders of record of shares of Time Warner Common Stock and shares of Series D Convertible Preferred Stock of Time Warner, par value $1.00 12
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per share ("Time Warner Series D Preferred Stock"), Series E Convertible Preferred Stock of Time Warner, par value $1.00 per share ("Time Warner Series E Preferred Stock"), Series F Convertible Preferred Stock of Time Warner, par value $1.00 per share ("Time Warner Series F Preferred Stock"), Series G Convertible Preferred Stock of Time Warner, par value $1.00 per share ("Time Warner Series G Preferred Stock"), Series I Convertible Preferred Stock of Time Warner, par value $1.00 per share ("Time Warner Series I Preferred Stock"), and Series J Convertible Preferred Stock of Time Warner, par value $1.00 per share ("Time Warner Series J Preferred Stock" and, together with the foregoing series of preferred stock, "Time Warner Voting Preferred Stock"), at the close of business on August 26, 1996 (the "Time Warner Record Date"), are entitled to notice of and to vote at the Time Warner Meeting. At the close of business on the Time Warner Record Date, there were 384,737,911 shares of Time Warner Common Stock and 33,794,710 shares of Time Warner Voting Preferred Stock outstanding and entitled to vote. Each share of Time Warner Common Stock is entitled to one vote, and each share of Time Warner Voting Preferred Stock is entitled to two votes at the Time Warner Meeting. Approval of the TW Merger Proposal........ Under the Restated Certificate of Incorporation of Time Warner, as amended (the "Time Warner Charter"), and the General Corporation Law of the State of Delaware (the "DGCL"), the affirmative vote, in person or by proxy, of the holders of a majority in voting power of all outstanding shares of Time Warner Common Stock and Time Warner Voting Preferred Stock, voting together as a single class, is required to approve the TW Merger Proposal. Recommendations of the Time Warner Board...... The Time Warner Board has unanimously approved the Merger Agreement, the LMC Agreement, the other Transaction Agreements to be executed by Time Warner and its subsidiaries and the FTC Consent Decree, and unanimously approved the Transaction and determined that the Transaction is in the best interests of the stockholders of Time Warner. The Time Warner Board unanimously recommends that holders of Time Warner Capital Stock vote FOR the TW Merger Proposal. See "The Transaction--Recommendation of the Time Warner Board; Time Warner's Reasons for the Transaction." Opinion of Financial Advisor to Time Warner................. Time Warner has received the written opinion of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), Time Warner's financial advisor, to the effect that, as of August 8, 1996 and based upon and subject to the matters stated therein, the ratio contemplated by the Merger Agreement for the exchange of New Time Warner Common Stock for TBS Capital Stock and the consideration to be paid by New Time Warner for the SSSI Option and the LMC Non- competition Covenant, taken together, 13
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were fair to New Time Warner and its subsidiary, Time Warner, from a financial point of view. The full text of the opinion of Morgan Stanley, which sets forth the assumptions made and matters considered, is attached hereto as Appendix C-1. Each Time Warner stockholder should read such opinion carefully in its entirety. The opinion of Morgan Stanley is directed only to the matters set forth therein and does not constitute a recommendation to any Time Warner stockholder or TBS shareholder as to how such stockholder or shareholder should vote with respect to the TW Merger Proposal or the TBS Merger Proposal. See "The Transaction--Opinion of Time Warner's Financial Advisor." THE TBS MEETING Time, Place and Date.... The TBS Meeting will be held at the Time & Life Building, 1271 Avenue of the Americas, New York, New York 10020 on October 10, 1996, starting at 2:00 p.m., local time. Record Date, Shares Entitled to Vote....... Holders of record of TBS Class A Common Stock, TBS Class B Common Stock and TBS Class C Preferred Stock at the close of business on August 26, 1996 (the "TBS Record Date"), are entitled to notice of and to vote at the TBS Meeting. At the close of business on the TBS Record Date, there were 68,330,388 shares of TBS Class A Common Stock, 140,379,236 shares of TBS Class B Common Stock and 12,396,976 shares of TBS Class C Preferred Stock outstanding and entitled to vote. Each share of TBS Class A Common Stock is entitled to two votes, each share of TBS Class B Common Stock is entitled to one-fifth of a vote and each share of TBS Class C Preferred Stock is entitled to one and one-fifth votes at the TBS Meeting. Approval of the TBS Merger Proposal........ Under the TBS Articles and the GBCC, the affirmative vote of (a) a majority of the voting power of the outstanding shares of TBS Capital Stock, voting together as a single group, (b) a majority of the voting power of the outstanding shares of TBS Common Stock, voting together as a single group, and (c) a majority of the outstanding shares of TBS Class C Preferred Stock, voting as a separate class, is required to approve and adopt the TBS Merger Proposal. MR. TURNER, TIME WARNER AND LMC HAVE AGREED, SUBJECT TO THE SATISFACTION OR WAIVER OF CERTAIN CONDITIONS, TO VOTE OR CAUSE TO BE VOTED ALL SHARES OF TBS CAPITAL STOCK OWNED BY THEM AND CERTAIN OF THEIR AFFILIATES IN FAVOR OF THE TBS MERGER PROPOSAL. ACCORDINGLY (ASSUMING THE SATISFACTION OR WAIVER OF SUCH CONDITIONS), APPROVAL OF THE TBS MERGER PROPOSAL IS ASSURED, REGARDLESS OF THE VOTE OF ANY OTHER SHAREHOLDER OF TBS. SEE "OWNERSHIP OF TBS CAPITAL STOCK," "TCI ARRANGEMENTS--LMC AGREEMENT" AND "CERTAIN RELATED AGREEMENTS--SUPPORT AGREEMENT." Recommendations of the TBS Board.............. The TBS Board, with nine directors either not present or abstaining on the basis that they were "interested directors" within the meaning of the 14
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TBS By-Laws, has unanimously approved the Merger Agreement, the other Transaction Agreements to be executed by TBS or its subsidiaries and the FTC Consent Decree and determined that the Transaction is fair to and in the best interests of TBS and its shareholders. The TBS Board unanimously (with such nine directors either not present or abstaining) recommends that shareholders of TBS vote FOR the TBS Merger Proposal. Since such nine directors either were not present or abstained on the basis that they were interested directors, only six of the fifteen TBS directors were eligible under the applicable provisions of the TBS By-Laws to vote on the Merger Agreement, the other Transaction Agreements and the FTC Consent Decree. See "The Transaction-- Background" and "--Recommendation of the TBS Board; TBS's Reasons for the Transaction." Opinions of Financial Advisors to TBS........ The TBS Board has received the written opinion of CS First Boston Corporation ("CS First Boston"), a financial advisor to TBS, to the effect that, as of August 8, 1996 and based upon and subject to the matters stated therein, the consideration to be received by holders of TBS Capital Stock (other than Time Warner and its affiliates) pursuant to the TBS Merger was fair to such holders from a financial point of view. The TBS Board has also received the written opinion of Merrill Lynch & Co. ("Merrill Lynch"), a financial advisor to TBS, to the effect that, as of August 8, 1996 and based upon and subject to the matters stated therein, (a) the consideration to be received by holders of TBS Capital Stock (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (b) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). The full texts of the opinions of CS First Boston and Merrill Lynch, which set forth the assumptions made, matters considered and limits of the review undertaken by CS First Boston and Merrill Lynch, are attached hereto as Appendices C-2 and C-3, respectively, and should be read carefully in their entirety by TBS shareholders. The opinions of CS First Boston and Merrill Lynch are directed only to the matters set forth therein from a financial point of view and do not constitute a recommendation to any TBS shareholder or Time Warner stockholder as to how such shareholder or stockholder should vote with respect to the TBS Merger Proposal or the TW Merger Proposal. See "The Transaction--Opinions of TBS's Financial Advisors." THE TRANSACTION Purpose of the Transaction............ The purpose of the Transaction is to combine Time Warner and TBS. Effect of the Transaction Upon Time Warner................. Upon consummation of the Mergers, (a) TW Merger Corp. will be merged into Time Warner, (b) each outstanding share of Time Warner Common Stock, other than shares held directly or indirectly by Time Warner, will 15
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be converted into one share of New Time Warner Common Stock, and upon such conversion all such shares of Time Warner Common Stock will be canceled and retired and will cease to exist, (c) each outstanding share of each series of Time Warner Preferred Stock, other than shares held directly or indirectly by Time Warner and shares with respect to which appraisal rights are properly exercised, will be converted into one share of a substantially identical series of New Time Warner Preferred Stock, and upon such conversion all such shares of Time Warner Preferred Stock will be canceled and retired and will cease to exist, (d) all shares of Time Warner Capital Stock held by Time Warner will be canceled and retired and will cease to exist without payment of any consideration therefor and (e) all shares of Time Warner Capital Stock held by subsidiaries of Time Warner will continue as shares of Time Warner Capital Stock. As a result of the Transaction, Time Warner will become a wholly owned subsidiary of New Time Warner. Effect of the Transaction Upon TBS... Upon consummation of the Mergers, (a) TBS Merger Corp. will be merged into TBS, (b) each outstanding share of TBS Common Stock, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised, will be converted into the right to receive 0.75 of a share of New Time Warner Common Stock, and upon such conversion all such shares of TBS Common Stock will be canceled and retired and will cease to exist, (c) each outstanding share of TBS Class C Preferred Stock, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised, will be converted into the right to receive 4.80 shares of New Time Warner Common Stock, and upon such conversion all such shares of TBS Class C Preferred Stock will be canceled and retired and will cease to exist, (d) all shares of TBS Capital Stock held by TBS will be canceled and retired and will cease to exist without payment of any consideration therefor and (e) all shares of TBS Capital Stock held directly or indirectly by Time Warner or New Time Warner will continue as shares of TBS Capital Stock. As a result of the Transaction, TBS will become a wholly owned subsidiary of New Time Warner. Treatment of Options.... Upon consummation of the Mergers, each outstanding option to purchase shares of TBS Common Stock will be assumed by New Time Warner and converted into an option to purchase shares of New Time Warner Common Stock. Based on the number of such options outstanding as of June 30, 1996, such options will be exercisable in the aggregate for approximately 14 million shares of New Time Warner Common Stock. Following the consummation of the Mergers, each such option will continue to have, and will be subject to, the same terms and conditions as in effect immediately prior to the consummation of the Mergers, except that each such option will be exercisable for that number of shares of New Time Warner Common Stock equal to the product of the number of shares of TBS Common Stock for which such option was exercisable immediately prior to the consummation of the Mergers and 16
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0.75, and the exercise price per share subject to such option will be equal to the aggregate exercise price of such option immediately prior to the consummation of the Mergers divided by the number of shares of New Time Warner Common Stock for which such option will be exercisable immediately after the consummation of the Mergers. Upon consummation of the Mergers, all such options will become vested. In addition, upon consummation of the Mergers, each option to purchase shares of Time Warner Common Stock will be assumed by New Time Warner and converted into an option to purchase shares of New Time Warner Common Stock on the same terms and conditions as in effect immediately prior to the consummation of the Mergers. See "The Merger Agreement--Treatment of Options and Warrants." Treatment of Convertible Debt and Warrants............... Upon consummation of the Mergers, the outstanding Time Warner zero coupon convertible notes due 2013 (the "TW LYONs") will become convertible into shares of New Time Warner Common Stock at the rate of one share of New Time Warner Common Stock for each share of Time Warner Common Stock into which they were convertible immediately prior to the consummation of the Mergers. See "The Transaction--Effect of Transaction on Certain Outstanding Time Warner Convertible Securities." Upon consummation of the Mergers, the outstanding TBS zero coupon subordinated convertible notes due 2007 (the "TBS LYONs") will become convertible into shares of New Time Warner Common Stock at the rate of 0.75 of a share of New Time Warner Common Stock for each share of TBS Common Stock into which the TBS LYONs were convertible immediately prior to the consummation of the Mergers. See "The Transaction-- Effect of Transaction on the TBS LYONs." Upon consummation of the Mergers, each warrant to purchase Time Warner Common Stock will become exercisable for New Time Warner Common Stock at the same rate, for the same price and on the same terms as in effect immediately prior to the consummation of the Mergers. See "The Merger Agreement--Treatment of Options and Warrants." Interests of Certain Persons................ In considering the recommendations of the Time Warner Board and the TBS Board with respect to the Transaction, Time Warner stockholders and TBS shareholders should be aware that certain directors and executive officers of TBS have interests in the Transaction that may be in addition to the interests of other holders of TBS Capital Stock. See "The Transaction--Interests of Certain Persons in the Transaction." Appraisal and Dissenters' Rights..... Holders of Time Warner Common Stock are not entitled to appraisal or dissenters' rights in connection with the Time Warner Merger. Holders of record of Time Warner Preferred Stock who do not vote in favor of the TW Merger Proposal and who otherwise comply with the applicable 17
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statutory procedures summarized herein will be entitled to appraisal rights under Section 262 of the DGCL. Holders of shares of TBS Capital Stock who do not vote in favor of the TBS Merger Proposal and who otherwise comply with the applicable statutory procedures summarized herein will be entitled to assert dissenters' rights under Article 13 of the GBCC. The Merger Agreement provides that Time Warner is not obligated to consummate the Transaction if dissenters' rights are asserted with respect to more than 28 million TBS Common Stock equivalents. See "The Transaction--Appraisal and Dissenters' Rights" and "The Merger Agreement--Conditions to the Mergers." Federal Income Tax Consequences........... It is a condition to the consummation of the Time Warner Merger that Time Warner receive an opinion from Cravath, Swaine & Moore, counsel to Time Warner, reaffirming, as of the date of consummation of the Mergers, the opinion described in this Joint Proxy Statement/Prospectus to the effect that the Time Warner Merger will be treated for U.S. Federal income tax purposes as a transfer of property governed by Section 351 of the Code. Accordingly, except as set forth below and subject to the qualifications set forth under "The Transaction-- Federal Income Tax Consequences--Time Warner Merger," it is the opinion of Cravath, Swaine & Moore that no gain or loss will be recognized pursuant to the Time Warner Merger by (a) New Time Warner, (b) Time Warner, (c) a holder of Time Warner Common Stock whose shares of Time Warner Common Stock are converted into shares of New Time Warner Common Stock or (d) a holder of Time Warner Preferred Stock whose shares of Time Warner Preferred Stock are converted into shares of New Time Warner Preferred Stock. Notwithstanding the foregoing, a holder of Time Warner Preferred Stock may recognize gain or loss by reason of cash received upon the proper exercise of appraisal rights. See "The Transaction--Federal Income Tax Consequences--Time Warner Merger." It is a condition to the consummation of the TBS Merger that TBS receive an opinion from Skadden, Arps, Slate, Meagher & Flom, counsel to TBS, reaffirming, as of the date of consummation of the Mergers, the opinion described in this Joint Proxy Statement/Prospectus to the effect that the TBS Merger will be treated for U.S. Federal income tax purposes as a transfer of property governed by Section 351 of the Code. Accordingly, except as described below and subject to the qualifications set forth under "The Transaction--Federal Income Tax Consequences--TBS Merger," it is the opinion of Skadden, Arps, Slate, Meagher & Flom that no gain or loss will be recognized pursuant to the TBS Merger by (a) New Time Warner, (b) TBS or (c) a holder of TBS Capital Stock whose shares of TBS Capital Stock are converted into the right to receive shares of New Time Warner Common Stock. Notwithstanding the foregoing, a holder of TBS Capital Stock may 18
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recognize gain or loss by reason of cash received in lieu of fractional shares or upon the proper exercise of dissenters' rights. See "The Transaction--Federal Income Tax Consequences--TBS Merger." Accounting Treatment.... The Transaction will be accounted for by New Time Warner under the purchase method of accounting for business combinations. See "The Transaction-- Accounting Treatment." Regulatory Approvals.... The consummation of the Mergers requires, among other matters, (a) initial acceptance by the FTC of the FTC Consent Decree, (b) the expiration of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and (c) the approval of the Federal Communications Commission (the "FCC"). See "The Merger Agreement--Conditions to the Mergers." The FTC staff has completed its review of the parties' filings under the HSR Act. In order to eliminate concerns raised by the FTC staff regarding possible competitive effects of the Transaction, Time Warner, TBS, TCI and LMC have executed the FTC Consent Decree and have agreed to changes to the terms of the Transaction Agreements to (a) reflect limits on the amount and type of New Time Warner securities that TCI and its affiliates may hold after the consummation of the Mergers, (b) require that the New Time Warner Common Stock to be received by TCI and its affiliates in the TBS Merger be exchanged for New Time Warner securities with reduced voting rights, thus causing the parties to agree to create the LMC Reduced Voting Common Stock and eliminate those provisions that required TCI and its affiliates to place the New Time Warner Common Stock received in the TBS Merger in a voting trust to be voted by Mr. Levin, (c) eliminate the provisions that would have given New Time Warner an option to purchase the outstanding stock of SSSI, (d) eliminate Time Warner's option to purchase TCI's interest in TBS prior to the consummation of the Mergers and (e) reduce substantially the duration of the agreements for mandatory analog carriage by TCI cable systems of TBS programming services after the consummation of the Mergers. Time Warner, TBS, TCI and LMC have submitted the FTC Consent Decree to the commissioners of the FTC for initial acceptance, which has not yet occurred and on which the obligations of Time Warner, TBS and TCI to consummate the Transaction are conditioned. If the FTC does not initially accept the FTC Consent Decree, the FTC may seek to enjoin the Transaction. If the FTC does initially accept the FTC Consent Decree, the FTC will publish the FTC Consent Decree for public comment for 60 days. If the FTC does not finally accept the FTC Consent Decree after the period for public comment, the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking the divestiture of substantial assets of TBS or its subsidiaries or of Time Warner or its subsidiaries. The FCC has not completed its review of the Transaction. No assurance can be given that the FCC will not impose conditions to the 19
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consummation of the Transaction or otherwise require changes to the terms of the Transaction. Such conditions or changes could result in conditions to the obligations of Time Warner or TBS under the Merger Agreement not being satisfied or give LMC the right to require Time Warner to terminate the Merger Agreement and abandon the Transaction. See "The Transaction--Background" and "--Regulatory Approvals" and "TCI Arrangements--LMC Agreement." TCI ARRANGEMENTS Class C Premium......... In the TBS Merger, all holders of shares of TBS Class C Preferred Stock, including TCI but excluding Time Warner, will receive 0.80 of a share of New Time Warner Common Stock for each share of TBS Class B Common Stock into which the TBS Class C Preferred Stock is convertible. Holders of TBS Common Stock will receive 0.75 of a share of New Time Warner Common Stock for each share of TBS Common Stock. As of June 30, 1996, TCI and its affiliates owned shares of TBS Class C Preferred Stock representing approximately 49.1% of the total number of shares of TBS Class C Preferred Stock outstanding as of such date. Based upon the closing sale price of Time Warner Common Stock on August 7, 1996, the day prior to the date on which the Time Warner Board and the TBS Board approved the Merger Agreement, the incremental value to be received by TCI as a holder of shares of TBS Class C Preferred Stock as a result of the difference between the consideration to be paid for such shares and for the TBS Common Stock is approximately $65.5 million. LMC Agreement........... Following consummation of the Mergers, a number of the provisions of the LMC Agreement will continue for the benefit of LMC and certain of its affiliates (and, following the TCI Spin-off, SSSI) in their capacities as stockholders of New Time Warner, including provisions (a) relating to the exchange by LMC and such LMC affiliates of shares of New Time Warner Common Stock for shares of a new series of New Time Warner Series Common Stock exempt from the compulsory redemption provisions of the New Time Warner Charter, such shares to be either LMC Reduced Voting Common Stock or, in very limited circumstances, LMC Common Stock and (b) that would require New Time Warner to indemnify LMC and certain of its affiliates against certain income tax liabilities that may be incurred in the event that certain actions taken by New Time Warner after the consummation of the Mergers (including certain actions amending the New Time Warner Rights Agreement) result in (i) the continued ownership of shares of New Time Warner Capital Stock by LMC or any such LMC affiliate becoming illegal, (ii) the imposition on LMC or any such LMC affiliate of damages or penalties by reason of such continued ownership, (iii) the required divestiture by LMC or any such LMC affiliate of any such shares of New Time Warner Capital Stock or (iv) the requirement that LMC or any such LMC affiliate discontinue any business or divest of any business or assets or that any license that such party holds or is required to hold under the Communications Act of 1934, as amended (the "Communications Act"), be modified in any significant respect or 20
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not be renewed as a result of such continued ownership. See "TCI Arrangements--LMC Agreement." SSSI Agreement.......... Upon consummation of the Mergers, New Time Warner and LMC will enter into the SSSI Agreement pursuant to which (a) New Time Warner will issue to SSSI 4,166,667 shares of LMC Reduced Voting Common Stock and SSSI will grant to New Time Warner the SSSI Option and (b) New Time Warner will issue to LMC 833,333 shares of LMC Reduced Voting Common Stock and will pay to LMC approximately $67 million (payable, at New Time Warner's option, in cash or additional shares of LMC Reduced Voting Common Stock) and LMC will agree to the LMC Non-competition Covenant. See "TCI Arrangements--SSSI Agreement and the Distribution Contract." Program Agreement....... TBS and a subsidiary of TCI have entered into the Program Agreement relating to the mandatory carriage after consummation of the Mergers by TCI-affiliated cable systems of WTBS (once the WTBS Conversion has occurred) and Headline News, conditional rebates available to TCI-affiliated cable systems for carriage of TBS programming services and other related matters. See "TCI Arrangements--Program Agreement." SportSouth Agreement.... TBS and a subsidiary of TCI have entered into the SportSouth Agreement pursuant to which, upon consummation of the Mergers, TBS will sell its interest in SportSouth, a regional sports cable network, to such TCI subsidiary for an amount (currently estimated at $65 million) determined in accordance with the formula set forth in the SportSouth Agreement. See "TCI Arrangements-- SportSouth Agreement." Sunshine Option......... Upon consummation of the Mergers, a subsidiary of TCI and TWE will enter into the Sunshine Option Agreement pursuant to which TWE will grant to such TCI subsidiary the Sunshine Option to purchase the interests of TWE and certain affiliates in the Sunshine Network, a Florida-based sports cable network, for approximately $14 million. See "TCI Arrangements--Sunshine Option." PPV Output Agreement.... Certain TBS subsidiaries and certain affiliates of TCI have entered into the PPV Output Agreement, providing for the licensing of all motion pictures theatrically released during the term of the agreement by New Line, Castle Rock and Turner Pictures for exhibition, on a non-exclusive basis, on pay-per-view services owned by such TCI affiliates. See "TCI Arrangements--PPV Output Agreement." 21
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TIME WARNER SELECTED HISTORICAL FINANCIAL INFORMATION The selected historical financial information of Time Warner set forth below has been derived from and should be read in conjunction with the consolidated financial statements and other financial information of Time Warner contained in the Time Warner Form 10-K and with the unaudited consolidated condensed financial statements and other financial information of Time Warner contained in the Time Warner Form 10-Q for the quarter ended June 30, 1996, which are incorporated herein by reference. The selected historical financial information for all periods after 1992 reflects the deconsolidation of the Entertainment Group, principally TWE, effective January 1, 1993. The selected historical financial information for 1996 reflects (a) the issuance of 1.6 million shares of 10 1/4% Series K Exchangeable Preferred Stock, par value $1.00 per share, of Time Warner ("Time Warner Series K Preferred Stock"), and the use of approximately $1.55 billion of net proceeds therefrom to reduce debt and (b) (i) the issuance of 6.3 million shares of convertible Time Warner Preferred Stock having an aggregate liquidation preference of $633 million and 2.9 million shares of Time Warner Common Stock and (ii) the assumption or incurrence of approximately $2 billion of indebtedness in connection with the acquisition by Time Warner of Cablevision Industries Corporation ("CVI") and related companies. The selected historical financial information for 1995 reflects (a) the issuance of 29.3 million shares of convertible Time Warner Preferred Stock having an aggregate liquidation preference of $2.926 billion and 2.6 million shares of Time Warner Common Stock and (b) the assumption or incurrence of approximately $1.3 billion of indebtedness in connection with (x) the acquisitions by Time Warner of KBLCOM Incorporated ("KBLCOM") and Summit Communications Group, Inc. ("Summit") and (y) the exchange by Toshiba Corporation ("Toshiba") and ITOCHU Corporation ("ITOCHU") of their direct and indirect interests in TWE. See "Unaudited Pro Forma Consolidated Condensed Financial Statements." The selected historical financial information for 1993 reflects the issuance of $6.1 billion of long- term debt and the use of $500 million of cash and equivalents for the exchange or redemption of Time Warner 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 ("ATC") as of June 30, 1992, using the purchase method of accounting for business combinations. Per common share amounts and average common shares have been restated to give effect to the four-for-one Time Warner Common Stock split that occurred on September 10, 1992. [Download Table] SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------- ---------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------- ------- (MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS) OPERATING STATEMENT INFORMATION Revenues................ $4,207 $3,724 $8,067 $7,396 $6,581 $13,070 $12,021 Depreciation and amortization........... 452 231 559 437 424 1,172 1,109 Business segment operating income(a).... 325 322 697 713 591 1,343 1,154 Equity in pretax income of Entertainment Group.................. 209 106 256 176 281 -- -- Interest and other, net.................... 578 356 877 724 718 882 966 Income (loss) before extraordinary item..... (124) (55) (124) (91) (164) 86 (99) Net income (loss)(b)(c)........... (159) (55) (166) (91) (221) 86 (99) Net loss applicable to common shares (after preferred dividends)... (263) (63) (218) (104) (339) (542) (692) Per share of common stock: Loss before extraordinary item.... $ (.58) $ (.17) $ (.46) $ (.27) $ (.75) $ (1.46) $ (2.40) Net loss(b)(c)......... $ (.67) $ (.17) $ (.57) $ (.27) $ (.90) $ (1.46) $ (2.40) Dividends.............. $ .18 $ .18 $ .36 $ .35 $ .31 $ .265 $ .25 Average common shares(c).............. 390.6 380.5 383.8 378.9 374.7 371.0 288.2 Ratio of earnings to fixed charges(d)....... 1.0x 1.1x 1.1x 1.1x 1.1x 1.4x 1.1x Ratio of earnings to combined fixed charges and preferred stock dividends (deficiency in the coverage of combined fixed charges and preferred stock dividends by earnings before fixed charges and preferred stock dividends)(d).......... $ (127) 1.1x 1.0x 1.1x $ (91) $ (509) $(1,240) 22
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[Download Table] JUNE 30, DECEMBER 31, -------- --------------------------------------- 1996 1995 1994 1993 1992 1991 -------- ------- ------- ------- ------- ------- (MILLIONS) BALANCE SHEET INFORMATION Investments in and amounts due to and from Entertainment Group........................ $ 5,945 $ 5,734 $ 5,350 $ 5,627 $ -- $ -- Total assets.................. 24,508 22,132 16,716 16,892 27,366 24,889 Long-term debt................ 9,928 9,907 8,839 9,291 10,068 8,716 Borrowings against future stock option proceeds........ 225 -- -- -- -- -- Time Warner-obligated mandatorily redeemable preferred securities of subsidiaries holding solely subordinated notes and debentures of Time Warner(e)............... 949 949 -- -- -- -- Series K exchangeable preferred stock.............. 1,586 -- -- -- -- -- Shareholders' equity: Preferred stock liquidation preference.................. 3,559 2,994 140 140 6,532 6,256 Equity applicable to common stock....................... 284 673 1,008 1,230 1,635 2,242 Total shareholders' equity... 3,843 3,667 1,148 1,370 8,167 8,498 Total capitalization.......... 16,531 14,523 9,987 10,661 18,235 17,214 -------- (a) Business segment operating income for the year ended December 31, 1995 includes $85 million in losses relating to certain businesses and joint ventures owned by the Music division which were restructured or closed. Business segment operating income for the year ended December 31, 1991, includes a $60 million charge relating to the restructuring of the Publishing division. (b) The net loss for the six months ended June 30, 1996 includes an extraordinary loss on the retirement of debt of $35 million ($.09 per common share). The net loss for the year ended December 31, 1995 includes an extraordinary loss on the retirement of debt of $42 million ($.11 per common share). 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. (c) In August 1991, Time Warner completed the sale of 137.9 million shares of Time Warner 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 Time Warner Common Stock outstanding during the year. (d) For purposes of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, earnings were calculated by adding (i) pretax income, (ii) interest expense, including previously capitalized interest amortized to expense and the portion of rents representative of an interest factor for Time Warner and its majority-owned subsidiaries, (iii) Time Warner's proportionate share of the items included in (ii) above for its 50%-owned companies, (iv) preferred stock dividend requirements of majority-owned subsidiaries, (v) minority interest in the income of majority-owned subsidiaries that have fixed charges and (vi) undistributed losses of its less-than-50%-owned companies. Fixed charges consist of (i) interest expense, including interest capitalized and the portion of rents representative of an interest factor for Time Warner and its majority-owned subsidiaries, (ii) Time Warner's proportionate share of such items for its 50%-owned companies and (iii) preferred stock dividend requirements of majority-owned subsidiaries. Combined fixed charges and preferred stock dividends also include the amount of pretax income necessary to cover preferred stock dividend requirements of Time Warner. For periods in which earnings before fixed charges were insufficient to cover fixed charges or combined fixed charges and preferred stock dividends, the dollar amount of coverage deficiency, instead of the ratio, is disclosed. Earnings as defined include significant noncash charges for depreciation and amortization. With respect to the ratio of earnings to fixed charges, fixed charges for the six months ended June 30, 1996 and 1995 and the years ended December 31, 1995 and 1994 include noncash interest expense of $46 million, $116 million, $176 million and $219 million, respectively, relating to Time Warner's Zero Coupon Convertible Notes due 2012 and 2013 and, in 1995 and 1994 only, Time Warner's Redeemable Reset Notes due 2002. With respect to the ratio of earnings to combined fixed charges and preferred stock dividends, fixed charges similarly include noncash interest expense as noted above and, for the six-month period ended June 30, 1996 only, noncash preferred stock dividends of $36 million relating to the Time Warner Series K Preferred Stock. (e) Includes $374 million of preferred securities that are redeemable for cash or, at Time Warner's option, approximately 12.1 million shares of Hasbro, Inc. common stock owned by Time Warner. 23
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TIME WARNER ENTERTAINMENT GROUP SELECTED HISTORICAL FINANCIAL INFORMATION The selected historical financial information of the Entertainment Group set forth below has been derived from and should be read in conjunction with the consolidated financial statements and other financial information of Time Warner and TWE contained in the Time Warner Form 10-K and with the unaudited consolidated condensed financial statements and other financial information of Time Warner and TWE contained in the Time Warner Form 10-Q for the quarter ended June 30, 1996, which are incorporated herein by reference. For periods prior to January 1, 1993, the Entertainment Group is consolidated with Time Warner for financial reporting purposes and, accordingly, is also reflected in Time Warner's selected historical financial information. The selected historical financial information for 1995 reflects the consolidation by TWE of the TWE-Advance/Newhouse Partnership (as defined below) resulting from the formation of such partnership, effective as of April 1, 1995, and the consolidation of Paragon Communications ("Paragon") effective as of July 6, 1995. The selected historical financial information gives effect to the consolidation of Six Flags Entertainment Corporation ("Six Flags") effective as of January 1, 1993 as a result of an increase in TWE's ownership of Six Flags from 50% to 100% in September 1993, and the subsequent deconsolidation of Six Flags resulting from the disposition by TWE of a 51% interest in Six Flags effective as of June 23, 1995. The selected historical financial information for 1993 also gives effect to the admission of U S WEST as an additional limited partner of TWE as of September 15, 1993 and the issuance of $2.6 billion of TWE debentures during the year to reduce indebtedness under the TWE credit agreement. For 1992, the selected financial information gives effect to the initial capitalization of TWE and associated refinancings as of the dates such transactions were consummated and Time Warner's acquisition of the ATC minority interest as of June 30, 1992, using the purchase method of accounting. Time Warner's cost to acquire the ATC minority interest is reflected in the consolidated financial statements of TWE under the pushdown method of accounting. [Enlarge/Download Table] SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------ -------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- -------- ------ ------ ------ ------ ------ (MILLIONS, EXCEPT RATIOS) OPERATING STATEMENT INFORMATION Revenues................ $ 5,097 $ 4,508 $9,629 $8,509 $7,963 $6,761 $6,068 Depreciation and amortization........... 585 513 1,060 959 909 788 733 Business segment operating income....... 568 475 992 852 905 814 724 Interest and other, net.................... 222 304 539 616 564 531 526 Income before extraordinary item..... 170 70 170 136 217 173 103 Net income (a).......... 170 70 146 136 207 173 103 TWE ratio of earnings to fixed charges(b)....... 2.0x 1.4x 1.6x 1.4x 1.4x 1.4x 1.4x [Download Table] JUNE 30, DECEMBER 31, -------- --------------------------------------- 1996 1995 1994 1993 1992 1991 -------- ------- ------- ------- ------- ------- (MILLIONS) BALANCE SHEET INFORMATION Total assets................. $18,968 $18,960 $18,992 $18,202 $15,886 $14,230 Long-term debt............... 5,575 6,137 7,160 7,125 7,171 4,571 Time Warner General Partners' Senior Capital.............. 1,483 1,426 1,663 1,536 -- -- Partners' capital............ 6,735 6,576 6,491 6,228 6,483 6,717 -------- (a) Net income for the years ended December 31, 1995 and 1993 includes an extraordinary loss on the retirement of debt of $24 million and $10 million, respectively. (b) For purposes of the ratio of earnings to fixed charges, earnings were calculated by adding (i) pretax income, (ii) interest expense, including previously capitalized interest amortized to expense and the portion of rents representative of an interest factor for TWE and its majority-owned subsidiaries, (iii) TWE's proportionate share of the items included in (ii) above for its 50%-owned companies, (iv) minority interest in the income of majority-owned subsidiaries that have fixed charges and (v) undistributed losses of its less-than-50%-owned companies. Fixed charges consist of (i) interest expense, including interest capitalized and the portion of rents representative of an interest factor for TWE and its majority-owned subsidiaries and (ii) TWE's proportionate share of such items for its 50%- owned companies. Earnings as defined include significant noncash charges for depreciation and amortization. 24
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TBS SELECTED HISTORICAL FINANCIAL INFORMATION The selected historical financial information of TBS set forth below has been derived from and should be read in conjunction with the consolidated financial statements and other financial information of TBS contained in the TBS Form 10- K and with the unaudited consolidated condensed financial statements and other financial information of TBS contained in the TBS Form 10-Q for the quarter ended June 30, 1996, which are incorporated herein by reference. The selected historical financial information reflects (a) the acquisition of New Line on January 28, 1994, (b) the acquisition of Castle Rock on December 22, 1993 and (c) the acquisition on December 29, 1993 of the remaining 50% interest in a joint venture (the "HB Joint Venture"), which principally owns the Hanna-Barbera Film Library. TBS originally acquired a 50% interest in the HB Joint Venture in December 1991. Such acquisitions were accounted for using the purchase method of accounting for business combinations. [Download Table] SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------- ------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------- ------ (MILLIONS, EXCEPT PER SHARE AMOUNTS) OPERATING STATEMENT INFORMATION Revenues.................. $1,675 $1,508 $3,437 $2,809 $1,922 $ 1,770 $1,480 Depreciation and amortization(a).......... 92 85 189 153 115 113 100 Operating profit(b)....... 84 173 358 288 302 289 297 Interest and other, net... 81 97 185 208 182 190 196 Income before extraordinary items and the cumulative effect of a change in accounting for income taxes......... 1 44 103 46 72 34 43 Extraordinary items(c).... -- -- -- (25) (11) 44 43 Cumulative effect of a change in accounting for income taxes(d).......... -- -- -- -- (306) -- -- Net income (loss)......... 1 44 103 21 (244) 78 86 Net income (loss) applicable to common stock(e)................. 1 44 103 21 (244) 76 57 Net income (loss) per common share and common stock equivalent......... $ .01 $ .15 $ .36 $ .08 $ (.92) $ .30 $ .24 Cash dividends declared per common share(f): Class A Common Stock..... $.0350 $.0350 $.0700 $.0700 $.0700 $.04875 -- Class B Common Stock..... $.0350 $.0350 $.0700 $.0700 $.0700 $.05000 -- Weighted average Class A and Class B common shares outstanding(g)........... 287.3 287.3 284.4 281.3 264.4 255.5 238.2 [Download Table] JUNE 30, DECEMBER 31, -------- ----------------------------------- 1996 1995 1994 1993 1992 1991 -------- ------ ------ ------ ------ ------ (MILLIONS) BALANCE SHEET INFORMATION Working capital................. $ 589 $ 554 $ 642 $ 661 $ 475 $ 379 Cash and cash equivalents....... 119 85 53 163 126 79 Total assets.................... 4,488 4,395 4,073 3,245 2,524 2,397 Long-term debt, less current portion........................ 2,600 2,480 2,518 2,295 1,709 1,969 Redeemable preferred stock(h)... -- -- -- -- -- 5 Stockholders' equity (deficit).. 471 438 344 (1) 233 (38) -------- (a) Principally includes depreciation, amortization of goodwill and other intangibles, amortization of purchased programming and non-cash amortization of certain acquisition purchase adjustments. (b) Operating profit is defined as income before interest expense, interest income, provision for income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes. Operating profit includes $16 million, $3 million and $24 million incurred in the six-month periods ended June 30, 1996 and 1995 and the year ended December 31, 1995, respectively, of non-recurring costs related to the Transaction and costs related to TBS's accounts receivable securitization program which, when taken together with depreciation and amortization, should be excluded for purposes of determining the operating cash flow of TBS in such periods. (c) Extraordinary items consist of (i) for the years ended December 31, 1994 and 1993 losses on early extinguishment of indebtedness of $25 million ($.08 per common share) and $11 million ($.03 per common share), respectively, and (ii) for the years ended December 31, 1992 and 1991, utilization of operating loss carryforwards. (d) The year ended December 31, 1993 included a charge of $306 million ($1.16 per common share) from the cumulative effect of adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." (e) Amounts represent net income (loss) less dividends and accretion on the TBS Class B Cumulative Preferred Stock of approximately $1 million and $29 million for the years ended December 31, 1992 and 1991, respectively. (f) Holders of TBS Class C Preferred Stock are entitled to a cash dividend for each share held based on the number of underlying shares of TBS Class B Common Stock. (g) Amounts include common stock equivalents. (h) Represents the accreted value of the TBS Class B Cumulative Preferred Stock outstanding at December 31, 1991. 25
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NEW TIME WARNER SELECTED PRO FORMA FINANCIAL INFORMATION The unaudited selected pro forma balance sheet information of New Time Warner at June 30, 1996 set forth below gives effect to the Transaction and certain other transactions that Time Warner and TWE have completed, or have entered into, as if consummated on such date. The unaudited selected pro forma operating statement information of New Time Warner for the six months ended June 30, 1996 and the year ended December 31, 1995 set forth below gives effect to the Transaction and certain transactions that Time Warner and TWE have completed, or have entered into, in each case as if consummated at the beginning of 1995. The selected pro forma information set forth below is qualified in its entirety by, and should be read in conjunction with, the Unaudited Pro Forma Consolidated Condensed Financial Statements included herein and the historical financial information of Time Warner and TBS included or incorporated by reference herein. The selected pro forma information is presented for informational purposes only and is not necessarily indicative of the financial position or operating results that would have occurred if the transactions given retroactive effect therein had been consummated as of the dates indicated, nor is it necessarily indicative of future financial conditions or operating results. See "Unaudited Pro Forma Consolidated Condensed Financial Statements." [Download Table] SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1996 1995 ---------- ------------ (MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA OPERATING STATEMENT INFORMATION Revenues.............................................. $5,882 $12,179 Depreciation and amortization......................... 623 1,283 Business segment operating income..................... 328 832 Equity in pretax income of Entertainment Group........ 209 286 Interest and other, net............................... 627 1,142 Loss before extraordinary item........................ (182) (274) Loss before extraordinary item applicable to common shares (after preferred dividends)................... (337) (590) Per share of common stock: Loss before extraordinary item...................... $ (.59) $ (1.04) Dividends........................................... $ .18 $ .36 Average common shares................................. 568.9 566.0 Deficiency in the coverage of fixed charges by earnings before fixed charges (a).................... $ (19) $ (6) Deficiency in the coverage of combined fixed charges and preferred stock dividends by earnings before fixed charges and preferred stock dividends(a)....... $ (268) $ (444) [Download Table] JUNE 30, 1996 ---------- (MILLIONS) PRO FORMA BALANCE SHEET INFORMATION Investments in and amounts due to and from Entertainment Group..... $ 5,945 Total assets....................................................... 34,711 Long-term debt..................................................... 12,690 Borrowings against future options proceeds......................... 225 Time Warner-obligated mandatorily redeemable preferred securities of subsidiaries holding solely subordinated notes and debentures of Time Warner(b)................................................. 949 Series K exchangeable preferred stock.............................. 1,586 Shareholders' equity: Preferred stock liquidation preference........................... 3,559 Equity applicable to common stock................................ 6,308 Total shareholders' equity....................................... 9,867 Total capitalization............................................... 25,317 -------- (a) For purposes of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, earnings were calculated by adding (i) pretax income, (ii) interest expense, including previously capitalized interest amortized to 26
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expense and the portion of rents representative of an interest factor for New Time Warner and its majority-owned subsidiaries, (iii) New Time Warner's proportionate share of the items included in (ii) above for its 50%-owned companies, (iv) preferred stock dividend requirements of majority-owned subsidiaries, (v) minority interest in the income of majority-owned subsidiaries that have fixed charges and (vi) undistributed losses of its less-than-50%-owned companies. Fixed charges consist of (i) interest expense, including interest capitalized and the portion of rents representative of an interest factor for New Time Warner and its majority- owned subsidiaries, (ii) New Time Warner's proportionate share of such items for its 50%-owned companies and (iii) preferred stock dividend requirements of majority-owned subsidiaries. Combined fixed charges and preferred stock dividends also include the amount of pretax income necessary to cover preferred stock dividend requirements of New Time Warner. For periods in which earnings before fixed charges were insufficient to cover fixed charges or combined fixed charges and preferred stock dividends, the dollar amount of coverage deficiency, instead of the ratio, is disclosed. Earnings as defined include significant noncash charges for depreciation and amortization. With respect to the ratio of earnings to fixed charges, fixed charges for New Time Warner for the six months ended June 30, 1996 and the year ended December 31, 1995 include noncash interest expense of $56 million and $101 million, respectively. With respect to the ratio of earnings to combined fixed charges and preferred stock dividends, fixed charges similarly include noncash interest expense as noted above and, for the six-month period ended June 30, 1996 and the year ended December 31, 1995, noncash preferred stock dividends of $87 million and $173 million, respectively, relating to the Time Warner Series K Preferred Stock. (b) Includes $374 million of preferred securities that are redeemable for cash or, at Time Warner's option, approximately 12.1 million shares of Hasbro, Inc. common stock owned by Time Warner. 27
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COMPARATIVE PER SHARE DATA Set forth below are historical earnings per share, cash dividends per share and book value per share data of Time Warner and TBS, equivalent pro forma per common share data of TBS and pro forma combined per share data of New Time Warner. TBS historical and equivalent pro forma information with respect to the TBS Class C Preferred Stock has been computed on a TBS Class B Common Stock equivalent basis based upon the assumed conversion of each share of TBS Class C Preferred Stock into six shares of TBS Class B Common Stock. The data set forth below should be read in conjunction with the Time Warner and TBS audited consolidated financial statements and unaudited interim consolidated financial statements, including the notes thereto, which are incorporated by reference in this Joint Proxy Statement/Prospectus. The data should also be read in conjunction with the unaudited pro forma consolidated condensed financial information included elsewhere herein. [Download Table] YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1996 1995 ---------------- ------------ TIME WARNER--HISTORICAL Loss before extraordinary item per share......... $ (.58) $ (.46) Cash dividends per share......................... .18 .36 Book value per share(a).......................... 1.65 2.49 TBS PER COMMON SHARE EQUIVALENT--HISTORICAL TBS Common Stock Net income per share............................. $ 0.01 $ .36 Cash dividends per share......................... 0.035 .07 Book value per share(a).......................... 1.01 .86 TBS Class C Preferred Stock Net income per share............................. $ 0.01 $ .36 Cash dividends per share......................... 0.035 .07 Book value per share(b).......................... 3.50 3.50 TBS PER COMMON SHARE EQUIVALENT--PRO FORMA TBS Common Stock(c): Loss before extraordinary item per share......... $ (.44) $ (.78) Cash dividends per share......................... .14 .27 Book value per share............................. 8.84 9.44 TBS Class C Preferred Stock(d): Loss before extraordinary item per share......... (.47) (.83) Cash dividends per share......................... .14 .29 Book value per share............................. 9.43 10.07 NEW TIME WARNER--PRO FORMA Loss before extraordinary item per share......... $ (.59) $ (1.04) Cash dividends per share......................... .18 .36 Book value per share(e).......................... 11.79 12.59 -------- (a) Calculated by dividing the historical shareholders' equity less the historical book value of non-mandatorily redeemable preferred stock by the number of outstanding common shares. The outstanding common shares do not include shares issuable upon exercise of stock options or conversion of outstanding convertible securities. (b) Calculated by dividing the historical book value of the TBS Class C Preferred Stock by the number of shares of TBS Class B Common Stock into which the outstanding shares of TBS Class C Preferred Stock are convertible. (c) Calculated based upon the exchange ratio of 0.75 of a share of New Time Warner Common Stock per share of TBS Common Stock. (d) Calculated based upon the exchange ratio of 0.80 of a share of New Time Warner Common Stock per share of TBS Class B Common Stock into which the outstanding shares of TBS Class C Preferred Stock are convertible. (e) Calculated by dividing pro forma shareholders' equity less the book value of non-mandatorily redeemable preferred stock by the expected number of outstanding shares of New Time Warner Common Stock. The expected number of outstanding shares of New Time Warner Common Stock does not include shares issuable upon exercise of stock options or conversion of outstanding convertible securities. 28
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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION The Time Warner Common Stock is listed on the NYSE and the PSE under the symbol TWX and on the London Stock Exchange. The Time Warner Preferred Stock is not listed on any securities exchange or publicly traded. The TBS Class A Common Stock and the TBS Class B Common Stock are listed on the AMEX under the symbols TBS.A and TBS.B, respectively. The TBS Class C Preferred Stock is not listed on any securities exchange or publicly traded. Each share of TBS Class C Preferred Stock currently is convertible into six shares of TBS Class B Common Stock. The table below sets forth, for the calendar quarters indicated, the reported high and low sales prices of Time Warner Common Stock on the NYSE Composite Tape and the TBS Class A Common Stock and TBS Class B Common Stock, in each case based on published financial sources, and the dividends declared on such stock. For each quarter indicated, the cash dividend per share of TBS Class C Preferred Stock was six times the dividend per share of TBS Common Stock. [Enlarge/Download Table] TIME WARNER COMMON STOCK TBS CLASS A COMMON STOCK TBS CLASS B COMMON STOCK ----------------------------------------------------------------------------------------- HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS --------- --------- ------------------- -------- ------------------- -------- ----------- (IN DOLLARS) 1994 First Quarter.......... 44.250 36.625 .08 27.750 19.500 .0175 27.750 19.875 .0175 Second Quarter......... 40.625 34.500 .09 20.375 17.000 .0175 20.250 17.000 .0175 Third Quarter.......... 38.750 34.000 .09 20.000 16.375 .0175 20.000 16.625 .0175 Fourth Quarter......... 37.750 31.500 .09 20.125 14.500 .0175 20.375 14.500 .0175 1995 First Quarter.......... 39.250 33.625 .09 18.750 16.000 .0175 19.125 16.125 .0175 Second Quarter......... 43.500 34.250 .09 20.750 16.500 .0175 21.250 16.625 .0175 Third Quarter.......... 45.625 38.875 .09 33.500 20.000 .0175 31.875 20.375 .0175 Fourth Quarter ........ 41.250 35.750 .09 27.625 24.625 .0175 28.000 24.750 .0175 1996 First Quarter.......... 45.250 37.250 .09 29.250 24.000 .0175 29.750 24.125 .0175 Second Quarter......... 42.875 38.125 .09 28.250 24.750 .0175 28.250 24.875 .0175 Third Quarter (through September 4, 1996)................. 39.875 29.750 .09 27.875 22.500 .0175 28.125 22.500 .0175 On August 29, 1995, the last full trading day preceding the joint public announcement by Time Warner and TBS that they were in discussions regarding a possible business combination, the closing price of Time Warner Common Stock on the NYSE Composite Tape was $42.375 per share, and the closing prices of TBS Class A Common Stock and TBS Class B Common Stock on the AMEX were $23.625 and $24.000, respectively, in each case based on published financial sources. On September 4, 1996, the most recent practicable date prior to the printing of this Joint Proxy Statement/Prospectus, the closing price of Time Warner Common Stock on the NYSE Composite Tape was $32.750 per share, and the closing prices of TBS Class A Common Stock and TBS Class B Common Stock on the AMEX were $24.375 and $24.125, respectively. HOLDERS OF TIME WARNER CAPITAL STOCK AND TBS CAPITAL STOCK ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS PRIOR TO MAKING ANY DECISION WITH RESPECT TO THE TRANSACTION. The Merger Agreement contemplates that the New Time Warner Common Stock will be listed on the NYSE, and Time Warner currently expects that the New Time Warner Common Stock will also be listed on the PSE. Time Warner does not expect that any of the New Time Warner Preferred Stock will be listed on any securities exchange or publicly traded. The payment of future dividends on New Time Warner Common Stock will be a business decision to be made by the New Time Warner Board from time to time based upon the results of operations and financial condition of New Time Warner and such other factors as the New Time Warner Board considers relevant. 29
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THE SPECIAL MEETINGS This Joint Proxy Statement/Prospectus is furnished in connection with the solicitation of proxies (a) from the holders of Time Warner Common Stock and Time Warner Voting Preferred Stock by the Time Warner Board for use at the Time Warner Meeting and (b) from the holders of TBS Capital Stock by the TBS Board for use at the TBS Meeting. TIMES AND PLACES; PURPOSES The Time Warner Meeting is scheduled to be held at the Time & Life Building, 1271 Avenue of the Americas, New York, New York 10020, on October 10, 1996, starting at 9:00 a.m., local time. At the Time Warner Meeting, the stockholders of Time Warner will be asked to consider and vote on the TW Merger Proposal and such other matters as may properly come before the Time Warner Meeting. The TBS Meeting is scheduled to be held at the Time & Life Building, 1271 Avenue of the Americas, New York, New York 10020, on October 10, 1996, starting at 2:00 p.m., local time. At the TBS Meeting, the shareholders of TBS will be asked to consider and vote on the TBS Merger Proposal and such other matters as may properly come before the TBS Meeting. VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL Time Warner The Time Warner Board has fixed August 26, 1996, as the Time Warner Record Date. Only holders of record of shares of Time Warner Common Stock and Time Warner Voting Preferred Stock at the close of business on the Time Warner Record Date are entitled to vote at the Time Warner Meeting. At the close of business on the Time Warner Record Date, there were 384,737,911 shares of Time Warner Common Stock and 33,794,710 shares of Time Warner Voting Preferred Stock outstanding and entitled to vote at the Time Warner Meeting held by approximately 25,000 stockholders of record of Time Warner Common Stock and 14 stockholders of record of Time Warner Voting Preferred Stock. Each share of Time Warner Common Stock entitles the holder thereof on the Time Warner Record Date to one vote, and each share of Time Warner Voting Preferred Stock entitles the holder thereof on the Time Warner Record Date to two votes. The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast by the stockholders entitled to vote generally is necessary to constitute a quorum at the Time Warner Meeting. Approval of the TW Merger Proposal (the "TW Merger Approval") requires the affirmative vote, in person or by proxy, of the holders of a majority in voting power of all outstanding shares of Time Warner Common Stock and Time Warner Voting Preferred Stock, voting together as a single class. Abstentions and broker non-votes will have the effect of a vote against the TW Merger Proposal. Shares represented by abstentions and broker non-votes will be counted for purposes of determining whether there is a quorum at the Time Warner Meeting. Holders of Time Warner Common Stock are not entitled to appraisal or dissenters' rights in connection with the Time Warner Merger. Holders of record of Time Warner Preferred Stock who do not vote in favor of the TW Merger Proposal and who otherwise comply with the applicable statutory procedures summarized herein will be entitled to appraisal rights under Section 262 of the DGCL. See "The Transaction--Appraisal and Dissenters' Rights." As of June 30, 1996, directors and executive officers of Time Warner and their affiliates as a group beneficially owned 1,705,372 shares of Time Warner Common Stock and no shares of Time Warner Voting Preferred Stock, or approximately 0.4% of the total number of votes entitled to be cast at the Time Warner Meeting. TBS The TBS Board has fixed August 26, 1996, as the TBS Record Date. Only holders of record of shares of TBS Capital Stock at the close of business on the TBS Record Date will be entitled to notice of and to vote at the TBS Meeting. At the close of business on the TBS Record Date, there were outstanding and entitled to vote 30
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68,330,388 shares of TBS Class A Common Stock, 140,379,236 shares of TBS Class B Common Stock and 12,396,976 shares of TBS Class C Preferred Stock. Each share of TBS Class A Common Stock entitles the holder thereof to two votes, each share of TBS Class B Common Stock entitles the holder thereof to one- fifth of a vote and each share of TBS Class C Preferred Stock entitles the holder thereof to vote as though such holder held the six shares of the TBS Class B Common Stock into which each share of TBS Class C Preferred Stock is currently convertible (i.e., one and one-fifth votes per share of TBS Class C Preferred Stock). At the TBS Meeting, the presence, in person or by proxy, of a majority of the votes entitled to be cast by the holders of (a) TBS Capital Stock is necessary to constitute a quorum of the TBS Capital Stock, (b) TBS Common Stock is necessary to constitute a quorum of the TBS Common Stock and (c) TBS Class C Preferred Stock is necessary to constitute a quorum of the TBS Class C Preferred Stock. Approval of the TBS Merger Proposal by holders of TBS Capital Stock requires the affirmative vote of (a) a majority of the voting power of the outstanding shares of TBS Capital Stock, voting together as a single group, (b) a majority of the voting power of the outstanding shares of TBS Common Stock, voting together as a single group, and (c) a majority of the outstanding shares of TBS Class C Preferred Stock, voting as a separate class (collectively, the "TBS Merger Approval"). Abstentions and broker non-votes will have the effect of votes against the TBS Merger Proposal. Holders of TBS Class A Common Stock, TBS Class B Common Stock and TBS Class C Preferred Stock who do not vote in favor of the TBS Merger Proposal and who otherwise comply with the applicable statutory procedures summarized herein will be entitled to assert dissenters' rights with respect to the TBS Merger under and in accordance with Article 13 of the GBCC. See "The Transaction-- Appraisal and Dissenters' Rights." As of June 30, 1996, TBS's directors, executive officers and their affiliates (other than TCI and Time Warner), as a group, were entitled to vote 57,737,225 shares of TBS Class A Common Stock, 25,544,196 shares of TBS Class B Common Stock and no shares of TBS Class C Preferred Stock. Such shares represent 67.2% of the total combined voting power of the TBS Capital Stock entitled to vote at the TBS Meeting and 73.2% of the total combined voting power of the TBS Common Stock entitled to vote at the TBS Meeting. Pursuant to the Support Agreement, the Turner Shareholders have agreed to vote all shares of TBS Capital Stock that they are entitled to vote at the TBS Meeting in favor of the approval of the TBS Merger Proposal. See "Certain Related Agreements--Support Agreement." In addition, pursuant to the LMC Agreement, LMC and certain of its subsidiaries have agreed, subject to the conditions set forth in the LMC Agreement, to vote all shares of TBS Capital Stock that they are entitled to vote at the TBS Meeting in favor of the approval of the TBS Merger Proposal. See "TCI Arrangements--LMC Agreement." Pursuant to the Merger Agreement, Time Warner has agreed to vote or cause to be voted all shares of TBS Capital Stock owned of record by Time Warner or any of its subsidiaries in favor of the approval of the TBS Merger Proposal. As of June 30, 1996, the shares of TBS Capital Stock that the Turner Shareholders, LMC and such subsidiaries of LMC and Time Warner and its subsidiaries are entitled to vote at the TBS Meeting represented, in the aggregate, 81.5% of the total combined voting power of the TBS Capital Stock entitled to vote at the TBS Meeting, 80.8% of the total combined voting power of the TBS Common Stock entitled to vote at the TBS Meeting, and 88.5% of the shares of TBS Class C Preferred Stock entitled to vote at the TBS Meeting. ACCORDINGLY (ASSUMING THE SATISFACTION OR WAIVER BY LMC OF THE CONDITIONS CONTAINED IN THE LMC AGREEMENT), APPROVAL OF THE TBS MERGER PROPOSAL IS ASSURED, REGARDLESS OF THE VOTE OF ANY OTHER SHAREHOLDER OF TBS. PROXIES Time Warner All shares of Time Warner Common Stock and Time Warner Voting Preferred Stock represented at the Time Warner Meeting by properly executed proxies received prior to or at the Time Warner Meeting, and not revoked, will be voted in accordance with the instructions indicated on such proxies. If no instructions are indicated, such proxies will be voted FOR the TW Merger Proposal. No stockholder of record may appoint more than three persons to act as his or her proxy at the Time Warner Meeting. 31
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If any other matters are properly presented for consideration at the Time Warner Meeting, the persons named in the enclosed form of proxy and acting thereunder will have discretion to vote on those matters in accordance with their best judgment to the same extent as the person signing the proxy would be entitled to vote, except that any proxy marked AGAINST the TW Merger Proposal will not be voted on any proposal to adjourn the Time Warner Meeting. In accordance with the Time Warner By-laws, the Time Warner Meeting may be adjourned, including by the Chairman, in order to permit the solicitation of additional proxies with respect to the TW Merger Proposal. Time Warner does not currently anticipate that any other matters will be raised at the Time Warner Meeting. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (a) filing with the Secretary of Time Warner, at or before the taking of the vote at the Time Warner Meeting, a written notice of revocation bearing a later date than the proxy, (b) duly executing a later dated proxy relating to the same shares and delivering it to the Secretary of Time Warner before the taking of the vote at the Time Warner Meeting or (c) attending the Time Warner Meeting and voting in person (although attendance at the Time Warner Meeting will not in and of itself constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy should be sent and delivered to Time Warner Inc., 75 Rockefeller Plaza, New York, New York 10019, Attention: Secretary, or hand delivered to the Secretary of Time Warner at or before the taking of the vote at the Time Warner Meeting. All expenses of solicitation of proxies from Time Warner stockholders will be borne by Time Warner. Time Warner will solicit proxies by mail, and Time Warner's directors, officers and employees may also solicit proxies by telephone, telegram, facsimile or personal interview. These persons will receive no additional compensation for these services but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. In addition, Time Warner has retained D.F. King & Co., Inc., at an estimated cost of $40,000, plus reimbursement of expenses, to assist in Time Warner's solicitation of proxies from brokers, nominees, institutions and individuals. Continuing arrangements also will be made with custodians, nominees and fiduciaries for the forwarding of proxy solicitation materials to beneficial owners of shares held of record by such custodians, nominees and fiduciaries, and Time Warner will reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith. HOLDERS OF TIME WARNER CAPITAL STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES OF TIME WARNER CAPITAL STOCK WITH THE ENCLOSED PROXY CARD. IF THE TIME WARNER MERGER IS CONSUMMATED, CERTIFICATES THAT, PRIOR TO CONSUMMATION OF THE TIME WARNER MERGER, REPRESENTED SHARES OF TIME WARNER CAPITAL STOCK WILL, FOLLOWING CONSUMMATION OF THE TIME WARNER MERGER, REPRESENT SHARES OF NEW TIME WARNER CAPITAL STOCK WITH NO ACTION REQUIRED ON THE PART OF THE HOLDERS OF TIME WARNER CAPITAL STOCK. TBS Shares of TBS Capital Stock entitled to vote at the TBS Meeting (including any adjournment or postponement thereof) and which are represented by properly executed proxies in the form enclosed with this Joint Proxy Statement/Prospectus will, unless such proxies have previously been revoked, be voted in accordance with the instructions indicated in such proxies. To the extent instructions are not indicated, shares will be voted FOR the TBS Merger Proposal, and in the discretion of the proxy holder as to any other matter that may properly come before the TBS Meeting. A TBS shareholder who has given a proxy may revoke it at any time prior to its being voted at the TBS Meeting by delivering a new duly executed proxy with a later date or by delivering a written notice of revocation to the Secretary of TBS prior to the taking of the vote at the TBS Meeting or by appearing and voting in person at the TBS Meeting. Any written notice of revocation or subsequent proxy should be sent or delivered to Turner Broadcasting System, Inc., One CNN Center, Atlanta, Georgia 30303, Attention: Secretary, or hand delivered to the Secretary of TBS prior to the taking of the vote at the TBS Meeting. 32
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In addition to mailing this material to TBS shareholders, TBS has asked custodians, nominees and fiduciaries to forward copies to persons for whom they hold shares of TBS Capital Stock and to request authority for execution of proxies. TBS will reimburse such custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses in doing so. Officers and employees of TBS may, without being additionally compensated, solicit proxies by mail, telephone, telegram or personal contact. TBS will pay all of its expenses in connection with the solicitation of proxies for the TBS Meeting. TBS does not intend to employ any other party to assist in the solicitation of proxies. HOLDERS OF TBS CAPITAL STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES OF TBS CAPITAL STOCK WITH THE ENCLOSED PROXY CARD. IF THE TBS MERGER IS CONSUMMATED, A LETTER OF TRANSMITTAL WILL BE MAILED TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING SHARES OF TBS CAPITAL STOCK IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE TBS MERGER. TBS SHAREHOLDERS SHOULD SEND CERTIFICATES REPRESENTING TBS CAPITAL STOCK TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED IN, THE LETTER OF TRANSMITTAL. THE TRANSACTION BACKGROUND In June 1987, TBS issued 12,396,976 units of its securities (the "Units Offering") to a group of investors that had ongoing business relationships with TBS, principally as owners or affiliates of owners of cable television systems that distribute TBS's programming services (the "Cable Operators"). Each unit consisted of one share of TBS Class B Cumulative Preferred Stock ("TBS Class B Preferred Stock") and one share of TBS Class C Preferred Stock. The Cable Operators included affiliates of Time Inc. ("Time"), Warner Communications Inc. ("WCI"), TCI and Continental Cablevision, Inc. ("Continental"). The proceeds from the Units Offering, approximately $561 million, were used by TBS to redeem all outstanding shares of TBS's Series A Cumulative Preferred Stock. References herein to the relative ownership of shares of TBS Capital Stock by Time Warner during the period prior to consummation in 1990 of the merger of WCI and a subsidiary of Time Warner (the "WCI Acquisition") include shares owned by both Time and WCI and their respective affiliates. Each share of TBS Class C Preferred Stock initially was convertible into one share of common stock of TBS and, as a result of the August 1987 reclassification of the TBS common stock into TBS Class A Common Stock and TBS Class B Common Stock and a three-for-one stock split in 1990, is currently convertible into six shares of TBS Class B Common Stock. Dividends on the TBS Class C Preferred Stock are payable pro rata when, as and if declared by the TBS Board out of funds legally available therefor as though each share of TBS Class C Preferred Stock had been converted into the TBS Class B Common Stock underlying such TBS Class C Preferred Stock. The holders of TBS Class C Preferred Stock are entitled to vote, together with holders of TBS Common Stock as a single group except as described below and as otherwise required by applicable law, as though the TBS Class C Preferred Stock had been converted into TBS Class B Common Stock. As a result, each share of TBS Class C Preferred Stock was initially entitled to one vote per share (which, as a result of the August 1987 reclassification, was reduced to two-fifths vote per share). The shares of TBS Class C Preferred Stock issued in the Units Offering in the aggregate represented approximately 36% of the combined voting power of the voting securities of TBS outstanding at the time of the consummation of the Units Offering (approximately 15% of such combined voting power following such August 1987 reclassification). The shares of TBS Class C Preferred Stock issued to Time Warner and TCI in the Units Offering represented approximately 13% and 16%, respectively, of the combined voting power of the TBS common stock and the TBS Class C Preferred Stock outstanding upon consummation of the Units Offering and 37% and 44%, respectively, of the TBS Class C Preferred Stock outstanding at such time. 33
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In 1988 and 1989, TBS issued an aggregate of approximately four million shares of TBS Class B Common Stock to pay accrued dividends on the TBS Class C Preferred Stock. In March 1991, TBS issued an additional approximately 2.3 million shares of TBS Class B Common Stock on the reinvestment by holders of 86% of the outstanding TBS Class B Preferred Stock of cash dividends paid by TBS. In June 1991, holders of 98.6% of the outstanding shares of TBS Class B Preferred Stock exchanged their shares for approximately 24.2 million shares of TBS Class B Common Stock. TBS redeemed the remaining TBS Class B Preferred Stock in December 1992. In connection with the Units Offering, the TBS Articles and the By-Laws of TBS (the "TBS By-Laws") were amended to extend certain rights to the holders of TBS Class C Preferred Stock. The TBS Articles, as so amended, provide that, so long as at least four million shares of TBS Class C Preferred Stock are outstanding, the holders of the TBS Class C Preferred Stock have the right to vote as a separate class for the election of seven directors (the "Class C Directors") and on certain other matters as described below (the "Special Voting Rights"). Holders of TBS Common Stock, voting as a separate class, are entitled to elect the remaining eight TBS directors (the "Common Stock Directors"). Pursuant to a Voting Agreement entered into among TCI, Time, WCI and Continental and certain of their affiliates concurrently with the Units Offering (the "TBS Voting Agreement"), TCI and Time as a group are entitled to nominate five Class C Directors and WCI and Continental are each entitled to nominate one Class C Director. In addition, such parties agreed to vote all shares of TBS Class C Preferred Stock beneficially owned by them in favor of the election to the TBS Board of each such nominee. Nominees for election to the TBS Board as Class C Directors and Common Stock Directors are selected prior to each annual meeting of shareholders by a majority vote of the then existing directors of each respective class. Directors of each class may be removed only by the holders of shares of such class, and vacancies in any class of directors may be filled only by the directors of such class or, in the case of removal, by the holders of shares of such class. In addition to the right to elect seven directors, under the TBS Articles holders of TBS Class C Preferred Stock have Special Voting Rights with respect to certain matters, including (a) the disposition by TBS of shares of capital stock of any significant subsidiary of TBS (defined to exclude Atlanta National League Baseball Club, Inc. and Atlanta Hawks, Inc.) or of a substantial portion of the assets of TBS or any significant subsidiary of TBS not in the ordinary course of business, other than pledges or similar security interests securing bona fide indebtedness, (b) the merger or consolidation of TBS or any significant subsidiary of TBS with any other entity (other than certain mergers between subsidiaries of TBS or between TBS and any such subsidiary) or the dissolution or liquidation of TBS or any significant subsidiary of TBS (with certain exceptions) and (c) issuances by TBS of shares of its capital stock (with limited exceptions with respect to issuances pursuant to then outstanding or existing options, warrants, convertible securities or stock option or stock purchase plans). The TBS By-Laws require the affirmative vote of at least 12 members of the TBS Board, at least four of whom must be Class C Directors, on specified matters, including (a) approval of certain detailed annual budgets (the "Budgets"), (b) the making of commitments by TBS not provided for in the Budgets, which involve amounts in excess of $2 million for any one item or $5 million in the aggregate in any fiscal year, (c) the disposition by TBS of assets having an aggregate fair market value in excess of $2 million for any one disposition or $5 million for all dispositions by TBS, whether or not related, in any fiscal year, except for dispositions contemplated by the Budgets, (d) the acquisition by TBS of any other business for a purchase price in excess of, the acquisition by TBS of assets not comprising a business having an aggregate fair market value in excess of, or the making of any other capital expenditures not provided for in the Budgets which are in excess of, $2 million for any one acquisition or expenditure or $5 million in the aggregate for all such acquisitions or expenditures by TBS in any fiscal year, (e) the incurrence by TBS of any indebtedness, any refinancings of outstanding indebtedness of TBS, or the issuance by TBS of any debt securities, (f) the approval of any amendments to the TBS Articles or the TBS By-Laws, (g) the issuance by TBS of any shares of its capital stock or any of its other securities or the split-up, combination or reclassification of the capital stock of TBS (with limited exceptions), (h) the declaration or payment of any dividend on the capital stock or other securities of TBS other than the payment of dividends by a subsidiary to TBS, (i) the merger or consolidation of TBS with or into any person or the dissolution or liquidation of TBS and (j) the entering into by TBS of material contracts, except in the ordinary 34
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course of business. If, as to any matter, a director has an interest either himself or herself or through his or her affiliates (an "interested director"), such interested director must abstain from the vote on such matter, and the total number of affirmative votes required to authorize such matter is reduced by one vote for each interested director. If, as to any such matter, any of the interested directors is a Class C Director, the required vote of the Class C Directors with respect to such matter is deemed satisfied only if the matter is approved by the vote of at least 50% of the Class C Directors who are not interested directors as to such matter. A director is deemed to have an interest in such a matter only if (i) such matter is the approval of an agreement or transaction to which TBS (or any of its subsidiaries) and such director or any of his or her affiliates are parties or (ii) such director otherwise determines that he or she either directly or through his or her affiliates has an interest in the matter and advises the TBS Board that he or she has determined to abstain from the vote on such matter. Concurrently with the closing of the Units Offering, the Cable Operators, TBS and Mr. Turner entered into a Shareholders' Agreement (the "TBS Shareholders' Agreement"), and TBS and the Cable Operators entered into an Investors' Agreement (the "TBS Investors' Agreement"). In addition, Time, TCI, and certain affiliates of Time and TCI entered into an agreement (the "Time/TCI Agreement") with respect to their rights under the TBS Shareholders' Agreement and other matters. Pursuant to the TBS Shareholders' Agreement, Mr. Turner agreed to vote all shares of TBS Common Stock held of record by him and all shares as to which he has voting control, and each Cable Operator agreed to vote all shares of TBS Class C Preferred Stock and all TBS Common Stock held of record by such Cable Operator, and all shares as to which such Cable Operator has voting control, (a) in accordance with the decision of the TBS Board on all matters that require the affirmative vote of at least 12 members of the TBS Board (other than those matters that require a separate vote of the holders of the TBS Class C Preferred Stock under applicable law or the TBS Articles) and (b) for the election of the Common Stock Directors nominated from time to time by the TBS Board. Under the TBS Shareholders' Agreement, Mr. Turner may dispose of TBS Common Stock or securities that are convertible into TBS Common Stock ("TBS Convertible Securities") unless and until any such disposition would result in either (a) Mr. Turner's beneficially owning TBS Common Stock representing less than 51% of the combined voting power of the outstanding TBS Common Stock and TBS Class C Preferred Stock or (b) Mr. Turner's beneficially owning TBS Common Stock, including shares underlying TBS Convertible Securities he owns, representing less than 51% of the total voting power represented by the sum of the TBS Common Stock then outstanding, the TBS Common Stock underlying all TBS Convertible Securities then outstanding and the TBS Common Stock that could be issued (either directly or upon conversion of TBS Convertible Securities) without the approval of the holders of the TBS Class C Preferred Stock (any such effect under such clause (a) or clause (b), a "Prohibited Turner Effect"). The TBS Shareholders' Agreement provides that Mr. Turner will not make a disposition of TBS Common Stock or TBS Convertible Securities that would have a Prohibited Turner Effect, other than a sale of all but not less than all of the shares of TBS Capital Stock owned by Mr. Turner to a party that is not (and after the purchase would not be) an affiliate of Mr. Turner or pursuant to an exercise of the right of first refusal (described below). The TBS Shareholders' Agreement provides that if Mr. Turner receives a bona fide offer from a third party that is not an affiliate of Mr. Turner to purchase his TBS Common Stock and TBS Convertible Securities, he may not consummate such sale unless he first offers to sell such securities to the Cable Operators for an equivalent cash consideration and on terms no more favorable to him than those offered by the third party, and such offer is then rejected or does not result in a sale to the Cable Operators. In addition, the TBS Shareholders' Agreement provides that a purchaser of Mr. Turner's securities, whether purchasing pursuant to a third party bona fide offer or pursuant to exercise of the right of first refusal, must also agree to make available, or cause TBS to make available, to TBS shareholders (other than Mr. Turner, the Cable Operators and the purchasing party) the opportunity to receive, in exchange for their shares of TBS Common Stock and TBS Convertible Securities, consideration in an amount per share equal to the per share price payable to Mr. Turner for his securities. The TBS Shareholders' Agreement also includes a "take-along" provision that requires that a third party purchaser of all of Mr. Turner's securities must also agree to purchase, and the Cable Operators to sell, all the shares of TBS Class C Preferred Stock owned by the Cable Operators, and obligates such third party to purchase any shares of TBS Common Stock that the Cable Operators desire to sell, in each case for a price per share (assuming the conversion of the TBS Class C Preferred Stock into TBS Common Stock) equivalent to the consideration per share to be received by Mr. Turner. 35
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The TBS Investors Agreement provides, generally, that none of the Cable Operators may convert or make any disposition of any of its shares of TBS Class C Preferred Stock unless it first offers to sell to the other Cable Operators all of the shares of TBS Class C Preferred Stock that such Cable Operator proposes to convert or dispose of for a purchase price equal to the current market price of the shares of TBS Class B Common Stock into which such shares are convertible. Under the Time/TCI Agreement, Time and its controlled affiliates (the "Time Group") are entitled to nominate two of the five Class C Directors that Time and TCI as a group are entitled to nominate under the terms of the TBS Voting Agreement, and TCI and certain of its controlled affiliates (the "TCI Group" and each of the Time Group and the TCI Group, a "Group") are entitled to nominate three such Class C Directors. The Time/TCI Agreement provides that the Time Group will vote all its shares of TBS Capital Stock in favor of the election to the TBS Board of each nominee of the TCI Group, and the TCI Group will vote all its shares of TBS Capital Stock in favor of the election to the TBS Board of each nominee of the Time Group. The Time/TCI Agreement also provides, except as to voting for TBS directors (as described in the preceding sentence) and except as otherwise provided in the TBS Shareholders' Agreement, that each Group will consult and agree with the other Group as to the voting of all TBS Capital Stock owned by the members of such Group on all matters presented to a vote of holders of shares of TBS Capital Stock, and the members of each Group will vote their shares of TBS Capital Stock in accordance with any such agreement. However, if the Time Group and the TCI Group are unable to reach agreement on any such matter submitted to a shareholder vote, the members of each Group must vote all their shares of TBS Capital Stock against the approval of such matter. As a result of (a) the obligation described in the immediately preceding sentence, (b) the requirement of the TBS Articles that any merger involving TBS be approved by a majority of the TBS Class C Preferred Stock and (c) the fact that Time Warner and TCI together hold a majority of the TBS Class C Preferred Stock, any merger involving TBS (including the TBS Merger) requires the approval of both Time Warner and TCI. Beginning in late 1992 and continuing through early 1993, representatives of TBS, Time Warner and TCI discussed a number of potential transactions relating to TBS, including potential transactions in which various assets of TBS would be sold to, or TBS or related entities would engage in some form of business combination with, Time Warner or TCI or both. The parties were unable to reach any understanding with respect to any such transaction, and such discussions ceased by early May 1993. In early 1995, TBS, Time Warner and TCI commenced discussions regarding a possible reorganization of Time Warner's and TCI's shareholder interests in TBS. Such discussions included consideration of a possible purchase by TCI of all of Time Warner's interest in TBS and the implementation of changes to the terms of the securities held by TCI to position TBS to pursue the acquisition of a broadcast television network consistent with existing regulatory restrictions under the Communications Act and the rules and regulations of the FCC thereunder. The parties also discussed possible transactions in which TBS would participate in such a purchase of Time Warner's interest in TBS through the distribution to the holders of TBS Class C Preferred Stock (other than Time Warner) of an unspecified amount of cash, the issuance to TCI of additional TBS securities, the repurchase of a portion of Time Warner's interest by TBS or some combination of the foregoing. During these discussions, Time Warner indicated that it would then be willing to sell its minority interest in TBS for a cash price equivalent to $30 per share of TBS Common Stock on a pretax basis. Ultimately, the parties could not agree on the terms of any such transaction and such discussions ceased in late March 1995. Following the termination of the discussions related to a direct or indirect purchase by TCI of Time Warner's interest in TBS, Time Warner and TBS continued to discuss the possible repurchase by TBS of all of Time Warner's interest in TBS. TBS pursued these discussions in light of Time Warner's expressed desire to monetize its interest in TBS, TBS's desire to better position TBS to pursue the purchase of a broadcast television network and the view of the TBS senior management that Time Warner did not share TBS's vision for a long-term strategic plan for TBS as a stand-alone entity. The principal areas in which the parties' views of the long-term strategic plan had differed were TBS's interest in acquiring theatrical production operations, acquiring a broadcast television network and diversifying its programming offerings into new areas, such as in-home shopping. The discussions between Time Warner and TBS focused on a transaction in which Time Warner would exchange its interest in TBS on a tax-free basis for a business consisting of certain operating assets of TBS and 36
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cash. Representatives of TBS and Time Warner held a number of meetings during the summer of 1995 to develop the overall structure of a possible transaction, which was subject to a number of significant uncertainties, including the receipt of a favorable ruling from the Internal Revenue Service (the "IRS"). In August 1995, the legal advisors to TBS and Time Warner began preparing a ruling request and had discussions with the IRS regarding its willingness to rule that such proposed transaction would qualify for tax-free treatment. On August 19, 1995, Gerald M. Levin, Chairman and Chief Executive Officer of Time Warner, met with Mr. Turner and suggested that Time Warner and TBS consider a combination of the two companies on a stock-for-stock basis. Over the course of the following week, Mr. Levin, Mr. Turner and John C. Malone, Chairman of TCI, discussed a possible stock-for-stock combination of Time Warner and TBS and the possible terms of such a combination. Such terms included the exchange ratio of shares of Time Warner Common Stock for shares of TBS Capital Stock and the terms under which TCI and its affiliates would be restricted, for regulatory reasons, in their ability to vote shares of Time Warner Common Stock received by them in such a combination. On August 25, 1995, the parties agreed to proceed to negotiate the terms of a combination of Time Warner and TBS on the basis of an exchange ratio of 0.75 of a share of Time Warner Common Stock for each share of TBS Common Stock and 4.80 shares of Time Warner Common Stock for each share of TBS Class C Preferred Stock and the terms upon which TCI would agree to support the proposed stock-for-stock combination. On August 26, 1995, Time Warner and TBS executed a confidentiality agreement and commenced legal and financial due diligence. On August 28, 1995, the Time Warner Board held a special meeting to review the status of the discussions with TBS regarding a possible stock-for-stock combination. On August 30, 1995, Time Warner and TBS announced that they were negotiating the terms of a stock-for-stock combination of Time Warner and TBS. On that day, a special meeting of the TBS Board was held to consider the proposed transaction. During such meeting, (a) members of TBS senior management and TBS's legal advisors reviewed with the TBS Board the status of negotiations with Time Warner and TCI and the terms of the proposed transaction, (b) CS First Boston reviewed certain matters with the TBS Board, including the valuation methodologies to be utilized by CS First Boston for purposes of its financial analyses, and (c) TBS's legal advisors made a presentation to the TBS Board with respect to the fiduciary duties of the TBS directors in connection with the proposed transaction. During the period between August 26, 1995 and September 22, 1995, representatives of Time Warner, TBS and TCI, together with their respective legal and financial advisors, met frequently to continue to identify and resolve open issues and to negotiate the final terms of the proposed transaction and the proposed arrangements with TCI. On September 18, 1995, a meeting of the members of the Time Warner Board who, in the Time Warner Board's judgment, have no direct or indirect material economic relationship with Time Warner other than as a result of stock ownership or customary directors' compensation (the "Unaffiliated Directors") was held to review the terms of the proposed transaction, including the arrangements with TCI. The Unaffiliated Directors determined at such meeting to retain separate legal counsel to assist in their review of the proposed transaction. On September 19 and 20, 1995, representatives of TBS and its legal advisors met in informal informational sessions with certain directors of TBS. At such sessions, the status of negotiations with Time Warner and the remaining open issues, terms of the proposed arrangements with TCI, legal standards applicable to directors and other matters with respect to the proposed transaction were discussed. On September 20, 1995, representatives of senior management of Time Warner met in informal informational sessions with directors of Time Warner to discuss the proposed transaction. A meeting of the Time Warner Board was held on September 21, 1995, to consider the proposed Merger Agreement, the other proposed Transaction Agreements and the transactions contemplated thereby. At this meeting, presentations were made to the Time Warner Board by members of the senior management of Time Warner, Time Warner's legal advisors and Morgan Stanley, financial advisor to Time Warner. Members of the senior management of Time Warner, together with Time Warner's advisors, reviewed with the Time Warner Board the background of the proposed transaction, financial and other analyses of TBS, required corporate and 37
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governmental approvals and procedures and the terms of the proposed Transaction Agreements and the transactions contemplated thereby. Morgan Stanley delivered its oral opinion (subsequently confirmed in writing) to the Time Warner Board that, as of the date of such opinion and based upon and subject to the matters stated therein, the ratio contemplated by the proposed Merger Agreement for the exchange of Time Warner Common Stock for TBS Capital Stock and the consideration to be paid by Time Warner for the option to acquire SSSI as contemplated by the TCI Arrangements, as proposed at that time (the "Prior TCI Arrangements"), taken together, were fair to Time Warner from a financial point of view. After discussing the terms of the proposed Transaction Agreements and the transactions contemplated thereby and the various presentations, the Time Warner Board adjourned its meeting. The Unaffiliated Directors also met separately with their legal counsel to review the proposed transaction. The Time Warner Board reconvened on September 22, 1995. After further deliberation, the Time Warner Board unanimously approved the terms of the Merger Agreement and the other Transaction Agreements to be executed by Time Warner and its subsidiaries and the transactions contemplated thereby and authorized the execution of the Merger Agreement and such other Transaction Agreements. On September 21, 1995, a special meeting of the TBS Board was held to consider the proposed transaction. During such meeting, (a) TBS's legal advisors made a presentation to the TBS Board with respect to the fiduciary duties of the TBS directors with respect to the proposed transaction and related transactions, (b) TBS's legal advisors made a presentation with respect to the terms of the Merger Agreement and certain of the other Transaction Agreements, members of senior management of TBS made a presentation with respect to certain agreements to be entered into by TCI and TBS and counsel to TCI (who attended a portion of the meeting at the request of TBS) made a presentation with respect to certain agreements to be entered into by TCI and Time Warner, (c) CS First Boston made a financial presentation to the TBS Board with respect to the proposed transaction, (d) Merrill Lynch discussed the proposed transaction with the TBS Board and made a financial presentation to the TBS Board with respect to the terms of the Prior TCI Arrangements and (e) a member of senior management of TBS and TBS's legal advisors made a presentation with respect to the corporate and governmental approval procedures in connection with the proposed transaction, including the approvals by the TBS Board and TBS shareholders required under the TBS Articles and TBS By-Laws and existing contractual arrangements among certain shareholders of TBS, and the requisite FCC and antitrust filings and approvals. In addition, special counsel to TBS made a presentation to the TBS Board with respect to the engagement by TBS of MC Group, an entity of which Michael R. Milken is the president, including the terms of the engagement, the restrictions imposed on the activities of MC Group as a result of its affiliation with Mr. Milken, information with respect to fees paid to consultants and advisors in certain other large acquisition transactions and the legal standards applicable to directors of a Georgia corporation in considering such matters. The information concerning large acquisition transactions referred to in the previous sentence included (i) information from publicly available sources regarding the fees paid to consultants in connection with the acquisition of MCA Inc. ("MCA") by Matsushita Electric Industrial Co., Ltd. ("Matsushita"), the acquisition of American Cyanamid Company by American Home Products Corp., the acquisition of Squibb Corporation by Bristol-Myers Co., the acquisition of Hospital Corporation of America by HCA-Hospital Corporation of America, the acquisition of Kraft Inc. by Philip Morris Inc. and the acquisition of Fort Howard Corp. by HF Acquisition Corp., in which fees payable to one or more consultants ranged from approximately 0.20% to 1.1% of the total value of the transaction, as compared to approximately 0.47% of the total value of the Transaction in the case of the $40 million fee proposed to be paid by TBS to MC Group, or 0.56% of such value in the case of the aggregate $48 million of fees proposed to be paid by TBS to MC Group, CS First Boston, Merrill Lynch and Capital City Advisors, Inc. ("Capital City"), another consultant to TBS (the value of the Transaction, in each case, based on the closing price of Time Warner Common Stock on September 21, 1995), and (ii) information provided by representatives of MC Group with respect to consulting fees previously paid to MC Group in connection with a recent joint venture between The News Corporation Limited and MCI Communications Corporation and a recent transaction between Fox Television Stations, Inc. and New World Communications Group Incorporated in which the fees payable to MC Group, in each case, represented approximately 2% to 3% of the total value of the transaction. See "--Certain Fees and Expenses." 38
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During the Merrill Lynch presentation, the TBS directors raised questions regarding certain of the assumptions provided by TBS management as well as other assumptions used by Merrill Lynch to prepare its analysis with respect to the Prior TCI Arrangements. These questions principally related to (a) the assumptions relating to the growth rate in cable subscribers on TCI-affiliated cable systems and the growth rate in subscribers for TBS's recently launched cable networks and (b) the range of discount rates utilized by Merrill Lynch in evaluating the Prior TCI Arrangements generally. The TBS Board requested that Merrill Lynch perform additional analyses and make a presentation with respect thereto at the continuation of the meeting of the TBS Board to be held the following day. In addition, during this meeting, Timothy P. Neher, the Vice Chairman of the Board of Continental and a Class C Director of TBS, and Brian L. Roberts, the President of Comcast Corporation ("Comcast") and a Common Stock Director of TBS, each determined, after consultation with his respective counsel, that, due to the interests of his employer in the effects of the proposed transaction, he had a conflict of interest, and each declared himself to be an interested director with respect to the proposed transaction under the TBS By-Laws and informed the TBS Board that he would abstain from voting on the proposed transaction. Thereafter, each of Messrs. Neher and Roberts recused himself from further consideration of the proposed transaction and left the meeting, following which the remaining directors resumed their deliberations with respect to the proposed transaction. On September 22, 1995, the special meeting of the TBS Board was reconvened to consider and vote upon the Transaction. During such meeting, Merrill Lynch, in response to the request of the TBS directors made the prior day, made a financial presentation to the TBS Board with respect to the Prior TCI Arrangements using certain revised assumptions provided by TBS senior management. Merrill Lynch rendered its oral opinion (which was subsequently confirmed in writing) to the effect that, as of September 22, 1995, and based upon and subject to the matters stated therein, (a) the consideration to be received by shareholders of TBS (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (b) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the Prior TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). CS First Boston rendered to the TBS Board an oral opinion (which was subsequently confirmed in writing) to the effect that, as of September 22, 1995 and based upon and subject to the matters stated therein, the consideration to be received by the holders of TBS Capital Stock (other than Time Warner and its affiliates) in the TBS Merger was fair to such holders from a financial point of view. TBS, in consultation with its legal advisors, had determined that Mr. Levin, Joseph J. Collins and Michael J. Fuchs, Time Warner's then designees as Class C Directors of TBS; Dr. Malone, Peter R. Barton and Fred A. Vierra, TCI's designees as Class C Directors of TBS; and Mr. Turner, a Common Stock Director, were interested directors under the applicable provisions of the TBS By-Laws. In addition, as permitted by the TBS By-Laws and as described above, Mr. Neher and Mr. Roberts had each declared himself interested with respect to the proposed transaction. Under the TBS By-Laws, none of the interested directors of TBS was eligible to vote with respect to the proposed transaction. Thereafter, the TBS Board, by a unanimous vote of the six directors eligible to vote, approved the terms of the Merger Agreement and the other Transaction Agreements to be executed by TBS and its subsidiaries and the transactions contemplated thereby and authorized the execution of the Merger Agreement and such other Transaction Agreements. In addition, the TBS Board approved the payment of fees, conditioned upon consummation of the Mergers, of $40 million to MC Group and $3 million to Capital City. See "-- Certain Fees and Expenses." Time Warner and TBS announced on September 22, 1995 that they had agreed to the combination of TBS with Time Warner at an exchange ratio of 0.75 of a share of Time Warner Common Stock for each share of TBS Common Stock and 4.80 shares of Time Warner Common Stock for each share of TBS Class C Preferred Stock. Thereafter, the parties and their advisors proceeded to finalize the forms of the Merger Agreement and the other Transaction Agreements. Following the finalization of the Transaction Agreements, the parties executed the Merger Agreement (in its original form), the LMC Agreement (in its original form), the Support Agreement and certain other Transaction Agreements. The Merger Agreement, as originally executed, contemplated a transaction in which TBS would be merged with a wholly owned subsidiary of Time Warner but contained provisions relating to an amendment to the Merger Agreement if the parties agreed to alter the form of the Transaction. Time Warner and TBS subsequently 39
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concluded that it would be desirable to revise the transaction structure such that Time Warner and TBS would each become a wholly owned subsidiary of a holding company. To give effect to this revised structure, Time Warner and TBS, advised by their respective legal counsel, agreed to amend and restate the original Merger Agreement. At a meeting of the Time Warner Board held on November 16, 1995, the Time Warner Board approved the form of the Merger Agreement, as so amended and restated. At the request of the Time Warner Board, Morgan Stanley subsequently confirmed its opinion that, as of November 16, 1995, and based upon and subject to the matters stated therein, the ratio contemplated by the Merger Agreement for the exchange of New Time Warner Common Stock for TBS Capital Stock and the consideration to be paid by New Time Warner for the option to acquire SSSI as contemplated by the Prior TCI Arrangements, taken together, were fair to New Time Warner and its subsidiary, Time Warner, from a financial point of view. At a special meeting of the TBS Board held on November 21, 1995, the TBS Board approved the form of the Merger Agreement, as so amended and restated. At such meeting, CS First Boston rendered to the TBS Board an oral opinion (subsequently confirmed in writing) to the effect that, as of November 21, 1995 and based upon and subject to the matters stated therein, the consideration to be received by the holders of TBS Capital Stock (other than Time Warner and its affiliates) in the TBS Merger was fair to such holders from a financial point of view. In addition, at such meeting Merrill Lynch advised the TBS Board that the amendments to the Merger Agreement did not alter the conclusions reached in its opinion previously delivered to the TBS Board to the effect that, as of September 22, 1995, and based upon and subject to the matters stated therein, (a) the consideration to be received by shareholders of TBS (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (b) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the Prior TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). The parties thereafter executed the amended and restated Merger Agreement, and Time Warner, New Time Warner and LMC executed the LMC Agreement, as amended and restated to reflect the revised structure of the Transaction. The Transaction Agreements, as executed in November 1995, received extensive scrutiny from the FTC staff. As a result of that scrutiny, the parties entered into negotiations with the FTC staff with a view to revising the Transaction Agreements to eliminate concerns raised by the FTC staff regarding possible competitive effects of the Transaction. These negotiations resulted in the FTC Consent Decree, which required that the Transaction Agreements be revised to (a) reflect limits on the amount and type of New Time Warner securities that TCI and its affiliates may hold after the consummation of the Mergers, (b) require that the New Time Warner Common Stock to be received by TCI and its affiliates in the TBS Merger be exchanged for New Time Warner securities with reduced voting rights, thus causing the parties to agree to create the LMC Reduced Voting Common Stock and eliminate those provisions that required TCI and its affiliates to place the New Time Warner Common Stock received in the TBS Merger in a voting trust to be voted by Mr. Levin, (c) eliminate the provisions that would have given New Time Warner an option to purchase the outstanding stock of SSSI, (d) eliminate Time Warner's option to purchase TCI's interest in TBS prior to the consummation of the Mergers and (e) reduce substantially the duration of the agreements for mandatory analog carriage by TCI cable systems of TBS programming services after the consummation of the Mergers. See "--Regulatory Approvals" below for a discussion of the provisions of the FTC Consent Decree. Concurrently with the execution of the FTC Consent Decree, the parties entered into revised Transaction Agreements to give effect to the FTC Consent Decree and to make other revisions as negotiated by the parties. At a meeting of the Time Warner Board held on August 8, 1996, the Time Warner Board considered and approved the FTC Consent Decree and such revisions to the Transaction Agreements. At this meeting, presentations were made to the Time Warner Board by members of the senior management of Time Warner, Time Warner's legal advisors and Morgan Stanley. Members of the senior management of Time Warner, together with Time Warner's advisors, reviewed with the Time Warner Board the background of the proposed revisions to the Transaction Agreements, financial and other analyses of TBS, required corporate approvals and procedures and the status of governmental approvals. At such meeting, Morgan Stanley delivered its oral opinion (subsequently confirmed in writing) to the Time Warner Board that, as of August 8, 1996 and based upon and subject to the matters stated therein, the ratio contemplated by the Merger Agreement for the exchange of New 40
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Time Warner Common Stock for TBS Capital Stock and the consideration to be paid by New Time Warner for the SSSI Option and the LMC Non-competition Covenant, taken together, were fair to New Time Warner and its subsidiary, Time Warner, from a financial point of view. See "--Opinion of Time Warner's Financial Advisor" below. On August 8, 1996, a special meeting of the TBS Board was held to consider the FTC Consent Decree and proposed revisions to the Transaction Agreements necessary to give effect to the FTC Consent Decree and to make other changes as negotiated by the parties. During such meeting, (a) TBS's legal advisors made a presentation to the TBS Board with respect to the fiduciary duties of the TBS directors with respect to the Transaction, (b) TBS's management and legal advisors made a presentation with respect to the process and status of the discussions and negotiations between the parties and with the FTC, (c) TBS's management and legal advisors made presentations with respect to the FTC Consent Decree, the proposed revisions to the Merger Agreement and the Program Agreement and the PPV Output Agreement and counsel to Time Warner (who attended a portion of the meeting at the request of TBS) made a presentation with respect to the FTC Consent Decree, the proposed revisions to the LMC Agreement and the SSSI Agreement and the Distribution Contract to be entered into between Time Warner and TCI or its affiliates, (d) CS First Boston made a financial presentation (see "--Opinions of TBS's Financial Advisors--Opinion of CS First Boston" below) to the TBS Board with respect to the Transaction and rendered to the TBS Board an oral opinion (which was subsequently confirmed in writing) to the effect that, as of August 8, 1996 and based upon and subject to the matters stated therein, the consideration to be received by the holders of TBS Capital Stock (other than Time Warner and its affiliates) in the TBS Merger was fair to such holders from a financial point of view, (e) Merrill Lynch made a financial presentation to the TBS Board with respect to the TCI Arrangements and rendered its oral opinion (which was subsequently confirmed in writing) to the effect that, as of August 8, 1996, and based upon and subject to the matters stated therein, (i) the consideration to be received by shareholders of TBS (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (ii) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). See "-- Opinions of TBS's Financial Advisors" below. Thereafter, the TBS Board, by a unanimous vote of the six directors eligible to vote, approved the terms of the FTC Consent Decree and the Transaction Agreements, as revised, to be executed by TBS and its subsidiaries and the transactions contemplated thereby, ratified all action taken by the TBS Board and the officers of TBS prior to such meeting (except to the extent amended by the actions taken at such special meeting) and authorized the execution of the FTC Consent Decree and the revised Transaction Agreements to which TBS or any of its subsidiaries is a party. RECOMMENDATION OF THE TIME WARNER BOARD; TIME WARNER'S REASONS FOR THE TRANSACTION At meetings of the Time Warner Board and the Unaffiliated Directors held on September 21 and 22, 1995, the Time Warner Board received and considered presentations of the senior management of Time Warner and its legal and financial advisors regarding the Transaction. At its meeting on September 22, 1995 the Time Warner Board unanimously approved the Merger Agreement, the other Transaction Agreements to be executed by Time Warner and its subsidiaries and the Transaction and determined that the Transaction was in the best interests of the stockholders of Time Warner. Thereafter, on November 16, 1995, the Time Warner Board held a meeting at which it received and considered an additional presentation by the senior management of Time Warner regarding revisions to the structure of the Transaction, including revisions such that Time Warner and TBS would each become a wholly owned subsidiary of a holding company. At this meeting, the Time Warner Board unanimously approved the Merger Agreement, as amended and restated to reflect such revisions. On August 8, 1996, the Time Warner Board held a meeting at which it received and considered presentations from senior management of Time Warner and its legal and financial advisors regarding the FTC Consent Decree and the proposed amendments to the Transaction Agreements (see "--Regulatory Approvals--FTC Consent Decree" below). At this meeting, the Time Warner Board (with one member absent) unanimously approved the FTC Consent Decree, such amendments to the Transaction Agreements and the Transaction and determined that the Transaction is in the best interests of the stockholders of Time Warner. THE TIME WARNER BOARD UNANIMOUSLY RECOMMENDS THAT HOLDERS OF TIME WARNER CAPITAL STOCK VOTE FOR THE TW MERGER PROPOSAL. 41
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In reaching its determination to approve the Merger Agreement, the other Transaction Agreements to be executed by Time Warner and its subsidiaries and the Transaction, the Time Warner Board considered a number of factors, including those listed below. In view of the wide variety of factors considered by the Time Warner Board in connection with its evaluation of the Transaction Agreements and the Transaction, and the complexity of those matters, the Time Warner Board did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. At its meetings held on September 21-22, 1995, November 16, 1995 and August 8, 1996, the Time Warner Board did not consider any alternative business strategies with respect to Time Warner's investment in TBS. Relationship with Existing Businesses of Time Warner. The Time Warner Board reviewed presentations from the senior management of Time Warner with respect to the strategic rationale for the Transaction and the potential growth opportunities that would be created by the combination of the two companies. The Time Warner Board considered the view of senior management that the combination of Time Warner and TBS would create an entity with worldwide resources in entertainment, news and information and distribution systems. The Time Warner Board noted that the combination of TBS with Time Warner was expected to strengthen the combined entity, including by increasing the mix of revenues and cash flow being derived from "content." TBS's Business, Condition and Prospects. In evaluating the Transaction, the Time Warner Board considered information with respect to the financial condition, results of operations and businesses of TBS, on both an historical and prospective basis, and current industry, economic and market conditions as they would be likely to affect TBS. The Time Warner Board considered the three segments in which TBS primarily operates--cable networks, news and film production and distribution--and noted the performance of TBS and its prospects for growth in these segments. Management reviewed with the Time Warner Board TBS's historical revenue and cash flow growth rates and the growth potential of TBS's established domestic networks, TBS's two new cable networks - the Cartoon Network and TCM - and TBS's international operations. Benefits of a Combination. The Time Warner Board reviewed the potential benefits of a combination of the two companies. The management of Time Warner discussed with the Time Warner Board the current operations of WTBS and the opportunities that would be created for Time Warner from the ownership of WTBS, including those arising after the WTBS Conversion, if effected. The Time Warner Board discussed with the senior management how other assets of TBS would complement Time Warner's existing assets and provide opportunities for revenue enhancements and cost savings, including opportunities for cross promotion, to improve TBS's film and television distribution, to leverage TBS's characters and brands through Time Warner's consumer products outlets and to exploit CNN's news gathering capabilities. Pro Forma Impact on Time Warner. The Time Warner Board also considered information relating to the pro forma impact of a combination of TBS with Time Warner on the financial condition and results of operations of the combined entity. The Time Warner Board also considered the dilutive effect of the issuance of additional stock in connection with the Transaction and the likely effect of such issuance on the earnings per share and cash flow of the combined entity. The Time Warner Board reviewed presentations from senior management of Time Warner with respect to the expected effect of such a combination on Time Warner's cash flow, credit statistics and balance sheet. Opinion of Morgan Stanley. At its meeting on September 22, 1995, the Time Warner Board considered as favorable to its determination the oral opinion rendered by Morgan Stanley, subsequently confirmed in writing, that, as of September 22, 1995, and based upon and subject to the matters expressed in that opinion, the ratio contemplated by the Merger Agreement for the exchange of Time Warner Common Stock for TBS Capital Stock and the consideration to be paid by Time Warner for the option to acquire SSSI as contemplated by the Prior TCI Arrangements, taken together, were fair to Time Warner from a financial point of view. At the meeting of the Time Warner Board held on August 8, 1996, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that, as of August 8, 1996, the ratio contemplated by the Merger Agreement for the exchange of New Time Warner Common Stock for TBS Capital Stock and the consideration to be paid by New Time Warner for the SSSI Option and the LMC Non-competition Covenant, taken together, were fair to New Time Warner and its subsidiary, Time Warner, from a financial point of view. See "--Opinion of Time Warner's Financial Advisor" below. The Time Warner Board also considered the oral and written presentations made to it 42
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by Morgan Stanley (see "--Opinion of Time Warner's Financial Advisor" below) at the meetings of the Time Warner Board held on September 21, 1995 and August 8, 1996, including the analysis by Morgan Stanley of recent comparable acquisition transactions in the entertainment and media industries. The written opinion of Morgan Stanley to the Time Warner Board, dated as of August 8, 1996, is attached hereto as Appendix C-1 and is incorporated herein by reference. Time Warner requested that the opinion of Morgan Stanley specifically address the consideration to be paid by New Time Warner pursuant to the SSSI Agreement in light of the amount of such consideration and the fact that such consideration is to be paid by New Time Warner to a TBS shareholder (namely LMC and its affiliate SSSI). Time Warner management did not believe that the Morgan Stanley Opinion needed specifically to refer to the other components of the TCI Arrangements due to the fact that such other components either involved transactions that were in the nature of operational agreements or did not involve consideration that Time Warner management believed to be material to the evaluation of the fairness, from a financial point of view, of the Transaction taken as a whole. In the course of its due diligence (as discussed below under "--Opinion of Time Warner's Financial Advisor"), Morgan Stanley did, however, review certain of the other Transaction Agreements in connection with the issuance of the Morgan Stanley Opinion. Conditions, Termination Provisions and Termination Fee. The Time Warner Board reviewed the conditions to consummation of the Transaction and the circumstances under which Time Warner or TBS would have the right to terminate the Merger Agreement. In that connection, the Time Warner Board considered the provisions of the Merger Agreement that prohibit TBS from soliciting or encouraging alternative acquisition proposals or, subject to the fiduciary duties of the TBS Board, from negotiating with any third parties with respect to alternative proposals. The Time Warner Board also considered the terms of the Support Agreement and the LMC Agreement, pursuant to which TBS shareholders who, together with Time Warner, beneficially own a majority of each class of outstanding TBS Capital Stock would agree to vote all such shares in favor of the TBS Merger Proposal. The Time Warner Board also reviewed the various amounts that might be payable by or to Time Warner if the Merger Agreement were terminated under certain circumstances. See "The Merger Agreement--Termination of the Merger Agreement" and "--Effects of Termination." Arrangements with TCI. In evaluating the Transaction, the Time Warner Board took into account the terms of the TCI Arrangements. The Time Warner Board considered the terms of the SSSI Agreement, pursuant to which (a) New Time Warner will issue to SSSI 4,166,667 shares of LMC Reduced Voting Common Stock in consideration for the SSSI Option and (b) New Time Warner will issue to LMC 833,333 shares of LMC Reduced Voting Common Stock and will pay to LMC approximately $67 million (payable, at New Time Warner's option, in cash or additional shares of LMC Reduced Voting Common Stock) and LMC will agree to the LMC Non-competition Covenant. The Time Warner Board discussed with senior management of Time Warner the business opportunities that may arise from the WTBS Conversion and the Distribution Contract. The Time Warner Board also noted that the fairness opinion issued by Morgan Stanley took into account the payments to be made by New Time Warner as consideration for the SSSI Option and the LMC Non-competition Covenant. The Time Warner Board also considered that the payments to be made by New Time Warner pursuant to the SSSI Agreement and the Distribution Contract will be tax-deductible to New Time Warner. The Time Warner Board also reviewed the terms of the LMC Agreement, including the provisions pursuant to which (a) under certain circumstances, TCI would be entitled to require that the Transaction be abandoned, (b) if the Transaction were consummated, New Time Warner would be required to indemnify LMC and certain of its affiliates against certain income tax liabilities that may be incurred in the event that the activities of New Time Warner after the consummation of the Transaction require LMC or such affiliates to dispose of their shares of New Time Warner Capital Stock and (c) New Time Warner would be prevented from redeeming shares of LMC Common Stock and LMC Reduced Voting Common Stock held by LMC and its affiliates even if such redemption would be required to preserve a license or franchise from a governmental agency necessary to the business of New Time Warner. In conjunction with the discussion of the WTBS Conversion, management discussed with the Time Warner Board the Program Agreement, including the rebate arrangements available to TCI-affiliated cable systems, and the potential impact of that agreement on the combined operations of Time Warner and TBS. Management also reviewed with the Time Warner Board the terms of the other TCI Arrangements, including the PPV Output Agreement, and the recent operating performance of SportSouth and the Sunshine Network. 43
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Arrangements with Mr. Turner. The Time Warner Board considered the terms of the Transaction Agreements that provide certain rights to Mr. Turner, including his right, under certain circumstances, to designate two candidates to be nominated for election to the New Time Warner Board. The Time Warner Board also considered the general terms of the employment agreement to be entered into between New Time Warner and Mr. Turner. See "--Interests of Certain Persons in the Transaction" below. Regulatory Matters. In addition to its consideration of the conditions to the consummation of the Transaction, the Time Warner Board also specifically considered the various regulatory approvals that are necessary to consummate the Transaction, including FCC approvals and the approval of the FTC. At its meetings in September and November 1995, the Time Warner Board took into account the possibility that such approvals might not be forthcoming without changes to the terms of the Transaction Agreements or the Transaction. At its meeting held on August 8, 1996, the Time Warner Board also considered the terms of the FTC Consent Decree, including the provisions of the FTC Consent Decree relating to restrictions to be imposed on New Time Warner following the consummation of the Mergers and the changes to the terms of the Transaction Agreements that were required in order to comply with the FTC Consent Decree. See "--Regulatory Approvals" below. The Time Warner Board also noted that, pursuant to the LMC Agreement, and except for changes resulting from the FTC Consent Decree, which LMC has agreed to, LMC is not required to agree to or accept certain changes adverse to it that may be requested by any regulatory authority and that, in the event such changes were required and could not be accommodated in a manner satisfactory to LMC, Time Warner would be required, upon the written request of LMC, to terminate the Merger Agreement and abandon the Transaction. See "TCI Arrangements--LMC Agreement." Certain Stockholder Matters. The Time Warner Board, in evaluating the Transaction, also considered the effect that the Transaction would have on the composition of the stockholder body of New Time Warner relative to that of Time Warner. In particular, the Time Warner Board considered the restrictions that would be placed on the shares of New Time Warner Common Stock that would be held by Mr. Turner, as described under "Certain Related Agreements--Rights Amendment" and "--Investors' Agreements," and LMC, as described under "-- Regulatory Approvals" below. RECOMMENDATION OF THE TBS BOARD; TBS'S REASONS FOR THE TRANSACTION At TBS Board meetings held on August 30, 1995 and September 21 and 22, 1995, the TBS Board received and considered the presentations of the management of TBS and its legal advisors and investment bankers regarding the proposed transaction. On September 22, 1995, the TBS Board, with nine directors not present or abstaining on the basis that they were interested directors with respect to the proposed transaction, unanimously approved the terms of the Merger Agreement and the other Transaction Agreements to be executed by TBS or its subsidiaries and determined that the Transaction was fair to and in the best interests of TBS and its shareholders. Thereafter, on November 21, 1995, the TBS Board considered the amendment and restatement of the Merger Agreement to revise the transaction structure such that Time Warner and TBS would each become a wholly owned subsidiary of a holding company and to make other revisions negotiated by the parties. At this meeting, the TBS Board (with nine directors either not present or abstaining on the basis that they were interested directors) unanimously approved the Merger Agreement as so amended and restated. On August 8, 1996, the TBS Board held a meeting at which presentations were made by TBS senior management and legal and financial advisors to TBS with respect to the FTC Consent Decree and the changes to the Transaction Agreements required thereby (see "--Regulatory Approvals--FTC Consent Decree" below). At such meeting, the TBS Board (with nine directors either not present or abstaining on the basis that they were interested directors) unanimously approved the FTC Consent Decree and the Transaction Agreements to be entered into by TBS and its subsidiaries as so amended and determined that the Transaction was fair to and in the best interests of TBS and its shareholders. See "--Background" above. THE TBS BOARD HAS DETERMINED THAT THE TRANSACTION IS FAIR TO AND IN THE BEST INTERESTS OF TBS AND ITS SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS OF TBS VOTE FOR THE TBS MERGER PROPOSAL. In reaching its determination to approve the Transaction, the TBS Board considered a number of factors, including, without limitation, the factors listed below. In view of the number and wide variety of factors 44
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considered in connection with its evaluation of the Transaction, the TBS Board did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. At its meetings held on August 30, September 21 and 22, November 21, 1995 and August 8, 1996, the TBS Board did not consider alternative transactions to the Transaction, other than TBS continuing as an independent entity. Management's Recommendation. The TBS Board received and reviewed presentations from, and discussed the terms and conditions of the Merger Agreement and the Transaction with, senior executive officers of TBS, representatives of its legal counsel and representatives of its investment bankers. The TBS Board considered management's view of recent trends in the entertainment and media industries, including recently announced acquisitions and business combinations in such industries. The TBS Board considered management's view that the combination of Time Warner, a leading content provider in the global entertainment industry with strong positions in critical distribution channels, with TBS, another leading content provider, especially with respect to cable programming, would create a significantly stronger global competitor in the entertainment and media industries. In making its determination, the TBS Board considered that the Transaction would benefit the shareholders of TBS because they would participate in the value that may be generated through the combination of the two companies through their continued equity participation as stockholders of New Time Warner. TBS's Business, Condition and Prospects. In evaluating the terms of the Transaction, the TBS Board considered information with respect to the historical growth and the financial condition, results of operations, prospects and businesses of TBS, as well as current industry, economic and market conditions. In evaluating TBS's prospects, the TBS Board considered the strengths of TBS's cable programming business, the recent strength of the advertising market and the performance of TBS's growing filmed entertainment production operations, as well as the challenges facing its businesses, including higher programming and production costs, increasing capital demands and competition from the traditional broadcast media as well as emerging distribution channels. In addition, senior management of TBS noted that, in certain cases, the goals of the major shareholders of TBS had diverged, and such shareholders did not share a vision of the future of TBS. The TBS Board considered these factors and the potential for conflicts among the shareholder groups created by the existing TBS governance arrangements. Comparison of Historical and Recent Market Prices of TBS Common Stock to the Market Price of the Transaction Consideration. The TBS Board reviewed the historical market prices and recent trading activity of the TBS Class A Common Stock and the TBS Class B Common Stock. The TBS Board considered the value to be received per share of TBS Class A Common Stock and TBS Class B Common Stock (which, as of August 29, 1995, the last trading day prior to the announcement that TBS and Time Warner were engaged in merger discussions, represented a premium of more than 34.5% and 32.4%, over the respective closing sale prices on such date). The TBS Board also noted that the value to be received by holders of TBS Class A Common Stock and TBS Class B Common Stock pursuant to the TBS Merger was within the reference range of multiples paid in selected acquisitions of other companies deemed to be comparable to TBS contained in CS First Boston's analysis. At its meeting held on August 8, 1996, the TBS Board considered information regarding the historical market prices for the Time Warner Common Stock, the TBS Class B Common Stock and a peer group of other entertainment and media companies (comprised of The Walt Disney Corporation ("Disney"), The News Corporation Limited ("News Corp."), TCI and Viacom Inc. ("Viacom")) during the period from August 29, 1995 through August 2, 1996. The TBS Board considered the fact that the Merger Agreement does not contain any provisions that either limit the effect of changes in the price of Time Warner Common Stock prior to consummation of the Mergers on the value of the consideration to be received by the holders of TBS Common Stock in the Transaction or permit TBS to terminate the Merger Agreement based upon such changes and that, accordingly, the value of such consideration could change depending upon the performance of Time Warner Common Stock between the execution of the Merger Agreement and the consummation of the Mergers. While recognizing that the absence of such provisions exposed the TBS shareholders to some market risk, the TBS Board considered this risk to be 45
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mitigated by (a) a review of the historical trading prices of both the Time Warner Common Stock and the TBS Common Stock and the fact that, generally, industry changes affecting Time Warner Common Stock should similarly affect TBS Common Stock and (b) the fact that TBS shareholders would be able to participate in any appreciation in the value of Time Warner Common Stock between the announcement of the Transaction and the consummation of the Mergers. The TBS Board also recognized that, while such provisions might provide limited protection against declines in the share price of the New Time Warner Common Stock to be received, they also generally would limit the benefits from any appreciation in that price. Consideration Payable to Holders of TBS Class C Preferred Stock. In evaluating the terms of the Transaction, the TBS Board considered that the holders of TBS Common Stock would receive 0.75 of a share of New Time Warner Common Stock per share of TBS Common Stock and that the holders of TBS Class C Preferred Stock would receive 4.80 shares of New Time Warner Common Stock per share of TBS Class C Preferred Stock, equivalent to 0.80 of a share of New Time Warner Common Stock per share of TBS Class B Common Stock into which each share of TBS Class C Preferred Stock is convertible. The TBS Board considered (a) that, by virtue of the class voting rights to which holders of the TBS Class C Preferred Stock are entitled under the TBS Articles, the holders of such shares as a group and, by virtue of the TCI/Time Agreement, TCI individually in its capacity as a holder of such shares, has the ability to veto the Transaction, (b) its understanding that TCI was not willing to vote in favor of the Transaction absent the higher exchange ratio for shares of TBS Class C Preferred Stock, (c) the significant benefits which the TBS Board believed would accrue to holders of TBS Capital Stock as a result of the Transaction, (d) the range of premiums paid in other transactions involving multiple classes of stock, although the TBS Board recognized that there were a small number of such transactions, that each transaction was highly individualized and none was precisely comparable, and that in most cases no premium was paid to a given class of stock, and (e) the opinions of CS First Boston and Merrill Lynch. Time Warner's Business, Condition and Prospects. The TBS Board considered, among other things, certain publicly available information with respect to the financial condition and results of operations of Time Warner and the five business segments in which Time Warner operates and limited prospective financial data supplied by Time Warner with respect to Time Warner's publishing and music businesses and cable systems owned directly by Time Warner and for TWE and discussed such information with CS First Boston. Lack of Other Proposals. In evaluating the Transaction, the TBS Board also considered that no other parties had proposed or expressed an interest in exploring a business combination with TBS, particularly in view of the fact that any party that desired to do so would have had sufficient time to make an alternative proposal during the period between the August 30, 1995 joint announcement by TBS and Time Warner that they were in discussions regarding a possible business combination and the September 21-22, 1995 meeting of the TBS Board. In evaluating this factor, the TBS Board also took into consideration the existing governance arrangements that would permit any of Time Warner, Mr. Turner or TCI to veto any merger proposal relating to TBS and the provisions of the TBS Shareholders' Agreement relating to the Cable Operators' right of first refusal on Mr. Turner's shares of TBS Common Stock and the "take-along" provisions with respect to the shares of TBS Capital Stock owned by the Cable Operators applicable to certain sales of TBS Common Stock by Mr. Turner. In light of the arrangements described above and the fact that the TBS Merger represented a unique strategic combination for TBS, the TBS Board did not solicit other indications of interest from third parties with respect to the possible acquisition of TBS or any of its businesses, nor did it authorize or instruct its financial advisors to solicit any such indications of interest. Termination Provisions and Termination Fee. The TBS Board considered the provisions of the Merger Agreement that permit the TBS Board to terminate the Merger Agreement if an alternative proposal is received that the TBS Board determines, in the exercise of its fiduciary duties, to accept, upon the payment to Time Warner of a fee of $175 million (approximately 2.3% of the transaction value as of the time the Merger Agreement, as originally executed, was entered into). See "The Merger Agreement--Termination of the Merger Agreement" and "--Effects of Termination." The TBS Board considered the view of its legal advisors that the 46
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termination fee specified in the Merger Agreement was within the range of such fees agreed to be paid in transactions of comparable size and determined that such fee was not likely, in and of itself, to preclude an alternative proposal. The TBS Board also was aware that Mr. Turner and affiliates of TCI had agreed to enter into the Support Agreement and the LMC Agreement, respectively, pursuant to which, subject to certain conditions, each agreed to vote for the Transaction and that the Support Agreement contained certain provisions requiring Mr. Turner to pay to Time Warner any amounts received as a result of an alternative transaction in excess of the value that would have been received by Mr. Turner and certain of his affiliates in the Transaction. See "Certain Related Agreements--Support Agreement." In making its determination the TBS Board considered the effect of such provisions and the existing TBS governance arrangements on the likelihood that Mr. Turner, TCI or Time Warner could or would support an alternative transaction. Opinions of CS First Boston and Merrill Lynch. The TBS Board considered the oral opinions rendered by CS First Boston on September 22, 1995, November 21, 1995 and August 8, 1996 (subsequently confirmed in writing) to the effect that, as of the dates of such opinions and based upon and subject to the matters stated therein, the consideration to be received by the holders of TBS Capital Stock (other than Time Warner and its affiliates) pursuant to the TBS Merger was fair to such holders from a financial point of view. At its September 22, 1995 meeting, the TBS Board also considered the oral opinion rendered by Merrill Lynch on such date (subsequently confirmed in writing) to the effect that, as of the date of such opinion and based upon and subject to the matters stated therein, (a) the consideration to be received by shareholders of TBS (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (b) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the Prior TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). In addition, the TBS Board considered the oral advice by Merrill Lynch to the TBS Board on November 21, 1995 (subsequently confirmed in writing), that the amendments to the Merger Agreement did not alter its opinion previously delivered to the TBS Board to the effect that as of September 22, 1995 Merrill Lynch was of the opinions set forth therein. Furthermore, the TBS Board considered the oral opinion rendered by Merrill Lynch on August 8, 1996 (subsequently confirmed in writing) to the effect that, as of the date of such opinion and based upon and subject to the matters stated therein, (a) the consideration to be received by shareholders of TBS (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (b) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). The TBS Board also considered the oral and written financial presentations of CS First Boston and Merrill Lynch. See "--Opinions of TBS's Financial Advisors" below. The written opinions to the TBS Board of CS First Boston and of Merrill Lynch, each dated as of August 8, 1996, are attached hereto as Appendices C-2 and C- 3, respectively, and are incorporated herein by reference. Arrangements with TCI and its Affiliates. The TBS Board considered the terms of the TCI Arrangements being concurrently entered into by TBS and by Time Warner with TCI and its affiliates. See "TCI Arrangements." The TBS Board evaluated the TCI Arrangements in light of (a) the presentation by TBS management and TBS's legal advisors and, at the August 8, 1996 meeting, by legal advisors to Time Warner, as to the terms of the TCI Arrangements, (b) TCI's ability as a shareholder to veto the Transaction, (c) the understanding of the TBS Board that TCI was not willing to vote its shares of TBS Capital Stock in favor of the Transaction in the absence of the TCI Arrangements, (d) the significant benefits that the TBS Board believed would accrue to holders of TBS Capital Stock as a result of the Transaction, (e) the expected benefits to each of TBS and Time Warner of the TCI Arrangements and (f) information regarding the range of values represented in the aggregate by such arrangements. The TBS Board also reviewed and considered the presentation of Merrill Lynch with respect to the ranges of values represented by each of the TCI Arrangements and the opinion of Merrill Lynch to the effect that, as of August 8, 1996, and based upon and subject to the matters stated therein, in the context of the governance arrangements relating to TBS's ability to consummate the Transaction, the financial terms of the TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). 47
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Ability of the Shareholders of TBS to Obtain a Continuing Equity Interest in New Time Warner. The TBS Board considered that, pursuant to the terms of the Transaction, holders of TBS Capital Stock will receive equity securities of New Time Warner, thus enabling TBS shareholders to participate in the value that may be generated through the combination of the two companies through their continued equity participation as stockholders of New Time Warner, while realizing an immediate premium for their TBS shares and obtaining tax-free treatment. The TBS Board also considered that New Time Warner will have considerably greater market capitalization and public float than TBS, thus providing TBS shareholders who become stockholders of New Time Warner with enhanced liquidity. The TBS Board also considered that the voting power of TBS is currently concentrated and that, by virtue of the existing TBS governance arrangements, each of Mr. Turner, Time Warner and TCI has the ability to veto certain significant transactions, including certain changes of control of TBS. In evaluating the Transaction, the TBS Board reviewed the pro forma stock ownership of New Time Warner Common Stock following the Transaction and considered the fact that no stockholder would control New Time Warner and that shareholders of TBS who become stockholders of New Time Warner would retain the potential for obtaining a premium for their shares in the event of any subsequent change of control of New Time Warner, although the TBS Board also considered the fact that the total capitalization of New Time Warner after the consummation of the Mergers would limit the number of potential purchasers of New Time Warner. OPINION OF TIME WARNER'S FINANCIAL ADVISOR At the meeting of the Time Warner Board that began on September 21, 1995, Morgan Stanley delivered its oral opinion to the Time Warner Board that, as of September 22, 1995, the ratio contemplated by the Merger Agreement for the exchange of Time Warner Common Stock for TBS Capital Stock and the consideration to be paid by Time Warner for the option to acquire SSSI as contemplated by the Prior TCI Arrangements, taken together, were fair to Time Warner from a financial point of view (the "Original Morgan Stanley Opinion"). Morgan Stanley confirmed its oral opinion in a written opinion dated as of September 22, 1995. In connection with the amendment and restatement of the Merger Agreement in November 1995, the Time Warner Board requested that Morgan Stanley update the Original Morgan Stanley Opinion, and Morgan Stanley subsequently delivered a revised opinion dated as of November 16, 1995, confirming as of such date the Original Morgan Stanley Opinion. At the meeting of the Time Warner Board held on August 8, 1996, Morgan Stanley delivered its oral opinion, that as of such date, the ratio contemplated by the Merger Agreement for the exchange of New Time Warner Common Stock for TBS Capital Stock (the "Exchange Ratio") and the consideration to be paid by New Time Warner for the SSSI Option and the LMC Non-competition Covenant (the "SSSI Agreement Consideration"), taken together, were fair to New Time Warner and its subsidiary, Time Warner, from a financial point of view. Morgan Stanley confirmed its oral opinion in a written opinion dated August 8, 1996 (the written opinion of Morgan Stanley dated August 8, 1996 is referred to as the "Morgan Stanley Opinion"). Morgan Stanley has consented to the inclusion of the Morgan Stanley Opinion as Appendix C-1 to this Joint Proxy Statement/Prospectus. A COPY OF THE MORGAN STANLEY OPINION IS ATTACHED HERETO AS APPENDIX C-1. STOCKHOLDERS OF TIME WARNER ARE URGED TO READ THE MORGAN STANLEY OPINION IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY MORGAN STANLEY IN RENDERING THE MORGAN STANLEY OPINION. REFERENCES TO THE MORGAN STANLEY OPINION HEREIN AND THE SUMMARY OF THE MORGAN STANLEY OPINION SET FORTH BELOW ARE QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE MORGAN STANLEY OPINION, WHICH IS INCORPORATED HEREIN BY REFERENCE. THE MORGAN STANLEY OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY TIME WARNER STOCKHOLDER OR TBS SHAREHOLDER AS TO HOW SUCH STOCKHOLDER OR SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE TW MERGER PROPOSAL OR THE TBS MERGER PROPOSAL AND SHOULD NOT BE RELIED UPON BY ANY TIME WARNER STOCKHOLDER OR TBS SHAREHOLDER AS SUCH. In arriving at its opinion, Morgan Stanley (a) reviewed the publicly available consolidated financial statements of Time Warner for recent fiscal years and interim periods, and other relevant financial and operating data of Time Warner from published sources, as well as information made available to Morgan Stanley by Time Warner, including information derived from due diligence discussions with Time Warner senior management 48
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and discussed with Time Warner senior management their views regarding future business, financial and operating benefits arising from the Transaction, including such benefits from the possible exercise of the SSSI Option, (b) reviewed the publicly available consolidated financial statements of TBS for recent fiscal years and interim periods, and other relevant financial and operating data of TBS from published sources, as well as limited information made available to Morgan Stanley by TBS, including information derived from due diligence discussions with TBS senior management relating to the benefits from the possible exercise of the SSSI Option, and conducted other due diligence discussions with senior management of TBS, (c) analyzed the estimated pro forma financial impact of the Transaction, including the impact on Time Warner's consolidated capitalization and financial ratios, (d) reviewed the historical market prices of Time Warner Common Stock and TBS Common Stock, (e) analyzed published information regarding certain relevant companies and their equity securities and compared the financial performance of TBS and the prices and trading activity of TBS Common Stock with those other companies and their equity securities, (f) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions, (g) reviewed financial information prepared by the management of Time Warner and limited financial information prepared by the management of TBS, (h) participated in certain due diligence discussions among representatives of TBS and Time Warner and their financial and legal advisors, (i) reviewed the executed version of the amended and restated Merger Agreement and drafts of Amendment No. 1 to the Merger Agreement and the SSSI Agreement and related documents in the forms identified by Time Warner as those to be entered into by the parties and (j) performed such other analyses and examinations (as more fully described below) as Morgan Stanley deemed appropriate. In connection with its review, Morgan Stanley did not assume any responsibility for independent verification of any of the foregoing information and relied on its being complete and accurate in all material respects. With respect to the financial projections supplied to Morgan Stanley by Time Warner, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of Time Warner senior management of the future competitive, operating and regulatory environments and related financial performance of Time Warner. Morgan Stanley requested from TBS financial projections or long- range financial forecasts, and was provided with limited financial forecasts and financial targets prepared by TBS management for certain business segments of TBS and was orally provided with the views of TBS management as to expected results of operations of TBS over a two-year period. Furthermore, Morgan Stanley assumed no responsibility for conducting a physical inspection of the properties or facilities of Time Warner or TBS or for making or obtaining any independent valuation or appraisal of the assets or liabilities of Time Warner or TBS, nor was Morgan Stanley furnished with any such valuations or appraisals. Morgan Stanley noted that the Mergers are intended to qualify as reorganizations within the meaning of Section 368(a) of the Code and/or as exchanges under Section 351 of the Code, and assumed with the consent of Time Warner that the Mergers would so qualify. Morgan Stanley relied, without independent verification, upon the assessment of the managements of Time Warner and TBS of the amount and timing of potential cost savings and revenue enhancements realizable as a result of the Transaction, including the WTBS Conversion. The Morgan Stanley Opinion is necessarily based on economic, market and other conditions as in effect on, and any information and agreements made available to it as of, the date thereof. Morgan Stanley assumed that the transactions described in the Merger Agreement would be consummated on the terms set forth therein. Morgan Stanley assumed that the executed versions of Amendment No. 1 to the Merger Agreement and the SSSI Agreement would not differ in any material respect from the forms Morgan Stanley reviewed and that, if the SSSI Option were exercised, the exercise thereof would be consummated on the terms set forth therein. Morgan Stanley did not express any opinion as to the price or range of prices at which the New Time Warner Common Stock might trade subsequent to the consummation of the Transaction. At the August 8, 1996 meeting of the Time Warner Board, Morgan Stanley reviewed with the members of the Time Warner Board the financial, industry and market information with respect to TBS used by Morgan Stanley in its analyses as described below and the procedures used and the analyses underlying the Morgan Stanley Opinion. The summary set forth below does not purport to be a complete description of the Morgan Stanley Opinion or Morgan Stanley's analyses relating thereto. The preparation of a fairness opinion is a complex 49
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process that is not purely mathematical and is not necessarily susceptible to partial analyses or summary description. It involves complex considerations and judgments. Time Warner stockholders are encouraged to read the Morgan Stanley Opinion in its entirety. The following is a summary of all material analyses performed by Morgan Stanley in connection with the Morgan Stanley Opinion. The principal methods that Morgan Stanley used in assessing the fairness of the Exchange Ratio and the SSSI Agreement Consideration to New Time Warner and its subsidiary, Time Warner, as of August 8, 1996 were (a) an analysis of the variance of TBS's actual 1995 operating results and the 1996 operating results forecast by TBS management in June 1996 ("TBS 1996 Forecast"), from the 1995 operating results forecast by TBS management in August 1995 ("TBS 1995 Forecast") and TBS management's 1996 budget ("TBS 1996 Budget"), respectively, (b) an analysis of Time Warner's historical public market trading values as compared to a blended cable television and entertainment company index composed of the stocks of Cablevision Systems Corporation ("Cablevision Systems"), Cox Communications, Inc. ("Cox"), Comcast, TCI (adjusted for the distribution of the Liberty Media Group Common Stock by TCI), Disney, News Corp. and Viacom (the "Cable/Entertainment Index"), (c) an analysis of Time Warner's historical share price since August 29, 1995 as compared to companies included in the Cable/Entertainment Index and U S WEST Media Group ("UMG" and, together with the Cable/Entertainment Index, the "Modified Cable/Entertainment Index"), (d) an analysis of multiples paid in the Transaction and in certain precedent acquisition transactions, (e) an analysis of aggregate value multiples of certain cable television programming and diversified entertainment companies and (f) a discounted cash flow analysis with respect to TBS. Transaction Overview At the August 8, 1996 meeting of the Time Warner Board, Morgan Stanley presented a summary of the principal economic terms of the Merger Agreement, the SSSI Agreement and the Distribution Contract. Morgan Stanley noted that, based upon a weighted average exchange ratio of 0.759 shares of New Time Warner Common Stock for each share of TBS Common Stock, the nominal purchase price pursuant to the Merger Agreement, based upon the $36.50 closing price of Time Warner Common Stock on August 6, 1996, was approximately $27.71 per share of TBS Common Stock, as compared to the approximately $32.17 nominal purchase price per share of TBS Common Stock pursuant to the original Merger Agreement based upon the $42.375 unaffected closing price of Time Warner Common Stock on August 29, 1995. Morgan Stanley also noted that, based upon the $36.50 closing price of Time Warner Common Stock on August 6, 1996, assuming exercise of the SSSI Option by New Time Warner, the estimated cost of the consideration payable by New Time Warner pursuant to the SSSI Agreement and the Distribution Contract was approximately $360 million (assuming that such payments would be deductible for Federal and state income tax purposes), as compared to the estimated $370 million cost for the option to acquire SSSI as contemplated by the Prior TCI Arrangements (assuming exercise of such option by New Time Warner and based upon the $42.375 unaffected closing price of Time Warner Common Stock on August 29, 1995.) TBS Operating Performance Variance Analysis At the August 8, 1996 meeting of the Time Warner Board, Morgan Stanley presented a comparison of the actual results of operations for 1995 for each of the major business segments of TBS (comprised of Cable Networks, News, Film Production and Distribution, and real estate, sports-related assets and certain other assets ("Real Estate/Sports Segment")), as compared to the TBS 1995 Forecast provided to Morgan Stanley by TBS management in August 1995, as well as a comparison of the operating performance of these segments contained in the TBS 1996 Forecast provided to Morgan Stanley in June 1996 by TBS management, to the 1996 TBS Budget provided to Morgan Stanley. Morgan Stanley noted that actual results for 1995 revenue and earnings before interest, taxes, depreciation and amortization expenses ("EBITDA") were favorable, as compared to the TBS 1995 Forecast, for each of these business segments (other than EBITDA results for the Film Production and Distribution Segment). Morgan Stanley also noted that the TBS 1996 Forecast showed favorable revenue variances for the Cable Networks, News and Real Estate/Sports segments (and a negative variance for the Film Production and Distribution segment) as compared to the 1996 TBS Budget, and no variance in forecast 1996 EBITDA for the Cable Networks and News segments (and negative variances for the Film Production and 50
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Distribution and Real Estate/Sports segments) as compared to the 1996 TBS budget. Morgan Stanley noted that, notwithstanding the negative variances at the Film Production and Distribution Segment of TBS, which consists primarily of New Line and Castle Rock (the "Studios"), in connection with its analyses underlying the Morgan Stanley Opinion, Morgan Stanley continued to assume the same asset value for the Studios (based on historical cost) that it had assumed in connection with its analyses underlying the Original Morgan Stanley Opinion. Comparable Time Warner Share Price Analysis At the August 8, 1996 meeting of the Time Warner Board, Morgan Stanley reviewed the share price performance of Time Warner Common Stock for the period from August 29, 1992 through August 6, 1996, as compared to the performance of the Cable/Entertainment Index. The Cable/Entertainment Index was based on the assumption that Time Warner's estimated 1996 EBITDA would be contributed approximately 41% by its cable operations and 59% by its diversified entertainment operations. Specifically, Morgan Stanley noted that Time Warner Common Stock had in general performed consistently with the Cable/Entertainment Index for the period of comparison. Morgan Stanley also presented an analysis of the share price performance of Time Warner Common Stock as compared to each of the companies included in the Modified Cable/Entertainment Index from August 29, 1995 to August 6, 1996. Morgan Stanley noted that, with the exception of Disney, each of the Modified Cable/Entertainment Index companies experienced a decline in its stock price and that the 13.9% decline in the Time Warner Common Stock price was below the 15.0% mean decline experienced by all such companies contained in the Modified Cable/Entertainment Index (ranging from a 4.7% stock price increase in the case of Disney, to a 38.6% stock price decline in the case of Cablevision Systems). Acquisition Multiples Analysis At the August 8, 1996 meeting of the Time Warner Board, Morgan Stanley reviewed and analyzed selected acquisition transactions involving other companies in the entertainment and media industries that it deemed relevant. Among other factors, Morgan Stanley indicated that the merger and acquisition transaction environment varies over time because of macroeconomic factors such as interest rate and equity market fluctuations and microeconomic factors such as industry results and growth expectations. Morgan Stanley noted that no transaction reviewed was identical to the Transaction and that, accordingly, an assessment of the results of the following analysis necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of TBS and other factors that would affect the acquisition value of the companies to which it is being compared. Morgan Stanley advised the Time Warner Board that, in analyzing the results of the precedent acquisition transactions analysis, the Time Warner Board should consider the size and demographic and economic characteristics of the markets of each company and the competitive environment in which it operates. Morgan Stanley also pointed out that the entertainment and media industries, in particular, have undergone dramatic changes in recent years and face continued dynamic evolution. In analyzing the multiple of forward and current year EBITDA represented by the aggregate acquisition price, at the August 8, 1996 meeting of the Time Warner Board, Morgan Stanley noted that, based on the $36.50 closing price for Time Warner Common Stock on August 6, 1996, Morgan Stanley's analysis yielded an aggregate value acquisition multiple for the Transaction of 15.2x based on forward year EBITDA (13.2x, after adjusting the aggregate acquisition value for the Studios (based on historical cost), the Real Estate/Sports Segment (based on private market values) and the WTBS Conversion (the "Specified Adjustments") and adjusting EBITDA for the Specified Adjustments) and 20.7x based on current year EBITDA (14.6x, after the Specified Adjustments). Morgan Stanley noted that, based on the $42.375 unaffected Time Warner Common Stock price on August 29, 1995, its analysis yielded an acquisition multiple for the Transaction of 17.2x based on forward year EBITDA (15.2x, after the Specified Adjustments) and 23.4x based on current year EBITDA (16.8x, after the Specified Adjustments). Morgan Stanley also noted that its analysis of precedent transactions yielded the following acquisition multiples based on forward and current year EBITDA, respectively: TCI- 51
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Comcast/QVC Network Inc. ("QVC"), 8.9x and 10.5x; Disney/Capital Cities/ABC Inc. ("Capital Cities"), 10.1x and 11.5x; Westinghouse Electric Corporation ("Westinghouse")/CBS Inc. ("CBS"), 12.1x and 13.0x; The Seagram Company Ltd. ("Seagram")/MCA, 12.5x and 14.2x; Matsushita/MCA, 14.1x and 17.6x; Viacom/Paramount Communications Inc. ("Paramount"), 17.6x (16.3x, after giving effect to the sale of Paramount's Madison Square Garden assets (the "MSG Assets")) and 22.3x (20.5x, after giving effect to the sale of the MSG Assets); Sony Corporation ("Sony")/Columbia Pictures Entertainment Inc. ("Columbia"), 16.2x and 22.9x; and TBS/New Line, 15.3x and 33.6x. Public Market Trading Valuation At the August 8, 1996 meeting of the Time Warner Board, Morgan Stanley also presented a comparison of the multiples derived by dividing the acquisition value of TBS in the Transaction (based on the closing price of Time Warner Common Stock on August 6, 1996) by forward and current year EBITDA, with the multiples derived by dividing the aggregate value (based on closing stock prices on August 6, 1996) of three other publicly traded cable television programming companies (Gaylord Entertainment Company ("Gaylord"), International Family Entertainment, Inc. ("International Family") and BET Holdings Inc. ("BET")) and two other publicly traded diversified entertainment companies (Viacom and Disney), by their respective forward and current year EBITDA. Specifically, Morgan Stanley noted that such multiples, after making the Specified Adjustments, and for illustrative purposes assuming incremental annual EBITDA from revenue enhancement and cost saving opportunities of $200, $100 and $0 million, respectively, were 10.3x, 11.6x and 13.2x for forward year EBITDA and 11.2x, 12.7x and 14.6x for current year EBITDA, as compared to forward year and current year EBITDA multiples of 11.3x and 13.5x for Gaylord; 9.5x and 10.7x for International Family; 7.4x and 8.9x for Viacom; 8.0x and 9.5x for Disney; and 7.4x and 8.4x for BET. The foregoing companies, in Morgan Stanley's judgment and based in part on conversations with the managements of Time Warner and TBS, were comparable to TBS for the purposes of Morgan Stanley's analysis. Morgan Stanley noted that because of differences between the business mix, operations and other characteristics of TBS and the comparable companies, Morgan Stanley did not believe that a purely quantitative comparable company analysis would be particularly meaningful in this context. Rather, Morgan Stanley believes that an appropriate use of the comparable company analysis would also involve qualitative judgments concerning differences between the financial and operating characteristics of TBS and the comparable companies, which would affect the public trading values of the common stock of the comparable companies, which judgments are incorporated in the Morgan Stanley Opinion. TBS Discounted Cash Flow Analysis Morgan Stanley also considered a 10-year discounted cash flow valuation analysis based upon limited financial forecasts previously prepared by the management of TBS for certain businesses of TBS, updated financial targets provided by TBS management in July 1996, as well as due diligence discussions with Time Warner and TBS management regarding the businesses of TBS. However, in its discounted cash flow analysis, Morgan Stanley did not give effect to any potential cost saving or revenue enhancement opportunities that may result from the Transaction. In conducting this discounted cash flow analysis, Morgan Stanley assumed discount rates of between 11% and 13%, year 2005 EBITDA exit multiples of between 11x and 13x, and adjusted for the value of the Studios based on historic cost and for certain real estate, sports teams and certain international start-up businesses based on private market value estimates. The assumed discount rates were chosen based upon an analysis of the weighted average cost of capital of TBS. The range of exit multiples used reflected different assumptions regarding the growth and profitability prospects of TBS beyond the year 2005. Based on the aforementioned projections and assumptions, this discounted cash flow analysis yielded a midpoint reference value of approximately $32 per share of TBS Common Stock. Morgan Stanley also considered the Time Warner management projections regarding incremental values associated with the WTBS Conversion. This analysis yielded an incremental reference value per share of TBS Common Stock of approximately $2, net of the estimated $360 million after-tax cost associated with the SSSI Agreement and the Distribution Contract (based on the unaffected closing price of Time Warner Common Stock 52
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on August 6, 1996 and assuming that payments to be made by New Time Warner under the SSSI Agreement and the Distribution Contract will be deductible or amortizable for Federal and state income tax purposes). Morgan Stanley's discounted cash flow analysis was utilized to create points of reference and not to suggest forecasts of valuation ranges for TBS Common Stock. In arriving at its opinion, Morgan Stanley performed a variety of financial analyses, the material portions of which are summarized above. The summary set forth above does not purport to be a complete description of the analyses performed by Morgan Stanley. In addition, Morgan Stanley believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all such factors and analyses, could create a misleading view of the process underlying the analyses set forth in its opinion. The matters considered by Morgan Stanley in arriving at its opinion are based on numerous macroeconomic, operating and financial assumptions with respect to industry performance, general business, regulatory and economic conditions and other matters, many of which are beyond the control of Time Warner and TBS. Any estimates or financial projections incorporated or used in the analyses performed by Morgan Stanley are not necessarily indicative of actual past or future results or values, which may be significantly more or less favorable than such projections or estimates. Estimated values do not purport to be appraisals and do not necessarily reflect the prices at which businesses or companies may be sold in the future. Such financial projections and estimates are inherently subject to substantial uncertainty. With respect to the financial projections and other estimates supplied or prepared by third parties and used by Morgan Stanley in its analyses, Morgan Stanley assumed that such financial projections and estimates had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the third parties that supplied or prepared such financial projections or estimates. Arriving at a fairness opinion is a complex process, not necessarily susceptible to partial summary or description. No company utilized as a comparison is identical to Time Warner or TBS or the business segment for which a comparison is being made. Accordingly, an analysis of comparable companies and comparable business combinations resulting from the transactions is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the value of the comparable companies or company to which they are being compared. The Time Warner Board selected Morgan Stanley as its financial advisor because it is an internationally recognized investment banking firm, which has substantial experience in transactions similar to the Transaction and is familiar with Time Warner and its business. Morgan Stanley is an investment banking firm engaged, among other things, in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. In the ordinary course of Morgan Stanley's trading and brokerage activities, Morgan Stanley or its affiliates may at any time hold long or short positions, may trade or otherwise effect transactions, for its own account or for the account of customers, in debt or equity securities of Time Warner and TBS. Morgan Stanley in the past has provided certain investment banking, financial advisory and financing services to Time Warner and has received customary fees and reimbursement of expenses for such services. Since January 1, 1994, Morgan Stanley has received compensation, including underwriting fees, from Time Warner for such services of approximately $33 million, other than the fee paid in connection with the Morgan Stanley Opinion. See "--Certain Fees and Expenses" below for a summary of the terms of the engagement of Morgan Stanley by Time Warner, including the fee payable by Time Warner upon consummation of the Mergers. Time Warner also retained Bear, Stearns & Co. Inc. to act as an advisor on various matters, including the Transaction. Bear, Stearns & Co. Inc. was not requested to, and did not, provide a fairness opinion to the Time Warner Board. 53
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OPINIONS OF TBS'S FINANCIAL ADVISORS OPINION OF CS FIRST BOSTON CS First Boston has acted as financial advisor to TBS in connection with the Transaction. CS First Boston was selected by TBS based on CS First Boston's experience and expertise. CS First Boston is an internationally recognized investment banking firm and is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. In connection with CS First Boston's engagement, TBS requested that CS First Boston evaluate the fairness, from a financial point of view, to the holders of TBS Capital Stock (other than Time Warner and its affiliates) of the consideration to be received by such holders in the TBS Merger. At a meeting of the TBS Board held on September 22, 1995 to evaluate the proposed transaction, CS First Boston rendered to the TBS Board an oral opinion (subsequently confirmed in writing) to the effect that, as of September 22, 1995 and based upon and subject to the matters stated therein, the consideration to be received by the holders of TBS Capital Stock (other than Time Warner and its affiliates) in the TBS Merger was fair to such holders from a financial point of view. In connection with the meeting of the Board held on November 21, 1995 to consider the amendment and restatement of the Merger Agreement to revise the transaction structure and on August 8, 1996 to approve the FTC Consent Decree and proposed amendments to the Transaction Agreements, TBS requested that CS First Boston confirm its opinions delivered on September 22, 1995 and November 21, 1995, respectively. At meetings of the TBS Board on November 21, 1995 and August 8, 1996, CS First Boston rendered to the TBS Board oral opinions (subsequently confirmed in writing) to the effect that, as of the dates of such opinions and based upon and subject to the matters stated therein, the consideration to be received by the holders of TBS Capital Stock (other than Time Warner and its affiliates) in the TBS Merger was fair to such holders from a financial point of view. In connection with the CS First Boston opinions dated November 21, 1995 and August 8, 1996, CS First Boston updated certain of the analyses performed in connection with its opinion delivered November 21, 1995 and reviewed the assumptions on which such analyses were based and the factors considered in connection therewith. In arriving at its opinion dated August 8, 1996 (the "CS First Boston Opinion"), CS First Boston (a) reviewed publicly available business and financial information relating to TBS and Time Warner, (b) reviewed other information, including financial forecasts, provided to CS First Boston by TBS and Time Warner, (c) met with the respective managements of TBS and Time Warner for due diligence discussions concerning the businesses and prospects of TBS and Time Warner, (d) reviewed the Merger Agreement, as originally executed on September 22, 1995 and amended on November 21, 1995, and drafts of Amendment No. 1 to the Merger Agreement and other related documents, including certain agreements involving TCI and certain of its affiliates, and assumed for purposes of its opinion that the final terms of such Amendment No. 1 and the other documents reviewed by CS First Boston in draft form would not vary materially from the drafts reviewed by CS First Boston and that the terms of any additional documents agreed to other than those reviewed by CS First Boston would not materially affect CS First Boston's analyses, (e) considered financial and stock market data of TBS and Time Warner and compared that data with similar data for other publicly held companies in businesses similar to those of TBS and Time Warner, (f) considered, to the extent publicly available, the financial terms of certain other business combinations and other transactions recently effected and (g) considered such other information, financial studies, analyses and investigations and financial, economic, regulatory and market criteria (as more fully described below) which CS First Boston deemed relevant. CS First Boston has consented to the inclusion of the CS First Boston Opinion as Appendix C-2 to this Joint Proxy Statement/Prospectus. In connection with its review, CS First Boston did not assume responsibility for independent verification of any of the information provided to or otherwise reviewed by CS First Boston and relied upon its being complete and accurate in all material respects. With respect to the financial forecasts reviewed, CS First Boston assumed that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of the respective managements of TBS and Time Warner as to the future financial performance of TBS and Time Warner. In addition, CS First Boston did not make an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of TBS or Time Warner, nor was CS First Boston furnished with 54
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any such evaluation or appraisal. CS First Boston's opinion was necessarily based on information available to it and financial, economic, market, regulatory and other conditions as they existed and could be evaluated on the date of its opinion. CS First Boston expressed no opinion as to what the value of New Time Warner Common Stock actually would be when issued pursuant to the Transaction or the prices at which New Time Warner Common Stock would trade subsequent to the consummation of the Transaction. CS First Boston was not requested to, and did not, solicit third party indications of interest in acquiring all or any part of TBS. Although CS First Boston evaluated the fairness of the consideration to be received by the holders of TBS Capital Stock (other than Time Warner and its affiliates) in the TBS Merger from a financial point of view, the specific consideration payable in the Transaction was determined by negotiations among the parties to the Transaction. No limitations were imposed by TBS on CS First Boston with respect to the investigations made or procedures followed by CS First Boston in connection with the rendering of its opinions. THE FULL TEXT OF THE CS FIRST BOSTON OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN BY CS FIRST BOSTON, IS ATTACHED HERETO AS APPENDIX C-2 AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF TBS CAPITAL STOCK ARE URGED TO READ THE CS FIRST BOSTON OPINION CAREFULLY IN ITS ENTIRETY. THE CS FIRST BOSTON OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY HOLDERS OF TBS CAPITAL STOCK (OTHER THAN TIME WARNER AND ITS AFFILIATES) IN THE TBS MERGER FROM A FINANCIAL POINT OF VIEW, DOES NOT CONSTITUTE AN OPINION WITH RESPECT TO ANY OTHER ASPECT OF THE TRANSACTION OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY TBS SHAREHOLDER OR TIME WARNER STOCKHOLDER AS TO HOW SUCH SHAREHOLDER OR STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE TBS MERGER OR THE TIME WARNER MERGER. THE SUMMARY OF THE CS FIRST BOSTON OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT THEREOF. In preparing its opinions to the TBS Board, CS First Boston performed a variety of financial and comparative analyses, including those described below performed by CS First Boston in connection with the CS First Boston Opinion. The summary of CS First Boston's analyses set forth below does not purport to be a complete description of the analyses underlying the CS First Boston Opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. In arriving at its opinions, CS First Boston made qualitative judgments as to the significance and relevance of each analysis and factor considered by it. Accordingly, CS First Boston believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying such analyses and opinions. In its analyses, CS First Boston made numerous assumptions with respect to TBS, Time Warner, industry performance and regulatory, general business, economic, market and financial conditions and other matters, many of which are beyond the control of TBS and Time Warner. No company, transaction or business used in such analyses as a comparison is identical to TBS, Time Warner or the Transaction, nor is an evaluation of the results of such analyses entirely mathematical; rather, it involves complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions being analyzed. The estimates contained in such analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, such estimates are inherently subject to substantial uncertainty. The following is a summary of all the material analyses performed by CS First Boston in connection with the CS First Boston Opinion: Comparable Company Analysis. CS First Boston reviewed and compared certain financial, operating and stock market information of TBS with the following selected publicly traded entertainment companies: Time 55
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Warner, News Corp., Disney and Viacom (the "Comparable Companies"). CS First Boston compared adjusted market values (equity market value plus net debt) as a multiple of estimated fiscal 1996 and estimated fiscal 1997 revenue and operating cash flow. CS First Boston multiplied TBS's operating statistics by a range of multiples based on the trading performance of the Comparable Companies. The ranges of multiples of estimated fiscal 1996 and estimated fiscal 1997 revenues and operating cash flow for the Comparable Companies were as follows: (a) estimated fiscal 1996 and fiscal 1997 revenues: 1.9x to 2.5x and 1.7x to 2.2x, respectively; and (b) estimated fiscal 1996 and fiscal 1997 operating cash flow: 8.7x to 14.5x and 7.9x to 13.3x, respectively. All multiples were based on closing stock prices on August 2, 1996. Estimated financial information was based on, in the case of the Comparable Companies, estimates of selected investment banking firms and, in the case of TBS and Time Warner, estimates of TBS and Time Warner management. Applying multiples of estimated 1997 operating cash flow for the Comparable Companies of 10.0x to 13.0x to corresponding financial statistics for TBS resulted in an enterprise reference range for TBS of approximately $7.1 billion to $9.2 billion and an equity reference range for TBS of approximately $5.0 billion to $7.1 billion, resulting in a reference range per share of TBS Common Stock of approximately $16.50 to $23.50. Comparable Transaction Analysis. Using publicly available information, CS First Boston analyzed the adjusted purchase prices and multiples paid or proposed to be paid in the following selected media merger and acquisition transactions: A group including Tracinda Corporation and management of Metro- Goldwyn Mayer Inc. ("MGM")/MGM, U S WEST/Continental, Westinghouse/CBS, Disney/Capital Cities, Gannett Co., Inc./Multimedia, Inc., Seagram/MCA, Viacom/Blockbuster and Viacom/Paramount (the "Comparable Transactions"). CS First Boston compared adjusted purchase prices as a multiple of latest 12 months and forward year operating cash flow. The ranges of multiples of latest 12 months and forward year operating cash flow for the Comparable Transactions were as follows: (a) latest 12 months operating cash flow: 9.4x to 25.3x; and (b) forward year operating cash flow: 8.2x to 13.1x. All multiples for the Comparable Transactions were based on information available at the time of announcement of such transaction. Applying multiples of estimated 1997 operating cash flow for the Comparable Transactions of 16.5x to 19.1x to corresponding financial statistics for TBS resulted in an enterprise reference range for TBS of approximately $11.7 billion to $13.5 billion and an equity reference range for TBS of approximately $9.6 billion to $11.4 billion, resulting in a reference range per share of TBS Common Stock of approximately $32.00 to $38.00. Discounted Cash Flow Analysis. CS First Boston performed a discounted cash flow analysis of the projected unlevered free cash flow of TBS for the fiscal years ended December 31, 1996 through 2001, based upon operating and financial assumptions, forecasts and other information provided by the management of TBS. For purposes of this analysis, CS First Boston utilized discount rates of 11.5%, 12.5% and 13.5% (with particular focus on discount rates of 11.5% and 12.5%) and terminal value multiples of operating cash flow of 13.0x, 15.0x and 17.0x (with particular focus on terminal value multiples of 13.0x and 15.0x). Based on discount rates of 11.5% to 12.5% and terminal value multiples of 13.0x to 15.0x, this analysis indicated an enterprise reference range for TBS of approximately $8.9 billion to $10.5 billion and an equity reference range for TBS of approximately $6.8 billion to $8.4 billion, resulting in a reference range per share of TBS Common Stock of approximately $22.50 to $28.00. Other Factors and Analyses. In the course of preparing its opinion, CS First Boston reviewed other matters, including (a) historical and projected financial results of TBS and Time Warner, (b) trading characteristics and public market valuations of TBS and Time Warner, including the estimated public market value of Time Warner based on an analysis of the business segments of publishing, music and cable systems owned directly by Time Warner and Time Warner's investment in TWE, (c) the pro forma capitalization and ownership of the combined company and (d) the material terms of the TCI Arrangements (excluding arrangements resulting from the Program Agreement and the PPV Output Agreement). CS First Boston was not requested to, and did not, express any opinion with respect to the TCI Arrangements. CS First Boston's review of those TCI Arrangements evaluated by CS First Boston was focused primarily on the potential additional consideration to be received by TCI as a result of such TCI Arrangements. In analyzing such potential additional consideration, CS First Boston utilized an acquisition multiple of 12.0x fiscal 1996 projected operating cash flow 56
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with respect to SportSouth. CS First Boston assumed that the maximum value to TCI of the SSSI Option equaled the $155 million after-tax purchase price to be paid by Time Warner for the SSSI Option (based upon the closing price per share of Time Warner Common Stock on August 6, 1996 of $36.50 and assuming such payments are deductible by New Time Warner). CS First Boston further assumed that Time Warner would not be required to make payments to TCI under any tax indemnities or similar arrangements. Based on the foregoing and operating and financial assumptions and other information provided by or otherwise discussed with TBS management, CS First Boston derived an aggregate reference range for such potential additional consideration of approximately $15 million to $184 million. CS First Boston noted that, based on a weighted average of the per share consideration payable in the TBS Merger in respect of shares of TBS Capital Stock beneficially owned by TCI, this reference range represented potential additional consideration to TCI for its shares of TBS Capital Stock, on a TBS Common Stock equivalent basis, of approximately $1.23 to $3.77 per share. CS First Boston further noted that such potential additional consideration, if allocated among all outstanding shares of TBS Capital Stock (excluding shares beneficially owned by Time Warner and its affiliates), represented approximately $0.06 to $0.75 per share of additional potential consideration for the outstanding shares of TBS Capital Stock, on a TBS Common Stock equivalent basis. Miscellaneous. In the ordinary course of business, CS First Boston and its affiliates may actively trade the debt and equity securities of both TBS and Time Warner for their own account and for accounts of customers and, accordingly, may at any time hold a long or short position in such securities. CS First Boston in the past has provided investment banking and financial advisory services to TBS, Time Warner and certain shareholders of TBS and Time Warner in connection with a number of transactions (including debt and equity financing and merger and acquisition activities). Since January 1, 1994, CS First Boston has received compensation from TBS and Time Warner for such services of approximately $2.1 million and $0.5 million, respectively, other than the fee payable to CS First Boston in connection with the CS First Boston Opinion. See "--Certain Fees and Expenses" below for a summary of the terms of the engagement of CS First Boston by TBS. OPINION OF MERRILL LYNCH On August 8, 1996, Merrill Lynch delivered its oral opinion (which it subsequently confirmed in writing) (the "Merrill Lynch Opinion") to the TBS Board, to the effect that, as of August 8, 1996, and based upon the assumptions made, matters considered and limits of the review as set forth in such opinion, (i) the consideration to be received by holders of TBS Capital Stock (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (ii) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). For purposes of its opinion, Merrill Lynch included as part of the TCI Arrangements the incremental value to be received by TCI as a holder of shares of TBS Class C Preferred Stock as a result of the difference between the consideration to be received by holders of TBS Common Stock and holders of TBS Class C Preferred Stock, on an as-converted basis (the "Class C Premium"). Merrill Lynch has consented to the inclusion of the Merrill Lynch Opinion as Appendix C-3 to this Joint Proxy Statement/Prospectus. Merrill Lynch initially delivered an oral opinion (which it subsequently confirmed in writing) to the TBS Board on September 22, 1995 to the effect that, as of September 22, 1995, and based upon the assumptions made, matters considered and limits of the review as set forth in such opinion, (i) the consideration to be received by the holders of TBS Capital Stock (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view and (ii) in the context of the governance arrangements relating to TBS's ability to consummate the TBS Merger, the financial terms of the Prior TCI Arrangements were fair from a financial point of view to TBS and its shareholders (other than TCI and its affiliates and Time Warner). In connection with the execution of the FTC Consent Decree, the parties amended and modified the Prior TCI Arrangements and, at the request of TBS, Merrill Lynch provided the Merrill Lynch Opinion. The methodologies used by Merrill Lynch in the financial analyses relating to its September 22, 1995 opinion (the "September 22 Analyses") are similar to the methodologies used by Merrill Lynch in the financial analyses relating to the Merrill Lynch Opinion, which are described herein. Except as otherwise provided herein, the 57
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following data represents the financial analyses performed by Merrill Lynch in connection with the Merrill Lynch Opinion. A COPY OF THE MERRILL LYNCH OPINION IS ATTACHED HERETO AS APPENDIX C-3. HOLDERS OF TBS CAPITAL STOCK ARE URGED TO READ THE MERRILL LYNCH OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY MERRILL LYNCH. THE MERRILL LYNCH OPINION IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION TO BE RECEIVED BY HOLDERS OF TBS CAPITAL STOCK (OTHER THAN TCI AND ITS AFFILIATES AND TIME WARNER) IN THE TBS MERGER AND, IN THE CONTEXT OF THE GOVERNANCE ARRANGEMENTS RELATING TO TBS'S ABILITY TO CONSUMMATE THE TBS MERGER, TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE FINANCIAL TERMS OF THE TCI ARRANGEMENTS TO TBS AND ITS SHAREHOLDERS (OTHER THAN TCI AND ITS AFFILIATES AND TIME WARNER), AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY TBS SHAREHOLDER OR TIME WARNER STOCKHOLDER AS TO HOW SUCH SHAREHOLDER OR STOCKHOLDER SHOULD VOTE AT THE TBS MEETING OR THE TIME WARNER MEETING. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERRILL LYNCH OPINION. In arriving at the Merrill Lynch Opinion, Merrill Lynch (a) reviewed TBS's Annual Reports to Shareholders, Annual Reports on Form 10-K and related financial information for the five fiscal years ended December 31, 1995 and TBS's Quarterly Reports on Form 10-Q and the related unaudited financial information for the quarterly periods ended March 31, 1996 and June 30, 1996, (b) reviewed Time Warner's Annual Reports to Stockholders, Annual Reports on Form 10-K and related financial information for the five fiscal years ended December 31, 1995 and Time Warner's Quarterly Report on Form 10-Q and the related unaudited financial information for the quarterly period ended March 31, 1996, (c) reviewed information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of TBS and SportSouth furnished to Merrill Lynch by TBS, (d) reviewed information, including financial forecasts, relating to the business, earnings, cash flow, assets, and prospects of the Sunshine Network furnished to Merrill Lynch by Time Warner, (e) reviewed certain publicly available information relating to the business, earnings, cash flow, assets and prospects of Time Warner, (f) conducted due diligence discussions with members of senior management of TBS concerning its business and prospects, conducted due diligence discussions with members of senior management of Time Warner concerning its business and prospects, and conducted due diligence discussions with members of senior management of TBS, Time Warner and TCI concerning the TCI Arrangements, (g) reviewed the historical market prices and trading activity for the shares of TBS Common Stock and the shares of Time Warner Common Stock and compared them with that of publicly traded companies which Merrill Lynch deemed to be reasonably similar to TBS and Time Warner, respectively, (h) compared the results of operations of TBS and Time Warner with those of companies which Merrill Lynch deemed to be reasonably similar to TBS and Time Warner, respectively, (i) compared the proposed financial terms of the transactions contemplated by the Merger Agreement with the financial terms of other mergers and acquisitions which Merrill Lynch deemed to be relevant, (j) compared the proposed financial terms of the proposed transactions involving SportSouth and the Sunshine Network with the financial terms of other transactions which Merrill Lynch deemed to be relevant, (k) reviewed the financial terms of a limited number of transactions in which controlling shareholders or persons having the right to consent to, or effective veto power over, a transaction received different consideration than other shareholders, (l) reviewed the financial terms of a limited number of transactions in which an issuer of securities sold a non-controlling interest in the issuer to a strategic acquiror, (m) reviewed the TCI Arrangements and with respect thereto (i) prepared analyses based upon assumptions provided by TBS and Time Warner, (ii) analyzed from a financial point of view the impact of the TCI Arrangements on TBS and Time Warner and (iii) discussed its analyses with members of senior management of TBS who advised Merrill Lynch that its analyses were reasonable, (n) reviewed the Merger Agreement and a draft proxy statement relating to the Mergers, (o) reviewed a draft of the FTC Consent Decree, and (p) reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters (as more fully described below) as Merrill Lynch deemed necessary. In preparing its opinion, Merrill Lynch relied on the accuracy and completeness of all information supplied or otherwise made available to it by TBS and Time Warner, and Merrill Lynch did not independently verify 58
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such information or undertake an independent appraisal of the assets or liabilities of TBS or Time Warner. With respect to the financial forecasts furnished by TBS, Merrill Lynch assumed that they were reasonably prepared and reflected the best currently available estimates and judgment of TBS's management as to the expected future financial performance of TBS or SportSouth, as the case may be. With respect to the financial forecasts furnished by Time Warner relating to the Sunshine Network, Merrill Lynch assumed that they were reasonably prepared and reflected the best currently available estimates and judgments of Time Warner's management as to the expected future financial performance of the Sunshine Network for the period covered by the forecasts. Merrill Lynch also assumed, based on advice of TBS, that the TBS Merger could not be consummated without the support of TCI and that TCI would not support the TBS Merger unless the TCI Arrangements were entered into and effected. Merrill Lynch further assumed that (i) the payments to be made by New Time Warner in connection with the SSSI Agreement would be tax-deductible to New Time Warner and (ii) New Time Warner would not be required to make any payments to TCI under any tax indemnities or similar provisions contained in the TCI Arrangements. In addition, based upon advice of TBS senior management, Merrill Lynch assumed that the rebate arrangement with TCI under the Program Agreement would commence and terminate at specified dates in the case of each particular program service and that the terms of the PPV Output Agreement are customary for an arrangement of that type and reflect market terms and conditions. Merrill Lynch expressed no opinion as to what the value of New Time Warner Common Stock actually will be when issued to the shareholders of TBS pursuant to the TBS Merger or the prices at which New Time Warner Common Stock will trade subsequent to the Mergers. Merrill Lynch also assumed for purposes of its opinion that the terms of any additional documents that may be agreed to other than those reviewed by Merrill Lynch would not affect Merrill Lynch's analyses. In connection with the preparation of its opinion, Merrill Lynch was not authorized by TBS or the TBS Board to solicit, nor did Merrill Lynch solicit, third party indications of interest for the acquisition of all or any part of TBS. Although Merrill Lynch evaluated the fairness of the TBS Merger consideration and the TCI Arrangements from a financial point of view, Merrill Lynch was not requested to, and did not, participate in the negotiation or structuring of the Transaction or the TCI Arrangements and was not asked to, and did not, recommend or determine the specific consideration payable in the TBS Merger or the financial terms of the TCI Arrangements. The specific consideration payable in the Transaction was determined by negotiations among the parties to the Transaction. No limitations were imposed by TBS on Merrill Lynch with respect to the investigations made or procedures followed by Merrill Lynch in connection with the rendering of its opinion. Merrill Lynch provided the TBS Board with a summary of valuation results obtained by using several different valuation methods, the material portions of which are summarized below. While Merrill Lynch advised the TBS Board that the consideration to be received by the shareholders of TBS (other than TCI and its affiliates and Time Warner) pursuant to the TBS Merger was fair to such holders from a financial point of view, in light of the presentation made to the TBS Board by CS First Boston, at the request of TBS, Merrill Lynch did not provide the TBS Board with the valuation methods and analyses prepared in connection with such portion of its opinion. The following is a summary of all the material analyses performed by Merrill Lynch with respect to the TCI Arrangements. Summary Valuation of TCI Arrangements In valuing the TCI Arrangements, Merrill Lynch calculated (i) the imputed benefit to TCI for each TCI Arrangement (the "TCI Value") and (ii) the imputed (cost)/benefit to New Time Warner for each TCI Arrangement (a number in parentheses representing the cost to New Time Warner of such TCI Arrangement) (the "New Time Warner Value"). In its analysis, Merrill Lynch employed one or more of the following valuation methodologies (a) discounted cash flow analyses, (b) analyses of selected publicly traded comparable companies and/or (c) analyses of selected comparable acquisition transactions. In addition to calculating a TCI Value and a New Time Warner Value for each TCI Arrangement, Merrill Lynch also calculated (i) the aggregate TCI Value of all the TCI Arrangements as a percentage of the offer value of the TBS Merger (calculated to be $8.2 billion, based upon the market price of Time Warner Common Stock on August 7, 1996) (the "Offer Value Percentage") and (ii) the per share premium imputed to TCI with respect to all of the TCI 59
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Arrangements (defined to be the aggregate TCI Value of all the TCI Arrangements divided by the total number of TBS Common Stock equivalents owned by TCI) as a percentage of the per share consideration payable in the TBS Merger to each holder of TBS Common Stock (the "Per Share Premium Percentage"). Merrill Lynch calculated the aggregate TCI Value of all the TCI Arrangements to be $441.2 million and the aggregate New Time Warner Value of all the TCI Arrangements to be $224.3 million. The aggregate TCI Value of all the TCI Arrangements to TCI represented (a) an Offer Value Percentage of 5.4% and (b) a Per Share Premium Percentage of 24.5% (or a per share premium of $6.60). In its analyses, Merrill Lynch calculated the TCI Value and the New Time Warner Value of (i) the rebate arrangement under the Program Agreement to be $84.6 million and ($84.6) million, respectively, (ii) the SSSI Agreement (including the carriage arrangements relating to WTBS after the WTBS Conversion) to be $246.1 million and $409.4 million, respectively, (iii) the SportSouth Agreement to be $35.0 million and ($35.0) million, respectively, (iv) the Sunshine Option to be $10.0 million and $0.0, respectively, and (v) the Class C Premium to be $65.5 million and ($65.5) million, respectively. Following the delivery of its opinion, at the request of TBS management, Merrill Lynch reviewed the final terms of the Program Agreement and supplementally advised TBS that Merrill Lynch recalculated (a) the TCI Value for the Program Agreement to be $76.8 million and the New Time Warner Value for the Program Agreement to be ($76.8) million, (b) the aggregate TCI Value of all the TCI Arrangements to be $433.4 million and the aggregate New Time Warner Value of all TCI Arrangements to be $232.0 million, (c) the Offer Value Percentage of all TCI Arrangements to be 5.3% and (d) the Per Share Premium Percentage to be 24.1% (or a per share premium of $6.48). In its September 22 Analyses, Merrill Lynch calculated the aggregate TCI Value of all the Prior TCI Arrangements to be $401.2 million, representing an Offer Value Percentage of 4.4% and a Per Share Premium Percentage of 20.0% (or a per share premium of $6.00). Analysis of Premiums Paid in Selected Transactions Comparable Public Premium Analysis. Merrill Lynch compared the range of Offer Value Percentages to the premiums paid in 26 transactions from 1992 to the present in which minority interests (15%-49%) in publicly traded companies were acquired in privately negotiated transactions (each such transaction, a "Public Premium Transaction" and the company in which such minority interest was purchased referred to as the "Public Premium Target"). In connection with its analysis, Merrill Lynch reviewed the Public Premium Transactions to compare the premium payable to TCI in the TBS Merger with respect to its minority interest in TBS to premiums paid in other transactions in which a minority interest in a publicly traded company was purchased in order to analyze the incremental price a buyer would pay for a significant block of stock versus the purchase of shares on the open market. While the Public Premium Transactions are not exactly comparable to the TBS Merger (since they do not involve a sale of a minority interest with a veto power in the context of a sale of a company), Merrill Lynch conducted this analysis in order to analyze the fairness of the TCI Arrangements (and the imputed premium to TCI as a result thereof) in an alternative manner. In connection with this analysis, Merrill Lynch analyzed the aggregate economic premium (defined as the sum of (a) the market price per share multiplied by the number of shares of outstanding stock with respect to which no premium is payable and (b) the premium price per share multiplied by the number of shares of stock with respect to which such premium is payable) paid by the acquiror in each Public Premium Transaction as a percentage of the implied market value of the Public Premium Target and compared those results to the range of Offer Value Percentages. Merrill Lynch determined the range of economic premiums in the Public Premium Transactions to be (i) (5.4%) to 26.3% (based on the closing stock price one day prior to the announcement of the Public Premium Transaction) and (ii) (3.5%) to 24.4% (based on the closing stock price four weeks prior to the announcement of the Public Premium Transaction), as compared to an Offer Value Percentage of 5.4%. The Public Premium Transactions reviewed were Rebar Financial Group/Ampal-American Israel Corp.; DowElan Co./Mycogen Corp.; Travellers Inc./Taco Cabana Inc.; Telecom Holding Company Limited/Kopin Corp.; Investor Group/Micros Systems Inc.; The Anschutz Corporation/Forest Oil Corporation; Hass Wheat & Partners/Playtex Products, Inc.; Samsung Electronics Co., Ltd./AST Research, Inc.; American General Corporation/Western National Corporation; CIBA-GEIGY Limited/Chiron Corporation; France Telecom, 60
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Deutsche Telekom AG/Sprint Corporation; Nestle USA, Inc./Dreyer's Grand Ice Cream, Inc.; Electronic Data Systems Corporation/Video Lottery Technologies Incorporated; Bell Canada International, Inc./Jones Intercable, Inc.; Cadbury Schweppes P.L.C./Dr. Pepper/Seven-Up Companies, Inc.; Hyundai Electronics Industries Co., Ltd./Maxtor Corporation; Burlington Resources Inc./Permian Basin Royalty Trust; Rhone-Poulenc Rorer Inc./Applied Immune Sciences, Inc.; British Telecommunications plc/MCI Communications Corporation; Blockbuster Entertainment Corporation/Republic Pictures Corporation; Figgie International Inc./Kirschner Medical Corporation; Traco International NV/Hartmarx Corporation; Primerica Corporation/Travelers Corporation; Trian Group L.P./DWG Corporation; Archer-Daniels-Midland Company/Pilgrim's Pride Corporation; and Intel Corporation/VLSI Technology, Inc. Merrill Lynch also analyzed the per share premium paid by the acquiror in each Public Premium Transaction as a percentage of the closing stock price of the Public Premium Target (each such per share premium, a "Public Per Share Premium") and compared those results to the Per Share Premium Percentage. Merrill Lynch determined the range of Public Per Share Premiums to be (a) (16.5%) to 95.8% (based on a closing stock price one day prior to public announcement of the Public Premium Transaction) and (b) (12.6%) to 86.5% (based on a closing stock price four weeks prior to public announcement of the Public Premium Transaction), as compared to a Per Share Premium Percentage of 24.5%. The foregoing analysis of the Public Premium Transactions takes into account solely the purchase price paid for the equity interest in the Public Premium Target and does not take into account any value or detriment inherent in any strategic arrangements or other agreements that may have been entered into in connection with the Public Premium Transactions. Comparable Private Premium Analysis. Merrill Lynch compared the range of Offer Value Percentages to the premiums paid (or proposed to be paid) in ten recapitalization or acquisition transactions from 1986 to the present in which controlling shareholders were paid (or were proposed to be paid) a premium versus non-controlling or public shareholders. In conducting this analysis, Merrill Lynch reviewed the following ten transactions: General Motors Corporation's spin-off of Electronic Data Systems; recapitalization of Fischer & Porter Company; recapitalization of Bergen Brunswig Corporation; the proposed acquisition in November 1995 by Silver King Communications, Inc. ("Silver King") of Home Shopping Network, Inc. ("HSN"); The Griffin Co.'s acquisition of Resorts International, Inc.; CSX Corporation's acquisition of Sea-Land Service; Inc.; Bell Atlantic Corporation's proposed acquisition of TCI; AT&T Corp.'s proposed acquisition of McCaw Cellular Communications, Inc.; Premark International, Inc.'s acquisition of Sikes Corporation; and The Trump Group's acquisition of Pay'n Save Inc. (each a "Private Premium Transaction"). While there were numerous other instances of acquisitions of companies with dual classes of stock, the other transactions considered by Merrill Lynch did not involve the payment of a premium to controlling shareholders. Merrill Lynch compared the aggregate economic premium paid in each Private Premium Transaction as a percentage of the total consideration paid in such transaction and compared those results to the range of Offer Value Percentages. Merrill Lynch determined the value range of the economic premiums in the Private Premium Transactions to be 1.2% to 23.1%, as compared to an Offer Value Percentage of 5.4%. Merrill Lynch also analyzed the per share premium paid by the acquiror in each Private Premium Transaction as a percentage of the per share consideration paid to the other shareholders of the target company (the "Private Per Share Premium") and compared those results to the Per Share Premium Percentages. Merrill Lynch determined the range of Private Per Share Premiums to be 6.4% to 852.9%, as compared to a Per Share Premium Percentage of 24.5%. The foregoing analysis of the Private Premium Transactions takes into account solely the purchase price paid for the equity interest in the target company and does not take into account any value or detriment inherent in any strategic arrangements or other agreements that may have been entered into in connection with the Private Premium Transactions. The Merrill Lynch valuation of each TCI Arrangement is set forth in greater detail below. Program Agreement Merrill Lynch considered the value of the carriage arrangements under the Program Agreement relating to WTBS after the WTBS Conversion in its evaluation of the SSSI Agreement. Merrill Lynch assigned no value to the Program Agreement as it relates to carriage of Headline News since, while the Program Agreement provides 61
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for mandatory carriage of Headline News for a period of at least five years, the terms of such carriage are not materially more advantageous to TCI as compared to agreements with other cable systems operators. Merrill Lynch performed a discounted cash flow analysis of the value to TCI of the rebate arrangement under the Program Agreement. Merrill Lynch's calculations were based on the following principal assumptions: (i) that the rebates to TCI, in the case of each particular service, would commence and terminate at specified dates, (ii) that TCI would meet certain terms and conditions so that TCI would be entitled to the maximum rebate throughout the rebate period and (iii) certain operating assumptions provided by TBS senior management including with respect to pricing and subscriber growth rates. Utilizing discount rates ranging from 9% to 13%, Merrill Lynch calculated the TCI Value to be $84.6 million and the New Time Warner Value to be ($84.6) million. Merrill Lynch did not attempt to quantify the benefit, if any, to New Time Warner of any long-term carriage on TCI cable systems as part of its analysis described above. Following the August 8, 1996 meeting of the TBS Board, the Program Agreement was executed with certain changes from the draft of such agreement reviewed by Merrill Lynch and the TBS Board relating to the timing and duration of the rebate arrangements to which TCI would be entitled thereunder. At the request of TBS management, Merrill Lynch performed a discounted cash flow analysis of the value to TCI of the revised rebate arrangement under the Program Agreement, using the same assumptions as in the prior analysis (described in the previous paragraph). Utilizing discount rates ranging from 9% to 13%, Merrill Lynch calculated the TCI Value of the revised rebate arrangements to be $76.8 million and the New Time Warner Value of such arrangements to be ($76.8) million, as compared to the $84.6 million TCI Value and the ($84.6) million New Time Warner Value presented to the TBS Board. PPV Output Agreement Merrill Lynch assumed, based on the advice of TBS senior management, that the terms of the PPV Output Agreement are customary for an arrangement of that type and reflect market terms and conditions. SSSI Agreement Merrill Lynch performed a discounted cash flow analysis of the value of the SSSI Agreement to New Time Warner based upon discussions with TBS senior management as to the projected license revenues, advertising sales and expenses associated with the WTBS Conversion. Utilizing these projections, Merrill Lynch calculated a range of present values of the SSSI Agreement based upon the discounted net present value of the sum of (a) the projected unlevered after-tax free cash flow (defined as operating cash flow available after working capital, capital spending and tax requirements) of WTBS to the year 2007 and (b) the projected terminal value of SSSI at such year based upon a range of multiples of projected operating cash flows ("OCF") of WTBS in the year 2007. Merrill Lynch's calculations were based on the following principal assumptions: (i) operating assumptions provided by TBS senior management, including with respect to pricing and subscriber growth rates, advertising revenues and probability of carriage of WTBS by all cable operators (other than Time Warner and TCI), (ii) that New Time Warner would make quarterly payments of $7.7 million for a period of twelve years and (iii) that all payments by New Time Warner in connection with the SSSI Agreement would be deductible by New Time Warner for Federal and state income tax purposes. Utilizing this methodology, assuming New Time Warner exercised the SSSI Option and applying (i) a sensitivity analysis based on the probability of carriage of WTBS by all cable operators (other than Time Warner and TCI), (ii) discount rates ranging from 11.0% to 13.0% and (iii) multiples of terminal OCF ranging from 7.0x to 8.0x, Merrill Lynch calculated the New Time Warner Value of the SSSI Agreement to be $409.4 million (net of the $246.1 million cost of the SSSI Agreement, which amount represents the sum of (A) 5 million shares of LMC Reduced Voting Common Stock being issued to SSSI and LMC in respect of the SSSI Option and the LMC Non-competition Covenant, respectively, valued at $35.88 per share (the market price per share of Time Warner Common Stock on August 7, 1996) plus (B) an approximately $67 million payment, payable in cash or stock at New Time Warner's option). Merrill Lynch calculated the TCI Value of the SSSI Agreement to be $246.1 million based on the assumption that New Time Warner would not exercise the SSSI Option if management of New Time Warner did not believe that New Time Warner could obtain sufficient carriage of WTBS by cable operators (other than Time Warner and TCI). 62
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SportSouth Agreement Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash flow analysis of SportSouth based on its review of SportSouth's historical financial performance and projections of SportSouth's financial performance as provided by TBS senior management. Utilizing these projections, Merrill Lynch calculated a range of present values for SportSouth based upon the discounted net present value of the sum of (a) the projected unlevered after-tax free cash flow (defined as operating cash flow available after working capital, capital spending and tax requirements) of SportSouth to the year 2005 and (b) the projected terminal value of SportSouth at such year based upon a range of multiples of projected OCF of SportSouth in the year 2005. Merrill Lynch subtracted SportSouth's net indebtedness as of June 30, 1996 from each such value and multiplied the result by TBS's percentage interest in SportSouth in order to determine a range of implied values of TBS's equity interest in SportSouth. Utilizing this methodology and applying discount rates ranging from 14.0% to 16.0% and multiples of terminal OCF ranging from 10.0x to 12.0x, Merrill Lynch calculated the implied value of TBS's equity interest in SportSouth to range from $76.8 to $97.7 million. Comparable Public Company Analysis. Merrill Lynch reviewed certain publicly available financial information regarding the following four selected publicly traded basic cable network companies: Gaylord, HSN, International Family and BET (the "Public Programming Companies"). For each Public Programming Company, Merrill Lynch derived an OCF multiple by comparing the adjusted enterprise value of the Public Programming Company (determined by multiplying the closing stock price by the total outstanding shares, adding thereto net indebtedness, preferred stock and minority interests and subtracting therefrom, if required, the estimated value of all non-programming and non-consolidated assets) to its 1997 estimated OCF. Applying OCF multiples ranging from 7.0x to 10.0x, which multiples were derived from the Public Programming Companies, to SportSouth's 1997 expected OCF, Merrill Lynch calculated the implied asset value of SportSouth. Merrill Lynch subtracted SportSouth's net indebtedness as of June 30, 1996 from each such value and multiplied the result by TBS's percentage interest in SportSouth to determine a range of implied values for TBS's equity interest in SportSouth. Utilizing this methodology, the implied value of TBS's equity interest in SportSouth was calculated by Merrill Lynch to range from $57.9 to $83.9 million. Comparable Acquisition Transaction Analysis. Merrill Lynch reviewed certain publicly available information regarding ten selected business combinations of cable networks (the "Cable Comparables") and five selected business combinations in the entertainment industry (the "Entertainment Comparables"). The Cable Comparables reviewed were Comcast-TCI/QVC, Cablevision Systems--ITT Corp./Madison Square Garden Corp., K-III Communications Corp./Whittle Educational Network, LMC/Prime Ticket Inc., Capital Cities/Lifetime Television, Ellis Communications Inc./Raycom Inc., Cablevision Systems/AMC Entertainment Inc., LMC/Sportschannel Chicago Associates, Hearst Corp./ESPN Inc., the Wometco sale of its participation interest in SportSouth to TBS and TCI and the proposed acquisition in November 1995 by Silver King of HSN. The Entertainment Comparables reviewed were Viacom/Paramount, Seagram/MCA, Disney/Capital Cities, Westinghouse/CBS and the proposed acquisition of MGM by a group including Tracinda Corporation and MGM management. For each such transaction, Merrill Lynch compared the transaction value (determined by multiplying the consideration per share by the total outstanding shares of the target company, adding thereto net indebtedness, preferred stock and minority interests of the target company and subtracting therefrom, if required, the estimated value of all non-programming and non-consolidated assets of the target company) of each such transaction as a multiple of EBITDA for the last twelve months of the target company. Applying this analysis to the SportSouth transaction, Merrill Lynch calculated the transaction value of the SportSouth transaction to be 9.2x SportSouth's OCF for the twelve months ending June 30, 1996. Merrill Lynch then calculated the implied asset value of SportSouth by applying OCF multiples ranging from 10.0x to 12.0x, which multiples were derived from the Cable Comparables and the Entertainment Comparables, to SportSouth's 1997 expected OCF. Merrill Lynch subtracted SportSouth's net indebtedness as of June 30, 1996 from each such value and multiplied the result by TBS's equity interest in SportSouth to determine a range of TBS's implied equity value in SportSouth. Utilizing this methodology, the implied equity value of TBS's interest in SportSouth was calculated by Merrill Lynch to range from $83.9 to $101.3 million. 63
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Based on its analyses, Merrill Lynch calculated the TCI Value and the New Time Warner Value of the SportSouth Agreement to be $35 million and ($35) million, respectively. Sunshine Option Merrill Lynch calculated the implied offer value of the Sunshine Network to be $93.3 million based on TCI's purchase of Time Warner's approximately 15.0% indirect interest in the Sunshine Network at a purchase price of $14.0 million pursuant to the Sunshine Option. Merrill Lynch calculated the implied transaction value of the Sunshine Option to be $90.7 million (implied offer value of $93.3 million plus ($2.6) million of net indebtedness of the Sunshine Network as of June 30, 1996) and determined such value to be a 22.1x, 18.5x and 45.4x multiple of the Sunshine Network's 1995 OCF, 1996 OCF and adjusted 1996 OCF (adjusted 1996 OCF assumes that the Sunshine Network loses a significant amount of its programming rights to SportsChannel Florida, a competing regional sports programming service controlled by Front Row Communications, Inc. (an affiliate of H. Wayne Huizenga, who also controls major Florida sports teams) and annual cash flow decreases to approximately $2 million). Merrill Lynch then analyzed the value of the Sunshine Network based on the Sunshine Network's 1996 OCF and adjusted 1996 OCF utilizing OCF multiples of 10.0x to 12.0x. In addition, Merrill Lynch also analyzed the value of the Sunshine Network based on the terms of the recent sale of the Prime Ticket Network. Based on its analyses, Merrill Lynch calculated the TCI Value and the New Time Warner Value of the Sunshine Option to be $10.0 million and $0.0, respectively. Class C Premium Payable to TCI Pursuant to the TBS Merger, (a) the exchange ratio with respect to each share of TBS Common Stock is 0.75 of a share of New Time Warner Common Stock and (b) the exchange ratio with respect to each share of TBS Class C Preferred Stock (which, by its terms, is convertible into six shares of TBS Class B Common Stock) is 4.80 shares of New Time Warner Common Stock. Based on a $35.88 price per share of New Time Warner Common Stock (the closing market price of Time Warner Common Stock on August 7, 1996), Merrill Lynch calculated the aggregate Class C Premium payable to TCI with respect to its holdings of TBS Class C Preferred Stock to be $65.5 million. In arriving at the Merrill Lynch Opinion, Merrill Lynch performed a variety of financial analyses, the material portions of which are summarized above. Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all such factors and analyses, could create a misleading view of the process underlying its analyses set forth in the Merrill Lynch Opinion. Any estimates incorporated in the analyses performed by Merrill Lynch are not necessarily indicative of actual past or future results or values, which may be significantly more or less favorable than such estimates. Estimated values do not purport to be appraisals and do not necessarily reflect the prices at which businesses or companies may be sold in the future, and such estimates are inherently subject to uncertainty. No company or transaction utilized in the comparable company and comparable acquisition analyses as a comparison is identical to SportSouth or the Sunshine Network. Additionally, no Public Premium Transaction or Private Premium Transaction is identical to the Transaction or to the TCI Arrangements. Accordingly, an analysis of comparable transactions and/or comparable companies is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading value of the comparable companies or the business segment or company to which they are being compared. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Miscellaneous The TBS Board selected Merrill Lynch to render a fairness opinion because Merrill Lynch is an internationally recognized investment banking firm with substantial experience in transactions similar to the 64
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Transaction and because it is familiar with TBS and its business. Merrill Lynch has, in the past provided (and may in the future provide), financial advisory and/or financing services to TBS, Time Warner and TCI and has received fees for the rendering of such services. Specifically, since January 1, 1989, Merrill Lynch has received fees, including underwriting fees, of approximately $18 million, $122 million and $50 million from TBS, Time Warner and TCI, respectively, other than the fee paid to Merrill Lynch in connection with the Merrill Lynch Opinion. Merrill Lynch has recently provided financial advisory services to TCI in connection with other matters for which Merrill Lynch expects to receive customary compensation. In addition, an affiliate of Merrill Lynch is currently providing commercial lending services to Mr. Turner for which it receives customary compensation and Merrill Lynch may in the future provide additional services to Mr. Turner. See "Certain Fees and Expenses" below for a summary of the terms of the engagement of Merrill Lynch by TBS. PURPOSE AND CERTAIN EFFECTS OF THE TRANSACTION The purpose of the Transaction is to combine Time Warner and TBS. As a result of the Transaction, Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner. New Time Warner will derive the sole benefit of TBS's net earnings and net book value, and former holders of TBS Capital Stock will no longer have any direct interest in TBS or be able to vote with respect to the future affairs of TBS. Although former holders of TBS Capital Stock will no longer enjoy the possibility of a direct interest in any future appreciation in their equity interest in TBS, after the Transaction such former holders will enjoy the possibility of future appreciation in their equity interest in New Time Warner, which will include TBS. Registration of the TBS Common Stock under the Exchange Act may be terminated upon application of TBS to the Commission if the TBS Common Stock is neither listed on a national securities exchange nor held by more than 300 holders of record. Following consummation of the Mergers, TBS will be a wholly owned subsidiary of New Time Warner and the TBS Common Stock will be delisted from the AMEX and will no longer trade publicly. TBS expects that the TBS Common Stock will continue to be listed and traded on the AMEX until the consummation of the Transaction. Following consummation of the Mergers, New Time Warner intends to guarantee unconditionally the outstanding publicly traded indebtedness of Time Warner and TBS. As a result (subject to confirmation from the Commission), neither Time Warner nor TBS expects to continue to file financial information or other reports under the Exchange Act; however, New Time Warner intends to include summarized financial information regarding Time Warner and TBS in its financial statements, to the extent required by the rules of the Commission. INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION In considering the recommendations of the Time Warner Board and the TBS Board with respect to the Transaction, stockholders of Time Warner and shareholders of TBS should be aware that certain members of the TBS Board and management of TBS have certain interests in the Transaction that may be in addition to the interests of stockholders of Time Warner or shareholders of TBS generally. The Time Warner Board and the TBS Board were aware of these interests and considered them, among other factors, in approving the Transaction. These interests are summarized below. Employment Agreement with R.E. Turner Upon consummation of the Mergers, New Time Warner and Mr. Turner will enter into a five-year employment agreement (the "Turner Employment Agreement"). The Turner Employment Agreement provides that, subject to and after consummation of the Mergers, Mr. Turner will serve as Vice Chairman of New Time Warner and Chief Executive Officer of New Time Warner's newly-created Video Division (consisting principally of the businesses of TBS, the Home Box Office division of TWE ("Home Box Office") and TWE's interest in Court TV) (the "Video Division") until December 31, 2001 (the "Term Date"). He will also continue to serve as the Chairman of the Board, President and Chief Executive Officer of TBS. Pursuant to the Turner Employment 65
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Agreement, Mr. Turner will receive an annual salary of not less than $700,000 and will have a target annual bonus equal to 90% of the target annual bonus paid to the Chief Executive Officer of New Time Warner (assuming comparable levels of achievement of their respective qualitative goals established by the Compensation Committee of the New Time Warner Board (the "Compensation Committee")), with the actual annual bonus paid to be determined by the Compensation Committee in accordance with the Time Warner Inc. Annual Bonus Plan for Executive Officers, which will be assumed by New Time Warner. In addition, the Turner Employment Agreement provides that deferred compensation in an amount equal to 50% of Mr. Turner's base salary during each year of the term of employment will be credited to an account to be maintained by New Time Warner and managed by an investment advisor appointed by New Time Warner, subject to Mr. Turner's approval. Funds will be invested or deemed to be invested in securities as directed by the investment advisor, with the assumed after-tax effect upon New Time Warner of gains, losses and income, and distributions thereof, and of interest expenses and brokerage commissions and other direct expenses attributed thereto, being credited or charged to the account. Payments from his deferred compensation account will be made to Mr. Turner in installments over a five-year period beginning after expiration of his term of employment. Such payments will include an amount equal to the assumed tax benefit to New Time Warner of the compensation deduction available for tax purposes for the portion of the account represented by the net appreciation in such account, even though New Time Warner might not actually receive such tax benefit. So long as Mr. Turner is employed by New Time Warner and subject to New Time Warner's obligations under Investors' Agreement (No. 1), New Time Warner will include him in management's slate for election as a director at every stockholders' meeting at which his term as a director would otherwise expire and will use its best efforts to cause Mr. Turner to be elected to the New Time Warner Board. In the event Mr. Turner's employment is terminated for cause, Mr. Turner will receive earned and unpaid base salary and deferred compensation accrued through such date of termination. "Cause" under the Turner Employment Agreement will be defined as termination by action of the New Time Warner Board, or a committee thereof, because of Mr. Turner's conviction of a felony, willful refusal without proper cause to perform his obligations under the Turner Employment Agreement or his material breach of certain other provisions of the Turner Employment Agreement. In the event of New Time Warner's material breach or wrongful termination of the Turner Employment Agreement, Mr. Turner will be entitled to terminate his employment with New Time Warner and receive a lump-sum payment (the "Lump Sum Payment") equal to the present value of the base salary, bonuses and deferred compensation that would otherwise be payable to Mr. Turner through the Term Date. In lieu of the Lump Sum Payment, Mr. Turner may elect to remain an employee of New Time Warner through the Term Date and, without performing any services, receive the base salary, bonuses and deferred compensation payable under the Turner Employment Agreement at the times such amounts would have been paid had there been no breach or wrongful termination. Mr. Turner is not generally required to mitigate his damages after such a termination, other than as necessary to prevent New Time Warner from losing any tax deductions that it otherwise would have been entitled to receive for any payments deemed to be "contingent on a change" in ownership or control of a corporation under the Code and applicable regulations. If Mr. Turner becomes disabled during the term of the Turner Employment Agreement, he will receive his full salary, bonus and deferred compensation through the sixth month of disability and 75% of his annual salary and bonus through the Term Date. Deferred compensation will be maintained and paid after giving effect to Mr. Turner's base salary after disability. Any such payments will be reduced by amounts received by Mr. Turner from Workers' Compensation, Social Security and disability insurance policies maintained by New Time Warner. If Mr. Turner dies during the term of the Turner Employment Agreement, his beneficiaries will receive Mr. Turner's earned and unpaid salary and deferred compensation to the last day of the month in which the death 66
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occurs and a pro rata portion of Mr. Turner's bonus for the year of his death. Deferred compensation will be valued and paid promptly after death. Mr. Turner will have the right to terminate the Turner Employment Agreement at any time prior to the Term Date. In such event, Mr. Turner will receive earned and unpaid salary and deferred compensation and a pro rata portion of his bonus through the date of such termination. New Time Warner is required to maintain for Mr. Turner, throughout his life, $6 million of split ownership life insurance. At the time of his death, Mr. Turner's estate is required to pay New Time Warner an amount equal to the net after-tax cost to New Time Warner of the premiums on such policy. Such insurance is in addition to any other insurance provided to Mr. Turner under any group contract maintained by New Time Warner. Pursuant to the Turner Employment Agreement, Mr. Turner, as Vice Chairman of New Time Warner, is entitled to receive an initial award of options ("Options") to purchase 1.3 million shares of New Time Warner Common Stock upon consummation of the Mergers (the "Initial Award") and an award of Options with respect to an additional 300,000 shares of New Time Warner Common Stock on each of the first four anniversaries of the consummation of the Mergers, in each case pursuant to the terms of a stock option plan of New Time Warner. Pursuant to the Turner Employment Agreement, each such Option will have a ten- year term and will become exercisable in installments of one-third on each of the first three anniversaries of the date of the grant. Pursuant to the Turner Employment Agreement, the Options included in each of Mr. Turner's annual awards other than the Initial Award will be awarded at exercise prices no less favorable to Mr. Turner (on a percentage basis) than those most recently granted to the Chief Executive Officer of New Time Warner. With respect to the Initial Award, Options to purchase 650,000 shares of New Time Warner Common Stock will be awarded at an exercise price equal to the fair market value of Time Warner Common Stock on the date of the Initial Award, Options to purchase 325,000 shares of New Time Warner Common Stock will be awarded at an exercise price equal to 125% of the fair market value of Time Warner Common Stock on the date of the Initial Award and Options to purchase 325,000 shares of New Time Warner Common Stock will be awarded at an exercise price equal to 150% of the fair market value of Time Warner Common Stock on the date of the Initial Award. Mr. Turner's Options will become immediately exercisable in full in respect of the aggregate number of shares covered thereby if Mr. Turner's employment terminates by reason of death or total disability. In the event of New Time Warner's material breach or wrongful termination of the Turner Employment Agreement, all Options awarded to Mr. Turner will become immediately exercisable and all remaining Options under the Turner Employment Agreement will be granted. Options may be exercised after termination of Mr. Turner's employment only to the extent provided in the agreement pursuant to which the Options are awarded; provided, however, that (a) if his employment terminates by reason of death or total disability, Options will remain exercisable for a period of at least one year after such termination (but not later than the scheduled expiration of such Options), (b) if his employment terminates for cause, then all Options awarded to Mr. Turner will terminate immediately and (c) in the event of New Time Warner's material breach or wrongful termination of the Turner Employment Agreement, the Options will remain exercisable until the scheduled expiration of such Options. Right of R.E. Turner to Name Designees to New Time Warner Board Pursuant to Investors' Agreement (No.1), New Time Warner will agree to take all action necessary to cause Mr. Turner and a designee of Mr. Turner to be elected as directors of New Time Warner. See "Certain Related Agreements-- Investors' Agreements." Certain Arrangements With Officers of TBS In connection with the execution of the Merger Agreement, Time Warner agreed to extend certain severance and option arrangements to a group of senior executives of TBS and its subsidiaries. Such arrangements are 67
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described below. Notwithstanding the entry into such arrangements, Time Warner has expressed its desire that such persons remain with the combined enterprise following consummation of the Mergers. With respect to each of Terence F. McGuirk, TBS Executive Vice President, W. Thomas Johnson, TBS Vice President--News, Scott M. Sassa, TBS Vice President-- Turner Entertainment Group, Bert Carp, TBS Vice President--Government Affairs, William H. Grumbles, TBS Vice President--Worldwide Distribution, Steven J. Heyer, TBS Vice President--Advertising Sales and Marketing, Steven W. Korn, TBS Vice President, General Counsel and Secretary, and Wayne H. Pace, TBS Vice President--Finance and Chief Financial Officer (collectively, the "TBS Officers"), Time Warner has acknowledged and agreed that the consummation of the Mergers will be deemed a breach of each such officer's employment agreement with TBS and that each such officer will have the right thereafter at any time to terminate his employment agreement and receive a lump sum payment equal to the aggregate of his salary, bonus, long-term bonus, car allowance and all other payments due such officer under the terms of his employment agreement. Upon consummation of the Mergers, all options to purchase shares of TBS Common Stock held by the TBS Officers, whether vested or unvested, will, pursuant to their terms, be converted into vested options to purchase shares of New Time Warner Common Stock. Currently such options terminate between 90 days and one year after the termination of such officer's employment. However, in the event such officer's employment is terminated for any reason, Time Warner has agreed that each of such options will be exercisable until the earlier of the existing expiration date of such option and the fifth anniversary of the consummation of the Mergers (the "Five-Year Exercise Right"). As of June 30, 1996, the TBS Officers held options to acquire in the aggregate 3,661,000 shares of TBS Class B Common Stock. As of such date, the net value of such options (i.e., the aggregate positive difference between the exercise price of such options and the value of the TBS Class B Common Stock that may be purchased pursuant to such options, based on the closing sale price of TBS Class B Common Stock on such date (the "Net Value")) held by the TBS Officers was $19,499,344. The lump sum payments to which the TBS Officers would be entitled upon termination of their employment agreements (assuming that each of them terminated his employment agreement as of September 30, 1996), in the aggregate, would be approximately $28,336,000 (exclusive of long-term bonuses, amounts in respect of required continuation of certain benefit plans and the value of certain services to be provided under such contracts). With respect to each of Robert Shaye, Chairman and Chief Executive Officer of New Line, Michael Lynne, President and Chief Operating Officer of New Line, and Alan F. Horn, Chief Executive Officer of Castle Rock, Time Warner has agreed that all options held by such officers that would not otherwise vest pursuant to their terms will, upon consummation of the Mergers, be converted into vested options to purchase shares of New Time Warner Common Stock and has agreed to extend the Five-Year Exercise Right to such officers. Absent the Five-Year Exercise Right, the options held by such officers to which such right has been extended would otherwise terminate between 90 days and one year after the termination of such officer's employment. As of June 30, 1996, Messrs. Shaye, Lynne and Horn held options to acquire in the aggregate 6,046,778 shares of TBS Class B Common Stock. As of such date, the Net Value of such options held by such officers was $50,937,000. Director and Officer Liability Insurance and Indemnification The Merger Agreement provides that all rights to indemnification for acts or omissions occurring prior to the consummation of the Mergers, existing as of September 22, 1995, in favor of the current or former directors or officers of TBS as provided in the TBS Articles or the TBS By-Laws will survive the TBS Merger and will continue in full force and effect in accordance with their terms from the consummation of the Mergers until the expiration of the applicable statute of limitations with respect to any claims against the current or former directors or officers of TBS arising out of such acts or omissions. New Time Warner has agreed to cause to be maintained TBS's directors' and officers' insurance and indemnification policy in effect as of September 22, 1995, to the extent that it provides coverage for events occurring prior to the consummation of the Mergers so long as the annual premium therefor would not be in excess of 150% of the last annual premium paid prior to September 22, 1995 (the "Maximum Premium"). If such policy expires, is terminated or canceled during such six-year period, 68
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New Time Warner will use all reasonable efforts to cause to be maintained as much of such insurance coverage as can be obtained for the remainder of such period for an annualized premium not in excess of the Maximum Premium. TCI Arrangements Certain agreements have been or will be entered into between TCI and Time Warner, or their respective affiliates, and between TCI and TBS, or their respective affiliates. For a description of the principal terms of these agreements, see "TCI Arrangements." As of June 30, 1996, TCI owned 7.7% of the voting power of the outstanding TBS Capital Stock and has the right to designate three of the seven Class C Directors. See "--Background" above. FEDERAL INCOME TAX CONSEQUENCES Time Warner Merger The discussion set forth below is the opinion of Cravath, Swaine & Moore as to the material Federal income tax consequences of the Time Warner Merger. Such opinion is not binding on the IRS. The opinion is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury Regulations thereunder, judicial decisions and current administrative rulings, any of which may be changed at any time with retroactive effect. The opinion does not address all aspects of Federal income taxation that may be important to particular taxpayers in light of their personal investment circumstances or to taxpayers subject to special treatment under the Federal income tax laws (including life insurance companies, foreign persons, tax-exempt entities, holders who acquired their Time Warner Capital Stock pursuant to the exercise of employee stock options or otherwise as compensation and persons who hold, directly or indirectly, 10% or more of Time Warner Capital Stock or any class of Time Warner Capital Stock) and does not address any aspect of state, local or foreign taxation. The opinion also assumes that Time Warner Capital Stock will be held as a capital asset at the time of the consummation of the Time Warner Merger. No rulings have been or will be requested from the IRS with respect to any of the matters discussed herein. There can be no assurance that future legislation, regulations, administrative rulings or court decisions would not alter the tax consequences set forth below. Based upon representation letters, which will be reconfirmed prior to the Closing of the Mergers, it is the opinion of Cravath, Swaine & Moore that the Time Warner Merger will be treated as a transfer of property to New Time Warner by the holders of Time Warner Capital Stock and governed by Section 351 of the Code. The opinion is based on current law and assumes that the Mergers will be consummated as described in this Joint Proxy Statement/Prospectus and in accordance with the Merger Agreement and related agreements in their current form. It is a condition to the obligation of Time Warner to consummate the Time Warner Merger that it shall have received confirmation, dated the Closing Date, of the opinion contained in this paragraph. Treatment of New Time Warner, Time Warner and TW Merger Corp. No gain or loss will be recognized by New Time Warner, Time Warner or TW Merger Corp. as a result of the Time Warner Merger. Conversion of Time Warner Common Stock into New Time Warner Common Stock. A holder of Time Warner Common Stock whose shares of Time Warner Common Stock are converted in the Time Warner Merger into shares of New Time Warner Common Stock will not recognize gain or loss upon such conversion. The tax basis of the New Time Warner Common Stock received by such holder will be equal to the tax basis of the Time Warner Common Stock so converted, and the holding period of the New Time Warner Common Stock will include the holding period of the Time Warner Common Stock so converted. Conversion of Time Warner Preferred Stock into New Time Warner Preferred Stock. A holder of Time Warner Preferred Stock whose shares of Time Warner Preferred Stock are converted in the Time Warner Merger 69
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into shares of New Time Warner Preferred Stock will not recognize gain or loss upon such conversion. The tax basis of the New Time Warner Preferred Stock received by such holder will be equal to the tax basis of the Time Warner Preferred Stock so converted and the holding period of the New Time Warner Preferred Stock will include the holding period of the Time Warner Preferred Stock so converted. Constructive Distributions on the New Time Warner Series M Preferred Stock. Section 305 of the Code and the Treasury Regulations thereunder provide that, under certain circumstances, the excess of the redemption price of preferred stock (as defined for purposes of Section 305 of the Code) over the issue price of such preferred stock will be taxable as a constructive distribution to the holder (which will be treated as a dividend to the extent of the issuer's current and accumulated earnings and profits). None of the New Time Warner Preferred Stock except the New Time Warner Series M Preferred Stock will be deemed "preferred stock" for purposes of Section 305 of the Code. If the redemption price at the issue date of the New Time Warner Series M Preferred Stock exceeds, by more than a de minimis amount, the issue price of the New Time Warner Series M Preferred Stock (i.e., the fair market value of such stock at its date of issue), holders will be required to accrue such excess (the "redemption premium") as a constructive dividend distribution (to the extent of the issuer's current and accumulated earnings and profits) over the term of such stock. In addition, distribution by New Time Warner of any additional shares of New Time Warner Series M Preferred Stock, in lieu of a cash dividend payment, may give rise to additional redemption premium. Holders should consult their tax advisors regarding the application of the above rules to their particular situation. Dissenting Holders of Time Warner Preferred Stock. A holder of Time Warner Preferred Stock that receives solely cash in exchange for such stock in the Time Warner Merger pursuant to the exercise of appraisal rights under Section 262 of the DGCL will recognize capital gain or loss at the time of the consummation of the Time Warner Merger equal to the difference between the tax basis of the Time Warner Preferred Stock surrendered and the amount of cash received therefor. Such capital gain or loss will constitute long-term capital gain or loss if such Time Warner Preferred Stock has been held by the holder for more than one year at the time of the consummation of the Time Warner Merger. Reporting Requirements. Each holder of Time Warner Common Stock that receives New Time Warner Common Stock in the Time Warner Merger and each holder of Time Warner Preferred Stock that receives New Time Warner Preferred Stock in the Time Warner Merger will be required to retain records and file with such holder's Federal income tax return a statement setting forth certain facts relating to the Time Warner Merger. TBS Merger The discussion set forth below is the opinion of Skadden, Arps, Slate, Meagher & Flom as to the material Federal income tax consequences of the TBS Merger. Such opinion is not binding on the IRS. The opinion is based upon the provisions of the Code, applicable Treasury Regulations thereunder, judicial decisions and current administrative rulings, any of which may be changed at any time with retroactive effect. The opinion does not address all aspects of Federal income taxation that may be important to particular taxpayers in light of their personal investment circumstances or to taxpayers subject to special treatment under the Federal income tax laws (including life insurance companies, foreign persons, tax-exempt entities, holders who acquired their TBS Capital Stock pursuant to the exercise of employee stock options or otherwise as compensation and persons who hold, directly or indirectly, 10% or more of TBS Capital Stock or any class of TBS Capital Stock) and does not address any aspect of state, local or foreign taxation. The opinion also assumes that TBS Capital Stock will be held as a capital asset at the time of the consummation of the TBS Merger. No rulings have been or will be requested from the IRS with respect to any of the matters discussed herein. There can be no assurance that future legislation, regulations, administrative rulings or court decisions would not alter the tax consequences set forth below. 70
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Based upon representation letters, which will be reconfirmed prior to the Closing of the Mergers, it is the opinion of Skadden, Arps, Slate, Meagher & Flom that the TBS Merger will be treated as a transfer of property to New Time Warner by the holders of TBS Capital Stock governed by Section 351 of the Code. The opinion is based on current law and assumes that the Mergers will be consummated as described in this Joint Proxy Statement/Prospectus and in accordance with the Merger Agreement and related agreements in their current form. It is a condition to the obligation of TBS to consummate the TBS Merger, that it shall have received confirmation, dated the Closing Date, of the opinion contained in this paragraph. Treatment of New Time Warner, TBS and TBS Merger Corp. No gain or loss will be recognized by New Time Warner, TBS or TBS Merger Corp. as a result of the TBS Merger. Conversion of TBS Capital Stock into New Time Warner Common Stock. A holder of TBS Capital Stock whose shares of TBS Capital Stock are converted in the TBS Merger into the right to receive shares of New Time Warner Common Stock will not recognize gain or loss upon such conversion, except to the extent cash is received in lieu of fractional shares. See "--Cash in Lieu of Fractional Shares" below. The aggregate tax basis of the New Time Warner Common Stock received by such holder will be equal to the aggregate tax basis of the TBS Capital Stock so converted (excluding any portion of the holder's basis allocated to fractional shares), and the holding period of the New Time Warner Common Stock will include the holding period of the TBS Capital Stock so converted. See "--Transfer Taxes" below. Cash in Lieu of Fractional Shares. A holder of TBS Capital Stock who receives cash in lieu of fractional shares of New Time Warner Common Stock will be treated as having received such fractional shares pursuant to the TBS Merger and then as having exchanged such fractional shares for cash in a redemption by New Time Warner. Any gain or loss attributable to fractional shares will generally be capital gain or loss. The amount of such gain or loss will be equal to the difference between the ratable portion of the tax basis of the TBS Capital Stock converted in the TBS Merger that is allocated to such fractional shares and the cash received in lieu thereof. Any such capital gain or loss will constitute long-term capital gain or loss if such TBS Capital Stock has been held by the holder for more than one year at the time of the consummation of the TBS Merger. Dissenting Holders of TBS Capital Stock. A holder of TBS Capital Stock that receives solely cash in exchange for such stock in the TBS Merger pursuant to the exercise of dissenter's rights under Article 13 of the GBCC will recognize capital gain or loss at the time of the consummation of the TBS Merger equal to the difference between the tax basis of the TBS Capital Stock surrendered and the amount of cash received therefor. Such capital gain or loss will constitute long-term capital gain or loss if such TBS Capital Stock has been held by the holder for more than one year at the time of the consummation of the TBS Merger. See "--Transfer Taxes" below. Reporting Requirements. Each holder of TBS Capital Stock that receives New Time Warner Common Stock in the TBS Merger will be required to retain records and file with such holder's Federal income tax return a statement setting forth certain facts relating to the TBS Merger. Tax Treatment to Holders of TBS LYONs. As a result of the Mergers, the TBS LYONs will become convertible into shares of New Time Warner Common Stock. See "--Effect of Transaction on TBS LYONs" below. There will be no gain or loss recognized for Federal income tax purposes as a result of such modification. Any conversion of a TBS LYON into New Time Warner Common Stock after the consummation of the Transaction will, however, be a taxable transaction to a holder of such TBS LYON. THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT APPLY TO ALL HOLDERS OF TIME WARNER CAPITAL STOCK OR TBS CAPITAL STOCK. SUCH HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGERS. 71
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ACCOUNTING TREATMENT The Transaction will be accounted for by New Time Warner under the purchase method of accounting for business combinations. See "Unaudited Pro Forma Consolidated Condensed Financial Statements." CERTAIN FEES AND EXPENSES TBS retained CS First Boston, pursuant to the terms of a letter agreement (the "CSFB Engagement Letter"), as its financial advisor to provide financial analyses and advice and to render an opinion to the TBS Board as to the fairness to the shareholders of TBS (other than Time Warner and its affiliates), from a financial point of view, of the consideration to be received by such shareholders pursuant to the terms of a potential business combination between Time Warner and TBS. TBS agreed to pay CS First Boston, as compensation for its services under the CSFB Engagement Letter, a fee of $4 million, payable upon delivery of the opinion dated September 22, 1995 contemplated by the CSFB Engagement Letter, and to reimburse CS First Boston for reasonable out-of-pocket expenses, including reasonable fees and expenses of counsel, incurred in connection with its services to TBS. TBS also agreed to pay CS First Boston an additional fee of $500,000 as compensation for additional services, payable upon delivery of the opinion dated August 8, 1996. TBS also agreed to indemnify CS First Boston and certain related persons and entities against certain liabilities, including liabilities under the Federal securities laws. TBS retained Merrill Lynch, pursuant to the terms of a letter agreement (the "Merrill Lynch Engagement Letter"), as its financial advisor to assist in analyzing the proposed transaction and the Prior TCI Arrangements and to render an opinion to the TBS Board as to (a) the fairness to the shareholders of TBS (other than TCI and its affiliates and Time Warner), from a financial point of view, of the consideration to be received by such shareholders pursuant to the Transaction and (b) in the context of the governance arrangements relating to TBS's ability to consummate the Transaction, the fairness of the financial terms of the Prior TCI Arrangements, from a financial point of view, to TBS and its shareholders (other than TCI and its affiliates and Time Warner). TBS and Merrill Lynch subsequently entered into an amendment to the Merrill Lynch Engagement Letter pursuant to which TBS retained Merrill Lynch to render an additional opinion to the TBS Board with respect to the amended TCI Arrangements. TBS agreed to (i) pay Merrill Lynch (x) as compensation for its services under the Merrill Lynch Engagement Letter, a fee of $1 million, payable upon delivery of the opinion contemplated by the Merrill Lynch Engagement Letter and (y) as compensation for its services under the amendment to the Merrill Lynch Engagement Letter, an additional fee of $500,000, payable upon delivery of the opinion contemplated by that amendment, and (ii) to reimburse Merrill Lynch for certain out-of- pocket expenses incurred in connection with its services to TBS. TBS also agreed to indemnify Merrill Lynch, its affiliates, the respective directors, officers, agents and employees of Merrill Lynch and its affiliates, and each person, if any, controlling Merrill Lynch or any of its affiliates, against certain liabilities, including liabilities under the Federal securities laws. The TBS Board has approved the payment to Capital City of $3 million upon consummation of the Mergers in addition to monthly retainer fees payable by TBS pursuant to a consulting agreement dated May 1, 1994, between TBS and Capital City (as amended, the "Capital City Consulting Agreement"). The principal of Capital City, Randolph L. Booth, was formerly the Chief Financial Officer of TBS and provided certain consulting services to TBS relating to the development and implementation of plans and strategies related to mergers, acquisitions, financings and such additional matters as mutually agreed upon pursuant to the Capital City Consulting Agreement, which expired on April 30, 1996. The services performed by Capital City included (a) meeting with members of TBS's senior management and other advisors to TBS to discuss potential business opportunities identified by TBS and under consideration from time to time by TBS, (b) meeting with representatives of TBS and its advisors and with representatives of Time Warner and TCI to identify unresolved business issues relating to the proposed Transaction, (c) meeting with representatives of TBS to discuss strategies for resolving open business issues, (d) assisting TBS in developing its presentations addressing the strategic benefits of the Transaction for the meetings of the TBS Board held in August and September of 1995 and (e) assisting in the resolution of issues related to the arrangements to be put in place for executive officers of TBS 72
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upon consummation of the Mergers. The Capital City Consulting Agreement provided for a monthly retainer of $50,000, certain transaction fees, as described therein, and the reimbursement of certain out-of-pocket expenses. Pursuant to the Capital City Consulting Agreement, each of TBS and Capital City also agreed to indemnify the other against certain liabilities arising as a result of the consulting services provided under the Capital City Consulting Agreement. TBS and MC Group are parties to a letter agreement (the "MC Group Consulting Agreement"), pursuant to which MC Group agreed to provide certain consulting services to TBS. Such services have included (a) meeting with representatives of TBS and Capital City to discuss and provide MC Group's views and perspective on the future of the entertainment/telecommunications industry and TBS's position in such industry, (b) consulting with respect to TBS's long- term goals, including discussing with Mr. Turner his desire to position TBS to acquire a broadcast television network, to establish a presence in the interactive television and computer technologies industries and to enhance TBS's international businesses, (c) assisting TBS in identifying strategic partners for TBS in the pursuit of these long-term goals, (d) providing TBS with MC Group's views with respect to the manner in which certain potential opportunities identified and under consideration from time to time by TBS could contribute to TBS's long-term strategy, (e) providing TBS with introductions to other operating companies for the purpose of exploring potential business opportunities, (f) meeting with representatives of TBS and Capital City to discuss and provide MC Group's views and perspective on the strategic benefits to TBS of the proposed merger with Time Warner in the context of TBS's long-term strategic goals, (g) meeting with Mr. Turner and representatives of TCI and Time Warner to identify business issues relating to the proposed merger to be resolved by the parties, (h) providing Mr. Turner with advice with respect to keeping the parties to the Transaction focused on resolving open business issues, and (i) providing Mr. Turner and representatives of TCI and Time Warner with MC Group's views with respect to the long-term benefit of the proposed merger for each such party. TBS agreed to pay MC Group a fee of $100,000 per month during the term of the engagement of MC Group, which commenced on July 1, 1995 and extended to June 30, 1996. In addition, the MC Group Consulting Agreement provided that an additional fee, in an amount to be agreed upon between MC Group and TBS, would be payable to MC Group with respect to any transaction between TBS and any other entity during the term of the MC Group Consulting Agreement or within 12 months thereafter which resulted from or was otherwise facilitated by the services of MC Group under the MC Group Consulting Agreement. At the meeting held in September 1995, the TBS Board approved the payment of $40 million to MC Group upon consummation of the Mergers as such additional fee. In reviewing and approving such fee, the TBS Board was aware that, in connection with the settlement of civil proceedings brought by the Commission, Mr. Milken entered into a consent decree (the "Consent Decree") with the Commission in 1991 which prohibits Mr. Milken from association with any broker, dealer, investment adviser, investment company or municipal securities dealer. The effect of the Consent Decree is to limit the activities in which MC Group and Mr. Milken may engage. In addition, prior to the approval of the MC Group fee, Mr. Turner informed the TBS Board that, in view of the substantial benefits that would accrue to him as a result of the Transaction in his capacity as the largest shareholder of TBS, he thought it appropriate, and had agreed with MC Group, that he would pay MC Group a fee of $10 million, in addition to the fee proposed to be paid by TBS. Pursuant to the MC Group Consulting Agreement, each of TBS and MC Group also agreed to indemnify the other, and the other's affiliates, directors, officers, employees, agents and controlling persons, against certain liabilities. Time Warner retained Morgan Stanley, pursuant to the terms of a letter agreement (the "Morgan Stanley Engagement Letter"), as its financial advisor to provide financial analyses and advice and to render an opinion to the Time Warner Board as to the fairness to New Time Warner and its subsidiary, Time Warner, from a financial point of view, of the Exchange Ratio and the SSSI Agreement Consideration, taken as a whole. Time Warner agreed to pay Morgan Stanley, as compensation for its services under the Morgan Stanley Engagement Letter, a fee of $13 million, $4 million of which was payable upon announcement of the Transaction and $9 million of which is payable upon consummation of the Mergers, and to reimburse Morgan Stanley for certain out- of-pocket expenses incurred in connection with its services to Time Warner. Time Warner also agreed to indemnify Morgan Stanley, its affiliates, the respective directors, officer, partners, agents and employees of 73
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Morgan Stanley and its affiliates, and each person, if any, controlling Morgan Stanley or any of its affiliates, against certain liabilities, including liabilities under the Federal securities laws. REGULATORY APPROVALS FCC Approval Process Regulation of Broadcast Stations. Television and radio broadcasting are subject to the jurisdiction of the FCC under the Communications Act. The Communications Act prohibits the operation of broadcasting stations except under licenses issued by the FCC. The Communications Act further prohibits the assignment of a station license or the transfer of control of a broadcast station licensee without prior approval of the FCC. Because the Transaction will result in the transfer of control of TBS, which, through a subsidiary (Superstation, Inc.), is the licensee of one television broadcasting station (WTBS, Channel 17, Atlanta, Georgia), the prior approval of the FCC is necessary before the Transaction may be consummated. Upon the filing of an application for consent to the transfer of control of a broadcast station licensee, the FCC will issue an official public notice of such filing. Interested parties have a period of 30 days following issuance of the public notice in which to petition to deny such application. An application for consent to the transfer of control to New Time Warner of Superstation, Inc., the licensee of WTBS, and associated broadcast auxiliary licenses, was filed with the FCC on October 20, 1995 (the "FCC Application"). On December 1, 1995, the deadline for filing petitions to deny the FCC Application, comments were filed with regard to the FCC Application by the United States Telephone Association and The Small Cable Business Association. Comments were filed after that deadline by The Center for Media Education/Consumer Federation of America and Peoples Network Inc. No comments were filed with regard to the transfer of any other TBS facilities. Such comments primarily expressed concern about the effect of the Transaction on competition in the video programming market and requested that the FCC impose conditions to ensure the continued availability of programming at nondiscriminatory prices, terms and conditions. In reviewing applications for its consent to transfer of control, the FCC considers whether such transfers will serve the "public interest, convenience and necessity," as well as whether the proposed transferee has the requisite legal, financial, technical and other qualifications to operate the licensed entities. In making its decision, the FCC has the authority to approve or deny the application, or to condition its approval in ways which the FCC believes would best serve the public interest. Following the FCC's approval or denial with respect to such a transfer, any "person who is aggrieved or whose interests are adversely affected" may appeal such action to the United States Court of Appeals for the District of Columbia Circuit. In addition, under certain circumstances, the FCC may reconsider its action at the request of a third party or on its own motion. License Grant and Renewal. The Telecommunications Act of 1996 (the "Telecommunications Act"), which substantially amends the Communications Act, was enacted on February 8, 1996. The Telecommunications Act authorizes the FCC to extend television license terms to eight years from current terms of five years. The FCC has initiated a rulemaking proceeding which proposes to implement eight-year terms for television stations commencing with their next renewal application. The Telecommunications Act also directs the FCC to grant renewal of a broadcast license if it finds that the station has served the public interest, convenience, and necessity, and that there have been no serious violations (or other violations which would constitute a "pattern of abuse") by the licensee of the Communications Act or FCC rules. If the FCC finds that a licensee has failed to meet these standards and there are not sufficient mitigating factors, it may deny renewal or condition renewal appropriately, including renewing for less than a full term. Any other party with standing may petition the FCC to deny a broadcaster's application for renewal. However, only if the FCC issues an order denying renewal will it accept and consider applications from other parties for a construction permit for a new station to operate on the channel subject to such denial. The FCC may not consider any such applicant in making determinations concerning the grant or denial of the licensee's renewal application. 74
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The license for WTBS was last renewed on April 1, 1992. There were no petitions to deny the renewal application or competing applications filed. WTBS's current five-year term expires on April 1, 1997. An application for renewal, which must be filed four months prior to the scheduled expiration of the license, must therefore be filed on or before December 1, 1996. Regulation of Other Facilities. TBS, in connection with the operation of its news and entertainment networks, holds licenses for broadcast auxiliary facilities, private operational fixed microwave facilities and fixed satellite earth stations. Applications to transfer control of these facilities have been granted by the FCC. The broadcast auxiliary and fixed satellite applications were subject to the same public notice and 30-day comment period procedures as is the broadcast station transfer application. No comments or oppositions were filed with regard to those applications. Cable Television/Television Cross-Ownership Rule. The FCC's rules prohibit the common ownership or control of a cable television system located in whole or in part within the predicted Grade B service contour of a television broadcast station. The Telecommunications Act eliminated a similar provision in the Communications Act, but preserved the parallel FCC rule pending FCC review. Time Warner has an ownership interest in a cable system serving approximately 60,000 subscribers which is located within the Grade B service contour of WTBS. Time Warner has asked the FCC for a temporary waiver of this rule for a period of 18 months to allow for the orderly divestiture of its interest in the affected cable system. The "Grade B service contour" is an FCC-promulgated technical description of the strength of a television station's signal which demarks an area in which a certain minimum signal strength can be received. Generally, this defines an area where, on average, a television station can be expected to be viewable with the aid of a rooftop antenna. The FCC uses this contour measurement as a geographical demarcation in several of its ownership rules. Cable Television Multiple Ownership Rule. Pursuant to the Communications Act, the FCC has imposed limits on the number of cable television systems in which a single entity may hold an attributable interest. In general, no cable operator may have an attributable interest in cable systems which pass more than 30% of all cable homes passed nationwide. In the context of the cable television multiple ownership rule, the term "homes passed" means the number of homes which are or could be readily connected to a cable system's distribution wires running along the street on which the homes are located. Attributable interests for these purposes include voting stock interests of 5% or more, officerships, directorships and general partnership interests. The FCC has stayed the effectiveness of this rule pending the outcome of its appeal of a U.S. District Court decision holding the multiple ownership limit provision of the Communications Act unconstitutional. Because TCI would receive more than 5% of the voting securities of New Time Warner pursuant to the TBS Merger, TCI would be in violation of the multiple ownership rule if the rule were again made effective. The provisions of the LMC Agreement regarding the exchange of TCI's New Time Warner Common Stock for shares of LMC Reduced Voting Common Stock will render LMC's interest in New Time Warner non- attributable for purposes of current FCC rules. See "TCI Arrangements--LMC Agreement." The FCC is currently engaged in an extensive review of its attribution rules and its broadcast ownership rules. In connection with such review, it has sought comment on whether non-voting stock should be deemed attributable for purposes of multiple ownership rules in certain circumstances. The cable television multiple ownership rule which has been stayed incorporates the broadcast attribution standard. Time Warner cannot predict the outcome of the FCC's attribution rules review or what impact it may ultimately have. FTC Consent Decree Under the HSR Act and the rules promulgated thereunder by the FTC, transactions such as the Transaction may not be consummated until notifications have been given and certain information has been furnished to the Antitrust Division of the United States Department of Justice and the FTC and specified waiting period requirements have been satisfied. In October 1995, Time Warner, TBS and TCI filed all appropriate Notification and Report Forms with the Antitrust Division and the FTC with respect to the Transaction. After an extensive 75
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review of the Transaction by the FTC and in order to eliminate concerns raised by the FTC regarding possible competitive effects of the Transaction, Time Warner, TBS, TCI and LMC have executed the FTC Consent Decree and have submitted the FTC Consent Decree to the commissioners of the FTC. The FTC commissioners have not yet initially accepted the FTC Consent Decree, and the obligations of Time Warner, TBS and TCI to consummate the Transaction are conditioned upon such initial acceptance. For purposes of the FTC Consent Decree, TCI and its affiliates include John C. Malone and Robert Magness. The material provisions of the FTC Consent Decree are described below. TCI/LMC Equity Interest in New Time Warner. TCI and its affiliates will not be permitted to hold voting securities of New Time Warner (other than securities, such as LMC Reduced Voting Common Stock, that have limited voting rights). In addition, TCI and its affiliates will not be permitted to hold more than the lesser of (a) 9.2% of the outstanding New Time Warner Common Stock (calculated on a fully diluted basis) and (b) 12.4% of the outstanding common stock of New Time Warner (calculated on an actual outstanding basis), without the prior approval of the FTC. The effect of this provision, among other things, was to require (a) the elimination of the provisions of the Transaction Agreements that permitted LMC to hold voting securities of New Time Warner if such securities were placed in a voting trust to be voted by Mr. Levin, (b) significant restrictions to be placed upon the exercise by LMC of its rights under the Right of First Refusal Agreement to purchase shares of New Time Warner Common Stock from Mr. Turner and (c) the elimination of the provisions of the Transaction Agreements under which LMC agreed to give Time Warner an option to purchase LMC's interest in TBS directly. TCI will be required under the FTC Consent Decree to use its best efforts to obtain a ruling (the "Letter Ruling") from the IRS to the effect that the distribution of SSSI, which at the time of the such distribution will hold, directly and indirectly, substantially all the New Time Warner Capital Stock received by TCI and its affiliates pursuant to the Transaction, to holders of the Liberty Media Group Common Stock issued by TCI would be a non-taxable transaction under Section 355 of the Code. If the Letter Ruling is obtained, TCI will implement the TCI Spin-off within 30 days after making required regulatory filings. If the TCI Spin-off takes place, Mr. Magness, Dr. Malone and Kearns-Tribune Corporation (together, the "TCI Control Shareholders") will exchange all of the shares of SSSI they receive in the TCI Spin-off for a convertible preferred security of SSSI that will have limited voting rights in SSSI. TCI's officers, directors and employees (including the TCI Control Shareholders) will be prohibited from communicating with the management of SSSI, except on those limited matters on which the TCI Control Shareholders are entitled to vote. Following the TCI Spin-off, SSSI will be prohibited from holding more than 14.99% of the outstanding New Time Warner Common Stock (calculated on a fully diluted basis), and from holding New Time Warner securities with voting rights (other than securities, such as LMC Reduced Voting Common Stock, that have limited voting rights). The restrictions described in the immediately preceding sentence will terminate if the TCI Control Shareholders hold no more than 0.1% of the ownership interest and the voting power of SSSI or if the TCI Control Shareholders hold no more than 0.1% of the ownership interest and the voting power of both of TCI and LMC. Following such distribution, TCI and its affiliates will not be permitted to purchase more than the lesser of (a) an additional 1% of the outstanding New Time Warner Common Stock (calculated on a fully diluted basis) and (b) 1.35% of the outstanding common stock of New Time Warner (calculated on an actual outstanding basis), without the prior approval of the FTC. Program Carriage Agreements. Time Warner, TBS and TCI were required to eliminate from the Transaction Agreements provisions providing for long-term, mandatory carriage by TCI cable systems of TBS programming services, except that the parties were permitted to enter into five-year agreements providing for the mandatory carriage after consummation of the Mergers by TCI cable systems of WTBS (once the WTBS Conversion has occurred) and Headline News. Prior to six months after the consummation of the Mergers, Time Warner and TCI will not be permitted to enter into any new agreement providing for the mandatory carriage by TCI cable systems on their analog tiers of any other video programming service offered by TBS, and any such mandatory carriage agreement entered into thereafter will be limited in effective duration to five years. Anti-bundling Provision. New Time Warner will not be permitted to condition the availability or terms of providing its HBO video programming service to any MVPD on whether that MVPD or any other MVPD agrees to carry any national video programming service offered by TBS. New Time Warner will not be permitted to 76
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condition the availability or terms of providing CNN, TNT or WTBS to any MVPD on whether that MVPD or any other MVPD agrees to carry any national video programming service offered by TWE. Price Discrimination Provision. New Time Warner will be prohibited from discriminating, in certain respects, against MVPDs having geographical overlap with New Time Warner's cable systems in the terms upon which TBS programming services are made available to such MVPDs in the relevant geographical overlap area. Programming Foreclosure Provision. The FTC Consent Decree provides that New Time Warner will be prohibited generally from requiring a financial interest in any video programming service as a condition for carriage or otherwise improperly discriminating against unaffiliated national video programming vendors in the provision of access to New Time Warner's cable systems. New Time Warner will be required to collect, on a quarterly basis, certain information relating to the terms under which New Time Warner cable systems carry national video programming services, including information relating to pricing, commitments, if any, to a roll-out schedule and penetration rates. This information is to be provided to each member of the Management Committee of TWE on a quarterly basis. By February 1, 1997, New Time Warner will be required to enter into a programming service agreement with at least one nationally significant advertising-supported news and informational national video programming service not affiliated with New Time Warner. Under the terms of the FTC Consent Decree, New Time Warner will be required to carry such national video programming service in accordance with a roll-out schedule incorporated in the FTC Consent Decree. To the extent applicable to New Time Warner, the foregoing provisions are generally consistent with existing legal requirements or Time Warner's existing business practices and will not impose undue financial burdens on New Time Warner and, accordingly, Time Warner does not believe that the FTC Consent Decree will have an adverse effect on the businesses of New Time Warner and TBS following consummation of the Mergers. If the FTC does not initially accept the FTC Consent Decree, the FTC may seek to enjoin the consummation of the Transaction. If the FTC does initially accept the FTC Consent Decree, the FTC will publish the FTC Consent Decree for public comment for a period of 60 days. If the FTC does not finally accept the FTC Consent Decree after the period for public comment, the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking the divestiture of substantial assets of TBS or its subsidiaries or of Time Warner or its subsidiaries. If the FTC does finally accept the FTC Consent Decree, the FTC Consent Decree will terminate on the tenth anniversary of such final acceptance. Other Antitrust Other antitrust authorities may also bring legal action under state or federal antitrust laws. Such action could include seeking to enjoin the consummation of the Transaction or seeking divestiture of certain assets of Time Warner or TBS. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Transaction on antitrust grounds will not be made or, if such a challenge is made, with respect to the result thereof. Further, although the Transaction is not subject to preclosing notification and approval requirements of the Merger Regulation of the European Community, separate regulatory approvals are required in certain European jurisdictions. Status of Regulatory Approvals and Other Information Time Warner and TBS have filed applications with all applicable domestic regulatory agencies and have taken, or will take, other appropriate action with respect to any requisite approvals or other action of any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, whose consent, approval, order or authorization, or with whom registration, declaration or filing of the Merger Agreement is required to consummate the Transaction, subject to the provisions of the Merger Agreement. Time Warner has determined that franchise agreements covering approximately 10% of the total number of subscribers to cable systems owned by Time Warner and TWE contain provisions that may result in the Transaction being 77
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treated as a "transfer of control" of the franchise for which approval of the franchising authority is required. Time Warner expects to obtain any required approvals prior to consummation of the Transaction. The Merger Agreement provides that the obligation of each of Time Warner and TBS to consummate the Transaction is conditioned upon, among other things, the approval of the FCC, the termination of any applicable waiting period under the HSR Act, initial acceptance of the FTC Consent Decree and the absence of any injunction restraining consummation of the Transaction. In addition, the Merger Agreement also provides that the obligation of Time Warner to consummate the Transaction is conditioned upon receipt of all necessary orders and permits approving the Mergers from all applicable cable franchising authorities having jurisdiction over all or any portion of a material cable system operated by Time Warner. See "The Merger Agreement--Conditions to the Mergers." There can be no assurance that any governmental agency will approve or take any other required action with respect to the Transaction, and, if approvals are received or action is taken, that such approvals or action will not be conditioned upon matters that would cause the parties to abandon the Transaction. In addition, there can be no assurance that an action will not be brought challenging such approvals or action, including a challenge by the FTC, or, if such challenge is made, with respect to the result thereof. Other than the FTC Consent Decree, which TCI has agreed to, the LMC Agreement provides that neither TCI nor any of its affiliates is required to agree to, approve or otherwise be bound by or satisfy any condition upon the grant or effectiveness of any consent or approval of any governmental agency required in connection with the consummation of the transactions contemplated by the Merger Agreement and the LMC Agreement that requires the surrender or modification in any significant respect of any license held by TCI or any of its affiliates, the divestiture of any assets of TCI or any of its affiliates, the holding of any such assets in a trust or otherwise separate and apart from such person's other assets, limitations on such person's freedom of action, any change in such person's ownership or any rights or arrangements among its equity holders or any other restrictions, limitations, requirements or conditions which are or might be burdensome or adverse to any such person. See "TCI Arrangements--LMC Agreement." Time Warner and TBS are not aware of any material governmental approvals or actions that may be required for consummation of the Transaction other than as described above. Should any other approval or action be required, it is presently contemplated that such approval or action would be sought. There can be no assurance, however, that any such approval or action, if needed, could be obtained and would not be conditioned in a manner that would cause the parties to abandon the Transaction. CERTAIN LITIGATION U S WEST Litigation On September 22, 1995, U S WEST and U S WEST Multimedia Communications, Inc. ("USWMC"), a wholly owned subsidiary of U S WEST, filed a complaint in the Court of Chancery of the State of Delaware individually and allegedly in a derivative capacity on behalf of TWE against Time Warner and four of TWE's general partners, ATC, Time Warner Operations Inc., WCI and Warner Cable Communications Inc. ("WCCI"), as well as TWE (as a nominal defendant) alleging that the Transaction would breach fiduciary duties owed by the defendants to U S WEST and that the Transaction would breach certain provisions of the agreement pursuant to which TWE is organized and managed (the "TWE Partnership Agreement") and the agreement pursuant to which USWMC was admitted as a limited partner in TWE (the "Admission Agreement"). U S WEST, Inc., et al. v. Time Warner Inc., et al., Case No. 14555. U S WEST sought equitable relief, including an injunction against consummation of the Transaction. On October 11, 1995, Time Warner and the other defendants filed an answer and counterclaims denying the material allegations contained in U S WEST's complaint. The trial of this action was completed in March 1996. On June 6, 1996, the Court of Chancery ruled in Time Warner's favor on all of U S WEST's claims and denied U S WEST's application for an injunction against consummation of the Transaction. U S WEST has not appealed the court's decision and the period for filing a notice of appeal expired on July 12, 1996. Thereafter, Time Warner consented to the dismissal of its counterclaims. TBS Shareholder Litigation Seventeen complaints have been filed against TBS, Time Warner, certain officers and directors of TBS, Time Warner or TWE, and other defendants, purportedly on behalf of a class of TBS shareholders, two of which 78
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have been voluntarily dismissed. Sixteen of the seventeen complaints were filed in Superior Court, Fulton County, Georgia; the other was filed in the Court of Chancery of the State of Delaware in and for New Castle County. Of the complaints filed in Georgia, fourteen were filed prior to the approval of the Transaction on September 22, 1995 by the Time Warner Board and the TBS Board (Shingala v. Turner Broadcasting Sys., Inc., et al., Case No. E-41502; Schrank v. R. E. Turner, et al., Case No. E-41501; Lewis, et al. v. Turner Broadcasting Sys., Inc., et al., Case No. E-41500; Silverstein and Silverstein v. Turner Broadcasting Sys., Inc., et al., Case No. E-41526; Strauss v. Turner Broadcasting Sys., Inc., et al., Case No. E-41538; Hoffman v. Ted Turner, et al., Case No. E-41544; Barry v. Turner Broadcasting Sys., Inc., et al., Case No. E-41545; Mersel and Mersel v. R. E. Turner, et al., Case No. E-41554; Friedland and Friedland v. Turner Broadcasting Sys., Inc., et al., Case No. E- 41562; Schwarzchild v. Turner Broadcasting Sys., Inc., et al., Case No. E- 41586; Turner and Hanson v. Turner Broadcasting Sys., Inc., et al., Case No. E-41637; H. Mark Solomon v. Turner Broadcasting Sys., Inc., et al., Case No. E-41685; Shores v. Turner Broadcasting Sys., Inc., et al., Case No. E-41749; and Krim and Davidson v. Turner Broadcasting Sys., Inc., et al., Case No. E- 41779). Two of the complaints filed in Georgia were filed after the Transaction was approved by the Time Warner Board and the TBS Board on September 22, 1995 (Altman v. Turner Broadcasting Sys., Inc., et al., Case No. E-43205; Joyce v. Tele-Communications, Inc., et al., Case No. E-43321). The plaintiff in Altman filed a voluntary dismissal of the action without prejudice on November 10, 1995. On September 27, 1995, an amended complaint was filed in Shingala. On October 24, 1995, an amended complaint was filed in Lewis, apparently on behalf of the named plaintiffs in twelve of the sixteen actions filed in Georgia. On November 1, 1995, a second amended complaint (the "Second Amended Complaint") was filed in Lewis which is virtually identical to the first amended Lewis complaint except that the plaintiff in the Joyce action was no longer included as a named plaintiff. The purported class action filed by a TBS shareholder in Delaware was filed on October 2, 1995 (Joyce v. John C. Malone, et al., Case No. 14592) and subsequently dismissed voluntarily without prejudice by the plaintiff on November 15, 1995. As noted above, a substantially similar action on behalf of the same plaintiff was filed in Georgia on October 23, 1995 (Joyce v. Tele-Communications, Inc., et al., Case No. E-43321). On November 13, 1995, Judge Elizabeth Long, to whom all remaining actions had been assigned, consolidated the actions, except the Joyce action. On November 20, 1995, subject to court approval, the plaintiff in Joyce proposed to file an amended and consolidated class action complaint which also includes a derivative claim. Also on November 20, 1995, plaintiffs in the actions other than Joyce filed a motion for the recusal of Judge Long, which motion was denied on January 22, 1996. On December 20, 1995, the defendants filed answers in response to the Second Amended Complaint previously filed in Lewis. On January 19, 1996, defendants in these actions filed a motion for judgment on the pleadings on all claims asserted in the Second Amended Complaint filed in Lewis on the grounds that, under Georgia law, the valid grant of dissenters' rights to TBS shareholders with respect to the TBS Merger prohibits plaintiffs from maintaining the claims asserted in the Second Amended Complaint. On January 31, 1996, the court consolidated the Joyce action with the other consolidated actions, and ordered plaintiffs to file a consolidated amended complaint within thirty days of the date of the order. Additionally, the court stayed discovery in these consolidated actions until the court rules on the defendants' motion for judgment on the pleadings. On February 29, 1996, plaintiffs filed their third amended consolidated supplemental and derivative class action complaint (the "Third Amended Complaint"). The Third Amended Complaint, which includes a derivative claim, alleges, among other things, that the terms of the TBS Merger are unfair to TBS shareholders and that the defendants have breached or aided and abetted the breach of fiduciary common law and statutory duties owned to TBS shareholders by (a) conferring benefits on controlling shareholders at the expense of other shareholders, (b) committing corporate waste and (c) taking actions to entrench TBS Board members. The Third Amended Complaint further alleges that the defendants acted fraudulently in negotiating and approving the proposed TBS Merger, that the approval of the TBS Merger by the TBS Board was fraudulently obtained, and that the vote of the TBS Board approving the TBS Merger did not comply with the TBS Articles and TBS 79
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Bylaws or with Georgia law. Among other relief demanded, the Third Amended Complaint seeks damages, an injunction against the consummation of the TBS Merger and related transactions, and an auction of TBS. On April 1, 1996, defendants in this action filed motions for judgment on the pleadings on all claims asserted in the Third Amended Complaint. On June 17, 1996, the court transformed the defendants' motion for judgment on the pleadings into a motion for summary judgment with respect to two of the plaintiffs' claims and denied the plaintiffs' request for discovery on those claims. The court has not yet ruled on the defendants' motion. Time Warner and TBS intend to continue to defend vigorously these actions. By letter dated October 20, 1995, plaintiffs in certain of the Georgia suits made a demand upon TBS to repudiate the SportSouth Agreement and the fee authorized to be paid by TBS to MC Group as corporate waste or, absent repudiation, to seek indemnification from any officers or directors of TBS who authorized the challenged matters. These plaintiffs indicated that a shareholders' derivative suit seeking injunctive relief would be filed in less than 90 days. These derivative claims were asserted four days later in the first amended complaint filed in Lewis and later asserted in both the Second Amended Complaint and the Third Amended Complaint. The TBS Board has established a committee of the TBS Board to investigate such claims. Time Warner Stockholder Litigation Three complaints have been filed against Time Warner, certain officers and directors of Time Warner, and other defendants, by Time Warner stockholders, purportedly derivatively on behalf of Time Warner. The first two complaints filed by Time Warner stockholders were filed in the Court of Chancery of the State of Delaware in and for New Castle County on October 30, 1995 (Bernard v. Time Warner Inc., et al., Case No. 14651; Parnes v. Time Warner Inc., et al., Case No. 14660). These two complaints allege that some or all of the defendants have violated fiduciary duties owed to Time Warner and its stockholders by (a) seeking to entrench themselves in board and management positions and to eliminate the threat of a hostile takeover, (b) securing economic benefits for themselves or conferring special benefits on TCI and others at the expense of Time Warner's public stockholders and (c) structuring the Transaction so as to place Time Warner's chief executive officer in a position which allegedly will involve a conflict between the interests of TCI and Time Warner. Both complaints seek an injunction against consummation of the Transaction and an order directing the individual defendants to account to Time Warner for their alleged profits and plaintiffs' alleged damages. On November 22, 1995, Time Warner and the other defendants named in the Bernard complaint moved to dismiss such complaint on the ground that the plaintiff has failed to comply with the Delaware Chancery Court Rule 23.1. As of December 5, 1995, the parties in Bernard agreed to stay discovery and to stay briefing of the pending motions to dismiss. The third complaint, brought by a Time Warner stockholder against the directors and certain officers of Time Warner and nominally against Time Warner, was filed in the Court of Chancery of the State of Delaware in and for New Castle County on March 12, 1996 (Trust for the Benefit of Paula C. Rand v. Levin, et al., Case No. 14890). The Rand complaint alleges that some or all of the defendants have breached or will in the future breach fiduciary duties owed to Time Warner and its stockholders in furtherance of an entrenchment scheme by, among other things, (a) forcing the resignations of or firing certain Time Warner directors and officers, (b) conferring special benefits on TCI, Mr. Turner and Mr. Milken in connection with the Transaction and (c) agreeing in the future to settle the ongoing dispute with U S WEST in order to remove U S WEST's opposition to the Transaction. The complaint seeks (a) an injunction against consummation of the Transaction, (b) voiding of a voting trust agreement that, prior to the amendment of the Transaction Agreements pursuant to the FTC Consent Decree, was intended to hold the shares of LMC Common Stock received by TCI and its affiliates, (c) an injunction against any settlement of the U S WEST dispute and (d) damages. On April 8, 1996, the defendants moved to dismiss the Rand complaint. Time Warner intends to continue to defend vigorously each of these actions. 80
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Other Litigation In Bartholdi Cable Company, Inc., and LVE, L.L.C. v. Time Warner Inc., et al., Case No. 96-2687 (E.D.N.Y.), the plaintiffs have filed an amended complaint adding TBS as a defendant and alleging, among other things, that the Transaction would violate the antitrust laws. The amended complaint seeks injunctive relief, divestiture and damages. Time Warner intends to defend vigorously this action. STOCK EXCHANGE LISTING New Time Warner will apply for the listing of New Time Warner Common Stock on the NYSE and the PSE under the symbol TWX. It is a condition to the consummation of the Mergers that the shares of New Time Warner Common Stock to be issued in connection with the Mergers shall have been approved for listing on the NYSE, subject only to official notice of issuance. FEDERAL SECURITIES LAWS CONSEQUENCES All shares of New Time Warner Capital Stock received by Time Warner stockholders and TBS shareholders in the Mergers will be freely transferable under the Federal securities laws, except that shares of New Time Warner Capital Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of Time Warner or TBS prior to the consummation of the Mergers may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144 in the case of such persons who become affiliates of New Time Warner) or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of Time Warner, TBS or New Time Warner generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal stockholders of such party. Upon the consummation of the Mergers, New Time Warner, the Turner Shareholders and certain associated holders will enter into the Turner Registration Rights Agreement, and New Time Warner and the LMC Holders (as defined below) will enter into the LMC Registration Rights Agreement. See "Certain Related Agreements--Registration Rights Agreements." APPRAISAL AND DISSENTERS' RIGHTS Time Warner Under the DGCL, holders of Time Warner Common Stock are not entitled to appraisal or dissenters' rights in connection with the Time Warner Merger because the Time Warner Common Stock is listed on a national securities exchange and the consideration which such holders will be entitled to receive in the Time Warner Merger will consist solely of New Time Warner Common Stock which will also be listed on a national securities exchange. Holders of record of Time Warner Preferred Stock who do not vote in favor of the TW Merger Proposal and who otherwise comply with the applicable statutory procedures summarized herein will be entitled to appraisal rights under Section 262 of the DGCL ("Section 262"). A person having a beneficial interest in shares of Time Warner Preferred Stock held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below properly and in a timely manner to perfect appraisal rights. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 262 WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX D-1. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER" OR "HOLDER" ARE TO THE RECORD HOLDER OF THE SHARES OF TIME WARNER PREFERRED STOCK AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED. Under the DGCL, holders of shares of Time Warner Preferred Stock ("Appraisal Shares") who follow the procedures set forth in Section 262 will be entitled to have their Appraisal Shares appraised by the Delaware 81
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Chancery Court and to receive payment in cash of the "fair value" of such Appraisal Shares, exclusive of any element of value arising from the accomplishment or expectation of the Transaction, together with a fair rate of interest, if any, as determined by such court. Under Section 262, where a proposed merger is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, must notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available, that appraisal rights are so available, and must include in such notice a copy of Section 262. This Joint Proxy Statement/Prospectus constitutes such notice to the holders of Appraisal Shares and the applicable statutory provisions of the DGCL are attached to this Joint Proxy Statement/Prospectus as Appendix E-1. Any stockholder who wishes to exercise such appraisal rights or who wishes to preserve his right to do so should review the following discussion and Appendix D-1 carefully, because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights under the DGCL. A HOLDER OF APPRAISAL SHARES WISHING TO EXERCISE SUCH HOLDER'S APPRAISAL RIGHTS (A) MUST NOT VOTE IN FAVOR OF THE TW MERGER PROPOSAL AND (B) MUST DELIVER TO TIME WARNER PRIOR TO THE VOTE ON THE TW MERGER PROPOSAL AT THE TIME WARNER MEETING TO BE HELD ON OCTOBER 10, 1996, A WRITTEN DEMAND FOR APPRAISAL OF SUCH HOLDER'S APPRAISAL SHARES. A HOLDER OF APPRAISAL SHARES WISHING TO EXERCISE SUCH HOLDER'S APPRAISAL RIGHTS MUST BE THE RECORD HOLDER OF SUCH APPRAISAL SHARES ON THE DATE THE WRITTEN DEMAND FOR APPRAISAL IS MADE AND MUST CONTINUE TO HOLD SUCH APPRAISAL SHARES OF RECORD UNTIL THE CONSUMMATION OF THE TIME WARNER MERGER. ACCORDINGLY, A HOLDER OF APPRAISAL SHARES WHO IS THE RECORD HOLDER OF APPRAISAL SHARES ON THE DATE THE WRITTEN DEMAND FOR APPRAISAL IS MADE, BUT WHO THEREAFTER TRANSFERS SUCH APPRAISAL SHARES PRIOR TO THE CONSUMMATION OF THE TIME WARNER MERGER, WILL LOSE ANY RIGHT TO APPRAISAL IN RESPECT OF SUCH APPRAISAL SHARES. Only a holder of record of Appraisal Shares is entitled to assert appraisal rights for the Appraisal Shares registered in that holder's name. A demand for appraisal should be executed by or on behalf of the holder of record, fully and correctly, as such holder's name appears on such holder's stock certificates. If the Appraisal Shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity, and if the Appraisal Shares are owned of record by more than one person as in a joint tenancy or tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including one or more joint owners, may execute a demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is agent for such owner or owners. A record holder such as a broker who holds Appraisal Shares as nominee for several beneficial owners may exercise appraisal rights with respect to the Appraisal Shares held for one or more beneficial owners while not exercising such rights with respect to the Appraisal Shares held for other beneficial owners; in such case, the written demand should set forth the number of Appraisal Shares as to which appraisal is sought. When no number of Appraisal Shares is expressly mentioned the demand will be presumed to cover all Appraisal Shares held in the name of the record owner. Stockholders who hold their Appraisal Shares in brokerage accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers to determine the appropriate procedures for the making of a demand for appraisal by such a nominee. ALL WRITTEN DEMANDS FOR APPRAISAL SHOULD BE SENT OR DELIVERED TO TIME WARNER INC. AT 75 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10019, ATTENTION: SECRETARY. Within 10 days after the consummation of the Time Warner Merger, Time Warner will notify each stockholder who has properly asserted appraisal rights under Section 262 and has not voted in favor of the TW Merger Proposal of the date the Time Warner Merger became effective. Within 120 days after the consummation of the Time Warner Merger, but not thereafter, Time Warner or any stockholder who has complied with the statutory requirements summarized above may file a petition in the Delaware Chancery Court demanding a determination of the fair value of the Appraisal Shares. Time Warner is under no obligation to and has no present intention to file a petition with respect to the appraisal of the fair value of the Appraisal Shares. Accordingly, it is the obligation of the stockholders to initiate all necessary action to perfect their appraisal rights within the time prescribed in Section 262. 82
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Within 120 days after the consummation of the Time Warner Merger, any stockholder who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from Time Warner a statement setting forth the aggregate number of Appraisal Shares not voted in favor of adoption of the TW Merger Proposal and with respect to which demands for appraisal have been received and the aggregate number of holders of such Appraisal Shares. Such statements must be mailed within ten days after a written request therefor has been received by Time Warner. If a petition for an appraisal is timely filed, after a hearing on such petition, the Delaware Chancery Court will determine the stockholders entitled to appraisal rights and will appraise the "fair value" of their Appraisal Shares, exclusive of any element of value arising from the accomplishment or expectation of the Time Warner Merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. Stockholders considering seeking appraisal should be aware that the fair value of their Appraisal Shares as determined under Section 262 could be more than, the same as or less than the value of the consideration they would receive pursuant to the Merger Agreement if they did not seek appraisal of their Appraisal Shares and that investment banking opinions as to fairness from a financial point of view are not necessarily opinions as to fair value under Section 262. The Delaware Supreme Court has stated that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered in the appraisal proceedings. The Delaware Chancery Court will determine the amount of interest, if any, to be paid upon the amounts to be received by persons whose Appraisal Shares have been appraised. The costs of the action may be determined by the Delaware Chancery Court and taxed upon the parties as the Delaware Chancery Court deems equitable. The Delaware Chancery Court may also order that all or a portion of the expenses incurred by any stockholder in connection with an appraisal, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the Appraisal Shares entitled to appraisal. Any holder of Appraisal Shares who has duly demanded an appraisal in compliance with Section 262 will not, after the consummation of the Time Warner Merger, be entitled to vote the Appraisal Shares subject to such demand for any purpose or be entitled to the payment of dividends or other distributions on those Appraisal Shares (except dividends or other distributions payable to holders of record of Appraisal Shares as of a record date prior to the consummation of the Time Warner Merger). If any stockholder who properly demands appraisal of his Appraisal Shares under Section 262 fails to perfect, or effectively withdraws or loses, his right to appraisal, as provided in the DGCL the Appraisal Shares of such stockholder will be converted into the right to receive the consideration receivable with respect to such Appraisal Shares in accordance with the Merger Agreement. A stockholder will fail to perfect, or effectively lose or withdraw, his right to appraisal if, among other things, no petition for appraisal is filed within 120 days after the consummation of the Time Warner Merger, or if the stockholder delivers to Time Warner a written withdrawal of his demand for appraisal. Any such attempt to withdraw an appraisal demand more than 60 days after the consummation of the Time Warner Merger will require the written approval of Time Warner. FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH EVENT A STOCKHOLDER WILL BE ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE WITH RESPECT TO SUCH APPRAISAL SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT). The holders of all the outstanding Time Warner Series J Preferred Stock have agreed not to exercise appraisal rights with respect to the Time Warner Merger. TBS Holders of TBS Capital Stock will be entitled to assert dissenters' rights with respect to the TBS Merger under and in accordance with Article 13 of the GBCC. The Merger Agreement provides that Time Warner is not obligated to consummate the TBS Merger if dissenters' rights are exercised with respect to more than 28 million 83
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TBS Common Stock equivalents (calculated on the basis of each share of TBS Common Stock representing one TBS Common Stock equivalent and each share of TBS Class C Preferred Stock representing six TBS Common Stock equivalents), which represent approximately 10% of the TBS Common Stock equivalents outstanding as of June 30, 1996. Holders of 73.35% of the TBS Common Stock equivalents outstanding as of June 30, 1996 have agreed to vote all shares of TBS Capital Stock owned by them in favor of the TBS Merger Proposal and thus will not exercise dissenters' rights. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING TO DISSENTERS' RIGHTS UNDER THE GBCC AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF ARTICLE 13 OF THE GBCC, WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX D-2. ALL REFERENCES IN ARTICLE 13 OF THE GBCC AND IN THIS SUMMARY TO A "SHAREHOLDER" OR "HOLDER" ARE TO THE RECORD HOLDER OF TBS CAPITAL STOCK AS TO WHICH DISSENTERS' RIGHTS ARE ASSERTED. This Joint Proxy Statement/Prospectus constitutes notice to holders of TBS Capital Stock of the applicable statutory provisions of Article 13 of the GBCC. Any shareholder who wishes to assert such dissenters' rights or who wishes to preserve his right to do so should review the following discussion and Appendix D-2 carefully because failure to comply timely and properly with the procedures specified will result in the loss of dissenters' rights under Article 13 of the GBCC. A shareholder of TBS is entitled to dissent, and obtain payment of the Fair Value (as hereinafter defined) of his shares of TBS Capital Stock ("Dissenting Shares"), if the TBS Merger is consummated. For purposes of Article 13 of the GBCC, "Fair Value" means the value of the Dissenting Shares immediately before the consummation of the TBS Merger, excluding any appreciation or depreciation in anticipation of the TBS Merger. Each record holder of Dissenting Shares who wishes to assert dissenters' rights (a) must deliver to TBS, before the TBS Merger Proposal is voted upon at the TBS Meeting, written notice of his intent to demand payment for his Dissenting Shares if the TBS Merger is consummated (a "Notice of Intent") and (b) must not vote his Dissenting Shares in favor of the TBS Merger Proposal (any such holder, a "Dissenting TBS Holder"). A shareholder of TBS who does not satisfy such requirements is not entitled to payment for his Dissenting Shares under Article 13 of the GBCC. All Notices of Intent should be sent or delivered to TBS at One CNN Center, Atlanta, Georgia 30303, Attention: Secretary. A TBS shareholder entitled to dissent and obtain payment for his shares of TBS Capital Stock under Article 13 of the GBCC may not challenge the TBS Merger unless the TBS Merger fails to comply with certain procedural requirements of the GBCC or the TBS Articles or the TBS By-Laws or the vote required to obtain approval of the TBS Merger was obtained by fraudulent and deceptive means, regardless of whether such shareholder has exercised dissenters' rights. A shareholder of record of TBS may assert dissenters' rights as to fewer than all shares of TBS Capital Stock registered in his name only if he dissents with respect to all shares of TBS Capital Stock beneficially owned by any one beneficial shareholder and notifies TBS in writing of the name and address of each person on whose behalf he asserts dissenters' rights. The rights of such a partial dissenter are determined as if the shares of TBS Capital Stock as to which he dissents and his other shares of TBS Capital Stock were registered in the names of different shareholders. A beneficial owner of shares of TBS Capital Stock that are held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized herein properly and in a timely manner to assert any dissenters' rights on behalf of such beneficial owner. If the TBS Merger is authorized at the TBS Meeting, TBS must deliver a written dissenters' notice (the "Dissenters' Notice") to all Dissenting TBS Holders. The Dissenters' Notice must be sent no later than ten days after consummation of the TBS Merger and must (a) state where the payment demand must be sent and where and when certificates for certificated Dissenting Shares must be deposited, (b) set a date by which TBS must 84
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receive the payment demand, which date may not be fewer than 30 nor more than 60 days after the date the Dissenters' Notice is delivered, and (c) be accompanied by a copy of Article 13 of the GBCC. A Dissenting TBS Holder to whom a Dissenters' Notice is sent must demand payment and deposit his certificates representing Dissenting Shares in accordance with the terms of the Dissenters' Notice. Upon consummation of the TBS Merger, the rights of a Dissenting TBS Holder are limited to the right to receive the Fair Value of his Dissenting Shares, assuming compliance with Article 13 of the GBCC. A Dissenting TBS Holder who does not demand payment or deposit his certificates representing Dissenting Shares where required, each by the date set in the Dissenters' Notice, will not be entitled to payment for his Dissenting Shares under Article 13 of the GBCC and, thereafter, will no longer be deemed a Dissenting TBS Holder. Except as described below, within ten days of the later of consummation of the TBS Merger or receipt of a payment demand, TBS must by written notice (the "Offer of Payment") offer to pay to each Dissenting TBS Holder, who complied with the payment demand and deposit requirements specified in the Dissenters' Notice, the amount TBS estimates to be the Fair Value of his Dissenting Shares, plus accrued interest from the date of consummation of the TBS Merger. The Offer of Payment must be accompanied by (a) certain recent TBS financial statements, (b) a statement of TBS's estimate of the Fair Value of the Dissenting Shares, (c) an explanation of how the interest was calculated, (d) a statement of the Dissenting TBS Holder's right under the GBCC to notify TBS of his own estimate of the Fair Value of his Dissenting Shares and the amount of interest due and (e) a copy of Article 13 of the GBCC. If such Dissenting TBS Holder accepts TBS's Offer of Payment by written notice to TBS within 30 days after TBS's Offer of Payment or is deemed to have accepted the Offer of Payment by failure to respond within such 30-day period, payment by TBS for such Dissenting TBS Holder's Dissenting Shares must be made within 60 days after the later of the making of the Offer of Payment or the consummation of the TBS Merger. If the TBS Merger is not consummated within 60 days after the date set in the Dissenters' Notice for demanding payment and depositing certificates representing Dissenting Shares, TBS must return the deposited certificates. If, after such return, the TBS Merger is consummated, TBS must send a new Dissenters' Notice and repeat the payment demand procedure described above. A Dissenting TBS Holder may notify TBS in writing of his own estimate of the Fair Value of his Dissenting Shares and amount of interest due, and demand payment of such estimate (a "Dissenting TBS Holder Demand"), if (a) such Dissenting TBS Holder believes that the amount offered by TBS in the Offer of Payment is less than the Fair Value of his Dissenting Shares or that the interest is incorrectly calculated or (b) TBS, having failed to consummate the TBS Merger, does not return the deposited certificates within 60 days after the date set in the Dissenter's Notice for demanding payment. A Dissenting TBS Holder waives his right to demand payment pursuant to a Dissenting TBS Holder Demand and is deemed to have accepted TBS's offer contained in the Offer of Payment unless he notifies TBS of his demand in writing within 30 days after TBS's Offer of Payment for his Dissenting Shares. If TBS does not make an Offer of Payment to any Dissenting TBS Holder within ten days of the later of the consummation of the TBS Merger or receipt of a payment demand, then (a) such Dissenting TBS Holder may demand the financial statements and other information required to accompany the Offer of Payment, and TBS must provide such information within ten days after receipt of written demand for such information, and (b) such Dissenting TBS Holder may, at any time within three years after the TBS Merger is consummated, notify TBS of his own estimate of the Fair Value of his Dissenting Shares and the amount of interest due and demand payment of such estimate. If a Dissenting TBS Holder Demand remains unsettled, TBS must commence a nonjury equitable valuation proceeding (the "Appraisal Proceeding") in the Superior Court of Fulton County, Georgia (the "Court"), within 60 days after receiving such Dissenting TBS Holder Demand and must petition the Court to determine the Fair Value of the Dissenting Shares and accrued interest. If TBS does not commence the Appraisal Proceeding within 85
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such 60-day period, it must pay each Dissenting TBS Holder whose demand remains unsettled, the amount demanded. TBS must make all Dissenting TBS Holders whose demands remain unsettled parties to the Appraisal Proceeding and must serve a copy of the petition in the Appraisal Proceeding upon each Dissenting TBS Holder. The Court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the Fair Value of the Dissenting Shares. Each Dissenting TBS Holder made a party to the Appraisal Proceeding will be entitled to judgment for the amount that the Court finds to be the Fair Value of such holder's Dissenting Shares plus interest to the date of judgment. Under existing Georgia case law, claims arising by virtue of a person's status as a shareholder, including claims relating to breaches by directors of a Georgia corporation of their fiduciary duties to shareholders, are generally not maintainable following consummation of a transaction to which dissenters' rights apply except as an element of the determination of the fair value of the dissenting shares in an Appraisal Proceeding. TBS has moved to dismiss all of the pending litigation filed in connection with the Transaction in the Georgia state court actions on behalf of purported shareholders of TBS on that basis. See "--Certain Litigation--TBS Shareholder Litigation." The Court in the Appraisal Proceeding will determine all costs of the Appraisal Proceeding, including the reasonable compensation and expenses of appraisers appointed by the Court, but not including fees and expenses of attorneys and experts for the respective parties. The Court will assess such costs against TBS, except that the Court may assess the costs against all or some of the Dissenting TBS Holders, in amounts the Court finds equitable, to the extent the Court finds they acted arbitrarily, vexatiously or not in good faith in making a Dissenting TBS Holder Demand. The Court also may assess the fees and expenses of attorneys and experts for the respective parties against TBS and in favor of all Dissenting TBS Holders if the Court finds that TBS did not substantially comply with the requirements of certain provisions of Article 13 of the GBCC, or against either TBS or a Dissenting TBS Holder, in favor of the other party, if the Court finds that the party against whom such fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by Article 13 of the GBCC. If the Court finds that the services of attorneys for any Dissenting TBS Holder were of substantial benefit to other Dissenting TBS Holders similarly situated, and that the fees for those services should not be assessed against TBS, the Court may award such attorneys reasonable fees to be paid out of the amounts awarded the Dissenting TBS Holders who were benefitted. No action by any Dissenting TBS Holder to enforce dissenters' rights may be brought more than three years after consummation of the TBS Merger, regardless of whether notice of the Transaction and of the right to dissent was given by TBS in accordance with the relevant provisions of Article 13 of the GBCC. Any Dissenting TBS Holder who has duly asserted dissenters' rights in compliance with Article 13 of the GBCC will not, after the consummation of the TBS Merger, be entitled to vote the Dissenting Shares subject to such demand for any purpose or be entitled to the payment of dividends or other distributions on those Dissenting Shares (except dividends or other distributions payable to holders of record of Dissenting Shares as of a record date prior to the consummation of the TBS Merger). If any shareholder who properly asserts dissenters' rights under Article 13 of the GBCC fails to perfect such rights, or effectively withdraws such assertion or loses such rights, as provided in Article 13 of the GBCC, the Dissenting Shares of such shareholder will be converted into the right to receive the consideration receivable with respect to such Dissenting Shares in accordance with the Merger Agreement. FAILURE TO FOLLOW THE STEPS REQUIRED BY ARTICLE 13 OF THE GBCC FOR ASSERTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. IN VIEW OF THE COMPLEXITY OF THE PROVISIONS OF ARTICLE 13 OF THE GBCC, SHAREHOLDERS OF TBS WHO ARE CONSIDERING DISSENTING FROM THE TBS MERGER PROPOSAL SHOULD CONSULT THEIR OWN LEGAL ADVISORS. 86
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EFFECT OF TRANSACTION ON THE TBS LYONS As of June 30, 1996, there was $582,056,000 aggregate principal amount at maturity of the TBS LYONs outstanding. The TBS LYONs were issued under an Indenture dated as of February 13, 1992 (the "TBS LYONs Indenture"), between TBS and The Bank of New York, as successor trustee. The TBS LYONs are convertible at the option of the holder thereof into shares of TBS Class B Common Stock at a conversion rate of 12.783 shares of TBS Class B Common Stock per $1,000 principal amount at maturity of the TBS LYONs, subject to adjustment upon the happening of certain events. Accordingly, the effective conversion price at June 30, 1996, based upon the original issue price and the accrued original issue discount at such date, would have been $36.72 per share. Upon consummation of the Mergers, New Time Warner will enter into a supplemental indenture to the TBS LYONs Indenture providing that thereafter, subject to the terms and conditions set forth in the TBS LYONs Indenture, the TBS LYONs will be convertible into the number of shares of New Time Warner Common Stock which a holder of such TBS LYONs would have received if such holder had converted such TBS LYONs immediately prior to the consummation of the Mergers, subject to adjustment thereafter upon the happening of the same events that would currently result in an adjustment pursuant to the TBS LYONs Indenture. Accordingly, assuming no events occur prior to consummation of the Mergers that would result in an adjustment to the current conversion rate, upon consummation of the Mergers the TBS LYONs will become convertible into 9.587 shares of New Time Warner Common Stock for each $1,000 principal amount at maturity of the TBS LYONs. The TBS LYONs also provide that, in the event of a "Change in Control" (as defined in the TBS LYONs Indenture) occurring on or prior to February 13, 1997, each holder of TBS LYONs will have the right to require TBS to purchase all or any part of such holder's TBS LYONs at a cash purchase price equal to the original issue price plus accrued original issue discount to the repurchase date. Because New Time Warner is a "Permitted Other Holder," within the meaning of the TBS LYONs Indenture, the Transaction will not constitute a "Change In Control" as defined in the TBS LYONs Indenture and, accordingly, holders of TBS LYONs will not have the right to require TBS to repurchase TBS LYONs as a result of the consummation of the Mergers. Following consummation of the Mergers, it is expected that New Time Warner will guarantee the obligations of TBS under the TBS LYONs. EFFECT OF TRANSACTION ON CERTAIN OUTSTANDING TIME WARNER CONVERTIBLE SECURITIES TW LYONs As of June 30, 1996, there was $2,415,000,000 aggregate principal amount at maturity of the TW LYONs outstanding. The TW LYONs were issued under an Indenture dated as of January 15, 1993 (the "TW Indenture"), between Time Warner and Chemical Bank, as trustee. The TW LYONs are convertible at the option of the holder thereof into shares of Time Warner Common Stock at a conversion rate of 7.759 shares of Time Warner Common Stock per $1,000 principal amount at maturity of TW LYONs, subject to adjustment upon the happening of certain events. Upon consummation of the Mergers, New Time Warner will enter into a supplemental indenture to the TW Indenture providing that thereafter, subject to the terms and conditions set forth in the TW Indenture, the TW LYONs will be convertible into the number of shares of New Time Warner Common Stock which a holder of TW LYONs would have received if such holder had converted such TW LYONs immediately prior to the Mergers, subject to adjustment thereafter upon the happening of the same events that would currently result in an adjustment to the TW LYONs pursuant to the TW Indenture. Following consummation of the Mergers, it is expected that New Time Warner will guarantee the obligations of Time Warner under the TW LYONs. Hasbro LYONs The Transaction will not result in any adjustment to Time Warner's Liquid Yield Option Notes due 2012 (the "Hasbro LYONs"), which are exchangeable for shares of the common stock of Hasbro, Inc. held indirectly by Time Warner. Following consummation of the Mergers, it is expected that New Time Warner will guarantee the obligations of Time Warner under the Hasbro LYONs. 87
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THE MERGER AGREEMENT The following is a summary of certain provisions of the Merger Agreement, a copy of which is attached hereto as Appendix A-1(a), and Amendment No. 1 thereto, a copy of which is attached hereto as Appendix A-1(b), each of which is incorporated herein by reference. The following summary is qualified in its entirety by reference to the complete text of the Merger Agreement. THE MERGERS Pursuant to the Merger Agreement and on the terms and subject to the conditions set forth in the Merger Agreement, TW Merger Corp. and TBS Merger Corp. will be merged into Time Warner and TBS, respectively. Following the Mergers, Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner. Subject to the conditions set forth in the Merger Agreement, the closing of the Mergers (the "Closing") will take place on a date to be specified by the parties, which shall be no later than the second business day after satisfaction of the conditions described in the first paragraph under "-- Conditions to the Mergers" below (the "Closing Date"). The Mergers will become effective at the time specified in the certificate of merger filed with the Secretary of State of the State of Delaware with respect to the Time Warner Merger and the articles of merger filed with the Secretary of State of the State of Georgia with respect to the TBS Merger. The time at which the Mergers become effective is referred to as the "Effective Time of the Mergers." CONVERSION OF TIME WARNER CAPITAL STOCK At the Effective Time of the Mergers, pursuant to the Merger Agreement (a) each issued and outstanding share of Time Warner Common Stock, other than shares held directly or indirectly by Time Warner, will be converted into one share of New Time Warner Common Stock, and upon such conversion all such shares of Time Warner Common Stock will be canceled and retired and will cease to exist, (b) each issued and outstanding share of each series of Time Warner Preferred Stock, other than shares held directly or indirectly by Time Warner and shares with respect to which appraisal rights are properly exercised, will be converted into one share of a substantially identical series of New Time Warner Preferred Stock having the same designation as the shares of Time Warner Preferred Stock so converted, and upon such conversion all such shares of Time Warner Preferred Stock will be canceled and retired and will cease to exist, (c) all shares of Time Warner Capital Stock held by Time Warner will be canceled and retired and will cease to exist without payment of any consideration therefor and (d) all shares of Time Warner Capital Stock held by subsidiaries of Time Warner shall continue as shares of Time Warner Capital Stock. Holders of Time Warner Common Stock will not receive any payment or other consideration in the Time Warner Merger in respect of the preferred stock purchase rights (the "Rights") outstanding under the Existing Rights Agreement. AT THE EFFECTIVE TIME OF THE MERGERS, (A) EACH CERTIFICATE REPRESENTING OUTSTANDING SHARES OF TIME WARNER COMMON STOCK WILL, WITHOUT ANY ACTION ON THE PART OF THE HOLDER THEREOF, BE DEEMED TO REPRESENT AN EQUAL NUMBER OF SHARES OF NEW TIME WARNER COMMON STOCK AND (B) EACH CERTIFICATE REPRESENTING OUTSTANDING SHARES OF TIME WARNER PREFERRED STOCK (OTHER THAN SHARES OF TIME WARNER PREFERRED STOCK WITH RESPECT TO WHICH APPRAISAL RIGHTS ARE PROPERLY EXERCISED) WILL, WITHOUT ANY ACTION ON THE PART OF THE HOLDER THEREOF, BE DEEMED TO REPRESENT AN EQUAL NUMBER OF SHARES OF NEW TIME WARNER PREFERRED STOCK OF THE SAME DESIGNATION. HOLDERS OF TIME WARNER CAPITAL STOCK SHOULD NOT SUBMIT CERTIFICATES REPRESENTING THEIR SHARES OF TIME WARNER CAPITAL STOCK FOR EXCHANGE. 88
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CONVERSION OF TBS CAPITAL STOCK At the Effective Time of the Mergers, pursuant to the Merger Agreement (a) each issued and outstanding share of TBS Common Stock, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to which dissenters' rights are properly exercised, will be converted into the right to receive 0.75 of a share of New Time Warner Common Stock, and upon such conversion all such shares of TBS Common Stock will be canceled and retired and will cease to exist, (b) each issued and outstanding share of TBS Class C Preferred Stock, other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of TBS and shares with respect to dissenters' rights are properly exercised, will be converted into the right to receive 4.80 shares of New Time Warner Common Stock, and upon such conversion all such shares of TBS Class C Preferred Stock will be canceled and retired and will cease to exist, (c) all shares of TBS Capital Stock held by TBS will be canceled and retired and will cease to exist without payment of any consideration therefor and (d) all shares of TBS Capital Stock directly or indirectly held by Time Warner or New Time Warner will continue as shares of TBS. HOLDERS OF TBS CAPITAL STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES OF TBS CAPITAL STOCK WITH THE ENCLOSED PROXY CARD. IF THE TRANSACTION IS APPROVED, A LETTER OF TRANSMITTAL WILL BE MAILED AFTER THE EFFECTIVE TIME OF THE MERGERS TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING SHARES OF TBS CAPITAL STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME OF THE MERGERS. TBS SHAREHOLDERS SHOULD SEND CERTIFICATES REPRESENTING TBS CAPITAL STOCK TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED IN, THE LETTER OF TRANSMITTAL. TREATMENT OF OPTIONS AND WARRANTS At the Effective Time of the Mergers, pursuant to the Merger Agreement, each outstanding option or warrant to purchase Time Warner Common Stock and each outstanding option to purchase TBS Common Stock will be assumed by New Time Warner and converted into an option or warrant to purchase shares of New Time Warner Common Stock. Following the Effective Time of the Mergers, each such option or warrant will continue to have, and will be subject to, the same terms and conditions as in effect immediately prior to the Effective Time of the Mergers, except that each option to purchase shares of TBS Common Stock shall be exercisable for that number of shares of New Time Warner Common Stock equal to the product of the number of shares of TBS Common Stock for which such option was exercisable immediately prior to the Effective Time of the Mergers and 0.75, and the exercise price per share of such option will be equal to the aggregate exercise price of such option immediately prior to the Effective Time of the Mergers divided by the number of shares of New Time Warner Common Stock for which such option will be exercisable immediately after the Effective Time of the Mergers. At the Effective Time of the Mergers, all options to purchase TBS Common Stock will become vested. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains customary representations and warranties by both Time Warner and TBS as to, among other things, (a) due organization, good standing and absence of violations of constitutive documents, (b) ownership of subsidiaries and other investments, (c) capital structure, (d) requisite corporate power and authority to enter into the Merger Agreement and to consummate the transactions contemplated by the Merger Agreement, due authorization, execution and delivery of the Merger Agreement, validity and enforceability of the Merger Agreement and the compliance of the Mergers with constitutive documents, agreements and applicable laws, (e) required filings and approvals, (f) the disclosure contained in documents filed with the Commission and absence of certain undisclosed liabilities, (g) absence of certain material changes or events, (h) absence of certain litigation, (i) absence of certain changes in benefit plans, (j) compliance with laws applicable to employee benefit plans, (k) matters relating to financial advisors, (l) receipt of fairness opinions, (m) tax matters, and (n) compliance with laws. 89
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CERTAIN COVENANTS Conduct of Business Pending the Mergers Pursuant to the Merger Agreement, TBS has agreed that, prior to the Effective Time of the Mergers, TBS will, and will cause its subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the manner as conducted prior to September 22, 1995 and in compliance in all material respects with all applicable laws and regulations (including the Communications Act and the FCC's rules and regulations). Specifically, prior to the Effective Time of the Mergers, and except for Approved Matters (as defined below), TBS has agreed, among other things, not to (a) declare any dividends or make any other distributions in respect of any TBS Capital Stock, other than regular quarterly cash dividends, or purchase, redeem or otherwise acquire any shares of TBS Capital Stock, (b) subject to certain exceptions, issue or sell any shares of TBS Capital Stock, (c) amend the TBS Articles or the TBS By-Laws, (d)(i) make any material acquisition, (ii) subject to certain exceptions, sell or otherwise dispose of its properties or assets, (iii) incur any indebtedness for borrowed money, except for short-term borrowings incurred in the ordinary course of business consistent with past practice, or make any loans, advances or capital contributions to, or investments in, any other person or (iv) make any new capital expenditures, (e) make any material tax election or settle or compromise any material tax liability or refund, (f) subject to certain exceptions or in the ordinary course of business pursuant to existing employment agreements or benefit plans, or as required by applicable laws, (i) increase the compensation payable to its executive officers or employees, (ii) grant any severance or termination pay to, or enter into any employment or severance arrangement with, any director, executive officer or employee or (iii) establish, adopt, enter into or amend in any material respect or take action to accelerate any rights or benefits under any employee benefit plan or (g) terminate or amend on terms less favorable to TBS certain material agreements. For purposes of the Merger Agreement, "Approved Matters" means matters that are (x) expressly included in a master budget contemplated by the TBS By-Laws as in effect on September 22, 1995, or thereafter approved by Time Warner or (y) otherwise approved in writing by Time Warner. Pursuant to the Merger Agreement, Time Warner has agreed that (a) simultaneously with or prior to the Effective Time of the Mergers, it will cause the New Time Warner Charter to be amended to read in the form of the Time Warner Charter, and will cause the by-laws of New Time Warner (the "New Time Warner By-laws") to be amended to read in the form of the Time Warner By- laws, in each case as in effect immediately prior to the Effective Time of the Mergers, together with such changes thereto as Time Warner and TBS may from time to time agree, and (b) during the period from September 22, 1995, to the Effective Time of the Mergers, Time Warner will not amend the Time Warner Charter or the Time Warner By-laws in any manner that would be materially adverse to the holders of Time Warner Common Stock. Pursuant to the Merger Agreement, TBS and Time Warner have each agreed that it will not take any action that would, or that could reasonably be expected to, result in (a) any of the representations and warranties of such party set forth in the Merger Agreement that are qualified as to materiality becoming untrue, (b) any of such representations and warranties that are not so qualified becoming untrue in any material respect or (c) any of the conditions to the Mergers not being satisfied. Solicitation of Takeover Proposals Pursuant to the Merger Agreement, TBS has agreed that it will not, nor will it permit any of its subsidiaries to, nor will it authorize or permit any of its officers, directors or employees or any investment banker, attorney or other advisor or representative of TBS to (a) solicit, initiate or encourage the submission of any Takeover Proposal (as defined below), (b) enter into any agreement with respect to any Takeover Proposal or (c) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Takeover Proposal. TBS and the TBS Board, however, may (i) furnish nonpublic information to, or enter into discussions or negotiations with, any person in connection with an unsolicited bona fide written Takeover Proposal to TBS or its shareholders if and to the extent that (A) the TBS Board determines 90
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in good faith based on written advice of its outside legal counsel that such action is necessary for the TBS Board to comply with its fiduciary duties to TBS shareholders under applicable law and (B) prior to furnishing such nonpublic information to, or entering into discussions or negotiations with, such person, the TBS Board receives from such person or entity an executed confidentiality agreement with terms no less favorable to TBS than those contained in TBS's confidentiality agreement with Time Warner and (ii) comply with Rule 14e-2 under the Exchange Act with respect to any Takeover Proposal. TBS has also agreed to advise Time Warner of any Takeover Proposal or any inquiry with respect to or which could lead to any Takeover Proposal and the identity of the person making any such Takeover Proposal or inquiry and to keep Time Warner promptly and fully informed in all material respects of the status and details of any such Takeover Proposal or inquiry. For purposes of the Merger Agreement, "Takeover Proposal" means any proposal for a merger, consolidation or other business combination involving TBS or any of its material subsidiaries or any proposal or offer to acquire in any manner, directly or indirectly, more than 15% of any class of voting securities of TBS or any of its material subsidiaries, or assets representing a substantial portion of the assets of TBS and its subsidiaries, taken as a whole. Material Transactions by Time Warner Pursuant to the Merger Agreement, Time Warner has agreed to notify TBS if, prior to the Effective Time of the Mergers, Time Warner or any of its subsidiaries enters into a definitive agreement for the implementation of a Material Transaction (as defined below). In such event, the TBS Board may request CS First Boston to deliver a written opinion, substantially in the same form as the opinion attached as Appendix C-2, that, after giving effect to the Material Transaction, the consideration to be received by holders of TBS Capital Stock in the TBS Merger is fair to such holders (other than Time Warner) from a financial point of view. If CS First Boston is unable to deliver such opinion, TBS will have the right to terminate the Merger Agreement. See "--Termination of the Merger Agreement" below. For purposes of the Merger Agreement, a "Material Transaction" means, subject to specified exceptions, (a) the issuance by Time Warner of more than 90 million shares of Time Warner Common Stock or their equivalent in any single transaction or series of individual transactions, each of which involves the issuance of more than 20 million shares of Time Warner Common Stock or their equivalent, or (b) the sale or other disposition by Time Warner in any transaction or series of transactions of any business or assets with an aggregate fair market value in excess of $3.5 billion, excluding from such amount sales of inventory in the ordinary course of business and the sale, in a single transaction or a series of related transactions, of assets with an aggregate fair market value of $500 million or less. Other Actions Pursuant to the Merger Agreement, each party has agreed to use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Mergers and the other transactions contemplated by the Merger Agreement; provided, however, that a party shall not be obligated to take any such action if the taking of such action is reasonably likely (a) to be materially burdensome to such party and its subsidiaries taken as a whole or to impact in a materially adverse manner the economic or business benefits of the transactions contemplated by the Merger Agreement, the Support Agreement and the LMC Agreement so as to render inadvisable the consummation of the Time Warner Merger or the TBS Merger, as the case may be, or (b) to result in any suit, action or proceeding by a governmental entity that seeks to (i) prohibit or limit the ownership or operation by TBS, Time Warner, New Time Warner or any of their respective material subsidiaries, of any material portion of their businesses or assets, (ii) impose limitations on the ability of New Time Warner to acquire or hold any shares of capital stock of Time Warner or TBS, including, without limitation, the right to vote such capital stock, or (iii) prohibit New Time Warner from effectively controlling in any material respect the business or operations of TBS or any of its material subsidiaries (collectively, the "Ownership Limitations"). Board Authority Pursuant to the Merger Agreement, the TBS Board has adopted resolutions providing that (a) any action to be subsequently taken by the TBS Board to implement the transactions contemplated by the Merger Agreement 91
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shall be authorized if approved by a majority vote of the directors of TBS (other than any directors that are "interested directors" under the TBS By- Laws) present and voting at a meeting at which a quorum is present, without regard to class, and (b) any action to be taken subsequently by TBS to implement the transactions contemplated by the Merger Agreement that otherwise requires the approval of the TBS Board shall be authorized if approved by a majority vote of the directors of TBS (other than any directors that are "interested directors") present and voting at a meeting at which a quorum is present, without regard to class. TBS has agreed that the TBS Board will not amend, rescind or repeal any of such resolutions and that TBS will not enter into any contract, agreement or other instrument, or adopt any resolution that, directly or indirectly, would result in any action to be taken by the TBS Board to implement the transactions contemplated by the Merger Agreement requiring (i) any approval other than the approval by the majority vote of all the directors of TBS (other than any directors that are "interested directors") present and voting at a meeting at which a quorum is present, without regard to class or (ii) the approval (if not required as of September 22, 1995) of the directors of TBS or any group or committee thereof. Benefit Plans Pursuant to the Merger Agreement, New Time Warner has agreed that, for a period of two years after the Effective Time of the Mergers, New Time Warner will (a) either (i) maintain the employee benefit plans (other than medical plans) for TBS at the benefit levels in effect on September 22, 1995, or (ii) provide benefits to employees of TBS and its subsidiaries that are not materially less favorable in the aggregate to such employees than are those that were in effect on September 22, 1995, and (b) provide or cause to be provided medical benefits to employees of TBS and its subsidiaries that are substantially equivalent to those provided to similarly situated employees of Time Warner. Indemnification and Insurance Pursuant to the Merger Agreement, New Time Warner, Time Warner and TBS Merger Corp. have agreed that all rights to indemnification for acts or omissions occurring prior to the Effective Time of the Mergers existing as of September 22, 1995 in favor of the current or former directors or officers of TBS as provided in the TBS Articles or the TBS By-Laws shall survive the TBS Merger and shall continue in full force and effect in accordance with their terms. New Time Warner has agreed to cause to be maintained for a period of not less than six years from the Effective Time of the Mergers TBS's directors' and officers' insurance and indemnification policy in effect as of September 22, 1995, to the extent that it provides coverage for events occurring prior to the Effective Time of the Mergers, so long as the annual premium therefor would not be in excess of the Maximum Premium. If such policy expires, is terminated or canceled during such six-year period, Time Warner will use all reasonable efforts to cause to be obtained as much of such insurance coverage as can be obtained for the remainder of such six-year period for an annualized premium not in excess of the Maximum Premium. Access to Information Pursuant to the Merger Agreement, each of TBS and Time Warner has agreed to afford to the other and to its officers, employees, accountants, counsel, financial advisors and other representatives, reasonable access during normal business hours prior to the Effective Time of the Mergers to all its respective properties, books, contracts, commitments, personnel and records. Except as required by law, each of TBS and Time Warner has agreed to hold any non-public information in confidence. Certain Other Covenants The Merger Agreement also contains customary covenants applicable to transactions like the Mergers, including covenants relating to (a) delivery of letters of accountants relating to financial information included in this Joint Proxy Statement/Prospectus, (b) consultation prior to the issuance of any press release or other public statement, (c) each party's obligation to pay its own fees and expenses, (d) the listing on the NYSE of the shares of New Time Warner Common Stock to be issued in the Mergers, (e) execution and delivery of closing 92
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documentation and (f) use of reasonable best efforts to cause the Mergers to qualify as a tax-free incorporation transaction under Section 351 of the Code. CONDITIONS TO THE MERGERS The obligations of Time Warner and TBS to consummate the Mergers are subject to certain conditions, including the following: (a) the TBS Merger Approval and the TW Merger Approval shall have been obtained; (b) the shares of New Time Warner Common Stock issuable pursuant to the Merger Agreement shall have been approved for listing on the NYSE, subject to official notice of issuance; (c) the waiting periods (and any extensions thereof) applicable to the transactions contemplated by the Merger Agreement under the HSR Act and applicable foreign antitrust laws shall have been terminated or shall have expired, and the FTC shall have initially accepted the FTC Consent Decree; (d) no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers or preventing LMC or any of its subsidiaries from voting, as contemplated by the LMC Agreement, shares of TBS Capital Stock that LMC or any such subsidiary is otherwise entitled to vote, shall be in effect; (e) the Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order; and (f) all orders and approvals of the FCC required in connection with the consummation of the transactions contemplated by the Merger Agreement shall have been obtained without the imposition of any Ownership Limitation. The obligation of Time Warner to consummate the Mergers is also subject to certain additional conditions, including the following: (a) the accuracy of the representations and warranties of TBS set forth in the Merger Agreement; (b) TBS having performed in all material respects all obligations required to be performed by TBS under the Merger Agreement at or prior to the Closing; (c) receipt by Time Warner of a satisfactory opinion of its tax counsel; (d) absence of certain pending suits, actions or proceedings by governmental agencies; (e) receipt of all necessary orders and permits approving the transactions contemplated by the Merger Agreement by all applicable cable franchising authorities having jurisdiction over all or any portion of any material cable system operated by Time Warner or any of its subsidiaries; and (f) dissenters' rights not having been asserted with respect to shares of TBS Capital Stock representing more than 28 million TBS Common Stock equivalents (calculated on the basis of each share of TBS Common Stock representing one TBS Common Stock equivalent and each share of Class C Preferred Stock representing six TBS Common Stock equivalents). The obligation of TBS to consummate the TBS Merger is also subject to additional conditions, including the following: (a) the accuracy of the representations and warranties of Time Warner set forth in the Merger Agreement; (b) Time Warner having performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the Closing; (c) the absence of certain pending suits, actions or proceedings by governmental agencies; and (d) receipt by TBS of a satisfactory opinion of its tax counsel. TERMINATION OF THE MERGER AGREEMENT The Merger Agreement may be terminated at any time prior to the Effective Time of the Mergers pursuant to the mutual written consent of Time Warner and TBS and at the option of either Time Warner or TBS under certain circumstances, including the following (a) if at the TBS Meeting the TBS Merger Approval is not obtained, (b) if at the Time Warner Meeting the TW Merger Approval is not obtained, (c) if the Mergers shall not have been consummated on or before December 31, 1996, unless the failure to consummate the Mergers is the result of a willful and material breach of the Merger Agreement by the party seeking to terminate the Merger Agreement, (d) if any court or other governmental agency shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the Mergers, and such order, decree, ruling or other action shall have become final and nonappealable, (e) in the event of a material breach by the other party to the Merger Agreement, (f) if the FCC shall have issued an order or ruling or taken other action denying approval of the transactions contemplated by the Merger Agreement, and such order, ruling or other action shall have become final and nonappealable or (g) if (i) all the conditions to the Mergers that are conditions 93
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to the obligations of both Time Warner and TBS have been satisfied and (ii) any of the conditions to the obligations of the terminating party to consummate the Mergers cannot be satisfied on or before December 31, 1996. The Merger Agreement may also be terminated at the option of Time Warner under certain circumstances, including: (a) if any order or approval of the FCC, receipt of which is a condition to the obligation of Time Warner to consummate the Mergers, when obtained shall include any Ownership Limitation that is not acceptable to Time Warner in its sole discretion and such order or approval shall have become final and nonappealable; or (b) if Time Warner is required to terminate the Merger Agreement pursuant to the LMC Agreement. For a description of the circumstances under which LMC may require Time Warner to terminate the Merger Agreement and abandon the Mergers, see "TCI Arrangements--LMC Agreement--Covenants With Respect to the Mergers." The Merger Agreement may also be terminated at the option of TBS under certain circumstances, including: (a) if Time Warner enters into a definitive agreement providing for the implementation of a Material Transaction and CS First Boston is unable to deliver to the TBS Board its opinion that, after giving effect to such Material Transaction, the consideration to be received by holders of TBS Capital Stock in the TBS Merger is fair to such holders (other than Time Warner) from a financial point of view (see "--Certain Covenants--Material Transactions" above); or (b) within 30 days of (i) Time Warner entering into an agreement providing for the merger or consolidation of Time Warner in which the Time Warner Capital Stock is exchanged for or converted into the right to receive anything other than Time Warner Common Stock, (ii) any person becoming the beneficial owner of more than 15% of the outstanding Time Warner Common Stock, other than with the prior approval of the Time Warner Board or (iii) any person becoming the beneficial owner of more than 30% of the outstanding Time Warner Common Stock, regardless of whether approved by the Time Warner Board. In addition, the Merger Agreement may be terminated at the option of TBS if the TBS Board determines that a Takeover Proposal is more favorable to the shareholders of TBS than the transactions contemplated by the Merger Agreement and the TBS Board shall concurrently approve, and TBS shall concurrently enter into, a definitive agreement providing for the implementation of the transactions contemplated by such Takeover Proposal. In order to terminate the Merger Agreement under this provision, TBS must give Time Warner at least two business days' notice of its intention to terminate, and the TBS Board is required to take into account the terms of any revised proposal made by Time Warner during such two business-day period. In considering the effect of the termination provisions described in the immediately preceding paragraph, TBS shareholders should consider the existing governance arrangements with respect to TBS, certain provisions of the Support Agreement and the termination fee provisions of the Merger Agreement described below. The effect of such governance arrangements is that any of Time Warner, TCI or Mr. Turner may veto any transaction involving a merger or consolidation of TBS. The Support Agreement provides that if the Merger Agreement is terminated pursuant to such termination provisions, Mr. Turner is required to pay to Time Warner all "profit" of Mr. Turner and certain other holders of TBS Capital Stock from the consummation of any Takeover Proposal that is consummated, or with respect to which a definitive agreement is executed, within 18 months of the termination of the Merger Agreement. See "Certain Related Agreements--Support Agreement." Finally, any such termination pursuant to such termination provisions will obligate TBS to pay to Time Warner a termination fee of $175 million upon execution of a definitive agreement with respect to any Takeover Proposal. See "--Effects of Termination" below. As a result, in considering whether to exercise the right to terminate the Merger Agreement in order to enter into a definitive agreement with respect to a Takeover Proposal, the TBS Board would necessarily have to consider the likelihood that any such Takeover Proposal would be consummated, based in part upon whether each of Time Warner, TCI and Mr. Turner would support such Takeover Proposal and the fact that the termination fee would be payable by TBS upon execution of a definitive agreement with respect to such Takeover Proposal, regardless of whether such Takeover Proposal, or any other Takeover Proposal, is consummated. 94
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EFFECTS OF TERMINATION If any person makes a Takeover Proposal and thereafter (a) the Merger Agreement is terminated (i) for failure to obtain the TBS Merger Approval, (ii) because the Closing shall not have occurred on or before December 31, 1996 (if at the time of termination TBS is in material breach of the Merger Agreement and such breach cannot be or has not been cured within 30 days after TBS becomes aware of such breach or such shorter period as may elapse between the date TBS becomes aware of such breach and the time of termination), (iii) by TBS because a court of competent jurisdiction or other governmental agency shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the Mergers (if at the time of termination TBS is in material breach of the Merger Agreement and such breach cannot be or has not been cured within 30 days after TBS becomes aware of such breach), (iv) by Time Warner as a result of the breach of the Merger Agreement by TBS, (v) because the FCC has issued an order or ruling or taken other action denying approval of the transactions contemplated by the Merger Agreement (if at the time of termination TBS is in material breach of the Merger Agreement and such breach cannot be or has not been cured within 30 days after TBS becomes aware of such breach), (vi) by TBS because any of the conditions to its obligations is not capable of being satisfied prior to December 31, 1996 (or as extended pursuant to the Merger Agreement) or (vii) by TBS to permit TBS to enter into a definitive agreement providing for the implementation of another Takeover Proposal, and (b) a definitive agreement with respect to a Takeover Proposal is executed, or a Takeover Proposal is consummated, at or within 18 months after such termination, then TBS shall pay to Time Warner a fee of $175 million (reduced by any amount actually paid by TBS pursuant to the next paragraph in connection with such termination). If the Merger Agreement is terminated for the failure to obtain the TBS Merger Approval or terminated by Time Warner as a result of a breach of the Merger Agreement by TBS, then TBS shall reimburse Time Warner for all its reasonable out-of-pocket expenses actually incurred in connection with the Merger Agreement and the transactions contemplated thereby, up to a maximum of $15 million. If the Merger Agreement is terminated for the failure to obtain the TW Merger Approval or terminated by TBS as a result of a breach of the Merger Agreement by Time Warner, then Time Warner shall reimburse TBS for all its reasonable out-of-pocket expenses actually incurred in connection with the Merger Agreement and the transactions contemplated thereby, up to a maximum of $15 million. In the event of termination of the Merger Agreement, the Merger Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of Time Warner or TBS, other than (a) liability with respect to termination payments and reimbursement of fees and expenses as described above, (b) each party's obligation to pay its own fees and expenses (except as set forth above with respect to reimbursement of fees and expenses), (c) certain obligations of confidentiality and (d) liability resulting from any willful and material breach by any party to the Merger Agreement. 95
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TCI ARRANGEMENTS The following is a summary of certain provisions of the Transaction Agreements that provide for the TCI Arrangements. Copies of these Transaction Agreements are filed as Exhibits to the Registration Statement and, in the case of the LMC Agreement, attached hereto as Appendix A-2, and are incorporated herein by reference. The following summaries are qualified by reference to the complete text of the relevant Transaction Agreement. LMC AGREEMENT Covenants with Respect to the Mergers Pursuant to the LMC Agreement, LMC has agreed to cause each of its subsidiaries that holds shares of TBS Capital Stock to attend the TBS Meeting and to vote all such shares in favor of the approval of the TBS Merger and each of the other transactions contemplated by the Merger Agreement and in favor of the approval of the Merger Agreement. This obligation of LMC is subject to the satisfaction of the following conditions as of the time of the TBS Meeting (a) the Merger Agreement shall not have been amended in any respect, nor shall any right of TBS or Time Warner thereunder have been waived, other than any amendments and waivers that do not change the consideration to be received in exchange for TBS Capital Stock in the TBS Merger or the exchange ratio therefor and that, when taken together with all other amendments and waivers, do not have a material adverse effect on the value of the consideration to be received in exchange for TBS Capital Stock in the TBS Merger, (b) Mr. Turner, as a shareholder of TBS, shall have voted or shall simultaneously be voting all his shares of TBS Capital Stock in favor of the approval of the TBS Merger, (c) if the Time Warner Meeting shall have been held, the TW Merger Approval shall have been obtained, (d) no judgment shall have been entered and be continuing that restrains or enjoins LMC or any of its subsidiaries from voting its shares of TBS Capital Stock, (e) no person shall have become the beneficial owner of more than 15% of the Time Warner Common Stock on a fully-diluted basis and (f) Time Warner shall not have entered into an agreement (other than the Merger Agreement) providing for the merger of Time Warner in which shares of Time Warner Capital Stock are exchanged for or converted into the right to receive anything other than Time Warner Common Stock. Pursuant to the LMC Agreement, TCI and LMC have agreed to, and LMC has agreed to cause each of its subsidiaries that holds shares of TBS Capital Stock to, and Time Warner has agreed to, use reasonable efforts (a) to take all actions and to do, and to assist and cooperate with each other in good faith in doing, all things necessary to obtain all approvals from governmental agencies as may be necessary for the consummation of the transactions contemplated by the Merger Agreement and the LMC Agreement and (b) to defend any lawsuits or other legal proceedings challenging the Merger Agreement or the LMC Agreement or the consummation of the transactions contemplated thereby; provided, however, that the foregoing obligation shall not, subject to limited exceptions, require any such person to agree to enter into or be bound by any settlement or judgment, or to agree to any change in the terms of the LMC Agreement or any of the other agreements contemplated by the LMC Agreement. Notwithstanding the foregoing, nothing in the LMC Agreement imposes any obligation or duty on the part of TCI or any of its affiliates to agree to, approve or otherwise be bound by or satisfy, any condition in connection with the grant or effectiveness of any approval of any governmental agency required in connection with the consummation of the transactions contemplated by the Merger Agreement and the LMC Agreement that requires the surrender or modification in any significant respect of any license held by TCI or any of its affiliates, the divestiture of any assets of TCI or any of its affiliates, the holding of any such assets in a trust or otherwise separate and apart from such person's other assets, limitations on such person's freedom of action with respect to future acquisitions of assets or with respect to any existing or future business or activities or its enjoyment of the full rights of ownership, possession and use of any asset now owned or hereafter acquired by such person (including any requirement not to receive shares of New Time Warner Common Stock or LMC Reduced Voting Common Stock pursuant to the Merger Agreement, the SSSI Agreement or otherwise), any agreement to divest any such shares, any requirement not to receive, or to agree to divest, shares of LMC Common Stock or LMC Reduced Voting Common Stock to be received pursuant to the LMC Agreement, any change in such person's ownership or any rights or arrangements among its equity holders or any other restrictions, limitations, requirements or conditions which are or might be burdensome or adverse to any such person (in any such case, other than such items as are contemplated by the Transaction Agreements or the FTC Consent Decree). 96
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Pursuant to the LMC Agreement, Time Warner has agreed, upon the written request of LMC, to terminate the Merger Agreement and abandon the Mergers in certain circumstances, including if (a) on the date fixed for the consummation of the Mergers, the LMC Agreement, any agreement contemplated by the LMC Agreement or the Merger Agreement or the consummation of the Mergers or any other transaction contemplated thereby shall be illegal or would result in the imposition on the Liberty Parties (as defined below) or the SpinCo Parties (as defined below) of damages or penalties or the FTC shall have failed to accept or denied acceptance of the FTC Consent Decree for public comment or there shall be pending any suit by any governmental agency in which the relief sought would have any such effects or any effect described in the last sentence of the immediately preceding paragraph (including any proceeding with respect to an alleged violation of the FTC Consent Decree, but excluding any other proceeding contemplated by the FTC Consent Decree), (b) on the date fixed for the consummation of the Mergers, any consent or approval of any governmental agency required in connection with the consummation of the transactions contemplated by the Merger Agreement and the LMC Agreement shall be subject to any condition referred to in the last sentence of the immediately preceding paragraph, (c) the New Time Warner Rights Agreement, if adopted, shall differ in any material respect, other than as contemplated by the Rights Amendment, from the Existing Rights Agreement, (d) on the date fixed for the consummation of the Mergers (i) any person shall have become the beneficial owner of more than 15% of the Time Warner Common Stock on a fully- diluted basis, (ii) Time Warner shall have entered into an agreement (other than the Merger Agreement) providing for the merger of Time Warner in which shares of Time Warner Capital Stock are exchanged for or converted into the right to receive anything other than Time Warner Common Stock or (iii) any bona fide tender or exchange offer for the Time Warner Common Stock shall have been commenced or publicly announced and not terminated or withdrawn if consummation of such offer in accordance with its terms would result in the consequence described in clause (i) or (ii) above, (e) on the date fixed for the consummation of the Mergers, the condition to the obligation of TBS to consummate the TBS Merger that relates to the representations and warranties of Time Warner in the Merger Agreement shall not have been satisfied, (f) any action shall have been taken by Time Warner that if taken after the Effective Time of the Mergers would result in a Prohibited Effect (as defined below), (g) as of the date fixed for the consummation of the Mergers, any party (other than LMC and its affiliates) shall be in breach of its obligations under the LMC Agreement or any other agreement contemplated by the LMC Agreement or (h) as of the date fixed for the consummation of the Mergers, any required approval by the stockholders of Time Warner for the consummation of the transactions contemplated by the Merger Agreement, the LMC Agreement and the other agreements contemplated by the LMC Agreement shall not have been obtained. Pursuant to the LMC Agreement, Time Warner and LMC have agreed to execute and deliver to the other parties thereto, at the Closing, the LMC Registration Rights Agreement, the Right of First Refusal Agreement, the SSSI Agreement, the Distribution Contract and the Sunshine Agreement, each of which is discussed below or under "Certain Related Agreements." Post-Closing Covenants Pursuant to the LMC Agreement, and subject to certain exceptions, (a) all shares of New Time Warner Common Stock received by LMC or any of its subsidiaries in connection with the Mergers and related transactions will be exchanged on a one-for-one basis for shares of LMC Reduced Voting Common Stock and (b) prior to the expiration of the Restriction Period (as defined below) and for so long as any of the Liberty Parties or SpinCo Parties hold any shares of LMC Reduced Voting Common Stock, all shares of New Time Warner Common Stock and shares of LMC Common Stock from time to time owned beneficially or of record by any Liberty Party or SpinCo Party, as applicable, shall be exchanged on a one-for-one basis for shares of LMC Reduced Voting Common Stock. See "Description of New Time Warner Capital Stock" for a discussion of the relative rights of the New Time Warner Common Stock and the LMC Reduced Voting Common Stock. Pursuant to the New Time Warner Charter, New Time Warner will have the right to redeem at fair market value shares of New Time Warner Common Stock to the extent necessary to prevent the loss or to secure the 97
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reinstatement of any license or franchise issued by any governmental agency. New Time Warner has agreed pursuant to the LMC Agreement that it will not exercise such right to require the redemption from any Liberty Party or any SpinCo Party of any shares of New Time Warner Common Stock unless it has first given prior written notice of such proposed redemption, whereupon such Liberty Party or SpinCo Party will have the right to exchange on a one-for-one basis the shares to be redeemed for shares of LMC Common Stock. LMC Common Stock and LMC Reduced Voting Common Stock, by their terms, will not be subject to redemption at the option of New Time Warner. The LMC Agreement also provides that if, during the Restriction Period, New Time Warner takes certain actions that have a Prohibited Effect and such Prohibited Effect did not exist prior to the taking of such action and did not result from any breach of the LMC Agreement or the FTC Consent Decree by LMC or any of its affiliates, then New Time Warner will be required to compensate the Liberty Parties or the SpinCo Parties, as applicable, for income taxes incurred by them in disposing of Covered TW Securities (as defined below). New Time Warner will not be required to compensate the Liberty Parties or the SpinCo Parties under this provision unless the Liberty Parties or the SpinCo Parties, as applicable, comply with certain notice requirements and New Time Warner is given the opportunity, at its expense, to try to mitigate the effect of the actions taken by New Time Warner or otherwise to avoid the Prohibited Effect. If New Time Warner becomes obligated to compensate the Liberty Parties or the SpinCo Parties, as applicable, for taxes pursuant to this provision, (a) New Time Warner will be required so to compensate any Liberty Party or SpinCo Party that disposes of Covered TW Securities to the extent required or to the extent necessary to avoid the applicable Prohibited Effect and (b) if the aggregate number of Covered TW Securities disposed of by the Liberty Parties or the SpinCo Parties, as applicable, pursuant to clause (a) above equals or exceeds (on an "as converted" basis, if applicable) 5% of the number of Covered TW Securities held by LMC and all its subsidiaries immediately after the Effective Time of the Mergers, then, at the option of LMC, New Time Warner will be required to compensate the Liberty Parties or the SpinCo Parties, as applicable, for the disposition of all the Covered TW Securities if all equity securities of New Time Warner held by the Liberty Parties are disposed of within twelve months. For the purposes of this compensation obligation, the taxes incurred by any Liberty Party or SpinCo Party will be calculated by reference to the gain or income recognized by such Liberty Party or SpinCo Party for Federal income tax purposes from the disposition of the Covered TW Securities at the highest combined corporate Federal, state and local marginal capital gains tax rate applicable to such Liberty Party or SpinCo Party during the year of disposition and will be calculated on a fully grossed-up basis. The covenants described in the two preceding paragraphs may have the effect, for so long as the Liberty Parties and the SpinCo Parties have any significant interest in New Time Warner, of requiring New Time Warner to pay amounts to the Liberty Parties and the SpinCo Parties in order to engage in (or requiring New Time Warner to refrain from engaging in) activities that the Liberty Parties and the SpinCo Parties would be prohibited under the Federal communications laws from engaging in. The extent and duration of these requirements will vary as a result of changes in the nature or scope of the businesses of New Time Warner, the Liberty Parties and the SpinCo Parties and their respective affiliates as well as changes in applicable law. Based on the current businesses of Time Warner, TBS, the Liberty Parties and the SpinCo Parties and based upon Time Warner's current understanding of applicable law, Time Warner does not expect these requirements to have a material effect on the business of New Time Warner. In the LMC Agreement, New Time Warner has also agreed that, if New Time Warner amends the New Time Warner Rights Agreement to reduce the threshold for determining an "Acquiring Person" and such reduction results in any Liberty Party or SpinCo Party being required to dispose of Covered TW Securities, then New Time Warner will compensate such Liberty Party or SpinCo Party for income taxes incurred in such disposition. 98
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Certain Definitions In the LMC Agreement: "Covered TW Securities" means (a)(i) if the Mergers are consummated, the shares of New Time Warner Common Stock beneficially owned by LMC immediately following the consummation of the TBS Merger as a result of the conversion in the TBS Merger of the shares of TBS Capital Stock beneficially owned by LMC on September 22, 1995, and (ii) if the Contribution Election (as defined in the Contribution and Exchange Agreement (see "--Contribution and Exchange Agreement" below)) is made, the shares of New Time Warner Common Stock received by the Liberty Parties in connection therewith, determined assuming that the shares of TBS Capital Stock contributed to New Time Warner or owned by the subsidiaries of LMC so contributed did not include any shares of TBS Capital Stock not beneficially owned by LMC on September 22, 1995, (b) the shares of LMC Reduced Voting Common Stock issued pursuant to the SSSI Agreement and (c) all shares of LMC Common Stock and LMC Reduced Voting Common Stock for which the shares of New Time Warner Common Stock and LMC Reduced Voting Common Stock referred to in clauses (a) and (b) above and in this clause (c) may be exchanged pursuant to the provisions of the LMC Agreement described above. "Liberty Party" means LMC and each affiliate of LMC that is controlled by LMC from time to time and, for so long as LMC is controlled by TCI, shall also mean TCI and each affiliate of TCI that is controlled by TCI from time to time. "Prohibited Effect" means the effect or consequence (a) (i) of making the continuing ownership by the Liberty Parties or any of them of any equity securities of New Time Warner then owned by the Liberty Parties or any of them illegal under any Federal or state law or (ii) of making the continued ownership by the SpinCo Parties or any of them of any equity securities owned by the SpinCo Parties or any of them illegal under any Federal or state law, (b) of imposing or resulting in the imposition under any Federal or state law on the Liberty Parties or any of them or the SpinCo Parties or any of them of damages or penalties by reason of or as a result of such continued ownership, (c) of requiring the divestiture of, or resulting in the requirement to divest, any such securities by any Liberty Party or SpinCo Party under any Federal or state law or (d) of requiring, or resulting in the requirement, under any Federal or state law that any Liberty Party or SpinCo Party discontinue any business or divest of any business or assets or that any license that such Liberty Party or SpinCo Party holds or is required to hold under any Federal communications law be modified in any significant respect or not be renewed as a result of such continued ownership. "Restriction Period" means that period of time commencing on the date any Covered TW Securities are first issued and (a) if the TCI Spin-off does not occur, continuing until the first time that the ownership or deemed ownership by the Liberty Parties of the New Time Warner Common Stock and other voting securities of New Time Warner then owned by the Liberty Parties (assuming conversion in full of all LMC Reduced Voting Common Stock and the absence of any restriction on the exercise by the Liberty Parties of the rights of a holder of New Time Warner Common Stock), would not have a Prohibited Effect under any Federal communications law or violate the FTC Consent Decree, and (b) if the TCI Spin-off occurs, continuing until the first time that both the ownership by the SpinCo Parties of the New Time Warner Common Stock and the other voting securities of New Time Warner then owned by the SpinCo Parties (assuming conversion in full of all LMC Reduced Voting Common Stock and the absence of any restriction on the exercise by the SpinCo Parties of the rights of a holder of New Time Warner Common Stock), and the deemed ownership of such New Time Warner securities by the Liberty Parties (assuming such conversion and absence of restrictions) pursuant to any relevant attribution rules of the Federal communications laws would not have a Prohibited Effect under any Federal communications law or violate the FTC Consent Decree. "SpinCo Party" means, after the TCI Spin-off, SSSI and each affiliate of SSSI that is controlled by SSSI from time to time and, for so long as SSSI is an affiliate of TCI, shall also mean TCI and each affiliate of TCI that is controlled by TCI from time to time. 99
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SSSI AGREEMENT AND THE DISTRIBUTION CONTRACT General Pursuant to the LMC Agreement, each of New Time Warner, LMC and SSSI will execute and deliver, at the Closing, the SSSI Agreement. Pursuant to the SSSI Agreement, upon the earliest of (a) receipt by TCI of the Letter Ruling, (b) the date on which TCI shall have been advised by the IRS, or TCI shall have notified New Time Warner in writing that it has determined, that TCI will not obtain the Letter Ruling and (c) May 31, 1997, (i) SSSI will grant to New Time Warner the SSSI Option and New Time Warner will issue to SSSI 4,166,667 shares of LMC Reduced Voting Common Stock in a transaction taxable to SSSI in consideration for the SSSI Option and (ii) LMC will agree to the LMC Non- competition Covenant in consideration of which New Time Warner will issue to LMC 833,333 shares of LMC Reduced Voting Common Stock and will pay to LMC approximately $67 million (payable, at New Time Warner's option, in cash or additional shares of LMC Reduced Voting Common Stock) in a transaction taxable to LMC. SSSI Option Exercise The SSSI Option will be exercisable by New Time Warner at any time prior to the sixth anniversary of the Closing. Upon exercise of the SSSI Option by New Time Warner, the Distribution Contract will become effective. The consideration payable by New Time Warner for the exercise of the SSSI Option consists of the payments due under the Distribution Contract described below. Distribution Contract Pursuant to the Distribution Contract, New Time Warner will be required to make payments to SSSI in an amount sufficient to ensure that, on and after the effective date of the Distribution Contract, the sum of (a) SSSI's aggregate Net Cash Flows (as defined in the Distribution Contract) subsequent to such effective date and (b) all payments received by SSSI from New Time Warner under the Distribution Contract will have a net present value (calculated in accordance with the Distribution Contract) as of such effective date of $213,333,333. In addition, until the aggregate amounts required to be paid pursuant to the immediately preceding sentence have been received by SSSI, New Time Warner will make minimum quarterly payments to SSSI in an amount sufficient to ensure that, with respect to each fiscal quarter of SSSI ending after such effective date, the sum of (i) SSSI's aggregate Net Cash Flows in respect of such fiscal quarter and (ii) New Time Warner's payments in respect of such fiscal quarter under the Distribution Contract is not less than $7,681,000. Pursuant to the Distribution Contract, SSSI will, to the extent requested by New Time Warner, provide satellite uplink and distribution services with respect to WTBS if the WTBS Conversion shall have occurred. Limitation on Competitive Activities by LMC Pursuant to the SSSI Agreement and the Distribution Contract, LMC will agree to the SSSI Non-competition Covenant. The SSSI Non-competition Covenant provides that, other than through SSSI, LMC will not and will cause its affiliates not to (a) engage in the business of uplinking or distributing the WTBS signal to video programming distribution systems until the sixth anniversary of the consummation of the Mergers or, if the SSSI Option has been exercised, the fifth anniversary of the termination of the last programming agreement between SSSI and any MVPD for the distribution of the WTBS signal and (b) if the SSSI Option has been exercised, solicit any MVPD to terminate the carriage of WTBS or, except as contemplated by the Distribution Contract, terminate any programming agreement with SSSI with respect to WTBS until the fifth anniversary of the termination of the last programming agreement between SSSI and any MVPD for the distribution of the WTBS signal. 100
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PROGRAM AGREEMENT The Program Agreement provides that, subject to consummation of the Mergers, TCI and its affiliated cable systems will continue to carry Headline News, where it was carried and on the same tier of service as it was carried as of September 15, 1995, for a term of five years from the consummation of the Mergers, with four five-year renewal terms at TCI's election. The Program Agreement also provides that if the WTBS Conversion occurs, then, subject to certain terms and conditions, such service will be carried by TCI and its affiliated cable systems that carried WTBS on September 15, 1995, at the rates set forth therein through the fifth anniversary of the WTBS Conversion, with four five-year renewal terms at TCI's election. The Program Agreement also contemplates, subject to certain conditions, an annual rebate (determined pursuant to the Program Agreement) for TCI and its affiliated cable systems with respect to the carriage of TBS programming services, which rebate commences at various dates for various services. CONTRIBUTION AND EXCHANGE AGREEMENT Pursuant to the Contribution and Exchange Agreement, LMC may elect (the "Contribution Election") to contribute all the capital stock of United Cable Turner Investment Inc. ("UCTI"), a wholly owned subsidiary of LMC that owned, as of June 30, 1996, approximately 2.06% of the outstanding TBS Common Stock equivalents, to New Time Warner simultaneously with the Closing. If LMC makes the Contribution Election, LMC will be entitled to receive from New Time Warner 0.75 of a share of New Time Warner Common Stock for each share of TBS Common Stock and 4.80 shares of New Time Warner Common Stock for each share of TBS Class C Preferred Stock owned by UCTI. All the provisions of the Transaction Agreements that relate to New Time Warner Capital Stock acquired by LMC and its affiliates pursuant to the Merger Agreement, including the LMC Agreement, the Right of First Refusal Agreement and the LMC Registration Rights Agreement, will apply to shares of New Time Warner Common Stock issued as a result of the exercise of the Contribution Election. See "--LMC Agreement" above and "Certain Related Agreements" for a description of these agreements. SPORTSOUTH AGREEMENT TBS and LMC Southeast Sports, Inc. ("LSSI") have entered into the SportSouth Agreement, whereby LSSI has agreed to purchase from TBS, and TBS has agreed to sell to LSSI, all of the issued and outstanding capital stock of Turner Sports Programming, Inc. ("TSP"). The only asset of TSP is a 44% partnership interest in SportSouth. The purchase price is payable by delivery to TBS of a promissory note of LSSI with a principal amount equal to 44% of the Net Partnership Value. For purposes of the SportSouth Agreement, "Net Partnership Value" means (a) $153.7 million, plus (b) the net difference between certain current assets and certain current liabilities of SportSouth, minus (c) the amount of certain indebtedness of SportSouth. The purchase price is currently estimated to be approximately $65 million. The promissory note will be due on the second anniversary of the closing under the SportSouth Agreement, will bear interest, payable quarterly, at 7.50% per annum, and will be secured by a first priority security interest in the TSP shares purchased by LSSI and TSP's partnership interest in SportSouth. Affiliates of LMC currently own a 44% partnership interest in SportSouth. The transactions contemplated by the SportSouth Agreement are conditioned upon the consummation of the Transaction and will close on the same date as the Transaction, or, if all the conditions to the parties' obligations set forth in the SportSouth Agreement have not been satisfied on or prior to such date, on the third business day after all such conditions have been satisfied or waived. The SportSouth Agreement contains customary representations, warranties, covenants and conditions. The SportSouth Agreement may be terminated (a) by LSSI, if TBS has not complied with or performed its obligations in all material respects under the SportSouth Agreement prior to the closing of the transactions contemplated by the SportSouth Agreement, (b) by TBS, if LSSI has not complied with its obligations under the SportSouth Agreement prior to the closing of the transactions contemplated by the SportSouth Agreement, (c) by LSSI, if in connection with its HSR filing, it in its sole opinion considers a request from a governmental authority for additional data and information to be unduly burdensome, (d) by TBS or LSSI, if the Merger Agreement is terminated or otherwise ceases to be in effect pursuant to its terms or (e) by TBS or LSSI, if the 101
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closing of the transactions contemplated by the SportSouth Agreement has not been consummated on or prior to the consummation of the Transaction or the date that is 92 days after the earlier of the two dates referred to in the Merger Agreement as the outside date by which the Transaction may be consummated, for any reason other than (i) a breach or default by such party in the performance of any of its obligations under the SportSouth Agreement or (ii) the failure of any representation or warranty of such party to be true. LSSI's obligations under the SportSouth Agreement are conditioned upon TBS and Time Warner, on the one hand, and SportSouth, on the other, entering into an agreement (the "Agreement Restricting Activities") restricting certain activities of TBS, Time Warner and their respective affiliates. The Agreement Restricting Activities will provide that, for a period of twelve years beginning on the closing under the SportSouth Agreement, and subject to certain exceptions, none of TBS, Time Warner or any of their respective affiliates will in any way engage or participate in (a) a Competing Business (as hereinafter defined), (b) the formation or ownership of a Competing Person (as hereinafter defined) or (c) any purchase or other acquisition of any right to transmit or distribute any collegiate or professional athletic game, competition or event for exhibition in the states of Kentucky, North Carolina, South Carolina, Tennessee, Georgia, Alabama and Mississippi (the "SportSouth Region") for or on behalf of a Competing Business. "Competing Business" means the organization, ownership or operation of a regional cable television sports network offered primarily to viewers in the SportSouth Region. "Competing Person" means a person engaged, directly or indirectly, in a Competing Business. The obligations of both LSSI and TBS under the SportSouth Agreement are conditioned upon SportSouth's entering into telecast rights agreements with respect to the broadcast by SportSouth of games of the Atlanta Hawks and the Atlanta Braves for the period from the closing under the SportSouth Agreement through the end of such sports teams' seasons in 2007. SUNSHINE OPTION Pursuant to the LMC Agreement, at the Closing, TWE and a subsidiary of LMC will enter into the Sunshine Option Agreement pursuant to which such subsidiary of LMC will be granted the Sunshine Option to purchase the approximately 15% interest of TWE and certain of its affiliates in the Sunshine Network, a Florida-based sports cable channel, for $14 million in cash. The Sunshine Option will expire on December 31, 2005, and may be exercised in whole but not in part. If the Sunshine Option is exercised, then until December 31, 2010, none of New Time Warner or any of its affiliates will, directly or indirectly, in any way engage or participate in (a) the formation, ownership, or operation of a regional television sports network (by any distribution technology) distributing sports programming primarily to viewers in the State of Florida or (b) any purchase or other acquisition of, or any other offer to purchase or otherwise acquire, any right to televise or otherwise transmit or distribute any collegiate or professional athletic game, competition, or competitive sporting event taking place in the State of Florida (excluding professional boxing matches) or involving any team (whether collegiate or professional) from or based in the State of Florida, for exhibition on television in the State of Florida (except any exhibition as part of a national exhibition) for or on behalf of itself or any other person or entity. PPV OUTPUT AGREEMENT The PPV Output Agreement provides for the licensing of all motion pictures theatrically released during a four-year period commencing August 13, 1996 by New Line, Castle Rock and Turner Pictures for exhibition, on a non-exclusive basis, on pay-per-view services owned by certain affiliates of TCI. The PPV Output Agreement provides for a specified number of showings of each such motion picture, which varies depending upon the domestic box office results for such motion picture. 102
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CERTAIN RELATED AGREEMENTS The following is a summary of certain provisions of the Transaction Agreements other than the Merger Agreement and the Transaction Agreements described under "TCI Arrangements." Copies of these Transaction Agreements are filed as Exhibits to the Registration Statement and, in the case of the Support Agreement, attached hereto as Appendix A-3, and are incorporated herein by reference. The following summaries are qualified by reference to the complete text of the relevant Transaction Agreement. RIGHTS AMENDMENT The LMC Agreement contemplates (but does not require) that New Time Warner will adopt, at or prior to the Closing, the New Time Warner Rights Agreement. It is currently expected that prior to the Closing, New Time Warner will adopt the New Time Warner Rights Agreement. If adopted, it is contemplated that the New Time Warner Rights Agreement would be the same as the Existing Rights Agreement, other than the changes required to give effect to the Rights Amendment. The following is a discussion of the principal changes to be effected by the Rights Amendment. The Rights Amendment contemplates a change to the definition of "outstanding" shares of New Time Warner Common Stock to include (a) all issued and outstanding securities generally entitled to vote together with the shares of New Time Warner Common Stock actually issued, except such other securities, if any, owned by New Time Warner or any subsidiary of New Time Warner which could not be voted at a meeting called for the purpose of electing the directors of New Time Warner plus (b) the maximum aggregate number of shares of New Time Warner Common Stock and such other securities which would be issued upon the exercise in full of all outstanding options, warrants and rights (other than the New Time Warner Rights), however denominated, to subscribe for, purchase or otherwise acquire any shares of New Time Warner Common Stock or such other securities, and the exchange for, or conversion into, shares of New Time Warner Common Stock or such other securities in full of all outstanding securities of New Time Warner or any of its subsidiaries that are exchangeable for, or convertible into, shares of New Time Warner Common Stock or such other securities. The effect of this change is to increase the amount of New Time Warner Common Stock that a person may acquire before becoming an "Acquiring Person" and causing the New Time Warner Rights to be exercisable. For example, based upon the Time Warner Common Stock and TBS Capital Stock and the options, warrants and convertible securities of Time Warner and TBS outstanding on June 30, 1996, and assuming consummation of the Transaction, a person would have been able to beneficially own approximately 20.2% of the New Time Warner Common Stock outstanding on that date without becoming an "Acquiring Person" if the Rights Amendment had been in effect on that date. Such beneficial ownership of New Time Warner Common Stock would represent approximately 18% of the aggregate voting power of the outstanding New Time Warner Capital Stock on that date. In addition, the Rights Amendment contemplates a change to the definition of "Beneficial Ownership." The Existing Rights Agreement provides that a person will be deemed the "Beneficial Owner" of, among others, any securities which are beneficially owned, directly or indirectly, by any other person with which such person or any of such person's affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any "securities of the Company." The Rights Amendment will limit "securities of the Company" to any other securities of New Time Warner generally entitled to vote together with the New Time Warner Common Stock or any rights (other than the New Time Warner Rights), warrants, options or other securities exercisable or exchangeable for, or convertible into, shares of New Time Warner Common Stock or other securities of New Time Warner generally entitled to vote together with such shares. In addition, under the Rights Amendment, a person will be deemed to be the "Beneficial Owner" of shares of New Time Warner Common Stock if such person is the Beneficial Owner of any other securities of New Time Warner (whether or not exchangeable for, or convertible into, shares of New Time Warner Common Stock) generally entitled to vote together with the New Time Warner Common Stock. The Rights Amendment also contemplates that, in the event any securities of New Time Warner are subject to a voting trust, each beneficiary of any such voting trust, and not the trustee or trustees thereunder, will be deemed to be the "Beneficial Owner" of all such securities. 103
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The Rights Amendment also contemplates that no person will be deemed to be the "Beneficial Owner" of any securities by reason of such person or any of such person's affiliates or associates having the right to acquire (whether such right is exercisable immediately or only after the passage of time) such securities pursuant to a right of first refusal, right of first offer or similar agreement, arrangement or understanding granted by another person (the "subject person") (a) that does not provide any direct or indirect limitations or restrictions on the ability of the subject person to exercise (or refrain from exercising) any voting rights associated with such securities or contain any other agreement, arrangement or understanding with respect to such voting rights, (b) that does not contain any incentive for the subject person to support or oppose any particular business combination with an "Acquiring Person" (as defined in the New Time Warner Rights Agreement) or otherwise to exercise (or refrain from exercising) any voting rights associated with such securities in a manner advantageous to such person or any of such person's affiliates or associates and (c) with respect to which prior written notice is given to New Time Warner. This change is intended to ensure that LMC and the Turner Shareholders will not be regarded as the "Beneficial Owners" of New Time Warner Capital Stock solely by reason of the Right of First Refusal Agreement. See "--Right of First Refusal Agreement" below. If New Time Warner adopts the New Time Warner Rights Agreement, each share of New Time Warner Common Stock issued pursuant to the Transaction will be accompanied by one New Time Warner Right. SUPPORT AGREEMENT The Turner Shareholders have entered into the Support Agreement with Time Warner. Pursuant to the Support Agreement, at any meeting of the shareholders of TBS held prior to the termination of the Support Agreement, each Turner Shareholder is required to vote the shares of TBS Capital Stock that such Turner Shareholder is entitled to vote (the "Turner Shareholder Shares") (a) in favor of the approval of the Transaction and each of the other transactions contemplated by the Merger Agreement and in favor of the approval and adoption of the Merger Agreement, and any actions required in furtherance thereof, (b) against any action or agreement that would result in a breach in any material respect of any provision of the Merger Agreement and (c) against any takeover proposal or any other action or agreement that is inconsistent with or that is reasonably likely to impede, interfere with, delay, postpone or attempt to discourage the Transaction or any other transaction contemplated by the Merger Agreement. The Support Agreement also provides that the Turner Shareholders will not assert dissenters' rights with respect to the Transaction. The Support Agreement provides that if the Merger Agreement is terminated by TBS in accordance with its terms because the TBS Board shall have concurrently approved, and TBS shall have concurrently entered into, a definitive agreement providing for a Takeover Proposal, each Turner Shareholder must pay to Time Warner an amount in cash equal to all "profit" of such Turner Shareholder (and, in the case of Mr. Turner, the profit of certain other holders of TBS Capital Stock) from the consummation of any Takeover Proposal (a) that is consummated within 18 months of such termination or (b) with respect to which a definitive agreement is executed within 18 months of such termination. For purposes of the Support Agreement, the "profit" of any shareholder from any Takeover Proposal subject to the provision described in the immediately preceding paragraph is equal to (a) the aggregate consideration received by such shareholder pursuant to such Takeover Proposal, valuing any non-cash consideration (including any residual interest in TBS) at its fair market value on the date such Takeover Proposal is consummated, plus (b) the fair market value, on the date of disposition, of all shares of TBS Capital Stock disposed of by such shareholder after the termination of the Merger Agreement and prior to the date such Takeover Proposal is consummated, less (c) the aggregate consideration that such shareholder would have received pursuant to the Transaction, valuing each share of New Time Warner Common Stock at the average of the closing price per share of Time Warner Common Stock on the NYSE for the five trading days prior to the first public announcement by TBS of its intention to terminate the Merger Agreement. The foregoing profit calculation does not give effect to any taxes that would be payable by such shareholders as a result of the consummation of the Takeover Proposal. 104
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The Support Agreement (other than the provisions described in the previous two paragraphs) will terminate upon the termination of the Merger Agreement in accordance with its terms or, if earlier, upon consummation of the Transaction. INVESTORS' AGREEMENTS Investors' Agreement (No. 1) The Merger Agreement contemplates that at the Closing New Time Warner will enter into Investors' Agreement (No. 1) with Mr. Turner, Turner Outdoor and Turner Partners and thereafter with each successor, assign and other person that, pursuant to the terms of Investors' Agreement (No. 1), is required to become a party thereto (each, an "Investor"). Investors' Agreement (No. 1) contains certain "standstill" restrictions and restrictions on dispositions of New Time Warner Common Stock applicable to the Investors and also provides for the election to the New Time Warner Board of two persons designated by Mr. Turner, in each case as more fully described below. Pursuant to Investors' Agreement (No. 1), from and after the consummation of the Mergers, the Investors may not (and each Investor will cause its affiliates and associates that it controls, and use reasonable efforts to cause its other affiliates and associates, not to), without the prior written consent of the New Time Warner Board (a) publicly propose that any Investor or any Qualified Stockholder (as defined below) or any of their respective affiliates or associates enter into any merger or other business combination involving New Time Warner or propose to purchase a material portion of the assets of New Time Warner or any of its material subsidiaries, or make any such proposal privately if it would reasonably be expected to require New Time Warner to make a public announcement regarding such proposal, (b) make or in any way participate in any solicitation of proxies to vote or consent with respect to any voting securities of New Time Warner or become a participant in any election contest with respect to New Time Warner, (c) form, join, or participate in or encourage the formation of a group with respect to any voting securities of New Time Warner, other than a group consisting solely of Investors and Qualified Stockholders, (d) deposit any voting securities of New Time Warner into a voting trust or subject any such voting securities to any voting agreement or arrangement, other than any such trust, arrangement or agreement (i) the only parties to or beneficiaries of which are Investors and Qualified Stockholders and (ii) the terms of which do not require or expressly permit any party thereto to act in a manner inconsistent with Investors' Agreement (No. 1), (e) initiate, propose or otherwise solicit stockholders of New Time Warner for the approval of one or more stockholder proposals with respect to New Time Warner, or induce or attempt to induce any other person to initiate any stockholder proposal with respect to New Time Warner, (f) except with respect to Mr. Turner's rights to designate nominees to the New Time Warner Board (as described below), seek election to or seek to place a representative on the New Time Warner Board, or seek the removal of any member of the New Time Warner Board, (g) call or seek to have called any meeting of the stockholders of New Time Warner, (h)(i) solicit, seek to effect, negotiate with or provide non-public information to any other person with respect to, (ii) make any statement or proposal, whether written or oral, to the New Time Warner Board or any director or officer of New Time Warner with respect to, or (iii) otherwise make any public announcement or proposal whatsoever with respect to, any form of business combination transaction (with any person) involving a change of control of New Time Warner or the acquisition of a substantial portion of the equity securities or assets of New Time Warner or any of its material subsidiaries; provided, however, that the foregoing will not (A) apply to any discussion between or among the Investors and the Qualified Stockholders or any of their respective officers, employees, agents or representatives or (B) in the case of the immediately preceding clause (ii) above, be interpreted to limit the ability of any Investor or Qualified Stockholder, or any designee of any Investor or Qualified Stockholder, on the New Time Warner Board to make any such statement or proposal or to discuss any such proposal with any officer or director of or advisor to the New Time Warner Board unless, in either case, it would reasonably be expected to require New Time Warner to make a public announcement regarding such discussion, statement or proposal, (i) otherwise act, alone or in concert with others, to seek to control or influence the management or policies of New Time Warner (except for voting as a holder of voting securities in accordance with the terms of such voting securities and actions taken as a director or officer of New Time Warner), (j) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing, or make any such disclosure privately if it would reasonably be expected to require New Time 105
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Warner to make a public announcement regarding such intention, plan or arrangement or (k) advise, assist (including by knowingly providing or arranging financing for that purpose) or knowingly encourage any other person in connection with any of the foregoing. "Qualified Stockholder" means any Charitable Transferee or Qualified Trust from time to time bound under Investors' Agreement (No. 2) (as hereinafter defined and described below). A "Charitable Transferee" means any charitable organization described in Section 501(c)(3) of the Code. A "Qualified Trust" means any trust described in Section 664 of the Code of which Mr. Turner or members of his family are income beneficiaries. Investors' Agreement (No. 1) provides that none of the Investors may, without the prior written consent of New Time Warner, sell, transfer, pledge, encumber or otherwise dispose of, or agree to sell, transfer, pledge, encumber or otherwise dispose of, any voting securities of New Time Warner, or any rights or options to acquire such voting securities, except (a) to the underwriters in connection with an underwritten public offering of shares of such securities on a firm commitment basis registered under the Securities Act, pursuant to which the sale of such securities is in a manner that is intended to effect a broad distribution, (b) to any wholly owned subsidiary of such Investor or any partnership of which such Investor is the sole general partner; provided, however, that such transferee becomes a party to Investors' Agreement (No. 1) as an Investor, (c) to any person in a transaction that complies with the volume and manner of sale provisions contained in Rule 144(e) and Rule 144(f) under the Securities Act; provided, however, that no such disposition may be made during any period that a person has made and not withdrawn or terminated a tender or exchange offer for voting securities of New Time Warner or has announced its intention to make such an offer, (d) to any person, other than a person that such Investor, or any of its affiliates or associates, knows or, after commercially reasonable inquiry should have known, beneficially owns or, after giving effect to such sale, will beneficially own more than 5% of the aggregate voting power of the voting securities of New Time Warner, (e) in the case of a natural person, to any Permitted Transferee (as defined below) of such person; provided, however, that such transferee becomes a party to Investors' Agreement (No. 1) as an Investor, (f) in a bona fide pledge of shares of voting securities of New Time Warner to a financial institution to secure borrowings; provided, however, that such financial institution agrees to be bound by the transfer restrictions contained in Investors' Agreement (No. 1) and the borrowings so secured are full recourse obligations of the pledgor entered into substantially simultaneously with such pledge, (g) upon five business days' prior notice to New Time Warner, pursuant to the terms of any tender or exchange offer for voting securities of New Time Warner or pursuant to any merger or consolidation of New Time Warner, subject to certain limitations, (h) a gift to a Charitable Transferee or Qualified Trust, subject to certain limitations, (i) to TCITP, or its designee in accordance with the Right of First Refusal Agreement or (j) to New Time Warner. A "Permitted Transferee" of any natural person means (i) in the case of the death of such person, such person's executors, administrators, testamentary trustees, heirs, devisees and legatees and (ii) such person's current or future spouse, parents, siblings or descendants or such parents', siblings' or descendants' spouses (the "Family Members"). In addition, Investors' Agreement (No. 1) will provide that none of the Investors may (and each Investor will cause its controlled affiliates and associates, and use reasonable efforts to cause its other affiliates and associates, not to) (a) publicly request New Time Warner or any of its agents to amend or waive any provision of Investors' Agreement (No. 1) or (b) knowingly take any action that would reasonably be expected to require New Time Warner to make a public announcement regarding the possibility of a transaction with such Investor. Investors' Agreement (No. 1) will provide that New Time Warner will use reasonable efforts to cause to be elected to the New Time Warner Board two persons designated by Mr. Turner who are Eligible Persons. "Eligible Person" means Mr. Turner and any other individual (a) who is reasonably acceptable to the New Time Warner Board, (b) whose election to the New Time Warner Board would not, in the opinion of counsel for New Time Warner, violate, conflict with, or result in any material limitation on the ownership or operation of any business or assets of New Time Warner or any of its subsidiaries under, any statute, law, ordinance, regulation, rule, judgment, decree or order of any governmental entity and (c) who has agreed in writing to comply with the standstill covenants, and to resign as a director of New Time Warner if requested to do so upon a reduction in the number of designees to the New Time Warner Board to which Mr. Turner is entitled, as described below. 106
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Upon the Investors and the Qualified Stockholders, taken together, ceasing to own of record and beneficially at least 50% of the voting securities of New Time Warner owned by the Investors and the Qualified Stockholders, taken together, immediately following consummation of the Transaction ("Initial Shares"), the number of persons that Mr. Turner will be entitled to designate for election to the New Time Warner Board will be reduced to one. Upon (i) the Investors and the Qualified Stockholders, taken together, ceasing to own of record and beneficially at least one-third of the Initial Shares and Mr. Turner ceasing to be an employee of New Time Warner or any of its subsidiaries, (ii) the death or incapacity of Mr. Turner, (iii) the willful violation in any material respect of certain covenants contained in Investors' Agreement (No. 1) by any Investor or (iv) the fifth business day following written notice of termination of Investors' Agreement (No. 1) from Mr. Turner, the number of persons that Mr. Turner will be entitled to designate for election to the New Time Warner Board will be reduced to zero. If at any time Mr. Turner and his Family Members cease to constitute a sufficient number of the directors or trustees, as applicable, of any Qualified Stockholder to permit approval of matters by such Qualified Stockholder without the approval of any other director or trustee of such Qualified Stockholder, the voting securities of New Time Warner held by such Qualified Stockholder will thereafter be deemed not to be owned of record and beneficially by such Qualified Stockholder (or any Investor) for purposes of determining Mr. Turner's entitlement to representation on the New Time Warner Board. The standstill covenants of Investors' Agreement (No. 1) will terminate upon the last to occur of (a) Mr. Turner ceasing to be an employee of New Time Warner or any of its subsidiaries, (b) Mr. Turner ceasing to be a member of the New Time Warner Board and (c) Mr. Turner ceasing to be entitled to designate any Eligible Persons for election to the New Time Warner Board. In addition, the transfer restrictions of Investors' Agreement (No. 1) will terminate on the fifth anniversary of the consummation of the Mergers. Without limiting the foregoing, the standstill covenants and transfer restrictions will terminate if the New Time Warner Board does not (i) on the date of execution of Investors' Agreement (No. 1), elect to the New Time Warner Board the two Eligible Persons designated by Mr. Turner, (ii) recommend for election by the stockholders of New Time Warner to the New Time Warner Board any Eligible Person designated by Mr. Turner in accordance with the terms of Investors' Agreement (No. 1) or (iii) reasonably promptly after any request from Mr. Turner, fill any vacancy created on the New Time Warner Board upon the death, resignation or removal of any designee of Mr. Turner on the New Time Warner Board with another Eligible Person designated by Mr. Turner, in each case if the effect of such failure is that Mr. Turner does not have the representation on the New Time Warner Board to which he is entitled under Investors' Agreement (No. 1). Investors' Agreement (No. 2) The Merger Agreement also contemplates that any Charitable Transferee or Qualified Trust to whom any Turner Shareholder transfers voting securities of New Time Warner must enter into an Investors' Agreement ("Investors' Agreement (No. 2)") with New Time Warner, whereupon such transferee will become a Qualified Stockholder. Investors' Agreement (No. 2) will provide that none of the Qualified Stockholders may, without the prior written consent of New Time Warner, sell, transfer, pledge, encumber or otherwise dispose of, or agree to sell, transfer, pledge, encumber or otherwise dispose of, any Covered New Time Warner Common Stock (as hereinafter defined), or any rights or options to acquire Covered New Time Warner Stock, except in a transaction complying with clause (a), (c), (d), (f), (g), (i) or (j) contained in the summary of the transfer restrictions of Investors' Agreement (No. 1) set forth above (except that, in the case of such clause (f), the financial institution must agree to be bound by the transfer restrictions contained in Investors' Agreement (No. 2) rather than the transfer restrictions contained in Investors' Agreement (No. 1)). "Covered New Time Warner Common Stock" means (i) any shares of New Time Warner Common Stock transferred to a Qualified Stockholder by an Investor pursuant to Investors' Agreement (No. 1) and (ii) any shares of New Time Warner Common Stock acquired by a Qualified Stockholder pursuant to the Transaction otherwise than in exchange for any shares of TBS Common Stock owned by such Qualified Stockholder on September 22, 1995. 107
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The transfer restrictions contained in Investors' Agreement (No. 2) will terminate on the earlier of (a) the fifth anniversary of the consummation of the Mergers and (b) the date on which the transfer restrictions contained in Investors' Agreement (No. 1) have been terminated. RIGHT OF FIRST REFUSAL AGREEMENT Pursuant to the LMC Agreement, at the Closing, TCI Turner Preferred, Inc. ("TCITP") and certain of its subsidiaries (the "TCITP Stockholders") will enter into the Right of First Refusal Agreement with the Turner Shareholders (any TCITP Stockholder or Turner Shareholder is referred to herein as a "Subject Stockholder") and New Time Warner. As used below, the term "Other Stockholder" means, with respect to any TCITP Stockholder, Mr. Turner, and with respect to any Turner Shareholder, TCITP. The Right of First Refusal Agreement places various restrictions on dispositions by any Subject Stockholder of New Time Warner Capital Stock, New Time Warner securities convertible into such capital stock, or options, warrants or other rights to purchase such capital stock or such securities convertible into such capital stock (collectively, "Covered Securities"). Among other restrictions, if a Subject Stockholder intends to sell any or all of its Covered Securities (the "Subject Shares"), such Subject Stockholder must give the Other Subject Stockholder an opportunity to purchase such Subject Shares for a consideration no more favorable to such Subject Stockholder than the consideration that would apply if such Subject Stockholder consummated such proposed sale (the "First Refusal Right"). Under certain circumstances, New Time Warner will also have a similar First Refusal Right with respect to Subject Shares that are not purchased by the Other Stockholder. REGISTRATION RIGHTS AGREEMENTS Turner Registration Rights Agreement Pursuant to the Merger Agreement, at the Closing, the Turner Registration Rights Agreement will be entered into by New Time Warner, on the one hand, and Mr. Turner, Turner Outdoor, Turner Partners and certain associated holders of New Time Warner Common Stock, on the other (collectively, and together with certain specified entities to whom the Registrable Shares (as defined below) are transferred, the "Turner Holders"). For a three-year period, the Turner Holders will have the right (a "Turner Demand Registration"), by written notice, to require New Time Warner, on three separate occasions, to register under the Securities Act sales of shares of New Time Warner Common Stock issued to them (the "Registrable Shares") . Each Turner Demand Registration must include at least five million Registrable Shares. Except to the extent required by agreements entered into prior to September 22, 1995, New Time Warner will not include any securities that are not Registrable Shares in any Turner Demand Registration without the prior written consent of the Turner Holders who hold a majority in number of the Registrable Shares covered by such Turner Demand Registration. If New Time Warner proposes to file a registration statement under the Securities Act with respect to securities of the same type as the Registrable Shares pursuant to a firm commitment underwritten offering solely for cash for its own account (other than a registration statement on Form S-8 or filed in connection with a dividend reinvestment plan or an employee benefit plan covering officers or directors of New Time Warner or its affiliates) or for the account of any holders of securities of the same type as the Registrable Shares (to the extent that New Time Warner has the right to include Registrable Shares in any registration statement to be filed by New Time Warner on behalf of such holders), then New Time Warner will be required to offer the Turner Holders the opportunity, subject to certain conditions, to include in such registration statement such number of Registrable Shares as such Turner Holders may request. New Time Warner will be required to pay all costs, fees and expenses incident to its performance of the Turner Registration Rights Agreement, except that the fees and expenses of any Turner Holder other than for one counsel for all Turner Holders, and any discounts, commissions, brokers' fees or fees of similar securities industry professionals and any transfer taxes relating to the disposition of Registrable Shares by a Turner Holder, will be payable by such Turner Holder, and New Time Warner will have no obligation to pay any such amounts. 108
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The Turner Registration Rights Agreement will contain provisions under which New Time Warner may require the Turner Holders temporarily to refrain from effecting public sales of Registrable Shares. In addition, under the Turner Registration Rights Agreement, New Time Warner and the Turner Holders will indemnify each other against certain liabilities, including liabilities arising under the Federal securities laws. LMC Registration Rights Agreement Pursuant to the LMC Agreement, at the Closing, the LMC Registration Rights Agreement will be entered into by New Time Warner, on the one hand, and LMC, on the other (together with certain specified entities to whom the LMC Registrable Shares (as defined below) are transferred pursuant to the LMC Registration Rights Agreement, the "LMC Holders"). The LMC Holders of not less than a majority of the LMC Registrable Shares then held by all LMC Holders will have the right, by written notice, to require New Time Warner, on three separate occasions, to register under the Securities Act all or any portion of the LMC Registrable Shares designated by such LMC Holders (an "LMC Demand Registration"). In addition, if a Prohibited Effect occurs, certain LMC Holders may have an additional demand registration right. Each LMC Demand Registration must include at least four million LMC Registrable Shares or the remaining LMC Registrable Shares, if less. If New Time Warner proposes to file a registration statement under the Securities Act with respect to a public offering of securities of the same type as the LMC Registrable Shares pursuant to an underwritten offering solely for cash for its own account (other than a registration statement on Form S-8 or filed in connection with a dividend reinvestment plan or an employee benefit plan covering officers or directors of New Time Warner or its affiliates), then New Time Warner will be required to offer the LMC Holders the opportunity, subject to certain limitations, to include in such registration statement such number of LMC Registrable Shares as such LMC Holders may request. The rights of an LMC Holder under the LMC Registration Rights Agreement will terminate upon the later of (a) the third anniversary of the Closing Date and (b) if such LMC Holder is an affiliate of New Time Warner, the date such LMC Holder ceases to be an affiliate of New Time Warner. New Time Warner will be required to pay all costs, fees and expenses incident to its performance of the LMC Registration Rights Agreement, except that the fees and expenses of any LMC Holder other than for one counsel for all such LMC Holders, and any discounts, commissions or brokers' fees or fees of similar securities industry professionals and any transfer taxes relating to the disposition of the LMC Registrable Shares by an LMC Holder, will be payable by such LMC Holder and New Time Warner will have no obligation to pay any such amounts. The LMC Registration Rights Agreement will contain provisions under which New Time Warner may require the LMC Holders temporarily to refrain from effecting public sales of Registrable Shares. In addition, under the LMC Registration Rights Agreement New Time Warner and the LMC Holders will indemnify each other against certain liabilities, including liabilities arising under the Federal securities laws. "LMC Registrable Shares" means shares of New Time Warner Common Stock issued to any of the initial LMC Holders pursuant to the Merger Agreement, or any securities into which such shares may be exchanged or converted and any such shares issued to any Turner Holder and acquired by any LMC Holder pursuant to the Right of First Refusal Agreement. 109
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UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The following pro forma consolidated condensed financial information of New Time Warner gives effect to the consummation of the Transaction and a number of transactions that Time Warner and TWE have completed, or have entered into, during the periods presented below (the "TW Transactions"). The pro forma effect on Time Warner's historical financial statements resulting from the TW Transactions is set forth under the heading "Time Warner Adjusted." The TW Transactions for which adjustments have been made, as more fully described in the Time Warner Form 8-K, dated August 14, 1996 and the Time Warner Form 10-K, each of which is incorporated by reference herein, are as follows: (a) on April 11, 1996, Time Warner issued 1.6 million shares of Time Warner Series K Preferred Stock for approximately $1.55 billion of net proceeds. Such proceeds were used by Time Warner to redeem all $250 million principal amount of its outstanding 8.75% Debentures due 2017 (the "TW 8.75% Debentures") for $265 million (including redemption premiums and accrued interest thereon of $15 million) and to reduce indebtedness of TWI Cable Inc. ("TWI Cable"), a wholly-owned subsidiary of Time Warner, under the New Credit Agreement (as defined below) by approximately $1.3 billion. The issuance of the Time Warner Series K Preferred Stock and the use of the proceeds therefrom to reduce outstanding indebtedness of Time Warner are referred to herein as the "Series K Refinancing"; (b) on February 1, 1996, Time Warner redeemed the remaining $1.2 billion principal amount of 8.75% Convertible Subordinated Debentures due 2015 (the "TW 8.75% Convertible Debentures") for $1.28 billion, including redemption premiums and accrued interest thereon (the "February 1996 Redemption"). In addition, in September 1995, Time Warner redeemed approximately $1 billion principal amount of TW 8.75% Convertible Debentures for $1.06 billion, including redemption premiums and accrued interest thereon (the "September 1995 Redemption"). The September 1995 Redemption was financed with (1) approximately $500 million of proceeds raised in June 1995 from the issuance of 7.75% notes due 2005 (the "TW 7.75% Notes"), (2) $363 million of net proceeds raised in August 1995 from the issuance of approximately 12.1 million Time Warner-obligated mandatorily redeemable preferred securities of a subsidiary ("PERCS") that are redeemable for cash or, at Time Warner's option, approximately 12.1 million shares of Hasbro, Inc. common stock owned by Time Warner and that pay cash distributions at a rate of 4% per annum and (3) available cash and equivalents (the "1995 Convertible Debt Refinancing"). The February 1996 Redemption was financed with (1) $557 million of net proceeds raised in December 1995 from the issuance of Time Warner-obligated mandatorily redeemable preferred securities of a subsidiary ("Preferred Trust Securities") that pay cash distributions at a rate of 8 7/8% per annum and (2) proceeds raised from the $750 million issuance of debentures in January 1996, consisting of (i) $400 million principal amount of 6.85% debentures due 2026, which are redeemable at the option of the holders thereof in 2003, (ii) $200 million principal amount of 8.3% discount debentures due 2036, which do not pay cash interest until 2016, (iii) $166 million principal amount of 7.48% debentures due 2008 and (iv) $150 million principal amount of 8.05% debentures due 2016 (collectively referred to herein as the "January 1996 Debentures"). The issuance of the Preferred Trust Securities and the January 1996 Debentures, together with the February 1996 Redemption are collectively referred to herein as the "1996 Convertible Debt Refinancing." The 1995 Convertible Debt Refinancing and the 1996 Convertible Debt Refinancing are collectively referred to herein as the "Convertible Debt Refinancings"; (c) on January 4, 1996, Time Warner completed its acquisition of CVI and certain affiliated entities of CVI (the "Gerry Companies") (the "CVI Acquisition"). CVI and the Gerry Companies owned cable television systems serving approximately 1.3 million subscribers; (d) on October 2, 1995 and September 5, 1995, Toshiba and ITOCHU, respectively, each exchanged (i) their 5.61% pro rata equity interests in TWE, (ii) their 6.25% residual equity interests in TW Service Holding I, L.P. and TW Service Holding II, L.P., each of which owned certain assets related to the TWE businesses (the "Time Warner Service Partnerships") and (iii) their options to increase their interests in TWE under certain circumstances for, in the case of ITOCHU, 6.2 million shares of Time Warner Series G Preferred Stock and 1.8 million shares of Time Warner Series H Preferred Stock and, in the case of Toshiba, 110
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7 million shares of Time Warner Series I Preferred Stock and $10 million in cash (the "ITOCHU/Toshiba Transaction"). As a result of the ITOCHU/Toshiba Transaction, Time Warner and certain of its wholly owned subsidiaries collectively now own 74.49% of TWE's Series A Capital and Residual Capital and 100% of TWE's Senior Capital and Series B Capital. A subsidiary of U S WEST owns the remaining 25.51% of TWE's Series A Capital and Residual Capital; (e) on August 15, 1995, Time Warner redeemed all of its $1.8 billion principal amount of outstanding Redeemable Reset Notes due 2002 (the "Reset Notes") in exchange for new securities (the "Reset Notes Refinancing"), consisting of approximately $454 million aggregate principal amount of Floating Rate Notes due 2000, approximately $272 million aggregate principal amount of 7.975% Notes due 2004, approximately $545 million aggregate principal amount of 8.11% Debentures due 2006, and approximately $545 million aggregate principal amount of 8.18% Debentures due 2007; (f) on July 6, 1995, Time Warner acquired KBLCOM, which owned cable television systems serving approximately 700,000 subscribers and a 50% interest in Paragon, which owned cable television systems serving an additional 972,000 subscribers (the "KBLCOM Acquisition"). The other 50% interest in Paragon was already owned by TWE; (g) on June 30, 1995, TWI Cable, TWE and the TWE-Advance/Newhouse Partnership (as defined below) executed a five-year revolving credit facility (the "New Credit Agreement"). The New Credit Agreement enabled such entities to refinance certain indebtedness assumed in connection with the Cable Acquisitions (as defined below), to refinance TWE's indebtedness under a pre-existing bank credit agreement and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower (the "Bank Refinancing"). The Series K Refinancing, the Convertible Debt Refinancings, the Reset Notes Refinancing and the Bank Refinancing are referred to herein as the "Debt Refinancings"; (h) on June 23, 1995, (i) Six Flags was recapitalized, (ii) TWE sold a 51% interest in Six Flags to an investment group led by Boston Ventures and (iii) TWE granted certain licenses to Six Flags (collectively, the "Six Flags Transaction"); (i) on May 2, 1995, Time Warner acquired Summit, which owned cable television systems serving approximately 162,000 subscribers (the "Summit Acquisition" and, together with the CVI Acquisition and the KBLCOM Acquisition, the "Cable Acquisitions"); (j) on April 1, 1995, TWE closed its transaction (the "TWE-A/N Transaction") with the Advance/Newhouse Partnership ("Advance/Newhouse"), pursuant to which TWE and Advance/Newhouse formed the Time Warner Entertainment-Advance/Newhouse Partnership, a New York general partnership (the "TWE-Advance/Newhouse Partnership"), and to which Advance/Newhouse and TWE contributed cable television systems (or interests therein) serving approximately 4.5 million subscribers, as well as certain foreign cable investments and certain programming investments that included Advance/Newhouse's 10% interest in Primestar Partners, L.P. TWE owns a two- thirds equity interest in the TWE-Advance/Newhouse Partnership and is the managing partner and Advance/Newhouse owns a one-third equity interest; and (k) during 1995, TWE entered into agreements to sell, or announced its intention to sell, 17 of its unclustered cable television systems serving approximately 180,000 subscribers, of which certain of the transactions closed during 1995 and the remaining transactions, which are not material, have closed or are expected to close in 1996 (the "Unclustered Cable Transactions"). The pro forma consolidated condensed balance sheet of New Time Warner at June 30, 1996 gives effect to the Transaction as if it was consummated on such date. The pro forma consolidated statements of operations of New Time Warner for the six months ended June 30, 1996 and the year ended December 31, 1995 give effect to the Transaction and the TW Transactions, as if such transactions had occurred at the beginning of 1995. The pro forma consolidated condensed financial statements should be read in conjunction with (a) the historical financial statements of Time Warner and TWE, including the notes thereto, which are contained in the Time Warner Form 10-Q for the quarter ended June 30, 1996 and the Time Warner Form 10-K, (b) the historical financial statements 111
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of TBS, including the notes thereto, which are contained in the TBS Form 10-Q for the quarter ended June 30, 1996 and the TBS Form 10-K and (c) the historical financial statements and pro forma consolidated condensed financial statements included or incorporated by reference in the Time Warner Form 8-K dated August 14, 1996. The pro forma consolidated condensed financial statements are presented for informational purposes only and are not necessarily indicative of the financial position or operating results that would have occurred if the transactions had been consummated as of the dates indicated, nor are they necessarily indicative of future financial conditions or operating results. Pro forma adjustments for the Transaction reflect (a) the issuance by New Time Warner of approximately 173.3 million shares of New Time Warner Capital Stock to be issued to the holders of TBS Capital Stock, including approximately 50.6 million shares of LMC Series Common Stock to be received by LMC, (b) the issuance by New Time Warner of an additional five million shares of LMC Series Common Stock to be received by LMC and its affiliates and the payment of $67 million in cash in connection with the SSSI Agreement, (c) the issuance by New Time Warner of options to purchase approximately 14 million shares of New Time Warner Common Stock to replace all outstanding TBS options, (d) the assumption of approximately $2.6 billion of indebtedness, including $273 million of TBS LYONs and (e) the payment of approximately $95 million for transaction costs and other related liabilities of Time Warner and TBS. The TBS LYONs may be converted at the option of the holders into an additional 7.4 million shares of TBS Class B Common Stock prior to the consummation of the Transaction. Should such conversion occur, (i) New Time Warner's pro forma shareholders' equity at June 30, 1996 would be increased by approximately $186 million to reflect the issuance of approximately 5.6 million additional shares of New Time Warner Common Stock, (ii) New Time Warner's pro forma indebtedness at June 30, 1996 would be reduced by $273 million and (iii) New Time Warner's pro forma loss before extraordinary item and loss before extraordinary item per common share for the six months ended June 30, 1996 and the year ended December 31, 1995 would be reduced by $6 million and $.01 per common share and $11 million and $.03 per common share, respectively. The pro forma consolidated condensed financial statements reflect an assumption that New Time Warner will elect to satisfy a portion of the consideration to be paid to LMC in connection with the SSSI Agreement in cash, rather than in additional shares of LMC Series Common Stock. Should New Time Warner elect otherwise, the effect on New Time Warner's pro forma financial condition and operating results would not be material. The Transaction will be accounted for by the purchase method of accounting for business combinations and, accordingly, the estimated cost to acquire such assets will be allocated to the underlying net assets in proportion to their respective fair values. The valuations and other studies which will provide the basis for such an allocation have not been completed. As more fully described in the notes to the pro forma consolidated condensed financial statements, a preliminary allocation of the excess of cost over the book value of the net assets to be acquired has been made to goodwill. Time Warner expects to realize certain revenue enhancements and cost reductions as a result of strategic and cost-saving initiatives relating to the integration of the operations of TBS into Time Warner's operating structure; however, such incremental revenues and cost savings have not been reflected in the pro forma consolidated condensed statements of operations of New Time Warner. 112
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NEW TIME WARNER PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET JUNE 30, 1996 (MILLIONS, UNAUDITED) [Download Table] TBS TRANSACTION NEW TIME ---------------------------- WARNER TIME WARNER TBS PRO FORMA PRO HISTORICAL HISTORICAL(A) ADJUSTMENTS(B) FORMA ----------- ------------- -------------- -------- ASSETS Cash and equivalents......... $ 482 $ 119 $ -- $ 601 Other current assets......... 2,742 1,292 (174) 3,860 ------- ------ ------ ------- Total current assets......... 3,224 1,411 (174) 4,461 Investments in and amounts due to and from Entertainment Group......... 5,945 -- -- 5,945 Other investments............ 2,507 -- (539) 1,968 Noncurrent inventories....... -- 2,042 -- 2,042 Property, plant and equipment................... 1,481 368 -- 1,849 Cable television franchises.. 3,970 -- -- 3,970 Goodwill..................... 5,825 260 6,428 12,513 Other assets................. 1,556 407 -- 1,963 ------- ------ ------ ------- Total assets................. $24,508 $4,488 $5,715 $34,711 ======= ====== ====== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Total current liabilities.... $ 2,762 $ 822 $ -- $ 3,584 Long-term debt............... 9,928 2,600 162 12,690 Borrowings against future stock option proceeds....... 225 -- -- 225 Deferred income taxes........ 3,983 421 -- 4,404 Other long-term liabilities.. 1,232 174 -- 1,406 Time Warner-obligated mandatorily redeemable preferred securities of subsidiaries holding solely subordinated notes and debentures of Time Warner(1)................... 949 -- -- 949 Series K exchangeable preferred stock............. 1,586 -- -- 1,586 Shareholders' equity: Preferred stock............. 36 -- (32) 4 Common stock................ 387 -- (381) 6 Paid-in capital............. 5,866 -- 6,437 12,303 Unrealized gains on certain marketable securities...... 177 -- -- 177 TBS shareholders' equity.... -- 471 (471) -- Accumulated deficit......... (2,623) -- -- (2,623) ------- ------ ------ ------- Total shareholders' equity... 3,843 471 5,553 9,867 ------- ------ ------ ------- Total liabilities and shareholders' equity........ $24,508 $4,488 $5,715 $34,711 ======= ====== ====== ======= ----------------- (1) Includes $374 million of preferred securities that are redeemable for cash or, at Time Warner's option, approximately 12.1 million shares of Hasbro, Inc. common stock owned by Time Warner. See accompanying notes. 113
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NEW TIME WARNER PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 (MILLIONS, UNAUDITED) [Enlarge/Download Table] TBS TRANSACTION NEW TIME ---------------------------- WARNER TIME WARNER TIME WARNER TBS PRO FORMA PRO HISTORICAL ADJUSTED(C) HISTORICAL(E) ADJUSTMENTS(F) FORMA ----------- ----------- ------------- -------------- -------- Revenues................ $4,207 $4,207 $1,675 $ -- $5,882 Cost of revenues*....... 2,525 2,525 1,101 97 3,723 Selling, general and administrative*........ 1,357 1,357 474 -- 1,831 ------ ------ ------ ---- ------ Operating expenses...... 3,882 3,882 1,575 97 5,554 ------ ------ ------ ---- ------ Business segment operating income (loss)................. 325 325 100 (97) 328 Equity in pretax income of Entertainment Group.................. 209 209 -- -- 209 Interest and other, net.................... (578) (540) (97) 10 (627) Corporate expenses...... (36) (36) -- -- (36) ------ ------ ------ ---- ------ Income (loss) before income taxes........... (80) (42) 3 (87) (126) Income tax (provision) benefit................ (44) (60) (2) 6 (56) ------ ------ ------ ---- ------ Income (loss) before extraordinary item..... (124) (102) 1 (81) (182) Preferred dividend requirements........... (104) (155) -- -- (155) ------ ------ ------ ---- ------ Income (loss) before extraordinary item applicable to common shares................. $ (228) $ (257) $ 1 $(81) $ (337) ====== ====== ====== ==== ====== Loss before extraordinary item per common share........... $(.58) $ (.66) $ (.59) ====== ====== ====== Average common shares... 390.6 390.6 568.9 ====== ====== ====== -------- * Includes depreciation and amortization expense of: ......... $ 452 $ 452 $ 92 $ 79 $ 623 ====== ====== ====== ==== ====== See accompanying notes. 114
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NEW TIME WARNER PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (MILLIONS, UNAUDITED) [Enlarge/Download Table] TBS TRANSACTION NEW TIME ---------------------------- WARNER TIME WARNER TIME WARNER TBS PRO FORMA PRO HISTORICAL ADJUSTED(D) HISTORICAL(E) ADJUSTMENTS(F) FORMA ----------- ----------- ------------- -------------- -------- Revenues................ $8,067 $8,742 $3,437 $ -- $12,179 Cost of revenues*....... 4,682 5,236 2,166 206 7,608 Selling, general and administrative*........ 2,688 2,850 889 -- 3,739 ------ ------ ------ ----- ------- Operating expenses...... 7,370 8,086 3,055 206 11,347 ------ ------ ------ ----- ------- Business segment operating income (loss)................. 697 656 382 (206) 832 Equity in pretax income of Entertainment Group.................. 256 286 -- -- 286 Interest and other, net.................... (877) (926) (209) (7) (1,142) Corporate expenses...... (74) (74) -- -- (74) ------ ------ ------ ----- ------- Income (loss) before income taxes........... 2 (58) 173 (213) (98) Income tax (provision) benefit................ (126) (132) (70) 26 (176) ------ ------ ------ ----- ------- Income (loss) before extraordinary item..... (124) (190) 103 (187) (274) Preferred dividend requirements........... (52) (316) -- -- (316) ------ ------ ------ ----- ------- Income (loss) before extraordinary item applicable to common shares................. $ (176) $ (506) $ 103 $(187) $ (590) ====== ====== ====== ===== ======= Loss before extraordinary item per common share........... $ (.46) $(1.30) $ (1.04) ====== ====== ======= Average common shares... 383.8 387.7 566.0 ====== ====== ======= -------- * Includes depreciation and amortization expense of: ......... $ 559 $ 935 $ 189 $ 159 $ 1,283 ====== ====== ====== ===== ======= See accompanying notes. 115
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NOTES TO THE NEW TIME WARNER PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (a) Reflects the historical financial position of TBS at June 30, 1996, including $2.6 billion of long-term indebtedness that will be assumed pursuant to the Transaction. (b) Pro forma adjustments to record the Transaction reflect (1) a reclassification in shareholders' equity from common stock and preferred stock to paid-in capital to reflect the reduction in the par value, in the case of common stock, from $1.00 per share to $.01 per share, and, in the case of preferred stock, from $1.00 per share to $.10 per share, (2) the issuance of (i) 173.3 million shares of New Time Warner Capital Stock to be issued to the holders of TBS Capital Stock, including approximately 50.6 million shares of LMC Series Common Stock to be received by LMC, (ii) an additional 5 million shares of LMC Series Common Stock to be received by LMC and its affiliates in connection with the SSSI Agreement and (iii) approximately 14 million stock options to replace all outstanding TBS stock options, valued at an aggregate of $6.024 billion for pro forma purposes based on a New Time Warner Common Stock price of $33.25 per share, (3) the write-off of approximately $260 million of pre-existing goodwill of TBS and approximately $174 million of TBS inventory to conform TBS's accounting policy with respect to the capitalization and amortization of film exploitation costs to Time Warner's accounting policy, (4) the incurrence of $162 million of additional indebtedness for the payment of (i) $67 million in connection with the SSSI Agreement and (ii) $95 million in connection with transaction costs and other related liabilities of Time Warner and TBS, (5) the allocation of the excess of the purchase price over the book value of the net assets acquired of $6.688 billion to goodwill and (6) the elimination of (i) Time Warner's historical investment in TBS in the amount of $539 million and (ii) TBS's historical stockholders' equity in the amount of $471 million. (c) Reflects Time Warner's pro forma consolidated condensed statement of operations for the six months ended June 30, 1996 as previously reported in the Time Warner Form 8-K dated August 14, 1996, which gives effect to the Series K Refinancing and the 1996 Convertible Debt Refinancing as if such transactions occurred at the beginning of 1995. (d) Reflects Time Warner's pro forma consolidated condensed statement of operations for the year ended December 31, 1995 as previously reported in the Time Warner Form 8-K dated August 14, 1996, which gives effect to the Cable Acquisitions, the Six Flags Transaction, the Unclustered Cable Disposition, the TWE-A/N Transaction, the Debt Refinancings and the ITOCHU/Toshiba Transaction, as if each applicable transaction had occurred at the beginning of such period. (e) Reflects the historical operating results of TBS for the six months ended June 30, 1996 and the year ended December 31, 1995, including certain reclassifications to conform to Time Warner's financial statement presentation. (f) Pro forma adjustments to record the Transaction for the six months ended June 30, 1996 and the year ended December 31, 1995 reflect (1) the exclusion of $7 million and $10 million, respectively, of merger costs directly related to the Transaction expensed by TBS in each respective period, (2) an increase of $97 million and $206 million, respectively, in cost of revenues consisting of (i) a $5 million and $8 million reduction, respectively, of TBS's historical amortization of pre-existing goodwill, (ii) an $84 million and $167 million increase, respectively, in amortization with respect to the excess cost to acquire TBS that has been allocated to goodwill and amortized on a straight-line basis over a forty-year period and (iii) an $18 million and $47 million increase, respectively, in the amortization of capitalized film exploitation costs to conform TBS's accounting policy to Time Warner's accounting policy, (3) an increase of $5 million and $9 million, respectively, in interest expense on the $162 million of additional indebtedness for the payment of (i) $67 million in connection with the SSSI Agreement and (ii) $95 million in connection with transaction costs and other related liabilities of Time Warner and TBS, (4) a decrease of $8 million and an increase of $8 million, respectively, in interest and other, net due to the elimination of Time Warner's historical equity accounting for its investment in TBS and (5) a decrease of $6 million and $26 million, respectively, in income tax expense as a result of income tax benefits provided at a 41% tax rate. 116
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BUSINESS OF TIME WARNER Time Warner is the world's leading media company, and has interests in three fundamental areas of business: Entertainment, consisting principally of interests in recorded music and music publishing, filmed entertainment, broadcasting, theme parks and cable television programming; News and Information, consisting principally of interests in magazine publishing, book publishing and direct marketing; and Telecommunications, consisting principally of interests in cable television systems. Time Warner was incorporated in the State of Delaware in August 1983 and is the successor to a New York corporation that was originally organized in 1922. Time Warner changed its name from Time Incorporated to Time Warner Inc. following its acquisition of 59.3% of the common stock of WCI in July 1989. WCI became a wholly owned subsidiary of Time Warner in January 1990 upon the completion of the WCI Acquisition. TWE was formed as a Delaware limited partnership in 1992 and owns substantially all of Time Warner's interests in filmed entertainment, broadcasting, theme parks, cable television programming and a majority of its interests in cable television systems. Time Warner and the Time Warner General Partners collectively own general and limited partnership interests in 74.49% of the Series A Capital and Residual Capital of TWE and 100% of the Senior Capital and Series B Capital of TWE. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by U S WEST. Publishing. Time Warner's publishing operations are conducted through wholly owned subsidiaries and include the publication of magazines such as TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, ENTERTAINMENT WEEKLY and PARENTING and regional magazines such as SOUTHERN LIVING and SUNSET. The publication and distribution of books is conducted by Time Life Inc., Book-of-the-Month Club, Inc., Warner Books, Inc., Little, Brown and Company, Oxmoor House and Sunset Books. Music. Time Warner's worldwide music business is conducted through wholly owned subsidiaries and includes the production and sale of compact discs and cassette tapes marketed throughout the world under various labels, including the proprietary labels "Warner Bros.," "Elektra," "Atlantic," "Reprise," "Sire," "EastWest," "WEA," "Teldec," "Erato" and "Carrere." Time Warner also owns 50% of the Columbia House Company, a direct marketer of compact discs, cassette tapes and videocassettes in the U.S. and Canada. Time Warner's music publishing subsidiaries, headed by Warner/Chappell, Inc., own or control the rights to many standard and contemporary compositions, and CPP/Belwin, Inc. and other subsidiaries market sheet music and song books throughout the world. Filmed Entertainment. Time Warner's filmed entertainment operations are conducted primarily as a division of TWE. These operations include Warner Bros. which produces and distributes feature motion pictures, television programming and animated programming for theatrical and television exhibition. Warner Home Video distributes home videocassettes and laser discs throughout the world. In addition, TWE is engaged in product licensing and the ownership and operation of retail stores, movie theaters and theme parks, including the management of TWE's interest in Six Flags Theme Parks. Programming-HBO. Programming-HBO, a division of TWE, consists principally of Home Box Office, which operates two pay television programming services, HBO and Cinemax. Home Box Office also has a number of international joint ventures, including HBO Ole in Latin America and a movie-based HBO service in Asia. The Home Box Office division also produces television programming and operates TVKO, an entity that produces boxing matches and other programming for pay-per-view. Cable. Time Warner Cable, a division of TWE, is the second largest multiple system cable operator in the United States. In addition, as a result of the recent acquisitions of Summit, KBLCOM and CVI, wholly owned subsidiaries of Time Warner own cable television systems that are managed by Time Warner Cable. Time Warner may transfer certain of these newly-acquired cable systems to the TWE-Advance/Newhouse Partnership on a tax-efficient basis. Such transfers, if they are made, are expected to be structured so that the systems will be 117
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transferred subject to a portion of Time Warner's debt, thereby reducing the financial leverage of Time Warner and increasing the under-leveraged capitalization of the TWE-Advance/Newhouse Partnership and consequently, TWE. As of June 30, 1996, Time Warner's wholly and partially owned cable systems served a total of approximately 11.8 million subscribers. The WB Television Network. Warner Bros., a division of TWE, launched The WB, a new national television network, which completed its first full year of broadcast operations in January 1996. Combining The WB's current broadcast affiliate line-up of 95 stations with the reach of Tribune Broadcasting Company's WGN Superstation, The WB's national coverage is more than 80% of all United States television households. Six Flags Theme Parks. Six Flags, in which TWE currently owns a 49% interest, operates 11 theme parks in seven locations, making it the second largest operator of theme parks in the United States and the leading operator of a national system of regional theme parks. Six Flags' theme parks include seven major ride-based theme parks, as well as three separately-gated water parks and one wildlife safari park. TWE is the principal component of Time Warner's Entertainment Group, which is not consolidated with Time Warner for financial reporting purposes. Although TWE manages substantially all the cable systems owned by Time Warner, TWE and the TWE-Advance/Newhouse Partnership, the results of operations of the cable systems owned by Time Warner's consolidated subsidiaries are included in Time Warner's consolidated results, while the results of operations of the cable systems owned by TWE and the TWE-Advance/Newhouse Partnership are included in the consolidated results of the Entertainment Group. Time Warner is a holding company and its assets consist primarily of investments in its consolidated and unconsolidated subsidiaries, including TWE. Time Warner's ability to service its indebtedness is dependent primarily upon the earnings of its consolidated and unconsolidated subsidiaries, including TWE, and the distribution or other payment of such earnings to Time Warner. Additional information concerning Time Warner is included in the Time Warner Reports incorporated by reference in this Joint Proxy Statement/Prospectus. See "Available Information" and "Incorporation of Certain Documents By Reference." 118
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BUSINESS OF TBS TBS is a diversified information and entertainment company which was incorporated in the State of Georgia in 1965. TBS's operations are in two primary industry segments: Entertainment and News. The Entertainment Segment, which consists of Entertainment Networks and Entertainment Production and Distribution, accounted for approximately 73% of TBS's consolidated revenue for the year ended December 31, 1995. The News Segment, which consists of domestic and international news networks, accounted for approximately 22% of TBS's consolidated revenue for the year ended December 31, 1995. Entertainment The TBS domestic Entertainment Networks include WTBS (commonly known as the "TBS Superstation"), TNT, the Cartoon Network and TCM. The international Entertainment Networks comprise TNT Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe and TNT & Cartoon Network Asia. TBS Superstation is a 24-hour per day independent UHF television station that is transmitted over the air to the Atlanta, Georgia area and is also retransmitted by SSSI via satellite to cable systems located in all 50 states, Puerto Rico and the Virgin Islands. TNT is a 24-hour per day advertiser- supported cable television entertainment program service. The Cartoon Network is a 24-hour per day advertiser-supported cable television animated program service. TCM is a 24-hour per day, subscriber supported, commercial-free cable television entertainment program service. TNT Latin America is a 24-hour per day trilingual entertainment program service and Cartoon Network Latin America is a 24-hour per day trilingual animated program service, each distributed principally to subscribing cable systems in Latin America and the Caribbean. TNT & Cartoon Network Europe is a 24-hour per day program service which originates in the United Kingdom and is distributed throughout Europe. TNT & Cartoon Network Asia is a 24-hour per day program service which originates in Hong Kong and is distributed throughout the Asia Pacific region. The Entertainment Production and Distribution companies are involved in the creation of programming or the distribution of original and library products to the Entertainment Networks and third parties. The Production companies include New Line, Castle Rock and Turner Pictures, each of which is principally involved in motion picture and television production. In 1995, these entities released an aggregate of 28 theatrical films. TBS owns two major copyright libraries. The Turner Entertainment Co. library (the "TEC Library") contains approximately 3,400 MGM, RKO Pictures, Inc. and pre-1950 Warner Bros. films, 3,000 short subjects and 1,850 cartoon episodes, and a number of television shows. The Hanna-Barbera library consists of over 3,000 half-hours of animation programming. News TBS's news networks are CNN, Headline News, CNNI and CNNfn. CNN is a 24-hour per day cable television news service. CNN uses a format consisting of up-to-the minute national and international news, sports news, financial news, science news, medical news, weather, interviews, analysis and commentary. Headline News is a 24-hour per day cable television news service which uses a concise, fast-paced format to provide constantly updated half- hour newscasts. CNNI is a 24-hour per day television news service consisting of programming produced by CNN and Headline News, as well as original programming, which is distributed to cable systems, broadcasters, hotels, direct-to-home satellite viewers and businesses around the world on a network of 12 satellites outside the United States. CNNfn is a 12-hour per day, 5-day per week financial news service which was launched in the United States on December 29, 1995. CNNfn provides live, global market news and information, business news, political-economic analysis, consumer news and personal financial reports and is broadcast domestically in connection with the CNNI domestic feed. 119
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Other TBS also owns the Atlanta Braves, the 1995 World Series champions, and has a 96% limited partnership interest in the Atlanta Hawks, a member of the National Basketball Association. Additional information concerning TBS is included in the TBS Reports incorporated by reference in this Joint Proxy Statement/Prospectus. See "Available Information" and "Incorporation of Certain Documents by Reference." BUSINESS OF NEW TIME WARNER New Time Warner is currently a wholly owned subsidiary of Time Warner that does not conduct any substantial business activities. As a result of the Transaction, Time Warner and TBS will each become a wholly owned subsidiary of New Time Warner. Accordingly, the business of New Time Warner will be the businesses currently conducted by Time Warner and TBS. See "Business of Time Warner" and "Business of TBS." MANAGEMENT OF NEW TIME WARNER DIRECTORS The following table sets forth the name, age as of June 30, 1996 and principal positions held during the past five years by each of the persons who are expected to serve as directors of New Time Warner following consummation of the Mergers. Immediately following consummation of the Mergers, the New Time Warner Board is expected to consist of the members of the Time Warner Board as constituted immediately prior to the consummation of the Mergers, except that pursuant to Investors' Agreement (No. 1), Mr. Turner is also expected to be appointed as a director of New Time Warner. In addition, pursuant to Investors Agreement (No. 1), Mr. Turner will be entitled to designate another person for election to the New Time Warner Board. The New Time Warner Board will be divided into three classes consisting of five directors each. The directors in each class will serve staggered three-year terms expiring in 1997, 1998 or 1999, respectively. Mr. Turner's designee to the New Time Warner Board will be elected to the class with a term expiring in 1998. [Enlarge/Download Table] BUSINESS EXPERIENCE NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS A DIRECTOR OF TIME WARNER AGE AND OTHER INFORMATION -------------------------- --- -------------------------- DIRECTORS WHOSE TERMS EXPIRE IN 1997 Lawrence B. 64 Partner, Rosenman & Colin. Mr. Buttenwieser served as a Buttenwieser........... director of WCI from 1963 to 1990. Mr. Buttenwieser has (1989) been a partner at Rosenman & Colin (attorneys) for more than the past five years. He is also Chairman of the Board of Directors of General American Investors Company, Inc. David T. Kearns......... 65 Retired Chairman and Chief Executive Officer of Xerox (1993) Corporation. Mr. Kearns served as a Senior University Fellow at Harvard University from August 1993 to March 1995 and served as Deputy Secretary of the U.S. Department of Education from May 1991 until January 1993. Prior to that, he served as Chairman of Xerox Corporation from 1985 until May 1991, having served as its Chief Executive Officer from 1982 to August 1990. He previously served as a director of Time Warner from 1978 until May 1991 when he resigned to accept his government appointment. He is also a director of Ryder System, Inc. 120
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[Enlarge/Download Table] BUSINESS EXPERIENCE NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS A DIRECTOR OF TIME WARNER AGE AND OTHER INFORMATION -------------------------- --- -------------------------- Gerald M. Levin......... 57 Chairman of the Board and Chief Executive Officer of Time (1988) Warner. Mr. Levin became Chairman of the Board and Chief Executive Officer of Time Warner on January 21, 1993, having served as President and Co-Chief Executive Officer from February 20, 1992. Prior to that, Mr. Levin served as Vice Chairman of the Board and Chief Operating Officer of Time Warner from May 1991, having served as Vice Chairman of the Board from July 1988. He previously served as a director of Time Warner from 1983 until January 1987. He is also a director of TBS and a member of the Board of Representatives of TWE. J. Richard Munro........ 65 Former Chairman of the Board of, and advisor to, Time (1978) Warner. Mr. Munro became an advisor to Time Warner in July 1994. He served as the Chairman of the Executive Committee of the Time Warner Board from May 1990 until January 1993 when he became Chairman of the Executive/Finance Committee following the combination of the Executive Committee and the Finance Committee. He served in such position until May 1996. He is also a director of Genentech, Inc., Kellogg Company, Kmart Corporation and Mobil Corporation. Richard D. Parsons...... 48 President of Time Warner. Mr. Parsons became President of (1991) Time Warner on February 1, 1995. Prior to that, Mr. Parsons served as the Chairman and Chief Executive Officer of The Dime Savings Bank of New York, FSB from January 1991. He served as a director of ATC, then an 82%-owned subsidiary of Time Warner, from 1989 until 1991 and is currently also a director of Citicorp, the Federal National Mortgage Association and Philip Morris Companies Inc. and a member of the Board of Representatives of TWE. DIRECTORS WHOSE TERMS EXPIRE IN 1998 Merv Adelson............ 66 Chairman of East-West Capital Associates and former (1989) Chairman and Chief Executive Officer of Lorimar Telepictures. Mr. Adelson has served as Chairman of East-West Capital Associates (private investment company) since April 1989. Mr. Adelson served as Vice Chairman and a director of WCI from January 1989 through August 1991. Prior to that, Mr. Adelson served as Chairman and Chief Executive Officer of Lorimar Telepictures Corporation from February 1986 until its acquisition by WCI in January 1989. He is also a director of 7th Level, Inc. Michael A. Miles........ 57 Former Chairman of the Board and Chief Executive Officer (1995) of Philip Morris Companies Inc. Mr. Miles served as Chairman of the Board and Chief Executive Officer of Philip Morris Companies Inc. (consumer products) from September 1991 until July 1994, having served as Vice Chairman and a member of the Board of Directors of Philip Morris Companies Inc. and Chairman and Chief Executive Officer of Kraft General Foods, Inc. from December 1989. He is also a director of Allstate Corp., Dean Witter, Discover & Co., Dell Computer Corporation and Sears, Roebuck and Co. and is also a Special Limited Partner in Forstmann Little and Co. 121
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[Enlarge/Download Table] BUSINESS EXPERIENCE NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS A DIRECTOR OF TIME WARNER AGE AND OTHER INFORMATION -------------------------- --- -------------------------- Donald S. Perkins....... 69 Former Chairman of Jewel Companies, Inc. Mr. Perkins (1979) became President of Jewel Companies, Inc. (retailing) in 1965, Chairman of its Board in 1970, and served as Chairman of its Executive Committee from 1980 to June 1983. He is also a director of AON Corporation, Cummins Engine Company, Inc., Current Assets, Illinova and Illinois Power Company, Inland Steel Industries, Inc., LaSalle Street Fund, Inc., Lucent Technologies Inc., The Putnam Funds (including all 97 of its funds), Ryerson Tull, Inc. and Spring Industries, Inc. Raymond S. Troubh....... 70 Financial Consultant and Director of various companies. (1989) Mr. Troubh served as a director of WCI from 1979 to 1990. Mr. Troubh has been a financial consultant and a corporate director for more than the past five years. He is also a director of ADT Limited, America West Airlines, Inc., Applied Power Inc., ARIAD Pharmaceuticals, Inc., Becton, Dickinson and Company, Diamond Offshore Drilling, Inc., Foundation Health Corporation, General American Investors Company, Inc., Olsten Corporation, Petrie Stores Corporation, Triarc Companies, Inc. and WHX Corporation. DIRECTORS WHOSE TERMS EXPIRE IN 1999 Beverly Sills 67 Chairman of Lincoln Center for the Performing Arts. Mrs. Greenough.............. Greenough served as a director of WCI from 1982 to 1990. (1989) Mrs. Greenough has served as the Chairman of Lincoln Center for the Performing Arts since June 1994, having served as a Managing Director of The Metropolitan Opera from 1991 and the President of the New York City Opera Inc. from March 1989 through 1990. She has also served as National Chairman of the March of Dimes Birth Defects Foundation. She is also a director of American Express Company and Human Genome Sciences Inc. Carla A. Hills.......... 62 Chairman and Chief Executive Officer of Hills & Company (1993) and former United States Trade Representative. Ambassador Hills became Chairman and Chief Executive Officer of Hills & Company (international trade consultants) in March 1993, having served in President Bush's Cabinet as the United States Trade Representative from February 1989 to January 20, 1993. Ambassador Hills is also a director of American International Group, Inc., Chevron Corporation, Lucent Technologies Inc. and Trust Company of the West. Reuben Mark............. 57 Chairman and Chief Executive Officer of Colgate-Palmolive (1993) Company. Mr. Mark has served as the Chief Executive Officer of Colgate-Palmolive Company (consumer products) since May 1984. In May 1986, he was elected Chairman. Mr. Mark is also a director of Citicorp, Toys 'R' Us, Inc. and The New York Stock Exchange, Inc. R.E. Turner............. 57 Chairman of the Board and President of TBS. Mr. Turner has served as Chairman of the Board and President of TBS since 1970 and is a controlling shareholder of TBS. Mr. Turner will become Vice Chairman of New Time Warner upon consummation of the Mergers. 122
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[Enlarge/Download Table] BUSINESS EXPERIENCE NAME AND YEAR FIRST BECAME DURING THE PAST FIVE YEARS A DIRECTOR OF TIME WARNER AGE AND OTHER INFORMATION -------------------------- --- -------------------------- Francis T. Vincent, 58 Chairman of Vincent Enterprises. Mr. Vincent has been a Jr. ............ (1993) private investor at Vincent Enterprises since January 1, 1995. Prior to that, Mr. Vincent served as the Commissioner of Major League Baseball from September 1989 until September 1992. He is also a director of Culbro Corporation, Horizon Group and Oakwood Homes Corporation. For certain additional information concerning the persons expected to serve as directors of New Time Warner, see Time Warner's Proxy Statement used in connection with its 1996 Annual Meeting of Stockholders (the "1996 Proxy Statement for Time Warner"), the relevant portions of which are incorporated by reference into the Time Warner Form 10-K. See "Incorporation of Certain Documents by Reference." COMPENSATION OF DIRECTORS In accordance with existing Time Warner practice, it is expected that directors who are also full-time employees of New Time Warner will receive no additional compensation for their services as directors. Each non-employee director will initially receive the same compensation for service on the New Time Warner Board as received by non-employee directors on the Time Warner Board. For information concerning the compensation paid to non-employee directors on the Time Warner Board, see the 1996 Proxy Statement for Time Warner, the relevant portions of which are incorporated by reference into the Time Warner Form 10-K. See "Incorporation of Certain Documents by Reference." EXECUTIVE OFFICERS Set forth below are the name and expected title of each person who is expected to serve as an executive officer of New Time Warner following consummation of the Mergers and the age as of June 30, 1996 and principal positions held by each such person during the past five years. With the exception of Mr. Turner, these are the current executive officers of Time Warner. [Enlarge/Download Table] NAME AGE OFFICE ---- --- ------ Gerald M. Levin ........ 57 Chairman of the Board of Directors and Chief Executive Officer of Time Warner 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. R.E. Turner............. 57 Vice Chairman of New Time Warner upon consummation of the Mergers. Currently, Chairman of the Board and President of TBS. Mr. Turner has served as Chairman of the Board and President of TBS since 1970 and is a controlling shareholder of TBS. Richard D. Parsons...... 48 President of Time Warner since February 1, 1995. Prior to that he served as Chairman and Chief Executive Officer of the Dime Savings Bank of New York, FSB from January 1991. Peter R. Haje .......... 61 Executive Vice President and General Counsel of Time Warner since October 1, 1990 and Secretary since May 20, 1993. Timothy A. Boggs........ 46 Senior Vice President of Time Warner since November 19, 1992. Prior to that he served as Vice President of Public Affairs. 123
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[Enlarge/Download Table] NAME AGE OFFICE ---- --- ------ Richard J. Bressler..... 38 Senior Vice President and Chief Financial Officer of Time Warner since March 16, 1995. Prior to that he served as Senior Vice President, Finance from January 2, 1995; and as a Vice President prior to that. Tod R. Hullin .......... 53 Senior Vice President of Time Warner since February 7, 1991. Philip R. Lochner, Jr. 53 Senior Vice President of Time Warner since July 18, 1991. ....................... Prior to that, he was a Commissioner of the Securities and Exchange Commission from March 1990 to June 1991. For certain additional information concerning the persons expected to serve as executive officers of New Time Warner, see the 1996 Proxy Statement for Time Warner, the relevant portions of which are incorporated by reference into the Time Warner Form 10-K. See "Incorporation of Certain Documents by Reference." COMPENSATION OF EXECUTIVE OFFICERS New Time Warner has not yet paid any compensation to its Chief Executive Officer or any other person anticipated to become an executive officer, and the form and amount of such compensation to be paid to each such executive officer in any future period is expected to be substantially similar to the form and amount of such compensation that Time Warner would have paid to such executive officer in such period. New Time Warner will assume employment agreements that are currently in effect between such executive officers and Time Warner. Upon consummation of the Mergers, New Time Warner will enter into the Employment Agreement with Mr. Turner. For a description of the Employment Agreement with Mr. Turner, see "The Transaction--Interests of Certain Persons in the Transaction--Employment Agreement with R.E. Turner." For information concerning the employment agreements with, and the compensation paid to, the Chief Executive Officer and the other four most highly compensated executive officers of Time Warner for the 1995 fiscal year, see the 1996 Proxy Statement for Time Warner, the relevant portions of which are incorporated by reference into the Time Warner Form 10-K. For information concerning the compensation paid to Mr. Turner by TBS for the 1995 fiscal year, see TBS's Proxy Statement used in connection with its 1996 Annual Meeting of Shareholders, the relevant portions of which are incorporated by reference into the TBS Form 10-K. See "Incorporation of Certain Documents by Reference." 124
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DESCRIPTION OF NEW TIME WARNER CAPITAL STOCK The following summary of the capital stock of New Time Warner is qualified in its entirety by reference to the complete text of the proposed New Time Warner Charter. Attached hereto as Appendix B-1 and incorporated herein by reference is a copy of the proposed New Time Warner Charter, excluding the certificates of designations for the LMC Series Common Stock and the various series of New Time Warner Preferred Stock expected to be outstanding immediately following the consummation of the Mergers. The forms of such certificates of designations are filed as Exhibits to the Registration Statement and are incorporated herein by reference. AUTHORIZED CAPITAL STOCK New Time Warner will be authorized by the New Time Warner Charter to issue (a) 2.0 billion shares of New Time Warner Common Stock, (b) 200 million shares of New Time Warner Series Common Stock, issuable in series, of which the following series will be designated: (i) 60 million shares of LMC Common Stock and (ii) 60 million shares of LMC Reduced Voting Common Stock and (c) 250 million shares of New Time Warner Preferred Stock, issuable in series, of which the following series will be designated: (i) 8.0 million shares of Series A Participating Cumulative Preferred Stock ("New Time Warner Series A Preferred Stock"), (ii) 11 million shares of Series D Convertible Preferred Stock ("New Time Warner Series D Preferred Stock"), (iii) 3.25 million shares of Series E Convertible Preferred Stock ("New Time Warner Series E Preferred Stock"), (iv) 3.08 million shares of Series F Convertible Preferred Stock ("New Time Warner Series F Preferred Stock"), (v) 6.2 million shares of Series G Convertible Preferred Stock ("New Time Warner Series G Preferred Stock"), (vi) 1.8 million shares of Series H Convertible Preferred Stock ("New Time Warner Series H Preferred Stock"), (vii) 7.0 million shares of Series I Convertible Preferred Stock ("New Time Warner Series I Preferred Stock"), (viii) 3.35 million shares of Series J Convertible Preferred Stock ("New Time Warner Series J Preferred Stock") and (ix) 15.2 million shares of 10 1/4% Series M Exchangeable Preferred Stock ("New Time Warner Series M Preferred Stock"). In addition, the New Time Warner Board will authorize 9.0 million shares of 10 1/4% Series L Exchangeable Preferred Stock ("New Time Warner Series L Preferred Stock") issuable upon exchange for shares of New Time Warner Series M Preferred Stock. The New Time Warner Board is authorized to issue shares of New Time Warner Series Common Stock and New Time Warner Preferred Stock, in one or more series, and to fix for each such series voting powers, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as are permitted by the DGCL. The additional shares of authorized stock available for issuance by New Time Warner may be issued at such times and under such circumstances as to have a dilutive effect on earnings per share and on the equity ownership of the holders of New Time Warner Capital Stock. The ability of the New Time Warner Board to issue additional shares of stock could enhance the New Time Warner Board's ability to negotiate on behalf of the stockholders in a takeover situation. However, the New Time Warner Board could authorize the issuance of additional shares of New Time Warner Series Common Stock or New Time Warner Preferred Stock with terms and conditions that could make a change in control more difficult or discourage a takeover or other transaction in which such holders might receive a premium for their shares of stock over the then market price of such shares that holders of some or a majority of shares of New Time Warner Common Stock might believe to be in their best interests. NEW TIME WARNER COMMON STOCK The holders of New Time Warner Common Stock will be entitled to receive dividends when, as and if declared by the New Time Warner Board out of funds legally available therefor, subject to the rights of any shares of New Time Warner Preferred Stock or New Time Warner Series Common Stock at the time outstanding. The holders of New Time Warner Common Stock will be entitled to one vote for each share on all matters voted on by stockholders under the New Time Warner Charter, including elections of directors. The holders of New Time Warner Common Stock do not have any cumulative voting, conversion, redemption or preemptive rights. In the event of dissolution, liquidation or winding up of New Time Warner, holders of the New Time Warner 125
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Common Stock will be entitled to share ratably with the holders of LMC Series Common Stock in any assets remaining after the satisfaction in full of the prior rights of creditors, including holders of New Time Warner's indebtedness, and subject to the aggregate liquidation preference and participation rights of any New Time Warner Preferred Stock or other series of New Time Warner Series Common Stock then outstanding. Pursuant to the New Time Warner Charter, outstanding shares of New Time Warner Common Stock may be redeemed by action of the New Time Warner Board to the extent necessary to prevent the loss of any governmental license or franchise, the holding of which is conditioned upon stockholders possessing prescribed qualifications. LMC SERIES COMMON STOCK Pursuant to the LMC Agreement, New Time Warner will be required to issue either LMC Common Stock or LMC Reduced Voting Common Stock to the Liberty Parties in exchange for New Time Warner Common Stock issued to the Liberty Parties in the TBS Merger. In addition, from time to time following consummation of the Mergers, New Time Warner may be required to issue shares of LMC Common Stock or LMC Reduced Voting Common Stock to the Liberty Parties in exchange for shares of New Time Warner Common Stock. See "TCI Arrangements--LMC Agreement" for a description of the circumstances under which such exchanges will be required. The holders of LMC Series Common Stock will be entitled to receive dividends ratably with the holders of New Time Warner Common Stock when, as and if declared by the New Time Warner Board out of funds legally available therefore, subject to the terms of any New Time Warner Preferred Stock at the time outstanding. In the event of dissolution, liquidation or winding up of New Time Warner, holders of LMC Series Common Stock will be entitled to share ratably with the holders of New Time Warner Common Stock in any assets remaining after the satisfaction in full of the prior rights of creditors, including holders of New Time Warner's indebtedness, and subject to the aggregate liquidation preference and participation rights of any New Time Warner Preferred Stock or other series of New Time Warner Series Common Stock then outstanding. The holders of LMC Series Common Stock do not have any conversion, redemption or preemptive rights, except that (i) each share of LMC Common Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of either LMC Reduced Voting Common Stock or a share of New Time Warner Common Stock and (ii) subject to the federal communications laws, each share of LMC Reduced Voting Common Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of either LMC Common Stock or a share of New Time Warner Common Stock. The holders of LMC Common Stock will be entitled to one vote for each share on all matters voted on by holders of New Time Warner Common Stock, including elections of directors. The holders of LMC Common Stock do not have any cumulative voting rights. Holders of LMC Reduced Voting Common Stock will be entitled to one one-hundredth (1/100th) of a vote for each share with respect to the election of directors. Holders of LMC Reduced Voting Common Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the LMC Reduced Voting Common Stock adverse to such holders. Unlike shares of New Time Warner Common Stock, shares of LMC Series Common Stock will not be redeemable by action of the New Time Warner Board to the extent necessary to prevent the loss of any governmental license or franchise, the holding of which is conditioned upon stockholders possessing prescribed qualifications. The LMC Series Common Stock will not be transferable, except in limited circumstances, and will not be listed on any securities exchange. NEW TIME WARNER RIGHTS AGREEMENT; NEW TIME WARNER SERIES A PREFERRED STOCK The following description of the terms of the New Time Warner Rights Agreement and the New Time Warner Rights is qualified in its entirety by reference to the form of the New Time Warner Rights Agreement, 126
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which is filed as an Exhibit to the Registration Statement and is incorporated herein by reference. The following description assumes that the New Time Warner Rights Agreement is adopted. The New Time Warner Rights Agreement will be the same as the Existing Rights Agreement, except for the amendments contemplated by the Rights Amendment. See "Certain Related Agreements--Rights Amendment." New Time Warner Rights Agreement Each share of New Time Warner Common Stock issued pursuant to the Mergers or otherwise from time to time and prior to redemption or expiration of the Rights, will be accompanied by one New Time Warner Right. Each New Time Warner Right, when it becomes exercisable as described below, will entitle the registered holder thereof to purchase from New Time Warner one one-thousandth ( 1/1000th) of a share of New Time Warner Series A Preferred Stock at a price of $150 (the "Purchase Price"). Until the earlier of (a) such time as New Time Warner learns that a person or group (including an affiliate of such person or group) has acquired, or has obtained the right to acquire, Beneficial Ownership (as defined below) of more than 15% of the "outstanding" shares of New Time Warner Common Stock (as defined in the New Time Warner Rights Agreement, see "Certain Related Agreements--Rights Amendment"), other than pursuant to a Qualifying Offer (as defined below) (such person or group being an "Acquiring Person"), and (b) such date, if any, as may be designated by the New Time Warner Board following the commencement of, or first public announcement of intent to commence, a tender or exchange offer for outstanding shares of New Time Warner Common Stock which could result in such person or group becoming the beneficial owner of more than 15% of the New Time Warner Common Stock on a fully diluted basis, other than pursuant to a Qualifying Offer (the earlier of such dates being called the "Distribution Date"), the New Time Warner Rights will be evidenced by the certificates for the New Time Warner Common Stock registered in the names of the holders thereof (which certificates for New Time Warner Common Stock will also be deemed to be Rights Certificates, as defined below) and not by separate Rights Certificates. Therefore, until the Distribution Date, the New Time Warner Rights will be transferred with and only with the New Time Warner Common Stock. As soon as practicable following the Distribution Date, separate certificates evidencing the New Time Warner Rights ("Rights Certificates") will be mailed to holders of record of shares of New Time Warner Common Stock as of the close of business on the Distribution Date and to each initial record holder of certain shares of New Time Warner Common Stock issued after the Distribution Date, and such separate Rights Certificates alone will thereafter evidence the New Time Warner Rights. The New Time Warner Rights will not be exercisable until the Distribution Date and will expire on January 20, 2004 (the "Expiration Date"), unless earlier redeemed by New Time Warner as described below. The number of shares of New Time Warner Series A Preferred Stock or other securities issuable upon exercise of a New Time Warner Right, the Purchase Price, the Redemption Price (as defined below) and the number of New Time Warner Rights associated with each outstanding share of New Time Warner Common Stock are all subject to adjustment in the event of any change in the New Time Warner Common Stock or the New Time Warner Series A Preferred Stock, whether by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchanges of securities, split-ups, split-offs, spin-offs, liquidations, other similar changes in capitalization, any distribution or issuance of cash, assets, evidences of indebtedness or subscription rights, options or warrants to holders of shares of New Time Warner Common Stock or New Time Warner Series A Preferred Stock, as the case may be (other than distribution of the New Time Warner Rights or regular quarterly dividends) or otherwise. The shares of New Time Warner Series A Preferred Stock will be authorized to be issued in fractions which are an integral multiple of one one-thousandth ( 1/1000th) of a share of New Time Warner Series A Preferred Stock. New Time Warner may, but will not be required to, issue fractions of shares upon the exercise of New Time Warner Rights and, in lieu of fractional shares, New Time Warner may issue certificates or utilize a depositary arrangement as provided by the terms of the New Time Warner Series A Preferred Stock and, in the case of fractions other than one one-thousandth ( 1/1000th) of a share of New Time Warner Series A Preferred Stock or an integral multiple thereof, may make a cash payment based on the market value of such shares. 127
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At such time that there is an Acquiring Person, the New Time Warner Rights will entitle each registered holder (other than such Acquiring Person or any associate or affiliate of such Acquiring Person) of a New Time Warner Right to purchase, for the Purchase Price, that number of one-thousandths ( 1/1000ths) of a share of New Time Warner Series A Preferred Stock that is equivalent in value to the number of shares of New Time Warner Common Stock that at the time of such event would have a market value of twice the Purchase Price. In the event New Time Warner is acquired in a merger or other business combination by an Acquiring Person or an associate or affiliate of an Acquiring Person that is a publicly traded corporation or 50% or more of New Time Warner's assets or assets representing 50% or more of New Time Warner's revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring Person or an associate or affiliate of an Acquiring Person that is a publicly traded corporation, each New Time Warner Right will entitle its holder (subject to the next paragraph) to purchase, for the Purchase Price, that number of common shares of such corporation that at the time of the transaction would have a market value of twice the Purchase Price. In the event New Time Warner is acquired in a merger or other business combination by an Acquiring Person or an associate or affiliate of an Acquiring Person that is not a publicly traded corporation or 50% or more of New Time Warner's assets or assets representing 50% or more of New Time Warner's revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring Person or an associate or affiliate of an Acquiring Person that is not a publicly traded entity, each New Time Warner Right will entitle its holder (subject to the next paragraph) to purchase, for the Purchase Price, at such holder's option, (a) that number of shares of the surviving corporation in the transaction with such entity (which surviving corporation could be New Time Warner) that at the time of the transaction would have a book value of twice the Purchase Price, (b) that number of shares of such entity that at the time of the transaction would have a book value of twice the Purchase Price or (c) if such entity has an affiliate that has publicly traded shares, that number of shares of such affiliate that at the time of the transaction would have a market value of twice the Purchase Price. Any New Time Warner Rights that are at any time beneficially owned by an Acquiring Person (or any affiliate or associate of an Acquiring Person) will be null and void and nontransferable and any holder of any such New Time Warner Right (including any purported transferee or subsequent holder) will be unable to exercise or transfer any such New Time Warner Right. The New Time Warner Rights Agreement will not apply to any Qualifying Offer. Accordingly, the New Time Warner Rights will not become exercisable in the case of a tender offer that constitutes a Qualifying Offer or a merger or business combination consummated in compliance with the requirements of a Qualifying Offer. The New Time Warner Rights Agreement will define a "Qualifying Offer" as an all-cash tender offer for all outstanding shares of New Time Warner Common Stock which meets the following requirements (a) the person or group making the tender offer must, prior to or upon commencing such offer, have provided to New Time Warner firm written commitments from responsible financial institutions, which have been accepted by such person or group, to provide, subject only to customary terms and conditions, funds for such offer which, when added to the amount of cash and cash equivalents which such person or group then has available and has irrevocably committed in writing to New Time Warner to utilize for purposes of the offer, will be sufficient to pay for all shares of New Time Warner Common Stock outstanding on a fully diluted basis pursuant to the offer and the second-step transaction required by clause (e) below and all related expenses, together with copies of all written materials prepared by such person or group for such financial institutions in connection with obtaining such financing commitments, (b) such person or group must own, after consummating such offer, shares of New Time Warner Capital Stock representing a majority of the shares of New Time Warner Common Stock outstanding on a fully diluted basis, (c) such offer must in all events remain open for at least 45 business days and must be extended for at least 20 business days after the last increase or permitted decrease in the price offered and after any bona fide higher alternative offer (except in certain limited circumstances to be set forth in the New Time Warner Rights Agreement), (d) such offer is accompanied by a written opinion, in customary form, of a nationally recognized investment banking firm which is addressed to the holders of the shares of New Time Warner Common Stock other than such person or group and states that the price to be paid to such holders pursuant to the offer is fair from a financial point of view to such holders and which includes any written 128
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presentation of such firm showing the analysis and range of the values underlying such conclusion, and (e) prior to or upon commencing such offer, such person or group must irrevocably commit in writing to New Time Warner (i) to consummate promptly upon completion of the offer a transaction or transactions whereby all remaining shares of New Time Warner Common Stock will be acquired for the same price per share paid pursuant to the offer, subject only to the condition that the New Time Warner Board has granted any approvals required to enable such person or group to consummate such transaction or transactions without obtaining the vote of any other stockholder, (ii) that such person or group will not amend such offer to reduce the per share price offered (except in certain limited circumstances to be set forth in the New Time Warner Rights Agreement), to change the form of consideration offered or to reduce the number of shares being sought or in any other respect which is materially adverse to New Time Warner's stockholders, (iii) that such person or group will not make any offer for any equity securities of New Time Warner for six months after commencement of the original offer if the original offer does not result in the tender of the number of shares required to be purchased pursuant to clause (b) above, unless another tender offer by another party for all outstanding shares of New Time Warner Common Stock (x) constitutes a Qualifying Offer and (y) is approved by the New Time Warner Board (in which event any new offer by such person or group must be at a price no less than that provided for in such approved offer). At any time prior to the earlier of (a) such time as a person becomes an Acquiring Person and (b) the Expiration Date, the New Time Warner Board may redeem the New Time Warner Rights in whole, but not in part, at a price (in cash or shares of New Time Warner Common Stock or other securities of New Time Warner deemed by the New Time Warner Board to be at least equivalent in value) of $0.01 per New Time Warner Right, subject to adjustment as provided in the New Time Warner Rights Agreement (the "Redemption Price"); provided, however, that, for the 120-day period after any date of a change (resulting from a proxy or consent solicitation) in a majority of the New Time Warner Board in office at the commencement of such solicitation, the New Time Warner Rights will be able to be redeemed only if (i) there are directors then in office who were in office at the commencement of such solicitation and (ii) the New Time Warner Board, with the concurrence of a majority of such directors then in office, determines that such redemption is, in their judgment, in the best interests of New Time Warner and its stockholders. Immediately upon the action of the New Time Warner Board electing to redeem the New Time Warner Rights, and without any further action and without any notice, the right to exercise the New Time Warner Rights will terminate, and the only right of the holders of New Time Warner Rights will be to receive the Redemption Price. After there is an Acquiring Person, the New Time Warner Board may elect to exchange each New Time Warner Right (other than New Time Warner Rights that become null and void and nontransferable as is described above) for consideration per New Time Warner Right consisting of one-half of the securities that would be issuable at such time upon the exercise of one New Time Warner Right pursuant to the terms of the New Time Warner Rights Agreement. Until a New Time Warner Right is exercised, the holder thereof, as such, will have no rights as a stockholder of New Time Warner, including the right to vote or to receive dividends. At any time prior to the Distribution Date, New Time Warner will be able, without the approval of any holder of New Time Warner Rights, to supplement or amend any provision of the New Time Warner Rights Agreement (including the date on which the Distribution Date shall occur, the time during which the New Time Warner Rights may be redeemed or the terms of the New Time Warner Series A Preferred Stock), except that no supplement or amendment shall be made that reduces the Redemption Price (other than pursuant to certain adjustments therein) or provides for an earlier Expiration Date. However, during the 120- day period after any date of a change (resulting from a proxy or consent solicitation) in a majority of the New Time Warner Board in office at the commencement of such solicitation, the New Time Warner Rights Agreement will be able to be supplemented or amended only if (a) there are directors then in office who were in office at the commencement of such solicitation and (b) the New Time Warner Board, with the concurrence of a majority of such directors then in office, determines that such supplement or amendment is, in their judgment, in the best interests of New Time Warner and its stockholders. 129
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The New Time Warner Rights Agreement and the New Time Warner Rights will have certain antitakeover effects. The exercise of the New Time Warner Rights will cause substantial dilution to any person or group that attempts to acquire New Time Warner unless (a) such acquisition is approved by the New Time Warner Board (since the New Time Warner Board may, at its option, at any time prior to any person becoming an Acquiring Person, redeem the New Time Warner Rights), (b) such acquisition meets the standard for a Qualifying Offer or (c) such acquisition is conditioned upon substantially all the New Time Warner Rights being acquired. Under the New Time Warner Rights Agreement, a person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own," and shall be deemed to have "Beneficial Ownership" of, any securities: (a) which such person or any of such person's affiliates or associates is deemed to "beneficially own" within the meaning of Rule 13d-3 under the Exchange Act; (b) which such person or any of such person's affiliates or associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (written or oral), or upon the exercise of conversion rights, exchange rights, rights (other than the New Time Warner Rights), warrants or options, or otherwise; provided, however, that a person shall not be deemed under this clause (i) to be the Beneficial Owner of, or to beneficially own, or to have Beneficial Ownership of, any securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person's affiliates or associates until such tendered securities are accepted for purchase or exchange thereunder or (ii) the right to vote pursuant to any agreement, arrangement or understanding (written or oral); provided, however, that a person shall not be deemed under this clause (ii) to be the Beneficial Owner of, or to beneficially own, any security if (A) the agreement, arrangement or understanding (written or oral) to vote such security arises solely from a revocable proxy or consent given to such person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act and (B) the beneficial ownership of such security is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of such person's affiliates or associates has any agreement, arrangement or understanding (written or oral) for the purpose of acquiring, holding, voting or disposing of any shares of New Time Warner Common Stock, any other securities of New Time Warner generally entitled to vote together with the shares of New Time Warner Common Stock or any rights, warrants, options or other securities exercisable or exchangeable for, or convertible into, shares of New Time Warner Common Stock or other securities of New Time Warner generally entitled to vote together with the shares of New Time Warner Common Stock. A person shall also be deemed to be the "Beneficial Owner" of, and to "beneficially own," and to have "Beneficial Ownership" of, shares of New Time Warner Common Stock if such person is the Beneficial Owner of, or beneficially owns, or has Beneficial Ownership of (as the case may be), any other securities of New Time Warner (whether or not convertible into or exchangeable for shares of New Time Warner Common Stock) generally entitled to vote together with the shares of New Time Warner Common Stock. If the preceding sentence is applicable in any case, such person shall be deemed by virtue of Beneficial Ownership of such other securities to be the "Beneficial Owner" of, and to "beneficially own," and to have "Beneficial Ownership" of, that number of shares of New Time Warner Common Stock equal to the greater of (a) the number of votes entitled to be cast in respect of such other securities upon any matter being voted upon by the holders of shares of New Time Warner Common Stock and the holders of such other securities, voting together as a single class, and (b) if applicable, the number of shares of New Time Warner Common Stock issuable upon conversion in full into, or exchange in full for, shares of New Time Warner Common Stock of such other securities. In the event any New Time Warner securities are subject to an approved voting trust, then (a) the trustee or trustees under such voting trust shall be deemed not to be the "Beneficial Owner" of any such New Time Warner securities and (b) each beneficiary of such voting trust shall be deemed to be the "Beneficial Owner" of all such New Time Warner securities. 130
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Notwithstanding the foregoing, (a) no person ordinarily engaged in business as an underwriter of securities shall be deemed to be the "Beneficial Owner" of, to "beneficially own," or to have any "Beneficial Ownership" of, any securities acquired in a bona fide firm commitment underwriting pursuant to an underwriting agreement with New Time Warner and (b) no person shall be deemed to be the "Beneficial Owner" of, to "beneficially own," or to have any "Beneficial Ownership" of, any securities by reason of such person or any of such person's affiliates or associates having the right to acquire (whether such right is exercisable immediately or only after the passage of time) such securities pursuant to a right of first refusal, right of first offer or similar agreement, arrangement or understanding granted by another person (the "subject person") (i) that does not provide any direct or indirect limitations or restrictions on the ability of the subject person to exercise (or refrain from exercising) any voting rights associated with such securities or contain any other agreement, arrangement or understanding with respect to such voting rights, (ii) that does not contain any incentive for the subject person to support or oppose any particular business combination with an Acquiring Person or otherwise to exercise (or refrain from exercising) any voting rights associated with such securities in a manner advantageous to such person or any of such person's affiliates or associates and (iii) with respect to which prior written notice of which shall have been given to New Time Warner. For purposes of the New Time Warner Rights Agreement, neither TCITP and its affiliates nor Mr. Turner and his affiliates will be deemed to "beneficially own" any shares of New Time Warner Capital Stock held by the other party solely as a result of their respective rights to purchase the other parties' shares of New Time Warner Capital Stock pursuant to the Right of First Refusal Agreement. See "Certain Related Agreements--Right of First Refusal Agreement." New Time Warner Series A Preferred Stock The holders of New Time Warner Series A Preferred Stock will be entitled to receive (a) quarterly cumulative dividends payable in cash in an amount per share equal to $0.01 per share less the amount of cash dividends received pursuant to the following clause (b) (but not less than zero) and (b) cash and in-kind dividends on each payment date for similar dividends on the shares of New Time Warner Common Stock in an amount per share of New Time Warner Series A Preferred Stock equal to 1,000 (subject to adjustment) times the per share amount of all cash dividends then to be paid on each share of New Time Warner Common Stock. Holders of New Time Warner Series A Preferred Stock will be entitled to vote on each matter on which holders of New Time Warner Common Stock are entitled to vote and will have 1,000 (subject to adjustment) votes for each share of New Time Warner Series A Preferred Stock held. Holders of any fraction of a share of New Time Warner Series A Preferred Stock that is not smaller than one one- thousandth (1/1,000th) of a share will be entitled to vote such fraction. Holders of New Time Warner Series A Preferred Stock will have certain special voting rights in the election of directors when the equivalent of six quarterly dividends are in default. Whenever quarterly dividends or distributions on the New Time Warner Series A Preferred Stock shall be in arrears, New Time Warner's right to declare or pay dividends or other distributions on, redeem or purchase any shares of stock ranking junior to or on a parity with the New Time Warner Series A Preferred Stock will be subject to certain restrictions. Upon any liquidation, dissolution or winding up of New Time Warner, whether voluntary or involuntary, the holders of shares of New Time Warner Series A Preferred Stock will be entitled to receive, before any distribution is made to holders of shares of stock ranking in junior to the New Time Warner Series A Preferred Stock or any distribution (other than a ratable distribution) is made to the holders of stock ranking on a parity with the New Time Warner Series A Preferred Stock in an amount equal to the accrued dividends thereon plus the greater of (a) $1,000 per share or (b) an amount per share equal to 1,000 (subject to adjustment) times the amount per share to be distributed to holders of New Time Warner Common Stock. The New Time Warner Series A Preferred Stock will rank junior to all other series of New Time Warner Preferred Stock outstanding immediately following the consummation of the Mergers. The shares of New Time Warner Series A Preferred Stock will not be redeemable. 131
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NEW TIME WARNER SERIES D PREFERRED STOCK General The New Time Warner Series D Preferred Stock is identical to the Time Warner Series D Preferred Stock, except for (a) the items described under "Comparison of Rights of Stockholders of New Time Warner and Time Warner" and (b) certain technical, immaterial changes (primarily giving precise dates for certain matters rather than anniversaries of dates of issuance, changing the definition of "Parity Stock" to include all the pari passu New Time Warner Preferred Stock and changing the definition of "Junior Stock" to include the LMC Series Common Stock). Dividend Rights Holders of New Time Warner Series D Preferred Stock will be entitled to receive quarter-annual dividends, as and when declared by the New Time Warner Board out of funds legally available for payment in the amount per share equal to (i) in the case of each Series D Dividend Payment Date (as defined below) occurring on or before July 6, 1999, the greater of (A) $.9375 (which is equivalent to $3.75 per annum) per $100 in liquidation value, and (B) the product of (1) the Series D Conversion Rate (as defined below) and (2) the aggregate per share amount of regularly scheduled dividends paid in cash on the New Time Warner Common Stock during the period from but excluding the immediately preceding Series D Dividend Payment Date to and including such Series D Dividend Payment Date. Dividends on New Time Warner Series D Preferred Stock will be payable in cash on or about January 1, April 1, July 1 and October 1 of each year, as fixed by the New Time Warner Board, or such other dates as are fixed by the New Time Warner Board (provided that July 6, 1999 shall be a Series D Dividend Payment Date) (each a "Series D Dividend Payment Date"), to the holders of record on such record dates as are fixed by the New Time Warner Board of Directors (each a "Series D Record Date"). Dividends payable in respect of periods prior to July 6, 1999 will be cumulative and will accrue on each share on a daily basis, whether or not there are unrestricted funds legally available for the payment of such dividends and whether or not earned or declared. Any such dividends that become payable for any partial dividend period shall be computed on the basis of the actual days elapsed in such period; provided, however, that the dividend payable on the first Series D Dividend Payment Date shall be computed as if the period in respect of which such dividend is payable commenced on the date of payment of the last dividend paid on the Time Warner Series D Preferred Stock and no payments will be made by Time Warner with respect to the Time Warner Series D Preferred Stock for the dividend period ending on the first Series D Dividend Payment Date. From and after July 6, 1999, dividends on New Time Warner Series D Preferred Stock shall accrue to the extent, but only to the extent, that regularly scheduled cash dividends are declared by the New Time Warner Board on the New Time Warner Common Stock with a payment date after July 6, 1999 (or, in the case of shares of New Time Warner Series D Preferred Stock originally issued after July 6, 1999, after the Series D Dividend Payment Date next preceding such date of original issuance). So long as any New Time Warner Series D Preferred Stock is outstanding, New Time Warner may not declare or pay any dividend on the New Time Warner Common Stock or other stock ranking as to the right to receive dividends or to participate in any distribution of assets other than by way of dividends junior to or on a parity with the New Time Warner Series D Preferred Stock (other than a dividend payable in New Time Warner Common Stock or other junior stock), nor may New Time Warner or any of its subsidiaries purchase, redeem or otherwise acquire New Time Warner Common Stock or any other stock ranking as to the right to receive dividends or to participate in any distribution of assets other than by way of dividends junior to or on a parity with the New Time Warner Series D Preferred Stock (except by conversion into or exchange for stock of New Time Warner ranking junior to the New Time Warner Series D Preferred Stock as to dividends and other distributions), nor shall any monies be paid or made available for a purchase, redemption or sinking fund therefor, unless all dividends on the New Time Warner Series D Preferred Stock and any other New Time Warner Capital Stock ranking as to dividends on a parity with the New Time Warner Series D Preferred Stock that shall have accrued and be payable as of any date shall have been paid, or declared and funds set apart for payment thereof. Should dividends not be paid in full on any outstanding New Time Warner Series D Preferred 132
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Stock or any other New Time Warner Capital Stock ranking as to dividends on a parity with the New Time Warner Series D Preferred Stock, all dividends declared on the New Time Warner Series D Preferred Stock and any other New Time Warner Capital Stock ranking as to dividends on a parity with the New Time Warner Series D Preferred Stock will be declared pro rata, so that the amount of dividends declared per share of New Time Warner Series D Preferred Stock and such other New Time Warner Capital Stock will bear to each other the same ratio that accrued dividends per share on the shares of each series of New Time Warner Series D Preferred Stock and such other New Time Warner Capital Stock bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on New Time Warner Series D Preferred Stock which may be in arrears. The New Time Warner Series D Preferred Stock will rank on a parity with the New Time Warner Series E Preferred Stock, the New Time Warner Series F Preferred Stock, the New Time Warner Series G Preferred Stock, the New Time Warner Series H Preferred Stock, the New Time Warner Series I Preferred Stock, the New Time Warner Series J Preferred Stock and the New Time Warner Series K Preferred Stock and will rank senior to the New Time Warner Common Stock and the LMC Series Common Stock and, if issued, the New Time Warner Series A Preferred Stock. If New Time Warner distributes (other than a distribution in liquidation of New Time Warner) to all holders of New Time Warner Common Stock any assets or property, including debt or equity securities, of New Time Warner or cash (excluding regularly scheduled cash dividends payable on shares of New Time Warner Common Stock), or if New Time Warner distributes (other than a distribution in liquidation of New Time Warner) rights, options or warrants to subscribe for or purchase any securities, assets or property (in each case, whether of New Time Warner or otherwise, but other than any distribution of rights to purchase securities of New Time Warner if the holder of New Time Warner Series D Preferred Stock would otherwise be entitled to receive such rights upon conversion of shares of New Time Warner Series D Preferred Stock for New Time Warner Common Stock; provided, however, that if such rights are subsequently redeemed by New Time Warner, such redemption will be treated for purposes of the provisions described in this paragraph as a cash dividend on the New Time Warner Common Stock), New Time Warner must simultaneously distribute such assets, property, securities, rights, options or warrants pro rata to the holders of New Time Warner Series D Preferred Stock in an amount equal to the amount that such holders would have been entitled to receive had their shares of New Time Warner Series D Preferred Stock been converted into New Time Warner Common Stock immediately prior to the applicable record date. If a distribution is made to the holders of New Time Warner Series D Preferred Stock in accordance with the provisions described in the immediately preceding paragraph, no adjustment to the Series D Conversion Rate shall be effected by reason of the distribution of such assets, property, securities, rights, options or warrants or any subsequent modification, exercise, expiration or termination of such securities, rights, options or warrants. If holders of New Time Warner Common Stock are entitled to make any election with respect to the kind or amount of securities or other property receivable by them in any such distribution, the kind and amount of securities or other property that shall be distributable to the holders of the New Time Warner Series D Preferred Stock shall be based on (a) the election, if any, made by the record holder (as of the date used for determining the holders of New Time Warner Common Stock entitled to make such election) of the largest number of shares of New Time Warner Series D Preferred Stock in writing to New Time Warner on or prior to the last date on which a holder of New Time Warner Common Stock may make such an election and (b) if no such election is timely made, an assumption that such holder failed to exercise any such rights (provided that if the kind or amount of securities or other property is not the same for each nonelecting holder, then the kind and amount of securities or other property receivable by holders of New Time Warner Series D Preferred Stock shall be based on the kind or amount of securities or other property receivable by a plurality of shares held by the nonelecting holders of New Time Warner Common Stock). Conversion Provisions General. Holders of New Time Warner Series D Preferred Stock shall have the right at any time or, as to any share of New Time Warner Series D Preferred Stock called for redemption or exchange, at any time prior to the close of business on the date fixed for redemption or exchange (unless New Time Warner defaults in the 133
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payment of the Series D Redemption Price (as defined below) or fails to exchange the shares of New Time Warner Series D Preferred Stock for the applicable number of shares of New Time Warner Common Stock and any cash portion of the Series D Exchange Price (as defined) or exercises its right to rescind such redemption, in which case such right shall not terminate at the close of business on such date), to convert such share into (a) a number of shares of New Time Warner Common Stock equal to 2.08264 shares of New Time Warner Common Stock for each share of New Time Warner Series D Preferred Stock, subject to adjustment as described herein (such rate, as so adjusted from time to time, is herein called the "Series D Conversion Rate;" and the "Series D Conversion Price" at any time shall mean the liquidation value per share of New Time Warner Series D Preferred Stock divided by the Series D Conversion Rate in effect at such time (rounded to the nearest one hundredth of a cent)) plus (b) a number of shares of New Time Warner Common Stock equal to (A) (1) the aggregate amount of accrued and unpaid dividends on such share to and including the Conversion Date (as defined below) excluding, if such Conversion Date occurs after a Series D Record Date and prior to the related Series D Dividend Payment Date, accrued and unpaid dividends for the period from and after the most recent Series D Dividend Payment Date (the "Series D Accrued Dividend Amount") minus (2) unless clause (3) below is applicable, the product of (x) the Series D Conversion Rate, (y) the regular quarterly cash dividend per share, if any, paid by New Time Warner on the New Time Warner Common Stock on the most recent dividend payment date for the New Time Warner Common Stock occurring during the four months immediately preceding such Conversion Date and (z) a fraction (I) the numerator of which is the number of calendar days from and excluding such most recent dividend payment date to and including such Conversion Date (or, if such Conversion Date falls after a Series D Record Date and on or prior to the related Series D Dividend Payment Date, to and including such Series D Dividend Payment Date) and (II) the denominator of which is 91 days (provided that in no event shall such fraction be greater than one) or plus (3) if such Conversion Date falls after a record date and prior to the related payment date for a regularly scheduled cash dividend on the New Time Warner Common Stock, the product of (x) the Series D Conversion Rate, (y) the amount per share of New Time Warner Common Stock of the regularly scheduled cash dividend for which the record date has been set but a payment date has not yet occurred and (z) a fraction (I) the numerator of which is the number of calendar days from and including such Conversion Date (or, if such Conversion Date falls after a Series D Record Date and on or prior to the related Series D Dividend Payment Date, from and excluding such Series D Dividend Payment Date) to and including such related payment date for such regularly scheduled cash divided and (II) the denominator of which is 91 (provided that in no event shall such fraction be greater than one) (the amount calculated pursuant to this clause (A) being the "Series D Net Dividend Amount") divided by (B) the closing price of the New Time Warner Common Stock on the last NYSE trading day prior to the Conversion Date; provided, however, that in the event that the Series D Net Dividend Amount is a negative number, the number of shares deliverable upon conversion of a share of New Time Warner Series D Preferred Stock shall be equal to (I) the number of shares determined pursuant to clause (a) minus (II) a number of shares equal to (x) the absolute value of the Series D Net Dividend Amount divided by (y) the closing price of the New Time Warner Common Stock on the last NYSE trading day prior to the Conversion Date. If the Series D Net Dividend Amount is positive, New Time Warner may deliver cash equal to the Series D Net Dividend Amount or any portion thereof in lieu of New Time Warner Common Stock. The obligations of New Time Warner to issue the New Time Warner Common Stock or make the cash payments upon the exercise of conversion rights is absolute whether or not any accrued dividend by which such issuance or payment is measured has been declared by the New Time Warner Board and whether or not New Time Warner would have adequate surplus or net profits to pay such dividend if declared or is otherwise restricted from making such dividend. 134
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Except as described herein, no adjustments in respect of payments of dividends on shares surrendered for conversion or any dividend on the New Time Warner Common Stock issued upon conversion will be made upon the conversion of any shares of New Time Warner Series D Preferred Stock (it being understood that if any conversion of shares of New Time Warner Series D Preferred Stock occurs after a record date for any Series D Dividend Payment Date and on or prior to such Series D Dividend Payment Date, the holder of record on such record date will be entitled to receive the dividend payable with respect to such shares on the related Series D Dividend Payment Date). New Time Warner may, but is not required to, in connection with any conversion of shares of New Time Warner Series D Preferred Stock, issue a fraction of a share of New Time Warner Common Stock, and if New Time Warner does not issue any such fraction, New Time Warner shall, except as described below, make a cash payment (rounded to the nearest cent) equal to such fraction multiplied by the closing price of the New Time Warner Common Stock on the last NYSE trading day prior to the Conversion Date. Conversion of shares of New Time Warner Series D Preferred Stock will be deemed to have been made as of the date (the "Conversion Date") that certificates for such shares, and a written notice of election to convert, are received by the transfer agent or agents for the New Time Warner Series D Preferred Stock; and the person entitled to receive the New Time Warner Common Stock issuable upon such conversion will be treated for all purposes as the record holder of such New Time Warner Common Stock on such date. If New Time Warner has rescinded a redemption of shares of New Time Warner Series D Preferred Stock, any holder of shares of New Time Warner Series D Preferred Stock that shall have surrendered such shares for conversion following the day on which notice of the subsequently rescinded redemption shall have been given but prior to the close of business on the later of (a) the NYSE trading day next succeeding the date on which public announcement of the rescission of such redemption was made and (b) the NYSE trading day on which the notice of rescission is deemed given (a "Converting Holder") may rescind the conversion of such shares surrendered for conversion by properly completing a form prescribed by New Time Warner and mailed to holders of shares of the New Time Warner Series D Preferred Stock (including Converting Holders) with New Time Warner's notice of rescission delivering such form to New Time Warner no later than the close of business on that date that is 10 NYSE trading days following the date on which notice of rescission is deemed given. New Time Warner is required to pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares on conversion of New Time Warner Series D Preferred Stock. New Time Warner is not, however, required to pay any tax which is payable in respect of any transfer involved in the issue or delivery of such shares in a name other than that in which the shares of the New Time Warner Series D Preferred Stock so converted were registered, and no such issue or delivery is permitted unless and until the person requesting such issue has paid to New Time Warner the amount of such tax, or has established, to the satisfaction of New Time Warner, that such tax has been paid. Adjustment of Series D Conversion Rate for Certain Actions or Events. The Series D Conversion Rate will be adjusted from time to time as follows: (a) In case New Time Warner (i) pays a dividend in shares of New Time Warner Common Stock, (ii) combines the outstanding shares of New Time Warner Common Stock into a smaller number of shares, (iii) subdivides the outstanding shares of New Time Warner Common Stock or (iv) reclassifies (other than by way of a merger or consolidation that is described below) the shares of New Time Warner Common Stock, then the Series D Conversion Rate in effect immediately before such action will be adjusted so that immediately following such event the holders of such shares will be entitled to receive upon conversion or exchange thereof the kind and amount of shares of capital stock of New Time Warner which they would have owned or been entitled to receive upon or by reason of such event if such shares had been converted or exchanged immediately before the record date (or, if no record date, the effective date) for such event (it being understood that any distribution of cash or of capital stock (other than New Time Warner Common Stock), including any distribution of capital stock that will accompany a reclassification of the New Time Warner Common Stock, will have the effect described under "--Dividend Rights" above). Any such 135
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adjustment will become effective retroactively immediately after the record date in the case of a dividend or distribution and will become effective retroactively immediately after the effective date in the case of a subdivision, combination or reclassification. If holders of New Time Warner Common Stock are entitled to make any election with respect to the kind or amount of securities receivable by them in any transaction described in this paragraph (including any election that would result in all or a portion of the transaction being treated as described under "--Dividend Rights" above), the kind and amount of securities that will be distributable to the holders of New Time Warner Series D Preferred Stock will be based on (i) the election, if any, made by the record holder (as of the date used for determining the holders of New Time Warner Common Stock entitled to make such election) of the largest number of shares of New Time Warner Series D Preferred Stock in writing to New Time Warner on or prior to the last date on which a holder of New Time Warner Common Stock may make such an election or (ii) if no such election is timely made, an assumption that such holder failed to exercise any such rights (provided that if the kind or amount of securities is not the same for each nonelecting holder, then the kind and amount of securities receivable will be based on the kind or amount of securities receivable by a plurality of nonelecting holders of New Time Warner Common Stock). (b) If a Change of Control (as defined below) occurs, the Series D Conversion Rate in effect immediately prior to the Change of Control Date (as defined below) will be increased (but not decreased) by multiplying such rate by a fraction as follows (i) in the case of a Change of Control specified in clause (A) of the definition of "Change of Control" set forth below, a fraction in which the numerator is the Series D Conversion Price prior to adjustment pursuant hereto and the denominator is the current market price of the New Time Warner Common Stock at the Change of Control Date, (ii) in the case of a Change of Control specified in clause (B) of the definition "Change of Control" set forth below, the greater of the following fractions: (x) a fraction the numerator of which is the highest price per share of New Time Warner Common Stock paid by the acquiring person in connection with the transaction giving rise to the Change of Control or in any transaction within six months prior to or after the Change of Control Date (the "highest price"), and the denominator of which is the current market price of the New Time Warner Common Stock as of the date (but not earlier than six months prior to the Change of Control Date) on which the first public announcement is made by the acquiring person that it intends to acquire or that it has acquired 40% or more of the outstanding shares of New Time Warner Common Stock (the "announcement date") or (y) a fraction the numerator of which is the Series D Conversion Price prior to adjustment pursuant hereto and the denominator of which is the current market price of the New Time Warner Common Stock on the announcement date and (iii) in the case where there co-exists a Change of Control specified in both clauses (A) and (B) of this paragraph, the greatest of the fractions determined pursuant to clauses (i) and (ii). Such adjustment will become effective immediately after the Change of Control Date and will be made, in the case of clauses (ii) and (iii) above, successively for six months thereafter in the event and at the time of any increase in the highest price after the Change of Control Date; provided, however, that no such successive adjustment shall be made with respect to the Series D Conversion Rate of the shares of this Series in respect of any event occurring after the Conversion Date. For the purposes of the New Time Warner Series D Preferred Stock, "Change of Control" means the occurrence of one or both of the following events: (A) individuals who would constitute a majority of the members of the New Time Warner Board elected at any meeting of stockholders or by written consent (without regard to any members of the New Time Warner Board elected pursuant to the terms of any New Time Warner Preferred Stock) shall be elected to the Board of Directors and the election or the nomination for election by the stockholders of such directors was not approved by a vote of at least a majority of the directors in office immediately prior to such election (in which event "Change of Control Date" shall mean the date of such election) or (B) a person or group of persons acting in concert as a partnership, limited partnership, syndicate or other group within the meaning of Rule 13d-3 under the Exchange Act shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases, share repurchases or redemptions or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 40% or more of the outstanding shares of New Time Warner Common Stock (in which event "Change of Control Date" shall mean the date of the event resulting in such 40% ownership). 136
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(c) New Time Warner is entitled to make such additional adjustments in the Series D Conversion Rate, in addition to those described above in paragraphs (a) and (b) as are necessary in order that any dividend or distribution in New Time Warner Common Stock or any subdivision, reclassification or combination of shares of New Time Warner Common Stock referred to above, will not be taxable to the holders of New Time Warner Common Stock for United States Federal income tax purposes so long as such additional adjustments do not decrease the Series D Conversion Rate. (d) New Time Warner may elect to defer (but only for five NYSE trading days following the occurrence of an event which necessitates adjustment of the Series D Conversion Rate) issuing to the holder of any shares of a series of New Time Warner Series D Preferred Stock converted after such record date the shares of New Time Warner Common Stock and other capital stock of New Time Warner issuable upon such conversion over and above the shares of New Time Warner Common Stock and other capital stock of New Time Warner issuable upon such conversion on the basis of the Series D Conversion Rate prior to adjustment; provided, however, that New Time Warner must deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (e) No adjustment will be made to the Series D Conversion Rate (i) if the effect thereof would be to reduce the Series D Conversion Price below the par value of the New Time Warner Common Stock or (ii) subject to paragraph (c) above, with respect to any share of New Time Warner Series D Preferred Stock that is converted, prior to the time such adjustment otherwise would be made. Adjustment of Series D Conversion Rate upon Consolidation, Merger or Sale of Assets. If: (a) any consolidation or merger to which New Time Warner is a party, other than a merger or consolidation in which New Time Warner is the surviving or continuing corporation and which does not result in any reclassification of, or change (other than a change in par value or from par value to no par value or from no par value to par value, or as a result of a subdivision or combination) in, outstanding shares of New Time Warner Common Stock, occurs, or; (b) any sale or conveyance of all or substantially all of the property and assets of New Time Warner occurs, then lawful provision will be made as part of the terms of such transaction whereby the holder of each share of New Time Warner Series D Preferred Stock will have the right thereafter, during the period such share is convertible or exchangeable, to convert such share into or have such share exchanged for the kind and amount of shares of stock or other securities and property receivable upon such consolidation, merger, sale or conveyance by a holder of the number of shares of New Time Warner Common Stock into which such share could have been converted or exchanged immediately prior to such consolidation, merger, sale or conveyance, subject to adjustment which shall be as nearly equivalent as may be practicable to the adjustments described herein (based on (i) the election, if any, made in writing to New Time Warner by the record holder (as of the date used for determining holders of New Time Warner Common Stock entitled to make such election) of the largest number of shares of New Time Warner Series D Preferred Stock on or prior to the last date on which a holder of New Time Warner Common Stock may make an election regarding the kind or amount of securities or other property receivable by such holder in such transaction or (ii) if no such election is timely made, an assumption that such holder failed to exercise any such rights (provided that if the kind or amount of securities or other property is not the same for each nonelecting holder, then the kind and amount of securities or other property receivable will be based upon the kind and amount of securities or other property receivable by a plurality of the nonelecting holders of New Time Warner Common Stock)). If any of the transactions referred to in clauses (a) or (b) of the immediately preceding paragraph involves the distribution of cash (or property other than equity securities) to a holder of New Time Warner Common Stock, lawful provision will be made as part of the terms of the transaction whereby the holder of each share of New Time Warner Series D Preferred Stock on the record date fixed for determining holders of New Time Warner Common Stock entitled to receive such cash or property (or if no such record date is established, the 137
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effective date of such transaction) will be entitled to receive the amount of cash or property that such holder would have been entitled to receive had such holder converted his shares of New Time Warner Series D Preferred Stock into New Time Warner Common Stock immediately prior to such record date (or effective date) (based on the election or nonelection made by the record holder of the largest number of shares of New Time Warner Series D Preferred Stock, as provided above). New Time Warner will not enter into any of the transactions referred to in clause (a) or (b) of the immediately preceding paragraph unless effective provision shall be made in the certificate or articles of incorporation or other constituent documents of New Time Warner or the entity surviving the consolidation or merger, if other than New Time Warner, or the entity acquiring New Time Warner's assets, as the case may be, so as to give effect to the provisions set forth in the immediately preceding paragraph. The provisions of this paragraph shall apply similarly to successive consolidations, mergers, sales or conveyances. Redemption or Exchange at New Time Warner's Option General. New Time Warner may, at its sole option from time to time on and after July 6, 2000, in the case of clause (i) or (iii) of the immediately succeeding paragraph and on and after July 6, 1999, in the case of clause (ii) of the immediately succeeding paragraph, redeem, out of funds legally available therefor, or exchange, as provided below, shares of New Time Warner Common Stock for, all (or in the case of a cash redemption, any part) of the outstanding shares of the New Time Warner Series D Preferred Stock. The redemption price for each such share called for cash redemption shall be the liquidation value together with an amount equal to the accrued and unpaid dividends to the date fixed for redemption (hereinafter collectively referred to as the "Series D Redemption Price"). The exchange price for each share of New Time Warner Series D Preferred Stock called for exchange shall be a number of shares of New Time Warner Common Stock equal to the Series D Conversion Rate, together with, at the option of New Time Warner, either (x) cash or (y) a number of shares of New Time Warner Common Stock, valued at the closing price on the NYSE trading day immediately preceding the date fixed for exchange, equal, in either case, to the aggregate amount of accrued and unpaid dividends on New Time Warner Series D Preferred Stock to the date fixed for exchange (provided that any dividends which are in arrears must be paid in cash) (hereinafter collectively referred to as the "Series D Exchange Price"). On the date fixed for redemption or exchange of shares of New Time Warner Series D Preferred Stock, New Time Warner will, at its option, effect either (i) a redemption of the shares of New Time Warner Series D Preferred Stock to be redeemed by way of payment, out of funds legally available therefor, of cash equal to the aggregate Series D Redemption Price for the shares then being redeemed; (ii) an exchange of the shares of New Time Warner Series D Preferred Stock for the Series D Exchange Price in shares of New Time Warner Common Stock (provided that New Time Warner (A) will be entitled to deliver cash (1) in lieu of any fractional share of New Time Warner Common Stock and (2) equal to accrued and unpaid dividends to the date fixed for exchange in lieu of shares of New Time Warner Common Stock and (B) will be required to deliver cash in respect of any dividends that are in arrears); or (iii) any combination of a cash redemption and an exchange with respect to the shares of New Time Warner Series D Preferred Stock called for redemption or exchange. In the event that fewer than all the outstanding shares of the New Time Warner Series D Preferred Stock are to be redeemed, the number of shares to be redeemed from each holder of shares of New Time Warner Series D Preferred Stock shall be determined by New Time Warner by lot or pro rata or by any other method as may be determined by the New Time Warner Board. Notice of any proposed redemption or exchange may be given by New Time Warner by mailing a copy of such notice not less than 15 nor more than 60 days prior to the date fixed for redemption or exchange, to the record holder of the shares to be redeemed or exchanged, at their addresses as reported on the books of New Time Warner. 138
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All dividends on the shares so called for redemption or exchange shall cease to accrue and all rights of the holders thereof as stockholders of New Time Warner with respect to shares so called for redemption or exchange (except (i) in the case of redemption, the right to receive the Series D Redemption Price without interest and in the case of exchange, the right to receive the Series D Exchange Price without interest and (ii) the right to convert such shares as described above under "--Conversion Provisions" above) shall terminate (including any right to receive dividends otherwise payable on any Series D Dividend Payment Date that would have occurred after the time and date of redemption or exchange) either in the case of a redemption or exchange, from and after the time and date fixed in the notice of redemption or exchange as the time and date of redemption or exchange (unless New Time Warner shall (x) in the case of a redemption, default in the payment of the Series D Redemption Price, (y) in the case of an exchange, fail to exchange the applicable number of shares of New Time Warner Common Stock and any cash portion of the Series D Exchange Price or (z) exercise its right to rescind such redemption or exchange, in which case such rights shall not terminate at such time and date) or, if New Time Warner shall so elect and state in the notice of redemption or exchange, from and after the time and date (which date shall be the date fixed for redemption or exchange or an earlier date not less than 15 days after the date of mailing of the redemption or exchange notice) on which New Time Warner shall irrevocably deposit with a designated bank or trust company designated as paying agent, money sufficient to pay at the office of such paying agent, on the redemption date, the Series D Redemption Price, in the case of redemption, or certificates representing the shares of New Time Warner Common Stock to be so exchanged and any cash portion of the Series D Exchange Price, in the case of an exchange. Subject to applicable escheat laws, any moneys or certificates so set aside by New Time Warner and unclaimed at the end of one year from the redemption date will revert to the general funds of New Time Warner, after which reversion the holders of such shares so called for redemption or exchange may look only to New Time Warner for the payment of the Series D Redemption Price or the Series D Exchange Price, as applicable, without interest. Any interest accrued on funds so deposited shall be paid to New Time Warner from time to time. The New Time Warner Series D Preferred Stock will not be subject to redemption at the option of New Time Warner pursuant to Section 5 of Article IV of the New Time Warner Charter. Right to Rescind Redemption. If a Redemption Rescission Event (as defined below) shall occur following any day on which a notice of cash redemption shall have been given but at or prior to the earlier of (a) the time and date fixed for cash redemption as set forth in such notice of cash redemption and (b) the time and date at which New Time Warner shall have irrevocably deposited funds or certificates with a designated bank or trust company, New Time Warner may, at its sole option, at any time prior to the earliest of (i) the close of business on that day which is two NYSE trading days following such Redemption Rescission Event, (ii) the time and date fixed for redemption as set forth in such notice and (iii) the time and date on which New Time Warner shall have irrevocably deposited such funds or certificates with a designated bank or trust company, rescind the cash redemption to which such notice of redemption shall have related by making a public announcement of such rescission. From and after the making of such announcement, New Time Warner shall have no obligation to redeem shares of New Time Warner Series D Preferred Stock called for cash redemption pursuant to such notice of redemption or to pay the Series D Redemption Price therefor and all rights of holders of New Time Warner Series D Preferred Stock shall be restored as if such notice of redemption had not been given. New Time Warner will give notice of any such rescission as promptly as practicable, but in no event later than the close of business on that date which is five NYSE trading days following the date of public announcement of such rescission to each record holder of shares of New Time Warner Series D Preferred Stock at the close of business on such date and to any other person or entity that was a record holder of shares of New Time Warner Series D Preferred Stock and that shall have surrendered shares of New Time Warner Series D Preferred Stock for conversion following the giving of notice of the subsequently rescinded redemption. For purposes of the New Time Warner Series D Preferred Stock, a "Redemption Rescission Event" means the occurrence of (a) any general suspension of trading in, or limitation on prices for, securities on the principal national securities exchange on which shares of New Time Warner Common Stock are registered and listed for trading (or, if shares of New Time Warner Common Stock are not registered and listed for trading on any such exchange, in the over-the- counter market) 139
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for more than six-and-one-half consecutive trading hours, (b) any decline in either the Dow Jones Industrial Average or the Standard & Poor's Index of 400 Industrial Companies (or any successor index published by Dow Jones & Company, Inc. or Standard & Poor's Corporation) by either (i) an amount in excess of 10%, measured from the close of business on any NYSE trading day to the close of business on the next succeeding NYSE trading day during the period commencing on the NYSE trading day preceding the day notice of any redemption of shares is given (or, if such notice is given after the close of business on a NYSE trading day, commencing on such NYSE trading day) and ending at the earlier of (x) the time and date fixed for redemption in such notice and (y) the time and date at which New Time Warner shall have irrevocably deposited funds or certificates with a designated bank or trust company or (ii) an amount in excess of 15% (or, if the time and date fixed for redemption is more than 15 days following the date on which notice of redemption is given, 20%), measured from the close of business on the NYSE trading day preceding the day notice of such redemption is given (or, if such notice is given after the close of business on a NYSE trading day, from such NYSE trading day) to the close of business on any NYSE trading day on or prior to the earlier of the dates specified in clauses (x) and (y) above, (c) a declaration of a banking moratorium or any suspension of payments in respect of banks by Federal or state authorities in the United States or (d) the commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States which in the reasonable judgment of New Time Warner could have a material adverse effect on the market for the New Time Warner Common Stock. Pro Rata Repurchase Upon a Pro Rata Repurchase (as defined below), each holder of shares of New Time Warner Series D Preferred Stock will have the right to require New Time Warner to repurchase, out of funds legally available therefor, a Pro Rata Portion (as defined below) of the shares of New Time Warner Series D Preferred Stock of such holder, or any lesser number requested by the holder, at a price per share equal to the highest price per share of New Time Warner Common Stock paid in the Pro Rata Repurchase multiplied by the Series D Conversion Rate then in effect plus an amount equal to the accrued but unpaid dividends on such shares to the date of repurchase. The Board of Directors of New Time Warner may not approve any tender or exchange offer by New Time Warner or a third party for shares of New Time Warner Common Stock or recommend that the holders of New Time Warner Common Stock accept any offer or tender their shares into any offer unless a Pro Rata Portion of the shares of New Time Warner Series D Preferred Stock of all holders are entitled to be tendered into such offer at a price not less than the price per share for shares of New Time Warner Common Stock pursuant to such offer multiplied by the Series D Conversion Rate then in effect plus an amount equal to accrued but unpaid dividends on such shares to the date of payment for such shares in such tender or exchange offer. "Pro Rata Portion" with respect to the shares of New Time Warner Series D Preferred Stock held by any holder shall mean all the shares of New Time Warner Series D Preferred Stock then owned by such holder times a fraction, the numerator of which is the number of outstanding shares of New Time Warner Common Stock (a) purchased in the applicable Pro Rata Repurchase or (b) for which a tender or exchange offer referred to above is made, as the case may be, and the denominator of which is the number of outstanding shares of New Time Warner Common Stock immediately prior to such Pro Rata Repurchase or the commencement of such tender or exchange offer, as the case may be. "Pro Rata Repurchase" shall mean the purchase of shares of New Time Warner Common Stock by New Time Warner or by any of its subsidiaries, whether for cash or other property or securities of New Time Warner, which purchase is subject to Section 13(e) of the Exchange Act or is made pursuant to an offer made available to all holders of New Time Warner Common Stock, but excluding any purchase made in open market transactions that satisfies the conditions of clause (b) of Rule 10b-18 under the Exchange Act or has been designed (as reasonably determined by the New Time Warner Board or a committee thereof) to prevent such purchase from having a material effect on the trading market of the New Time Warner Common Stock. The "Effective Date" of a Pro Rata Repurchase shall mean the applicable expiration date (including all extensions 140
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thereof) of any tender or exchange offer which is a Pro Rata Repurchase or the date of purchase with respect to any Pro Rata Repurchase which is not a tender or exchange offer. Liquidation Rights Upon the dissolution, liquidation or winding up of New Time Warner, whether voluntary or involuntary, holders of shares of New Time Warner Series D Preferred Stock shall be entitled to receive out of the assets of New Time Warner available for distribution to stockholders, in preference to the holders of, and before any payment or distribution shall be made on, junior stock, the liquidation value in respect of such share, plus an amount equal to all accrued and unpaid dividends to the date of final distribution. The liquidation value applicable to shares of New Time Warner Series D Preferred Stock shall initially be $100 per share, subject to adjustment from time to time to appropriately give effect to any split or combination of such share. In the event the assets of New Time Warner available for distribution to the holders of New Time Warner Series D Preferred Stock upon any dissolution, liquidation or winding up of New Time Warner, whether voluntary or involuntary, are insufficient to pay in full all amounts to which such holders are entitled, no such distribution may be made on account of any shares of any parity stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of shares of the New Time Warner Series D Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all parity stock are entitled upon such dissolution, liquidation or winding up. Voting Rights Each share of New Time Warner Series D Preferred Stock will be entitled to vote together with holders of the shares of New Time Warner Common Stock (and any other class or series which may similarly be entitled to vote with the shares of New Time Warner Common Stock) as a single class upon all matters upon which holders of New Time Warner Common Stock are entitled to vote. In any such vote, the holder of such share shall be entitled to two votes per $100 in liquidation value of such share, subject to adjustment at the same time and in the same manner as each adjustment of the Series D Conversion Rate, so that the holders of New Time Warner Series D Preferred Stock shall be entitled following such adjustment to the number of votes equal to the number of votes such holders were entitled to immediately prior to such adjustment multiplied by a fraction (x) the numerator of which is the Series D Conversion Rate as adjusted and (y) the denominator of which is the Series D Conversion Rate immediately prior to such adjustment. So long as any shares of New Time Warner Series D Preferred Stock shall be outstanding, unless a greater percentage is required by law, New Time Warner will not, without the affirmative vote at a meeting or the written consent with or without a meeting of the holders of shares of New Time Warner Series D Preferred Stock representing at least two-thirds of the aggregate voting power of shares of New Time Warner Series D Preferred Stock then outstanding, (i) authorize any class or series of stock ranking prior to the New Time Warner Series D Preferred Stock and the parity stock or reclassify any parity stock or junior stock into shares of stock ranking prior to the New Time Warner Series D Preferred Stock, (ii) merge into or consolidate with any person where the surviving or continuing corporation will have any authorized senior stock (other than capital stock corresponding to shares of senior stock of New Time Warner existing immediately before such merger or consolidation), or (iii) amend, alter or repeal (by operation of law or otherwise) any provision of the Certificate of Designations of New Time Warner Series D Preferred Stock or the New Time Warner Charter so as in any such case to materially and adversely affect the voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of, the shares of New Time Warner Series D Preferred Stock. No consent of holders of the New Time Warner Series D Preferred Stock is required for (i) the creation of any indebtedness of any kind of New Time Warner, (ii) the authorization or issuance of any class of junior stock or parity stock, (iii) in certain circumstances, the authorization, designation or issuance of additional shares of New Time Warner Series D Preferred Stock or (iv) subject to the immediately preceding paragraph, the authorization or issuance of any other shares of New Time Warner Preferred Stock. 141
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If and whenever at any time or times dividends payable on shares of the New Time Warner Series D Preferred Stock shall have been in arrears and unpaid in an aggregate amount equal to or exceeding the amount of dividends payable thereon for six quarterly dividend periods, then the number of directors constituting the New Time Warner Board shall be increased by two (without duplication of any such increase in directorships required by the terms of any other New Time Warner Capital Stock which has similar rights) and the holders of shares of the New Time Warner Series D Preferred Stock, together with the holders of any shares of any parity stock as to which in each case dividends are in arrears and unpaid in an aggregate amount equal to or exceeding the amount of dividends payable thereon for six quarterly dividend periods, shall have the exclusive right, voting separately as a class with such other series, to elect two directors of New Time Warner. NEW TIME WARNER SERIES E PREFERRED STOCK General The New Time Warner Series E Preferred Stock is identical to the Time Warner Series E Preferred Stock, except for (a) the items described under "Comparison of Rights of Stockholders of New Time Warner and Time Warner" and (b) certain technical, immaterial changes (primarily giving precise dates for certain matters rather than anniversaries of dates of issuance, changing the definition of "Parity Stock" to include all the pari passu New Time Warner Preferred Stock and changing the definition of "Junior Stock" to include the LMC Series Common Stock). Dividend Rights Holders of New Time Warner Series E Preferred Stock will be entitled to the same dividend rights as holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Dividend Rights" above, except that (i) all references to the date July 6, 1999, in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to November 30, 2000, (ii) all references to January 1, April 1, July 1 and October 1 in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to March 1, June 1, September 1 and December 1, respectively, and (iii) dividends payable in respect of periods prior to November 30, 2000, will be cumulative and will accrue on each share on a daily basis, whether or not there are unrestricted funds legally available for the payment of such dividends and whether or not declared. Conversion Provisions General. The New Time Warner Series E Preferred Stock shall be subject to the same general conversion provisions as the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock-- Conversion Provisions--General" above, except that the following two paragraphs shall apply instead of the first and second paragraphs, respectively, of "--New Time Warner Series D Preferred Stock--Conversion Provisions--General." Holders of New Time Warner Series E Preferred Stock shall have the right at any time or, as to any share of New Time Warner Series E Preferred Stock called for redemption or exchange, at any time prior to the close of business on the date fixed for redemption or exchange (unless New Time Warner defaults in the payment of the Series E Redemption Price (as defined below) or fails to exchange the shares of New Time Warner Series E Preferred Stock for the applicable number of shares of New Time Warner Common Stock and any cash portion of the Series E Exchange Price (as defined) or exercises its right to rescind such redemption, in which case such right shall not terminate at the close of business on such date), to convert such share into (a) a number of shares of New Time Warner Common Stock equal to 2.08264 shares of New Time Warner Common Stock for each share of New Time Warner Series E Preferred Stock, subject to appropriate adjustment in the event of a split or combination of shares of New Time Warner Series E Preferred Stock and subject to further adjustment as described herein (such rate, as so adjusted from time to time, is herein called the "Series E Conversion Rate"; and the "Series E Conversion Price" at any time shall mean the liquidation value per share of New Time Warner 142
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Series E Preferred Stock divided by the Series E Conversion Rate in effect at such time (rounded to the nearest one hundredth of a cent)) plus (b) if there shall be any dividends on shares of New Time Warner Series E Preferred Stock which shall be accrued and unpaid as of the immediately preceding Series E Dividend Payment Date, a number of shares of New Time Warner Common Stock equal to (A) the aggregate amount of accrued and unpaid dividends on such share to and including the most recent scheduled Series E Dividend Payment Date (whether or not such dividends were declared and whether or not there are unrestricted funds legally available for the payment thereof) (the "Series E Accrued Dividend Amount") divided by (B) the closing price of the New Time Warner Common Stock on the last NYSE trading day prior to the Conversion Date. New Time Warner may deliver cash equal to the Series E Accrued Dividend Amount or any portion thereof in lieu of New Time Warner Common Stock. The obligations of New Time Warner to issue the New Time Warner Common Stock (or its option to make cash payments) upon the exercise of conversion rights is absolute whether or not any accrued dividend by which such issuance (or payment) is measured has been declared by the New Time Warner Board and whether or not New Time Warner would have adequate surplus or net profits to pay such dividend if declared or is otherwise restricted from paying such dividend. Adjustment of Series E Conversion Rate for Certain Actions or Events. The Series E Conversion Rate will be adjusted from time to time in the same manner and under the same circumstances as the Series D Conversion Rate described in "--New Time Warner Series D Preferred Stock--Conversion Provisions--Adjustment of Series D Conversion Rate for Certain Actions or Events" above, except that the Series E Conversion Rate will also be adjusted from time to time as follows: If New Time Warner or any subsidiary thereof makes a Pro Rata Repurchase, the Series E Conversion Rate in effect immediately prior to such action shall be adjusted (but shall not be decreased) by multiplying such Series E Conversion Rate by a fraction, the numerator of which shall be the product of (i) the number of shares of New Time Warner Common Stock outstanding immediately before such Pro Rata Repurchase minus the number of shares of New Time Warner Common Stock repurchased by New Time Warner or any subsidiary thereof in such Pro Rata Repurchase and (ii) the current market price of the New Time Warner Common Stock as of the day immediately preceding the first public announcement by New Time Warner of the intent to effect such Pro Rata Repurchase, and the denominator of which shall be (i) the product of (x) the number of shares of New Time Warner Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the current market price of the New Time Warner Common Stock as of the day immediately preceding the first public announcement by New Time Warner of the intent to effect such Pro Rata Repurchase minus (ii) the aggregate purchase price of the Pro Rata Repurchase (provided that such fraction shall never be less than 1). Such adjustment shall become effective immediately after the Effective Date of such Pro Rata Repurchase. Adjustment of Series E Conversion Rate upon Consolidation, Merger or Sale of Assets. Holders of New Time Warner Series E Preferred Stock will be entitled to the same rights upon a consolidation, merger or sale of assets by New Time Warner as the holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Conversion Provisions--Adjustment of Series D Conversion Rate upon Consolidation, Merger or Sale of Assets" above. Redemption or Exchange at New Time Warner's Option New Time Warner may redeem or exchange the New Time Warner Series E Preferred Stock in the same manner and under the same circumstances as it may redeem or exchange the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Redemption or Exchange at New Time Warner's Option" above, except that (i) all references to July 6, 2000 or July 6, 1999 shall instead apply to November 30, 2000, and (ii) dividends which are in arrears need not be paid in cash. 143
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Liquidation Rights Holders of New Time Warner Series E Preferred Stock will be entitled to the same rights upon the dissolution, liquidation or winding up of New Time Warner as the holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Liquidation Rights" above. Voting Rights Holders of each share of New Time Warner Series E Preferred Stock will be entitled to the same general voting rights as holders of each share of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Voting Rights" above. NEW TIME WARNER SERIES F PREFERRED STOCK General The New Time Warner Series F Preferred Stock is identical to the Time Warner Series F Preferred Stock, except for (a) the items described under "Comparison of Rights of Stockholders of New Time Warner and Time Warner" and (b) certain technical, immaterial changes (primarily giving precise dates for certain matters rather than anniversaries of dates of issuance, changing the definition of "Parity Stock" to include all the pari passu New Time Warner Preferred Stock and changing the definition of "Junior Stock" to include the LMC Series Common Stock). Dividend Rights Holders of New Time Warner Series F Preferred Stock will be entitled to the same dividend rights as holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Dividend Rights" above, except that (i) all references to the date July 6, 1999, in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to November 30, 1999, (ii) all references to January 1, April 1, July 1 and October 1 in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to March 1, June 1, September 1 and December 1, respectively, and (iii) dividends payable in respect of periods prior to November 30, 1999, will be cumulative and will accrue on each share on a daily basis, whether or not there are unrestricted funds legally available for the payment of such dividends and whether or not declared. Conversion Provisions General. The New Time Warner Series F Preferred Stock shall be subject to the same general conversion provisions as the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock-- Conversion Provisions--General" above, except that the following two paragraphs shall apply instead of the first and second paragraphs, respectively, of "--New Time Warner Series D Preferred Stock--Conversion Provisions--General." Holders of New Time Warner Series F Preferred Stock shall have the right at any time or, as to any share of New Time Warner Series F Preferred Stock called for redemption or exchange, at any time prior to the close of business on the date fixed for redemption or exchange (unless New Time Warner defaults in the payment of the Series F Redemption Price (as defined below) or fails to exchange the shares of New Time Warner Series F Preferred Stock for the applicable number of shares of New Time Warner Common Stock and any cash portion of the Series F Exchange Price (as defined) or exercises its right to rescind such redemption, in which case such right shall not terminate at the close of business on such date), to convert such share into (a) a number of shares of New Time Warner Common Stock equal to 2.08264 shares of New Time Warner Common Stock for each share of New Time Warner Series F Preferred Stock, subject to appropriate adjustment in the event of a split or combination of shares of New Time Warner Series F Preferred Stock and subject to further adjustment as described herein (such rate, as so adjusted from time to time, is herein called the "Series F Conversion Rate"; 144
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and the "Series F Conversion Price" at any time shall mean the liquidation value per share of New Time Warner Series F Preferred Stock divided by the Series F Conversion Rate in effect at such time (rounded to the nearest one hundredth of a cent)) plus (b) if there shall be any dividends on shares of New Time Warner Series F Preferred Stock which shall be accrued and unpaid as of the immediately preceding Series F Dividend Payment Date, a number of shares of New Time Warner Common Stock equal to (A) the aggregate amount of accrued and unpaid dividends on such share to and including the most recent scheduled Series F Dividend Payment Date (whether or not such dividends were declared and whether or not there are unrestricted funds legally available for the payment thereof) (the "Series F Accrued Dividend Amount") divided by (B) the closing price of the New Time Warner Common Stock on the last NYSE trading day prior to the Conversion Date. New Time Warner may deliver cash equal to the Series F Accrued Dividend Amount or any portion thereof in lieu of New Time Warner Common Stock. The obligations of New Time Warner to issue the New Time Warner Common Stock (or its option to make cash payments) upon the exercise of conversion rights is absolute whether or not any accrued dividend by which such issuance (or payment) is measured has been declared by the New Time Warner Board and whether or not New Time Warner would have adequate surplus or net profits to pay such dividend if declared or is otherwise restricted from paying such dividend. Adjustment of Series F Conversion Rate for Certain Actions or Events. The Series F Conversion Rate will be adjusted from time to time in the same manner and under the same circumstances as the Series D Conversion Rate described in "--New Time Warner Series D Preferred Stock--Conversion Provisions--Adjustment of Series D Conversion Rate for Certain Actions or Events" above, except that the Series F Conversion Rate will also be adjusted from time to time as follows If New Time Warner or any subsidiary thereof makes a Pro Rata Repurchase, the Series F Conversion Rate in effect immediately prior to such action shall be adjusted (but shall not be decreased) by multiplying such Series F Conversion Rate by a fraction, the numerator of which shall be the product of (i) the number of shares of New Time Warner Common Stock outstanding immediately before such Pro Rata Repurchase minus the number of shares of New Time Warner Common Stock repurchased by New Time Warner or any subsidiary thereof in such Pro Rata Repurchase and (ii) the current market price of the New Time Warner Common Stock as of the day immediately preceding the first public announcement by New Time Warner of the intent to effect such Pro Rata Repurchase, and the denominator of which shall be (i) the product of (x) the number of shares of New Time Warner Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the current market price of the New Time Warner Common Stock as of the day immediately preceding the first public announcement by New Time Warner of the intent to effect such Pro Rata Repurchase minus (ii) the aggregate purchase price of the Pro Rata Repurchase (provided that such fraction shall never be less than 1). Such adjustment shall become effective immediately after the Effective Date of such Pro Rata Repurchase. Adjustment of Series F Conversion Rate upon Consolidation, Merger or Sale of Assets. Holders of New Time Warner Series F Preferred Stock will be entitled to the same rights upon a consolidation, merger or sale of assets by New Time Warner as holders of New Time Warner Series D Preferred Stock described in "-- New Time Warner Series D Preferred Stock--Conversion Provisions--Adjustment of Series D Conversion Rate upon Consolidation, Merger or Sale of Assets" above. Redemption or Exchange at New Time Warner's Option New Time Warner may redeem or exchange the New Time Warner Series F Preferred Stock in the same manner and under the same circumstances as it may redeem or exchange the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Redemption or Exchange at New Time Warner's Option" above, except that (i) all references to July 6, 2000 shall instead apply to November 30, 145
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2000, (ii) all references to July 6, 1999 shall instead apply to November 30, 1999, and (iii) dividends which are in arrears need not be paid in cash. Liquidation Rights Holders of New Time Warner Series F Preferred Stock will be entitled to the same rights upon the dissolution, liquidation or winding up of New Time Warner as the holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Liquidation Rights" above. Voting Rights Holders of each share of New Time Warner Series F Preferred Stock will be entitled to the same general voting rights as holders of each share of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Voting Rights" above. NEW TIME WARNER SERIES G PREFERRED STOCK General The New Time Warner Series G Preferred Stock is identical to the Time Warner Series G Preferred Stock, except for (a) the items described under "Comparison of Rights of Stockholders of New Time Warner and Time Warner" and (b) certain technical, immaterial changes (primarily giving precise dates for certain matters rather than anniversaries of dates of issuance, changing the definition of "Parity Stock" to include all the pari passu New Time Warner Preferred Stock and changing the definition of "Junior Stock" to include the LMC Series Common Stock). Dividend Rights Holders of New Time Warner Series G Preferred Stock will be entitled to the same dividend rights as holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Dividend Rights" above, except that (i) all references to the date July 6, 1999, in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to September 5, 1999, and (ii) all references to January 1, April 1, July 1 and October 1 in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to March 1, June 1, September 1 and December 1, respectively. Conversion Provisions The New Time Warner Series G Preferred Stock will be subject to the same conversion provisions as the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Conversion Provisions" above. Redemption or Exchange at New Time Warner's Option New Time Warner may redeem or exchange the New Time Warner Series G Preferred Stock in the same manner and under the same circumstances as it may redeem or exchange the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Redemption or Exchange at New Time Warner's Option" above, except that all references to July 6, 2000 or July 6, 1999 shall instead apply to September 5, 1999. Pro Rata Repurchase Holders of New Time Warner Series G Preferred Stock will be entitled to the same rights, and New Time Warner and the New Time Warner Board will be subject to the same obligations and restrictions, as those described in "--New Time Warner Series D Preferred Stock--Pro Rata Repurchase" above. 146
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Liquidation Rights Holders of New Time Warner Series G Preferred Stock will be entitled to the same rights upon the dissolution, liquidation or winding up of New Time Warner as the holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Liquidation Rights" above. Voting Rights Holders of each share of New Time Warner Series G Preferred Stock will be entitled to the same voting rights as holders of each share of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Voting Rights" above. NEW TIME WARNER SERIES H PREFERRED STOCK General The New Time Warner Series H Preferred Stock is identical to the Series H Convertible Preferred Stock, par value $1.00 per share, of Time Warner (the "Time Warner Series H Preferred Stock"), except for (a) the items described under "Comparison of Rights of Stockholders of New Time Warner and Time Warner" and (b) certain technical, immaterial changes (primarily giving precise dates for certain matters rather than anniversaries of dates of issuance, changing the definition of "Parity Stock" to include all the pari passu New Time Warner Preferred Stock and changing the definition of "Junior Stock" to include the LMC Series Common Stock). Dividend Rights Holders of New Time Warner Series H Preferred Stock will be entitled to the same dividend rights as holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Dividend Rights" above, except that (i) all references to the date July 6, 1999, in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to September 5, 1999, and (ii) all references to January 1, April 1, July 1 and October 1 in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to March 1, June 1, September 1 and December 1, respectively. Conversion Provisions The New Time Warner Series H Preferred Stock shall be subject to the same conversion provisions as the New Time Warner Series D Preferred Stock described in "'--New Time Warner Series D Preferred Stock--Conversion Provisions" above, except that holders of New Time Warner Series H Preferred Stock shall only have the right to convert shares of New Time Warner Series H Preferred Stock during the Conversion Period (as defined below). The "Conversion Period" shall mean (i) the period commencing on September 5, 2000, and (ii) any period prior to September 5, 2000 (A) during which there shall remain open (within the meaning of Rule 14e-1(a) under the Exchange Act) a tender or exchange offer for 40% or more of the outstanding shares of New Time Warner Common Stock; provided, however, that New Time Warner shall have filed a Schedule 14D-9 with respect to such tender or exchange offer and such tender or exchange offer shall not have been opposed by the New Time Warner Board or (B) immediately prior to the effective time of any consolidation or merger to which New Time Warner is a party, other than a merger or consolidation in which New Time Warner is the surviving or continuing corporation and which does not result in any reclassification of, or change (other than a change in par value or as a result of a division or combination) in outstanding shares of New Time Warner Common Stock. Redemption or Exchange at New Time Warner's Option New Time Warner may redeem or exchange the New Time Warner Series H Preferred Stock in the same manner and under the same circumstances as it may redeem or exchange the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Redemption or Exchange at New 147
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Time Warner's Option" above, except that New Time Warner may only redeem or exchange New Time Warner Series H Preferred Stock (a) as described in clause (i) of the second paragraph of "--New Time Warner Series D Preferred Stock-- Redemption at New Time Warner's Option" on and after September 5, 1999, and (b) as described in clause (ii) or (iii) of the same paragraph on or after September 5, 2000. Pro Rata Repurchase Holders of New Time Warner Series H Preferred Stock will have the same rights, and New Time Warner and the New Time Warner Board will be subject to the same obligations and restrictions, as those described in "--New Time Warner Series D Preferred Stock--Pro Rata Repurchase" above. Liquidation Rights Holders of New Time Warner Series H Preferred Stock will be entitled to the same rights upon the dissolution, liquidation or winding up of New Time Warner as the holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Liquidation Rights" above. Voting Rights Holders of New Time Warner Series H Preferred Stock will have no voting rights, except as required by law or with respect to certain limited circumstances, including certain amendments to the terms of the New Time Warner Series H Preferred Stock. NEW TIME WARNER SERIES I PREFERRED STOCK General The New Time Warner Series I Preferred Stock is identical to the Time Warner Series I Preferred Stock, except for (a) the items described under "Comparison of Rights of Stockholders of New Time Warner and Time Warner" and (b) certain technical, immaterial changes (primarily giving precise dates for certain matters rather than anniversaries of dates of issuance, changing the definition of "Parity Stock" to include all the pari passu New Time Warner Preferred Stock and changing the definition of "Junior Stock" to include the LMC Series Common Stock). Dividend Rights Holders of New Time Warner Series I Preferred Stock will be entitled to the same dividend rights as holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Dividend Rights" above, except that (i) all references to the date July 6, 1999, in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to October 2, 1999, and (ii) all references to January 1, April 1, July 1 and October 1 in "--New Time Warner Series D Preferred Stock--Dividend Rights" shall instead apply to March 1, June 1, September 1, and December 1, respectively. Conversion Provisions The New Time Warner Series I Preferred Stock shall be subject to the same conversion provisions as the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Conversion Provisions" above. Redemption or Exchange at New Time Warner's Option New Time Warner may redeem or exchange the New Time Warner Series I Preferred Stock in the same manner and under the same circumstances as it may redeem or exchange the New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Redemption or Exchange at New 148
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Time Warner's Option" above, except that all references to July 6, 2000, and July 6, 1999, shall instead apply to October 2, 1999. Pro Rata Repurchase Holders of New Time Warner Series I Preferred Stock will be entitled to the same rights, and New Time Warner and the New Time Warner Board will be subject to the same obligations and restrictions, as those described in "--New Time Warner Series D Preferred Stock--Pro Rata Repurchase" above. Liquidation Rights Holders of New Time Warner Series I Preferred Stock will be entitled to the same rights upon the dissolution, liquidation or winding up of New Time Warner as the holders of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Liquidation Rights" above. Voting Rights Holders of each share of New Time Warner Series I Preferred Stock will be entitled to the same general voting rights as holders of each share of New Time Warner Series D Preferred Stock described in "--New Time Warner Series D Preferred Stock--Voting Rights" above. NEW TIME WARNER SERIES J PREFERRED STOCK General The New Time Warner Series J Preferred Stock is identical to the Time Warner Series J Preferred Stock, except for (a) the items described under "Comparison of Rights of Stockholders of New Time Warner and Time Warner" and (b) certain technical, immaterial changes (primarily giving precise dates for certain matters rather than anniversaries of dates of issuance, changing the definition of "Parity Stock" to include all the pari passu New Time Warner Preferred Stock and changing the definition of "Junior Stock" to include the LMC Series Common Stock). Dividend Rights Holders of New Time Warner Series J Preferred Stock will be entitled to receive quarter-annual dividends, as and when declared by the New Time Warner Board out of funds legally available for payments in the amount per share of New Time Warner Series J Preferred Stock equal to (i) in the case of each Series J Dividend Payment Date (as defined below) occurring on or before May 2, 2000, the greater of (A) $.9375 (which is equivalent to $3.75 per annum) per $100 in liquidation value, and (B) the product of (1) the Series J Conversion Rate (as defined below) and (2) the aggregate per share amount of regularly scheduled dividends paid in cash on the New Time Warner Common Stock during the period from but excluding the immediately preceding Series J Dividend Payment Date to and including such Series J Dividend Payment Date and (ii) in the case of each Series J Dividend Payment Date occurring thereafter, the product of (1) the Series J Conversion Rate and (2) the aggregate per share amount of regularly scheduled dividends paid in cash on the New Time Warner Common Stock during the period from but excluding the immediately preceding Series J Dividend Payment Date to and including such Series J Dividend Payment Date. Dividends on New Time Warner Series J Preferred Stock will be payable in cash on or about February 1, May 1, August 1 and November 1 of each year, as fixed by the New Time Warner Board of Directors, or such other dates as are fixed by the New Time Warner Board (provided that May 2, 2000, shall be a Series J Dividend Payment Date) (each a "Series J Dividend Payment Date"), to the holders of record on or about the 15th day of the month next preceding such February 1, May 1, August 1 and November 1 (or immediately preceding May 2, 2000, as the case may be,) as fixed by the New Time Warner Board, or such other dates as are fixed by the New Time Warner Board (each a "Series J Record Date"). Dividends payable in respect of periods prior to May 2, 2000, will be cumulative and will accrue on each share on a day-to-day basis, whether or not declared. Any such dividends that become payable for any partial dividend 149
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period shall be computed on the basis of the actual days elapsed in such period; provided, however, that the dividend payable on the first Series J Dividend Payment Date shall be computed as if the period in respect of which such dividend is payable commenced on the date of payment of the last dividend paid on the Time Warner Series J Preferred Stock. From and after May 2, 2000, dividends on the New Time Warner Series J Preferred Stock shall accrue to the extent, but only to the extent, that regularly scheduled cash dividends are declared by the New Time Warner Board on the New Time Warner Common Stock with a payment date after May 2, 2000 (or, in the case of shares of New Time Warner Series J Preferred Stock originally issued after May 2, 2000, after the Series J Dividend Payment Date next preceding such date of original issuance). So long as any New Time Warner Series J Preferred Stock is outstanding, New Time Warner may not declare or pay any dividend on the New Time Warner Common Stock or other stock ranking as to the right to receive dividends or to participate in any distribution of assets other than by way of dividends junior to or on a parity with the New Time Warner Series J Preferred Stock (other than a dividend payable in New Time Warner Common Stock or other junior stock), nor may New Time Warner or any of its subsidiaries purchase or redeem New Time Warner Common Stock or any other stock ranking as to the right to receive dividends or to participate in any distribution of assets other than by way of dividends junior to or on a parity with the New Time Warner Series J Preferred Stock (except by conversion into or exchange for, or out of the net cash proceeds from the concurrent sale of, stock of New Time Warner ranking junior to the New Time Warner Series J Preferred Stock as to dividends and other distributions), nor shall any monies be paid or made available for a purchase, redemption or sinking fund therefor, unless all dividends on the New Time Warner Series J Preferred Stock and any other New Time Warner Capital Stock ranking as to dividends on a parity with the New Time Warner Series J Preferred Stock that shall have accrued and be payable as of any date shall have been paid, or declared and funds set apart for payment thereof; provided, however, that nothing herein shall prevent New Time Warner from completing the purchase of New Time Warner Series J Preferred Stock, parity stock or junior stock for which a purchase contract was entered into, or the notice of redemption of which was originally published, prior to the date on which any such dividends were first required to be paid. Should dividends not be paid in full on any outstanding New Time Warner Series J Preferred Stock or any other New Time Warner Capital Stock ranking as to dividends on a parity with the New Time Warner Series J Preferred Stock, all dividends declared on the New Time Warner Series J Preferred Stock and any other New Time Warner Capital Stock ranking as to dividends on a parity with the New Time Warner Series J Preferred Stock will be declared pro rata, so that the amount of dividends declared per share of New Time Warner Series J Preferred Stock and such other New Time Warner Capital Stock will bear to each other the same ratio that accrued dividends per share on the shares of each series of New Time Warner Series J Preferred Stock and such other New Time Warner Capital Stock bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on New Time Warner Series J Preferred Stock which may be in arrears. The New Time Warner Series J Preferred Stock will rank on a parity with the New Time Warner Series D Preferred Stock, the New Time Warner Series E Preferred Stock, the New Time Warner Series F Preferred Stock, the New Time Warner Series G Preferred Stock, the New Time Warner Series H Preferred Stock, the New Time Warner Series I Preferred Stock and the New Time Warner Series K Preferred Stock and will rank senior to the New Time Warner Common Stock and the LMC Series Common Stock and, if issued, the New Time Warner Series A Preferred Stock. If New Time Warner distributes (other than a distribution in liquidation of New Time Warner) to all holders of New Time Warner Common Stock any assets or property, including evidences of indebtedness or securities, of New Time Warner or cash (excluding regularly scheduled cash dividends payable on shares of New Time Warner Common Stock) or if New Time Warner distributes (other than a distribution in liquidation of New Time Warner) rights, options or warrants to subscribe for or purchase any securities, assets or property (in each case, whether of New Time Warner or otherwise, but other than any distribution of rights to purchase securities of New Time Warner if the holder of New Time Warner Series J Preferred Stock would otherwise be entitled to receive such rights upon conversion of shares of New Time Warner Series J Preferred Stock for New Time Warner Common Stock; provided, however, that if such rights are subsequently redeemed by New Time Warner, such redemption will be treated for purposes of the provisions described in this paragraph as a cash dividend on 150
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the New Time Warner Common Stock), New Time Warner must simultaneously distribute such assets, property, securities, rights, options or warrants pro rata to the holders of New Time Warner Series J Preferred Stock in an amount equal to the amount that such holders would have been entitled to receive had their shares of New Time Warner Series J Preferred Stock been converted into New Time Warner Common Stock immediately prior to the applicable record date. If a distribution is made to the holders of New Time Warner Series J Preferred Stock in accordance with the provisions described in the immediately preceding paragraph, no adjustment to the Series J Conversion Rate shall be effected by reason of the distribution of such assets, property, securities, rights, options or warrants or the subsequent modification, exercise, expiration or termination of such securities, rights, options or warrants. If holders of New Time Warner Common Stock are entitled to make any election with respect to the kind or amount of securities or other property receivable by them in any such distribution, the kind and amount of securities or other property that shall be distributable to the holders of the New Time Warner Series J Preferred Stock shall be based on (a) the election, if any, made by the record holder (as of the date used for determining the holders of New Time Warner Common Stock entitled to make such election) of the largest number of shares of New Time Warner Series J Preferred Stock in writing to New Time Warner on or prior to the last date on which a holder of New Time Warner Common Stock may make such an election and (b) if no such election is timely made, an assumption that such holder failed to exercise any such rights (provided that if the kind or amount of securities or other property is not the same for each nonelecting holder, then the kind and amount of securities or other property receivable by holders of New Time Warner Series J Preferred Stock shall be based on the kind or amount of securities or other property receivable by a plurality of the shares held by the nonelecting holders of New Time Warner Common Stock). Conversion Provisions General. Holders of New Time Warner Series J Preferred Stock shall have the right at any time or, as to any share of New Time Warner Series J Preferred Stock called for redemption or exchange, at any time prior to the close of business on the date fixed for redemption or exchange (unless New Time Warner defaults in the payment of the Series J Redemption Price (as defined below) or fails to exchange the shares of New Time Warner Series J Preferred Stock for the applicable number of shares of New Time Warner Common Stock and any applicable cash amount, or exercises its right to rescind such redemption or exchange, in which case such right shall not terminate at the close of business on such date), to convert such share into a number of shares of New Time Warner Common Stock equal to 2.08264 shares of New Time Warner Common Stock for each share of New Time Warner Series J Preferred Stock, subject to adjustment as described herein (such rate, as so adjusted from time to time, is herein called the "Series J Conversion Rate;" and the "Series J Conversion Price" at any time shall mean the liquidation value per share of New Time Warner Series J Preferred Stock divided by the Series J Conversion Rate in effect at such time (rounded to the nearest one hundredth of a cent)). If any shares of New Time Warner Series J Preferred Stock are surrendered for conversion subsequent to the Series J Record Date immediately preceding a Series J Dividend Payment Date but on or prior to such Series J Dividend Payment Date (except shares called for redemption or exchange on a redemption date or exchange date between such Series J Record Date and Series J Dividend Payment Date and with respect to which such redemption or exchange has not been rescinded), the registered holder of such shares at the close of business on such Series J Record Date shall be entitled to receive the dividend, if any, payable on such shares on such Series J Dividend Payment Date notwithstanding the conversion thereof. Shares of New Time Warner Series J Preferred Stock surrendered for conversion during the period from the close of business on any Series J Record Date next preceding any Series J Dividend Payment Date to the opening of business on such Series J Dividend Payment Date shall (except in the case of shares which have been called for redemption or exchange on a redemption date or exchange date within such period and with respect to which such redemption or exchange has not been rescinded) be accompanied by payment of an amount equal to the dividend payable on such Series J Dividend Payment Date on the shares being surrendered for conversion. Except as described herein, no adjustments in respect of payments of dividends on shares surrendered for conversion or any dividend on the New Time Warner 151
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Common Stock issued upon conversion will be made upon the conversion of any shares of New Time Warner Series J Preferred Stock. New Time Warner may, but is not required to, in connection with any conversion of shares of New Time Warner Series J Preferred Stock, issue a fraction of a share of New Time Warner Common Stock, and if New Time Warner does not to issue any such fraction, New Time Warner shall, except as described below, make a cash payment (rounded to the nearest cent) equal to such fraction multiplied by the closing price of the New Time Warner Common Stock on the last NYSE trading day prior to the date of conversion. Conversion of shares of New Time Warner Series J Preferred Stock will be deemed to have been made as of the date that certificates for such shares, and a written notice of election to convert and any required payment, are received by the transfer agent or agents for the New Time Warner Series J Preferred Stock; and the person entitled to receive the New Time Warner Common Stock issuable upon such conversion will be treated for all purposes as the record holder of such New Time Warner Common Stock on such date. If New Time Warner has rescinded a redemption or exchange of shares of New Time Warner Series J Preferred Stock, any holder of shares of New Time Warner Series J Preferred Stock that shall have surrendered such shares for conversion following the day on which notice of the subsequently rescinded redemption or exchange shall have been given but prior to the close of business on the later of (a) the NYSE trading day next succeeding the date on which public announcement of the rescission of such redemption or exchange was made and (b) the NYSE trading day on which the notice of rescission is deemed given (a "Converting Holder") may rescind the conversion of such shares surrendered for conversion by properly completing a form prescribed by New Time Warner and mailed to holders of shares of the New Time Warner Series J Preferred Stock (including Converting Holders) with New Time Warner's notice of rescission delivering such form to New Time Warner no later than the close of business on that date that is 15 NYSE trading days following the date of mailing of New Time Warner's notice of rescission. If any shares of New Time Warner Common Stock which would be issuable upon conversion of shares of the New Time Warner Series J Preferred Stock require registration with or approval of any governmental authority before such shares may be issued upon conversion, New Time Warner is required to cause such shares to be duly registered or approved, as the case may be, and to endeavor to list the shares of (or depositary shares representing fractional interests in) New Time Warner Common Stock required to be delivered upon conversion of shares of the New Time Warner Series J Preferred Stock prior to such delivery upon the principal national securities exchange upon which the outstanding New Time Warner Common Stock is listed at the time of such delivery. New Time Warner is required to pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of New Time Warner Common Stock on conversion of shares of the New Time Warner Series J Preferred Stock. New Time Warner is not, however, required to pay any tax which is payable in respect of any transfer involved in the issue or delivery of New Time Warner Common Stock in a name other than that in which the shares of the New Time Warner Series J Preferred Stock so converted were registered, and no such issue or delivery is permitted unless and until the person requesting such issue has paid to New Time Warner the amount of such tax, or has established, to the satisfaction of New Time Warner, that such tax has been paid. Adjustment of Series J Conversion Rate for Certain Actions or Events. The Series J Conversion Rate will be adjusted from time to time as follows: (a) In case New Time Warner (i) pays a dividend in shares of New Time Warner Common Stock, (ii) combines the outstanding shares of New Time Warner Common Stock into a smaller number of shares, (iii) subdivides the outstanding shares of New Time Warner Common Stock or (iv) issues by reclassification of the shares of New Time Warner Common Stock any shares of New Time Warner Capital Stock, then the Series J Conversion Rate in effect immediately before such action will be adjusted so that the holders of New Time Warner Series J Preferred Stock will be entitled to receive upon conversion the kind and amount 152
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of shares of capital stock of New Time Warner which they would have owned or been entitled to receive upon or by reason of such event if such shares had been converted immediately before the record date (or, if no record date, the effective date) for such event. Any such adjustment will become effective retroactively immediately after the record date in the case of a dividend or distribution and will become effective retroactively immediately after the effective date in the case of a subdivision, combination or reclassification. Each holder of New Time Warner Series J Preferred Stock shall be deemed to have failed to exercise any right to elect the kind or amount of securities receivable upon the payment of any such dividend, subdivision, combination or reclassification (provided that if the kind or amount of securities receivable upon such dividend, subdivision, combination or reclassification is not the same for each nonelecting share, then the kind and amount of securities receiv